Going Nuclear: Establishing First Mover...

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David Crane President and Chief Executive Officer Going Nuclear: Establishing First Mover Advantage Merrill Lynch Power & Gas Leaders Conference September 26, 2007

Transcript of Going Nuclear: Establishing First Mover...

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David Crane President and Chief Executive Officer

Going Nuclear: Establishing First Mover Advantage

Merrill Lynch Power & Gas Leaders ConferenceSeptember 26, 2007

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Safe Harbor Statement

This Investor Presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are subject to certain risks, uncertainties and assumptions and typically can be identified by the use of words such as “expect,” “estimate,” “should,” “anticipate,” “forecast,” “plan,”“guidance,” “believe” and similar terms. Such forward-looking statements include the proposed timing and NRG’s expectations regarding the South Texas Project and nuclear power plant expansion, as well as the Company’s carbon emissions and the projected carbon intensity of NRG’s fleet. Although NRG believes that its expectations are reasonable, it can give no assurance that these expectations will prove to have been correct, and actual results may vary materially. Factors that could cause actual results to differ materially from those contemplated above include, among others, general economic conditions, hazards customary in the power industry, weather conditions, changes in government regulation of markets and of environmental emissions, the inability to implement value enhancing improvements to plant operations and companywide processes, permitting and regulatory obstacles, construction delays and our ability to realize the impact of Repowering NRG on the Company’s carbon emissions and the projected carbon intensity of NRG’s fleet.

NRG undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors that could cause NRG’s actual results to differ materially from those contemplated in the forward-looking statements included in this Investor Presentation should be considered in connection with information regarding risks and uncertainties that may affect NRG's future results included in NRG's filings with the Securities and Exchange Commission at www.sec.gov.

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Company Overview

NRG: The center of the power industry value chain.

3rd Fastest Growing Co. in Fortune 500

Listed: NYSE (NRG)

Market Cap.: ~$10 billion

Employees: ~3,200

Generating Assets: ~23,000 MW, primarily in four domestic regions

NRG: Leading the Competitive Power Generation Business

Makes our Portfolio younger, bigger, greener and more

efficient

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Trends in Power Generation: Top 10 Industry Dynamics

Twelve months ago at Merrill Lynch...

1. Consolidation – no more utility mega-mergers

2. Credit – comfortable at Junk

3. Locational Capacity Markets – get implemented

4. Reserve Margins – ever tighter

5. Summer Gas – withdrawals

6. TXU/NRG New Builds – avoiding the Seven Sins

7. PPAs – Not whether but how

8. Carbon

9. Backend Controls – the rising cost of remediation

10.Shareholder Activism in Power Sector

1. Carbon

2. Carbon

3. Carbon

4. Carbon

5. Carbon

6. Carbon

7. Carbon

8. Carbon

9. Carbon

10.Carbon

Today

A Once-in-a-Generation Paradigm Shift

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5A Comprehensive Development Program Crafted to Meet

the Specific Energy Needs of our Domestic Markets

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

# ofProjects

MW MWh InvestedCapital

AvoidedCO

Nuclear Clean Coal Wind Gas Coal

% Contribution by Technology

2

First Mover Advantage to Value Creating Investments

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NRG’s Low Carb Line-up

New Nuclear Plays Center

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Environmental Air Emission Displaced1

Energy Independence1

Nuclear power is the most efficient “zero carbon” power generation available

Why Nuclear Power?

NRG Projected CO2 Emission Rates

Avoids 37.6 million barrels of oil/p.a.

Avoids 177 bcf of gas/p.a.

Avoids 13.1 million tons of coal/p.a.

Avoids 8,100 MW or 202,500 acres of land for wind

Avoids SO2 emissions of 40,918 tons/p.a. (3.46 lb/MWh)

Avoids NOx emissions of 11,353 tons/p.a. (0.96 lb/MWh)

Avoids mercury emissions of 828 lbs (0.56 oz/GWh)

Avoids CO2 emissions of 18.4 million tons (1,560 lb/MWh)0.8

0.70.9

0.00.10.20.30.40.50.60.70.80.91.0

NRG 2005 NRG w/ New Build NRG w/New Build w/oSTP 3&4

tons/

MW

h

South Texas Project

1 Assumes 100% capacity factor for nuclear, ERCOT average (2005) and Assumes representative technology by fuel type

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4 unit site (2 currently operating)7,000 acre reservoir

South Texas Project (STP) - “Today”Key Operating Data for Current Units

Unit 1 2

Commenced Operations 8/1988 6/1989

License Expiration 2027 2028

Net Capacity1 (MW) 1,342 1,331

Technology Westinghouse PWR

Last Outage Cycle 10/2006 4/2007

Net Capacity Factor (3 year rolling avg.) 96.1% 94.7%

Key Site Characteristics

Existing STP Facility is Young and Robust

Owners include NRG (44%), City of San Antonio (40%) and City of Austin (16%)Operator and Fuel Manager is South Texas Project Nuclear Operating Company or STPNOCFuel Storage is adequate for current life of the units Fuel Contract Coverage is 100% through 2011 and 25% through 2021 for uranium, 100% through license life for enrichment, and 100% through license life for fabrication

Other STP Facts

12,200 acre siteLow populationMinimal site preparation required

Barge & rail accessRobust transmission system

1 Total MW capacity includes recently completed uprates

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South Texas Project Nuclear Operating Company or STPNOC: Industry Leading

STPNOC is a top nuclear power operator with a performance record equal to top fleet operators

ProductivityLow Fuel cost One of the lowest reported production cost (1.35¢/kwh)Highest producing two-unit nuclear plant (out of 33) three years in a row Highest producing single unit in 2006 (unit 2)

SafetyThe Only U.S. plant with three safety trains per unitStrenuous and continuous training programExposure limits twice as strict as required

SecurityDesign, strength of structures Multiple layers, types of defenses Upgrades since 9/11

InnovationIn cooperation with NRC, piloted risk analysis of plant components Piloted post-9/11 security requirements Two Best of The Best Awards—Only repeat-winner plant Six Top Industry Practice Awards—Most for any plant

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Why ERCOT Market?

1 Source: NRG Estimates and ERCOT Capacity, Demand and Resourced report dated 05/17/07, public announcements of new generation; Assumes all announced coal (~ 5200MW) and nuclear (~12,000MW) are completed, and ERCOT estimates for retirement of 50-year old units

Texas Is The Best Market for New Nuclear, Bar None

201220112010200920082007Year

5.9%6.7%8.3%10.1%12.6%14.6%Reserve Margin:

72,939

68,331

71,960

65,383

71,812

62,669

72,048

64,010

72,394

66,830

73,703Total Resources (MW):

69,608Firm Load Forecast (MW):

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

ERCOT Estimate of Generation Shortfall Announced generation 60% Hit Rate

Strong Baseload growth

Big purchasers with long-term contract appetite

Gas on the margin

Regulatory stability

Political and popular support

Existing space and infrastructure

Skilled labor force

STP – people and assets

NRG has 11GW local backup

Why is Texas Best for Nuclear?

Rapidly Declining Reserve Margins1

Generation Shortfall vs. Announced Baseload Build1

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STP 3&4 – The Site

Gulf of Mexico

Cooling Pond

Unit 1

Unit 2

SwitchyardUnit 3&4 Site

STP: The Best Site in Texas

Advantages of the STP Site

One of only two existing nuclear facilities in state

Enormous footprint

Common facilities (particularly reservoir) already designed for four units

Ready access by barge and rail

Widespread public support

Open space and access to local Houston load center

Top quality operations

The $500 Million Advantage

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STP 3&4 – The Design

ABWR technology has been commercially deployed for 10 years in Japan with plants built “on time and on budget.”

ABWR technology has been commercially deployed for 10 years in Japan with plants built “on time and on budget.”

Proven Design: Timely Construction, Flawless Operation

Already certified by NRC Four units successfully commissioned

Advantages of ABWR design

4

Completed except for site specific

changes

Yes

Boiling Water Reactor

1,350

GE, Hitachi, Toshiba

ABWR

0

In Progress

No

Boiling Water Reactor

1,600

GE

ESBWR

0

In Progress

Yes

Pressurized Water Reactor

1,000

Westinghouse

AP1000

0

In Progress

No

Pressurized Water Reactor

1,600

AREVA

EPR

Units Commissioned / In Operation

Status of Design Engineering

NRC Certified Design

Reactor Design

Unit Size

Manufacturers

Design is complete Dependable construction schedule & supply chain

Our Choice

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20,000 plus page document outlining all technical specifications for developing the ABWR Design for 2 units (STP 3&4) totaling 2,700MW for COD 2014/2015

Joint development with CPS Energy, subject to their final board approval anticipated Q407Identify development consortium including Toshiba/Fluor as EPC contractor and GE-Hitachi for important licensing, design and equipment supply, subject to final agreementsReassurance regarding premier safety and security features, environmental benefits and future operations

The Combined Construction and Operating License Application (COLA)

2008 2009 2010- 20112007

NRC Acceptance

Review:Oct. 1

License Issuance

Complete Acceptance

Review Target: Dec. 1

NRC Detail ReviewApplicant Response

Hearings

What is the Anticipated Timeline and Process for COLA Filing?

License Submittal:Sept. 25

NRG & STPNOC will work with NRC to move through permitting process as expeditiously as possible

What is in the COLA Filing?

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General STP Development Timeline

Key for timeline is securing long lead items, some in excess of 60 months to fabricate (e.g., forgings)

Com

ple

tion

Fuel Lo

ad

Set R

eacto

r

Unit 3

Unit 4

COL Final ApprovalExecute PPAs

EPC Contract FinalizedProject FinancingBegin Simulator Training (commences 2007)Start Safety Related Construction

…to be constructed with an optimal 12 month

stagger

2011 2012 2013 2014 20152010

2011 2012 2013 2014 20152010

Set Reactor Pressure Vessel

Fuel Load/Commercial Operations

Two units developed and permitted together…

Mobilize Licensing ContractorsExecute Interim ContractsDevelop Conceptual PlanIndependent Evaluation/FeasibilityDevelop and Submit COLAState Environmental ApprovalsSecure Forging Slots for Project

Owner ApprovalsExecute Vendor/Contractor AgreementsDevelop project financing planComplete power marketing plan

Support NRC ReviewEngineering and ModularizationEPC Open Book Process Executed

2007

2008 2009 2010

Order Long Lead Components

Begin Non-Safety Related Construction

2007

Complete

In Progress

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1.

2.

5.

Risks Mitigants Progress to Date

New Nuclear: Mitigating Risks

3. Political

4. Financing

Completion/Performance

Merchant

Regulatory1. COLA filing process at NRC2. US Standby Support

1. Partners2. Long Term Offtake Agreements3. Production Tax Credits

1. State Action2. Local Coordination

1. Loan Guarantee Program2. US/Japan Cooperation

1. Turnkey contract with experienced EPC provider

1. On track to sell down to 40% (1,080MW net)2. Progress towards 80% of targeted net3. In queue to secure due to COLA filing

1. Submitted first filing in over 25 years2. In queue to access due to COLA filing

1. Passed Decommissioning Funding and Tax Abatement Laws

2. Developing training programs for construction and staffing

1. Vendors committed to project success and financeable contract terms

1. In queue for benefits due to filing and working closely with DOE, Treasury, Office of Management and Budget (OMB)

2. Japan/US framework developed for potential Japanese guarantees and traditional US project financing

Counter Conventional Wisdom: Application of classic project finance techniques mitigates new nuclear risks better than expecting ratepayers to bear all of the risks

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COLASupport NRC review process

Five Key Next Steps

Next Strategic Steps Approximate Timing

Not “out of the woods,” but path ahead is clear and open

Ongoing through late 2010

In advance of financing in 2010

In two stages: in 2007 and remainder advance of financing in 2009

Arrangements between 2008-2010

Finalize strategy in 2008; Execute non-recourse financing plan, supported by government guarantees, by 2010

EPC ContractFinalize EPC contract, vendor roles and costs

PartnersSell down additional equity interests

PPA/OfftakeComplete binding agreements for initial 80%Keep a portion of available capacity open for higher value sales and/or carbon hedge

FinancingDevelopment of optimal financing plan incorporating U.S. and Japanese government credit support

1.

2.

5.

3.

4.

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STP Development: Meeting The Challenges

A Strong Track Record in Nuclear Development already

Completed first application for a new operating nuclear unit to be received by the NRC in over 29 years

Established STP as a credible project in the eyes of the NRCCreated potential to access Energy Policy Act of 2005 benefitsCredible voice/seat at the table in Washington

Negotiated EPC terms that are consistent with project finance market requirements Developed a valuable supplement to the U.S. loan guarantee program

Developed U.S./ Japan framework for international cooperation toallow Japan guarantees to work in concert with U.S. loan programs Established strong relationships within White House, Treasury, OMB and DOE

Negotiated agreement with CPS Energy (subject to final approval) to:Jointly develop STP 3 & 4Begin recovery of NRG’s investment

Texas legislature acts to support nuclear developmentPassed Decommissioning lawPassed Tax Abatement law

Developing labor training programs in concert with the State of Texas to support STP construction and permanent staffing

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Benefits of Nuclear to NRG

Key areas coming together to make “merchant” new nuclear a reality for the next decade of generation

Increase baseload profile

Hedge carbon meaningfully

Contract portions at market

Capitalize on STP site development value

Maintain equity sell down optionality

Lead ABWR development in U.S.

Partner with premier nuclear experts

Provides for Texas generation needs

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Questions and Answers

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Appendix:

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Loan Guarantee ProgramLoan guarantee for 80% of project cost30 years termEnables financing and lowers cost of fundsSpecific implementation rules being drafted by DOE now

Production Tax Credits (PTCs)$18/MWhr or $125mm per year per 1000 MW maximumDeclines pro-rata based on number of units in operationSTP 3&4 well positioned to receive the maximum PTCs permitted by the Energy Policy Act

Energy Policy Act of 2005

Final guidelines are anticipated this fallInitial draft guidelines had flaws

Limited flexibility for borrowers and lendersCreated capital inefficiencies by binding diverse borrowers

Industry provided comments on initial draft to improve financing potential

Significant flexibility for project developersAccess to the deepest portions of the government backed markets

There are still issues that create uncertainty for potential borrowers

No defined size to the programIssuer pays government “subsidy”cost which is a number that is not yet defined

Being a first mover has significant financial benefit for NRG

Highlights Loan Guarantee Program Timeline

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Reactor Pressure Vessel

Steam Turbine

Nuclear Island

Turbine Island,Balance of Plant

The Advanced Boiler Water Reactor Design (ABWR)

The ABWR design is a mature, well quantified design that EPC contractors understand well

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ABWR Technology Evolution

Source: Toshiba

The ABWR is not a new design; it’s a proven technology that has evolved over the last three decades

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ABWR History: Engineering, Procurement and Construction

Source: Toshiba

The first ABWR, Kashiwazaki-Kariwa 6, completed construction in 37 months

Base Mat Base Mat completecomplete

Crane Crane AvailableAvailable

RCCV RCCV completecomplete1st ABWR

KK-6experienced

37M 3 16.5M 9.5M 8M 11M

T.O.T.O.F.L.F.L.

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Plant CompletedMonths of

ConstructionKashiwazakiKariwa - 6 Jan-96 37KashiwazakiKariwa - 7 Dec-96 40

Hamaoka - 5 Apr-05 45

Shika 2 Jul-05 46

0

25

50

75

100

125

150

Jun-68 Dec-73 May-79 Nov-84 May-90 Oct-95 Apr-01 Oct-06

Mon

ths

USJapanJapan ABWR

Constructing: 5 ABWRsOperating: 4 ABWRs

* Construction Months is from first safety concrete to complete first fuel load

*

ABWR Construction Duration

Source: Toshiba

Tennessee Valley Authority (TVA) ABWR construction study (BellafonteStudy completed in 2004 by Toshiba, GE, Bechtel) shows that Japanese

40 months construction schedule can be applied in the US

Construction Duration US and Japan

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In the past 15 years:Construction period has been reduced by nearly 20 %Construction man-hours have been reduced by nearly 40%

100%

76% 72%61%

100%93%

86%83%

0%

20%

40%

60%

80%

100%

1990 1994 1997 2006

Fieldwork Cost (man-hours)Construction Period

Start of modularization

Applicationof large crane

crawler

Mass Production

IntegratedDesign

BWR (1,100 MW) BWR (1,100 MW) ABWR (1,356 MW) ABWR (1,358 MW)

Existing units completed in 38-46 months

Source: Hitachi

Construction and Manufacturing Methods Have Been Constantly Refined

Source: Hitachi

Advanced construction technology will enable a shorter construction schedule and cost reductions

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Fukushima Daiichi 1

Hamaoka 1Fukushima Daiichi 5

Fukushima Daiichi 6Hamaoka 2

Onagawa 1

Hamaoka 3Kashiwazaki Kariwa 2

Hamaoka 4Onagawa 2

Onagawa 3

Hamaoka 5

Fukushima Daiichi 2

Tsuruga 1

Fukushima Daini 1Kashiwazaki Kariwa 1

Fukushima Daini 3

Kashiwazaki Kariwa 3

Kashiwazaki Kariwa 6Kashiwazaki Kariwa 7

Fukushima Daiichi 3

Lungmen 2Ohma 1

Lungmen 1

Higashidori 1

Entered business in 1966

Constructed 22 plants

17 as prime contractor

1970 1975 1980 1985 1990 1995 2000 2005 201019651960

Toshiba’s BWR and ABWR Experience

Plants in OperationUnder Construction

Planning

TEPCO Higashidori 1Fukushima Daiichi 7TEPCO Higashidori 2

Namie Odaka 1Fukushima Daiichi 8

Higashidori 2

Toshiba, as prime contractor on 17 BWRs, including 2 ABWRs, has built the most BWR plants in the world and built the ABWRs

in the shortest period of time

Toshiba BWR Experience

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New Reactor Licensing Applications at NRC (Site and Technology Selected)

Source: NRC

ABWR had been certified by the NRC in 1997

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New Reactor Licensing Applications (Site and Technology Selected)

Source: NRC

ABWR had been certified by the NRC in 1997

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