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NRG Energy, Inc. (NYSE:NRG)

Q4 2008 Earnings Call

February 12, 2009 9:00 am ET

Executives

Nahla A. Azmy – Director of Investor Relations

David Crane – President & Chief Executive Officer

Robert Flexon – Executive Vice President & Chief Operating Officer

Clint Freeland – Senior Vice President & Chief Financial Officer

Analysts

John Kiani – Deutsche Bank

Chris Taylor – Evergreen Investments

Lasan Johong – RBC Capital Markets

Neel Mitra – Simmons & Company

Michael Lapides – Goldman Sachs

Jeffrey Coviello – Duquesne Capital

Operator

Good day, ladies and gentlemen, and welcome to the NRG Energy Fourth Quarter and Year End 2008 Earnings Results Conference Call. As a reminder, this conference is being recorded today February 12, 2009. At this time, I would like to turn the meeting over to Ms. Nahla Azmy. Please go ahead.

Nahla A. Azmy

Thank you, [Salvi]. Good morning, and welcome to our fourth quarter and year-end 2008 earnings call. This call is being broadcast live over the phone and from our website at www.nrgenergy.com. You can access the call presentation and press release furnished with the SEC through a link on the Investor Relations page of our website. A replaying podcast of the call will be posted on our website. This call, including the formal presentation and question-and-answer session will be limited to one hour. In the interest of time, we ask that you please limit yourself to one question with just one follow up.

And now for the obligatory Safe Harbor Statements. During the course of this morning's presentation, management will reiterate forward-looking statements made in today's press release, regarding future events and financial performance. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

We caution you to consider the important risk factors contained in our press release and other filings with the SEC that could cause actual results to differ materially from those in the forward-looking statements in the press release and this conference call. In addition, please note that the date of this conference call is February 12, 2009 and any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of future events, except as required by law.

During this morning's call, we will refer to both GAAP and non-GAAP financial measures of the company's operating and financial results. For complete information regarding our non-GAAP financial information to most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today's press release and this presentation.

In addition, we will be discussing Exelon Corporation’s outstanding exchange offer and the solicitation of proxy for 2009 annual meeting. Today’s discussion does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of proxy of any stockholder of NRG Energy, Inc. nor is it a substitute for the exchange offer documents currently on file with the SEC or the proxy materials to be filed with the SEC.

Now, with that I would like to turn it over to David Crane, NRG’s President and Chief Executive Officer.

David Crane

Thank you, Nahla, and good morning everyone. Thank you for joining us for our year-end 2008 conference call. Today, I am joined by Bob Flexon, our Chief Operating Officer and Clint Freeland, our Chief Financial Officer who will be giving part of presentation. I also have with me Mauricio Gutierrez, who runs our Commercial Operations Group and who will be available to answer questions. And I guess in the sign of the times also by our General Counsel, Drew Murphy, in case we get any legal questions.

In a moment, I will be turning the call over to Bob and Clint to review our operational and financial results for the fourth quarter and the full year 2008.

As you saw from our release, 2008 was a record year for NRG, which was all the more remarkable given the unprecedented economic turmoil that confronted all of us in the second half of the year. But we recognize that this call must be about much more than our year-end results, however good they might be.

This call more plainly than many others must address NRG’s long-term future in light of the Exelon offer, and the other potential alternatives available to us. Since September of 2008, NRG’s management and Board of Directors have expanded in an enormous amount of time, energy and care considering Exelon's unsolicited exchange offer of 0.485.

With the February 25th deadline for their second straw poll now looming many of you again will have a chance to consider their offer and undoubtedly again, Exelon will be exhorting you to tender your shares on that date in order to send a message to NRG’s management.

Let me explain to you why, come February 25, you should send Exelon a message by not tendering. Bluntly put, the Exelon offers a lowball uncertain and unstable offer for a strong fiscally sound, well-run competitive power generation company that has an extremely bright future with exciting growth opportunities that we have the financial strength to act upon.

Moreover, these are growth opportunities, which are unique to NRG and that Exelon simply does not have the capability to realize upon themselves. The great majority of NRG shareholders both those who did tender and those who did not have told us that the current exchange ratio offered by Exelon is unfair to NRG shareholders. It captures a severely disproportionate share of NRG’s value, and of the potential value embedded within the combination of the two companies for Exelon’s shareholders and to the detriment of NRG shareholders.

As I have said, the unfairness of the current exchange offer as a matter of fundamental economic value is obvious even to those who tender to Exelon on January 6. But what reasonable shareholders have differed on is the answer to two basic questions. Whether Exelon is capable of offering a materially better price for NRG, and whether they ever would.

Let me answer those two questions in order. First is Exelon able to offer a materially better price for NRG. The answer to that question unequivocally is yes. Each year for the past several years NRG management has presented to our Board of Directors, a quantitative analysis of each major utilities, ability to pay for NRG and every year Exelon has been at the top of the list at least among American utilities.

That is a major reason why, when John Rowe called me in late September to express his interest in NRG, I met with him just four days later. That meeting proved fairly uneventful, but certainly an impression left with us by Exelon was that they were seeking to do a consensual deal at a reciprocal valuation level that would be fair to both company’s shareholders.

Three weeks later, however, when Exelon preemptively launched its hostile bid on a Sunday night at the extreme lowball exchange ratio of 0.485. It was immediately obvious that they had decided to take a very different approach. Taking advantage of the broader marketplace at that time had just been carpet bombed by the Lehman Brothers bankruptcy, the total paralysis of the credit markets and the near-collapse of the global banking system and motivated by the envy, which Exelon looked upon mid Americans bargain basement deal for Constellation.

Exelon adopted a course of action that was designed quite simply to steal NRG from its shell-shocked shareholders. But of course NRG was not then and is not now in anything like the position Constellation was in. This is what informed the nature and tone of our response to Exelon in November.

Come January, we got the message from our shareholders that they want to see another discussion between Exelon and NRG in the hopes that it would lead to a materially better price. So, I met with John in Washington and he confirmed that even with due diligence, a price increase from Exelon if at all would not, and I repeat the word not be meaningful, and that is what this is about, the price.

Everything else is noise, and that is indeed what Exelon strategy is now and we will continue to be to distract NRG’s shareholders. Distract you with red herrings about being denied due diligence, distract you with exotic board packing schemes and distract you with unfounded and factually unsupportable accusations that the NRG Board is not independent and that they in particularly me are entrenched.

All this is to distract from the fundamental fact that Exelon’s current offer represent a terrible value proposition to NRG shareholders. So let me demonstrate what I mean, let’s look at the numbers and if you are looking at the slide five. And let’s use as a reference point, the year 2010, not 2008 but 2010. Furthermore, let’s use Exelon’s own numbers, the numbers recently used by Exelon to demonstrate their own shareholders that the consummation of this deal at a 0.485 exchange ratio would result in a 33% free cash flow accretion to Exelon.

Exelon’s own calculation shows that a 33% free cash flow accretion to their shareholders is a 49% free cash flow dilution to NRG shareholders. 49% free cash flow dilution in 2010 in dollar terms NRG shareholders stand to receive $1.95 a share as part of Exelon, versus $3.82 a share as a standalone company. That is a very steep penalty for NRG shareholders to pay, but the thing is, as time has passed it has only gotten worse. Based on our updated cash tax forecast as we recently announced, we expect our effective cash tax rate in 2010 to decline significantly.

Generating another $150 in free cash flow, which in turn would drive NRG shareholder dilution from the Exelon offer up to 53%. Now, our shareholders are looking at giving up $4.36 share as a standalone company for the opportunity to make $2.05 a share as part of Exelon.

Exelon in their investor presentation filed earlier this week, responds to this basic value disequilibrium by pointing out the financial salvation that they hope to receive through the Pennsylvania, PPA roll off currently scheduled for 2011, and to the part of the goal that they would have you believe will be drop into their lap by several climate change legislation.

Legislation, which I should point out has yet to be proposed, debated, enacted, signed into law or implemented. So, if you remember one thing about my preliminary remarks here today, remember this. The more value NRG creates today and in the foreseeable future, as we continue to implement our business plan, the more diluted and value destructive the proposed Exelon transaction becomes to you the owners of NRG.

Remember this, because we fully intend to be back before you in the weeks and months to come having created more value, value that you can, as I use to say put in the bank. For your part, we understand that many of you tendered Exelon on January 6, because you saw it as a risk-free way to keep the process going. We understand your motivation, with equity returns under extreme pressure, any positive return whatsoever can seem attractive and may seem preferable then no gain at all. We fully understand that.

But endorsing Exelon’s current offer at this point may be construed as an affirmation that it implies a fair value for our company’s equity. That simply isn’t so. And the more investors who call back their shares, the more leverage we will have in any further talks, talks which we are perfectly willing to have with Exelon or any other potential acquirer. So to all of our shareholders whichever way you went on January 6, this time reject Exelon’s exchange offer. Demand a fair allocation of the combined company. Send a message to Exelon by not tendering that you want indeed that you insist on a better offer.

And with that, I will turn it over to Bob.

Robert Flexon

Good morning. Thank you, David. NRG continued its strong operating and commercial performance throughout the fourth quarter resulting in 2008 being the best and safest year for NRG operations since our beginning in December of 2003.

Slide seven, highlights the few of the accomplishments achieved in 2008. NRG’s safety performance continued its positive improvement trend in 2008, as it has for each of the last five years. NRG posted a low 0.84 OSHA recordable rate in 2008, nearly a 50% improvement versus 2007.

Our environmental performance, similar to safety improved dramatically over 2007. During 2008, the key environmental performance measures across the fleet improved by 41%. Our Engineering, Procurement and Construction group successfully completed several re-powering and environment projects during 2008, their most recent achievement being the construction of the Huntley baghouses in December 2008 and January 2009.

Both baghouses are our operating as designed and meet our New York State environmental requirements. Baghouses for our four units at the Dunkirk facility are under construction, and are expected to be completed later this year. The Cedar Bayou 4 combined cycle re-powering project although not highlighted on the slide is well on track with the completion date currently expected in June 2009.

In 2008, coal plant availability and reliability improve significantly across all regions. The average Equivalent Availability Factor or EAF of our coal fleet in 2008 was 91.1%, a 4-percentage point increase over 2007 that resulted in approximately $2 million megawatt hours of additional available generation. Baseload availability was a primary factor behind NRG’s solid financial performance in 2008, as Clint will cover shortly and we will continue driving EAF improvement across the fleet in 2009.

Nuclear operations at STP were flawless in 2008 with no forced outages or maintenance outages during the year. In fact, with its latest fall refueling outage STP established a station breaker-to-breaker industry record by completing four consecutive production runs on both units with no interruptions and operations between refueling.

This is a first time accomplishment in five decades of commercial nuclear operations in the American nuclear power industry. The last unplanned outages of STP were January 2004 for unit one and February 2005 for unit two. FORNRG 1.0 successfully concluded during the fourth quarter when it exceeded the $250 million pretax income improvement target, one year earlier than originally scheduled.

Savings achieved through a combination of reliability, capacity and efficiency improvements at our coal generating assets and cost savings across our corporate and regional groups all contributed to the results.

FORNRG 2.0 was launched in January 2009 with the goal of improving NRG’s return on invested capital by 100 basis points by the end of 2012. Projects are underway to improve heat rate and plant availability, increased asset optimization and reduced cost across the company.

As we all know, 2008 was extremely volatile year for the NRG commodity markets. Our commercial operations team successfully protected and managed our commercial portfolio contributing to the most profitable year in history. Comm ops added 48 terawatt hours of power hedges during the year primarily in the first half of 2008 when gas and power prices were rising.

Slide 8, shows the longer-term view of overall fleet safety and the increased reliability and availability of NRG’s coal assets. Making NRG in an increasingly safer place to work is goal number one, and the five-year trend shows our progress towards achieving that goal.

The 2008 number of OSHA recordable incidents fell by 48% to 27% from 52% in 2007. And achieved a recordable rate significantly below OSHA’s average of 3.4 for our industry. This safety performance approached the Edison Electric Institute, safety survey, top decile level for fossil generators. We had 21 injury free facilities in 2008 and five site certified or recertified as OSHA VPP Star Worksites.

During 2008, the forced outage rate was at the lowest level in at least the last eight years, with 1.5-percentage point decline in the forced outage rate, compared to 2007 adding approximately 800,000-megawatt hours of recovered generation. Particularly notable improvements occurred at Limestone, Somerset Unit 6 and Huntley. Limestone’s improvement alone accounted for approximately 460,000-megawatt hours of the recovered generation.

Limestone established a station generation record in 2008, while Huntley’s combined generation from its two coal units were at their highest level in 10 years. Although EAF will always have a level of natural volatility due to the cycle of planned outages, the trend is clearly higher reliability.

Our ultimate goal was to increase our coal EAF to top decile industry wide performance, which for our coal assets would be approximately 92 plus percent. Our hedging decisions are largely driven by our market views. And slide 9 provides an overview of commercial operations hedging activity during 2008 and Houston zone clearing heat rate.

Overlaying natural gas price movements on the power and power equivalent hedge activity illustrates the vast majority of hedges added during 2008 occurred during the rise in gas environment in the first half of the year. Clearing heat rates for 2008 peaked during the second quarter entering 2008 our market view supported carrying in open heat rate position and we benefited from that decision during the year.

For 2009, we have substantially flattened out our heat rate exposure. Unlike many other power generators, we actively manage and hedge our portfolio to provide a more stable cash flow profile. Demonstrating our commodity price volatility affects the cash flow profile and how hedging is made in the protection of the portfolio, the table at the bottom of the slide is from our 2008 10-K and discloses that the fair value of our hedges increased by over $1.3 billion during 2008.

The portfolio hedge profile was shown on slide 10. We enter the year highly hedged for 2009 and 2010 as near-term economic pressures affecting commodity prices and demand warrant close position to minimize down side risk. Our portfolio over the next 12 to 24 months should be very well insulated from the recessionary pressure, while longer term the portfolio was positioned to benefit from an economic recovery, which has the potential to be very short considering the current lack of capital investments and project cancellations that are occurring in the gas and power sectors.

Since, our prior quarterly call, the exposure to near term heat rates has been substantially reduced, which is illustrated on the bottom right portion of the slide. Slide 11; provides a summary of how NRG energy plans to meet tightening environmental compliance requirements facing the industry at both federal and state levels.

As indicated on the slide NRG utilizes an integrated approach of capital investment, modifying existing operating practices and utilizing emission credits to comply with relevant federal and state requirements. Looking at the three regions with coal generation assets, the environmental compliance situation is as follows.

The Texas region previously made significant environmental capital investments to its fleet and its very well controlled including SCRs on all four Houston area units.

Future environmental investments for the Texas fleet are relatively insignificant over the next five years. Compliance in the northeast is primarily governed at the state level, the back end control work in Western New York will be completed in 2009 bringing the fleet into compliance with New York state requirements.

The majority of the remaining capital spend in the Northeast over the next five years is to meet multi-pollutant requirements at our Indian River site in Delaware. Compliance with RGGI, or the Regional Greenhouse Gas Initiative will be achieved through participation in options, credit allocations from Delaware and through the emission credit trading markets. Future investment in South Central will further reduce NOx, SO2 and mercury to meet CAIR and mercury MACT requirements.

Turning to slide 12, I will finish with a view of trends influencing the power and commodity markets. Beginning with gas production and rig counts, there’s been an approximate 30% reduction in active gas rigs since September 2008. Based on an internal analysis this equates about 4 to 5 Bcf per day of gas production.

This reduction along with the cancellation of new projects due to either economic for capital constraints will provide support for the longer term gas prices. Similar dynamics are occurring in power generation, tighter environmental standards resulting in permanent challenges for additional capital expenditure requirements at marginal plans are further constraining supply in addition to the continuing capital market constraints.

By near term heat rates are stable, these supply side constraints provide upward pressure on longer-term heat rates, coinciding with the time period in which our portfolio is most opened to heat rates. As such between the strength of our short, medium term based on hedge position, and the capacity we can bring into the market thereafter. I believe we are extremely well positioned to take advantage of the short turnaround. We believe inevitably will follow the current downturn.

Now, I will turn it to Clint for the year-end financial review.

Clint Freeland

Thank you, Bob. As we look back at 2008, NRG like most other companies faced unprecedented challenges during the year. However, our steadfast commitment to financial prudence and operational excellence enabled NRG to deliver what many of those other companies happen.

Record full year financial results and record liquidity as shown on slide 14. Adjusted EBITDA for 2008 topped $2.29 billion, a $50 million improvement over 2007, which was previously the company’s best year. At the same time, NRG boosted its available liquidity to $3.36 billion, its highest point ever, as cash from operations, asset sale proceeds, and active management of our collateral program drove cash balances higher and freed up significant letter of credit capacity.

As we look forward to 2009, we expect financial market and general economic conditions to remain challenging. However, considering our hedge profile that Bob just covered, we are able to maintain our guidance for the year at $2.2 billion for adjusted EBITDA and $1.5 billion for cash from operations.

Slide 15, provides both the fourth quarter and annual comparison of 2008 versus 2007. As you can see quarterly adjusted EBITDA was down 20% to $403 million primarily due to several distinct events in our Texas and Northeast regions, which accounted for the bulk of the period's variance.

In December 2007, NRG received a $39 million reimbursement of development expenses from our partner in the STP 3, and 4 projects, which positively impacted last year’s results in Texas and led to a negative variance this year. Further, results were negatively impacted in 2008 by two additional planned outages at baseload facilities, as compared to 2007.

A 31-day refueling outage at STP Unit 2 resulting in a loss of 431,000 megawatt hours of low cost generation and an additional 21 outage days that our Huntley facility primarily related to baghouse installations on the Unit 67 and 68, resulting in a loss of 191,000 megawatt hours of generation.

In addition to these particular events, capacity revenues in the Northeast were down $13 million, compared to last year primarily due to lower in City New York capacity prices and equity earnings were down $12 million due largely to carbon offset costs at our MIBRAG facility, which were not incurred in 2007.

For full year 2008 adjusted EBITDA totaled $2.291 billion, the strongest annual results in the five-year history of the new NRG. As can be seen on the slide, the Texas and South Central regions drove the company’s overall performance during the year. In Texas, exceptional baseload plant performance, higher average merchant energy prices particularly during the second quarter and advantages hedge positions came together to drive the region's results for the year, further benefiting consolidated results was our South Central region were average realized merchant prices were at 19%.

At the same time that we had an additional 572,000 megawatt hours available for sale in the merchant market due to the higher generation at our Big Cajun II facility and lower load service requirements. Additionally, there was one less outage during the year, which resulted in a $10 million improvement in O&M expenses.

Partially offsetting these gains with our Northeast region, where results were negatively impacted by higher fuel costs. Coal and related transportation costs rose $62 million and natural gas expense increased $21 million due to the higher average commodity prices during the year.

The coal generation was flat year-over-year, total generation for the region was down 6% mainly driven by the gas fleet. At the corporate level a $32 million reduction in interest income primarily due to lower interest rates on corporate cash balances and an additional write-down of two previously disclosed commercial paper investments, further impacted annual results.

Turning to slide 16, NRG generated over $1.4 billion in cash from operations during 2008, and this together with proceeds from the sale of our ITISA asset in the first quarter provided the company with sufficient cash flow to fully fund its 2008 capital allocation initiatives, while simultaneously building its cash balances by almost $350 million.

As commodity prices continued to come under pressure during the fourth quarter, we saw an increasing amount of cash collateral being posted to us by our hedging counterparties reaching $760 million by year-end.

Given the magnitude of these inflows, we felt it was appropriate to segregate these funds into a separate balance sheet account and included them as part of working capital instead of corporate cash balances. As such, the $417 million in cash collateral outflows shown on this slide represents only cash posted by NRG during the year not net cash collateral movements. After taking into consideration proceeds from asset sales and maintenance CapEx NRG had over $1.5 billion in cash to use for debt repayments, share repurchases and environmental and repowering investments.

Of the $595 in repowering investments made during the year, $418 million was used to fund our Elbow Creek, Sherbino I, Cos Cob and Cedar Bayou 4 projects all of which are expected to contribute to the company’s earnings in 2009 and beyond. The $349 million change in cash accounted for over half of the liquidity build in 2008, which is outlined on slide 17. This together with a $300 million increase in letter of credit capacity, primarily due to the return of letters of credit from hedging counterparties migrating from the second lien programs to the first lien structure drove liquidity to an all time high of $3.36 billion.

This however, does not include the $760 million deposited with us by our hedging counterparties, which is available for future cash collateral called by those counterparties should commodity prices rebound. Including these deposits, total liquidity available to the company at year-end exceeded $4.1 billion.

Complementing this liquidity position is NRG’s long-term low cost corporate debt structure with no corporate maturities before 2013. There is no need to refinance this debt anytime soon, and with the weighted average cost of debt of approximately 6.6%, the cost of our existing financing is significantly below any comparable financings that could be done in today’s market even by an investment grade issuer.

For any new growth oriented project level financing, we did not foresee any cost disadvantage as these projects, we continue to pursue such as the peaker projects in Connecticut will tend to be investment grade.

Our 2009 adjusted EBITDA; cash flow and capital allocation guidance is outlined on slide 18. Considering our hedge position going into 2009, we are able to maintain our 2009 guidance for adjusted EBITDA at $2.2 billion and cash from operations at $1.5 billion. As previously disclosed, our guidance also includes the benefit of various tax strategies, which we expect will bolster cash flows in 2009 and 2010. While we historically estimated that our cash tax rate in those years would approach 30%, we now expected to be closer to 10%.

For the year, we anticipate higher maintenance CapEx than in 2008 mainly attributable to normal planned activities at our baseload facilities in Texas and higher environmental spend as we complete back-end control projects primarily at our Dunkirk plant and initiate back in control work at Indian River.

Repowering investments for 2009 include completion of Cedar Bayou 4, initiation of the Connecticut peaker projects with our partner United Illuminating and final payments on one set of GE wind turbines. We will also continue to aggressively pursue the development of STP 3 and 4. However, we expect this to be cash neutral to NRG in 2009 as partner contributions and other financing arrangements fully fund CapEx requirements.

During the year, we also ancipitate repaying $426 million in debt, including a $197 million mandatory offer to the term loan B lenders in March, and $143 million to settle the CSF II structure in the fourth quarter this year.

Regarding share repurchases, we remain committed to completing the share repurchases for both our 2008 and 2009 capital allocation programs totaling $330 million once we are clear to do so. With the company’s sizable liquidity position and restricted payments basket of approximately $530 million as of the filing of our 10-K. NRG has more than sufficient capacity to execute on these commitments.

So as we look forward to the rest of 2009, the prospects for NRG remain solid. The combination of operating excellence, robust liquidity and highly hedged portfolio positions the company to deliver yet another year of strong financial performance.

With that, I will turn it back to you David.

David Crane

Thank you, Clint. I am turning to slide 20. Our industry operates, as all of you on the phone know in an environment that is very dynamic and oft changing perhaps more than other sector. As a capital-intensive cyclical commodity driven industry, I’ve always felt that the role of management in this industry is to sift through the haze that obscures visibility at any point in time in order to understand and respond to the tectonic shifts that will shape the industry overtime, and they help to find, which companies by acting forcefully in response in those shifts will put themselves in the best possible position to succeed, and which companies by doing nothing will risk failure. What has changed most obviously since the last time we got together is the prospect of the immediate government involvement in our industry as a result of the economic recession.

The way that this will manifest itself in our sector in the near term at the very least, but at almost certainly for the foreseeable future as well, is that the government is going to rely much more on the carrot of the investment tax credits, production tax credits and federal loan guarantees to further its environmental and energy agenda rather than resorting to the stick of federal climate change legislation that would impose a significant cost on carbon emissions, a cost which ultimately would have to born by the hard pressed American consumer. This situation represents a tremendous opportunity for companies, which stand ready with environmentally friendly, shovel ready, energy infrastructure projects.

We are in a very strong position today in this regard because we have been developing a wide range of such low and no carbon projects across all of our regions, since we announced our repowering NRG in our echo NRG initiatives back in 2006. Just some of these projects are listed on slide 21.

These projects will generate very favorable tax benefits, which we will be able to utilize to turbocharge our cash returns and through access the federal loan guarantees, we will have an effective cost of capital for our growth projects is well below the cost of capital of even single A rated corporate issuers, a cost of capital advantage that will be embedded into our capital structure for years and decades to come.

We have from time-to-time been faulted for having such an ambitious and wide-ranging development program. Skeptics have questioned everything from the overall capital commitment to involve to the lead-time required to bring such projects to fruition. We of course are mindful with these issues, and that’s one of the reasons why we have such a robust partnering approach to project development.

Working with top quality partners such as those listed on slide 22 on projects, where the partner has a particular contribution to make not only eliminates or at least mitigates project risk to NRG, but through the monetization of NRG site contribution and other development assets that allows NRG to accelerate the cash return on the project to appoint in many cases at or before the commencement of site construction.

The most noteworthy example of this development philosophy is our nuclear development partnership with Toshiba Corporation entered into last March. Recall that we sold down 12% of that nuclear development company, which we call NINA and its development interest in STP 3 and 4 in exchange for a cash injection from Toshiba into NINA of $300,000 over the next six years.

As shown on slide 23, since that partnership was founded, NINA has achieved success upon success with the STP development. The project has gained momentum as demonstrated by its position in the top tier of new nuclear projects under consideration by the DoE for federal loan guarantees, where we expect the conditional award decision to be made before the end of 2009.

NINA also has agreed to a highly attractive and competitive EPC agreement, which we have just concluded with Toshiba and a 500 million non recourse credit facility to NINA also provided by Toshiba, which will enable us to order very long lead-time equipment. And just yesterday, the Nuclear Regulatory Commission published the review calendar for the STP 3 and 4 projects, which is a very meaningful step towards securing our combined operating license in or before 2012.

All of these very positive development when taken together put STP 3 and 4 in a very strong position to be one of the first, if not the first new nuclear project in the United States. Based on these positive developments, today we are announcing our intention to sell down a portion of our nuclear development program.

As shown on slide 24, a sell down to the right partner or partners will further reduce our equity capital at risk during the development phase. And in most cases depending on the identity of the new partner enhance our access to low cost financing from the U.S. and Japanese Governments, and ideally facilitate partnerships on other advanced nuclear projects and furtherance of both NRG and NINA’s long-term strategy for additional ABWR development.

And that brings to my last slide, which is to say that’s clear to me that the United States to make significant headway in the fight against climate change in the years to come, a full-fledged nuclear renaissance must occur in the American power generation sector. And any way you evaluate it that nuclear renaissance will very quickly become a business worth hundreds of billions of dollar.

The decision made by the DoE about loan guarantees later in 2009 in all likelihood will decide, which technologies dominate that nuclear renaissance. My personal opinion based on what I know at this point is that, two technologies will emerge preeminent from the DoE decision-making process.

One will be the prevalent technology for installation by vertically integrated utilities operating in a rate-based market. The other will be the ABWR design being pioneered by the STP 3 and 4 project, which will become the prevailing technology for new nuclear projects serving the competitive markets.

As reflected on slide 25, as the pioneer in this type of technology and merchant market nuclear development, we have intellectual property and development know-how, which by our estimation is worth hundreds of millions of dollars in savings to the sponsors of all future ABWR projects.

Our objective now is to stimulate those project developments and assist those projects and their sponsors in a manner, which proves to be a financial win-win for both parties.

So, in conclusion to all of our investors on the call, please recognize that while we can’t visit you as often as we would like and as others may. It’s because, we are out there every day executing on our business plan creating value for the shareholders of NRG. And that value is something that you, our shareholders, deserve to have reflected in any offer for your company. Thank you very much, [Salvi] I think we can open the lines for questions.

Question-and-Answer Session

Operator

Certainly sir. (Operator Instructions). Our first question will be from the John Kiani of Deutsche Bank. Please go ahead.

John Kiani – Deutsche Bank

Good morning

Unidentified Company Representative

Good morning, John.

John Kiani – Deutsche Bank

It looks like NRG made some positive announcements and continues to make good progress on the development of STP nuclear units 3 and 4 and also heard you make some interesting comments on carbon and the uncertainty in timing surrounding it’s implementation, can you please talk a little bit about the thought process and benefits behind building your nuclear in Texas with this view on CO2?

David Crane

Well, John I would say that the main driver that makes nuclear power in Texas a strong economic proposition is gas prices. It has nothing to do with carbon. I mean obviously the current price of gas right now is nothing that would cause you to build a nuclear power plant, but if you look at the forward curve, if you take a long run view of gas in even in the $6 range but $7, $8, $9. A nuclear plant in Texas makes good money even before you get the carbon. Obviously as a huge baseload generator any sort of carbon-driven uplift in the price of power in Texas, will be a further benefit to the nuclear plant. Let me say, our view on carbon legislation, which has actually being consistent from before the recession to now, is we are supporter of federal carbon legislation like a lot of corporations that support carbon legislation, we have always been concerned that the pace and the style, which it’s implemented in the early years. So nothing I’ve said in my comments indicate that we don't support carbon legislation or we don't believe that the carbon legislation might not be passed in 2009 or 2010. But we think those in Congress who will pass it will be very mindful of particularly the near-term impact. So any carbon legislation will be mild in the early years and have a long runway, in terms of, allocation versus auction.

John Kiani – Deutsche Bank

Okay thanks David.

David Crane

Thanks John.

Operator

Thank you. Our next question will be from Chris Taylor of Evergreen Investments

Chris Taylor – Evergreen Investments

Thanks, can you tell us what your open EBITDA would be, unhedged EBITDA or would have been for 2008 and more importantly what it would be for 2009 in your guidance?

Clint Freeland

Yeah Chris in all honesty given that the commodity prices have reversed the way that they have, we haven’t recalculated an open EBITDA. I think what you are seeing though is that the true value of the hedging program that we have in place, as Bob spoke about in his comments.

Chris Taylor – Evergreen Investments

But what we have in there, in the value of the hedges themselves [Inaudible] we could back that out…

Robert Flexon

Well, the value of the hedges at the end of the year, the fair value was an uplift of $1 billion, but that's over the term of our hedging that goes out to 2014

Unidentified Company Representative

Right, that is a present value of the entire program.

Chris Taylor – Evergreen Investments

How much would the uplift have been in 2008?

Clint Freeland

We may have to get back to you, we don't have that number at our fingertips and we would rather not sort of speculate. So we’ll…

Chris Taylor – Evergreen Investments

For me it's hard to imagine do you have a sense of your underlying profitability…

Robert Flexon

Well to us I mean first of all, our profitability – the hedge is real. We operate on a point of view of cash not theory. And so, we've never been a big fan of open EBITDA as a concept and our hedges are performing, they are producing cash for the company that is cash that we put in the bank that’s why we have $3.4 billion of liquidity $1.5 billion of cash. So, to us that’s the world we live in, is were we focus on cash not theory.

Chris Taylor – Evergreen Investments

Well, but the world we live in true economics of power significantly below the hedged economics. It’s the hedged EBITDA is not a guidance to valuation in today's its not.

Robert Flexon

The only thing I'd add to it, Chris, is just to say that we continually hedge around volatility and that’s our business model. We don’t leave prompt years open. We hedged rolling out five years. So, I wouldn’t say that today’s forward curve is also just an underlying view of the company, because you've got volatility that’s quite. Quite large in this market we will continue to hedge as we go forward and pivot off that volatility.

Chris Taylor – Evergreen Investments

Well, let me ask question in a different way. How many hedges have you put down in the last three or six month, or have you not been putting on hedges…

Clint Freeland

I would only quantify it this way, Chris, I mean we did 48 terawatt hours hedges during 2008 going forward. The vast majority of that called as 41 of that within the first half of the year. In the second half of the year, the hedges that we tended to put on were heat rates flatten out the heat rates position as we went forward. So, there it was more just converting the gas hedges to pure power at that point in time. But we haven’t done anything on the power – nothing significant on the power side, but this is the opportunity, when you are in this market to actually hedge out the coal. So, we been focusing more on the coal side in this environment and we will continue to do so.

Chris Taylor – Evergreen Investments

If the power markets don’t rebound over the next 12 months. Will you start extending your hedging program or will you see hedging electricity price until the power markets rebound?

Clint Freeland

Well, for 2010 we’re pretty well hedged as well. So we’ve got time to decide what we want to do in the out years, and even if you look at 2011 on our hedge profile, it’s pretty well hedged in ‘11 as well so. We’ve got time to make those decisions. So we’re not here going to rush into anything. We’ve got plenty of time to make those decisions.

Chris Taylor – Evergreen Investments

Thank you.

Operator

Thank you. Our next question will be from Lasan Johong of RBC Capital Markets.

Lasan Johong – RBC Capital Markets

Thank you. Few questions very quickly I will just rattle them off and I will let you take your time answering them. Would you consider an alternative transaction to what Excelon's proposing i.e., would you exchange, for example, STP for all of Exelon's non-nuclear IPP portfolio along with NINA? Second, if you believe in the hedge cheap rate story going forward why you reducing or why you engaging in more heat rate hedges going forward, it seems kind of opposite of your beliefs. And then very quickly on the STP situation last time, you had given some guidance on STP unit cost to build 3 and 4, it was around $3800 KW, wondering if that has changed. And lastly what are your intentions with $1.5 billion in cash, I mean that seems a little excessive in terms of balance on your balance sheet.

David Crane

Well okay, you are really testing the limit of the single question rule. Let’s go…

Lasan Johong – RBC Capital Markets

Sorry, about that.

David Crane

No, I’m going to answer questions one and three then Bob is going answer question two. No I'm going to answer the questions one and three then I may give a first part question four and then Clint is going to follow on to that and then Bob you can come back in for question two. So, that’s all clear.

Unidentified Company Representative

[Inaudible]

David Crane

Yeah, You can go and Bob you can go back so, question one would we consider some swap arrangement nuclear for something of Exelon’s. We haven’t look at that in any great detail. We see tremendous value in the nuclear program we think particularly the nuclear development program, its value that only going to increase overtime. Its nuclear is absolutely the key to the decarbonizing of NRG overtime, so it's pretty fundamental to us we ascribe quite a high value to it. And then technically, I have to tell you because of the nature of the partnership arrangement with San Antonio and Austin. It’s very difficult for us to unilaterally sort of carve out the nuclear from NRG it can’t really be done without the consent of the two partners. So, that’s one of the reasons why we haven’t spent a lot of time evaluating, but second to the fact that. We put a lot of value on nuclear. The answer to your third question, you said that our last estimates for STP was $3800 for KW I'm not aware of NINA putting that number out the number I'm remember for NINA is the 3200 for KW number, which is an overnight number without interest during construction. Our view and this number like everyone’s number fluctuates a lots with exchange, with currency fluctuations and the like. But if anything we think that number, which we felt was conservative at the time we gave it. We think its obviously more conservative now that we can comment within that number. But I am not sure we’re ready to put out a new number relative to the $3200 per KW number. In terms of the $1.5 billion of cash, Clint mentioned obviously that we hope at some point to be able to return a portion of that to our shareholders. We obviously have a cash [sweep] on the debt coming. But I can say, this is a target rich environment for companies that have cash in terms of what’s out there and prices at which key things can be obtained.

Lasan Johong – RBC Capital Markets

Yes so…

David Crane

And so, we certainly would hope to be able to put some of that money to what we are absolutely convinced, you would find to be very good use. So, Clint do you want to add to that and then Bob, we can come back in for question two.

Clint Freeland

No, David. I would just echo what you just said. I mean right now in these markets, cash is king and liquidity is critical and obviously there are number of opportunities out there, that having that liquidity. Give us the ability to take a look at. But one thing to keep in mind [with honest] just looking at our capital allocation program, we’re in the process probably in the next couple of months of offering almost $200 million to our first lean lenders. We have our CSF II maturity coming out toward the end of the year, that’s $180 million as principle plus accrued interest. And then we also have the share repurchase call it 330 million that we would still like to execute when we’re actually legally able to do that. So between all of those things you are talking about call it $700 million worth of capital allocation exercises that we would like to look at throughout the year. So, what we do have call it $1.5 billion in cash, part of that is we would like to deploy in the capital allocation program to the extent we can. And so it may not be as excessive as you think. Bob.

Robert Flexon

First, on the heat rate question, basically the way we’re approaching the portfolios that during the next 24 months calling it 2009 and 2010, we’re really just trying to make sure, we’ve got the portfolio protected given the economic circumstance that exists. So our heat rates hedges have been focused on certainly for 2009 as you could see the sensitivity on the page 10, points out that it’s just quite low at this point in time, but we are very open on heat rates when you are looking at 2012 and 2013. We’re not looking to do anything at this point in time on 12 and 13. We’ve done a little bit, since the last call on ’11, but remain largely open 11 as well so. We’re still bullish on the back-end of the curve and right now it’s just been more about protecting our cash flows primarily in ‘09 and in 2010.

Lasan Johong - RBC Capital Markets

Thank you for your indulgence.

Unidentified Company Representative

Thank you Lasan.

Robert Flexon

Thank you Lasan.

Operator

Thank you. Our next question will now come from Neel Mitra of Simmons & Company.

Neel Mitra – Simmons & Company

Hi, thanks. In regards to the Exelon offer, can you discuss your concerns over Exelon gaining more control on the NRG Board and the implementation risk of trying to restructure or reverse merger or other vehicle in order to not trip your change of control covenants and has Exelon indicated any willingness to increase exchange offer, if they able to avoid triggering change of control on your bonds?

David Crane

Well, I mean in terms of has Exelon indicated any willingness to increase their exchange offer, we are pretty much believe what we’ve heard what they have said in public about their prices, their prices, their price and they’ve hinted at various times that they have one sort of bump in them, but when I have met with John Rowe in January, he made it very clear that bump would not be a meaningful number. And that’s their own words. So, I'm not sure there is anything out there that would prompt Exelon at this point to make a significant increase. But that’s really a question that is better posed for them.

On where they stand with their board packing scheme, or whatever you call it, it seems obviously that this change control issue is, it's an important issue. Obviously it seems what Exelon is trying to do with the nature of their board packing scheme is to get effective control of NRG without triggering the legal change of control. But we take the risk that that change of control could be triggered inadvertently, very seriously. What happen, if the board became a 10/9 or 9/8 or something like that, if at any point thereafter an incumbent NRG director resigns, that triggers the change of control. You will see that we have identified that as a risk in our 10-K.

So, our Board is looking at that issue but I can't tell you, I mean, all I can tell you is that certainly our board thinks an inadvertent change of control of the company at a time, when the capital markets are still pretty seized up would have the potential to be a very serious value destructive event for our NRG's equity. And so our Board is obviously taking has a concern about that. But no decision has been made.

Neel Mitra – Simmons & Company

Okay. Thank you.

Operator

Thank you. Our next question will be from Michael Lapides of Goldman Sachs. Please go ahead.

Michael Lapides – Goldman Sachs

Hey guys you referenced the 10-K filings, just a handful of high level items. You have given '09 CapEx. Any insight you can give on CapEx beyond 2009 and other major cash requirement cash outflows beyond 2009?

Unidentified Company Representative

Clint?

Clint Freeland

Michael I think on the CapEx front beyond 2009 really the CapEx would be more focused toward STP 3 and 4. When you look at what our CapEx requirements are for 2009 mostly when finishing up the Cedar Bayou 4 project. We also have some level CapEx related to GenConn and obviously that would continue into 2009, but that’s probably not a significant amount within the scope of NRG going forward and certainly shouldn't be beyond 2010. As far as environmental CapEx, I think as we go out beyond 2009 for call it 10, 11 and 12 think about environmental CapEx being in the call it $200 to $300 million range each year and then trailing off by 2013. And then beyond that I think those are kind of the major cash requirements for the company.

Michael Lapides – Goldman Sachs

And when you think about the environmental CapEx. What is the discretion in terms of timing meaning when do you have to have kind of back end controls at both Indian River and Big Cajun how much differential is there in the time in the timing requirement.

David Crane

Michael on the environmental CapEx the 2009 we need to be complete up in New York State and that is Dunkirk. So that's for western New York for Indian River we got to be complete by 2012. So, when you see the CapEx spend for environmental in the Northeast when you look at 10 and 11 that's largely in the Indian River related, and then for South Central our CapEx there is more back end loaded more towards the 12 and 13 timeframe, and there we're trying to work that around with what's happening with legislation CAIR and the like so. We're being a little bit more flexible with that one until we understand what rules are out there so we can make sure that we match up with the rules since relying on the federal rules there, as compared to the Northeast where you've got state agreements. So in New York you got a consent decree. In Delaware they have state requirements that we have to comply with so. South Central is the one that is a little bit more variable because the federal rules are not clear on where they are going right now.

Michael Lapides – Goldman Sachs

Got it. Okay, thank you guys much appreciated.

Operator

Thank you. In the interest of time, our last question will be from Jeff Coviello of Duquesne Capital. Please go ahead.

Jeffrey Coviello – Duquesne Capital

Hi, good morning guys. How are you?

Unidentified Company Representative

Good morning, Jeffrey.

Jeffrey Coviello – Duquesne Capital

I just had two follow-up questions on the heat rate hedging you guys did I presume that took place mostly in ERCOT. I just wanted to check that and I think the way you would do it is just rolling out of the gas hedges into power. And again I wanted to see if that’s logistically how you did it and then detailed question, if you guys seemed to slightly change the equally probable move in heat rate versus the move in gas. I'm just wondering if that was from the variability in heat rate increasing relative to gas over the last few months, that wouldn’t cost?

Unidentified Company Representative

Jeffrey, Mauricio is going to answer those questions for you.

Jeffrey Coviello – Duquesne Capital

Sure. And I guess also [Inaudible] did you do it during the course of the year. Is it mostly on the fourth quarter or?

Unidentified Company Representative

Basically, you see if Mauricio answers that question. Go ahead Mauriciro.

Mauricio Gutierrez

Hi, good morning Jeff. With respect to the heat rate hedging that we have gone quarter-on-quarter, it was primarily 2009, 2010. A little bit in 11 we were unfortunately think about it in terms of liquidity and some price or heat rates spikes that we saw particularly in early January, as you say the heat residuals evolving our gas hedges into power. Just to remind you we manage the price risk of our basal portfolio on the natural gas equivalent basis and then on heat rate basis. So, we could just rolling some of those gas hedges into power.

Unidentified Company Representative

And on the probability question, what we do each quarter so we just want to we go back and look historical volatility and just want to ensure that when you look at the probability of the gas change of dollar, we just calibrate that to the same level of probability for heat range change. So, the reason we just change or it is to sync up the two disclosures on the slide.

Jeffrey Coviello – Duquesne Capital

Got it. Okay and that was just - heat rate just got a little bit more volatile and that is what drove the change.

Clint Freeland

That’s right

Jeffrey Coviello – Duquesne Capital

Great. Okay, thanks a lot guys. I appreciate it.

David Crane

Okay, thanks Jeff. I think that concludes this call. We appreciate everyone participating and we appreciate your support and we look forward to talking to you in the weeks to come. Thank you very much.

Operator

Thank you sir. Ladies and gentlemen, this does conclude your conference call for today. Once again thank you for participating. And at this time, we ask that you please disconnect your lines. Have yourselves a great day.

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Source: NRG Energy, Inc. Q4 2008 Earnings Call Transcript
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