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NRG 'Bullish' on Natural Gas Prices, CEO Says

With active hedging to manage its 23,000 MW fleet of independent electric generation plants, Princeton, NJ-based NRG Energy Inc. views this summer and long-term with a "fundamentally bullish" attitude toward natural gas prices, CEO David Crane said last Thursday during a conference call with financial analysts.

NRG reported lower first quarter earnings compared to the same period in 2007 -- $48 million, or 14 cents/diluted share, in the quarter this year versus $61 million, or 19 cents/share, last year.

In the United States, new renewables and other power generation are not being added fast enough, and globally the demand for gas is far out stripping supply, so the price is bound to keep going up, Crane said, but the North American electricity sector will continue to turn to gas as the fuel of choice.

"We enter the summer this year as a 'double bull' -- bullish short- and long-term," Crane said. "Short-term, we think we are coming closer to a perfect storm of bullish signals, such as lower gas inventory as a result of a cold winter and domestic supply disruptions at the Independence Hub, the prospects for an active hurricane season in the Gulf of Mexico, and the fact currently that it seems highly unlikely that liquefied natural gas (LNG) spot cargoes will keep the lid on prices this summer as they did last year."

Regarding the third point, Crane said he has come to this conclusion because of the higher LNG spot prices in both Europe and Asia currently. Longer term, he thinks the fundamentals for gas prices globally remain the same -- up.

"International demand for transportable hydrocarbons continues to significantly outpace world supply, and natural gas remains by far the cheapest hydrocarbon in and around the petroleum complex," Crane said. "Compounding the impact of robustly increasing international demand, the United States with its weak dollar and desire for cheap fossil fuels will increasingly need to resort to natural gas to meet its increasing electricity demand since 'non-natural' gas-fired generation is simply not being added fast enough, or on a sufficient scale, to avoid substantially increasing natural gas demand over the short term."

Crane reiterated that natural gas fundamentals drive many important aspects of NRG's business strategy. He said the most obvious tie to the power plant operator/developer's future financial results is the influence gas prices have on NRG's baseload forward hedging strategy.

"After substantially no baseload hedging for four quarters, we have made a substantial 28 million MWh move in the first quarter, and it took place in the substantially higher pricing environment than it had in previous forecasts," Crane said. "A point to take away from this is that NRG intends to act on its bullish view with respect to natural gas, not just by abandoning our baseload hedge philosophy, but by substantially increasing the prices used to fill our hedge position."

Crane and other NRG executives reiterated that what happens to heat rates overall in the power sector will have a lot of impact on operations, particularly in Texas, and there are uncertainties regarding the integration of wind and related new power transmission infrastructure that are still unresolved. In addition, Crane specifically mentioned the current shrinking of the price of sulfur dioxide emissions credits as causing NRG to re-think its approach to investing in new scrubbers at some of its plants in the near term.

"The question of the transmission buildout to accommodate more wind-generated power in West Texas is the big issue for the next few months," Crane said. "I think there is a bit of an overreaction of the market. From our asset position, as we look at it, if you think about the impact of wind long term in Texas, depending on how much new transmission gets built, it could be [adversely impact] our baseload generation, which is the center or our profitability in that state." Its impact would mainly be during off-peak times in the so-called "shoulder season," he said.

Wind's more direct impact is on combined-cycle natural gas-fired generation plants, and that is why there is a slow down in building these plants, Crane said. "We don't have many of those," he said, and any plans we would have to develop new gas combined-cycle plants would be influenced by an impact on them from wind generation.

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