NRG Energy Inc (NRG) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 NRG earnings -- NRG Energy Inc.

earnings conference call.

My name is Kiana and I'll be your operator for today.

At this time all participants are in listen-only mode and later we will conduct a question-and-answer session.

(Operator Instructions).

I would now like to turn the conference over to the host for today, Ms.

Nahla Azmy, Senior Vice President, Investor Relations.

Please proceed.

Thank you, Kiana.

Good morning and welcome to our second-quarter 2011 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 be also available on our website.

This call, including the formal presentation and the question-and-answer session, will be limited to 1 hour.

In the interest of time we ask that you please limit yourself to 1 question with 1 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 4, 2011 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 a quantitative reconciliation of those figures, please refers to today's press release and this presentation.

And now with that I'd like to turn it over to David Crane, NRG's President and Chief Executive Officer.

Thank you, Nahla, and good morning, ladies and gentlemen.

For this quarterly earnings call, which is the thirtieth such call in the history of the new NRG, we come to you for the first time from Houston, Texas, where the temperature forecast for the day is hot followed by periods of hotter; the humidity is about as thick as New York cheesecake and air conditioners are working overtime.

With ERCOT shattering its load record every day this week, hopefully this will a good day to be in the electricity business in Texas.

For this call I am joined by our COO, Mauricio Gutierrez, and our CFO, Chris Schade, both who will be joining me in delivering prepared remarks.

I'm also joined here today by Jason Few, the head of highflying Reliant, and Tom Doyle, the President of scorching hot NRG Energy Solar, both of whom will be available to answer any questions you may have regarding their respective areas of responsibility.

Turning to the presentation, we have a lot of very positive things to talk about today, so let's go straight to the highlight page, which is a slide 3 of the presentation.

As Chris will elaborate on a little later, the financial results speak for themselves.

Buoyed by Reliant's continued exceptional performance, we not only posted a very healthy $517 million of adjusted EBITDA for the quarter, we also are in a position to narrow the range and revise upward our full-year 2011 adjusted EBITDA guidance to $1.9 billion to $2 billion.

What is particularly positive about this result is that while we certainly have benefited from a very warm summer to date, we also benefited substantially from the immense progress Reliant has made in slowing and ultimately reversing the long-term decline in its customer count.

Reliant has achieved this positive reversal not by eroding margins excessively, but rather through its best-in-class customer care, effective use of multiple sales channels and expanded product offering.

Reliant's exceptional financial and operating performance was replicated during the quarter by Green Mountain, which performed well, and also across our wholesale generation fleet where we realized a base load fleet availability around the critical 90% mark and achieved a very high level of reliability in peak startups, which is obviously a very important operating metric, particularly during the hot and high-priced summer peak hours.

As it has been for the past 7.5 years, the strong operating performance achieved by our plant operations group, together with the forward-hedging program implemented by our commercial operations team, achieved a substantially cash-generative result, which in turn feeds our very strong liquidity and our strategic capital allocation efforts.

This quarter and year to date our financial team has gone from success to success in the steps it has taken to simplify our capital structure and to enable us to allocate our shareholders' capital with maximum efficiencies.

Now, only our 2017 bonds remain in our way and they become redeemable in just 5 months' time.

NRG's commitment to efficient capital allocation stands still for no man, nor will it be frustrated by obstacles placed in its path by any individual bond issue.

I'm very pleased today to announce an additional $250 million share buyback program, which together with the $50 million of shares which remain to be repurchased under our previously-announced 2011 program, means that we have $300 million of NRG shares to be purchased before the end of 2011.

This supplemental buyback program, which we intend to implement over the balance of 2011, is made possible by the accounting impact of our recently concluded IRS audit and the impact of that on our existing RP basket, and Chris will explain that in greater detail.

When fully implemented, we will have completed $430 million of share repurchases in 2011, but I would prefer for you to think of this new $250 million share buyback program as a down payment on what may be to come in the first quarter of 2012.

Our cash position is so strong that while we have committed substantial capital in 2011, both to buying back shares and paying down debt, we continue to be able to invest substantial capital in growing the Company's portfolio in various low-risk, value-enhancing ways.

Most notably, our solar efforts achieved very significant successes during the quarter.

Our big 3 solar projects progressed well and are on track, notwithstanding a temporary hiccup caused by a desert tortoise issue at 1 of the 3 projects.

In the most exciting development the quarter, we achieved a major step forward towards competitive advantage in large-scale rooftop solar when our project and our partnership with ProLogis received conditional approval for a $1.4 billion DOE loan guarantee.

We consider large-scale rooftop solar to be a critical and highly attractive area within the distributed generation space and one that is going to attract an increasing amount of favorable public policy support in the years to come.

Before I go into little bit more detail on all of this, I ask you, the shareholders and prospective shareholders of NRG, to consider this.

If this is what NRG can accomplish 36 months into a deep commodity down cycle, imagine what we can achieve as we come out of that down cycle and as our core commodities trend upwards toward mid-cycle levels.

The potential is enormous.

Let me just amplify a few of my points, starting on slide 4.

From an earnings-call perspective, this is the second anniversary of our purchase of Reliant.

Those who were skeptical on this call 2 years ago that Reliant could sustain strong financial results quarter on quarter, and year on year have to accept that Reliant's business model, as supported by NRG's wholesale fleet and commercial operations team, is a very strong and valuable business and is now an intrinsic part of our business model, a part that makes us absolutely unique amongst our immediate peer group.

As part of the our new guidance, we expect Reliant to contribute over $600 million of EBITDA in calendar year 2011.

And, as I said previously, it is no longer business that is contracting in size over time.

Not only are we seeing the day when Reliant is able to grow its customer count, but we see greater value creation opportunities for Reliant presenting themselves in expanded product offerings and in geographic expansion.

Indeed, like many retailers, we see this as a particularly ripe opportunity for retail expansion in the Northeast United States and both Reliant and Green Mountain are having positive early success in their efforts in that market.

Since I have a large group of people listening on the phone and many of you are located in the Northeast United States, I invite you to visit reliant.com or greenmountain.com.

With a minimal of fuss you can enjoy the financial and customer care benefits of Reliant or Green Mountain, as I do at my home in New Jersey.

And while I'm in sales mode, Reliant and Green Mountain obviously serve businesses, as well as individuals, so feel free to cause your employer to switch to Reliant or Green Mountain so that you can enjoy the benefits at the office, as well as a home.

Now reverting back from that brief commercial to my presentation and from the Northeast to Texas, I want to point out that the robust supply demand fundamentals in Texas indicate a bright future for the biggest part of our operation and a future that will be realized sooner rather than later.

The 60-gigawatt record lows that ERCOT is setting every day this week indicates a peak reserve margin for ERCOT in the 10% range rather than in the 17% range officially predicted by ERCOT just 3 months ago.

This record performance was significantly influenced by the heat, but in case people haven't been paying attention, it's getting significantly hotter almost everywhere, every year, and that trend seems destined to accelerate.

One of my Texas colleagues who was in the room today reminded me that in College Station, Texas, it was 99 degrees yesterday.

Maybe that doesn't seem so remarkable, but it was 99 degrees at 11 o'clock at night.

I think everyone should consider that what we currently -- what we like to think of as being abnormally hot is actually probably the new summer normal.

Finally, we continue to invest in the revitalization of our conventional fleet, led by several repowerings at geographically-favored locations in or near load pockets, employing new fast-start combined-cycle technology that achieves high efficiency while being able to respond to the system's increasing need for capacity resources that can respond quickly to grid fluctuations caused by a high percentage of intermittent renewable plants.

In particular I'm speaking about El Segundo in Los Angeles, which is in construction, but we also have high expectations for Encina in San Diego County and for Astoria in New York City.

What this all adds up to is a company that is able to deliver a high-teen free cash flow yield before growth investment and even nearly a double-digit free cash flow yield, even after taking into account our several hundred million dollars of current-year investment in attractive growth projects.

Turning to slide 5 and continuing to focus on capital allocation, as those of you who have followed us for several years understand, we have always pursued a very balanced capital allocation program.

Over the life of the new NRG we have deployed about $9 billion of the Company's capital relatively evenly across 4 buckets of capital allocation that are depicted on the pie chart on this page.

Notwithstanding that the greater part of the attention to our capital allocation program has been on share buybacks, the single largest deployment over that period has been to debt repayment, with $3.1 billion of debt paid down.

The first half of 2011 was no different in this regard, with the Company having paid down almost $600 million of debt in the first half of the year alone.

This is consistent with our commitment to prudent balance sheet management, which has been an unwavering aspect of our management approach at NRG over the past 8 years and will continue to be so into the into the indefinite future.

But now we have the additional $250 million of share buybacks announced today, which serves as a precursor for the additional capital allocation actions we hope to take after we clear away the 2017 bonds in the first quarter of 2012.

The good news is that, even after this additional buyback in 2011, even after our substantial debt repayment, even after we invested a very substantial amount of equity capital in solar projects and conventional combined cycle projects.

And even after we spend our typical net $200 million to $300 million a year on major maintenance and environmental CapEx in our assets, we expect to end 2011 with several hundred million dollars of cash on our balance sheet in excess of what we feel we need to run our business.

As a result we will be well-positioned to set up 2012 as another year of significant return of capital to shareholders.

Before turning it over to Mauricio let me say a few words about our thriving solar effort.

Our first-tier utility scale solar projects identified on slide 6 are all progressing either on schedule or ahead of schedule through the final development and financing phase, and in many cases, into construction.

Tom Doyle will be pleased to answer any questions you might have about any of these projects.

A point that I want to reemphasize about these solar projects is the relative lack of risk.

In the 20 years that I have been in this business developing, financing and building power plants, never have I ever been associated with utility-scale projects that feature such a relative absence of risk.

When we assess these large-scale solar projects from the point of view of political risk, technological risk, environmental risk, commercial risk -- by which I mean offtake risk -- and most of all, completion risk, the risk profile is nowhere on the chart, even compared to a standard gas-fired combine-cycle power plant.

So we like this business a lot and think it's an appropriate place to invest our shareholders capital.

As we have said previously, we expect the solar business to migrate over the next few years towards more distributed applications.

A couple weeks back I was privileged to be with Governor Jerry Brown of California when he spoke of his firm intent to bring 12,000 megawatts of distributed generation to California.

We expect to distributed solar increasingly to benefit from support of public policy at the state and local levels because distributed solar means jobs, and not just any type of jobs.

It means local jobs for contractors and other small-business employers.

This is why, in my opinion, you no longer hear much talk about a high-voltage transmission system spanning the country.

Public policymakers want to keep it local and since we always have thought, and said, that the idea of a high-voltage, national transmission system was nonsensical, we fully support this keep-it-local approach.

We have taken several steps, over the past several months to put ourselves in a position to be a leader in capitalizing on this trend to distribute solar.

We will come back next quarter and talk more about what we have done in this area but I will just mention, again, this one program.

The multi-state warehouse rooftop program alliance we have with ProLogis, with financial support from Bank of America and the Department of Energy, is a hugely important and strategic initiative that will enable us to scale up and reduce cost in this critical segment of the distributed market.

With that, I'll turn it over to Mauricio.

Thank you, David, and good morning, everyone.

NRG delivered another strong operating performance during the second quarter in both our generation and retail segments.

Some of the highlights are listed on slide 8.

Starting with safety, we maintained our top decile performance, with an OSHA recordable rate of 0.78 for the first half of the year.

This is our number 1 focus across the operations group and we will continue to strive towards a zero-injury workplace.

Our plant performance metrics saw significant improvements on availability and starting reliability compared to the second quarter 2010.

Given that we successfully concluded our spring outage season, we're in a very solid operational position during these critical summer months.

On the commercial front, we added significant hedges for 2012 while effectively managing the retail supply requirements during the warmest June on record in Texas.

On the environmental front, the EPA released the final cross-state air pollution rule in July.

As you all know, the main change was the inclusion of Texas in the rule.

And while there will be some incremental operating expenses, we are reaffirming today our environmental capital plan of approximately $720 million.

We continue to make good progress on our repowering and solar projects.

In June we reached commercial operations on our 200-megawatt Middletown repowering project in Connecticut, and started the commissioning sequence for Road Runner solar project in New Mexico.

All other projects, at Indian River, El Segundo and Ivanpah continue to be on schedule.

Turning to slide 9 for more detailed review of our operating performance, net generation was higher by 2.5-terawatt hours during the second quarter, compared to 2010, driven primarily by generation in Texas due to record weather in June and the addition of Cottonwood in our South Central portfolio.

Our base load plants continued strong operating performance and posted an equivalent availability factor, or EAF, of 91% for the second quarter.

Indian River led the fleet with 97% availability, followed by Parish and Big Cajun, both with over 94% availability.

Since the beginning of year we have seen a significant increase in the number of starts on our gas and oil fleet.

During the second quarter, our peaking units responded with an impressive 99% starting reliability, ensuring we didn't miss any opportunity during the high-price hours.

Moving on to our retail operations on slide 10, we delivered yet another quarter of strong financial results.

Texas experienced record temperatures for the month of June, and with our hedging strategy and relatively stable market prices we achieved significant earnings uplift.

We also continued to grow net mass customer count, making 2 consecutive quarters of growth, with 17,000 additional customers since the end of 2010.

We feel even stronger about delivering net zero customer losses by the end of the year.

Reliant also delivered lower bad debt expenses on our mass segment.

This strong performance has enabled NRG's retail business be the largest in Texas while also delivering the stronger customer satisfaction levels.

On the residential segment we launched our expansion into the Northeast and are now serving customers in 3 states.

Plus we have grown the number of e-Sense customers with the smart meter services from 220,000 at the end of the first quarter to 350,000 today.

Our C&I expansion into the Northeast continues, as well, with sales teams currently operating in 6 states.

This segment has experienced increased competition and compressed margins, and we're being selective on transactions where margins justify the risk of serving that load.

Moving on to our hedge profile and commodity sensitivities on slide 11.

We increased our base load hedges from 60% to 75% in 2012 where gas fundamentals remain weak.

In addition, we saw an opportunity to increase our coal hedges for 2012, ahead of the EPA rule, and our commercial operations group did a great job executing in the market and hedging 100% of our requirements.

Beyond 2012 we continue to remain open on our base load and peaking portfolios.

We see limited downside risk on the gas market from current levels.

Coupled with our view that our recovery's already underway in our core (inaudible) market driven by robust demand, lack of supply and stringent environmental rules, we anticipate ample opportunities to layer additional power hedges in the near future.

Expanding a bit further on these market dynamics on slide 12, you can see that Texas continues to show strong signs of growth in economic recovery.

During the second quarter demand grew by a healthy 2.5% on a weather-normalized basis, and given the extreme weather conditions over the past few weeks, we're setting back-to-back new peak load records of over 68 gigawatts, almost a 4% increase from the record just set last summer.

On the upper right-hand corner we have provided the new reserve margin for ERCOT released in May, which shows reserve margins falling below the target of 13.75% by 2014.

2 points I want to make on this forecast.

On the load growth assumptions, we believe they are too optimistic in the near term and aggressive on the later years.

On the supply side we remain skeptical about new generation given that (inaudible) still don't support new-build economics.

What this means from our point of view is that we may see reserve margins fall sooner than 2014; possibly 1 or 2 years sooner.

On environmental front, the more stringent air pollution rule will accelerate some retirements across the [East] and Texas.

The market has already to started to price some of this impact, as you can see on the lower right chart.

It is difficult to assess the ultimate impact since it will depend on the price of allowances and changes on the generation stack, which will have significant seasonal differences.

But we believe the remaining base load coal generators, like NRG, will benefit from increased gas on the margin.

Finally, we have been talking about gaining clarity on EPA requirements in 2012 for the transport rule, now the air pollution rule.

It differed from the proposal in a number of respects.

Among the most noteworthy for NRG were the tightening of allocations, inclusion of Texas in the Group 2 SO2 and NOx programs, [limitation] of Louisiana to (inaudible) NOx program, removal of Connecticut and Delaware from the list of states and the loss of trading flexibility in the early years.

Our investment in existing control technologies and use of PRB coal plays a large part in our ability to manage the final air pollution rule.

We anticipate from our early analysis of this rule that NRG can comply through an integrated strategy.

Increased scrubber efficiency by about 10% to 15%, fuel switching to lower sulfur PRB coal and additional blending at our Limestone facility, seasonal dispatch and allowance purchases.

We believe that incremental compliance costs are not material and can largely be offset by the impacting of electricity prices, as we saw on the previously.

Given what I have reviewed between our current operational and commercial competitive advantages and the signs of improving fundamental drivers in our core market, we expect NRG's base business portfolio to realize enhanced returns over the next few years.

With that, I will turn it over to Chris Schade for the financial review.

Thank you, Mauricio, and good morning.

Beginning with the financial summary on slide 15, we are very pleased with our results for both the quarter and year-to-date 2011, having announced adjusted EBITDA of $517 million and $972 million respectively.

During the second quarter, Reliant Energy continued to perform well, contributing $176 million of adjusted EBITDA, as the business benefited from the warmest June on record, leading to a 9% increase in mass volumes.

NRG's wholesale generation business reported $341 million of adjusted EBITDA for the second quarter.

Texas wholesale generation contributed $215 million of adjusted EBITDA, as the fleet's average capacity factor improved 3%, allowing the region to benefit from the favorable weather.

However, despite the improvement in operational performance, year-over-year adjusted EBITDA decreased $128 million, largely as a result of lower quarter-on-quarter energy and hedge prices realized in 2010.

In the Northeast region, adjusted EBITDA for the quarter was $47 million, approximately $50 million decline versus the second quarter of 2010, and it was driven by lower hedge prices and a substantial decrease in capacity revenues, all offset by lower operating costs.

The West and South Central regions delivered $51 million of adjusted EBITDA, which was an increase of $20 million from the prior year's period.

These regions continue to benefit from strong merchant activity, particularly in the South Central, with the addition of Cottonwood.

Adjusted EBITDA for the first 6 months of 2011 was $972 million, with Reliant contributing $327 million and our wholesale business adding $645 million.

Reliant's business has performed extremely well by continuing to grow its mass customer base, and the $13 million improvement in the C&I business on year on year, due in part to an improvement in unit margins.

The NRG wholesale business has also performed well and benefited from an 8% year-on-year increase in generations sold, or 3.7-terawatt hours, and a 3% improvement in base load operational performance.

The results were offset, again, by lower energy prices, higher fuel and transport costs and lower capacity revenues.

Following the completion of a federal tax audit during the quarter, net income increased by over $600 million due to the reversal of tax liabilities resulting from the confirmation of the Company's net operating loss positions.

For those of you that are new to NRG, net income is the determinant of the size of the restricted payments basket calculation under our most restricted instruments, which are the 2017 bonds.

As a result of this $600 million accounting reversal, our RP basket expanded by an additional $300 million during the quarter.

Due to the expanded RP basket and taking into account the significant undervaluation that persists in the Company's share price performance, today we are able to increase our share purchase program by $250 million, bringing the total 2011 share repurchase program to $430 million.

To date we have completed $130 million of share repurchases, leaving $300 million of additional share repurchases, which we intend to complete before year-end 2011.

Turning to 2011 guidance on slide 16.

As David mentioned, we are raising the adjusted EBITDA guidance range to $1.9 billion to $2 billion.

This increase is largely driven by the strong performance of our Reliant Energy retail business, as it has benefited this year from favorable weather conditions and improved customer retention.

We now expect Reliant to contribute between $610 million to $660 million of EBITDA, compared to our original expectations of a range between $480 million to $570 million.

Meanwhile, the wholesale business has performed as expected and as such, we are narrowing our original guidance range to $1.22 billion, to $1.26 billion.

Turning to free cash flow, we currently expect free cash flow before growth to be in a range of $1 billion to $1.1 billion, reflecting strong cash flow offset by the impact of collateral movements and the first lien refinancing.

Turning to slide 17, total liquidity remained strong for the first half of the year at $3.3 billion.

Total cash at the end of Q2 was $2.1 billion, which was a decrease of about $900 million from year end 2010.

The decrease in cash was largely explained by debt repayment of about $560 million; maintenance and environmental CapEx, net of financing, of about $115 million; investments on solar and repowering projects, net of financing, of about $310 million; $130 million of share repurchases, all offset by about $300 million of cash from operations.

Based on our current forecast and changes to the capital allocation plan, we now expect to end 2011 with almost $2.1 billion of cash, even including the impact of the expanded repurchase program announced today.

Although not illustrated on this slide, I would like to quickly provide an update of our ongoing efforts to sell down equity in our solar development projects.

We continue to target of 49% sell-down of 880-megawatts of utility projects that will accomplish 3 goals.

1, efficiently manage solar tax attributes; 2, attract new investors to solar development; 3, free up capital to be redeployed in our prolific solar pipeline.

The progress of this initiative has been slower than expected, mostly as a result of the pace of moving agreements through the Department of Energy for the larger projects.

With that said, we remain confident that we will reach financial close with the net effect of increasing liquidity this year.

Our share buyback plans are not dependent on the timing of this sell-down.

On slide 18 I would like to provide an update to the simplification of the capital structure encompassing both our first lien facilities, as well as the senior notes that we announced during the Q1 earnings call.

We successfully completed stage one by replacing our existing $1 billion revolver and $1.3 billion letter-of-credit facility with a single $2.3 billion revolving credit facility due in 2016.

Additionally, we issued a new, single $1.6 billion term loan B facility that matures in 2018 to replace 2 existing term loan B tranches with maturities in 2013 and 2015.

This refinancing eliminated investment basket restrictions and cash flow sweep requirements while aligning the covenant structure in our first lien with our newer, on the indentures.

Stage 2 of the refinancing of the $3.5 billion of senior notes is progressing as indicated.

In May we completed the redemption of $2.4 billion 2016 senior notes with the issuance of senior notes with a simplified indenture package maturing in 2019 and 2021.

Over the coming months we will look to complete the final stage of the simplification with the refinancing of the 2017 senior notes.

As I mention on the Q1 earnings call, the long-term benefits to NRG and its stakeholders through successful execution of this debt restructure strategy are numerous.

First, there is an immediate improvement in the debt maturity profile, with the nearest maturity of either first lien debt or bonds no earlier than 2016.

Second, a common covenant package will be aligned across the NRG capital structure, permitting greater flexibility and creation of a long-range approach to capital allocation, for a more efficient approach to reinvestment in our business and/or to return to shareholders.

And finally, as it was announced earlier this morning I will be leaving NRG in early September to pursue an exciting and unique new opportunity in the healthcare industry.

This decision is in no way a reflection of the current health of the Company, or a judgment about its future prospects.

On the contrary, I am quite proud to have had the opportunity to work alongside an incredibly talented and gifted team to strengthen the Company's financial position and improve NRG's ability to provide greater returns to shareholders.

I am also grateful to have been able to help execute David Crane's strategy of transitioning NRG to a twenty-first-century power provider, particularly as it relates to building one of the country's largest solar power companies.

As the current and future shareholder, I look forward to following NRG's transformative progress.

Now I'll turn over to David for closing remarks.

Thank you, Chris, and before I get those closing remarks, I just wanted to mention about Chris's departure, which obviously, we announced in the second press release this morning.

I'm very sorry to see Chris go, as I think he did much during his comparatively short time with the Company to streamline some of our critical processes and simplify our balance sheet so that we would be in a better position to optimize the allocation of the Company's capital.

On behalf of myself and everyone at NRG, I wish him well in his new endeavor.

With respect to a new CFO, we have just commenced consideration of potential successors for Chris, and while it is early days yet, I want you to know that I have every expectation that we will be able to consider our alternatives and fill the position in a much shorter period of time than last time around.

The second and final thing I would tell you at this early stage in our CFO search is that we have very capable finance and accounting teams with deeply experienced management and they will continue to pursue the Company's various financing and capital allocation initiatives, no matter how short or how long the CFO interregnum period turns out to be.

Turning to the concluding slide on page 20, sometimes the NRG story, by which I mean our investment proposition, can seem rather complicated, but I think at this juncture and at this share price it boils down to 3 things that you may wish to consider as drivers for further investment in NRG.

First, our unique wholesale asset retail business mix that has its core strength in Texas, the best and strongest growing regional market in the United States with a reserve margin that has proven itself in the past few days to be surprisingly tight.

Second, our robustly growing green energy portfolio of projects and businesses led by our industry-leading multifaceted solar program.

And third, our willingness and significant ability to return excess capital through our capital allocation program in a manner that creates value for our shareholders.

This is the business model which we have been pursuing relentlessly in the past and will continue to do so in the future.

And with that, Kiana, we will be happy to take questions from people on the phone.

(Operator Instructions).

And our first question comes from the line of Brandon Blossman with Tudor, Pickering, Holt & Co.

Please proceed.

Good morning, gentlemen.

Good morning, Brandon.

Let's see, kick it off with some solar questions.

So I guess one, can you help us size the ProLogis distributed solar project.

I see the DOE loan, but it seems, to some degree, unlimited here as far as size and ultimately trying to back into some kind of EBITDA expectations in the out years?

Well, the project at ProLogis I think you have to think of it in three phases.

There's an initial 15-megawatts that's -- it's a program that's supposed to unveil itself over four years, that's the period of which the DOE loan is available, and so the maximum size is about 800-megawatts but the initial -- the part that's starting right away is 15-megawatts and so, how large it ultimately ends up being, if it achieves its full potential the total size of the program is roughly about $2.4 billion in terms of total enterprise value.

I think it's really early to say whether it'll be 100% successful, but I would say from our perspective even 50% successful or 75% successful would be a great win and that would mean that the investment for us would be over four years in the $500 million of $700 million range.

So, translating that into EBITDA, it might be a little bit early for us to do that, but I think that that's something we try and flush out on our next call.

Tom, do you want to add to that?

No, I think you covered a completely, David.

Brandon, is that good enough for you?

It's helpful, I appreciate the color.

And then just following on the solar theme, I think Chris mentioned a 49%, 48% sell down of -- that was -- I didn't -- the equity portion of the current solar projects?

Could you -- is there any additional color that you can give around that?

Is that indeed the equity portion and what order of magnitude we are looking at there, also?

Yes.

No, Brandon, is 49% of the equity in the 880megawatts of utility scale.

To give you size, there is -- before ITCs it's about $1.8 billion total equity so afterwards -- after the ITC grant it's about approximately $1 billion, so 49% of that would leave us with approximately $500 million of equity, And as I said on the call, the benefits to us here are three fold.

Obviously, we're looking to attract new investors into this to continue to bring them in other investments that we have in the future and clearly, we want to optimize the tax benefit created by these projects.

So, those are the two certain goals as we move this forward.

And, we are -- certainly still expect to have this done before year end.

Great, so more cash in the door.

Thank.

Appreciate it, guys.

And that's not included in any of the liquidity slides that you have in the deck in the slide presentation.

Got it.

Thanks.

Thank you, Brandon.

And our next question comes from the line of Paul Fremont with Jefferies.

Please proceed.

Thank you very much.

First of all, congratulations on a great quarter.

Thanks, Paul.

You talked a little bit about EPA compliance in Texas, including the purchase of emission allowances, can you give us a feel for what allowances are trading at that market right now?

Good morning, Paul, this is Mauricio.

Right now there is no market liquidity for allowances and we haven't seen any indication on pricing outside of what the EPA provided.

So, as we said, we have an integrated compliance strategy; I think purchasing allowances is one of the options.

And as we gain clarity on pricing then we will decide whether we buy more (inaudible), how much more we're going to increase our scrubber removal efficiency on Limestone and Parish, but that's yet to be determined based on prices.

So, the EPA range is a really wide range, do you have a sense of where your pricing expectations will come out relative to their range?

Paul, that's -- it's very difficult to establish at this point.

We're looking at the spread between low-sulfur and high-sulfur PRB, or lower-sulfur or low-sulfur PRB.

That will provide us some indication, capital investment or low capital investment to comply.

So at this point it's very difficult to pin of pricing expectation.

And then on the Reliant side, you talk about declining margins there, but can you give us a sense, dollar wise, either for C&I or mass market, what those margins look like right now?

Paul, this is Jason.

We don't give margins at a segment level between our mass business and our C&I business but what can I -- what I can to you is that if you look at our performance against both those segments, in the mass segment we have seen a slight erosion of margins in that business, but that's consistent with competitive market, but yet, we're still delivering very strong margins against the portfolio.

In the C&I business, we continue to see increased margin pressure in that business; however, we're taking a very disciplined approach against the types of business that we're going after to make sure that we can earn the proper type of return against the capital we're putting at risk against the C&I business.

And then the last question is, you changed your projections on adjusted free cash flow, it looks like the big change is a reduction in working capital assumption, what's driving that?

It would just be the movement of collateral to support the trading businesses.

Okay.

Paul?

Yes?

You heard that?

Yes, thank you very much.

Okay.

Thank you, Paul.

And our next question comes from the line of Ted Durbin with Goldman Sachs.

Please proceed.

Yes, just following up on the retail question, I'm wondering, are you -- how are you getting these higher customers, are you ramping up your customer acquisition costs?

And then if you could just comment on that first?

One of -- we have increased some of our marketing activity.

The other thing that we've done is we've entered into some new channel arrangements to meet customers in more places from an acquisition standpoint.

We've made significant improvements in our conversion performance within our channel.

In fact, our conversion on a close rate is higher than it's been in our historical performance.

The third thing that we've done on a retention standpoint in retaining customers is we've gotten a lot better in terms of our overall retention performance, as well.

So it's a factor of new channels, our acquisition performance, our conversion rate and just performing a lot better on a retention level, which is enhanced by our customer service and the types of product offerings that we're giving our customers than, we believe, continue to differentiate us in the market and what we're doing around our e-Sense product program.

That's helpful, and just on that -- on the segment, as well.

For the quarter, how much did whether impact the volumes would you estimate?

Weather clearly had an impact on our overall volumes, but I will tell you in terms of our performance for the quarter, it's a combination of not only whether driving higher volume, we had benefited from lower supply costs than budget, as well as strong improvement in our bad debt, which I think is consistent with just the overall economic environment that you see here in Texas, and then, fourth, the strong customer count growth.

So it's a combination of all four of those things that's really driving the performance.

Got it, and then if I could ask one more question, just shifting more to balance sheet and it sounds like the positive commentary on the buyback potentially in 2012.

Any thoughts on sizing how big that might look like in -- I'm particularly interested in what kind of cash balance you think you'll need to run on a sustainable basis; higher or lower than where you've been over the last few quarters, or just some thoughts there?

Well, Ted, obviously we are intentionally being vague about what we expect to do in 2012 because we don't want to create an expectation amongst people like yourselves that we would have fulfill six months from now under completely different circumstances.

Obviously with where the Company share price is now, seriously undervalued from our perspective, we see investment in the Company stock as to be about the best thing that the Company can do with its money.

We obviously have no idea what the Company share price will be in the first quarter of next year.

Obviously we hope it had moved in a particular direction from where it is right now.

So I don't want to give you a particular number in that regard, but I would tell you that as we think through what will happen once we are out from underneath the -- out from underneath this restricted payment basket is that I think one thing that we'll be trying to change people's mindset on is the idea that there's a specific amount of buyback that we'll do every year on a recurring basis.

That was something that we put in place about five years ago, because looking forward, with the RP basket as part of our life, we saw that we'd have that ability to do that.

I think what you'll see in the first quarter next year is that the way we're going to look at it is that we want to right size our balance sheet from the point of view of how much liquidity we maintain and go back to the way most people do buybacks, which is not something they do the same number every year, but if they have the excess cash they do it and if they don't have excess cash they don't do it.

So I think that's the way we'll be looking at whatever decision we make in the first quarter of the year is how much excess cash do we have and what should we do with it so that the balance sheet isn't constantly caring this big -- it's a high-quality problem but this burden of too much high-cost capital.

Okay, that's very helpful, thanks.

That's it for me.

Thank you.

And our next question comes from the line of Ameet Thakkar with Bank of America.

Please proceed.

Good morning, David.

Good morning, Ameet.

Just following up on the last question there, the last several quarters and you guys have been more focused on organic growth around your existing conventional fleet and the solar business, but given where we are in the cycle and now having some more finality or clarity on EPA rules, if we have to rank order your ex -- your potential uses of that excess liquidity is it fair to say that share buybacks are at the top of the list at this point?

Well, based on what we can see now, yes, that would be at the top, but let me address some of the other potential uses since you mentioned them.

And I think you can see the limits of my predictive capacity because I had anticipated in early 2010 that 2011 would be a good time to be in the market buying power plants, but nothing could be further from the truth.

I'll tell you what we've seen in the last several months is that -- and this is speaking, Ameet, about gas-fired plants -- is that -- yes, that it's -- that there is a lot -- there are of lot of people chasing the gas plants in the market and they're willing to pay prices that we can't justify and the price that we're thinking things are worth and the price that people are paying for plants is not shrinking, it's getting larger.

The other thing we're seeing in the market for gas-fired power plants is it's not just churches you buyers in the market anymore, its financial buyers.

And it seems that people are anticipating a turn in the commodity cycle and private enterprises that don't have to worry at all about near-term accretion dilution are amassing power plants on the idea that the forward price curve is about to turn in a positive direction.

So I would say about things that you might see us investing money in, the least likely thing you'll see us investing money in is in buying gas-fired combined cycle power plants.

Another question that comes up is, well, what about coal plants now that we have a little bit greater clarity because the EPA rules are out there?

I think it's really too early to tell on that because first of all, I'm not sure -- no one's sure exactly how the EPA rules are going to kick in or whether they're going to be applied on time or things, so I think the jury's still out on whether there's to be value obtained in buying coal plants.

And I would mention, we continue to seek -- we would like to have a larger conventional power plant business in the Northeast United States, particularly in PJM, so it continues to be an aspiration of this Company, but I'm not -- I'm just telling you, I'm not confident that we can do that have at value and so that's not as likely a use of cash resources.

So apart from that, on the M&A front there are things that we see in the alternative energy space or around the retail business that would fill out what we're trying to do in terms of our intrinsic growth, but those types of things are a much smaller dollar number of things and would not impact, I think, in any way what we're contemplating in terms of capital allocation over the next several months.

Ameet, how is that for a long-winded answers?

Did that answer -- somewhere in there was there an answer your question?

That was very good, thank you.

And just real quick for Mauricio.

There's been, obviously, a lot of back and forth regarding some of the inner workings of the New York capacity market, I was just wondering if you could provide us an update on where you see that process moving to next?

And, also, was wondering if the lower spot on your capacity options is what drove a slight reduction in the top end of your wholesale guidance?

Okay.

Well, as you know we would file a complaint with FERC.

We believe that the NISO did not -- exerted the buy side mitigation rules in the Astoria SES plant.

That was the main driver of the decreasing capacity prices from June to July.

We think that -- we're awaiting the ruling from FERC.

We think that there is a good precedent given how they cited on the (inaudible) rule in PJM and we'll update you when we know more about it.

Thank you.

Thank you, Ameet.

And our next question comes from the line of Gregg Orrill with Barclays Capital.

Please proceed.

Thanks.

Was wondering if I could take another crack at the idea of the excess cash that you would have available in 2012.

Just how do you think about the concept of excess cash in terms of metrics and levels there, or is there really another way to think about it just in terms of the amount of cash that you need to have set aside just as a -- as more of a static measure to run the business?

Well, Gregg, let me take a cram -- the way we look at it is that -- Chris comes in what's an increasingly long line of CFOs for this Company, all of whom have told me that they think that the ongoing cash needs of the Company in order to operate our business is in the $700 million range and so we start by setting that aside.

The second thing I think that you will -- you can count on us doing is that we will look at the equity capital -- when we get to the first quarter of next year we'll look at the equity capital that we expect to invest in the solar projects and the conventional projects that are well on their way.

One of the things about -- another one of the things that I like about solar development is that the hit rate on solid development seems to be significantly higher than the hit rate on conventional power generation and so if it looks like we have projects in the pipeline that are going to require equity capital in a foreseeable period of time, for example, calendar year 2012, we will take that into account and then we will look at -- having deducted those two things and obviously, the maintenance environment CapEx and the other things that we do every year then that's the number.

Right now, we projected that number will be in the several hundred million dollar range.

And then -- and so, I know -- I did sort of avoid the previous question in terms of ranking these various uses of our capital and to some degree, I don't think that we have to rank these uses of capital because we have so much capital that have we -- if we have very strong investments I think we can do more than one thing.

But I think we will look where we stand at that time in the spring of 2012.

And, this is important.

And we will consult with our board of directors because they will have a very strong point of view on this and then we will look at the options in terms of return of capital to all the stakeholders.

The shareholder certainly, but even whether there should be more debt repayment.

And so in terms of the timing of taking out the 17s, is that -- has your view changed at all on when that would occur?

I thought the base case was to wait until February.

No, that's still the base case, but that's not -- Chris why don't you just give the --?

I don't think the timeline's changed at all.

I think we've been very opportunistic about the refinancings to date and that really has taken advantage of a firm, high-yield bond market.

So we continue to track that, we continue to understand where a potential refinancing would price, vis-a-vis we would redeem these bonds.

Obviously there's a make whole call period, which is available now, which declines from -- based on treasury's it's about 107.5 or so now, it declines to the call price, which is about 103 and three-eighths or so in January.

So we'll just continue to track it through that time period and then see what our refinancing alternatives are.

Thank you.

And our next question comes from the line of Keith Stanley of Deutsche Bank.

Please proceed.

Hi, good morning.

Can you provide an update just on how much load Reliant is now serving outside of Texas and the mix of customers you have there in terms of residential and C&I, and how quickly you intend to grow this business outside of Texas?

So, in -- outside of Texas it's still early days for us.

We're a little under 2-terawatt hours in our C&I business, our residential business we're only in three states.

We've not begun to fully turn up our marketing activity as of yet, so we really think that we'll see more of our growth come from out of region the back half of this year and certainly, into 2012.

But we do you intend, over the next couple years that that will -- it will represent meaningful growth for us in terms of our overall retail EBITDA performance, as well as customers and volume.

Okay, thank you, that's helpful, and one follow up.

For 2012 you've now added some hedges in each of the past two quarters, but looking at the heat rate sensitivity on an apples-to-apples basis it looks like it hasn't changed much.

Is it fair to assume you're layering in mostly in gas hedges still for 2012 and looking to keep some of that upside to heat rates open?

That is correct.

We've taken advantage of short-term rallies in the gas market, particularly pre-summer, and we executed some gas hedges in our base portfolio.

And as you know, as we get closer to the delivery year we'll convert that into power.

Okay, thank you.

In the interest of time, we are able to take just two more questions.

Our next question comes from line of Jay Dobson with Wunderlich Securities.

Please proceed.

Hey, good morning David.

Jay.

Was hoping to throw one to Jason, just to follow up on the retail business, and the last question was asking about the outside -- or out of Texas business.

Can you talk a little bit, Jason, just what you're seeing margin wise outside of Texas -- understanding it is early days -- vis-a-vis what you're seeing in Texas?

And understand you may not want to give specific numbers but just in ZIP code and the idea being Texas is a pretty developed market versus some of these other states not as developed, just what we can read in by a comparison of those two markets?

Well, against both segments, whether C&I or mass segment, we see lower margins in the Northeast than we do in the Texas market just given the market structures that exist across PJM.

But relative to our plan and what we thought we would be able to achieve in those markets, again, early days, we're fairly consistent with the types of margins we thought we would be able to generate in the Northeast.

And are you expecting to see some increase in margins and that's what's going to drive you towards accelerating the outside of Texas business, or are these margins what it's going to be and you'll just grow on the back of volume off these lower margins?

Our expectation is that the margins are going to be what they are and that's going to -- our growth and the speed at which we would grow was really more about getting certified in each of the states and then us actively marketing in those states.

But we think that over time -- and we certainly believe that market conditions may change and that you might get to a more open competitive market like you see in Texas over time and PJM and we think that will create some margin expansion opportunity in those markets if that actually happens.

Nope, that's great.

And then Mauricio, one last one, back to the Casper rules.

On page 13 you indicate that you're looking at some low-cost controls for Big Cajun versus allowances and know you're waiting on some additional interpretation there, but wondering what you're thinking about there in addition to the ACI and fabric filters you identify in the table above?

I think specifically for Big Cajun we'll be evaluating [SNCR's] relative to the cost of allowances and potentially the use of lower-sulfur PRB, that is -- that's what we're contemplating right now.

But as you can appreciate, without having some pricing stability we haven't made up our mind on what route to take.

Got you.

And SNCR's relatively inexpensive, but would that be in the $720 million, or would that be on top?

No, we believe it's going to be within the $720 million.

Okay, great.

Thanks a lot.

And in the interest of time our last question comes from the line of Angie Storozynski with Macquarie.

Please proceed.

Thank you.

Another question about retail, not surprisingly.

You mentioned that you think that margins should stay stable going forward, but should we just simply assume there is a higher profitability of this business going forward, especially in Texas, or should we assume that 2011 in ERCOT is a bit of a one-off year where ERCOT clearly intervenes in the power markets, which caps the power prices of reducing the purchase power costs of Reliant and as such Reliant's margins are a bit inflated?

Hey, Angie, this is Jason.

No, I think if you look at our margins of 2011, again, they're being held today, also, by lower supply costs.

We're seeing improvement in our bad debt, it's not all just the market dynamic that's driving that.

I think, when you look at our position in the market, our ability to capture a premium from a pricing standpoint, we feel fairly confident that we'll continue to be able to hold the kind of margins that we're delivering today.

Now, whether or not you continue to see the volume inflation that -- weather is one of those contributing factors, that's something that we'll see if that repeats itself in 2012.

But I don't think that you would look at our margins today and say that they're being inflated by in which the way ERCOT operate the market.

Angie, if I could add to what Jason's saying, I think one of the things we've been concerned about on the retail side -- and this is another testament to what Reliant has achieved -- is that since the market has felt that wholesale prices were subdued and were going to stay subdued, that unleashes a tremendous amount of competition on the retail side.

Jason, how many retail electricity providers that are active in Texas right now, 40, 50?

It's about 60.

60 in Texas.

And what we're particularly concerned about is when the retail margin would erode under, obviously price competition from other retailers and for the reasons that we already described, Reliant had been able to withstand that attack.

But what we may be facing over the next three years is that if ERCOT, which does not have a lot of generation supply coming to the construction pipeline, gets very tight on the generation side, Jason's wholesale cost may rise and compress retail margins in that regard.

But, -- and that's -- and so will Jason be able to do $600 million or $700 million a year every year going forward?

Not in that rising wholesale price environment.

But, of course, the good thing for an NRG shareholder is what Jason sees terms of compression is what our generation side will see as greater margin.

In Texas we're still roughly two-thirds generation and one-third retail.

So ultimately, the Company overall will benefit in that situation, even if Reliant has difficulty posting that same type of number year on, year out -- year in, year out.

Yes, that's great, thank you very much.

Congratulations.

Thank you.

And, operator, I think that's a great note for us to -- that last effort to extol the beauty of the wholesale-retail model that is unique to NRG is a good way to end the discussion.

So, thank you all very much for participating in this call and we look forward to speaking with you in the months to come and on the next quarter call at the beginning of November.

Thank you very much.