NRG Energy Inc (NRG) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second-quarter 2013 NRG Energy Incorporated earnings conference call.

My name is Katina and I'll be your coordinator for today.

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

We will facilitate a question and answer session towards the end of the presentation.

(Operator Instructions)

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

I would now like to turn the presentation over to your host for today, Mr. Chad Plotkin, Vice President Investor Relations.

Please proceed.

Thank you, Katina, and good morning everyone.

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

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

You can access the call, associated presentation material, as well as a 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 limit yourself to only one question with just one follow-up.

In addition, as this is the earnings call for NRG Energy, any statements made on this call that may pertain to NRG Yield will be provided from NRG's perspective.

Before we begin, I'd 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 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 Friday, August 9, 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 a complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures, and a quantitative reconciliation of those figures, please refer to today's' press release and this presentation.

Lastly, please note that both David Crane and Kirk Andrews are on the road today, so please bear with us in case we experience any technical issues during this call.

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

Thank you, Chad.

Good morning everyone.

Today I'm joined on this call as usual by Mauricio Gutierrez, our Chief Operating Officer, and Kirk Andrews, our Chief Financial Officer.

And both of them will be giving part of the presentation.

We're also joined in Princeton by Chris Moser, who runs our Commercial Operations, Elizabeth Killinger, who is responsible for our Texas retail business, and Jim Steffes, who runs our Northeast Retail business, and Chris, Elizabeth, and Jim will all be available to answer any specific questions that you have about their areas of our Business.

And so let me get right into the topic at hand.

If you're following along with the presentation, this would be on Slide 3. Based on our financial performance through the first six months of 2013, and the mild weather and subdued wholesale prices that have gripped Texas in the critical weeks of mid-summer that have ensued since the end of the second quarter, we are compelled today to reduce our financial guidance for full-year 2013 adjusted EBITDA by 3% at the bottom end of the range and 4% at the top end of the range.

This is, of course, very disappointing to me because it raises the real possibility that for the first time since we started giving guidance as a range several years ago, we may end the year below the range of our original expectation.

Before explaining the negative drivers which have gotten us to this point, let me emphasize on behalf of all of NRG Management that finishing the year within our original guidance range is a streak that none of us want to see broken, and I want to assure you we are doing everything we can prudently do between now and the end of the year to get our financial performance back within the original range.

In fact, this is a uniquely unusual earnings call for me.

In fact, it's my 39th quarterly earnings call report as CEO of NRG.

Twice before in the second quarter 2005 and the third quarter of 2011 to be specific, we have announced financial results which disappointed me, and in both cases the poor financial results were driven by mediocre-to-bad operational performance.

For this, the second quarter of 2013, the situation is different.

While our financial performance has not met expectations, either yours or mine, to be candid, I can't say that overall I am displeased with the Company's operational performance.

Certainly, there have been specific operational disappointments that have contributed to our year-to-date shortfalls.

The extended forced outage at STP 2 this spring, the losses attributed to our commercial optimization activities discussed last quarter, the projected delay in the completion of one of our construction projects.

But overall, I'm quite proud of our people's performance across the entirety of the Company in the first six months of 2013.

In terms of what we can control, we have had many more wins so far this year than we have had losses.

The main culprit driving 2013's soft year-to-date financial results has been a factor beyond our control, which obviously is the Texas summer weather.

The weather, which until this week at least, had been unusually mild by Texas standard, has impacted our volumetric sales of both our Wholesale and Retail businesses, leading to disappointing overall results year to date.

Plus, the mild weather effectively has eliminated the short-term risk of scarcity pricing, which has in turn led to a decline in the forward curve, which obviously has had a negative impact on our assessment of the earnings power of our Texas fleet over the balance of the year.

Just this week we finally did get some heat in Texas.

In fact, Wednesday was the third highest load demand day on record in Texas, matched only by a few days in August of 2011.

But one day does not a season make and heat will have to occur on a more consistent basis if we are to see more goals in the market driving up the prices in the forward market.

I will say this, though, the conditions that we experienced this week, high load and low wholesale prices, explains why we are pleased to have a robust Wholesale business in Texas.

I'm sorry, a robust Retail business in Texas.

Anyway, this is enough for me, at least, about the weather.

It is what it is and we are doing our best to achieve the best financial performance possible in the current commodity price environment.

If there is any silver lining in this situation, it is that in 2014 we will be in a much better position to reap the benefit of our long-term strategic plan to diversify our financial performance away from 100% dependence on cyclical commodity risk into a broader and more resilient set of revenue streams, and cost savings on operational improvements.

The EBITDA and free cash flow synergies expected to arise out of the GenOn transaction will be realized on a full-year basis in 2014.

The timely completion during 2013 of virtually the entirety of our current construction program, including both the conventional and the large scale solar projects, means that our new builds will contribute in 2014 on a full-year basis as well.

The additional marketing and customer acquisition spend in the retail end of our Business in 2013 is resulting in an expanded retail customer base that should benefit us financially in 2014 and beyond.

These actions and more I believe enhance NRG's competitive positioning and our earnings power going forward.

So turning to Slide 4, a slide you have come to be familiar with, I want to report on the current status of the GenOn integration, which currently is in full tilt.

Of course, you're very focused on the financial impact of the integration, which I am reporting on here, and I'm pleased to report in that regard that we have identified and secured another $50 million of annual cost synergies, raising that number from $200 million to $215 million per year.

And as with all the cost synergies arising out of the GenOn transaction, they will be you achieved and have a full-year effect by January 1, 2014.

The integration numbers are important.

They're gratifying in that they have exceeded all our expectations financially.

I want to make sure our focus on them did not obscure the fact that achieving this result represents an enormous amount of hard work, very capably done by professionals throughout our organizations, including all aspects of our plant operations group as well as by our IT group, HR, accounting, tax, treasury, supply chain management, and other key functional and corporate support teams.

It also obscures the fact that our second twin objective for our GenOn integration beyond achieving cost savings was to create an operation that was not only bigger but also better in every aspect of our processes, practices, and technologies.

I want to let you know that we are well on our way to achieving this twin objective.

I want to thank Anne Cleary, our Chief Integration Officer, and the hundreds of employees that have focused and continued to do so diligently, executing the integration activities and synergy recognition that we have committed to you.

We are on track to finish the integration strong in 2013, so as I said before, we can recognize the fruits of our labor in 2014 and beyond.

Another area of intense focus for our Company in 2013, the completion of our $5 billion construction program is reported on Slide 5. As you can readily see from the abundance of green checks and green circles on the Slide, we are almost done and the record of an on time, on budget completion achieved by our EPC group led by [Ben Trapol], is exemplary.

Almost all of our new units, whether fossil or conventional are now in commercial operation and operating well in the early going.

Even our two giant solar PV projects, CVSR and Agua Caliente, which are listed here as still in construction, are for the most part actually in commercial operations, since those two plants are divided into blocks that are handed over into commercial operation when they are ready.

Indeed, over 265 megawatts of the aggregate 398 megawatts of those two units are already fully operational.

Our one project that has slid into sec of this completion date is Ivanpah, where two of the three units have slid by roughly one quarter into the fourth quarter of this year.

At this point, all three units of Ivanpah are at or very near physically complete and the multistage commissioning process has begun.

Together with our partners and our contractors we are moving through the commissioning process deliberately and thoroughly to ensure that it is done right.

We are increasingly confident that this ground-breaking solar thermal project is going to be a big success when it achieves commercial operation in the fourth quarter of 2013.

Before I conclude, I want to touch upon the topic of NRG Yield, as the importance of NRG Yield and its successful reception by the market is just too important to NRG financially and strategically to be overlooked.

As depicted on Slide 6, NRG Yield significantly enhances our strategic competitiveness in two of our three critical business areas, and within those two areas, NRG Yield benefits both our intrinsic green and brownfield development efforts, and our ability to grow extrinsically by improving our ability to acquire suitable assets at value.

This is a very important development in terms of our growth aspirations for our Renewable business, because at long last there are signs that the big strategic players in our industry are awakening from their long slumber and finally recognizing both the opportunity and the risk to them that solar represents, and some of them are trying to get active with their lower cost of capital in acquiring contractive solar assets.

NRG Yield goes a long way to reducing or eliminating our cost of capital disadvantaged to them, making it possible for us to continue to win projects and opportunities based on our greater nimbleness and understanding of the renewable space, and particularly the Solar business.

Actually I'm sure everyone on the call recognizes the importance of NRG Yield to our Renewable business, which has always been a business driven by renewable portfolio standards and long-term off-take agreements with load serving entities.

What is a little bit less obvious is the importance of NRG Yield to our growth aspirations for our conventional generation business.

In the low gas price environment that exists, it's nearly impossible to justify the construction of new capacity on a merchant basis.

As the governors of various states consider how they're going to replace the wave of generation capacity that will be retired over the next few years, as a result of either economic distress or environmental obsolescence, they are increasingly reaching the conclusion that they need to offer some sort of state sponsored long-term off-take agreement, even for conventional new builds.

NRG has the best brownfield sites in the best locations on the grid with the technical expertise and commercial savvy to get these projects built, but what we lacked before NRG Yield was a competitive cost of capital for assets that do not bear commodity price risk and now we have that.

So in summary, if you consider the message contained within my previous three slides, the successful integration of GenOn that has outstripped everyone's financial expectations in terms of synergy capture, a massive construction program that has been close to perfectly executed and is now almost completed, and an effective execution of NRG Yield vehicle IPO that has effectively addressed, or at least mitigated, both our cost of capital issue and our tax benefit optimization issue in respect of our renewable progress, and the progress that's been made by my colleagues at NRG on all these three fronts in the second quarter 2013, hopefully you can understand how my disappointment in our financial performance year to date has been tempered by my gratitude to my colleagues for advancing the longer-term interest of our Company on the three integration, construction, and optimization initiatives described above.

Let me conclude actually on a personal note.

As I alluded to earlier, I'm now approaching the tenth anniversary of my tenure at NRG, which is not particularly significant to any of you, other than it means that the initial sign-on grant with NRG stock options that I received in 2003 expire this year.

As such, I want to alert you that over the next few months in a rare instance when we are not in a closed period for trading purposes, I plan to take steps to convert a modest portion of my overall holdings in NRG stock to other investments, which only will be the second time I have taken such an action in my 10 years at NRG.

Even after that partial divestment, I will hold NRG stock well in excess of 10 times my base salary, which exceeds the six times requirement imposed by the NRG Board of Directors, and I will continue to hold an amount far in excess of the required amount for the full extent of my duration at NRG.

I tell you this now for two reasons.

First, to ensure you that there are no surprises in respect to my personal investment decision making that might raise questions in your mind about my commitment to the success to NRG.

And two, to reassure you that in no way does my partial selldown indicate a pessimistic point of view on my part about the prospects for NRG stock price appreciation.

Notwithstanding the challenges of the present commodity environment, I remain very bullish on NRG's prospects to flourish over the short to medium term.

Given the relative strength of NRG's financial performance, even now, four full years into the commodity price down cycle, I can only imagine how strong we will be when the cycle turns around, as it inevitably will do.

And when it does I expect to be there to benefit from it as a major individual shareholder in NRG.

So now, I'd like to turn it over to Mauricio.

Thank you, David and good morning.

During the second quarter our primary focus was on several key areas.

Optimizing the overall spend of our fleet as far as the operational synergies efforts, continuing to integrate the GenOn assets, and getting the portfolio ready for summer operations.

Importantly, we executed our spring outage plan to ensure reliable summer operations, and our key operational performance metrics improved relative to last year for the combined organization.

Our safety numbers are well within support of performance, but they are not at the level we expect.

We implemented a number of corrective actions during the quarter and are encouraged by the changes we have seen over the last two months.

As David already mentioned, Texas was disappointing so far this summer, both in terms of weather and prices, affecting our Integrated business in Texas.

Given this market dynamic, we're in the midst of implementing changes across the retail organization, such as reducing operating costs and expanding our product offerings.

These actions are intended to improve financial performance without compromising the long-term value of our franchise.

On the positive side, I would like to point out that our financial performance benefited this quarter by the improved regional diversification that we have as a result of the GenOn combination.

Finally, we continue to make significant progress with our projects under construction.

We brought Marsh Landing and the Dover gas conversion projects online in May, the Parish Peaker in June, and the El Segundo Energy Center on August 1. This is a great achievement, and I want to join David in recognizing the entire engineering, procurement, and construction organization for delivering these four projects on time.

We continue to focus on the rest of our utility scale solar projects with a particular emphasis on Ivanpah, where full commissioning is under way.

There have been delays in two of the three units.

However, we expect to reach commercial operation by the fourth quarter.

Now, moving on to our operational metrics on Slide 9. Starting with safety.

99 out of 118 facilities finished the quarter without a single reportable injuring.

These numbers are solid, but given the increase in recordables we're seeing from last year, we have implemented a number of initiatives, particularly in the retail and service groups, where some of our employees are not accustomed to the rigorous safety culture typical in industrial environments.

As you can see, our total generation was higher by 2.5% for the quarter, driven primarily by a reversal in coal to gas switching and improved coal availability.

Coal and nuclear generation were up 20% for the quarter with gas down 35%.

Looking around the country, on a regional basis, Texas and south central were slightly lower, driven by lower gas generation.

Northeastern California was slightly higher given higher loads and power prices.

Our availability and reliability metrics are up from last year for the combined portfolio.

Parish led the quarter with over 90% availability, and we successfully executed our spring outage plan with 127 planned outages and more than 2,800 outage days for the year.

Identifying additional operational synergies continues to be a priority.

With 80 plants and more than 350 units, this provides an opportunity to reduce and optimize maintenance dollars spend on our portfolio.

These will continue to be a priority for the operations group as we identify additional synergies.

Moving on to Slide 10.

Our Retail business performed within our revised expectations for the second quarter, where we deliver $140 million in adjusted EBITDA.

As we discussed on the June 24 investor call, the combination of milder weather, higher supply costs, and discipline we're taking in our commercial and industrial business, largely led to the year-over-year reduction in financial performance.

However, as I mentioned earlier, we continue to invest and manage the business in order to optimize near-term earnings while protecting long-term value.

To that end, we increased customer count for the tenth consecutive quarter, now up 44,000 customers for the year.

This demonstrates the continued momentum we have built in attracting and retaining customers.

And while we continue to invest in new markets, new products, and new sales channels to drive growth in customer count, we are applying the same discipline underpinning the operational synergies across the Wholesale business.

As a result, we are recalibrating our retail cost structure to respond to changing market dynamics.

Year-to-date results indicate that our operations and maintenance costs per customer is down 4% year over year.

Now on a regional basis, we continue to organically grow customer count in Texas as a result of effective execution and expansion of innovative products and services.

We have seen retention rates improve by 10% to 20% for customers enrolled in these products.

However, total volumes were down close to 7% for the quarter.

They were driven by weather and discipline on pricing and margins in the commercial and industrial segments.

In the Northeast, while margins have been under pressure, we were able to increase our total revenues, grow customer counts, and nearly double retail volumes all across the region.

Earnings for the quarter were disappointing relative to last year.

But we are absolutely committed to executing for the long term and are pleased to remain the largest retailer in Texas and are excited about our growing Northeast presence.

Turning to our market update on Slide 11.

Summer weather has not materialized as we expected, particularly in Texas, where cooling degree days are down 12% through July compared to last year.

As you know, we have maintained a more open gas portfolio to benefit from scarcity pricing given the tighter fundamentals compared to last year.

Mild weather and higher wind generation depressed heat rates during the quarter and these trends have extended to the summer months where we saw a complete collapse in prices at the end of June.

On the upper left hand chart we are have provided the peak pricing history for the summer months.

And as you can see, August is down more than 50%, erasing any imbedded scarcity premiums.

This short-term dynamic has put some pressure on the forward markets beyond 2013, and have increased the gap between the market and the required margin to justify new generation.

We are convinced of the strong fundamentals in Texas, but these short-term dynamics may create the lack of urgency for the additional market reforms necessary to ensure the adequate level of resources needed to meet their cost reliability target.

Even though Texas has been disappointing to us, the regional diversification we have now after the GenOn transaction has proven be very beneficial.

Outside of our cost, and particularly in the Northeast and California, prices were robust in the second quarter, driven by higher gas prices, unit retirements, and higher loads.

More recently, in July, we experienced a heat wave across the Northeast.

New York actually set a new all time record peak load in July 19.

We saw scarcity prices across all three Northeast pools, reflecting some of the price formation changes implemented this summer.

In particular, I want to call out the positive changes in New York where emergency demand response was setting price during intervals of reserve shortages and extending the current pricing to the market.

In PJM we saw a similar situation in the Atsi zone, where demand response set prices close to $1,800 per megawatt for a couple of hours.

We are encouraged by these changes and we will continue to work with all three pools to ensure the competitive pricing notes continue to improve.

I want to make sure to recognize the efforts of the entire integration team.

Through their ongoing efforts, they have integrated over 14 gigawatts across all three Northeast pools to our commercial and risk management systems.

I am very pleased to say that all systems, both the operations and commercial groups, worked flawlessly during this heat wave.

Our hedge positions are represented on Slide 12.

We continue to layer in additional hedges in 2014 and 2015 against our coal and nuclear assets.

We are significantly hedged for the balance of the year, and are now close to 75% hedged on power and slightly higher on coal for 2014.

We're constantly evaluating the benefits of being opportunistic in hedging in the wholesale market, or crossing megawatts with our retail companies.

Different than other merchant generators that rely purely on wholesale markets, we believe these options will become more valuable over time as financial players leave this space given more stringent financial reforms.

Finally, in California, our reorganization team successfully extended the contract with PG&E for all three units at the [pilfer] facility for one more year.

Consistent with our hedging philosophy over the past two years, we made a conscious decision to leave a significant part of our Texas gas portfolio open for the summer months.

This was driven by our fundamental view, given the regulatory changes, the new price cuts, and the tighter reserve margins, as I discussed in our first quarter call.

In our view, summer prices in Texas have not reflected the potential upside imbedded in the market.

The key take-away is that we will continue to position our portfolio to be consistent with our fundamental view, while taking into consideration operational risk and the potential upside expected in our different markets.

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

Thanks, Mauricio.

With the financial summary on Slide 14, NRG is reporting second-quarter 2013 adjusted EBITDA of $594 million, with $393 million from wholesale, $140 million from retail, and $61 million from our new operating segment, NRG Yield.

Through the first half of the year, adjusted EBITDA totaled $967 million, with $629 million from wholesale, $243 million from retail, and $95 million from NRG Yield.

Turning to the quarter's highlights.

With the successful closing of the IPO behind us, and based on yesterday's closing price, NRG Yield now trades at an implied multiple of 12.8 times 2014 adjusted EBITDA, providing a market based measure of the value of our growing contracted renewable, conventional, and thermal portfolios.

In addition, as a result of the IPO, NRG received net proceeds of approximately $462 million, enhancing liquidity and increasing capital available for allocation.

On the financing front, NRG took advantage of favorable market conditions with a well-timed prepricing and upsizing of our term loan B, through which, we not only reduced the spread on the loan from 2.5% to 2%, but raised new capital at this reduced rate by increasing the loan amount by $450 million.

During the quarter we also reduced the cost of our revolving credit facility by 50 basis points, extended its maturity by you two years to 2018, and further enhanced NRG's liquidity by upsizing the facility by $200 million to $2.5 billion.

These transactions helped drive balance sheet efficiencies to $142 million annually, which significantly exceeds our original target.

Just this week on August 7, we successfully closed the acquisition of the 390-megawatt Gregory cogeneration plant for $244 million.

And used approximately $120 million of the proceeds from the upsized term loan I just mentioned to partially fund the transaction.

In addition, closed on three solar projects, totaling 66 megawatts, High Desert and Kansas South, both of which are currently operating, and an advanced development project on the Island of Guam.

Turning to 2013 capital allocation.

In addition to expanding capital through the NRG Yield IPO, during the second quarter NRG also exceeded its previously announced $1 billion deleveraging plan by retiring $575 million of GenOn senior notes using excess GenOn cash on hand.

When we take into account the $330 million balance of the term loan B upsize, which served to increase cash at the NRG level, this transaction resulted in a $245 million reduction in overall debt, allowing us to significantly exceed our original $1 billion deleverring target.

Finally, the trading restrictions resulting from the ongoing NRG Yield IPO process significantly limited opportunities for share repurchases during the quarter, and we intend to complete the remaining $175 million of our share repurchase program by the end of 2013.

Turning to the guidance overview on Slide 15.

Based on year-to-date results and declines in forward prices over the balance of the year, we are both revising downward and narrowing the ranges of our adjusted EBITDA and free cash flow before growth investments guidance for 2013.

This reduction primarily arises out of the volumetric sales shortfall caused by the unseasonably mild summer weather in Texas as well as a contraction in forward prices over the balance of the year.

Our revised guidance for 2013 adjusted EBITDA of $2.55 billion to $2.7 billion reflects a $65 million reduction versus previous guidance, and a $50 million narrowing of the range.

We are also narrowing our guidance for 2013 free cash flow before growth by reducing the upper end of the previous range by $50 million, and maintaining the lower end, due to a reduction in maintenance CapEx and assuming collateral posted is either returned, replaced by LCs, or covered by our $900 million liquidity reserve.

2014, which benefits from increased EBITDA contributions from our contracted assets, as well as an increase in expected cost synergies, we are reaffirming our guidance ranges for both adjusted EBITDA and free cash flow before growth.

Specifically, our adjusted EBITDA guidance ranges remain at $2.85 billion to $3.05 billion, and our free cash flow before growth ranges remain at $1.1 billion to $1.3 billion.

Finally, with the successful completion of the NRG Yield IPO, we are modifying the components of our adjusted EBITDA guidance ranges, which will now include wholesale, retail, and NRG Yield.

NRG adjusted EBITDA guidance includes the seven utility scale solar facilities and two distributed solar portfolios previously part of solar guidance, as well as the expected adjusted EBITDA from our South Trent wind facility, thermal, and our Gen-Con and Marsh Landing assets, all of which were previously part of wholesale guidance.

[Second] adjusted EBITDA contribution from the remaining utility scale solar projects, which were also part of our previous solar guidance, and now comprise the five solar assets covered in the Right of First Offer agreement with NRG Yield, is now part of wholesale EBITDA guidance.

Turning to Slide 16, with the NRG Yield IPO now completed, we have put in place the critical final step in enabling a clearer understanding of the distinct components of NRG's value, our Wholesale, Retail business, and our contracted and growing generation platform, now optimized through the creation of NRG Yield.

While there are a number of valuation methodologies and metrics used by the financial community in assessing NRG's value, in order to summarize the impact of NRG Yield, we have demonstrated this in the context of an EBITDA multiple.

On the left side of Slide 16, starting with the current NRG market capitalization of approximately $8.7 billion based on yesterday's closing price.

And deducting the market value of NRG's 65.5% stake in NRG Yield, the implied residual NRG equity market value is $7.5 billion.

Next we add NRG's preferred stock and proportional debt balance and subtract NRG Yield debt.

Finally by subtracting our June 30 pro forma cash balance we can derive the implied market residual enterprise value for NRG net of NRG Yield.

At the bottom of the page we've expressed this residual enterprise value as a multiple of residual adjusted EBITDA, based on the midpoint of our 2014 guidance range.

The market 2014 residual adjusted EBITDA multiple is approximately 7.7 times.

On the right side of the slide we have provided the calculation of the 2014 residual adjusted EBITDA range by deducting the guidance for NRG Yield, as well as deducting the portion of consolidated EBITDA associated with other noncontrolling interests.

Consistent with the enhanced disclosures for adjusted EBITDA and debt we initiated at the beginning of the year, we will continue to provide the details in deriving proportional EBITDA and debt in the appendix to our quarterly disclosures.

Finally, as some you may have already observed, as the residual adjusted EBITDA numbers still contain the contribution of the ROFO assets, the implied multiple on the left hand side is reflective of a an interim step that we've also provided for your reference to the adjusted EBITDA contribution from these ROFO assets into 2014.

Importantly, this not only underscores the adjusted EBITDA from these assets is nearly equivalent to the current NRG Yield adjusted EBITDA, but is valued at the same multiple for NRG Yield; this further clarifies the implied trading multiple of our competitive businesses, which based on this approach currently trade at an implied 2014 adjusted EBITDA multiple of just over 7 times.

Turning briefly to corporate liquidity on Slide 17.

NRG's liquidity adjusted for the recent NRG Yield IPO proceeds, and the cash paid for the acquisition of the Gregory cogeneration plant since the quarter end, remains strong with a balance of approximately $3 billion.

The right side of the slide provides year-to-date sources and uses, which comprise this change in liquidity since year end and include the benefit of our now expanded revolver.

Turning to Slide 18.

I'd like to review NRG's common dividend in the context of the NRG Yield IPO.

As you may recall, NRG's growing portfolio of contracted assets forms the foundation supporting our common stock dividend.

As a result of the NRG Yield IPO, about 50% of our contracted assets are now held by NRG Yield.

And about 50% -- or excuse me, and about 35% of the cash distributions from those assets now support the NRG Yield dividend to the public shareholders, which in the aggregate, totals approximately $27 million at the current rate.

NRG retains a 65.5% stake in the contracted cash flows from the NRG Yield assets, which when combined with the growing distributions from the remaining contracted ROFO assets continues to provide a solid basis of support for the NRG dividend.

Finally, turning to Slide 19, I'd like to provide a brief update on our year-to-date capital allocation progress, which during the second quarter represents a balance between continuing value-enhancing investment and expanding our overall base of capital for allocation.

During the second quarter, we acquired additional contracted solar assets that were included in the Right of First Offer agreement for NRG Yield, as well as exceeded our delevering goals by redeeming the GenOn 2014 notes.

In addition, we closed on the acquisition of Gregory, which as I mentioned we included in our prior capital allocation update.

However, by utilizing the $120 million of the proceeds from the low cost expansion of our term loan B, we reduced the capital allocation requirement for this acquisition from $244 million to $124 million.

The $462 million in net proceeds from NRG Yield IPO, combined with the increased free cash flow guidance we announced in late June as a part of the asset optimization update, served to expand the overall base of capital for allocation.

As a result, excess cash for capital allocation now stands between $1.03 billion and $1.18 billion for 2013.

As $130 million of this consolidated excess cash now resides at the NRG Yield level, we've broken this out separately on the chart, leading to approximately $1 billion in excess cash through year end at the NRG level.

We continue to actively evaluate opportunities for accretive capital allocation across all categories as the remainder of the year unfolds, including the possibility of enhanced or different allocations should conditions evolve.

We will provide an update on our progress, including progress on the deployment of the remaining $175 million in share repurchases on our next quarterly call.

With that, I'll turn it back to David for his closing remarks.

Thank you, Kirk.

And operator, Katina, I think we should turn straight to questions.

I think we have about 15 minutes for questions.

So we're happy to answer any questions that anyone has.

(Operator Instructions)

Your first question comes from the line of Jon Cohen, representing ISI.

Please proceed.

Thank you.

Good morning, guys.

Good morning.

I'm going to let somebody else ask about capital allocation, but on NRG Yield, how are you thinking about the pace of dropdowns from NRG into NRG Yield?

Will that be done sort of with an eye toward managing toward that 10% to 15% distribution growth or some other metric?

And the second question is how will those be valued?

Is it going to be on some premium to book value or some discount to where NRG Yield is trading?

Well, Jon, I think from NRG parent's perspective, we want to do it in sort of a measured pace, based on the assets that are part of the ROFO perspective, that are in the set of ROFO assets.

I think the main thing that could sort of change -- we talked about maintaining a 10% to 15% growth rate over like a five year period, which was something that we thought we could do with the assets that are in their ROFO set.

If the amount of assets that we can see that we either develop intrinsically, we have high hopes for a lot of our brownfield development projects, as I talked about in my comments.

Or if we were to get appropriate assets through acquisition, then I think we would accelerate the pace or try and make the dropdowns when they occur bigger.

But it's very early days yet.

So I would say that nothing's really changed from that relative to when we were on the road a few weeks ago on behalf of NRG Yield.

In terms of the valuation, speaking from NRG's perspective, obviously we would like to sell the assets to NRG Yield at a price that maximizes value to NRG.

But NRG Yield and its independent directors I think will probably want to follow the normal approach of getting independent valuations and making sure that they're acquiring assets that are not only appropriate, but assets that they can acquire in terms of returns that safely achieve their weighted average cost of capital.

And the NRG Yield Board of Directors has had one meeting, an organizational meeting, so I think there's a fair amount of work that needs to be done there to settle exactly.

I'm not sure that even if this were an NRG Yield call, which it's not, I'm not sure I would be able to be much more specific than to say something like that at this point.

Kirk, is there anything that you want to add on behalf of NRG?

No, I think you've covered it, David.

But certainly the point to underscore is that the ROFO assets in particular, now that we've provided you some additional detail, Jon, around those, gives us a lot of confidence in terms of the tangible pipeline to drive that growth rate that you mentioned.

Looking at the other opportunities David had mentioned, that more than anything will drive the pace in terms of delivering all that.

And from a valuation standpoint, I think that's also a function of course of the independent directors, I think as David may have mentioned, and I would expect on larger dropdowns that would also be informed, the degree to which the independent directors of NRG Yield determine to access third-party advisor on the value of those assets.

Great.

One follow-up for you, Kirk.

On your Page 16 analysis here, if you were to take the -- where you show NYLD proportional debt, if you were to take that number including all of the current ROFO assets, I realize you're on the road so you might not have it, but how much would that go up and the NRG debt go down?

And you're correct, I can't give you that number in detail off the top of my head, and don't have it directly in front of me.

But the order of magnitude of those particular assets from a leverage perspective should be directionally towards that leverage, if not a little higher than that, just given the preponderance of those particular assets are more along the lines of the DOE loan guarantee, which tend to be a little bit larger in terms of the leverage capacity.

Okay.

Great.

That cash is just as at June 30 does not include cash flow for the rest of the or for '14, correct?

That's correct.

That's as of June 30.

But importantly, if you'll notice included because we're accounting for NRG Yield on a pro forma basis which obviously didn't close as of June 30, but on this page looking to depict that, that cash balance is both pro forma for the Gregory acquisition as well as pro forma for the cash from NRG Yield.

Okay, great.

Thank you very much.

Your next question comes from the line of Keith Stanley representing Deutsche Bank.

Please proceed.

Hi, good morning.

Can you comment just a little more on ERCOT pricing this summer to date and what you see as driving that, looking particularly at this week for example when peak demand was actually very high but the price stayed fairly low.

And then how does this make you think about hedging heat rates differently, if at all, for the outer years, just given the experience of the past two years where we see a pretty big drop in the summer period?

Well, Keith, let me take the first cut at that, then I'm going to turn it to Mauricio or Chris, particularly to answer the hedging question or to not answer the question as they see fit.

I think what we saw this week is really a combination of three things.

Because the level of -- you're right, the level of demand we saw on Wednesday, when we reached that level of demand back in 2011, there was scarcity pricing.

And so why did it not happen this week?

I would say three things.

Number one is that a lot of times when it's very, very hot, the wind situation is dead calm.

But in this situation, there's was ample wind generation this week in Texas.

So whether that's a new weather phenomenon or not, I don't know.

Maybe Mauricio has a point of view.

That's one of the reasons, that the wind was there.

I think the second thing is is that typically what happens, what happened to us and what happens in market in August of 2011 is sustained periods of heat, not only does it build up demand on the demand side, but some of the power plants that are used to only operating a few days out of the year, they wear down and they break, and so you have more outages than you normally do.

That clearly hurt us and hurt the market in the second half of August in 2011.

But the supply side was fully there this year because it had not been tested so far this summer.

And then the third thing is just psychological element, again Mauricio and Chris know this better than I, there's just no fear in the market of running out of supply because things have been so calm so far.

So Mauricio or Chris, do you want to add anything to that in terms of this week's subdued prices?

And then also talk, say whatever you're willing to say about hedging philosophy?

Thanks, David.

This is Chris.

Keith, when we're looking back at the Wednesday number which was around a 67.2 peak or so, there was almost 3,700 megawatts on average of wind, and that's pretty far in excess of the expected load carrying capability of the wind, even under the new construct that they're talking about moving to, moving in from the 8.7 to the 14, and the 32.

So there was clearly, as David pointed out, a lot more wind going on out there as well.

To his point as well, the Gen stack was very healthy across the fleet, ours and everyone else's looked like it too.

So extra wind, very healthy generation, and then the load at 67.2 is a pretty good load, but it's not near what we saw in 2011 or even keep in mind, the forecast when the CERA came out for this summer was for 68.4.

So you're 1,200 megawatts short of where they thought the load was going to be as well.

Obviously, as guys very interested from both the wholesale and the retail side on what the load's doing, we're digging into a lot of the moving pieces on the load side.

I don't have a lot of answers yet on that piece.

But I think wind, I think a very healthy Gen stack, and I think the fact that frankly it just wasn't as hot as 2011.

The numbers I have give or take for the 7th was a Dallas high of 105 and a Houston high of 100.

The numbers we were seeing in '11 were 109s and 110s, and 104s, and 103s in Houston.

It's just a step change difference in terms of the temperatures.

And Keith, I guess just a word on the hedging strategy.

I mean, I want to just make sure that I point out that for the summer, we were significantly hedged, our coal portfolio.

And we have told you over the past couple of quarters that we will have a long biased position around our gas portfolio, given the tight fundamentals that we see in the market.

Then certainly I laid out the value proposition for this summer, given the regulatory changes that we have seen and the tighter reserve margins that we were expecting, which hasn't played out yet.

Going forward, we're going to continue to maintain the same discipline on hedging the gas portfolio.

Keep in mind, that we want to have a -- we will be consistent with our fundamental view and we will continue to have a long biased position, so long we believe that the Texas has strong fundamentals, which we believe they do.

Thank you.

That's very helpful.

If I could just do one very quick follow-up.

Just on the quarter, what was the driver of the $19 million in positive EBITDA that corporate segment?

I think that's usually a negative number.

And the big working capital and collateral deposit drags year to date on cash flows, should we expect that to reverse over the balance of the year?

Keith, this is Kirk.

To address that question, on the collateral side, some portion of the collateral that's posted, yes, is for positions that we expect to roll off of the balance of the year.

But with the volatility and the movements that we see in the commodities markets, obviously the additional collateral posting is obviously increasingly difficult to predict.

But we expect a good portion of that to come back and another portion of that to be supportable through the posting of LCs if deemed necessary.

That's also part of the reason we have the $900 million liquidity reserve.

As to the change on the corporate side, I actually don't have that particular number in front of me at present, but I think we can follow up with you on that one offline.

Okay.

Thank you.

Your next question comes from the line of Angie Storozynski representing Macquarie.

Please proceed.

Thank you.

Given what's happening with prices in Texas and we saw a memo today filed by one of the commissioners, Commissioner Nelson, do you feel like a capacity market in Texas is now more likely, given how disappointing prices have been, even though we have had an increase in price gaps and Commissioner Nelson is clearly suggesting that a second look needs to be taken at capacity market.

What's your view?

Angie, I mean, it's hard for us to obviously determine any sort of political regulatory process and how influenced they are by in terms of market designed by short-term movements.

I would say for the most part I wouldn't say that sort of a weather-driven situation in Texas is going to change the fundamental attitudes for or against.

I would say the most important thing is as the forward price in Texas moves away from replacement price, the chance that a bunch of people start to build power plants without a change in the market design becomes more remote.

And so I think for the people charged with maintaining the stability of the system and keeping the lights on, I think that it may incrementally increase their desire to make a change.

But pretty indirect connection.

Mauricio, I don't know if you have a different point of view about it than that, but --

Just to -- I guess to complement or to add, the memo filed by Chairman Nelson, I think they're looking at this the right way, which is first evaluate, and whether they need a mandated reserve margin.

Second, looking at what is the mechanism to achieve that target reserve margin.

And what is the most effective mechanism of doing that.

I think there's been multiple parties that have been [pro A] capacity market to be the more cost effective way of doing that.

I will tell you, Angie, that I think a lot of that, and the probability whether or not a capacity is more likely, will be determined once the next Commissioner gets appointed.

Given that the Texas legislative has ended their session, we expect somebody to be named within the next couple of weeks.

So I think that will resume the talks around resource adequacy for Texas on the long term.

Okay.

And completely separately, you mentioned that a delay in operations of one of the assets has had an effect on your annual guidance.

Are we talking Ivanpah or El Segundo?

No, we're talking Ivanpah.

Okay.

Thank you.

Thank you, Angie.

Your next question comes from the line of Stephen Byrd, representing Morgan Stanley.

Please proceed.

Good morning.

Good morning, Stephen.

David, wanted to go back to your opening comments on NRG Yield.

You mentioned in a low gas price environment that long-term contracted assets are the key to replacement capacity.

Can you talk a little bit further about that in terms of in the competitive markets that you're in, do you see further trends towards long-term contracted assets, or could you just sort of expand on that point a bit further?

What I would say about that, Stephen, is if we look around our system, clearly the trends started a few years ago, the GenConn assets that we have in Connecticut were driven by a process, El Segundo, Marsh Landing in California.

But if you look around our system, in California and New York state and Connecticut and Maryland, they're either RFPs either by state entities or sponsored by the state for 10 years plus, and a lot of it is specifically targeted as replacement capacity.

But to be frank, my point of view, our Company's point of view, is we don't really see conventional generation being a growth business in response to sort of tepid demand growth in a post-industrial society.

It's all about replacement power.

And so each situation is different.

So California needs to replace San Onofre.

New York, depending on what they decide about Indian Point may need to replace that power.

In each of these cases, we have great sites basically in the load pockets where they're looking for new capacity.

So we hope to respond to those RFPs with our own brownfield developments, and if -- I think the way we will price those would be that typically we're going to price NRG's cost of capital sort of over the entire life of the asset, but certainly through the construction period, which is relatively the higher risk portion of it.

But now that we have at least a sense from NRG's perspective what NRG Yield's cost of capital should be, it may cause us to sharpen the pencil a little bit on what we expect the cost of capital would be during the period of the PPA.

Does that answer your question?

That does.

That's very helpful.

And then I just wanted to talk broadly about kind of related point on capital allocation.

You'll have quite a bit of excess cash and we're seeing headwinds in a lot of these competitive markets.

As you look at the growth prospects out there relative to your own stock, can you just comment on a broad level sort of the relative attractiveness of those two options?

Well, I'm not sure I'm following what your two options are.

You want to rephrase that?

Or else you're going to get some sort of meandering answer from me about both the acquisition environment and capital allocation.

Probably on a Friday in August you have better things to do than listen to me go on for 10 minutes.

So what exactly do you want me to comment on?

Yes, maybe a little more point on it.

Given that it looks pretty challenging in the competitive markets, it would seem to make M&A maybe a little less attractive relative to your own currency, which you laid out in terms of valuation metrics.

As you look at buying assets in the market versus your own stock in this kind of sort of more challenging commodity environment that we're in, does that sort of point you more towards your own stock than it would have maybe six months or a year ago?

Well, okay, I think I got the question now.

What I would say, starting on the capital allocation front and segueing effortlessly and smoothly into an M&A discussion is the approach we've taken in the past, certainly our fire power has been enhanced by the proceeds we got from NRG Yield.

But the fundamental approach we have through the balance sheet management, we've always been fortunate enough to have enough cash flow to apply to debt reduction, we've done share buybacks, but we've also had enough money to take advantage of opportunities in the M&A world.

And I think that that balanced approach is going to continue.

In terms of returning capital to shareholders, our immediate goal as Kirk laid out for everyone was we got to finish our 2013 program.

To us, it's really pointless to sort of think about doing anything beyond that until we finish what we undertook to do earlier in the year.

So that's really what our eyes are set on in terms of from now through the end of the year.

Beyond that, we'll look at the circumstances, discuss it with our Board and maybe have more to say on the November call.

On the M&A front, what I will tell you is you mentioned the challenging M&A environment that's in our merchant space.

As we saw with the GenOn transaction, to me there's more opportunity, the more challenging it is.

As I like to say, Stephen, I'm sure you heard me say this on many occasions before, it's when there's no hope that there's the best opportunity to make acquisitions at a price that makes sense.

So we hope to see opportunity even on the merchant space, precisely because it is a challenging environment to make money, and we've shown that one way you can make money with those type of assets is through consolidation.

But also, it used to be that if there's was a contracted asset out there, we wouldn't even really bother to take a look at it because we knew we weren't going to be able to compete with the Canadians or someone else for those assets.

Now, again, because NRG has the sense of what NRG Yield's cost of capital should be, I think we can be more competitive on that front as well.

But my final point, Stephen, is we're not specifically setting aside money at the NRG level because, while now we're going to go out there and set the world afire with 20 acquisitions in the next two months because you never know.

I mean, it takes a willing seller, willing to accept a reasonable price, and often what we found in my 20 years in this industry is that they're willing sellers, but they don't have a reasonable point of view about what the price should be.

That's a great discussion.

Thanks, David.

Thank you, Stephen.

Your final question will come from the line of Neel Mitra, representing Goldman Sachs.

Please proceed.

Good morning.

Good morning.

I appreciate there's some sensitivity about this, but can you talk about retail margins?

One of the trends we've seen year-to-date is those margins have come in a bit.

Is this an ongoing trend in your view or have we reached a point of stability in terms of the margins?

Neel, are you more focused on Texas, Northeast, or do you want -- I'm sure you're asking about Texas.

So why don't you start with an answer on Texas, and then Jim, if you want to add any comment on the Northeast, go ahead.

That would be great.

Sure, thanks.

Hi, Neel.

So margins in retail as you can tell from the slide Mauricio walked through, they did drop about $3.

And that's really largely due to the higher supply in hedging costs, some of the weather variability, it was expected to be much warmer and then it came in cooler, and then some competition in C&I, as well as some customer mix between both customer segments and markets.

In Texas we saw a little over $1 reduction in unit margins.

And we're actively managing the balance between margin and customer count.

I would say we're in the stability range, but I'll turn it over to Jim to also speak to the Northeast.

Thanks, Elizabeth.

I think the same story is true for the Northeast as was the highlight.

A little bit of emphasis, different emphasis across the different elements but generally speaking competition remains very intense in the C&I space.

We do believe there's, again, pressure because costs have increased.

We're seeing sort of stabilizing in those key numbers.

Got it.

And last question from me.

Another dynamic we've seen is basis in PJM is compressed here and even inverted relative to Henry Hub.

What does that mean for your PJM fleet, and how do you think about managing that risk?

Mauricio, do you want to answer that, and I think Mauricio when you're done I think we'll just call it a day at that point.

Yes.

Hey, Neel.

Hey.

I guess a couple of things.

One, and I alluded to that on my script.

There has been a reversal of coal to gas switching.

If you look at the gas pricing scenario last year versus this year, there is almost $1.50 to $2 higher, so that basically put our coal facilities in the money.

Prices certainly have come down and basis has contracted across the PJM pool.

We still see premiums on the Eastern side where we have most of our base load portfolio.

With respect to the gas, the gas basis and the potential dynamics to that, we certainly don't expect gas prices to fall back to spring of 2012 levels, but we are seeing a significant bottled gas around the Marcellus Shale.

We presented the economics for new builds.

We looked at the sensitivity of gas, which I think we tried to capture the potential dynamic.

And even with that, we see a significant gap between the current market and the new build economics needed not now, but three, four years down the road, given our capacity option.

So what I would say is we don't expect kind of go back to the coal to gas switching situation that we saw last year, even with this drop in gas prices around the Marcellus Shale.

Thank you guys.

Okay.

We appreciate everyone looking -- joining us on this call, and we look forward to talking to you at or before our next quarterly call.

Thank you, operator.

Thank you, sir.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.