Nov 4, 2007
Operator
: Good morning, ladies and gentlemen. Welcome to NRG Energy Third Quarter 2007 Earnings Results Conference Call.
At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session.
[Operator Instructions]. As a reminder, this conference is being recorded today, Friday, November 2, 2007.
I will now turn the call over to Ms. Nahla Azmy.
Please go ahead.
Nahla A. Azmy
Thank you, Jennifer. Good morning and welcome to our third quarter 2007 earnings call.
This call is being broadcast live over the phone and from our website at www.nrgenergy.com. You can access the call presentation and press release furnished with the SEC through a link on the Investor Relations page of our website.
A replay and a podcast of the call will be posted on our website. This call, including the formal presentation and the question-and-answer session will be limited to one hour.
In the interest of time, we ask that you please limit yourself to one question with just one follow-up. And now for the obligatory Safe Harbor statement, during the course of this morning's presentation, management will reiterate forward-looking statements made in today's press release regarding future events and financial performance.
These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important risk factors contained in our press release and other filings with the SEC that could cause actual results to differ materially from those in the forward-looking statements, in the press release and this conference call.
In addition, please note that the date of this conference call is November 2, 2007, and any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of future events.
During this morning's call, we will refer to both GAAP and non-GAAP financial measures of the Company's operating and financial results. For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures and a quantitative reconciliation of these figures, please refer to today's press release and this presentation.
And now I'd like to turn the call over to David Crane, NRG's President and Chief Executive Officer.
David Crane
Thank you, Nahla, and good morning everyone. I am joined here today by Bob Flexon, our Chief Financial Officer who will be speaking to the Company's quarterly financial results.
Also I have with me Kevin Howell who runs our commercial operations group and who is here to answer or not answer, as the case may be, questions you might ask about the Company's commercial operation strategy. And a special guest today, John Ragan, Head of our Northeast Region, who is here, given that we'll be talking in some length, in some detail about the Huntley IGCC project or if you have questions about the recent announcements we made with respect to peaking units in Connecticut, a joint venture with United Illuminating, he can answer those questions.
So, I am going to be referring to slides that appear on the website and starting with slide three and this slide which I entered into the slide deck which I got because as usual our slide deck is full of information about all that the company is doing and is part of knowledge quest to make sure that the investors in this company know every single last detail of what we are up to. But I want to start with a very simple slide and use that as a backdrop, something that was easy on the eyes while I gave some bit of context to this call as to where the company has been and where we are going.
I want to do that on two levels. First, operationally, and by that in this case I mean really what we have been doing 2007 and looking forward to 2008; and then strategically covering 2008 and beyond.
So first, operationally. Here we are in early November and as a company, I think, we are in the process of wrapping up what we believe has been a highly successful year in terms of current operation.
Based on the strong performance of our plant and commercial operations group year-to-date we are increasing our full-year adjusted EBITDA guidance by $100 million. Our fully hedged position gives us a very high level of confidence that when the dust settles and the year has closed out, we will have met these revised financial targets.
Operationally, at this time we are also looking forward to 2008. We are well placed in terms of winter preparedness, and we are pushing forward a series of operational initiatives which we are planning for 2008.
Much of this is encompassed in our highly successful FORNRG program, for which we are raising the bar again today. In terms of positioning this company for the future beyond 2008, we feel that with each day the path we are on and the direction which our business is headed and has been headed is the right one, and that the principle task for us is not to deviate to the left or to the right of where we have been headed, but only to keep going faster, higher and stronger.
And what do I mean by this? When we start out here at our NRG four years ago with a business strategy focused on developing multi-fuel across the merit order portfolios of low marginal cost generating assets concentrated in a few competitive wholesale power generation markets in United States.
Given what we own coming out of Chapter 11 that was undoubtedly the right strategy for NRG. Aided in significant part by the Texas Genco acquisition, which was announced in late 2005, we have done well to-date in terms of executing on our original core strategy.
Also in 2005, we assess six principle long-term industry trends that were emerging at that time: the seemingly permanent recalibration hire of the Gasco, the aging of our Company and the nation's power generation fleet, the virtual absence of new plant construction, the tightening of reserve margins, the ever increasing environmental sensitivity with respect to the traditional regulated emissions, and the emergence of global warming which during the past few years has entered the national consciousness with the subtlety of a freight train bringing with it the virtual certainty of carbon constraints and regulation. For NRG, all these trends pointed in the same direction and led us to embark on a significant enhancement to our core strategy, and that was RepoweringNRG and ecoNRG.
They are aimed at revitalizing and enhancing NRG's existing generating fleet in a road to no carbon way without excessive dependence on additional high-cost natural gas fire generation. The twin center pieces of both RepoweringNRG and ecoNRG have been our attempts to secure first-mover status in both of the emerging technologies which we consider to be the future of base load generation in the United States, advanced nuclear power and clean coal.
In this regard, I am very pleased with where we are on both counts. Certainly the biggest news for the quarter for us is that we filed our combined operating license application for two new nuclear units in South Texas, with the Nuclear Regulatory Commission on September 24th.
While the NRC continues to review our application to determine whether it qualifies for docketing, I would note that two days ago at a US Energy Association press briefing, NRC Chairman Klein stated that the NRG STP application appeared "robust and complete." So if anyone on this call tuned in, in the hopes that we would have a change of heart or a major shift in strategic direction, that we would be backing away from our hedging program, from our commitment to the regular return of capital to our shareholders, from our Repowering program, or from our advocacy of comprehensive and effective carbon regulation at the Federal level, you will be disappointed by this call.
Going forth, our approach as set forth on this slide is quite simply Citius, Altius, Fortius. Now turning to slide 4, we provide our financial highlights for the quarter and year-to-date.
As I mentioned, Bob will be dissecting these numbers for you in great detail. My only comment, listing a blinding glimpse of the obvious, we as a company remain singularly focused on generating cash.
Thanks to the solid performance of the plant operations group, the exceptional hedging work done by commercial operations and the financial management activity of Bob's own Treasury and Risk Management Groups, our cash position is as strong as it has ever been. While this summer's credit crisis has receded to some extent, the fact that it occurred and that had virtually no lasting impact on NRG, reaffirms to me the soundness of our approach to balance sheet management which, while certainly active, remains always prudent.
Keep in mind that the liquidity number that you see on this slide is effectively understated by a significant amount. If you add to the $2.3 billion shown, the $600 million of synthetic LCs being returned by our principal trading counter parties, our total liquidity approaches $3 billion.
If you permit me to digress for a moment with an editorial comment, I don't know whether the rating agencies are listening to this call but what I see when I look at NRG is a company piling up liquidity, generating substantial free cash flow and prepaying debt... at the same time we remain mired deeply in the effluvia of low sub-investment grade with the DA3 B+ corporate credit rating.
So I don't know if the rating agencies are distracted with problems in the investment grade commercial paper market but I mean throw us a bone here; at least take us off negative outlook. Well let's turn to slide 5 before I continue with my executive temper tantrum here.
Let's talk about safety. Our year-to-date, OSHA's recordable rate is 1.7; it's less than half of the 2006 industry average of 3.9.
This result is due to the strong performance and material year-on-year improvement across all plants and all regions, but particularly in the Northeast and the West. We continue to make progress on our implementation of OSHA's voluntary protection program at five NRG classic plants: Montville, Encina, Seguendo, Big Cajun II and Saguaro.
These five plants already have reduced the number of injuries by 30% compared to last year. In addition, TH Wharton has been recommended for star status under their VPP program, which means that all of our Texas plants now have start status under the VPP program.
In terms of plant production, we posted yet another strong summer quarter on par with last summer with the sole exception that our Texas gas plants did not run nearly as much this summer due to the mild and wet weather in Texas. We overcame that mild summer weather with an effective hedging strategy in our cost and as a result of good weather in the Northeast which drove higher late summer prices, if not higher production.
Again, there are many extraordinary achievements, some around the Company on the operational level under which too many to mention, but I would mention the extraordinary reliability that Arthur Kill showed. So a great job by Tom Bishop and his team.
I also want to mention the Encina plant in California where Jerry Carter and his team contribute to keep in the lights on in San Diego during the recent wild fires. Even with a lot of the staff there distracted because their own families had been evacuated.
Still looking at this slide on the bottom left we show our E4 results which exhibits some slippage relative to a very strong performance turned in last summer, particular by our Texas coal units. As we've mentioned on previous calls, we had recurring reliability issues with Indian River 4 during the first half of 2007.
We devoted considerable amount of management and other resources to the unit and IR, and Indian River 4's recent performances has been very good. Indian River units 1, 2 and 3 are currently running at top quartile levels.
Finally, with respect to our coal inventory levels, they obviously remain in excess of our target range. Recent capacity expansion on the joint line out of the Powder River Basin gives us confidence that we can move much more assertively to reduce our inventory levels, as such for this quarter our focus will be to decrease inventory to within a target range of 25- to 35 days.
Now, switching to our hedge position on slide 6, you can see that we are now fully hedged in respect to our base load position for 2008. In terms of the out years the forward gas curve is healthy but not as robust as we expected to be from time to time in the future.
Indeed to me it's a remarkable indication of the resilience of the gas curve that prices remain as strong as they not withstanding the current gas inventory surplus, the demand inhibiting heavy rains in Texas this summer and the lack of tropical activity in the Gulf. We retain some gas lines in the out years so that we can capitalize on opportunities which we expect to rise...
to arise from time to time. While we are neutral to mildly bearish on gas prices short term and bullish medium to long term, on heat rates we are bullish as far as the eye can see.
While heat rate forward curves have risen, the continued lack of new building, consequent declining reserve margins, particularly in Texas and the Northeast plus the increased cost of adding new capacity caused us to continue to maintain a fairly open position with respect to heat rate expansion. And finally turning to slide 7, as I mentioned upfront, I want to spend a little time on the call looking forward as well to looking back.
On this slide, I want to give you some sense of what we are planning for 2008 in our principal operating function. We could consume the entire hour talking about any of these initiatives but there is one general theme that cuts across all and that is this.
We absolutely do not believe that we have yet captured the full benefit of our scale or all the potential synergies arising out of last year's Texas Genco acquisition. You might want to think about it as set of initiatives that are up to a second stage integration of Texas Genco.
Now, turning to slide 8, and we continue our transition from slide 7, from reporting to the past to looking to the future, and slide 8 reintroduces the four interrelated company-wide initiatives, upon which so much of our forward strategy is based. FUTURE NRG, which was initiated in the second half of 2006, ecoNRG and RepoweringNRG announced in the first half of 2006 and the grand daddy of them all focused on ROIC@NRG, or FORNRG, which was introduced and began implementation in the spring of 2005.
Starting with FORNRG on slide 9, today's news is that we are accelerating and concluding the FORNRG program in 2008 by bringing forward the 2009 recurring EBITDA target of $250 million to 2008, obviously our willingness to do this is rooted in the success we have achieved in the program to-date, and indeed we now expect to achieve $220 million this year which exceeds the previously announced 2007 FORNRG target of $200 million. The better than expected 2007 results are being driven by better overall plant performance particularly in the area of the recapture of plant generating capacity.
Further penetration of the FORNRG program into the Texas region and increased corporate contribution. As we look forward to 2008, the 2007 results combined with additional FORNRG opportunities identified during the year, particularly in the area of procurement, give us confidence that we can achieve the overall program target of $250 million a year early.
But, we know that your delight at the FORNRG program is being accelerated is tempered by the sense of emptiness that you must feel that come the end of 2008, we will no longer be reporting to you on this, the most cherished endeavor of our initiative. So, I say you never fear.
Even that we believe that there is more gas in the tank and room for improvement across the company in areas such as those I mentioned on slide 7, we are re-badging the current FORNRG program as FORNRG 1.0 and we are reviewing our potential to launch a second phase of FORNRG covering 2009 and beyond which we are quite creatively referring to as FORNRG 2.0. So turning to slide 10, shifting to the RepoweringNRG program, there remain many projects in this program more than appear on the slide and more than we...
than we can discuss. But looking at the program as a whole, we remain principally in development mode.
By the end of 2008 we hope and expect to be much more significantly in construction mode, and under John Brewster and Dave Harris over the past year we have developed the capability to manage multiple complex construction projects. The other point I want to make in reference to the slide has to do with the projects that have failed along the way.
When we announced RepoweringNRG in June 2006 with 18 projects encompassing the full range of technologies, we made it clear that the program was dynamic and that projects would be dropped. That is what happens in development, particularly if you are intent upon being a disciplined developer and indeed that is what is happened in our program.
But, what also has happened is that some projects have been replaced by morphed into other projects. For example, the 3 IGCC projects in New York, Connecticut and Delaware have transformed into 1 IGCC project in New York with CCS, as I mentioned before; a gas peaking initiative in Connecticut; and a gas firming project in Delaware which may yet morph again into another type of project.
This, in my mind, is a very positive development, as in most cases we are pursuing projects conceived directly in response to the stated needs of our customers. The other general point that I want to make about the retirement program which is shown on slide 11, and this a part which also applies to ecoNRG is that we see tremendous advantage in pursuing these projects in cooperation with capable and compatible partners, and that's one of the big stories of this quarter.
And the reasons for partnering I think are fairly self-evident, we've listed some of those on this slide for your ease of reference. But we are extremely pleased with the partnerships that have been announced recently under both the RepoweringNRG and our ecoNRG programs, and you should expect more partnership announcements in the future.
We have included slide 12 regarding South Texas 3 and 4, since the new nuclear plants are indeed the flagship of our RepoweringNRG program and the filing of the COL application and the partnership with CPS. Those were two of the three significant positive developments that I intimated on our last quarterly call.
Since, I spoke at length about STP 3 and 4 a few weeks ago at the Merrill Lynch conference in New York, I don't intend to devote significant additional time to adhere, other than to say that we are convinced more than ever that our approach to new nuclear development which is centered around building the only advanced nuclear design which actually has been built on time and on budget, is the best, most risk mitigated approach to new nuclear construction in a non rate based market. As I said at the beginning, I remain extremely pleased with the progress of our nuclear development and am confident in the months to come, you will continue to receive from us announcements of material progress and success in connection with this project.
I remain equally convinced that the Company's efforts in the nuclear arena will significantly enhance our shareholder value and will do so long before STP 3&4 actually begin to generate EBITDA in 2014. Now moving to slide 13 and 14, we haven't spent much time talking about Huntley, since our recent announcement of the award of that project on December 19, 2006.
Again that was the day that we received a conditional award from State of New York. Since that time, the project has evolved from IGCC with a promise of future carbon capture and sequestration, or CCS, which I refer to as CCS, to IGCC with CCS at or very near to our conception.
The one point I want to make is with respect to an industry environmental trend. And that is this: at this point, our view is that there is no market for IGCC in this country without CCS.
And CCS effectively defines clean coal. And in opinion people in our industry who use the label clean coal to refer anything other than coal fire generation that captures and sequesters a substantial portion of the CO2 emissions are misusing the term.
Our project located at our Huntley facility in Tonawanda, New York outside Buffalo, would be the largest IGCC with CCS facility in the US and possibly in the world. We have spent much of the past year proving up the CCS end of the project and have determined that the geology of Western New York is highly attractive from a sequestration point of view with existing pipelines rights and weights to the best sequestration area.
Indeed, the largest impediment to this project at this point is not technical or even environmental, but rather legal, regulatory and particularly commercial. At this point in time, custom-built IGCC plants are simply more expensive to build than mass produced traditional pulverized coal plants; and separating and sequestering millions of tons of CO2 adds a substantial additional layer of expense that additional layer of expense remains particularly hard to justify, and in an environment where it remains legal simply to vent those millions of tons of carbon into the earth's atmosphere for free.
This is one of the reasons why in our opinion there must be Federal carbon legislation putting a price on carbon, and that legislation must include substantial support for multiple commercial scale CCS projects around the country, including, but in no way limited to, the Huntley IGCC project. While slides 13 and 14 address the centerpiece of our effort to get the carbon out of coal fire to combustion through IGCC technology; slide 15 highlights our efforts to mitigate carbon through post-combustion carbon capture.
Success in this area is, of course, essential to the retrofitting of carbon capture technologies on existing coal fire facilities. Previously, we have referred to our continued work with GreenFuel at our Big Cajun site.
We are working closely with GreenFuel to scale up their promising technology at Big Cajun, keeping in mind that the economic impetus for their carbon-eating algae project is primarily biofuel, and secondarily carbon recycling. The second post-combustion carbon capture initiative which we are announcing today is an agreement with Powerspan to jointly design, construct and operate a demonstration facility that will be among the largest post-combustion carbon capture and sequestration projects in the world and maybe the first to achieve commercial scale from an existing coal fire power plant.
The project will be built at our WA Parish Plant near Sugarland, Texas and is designed to capture and sequester 90% of the carbon dioxide from flue gas, equal in quantity to that of a 125 wegawatt coal unit. On slide 16, in the fourth and last of our company wide initiatives, FUTURE NRG, much of what is encompassed in this program is simply good corporate practice common in other industries but I think not so common in ours.
The investment committee need not be concerned with it beyond insuring that companies that they are investing in for the long term need to be doing this, particularly in the industrial sector where there is an ageing work force issue across the sector and in our particular sub-sector where there has been little attention paid to management development over the past several years. I simply want to assure our investors on this call that we are working these important long-term issues on all levels and that we have some notable if unseen successes during this past year.
Particularly in the area of management retention, what I have set is a personal goal; the retention of what I believe is the strongest and deepest management team in the business. While we indeed lost some key executives during the year, we succeeded through the 10b51 programs announced in August and through other means, in keeping the core management team intact.
This remains a very high personal priority for me looking forward to 2008 and beyond. Finally, on slide 17, and before I turn it over to Bob, I want to review our scorecard for the year.
We accomplished close to everything that we set out to do at the beginning of the year, and hopefully those of you who have been with us since the beginning four years ago, will agree that this is the hallmark of the new NRG. We tell our investors what we intend to do in advance and then we go out and get it done.
This quarter and this year I am confident that that is exactly what we did. We got it done.
Thank you. Bob?
Robert Flexon
Thank you, David and good morning. Today in addition to our customary review of the third quarter and year-to-date financial performance, I'll also cover our third consecutive quarter of improved outlook for 2007, our first comment on 2008 guidance, and finally several significant events impacting the company's liquidity and capital structure.
I'll began with the third quarter results shown on slide 19. Third quarter 2007 adjusted EBITDA, excluding mark-to-market was $719 million versus $519 million for the same period last year, resulting in the second consecutive quarter where performance exceeded our forecasted expectations.
The current quarter benefited from a $180 million revenue increase in the Texas region from the November 2006 contract hedge reset. Partially offsetting this was 1.1 million megawatt hours of Lower Texas gas generation due to cool and wet weather which reduced demand for our gas peaking units.
This decline, accompanied by a 30% quarterly drop in average peak market power prices, although largely offset by our hedge positions in our cost, resulted in a $31 million decrease in energy margins for the quarter. Development expenses this quarter, mostly in support of September's COLA submission increased $40 million.
We will recover 40% to 50%, of our development cost incurred to-date from our partner in the project CPS of San Antonio. Demonstrating the value of our geographically diverse portfolio, the Texas region decline was offset by the improvement in the Northeast region results.
The current year's third quarter adjusted EBITDA versus 2006 improved by $95 million. Quarterly adjusted EBITDA improved despite a 1% decrease in Northeast generation.
Our hedge positions in the Northeast also helped offset generation and pricing decline. In Northeast, capacity revenues increased $28 million over the third quarter of last year as new capacity payment programs, the NEEPOL and PGM went into effect this year.
Fuel mix led to a $12 million net decrease in the region's fuel cost. A 31% increase in gas generation at our Arthur Kill plant led to higher natural gas expenses by $14 million, which was more than offset by the $26 million decline in oil fuel expense, as oil fire generation declined 47%.
Our year-to-date earning comparisons are illustrated on slide 20. Our adjusted EBITDA, excluding mark-to-market activity, grew almost $600 million due to many of the same factors that influenced our three months comparison.
Again, these include the Texas revenues, revenues attributable to last November's hedge reset, the new Northeast capacity revenues and the partial offset of increased development spending. These and other key contributors to the year-over-year improvement include $123 million and $8 million of adjusted EBITDA, respectively, for the full year inclusion of Texas and West regional results.
$425 million from the year-to-date impact of the hedge reset on Texas contract revenue, a $2.1 million megawatt-hour decline in Texas gas generation, largely offset by successful hedging programs, and $220 million of higher Northeast margins due to increased generation and realized pricing in the region as well as increased capacity revenues. These improvements were offset by development expenses that increased $93 million, mainly $75 million to support the STP COLA submission and a $41 million decline in sales of emission allowances.
The cash flow for the first nine months of 2007 is shown on slide 21. The $596 million improvement in adjusted EBITDA was offset by collateral postings, higher working capital and increased interest payments.
The majority of the free cash flow decrease is due to the $504 million year-over-year swing in collateral movement. This year we paid out or returned a $107 million in collateral to counter parties while in the first nine months of 2006, we received a net of $397 million due to a decrease in gas prices and trade settlements during the first nine months of last year.
If collateral swings are excluded, adjusted cash from operations was $432 million higher than 2006 and free cash flow from recurring operations would have been $895 million almost doubling the comparable 2006 nine-month period. Cash interest payments increase for 2007 versus 2006 due to a full nine months of interest related to debt incurred to finance to Taxes Genco acquisition and additional debt associated with hedge reset in November of 2006.
Cash flows upon working capital increased by $97 million, accounts receivable balances increased by $186 million, mainly due to higher market and contract pricing. Substantially all of the accounts receivable increase is current and has since been collected.
As shown on slide 22, with over $500 million of operating cash flow for the quarter... for the third quarter of 2007 our liquidity has substantially strengthened since June 30, with a cash build of almost $400 million.
Liquidity at September 30, 2007 was approximately $2.3 billion, an increase of $444 million since the end of the second quarter. Major cash uses during the quarter were $104 million for capital expenditures and $53 million for common share buyback.
I'll provide more detail later on but our liquidity today giving effect for the changes in our hedging collateral structure has reached approximately $3 billion. Moving to 2007 guidance with our third quarter performance, we are increasing our 2007 full year outlook by $100 million to $2.3 billion and adjusted EBITDA as outlined on slide 23.
Operating cash flow guidance is being increased $80 million due to the increased EBIT expectations partially offset by an increase in cash collateral posting. Recurring free cash flow from our base business before Repowering an environmental, capital expenditures is projected to be $1.2 billion for the full year, almost a $100 million higher than our previous guidance.
This represents recurring free cash flow yield of around 11%. Total projected capital expenditures for maintenance, environmental and Repowering was $569 million, a $61 million declined from the estimate we provided on the last earnings call, mainly due to a delay in timing in wind and environmental capital spending into 2008.
Our initial full year outlook for 2008 is $2.2 billion, as provided on slide 24. Next year is expected to be a $100 million lower than this year, mainly due to a decline in the average prices of hedge generation.
Free cash flow from recurring operations, however, is expected to remain at the 2007 level of about $1.2 billion. Also on slide 24, the primary differences between 2007 and 2008 have been listed.
Development spending is lower in 2008 versus 2007 as we expect to begin capitalizing STP cost in 2008. This EBITDA...
the EBITDA benefit of FORNRG, of approximately $30 million, is expected to be offset by the inflationary impact on cost and wage and benefit increases. Cash flow from operations for 2008 is expected to remain at the 2007 level of $1.5 billion.
The environmental and Repowering CapEx numbers are before financing and are further discussed on slide 25. Our environmental, Repowering and maintenance forecast to capital expenditures for the balance of 2007 and for 2008 are shown by region on slide 25.
As mentioned earlier, the full year capital forecast, including Repowering, environmental is $569 million. Capital expenditures for the nine months ending September 30, 2007 were $309 million including $47 million for STP nuclear fuel and maintenance, $45 million in the Texas South plant turbine and combustion system and $46 million to the Huntley and Dunkirk bad gas emission project.
The principal investments to be made during the last three months of 2007, totaling $260 million include: maintenance, with maintenance CapEx totaling $84 million through the fall outage reason; environmental, the work continues on the flu-gas desulfurization project at Huntley and Dunkirk. And work will begin on the scrubber installation at Big Cajun II.
$40 million of environmental CapEx, principally for backend controls in the Northeast region, originally scheduled for this year will now begin after 2007. On Repowering, feeder value and free wind projects comprised the remaining 2007 expenditures.
Wind related capital amounted to $54 million projected for 2007 will now occur into 2008 or financed at the project level. Our initial 2008 capital projection is $1.2 billion which includes $251million for major maintenance, $323 million for environmental remediation and $626 million for Repowering programs.
We estimate project level financing is available for at least $240 million for RepoweringNRG and $60 million for environmental CapEx. The financing alternatives associated with our capital spend includes with the Huntley and Dunkirk environmental investments we elect...
we expect to pursue solid waste taxes and bonds during 2008 and for Padoma wind, we are pursuing equipment and project level financing. The financings are anticipated to occur throughout 2008 as we balance the economic of carrying costs versus delaying funding.
I will now shift the discussion to slide 26 to cover recent milestones and events affecting our liquidity and capital structure. The first item is the third quarter completion of phase II of our capital allocation plan.
This plan originally announced in August 2006, subsequently upsized to following November, consisted of two phases each of which calls for the purchase of $500 million of our common stock. With the August 2007 purchase of 1.34 million shares for $53 million, the Company has completed, in just one year, the repurchase of $1 billion of common shares representing 36.6 million shares or approximately 15% of our outstanding shares all at an average cost of $27.31 per share.
This outstanding accomplishment reflects exceptional execution and teamwork from our finance, accounting and legal departments in concert with our outside advisers. The next significant accomplishment is the implementation of a first lean collateral structure which longer term replaces our existing second lean structure.
During the re-financing of our senior secured credit facility last May, we obtained from our lenders the basic rent, to partly pursue [ph] first lean collateral position to NRG's hedging counter parties in support of our commercial operations strategic hedging program. The primary benefit of this is realized through the elimination of the posted LCs used to cover a portion of the existing second lean trading collateral requirement.
In a moment, I will cover this in more depth, today we are also announcing a next step in the implementation of our holding company structure, or Holdco, which we originally launched in May of this year. We have made considerable progress in obtaining the required regulatory approvals, including the NRC and considering the recovery in the broader credit markets since our August 2nd earnings call, we are proceeding with the next step in the Holdco implementation plan, which I will describe in more detail momentarily.
The final capital allocation then I will cover today, is our plan to pre-pay a portion of our Term B loan to obtain a 25 basis point reduction in the interest rate spread for our Term B loan at boththe operating company level as well as the Holdco level and the synthetic LC facility. This pre-payment currently estimated at around $300 million, will result in the Company's achieving the corporate level debt to corporate level EBITDA ratio, needed for a 25 basis point reduction, beginning January 1, 2008.
Any prepayment in the fourth quarter of 2007will be credited against the mandatory offer and take we are required to make to our lean lenders in the second quarter of 2008. Now beginning on slide 27, I'll go over the second lean to first lean change in the next step in Holdco implementation.
Recently, we reached agreement with several of our largest counterparties, representing just under 60% of the notional hedges in the second lean structure to shift their collateral position to a first lean position. As a result, the LC requirements are now eliminated and has resulted in return of over $550 million from previously posted LCs, thereby significantly increasing the Company's liquidity.
Over the next several weeks, we will initiate discussions with the remaining second lean counterparties and attempt to convert their collateral programs to the first lean position in a similar fashion. If successful, the remaining counterparties would return an additional $200 million plus of LCs currently held by them.
The migration of NRG's hedging counterparties to the first lean program has increased the company's available equity to approximately $3 billion, and with this dramatic increase in liquidity we are evaluating three alternatives which include retain the excess liquidity in its current form, downsizing the synthetic LC facility and eliminate the carrying cost, or converting up to $500 million of the synthetic facility on balance sheet on the Term B debt, and use the proceeds as part of our Holdco strategy, I'll discuss later. The option selected will largely be dependent on the outcome of the Holdco conditional tender offer and alternative consent being launched today, which I'll now cover.
Slide 28 provides some background information on the Holdco transaction which we launched and described in detail on our May 2007 earnings call. For today's discussion, the key elements of the Holdco structure to consider are as follows: we have created, but not implemented, the holding company that holds the call rights on $1 billion of Term B financing that was obtained in our refinancing of the Term B facility last May and the proceeds just funded from it to wager off term loan will be contributed to NRG Energy or Opco as an equity contribution.
And Opco will, in turn, use that capital to repay a portion of its existing Term B loan. This capital contribution from Holdco would result in the expansion of the restricted payments capacity under the bond indentures by nearly $1 billion.
The primary issues surrounding the Holdco structure is the change in control event that is triggered for the corporate bond, if implemented. With the weakening credit markets during the third quarter and our bonds trading down below par, we expected the Holdco implementation would have resulted in the vast majority of bonds being put to the company at 1:1 of par leaving us venerable to an unfavorable credit market.
With the credit markets improving since September and our bonds trading at or above par, the question now is how many bondholders would actually accept the 1:1 offer in the current environment, if made. I'll cover how we will answer this question on slide 29.
Today's launch of the conditional tender offer and alternative consent of bondholders will provide the answer in 30 days. Under the terms of our bond indentures, we have the right to make a change in control offer to our bondholders in advance of the actual change in control event, with the obligation to accept any tender bonds conditioned upon the confirmation of that change in control.
In other words, bondholders will have 30 days from today to notify the company if they will accept the 1:1 offer if Holdco is implemented in December. At that time, NRG will review the results of the process and decide whether or not to move forward with the Holdco formation.
Concurrent with the conditional tender offer, bondholders will receive an alternative consent solicitation to waive their rights to the change in control offer in exchange for a nominal consent fee. If the majority of bondholders within each class consent, NRG's obligation to repay the bonds tendered at 1:1 by holders in the class goes away.
Regardless of the outcome and whether or not Holdco is implemented, NRG retains the right to purchase any bonds tendered at 1:1. Along with the committed backstop facility of over $4 billion, NRG has the ability to convert excess synthetic LC capacity created by the second to first lean migration into a Term B loan and use the proceeds to buy bonds tendered.
We're moving forward with the Holdco strategy with an approach that gives us in complete control of our capital structure throughout the process. If we are successful implementing Holdco, it will benefit our bondholders through a credit accretive event and it will benefit our shareholders by providing additional flexibility for returning capital to shareholders.
Later this morning we will issue a more detailed press release that provides more specifics on the tender and consent process. Slide 30 summarizes our 2007 financial objectives which we've shown throughout the year, which at this point in time my confidence level is quite high on meeting or exceeding these goals.
As we begin the last quarter of this year, our annual financial performance for earnings and cash flow will likely exceed our expectations set out at the beginning of 2007, aided by the FORNRG achievements of our plants and corporate personnel along with an outstanding performance from our commercial operations team. We have demonstrated the value of past capital allocation programs, as discussed earlier, and while we remain confident and optimistic that the conditional tender offer and consent process launched today will accomplish this, we've identified additional ways to ensure we continue to fulfill our commitments in this area.
Finally, the successful movements to the first lean hedging program is a significant win for this company and a materially positive liquidity event. Ideas and efforts like this will continue to be reviewed and identified in order for us to continuously improve our capital structure.
I'll now turn it back to David for closing comments and questions.
David Crane
Thanks, Bob. We have taken a lot of time, so I am going to...
Jennifer, I am going to turn it over to you to open the lines for some questions? Question And Answer
Operator
Thank you. [Operator Instructions].
Your first question comes from John Kiani from Deutsche Bank. Please go ahead.
John Kiani
Good morning, David, Bob.
David Crane
Good morning, John.
Robert Flexon
Hi.
John Kiani
Bob, you touched on this a little bit in your opening comments but can you walk us through how the 50% CPS ownership and the STP development project, how that applies to cost sharing of development costs and perhaps in conjunction with that, how much you are estimating for development costs in the '08 EBITDA guidance?
Robert Flexon
John for, the way that will work is through October from inception to date, the CPS share of the development will be around $40 million to $45 million and that takes you through October, and then in November and December we estimate that their share which they will be picking up will be about another $6 million say for each month, so in round numbers that puts you to the $50 million to $55 million level. So, I think what you'll see is a lower development spend in November and December, since we are only picking up say half of it and then we will also have a credit coming in of about $40 million to $45 million for the inception to date cost that we have had.
For 2008 our intent at this point in time remains to start capitalizing, so we don't have much of anything in the development expenses for 2008 for STP. Included in our CapEx budget is about $75 million of CapEx related to STP in 2008.
John Kiani
Thanks. That's helpful.
And then one follow-up question on '08. What contribution are you assuming from your gas and oil fired assets in the '08 EBITDA guidance?
Robert Flexon
Generally from... really from on how we view those assets, we look at the contributions from a margin standpoint to be roughly $100 million to $150 million kind of number, and then there will be some variability around that, depending on what's going on in the market, fuel cost and the like, so that's the order of magnitude, virtually of all the forecast is obviously heavily driven by base growth.
John Kiani
So $100 million to $150 million for 6,000- to 7,000 megawatts of capacity?
Robert Flexon
Correct.
John Kiani
Okay. Thank you.
Operator
Your next question comes from Dan Eggers from Credit Suisse. Please go ahead.
Dan Eggers
Good morning. David, you are talking about the carbon capture technology, kind of at the two facilities, can you talk to the Texas project, both by way of what kind of Government support you are looking for to help develop that project, how much capital NRG will be investing in this project, and then what implications that is going to have as far as operating plant efficiency as far as energy losses etcetera?
David Crane
The, well, let me... in terms of the power...
you are talking about the Powerspan project, is that right?
Dan Eggers
Yes.
David Crane
On the Powerspan project, the total spend about $150 million in terms of the type of support we are expecting for that project from Federal or state sources and the form of that, there is always a wide range of different approaches to that, but I mean I think grants through the DoE program, there's money in the current energy bills before congress. Absolutely we like to get some money at the state level as well as the Federal level, but in terms of the type of a commitment that we would expect as a company, I mean if at all proves out the time of our coal capital costs about 150, I would say that a rough number for where we would be investing would be in the $30 million to $40 million range, that's sort of our operating assumption.
The technology that they have, it has current economic benefits now in that to get to the point where you can the capture the carbon, you actually have to take out even more SOx as well, so the saved SOx obviously has economic value in the market already since there is a traded market for SOx as you know. The issue with anything that you do in terms of carbon capture, again is that we are anticipating that the carbon will have a value, and so how much we investment in it, how it actually gets financed sort of depends on whether we continue to live in an environment where carbon emissions are going to be free and they are not going to have an economic value.
And then finally, the last thing we have to prove up is that the sequestration in the case of the Powerspan project, we believe can be used for enhanced oil recovery in the area of the Parish plant, and you know what value we can secure from that is also a question that we need to answer over the next several months.
Dan Eggers
Okay, and then I guess one other question looking at the RepoweringNRG program, particularly on the wind side for 2008, it looks like about $390 million, give us a little color on size or projects, where you expect them to be, when we should anticipate and serve a statement --?
David Crane
Well, I think the lead projects will certainly be in West Texas and they will be in the 100- to 200 megawatt range and... at least some of them are likely to be with significant partners.
We are also got some very active wind development in California but it takes longer in California, so I think the first ones you'll hear from us about will be in Texas.
Dan Eggers
Okay, thank you.
Operator
Your next question comes from Elizabeth Parrella from Merrill Lynch. Please go ahead.
Elizabeth Parrella
Yes. Thank you.
I'm just following up on the $626 million growth CapEx this year. You mentioned there are $75 million in there for STP and just looking at your slide 25, can we assume that the rest of the Texas spend which would be about $100 million is for Cedar Bayou or is there --?
Robert Flexon
That's Cedar Bayou 4.
Elizabeth Parrella
Cedar Bayou. And then the 390 is all wind?
Robert Flexon
Yes.
Elizabeth Parrella
Now, where is the... this Powerspan project showing up?
Have you included that in the Repowering or the environmental bucket?
Robert Flexon
We don't have much, we don't really have the Powerspan in the end until we get more clarity around what the cost are going to be for '08.
David Crane
Yes. I don't think that the Powerspan is going to be in the design engineering stage in '08, so that would be...
that would start to hit in '09 and beyond.
Elizabeth Parrella
Okay. And then a question in a different area, what's your view on the outlook for New York City capacity prices near-term, medium-term, long-term, just in light of the ISOs compliance filing and updated three-year demand curve?
David Crane
I think, Elizabeth, that we can burn that question slightly to what our point of view on capacity prices in the Northeast. I would say that we are bullish on capacity prices in Connecticut, rest of the state and New York and PJM and we're bearish, we think that the measures you are taking about will reduce capacity prices in New York City, but the net effect in the capacity price area across those four areas we think are about mutual to us.
Elizabeth Parrella
So, you're saying the reduction in New York City is offset by what you see is the up tick in those three other regions?
David Crane
That's exactly what I am saying is, of course, you said it with much greater brevity than I do.
Elizabeth Parrella
And over what timeframe? Is that just '08 or multiyear or --?
David Crane
I would say that's from... the time period we are looking at there is 2008 to 2011.
Elizabeth Parrella
Okay. Thank you.
Operator
Your next question comes from David Silverstein from Merrill Lynch; please go ahead.
David Silverstein
Good morning,
Robert Flexon
Good morning, David.
David Silverstein
Hey, just to clarify from some of the comments you made about the backstop facility. Can you give us some detail in terms of what the rate is, it looked like your earnings release kind of alluded to some sort of a backstop facility being at a rate that was 1% above your existing non-callable loans?
Robert Flexon
It's a $4.2 billion backstop and the pricing I believe is LIBOR plus 250. My believe we will be filing the commitment letter, no, just would be a filing an 8-K on the commitment letter.
There are more details to be provided, but it's a $4.2 billion facility, reasonably sized at that level, David, with the liquidity we have on the synthetic LCs, we don't need a $4.7 billion backstop, we have got the $500 million ready to go and so it's $4.2 billion backstop facility.
David Silverstein
Okay.So this is backstop facility. Okay.
Then not the 1% than that was alluded to in the press release.
Robert Flexon
No I mean... I am not sure what the 1% was.
I mean, obviously the call on the offer on the bond is 1:1.
David Silverstein
Yeah, I know, there was something alluded to the fact that you had a financing available that would cost only 1% above the bonds. Just moving on then, in terms of the seniority of that facility, is that facility senior secured.
Robert Flexon
Yes, David, I mean that on the press release... just to come back and all we are saying there is that we have the right to buy the bonds at 1:1 and we're saying it's 1% above par for the bond, in that saying that we would use the liquidity facility to basically just exchange in the Term B for the...
for the bonds and that the 1% represents the call price. That's all we're trying to say in the press release.
David Silverstein
Great. Okay.
Thank you very much.
Operator
Your next question comes from Gregg Orrill from Lehman Brothers. Please go ahead.
Gregg Orrill
Thanks very much. Two quick questions, the first on the various carbon control initiatives that you've talked about.
David, do you have ultimate goal of, that you can quantify in terms of funds reduced or assets created for the company. Could it actually turn into a new business line for NRG?
Also on the offer to the bondholders, the way of the change in control at 12.5 basis points. Looks like a reasonable offer maybe not full, maybe you can comment on your commitment level for the new Holdco structure?
Thank you.
David Crane
Hi Gregg... obviously, I'll answer the first question and Bob will handle the second.
On the carbon control, we haven't set a formal target, but if we did set a target, we are very aware of our carbon intensity as a company, and it's pretty high, we produced almost a ton of carbon, I think we are 0.9 tons of carbon per megawatt hour of NRG output across this week. Actually we'd like to add numbers as low as possible.
We continue the current Repowering program taking us down towards the 0.6, 0.7, now I'd say I'd like to be 0.3, but we haven't set a target. But that's way we will look at, because obviously we are a growing company, we'll be somewhat reluctant at least at the company-wide level to set a fixed absolute level of carbon.
Is it... in terms of new business areas, Gregg, absolutely, the one true growth area in this mature industry of ours is in the environmental area, and carbon maybe the biggest growth area, so we superseding or supplementing renewables, but in both areas, I think this is something that you should expect to hear more from our company.
And particularly in those areas within Renewables and in terms of environmental control, carbon controls, that are very closely tied to what we are doing today. Where we feel that we have a competitive advantage, we want to move very aggressively in this area.
We're very pleased with what Padoma is doing for us in the wind area but there is no question that if we... we don't want to be last mover in these other areas, the way we are, we were served at the tail end of the wind movement, so yes you should expect to hear more from us in this area in the future.
Robert Flexon
Gregg, on the consistency, the consistency been offer of the eight [ph], and the way that it works for each class of bond, there is an incentive fee on the pool of bonds, so it would and eight times the pool amount of the pool, and then for those that vote yes. They share in that entire pool.
So we expect, say, just for the math purposes, if half of the bond-holders accepted and half didn't the incentive fee would be go from an eight to a quarter, so there is an incentive there. And we view that where the bonds are trading today, at or slightly above par.
The various credit accretive events that we have been doing as well as the strengthening that we expect the bonds to get with the Holdco or moving a $1 billion behind them, it offers the appropriate incentive for us to get this thing across the line. On the other hand, we are not going to...
we will not be coming back and raising fees or anything, otherwise, we have very solid alternatives to the... for some reason it doesn't move forward.
So, we think we have got the right balance out there on economics to make this attractive for bondholders and good for shareholders, so we are optimistic that this will get us there.
David Crane
Jenifer, I think a lot of our listeners have another call to attend. So, we will take one more question, so people can get off the phone.
Operator
Our last question will come from Michael Lapides from Goldman Sachs. Please go ahead.
Michael Lapides
Hey guys, congratulations, on a great quarter. David, on the Repowering initiatives, two questions.
One, can we get just the latest status update on Carl Stat [ph], and then second on Big Cajun in terms of partnership in the off-take agreement?
David Crane
Mike, I am a little bit... your chemistry here is little disappointed, that you didn't ask your question to him about our trading position, but --
Michael Lapides
I learned my lesson.
David Crane
Well let me... in terms of Carl's [ph] that you are talking about, you are not talking about the existing plant, you are talking about our efforts to re-power that --
Michael Lapides
Yes.
David Crane
Get a contract for that. I think we are in good shaping and you should stay tuned in that regard.
I mean, I don't know if there is going to be. I mean, we would certainly expect to be able to give you some news on that before the end of, before the next quarterly call.
I am just reluctant to say anything about that, because the confidentiality... confidentiality arrangements around the bidding processes in California are very extreme, but, I certainly expect something before the next quarterly call, and even if there is a little bit of a delay because of the distraction in terms of the companies, all the companies down there struggling with the wild fire situation, but stay tuned.
As to Big Cajun I, we are actually in a very good position. I think, both, with respect to partnership and off-take on that project.
What we are waiting for is for the air department to clear the EPA, and as soon as that happens you should be hearing from us something about that project as well. And again that's serving the same eminent basket as Carl said.
Michael Lapides
I may have missed this or it may have not been disclosed yet, did you at all information at all about who the partners are, who the off-take agreements are with? On Big Cajun I.
David Crane
Have we?
Robert Flexon
I don't think we.
David Crane
No, we haven't.
Michael Lapides
Okay. Great.
Thanks guys. Congrats on a good quarter.
David Crane
Thanks. Well, thank you, Jenifer, and thank all of you who listen.
We appreciate you joining us for this call, and of course your continues support and interest in NRG.
Robert Flexon
Thank you.
Operator
Ladies and gentleman this concludes the conference call for today. Thank you for your participation, and have nice day.