Presentation to Capital Markets Credit Analysts Society

1
Presentation to Capital Markets Credit Analysts
Society

• Robert P. Tinari
• Managing Director
• Société Générale
• April 26, 2006

2
NRG Energy, Inc - Background

• Engaged in the ownership and operation of
  unregulated, or merchant power generation
  facilities and the sale of energy, energy
  capacity and related products. As of June 2002,
  NRG was a subsidiary of Xcel Energy with
  ownership of just over 16,000 Mw of net
  generating capacity, of which 12,000 Mw was in
  the US.

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NRG Energy, Inc.

• NRG had pursued a strategy of growth via
  acquisitions. Beginning in 2000, NRG added the
  development and construction of new power
  projects to its strategy, much of which was
  financed by project level debt. As of September
  30, 2002, NRG had approximately 9.4 billion of
  debt on its balance sheet.
• Of this amount, 1 billion was owed to bank
  lenders at the holding company level and another
  3 billion to bondholders.
• Most of the remaining debt was at the project
  company level on a non recourse basis to the
  parent. Generally, project company cash flows
  were trapped at the project company level to
  support debt service and reserves to support the
  viability of each project financing.

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NRG Energy, Inc.

• NRG was but one of several major companies
  developing new merchant power projects and in
  retrospect, the aggregate increase in power
  generation capacity over a short period of time
  was staggering. By the end of 2001, power prices
  began to decline due to significant over
  capacity. Anticipated demand for power did not
  materialize.
• The collapse of Enron left the industry without a
  viable trading platform (much of which was done
  on an unsecured basis) and led credit rating
  agencies and lenders to focus on liquidity and
  credit issues.
• In July 2002, SP and Moodys downgraded NRGs
  senior unsecured bonds to below investment grade.
  The downgrade triggered collateral calls
  aggregating 1.1 billion which NRG could not meet
  because its 1 billion liquidity facility was
  already fully drawn.

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NRG Energy, Inc.

• The downgrade and resulting inability to meet
  collateral calls shut NRG out of the markets for
  forward purchases of fuel (natural gas) and
  forward sales of power. Thus to the extent its
  projects had non contracted power generation
  capacity, such as through toll contracts (which
  generally were not collateralized), the projects
  were restricted to transacting in the spot
  markets.
• With a heavy reliance on the spot markets, cash
  flow forecasting became difficult. Several of the
  project level financings went into default.
• One of the NRG project financing transactions was
  a 1.1 billion bank deal to finance the
  construction of new projects. After extensive
  analysis, the project Lenders concluded that
  there was little assurance that the market could
  absorb the capacity of the project under
  construction if completed and decided to stop
  funding. As a result, construction activity
  ceased. The debt related to this project
  subsequently traded in the .10 range.

6
NRG Energy, Inc.

• In August 2002, NRG retained financial and legal
  advisors to assist in the preparation in the
  preparation of a comprehensive operational and
  financial restructuring plan.
• Shortly thereafter, NRGs top five managers left
  the Company and, in November 2002, filed an
  involuntary Chapter 11 petition against NRG in
  Minnesota. This involuntary filing was
  subsequently dismissed after Xcel announced that
  its board of directors had approved a settlement
  agreement with the holders of most of NRGs long
  term noteholders and NRGs Bank Lenders.
• Pursuant to this Settlement Agreement, Xcel
  announced that it would pay 752 million to
  various of NRGs creditors and turn over the
  stock of reorganized NRG in exchange for full
  releases from any and all claims and causes of
  action that could be asserted against Xcel by
  NRGs creditors. The conclusion of this
  Settlement Agreement facilitated the timely
  filing of a Plan of Reorganization by NRG.

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NRG Energy, Inc

• On May 14, 2003, NRG filed a voluntary bankruptcy
  petition and announced that it had obtained a
  250 million DIP commitment. NRG also announced
  the formal retention of an interim management
  team from the crisis management/restructuring
  firm Kroll Zolfo Cooper LLC. Concurrent with the
  bankruptcy filing, NRG began work to exit
  bankruptcy by year end.
• On August 19, 2003, NRG received exit financing
  commitments totaling 2.215 billion consisting of
  
• 1.182.5 billion of Senior Credit Facilities, of
  which
• 932.5 billion to 1.032.5 billion term loan
• 250 million LC Facility (as sublimit of term
  loan)
• 150 million to 250 million revolving credit
  facility
• 1.032.5 billion of High Yield Debt

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NRG Energy, Inc

• NRG used a portion of the proceeds of the exit
  financing to refinance project level debt at
  three of its most significant and valued
  projects. Whereas cash at these projects had been
  trapped pursuant to the project financing
  arrangements, NRG created for itself the
  flexibility to deploy cash in a more efficient
  manner.
• On December 5, 2003, NRG announced that it had
  successfully completed its emergence from
  bankruptcy.

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NRG Energy, Inc - Critical Issue

• When NRG lost its investment grade rating, its
  fuel suppliers stopped extending credit and
  instead insisted on payment in advance.
  Consequently, NRG lost the working capital
  equivalent of 55 days of trade credit. Moreover,
  the downgrade resulted in the imposition of, or
  increase in, cash collateral requirements
  associated with NRGs commitments for forward
  delivery of power. Without liquidity, NRG was
  effectively limited to transacting in the spot
  markets.
• While spot markets may, at times, provide healthy
  margins, excessive reliance on the spot markets
  results in unpredictable cash flows at the
  project level, and even greater unpredictability
  when assessing the cash upstreaming potential of
  those projects.

10
NRG Energy, Inc - Critical Issue

• Individual projects did not have the liquidity
  available to pay in advance for fuel or
  collateralize forward commitments. The structure
  of the project financing documents presumed that
  such working capital requirements would be met by
  the parent through its power trading subsidiary,
  NRG Power Marketing. Prior to the downgrade, the
  projects had relied on NRG Power Marketing to act
  as a central treasury to buy fuel and sell
  power. However, NRG Power Marketing was not
  sufficiently well capitalized to operate in the
  changed environment.

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NRG Energy, Inc - Critical Issue

• The challenge within the Plan of Reorganization
  was to determine how much liquidity NRG required
  to accommodate an acceptable hedging program. We
  asked management to define
• An optimal hedging strategy, assuming access to
  sufficient capital
• Several sub-optimal hedging strategies assuming
  access to limited amounts of capital for hedging
  purposes.
• We argued that reorganization capital structure
  could be determined only after the hedging
  strategy had been determined.

12
NRG Energy, Inc - Critical Issue

• Both NRG and the Steering Committee retained
  advisors to assist in this process. The mandate
  was to determine the amount of liquidity needed
  by NRG to assure its ability to maintain its
  hedge positions (based on optimal and sub-optimal
  scenarios) at a 95 confidence interval.
• The results of the analysis forced a rethinking
  of the capital structure of reorganized NRG
  including its exit financing requirements. Upon
  emergence from bankruptcy, NRG had an estimated
  1.1 billion of liquidity which enhanced its
  ability to participate in the forward markets. As
  noted in NRGs Annual Report for 2003
• With our greater liquidity, as well as high gas
  prices and rising coal prices, we successfully
  contracted forward a high percentage of the
  economic energy production from our coal plants,
  and locked in the associated fuel supply for the
  balance of 2004. We look to contract more while
  still maintaining the capacity to benefit from
  high spot electricity prices.

13
WINSTAR COMMUNICATIONS, INC.

• Winstar was a broadband provider to commercial
  customers, offering local and long distance phone
  services and high-speed Internet and data
  communications services. Its commercial customers
  were located primarily in large commercial office
  buildings. Winstar used fixed wireless broadband
  connections to provide broadband connectivity
  across the last mile from intra-city fiber
  rings to its customers.
• Source Winstar Annual Report to Shareholders
  dated December 31, 1999

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Winstar Communications, Inc

• Winstars global broadband network brings
  digital-age broadband services to businesses of
  all sizes
• Winstar is the largest holder of 38 GHZ wireless
  spectrum in the United States with licenses from
  the FCC that cover 80 of the US business market
• Winstars fixed wireless capabilities complement
  its extensive fiber network that will exceed
  16,000 long-haul route miles of fiber connecting
  more than 60 US markets and 6,000 local route
  miles of fiber in over 50 US cities
• Winstar is the global leader in the deployment of
  broadband fixed wireless and delivers broadband
  services over its own network to customers in
  twelve international markets
• Winstar has a business model that is strong and
  sustainable, and a superior ability to continue
  to implement its business strategy day in and day
  out.

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Winstar Communications, Inc.

• Winstars widely available broadband network is
  able to serve tens of thousands of businesses in
  more than 60 domestic markets and twelve
  international markets. Together with our
  infrastructure partners, Lucent Technologies,
  Williams Communications and Metro Media Fiber
  Neetwork, we are continuing to expand our
  end-to-end network from Boston to Austin, from
  Silicon Alley to Silicon Valley, and beyond.
• Winstar has a passion for customer satisfaction.
  Winstars consultative experts and advisers pull
  the pieces of a complex world together and show
  customers how to utilize and profit from cutting
  age technology.
• Source Winstar Annual Report to Shareholders
  dated December 31, 1999

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Winstar Communications, Inc. - Summary Financial
Data as of 9/30/00( 000,000 omitted)

• Current Assets .. 811.9
• PPE (net) . 2,672.6
• Licenses (net) 314.8
• Other Long Term Assets.. 669.9
• Total Assets 4,469.2
• Current Liabilities.. 578.9
• Senior Bank Debt.. 1,150.0
• Other Long Term Debt.. 2,162.3
• Other LongTerm Liabilities.. 488.0
• Preferred Stock. 200.0
• Stockholders Deficit.. (110.0)
• Operating Revenue.. 534.2
• Operating Loss (359.3)
• Net Loss... (641.5)
• Net Loss attributable to common
  stockholders..(747.0)

17
Winstar Communications, Inc.

• Footnote Disclosure
• We anticipate, based on our business plan and
  certain assumptions, that our existing financial
  resources will be sufficient to fund our planned
  operations and capital requirements into the
  first quarter of 2002
• As a result of our recently announced financing
  commitments, our expectation to be EBITDA
  breakeven in the first half of 2001 and our
  expectation that our core network infrastructure
  will be completed by the end of 2001, we believe
  that we will have the flexibility to grow our
  business at whatever pace is appropriate for the
  existing capital environment.
• SOURCE Winstar Communications, Inc. 10Q as of
  September 30, 2000

18
Winstar Communications, Inc. - Bankruptcy Filing

• Winstar filed a voluntary Chapter 11 petition on
  April 18, 2001
• Chapter 11 filing was precipitous and without
  prior planning
• Cited failure of Lucent Technologies, Inc. to
  abide by its obligations to make available to
  Winstar a line of credit of approximately 1
  billion as a significant contributing factor to
  the liquidity constrained financial condition of
  the company.
• Company reduced workforce by 44, filed lawsuit
  against Lucent alleging breach of contract and
  stopped virtually all capital spending
• Shift in management emphasis to generating cash
  as opposed to sales and EBITDA
• Five lenders committed to an emergency 75mm DIP
  facility. Strategy was to keep the company alive
  so it could be sold as a going concern.

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Winstar Communications, Inc. - Bankruptcy Filing

• Additional 225mm is DIP commitments requested.
• Many prospective DIP Lenders determined business
  plan to be unachievable. Only 100mm in
  additional DIP commitments obtained.
• Company missed DIP business plan by a wide
  margin forced to ratchet business down, lay off
  more employees and discontinue loss-making
  operations. Company eventually lost critical
  mass.
• No market for individual assets including
  spectrum licenses and leases on fiber-optics
  transmission equipment. Glut of telecom assets
  forced values down.
• Buyers concerned about reliability of technology.
  Fixed wireless vulnerable to disruptions caused
  by bad weather or construction of new buildings.
• Assets eventually sold for 42mm resulting in
  total loss to prepetition lenders and loss to DIP
  lenders.

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Winstar Communications, Inc.

• What went wrong?
• Bad Underwriting?
• Bad Business Model?
• Good Business Model but Bad Execution?
• A Concept Ahead of its Time?
• An Example of Build it and the Customers Will
  Come?
• Did Management (along with most other industry
  participants) overpay for assets such as fiber
  and telecommunications equipment?
• Were Managements Growth Expectations Unfounded?
• Or.
• Should we just call this an example of a six
  standard deviation event (that no one could have
  predicted) and get on with new deals?

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Presentation to Capital Markets Credit Analysts
Society

• Robert P. Tinari
• Managing Director
• Société Générale
• April 26, 2006