Seeing a rally in natural gas prices that could push them up to the $3.50 to the low $4 area in the next two to three years, Princeton, NJ-based NRG Energy Inc. senior executives speculated Wednesday that there may be the beginning of a reversal of the ongoing coal-to-gas switch for power generation, particularly in the Texas market in which NRG is the second biggest generator.
NRG COO Mauricio Gutierrez said gas prices in some areas are beginning to approach the same level as Eastern coal prices. He made these comments in response to a question during a 2Q2012 earnings conference call with financial analysts, during which NRG reported a sharp decrease in net income quarter over quarter ($259 million, or $1.09/share, compared to $621 million, or $2.54/share for the same period in 2011).
Gutierrez said that with the price rise combined with a rise in heat rates (the fuel quantity needed to produce a fixed amount of power) in Texas "we have seen the reversal of the switching that we experienced in January." That's why NRG sees the prospects for such a reversal more broadly, keeping in mind that natural gas is "just one component," he said.
"From our perspective there is a small relationship between heat rates and natural gas, and heat rates are a function of fuel markets in which gas has a lot of drivers," Gutierrez said. "In the forward markets, when you get into 2013 or '14 or '15, with gas prices in the high $3 range and low $4 territory, you are significantly out of the [coal-to-gas] switching area."
NRG CEO David Crane said the company is still on target to complete its recently announced acquisition of GenOn Energy in the first quarter next year, forming what will be the largest independent power generator in the nation and one with considerable generation assets in both the gas and coal sectors. Noting an absence of shareholder concerns about the pending merger, Crane said he and the NRG management team are focused on attaining the estimated $300 million in synergies that are supposed to come from the combination.
"Planning is proceeding very well for that, even though it is in its early stages. We're very confident about this transaction and the timetable for closing early in the first quarter of 2013."
GenOn is the product of a 2010 merger of Mirant Corp. and RRI Energy Inc. that created the country's second largest independent power producer at the time with 24,700 MW of capacity and a market capitalization of $3.1 billion.
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