Hedging Coal Price Risk in a Deregulated Power Market

Transcription

1 Hedging Coal Price Risk in a Deregulated Power Market Ginny Farrow Manager Rail Car Fleet NCCI Spring Conference Greensboro, NC April 12, 2007

2 Safe Harbor Statement 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 Forward-looking statements are subject to certain risks, uncertainties and assumptions and typically can be identified by the use of words such as expect, estimate, anticipate, forecast, plan, guidance, believe and similar terms. Such forwardlooking statements include, but are not limited to, the successful implementation of our acquisition and repowering strategy, our environmental compliance strategy, our hedging profile, Big Cajun II Unit 4 construction and our success in securing commercial arrangements for the output of the facility. 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 and related government regulation, the condition of capital markets generally, our ability to access capital markets, unanticipated outages at generation facilities, our ability to convert facilities to western coal successfully, adverse results in current and future litigation, failure to identify or successfully implement acquisitions and repowerings, the inability to implement value enhancing improvements to plant operations and companywide processes and the ability to manage coal price risk. NRG undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors that could cause NRG s actual results to differ materially from those contemplated in the forward-looking statements included in this Investor Presentation should be considered in connection with information regarding risks and uncertainties that may affect NRG's future results included in NRG's filings with the Securities and Exchange Commission at 2

3 Agenda NRG Who are we? NRG Coal Portfolio Coal Procurement Strategy NRG s Role in Repowering Future of Coal Procurement 3

4 NRG: Platform Established for Multiple Growth Opportunities What we strive to be: A regionally focused, multi-fuel, carbon-diversifed 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. Extracting maximum value from existing fleet FORNRG Commercial Ops. Improved market design Northeast Enhance and Expand Core Portfolio Texas Genco West Coast Power Padoma Wind Capital Allocation: Capital investment West South Central Capital Allocation: Balance sheet management Repowering Initiative Environmental Compliance Fuel supply chain investment (railcars) Texas Portfolio Optimization Free cash flow generation & liquidity Return excess capital Our target customer: 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. Expanding and enhancing our core asset base drives value enhancing growth 4

5 NRG: Portfolio with Scale and Diversity Western Gas 1,948 MW 100% Northeast Oil 3,556 MW 50.0% Gas 1 1,530 MW 21.5% Coal 2,029 MW 28.5% Gas 5,480 MW 50.9% Texas Coal 4,195 MW 38.9% Nuclear 1,101 MW 10.2% South Central Coal 1, % Gas 906 MW 37.8% Nuclear 1,101 MW 4.8% Combined Scale 2 Oil 3,556 MW 15.6% Coal 7,729 MW 33.9% Gas 10,442 MW 45.7% 1Includes Devon 10 reactivated June 29, 2006; 2 Includes other North America capacity of 594 MW. For combined scale 3,419 MW (15%) is dual-fuel capable. Reflects only domestic generation capacity. MW data as of September 30, 2006 Asset scale and diversity of fuel and location provide value creation opportunities 5

6 NRG: Existing Coal Portfolio Current Coal Sources PRB Lignite CAPP Colorado Import Petcoke 36MM tons ranks us in the top 10 coal buyers in the US overall and top 2 in the PRB 92% of our fleet has sourcing and transportation flexibility ~97% of transportation under firm contract through 2009 Extensive rail fleet with over 6,800 privately leased or owned rail cars Seasoned staff with experience in generation, coal production and coal transportation average 16 years in energy Rank Company Tons Coal (millions) 1 Southern Company AEP TVA Duke Energy Ameren Berkshire Hathaway NRG (current) TXU Xcel Edison International 24.0 Source: Company SEC filings, public presentations and Evelocity NRG s coal portfolio features sourcing and transportation flexibility 6

7 Coal Procurement Strategy Coal is always evaluated with emissions, Coal + SO 2 + NOx Emissions Prices add additional complexity Without a scrubber, emissions represent 10% 50% of the cost of coal Significant arbitrage opportunities exist for trading around coal qualities $45.00 Coal Costs in $/MWh Delivered to PJM Historical Spot SO2 Price $/MWh $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $- CAPP lb SO2 Columbia Import NAPP lb SO2 PRB lb SO2 SO2 Fuel & Transport $/Allowance $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 All Commodity prices based on 4/5/07 prompt month market Transportation costs are based on estimated industry average Emissions are a key driver in optimizing our fuel mix 7

8 Historical PJM Delivered Coal Prices Historical Coal Price Delivered to PJM Coal + Transport + SO2 + NOx $55.00 $50.00 CAPP $45.00 PRB NAPP Col % $40.00 $35.00 $30.00 $25.00 $20.00 Transportation costs are based on estimated industry average Optimizing coal portfolio requires flexibility 8 $/MWh 18-Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar-2007

9 Historical PJM Coal vs Gas PJM Dark Spreads vs Gas Spark Spreads $80.00 $60.00 $40.00 $20.00 $0.00 -$ $40.00 Feb-05 Mar-05 Apr-05 May-05 $/MWh Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Peak Gas Spark Spread Peak Dark Spread Off Peak Gas Spark Spread Off Peak Dark Spread All Commodity prices based on spot market Coal basis = CAPP; Gas basis = Dominion-South Point; Power basis = PJM West Hub Transportation costs are based on estimated industry average Flexibility is even more important in a moderate natural gas price environment 9

10 Repowering: Opportunity for Coal U.S. Capacity US Capacity Additions Current 80,000 $10 70,000 $9 MWs by fuel 60,000 50,000 40,000 30,000 20,000 Gas/Coal Indifference Zone $8 $7 $6 $5 $4 $3 $2 OTHER RENEW OIL NG NUKE HYDRO COAL NG Historical NG Forecast 10,000 $1 0 $ Year A flight to natural gas in the first half of this decade is causing a flight back to coal in the second half 10

11 Repowering: NRG s Role Expected Rank Company Tons Coal (millions) 1 Southern Company AEP NRG (after repowering) TVA Duke Energy Ameren Berkshire Hathaway TXU Xcel Edison International 24.0 Source: Company SEC filings, public presentations and Evelocity New Build Site Gross MW Fuel Technology Operation Big Cajun I 230 Coal/Pet Coke Fluildized Bed Boiler 2010 Indian River 752 Coal IGCC Huntley 752 Coal IGCC 2012 Limestone 800 Coal PC 2012 Big Cajun II 775 Coal PC 2010 Industry repowering presents growth opportunities for coal producers through partnerships with generators 11

12 Repowering: Environmental Considerations NRG s Carbon Pentagon Policy Outreach Responsible Planning Phased, Certain Equal Treatment NRG Fleet: Projected Carbon Intensity ~0.9 tons/mwh ~0.7 tons/mwh 1 w/igcc CO 2 sequestration Wind Power Increased CredibilityIncreased Credibility Carbon Hedge Carbon Hedge Carbon R&D Test Bed Sequestration Bioreactor Baseload Alternatives Nuclear Expansion IGCC First Mover Per Mwh Note: includes impact of 2,700MW of nuclear, 2,250MW of IGCC, 1,800MW of coal, 3,100MW of gas and 1,000MW of wind. All MW are before any potential equity sell down. 1 Assumes full impact of 2,700MW at STP. With only 44% ownership of STP, carbon intensity would be ~0.06 tons/mwh higher Repowering programs must be environmental palatable 12

13 Future Coal Procurement Strategy Demand shift from Central Appalachian to Illinois Basin and import coal due to declining reserves, high mining cost and scrubber installations Increased demand encouraging new mine development and expansion in these basins SO2 allowance cost is less relevant Transportation cost is key 2009 Coal Prices Delivered To PJM as of April 5, 2007 PRB lb SO2 IL Basin lb SO2 Without Scrubber PRB lb SO2 With Scrubber IL Basin lb SO2 New plants will focus on regions where transporters are willing to lock in long-term contracts at attractive prices Illinois Basin begins to look attractive, particularly for water served plants Scrubber VOM SO2 Allowances Transportation Fuel Clean coal technology changes fuel choices 13

14 Transportation Transportation continues to be a major driver in selecting the optimal coal supply Reliability and price are both important Import coal deliveries have proven to be reliable Recent disruptions in the US rail infrastructure have changed the risk profile of domestic coal Transportation contracts should be structured to minimize risk of supply interruption and allow for flexibility and coal price optimization Target inventory levels based on operational risk Coal transportation flexibility allows for reduced coal inventory investment Diversify your fuel mix transportation flexibility is an effective way to manage operational and price risks 14

15 In Summary Managing coal price risk is more than procurement Emissions are a major driver in coal selection Use long term contracts to lock in spread Optimize by trading around long term contracts Fuel diversity is key Managing operational risk continues to be a major focus Structure transportation contracts to facilitate portfolio optimization Transportation diversity reduces operational risk Coal choices will change with emission control technology Emission allowance cost no longer a factor New builds will drive market for lowest cost delivered Btu Optimizing coal plant profitability requires fuel and transportation flexibility 15

16 In Summary Coal is--and will remain--the premier energy source for power generation purposes in the United States for the foreseeable future. This means it is incumbent on us to find ways to convert coal to electricity while dramatically reducing its carbon emissions. David Crane, CEO NRG Energy, Inc. Coal can survive in a carbon constrained economy 16