425
Filed by NRG Energy, Inc. pursuant to
Rule 425 of the Securities Act of 1933 and
deemed filed pursuant to Rule 14a-12 of the
Securities Exchange Act of 1934
Subject Company: Calpine Corporation
Commission File No.: 001-12079
On May 28, 2008, David Crane, President and Chief Executive
Officer of NRG Energy, Inc. presented at the 2008 Deutsche Bank Energy & Utilities Conference.
The slides that were presented and a transcript of the presentation are included below.
David Crane
President and
Chief Executive Officer
Deutsche 2008 Energy & Utilities
Conference
May 28, 2008
Driving Intrinsic Value;
Capitalizing on Extrinsic
Opportunity
|
Safe Harbor Statement
This presentation does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval. This
material is not a substitute for the prospectus/proxy statement NRG Energy, Inc. ("NRG") would file with the Securities and Exchange Commission (the
"SEC") if an agreement between NRG and Calpine Corporation ("Calpine") is reached or for any other documents which NRG may file with the SEC and
send to NRG or Calpine stockholders in connection with the proposed transaction. INVESTORS AND SECURITY HOLDERS OF NRG AND CALPINE
ARE URGED TO READ ANY SUCH DOCUMENTS FILED WITH THE SEC CAREFULLY IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE
BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION.
Investors and security holders will be able to obtain free copies of any documents filed with the SEC by NRG through the web site maintained by the
SEC at www.sec.gov. Free copies of any such documents can also be obtained by directing a request to Investor Relations Department, NRG Energy,
Inc., 211 Carnegie Center, Princeton, New Jersey 08540.
NRG and its directors and executive officers and other persons may be deemed to be participants in the solicitation of proxies in respect of the proposed
transaction. Information regarding NRG's directors and executive officers is available in its Annual Report on Form 10-K for the year ended
December 31, 2008, which was filed with the SEC on February 28, 2008, and its proxy statement for its 2008 Annual Meeting of Stockholders, which
was filed with the SEC on April 2, 2008. Other information regarding the participants in a proxy solicitation and a description of their direct and indirect
interests, by security holdings or otherwise, will be contained in any proxy statement filed in connection with the proposed transaction.
This 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. Such forward-looking statements are subject to certain risks, uncertainties and assumptions that include, but are not limited to,
expected earnings and cash flows, future growth and financial performance and the expected synergies and other benefits of the transaction described
herein; and typically can be identified by the use of words such as "will," "expect," "estimate," "anticipate," "forecast," "plan," "believe" and similar terms.
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, the inability to implement value enhancing improvements to plant operations and companywide
processes, our ability to realize expected tax benefits, our ability to achieve the expected timing and benefits of our RepoweringNRG project and our
ability to realize expected synergies and other benefits as a result of the combination described herein.
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 press release 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 ("SEC") at www.sec.gov.
|
Proven management team has strong track
record of creating significant value for
shareholders
Positioned for upside through commercial
optimization and commodity price appreciation
Repowering program is driving intrinsic growth
while reducing carbon intensity
Proposed combination with Calpine would offer
compelling strategic and financial benefits
Overview
|
Four Year Track Record:
Shareholder Value Delivered
Transforming a Growth Company while
adhering to Financial Discipline principles
Emergence from
Bankruptcy 1
2007
Improvements
-
58%
e
104%
e
e
-
12%
e
-
37%
e
3.73
3.25
19.4%
59.2%
43.7%
8.85
1.59
66.9%
68.9%
CREDIT/STATS
Total Debt/EBITDA
EBITDA/Interest
FFO/Total Debt
Total Debt/Cap
Total Debt/EV
-
e
B+
Ba3
CORPORATE CREDIT RATINGS
S&P
Moody
'
s
554
173
7,042
New CEO
No CFO
3 Regions
18,200MW
37
~35%
Cash
2,279
1,252
2,715
19,137
Crane: 4 years
Flexon: 4 years
4 Regions
24,115MW
28
63%
1
st
Lien
311%
e
e
1,469%
e
172%
e
FINANCIAL PROFILE
EBITDA
FCF- Recurring Ops
Liquidity
Enterprise Value
e
33%
e
33%
e
-
24%
e
79%
e
e
BUSINESS PROFILE
Management Tenure
Geographical Diversity
Total MW
Average Age of
Baseload
Fleet as of 2008
5 Year Average %
Baseload
Hedged
Strategic Hedging Collateral Position
B+
B2
1 Reflects trailing twelve months ended 9/30/03 statistics on emergence from bankruptcy, with exception of credit rating
nm
nm
nm
nm
e
e
Cumulative Corporate Debt Reduction
Cumulative Share Repurchases
$0
$0
1,600
1,700
nm
nm
nm
|
Multiple Avenues to Shareholder Value
Regionally focused wholesale power generation business
Prudent balance sheet management
Focus on free cash flow
Lean and nimble organization focused on value enhancing growth
Enhancing asset position through dynamic trading and marketing activity
Striving for BOTH market diversification and asset concentration
Where We Have Been
2006 and Beyond
Harvesting the Benefits of Being the First Out of Chapter 11, with a
Healthy Balance Sheet in a Capital Intensive, Cyclical, Commodity-Based Industry
Where We Began
Intrinsic Growth
(eg. "FORNRG")
Extrinsic Opportunity
(eg. TGN Acquisition)
Beyond Back
to Basics
No management distraction on
legacies
Streamlining business in value
optimizing way
Demonstrated record of
returning capital to
shareholders
Shareholder
Value
Exit from
Chapter 11
|
Back to Business Basics:
Key Characteristics
Fundamental Truths
Strategic Consequences
Capital intensive / not labor intensive Competitive generators cannot "rationalize staff" their way to success; need to increase margins
Balance sheet management and continuous access to capital are critical
Assets relatively illiquid and totally immovable Need to build on what we have, where we have it
Need to have capacity around chronic transmission constraints
Electricity is a uniquely volatile commodity because it can not be stored Trading consequences - supplier has better information
Market consequences - supplier should be paid for capacity
Electricity prices are supply\demand driven, with the key being supply The more supply you have, the more flexibility you have to optimize your portfolio
Regional diversity critical since supply dynamics in various markets are not correlated
Electricity prices, in our core markets, are fundamentally driven by the underlying fuel price The "single-price auction system" means that gas, the marginal fuel, has primacy in a multi-commodity mindset
Portfolio consequences - fuel is a proxy for storage in most of our markets
All strategic decisions at NRG tie back to these five truths
|
From "Fundamentals" to "Imperatives"
Five Fundamentals
Five Imperatives
Capital
intensive -
Yes
Labor
intensive -
No
Highly
cyclical,
Inelastic
demand,
supply driven
Assets
relatively
Illiquid and
totally
immovable
Pure
commodity, but
inability to store
causes very
high
volatility
1.
2.
3.
4.
MUST accumulate generating portfolio
at competitive cost
1.
5.
Fuel
price-driven
Calpine Transaction Advances the Imperatives
3.
MUST develop and expand our route to
market through contracting with retail
load providers, trading, direct sales
etc.
MUST develop depth and breadth in key markets, particularly
across fuel types, transmission constraints and merit order
5.
4.
MUST have sophisticated ability to
trade, procure, hedge, and originate
for electricity and input fuels
3.
MUST develop and expand our route to
market through contracting with retail
load providers, trading, direct sales
etc.
MUST develop depth and breadth in key markets, particularly
across fuel types, transmission constraints and merit order
5.
4.
MUST have sophisticated ability to
trade, procure, hedge, and originate
for electricity and input fuels
|
NRG Looking Forward: The Opportunities
Calpine Proposal Advances All Corporate Objectives
Capital Allocation:
Capital investment
Enhance and Expand
Core Portfolio
Extracting maximum
value from existing fleet
West
South
Central
Northeast
Texas
Capital Allocation:
Balance sheet
management
FORNRG
Commercial ops. optimization
Improved market design
Texas Genco
West Coast Power
Padoma Wind
RepoweringNRG
ECONRG
Fuel supply chain investment
Portfolio optimization
Free cash flow generation &
liquidity
Return excess capital
A regionally focused, multi-fuel, carbon-diversified scale generator with assets across the merit order and around transmission in each of our core markets with the capability to procure, transport and trade all of the commodities involved in our business.
What we strive to be:
Load serving entities in our core regions willing to contract for their bulk generation needs at a premium price in exchange for our assistance mitigating their customers' aggregate electricity and fuel cost and transmission constraint risks.
Our target customer:
|
NRG - Calpine
Benefits of the Proposed Combination
Scale with Purpose
Asset Optimization/Disposition
Focus on Texas
Operational Synergies
Carbon
|
Merger Significantly Enhances
NRG's Industry Position
Market Capitalization / Enterprise Value(3)
($ in billions)
Source: Company filings, I/B/E/S and Wall Street research.
(1) PF for merger and Texas asset sales.
(2) Excludes Texas City and Clear Lake and includes Greenfield Energy Center.
(3) Stock price as of 5/14/08.
Generating Capacity
(GW)
(1)
Scale ... but with Purpose
|
Nuclear
Coal
Gas/Oil -
CT/ST
5.0%
62.0%
33.0%
Scale with Purpose
NRG Capacity: 22,890 MW
Pro Forma Capacity: 47,202 MW
Capacity
by Fuel Type
Capacity
by Region
Geothermal
Nuclear
Coal
Gas/Oil -
CT/ST
Gas -
Cogen
Gas -
CCGT
27%
16%
36%
16%
3%
2%
Where the "purpose" means value creation and risk diversification
Dispatch by
Fuel Type
NRG Output: 72,827 GWh
Pro Forma Output: 163,121 GWh
Note: Does not assume required Texas divestitures.
Nuclear
Coal
Gas/Oil - CT/ST
11%
76%
13%
Geothermal
Nuclear
Coal
Gas/Oil - CT/ST
Gas -
Cogen
Gas -
CCGT
29%
21%
6%
34%
6%
4%
NRG Capacity: 22,890 MW
Pro Forma Capacity: 47,202 MW
Northeast
South Central
Texas
West
9%
47%
11%
33%
Northeast
South
Central
Texas
West
20%
39%
18%
23%
|
Note: Excludes Texas City and Clear Lake, includes Greenfield Energy Center.
Asset Dispositions is a Key
Transaction Value Driver
Sales of over 20 non-core
assets removed debt of
~$1.4bn and provided cash
of over $980mm
Asset dispositions:
Transform EBITDA multiples
Pay down debt
Generate cash for "Return
of Capital to Shareholders"
NRG Asset Dispositions
Asset Dispositions:
Opportunity + Experience = Financial Success
-
400
800
1,200
1,600
2,000
2,400
Q1
04
Q2
04
Q3
04
Q4
04
Q1
05
Q2
05
Q3
05
Q4
05
Q1
06
Q2
06
Q3
06
Q4
06
Q1
07
Q2
07
Q3
07
Q4
07
Q1
Debt
Cash
08
|
Asset Optimization: NRG Track Record
CALP
Batesville
McClain
Kendall
NEO
Hsin Yu
Loy Yang
COBEE
Ilion
Northbrook
(Hydro)
Enfield (UK)
Arthur Kill
Dunkirk
Devon
Indian River
WA Parish
STP
Limestone
Texas Genco
West Coast
Power
Snowball Effect: Continuously Strengthening the Core
Audrain
Rocky Road
James River
Cadillac
SLAP
Flinders
Red Bluff
Chowchilla
PowerSmith
Cogen
STP
WA Parish
BC2
Long Beach
Huntley
ITISA
Total MW
Divestments
Acquisitions
Uprates
23,960 MW
17,853 MW
(3,708 MW)
(155 MW)
177 MW
139 MW
(103 MW)
(1,602 MW)
11,693 MW
(195 MW)
0
5,000
10,000
15,000
20,000
25,000
Base
2004
2005
2006
2007
2008
|
Asset Optimization:
Market Conditions Remain Very Bullish
Implied Gas Plant Value1
Note: See appendix for transaction detail.
1 Implied value for gas assets assuming $2,500 million value for geysers, and after benefits from accelerated tax benefits, synergies and
carbon.
Significant value to be realized through asset sales
$450
$800
$750
$1,000
$600
$900
$900
$1,200
$200
$400
$600
$800
$1,000
$1,200
$1,400
Southeast Recent Announced
Transactions
California / Western US
Recent Announced
Transactions
Texas / ERCOT Recent
Announced Transactions
CCGT Replacement Cost
$/KW
|
NRG Alone or NRG/Calpine
Still Focused on Texas
|
The impact on the portfolio due to gas
move is bigger than that of heat rate move
Heat rate moves are in a relatively narrow
range
Daily gas moves are 4x more volatile
For any forward 3 month period, the
probability of a 1 mmBtu/mWh heat rate
move is negligible
For any forward 3 month period, $1/mmBtu
move in gas is 'equally probable' to 0.25
mmBtu/mWh move in heat rate
Based on last 12 months historical data for
Cal 2009 Forward Gas and ERCOT RTC Heat Rate
Probabilities for Commodity Volatility
Henry Hub Gas Prices and ERCOT RTC Heat Rate
-10%
0%
10%
20%
30%
40%
5/25/07
7/25/07
9/25/07
11/25/07
1/25/08
3/25/08
Percent Change
Cal 2009 Gas
Cal 2009 ERCOT RTC Heat Rate
0.249 mmBtu/mWh
Negligible
0.029 mmBtu/mWh
7.7 to 8.3 mmBtu/mWh
$1 /mmBtu
14%
$0.115 /mmBtu
$8.1 to $11.4 /mmBtu
Gas and heat rate moves that
correspond to 14% probability
Probability of $1/mmBtu and
1 mmBtu/mWh heat rate move
One standard deviation of day
over day changes
Gas price and heat rate ranges
over past 12 months
Heat Rate
Gas
|
Baseload Gas Price Sensitivity (As of 4/25/08)
Gross margin change from $1/mmBtu gas price change
Hedge Profile Sensitivities
Fundamentals on gas and reserve margins suggest ample
opportunity to optimize long gas and heat rate exposure of portfolio
Baseload Heat Rate Sensitivity (As of 4/25/08)
Gross margin change from 0.25 mmBtu/Mwh
expansion in market implied RTC heat rate
$20
$69
$120
$129
$127
$127
$0
$100
$200
$300
$400
$500
$600
2008
2009
2010
2011
2012
2013
Impact of Rising Heat Rates
(Millions)
Note: Based on hedge positions as of 4/25/2008 and 2008 reflects balance of year.
Baseload Heat Rate Sensitivity (As of 4/25/08)
Gross margin change from 1 mmBtu/Mwh
expansion in market implied RTC heat rate
$168
$187
$322
$366
$4
$64
$0
$100
$200
$300
$400
$500
$600
2008
2009
2010
2011
2012
2013
(Millions)
Impact of Rising NG Prices
Baseload Gas and Heat Rate Sensitivities Impact1
(from 2/1/08 to 5/23/08)
Portfolio as of 2/1/08, excluding hedges after 2/1/08, against actual gas
and heat rate moves, holding all other inputs constant
972
869
448
523
407
(199)
(230)
(190)
(162)
(39)
$0
$200
$400
$600
$800
$1,000
$1,200
2009
2010
2011
2012
2013
(Millions)
Gas Impact
Heat Rate Impact
368
361
258
639
773
|
Remain Bullish On ERCOT Heat Rates
Implied Heat Rate - Houston Zone
ISO Forecast Reserve Margin
Note: 2008 heat rate: Jan-May historical, June-Dec forward
2008 heat rate
significantly higher than
forward heat rate just 5
months ago
May 08
Dec 07
Actual heat rate
Source: NRG Estimates, ERCOT
Heat rate 2009 - Houston all hours
RM Update
RM Update
RM Update
Heat rate compression exaggerated in short term but will
correct for long term fundamental drivers
Gas
HR
Recent compression on implied heat rates driven by:
ERCOT reserve margin forecast - may overstate
supply/demand fundamentals given amount of imputed
wind and transmission constraints
Wind generation - non coincident with peak load -
ultimate impact depends on transmission built
Sharp increase in gas prices with power lagging
Sensitive decrease in liquidity after credit crisis
Actual reserve
margin close to
17.9% due to
mild summer
Note: RM Update implies ERCOT reserve margin reforecast
Bear Collapse
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
2006
2007
2008
2009
2010
2011
2012
Jun-07
Dec-07
May-08
7.00
7.25
7.50
7.75
8.00
8.25
8.50
8.75
9.00
2006
2007
2008
2009
2010
2011
2012
mmbtu/MWh
|
Portfolio Management: Operational
Synergies Captured through FORNRG
Bottom-up and top-down program that leverages employees'
insights towards improving bottom line -- ready to deploy again
2005
2006
2007
2008
Projected
NRG Classic
Projected
NRG Texas
Actual
Results
$0
$50
$100
$150
$200
$250
$300
$30
$35
$81
$144
$122
$220
$250
|
Cost Savings and Operating Synergies
NRG Management should be able to
achieve greater than $100 million in savings
1 Includes SG&A and other operating expenses
($ in mm)
2007A (10 K Filing)
NRG
Calpine
Total
Fuel and Purchased Energy
1,974
$
5,683
$
7,657
$
Other COGS
454
136
590
Maintenance & Other OpEx
950
749
1,699
G&A
309
188
1
497
Development Costs
101
-
101
Total
3,788
$
6,756
$
10,544
$
$100 MM of Cost Savings
% of G&A
32.4%
53.2%
20.1%
% of Total
2.6%
1.5%
0.9%
|
Source: Credit Suisse Research
Carbon Intensity is defined as CO2 emissions (in tons)/MWHs generated
Repositioning NRG In a Carbon -
Constrained World
Nobody knows how aggressive a federal carbon regulatory regime ultimately will
become so "end game" protection over the next 25 years is to reach a "carbon light"
or at least "carbon neutral" status for our own generation
NRG's objective is to go from one of the most carbon intensive to one
of the more "carbon light" of the big generators within one generation
2006: 0.93 tons/ MWHr
2016: 0.75 tons/ MWHr
2025: 0.49 tons/ MWHr
CO2 Intensity
(Tons/MWH)
NRG
CO2
Neutral
Position
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
American Electric Power
Allegheny Energy
Mirant Corp
Edison International
Reliant Energy
NRG Now
Dynegy Inc
Texas Energy Future Holdings
NRG 2016
Duke Energy
PPL Corp
NRG 2025
Calpine Corp
Southern Co
Constellation Energy
Public Service Enterprise Group
Exelon Corp
|
Note: All curves exclude potential gas, heat rate and capacity adders driven by carbon regime.
1 35% allocations of historical CO2 from 2012 declining to 0% by 2030, and allowance prices of approximately $10 to $27 price per short ton
2 Phase I Repowering (2007-2015) assumes carbon margin uplift from 40% ownership in STP 3&4, 525 MW of wind, 125 MW post combustion capture with CCS, 375 MW IGCC with CCS, and carbon margin neutrality from 650
MW CCGT, Limestone 3, appx. 1,600 MW of gas peaking and Big Cajun 1. Low carbon assets assumed to retain carbon benefit; high carbon assets are assumed to be carbon mitigated through offtakers.
3 Phase II Repowering (2016-2030) assumes Repower I plus carbon margin uplifts from 2,250 MW nuclear, 3,000 MW post combustion capture with CCS, 800 MW IGCC, and 1,500 MW wind and carbon margin neutrality from
3,000 MW of CCGT's. Straight lined pro-rated 2020 through 2030.
4Calpine projected output kept flat at 2008 levels for gas plants. Assumes no new plants come online. Geysers output assumed to decline 1.0% per year. Does not adjust for any existing contracts or hedges. Assumes portfolio
emission rate of 0.42 short tons/MWh. Does not include any impact from AB32 legislation in California.
Even under more conservative allocation scenario than current legislative proposals, carbon legislation not likely to negatively
impact NRG's current fleet until 2019
With RepoweringNRG and econrg, if we achieve a reasonable degree of success, carbon constraints will likely be positive for NRG
NRG's "first-mover" advantage in key low-carbon technologies will allow us to further leverage and accelerate decarbonization plan
RGGI Period
Federal Transition Period
Incremental Margin Impact ($mm)
Carbon
Constrained World
Technology Transition
Short Term
2008-2011:
Minimal
Impact
Medium Term 2012-
2018: Neutral to Positive
Long Term 2018 and beyond:
Depends on Us
(2)
(3)
(4)
(2)(4)
NRG is poised to turn
carbon risk into carbon opportunities1
Calpine's carbon impact is a plus, but not a driver
($1,000)
($800)
($600)
($400)
($200)
$0
$200
$400
$600
$800
$1,000
Current NRG Portfolio
NRG Standalone w/ Phase I and II Repowering
NRG Standalone w/ Phase II Repowering
Current CPN + Current NRG
Current CPN + NRG w/ Phase I Repowering
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
|
Tax Optimization
Calpine has approx. $5.1 B of net operating loss carryforwards ("NOL")
subject to annual limitations:
$4.33 B over 13 years ($333 MM/year)
$750 MM over five years ($150 MM/year)
Any non-utilized limitation can be carried forward into subsequent
years
Pursuant to its 2007 10K filing, Calpine has a valuation allowance of
$2.4 B which primarily relates to NOL carryforwards and because of a
lack of earnings history
Tax Efficiency will Support Free Cash Flow Accretion
Calpine Tax
Situation
NRG Tax
Situation
In combination, NRG expects to reverse the valuation allowance with
regard to Calpine NOL's due to NRG's earnings history
As previously stated publicly, NRG expects to become a meaningful
cash tax payer in 2009 - estimated 2009 tax rate of 24% and 31% in
2010
NRG will have sufficient capacity to consume any unused NOL limitation
not utilized by Calpine
|
Financial Strength
Leverage
Increased consolidated leverage
manageable
Pro forma at 3/31 estimated Net Debt/Cap
of less than 50%, within NRG's targets
Estimated Consolidated Debt/EBITDA of
4.8x reduced quickly through cash flows
and portfolio optimization
Combined entity's leverage and liquidity
levels manageable before Portfolio management
Liquidity
Combined entity would have approximately
$3.5-$4B in liquidity based on 3/31
numbers
Significant additional liquidity provided by
1st lien trading facilities at both entities
Shareholder Benefits
Significant increase in RP basket due to
issuance of equity
Cash flow enhanced by optimizing combined
tax position
$20 billion market cap combined with
increased float creates greater liquidity for
shareholders
Risk
Combined entity can utilize NRG's additional
baseload hedge capacity to reduce volatility
of cash flows
Spreading development pipeline over
greater portfolio size reduces risk on any
one project
Financial Profile provides shareholder benefits
with manageable increase in leverage
|
Roadmap for Free Cash Flow Generation
Upsides
Underlying
Fundamentals
Calpine core
operations,
contracts esp.
above market
portion, hedge
profile
Asset
Disposition
Asset disposition
proceeds - only
question is how
much, how soon
and at what price
Restricted Payment Expansion From Current $150 million to ~$1.0 billion1
Commercial
Operations
FORNRG
Financial
Management
Expansion of
product offerings
Extrinsic value
Deeper
origination &
marketing team
Leverage NRG's
highly successful
program
Streamlining
capital structure
and lower cost of
capital
FCF
Management
Operational
Synergies
Cost savings
start at $100 MM
(SG&A)
Tax
Optimization
Accelerated usage
of $5.1 B NOL
Other Tax
Benefits
Utilization of
other potential
tax benefits
Free Cash Flow Accretion
Drivers
1 Based on the Term Loan covenants
|
NRG - Calpine
The Right Transaction ...
at The Right Time ...
Between The Right Partners
|
2008 Commercial Operations
2008 Coal Hedge Profile5
Hedging during periods of volatility to lock in higher dark spreads
Baseload Hedge Position1
PRB 8800 PRB 8400 Lignite Other
Approximate Annual Usage (mm) 6.0 16.0 6.0 1.8
Percent Hedged Fully Hedged Fully Hedged Fully Hedged Fully Hedged
Current Market $/ton $14.30 $10.10 Cost plus $87.20
Region Clearing Prices NRG MW 2007 Average 2008
NYC 1,415 $9.27 $4.54
NY ROS 2,545 $2.61 $2.35
FCM 1,725 $3.05 $3.46
LFRM 255 $14.00 $14.00
RPM-EMAAC 1,014 $3.52 $5.07
RPM-RTO 142 $0.76 $2.47
Market Capacity Prices (kw-month)
(excludes hedges)
1 Includes Northeast, South Central and Texas as of 04/25/2008. 2008 values reflect positions from
May '08 through December '08 only.
2 Before considering hedges, reflects actuals for Jan-April 2008 and forward for balance of year.
3 Per the terms of RMR agreement, any FCM transition capacity payments are offset against approved
RMR payment. RMR agreements were set to expire upon the start of the FCM auction 2010.
4 PJM name conventions changed for subsequent three of the four auctions.
5 Hedges include activity since beginning of the year for the full year of 2008. Current market prices for coal are
as of 04/25/2008 and represent average of balance of the year 2008 prices only. Price for other reflects
average of NYMEX QL, Colorado and International coal prices.
Open Energy
New Hedges
Q4 Hedged Energy
Hedged Fuel
25%
34%
61%
65%
85%
97%
23%
53%
59%
64%
100%
97%
2008
2009
2010
2011
2012
2013
9%
11%
13%
11%
2%
2
3
4
4
|
Natural Gas Fundamental...
Key Value Driver
Convergence to oil/residual prices
Global demand for LNG at prices
significantly above Henry Hub futures
Gas-fired generation demand based on
carbon uncertainty
Increasing Finding & Development/labor
costs
Note: Conversion factor from crude to gas 5.84bbl/mmbtu
Decline in US gas inventories (domestic
supply disruptions and colder spring)
Lower LNG imports driven by strong
international prices
Strong international demand (Japan/Spain)
Reduction in Canadian imports/Increasing
Mexican exports
Favorable short and long term gas fundamentals
US Gas Inventories
Short Term
Long Term
1,000
1,500
2,000
2,500
3,000
3,500
4,000
11/1/2007
11/8/2007
11/15/2007
11/22/2007
11/29/2007
12/6/2007
12/13/2007
12/20/2007
12/27/2007
1/3/2008
1/10/2008
1/17/2008
1/24/2008
1/31/2008
2/7/2008
2/14/2008
2/21/2008
2/28/2008
3/6/2008
3/13/2008
3/20/2008
3/27/2008
4/3/2008
4/10/2008
4/17/2008
Tcf
2008
2007
5-year Average
$/mmbtu
Fuel Convergence
Surplus
Deficit
Source: NYMEX and NRG estimates
Source: EIA and NRG estimates
$-
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
$18.00
$20.00
$22.00
$24.00
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
History
Futures
Oil
Natural
Gas
Current oil curve (~$130/Bbl)
translates into $16.7/mmbtu
gas using 7 yr avg. ratio and
$22.3/mmbtu at mmbtu parity
Historical Crude
Light/Natural Gas ratio
7.80 bbl/mmbtu
|
Selected Asset Transactions
Announce
Price
Price
Date
Buyer
Seller
Facility / Portfolio
Location
($US MM)
Per kW
02/25/08
GIP / Fortistar
Reliant Energy
Channelview (Cogeneration)
ERCOT
$502
$564
11/12/07
Arcapita / Fulcrum Power Services
LS Power
Bosque (CCGT)
ERCOT
430
754
05/29/07
EnergyCo
Dynegy
Lyondell (Cogeneration)
ERCOT
470
880
Texas Region
Mean
$467
$733
05/12/08
International Power
Tenaska / Warburg
Portfolio (CT)
RFC - ECAR, MAIN
$856
$461
03/31/08
TransCanada
National Grid
Ravenswood (Gas steam / CCGT)
NPCC - NYPP
2,900
1,169
01/29/08
FirstEnergy Generation Corp
Calpine
Fremont Energy (CCGT)
RFC - ECAR
404
571
12/10/07
IFM
Con Edison
Portfolio (CT / CCGT)
RFC, NPCC
1,477
866
11/02/07
NIPSCO
LS Power
Sugar Creek (CCGT)
RFC
539
508
05/25/07
Consumers Energy
LS Power
Zeeland (CCGT / CT)
RFC - ECAR
517
547
02/28/07
Astoria Generating
Boston Generating
Portfolio (CCGT / Oil)
NPCC - NEPOOL
3,221
1,087
North Region
Mean
$1,416
$744
05/12/08
GSC Acquisition
Complete Energy
Batesville (CCGT)
SERC
$400
$437
04/15/08
Wabash Valley / Hoosier Energy Rural Electric
Cooperative
Tenaska
Holland (CCGT)
MISO
383
576
04/03/08
Tennessee Valley Authority
Cogentrix
Southaven (CCGT)
SERC - CENTRL
466
576
02/06/08
Constellation Energy Group
Calpine
Hillabee (CCGT)
SERC - SOU
255
329
01/21/08
OG&E / GRDA / OMPA
Kelson Holdings
Redbud (CCGT)
SPP
852
693
Southeast Region
Mean
$471
$522
05/12/08
GSC Acquisition
Complete Energy
La Paloma (CCGT)
WECC
$900
$880
04/30/08
Hastings / JP Morgan Infrastructure
Black Hills
Portfolio (CT, CCGT)
WECC
840
862
04/22/08
Nevada Power
Reliant Energy
Bighorn (CCGT)
WECC - AZNMSNV
500
836
02/07/07
Puget Sound Energy
Calpine
Goldendale (CCGT)
WECC - NWPP
120
480
West Region
Mean
$590
$765
All transactions
Mean
$842
$688
Source: News releases and company filings.
|
Final Transcript
Conference Call Transcript
NRG NRG Energy at Deutsche Bank Energy & Utilities Conference
Event Date/Time: May. 28. 2008 / 7:30AM ET
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Final Transcript
May. 28. 2008 / 7:30AM ET, NRG NRG Energy at Deutsche Bank Energy & Utilities Conference
CORPORATE PARTICIPANTS
David Crane
NRG Energy President and CEO
CONFERENCE CALL PARTICIPANTS
John Kiani
Deutsche Bank Analyst
PRESENTATION
John Kiani Deutsche Bank Analyst
Good morning, everyone. I would like to welcome everybody to the 2008 Deutsche Bank Energy and
Utilities Conference here in Miami, Florida.
Were pleased to have with us today NRG Energy. With us we have David Crane, President and Chief
Executive Officer and also Nahla Azmy, Vice President of Investor Relations. As most of you know,
NRG is one of the largest independent power producers in the United States with almost 23,000
megawatts of coal, nuclear, natural gas and now wind-fired generating capacity. NRG currently has
one of the few generation development programs in this sector and we expect this program to
organically grow the Companys EBITDA by almost 10% over the long-term through investments and
lower-risk, higher-return projects. With that, Ill turn it over to David Crane.
David Crane NRG Energy President and CEO
Good morning, everyone. Thank you, John. I want to begin by saying that I apologize that we
are only going to be here in town for less than an hour. Now that Im here in my fourth and a half
hour here in Miami, thanks to the air traffic control system last night. So I apologize for all the
people that want to have one-on-ones or talk to us about the things that are going on with the
Company, but Im going to try and address some of those things during the speech this morning and
leave some time for questions.
Im also aware that as I look around the room, I see a lot of people that know the Company
pretty well and I asked them for their indulgence; because the way the presentation is structured
is that Im going to speak principally about the initiative that was announced last week somewhat
unexpectedly from our perspective. And I know that the people in the room know the Company pretty
well; but since it is being webcast, I want to go back and lay the foundation for the initiatives
we have taken before getting into a little bit more level of detail.
Safe Harbor statement. I understand that there is some new words this time because of what is going
on with the company, so Im sure it will make particularly good reading for everyone. But I will
ask you to go back and read it later.
In terms of getting started, what I want to mention to you to begin with is that the presentation
that I have today, focusing on the Calpine issue, what Ive tried to do is weave into the
presentation a lot of things that apply to NRG regardless of whether the Calpine presentation
occurs. From the point of view of a general overview, from our perspective, NRG is the premier
competitive power generation company in the United States today. We have a plan, actually, a series
of initiatives, to enhance our position based on intrinsic growth, which is well in advance and I
think increasingly a point of differentiation in our favor between us and other competitive power
generation companies.
Im convinced that we can and will achieve our destiny through organic growth, but when an
opportunity arises to accelerate our pace of development, broaden and strengthen our growth
platform and turbo-charge our returns, were going to be very aggressive in seeking to secure the
value of that opportunity for our shareholders. That is particularly the case when the value
proposition to be unlocked involves following virtually the exact same roadmap that we have pursued
in the 4.5 years since NRG itself exited Chapter 11.
Before I start, I want to reflect for a second on the awkwardness, though, of the timing of this
presentation. Right now our Company has made a specific combination proposal, to which we have not
yet received a substantive response. So it is obviously not the best time to discuss that proposal
or the merits of the contemplated transaction in public, yet, obviously, I cant ignore it.
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Final Transcript
May. 28. 2008 / 7:30AM ET, NRG NRG Energy at Deutsche Bank Energy & Utilities Conference
I hope you will recognize and respect that there are many things that we do not know that we would
expect to know once we have an opportunity to do due diligence. There are other things which we
think we know but which we choose not to disclose for competitive reasons. In either case, our
discussion today will be by necessity incomplete and not totally satisfactory to you.
So to our shareholders, by way of this Slide 4, what Im in effect saying is that trust us. Over
the 4.5 years at NRG we feel we have established an unbroken record of financial discipline and
strengthening credit metrics and risk profile. The proposed Calpine transaction is compelling from
a strategic point of view and persuasive from a financial point of view. But it is not so
compelling or otherwise persuasive that it would cause us to depart from our most cherished bedrock
principles of fiscal discipline and prudent balance sheet management.
Now getting into it, slide 5 lays the foundation for our initiative, vis-a-vis Calpine. This is a
slide by the way which I first used with the NRG Board of Directors back in 2005, and in my opinion
it provides the basic roadmap for a competitive power generation company emerging from bankruptcy.
First, you stabilize the Company by creating an organization that can survive and compete outside
the oxygen tent of Chapter 11.
Then you establish credibility with the investment community by successfully harvesting the
low-hanging fruit that inevitably has been left behind during the Chapter 11 process. And finally,
armed with the ready access to capital that this credibility provides, you take advantage of the
plentiful opportunities to grow in our industry. This is the roadmap we used to great success in
2004 and 2005 and it is the roadmap that I believe Mirant tried to follow a couple of years later,
but they miscalculated by skipping the first two steps.
This, in the simplest case, is what makes an NRG/Calpine combination so attractive to both sets of
shareholders. Mirroring the opportunity that they represent to follow the roadmap to value creation
with the management team that will give them the credibility that is required to vastly accelerate
the process.
For us, we evaluate the transaction not just as a way of harvesting low-hanging fruit but as a way
to take the combined company to a level of evolution that has not yet been seen in the competitive
power generation industry. Again, I go back to what I call the five fundamental truths about our
industry, and again, these are slides that I used with our Board a few years ago. And in these
fundamental truths that have informed every strategic decision that we have made at NRG over the
past four years. NRG today scores better against these truths than any other competitive power
generation company. But the combined company takes it to the next level.
Having converted the five fundamentals a few years back into the five imperatives, I note that this
combination with CPN substantially advances four of the five, and you could argue, advances all
five.
Now finally, translating the imperatives into something even more real, slide 8 is a slide that all
of you who have followed NRG should recognize, since we used to show this with regularity a few
years ago. Weve dusted off the diamond, brought it out of retirement to make a point, that all the
regional businesses and all the value drivers that we have in each of the regions since the
emergence through the Genco acquisition, through the four NRG internal improvement programs, the
hedge reset, the financial engineering, the regular return of capital to shareholders; all this are
enhanced by the Calpine merger and much less encumbered by the restricted payment baskets. All
these opportunities will arise again in this combination.
So with that overview, I would like to get a little bit more specific about the benefits of the
proposed combination. If people had a chance to review the letter that we sent to the Calpine
Board, they would have recognized that we actually listed 10 reasons why we thought the combination
made sense to both sets of shareholders.
Since I want to leave time for a significant number of questions, Im not going to go through all
10, but we have picked out five of what I think are the more important ones to talk about today. So
Im going to talk about these five benefits and then talk a little bit about the finances of the
transaction, and then open the floor to questions.
So first, talking about scale. The first thing I want to say about scale, and again, this applies
to NRG without Calpine. And that is that there is no part of NRGs present ambition, whether it be
in the nuclear development, the repowering program more generally or with respect to carbon policy,
that we feel is in any way hindered by our present size. Indeed, being mid-sized allowed us to be
fast and nimble in an industry that is just beginning to realize that those historically
unimportant qualities to the power industry are going to become essential as we enter the new
technology-driven, carbon-constrained world.
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Final Transcript
May. 28. 2008 / 7:30AM ET, NRG NRG Energy at Deutsche Bank Energy & Utilities Conference
So the obvious scale that this transaction would provide is in that sense a mixed blessing. I think
a very important part of the management integration that we would face and the part that would fall
on me personally is to ensure that this transaction goes through, we at NRG dont lose our clear
and crystal approach to decision-making and fall victim to management by committee.
On the positive side, as they say, scale has its privileges in terms of procurement, liquidity,
indexation, political influence, the combined company would be in a better place than NRG alone and
it would be in an altogether better place, almost a different time zone, from where Calpine is
right now.
But really what makes the combination a hum is not the scale for scales sake but the unique and
unparalleled combination of regional market diversification coupled with asset concentration. These
two companies in their present incarnation perfectly complement each other. They correct our bias
towards Texas and towards coal. We fix their absolute lack of solid fuel baseload generation. In
each of the four regions, the combined company will be able to dispatch efficiently across the
merit order and in most cases around known transmission constraints. The competitive advantage
provides us as we seek to follow load and be the bulk generation supplier of choice and field
manager for load-serving entities is enormous.
Now turning to asset dispositions. The combined companys regional scale would be so great that we
see one of the major upsides to this transaction is the opportunity it will provide us to
rationalize the combined asset base. Im not sure that those of you who follow only public
companies are aware of this fact, but right now, theres an absolutely enormous disparity between
the trading multiples of competitive power generation companies and the disposition multiples of
privately owned power plants. As demonstrated on this slide 12 once again, NRG has the experience
and proven track record in the disposition of assets at value. Working with a much weaker and more
disparate asset base in a much more negative market environment, we disposed of 24 assets for
almost $2 billion value in our first two and a half years.
As demonstrated on this slide 13, it has been the practice of NRG both to buy and sell more or less
simultaneously. The way I always liken this process, for those of you who live up in the Northeast,
it is like making a snowball. To make the best snowball, you grab a lot of snow, you pack
it in, you sort of dust off the outside of the snow and then you put more in. That is really what
we did at NRG in terms of we did basically two two and a half acquisitions over the last four
years. We sold 24 things. But that was always to strengthen the core. Calpine acquisition provides
that same opportunity in abundance. And of course as I mentioned before there is no better time to
be selling individual assets.
Now one of the questions that has come up in the past few days as weve talked about this
transaction with some of our investors, I have had the opportunity to speak with a few investors;
Bob Flexon and Clint Freeland have spoken more; is how can we be sure that the asset values will
continue particularly if and this is a topic Im going to discuss much more directly in a few
slides if people feel that heat rates are compressing.
And the reason that is, as demonstrated by this slide, is that we dont believe it is heat rates,
the prospect of appreciation in future heat rates or the fact that heat rates are compressing; that
is not what is driving asset values in the private asset market. What is driving asset values is
replacement costs. And if people saw the article just in yesterdays paper, Wall Street Journal,
written by Rebecca Smith, you would have seen, and we would substantiate that; that the price of
new build for gas-fired combined cycle plants in this country is going up on a weekly if not a
daily basis. As you can see from this slide, we would say, and this is obviously a blended average
across the country, it is not it would not be wrong to assume that the cost of building a new
combined cycle plant in the United States today ranges somewhere between $1,000 and $1200 per
kilowatt.
The way we do the math is we calculate the price at which we would be getting Calpines
considerable fleet of modern gas-fired combined cycle; it comes out to in the $600 to $700 per
kilowatt range. So theres a lot of room for upside in terms of asset optimization.
Now the next topic I really want to focus on has to do with this topic of heat rates. And the point
that I want to emphasize here is that this next set of slides is equally important, whether this
transaction goes through, whether you think about NRG and Calpine together, or whether you think
about NRG alone. Right now, obviously, Texas is our most important region by a significant extent.
Should we combine with Calpine, it would still be our most important region, although of course,
there would be more portfolio diversification.
The other thing that I think you have to keep in mind thats a fundamental difference between
Calpine and us is that NRG is and continues to be a natural gas play, if you look at it from a
commodity point of view, while Calpine is a heat rate play.
The point that I want to focus on, and I think when we came out of our first-quarter call, we felt
and some people actually were brave enough to suggest this to us, that when we talked about our
hedging plan and what was going on in Texas in particular with heat rates, that we had gotten it
almost exactly wrong at NRG and that we were hedging out our gas position while staying along heat
rate. And that, given that as we said, were
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Final Transcript
May. 28. 2008 / 7:30AM ET, NRG NRG Energy at Deutsche Bank Energy & Utilities Conference
very bullish on gas and think gas is going up but
people are seeing the heat rates compress, that that was almost a diametrically wrong strategy. So
what I would like to explain here today is why we think that is the right strategy and so we
start here with slide 16.
Obviously, what this shows in terms of top graph, is the relative movement of heat rate versus gas
prices. And you see that the gas prices have been far more volatile than heat rates and in an
upward direction. What we tried to do is actually calculate, as shown on this slide, on what I call
the probability equal basis, just how much more volatile was gas than heat rate. And the last
answer over the last 12 months is that the gas in Texas has been almost 4 times more volatile than
heat rate.
Which leads to the next slide. This is a graph that we show virtually every quarter, that, in this
case, shows our sensitivity to gas prices. Now one of the things that we feel we probably did not
help our own case with, is, you have to look at the unit of measurement here. This is the change in
gross margin to NRG coming from a $1 per million BTU change in gas price.
We also showed in the same slide at our [corethy thing] the change that would come from a 1 million
BTU per megawatt hour change in heat rate. And I think that people looked at these two slides next
to each other and said, well, the Companys exposure to heat rate, which they dont seem to be
doing anything about, is far greater than it is to gas prices.
The problem, and the one that I would like to correct with this slide today, is that the
probability of a $1 per million BTU or 1 million BTU per megawatt hour move in heat rate is far
less probably than a $1 per million in BTU gas. In fact, it is 4 times less probable. So if we
adjust to make
it on an equal probability state, you see that this is actually where NRG stands in terms of
relative sensitivity to gas prices versus relative sensitivity to heat rate.
If you focus on just 2012 as an illustration, and this is one of the reasons why we are hedging, a
$1 per million BTU move, $322 million of sensitivity to gas price, while on the same probability,
$127 million sensitivity to 0.25 million BTU per megawatt hour move in heat rate.
And so what this means, and we feel quite frankly of course it is always hard for us to figure out
why the market is pressuring the stock or otherwise. But you know we have felt that this
compression in heat rate question, and this sort of concern about our hedging strategy, has been
one of the main drivers over the last three months. So to take it to its conclusion, over the last
three months, while people have been concerned about our exposure to compressing heat rates in
Texas, with gas prices rising, what we have shown in this bottom right-hand slide is if you look at
the value in our portfolio overall, the blue bars show that the increase in value in each year of
our portfolio from rising gas prices over the last three months relative to the reduction in value
in our portfolio as a result of heat rates. As you could tell, obviously, and again, reinforcing
the notion that NRG is a gas play, you can see that its actually been a positive movement for us.
Now that there is the question of so what do we expect? Do we expect heat rates to continue to
compress? And this is the next part and the more substantive aspect of this question, and the
answer is, I understand from the reports that I read from John and other sell-slide analysts that
this notion that we have espoused and other companies have espoused that the compression in heat
rates is not borne by the fundamentals; it is something that is sort of common industry knowledge
now.
What I would like to do is explain what I think is going on in the heat rate market, and again,
focusing on slide 15. What you see on the upper left-hand slide over the last year, again, using
the Houston all-hours rate, is the movement in heat rate over the last year versus the movement of
gas prices. And as you can tell, they are almost inversely correlated. What we have plotted on
there, because some people thought that this is the driver to the compression in heat rates, is the
official ERCOT announcements of changes in the reserve margin.
But now if you compare the graph on the upper left with the one on the bottom right, which shows
how ERCOT has changed the reserve margin slide, if you can see the bottom slide, the red one, which
shows a very bullish case for a tightening in the market. When they announced that case in May of
2007, the heat rate continued to decline over that period until they raised the rate, which is the
green line on the bottom right. What that is indicating is if you look at this slide carefully, the
conclusion is that the reserve margin announcement out of ERCOT are not a leading indicator of
where heat rates are going. They are very much a lagging indicator.
What really has happened, what we believe are the really two factors that have caused significant
heat rate compression in Texas are number one, when gas prices rise, you have to take into
account the fact that the natural long-term buyers, that there is a fundamental imbalance in power
markets. There are more natural long-term sellers than there are long-term buyers. Such long-term
buyers that exist tend to be load-serving entities, not particularly sophisticated from a trading
perspective, co-ops and the like, who tend to look at their historic costs. And they are not
actually looking to trade heat rates at all. They are just worried about the absolute cost of power
of their wholesale power. So when gas prices rise, driving up electricity prices, suddenly, the
natural buyers, the people who serve loads leave the market.
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Final Transcript
May. 28. 2008 / 7:30AM ET, NRG NRG Energy at Deutsche Bank Energy & Utilities Conference
And then as we show here, if you look at the trajectory of the heat rate curve after the point that
is called Bear collapse, the other thing that happened in coincidence with this is once Bear
Stearns collapsed, the financial players, who at sometimes provided the counterparty for heat rates
trades, left the market in droves as well. So you see the precipitous drop in heat rate that
occurred.
So the simultaneous combination of gas prices rising driving out the natural buyers plus the
collapse of Bear Stearns drying up the activity of the financial buyers; to us, those are the two
factors that have caused heat rates to be under pressure in Texas.
Now the proof the ultimate proof of this is the graph you see on the upper right-hand corner.
This is one that I find particularly ironic because while our investors seem to be concerned about
how forward heat rates are going to impact us, what were struggling with in Texas right now is
power prices and heat rates that are out of control. The price of electricity in Texas over the
last couple of weeks in the South zone and in the Houston zone has been in triple digits most days
and in 4 digits. So you see the downward movement in the forward heat rate curve, while the 2000
heat rate curve has blown out. And that is a sign when the natural buyers have to fill their
position; they have to serve their load.
So again, this is what were dealing with now. You are concerned about our investors are
concerned about compressing heat rates. Were concerned about power prices in Texas that are so
high that it may invite a negative regulatory response. So just as an example, keeping in mind that
were still in May, all NRG power plants in the Houston zone ran last week and we produced more
power, close to 800,000 megawatt hours in one week, last week than we did on any given average week
in Texas last July and August. Keep in mind that last summer was an astonishingly wet summer in
Texas and that what we may be seeing is an unleashing of demand that is unexpected this summer. And
that is what were gearing up for at NRG.
Now, having focused on that topic, I just want to talk a little bit about operational synergies. I
think everyone knows that there will be synergies and a merger between two complementary companies.
The question is, once again, who has the proven track record on capturing those synergies? What we
try to show here is our FORNRG program, as it was affected by our Texas Genco acquisition. What you
see with the crosshatched bars in blue is what the original program was designed to achieve. Then
when we bought Texas Genco and brought them into the fold, the yellow crosshatched shows what we
were able to add. And then the blue lines are what we actually ended up the blue bars are what
we actually achieved for those years.
So how much operational synergies can we get if we combined with Calpine? It is too early, having
not had the opportunity for due diligence for us to give a proper number on this. But I think it is
fair to say, I would only point out that Calpine, much more spread out, twice as large as Texas
Genco. Texas Genco was an exceedingly well-run portfolio of assets when we bought them. So we think
there is enormous potential for operational synergies, which is one of the things that we would be
looking to firm up.
Looking at operating synergies from another point of view, again, for people who read the letter,
they would have said, and I think this may be one of the great understatements that ever come from
NRG management, that we should be able to achieve greater than $100 million in savings.
What this shows is the combined purchasing power of the two companies. As you can see if you just
look on the right-hand side, the two companies will spend over $10 billion a year on fuel and O&M
and G&A. What we have assumed so far, again, prior to due diligence, is that what we worked into
our model, is we capture only $100 million of that, which is less than 1% of the total. So we think
theres substantial room to do more here as well.
The carbon question came up several times in terms of conversations I had with people. Sorry, Im
also, in addition to being sleep deprived, trying to work through a cold as well. But the point I
would make about carbon is that carbon is not a driver to this transaction but an upside. We have a
carbon plan of our own. What I have tried to show here is how we see that. Right now we fall in the
category of what I would call a carbon heavy company. Based on the repowering program both the
Phase I, which is what were pursuing, that would get us to this, in terms of carbon intensity, at
0.75 tons of carbon per megawatt hour. If we sort of build on that with sort of a blue-sky
approach, we get to the point where 2025, our goal would be down in what I call the carbon moderate
or the carbon neutral territory.
You see where Calpine sits in terms of their present portfolio. Obviously, combined with Calpine
allows us to average down and get to a point, just based on immediately smashing together the
portfolios, where I think that we would move from being in the carbon heavy category to carbon
moderate. Again, I think the main impact of this for you right now, because Ill go on and talk
about the EBITDA impact of this, which in either case, is 10 to 20 years in the future, because I
think there is a little bit of a stigma, to be frank, that deals with being a carbon-heavy company
right now. I dont know if it is a I think it is something that weighs a little bit on the stock
price. But I think what it also weighs on is the prospect of NRG alone or NRG with Calpine as an
acquisition candidate in its own right, that there are people who would not pursue NRG because of
the carbon heavy aspect.
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Final Transcript
May. 28. 2008 / 7:30AM ET, NRG NRG Energy at Deutsche Bank Energy & Utilities Conference
So to the extent that NRG and Calpine come together, I think the most important point is almost an
image question, it puts the Company together as what I would call a carbon moderate company.
Looking at the carbon from the point of view of what impact on EBITDA and, again, this slide
which weve used several times before, only deals with the EBITDA impact of a carbon tax or a cost
on carbon itself. It does not show the positive impact of the new generation that we would bring on
to reduce the carbon footprint. Again, what this shows and we have done our best to calculate what
it would mean with Calpine onboard. But essentially, it shifts forward or it shifts outward the
time from which carbon would have a negative impact on our EBITDA from the 2018 to 2020 range into
much later in that decade. So it goes from a 10 to 12 years out problem with Calpine to like an
18 to 20-year out problem. And, again, that is assuming that we do not do anything.
Another key aspect of this transaction which I will mention only in passing, keeping in mind for
everyone that the management of NRG has always said that first and foremost, we manage this
business for cash. We know there is a, for the most part, people in your shoes are analyzing our
companies on an E.B. to EBITDA basis; and EBITDA obviously is often a proxy for cash, but not when
theres a huge tax benefit. An enormous part of this transaction is the ability of NRG who becomes
close to a full taxpayer in 2009, or transitions to a full taxpayer over 2009/2010, its the fact
that we can utilize Calpines considerable NOLs almost immediately and far more optimally than they
can.
Even if you look at Calpines 2007 10-K filing, they have a valuation allowance of $2.4 billion
against their $5.1 billion net operating loss carryforward, recognizing that they may never be able
to use their tax loss carryforward. So this has a major impact on the free cash flow accretion.
Beyond that, again, trying to push through to conclusion here, I think that our Company has gotten
a well-deserved reputation for creative and value creating financial engineering in the 4.5 years
that we have been at it. I think if you look at the Calpine situation, you see there is a lot of
opportunity for things that we have done before.
So some of the things that we pioneered, the first lean to support trading; the maintenance of a
strong; cost effective liquidity position; hedge resets; all these things are things that we can
look at doing, again, if we combine with Calpine. And of course, the big point is that we have
managed to do what we have done over the last four years, laboring under a very restricted payment
basket. Effectively combining with Calpine would shift the amount of money that we had available in
the restricted payment basket from $100 million right now to over $1 billion. And so it would make
the return of capital to shareholders something even more substantial than what we have done in the
past.
So again, this is the area where we have to be a little bit coy, in part because we have not done
due diligence; in part because of the competitive situation. But when we stack all of the
positives, the value drivers of this transaction; the potential upsides; the move on the restricted
payment baskets, what we come to is the fact that from a free cash flow accretion point of view, we
expect that this would be a very positive transaction in the first year.
And so with that, given that I am almost running out of time and I can feel John Kiani fidgeting on
my right, I will just say that, to paraphrase other comments that have been made in the past, we
are convinced that this is the right transaction at the right time between the right partners.
Thank you.
QUESTION AND ANSWER
John Kiani - Deutsche Bank Analyst
Thanks, David, for your time, and we will now open it up to questions.
Unidentified Audience Member
I was just wondering if you could talk about your balance sheet today and your credit metrics
today; how your balance sheet and your credit metrics would look going forward for the transaction?
And how that free cash flow accretion of this transaction would look if you would leverage up
yourself to see where you would end up being leveraged up [on for] Calpine? Is it really free cash
flow accretive excluding the financial engineering and the leverage implicit in assuming a more
leveraged debt to EBITDA and a more leveraged balance sheet?
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Financial.
Final Transcript
May. 28. 2008 / 7:30AM ET, NRG NRG Energy at Deutsche Bank Energy & Utilities Conference
David Crane NRG Energy President and CEO
Im not sure if Im following you. I mean generally on a pro forma basis when we put the two
companies together because of the acquisition currency being the stock, on a net debt to total
capital basis, we actually think the balance sheet strengthens. The debt to EBITDA goes up a bit
but we think that that quickly comes back in line with where we are now based on asset sales.
But the next part of your question about us leveraging ourselves up, the only thing I would say
Im not sure I follow the question. But in the current capital markets, there is nothing no
aspect of this transaction that were contemplating that depends on access right now to the debt
capital markets for more gearing or cheaper debt.
Unidentified Audience Member
Just putting it frankly, you are taking on two turns of debt to EBITDA. So it ought to be free
cash flow accretive because youre creating a pro forma credit metric profile that is much more
leveraged. So Im saying if you were to put on two turns of debt to EBITDA on a NRG stand-alone,
how free cash flow accretive per share would it be? And is the free cash flow accretion from this
transaction greater than the free cash flow accretion from putting on two turns of debt to EBITDA
on NRG stand-alone? And then risk adjusting the cash flows for a spark spread recovery three or
four or five years from now versus the risk inherent being low on gas?
David Crane NRG Energy President and CEO
Well, I dont know that I can answer that question because the idea of putting two turns of
debt to EBITDA or on NRG, we have not contemplated.
Unidentified Audience Member
And so you ought to contemplate it, because that ought to be the bogey against which you state
this is free cash flow accretive, because that is exactly what you are doing. You ought to risk
adjust the cash flows that you have today and see how they can tolerate leverage versus the cash
flows that you are assuming. That would make it a completely or a much more intellectually honest
comparison, versus saying, this is free cash flow accretive.
David Crane NRG Energy President and CEO
Okay, well you have your sense of intellectual honesty; I have my own. So what is the next
question?
Unidentified Audience Member
I just wanted you to clarify on the NOL you are positive that gets transferred and preserved
and transactioned? And then secondly, when we think about the RFT basket, what is the calculation;
it shows all a stock deal; how much would it increase by again? You said $1 billion?
David Crane NRG Energy President and CEO
Well, remind me, the first question the restricted payment basket. What happens with the
restricted payment basket under the bond deal is the restricted payment basket because of the
issuance of equity goes to $10 billion plus. But what happens then is that the pacing item for us
in terms of return of capital to shareholders actually becomes the restricted covenants under the
bank deal. And of course that is a free cash flow metric which and that is why we talk about it
going from the $100 million range to the $1 billion range. And of course, should we ever want to
modify that, it is a lot cheaper to modify the bank transaction than the bond deal. Im sorry, and
tell me the
Unidentified Audience Member
That is fine. The NOLs?
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Financial.
Final Transcript
May. 28. 2008 / 7:30AM ET, NRG NRG Energy at Deutsche Bank Energy & Utilities Conference
David Crane NRG Energy President and CEO
Oh, the NOLs, yes.
Unidentified Audience Member
The preservation of that in a transaction.
David Crane NRG Energy President and CEO
You know, before we went down this path, we did as much work as we could based on the public
information. We were pretty confident that that would be fully available to us based on public
information. Obviously, it is item number one on the due diligence front, you know, should we have
that opportunity. But we would not have gone through this if we did not have a pretty good
certainty that that would all be available.
Unidentified Audience Member
I guess with regard to the asset sale or the potential asset sales in the contemplated deal,
given the fact that the deal looks dilutive on near-term metrics it seems like the asset sales are
necessary to make the deal neutral at least in the near-term. How would you guarantee, aside from
what precedent transactions might say that youre able to sell the assets for a valuation that
would make the deal neutral or positive in the near-term?
David Crane NRG Energy President and CEO
How would I guarantee?
Unidentified Audience Member
Or would you make sure that if you were going to do the deal you could guarantee it, to put it
another way.
David Crane NRG Energy President and CEO
Well, I mean, my view of this is that there are really two types of assets. There are
non-core assets and there are assets that we would have to sell in Texas. I think the number has
been out there just to be below the 20% rule, we would have to sell 4,000 megawatts. I want to
emphasize that those would not necessarily be 4,000 Calpine megawatts. They could be a combination
of the two.
But in terms of pre-selling, pre-selling I mean everything is a risk/reward balance, as you
know. I think when you pre-sell, you leave money on the table like there is no tomorrow. I think
that we look around at the industry and the fundamentals of the industry and the people who are
buying, this now well-worn path of people who still have generation and rate base, where as long as
they pay $1 less than replacement cost, they are confident that they can justify buying modern
assets and getting it into rate base.
I would be reluctant to do too much pre-selling. I think the place where pre-selling might make
sense depending on what the regulatory dynamic is, would be in Texas. But I see the ability to sell
4,000 megawatts in Texas is a very high-quality situation. And if pre-selling involved giving to
someone some optimal thing, I would certainly take that risk.
But I would say that if you look at a sort of normal timing scenario, we would sort of expect that
if this transaction one good thing about this transaction. It is either going to happen or it is
not going to happen in a very short period of time I would say by the end of the second quarter.
And then roughly based on the approvals we think we would have to get, our operating scenario, the
approvals would come over the second half of the year. It depends, under Hart-Scott-Rodino how much
you can be prepared to do a sales effort for a transaction that has not been approved yet. But I do
not think it is going to take it would take a long time, into 2009, to make very significant
progress on a sell-down.
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Financial.
Final Transcript
May. 28. 2008 / 7:30AM ET, NRG NRG Energy at Deutsche Bank Energy & Utilities Conference
I mean the slide I showed you on how long we took to selling our 24 assets would show at about 2.5
years. Keep in mind that the environment was very different when you were looking to sell assets at
the end of 2003, than it looks right now.
John Kiani Deutsche Bank Analyst
We will take one or two more questions and then we will wrap it up.
Unidentified Audience Member
Im sorry, these are just more follow-ups on both the NOL and the asset sale. Just regarding
the NOLs, I think theres a very basic rule that if there is a change of control of a company just
coming out of bankruptcy within two years then those NOLs get disallowed. I would just like to hear
a little more whether you guys have heard that rule and just already had come up with a way to come
around it?
And then just regarding the asset sales, would those 4,000 megawatts have to be baseload, or do you
have a choice in terms of saying we can sell the peaking capacity as opposed to 4,000 megawatts of
baseload?
David Crane NRG Energy President and CEO
Theres no rule in Texas about baseload. It is a very simple rule. It says 20% of generation.
And certainly at one point I think the pioneer in this area was TXU, was that they were going to
sell all their old gas plants and keep all their baseload plants. And so at that time all the other
things that TXU had pushback, but they never received any pushback on that. So we expect that we
would be able to sell whatever we want to.
And, again, depending on what we see is the asset values is that we have 2,000 megawatts of plant
in the Houston area that are mothballed. And in the 20% rule, mothballed plants that are not
retired also count as part of the calculation. So if we wanted to, we could include those 2,000
megawatts.
As to your first question about tax, youre getting me a little bit out of my depth. I certainly am
aware of that rule, and I know that all of our tax people are aware of that rule. And certainly, we
do not think that that rule is not an obstacle, but I cannot tell you exactly why we think it is
not an obstacle. But I certainly have been in the room when that specific question was asked. And
so we dont think that is a concern.
Unidentified Audience Member
I have three hopefully quick questions. One, just wondering what impact does having contracts
on assets impact whether or not you have to actually sell them in the ERCOT market? Second, you
guys footnoted a $2.5 billion value for the geysers in getting to an implied gas plant value. Can
you just talk about what rationale went into getting to the $2.5 billion for the geysers? And
finally I guess when you look at the transaction what do you which way do you look at it in
terms of accretion, dilution, benefit to shareholders? There is mention of kind of people look at
it is not near-term accretive. They think it is dilutive. But what do you think the right way to
actually look at the deal is from an investor point of view?
David Crane NRG Energy President and CEO
Well, I mean the last point, I think it will be free cash flow accretive. My view is that
again a lot of it depends on asset sales. But I start with the fact it would be free cash flow
accretive. And at the end of the day, I think the most important financial metric for the Company
is free cash flow yield. I think that if we start with a transaction that is free cash flow
accretive in 2009 I think it becomes evermore free cash flow accretive. It becomes, I think it
goes from financially being a good deal to a great deal as the years as we go ahead.
I think in terms of the EBITDA accretive, again, that depends on the asset sales. Im confident we
can get there. I think that that is that will take a few months more.
But I think the other way that I would look at it as a shareholder in terms of more control of our
balance sheet in terms of the de facto lifting of the restricted payment basket.
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Final Transcript
May. 28. 2008 / 7:30AM ET, NRG NRG Energy at Deutsche Bank Energy & Utilities Conference
On the geysers, the $2.5 billion, I mean, again, I would say firming up the geysers and the CapEx
and the remaining resource, I think that is point number two on our due diligence list. But the
price that I have commonly heard talked about for the geysers is actually north of 2,500 per
kilowatt, more in the 3,000 to 4,000 range. So I think that would be positive.
And I know John is looking at me. Hes putting the hook on me. I see my friends from consolidated
Edison in the back of the room. What was the first question quickly?
Unidentified Audience Member
(inaudible question microphone inaccessible)
David Crane NRG Energy President and CEO
My understanding, contracting on ERCOT assets, we can try and make that argument, but I dont
think that ERCOT has ever recognized that if you control the [spats], you are allowed to own over
20%. Our operating assumption is that it is a pretty straightforward rule. So John, thank you very
much.
John Kiani Deutsche Bank Analyst
Thank you very much, David.
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