NRG Energy Inc (NRG) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the NRG Energy third-quarter 2014 earnings call.

(Operator Instructions)

As a reminder, today's call is being recorded.

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

Sir, you may begin.

Thank you, Shannon.

Good morning, and welcome to NRG's third-quarter 2014 earnings call.

This morning's call is being broadcast live over the phone and via webcast, which can be located on the investor section of our website at www.NRG.com under presentations and webcasts.

Because this call will be limited to one hour, we ask that you limit yourself to only one question with one follow-up.

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

Please note that today's discussion may contain forward-looking statements, which are based on assumptions that we believe to be reasonable as of this date.

Such statements are subject to risks and uncertainties that could cause actual results to differ materially.

We urge everyone to review the Safe Harbor statement provided in today's presentation as well as the risk factors contained in our SEC filing.

We undertake no obligation to update the statements as a result of future events, except as required by law.

During this morning's call, we will also refer to both GAAP and non-GAAP financial measures of the Company's operating and financial results.

For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to today's press release and this presentation.

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

Thank you, Chad.

And good morning, everyone, and thank you for joining us on this, our last earnings call of 2014.

As always, joining me today are Kirk Andrews, our Chief Financial Officer; and Mauricio Gutierrez, our Chief Operating Officer; and they'll both be giving part of this presentation.

In addition to Kirk and Mauricio, Chris Moser, who runs our commercial operations, Elizabeth Killinger, who's Head of Retail are available for questions.

And lastly, and making his first but hopefully not his last appearance on the quarterly earnings call, is Kelcy Pegler Jr, who runs NRG Home Solar.

He also will be available to answer any questions you may have in his area.

Turning to slide 3. On our last earnings call in early August, we noted that through the first part of the summer there had been nothing in the way of extreme heat in any of our core markets.

As a result, there had been no scarcity pricing of the type that our wholesale generation depends upon.

Scarcity pricing is particularly important in an energy-only market like ERCOT, were it is intended to act it is a de facto capacity payment.

With the summer now well past, you know by now that across all of our power markets, the summer never materialized.

The predictable consequences of the moderate summer we report today -- adapting of our third-quarter financial performance and a softening forward curve near-term adversely affecting the outlook for the balance of 2014.

Under these weather circumstances, I think our financial results for the quarter were as good as could be expected.

And while today we are reducing our full-year EBITDA guidance by 5% -- and I take no satisfaction in reducing guidance -- I do take a little comfort from the fact that our full-year guidance, as revised actually, remains at the high end of our original guidance for FY14, even when excluding the impact of the acquisitions we closed earlier in the year.

This is highlighted in the bar chart on the bottom right quadrant of slide 3, in order to permit an apples-to-apples comparison.

What makes me more positive than the revised 2014 guidance are two other factors.

First, notwithstanding the third quarter headwinds associated with the weather, our wholesale generation fleet performed up to our very high expectations on virtually every metric.

And that is a result of the culture of continuous improvement instilled by Mauricio and his operations team.

And secondly, I feel good about our prospects to grow the business in 2015 and beyond across all of our various lines of business.

As such, I'm pleased to announce the 2015 adjusted EBITDA guidance range of $3.2 billion to $3.4 billion.

This guidance, I would note, excludes the impact of our fast-growing Home Solar business, which is, at this point in the evolution of the residential solar business build out, a sector in which negative EBITDA is the norm for the leading industry players.

And financial success is measured by other metrics, which Kirk will discuss later.

Lastly, as we acknowledged on our last quarterly call, we recognize and appreciate that NRG is a complicated Company to understand and properly value at this stage.

We are dual-focused, both on winning the short- to medium-term future of our business, based on the 20th-century grid-based paradigm, while also preparing to win the medium- to long-term future of our industry, as its 21st-century paradigm take shape.

So rather than expand on my thoughts on this earnings call, I'm pleased to announce that we will be hosting our first Investor Day in over five years this coming January.

You will hear more of the details from Chad and the IR team about this must-attend event in the coming weeks.

Moving to slide 4 and coming back, for a moment, to our strength of execution.

Last quarter we spoke about the Edison Mission transaction and how our integration and asset optimization capabilities led us to an improved outcome from our original expectation.

We've also stated, on several occasions, that our efforts on integrating the Dominion retail acquisition were also trending favorably as well.

As these two acquisitions and integration efforts -- which, I might point out, were implemented almost simultaneously -- reached their completion, I'm pleased to report that in each case, we have not only delivered on our commitment to you, but exceeded our expectations.

We are ahead of schedule, and we are exceeding our targets in respect to key financial and operating metrics.

I think our success in a management- and systems-intensive endeavor, like large-scale integrations, demonstrates that this Company and our people across the organization continue to be singularly focused on getting the task at hand done quickly and efficiently.

Moving to slide 5, we are pleased to announce today that NRG West has been awarded a number of contracts, totaling 440 megawatts in aggregate, in Southern California Edison's recent RFP for fast-start gas units and what they refer to as preferred resources.

The 178 megawatts of preferred resources, which encompasses demand response and energy efficiency, is a particularly important win for us because we believe California, as it has so often in the past, is a trend setter in this area.

In just California alone, the public policy is shifting towards preferred resources making up 50% of all future resource procurement.

By winning this award and winning big, we are positioning NRG for first-mover advantage with all the benefits that entails, as preferred resources become a more significant part of the energy mix for load-serving entities across the United States.

The other part of the award -- the 262 megawatt Mandalay project -- now joins our 600 megawatt Carlsbad project, which is currently awaiting CPUC approval, as critical examples of how NRG is replacing and updating it's aging conventional generational assets with smaller, more flexible, renewable-friendly fast-start peaking units on long-term contracts.

It also, obviously, demonstrates our ability through intrinsic growth from development to restock the pipeline of NRG Yield eligible assets, ensuring that NRG can maintain NRG Yield's double-digit growth profile into the next decade.

Most of all, our success in this critical solicitation from SCE -- one of NRG's most valued customers -- shows that NRG is prepared to fill our role as an integral player in the critical California market, now and well into the future.

Turning on to slide 6, to the residential solar business.

We've made no secret of the importance that we attach to success in this area.

We've been developing our capabilities in residential solar for a few years.

But we have been very light on detail, when it comes to speaking with you, on how we think you should be thinking about this business, embedded as it is within NRG.

Obviously, a good deal of our reticence was driven by our desire to build the capabilities we felt we needed in this area outside of the public eye.

As a big player relative to the companies currently in the field, we did not want to telegraph our approach to the business.

While there continue to be many market-sensitive details of our approach that we are not prepared to disclose, on this slide 6, we begin to pull back the curtain.

The first thing you need to know is that while the graphs on slide 6 focus almost exclusively on Home Solar performance metrics, you will see that our Home Solar business is going to be about so much more than just solar panels on the roof.

And we consider that one of our greatest advantages.

Our Home Solar business is going to be about marrying up, cross-selling, and seamless integration of solar-driven home energy solutions, including complementary grid system sales, backup generation, and other energy products and services.

And in this regard, unlike other residential solar companies that talk about offering more than just solar to their customer base, we already have the capabilities in place to operate effectively many of these complementary products and services.

You can safely assume that we will expand upon our efforts to provide an appropriate level of detail about our home business -- our Home Solar business at our Investor Day.

So let me just give you a brief overview of where we are and where I see our activities leading over the coming years.

Focusing, as I said, purely on the Home Solar business itself for today, we have created a very strong business platform.

Starting with our original NRG Residential Solar Solutions and now combined with both RDS and Pure Energies through acquisitions, we now believe we have the premier one-stop shop for customers seeking a high-quality solar experience at their homes.

We have the multi-channel customer acquisition engine necessary to achieve the appropriate scale, we have the systems necessary to accommodate rapid expansion, and we have the financial acumen in place to finance our growth in an optimized manner.

Specifically, on the financing side, we are ramping up with tax equity financing, either closed or in negotiation, to support nearly $600 million of residential leases in the near-term.

On the operations side, we are driving down installation timing and improving the customer adoption process so that we can reduce substantially the wait times from customer sale to install completion.

By the end of this year, we expect to have over 10,000 installations, which is about 70 megawatts.

By the end of 2015, we expect to grow that amount by three times, with an objective of a total of 35,000 to 40,000 installations, or roughly 280 megawatts.

Lastly, and given our focus on operational excellence and continuous improvements, we see our costs coming down to where we can install and offer residential solar between $3.20 to $3.30 a watt into 2015, with further cost reductions occurring in the years beyond.

We look forward to updating you more on these efforts in January.

And with that, I'll turn it over to Mauricio.

Thank you, David, and good morning.

We deliver another quarter of strong results, despite the lack of weather and correspond weak prices.

More importantly, the relative [vary] sentiment from the summer was more than offset by the positive activity on the regulatory front.

Changes in capacity markets, extending from reliability concerns post polar vortex, implementation of environmental regulations, and the uncertainty around demand response are all contributing to a robust future across the wholesale markets.

Throughout the quarter, we continue to focus on repositioning our wholesale portfolio to win in both the short- and long-terms, either by extending the life of assets through fuel conversions or re-powering facilities at a significant discount to Greenfield economics.

These actions give us an opportunity to withstand low commodity prices, like the ones experienced this past summer, while standing ready to participate in market recovery.

Given the circumstances, our portfolio performed quite well.

The diversity in our generation portfolio, our hedging strategy, the integrated platform between wholesale and retail, and our focus on operational improvements all contributed to achieving a solid quarter.

Turning to our operational performance on slide 8, I am particularly pleased with the safety performance of the organization.

After two years of continuous integration, we're back to top docile levels.

We had 146 out of 161 facilities that finished the quarter without a single reportable injury.

Overall generation for the quarter was slightly down, driven primarily by lower coal and gas generation in both Texas and the East, despite better reliability and availability metrics.

This was somewhat offset by higher gas generation in the West and South Central regions.

But particularly, the significant increase in renewable generation.

Also our gas portfolio experienced a significant decrease in the number of starts, due to lower cycling of Cottonwood and lax scarcity pricing in the East.

These again highlight the value of our balanced portfolio between contracted a merchant assets during periods of low power prices.

Turning to slide 9, our retail business performed quite well and met our expectations for the quarter, when factoring in both the impact of the Dominion acquisition as well as continued organic growth, relative to the same period in 2013.

More importantly, however, we achieved these results by realizing higher retail margins, despite the introduction of the Dominion portfolio, which generally came in with lower-margin customers.

As David mentioned earlier, the Dominion integration is now complete, and performance has exceeded expectations.

Since the close of the deal, retail has retained higher-than-planned customer count and realized favorable EBITDA contributions, with customer retention and expense management being the key drivers of much better-than-planned results in EBITDA and customer count.

The Northeast drove the customer count over-performance, with Texas driving the cost efficiencies.

Lastly, with the closing of the Goal Zero acquisition in September and momentum building with NRG Home Solar, we have expanded the breadth of bundled product offerings across our market.

Our Home Solar team began selling system power along with residential solar and experienced nearly 50% success rate in cross-selling.

At the end of the third quarter, 20% of Texas customers were buying more than one product from NRG, and we're gaining momentum with cross-selling in the Northeast.

Overall, as more and more customers subscribe to multiple products and services, we expect our retail platform to demonstrate enhanced growth and improved retention, allowing us to realize more value from each customer.

Moving on to slide 10, and as we mentioned before, it was another summer of weak prices and lack of weather across the country.

While on the surface, weather was slightly below normal in the Northeast and close to normal in Texas, the number of hot days was unusually low, and as you can see in the lower left-hand chart.

In some cases, like in Texas, the first 100-degree day occurred well into the summer, resulting in much lower spot power prices, particularly when you compare them against the same forward prices before the third quarter.

This milder weather, combined with lower gas prices due to the higher production coming out of the Marcellus Shale, put some downward pressure on forward power prices during the summer.

Since then, we have seen some recovery in forward prices, particularly in the Northeast, where they are back to pre-summer levels, due in part to upcoming environmental regulations and concerns of cooler weather this winter.

I want to take this opportunity to remind everybody about our summer hedging policy.

While we increased our hedges in the aftermath of the polar vortex, we maintained a long reserve opening for the cash markets as a matter of prudent risk management.

These megawatts were affected by the lack of scarcity pricing, and therefore, exposed to weak spot prices.

This is something we implemented a few years back to ensure NRG would benefit from higher wholesale prices, despite operational issues or higher retail levels.

While we manage the size of this open position based on prices, we will continue to lean long in future summers, consistent with our build.

Moving on to slide 11 and starting with PJM, we see a number of positive trends in our wholesale business.

The implementation of environmental rules like MATS, [HIP], or CSAPR next year, in combination with the uncertainty around demand response, most likely we'll take megawatts out of the supply stack and provide a positive momentum for both energy and capacity prices.

In addition, PJM is in the process of making significant improvements to their capacity markets.

It was clear that in the aftermath of the polar vortex event, units that provided reliability and fuel certainty were at risk or retiring due to economics under the existing market structure.

PJM recognize this shortcoming, and it is recommending improvements to explicitly recognize the value of these units provide for the systems.

The new capacity performance market, while still under works, is designed to compensate generation resources that provide fuel certainty and reliability during peak weather conditions.

We believe this is an important and necessary enhancement to the capacity markets, particularly as the system becomes more dependent on natural gas for power generation.

We continue to work closely with all stakeholders and believe the market redesign is getting close to achieving the desired objectives.

In Texas, fundamentals remained strong, particularly on the demand side.

Demand grew 2.7% on a weather normalized basis for the year, and market design changes, including higher-priced caps and implementation of an operating demand curve, are positive improvements for the NRG-only market.

Although we continue to believe they're not adequate long-term solutions to address resource adequacy issues, these metric should improve pricing as to better dispatch the electric system.

As you can see in the upper right-hand chart, neither historical nor forward prices support long-term Greenfield development.

Market participants continue to focus on Brownfield sites, where cost advantages are necessary to manage the low-price environment that we have seen the past couple of years, while getting access to the fundamentally robust Texas market.

Earlier this year, we announced the moth balling of our Bertram plant in Houston, given the lack of support for capacity markets.

With the benefit of hindsight, it proved to be the right decision, given the lack of scarcity pricing this summer.

But as we move forward, we need to renovate our fleet to remain competitive in the evolving Texas market.

Our development efforts are predicated on either long-term contracts or units with a significant cost advantage where we don't have to take disproportionate market risk.

Today, we are announcing the construction of a 360 megawatt peaking facility at the former PH Robinson site, which will be operational in late 2015.

It's natural gas fast-start combustion turbines will help the state of Texas integrate the growing intermittent renewable generation, while using no water for cooling and taking advantage of higher price caps and potential scarcity pricing.

The plant meets our criteria of an ideal location in Houston, and it is expected to be built at a significant discount to traditional new build economics.

Finally, on October 23, the DC court lifted the stay imposed nearly three years ago on the CSAPR rule.

Oral arguments to address open issues are scheduled for March of next year.

While this rule will continue to be contested, and it is difficult to speculate on the final outcome, particularly pertaining to taxes, the EPA intends to start the rule on January 1, 2015.

Our compliance program is a multi-pronged strategy, which includes using allowances, optimizing existing backend controls, fuel switching, and the use of low sulfur PRB coal.

We don't expect the rule to have a significant impact on dispatch economics in the near-term, but it could become a catalyst for additional coal retirements in lignite-heavy states, like Texas, if implemented.

Turning to our hedge disclosures on slide 12, we decided to increase our coal and nuclear hedge levels for both gas as a proxy for power and heat rates for 2015 and 2016, in light of the week summer prices and increasing gas production.

We now stand at 94% hedge in 2015 and 45% in 2016, significantly reducing our exposure to near-term market dynamics.

Coal hedges remain well-balanced, and fuel inventories are being replenished ahead of the winter months, despite some of the rail performance issues that have affected our industry.

We're focused on executing our full outage season and reassessing the asset optimization projects that we have shared with you on previous calls, in light of the changes in capacity markets across our core regions.

We will update you in the near future, once these changes have been finalized.

With that, I will turn the call over to Kirk.

Thank you, Mauricio.

I'm beginning with the financial summary on slide 14.

NRG is reporting adjusted EBITDA of just over $1 billion for the third quarter, with $678 million from wholesale, $196 million from retail, and $140 million from NRG Yield.

For the first nine months of 2014, adjusted EBITDA totaled $2.5 billion, with $1.683 billion from wholesale, $477 million from retail, and $341 million from NRG Yield.

Despite the lack of price volatility and lower generation during the quarter, total consolidated EBITDA was flat compared to third-quarter 2013, due to higher contributions from retail, which benefited from increased margins from Dominion as well as continued customer growth.

EBITDA from the newly acquired EME assets and NRG Yield, combined with these higher retail results, served to offset lower wholesale EBITDA for the quarter.

For the third quarter, free cash flow before growth totaled approximately $0.5 billion, driving just over $800 million in free cash flow over the first nine months of the year.

Turning to highlights and updating our progress on drop-downs to NRG Yield, we're pleased to announce that we've now executed a definitive agreement for the drop-down of the second set of assets for $480 million in cash, which we expect to close by the end of the year.

This transaction, when combined with the previously executed drop-down in the second quarter, will bring total cash proceeds from drop-downs during 2014 to $830 million, providing significant capital replenishment to NRG while driving dividend growth at Yield.

As previously announced, NRG Yield also closed the acquisition of the Alta Wind assets on August 12, which will further support Yield's growth, through $220 million of incremental run rate adjusted EBITDA and $70 million of annual cash bill for distribution my 2016, once the remaining two PPAs for Alta 10 and 11 are in effect.

In addition, following the quarter end, NRG closed a new tax equity facility, permitting us to immediately monetize future tax benefits, consisting largely of PTCs, to be generated primarily by the NRG Yield eligible wind assets we acquired earlier this year as a part of the EME transaction.

NRG received approximately $190 million in net cash proceeds from the transaction, in effect, representing an advance on monetizing these assets through future drop-downs to NRG Yield and further replenishing capital to NRG in 2014.

This tax equity facility is structured to maintain the levelized cash available for distribution from the wind assets, thereby preserving our ability to monetize these cash flows from the assets through drop-downs to NRG Yield beyond 2014.

Finally, while executing on value-enhancing bolt-on transactions and completing our refinancing of NRG's unsecured notes during the third quarter, we maintained NRG's continued strong consolidated liquidity position, which is largely unchanged at $3.6 billion as of quarter-end and now further enhanced by the wind tax-equity proceeds, which closed subsequent to the quarter.

Turning to the guidance overview on slide 15.

As I mentioned on our second-quarter call, in the absence of warmer summer weather and higher prices over the balance of the year, our expectations for 2014 adjusted EBITDA were trending to the lower end of guidance.

The lack of extreme heat and scarcity pricing and resultant lower EBITDA over the balance of the summer, combined with expected results over the balance of the year, has placed our 2014 expectations now at or modestly below our prior guidance range.

And we are revising and narrowing our 2014 EBITDA guidance to $3.1 billion to $3.2 billion.

The reduction in wholesale guidance is partially offset by NRG Yield, which has been revised upward to reflect the partial-year impact of Alta Wind transaction, which closed during the third quarter, while retail remains on track with prior guidance, with a slightly tighter range of $620 million to $650 million.

Our 2014 EBITDA guidance also includes the impact of approximately $50 million in negative EBITDA from the Home Solar business, reflecting overhead and customer acquisition costs as we positioned the business for significant growth next year.

Our revised EBITDA guidance range, net of the contribution from the EME transaction -- which as you'll recall, was approximately $250 million this year -- still places us on track to the upper end of our original guidance range for 2014, as the positive impact from operational performance during the first quarter more than offset the impact of lower prices and generation later in the year.

We are also reducing and narrowing our guidance range for 2014 free cash flow before growth, based in part on the reduction in EBITDA guidance as well as other revisions to free cash flow expectations over the balance of the year.

These revisions total approximately $150 million and consist of three elements.

First, the impact of interest expense from both the Alta Wind transaction as well as interest expense resulting from the timing of the final redemption of our 2019 senior notes completed in September.

Second, mindful of the critical need for preparedness, which benefited us during the colder weather in the first quarter.

We've accelerated a portion of our oil and coal inventory build from 2015 into 2014, in advance of the winter months, in order to insulate the portfolio from any delivery challenges which may result from higher rail demand or other potential transport disruptions over the winter.

Finally, changes in working capital, largely due to the expected timing of wholesale revenue now later in the year.

Partially offset by changes in timing for environmental capital expenditures, make up the balance of these expected changes for free cash flow this year.

The majority of these changes are timing-related and should reverse as we move into 2015.

Importantly, the proceeds from the wind tax-equity transaction more than offset these largely temporary differences in cash flow, helping to maintain over $1 billion in consolidated excess cash available for allocation over the balance of the year, which I'll review in greater detail shortly.

Turning to 2015, we are initiating full-year consolidated adjusted EBITDA guidance of $3.2 billion to $3.4 billion, including wholesale EBITDA of 2.025 billion to $2.125 billion.

Retail, which is expected to deliver $625 million to $700 million in 2015.

NRG Yield, which makes up the balance of our guidance range, reflects an increase of $130 million, primarily due to the full-year impact of the Alta Wind transaction.

Our 2015 guidance excludes the anticipated impact of NRG Home Solar, which we expect to generate approximately $100 million in net operating costs, as overhead and customer acquisition costs reflect the rapid growth in lease volume, only partially offset by gross margin from leases in-service through 2015.

Next year, we expect an incremental 25,000 to 30,000 home solar installations, which, net of tax-equity proceeds, will require less than $150 million in incremental NRG capital in 2015.

Including fully allocated overhead, we expect NRG to return, net of tax-equity, in excess of 8%, positioning NRG to capitalize on low-cost opportunities for further lease monetization at a premium to fully installed cost.

And we will provide further details on this at our upcoming Investor Day in January.

Our 2015 free cash flow before growth guidance -- which is net of maintenance and environmental capital, including planned spend on Midwest Gen fuel conversions and backend controls -- remains a robust $1.1 billion to $1.3 billion for 2015.

Turning to slide 16, I'll review in greater detail the second drop-down of assets to NRG Yield for $480 million in cash.

These assets represent the first drop-down and monetization of Yield eligible assets acquired from Edison Mission, consisting of Walnut Creek, a fast-start natural gas-fired facility under a 10-year contract with Southern California Edison; Tapestry, a portfolio of wind assets in West Virginia and Oklahoma under 20- to 25-year PPAs; and Laredo Ridge, a Nebraska-based wind facility under a 20-year PPA.

This second drop-down portfolio is expected to generate approximately $120 million in adjusted EBITDA and $35 million in cash available for distribution at NRG Yield, helping drive near-term dividend growth at Yield.

An additional $100 million in cash billed for distribution remains available for drop-downs over the balance of the NRG ROFO assets and the EME eligible wind assets beyond 2014, providing Yield the means to deliver on its long-term growth targets.

In connection with the transaction at closing, NRG Yield will also assume approximately $746 million of non-recourse project debt.

This debt balance includes a pro forma increase of $40 million of incremental debt at Laredo Ridge, resulting from a pending refinancing of the existing project debt, which will close prior to drop-down.

This refinancing, which takes advantage of lower prevailing financing rates, maintains existing debt service and CAFD, while cash proceeds from the increased project debt will be paid as a dividend to NRG prior to the drop-down, supplementing the $480 million in proceeds from the transaction.

The cash purchase price and assumed debt implies transaction enterprise value of approximately $1.2 billion, or just north of 10.2 times 2015 adjusted EBITDA, while the equity purchase price implies a CAFD yield of 7.3%.

NRG Yield will fund the transaction using excess cash on hand of approximately $280 million, with the balance of the purchase price funded via a temporary draw on NRG Yield's revolving credit facility, which had approximately $420 million in capacity at quarter-end.

NRG Yield expects to repay the revolver in 2015 from the proceeds of its next capital raise.

And finally, updating our capital allocation progress on slide 17.

NRG's 2014 remaining consolidated cash available for allocation, which is net of $2 billion of capital previously committed, stands at approximately $1.1 billion.

$700 million of this cash resides at the GenOn level and is primarily earmarked to fund committed growth investments at GenOn beyond 2014, specifically, the planned fuel conversions at Portland, Shawville, Avon Lake, and Newcastle.

Following the closing of the new tax-equity facility and the fourth quarter drop-down to Yield, the remaining $400 million in excess cash will reside at the NRG level, as NRG Yield will use its excess cash to help fund the drop-down.

This NRG level excess cash provides a base of support for our growing residential solar business and Midwest Generation investments next year.

We'll provide an overview of 2015 capital allocation in the first quarter.

With that, I'll turn it back to David.

Thank you, Kirk.

And thank you, Mauricio, as well.

Before we open the line for questions -- and I think we'll go until 10:00 because I think Duke reports at 10:00, and we don't want you to miss that -- I want to turn your attention to slide 19.

As we begin to feel the cold breath the winter here in central New Jersey, let me give you a sense of where we feel that we are, in terms of our performance against our 2014 strategic goals, which we articulated in our first quarterly call last February.

Obviously, 2014 remains a work in progress, with two months remaining until the end of the year.

And we continue to strive against all of the goals that we articulated.

While I won't elaborate on each of the 12, you will see from our self-assessment that we feel that we have been pretty successful.

We've achieved meaningful and identifiable advances against each of the four strategic pillars of our strategy.

There are only 2 of the 12 areas where we would have liked to have accomplish more, and we will endeavor to do more in the months to come.

And those areas are utility scale renewables and capital allocation, specifically, share buybacks.

With respect to utilities scale renewables, our relative lack of success in this area has been caused by a relative lack of opportunity, as the last couple of years have witnessed an ever-increasing number of want-to-be wind and solar developers piling into the big renewables space.

These new entrants are making bargain-basement bids, based on excessively optimistic assumptions on the price tracked for solar equipment.

We continue to look for big renewable deals ourselves, but where we can create value because we think that Tom Doyle and NRG Renew are very good at this end of the business.

But we won't chase deals that may look good up on announcement but end up destroying shareholder value once implemented.

We're confident that this is an area of further value creation for NRG Renew in the years to come.

Indeed, we remain very bullish on business-to-business solar, specifically single-customer, multi-site opportunities that we can scale up.

And believe that our platform is well-positioned to capture meaningful value in the near- to medium-terms.

With respect to share buybacks, as you know, for a variety of reasons, we have not had the opportunity to buy back shares this year.

This being for only the second time in the 11 years that I have worked at NRG.

As we look forward to 2015, clearly, we already have committed a significant amount of our available capital to investment opportunities, which we believe will create significant shareholder value over time.

Equally clearly, a mismatch currently exists between the multiple sources of shareholder value currently embedded within the NRG group of Companies and the NRG share price, which as it traditionally has done, continues to move primarily in correlation to volatile near-term natural gas prices, no matter how modest and declining in relevance those short-term swings in gas pricing are to our performance or to our prospects.

As we continue to replenish our coffers after taking into account the current program of committed investments, we will revisit share repurchases as part of our capital allocation plan throughout 2015.

With that I will turn the call over to the operator.

Shannon?

Thank you.

(Operator Instructions)

Greg Gordon, Evercore ISI.

Thanks.

Good morning, guys.

Good morning, Greg.

Just in terms of thinking about the 2015 guidance in the light of the volatility in the guidance you had this year after a great first quarter and then a lack of opportunity in the summer anyway.

What type of extrinsic value assumptions are baked into your 2015 expectations, being cognizant of the fact that you guys want to make sure that you don't have to move your numbers around a lot in the future?

Greg, I'm going to ask Kirk to address that question specifically.

But the context in which you asked the question about the guidance -- I'm sure that you're frustrated, as everyone on the phone should be frustrated, with the moving the guidance around.

We are frustrated as well.

It just makes no sense to us.

As we look at our performance, I mean everything that we could control is right on track, yet we've had to change guidance twice this year because of weather -- once up because of the winter and once down because of the summer.

If we had done nothing but announce guidance last November, right now we'd be sitting here at the upper end of our range.

One of the things that we want to look at between now and our Investor Day and hopefully report back to you is if there's a more accurate way that we could look at guidance, in terms of doing guidance with sensitivity to weather.

So you could track it with your own following of the weather.

Having given that slightly off-topic answer, Kirk, do you want to answer the extrinsic value aspect?

Sure.

The wholesale component of our 2015 guidance is based upon the forward curves at this time, in terms of what we see in our core markets and particularly in the Northeast and Texas.

If anything, I would say that the upper end of that guidance range, specifically on wholesale, does incorporate -- in a way of saying, the bandwidth of the range of guidance -- does incorporate some extrinsic, value allowing for the possibility of volatility in the portfolio.

But overall, our guidance range, especially towards the bottom of the range, is simply based on the forward curves and the implied gross margin that we see from those at this point.

Great.

And then on the retail side, you're assuming slightly higher range of outcomes in 2015 versus 2014.

Can you give us sort of the puts and takes there?

Is that primarily the accretion from the Dominion retail offset by assumed margin decline in other areas?

And are there assumptions about incremental product margins in there as well?

To some degree, yes.

But I think overall, the way you summarized at the outset of your question -- interpreting the guidance -- is correct.

And that is that the upside includes the contribution from Dominion which -- I think, as I said on the second-quarter call -- while we didn't see a whole lot coming from Dominion as we transition the portfolio this year, we saw the upside.

And that's reflected in the guidance range.

Slightly offset by some declines or contractions on the margin side, particularly on the C&I side, where we've consistently said we don't see a compelling margins in that particular business.

Which is why we're repositioning our approach to C&I -- more comprehensively as a bundled product offering, not off the backward strictly great power.

And we'll talk a little bit more about that in greater detail at the Investor Day that David alluded to earlier.

Great.

Final question, and I'm sure you're getting a lot of follow-ons on this.

Obviously the growth rate from 2014 to 2015 in your Home Solar installation aspiration is quite high.

Can you give us a sense of what you think the three- to five-year growth rate is?

Or are we going to have to wait until the analyst day?

We'll, I'm asking Kelcy.

Kelcy will answer.

I don't know how he's going to answer the question, but I would tell you that in any of these super high-growth industries Kelcy is in a better position to answer your question than I am.

But even his answer is going to be a guess.

But Kelcy, go ahead.

So I would say that we are preparing ourselves to compete at the top tier of the sector.

And we see the guidance that our industry gives for growth trajectory of the whole residential solar space.

And we see ourselves in the top tier of that.

And we have no reason to disagree with what the other people in the industry are saying.

Correct.

Yes.

I mean, if anything, I would say as optimistic as they are, they could be bigger.

Anyway, it's obviously, Greg, you know this better than anyone -- it's exceedingly high growth.

And what we're more focused on, as Kelsey is saying, is making sure that if the growth comes, that we can accommodate it without any deterioration of service.

Great.

Thank you, guys.

Thank you.

Julien Dumoulin-Smith, UBS

Hi.

Good morning.

Good morning, Julian.

Following up a little bit on Greg's last question on the NRG home business -- how do you think investors should look at valuing the EBITDA and cash flow properties of the solar business in aggregate?

Obviously, it's a little bit different from the conventional thermal business.

What are you saying?

Julian, the first thing I would tell you is that -- answering that single question, more than any other reason, is why we're having an Investor Day in January.

So that we can go through -- because I'm not sure it's susceptible to a 30-second answer.

But Kirk, go ahead.

Give it your best shot.

You can start timing me now.

First of all, from our perspective as we allude to, which is part of the reason why we've excluded the negative EBITDA moving forward in our guidance range -- that business, because of the high growth and because of the long-term cash flows, doesn't really lend itself to traditional EBIT-to-EBITDA metrics.

And for that reason, we started to give you a little bit of a sense of what the net capital from NRG -- that's slightly less than $150 million is the expectation off of that lease volume next year.

And given we see a pretty robust return, as I alluded to, of greater than 8% off of that residual cash flow stream, I think the rest of the story, which we'll expand upon at the Investor Day, is translating that fully installed cost into a full monetization, if you will.

The way we think about it is monetizing our costs at a premium is the best way to translate value in the near-term.

Julian, if I could just add one point.

We see one of our big tasks for all of our investors and actually, for our business over the next couple of years, is to demonstrate what we think is this extraordinary potential synergy between what Kelcy and NRG Home Solar have to offer and what Elizabeth and NRG retail as who to offer it to.

So her 3 million customers, with this increasingly cost-competitive and attractive idea that people can monetize the solar value of the real estate -- we think that's a great combination.

And how you all should be thinking about how you should be valuing it, that's part of the thing that we want to present to you in January.

But we're also aware that we all live in the Show Me state.

We actually have to demonstrate to you that it actually can be done.

That's what we're really focused on in this area.

And that's why we put them both together under NRG Home.

Great.

Well, you certainly whet my palate to hear what you have to say next.

Separately though, could you address briefly the PJM performance scheme, as you're thinking about the opportunity to participate both in the transition options and in the subsequent 2018, 2019 options with the portfolio?

And especially the GenOn assets.

Will they all qualify, is basically the question?

Hey, Julian.

Good morning.

This is Mauricio.

Look, as you appreciate, the rules and the guidelines for the capacity performance continue to change.

What -- the first draft, as you know, was very prescriptive, in terms of who qualifies for that market.

That has changed, and that change, we see that positively.

The requirements are less.

They focus on fuel certainty.

And clearly, reliability will be part of the bidding cost, for lack of a better term, on the auctions.

We provided an indication, in terms of what could potentially qualify under this capacity performance, on the table on the slide where we show by fuel mix whether coal, nuclear, and dual fuel -- I believe it's on slide 11.

But again, I think that's going to -- until we have the final rules, we'll have more certainty, in terms of what can qualify and not.

I think it's important to say that we are reviewing all the projects that we announced in previous calls around GenOn and Edison Mission because of the capacity performance and the expectation of potentially much higher revenue stream from our capacity markets.

So that process is underway right now, but until we have final rules, it's really difficult to pinpoint.

Great.

Well, thank you for all the time.

Stephen Byrd, Morgan Stanley.

Good morning.

I wanted to talk about the financing at NYLD of the asset drop-downs.

Can you, Kirk, give a little bit of color, in terms of what portion of the purchase price will be financed with debt relative to equity?

Well, as I said, we're going to use the NRG Yield revolver capacity to supplement the cash on hand, as we move forward.

And as you run the math on what I had laid out there, that's a rough order of magnitude, roughly $200 million, relative to a little over $400 million in capacity on the revolver.

And as I'd characterize it, that's a temporary draw, which we look to repay with the proceeds from financing.

Given the fact, right now, though -- and I'm not going to be specifically predictive about exactly what form of financing to take.

That will depend upon the profile of the portfolio at that time.

But right now, as we talked about before off the back of the Alta Wind transaction and putting in place the Holdco unsecured debt, we are basically on par with our balance sheet targets there.

The extent to which we had capacity on those balance sheet targets, we'd supplement with debt.

If not, we'd be biased towards the equity side.

And we'll make that determination next year.

Understood.

And secondly, I want to follow up on Julian's question on PJM and the flip-side of it.

As you see the penalty language as it now stands, when you assess your portfolio do you think there's a probability of some of your assets more prudently being shut down to avoid penalties?

Do you think that is a very low probability situation, i.e., you're very confident that all of your plants, risk-adjusted, should stay online and be able to withstand the penalties?

Just curious how you think about the penalty side of things?

Steve, I guess, two dimensions on that.

The first one is the fuel certainty.

And if you look at the information we provided on the table, most of our portfolio -- as long as coal, nuclear, or some sort of dual fuel capability -- we feel comfortable with bidding those assets in the capacity performance.

The second one is the penalties.

If there is one concern that we have on the existing rule, it's, I guess, the relative slice of the penalty, compared to revenue.

And we provided those comments to PJM.

But ultimately, depending on the expectation of reliability of these assets, that will be priced into the bids that we submit into the auction.

So to the extent that we have an asset that is unreliable, I think that's going to be factored in.

And if the market doesn't need that asset, then it won't clear.

I think it's as straightforward as that.

Hey, Steve.

This is Chris.

Just to echo what Mauricio was just saying, too.

The penalties are definitely stiff at 1.5 times net CONE.

But the current suggestion is that the offer cap is going to be net CONE, which is a heck of a lot more space than we have today.

So I would think we'd be able to pricing a lot of that risk, and then we'll sit where the market clears.

That's very helpful.

Think you.

Angie Storozynski, Macquarie.

Thank you.

I actually wanted to ask additional questions about this capacity -- the new capacity product.

How should we think about it?

You're showing us growing retail and growing margins, while you expect higher -- and probably more volatile -- energy prices and higher capacity prices.

So how do you reconcile these two?

Do you basically assume that you price in the higher payments?

Or how about the contracts that have already been signed?

Yes.

I'll let Elizabeth talk about the retail, but I think, in general terms, the changes on the capacity performance market will be a net positive to our wholesale portfolio.

In terms of retail, particularly in the Northeast, it's heavily weighted towards the mass residential market.

That tends to be very short-term in nature.

So any potential market changes from the capacity performance will start happening in 2016 and beyond.

And that's well within the period where you can actually price it in.

But Elizabeth, I don't know if there's anything else.

Yes.

Mauricio, you covered it.

We benefit from our integrated model and wholesale -- our wholesale retail integrated model -- in circumstances like this.

And we feel comfortable that we can manage any risks associated with that.

Angie, this is Chris again.

Don't forget the sheer size of the comparison of the portfolios.

I mean, if we're serving 12,000 some megawatts in Texas -- and we have 11,500 or so megawatts down there -- that's pretty well-balanced.

When you get to the Northeast, we are preponderantly long generation there -- 17,000 megawatts in PJM alone, not counting New York and New England.

And the load we serve up there is a fraction.

So really, if capacity goes up, we're a multiple winner, just from the sheer leverage of that.

No.

I mean, talking about the potential upside, if you truly have 15 gigawatts of capacity that is eligible -- and looking at the sensitivity scenarios that PJM is showing -- we're talking about $400 million plus of potential upside in earnings.

My question is that does look a little bit too good to be true.

And I know I'm not accounting for the penalty side here.

But I mean, what type of a response and how sustainable do you think that level of earnings stream is actually -- starting in 2018 and beyond when that definitely also lined up a pocket of potential new build projects.

How do you think this pickup that you can see in incremental auctions is sustainable, going forward?

Yes, Angie.

Well, a couple of things.

Number one, I don't think we need to wait until 2018 to see some of the impact on the capacity performance.

As you know, there will be a transition period.

Hard to think that the 2015, 2016, I think is going to be more a target megawatts -- always going to have some upside.

And then there's going to be some sort of pro rata for the two auctions that already cleared, so the impact is going to be felt before that.

In terms of the size and the magnitude of that, it is really hard to pinpoint, at this point.

And Angie, the rules continue to change.

There was, yesterday, an open meeting with PJM, in terms of getting comments back from stakeholders.

Clearly, we think it is not a small change in our revenue expectation.

I think it is rather large.

So far, I guess, we have the quantity, in terms of the number of assets that could potentially qualify under the capacity performance.

We don't know the price.

We don't know the bidding behavior.

I already said that it is a significant change, in terms of what are the items that can be now priced in into your bids.

And ultimately, I guess, the price will work itself out when we go through the auctions.

But I think it's important to say that the impact is pretty significant for us.

We think our portfolio is well-positioned, and when we get the right pricing, then we'll be in a better position to tell you that.

Now, keep in mind that this capacity performance also is going to attract new builds.

And at this point, we would be speculating on the absolute impact on our portfolio.

And my last question, here, would be -- would you consider bringing back some of your coal plants that are either already shut down or actually slated for retirement -- in PJM?

Angie, the plants that aren't operating -- I mean, some are moth balled, some go into full retirement.

Once go into full retirement, you can't bring them back.

I'd say in general terms, obviously, we're continuously looking at the circumstances that exist.

And if we can create value by bringing plants back or bringing them back on a seasonal basis -- we've been doing that in Texas for a few years -- we'd do that in the Northeast, to the extent that we can.

To me, that is one of the premier competitive advantages we have on the wholesale generation side, is we have such a large and varied portfolio that we can find where the value is and get after it.

We will be constantly looking at that.

Okay.

Thank you.

Paul Fremont, Jefferies.

Thanks a lot.

I guess, being a fan of the Texas market is a lot like being a Mets fan.

It always comes down to wait until next year.

What seems to be changing in your opinion, given your new build announcement, Calpine new build, and Exelon new build announcements there?

Well, that sort of a loaded question.

And I come from the north side of Chicago, where to be a Cubs fan makes being a Mets fan look like being an optimist.

I mean, look -- Texas -- you sort of mentioned -- I would say the new build that we're talking about today at Robinson at $400 install capacity -- it's a Brownfield site with equipment obtained in the secondary market.

Not too many people can do that.

So I'm not sure that what we've seen is a huge flood of new supply unleashed yet.

So we have reason to be optimistic in the short- to medium-term, because Texas does grow.

It usually is affected by extreme weather in the summer and occasionally in the winter, so we like the Texas market.

But you do point to the fact that it's hard to have a sustained advantage in the Texas market on the wholesale side for years and years, because the barriers to entry, in terms of new builds, are low in Texas.

And they've always been low.

And that's where I think that the premier advantage that we have over others is the combined wholesale retail model, because when prices are subdued on the wholesale side, Elizabeth does well.

So overall, it's a good market, but you are right.

Texas will never be in a multi-year scarcity of generation situation because you can build quickly there.

Go ahead, Paul.

My other question is -- it seems like your outlook on the core generation business seems a lot more optimistic on this call than it did on the last call.

What accounts for that?

What accounts for that is that I wasn't clear enough on the last call, in terms of what sort of time frame that we were talking about.

On the last call, when I was talking about how we're going to reorganize the business -- I was talking about how we were going to reorganize the business, and I forgot two words: for the long-term.

Short- to medium-term, I'm quite optimistic.

Not every regional market.

One of the things that's going on on the wholesale generation side is it's very difficult to talk in broad brush terms about all the markets as if they're the same.

The Gulf Coast, the East Coast, and the West Coast -- they all have completely different dynamics, which is a big change in our industry from when I got going in this industry 15 years ago.

So you'd almost have to go region by region.

My fundamental view on the outlook for our wholesale portfolio, short- to medium-term, has not changed between this call and the previous call.

It's just, I wasn't talking about the short- to medium-term on the last call, and you and many other people didn't hear me distinguish that, and that was my fault.

And I'm going to try and be much clearer in the future.

I'm properly chastised.

Paul we've got to move on.

We don't want to run into conflicting with the Duke call, so we'll take one more caller.

And I apologize to the callers who did not get on, but Chad and the team would be happy to follow up.

And if you need to get Mauricio and Kirk and myself involved in the answers, we'll get involved as well, because we want to answer everyone's questions.

But for now, operator Shannon, can we take one more call?

Steven Fleishman, Wolfe Research.

Oh, thank you.

Just a question on the NRG Yield side, on the expansion of some of these California projects et cetera.

And I think you said you now have a growth backlog through at least the end of the decade for mid-teens.

Could you give a little more flavor on the Yield coal eligible cash flows that you now have for NRG Yield?

Sure, Steve.

It's Kirk.

And I think David's remarks about enabling us to sustain that double-digit growth into the next decade -- we're clearly focused on that, and we're optimistic about the potential contributions to enable that, specifically from the projects that were announced around SCE.

Although, we're not at the point now that where we're going to provide specific guidance, in terms of what the CAFD and the economics -- we're early days.

Obviously, we have to go through the CPUC approval process and the like.

But the guidance I give you -- if you look at the megawatts of those different projects, with the exception of preferred resources -- a little bit of a different profile there.

But as far as the Mandalay and also the Carlsbad projects -- roughly 265 megawatts and 600 megawatts, respectively -- a good proxy for at least the EBITDA contribution of those is off the back of the existing projects that are down there, where I think Marsh Landing and El Segundo rough order of magnitude -- EBITDA per megawatt, roughly 15% of megawatts translates to the EBITDA.

And that's probably a good proxy for how to think about the contributions from those plants.

And then also, with respect to NRG Yield in the scheme of the new NRG Home Solar businesses, could you give a little bit of flavor on how they will likely participate?

Only as to say, as I've alluded to in the past, that we're focused on -- as I said on this call, also -- monetizing the remainder of that capital in the residual cash flow stream after tax-equity.

There are a number of different options available, and we're evaluating all of those.

But specifically for NRG Yield, we think the potential is very great for NRG Yield to play a part in that monetization, both from the standpoint of highlighting the value in the near-term, as I alluded to before.

And also given the return profile that and the cash flows, the duration there -- 20 years long-term contract -- I think it has a lot of the elements that are very consistent with the NRG Yield portfolio.

So I would say, at this point, it has high potential and more to come as we move into 2015.

Okay, great.

Thank you.

Thank you, Stephen.

And Shannon, I think we have to conclude here.

And I appreciate everyone taking the time.

And like I said, we will follow-up with whoever couldn't get on the call.

So thank you, and we'll look forward to seeing you in January.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation and have a wonderful day.