NRG Energy Inc (NRG) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NRG Energy Incorporated Q4 2014 earnings conference call.

(Operator Instructions)

I would now like to introduce your host for today's conference call, Mr. Chad Plotkin.

You may begin.

Thank you, Kevin, and good morning everyone and welcome to NRG's full year fourth 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 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 Yield 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 filings.

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 and 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 turn the call over to David Crane, NRG's President and Chief Executive Officer.

Good morning, everyone.

Thank you, Chad.

And even before I go through the familiar ritual of introducing my colleagues, I want to draw your attention to the latter part of today's earnings release where we announced that Chad Plotkin is stepping down from being Head of Investor Relations for both NRG and NRG Yield in order to take up a position as Head of Finance for NRG Home Solar.

Chad came to the IR position three years ago as a rising star in our Strategy and M&A group at a time when we decided that our Company and our investors were best served by an IR head who had been deeply and directly involved in the business of the Company.

In the ensuing years Chad has worked tirelessly to explain the complexities of NRG to our current and hopefully future investors.

But Chad has been more than that.

During his stint he has been a trusted advisor to Kirk, Mauricio, and myself and the rest of the executive leadership team.

As he moves to a critically important finance position in home solar, our loss becomes Kelcy Pegler and Steve McBee's gain.

For our part we wish him well in his new position, and for your part as investors in the NRG group of companies I think you should expect to encounter him again.

Chad's successor, Matt Orendorff, who like Chad before him rises out of our Strategy and M&A group is similarly a rising star deeply immersed in and familiar with the key initiatives of the Company.

But I will wait to say other good things about him until he proves himself in his new position.

As always joining me today are Kirk Andrews, our Chief Financial Officer; and Mauricio Gutierrez, our Chief Operating Officer and President of NRG Business.

Additionally making his first appearance on an earnings call I'm pleased to have Steve McBee, President of NRG Home with us as well.

Additionally and available for questions are Chris Moser, Head of Commercial Operations, Elizabeth Killinger, Head of Home Retail, and Kelcy Pegler, Jr, Head of NRG Home Solar.

Before I begin I first want to thank everyone for participating in our investor event just six weeks ago.

And since our strategy hasn't changed appreciably in the intervening weeks and since there have been no strategy altering intervening events since then, I will keep my prepared remarks as brief as possible.

So let's get to it.

Turning to slide 3. As we've discussed over the past few quarters our core power markets experienced quite a roller coaster ride in 2014 with a particularly severe winter and an extraordinarily mild summer.

I'm pleased to report today that due to faultless execution across our core wholesale and retail platforms, we successfully delivered on our FY14 financial guidance as revised on last year's third quarter call.

Further, and as we indicated at our Investor Day, even in the face of continued softening of our core commodity prices, we again are reaffirming our 2015 financial guidance with its prospect of year-over-year growth from 2014.

There has been concern about softening commodity prices in the early days of this year, but our excellent operational execution over the past few months combined with the benefits of our diversification away from 100% reliance on conventional wholesale generation makes this possible for NRG, makes reaffirming guidance possible in a way that is not always possible for our pure play IPP peer group.

Building on that theme and turning to slide 4, our strategic actions in 2014 continue to lay the foundation for NRG as we build the future of our Company in response to transition that we now believe to be clearly underway in our industry.

Oh, by the way I'm still on slide 3. Following the strategic blueprint provided to us by the winners in the Telecom revolution, we have been a big and successful consolidator in the conventional power sector while pushing forward into key phases of the new, more distributed, more sustainable, and carbon constrained world of personal power.

We delivered on all of our integration targets for our two most significant 2014 acquisitions and did so more quickly than we originally thought possible.

We enhanced NRG Yield and we began the process through NRG Carbon 360 of providing a long-term future for our younger coal plants, even in a decarbonizing world.

Now you should turn to slide 4. Furthermore we have been on a strategic path at least since 2010 to diversify our financial performance away from pure commodity risk.

Back in 2007 or 2008 if you had asked me to explain in the most simple terms what NRG did to make money I would have told you that we sell coal and uranium at natural gas prices.

And while I still believe that for the most part in most markets, it's preferable to sell coal and uranium at natural gas prices than it is say to sell natural gas at natural gas prices.

NRG has in the ensuing five years become so much more than just a natural gas commodity play.

As illustrated on slide 4 we have grown our economic gross margin by 70% over those five years, all in a relentlessly subdued natural gas price environment while reducing the contribution of natural gas exposed margin by roughly 30%.

This is a trend both in terms of growing gross margin and reducing natural gas price correlation that we are working hard to perpetuate.

So in a market like we have seen over the past few months where natural gas has again declined to under $3 per million BTU, we remind you that NRG is not just a natural gas story but is increasingly an investment in the clean energy future.

Which means among other attributes that we are built to weather volatility and gas prices while preserving the upside in the power markets when they materialize.

Moving to slide 5. Because I've referenced our Investor Day and recognize that not all of you were able to join us in Houston, let me close by reiterating what we took seven hours to tell you down there into 70 seconds.

Here is my pitch and hopefully this becomes your NRG investment thesis.

Our industry is in the early but unmistakable stage of a technology-driven disruption of historic proportion.

This disruption ultimately is going to end in a radically transformed energy industry where the winners are going to be those who offer their customers, whether they be commercial, industrial or individual customers, a seamless energy solution that is safer, cleaner, more reliable, more convenient and increasingly wireless.

And I might add just generally more personalized than what is currently being offered to energy consumers through our current command and control centralized one size fits all wire and wooden pole system invented by Thomas Edison and seemingly last improved upon in his era.

NRG, through our multiple initiatives in the smart home with home solar, distributed generation, reliability solutions, microgrids, electric vehicle charging, and portable solar and energy storage products, is positioning itself to win this long-term future in a way that no other power company is attempting.

In the short to medium term we continue to execute across our consolidated and unrivalled asset platform in a manner that will allow us to win the next few years as the power plants of the post World War II era create a retirement tsunami washing across our core markets that will benefit us as one of the last men standing thanks to our substantial investment in environmental remediation over the past 10 years.

With that, I will turn it over to Mauricio.

Thank you, David, and good morning, everyone.

The extreme market conditions that prevailed in 2014 highlighted some of the strength of our integrated platform.

Our diverse fleet in the northeast benefited from the severe cold weather earlier in the year, and our integrated wholesale retail platform combined with our commercial and operational performance helped mitigate the impact of a very mild summer and allowed us to deliver our 2014 financial results.

Perhaps more relevant to you today is the fact that we aggressively hedged a portfolio for 2015 during the fourth quarter allowing us to reaffirm guidance.

While it's still early in the year, I am pleased to say that we're off to a good start with a solid performance during the most recent cold front.

Slide 7 presents the goals that I provided to you last year, and as you can see we delivered across the board on our safety, operational, and commercial metrics.

We successfully integrated Edison Mission's 8 gigawatt portfolio, delivered on operational synergies, and announced a comprehensive asset optimization plan for the midwest leap at attractive economics.

On our distributed generation efforts, we successfully integrated the Omaha district energy system and were awarded a contract for 178 megawatts of preferred resources in California.

We now have a full suite of distributed solutions for businesses.

This, combined with our commercial wholesale platform and access to low cost capital through NRG Yield, positions the group for significant growth in 2015.

You will hear more about this effort in the months to come.

A critical part of our strategy is the repositioning of our portfolio to out-survive the current wave of retirements and benefits from changes in capacity markets and repowering opportunities.

Slide 8 provides a summary of our comprehensive asset optimization and development plan.

We currently have close to 12,000 megawatts of generation targeted for fuel conversions, environmental retrofits, or repowering opportunities.

These initiatives are consistent with our goals of streamlining cost, maintaining or expanding fuel diversity, reducing the environmental footprint of our portfolio, and extending the economic life of assets.

The projects are progressing as planned, but since some of them are driven primarily by capacity revenues the outcome of the upcoming capacity performance auction in PJM could change our plans going forward.

Turning to our operational metrics on slide 9 and beginning with our most important metric, safety.

I want to take a moment to thank all of my colleagues for another great year of safety performance, finishing in the top quartile.

We had 128 out of 161 facilities without a recordable injury.

This is an outstanding result considering the significant winter conditions in the east and the Edison Mission integration efforts beginning in April.

It was the second best performance in the last eight years at a rate of 0.73.

While our fleet continues to grow in size and diversity, the one constant continues to be our strong safety performance.

I want to recognize our distributed group for a perfect safety record with zero recordable injuries.

Well done.

Our overall generation was up 4% year-over-year on a normalized basis despite the lack of summer demand.

The increase was driven primarily by higher generation in the west, the record production year at STP Unit 2, and the higher runs experienced during the polar vortex in the east.

This highlights the importance of our well-diversified portfolio.

We continue to balance operational performance with marginal risk and overall spend throughout this low commodity price environment.

Our coal and nuclear availability was down year over year to 82%.

However, the fleet showed strong performance during peak pricing periods.

This is evident in the improved year-over-year coal and nuclear reliability performance.

In the third and final year of the current fornrg program we leveraged best practices from the operational synergies efforts in the general facilities and expanded that through the rest of the organization.

We achieved an outstanding result of $198 million for the year, compared to a goal of $100 million.

This success was driven primarily by improvements delivered by plant operations and Texas retail.

Thank you to you all of our colleagues who provided commitment and execution behind our continuous improvement culture.

We're confident we can continue to deliver the same balance to our shareholders in the next iteration of the fornrg program.

Moving to our market updates on slide 10.

I want to start with natural gas given the recent decline in prices.

As David mentioned we have been very successful in diversifying our margins away from natural gas, but it continues to be an important driver so let me share a few thoughts.

Since the start of the shale gas revolution six years ago the industry has focused almost exclusively on the amount of supply flooding the market.

While impressive by any standards there have been very few catalysts on the demand side until now.

Over the next few years gas demand will likely see a step change coming primarily from four sources; the power industry, LNG, exports to Mexico, and industrial demand.

This incremental demand could come as early as this year with additional coal to gas switching and implementation of more stringent environmental regulations that will drive coal and oil retirement.

Our current head position allows us to weather this low commodity cycle and be ready for a more favorable market environment.

Turning to these markets, the ISOs are redefining the capacity products and requiring generators to perform during shortage conditions.

The changes will allow for higher compensation but will also hold them to higher penalties for non-performance.

As a generator with a large diverse portfolio, strong operational track record, and fuel on site we support and welcome these improvements.

The result from the recent New England capacity auction 41819 were quite encouraging, with prices increasing significantly year over year.

PJM is still awaiting resolution from FERC on its proposal which is expected to happen some time in early April.

We're excited about our prospects for our portfolio of 17 gigawatts of generation in the region, not only for the May auction but also for the transition auctions for the years that have already cleared.

The recent cold front in the northeast once again proved the value of our diversified portfolio where unlike gas generation our coal and oil assets benefited from spikes in gas and power prices.

Our strategies to extend the life of our assets and maintain a cheap option in energy that can benefit from short-term dislocations in the market like the ones we experienced the past two winters.

Now moving on to Texas on slide 11.

Demand grew by 2.4% on a weather normalized basis in 2014 driven primarily by the residential and commercial sectors.

While low oil prices will undoubtedly have an impact on the Texas economy, this will be somewhat muted by the diversification that Texas has been able to achieve in recent years.

A lot has been said about the robust demand in Texas and the need to build new generation, but given the implementation of new environmental programs like maps, Casper, and EPA's proposed regional hedgerow for Texas it is important to talk about the potential impact to the supply stock.

Make no mistake, we expect coal to be impacted by these regulations.

But as you can see in the table, our portfolio is well positioned to comply with these rules and not only out-survive the competition but benefit from the retirement of other units.

That leads me to the forward market where prices seem to reflect very little risk premium for the next few summers as you can see on the upper right hand chart.

For the past three years we have experienced no scarcity pricing despite having single digit operational reserve margins every year.

From our perspective Texas fundamentals remain robust and it will not take much change in the supply/demand balance to lead to scarcity pricing in the near term.

Turning to our hedge disclosures on slide 12.

We increased our hedges prior to the winter which insulated us from the recent drop in natural gas prices.

2015 is well hedged leaving us in good shape to weather the current downturn.

We expect to see some coal to gas switching, but the financial impact will be muted for us.

Just like we did in 2012, we're diligently working with fuel and transportation suppliers to ensure that our coal plants remain competitive during these extreme low natural gas price environments.

Finally, our goals for 2015 are pretty clear.

Execute on our asset optimization and development plan, and grow our distributed generation business by leveraging our wholesale portfolio.

With that, I will turn it over to Steve for the NRG Home review.

Thank you, Mauricio, and good morning, everyone.

As we discussed recently at our investor conference in Houston and as David mentioned this morning in his remarks, it's our view at NRG that traditional centralized energy service models are significantly at risk.

We believe that the future eventually will belong to demand-driven decentralized models of service that empower individual consumers through sustainable energy solutions that are affordable, personalized, convenient, and reliable.

NRG Home will continue to serve our customers through our robust traditional retail electric service franchise while at the same time position the business to win in a world where we believe a growing share of the market is going to want and expect to generate and manage a larger share of their own energy.

As you can see from the data on page 14, our strong performance in 2014 positions us well to achieve both our near and longer-term strategic and financial objectives.

Our home retail platform delivered at the upper end of our original financial guidance with adjusted EBITDA of $604 million, enabled in part by customer and product growth as well as by our ongoing commitment to continuous operational improvements that drove material reductions both in per customer cost and in bad debt.

Our recurring customer count grew by 28% driven primarily by the Dominion acquisition which included customer contracts in the northeast as well as the Cirro business in Texas.

We're pleased with the success of the Dominion acquisition which beat estimates of earnings and customer count delivered in 2014.

We expect to continue to report the Dominion customer contacts, excuse me, contracts separately through 2015 as many of the northeast customers will roll off during the year as purchase term contracts expire.

Our customer growth also positions our retail business to accelerate and deepen cross-selling of new products and services that will strengthen our business going forward.

In that regard we're excited that our home retail platform, which currently provides retail electricity and home solar, will be in the market with new offerings this year that include portable power solutions, new battery products, and a variety of additional home services.

In 2014, NRG Home also established NRG Home Solar, a leading residential platform formed through the combination of NRG's legacy residential solar solutions team and the acquisition of RDS and of Pure Energies.

We ended the year with over 13,000 home solar customers.

Our success in ramping this business was the result of rapid and successful integration of our new and legacy home solar businesses, our strong kitchen table and telephone sales capabilities, our ability to leverage our key strategic partnerships, and our ability to integrate additional NRG home services into our conventional home solar offering.

We also demonstrated early cross-selling success between home solar and home retail with about 50% of eligible home solar customers supplementing their solar production with NRG's retail electricity.

The strong foundation established for our residential solar business in 2014 positions us to be a top tier player in this rapidly growing space in 2015 and beyond.

If you flip to page 15 I'll quickly outline our priorities for 2015 before turning it over to Kirk.

In 2015 we are confident that we will deliver on our home retail financial expectations and that we will establish our home solar business as a Tier 1 player in the rapidly growing residential solar market.

We will also operationalize the NRG home platform toward our longer term goal of strengthening per customer EBITDA by further accelerating cross-sell systems that increase tenure and by establishing common operating systems wherever we can to continue to incrementally reduce cost structure.

And we will seek and pursue opportunities to scale our organic customer advantage and to enrich our existing product portfolio as we position NRG Home to become the dominant brand for clean and sustainable personal power solutions and services.

Thank you very much for your time this morning, and with that I will turn it over to Kirk.

Thank you, Steve.

Beginning with the financial summary on slide 17, NRG is reporting fourth-quarter 2014 adjusted EBITDA of $625 million with $382 million from business and renew, $165 million from home retail, a $34 million negative contribution from home solar as we continue to position that business for growth, and $114 million from NRG Yield.

For the full year adjusted EBITDA totaled $3.128 billion with $2.134 billion from business and renew combined, $604 million from home retail, a full year of negative contribution from home solar of $65 million, and $455 million from NRG Yield.

Compared to the fourth quarter of 2013 business and renew performance was down $26 million primarily from milder weather, but partially offset by the acquisition of the EME assets, full commercial operation of CVSR and Ivanpah in 2014, and lower operating costs across the fleet.

Retail EBITDA was lower by $15 million, also driven by milder weather which was partially offset from the incremental margin from increased customers following the Dominion acquisition.

Yield results improved by $21 million driven by the acquisition of the UltraWind assets, while we increased our investment in home solar by $32 million in the fourth quarter as compared to 2013.

Free cash flow before growth totaled $951 million for the full year, with $139 million inflow in the forth quarter.

Turning your attention to our 2015 guidance and as discussed at our Investor Day, given our hedge levels we're again reaffirming our adjusted EBITDA guidance range of $3.2 billion to $3.4 billion which now excludes the expected negative contribution of $100 million from investment in our growing home solar business.

Free cash flow before growth guidance is also reaffirmed as we continue to expect between $1.1 billion and $1.3 billion in 2015.

Turning to slide 18, I'd like to review a shareholder proposal by NRG Yield which is contained in the preliminary proxy statement filed by Yield last evening.

This proposal, which has been recommended by the NRG Yield independent Directors and has the full support of NRG, involves an important recapitalization of NRG Yield intended to achieve two important objectives.

First, to preserve and maintain the strong strategic support of NRG Yield by NRG and second, to enhance NRG Yield's flexibility to efficiently access capital to fund growth without the need for capital allocation by NRG towards additional investment in NRG Yield.

This proposal, which requires the vote of a majority of the Class A shares of NRG Yield, involves the creation of two classes of low vote NRG Yield stock which will be issued through a recapitalization of Yield's equity.

NRG Yield would intend to use this new low vote stock as its primary means of raising equity capital to fund growth going forward.

Basically the proposed recapitalization will take the form of a two-for-one stock split of both classes of NRG Yield stock, the Class A stock which is held by the public as well as the Class B stock which is held by NRG, thereby doubling the total number of NRG Yield shares outstanding.

The new low vote shares will be issued in two distinct classes due to the two classes of stock currently held by NRG and the public shareholders.

NRG, which holds approximately 42.7 million Class B shares, will receive an equal number of Class D shares each with a 1/100 voting right.

As NRG's economic interest is held exclusively through its direct interest in NRG Yield LLC, the new low vote Class D shares to be issued to NRG will have no economic rights.

Each Class A shares held by the public will receive one share of Class C stock with the same economic rights as the Class A stock and a 1/100 voting right.

Immediately following the stock split each shareholder will through their combined ownership of the classes of stock have the exact same economic and voting rights as they do today.

Going forward NRG Yield will be able to issue third party equity using C shares to fund acquisitions without the need for investment by NRG, as these types of acquisitions are best suited for NRG Yield, while the focus of NRG's capital allocation to fund growth is focused on other core areas.

The enhanced flexibility this provides is consistent with the rationale behind the original creation of NRG Yield and preserves the important strategic partnership.

NRG's economic ownership will be diluted through future issuances of Class C shares by NRG Yield to help fund growth.

However, the proposed plan would allow for approximately $21 billion of equity to be issued based on today's share price before NRG's voting interest would fall below 50%, providing substantial head room for additional equity capital.

In addition to the proposed recapitalization plan, NRG has agreed to add additional assets to the right of first offer agreement.

This expanded ROFO pipeline provides additional visibility into NRG Yield's long term dividend growth and total return in order to preserve its low cost of capital advantage.

The assets added to the expanded ROFO pipeline include NRG's Carlsbad and Mandalay repowering projects recently awarded in the ongoing RFOs for new contract generation in California.

Following CPUC approval, NRG will develop and construct these assets which if COD may be offered to NRG Yield, providing additional asset diversity in the years beyond the expected completion of the original ROFO pipeline.

These types of projects, enabled by and a testament to the strength of the NRG/NRG Yield partnership, underscores the need for the enhanced flexibility the proposed recapitalization will provide.

In terms of next steps, NRG Yield expects to file and distribute a definitive proxy statement on or about March 26.

NRG Yield has conditioned the proposal so that it does require the approval of a majority of the Class A shareholders at its annual meeting on May 5 of this year.

NRG strongly supports the proposal as approved by the independent directors of NRG Yield, and we ask for the support of the public shareholders of NRG Yield in this important step in building on the tremendous success of the NRG/NRG Yield relationship.

Finally updating our capital allocation progress on slide 19, NRG ended 2014 with an excess cash balance of $1.26 billion.

This excess cash balance, which is net of minimum cash at NRG, GenOn, and NRG Yield, when combined with NRG's increased 2015 free cash flow before growth investments guidance, leads to $2.46 billion in consolidated cash available for allocation during 2015.

Of this amount we have committed nearly $1.7 billion of capital, including $250 million or approximately 20% of our 2015 free cash flow to be returned to shareholders through the combination of our recently completed stock buyback program announced last December and a 4% increase in our annual dividend.

Our growth investments guidance of $900 million for 2015 is primarily driven by operational improvement initiatives across the fleet, approximately $150 million of investment in home solar installations as well as continued investments in solar, Carbon 360, and eVgo.

$800 million in remaining cash available for allocation, which is prior to any proceeds from NRG Yield dropdowns in 2015, consists of $600 million at the GenOn level which is intended to fund our ongoing fuel conversion initiatives, with the remaining $200 million at the NRG level.

Importantly this balance does not reflect the impact of NRG Yield dropdowns in 2015.

As we intend to offer NRG Yield the next portfolio of ROFO assets which we expect to consist of the remaining wind assets from the EME acquisition during the first half of 2015, the capital replenishment from this transaction will further increase NRG's excess capital.

Specifically, when combined with the residential solar lease dropdown currently under evaluation at NRG Yield, the proceeds from the wind assets are expected to generate between $250 million and $300 million in cash to NRG.

Once this drop down is finalized in the first half of the year, we will revisit further capital allocation decisions based on conditions and opportunities at that time, which may be further augmented by a second ROFO portfolio likely the remaining stake in CVSR, in late 2015.

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

Thank you, Kirk.

Let me close by turning to slide 21.

Every year on this call I set forth my overarching goals across the enterprise so that you can follow our progress during the year.

Given the reorientation of NRG into the NRG group of companies, this year I'm providing our key goals, or summarizing our key goals in the context of each of our businesses.

Now in the spirit of my opening remarks and because we've taken up a lot of your time already, I'll spare you from going through each of these sets of goals, but I will leave you with the following.

We remain steadfast as an organization delivering on our commitments, and while there are many goals on this page, we hope and expect that by the end of the year many of the newer initiatives that we have been nurturing and growing over the past few years will reach a size and a level of momentum where they will start to have a meaningful positive value impact on the overall NRG group alongside the intrinsic value of our almost 50,000 megawatts of conventional generation and our nearly 3 million retail customers.

And with that, Kevin, we are happy to take questions.

(Operator Instructions)

Our first question comes from Angie Storozynski with Macquarie Capital.

Yes, thank you.

So I have two questions here.

First of all, on the new share structure at NRG Yield, it seems relatively complex and I'm a little bit struggling here.

Why wouldn't NRG be willing to simply accept a share of future equity issuances from NRG Yield in lieu maybe for cash, and that way you could maintain not only your voting rights but also economic interest and best cash flow that will be flowing from NRG Yield.

So why wouldn't you want to actually keep the share of cash going forward?

Angie, do you want to give us your second question too so we can have time to think about it?

Yes, the second one is about residential solar.

So it seems like NRG Yield would be just a tax equity investor in those projects, and also it seems like you might have actually augmented the size of the residential portfolio since the Analyst Day.

Thank you.

Well so I think Kirk is going to answer the first question and half the second in terms of -- I think you had a question about the growth trajectory of home solar as well?

Yes.

Yes, so Kelcy will address that as well.

But Kirk, go ahead.

Sure, Angie.

The first part of your question as I think you know largely due to the successful equity issuance to fund the Alta Wind acquisition, that being a third party acquisition.

Our current ownership stake in NRG Yield is about 55%.

And while we recognize the possibility at the outset that when we drop down assets into NRG Yield we may take some portion of that consideration in kind, it is a different proposition entirely to consider the possibility of incremental cash investment in NRG Yield to help support that ownership relationship.

What I mean by that is if you extrapolate it forward on a potential third party acquisition the size of Alta Wind for example, in order for NRG to maintain its 50% plus ownership, that would require NRG to actually allocate capital and invest in Yield equity, effectively investing in those types of projects over the long run.

And while certainly those projects are financially compelling, it was the very motivation behind the creation of NRG Yield to separate those kind of investments so that they reside in a vehicle that's properly positioned for that kind of risk and return profile.

So because those assets are a high EBITDA multiple that would be tantamount to NRG investing capital or allocating capital towards a high EBITDA multiple.

This allows us to allocate that capital appropriately towards the types of investments conventional and the like and towards some of the growth initiatives at NRG that are more appropriately our core focus.

I think on the second part of your question, although I think we've outlined the structure within the relationship between NRG and NRG Yield, the important distinction here is we plan on tax equity financing primarily the tax attributes from residential solar leases as they're dropped down to NRG Yield.

NRG Yield's participation in that is actually investing in the residual equity after-tax equity.

So NRG Yield is not providing tax equity.

And using tax equity allows us to manage effectively the duration of that tax holiday, or that tax runway if you will.

We have the flexibility from time to time to drop down assets without tax attributes giving NRG Yield the ability to augment its tax yielding ability, but I think given the nature of the broader portfolio we'd use tax equity to help manage that.

Kelcy, do you want to just talk about sales?

Sure.

So in 2014 we really focused on building out and optimizing our platform for the residential solar space, as we talked about in Investor's Day.

We finished 2014 with over 13,000 cumulative customers, of which 9,000 were acquired in 2014.

As we look forward into 2015, we'll continue this momentum and we continue to target 35,000 to 40,000 cumulative customers for 2015.

Okay, and then just one follow up to that again, the recapitalization of NRG Yield.

Should we imply from that that there's basically a big third party acquisition coming that you don't want to chip in with cash and hence the change in the share structure?

Angie, Angie, Angie.

(laughter) You know, we never comment on anything that may or may not be happening.

I have to try.

But having said that I won't comment on it, I don't think that's the right premise in terms of any specific thing.

This recapitalization is just forward-looking, looking at how suboptimal it is to use high cost NRG equity capital and NRG Yield but with trying to maintain alignment on the control side.

I would say though while you're not going to wake up tomorrow and read about some massive NRG Yield acquisition, it is a target rich environment for NRG Yield.

Small, medium, large, there's a lot of things knocking about.

So we are active in that market, but no, this was not driven by any specific transaction that may or may not happen.

Thank you.

Our next question comes from Greg Gordon with Evercore ISI.

Thanks, good morning.

Good morning.

Looking at the full-year results and then trying to compare them back to the third quarter guidance ranges for the segments and then bridging to the new segments, I just want to make sure I'm reading correctly that business/renew came in more or less inside the range.

But it looks like you may be a little bit more up front on home solar than you had initially projected and came in a little light in retail.

Is that the correct read or the wrong read?

Because while the outlook for 2015 looks great, you came in on the low side of the guidance ranges for adjusted EBITDA and free cash flow before growth in 2014.

Sure, Greg, it's Kirk.

And I'm just referring you back to some of my remarks at the Investor Day presentation where we went through recasting the components of those segments.

We've recast the segments on a historic basis in 2014 to reflect home retail as opposed to what we used to call retail.

That segment that was retail that was comprised of our guidance contained about $50 million of EBITDA from the C&I business.

That $50 million, that portion of that performance is now reflected in the business segment.

So that $604 million you see from retail in 2014 is simply the mass retail component.

And yes, the $65 million in negative EBITDA from contribution from home solar is slightly ahead of what we expected.

But that was due to some advanced investments in cost initiatives and marketing and the like as we position ourselves continually to realize that significant growth objective in 2015.

Great.

And on that front it does seem to appear that you are slightly ahead of plan in terms of the number of home solar customers you signed up into the end of the year.

Is that right or not?

Kelcy?

I think we're right within the ballpark of the growth trajectory through the full year of 2015.

Great.

And the cross-selling opportunities you mentioned earlier, are they significantly accretive to the base case plan you laid out?

Are you seeing more cross-selling opportunities than you would have expected in the base case plan at this juncture, or is it more or less along the trend of that plan?

Greg, I would think that the way you should think about cross-selling -- and I've got to tell you the number of ways within our Company that we see cross-selling opportunities, the number of permutations and combinations.

I mean the obvious one may be between system power, retail, and solar power but the correlation between solar power, home solar, and electric vehicle charging is a 58% correlation.

But in terms of impacting our results, what I would tell you right now is we feel in the cross-selling area that we have to prove it to you and get it to a scale where it's actually having impact before we start asking you to evaluate it.

And I would say right now we would consider ourselves more in the demonstration phase.

Kelcy is working with Elizabeth.

They are going to be working with the electric vehicle charging folks.

So we're just proving things out and we're just telling you that's -- stay tuned.

Kirk, do you have anything?

Yes, I think, Greg, one of your questions about our performance in 2014 if I recall I think I may have missed addressing the question you had on free cash flow.

Is that correct?

Yes.

Our free cash flow before growth in 2014 of $951 million, obviously that's within the range of guidance we provided, obviously towards the lower end of that range.

That's primarily due to the fact that despite of everything we guided in the third quarter in anticipation of potential colder weather, learning from the lessons and the success we had off the polar vortex, we chose to make some additional investments kind of in a be prepared strategy specifically in our fuel inventory going into 2015, especially around oil in anticipation of potential colder weather.

And that's primarily the reason why the free cash flow before growth for 2014, although within our range, was trending toward the lower end.

Got it, thank you guys.

You bet.

Thanks, Greg.

Our next question comes from Paul Zimbardo with UBS.

Hi, thank you, good morning.

Good morning, Paul.

A follow-up question on the proposed change in share classes.

Just a higher level question.

Were there any kind of lessons learned from some of the subsequent yield Cos that you tried to add to the structure?

Or was there some reason why you didn't opt to trend at some permutation of an incentive distribution right?

Well I think in terms of the other structures that are out there, I think we feel comfortable with the incremental impact from a governance perspective that's quite in line with the governance provisions contained in some of the yield Cos that followed.

But as I've said a number of times, our primary goal is to ensure that NRG Yield has a maximum competitive advantage and low cost of capital.

And from our perspective the best means to do that is for NRG Yield to realize the maximum incremental potential CASD without the drag, if you will, of an IDR.

The other element of that is at the NRG level.

Because the IDR would basically be cash flow or EBITDA back to NRG, which obviously goes back to an entity with a lower EBITDA multiple, we wanted to maximize that portion of the cash flows that was associated with those contracted plants to ensure that it traded at the higher valuation.

And we think the absence of an IDR addresses that issue as well as the fact that it ensures that NRG Yield can be more competitive or have a competitive advantage from a realization of accretion relative to some of the other competitors out there whose IDRs can deter or detract from the accretion when we compete for assets in the third party market.

Paul, can I just add something more general to what Kirk's saying because like this question of IDR, Kirk's tried to explain the IDRs about 16 times and I'm mentally incapable of understanding them.

But I would tell you in general terms when it comes to yield Cos, we monitor closely all of the activity in the general yield Co market.

And it seems to me, and you probably could tell me -- you could certainly tell me better if this is true or not, that the market is now to the point where as opposed to buying every yield Co that comes out, they're starting to differentiate between quality yield Cos and lesser quality.

And we are committed at NRG that NRG Yield is going to be a top quality yield Co.

So on every basic metric that the yield community is looking at, we want ours to be in the top tier.

And so we're constantly following the situation; that's our goal and we're going to stick to it.

Okay, great.

Thanks, I appreciate the color.

And then a follow-up question on the home retail and home solar, for the target of the 35,000 to 40,000 customers.

Is that based primarily on conversion and cross-selling of existing customers, or is that kind of expansion to new customers?

Kelcy?

No, it's not based on cross selling.

I think the cross-selling initiatives that Elizabeth and I are working with Steve on are really in the developmental phase where we're getting proof of concept.

The customer count of the 35,000 to 40,000 in 2015 is not based on the cross-selling initiatives.

Okay, great.

Thank you very much for the time.

Thank you.

Our next question comes from Stephen Byrd with Morgan Stanley.

Good morning.

Stephen.

I wanted to start on Texas and just get your thinking on environmental regulations.

It looks like your coal fleet is in very good shape.

I'm just curious as you think about all of the rules that are coming down the road here, Casper and regional Hays and Clean Power.

Which in your mind are likely to be most impactful to your competition?

And what's the general time frame we should be thinking about in terms of the impact to your competition in the state?

You know, Stephen, thanks for the question and Mauricio is going to do the heavy lifting and answer the question.

But I do want to say as a general rule maybe for some of the investors on the phone that don't follow the space as closely as you because all of these environmental regulations either proposed in the courts, state, federal level, it's very complicated.

But I would say to you as a general rule, even with the coal plants that we own because of our investment in the back end controls as you alluded to in Texas, for us as long as the rules that are imposed are imposed in a fair and reasonable way, tightening environmental regulations actually enhance us relative to our competition.

So with that general statement as to your specific question about I think you asked what is the most impactful of the environmental rules that may or may not come down -- and is your question specifically about Texas or about across the fleet?

Texas.

Okay.

Hi, Stephen, good morning.

I think from our perspective and your question was the most impactful to our competitors.

No, I think to us.

Wasn't it?

Really more to your competitors.

And thinking about sort of --

I think it was primarily about competitors given that as you already alluded and we tried to highlight that on our earnings slide, our portfolio is pretty well positioned to comply with both maps, Casper, and I think the latest one is regional Hays.

And I think it's fair to say that regional Hays will have a significant impact on our competitors and not necessarily at NRG.

With respect to Parish we don't think that is going to be applicable because even if we install scrubbers don't have a significant impact on visibility.

So take Parish out.

And Langston will require minimal upgrades on the scrubbers that we have today.

So all of them will have some impact, right?

The question is the timeline and the implementation of all these rules.

But I think during Investor Day we actually quantified the potential impact of each of these regulations on coal markets, and what I would say is most of that impact will happen on coal plants that are not owned by NRG.

Okay, great, thank you very much.

Thanks, Stephen.

Our next question comes from Steve Fleishman with Wolfe Research.

Yes, hi, good morning.

Hi, Steve.

Couple quick ones.

First, at the Analyst Day I think you said you were tracking to the upper half of the 2015 guidance range.

I don't think I heard you say that again.

Is that still true?

Well to correct the record we actually said to the upper most quartile.

So okay, Kirk, Steve Fleishman's called you out.

What are you going to say now?

(laughter)

You can infer, which I'll confirm right now by reaffirming our guidance that we also did on the Investor Day, that yes our expectations are still consistent with that upper quartile.

Great, thank you.

See, Steve, what I deal with here, how hard it is to get him to say something?

(laughter)

And then just on the new structure for NRG Yield, I guess this is for Kirk.

Will you still be consolidating it from an accounting standpoint?

And also does it change any way that it's treated from a credit ratings standpoint for you?

First of all we don't expect that to have much of an impact on the credit rating, although early days and certainly get some feedback from the rating agency, but I would not expect that to have an impact.

Other than the fact that obviously it doesn't entail or give some greater transparency of the lack of the at least necessity for capital allocation towards maintaining that ownership by buying more NRG Yield shares if you will.

So I don't expect that to be the case.

And forgive me, Steve, but remind me your other question?

Accounting consolidation.

Oh, sure, yes.

Because this structure is really a structure that impacts economics and not vote, and it is vote that is the determinant of consolidation or from a GAAP perspective, we will continue to consolidate NRG Yield going forward.

Okay.

And then lastly I think Mauricio mentioned on the repowerings and the like something about the CP capacity auction outcome maybe be an important data point for some of them at least and continuing them.

Could you elaborate a little bit more on that?

Yes, Steven, good morning.

As we articulated on the Investor Day, we are looking at repositioning the portfolio particularly around fuel conversions and environmental CapEx.

And as you can appreciate some of those investments are focused primarily on capacity revenues.

So the outcome of the capacity performance auction is pretty important.

Now we are encouraged by the data point that the most recent New England capacity auction provided to us.

So while we have all the economic analysis and we have outlined the asset optimization plan, we want to have some certainty in terms of what is the final rule and I guess the rules of the game before we make any incremental capital commitment.

Okay, thank you.

Thanks, Steve.

Kevin, we want to end really at 10 because we have a 10:30 NRG Yield call and we've got some things to do in the meantime.

So we'll take two more questions, please.

Our next question comes from Jonathan Arnold with Deutsche Bank.

Hi.

Quick one on you're not going to need to purchase more NRG Yield shares, but could you and under what circumstances might you consider selling down some of your interest post the conversion?

Or should we just anticipate that the ownership percentage will decline as Yield grows?

Addressing that in reverse order, yes that is what the expectation is, is that our ownership stake will reduce over time as NRG Yield issues equity, not as NRG sells down equity.

The latter of those two is not our intention, however just to be clear the structure affords us the ability to do so.

We'd have to convert the units that we own into shares, but that is not our intention at this time moving forward.

Thanks, Kirk.

The split is simply just for liquidity and future issuance optimization, is that right?

Basically, yes that's right.

Okay, thank you.

Thanks Jonathan.

So last question?

Our next question comes from Gregg Orrill with Barclays.

Hi, thanks for taking my question.

Just following up on the Carlsbad comments, you said you expect that to come online in fall of 2017.

Just maybe more specifically, how do you expect to run the facility, and how much would your repowering cost, and how should we think about the benefits of that?

Sure, Gregg, it's Kirk.

We haven't yet provided the capital cost of that.

The best thing that I can give you is the Carlsbad project is a little over 600 megawatts in total size for that.

And the one thing I can say is -- and I provided guidance similar to this when folks have asked this about some of the conventional plants that were in the ROFO portfolio and how to think about things like CASD, and certainly we expect to project finance that using a construction facility and a permanent amortizing loan in similar fashion we've done in the past.

My expectation is that the cash available for distribution or the equity cash flows coming off of that project will be similar on average cash flow per megawatt basis.

And to give you a sense if you look back, and I've made these remarks before in addressing this question with respect to the assets that are in NRG Yield today, that range on a equity cash flow or CASD per megawatt basis is in the $35 to $45 a KW range.

Thank you.

So Kevin, I think we're reaching the top of the hour.

So I just want to thank everyone for participating on the call and for those who are going to participate in the NRG Yield call at 10:30.

I'm not sure there will be all that much more new information there, but at least you'll get to see us wearing our NRG Yield hats if you choose to join in.

Thank you very much and we'll look forward to talking to you next quarter.

Ladies and gentlemen this does conclude today's presentation.

You may now disconnect and have a wonderful day.