NRG Energy Inc (NRG) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Q1 2013 NRG Energy, Inc.

earnings call.

My name is Steve and I will be your operator today.

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

We will conduct a question-and-answer session towards the end of the conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

Now I would like to turn the call over to Chad Plotkin, Vice President of Investor Relations.

Please proceed, sir.

Thank you, Steve.

Good morning, everyone.

I'd like to welcome you to NRG's first-quarter 2013 earnings call.

This morning's call is being broadcast live over the phone and via website, which can be located at our website at www.nrgenergy.com.

Because this call, You can access the call, associated presentation material, as well as replay of the call in the Investor Relations section of our website.

Because this call, including the presentation and Q&A session, will be limited to one hour, we ask that you please limited yourself to only one question with just one follow up.

Before we begin, I urge everyone to review the Safe Harbor Statement provided in today's presentation, which explains the risks and uncertainties associated with future events and the forward-looking statements made in today's press release and presentation material.

We caution you to consider the important risk factors contained in our press release and other filings with 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 Tuesday May 7, 2013.

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

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

Good morning, everyone.

Thank you for joining us for this, our first-quarter 2013 earnings call.

Today I am joined this morning by Mauricio Gutierrez, the Company's Chief Operating Officer, and Kirk Andrews, the Company's Chief Financial Officer, both of whom who will be giving a portion of this participation.

As well, I am joined by Chris Moser who runs the Company's Trading and Commercial Operations activities, Elizabeth Killinger who is responsible for the Company's retail business in the ERCOT market, and Jim Steffes who is responsible for the Company's activities in the Northeast Retail markets.

They will be available to answer any specific questions that you have in their area.

Let's get right into it.

I have dispensed with our customary quarterly financial highlights section, which has been my tradition because our first quarter, which in recent years has been one of our softest quarters, fulfilled those expectations again this year.

The weather in our core regions did not provide us with much opportunity.

And our own performance in the face of the near-term opportunities that were presented to us was pretty uneven.

Having said that, we are intently focused at NRG on succeeding across the short, medium, and long term.

And we are always working on all three levels simultaneously.

This quarter, for reasons which should be obvious, our focus in particular has been on ensuring our success over the medium term, which I am defining for this purpose as the remainder of 2013 and full-year 2014.

In that regard, notwithstanding the lackluster first quarter that we are reporting today, I am very pleased that as a result of our successful actions over the past three months.

We are in a position to reconfirm full-year 2013 adjusted EBITDA guidance, increase full-year 2013 free cash flow before growth guidance, and reconfirm full-year 2014 guidance for both adjusted EBITDA and free cash flow before growth.

This positive medium-term outlook is driven, in significant part, by actions largely within our control, particularly our successful integration of GenOn.

And realization of the costs and other synergies arising out of that combination.

And the successful completion of our current construction program across both our conventional and renewable generation fleet.

I am going to talk about both of these in somewhat greater detail.

But, first, on slide 3, let me put our discussion in the context of our three-part approach to executing against our multi-tiered strategy.

Obviously at both the base of the pyramid, which is conventional generation, and at its top, clean energy, successful completion of our current construction program plays a big role in our medium-term prospects.

But that is not all we are doing at either level that will have substantial influence on our financial performance.

Proactive asset management at NRG's conventional fleet has led to some improved prospects, most notably at the Dunkirk plant, which received an extended RMR agreement in the New York ISO, good through May 2015.

A new environmental compliance plan across our existing coal fleet is shaving an additional $100 million in aggregate off of our projected environmental CapEx spend.

This reduction, when coupled with our previous announcement, now brings our total reductions and projected environmental spend to approximately $200 million below what we were estimating just one year ago.

Likewise, we have several initiatives underway around our Tier 1 utility solar portfolio, which now is entering into the final stages of construction.

With Alpine and Borrego already having achieved commercial operation in 2013 year to date.

With respect to our contracted solar assets, as we have stated previously, on or about the time of commercial operation of these assets is the appropriate time for us to take steps to realize or otherwise highlight the value of these assets.

As such, you should expect to hear from us before the end of this quarter with respect to our plans in this regard.

Sandwiched in between the capital-intensive generation and clean energy parts of our strategy our competitive retail business continues to perform well.

For the ninth quarter in a row our retail business has achieved organic customer count growth through our multi-brand strategy and emphasis on differentiated products and services.

In addition, we have extended our exclusive loyalty program partnerships with national brands like Southwest Airlines and United Airlines across our region.

Furthermore, last year we launched an exclusive partnership in Texas with Nest Labs, pursuant to which NRG, in its own name and through both our Reliant and Green Mountain retail brands, will be the exclusive partner among retail energy providers for their ground-breaking Nest Learning Thermostat.

A few weeks ago we announced that we have expanded that partnership to include our NRG retail business in the Northeast.

This is an important step for us and for the industry, as it is, in our opinion, a harbinger of where the competitive retail business is going.

Namely, beyond the meter into the house in order to provide more value-added energy services.

And where we expect to generate more brand loyalty and reduced customer churn.

Finally, critical to our retail success is scale and effectiveness in customer operations.

While our customer count is up by 139,000 year-over-year, total cost to support our customers decreased slightly as we worked to continuously improve our systems and processes.

Turning to slide 4 to greater detail on our construction program, there has been a lot of focus, both inside the Company and externally, on our industry-leading solar construction program.

And certainly that attention has been well deserved.

I am pleased both with the construction progress that we have made across the entire solar portfolio and the prospects for a successful conclusion to the current phase of our solar construction program, which is generally on time and on budget.

But overlooked somewhat externally, but not internally, was the current status and construction progress being made by our four conventional construction programs.

Marsh Landing, El Segundo, Parish Peaker, and Dover Already Marsh Landing has achieved completion and begun full commercial operation.

And El Segundo is not far behind, still pushing towards an August 1 commercial operation date.

All these solar and conventional plants under construction and due for completion this year will contribute significant EBITDA, not only in 2014 when they should benefit from a full year of operation, but even in the second half of 2013 where their aggregate contribution is expected to exceed $300 million.

Given the magnitude of this prospective financial contribution, I am sure you can appreciate the intensity of our focus on the construction program at all levels of the Company.

Moving on to slide 5, on a similar note the other area of intense concentration for me and for the rest of the Executive Management team, led by Anne Cleary, our Chief Integration Officer, has been on realizing all the benefits to be derived from the GenOn acquisition, which achieved financial closing just a short 4.5 months ago.

I am quite pleased with where we stand, both quantitatively and qualitatively.

As demonstrated on slide 5, we have executed on the great majority of the cost synergies and balance sheet efficiencies previously identified.

Constituting $285 million out of the $310 million in total cash flow synergies estimated today.

Importantly, even factoring in part year effect, and that 2013 is our transition year for this acquisition, we expect to realize $150 million of costs and operational synergies in fiscal year 2013.

With most of that, $130 million, back-end loaded, for obvious reasons.

You will note on slide 6 that we have not yet upgraded our estimate of operational synergies to be realized from the GenOn acquisition.

We intend to do so by the end of the second quarter.

While we might be trying the patience of some of you in this regard, I want to point out that just 4.5 months ago we acquired 21,400-megawatts of conventional generation, in 155 generating units, at 43 sites.

We are evaluating each asset individually and methodically.

Not only the assets in our acquired portfolio but also each asset in our pre-existing fleet to determine how to maximize asset value across the combined fleet.

The scope and potential significance of this operational synergy exercise is such that on slide 6 I provide some sense of the thorough process that we are going through, and the results we are seeking.

Importantly, we start by establishing a set of core principals that act as a guide to our decision making process across all our assets in the combined fleet.

This set of principals establishes what we refer to as our financial accretion framework which, when all assets are evaluated in combination with each other, should result in significant shareholder value creation from the fleet taken as a whole.

When we do report to you the outcome and further details of our operational synergies effort, we will be focusing your attention on three sets of numbers.

First and foremost, obviously, will be increased EBITDA arising from our operational synergies effort.

Some of this EBITDA will be nonrecurring, but the greater part of it will be recurring EBITDA rising over time.

Second, some of that revised operational synergy EBITDA will have no capital investment or material cost to achieve associated with it.

But a portion of the improved EBITDA will require a certain amount of capital investment in order to realize on the synergy opportunity.

We will provide details of the amount of incremental investment capital required.

And the quick payback period and the highly accretive multiples associated with it.

And, third, and finally, our operational synergy effort is likely to yield a meaningful free cash flow benefit somewhat separate and apart from the EBITDA impact.

This free cash flow benefit will be achieved, in some instances, by rethinking sub-optimal investments that have been previously planned.

We look forward to sharing with you the details of our operational synergies plan before the end of this quarter, with the idea that we will begin prompt and forceful implementation virtually immediately thereafter.

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

Thank you, David, and good morning, everyone.

During this first quarter, our focus was and continues to be on integrating the new GenOn assets, while delivering solid operational results across the fleet.

I am pleased to say that both remain on track for the year.

From a market perspective, we saw the gas storage surplus return to more normalized levels.

And, with that, an increasing gas prices, which in turn significantly reduced the coal-to-gas switching we experienced in the winter and spring of 2012.

As always, safety is our number one priority.

And we posted another quarter of top decile performance.

Our coal fleet improved its availability metrics.

And as prices increased, so did the generation from our coal fleet.

One of our priorities is to optimize the overall spend of the combined fleet.

To that end, today we are further reducing our estimated environmental capital plan by $100 million from $630 million to $530 million over the planning period.

This is a result of further testing and optimization of plant controls at our Big Cajun II plant, better equipment pricing at WA Parish, and more efficient solutions at our Cheswick facility.

These improvements, along with our previous announcement, now brings the total environment capital reduction to approximately $200 million over the same time planning period.

We will continue to focus on further optimizing our spend as part of our execution operational synergies.

As David mentioned, 2013 is a critical year for our construction program, as we have several large projects reaching commercial operation.

Which, when all complete, will bring nearly 2.2-gigawatts of new generation on line since 2012.

On the conventional front, and starting with Marsh Landing, we achieved commercial operations on May 1. We are proud of the engineering and construction team delivering the project on time and on budget.

The balance of our conventional projects -- El Segundo, Parish and the Dover gas conversion project in Delaware -- remain on budget and scheduled for operation this summer.

Finally, our industry-leading utility scale solar program remains largely on track to achieve commercial operations in 2013.

Turning to our operational metrics on slide 9, we achieved another quarter of strong safety performance, with 92 facilities out of 105 without a recordable injury.

We have combined two strong safety cultures.

And while our first-quarter recordable injury rate of 0.7 is top decile, given the increase from our 2012 record year we have significant work do as we head into the summer months.

Moving onto our generation for the quarter, we experienced much less coal-to-gas switching, and that is reflected in our numbers.

After normalizing for generation related to the GenOn assets, generation increased by 23% as compared to last year, driven primarily by Texas and the Northeast regions.

STP Unit 2 came back to service on April 22, ahead of our previous estimate.

During the forced shut-down, a full inspection of both turbines and associated feed pumps was completed in order to ensure that no other issues remain.

And to prepare the unit for optimal summertime operation.

As part of the program, the full 10-year inspections were completed on all turbines, as they were disassembled for repair.

There was no damage to the main generator or the exciter.

Additionally, a replacement transformer was fully tested prior to being energized and has been carefully monitored since returning the unit to service.

There were no significant issues arising from the completion of this work.

Unit 2 is operating at full power with no evident threat to generation.

And Unit 1 performed with a perfect record during the quarter.

Finally, coal availability improved compared to last year.

Parish and Big Cajun led the way with over 90% availability.

We are well on our way to complete the 154 outages planned for the first half of the year to ensure readiness for summer operations.

Moving to slide 10, our retail business performed within our expectations during the quarter, where we delivered $103 million of EBITDA.

The quarter-over-quarter change was driven primarily by higher supply costs, weather impact, and an increasing cost from our acquisition expense, as we organically grew customer count by 21,000 in the Northeast and Texas.

Our efforts to continuously improve our operations have delivered as we held customer operations [costs] flat on serving an average of 139,000 more customers during the same quarter from last year.

In Texas, we were successful at maintaining unit margins, while growing customer count.

And in the Northeast, we were able to increase our total gross margin by growing customer accounts despite lower unit margins.

In the [home] market segment we saw volume growth in both Texas and the Northeast.

We continue to introduce innovative and compelling home services and sustainable smart energy solutions to support unique customer needs and extend our relationship with customers.

Our multi-brand strategy, coupled with our product offerings, continues to differentiate us with customers.

And supports our strong momentum in the mass market.

In the C&I segment, we maintained discipline on pricing and margins, which led to a change in regional customer mix, with growth in our Northeast volumes and decline in Texas.

We will continue to focus on delivering profitable operations in this intensely competitive segment.

We are pleased with our performance as we continue to hold the leadership position in Texas.

And now rank as the third largest competitive residential retailer in the country.

Turning to slide 11, most of you are familiar with the gas storage chart on the upper left, which is one indicator for how tight the gas market has become.

As you remember, in 2012, we [left winter warm] season with record storage levels, resulting in natural gas prices falling below $2 per MMBtu, which drove much higher gas demand through coal-to-gas switching.

This winter and spring have proven to be a different story.

As you can see on the lower chart, gas storage rebalancing happened despite little coal-to-gas switching.

And it has driven mostly by colder than normal weather in March and increases in demand.

Pump gas prices reacted accordingly and moved to over $4 during the quarter, providing us an opportunity to increase our hedges in 2014.

We expect gas prices to remain well supported through the rest of the year, above coal-to-gas switching economics.

Now looking into the ERCOT market, over the past two quarters we have focused this section to the long-term resource adequacy issues in Texas.

We have laid out our case for higher heat rates and the possible solutions for closing the gap on the missing money needed to incentivize new generation.

This time I want to focus on looking at the upcoming summer months.

A few days ago, ERCOT published their latest seasonal assessment with an expected peak load of over 68,000-megawatts, a 3% increase from last year.

There have been significant changes from last summer in terms of higher price caps and changes in the real time price formation rules that should lead to higher and more frequent scarcity periods.

The current market implies some scarcity prices as you can see on the upper right-hand chart.

But if [2011] (corrected by company after the call) reserve margins are an indication of scarcity hours, we believe additional off-site is warranted for this summer.

We have taken the necessary step to position our wholesale and retail portfolios to take advantage of these market opportunities.

Turning to slide 12, as you can see on our hedging chart, we took advantage of the near-term increasing gas prices discussed earlier to layer in more hedges for 2014, bringing our hedge level up to 66%.

This was on the heels of coal purchases we made earlier in the quarter, thereby closing both legs of the [dark] spread and [staying] balanced.

In 2013, there was a decrease in the hedge percentage levels.

But this is strictly due to an increase in projected economic generation given higher prices later in the year.

Retail continues to execute their sales plan.

We have now priced close to 80% of our retail load for the balance of the year.

In New York we took advantage of the recent increase in capacity prices due to asset retirement and changes in the reserve margin requirements.

And layered in significantly more hedges for the summer period.

During the quarter, results were impacted by the roll off of higher priced hedges and increases in coal transportation costs relative to Q1 of 2012.

This increased cost resulted from low river conditions in the Mississippi, which required us to use high cost alternative routes to Big Cajun.

Also our coal costs in Texas in 2013 year to date suffer by comparison to 2012, a year in which coal carriers provided us with extraordinary price flexibility during extreme the low gas price environment that existed in early 2012.

In addition, first-quarter results were also impacted by the STP Unit 2 outage and commercial operation optimization activities.

As you know, we use a full suite of strategies and tools to capture both the intrinsic and extrinsic value of our portfolio.

And our track record in this regard over the past several years has been generally very positive.

In the first quarter of 2013, our commercial optimization activities were not as successful as in the past.

And contributed to the drag on year-over-year financial performance in our wholesale business segment.

Finally, our focus on integration efforts continue in this respect.

I am very pleased to note that we consolidated the real-time dispatch function for the Northeast, and West regions into our Princeton control center, a key milestone as we head into the summer months.

With that I will turn things over to Kirk for the financial review.

Thanks, Mauricio.

Beginning with the financial summary on slide 14, NRG is reporting first-quarter 2013 adjusted EBITDA of $373 million.

With $234 million from wholesale, $103 million from retail, and $36 million from our solar projects.

Our quarterly results include the impact of the GenOn transaction, which primarily contributed to $160 million in quarter-over-quarter adjusted EBITDA growth in our East region.

First-quarter results also reflect the impact of non-recurring items, including higher coal costs, primarily in our South-Central region related to the need to secure alternative coal transport due to unusually low river levels, which have now returned to normal.

And the outage at STP Unit 2 which, as Mauricio said, returned to service on April 22.

These items, combined with unrealized losses from commercial optimization activities, reduced first-quarter EBITDA by approximately $60 million.

Looking ahead, we are affirming adjusted EBITDA guidance for 2013 and 2014, which will see a significant ramp up in EBITDA from increasing synergy realization, and newly completed solar and conventional projects.

Moving to free cash flow, we are increasing our 2013 guidance by $100 million, while maintaining our free cash flow guidance for 2014.

Turning to capital allocation in 2013, as we announced in February, NRG substantially achieved its $1 billion debt reduction objective in connection with the GenOn transaction, significantly strengthening our consolidated balance sheet.

Having captured over 90% of the $100 million in annual free cash flow from balance sheet efficiencies announced in connection with the merger, we expect to exceed or exceed this target later in the year.

We also increased our dividend by one-third.

And have begun our $200 million share buyback program, with $25 million of stock repurchased during the quarter at a weighted average price of $25.80.

Turning briefly to the guidance overview on slide 15, as I just mentioned, we are reaffirming our guidance ranges for adjusted EBITDA, and increasing our cash flow before growth in 2013 by $100 million.

Last month we received an $80 million tax refund we had previously anticipated to receive in 2014.

The acceleration of this cash flow item, combined primarily with a reduction in projected environmental capital expenditures, allows us to increase 2013 cash flow before growth guidance, while maintaining our prior guidance for 2014.

Turning to slide 16, while the first quarter saw $36 million in solar EBITDA, and gave us the first $20 million of the full synergistic power of our combination with GenOn, the bulk of the EBITDA from our construction program and synergy realization efforts is yet to come over the balance of the year.

More than $400 million over the remainder of 2013, leading to $750 million in the aggregate in 2014 and beyond.

Breaking this down, NRG expects an additional $130 million in EBITDA synergies from the GenOn merger during 2013, leading to a run rate of $210 million for 2014.

As David mentioned earlier, we look forward to sharing with you the potential expansion of this number, as the benefits of our operational synergy efforts related to the merger are realized.

In addition, over the remainder of the year we also expect over $100 million in EBITDA in 2013, and more than $200 million in 2014, from our conventional project.

Having already placed our Marsh Landing project in service earlier this month.

Finally, as most of our solar projects achieve COD over the balance of the year, we will see an additional $170 million in 2013, growing to over $300 million in 2014.

Turning to corporate liquidity, on slide 17, NRG's liquidity decreased by $277 million in the first quarter of 2013, primarily due to the completion of our $1 billion delevering target following the GenOn merger.

As anticipated on the last quarterly call, the financings of our solar investments resulted in a net return of capital as we drew on the Alpine and Borrego financings, totaling over $300 million, once the projects hit COD during the quarter.

These financings, combined with cash grant receipts, exceeded NRG's equity investments during the quarter.

Finally, updating our capital allocation progress on slide 18, NRG ended 2012 with an excess cash balance of $1.062 billion net of targeted cash balances and certain cash not currently distributable from excluded project subsidiaries.

This excess cash balance, when combined with NRG's increased 2013 free cash flow before growth investments guidance now leaves us with $2.62 billion to $2.262 billion in cash available for allocation in 2013.

Our growth investments guidance of $226 million for 2013 remains unchanged, as we are on track to complete our Tier 1 solar construction and conventional projects.

In addition, we completed our open market bond repurchase program during the first quarter, retiring $200 million in NRG corporate debt at a cost of $226 million, including premiums.

Having declared our first increased quarterly dividend, we expect $145 million in common stock dividends paid to shareholders in 2013.

Which, when combined with our $200 million share repurchase program, will result in nearly $350 million in return of capital to shareholders this year.

Capital allocated to acquisitions consists of the remaining integration costs associated with the GenOn merger, the purchase of the Gregory co-gen plant expected to close in the third quarter, as well as the acquisition at COD of the High Desert solar facility which closed during the first quarter.

After successfully balancing the allocation of a portion of our 2013 excess cash, among return of shareholder capital, prudent balance sheet management, and growth opportunities for new construction and acquisitions, we are left with a substantial surplus, providing NRG with ongoing excess liquidity and capital flexibility.

With our balance sheet metrics in line with targets, and our credit rating stable and affirmed, given the continuing robust conditions in the debt markets, we would expect any further capital allocated to delevering to be opportunistic in nature.

We will also seek opportunities to take advantage of the robust conditions in the debt markets via accretive refinancings, including a potential additional term lender pricing, which would further contribute to balance sheet efficiency savings in 2013.

Given the breadth and diversity of the NRG platform, we continue to actively evaluate opportunities to further enhance shareholder value through acquisitions focused on conventional power generation, the enhancement of our retail business, and our growing leadership position in clean energy.

We continue to remain flexible regarding potential for enhanced or different capital allocations, should market conditions evolve.

Now I will turn it back to David for his closing remarks.

Thank you Kirk, and thank you, Mauricio.

Steve, I think we'll just take it straight to questions, if you want to open the floor.

(Operator Instructions)

Neel Mitra from Goldman Sachs.

Good morning.

Do you have a break down of the - I think the number you said was a negative $60 million of EBITDA of non-recurring items between STP, South-Central and commercial optimization in the quarter.

And, specifically, can you explain in a bit more detail what happened with commercial optimization?

Kirk, why don't you start.

Sure.

In terms of the break down, approximately $28 million was from commercial optimization activities.

The STP outage during the quarter resulted in about $25 million.

And the remainder of that was from the coal transport cost.

Mauricio or Chris do you want to -- or not want to -- give more?

Neel, apologies, but we haven't had a history, and we don't intend to now, of discussing any specific strategies or tools that we use on that side.

So I'm going to leave it there.

Fair enough.

And then my second question was around capital allocation.

Are you more likely to grow organically or via acquisition, in your view, from here?

Should we think of Gregory as the flavor of M&A from here -- one-off acquisitions that are tactical and opportunistic?

Or is a fleet of assets still in the cards?

Neel, because I like to answer questions literally and accurately, your question shifted from the beginning to the end.

On the organic versus inorganic, one of the things that I always liked about this company is that we are constantly having our own opportunities to grow the business from within.

And those require capital.

Historically less capital, let's assume, than obviously acquisitions.

But it's nice to have an organic growth strategy.

And we have that both on our conventional side and on our renewable side.

In terms of acquisitions, I don't think that you can really sense a pattern from Gregory.

I know that you know from previous comments we've always said that we feel that we have more of a competitive advantage in terms of acquisitions on bigger transactions rather than fewer.

In large part because there are just fewer buyers on the bigger stuff.

And we can get more cost synergies out of the bigger things than certainly some of the financial buyers.

Gregory -- I can't remember when was the last time we were successful in a one-asset acquisition, but we were pleased with the price we paid, and we're very pleased with the asset.

On the generation side, we are looking across the single asset portfolio Company side.

But the only thing that would cause Gregory to be more of the future than bigger deal is there are just fewer bigger things out there that may be available to us and may be appealing to us.

Thank you very much.

Brandon Blossman from Tudor, Pickering, Holt & Co.

Good morning, guys.

I'm going to try to rephrase this question and avoid commercially sensitive territory.

But, Mauricio, on the extrinsic capture Q1, was there a structural change in the market?

Or is this just normal quarter-to-quarter volatility in that capture ratio or rate?

No, Brandon, that's a good observation.

You can have quarter-on-quarter change that not ultimately reflects the overall profitability of the positions that we take.

I think that is the case in a lot of the optimization strategies that we utilize to fully extract the value of the portfolio.

Okay.

Fair enough.

And then, Mauricio, just following on that, '14 gas hedges, you did take some incremental down, perhaps, that would be a risk that you took even more down.

Is there any embedded gas view in how much is for gas for '14 on the gas side?

Keep in mind that 2014 we actually layer in a significant amount of hedges.

But, as you can appreciate, with gas prices moving up, so are our economic generation.

The move from 59% last quarter to 66%, if everything else would have been constant, it would have been higher.

Keep in mind that we just had more generation in the money.

And it is consistent with our strategic hedging program and our fundamental view.

When we saw the price increase in the first quarter, we felt that it was a good opportunity to lock in additional hedges.

And as I said, close the dark spread that we initiated earlier in the year where we saw an opportunity to buy incremental coal.

And we did it.

We believe that we're going to have additional opportunities to do that throughout the year.

Brandon, this is Chris Moser.

Just to add to that, I would mention that if you are comparing how much it takes for us to move from 59% to 66% today versus this time last year, it's a much bigger -- we have to sell a lot more to get there.

And now we're not quite double what we were before.

Not to mention the fact that gas is moving up and our deltas are moving up.

To move the portfolio 5% to 7% is also just a much bigger outright sale that has to happen.

Just to give you that perspective, as well.

Okay, great.

That is all useful insight.

That's important to understand, that the total number there is increasing year over year.

Thank you guys very much.

Julien Dumoulin-Smith from UBS.

Hi.

Good morning.

A first quick question, just to clarify, this is on plan for the year in the first quarter?

And perhaps could you speak to just the layering of hedges throughout the year?

Obviously Texas is becoming a, quote, peak year market.

How do you think about that with respect to your hedging program?

And then perhaps a second question here off the bat is, what's going on in California, just given the year-on-year trends?

Is there anything else that we should be paying attention to?

Let me just knock off the second one first because it's easy.

I like to take the easy questions, Julien, and then give Mauricio a little more time for the slightly more challenging.

On California, I don't think there is anything more you can read into it.

I believe if you go back and look at actually GenOn's first-quarter results from last year, you will see a negative result for first quarter 2012.

And I know that's counterintuitive, given that the fleet has basically tripled in size in California.

But the contracts that people have in California are extremely shaped towards summer revenue.

It looks unusual but it's not something that we are overly worried about.

With respect to the hedging strategy around Texas, Julien, as you know, we try to look at the natural gas hedging activity, or the natural gas component of our portfolio is one, and the heat rates.

With respect to the natural gas component, we try to lock in as much of the dark spread or base load gross margin that we have in our portfolio.

Certainly with heat rates, we have been talking about increasing heat rates given the regulatory changes to incentivize new-build economics.

That has paid out dividends for us over the past couple of years.

With respect to the balance of the year, your point about the distribution of the gross margin of the portfolio is correct.

We are seeing much peak year prices in the summer.

Q3 is becoming more important relative to the other quarters.

We have taken the necessary steps to benefit from that.

We are leading a long-biased position on our portfolio.

We have also increased the hedging on our retail portfolio to better manage or to increase the insurance around volumetric risk or weather risk.

We believe that the portfolio is well positioned to benefit from what we believe is going to be a very tight summer in Texas.

Great.

Thank you.

And just, entirely separately, quickly here, on solar -- you alluded to solar monetizations, broadly speaking.

How are you thinking about it?

Obviously we have seen some other peers of yours moving to spin their own businesses.

Is that something you'd contemplated at some point?

Julien, what I'd say is that we've contemplated everything.

This has been an exhaustive process.

We've looked at all the options.

We are aware of everything that's going on in the marketplace, at least everything that's visible in the marketplace.

I alluded to it pretty directly and explicitly that we would be back to you on this topic before the end of the second quarter.

I just don't know what else I can tell you other than just wait a few weeks and the long wait will be over.

No worries, thank you.

I'll be patient.

Keith Stanley from Deutsche Bank.

Good morning.

Can you talk to the level of retail margins and attrition you have seen year to date specific to the existing residential customers in Texas?

And how you expect this to evolve over the course of the year.

It seems like you guys are still fairly confident with retail guidance for '13 and '14 reaffirmed despite higher gas prices now.

Keith, I'm going to ask Elizabeth Killinger who runs that business, to answer that question for us.

We have seen sustained margins, as Mauricio mentioned, in Texas.

We have sustained our unit margins and believe we are well positioned, both from a selling perspective on acquiring new customers, as well as retaining others, using the new channels that we have, as well as innovative products that we're launching to intrigue customers to recognize we're different.

Whether it's providing home services or providing just the standard commodity plan.

Okay.

One quick clarification on the operational merger synergies.

Do you expect to provide an update before the end of Q2, as in June 30?

Or as part of the Q2 earnings call?

It's a good clarification.

Before June 30.

Before the end of the quarter.

Great.

Thank you.

Steven Byrd from Morgan Stanley.

Good morning.

I wanted to touch on PJM and the outlook for heat rates in that market.

There's quite a bit of debate about the impact of coal plant retirements over time to heat rates.

As you look out at the market now, what's your view in terms of whether there is a further heat rate movement likely or whether you see headwinds, be it from renewables, lack of demand growth, whatever the case may be?

Steven, this is Mauricio.

I think on the last quarter we tried to at least quantify what would be the impact on heat rates on that potential offsite, given their retirements that we're expecting to map in 2015 in the New Jersey head.

I think we said somewhere in the order of magnitude of $4 to $5 per megawatt hours, just to get to cost of new entry economics.

Clearly, that's going to depend on the capacity revenues or the capacity auction results that we will see later in the month that will fill the gap to incentivize the new generation that is expected to be required in the '16, '17 timeframe.

So our view hasn't changed dramatically from that.

We are expecting somewhat more volatility and potentially some upside this summer, given that the main response will potentially set price going into effect this summer.

So I would say that's the short term and the longer term view that we have on PJM.

Great.

Thank you.

Just as a follow up on a different matter, JVD talked about solar, and we'll stay tuned on that.

But you have a number of other contracted conventional assets that are relatively bond-like in terms of their cash flows over time.

Could you just talk to your general views as to your appetite to monetize some of those, given that they are so bond-like?

And maybe there are buyers who would effectively put a higher multiple on that than what's reflect in your own stock.

Steve, it's a good question.

I am not sure I've ever heard it to our contracted assets talked as it's bond-like.

But I can see your point.

It's something we're aware of.

Particularly with the new projects being brought online this year that are contracted, that the Company's balance on the wholesale side between assets what would be characterized as merchant versus contracted is moving more towards the contracted.

I think whether or not the market is valuing them as such is an open question.

So certainly it's something that we have under evaluation.

Okay.

Thank you very much.

Angie Storozynski.

Thank you very much.

Let me ask the question everybody is probably dying to ask.

We're waiting for the PJM capacity auction.

We were hoping to hear about some of the changes to the recently acquired GenOn portfolio.

You're suggesting that we are going to hear about those changes or any updates in June, which sounds like after the auction.

Should we imply that based on some of the CapEx that you might be talking about is contingent on clearing in this auction?

And also if you are willing at all to say what are your expectations for the auction, that would be great.

Angie, I can't imagine that we're going to answer that question in any substantive way.

Does anybody have anything they have to add to what Angie just said?

This is Chris.

I think in the last earnings call Mauricio mentioned our outlook on the PJM auction, I think we covered that already.

I think the one piece I'll throw out there is that with FERC just doing the MOPR ruling last week, I think that that was part of our calculations.

We are disappointed about it but it was within our expectations.

So I don't think it changes what we said in the last earnings call.

That's all I've got.

Angie, you want to ask a different question?

But is it fair to assume that you are waiting with any updates on the coal CapEx or convergence of coal plants until that auction happens?

Angie, I can swear that that question is identical to the question that you just asked 30 seconds before.

This isn't the Austin Powers movie.

If you ask the same question three times we're not going to answer it either the first, second, or third time that you ask it.

Is there a different question, Angie, that you'd like to ask?

How about maybe you mention the potential M&A target?

That's really a good path to go down.

What's your question there?

Can you tell us, for instance, which region you would be focused on, roughly speaking?

Is it more of Texas, is it more Northeast, is it PJM?

It's interesting, Angie, that you ask that question because I would say that compared to the past, in the ten years I have been here before, where we used to talk about the fact that we would like a bigger-based portfolio in PJM.

And there was the time when we talked about how we really needed a load-following asset down in South-Central.

Pretty much in terms of the real needs of the generation portfolio we like where we are.

We bounced away from Texas a little bit.

Obviously you can tell in the first quarter of this year that helped us already.

To us, as we consider things, it's very much look for value where there is value to be obtained.

We have no intrinsic desire to expand our geographic footprint from where we are.

But if we could do that at extraordinary value we would consider that, as well.

So I think there is nothing that you need to be concerned about that we're going reach out to and pay a big number for and then try and justify it on the grounds that it was strategic.

Okay.

Thanks for that.

I thought that was an answer.

Did you not like that answer?

(laughter)

Anyway, really appreciate it.

The disappointment in your voice is palpable, Angie.

So I am not sure that that's the best way to end the quarterly earnings call.

But, given that, we have to hold you to the two questions protocol, Steve, operator, I think that's it.

Everyone, we very much appreciate you taking the time to be on this call.

And as I've mentioned at least a couple times now, we don't know exactly the form that we're going to be speaking to you but we expect to speak to you on at least two topics before the end of the second quarter, which we define as the last day in June.

So thank you very much and have a good day.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.