David Crane, CEO of NRG Energy, last Thursday said he was baffled by the apparent renewed optimism over the future direction of wholesale power markets in the United States from certain quarters, noting, among other things, the continued oversupply cloud hanging over most parts of the country.

In announcing second quarter earnings results, the generator said that beyond 2004, it “continues to operate in an overbuilt and challenging wholesale power generation market. The recent suggestion of an improvement in values for power generation assets, in our opinion, is more reflective of the influx of money into funds seeking to invest in this sector than in any sustained recovery in wholesale electricity prices.”

Crane expanded on this during a conference call with investors following the release of NRG’s second quarter 2004 results. With respect to the apparent vote of confidence being given to the wholesale power sector from outside funds, “the only point we’re trying to make…is that there’s no reason for that enthusiasm that we can see in the basic spark spread environment or in the basic supply-demand,” he said.

“We still see the oversupply in almost all regions — obviously, varying dramatically region-to-region, but from our perspective, structural change in the industry would help correct that with a degree of consolidation,” Crane continued. “But, as I’ve said in the past, I’m somewhat pessimistic that happens in the near term because consolidation is, I think, difficult when most companies — excluding ourselves — [are] still struggling with excessive debt burdens.”

Meanwhile, another analyst quizzed NRG executives about whether the company had plans to shutdown its Long Beach power plant in California. NRG owns 50% of the 265 MW gas-fired power plant located in Long Beach, CA.

“We’re not going to sit around with the plants if the plants aren’t earning their keep — it’s more than Longbeach that would shutdown,” an NRG official responded. “I would say that Longbeach is the one that’s probably most on the bubble. We’re evaluating all options for all plants in California and we don’t intend to sit around and just carry the cost of those plants if they can’t achieve an economic return.”

NRG reported second quarter earnings of $83 million, or $0.83 per diluted share, which included $14 million, or $0.14 per diluted share, related to discontinued operations. Earnings from ongoing operations were $69 million, or $0.69 per diluted share.

During the quarter, NRG said it benefited from sustained higher natural gas prices, which led to improved energy revenue margin at NRG’s coal-fired facilities. The company continued to expand its Powder River Basin coal conversion program, aimed at substantially reducing sulfur emissions from NRG’s coal-fired plants in New York and Delaware. NRG plant staff focused on preparing for the high-demand summer season with increased seasonal maintenance schedules and continued efforts to improve operations and efficiencies at its facilities, the company said.

During the most recent second quarter, the company incurred $5.6 million of one-time costs related to its corporate relocation activities, primarily related to employee severance and termination benefits.

Equity earnings from West Coast Power, a joint venture with Dynegy, were higher than expected due to favorable market conditions and settlement adjustments. NRG continues to work with Dynegy to secure a replacement contract for the California Department of Water Resources that expires at year-end 2004.

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