NRG Energy Inc (NRG) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, welcome to the second quarter 2010 NRG Energy earnings conference call.

At this time, all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of today's conference.

(Operator instructions).

I would now like to turn the presentation over to your host for today's conference, Ms.

Nahla Azmy, Senior Vice President of Investor Relations.

Please proceed.

Good morning and welcome to our second quarter 2010 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 through a link on the investor relations page of our website.

A replay of the call will also be available on the website.

This call, including the formal presentation and the Q&A 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 August 2, 2010, 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, except as required by law.

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 the quantitative reconciliation of those figures, please refer to today's press release and this presentation.

Now, with that, I'd like to turn the call over to David Crane, NRG's President and Chief Executive Officer.

Thank you, Nahla, and good morning, everyone.

I want to provide -- add my personal welcome to the second quarter call, and I want to apologize and thank you for accommodating our date shift from tomorrow to today.

Since it was done on my schedule, I hope that by getting you to listen to us on a Monday morning we've brought you some good news earlier in the week than we otherwise would have.

Today I'm joined by Chris Schade, our Chief Financial Officer, who will begin part of the presentation; and John Ragan, who will beginning the Chief Operating Officer's part of the presentation.

Although, as maybe you know, John Ragan has moved on to become the President of NRG Texas.

His successor as Chief Operating Officer of the Company, Mauricio Gutierrez, is also here, but he will be reprising his role as the Head of Commercial Operations and available to answer questions on topics relating to the markets and the commodities.

Finally, I'm also joined by Jason Few, who runs Reliance Business.

Before I get started I just want to mention, of course, that this shift in the management team has been caused in large part by the retirement of Kevin Howell.

I know many of the long-term shareholders on the phone know Kevin well, and Kevin has had a great career at NRG, first fashioning our superb commercial operations team, then being -- acting as Chief Administrative Officer, and most recently as president of NRG Texas.

I want to thank Kevin for the phenomenal job he's done.

He will be -- I appreciate that a couple of years ago, when he wanted to retire, he allowed me to persuade him to stay a couple extra years, and I just want to thank you personally for all that is done for this Company.

Now turning to the presentation and page three, referring to the slides that have been posted on our website, I wanted to start, as I usually do, by giving you my take on the Company's financial performance during the quarter.

The Company quite simply performed spectacularly well during the quarter, and our superior performance, combined with favorable prevailing weather conditions, produced an exceptional financial performance for the Company -- $693 million of adjusted EBITDA, the second-strongest second quarter in our history, and nearly $350 million of cash from operations.

The goal of operating the business for cash, as we always have done, obviously is first to accumulate that cash and then to allocate it in a timely and efficient manner on behalf of its owners, NRG shareholders.

We have been successful on both counts during the quarter, increasing our cash balance by over $360 million, and by allocating the cash effectively, including $50 million expended to buy back NRG shares as the first stage of our 2010 capital allocation program.

Our cash accounts were buoyed by, in addition to our cash generated from operations, by more than $100 million received under the cash ITC program from the federal government in connection with the Langford Wind and the Blythe Solar projects.

I'm very pleased with the steps we are taking towards building more flexibility into our capital structure, and Chris will talk more about that during his presentation.

As we assess where we stand at this financial midpoint in 2010 today, the results achieved over the previous six months, together with the positions we have taken with respect to the six months to come, I'm very pleased to report to you that today we are increasing our guidance for the full year for both adjusted EBITDA and cash from operations by a very substantial amount.

As you assess our new guidance, as I believe that you must given the absolute magnitude and the sizable margin by which our performance in 2010 to date has exceeded the expectations of the financial community, I ask you to be mindful of three things.

First, consider that, 14 months after we purchased Reliant, perhaps it is time to recognize the superiority of our wholesale-retail model, unique among our peers, and as such acknowledged that we merit a multiple premium rather than a multiple discount in comparison to pure generators.

Second, consider the resilience of our business model, based as it is on the twin pillars of prudent balance sheet management and forward hedging through the commodity down cycles.

Here we are reporting on the eighth full fiscal quarter since natural gas prices began to drop, and even though commodity prices continue to scrape along at the bottom of the trough, NRG has continued to report nearly record results.

Of course, it isn't our hedging alone that is achieving such a fantastic result, it's the strong contribution of Reliant, and that is where the prudent balance sheet component of the strategy looms large.

If we had not been in a strong financial position when the financial tsunami occurred, we could not have acquired Reliant in the manner that we did.

Third and finally, consider that nine months ago, when we first announced guidance for 2010 of $2.2 billion coming off a record-shattering $2.6 billion EBITDA year in 2009, I told you that we were not satisfied with making $2.2 billion in 2010.

I vowed to you on behalf of all the management and employees of NRG that we would work our hardest to do better.

Today, with guidance revised significantly upward to $2.45 billion to $2.55 billion, we are fulfilling a good part but not yet all of that vow.

We will continue to work our hardest to improve our 2010 result.

We know that this is what you expect from the NRG team which you have infested your capital with.

Well, let's look beyond the numbers.

As you know, one of the most significant characteristics that differentiates NRG is that, all the while that we are delivering best-in-class financial results, we also are working tirelessly to position the Company as both the optimal conventional competitive power company and as a first mover in America's clean energy economy future.

As slide four indicates, we have five top priorities in respect of each of these two strategic tracks, and the progress we have achieved against all these priorities over the past couple of quarters has been highly satisfactory.

I'm happy to speak with you at length about any and all of these priorities, but given time constraints I am going to focus most of my comments on the two most topical -- on the conventional side, our wholesale-retail model and, on the new energy economy side, our push towards being first mover in low carbon-based load generation, particularly new nuclear power.

Success within our business model depends upon our success in maintaining our Reliant retail franchise through all commodity price cycles.

The particular challenge in this commodity price cycle is preserving, growing and extending the franchise through this potentially prolonged commodity price trough in an environment where retail margins are healthy and barriers to entry appear low.

As shown on slide five, our approach is fourfold -- first, target pricing and marketing to a highly segmented mass market; second, a resurgent and coordinated sales effort across all customer classes, especially the C&I segment, an area of Reliant's business which was being affirmatively and intentionally discontinued under previous ownership and which is in the process of being rebuilt under our ownership; third, various initiatives that leverage off the customer service capabilities of Reliant in order to increase revenue opportunities; and fourth, brand extension to a range of products and services built around smart metering technology being employed in homes and commercial establishments around Texas.

Our fifth objective for Reliant, which is both an objective in its own right but also is the quality that underpins the Reliant brand and, as such, our ability to achieve the other four objectives, is our relentless focus at Reliant on customer care and customer satisfaction.

Reliant is intensely committed to providing differentiated service across the entire customer lifecycle, and that commitment has paid off.

As illustrated on slide six, Reliant has the lowest customer complaint percentages of all the Texas retail electricity providers.

This has caused the Reliant brand only to enjoy the highest brand recognition in the key areas of ERCOT, but also the highest brand preference as demonstrated on the bar charts on the bottom right.

Everything we do and everything Reliant is doing is designed to preserve and enhance that brand and increase distinction between Reliant and its competition.

We are very confident that the things Reliant itself is doing in its communities with is smart meter program and with its customer service and that we at NRG are doing alongside Reliant in Texas, such as the windmills, the nuclear plant and the electric vehicle infrastructure, will further preserve and enhance Reliant's brand and NRG's retail advantage in Texas more generally.

What does all this mean to NRG's shareholders?

We reproduced slide seven to remind you that, in our humble opinion, Reliant is being severely undervalued within NRG, given the reciprocal advantages that matching wholesale and retail provide to each other.

The advantages are bulleted on this page.

These advantages exist not only in theory, but we have amply demonstrated to the market over the past 14 months that they exist in practice as well.

We have steadily and substantially reduced the capital required to collateralize the retail business through a continuous increase in the number of crossing trades we have done, and we have partially de-risked the business through a sequence of constructive hurricane risk mitigation products.

For the bottom line, it comes down to the earnings power of Reliant's retail business sustained through the extended trough of this commodity price cycle.

It was just over a year ago that you were being asked to believe that Reliant was worth no more than $1 a share to NRG.

And now, after just 14 months, Reliant already has generated over $1 billion in EBITDA for the Company, meaning that Reliant already has generated $4 for each NRG share outstanding.

It's a very good start.

It provides the proof of consistent performance which the market has sought and, as such, it's a good point for ascribing a fairer value.

Moving now to low carbon baseload, before we get to a discussion of our STP 3 and 4 project, let me say that, more than any other area of our business, renewables' demand-side management, fast-start gas, low-carbon baseload is, in my opinion, where it's going to be at over the next 20 years.

This is where the winners among 21st century power companies are going to be crowned.

And with NRG positioned to seize first mover status not only with new advanced nuclear but also with clean coal projects pivoting off the 60 megawatt carbon capture and enhanced oil recovery demonstration project we are developing with the assistance of the DOE at Parish, we are as well positioned as a company could be in this critical and valuable area.

Now, with that said, turning to the continuing saga of our STP 3 and 4 nuclear project on page 8, I have attempted to cut through the noise and the complexity of recent developments to put on one page everything important that you need to know about where we are and where we are going with this project.

Starting with Washington where activities continue as we speak both within the executive branch and on Capitol Hill to find a way to fund either the two or the three projects which remain in contention for nuclear loan guarantees, I'm here to tell you that I have absolutely no idea what funding method will succeed or how it will be achieved, but I can tell you this.

Based on what I personally have witnessed in terms of the commitment of high officers of the Obama administration, the highly professional and constructive approach of the DOE staff and their advisers to our project and the nearly unanimous pledges of support from senators and representatives of both parties to the concept of additional funding for nuclear loan guarantees, I am more confident than I have ever been that our project ultimately will be awarded a nuclear loan guarantee from the United States government.

The question I cannot answer and the question that informs the basis for the spending decisions that I'm announcing here today is the question of when.

I do not know when.

This uncertainty about when is what makes it impossible for me to continue spending NRG shareholders' money at the rate which we have been spending through the months since CPS withdrew from the project.

Accordingly, having reduced our ongoing spent on the project last month from approximately $30 million a month to $7.5 million a month, a 70% reduction, henceforth from August 1 onward, NRG is capping its spend on STP 3 and 4 at $1.5 million a month, a 95% reduction from the burn rate just two months ago.

The good news is that, after extensive work in discussions with our partner, Toshiba Corporation, and with the other key parties involved in the project development, we have developed a plan depicted in very general terms on slide nine to keep the project fully on schedule through at least the balance of 2010.

We have achieved this in significant part by reducing the project work streams only to those critical path matters which are absolutely essential to maintaining project schedule.

We have achieved this in even greater part by Toshiba having agreed to carry the project more fully on its shoulders in the months to come, in the same way that NRG has done for the several months since CPS withdrew from the project.

For our part, while our work in Washington continues with the DOE and the legislative branch, we and our Japanese partners have opened formal discussions with the Japanese government financial institutions regarding Japanese co-financing for this important project.

We are confident that the Japanese government and its lending institutions appreciate the importance of this project as much as do Toshiba and NRG.

We also intend to focus extensively over the next several months on finalizing the EPC arrangements with a structure and at a price that the project can bear.

And finally, in order to keep the project on track, we must over the next several months take our discussions on offtake arrangements with key counterparties to the next level of commitment.

We recognize that this critical path workstream is as important as the federal loan guarantee workstream and that they are interdependent.

In summary, with respect to nuclear, as we undertook to do several months ago, we have dramatically scaled back our financial commitment to the STP project development, but we have managed to do so in a manner that keeps the project fully on schedule with critical work processes at the DOE, the NRC, Japan and at the site all sufficiently manned.

We will determine over these next months of low NRG spend whether all the key elements -- the federal loan guarantee, the Japanese Government co-financing, and appropriate EPC arrangement and sufficient offtake arrangements -- can be brought together in a manner that enables the STP project, a project which is so critically important not only to NRG but also to the economy of the state of Texas and the zero emission energy objectives of the United States of America, to go forward.

Finally on slide 10, let me conclude before handing it over to John by bringing back slide four in a scorecard format so that we can grade our implementation to date against the dual strategy that we previously have articulated.

On the conventional side or, as I prefer to call it, the classic NRG side, we're delivering superlative results, providing positive proof that the wholesale-retail combination works better than the pure generator or the pure retail model.

Slowly but surely, we are revitalizing our gas fleet with brown fuel re-powerings or plant expansions completed at Long Beach, Cos Cob, Cedar Bayou and Devon, construction underway at Middletown and with a line of sight for El Segundo.

With respect to the fifth priority on the classic side, we have not appreciably expanded our conventional portfolio through acquisition, but we believe the current environment is an attractive market for asset buyers and that market dynamic is going to persist for at least a while longer.

In terms of the right side, the transformative side where the nature of the objectives are inherently longer-term, we are very pleased with our progress in terms of the low-carbon baseload, not only with STP, which we have previously discussed, but also with our carbon capture and enhanced oil recovery project at Parish.

Our multiple solar initiatives are proceeding exceedingly well, and you will hear much more about them in the months to come, and the projects that we are building in our various gas sites, particularly El Segundo, are going to be cutting edge in combining fast-start characteristics to firm renewables while providing modern CCGT efficiency and steady-state operations.

In short, I can assure you as shareholders of NRG that, while there's a lot that I'm very proud of as the CEO of your company, neither I nor the rest of the team that NRG will take our eye off the ball in terms of delivering another exceptional financial result in 2010, perfecting our classic competitive generation retail model and positioning the Company to be a leader in the transformation to a new energy economy.

Turning to John Ragan?

Thank you, David; good morning, everyone.

During the second quarter of 2010, NRG continued to sustain the strong operating and commercial performance they achieved during the first quarter, solidly positioning the Company to enter the critical summer months.

On slide 12 we've highlighted some of our second-quarter accomplishments.

Our focus on safety across the entire organization, including Reliant, has remained strong within an OSHA recordable rate of 0.7 through the first half of the year, which continues to exceed the top decile benchmark for the industry.

During the second quarter our Encino plant was awarded OSHA's VPP Star designation.

OSHA's Voluntary Protection Program or VPP, is a voluntary program that allows a facility to obtain one of the highest levels of safety recognition available within the power industry.

To achieve this designation a plant must demonstrate to OSHA that both management and the employees have achieved an exemplary health and safety record in addition to creating a steadfast safety culture that is embraced by the entire organization.

This is the first NRG facility to achieve this award outside of our Texas fleet and is a testament to our employees' desire across the organization to strive for continuous improvement in safety.

Our baseload fleet had another very good quarter of operational success with our plant personnel delivering strong performance.

During the quarter we continued to face challenging market conditions caused by cycling and additional starts for our coal assets.

This was followed by periods of extreme heat in June.

Through these widely fluctuating conditions in multiple planned maintenance outages, our coal fleet reliability was better than the second quarter of last year.

Most notably, I want to point out the superior quality of quarterly performance of the Indian River and Limestone stations, both with E-4 below 2%, and the Huntley Station with an E-4 below 1%.

Our EPC group has continued to move forward with multiple construction projects.

We have completed the Devon Peaking Plant in Connecticut, and these fast start units have been transitioned into our operating portfolio.

Middletown is currently under construction and is expected to come online about this time next year.

During the quarter we have also acquired and integrated the South Trent Wind Farm into our wind portfolio.

And, lastly, we were successful in being awarded a $167 million DOE grant to design and construct a 60-Megawatt carbon capture and enhanced oil recovery system at our Parish plant in Texas.

Finally, our Commercial Operations Group has continued to effectively manage the hedging and dispatch of our wholesale generation portfolio in addition to executing the integration and risk management requirements for the Reliant Energy retail supply.

This quarter was also marked by wins in additional load following contracts and portfolio hedges, which I will review later.

Now turning to our plant operation performance on slide 13, we have continued to operate our fleet safely and efficiently during the second quarter.

While net generation and baseload availability were slightly off for the first half of this year as compared to 2009, this was primarily the result of three specific events within the fleet.

These include a refueling outage at STP Unit 2 as compared to no outages at STP during the same time period during 2009; the movement of an outage from 2011 to the second quarter of 2010 for Limestone Unit 1 and a generator rotor outage at Dunkirk Unit 4 in January that was discussed during the first quarter earnings call.

Our units did experience some limited fuel switching, primarily during the shoulder months of March and April, that impacted net generation.

However, this was partially offset by strong load from weather-related events during the second quarter.

From a unit reliability perspective, our baseload E-4 for the second quarter was 2.05%, which is an exceptionally strong showing from our operations team.

When taking the events into account that I previously mentioned, our overall plant reliability and availability during the first half of the year was solid and within our expectations for strong operating performance.

We also recognize that in the low-margin price environment that we currently operate in, it doesn't always make economic sense to spend that last marginal maintenance dollar in order to achieve the highest possible availability statistics.

At NRG we are always making those analytical decisions based on real-time information.

We can promise you that we are scrutinizing our spend relentlessly across the fleet and putting our maintenance dollars to the best possible use where we can capture the value of the last marginal megawatt hour while making the best cost-benefit decisions to be manage our overall plant assets.

Finally, on the chart to the bottom left, at the end of the second quarter we have achieved 50% of our full-year four energy targets.

This achievement was accomplished through contributions from our retail, tax and other corporate departments, continued plant efficiency improvements within our generation fleet and the sale of Padoma.

We are on track to complete this year's goals and have the potential of getting a head start on the 2011 targets.

Turning to our retail operations on slide 14, warmer than normal weather across Texas with cooling degree days above the 10- and 30-year benchmarks coupled with lower gas prices created an opportunity to deliver higher volumes and stronger margins from our Mass Market segment.

The dramatic decline in the commodities last year allowed us to deliver margins significantly above our targeted run rate while the market became much more competitive.

With the steady state of commodities this year, we have taken disciplined targeted marketing pricing and actions to begin to stabilize our customer count while maintaining strong margins, thereby driving towards higher customer retention levels.

At the same time, we have strengthened our sales channels and maintained our leadership in customer satisfaction and brand preference.

The result for the quarter reflects an optimized balance between customer count and margin which is consistent with our long-term mass-market strategy for the Reliant brand and the specific customer segment we desire to serve.

In the C&I segment, we improved renewal rates of existing customers during the second quarter and extended the term and diversity of our portfolio while experiencing profitable margins within the segment.

Reliant remains the largest C&I retail provider, the second-largest residential provider and the largest retailer overall based on volume in Texas.

Before I conclude the operations section I want to provide some thoughts on EPA's recently proposed Clean Air Transport Rule, or CATR, which was developed in response to the court's rejection of CAIR.

The primary objectives of the new rule as compared to CAIR are outlined on slide 15.

The rule initiates new NOx and SO2 trading programs in 2012 with a second phase in 2014 which further lowers SO2 emission caps in certain states.

The main difference between CAIR and CATR are, one, the inability to use acid rain allowances to meet CATR requirements after the program's implementation; and, two, the restriction on trading of allowances between group 1 and group to states for as SO2 compliance.

According to the EPA, the cap and allocations for 2012 are based on modeling current power plant operations with existing and planned controls across the industry.

The key takeaway is that NRG can meet the 2012 NOx and SO2 caps without any new environmental construction requirements.

As we elaborate on slide 16, NRG's fleet is well-positioned vis-a-vis the proposed CATR rule, specifically, our existing plans for additional environmental capital projects remains unchanged.

CATR does not include Texas in the SO2 program; therefore, our Parish and Limestone units will not need to hold SO2 allowances.

Having separate group 1 and group 2 SO2 trading allowance restrictions does not impact NRG's ability to comply with the program.

Our assets in New York and Pennsylvania, which are group 1 states, already have SO2 controls and will not face additional incremental CapEx requirements to meet the 2014 cap.

And, lastly, as older, uncontrolled plants are at risk of retirement, NRG hopes to benefit from changes to higher heat rates and power prices.

In summary, the proposed CATR rule is anticipated to have very little impact on NRG's plant operations and currently forecasted capital spend.

Additionally, while EPA has acted in a very proactive way to address both NOx and SO2, they have done so by working constructively with the industry to achieve the desired area mission goals.

As we have been saying since our investor conference last fall, we believe the EPA will take a pragmatic and moderate approach to current and future air standards.

Therefore, based on their actions to date, we believe that any future EPA regulations will be similarly pragmatic to allow the industry sufficient time and means to approach compliance.

Moving to our hedge profile and commodity sensitivities on slide 17, as we have reviewed with you many times on prior calls, we continuously seek opportunities to lock in additional hedges, hedging power during the up cycles and [cold] during the down cycles.

As illustrated in the chart on the top left, our wholesale and retail segments continue to be well hedged over the next few years.

Basedload generation is fully hedged for the remainder of this year, and we have increased our hedge position for 2011 to approximately 86% from 73% last quarter.

During the quarter we have focused our hedging strategy for 2011 on using option structures similar to the strategy we implemented in 2006.

This hedge structure helps to protect us from further downward gas price movements while retaining some upside for positive upward price movements.

Based on NRG's view that gas prices reached their floor during 2009, in a time when demand was significantly off and supply was plentiful, we believe that the last half of 2010 and 2011 will provide opportunities to continue to hedge our portfolio at higher gas prices than the current forward market.

Concerning our retail business, our hedge positions have increased during the quarter, as shown by the cross hatches.

We will continue to increase our hedge percentages as we execute on aggregating fully priced retail load.

The chart at the top right illustrates our coal and transport positions.

During the quarter we were successful in executing a fairly priced and beneficial multi-year transportation contract for our Western New York coal plants.

Based on the current supply-demand factors for PRB coal, we don't expect any significant upward commodity pricing pressure in the foreseeable future.

Lastly, moving to the chart on the bottom left, as is customary with our hedge profile, we have limited our sensitivity to gas and coal prices and heat rate movements through 2011.

Turning to review market fundamentals on slide 18, the quarter-on-quarter demand growth for ERCOT continues to show solid trends for recovery and positive growth on a year-over-year basis, particularly in comparison with PGM, where weather-normalized load growth continues to be fairly stagnant.

However, during the second quarter, warmer than normal weather drove significant load increases across all three northeast operating systems with peak load recovery in close to 2008 demand levels and total load up 6% to 7% across the region as compared to Q2 2009.

In Texas forward heat rates have continued to be well supported during the first half of the year, due to increasing demand recovery, tighter supply, potential for future plant retirements and the continued lack of capital market access for non-PPA projects.

So I would like to end by saying that we are very well positioned operationally and commercially to deliver on our revised set of financial objectives for 2010.

Now I will turn it over to Chris, who will discuss our financial results.

Thank you, John.

Good morning, everyone, and thank you for joining us to discuss the second quarter and year-to-date financial results achieved during my first quarter as CFO.

Let's begin with a brief overview of our achievements during the second quarter on slide 20.

As David previewed earlier, the Company delivered strong financial results in the second quarter, totaling $693 million of adjusted EBITDA.

Reliant Energy contributed $195 million of adjusted EBITDA.

Robust gross margins in our retail business benefited from favorable weather conditions and a favorable commodity environment.

Meanwhile, the Wholesale business contributed $498 million of adjusted EBITDA, only $19 million lower than Q2 2009 performance.

The year-on-year difference was affected by a refueling outage at STP unit 2 and a major planned outage at unit 2 of our Big Cajun facility, which occurs every six to eight years.

Baseload generation in the Northeast was comparatively flat but, due to hotter than normal weather during the quarter, oil and gas generation increased 20%.

Benefiting our wholesale performance was increased capacity pricing in New York City as well as new projects that came online as a result of our repowering and renewable initiative, including Cedar Bayou 4, (inaudible) Solar facility and the Langford wind farm.

Year to date EBITDA for the first six months was a record $1.294 billion, representing a 6% increase over $1.224 billion generated in the first half of 2009.

The addition of Reliant energy added $385 million of EBITDA as favorable weather drove an 11% increase in customer usage, partially offsetting a 2% decline in average customer count.

Also the improvement in customer payment patterns we mentioned in the first quarter continued into the second quarter.

Meanwhile, the Wholesale business generated $909 million of adjusted EBITDA for the first half of this year -- solid results despite a low commodity environment.

The strong quarter and year-to-date financial results were directly influenced by our strategic forward hedging program and the continued focus on operational excellence.

Our record results also reinforce the benefits of our strategy of owning both generation and retail in Texas.

Finally, on this slide I want to touch briefly on our liquidity position, as I will review it in more detail on the next slide.

We ended the first half of 2010 with total liquidity of $3.5 billion, an increase of $290 million from the end of the first quarter.

Cash on hand of nearly $2.2 billion provides ample capacity to serve our capital structure objectives and current capital allocation strategies.

Of particular note during the second quarter, we successfully completed the amend and extend of our first-lien facilities, an important step in improving the financial flexibility of the Company.

The highlights of this transaction include extending the maturities from 2013 to 2015 for $1.8 billion combined for our term loan facility and synthetic LC and refinancing our revolver to $875 million while extending its maturity to 2015.

The results of this transaction provides NRG with improved LC and term funding capacity to support our future growth initiatives.

Now for a more detailed discussion on our capital allocation, please turn to slide 21.

Again, the Company's strong liquidity position as of June 30, which, excluding funds deposited by hedging counterparties, stood at $3.5 billion.

While liquidity is up from the prior quarter, I would like to review the year-to-date change of $294 million as of June 30 from year-end 2009.

This difference is largely explained by debt repayments of $459 million, which included a reduction of the term loan B debt of $240 million and the settlement of the common stock fund of $190 million; capital expenditures net of project funding of $294 million, consisting primarily of $70 million of normal maintenance CapEx, $88 million of environmental CapEx and $125 million for NINA; acquisitions of $141 million net of financing related largely to the purchase of South Trend and Northwind Phoenix and share repurchases totaling 2.2 million shares at a volume weighted average price of $22.58 for $50 million.

We are in a very comfortable liquidity position, allowing us to complete the remainder of our $180 million share buyback program before year end as well as continue to be opportunistic about intrinsic and extrinsic capital investments to enhance our retail, wholesale and renewable businesses.

We will continue to review our options to increase returning value to our shareholders and will evaluate the possibility of increasing our share buybacks later in the year.

With respect to the restrictive payments basket and certain of our bond indentures, we have decided for now not to offer bondholders a payment for relief of this covenant.

We believe the costs required to ensure a successful amendment of the current RFP restriction to be prohibitive, particularly when compared to upcoming call prices embedded in the bonds' original issuance.

Finally, to date, our successful hedging strategy has provided stability to our EBITDA results, and in the future we will continue to hedge our baseload business when appropriate.

With that said, as you can see from this slide, we have ample capacity to execute on hedges in the out years under our first lien structure, which preserves other sources of liquidity necessary to assist our future growth.

Now turning to our full-year guidance slide on slide 22, we have increased our full-year EBITDA guidance to a range of $2.45 billion to $2.55 billion, an increase of $250 million to $350 million from earlier projections.

Going forward, we will continue to provide full-year EBITDA guidance as a range.

We believe a range of EBITDA results better captures unanticipated volatility and certain factors that may impact our results, such as weather changes and fluctuations in the underlying commodity markets.

Our goal will be to narrow our ranges as the year progresses and final results become more certain.

Alongside this update in EBITDA guidance, we are also updating free cash flow guidance to a range of $816 million to $916 million, an increase of $354 million to $454 million.

In addition to our strong operating results, the increase in free cash flow is a certain beneficiary of our decision to dramatically reduce the spend on the STP nuclear projects until there is clarity on the prospects for receipt of a DOE loan guarantee.

In closing, as David pointed out earlier, we continue to drive this business to focus on cash and, based on Friday's closing stock price of $22.68 and our updated outlook, the recurring free cash flow yield currently stands between 22% to 24%, or $5.06 to $5.45 per share.

With that, I'll turn it back to David for closing comments and questions.

Thank you, Chris.

I think we're prepared to take any questions that callers may have.

(Operator instructions) Dan Eggers, Credit Suisse.

David, I was wondering if we could just go to South Texas for a minute.

Can you just maybe revisit or talk through a little more the thought process from the timing of the major components when you could reasonably expect decisions on major things like US loan guarantees, Japanese loan guarantees, EPC contracting of PPAs, equity sell-down?

And are there certain pieces you see as contingent of getting done before the other pieces can get done right now?

Well, Dan, I could take the air out of the ball for the remaining 18 minutes of this call in terms of answering that question, but I'll try and give you the short form.

I think the way that we've gone around planning South Texas and the new reality is around this fact that we just literally have no idea when the US government will do the two things -- the Department of Energy actually finish the loan guarantee process, hopefully in a positive fashion, and the money be appropriated.

It's really the second part that's more uncertain.

We are really at the final stages with the DOE, with negotiations of the loan agreement complete.

But as to when the money would be there for an award, to be frank, as I'm told, it could be today or, worst case scenario, if it gets to be part of the 2011 budget appropriations and that takes the track that it's taken in recent years, it could be as far away as next February or March.

So that's really the timing horizon that we've looked at in all of those critical decisions.

And we expect to have all the four things I talked about resolved within that time period, so the US government financing, the Japanese government financing, the EPC and the off-take.

In terms of further sell-downs, Dan, I would say that's the one thing that's really changed in this because our motivation to sell down early in the project was actually to reduce the amount that we were spending every month.

Left to our own devices, if we weren't spending as much as we were spending, we would prefer to sell down later rather than earlier because the project gets more valuable as it gets towards closing.

So, since our spend rate has been cut by 95%, I think the one other significant change in terms of the things that you mentioned is that you probably shouldn't expect additional sell-downs unless they are for highly strategic reasons until we get these other four main critical path items resolved.

That's the best short answer I can give.

Did you want to follow up on some aspect of that?

That's fine, and I can take the rest of it off-line.

But the other question -- I guess maybe if you could talk to in this venue is, coming into the year, you guys talked about the amount of economic exposure NRG has for shareholders in the project and what kind of cash unwind or commitments would be required if the project weren't to have gone forward when you were negotiating with San Antonio.

Can you give an update on where that stands and where you guys have gone as far as future development commitments have been made beyond your CapEx run rate right now?

You are saying, if the project would actually be canceled, would there be exposure beyond the cash that we already have sunk in the project?

I guess, yes, I assumed there would be, and I guess it's just kind of the magnitude of potential exposure.

I think, in terms of -- first of all, there are not a lot of hidden commitments.

If the partners -- and one thing I want to emphasize here, and I apologize to all our shareholders because I may not have spoken as accurately as I should have about the way this works.

When we talk about like shutting down the project, this project, like every other jointly developed project I've ever been in, in my life -- one party does not have the right to shut down the project.

One party only has the right to reduce or stop their spend in the project.

The other party always has the right to unilaterally go forward.

So when I talk about our decision making in terms of actually shutting down the project, let's assume we have a joint decision of Toshiba and NRG to shut down the project.

I think our overall sense is that, while it would take a few months of wind-down spend and money spent on demobilization and the like, there are not like enormous commitments that have not been disclosed before.

I think the overall commitment of the Company would be in the $500 million range, which is -- but that $500 million includes the money that Toshiba has put to date, so that's more of an earnings number.

You would have to deduct the $150 million from Toshiba to get the cash exposure of NRG.

Lasan Johong, RBC Capital Markets.

David, if Toshiba is accelerating spending and NRG is reducing spending, does that mean that, should the project either go forward or not proceed, that there is going to be some makeup on NRG's part going forward after the decision point is reached?

If you are saying, as part of this arrangement with Toshiba that there would be some sort of reimbursement agreement that the --

Yes.

-- if it goes forward?

The answer to that question is no.

There's no reimbursement agreement.

We tried to depict on page nine -- and, Lasan, this is a work in progress.

But in terms of funding the work -- again, I wouldn't say that -- just make sure that we are 100% accurate with the words.

I'm not sure Toshiba is accelerating the payment.

They're just bearing more of the ongoing costs.

The spend rate of the project is being reduced from about $30 million a month to about $20 million a month.

In terms of the part of that, the very significant part of that that NRG is not going to be funding, what we are showing on the right-hand side of page nine is the various alternatives that Toshiba has to bear that cost.

And it could be vendor financing or there's the TANE credit facility.

Toshiba also has the option of doing it through equity in NINA, in which case there would be some dilution of NRG.

But there's no reimbursement agreement we've entered into to cause us to have to make up the cost that Toshiba is bearing in these months going forward.

Just as a follow up to the SCP issue, if NRG felt that this was not a project that was good for shareholder value, either because you couldn't sell down the shares or you couldn't get financing or you can't get a long-term contract or you can't get DoE loan funding, does that imply that you have no hesitation in pulling NRG out of this project?

Well, we could, but -- that's possible, but what I would tell you is we are announcing today that we've cut spending on the project by 95%.

That is -- from a point of view of removing the burden from the shoulders of NRG shareholders, I would say that that's a very significant step.

If we decided and Toshiba agreed that the project really made no sense to go forward, would we cut from $1.5 million a month to zero?

I don't think we would do that immediately because there's significant value in the project.

First of all, we would probably keep the license going to conclusion, given how far we've come.

And between some long lead time items that we've ordered, the intellectual property involved in the application process, the design, the Americanization of the Japanese ABWR design -- we are talking about a set of development assets that have significant value, and we would certainly not just throw those into the ocean.

I think we would keep a team going to see if we could monetize that value.

Angie Storozynski, Macquarie.

Two questions about Reliant.

First of all, should we assume that the ongoing EBITDA for this business is actually above your previous expectations?

And, also, any comments regarding the cost level, especially the G&A and selling expenses?

Should we assume that there's simply a lower run rate going forward?

Well, I may ask Jason to answer the second question.

Let me just say on the first question, I think, if I'm getting your question right, clearly we've upgraded the expectations of Reliant for all of 2010.

We haven't changed what we've considered, what we've said before is like a mid-cycle run rate of $300 million.

I think the question out there is that, how much money can Reliant make on a steady state business during a prolonged trough in the market?

I think that's what we are gearing our strategy for.

Clearly, if we believe that Reliant is going to make in the range of $600 million this year, it's not going to revert to $300 million going from December 31 to January 1, 2010 to 2011.

So we don't have a perfect insight into this crystal ball, but I would say that, clearly, we are impressed with the resilience of Reliant's ability to out-earn this mid-cycle return during a prolonged trough, and we're doing everything in our power to extend that, as long as possible.

As to the cost structure, Jason?

Yes, Angie.

on the cost structure we have taken action to actually reduce our overall G&A, and we continue to do that not only as part of our four NRG efforts, but just overall in terms of operational efficiency and other things we are doing from an automation standpoint in our business.

So you should assume that you will see reduced G&A in our business.

Okay, one more question, then.

How about the new contracts?

We heard from other competitive retail providers that there seems to be higher competition, which is partly related to low volatility in natural gas and power prices.

Should we assume, then, that new contracts that you are signing are actually at compressed margins versus now, for sure; but versus your expectations?

As you know, we don't give segment level, but I'll answer it in two ways.

We are actually seeing, although on lower volumes on our C&I business, actually our margins are up for Q2 versus Q1.

And on our residential side of our business or mass side, we have taken deliberate pricing actions to actually bring down margins to respond to competitive pressures in the market.

So overall, on the mass side, you've seen some of that compression, which is intentionally driven.

And on the C&I side, we are actually seeing the ability to create some expansion there.

That's for new contracts?

That's not for realized margins, that's for new contracts signed during the quarter?

For new contracts; that's right.

Ameet Thakkar, Merrill Lynch.

Good morning, guys, congratulations on a good quarter.

Real quick, on the Texas wholesale it looks like the EBITDA was relatively flat versus the prior year.

And looking at your hedge disclosures and your 10-K, we look like (inaudible) the equivalent price of gas that you were hedged at was $8.37 in '09 and something closer to $7.70 in 2010.

So I was just wondering how do you were able to keep EBITDA flat at that business when volumes looked like they were actually down slightly.

Some of the revenue comes from ancillaries.

We've been able to position our portfolio to take advantage of a higher or [jucier] ancillary prices.

As you think about our portfolio, as we are -- our fuel solid -- our solid fuel portfolio ramps down during off-peak hours.

We've become basically the least-cost provider of ancillary services.

And during on-peak hours our gas portfolio can meet those obligations.

So, think of our portfolio of the least-cost provider of ancillaries.

And as these ancillaries increase in price, we have been able to position ourselves to mitigate some of the lower gas prices that you mentioned and that we have experienced in the business.

That is one of the drivers.

You guys are 112% hedged in 2010.

And I think you guys talked about this on the last call -- some of that is maybe just a little bit less volumes expected.

But how do I think about you being over hedged?

Are you basically booking additional trading-related revenue because you were essentially short the market more than the fleet is expected to run?

I think you already addressed the first reason.

We were hedged against the expected levels that we had back in October of 2009.

As the gas prices have decreased, our expected generation has decreased with it.

We have not pared down completely our hedges.

We want to be consistent with our market view, and I think it's pretty simple to deduct that we were somewhat bearish of the front part of the gas market, and we didn't see the need to change our [hedge] profile for the balance of 2010.

Neel Mitra, Simmons & Co.

I just wanted to follow up on Ameet's question on the strong Texas outperformance, specifically on the increased ancillaries sold to Reliant.

I was wondering if you could quantify that.

And then also, why would the ancillary services revenues go up this quarter versus last year with, I guess, lower gas prices continuing to occur?

Well, Neel, one of the benefits of combining wholesale and retail is the stability that it provides to our generation portfolio in ancillary services but also shape products and optionality that the Reliant business needs to manage the low variability.

So this is just a -- I would consider a perfection of hedging wholesale and retail after 14 months of ownership.

With respect to the ancillary question, I think people try to get -- as you look into 2000 -- two years out, the market tends to pay up for insurance in the form of ancillaries.

So we have been able to capitalize on that back in 2008 going into -- back into 2009 going into 2010.

So I think the combination of combining wholesale and retail and providing these ancillary products as well as the market being able to pay up for ancillaries -- I think that's a combination that has provided or that has mitigated some of the downside risk on gas prices for our Texas fleet.

And, Mauricio, the new collars or put options that were added this quarter -- can you guys quantify how much the cost of those options are and where they would show up, I guess, in expenses?

Well, I don't believe we have disclosed the absolute amount of the cost.

What I will tell you is, most of hedging that we did in 2011 was under the collar structure.

So moving it from the low 70s to the mid-80%, it was (multiple speakers) [incremental] on the back of the collars that we executed.

Okay, great, thank you.

Congrats on the good quarter.

Jay Dobson, Wunderlich Securities.

I was wondering if you could go back to STP and NINA.

On the offtake agreement, you went by it somewhat quickly in your prepared comments.

But I interpreted it to be that you were going to be focusing there a bit more.

And, if I got that properly, maybe confirm that, and then what exactly you mean in light of the ongoing uncertainty.

Well, Jay, it's a good question, and you surmised correctly when you say that we plan on focusing on it a bit more over the next several months.

I think one way to look at it simplistically is that, really, the STP development project has three work streams.

The one which I think when people started we would talk the most about, which was the regulatory approval workstream at the NRC.

We don't ever talk about that anymore because it's working perfectly, it's right on track.

It's the other two work streams.

One is how to get money for the project and then, of course, the commercial arrangement.

And there's been a lot of focus on the getting money work stream because of the DOE loan guarantee process.

But the third work stream is the offtake.

The offtake -- the uncertainty that has caused us to not push so hard on the offtake thus far is not really related to the money, it's more related to the fact that you have to have a solid EPC price in order to talk to offtakers about the power and what it's going to cost.

And we are getting much closer to a conclusion there in terms of getting a final EPC price that we then can work and do something more specific to take to the offtakers.

And so we expect in the second half of this year, maybe spilling into the first quarter, to be looking for binding commitments from the several people that we've been talking to about long-term offtake for the project.

That's great, perfectly adds to your prepared comments.

And then on a separate topic, Devon, I assume that wasn't synchronized with the grid in time to give us any benefit in the second quarter.

So your comments are, it sort of got done late June/early July and moved forward from there.

Is there a COD date, I guess I'm asking, on that?

Well, it's multiple units, John.

I think a couple came on in June.

We had three of the four units come on in June, kind of spaced out on a one-week basis, so they were synchronized to the grid during June -- three of the four units.

Michael Lapides, Goldman Sachs.

Just had a question, was thumbing back through the K the other day.

Can you walk us through which of your coal plants you expect to spend capital on for environmental retrofits and just the timing of that?

Can you also walk through, with contracts expiring in 2014 at Big Cajun, how the cost of that gets recovered from your counterparty?

Well, Michael, first, if you were just thumbing through the K, I've just got to say, with due respect, and I love you as the brother I never had, you know, get a life.

You've got to have better things to do with it.

But on the coal, John, do you want to -- ?

Sure.

Right now, we've finished all the work at Dunkirk and Huntley.

We are currently putting controls in place on Indian River 4.

As we had mentioned earlier this year, we stopped work on Indian River 3 and completed a new structure with Delaware that allows us to continue to run that unit for a period of time and then shut down.

So that's really where our CapEx is being spent right now.

Regarding the [lodge in] assets, again, we see these being able to recover that CapEx in new contracts that we structure with the co-ops in Louisiana.

So we do think that we can get recovery for that CapEx when those controls are put in place.

And, in Texas -- what are you planning in terms of environmental CapEx in Texas?

Again, right now we are doing the engineering work to determine what we need to do.

But again, until we get a better sense of the macro around asset gases, it's a little more difficult to determine exactly what we will do there.

If, as we expect EPA to be pragmatic around how they go about facilitating the reductions, again, we don't see the worst-case scenario where we have to control unit by unit.

So until we have a better sense of that, it's a little hard to say how the CapEx will be spent in Texas.

And on South Central, a little confused about the cost recovery.

Your hedge prices there roll up to about $50, $51 a megawatt hour; forward energy prices, kind of the low 40s.

So, even if you put a capacity payment on it for a combined cycle, it would get you mid-to high -- really high 40s, low 50s.

I'm a customer.

Why do I do it?

Well, I think there are a few things going on.

First of all, I think that you -- first of all, we are sensitive to the fact that the co-ops, like everyone who serves load, are very price sensitive.

And it's one thing to say that we have the right to charge it through.

And, at least for the customers whose contracts expire in 2014, they obviously have the right to not renew.

But I think when people have looked at this issue with South Central, they've exaggerated the ease with which a customer to Louisiana generating could switch because it's a constrained transmission system down there.

Our plants have the transmission rights to serve these customers who, as you know, are spread all over Louisiana.

So it may not be as straight -- look, I can get a price, 2% lower from someone else that you are suggesting.

It's a more complicated assessment.

Having said that, like I said, we want to work with the co-ops to smooth out the path and get the right outcome for them and their customers.

Mauricio, did you have anything to add on that?

Well, the only thing that I would add is the -- or emphasizing the congestion aspect of it.

We have firm transmission to the customer.

The customer has firm transmission from our facilities.

Anybody else who wants to serve that customer will have to have firm transmission, which could potentially require cost transmission upgrades or redirect our transmission cost.

So that puts us in a competitive advantage with respect to a generic combined cycle economics in the region.

Jonathan Arnold, Deutsche Bank.

A question on STP, and just if you could clarify what the status of the TEPCO investment is that was announced on the last quarterly call.

I apologize if I didn't glean this from the prepared remarks.

I wasn't quite sure what you said on that.

Well, the TEPCO investment is conditioned upon receipt of the DOE loan guarantee, so it hasn't happened yet.

Having said that, TEPCO has been a technical advisor to the project from the beginning.

And since they fully expect the DOE loan guarantee to come through -- we are working with them, but the trigger for the injection of the first funds from TEPCO has not occurred and will not occur until the DOE loan guarantee is received.

Okay, so there's nothing else that has changed on that front?

It's just part of the working through the Japanese financing aspect?

Well, no.

When you say Japanese financing, to me you're talking about the Japanese government co-financing on the debt side, which TEPCO is working with us to get those funds or those guarantees from the Japanese government.

No; I'm talking about the TEPCO equity investment, which is not related to Japanese financing.

It's actually related to DOE financing.

Once the DOE award is granted and accepted by us, then that will trigger their injection of capital into the I think 155 -- that would be the trigger for them to inject $155 million into the project.

Brandon Blossman, Tudor Pickering & Holt.

Good morning, good quarter, congrats.

Most of my questions have been asked and answered, but just to make it explicit, wholesale 2010 guidance up $110 million to $150 million.

What has changed, in your view, for the year?

Two things -- one is the Texas fleet being able to serve or sell premium products to Reliant.

And then the second is some upside on the Northeast markets.

We just saw very little fuel switching, particularly around the March and April time frame.

All the other months, we've been running pretty healthy on our solid fleet.

Okay, so it should -- to be fair, it is largely Reliant retail-driven for the guidance uptick, both explicitly on the retail side and implicitly on the product transfer pricing picture?

Well, but your question was on the wholesale side.

I think we split out the extent to which it was Reliant and the guidance on slide 22.

But, yes, but on the wholesale side, it was both Texas and the Northeast.

It continues to be a great acquisition.

And just a smaller question -- a little bit of hedging in '11; you mentioned it was largely option based.

Is that just gas collars, or is there some power in there also?

It's primarily gas collars.

Great, thank you guys.

Well, thank you very much, and operator, thank you for your assistance.

Again, thank everyone for tuning in on Monday and for your interest in NRG.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.