NRG Energy Inc (NRG) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NRG Energy first-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Matt Orendorff, Managing Director of Investor Relations.

Please, go ahead.

Thank you, Danielle.

Good morning, and welcome to NRG Energy's first-quarter 2015 earnings conference call.

This morning's call is being broadcast live over the phone and via webcast, which can be located on the Investor Relations section of our website at www.nrg.com under Presentations & Webcast.

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

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 urged 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 of the Company's operating 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.

With that, I will now turn the call over to David Crane, NRG's President and Chief Executive Officer.

Thank you, Matt.

Good morning, everyone.

Thank you for joining us.

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

Additionally, and available for questions, are Chris Moser, who heads our Commercial Operations, Elizabeth Killinger, who is the head of Home Retail, and Kelcy Pegler Jr, who is the head of Home Solar.

Somewhat unusually, we're actually communicating with you from multiple locations, so if we run into technological issues, please bear with us.

We've got a lot of great news to update you on today, and I realize we're starting slightly later than normal and during market hours, so we're going to get right into it and try and get through it as quickly as we can, giving you all the information you need.

Starting on slide 3 of the presentation.

The story of NRG's first-quarter 2015 is quite simple, record financial performance.

$840 million of adjusted EBITDA, breaking our previous record, which was set just last year.

This achievement is truly remarkable given that, that previous high in 2014 had received a substantial boost from the polar vortex, which occurred in January of that year.

What is even more remarkable is that we beat the existing record in the face of very, very soft wholesale pricing in our core markets.

Average on-peak prices in PJM in the first quarter of 2015 were just 50% of what they were in the first quarter of 2014.

In ERCOT, in the first quarter, the average on-peak prices were just 40% of what they were last year.

In my mind, and hopefully in yours, this is proof positive of the superiority of our integrated wholesale/retail business model.

Of course, the right business model only gets you to the starting line.

Our record first-quarter performance is entirely attributable to the superb execution of our plant operations and commercial operations teams from the first day of the quarter to the last.

I want to publicly thank Mauricio, Chris Moser, Fran Sullivan and their respective teams for a quarter very well done.

I especially want to thank Elizabeth Killinger and her entire team at NRG Retail for simply hitting the ball out of the park with a stunning $166 million of adjusted EBITDA.

Moving to slide 4, I want to note a couple of critical issues on this slide that Mauricio and Kirk will cover more completely in their sections of the presentation.

We realized that we're talking in the midst of a persistently challenging commodity price environment and NRG's conventional businesses are, for the most part, exposed to commodity price curve-based valuation.

For that reason, it has become common in the market over the past several years for analysts to evaluate businesses like ours on an open EBITDA basis.

While I have no particular problem, intellectually or otherwise, with open EBITDA analysis, it obviously fails to take into account the value of a savvy hedging program well executed on a timely basis.

That is what we have at NRG and that is what we've demonstrated.

For years it's been the strategy of NRG to smooth out as much of the downward price curve volatility as we can through this active base-load hedging program.

This quarter has been no exception, and I am very pleased with what our hedging team has accomplished, both with respect to the balance of 2015 and into 2016.

As you all know, spot natural gas prices are indeed very low, in particular, but we have seen this movie before, back in 2012, we did okay then and I am confident we will do okay again now, and we will navigate our way through this trough successfully thanks in significant part to the hedging program that Mauricio will shine some light on that later.

The other topic I address on this slide, which also will be touched on by both Mauricio and Kirk, is cash flow and capital expenditures.

NRG always has been a cash flow generative machine, and indeed from the beginning of the new NRG era in 2003, I told our investors that we always would manage NRG for cash, and that has not changed.

It has, however, been obscured recently by the fact that we are right in the middle of a three-year spike in our CapEx, arising largely out of the GenOn and EME acquisitions, as we spend and unusually large amount on major maintenance, environmental remediation, fuel conversions and repowerings of our expanded fleet.

While we are not yet quite at the end of the tunnel with respect to this program, we are almost over the hump.

Mauricio will show how the reinvestment program wraps up in 2016.

Come 2017, NRG shareholders will experience the twin benefit, both the EBITDA generated by those repowered and converted assets and also of the substantially greater free cash available for other allocations.

Since we do expect to have substantially more capital to allocate, I think it's a long passed time that we, and particularly me, provide you with some simplified clarity as to how we think about capital allocation at NRG in the past and into the foreseeable future.

If you turn to slide 5, you will see two simple ways to think about capital allocation at NRG.

What we call the 70/20/10 principal and the one-third rule, or the third's rule.

First, with respect to 70/20/10.

Since NRG embarked on its present strategic course four or five years ago, namely to continue to consolidate and flourish in the conventional power sector while positioning ourselves as an early mover in clean energy, we settled on a rough rule of thumb for our capital expenditures.

70% reinvestment in the assets and businesses that generate the preponderance of our current cash flow, 20% invested as equity capital in contracted assets that constitute the best and most realizable growth opportunities for NRG in the post merchant era.

And 10% invested into more speculative, early mover projects and businesses that have the potential to meaningfully expand universal opportunities for our business.

When describing the 70/20/10 rule internally, which is something we actually do a lot, it is not uncommon for us to draw the analogy to allocation of labor and agriculture, 70% of the time spent on harvesting, 20% of the time spent growing, and 10% planting seeds.

While 70/20/10 is more a guideline for us than a hard and fast rule, it is a good metric.

And we believe it has served us and our shareholders well, in terms of the current positioning of the Company, and we plan to continue with it.

We introduce it to you, here, to help you understand how we are thinking about reinvesting this cash generative business over the next few years.

On the bottom half of slide 5, I turn to a more recent and high-quality phenomenon.

What to do with a substantial amount of cash proceeds to be returned to NRG as a result of asset drop-downs to NRG Yield.

This is highly relevant issue, as we expect roughly $600 million of drop-downs to NRG Yield to be announced over the balance of 2015.

The way we think about this is that the removal on an unconsolidated basis of NRG's contracted and non-commodity exposed cash generative assets, over time, from NRG's balance sheet to NRG Yield's balance sheet requires us to think about the pro forma NRG balance sheet left supporting the merchant, i.e., commodity exposed side of our business.

Without the contracted assets it is seems to us that the prudent thing to do is some right-sizing of that pro forma balance sheet, with such right-sizing involving both voluntary debt reduction and equity retirement.

We also, of course, have to allocate some drop-down proceeds to restocking the pipeline of contracted assets for feature drop downs.

As such, and Kirk will explain this further, we are announcing today one-third/one-third/one-third rule associated with the receipt of future drop-down proceeds.

On a final note, and to amplify something I said on this topic when we announced the $100 million phase two of our share buyback program in March, was that we believe, given how much the Company's businesses have evolved over the past several years, there remains a significant disconnect and distortion between the Company's performance and prospects on one hand and the commodity price curve lens through which Wall Street views us and anticipates our future performance on the other hand.

Witness, for example, the fact that we can be announcing here a record first quarter, projecting a full-year result well in excess of $3 billion of adjusted EBITDA, and clearly becoming a real player in the red-hot home solar space, and our stock is down some 50% since last summer.

Largely, I believe, because we exist in a sub $3 natural gas price environment.

Surely, there have been other contributing factors contributing to our abysmal share-price performance, some of our own making -- some of my own making, but this gas price environment looms largest, notwithstanding, its demonstrably reduced relevance to our near-term financial performance.

With the $80 million we added to the buyback bucket today and a $200 million of drop-down proceeds connected from buybacks that we expect to re-charge the buyback program as the year goes on, I want to reiterate that we fully intend to enter the market to snap up our stock when it can be had at the exceptional bargain and buy at current price levels.

With that, I will turn it over to Mauricio.

Thank you, David.

Good morning, everyone.

We are off to a good start in 2015 with our integrated platform performing exceptionally well during the quarter.

A combination of higher retail loads in Texas, opportunistic hedging and solid operational performance allowed us to once again report record financial results for the quarter, but more importantly, reaffirm guidance for the year.

Keep in mind these results were achieved despite the fact that wholesale power prices were 50% lower than last year, underscoring the importance of our integrated platform that performs under multiple price and weather scenarios.

During the quarter, we also significantly increased our hedges in 2016, effectively protecting our earnings for the next two years, given our concerns on lower gas prices for the summer.

In addition, our wholesale asset optimization and development program, which I will discuss in more detail in a few slides remains largely on track.

Moving to our wholesale operational metrics on slide 7, we had another quarter of top quartile safety performance with 147 out of 167 facilities without single recordable injury.

Total generation was down 12% for the quarter on a pro forma basis, driven primarily by lower generation in the east, where power prices were 50% lower than last year.

In the Gulf, generation was flat as nuclear and gas generation offset lower coal production.

In the west, generation was impacted by the retirement of our cold water plant.

Reliability improved during the quarter, demonstrating our efforts to ensure that our units are available when it matters the most, during peak price periods.

Over time, these metrics will become more relevant under the new capacity performance construct.

The operations team remains focused on executing our spring outage season with nearly 173 planned outages, a significant logistical task when you have more than 150 sites across your portfolio.

Turning to Home operations on slide 8. I am pleased to report that our Retail business had another strong quarter, delivering $166 million in adjusted EBITDA, exceeding last year's first quarter by $51 million.

These results were driven by effective margins and risk management combined with colder than normal weather and lower supply costs.

Margins were strong and consistent with last year's quarterly performance, despite the addition of lower margins of Dominion load.

One-year later, we continue to achieve better than expected results from the Dominion acquisition on both customer accounts and EBITDA.

Our customer account is performing in line with plan, given the anticipated Dominion contract expirations, which we expect to be complete by year end.

Additionally, we continue to make progress across our Home Solar segment.

During the first quarter, our customer base increased to over 16,000 customers, an increase of 21% since the end of 2014.

More importantly however, during the month of April, we entered into a new partnership with NRG Yield and executed on additional tax equity financings to help facilitate our growth through the end of the year.

Kirk will discuss this in more detail.

Moving on to our market update on slide 9 and starting with the Northeast as the most immediate opportunity for our generation portfolio.

As you can see in the left-hand chart, we are seeing very robust, forward energy prices in PJM, as supply tightens due to stricter environmental regulations benefiting our entire 17-gigawatt portfolio.

In the medium term, the opportunity turns from energy to capacity margins with implementation of capacity reforms in PJM in New England, which focuses on higher reliability during shortage conditions.

This premium capacity product will most likely result in higher prices in exchange for higher penalties for nonperformance.

As a generator with a large and diverse portfolio with fuel on site, we welcome these changes.

Furthermore, our fuel conversion and compliance strategy enable us to capitalize on these opportunity.

Turning to our costs.

I want to highlight the value of our integrated platform as a key differentiator versus other generators.

Not only were we able to outperform during a period of very low commodity prices, but in the time of lower liquidity in the market, we have a natural hedge between our wholesale portfolio and our retail franchise.

In the medium term, we believe our portfolio is well positioned to benefit from a very fragile situation in Texas.

Currently, there are two divergent views in the market.

ERCOT recently released their latest CDR report where they see reserve margins expanding by 5% in 2018 and beyond, and putting them well above target reserve margins.

This outlook, from our perspective, is a best-case scenario requiring three assumptions to happen at the same time, low load growth, incremental new supply and zero retirements.

We are skeptical about this.

Over the past few years, load grew at an average of 2% on a weather-normalized basis.

We expect less than forecasted new builds as participants respond rationally to a very depressed forward market, and we expect greater than zero retirements given the challenging price environment and stricter environmental rules.

When we do see a supply rationalization, our Texas fleets are surviving coal and gas units will be well positioned to capture additional value.

Moving to our hedging disclosures on slide 10.

We have turned our focus to 2016, where we have increased significantly our hedge level to roughly 75%, effectively reducing our commodity risk and cash flow variation for the next two years.

This is particularly important as we progress to higher than average CapEx years for our wholesale portfolio.

I want to take a moment and briefly explain the 2015 hedge levels of 109%.

Remember that this percent that's represents the amount of hedges sold against our current expected generation.

I emphasize the word expected.

There will be times when the expected generation decreased due to market changes, and unless we immediately buyback our hedges, these will result in a hedge level above 100%.

It is not that we over hedged the portfolio, but rather a timing issue on when we record results and when we buy some of our hedges back.

On the fuel side, we have seen significant decreases in commodity, fuel surcharges and transportation costs this year.

We are working closely with our coal supply chain partners to layer in additional hedges to balance our power sales.

Finally on slide 11 is a summary of our asset organization and development plan that I discussed with you on our last earnings call.

I want to highlight three points that may not be fully appreciated.

First, we're deploying this capital at very attractive returns.

Attractive repowering opportunities, are good NRG Yield candidates where capital can be replenished at a premium.

The asset revitalization program in [these] is done at very low multiples compared to new-build economics.

Second, and as David mentioned in his remark, this plan represents a significant commitment to our conventional business, given the repowering opportunities that we see and the changes in capacity markets.

Finally, as you can see in the bottom right-hand chart, this plan is front loaded in 2015 and 2016.

Beyond that, there is very little incremental environmental CapEx to comply with existing regulations.

Of course, as we identify new opportunities or see new environmental regulations, the outlook can change.

For now, there is a significant decrease in committed capital beyond 2016 that translates into additional free cash flow for the Company.

As we turn our attention to the summer months, I want to reassure you that we are focused on executing on near-term market opportunities, repositioning our generation portfolio and leveraging our integrated platform.

With that, I will turn it over to Kirk.

Thank you, Mauricio, and good morning, everyone.

Turning to the financial summary on slide 13, for the first three months of 2015, adjusted EBITDA totaled $840 million, which is an increase of $23 million over the same period in 2014.

NRG's record adjusted EBITDA in the first quarter of 2015 was achieved thanks to outstanding results from our wholesale and retail businesses and augmented by a contributions from the assets acquired in the EME, Alta Wind and Dominion transactions, which combined to more than offset the impact of the extreme weather first quarter of last year.

For the first quarter, free cash flow before growth totaled $364 million.

Supported by our substantial hedged position and the strong start to the year, we are once again reaffirming both EBITDA and free cash flow guidance with our expectations continuing to track to the upper quartile of those ranges.

NRG also made substantial progress during the quarter on a number of fronts.

Earlier this week the public shareholders of NRG Yield approved the proposal to create two new share classes via a stock split, providing both ongoing capital replenishment for NRG and substantial funding capacity for Yield, without the need for further NRG investment.

With this important step now behind us, we are pleased to announce a new framework for the allocation of the portion of NRG's excess capital equivalent to future drop-down proceeds, to be committed towards a balance of share repurchases, corporate debt reduction and reinvestment in future NRG Yield eligible projects.

Going forward, we expect Residential Solar leases to represent a meaningful portion of future drop-downs thanks to a newly established partnership with NRG Yield, which will permit our Home Solar business to benefit by accessing more competitive costs of capital while providing a new source of CAFD growth for Yield.

Having meaningfully expanded our Home Solar tax equity runway with two new facilities, we have the two key pieces in place to realize value at NRG today in excess of the capital requirements of this fast growing business.

We have also established a similar new $100 million partnership with NRG Yield for future drop-downs of DG Solar assets, which we expect to occur over the balance of 2015, providing further value realization at NRG and expanded growth for Yield.

We will provide more details on this important partnership in the next quarter, as we initiate our first DG Solar drop-down.

Finally, having completed $56 million of the $100 million second phase of our 2015 share buyback program, we are pleased to announce an increase of $81 million to this second phase, thereby increasing remaining capacity to $125 million, providing us additional repurchasing power, which will be further augmented by future repurchases enabled by the NRG Yield drop-down one-third rule David mentioned earlier.

Turning to slide 14, I would like to provide a few highlights of the recently approved NRG Yield recapitalization, which provides significant benefits to both companies.

The creation of the 1/100th vote Class C shares, provides NRG Yield a substantial source of equity growth funding without reliance on NRG capital.

These new C shares will be the primary source of future equity in NRG Yield, and the low-vote structure gives Yield the ability to raise over $20 billion in new public equity without jeopardizing the strategic relationship with NRG.

The two-for-one stock split at NRG Yield will be effective May 14, with no change in total dividends paid.

As a result, we have now also expanded the pipeline of ROFO assets to include 900 megawatts, consisting primarily of the EME wind assets, which we expect to offer NRG Yield later this quarter.

The expanded pipeline, now, also includes up to $250 million in Residential Solar and the DG portfolios and 800 megawatts of long-term contracted gas comprised of our Carlsbad and Mandalay projects in California, expected to reach COD in 2017 and 2020.

On slide 15 is a summary of the expected impact of our tax equity facilities and new NRG Yield partnership in realizing the key objective I first introduced at investor day in January, monetizing leases at value to NRG today.

Partnering with Yield provides Home Solar access to competitively advantage capital while enhancing NRG Yield's CAFD growth.

We have already dropped down approximately 2,000 existing leases to NRG Yield for $26 million in proceeds.

In addition, the $150 million equity commitment from NRG Yield and the associated tax equity proceeds provide capacity to monetize approximately 13,000 additional leases at value in excess of our expected capital requirements, leading to $100 million in near-term value to be realized by NRG in 2015.

This should also put us well along the path to realize total value, which also exceeds G&A and marketing expenses for all of 2015, as we expect to seek future authorization to fund our ongoing leasing efforts over the balance of the year.

NRG Yield will benefit from a targeted 7.5% CAFD yield over the lease term, which equates to approximately $11 million in annual CAFD from its initial $150 million investment.

Turning to slide 16, I would like to provide some additional details on the 70/20/10 capital expenditure guideline David mentioned earlier.

The chart shows capital expenditures by year, which include maintenance and environmental CapEx as well as the growth investments portion of capital allocation.

These are categorized by conventional -- which is primarily wholesale and retail, proven growth, our contracted assets, and high-growth opportunities.

To provide some historical perspective I've included 2013 and 2014.

Turning to 2015, NRG has committed $1.7 billion in capital expenditures, approximately 70% is reinvestment in our conventional businesses, which provide the bulk of NRG's cash generative power and is largely comprised of our asset optimization projects, environmental capital, which includes the Midwest Gen assets, and maintenance to ensure reliability across the fleet.

We have committed 20% to Yield eligible contracted assets, including Residential Solar and DG Solar and approximately 10% to eVgo and our Carbon 360 project.

In 2016 we expect $1.6 billion in total CapEx consistent with 70/20/10, as we complete our environmental and asset optimization programs and bring Carbon 360 to COD in early 2017.

We expect to continue our Yield eligible investment program in 2016, fueled by our one-third rule, which will then include spend on our California contracted gas plants.

Beyond 2016, as I mentioned on investor day, having completed our environmental programs to bring the fleet to current compliance, we expect a significant reduction in currently committed capital of over $500 million, which is also aided by the completion of the Carbon 360 project and a reduction in maintenance CapEx.

This should provide significant capital allocation flexibility and help ensure the continued delivery of robust free cash flow.

Turning to slide 17.

NRG expects to offer assets to NRG Yield over the remainder of 2015 with anticipated equity proceeds totaling approximately $600 million.

These drop-down proceeds are expected to be realized in two equal tranches to be offered in the second and fourth quarter of the year.

With the first consisting primarily of the EME wind assets and the second anchored by the remaining stake in CVSR currently held by NRG.

We also expect to drop-down Residential Solar and DG portfolios over the course of the year.

In order to provide greater clarity, maintain our target ratios and continue to return capital to shareholders, we are announcing a new plan as, a part of capital allocation, based on future drop-down proceeds.

We will allocate capital in amount consistent with these proceeds, in thirds, toward share repurchases, corporate debt reduction and investment in future Yield eligible projects.

The allocation to debt reduction is sized to offset the impact on corporate EBITDA from the portion of CAFD, which will be support dividends paid to NRG Yield's public shareholders, thereby allowing us to maintain our key credit metrics following each drop-down.

Sizing our capital allocation to share repurchases should help further clarify the direct a benefit of NRG Yield to our shareholders.

These feature buyback allocations are incremental to the expansion of phase two of our buyback program, we announced today.

Recycling the remaining proceeds helps replenish the drop-down pipeline with greater capital efficiency.

Turning to slide 18, by adding the expected proceeds from drop-down offerings over the remainder of 2015, NRG's gross capital available for allocation is just over $3 billion this year.

Inclusive of the impact of the one-thirds plan and the expanded phase two buyback program, we have committed $2.2 billion of this capital, nearly half of which is allocated to preserving balance sheet strength and returning capital to our shareholders.

Committed growth of $960 million represents the growth component of the 70/20/10 capital expenditures guideline I reviewed earlier.

Of the $860 million in excess capital then remaining in 2015, $500 million resides at the GenOn level, a portion of which will fund the completion of our operational improvement program there in 2016.

NRG level excess capital is $360 million, which includes the portion of the one-thirds plan earmarked for future NRG Yield eligible investment.

In summary on slide 19, in addition to our excellent quarterly performance, our enhanced capital allocation program, NRG Yield recap and new NRG Yield partnerships, place NRG on a firm footing to ensure continued balance sheet strength and expanded return of shareholder capital, while harnessing the power of the NRG Yield cost of capital to benefit our growing Home Solar, DG and contracted asset initiatives.

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

Thank you, Kirk, and thank you, Mauricio.

Operator, I think I will dispense with closing remarks, so we can just take questions from people on the phone.

So if you would open the lines.

(Operator Instructions)

Stephen Byrd, Morgan Stanley.

Good morning, and congratulations on multiple fronts.

Thanks, Stephen.

I wanted to talk about leveraging your retail business in the pursuit of your clean energy growth.

Can you just talk a little bit about lessons learned?

How is that actually working day-to-day in terms of being able to use that retail platform?

Stephen, that is a great question.

I could go on about how excited I am about the prospects there, Since we have the two experts in the room, why doesn't Elizabeth give her impression first, and then Kelcy?

Thank you, Stephen.

We really are making strong progress on cross-selling, and as you have heard from us before, we have been working on this together.

I will give you two examples.

The first is the example of selling our electricity customers an incremental product.

In Texas we have seen great success there, with about 22% of our customers buying more than one product from us.

We have moved out of our trial phase and really are gaining momentum in the East, where we are selling our solar customers electricity products.

We are also generating solar leads within our electricity conversations and sharing them with Kelcy's business.

At the end of the day, those are just examples of our Plus concept.

If a customer starts with us as an electricity customer, the Plus there would be Home Solar or backup generation or some of our warranty products or other new products we offer.

If they start as a solar customer, we can add electricity or backup generation or, again other products.

I will toss it over to Kelcy for anything else he might add.

I think Elizabeth covered it well.

We are moving from the early days into some meaningful progress, especially in the lead transition of sharing within the business groups.

I think, overall, from the cross-selling, the bundling, and the up-selling perspective, with recent news around solar plus battery being a winning concept, I think we feel validated in the Solar Plus or Electricity Plus strategy because we think it's a little more comprehensive of being able to put electricity, solar, EV charging, portable power, backup generation -- which could include a battery or natural gas generator.

We feel validated in our strategy there.

Great.

Thank you.

I just wanted to shift over to the partnership on distributed generation.

Is this the form of relationship that we should be thinking on a going-forward basis?

Or is this more opportunistic in the near term?

Just wanted to get a better sense that this is the sort of model that you all prefer going forward here with distributed generation?

You mean in terms of the way that the Yield and NRG are working together on Home Solar leases, and down the road on business to business?

Yes.

Kirk, do you want to address that?

Stephen, the high-level answer to that is, yes.

It is for the same reason for both distributed solar and Residential Solar, and that is just the ongoing, continual nature of the opportunity set, combined with the fact that, as you know, now that we have shifted from cash grants, exclusively, really into ITCs -- that requires that the equity funding basically be locked down once we reach COD.

For that reason, it is important for us to have capacity to be flexible and nimble when those opportunities present, and they tend to do so on a rolling and ongoing basis.

That affords us the ability to be nimble on both DG and Residential Solar.

Broadly speaking, the structure of those two partnerships, in terms of the sharing of cash flows between NRG and NRG Yield, especially NRG, towards the residual, as we retain the recontracting ability, will be similar between those two partnerships.

Understood.

Maybe just a follow up on the structure, Kirk.

In terms of the return threshold at which there is that effective flip, is there any color you can provide?

Or are you not quite at that point that you want to provide that?

The only thing -- I'd say it this way -- is that the CAFD Yield, which is an average, and I am using the example more tangibly from the Residential Solar partnership -- that is 7.5% Yield -- is a good way to think about the economics, or at least the sharing of the cash flows that are represented by that 95% that goes to NRG Yield.

Great.

Thank you very much.

Daniel Eggers, Credit Suisse.

Good morning.

Just on the buyback update, which was helpful -- can you walk us through, in addition to the recycling of the cash from drops [10-YLD], how you're thinking about allocation of cash between the free cash generation from the business as well as the proceed dropdown?

So, are there buckets we should be thinking about more comprehensively with all the cash you are generating?

Kirk, do you want to take that?

Sure.

The committed piece, and I'm speaking specifically -- I think your question, Dan, was directly on the buyback front.

The predictable component of that, the committed piece of that, is the one-thirds of the dropdown proceeds that is earmarked for share repurchases.

While certainly we can opportunistically supplement that with additional capital allocation that is really anchored by the free cash flow, a good example of which is the $81 million we added today, we maintain that flexibility.

The committed part of it is the one-thirds piece from the Yield dropdowns.

So, the free cash generation from the core business is going to follow the same strategy of using it as you see the best and brightest use at that point in time?

Yes.

That is a safe summary.

Yes.

On the Carlsbad plant, CPUC deferred a decision yet again.

What is your thinking as far as where their holdouts are on that project?

Are there alternatives to you guys if they decide not to approve development of that property?

Certainly, we hope -- in a world of getting things approved in California, this is pretty much par for the course.

We certainly support President Picker's alternative decision.

I think that they're now going to make a final decision in just a couple of weeks, I think May 19 or 21 or something like that.

So we certainly hope it goes the right way because we think the plant is, obviously, the right solution for Southern California in the absence of the SONGS plant.

If it does go the other way -- the project is not dead yet, it's just that the path to approval becomes longer and a little bit more opaque.

At the very least, I think there would be a delay; and we certainly hope, for our sake and for the sake of California, that, that's not the case.

I will stay to my two questions.

Thank you.

Jonathan Arnold, Deutsche Bank.

Good morning, guys.

Morning, Jonathan.

Could I just ask about the Home Solar customer adds?

It looks like you added less than 3,000 in the quarter.

Is this seasonality, weather related: Or should we just expect the ramp to really pick up later in the year?

How we view that Q1 result in the context of what I guess is like 20,000-odd adds you wanted to do this year?

Jonathan, I will ask Kelcy to address the question looking forward.

I think your assessment of the first quarter is correct.

First of all, we always anticipated a high ramp rate quarter on quarter during the year.

There is no doubt that our Home Solar business, which is a little unusual compared to the other main home solar companies in that we started as an East Coast-based home solar company.

You can imagine that no one in Massachusetts, which is one of the biggest markets, was thinking about or executing on putting home solar on their roof from about the 1st of February through mid-March.

It was definitely weather impacted.

We are confident for the rest of the year, and Kelcy can give you a little flavor of that.

Kelcy?

Thanks, David.

I think you framed it properly.

We were impacted by Northeast weather, which was extreme in states like Massachusetts -- and Connecticut, especially, had snow on the ground for the better parts of four weeks at a time.

We've always recognized that our full year will have a ramp through that full year.

If we experience similar growth rates from what a 2014 experienced, we're confident we're right in that ballpark for our full-year number in 2015.

We did gain considerable ground on some meaningful progress with the partnership with Yield, which you've heard Kirk talk about, and extending our tax runway.

There is a lot of progress, and not the least of which is really gaining a foothold in the California market, which will help mitigate that seasonality that we experienced in Q1 in future quarters.

Okay.

Great.

Could I just ask about Carlsbad?

Is the spending in the numbers, not in the numbers -- how should we think about that?

Kirk?

Jonathan, there is no meaningful amount of spend, currently, and that would, as it would ordinarily be the case in the growth investments component of capital allocation.

We expect the preponderance of that spend to really begin in earnest in 2016.

Okay.

Great.

Thanks a lot, guys.

Steve Fleishman, Wolfe Research.

Good morning.

Just one simple question.

Back at the analyst Day, I think you'd highlighted for 2015 that you were already tracking to maybe the upper half of the range for this year.

Maybe you could just comment on that?

Obviously, the first quarter was very good.

I actually think we said to the upper quarter of the range, and we're still tracking to that same upper quarter.

If I did not say --or if Kirk did not say upper quarter -- then we're saying it now.

I actually did.

(laughter)

Okay.

Thank you.

Angie Storozynski, Macquarie Capital.

Thank you.

I'm not going to ask questions about solar for once.

There is -- you guys have shown us this integrated platform between the generation assets and the retail assets, especially, it's shielding your cash flows and earnings and volatility associated with natural gas prices.

We're seeing that one of the UK utilities has just put its big retail business in the US for a strategic review.

I know that there's a bit of an overlap in regional service there, [Maurice], and I know you don't comment on specific transactions, but could you in general tell us, is it possible for you to enlarge your retail presence, especially in Texas?

Wow, yes -- I don't -- Certainly, we would look to expand retail where we could do so at value.

We like the platform we have.

Unlike when we bought Green Mountain or Energy Plus, we have the brands and we have what we need.

We would look at other portfolios.

I'm not sure I actually even know which portfolio you are talking about, but I can guess by the way you framed your question.

I don't have any insights on whether or not there's a market share issue.

It is safe to say that if there is not a market share issue, we will look at anything in the retail space.

Elizabeth, do you want to comment on that?

I think you hit it on the head.

I would add that we are passionate about our retail business, and the Texas market.

And to the degree we can acquire either additional customers through acquisition or normal channels, we will always look at opportunities to do so.

Okay.

The second one, more generic about M&A as well.

If you now have a new class of shares for NRG Yield that could allow you for third-party acquisitions, how should we think about it if both of the Companies were to acquire a big existing portfolio of operating assets, would it be immediately dropped down into NRG Yield, and as such boost near-term distribution growth?

Or would it be, in a way, warehoused at NRG or at some other facility in order to be preserved for future dropdowns in order to basically extend the growth of distributions into the future?

Angie, it is a very situationally specific answer to that question.

We've really looked at every situation.

Led by the independent directors at NRG Yield, they have repeatedly said they want to remain true to the idea that there's very specific risks they're willing to take and a lot of risk that they are not willing to take -- if there is a big acquisition, half merchant, half contracted, and it has a lot of integration that has to be done and all that.

They want to see that done at NRG first, and then receive the contracted assets when they are settled down.

On the other hand, they have done direct acquisitions of assets, which they perceived and we perceived did not require a lot of new risk-taking on their part.

So it's really case by case, is best I could tell you.

Great.

Thank you.

Julien Dumoulin-Smith, UBS.

Good morning.

Morning, Julien.

Wanted to come back to the conventional portfolio for a quick minute here.

On Maryland, if you could give a little bit more of an update around intentions there?

And the latest on the regulations, as well as the GenOn fleet on Bowline?

Is it your intention still to move forward there and bring that unit back up -- or fully back up, shall we say?

Mauricio, do you want to take that?

Good morning, Julien.

As you know, the Maryland implemented a emergency ruling for 2015 setting up a specific limit that can be complied across the entire portfolio.

We continue to work with MBE in a solution that does not necessarily require a unit-by-unit NOx limit that could potentially lead to additional environmental equipment or potentially fuel conversion of that, in these market conditions are non-economic.

We will continue to work with them to find a solution that is consistent with other federal regulations in terms of compliance at a total portfolio level.

And then on Bowline?

On Bowline we are moving [up] and re-rating our units.

We have invested, already, that capital at very attractive multiples.

We are bringing additional megawatts, given the pricing conditions that we are seeing in the lower Hudson Valley.

Okay, great.

A bigger thematic question here.

Obviously, a lot of storage of late, but I'm curious -- how big of an opportunity do you all see it?

Specifically, given the diversity of your current businesses, where do you see the best opportunity?

Is it the C&I space or the utilities sales space?

I'm just curious how you all are thinking about tackling that opportunity here?

I am sorry, you said specifically in storage?

Yes.

Indeed.

I think that we see the biggest opportunity -- and we've had some success there in California's Preferred Resources, where there is a contract for it.

From my perspective, and particularly the more distributed you get, merchant storage, if you will, I think is still some ways away from being a significant opportunity.

Okay.

Great.

Thank you.

Greg Gordon, Evercore.

Thanks, good morning.

Morning, Greg.

I only have one question, but it is in 27 parts.

(laughter)

Thank you.

We appreciate that.

That is just what we wanted on a Friday morning.

Three quick ones: just to clarify an answer to a prior question, the $1.6 billion of CapEx in 2016 currently budgeted -- that would go up if Carlsbad were approved?

David, do you want me to take that?

I'm sorry, Kirk, go ahead.

All right.

Greg, I would not expect that, the approval, to have an impact on the $1.6 billion.

From a timing perspective, while there may be a small amount of capital towards the end of the year, in any circumstance I would still expect the bulk of the capital toward Carlsbad to really be in earnest in 2016.

In 2016 or 2017?

Well, he asked in 2016.

Forgive me, I though you said in 2015.

Yes it would start in 2016; sorry about that.

That would be -- you would -- so the $1.6 billion would go up?

Yes.

The second question was with regard to the excess capital remaining -- the $860 million of which $500 million is at GenOn and $360 million at NRG.

I think you said $200 million of that is associated with the replenishment of NRG Yield eligible assets.

So that means, for all intents and purposes, there is $106 million for the balance of this year that is unallocated?

Kirk?

When you are looking at the $360 million that's at the bottom there, that is correct.

Although I would say within the $960 million of committed capital that is on the growth investments page, that really includes the line of sight we have right now on the remaining NRG Yield eligible assets.

So while $200 million of that $360 million is the one-thirds component that goes towards Yield eligible assets, I would expect those dollars more likely to be spent in 2016 and moving forward.

I don't see a significant increase right now in allocation toward Yield-eligible investments, other than that which is already subsumed within that $960 million of growth capital.

I do want to go back to your question.

I apologize for the confusion over 2015 and 2016.

When you go to the slide on capital expenditures, I said Carlsbad would be an increase.

I want to clarify that point.

We provided that 2016 number for a reason.

Part of the committed capital in there is the Carlsbad plant and the Mandalay plant.

Forgive me for misunderstanding your question; that is included in the 2016 capital expenditures.

Great.

That was exactly what I needed.

Thank you.

Final question for Mauricio.

I think in the first quarter, vis-a-vis how the stock price traded, people definitely forgot how strong a counter-cyclical hedge your retail business is relative to your wholesale position in Texas.

You have not changed your 2015 guidance for Home Retail.

If we continue to see depressed gas prices, depressed Spark spreads, depressed wholesale prices in Texas for an extended period of time, given the tenor of your contracts, how do you think you trend in that $575 million to $650 million guidance range through the rest of the year?

Keep in mind, that you need two elements for an overperformance in retail.

Not only you need lower commodity prices that translate in lower supply costs, but you also need higher load given to extreme weather conditions.

In the case of Q1, you had colder than normal weather.

As we look at the rest of the year, I think it is a little too early to tell how weather is going to play out.

It's a little disingenuous to start making predictions about whether it's going to be hotter than normal or not.

Certainly, if those two elements present themselves in the summer, we can expect retail to overperform.

Thank you, gentlemen.

Have a good morning.

Brian Chin, Merrill Lynch.

My questions we're asked and answered.

Thank you.

Ryan Caylor, Tudor, Pickering, Holt.

Good morning.

Good morning.

My questions were answered regarding Carlsbad, but regarding the other California repowering project added to the NYLD ROFO list, given there is CapEx allocated to both in 2016, can you provide us with an update on Mandalay?

And whether there is any read-throughs from the Carlsbad process?

That is a good question.

I don't know of any; I think they are quite independent of each other.

I would say I'm not perfectly informed on that.

Mauricio, do you have any viewpoint on that?

I think the Mandalay project is back in the -- at the end of the decade.

What we provided to you is in the next two years.

The capital required for that project would be in the latter part of the decade.

I don't think it will be reflected on the numbers.

Kirk?

Not reflected on the numbers, and I am not aware of any read-through in terms of the situation with the Carlsbad project onto Mandalay, no.

Great.

Thanks.

Thank you.

That concludes today's Q&A session.

I would now like to turn the call back to David Crane for any closing remark.

Thank you, Operator, and thank you, all, for participating on this Friday morning.

We look forward to talking to you again next quarter.

Thanks.

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

This does conclude today's program.

You may all disconnect.

Everyone, have a great day.