NRG Energy Inc (NRG) 2015 Q2 法說會逐字稿

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

(Operator Instructions)

As a reminder this conference call is being recorded.

I would now like to turn the conference over to Matt Orendorff, Managing Director of Investor Relations.

Please begin.

Thank you, Latoya.

Good morning and welcome to NRG's second-quarter 2015 earnings 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 and Webcasts.

Because this call will be limited to one hour we ask that you limit yourself to only one question with one follow-up 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 the 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 of the Company's operating and financial results.

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

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

Thank you, Matt.

And good morning, everyone.

Thank you for joining us and our earlier than our usually 9:00 scheduled time.

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

Both of them will be giving part of the presentation.

Additionally, Chris Moser, the Head of Commercial Operations, Elizabeth Killinger Head of NRG Home Retail and Kelcy Pegler, Jr., the Head of NRG Home Solar are joining me here and will be available to answer your questions that pertain to their parts of our business.

Starting with the slide deck on slide 3, if you're following along with that, I'm pleased to announce today that NRG has continued the positive continued positive momentum started in the first quarter of the year by reporting second-quarter adjusted EBITDA of $729 million, which gives us $1.569 billion of adjusted EBITDA through the first half of 2015, and keeps us on track to achieve a full-year result comfortably within our $3.2 billion to $3.4 billion guidance range, notwithstanding the very challenging commodity price environment that we have been in for the entire year.

As noted in our press release, this favorable financial results has been spearheaded by our retail franchise led by Elizabeth Killinger and her retail management team who have gone from strength to strength, not only preserving healthy retail margins but also by retaining and acquiring customers at rates that have exceeded both our expectations and previous year's performance.

Of course, this good financial news has been significantly tempered by the fact that to date, at least, our shareholders haven't benefited from our improvement in year-on-year financial performance as our share price, like others in our industry, is significantly down since the beginning of the year and since our second-quarter 2014 call 12 months ago.

What this means, of course, taking the liberty of converting our adjusted EBITDA to free cash flow off page, is that we are now trading at a price that implies a mid-teens free cash flow yield, actually 16% for 2015.

And the good news is that given the consistency of our baseload hedging program and the strength of our core wholesale retail combination, we are confident that were these share prices to persist, we would continue to be realizing mid-teens free cash flow yield, if not higher, for the remainder of the decade.

As we look ahead over the remainder of the year, we see more regions for optimism and even bullishness.

And those are listed on this page.

We expect significantly more proceeds from NRG Yield dropdowns, fueling more buybacks, more delevering and more reinvestment in contracted assets.

There's the long-awaited PJM auction occurring in just a few days, that under the new rules places a financial premium on dependability, and should favor an operator like ours that operates a fleet, does so reliably, and includes power generation facilities not dependent on an interruptible gas supply, like many others in the market.

There's our home solar business which is ramping up quickly.

Our daily bookings 90% higher at the end of the second quarter than at the first quarter.

And we're achieving almost all that having barely begun to scratch the all-important California home solar market.

And, finally, there's the fuel conversions and other fleet repositioning projects that are proceeding at pace and remain on track to come online over the balance of 2015 and calendar year 2016, with a significant drop-off in capital spending to follow and the commensurate increase in free cash flow yield.

All in all it's an optimistic picture for NRG that belies the market pessimism arising out of the low commodity currently market currently gripping the entire energy commodities complex.

Kirk and Mauricio will talk more about these financial results and the stellar operating performance that underpins them.

Plus they will discuss what's to come in terms of dropdowns, PJM auctions, home solar bookings and plan conversions.

But before I turn it over to them, let me make just a couple more points.

Turning to slide 4, speaking today as we are, one day after the President's announcement of his clean power plan, it seems clear to us that the one true path for an incumbent power provider like us is to build an edifice of new clean energy technologies, capabilities and assets on top of a rock solid foundation of multi-fuel multi-market across-the-merit order conventional generation.

In doing all of this timing matters.

We and the rest of the industry continue to bear the responsibility for keeping the lights on in the short to medium term, which in turn depends for the foreseeable future on the sustained excellence we have demonstrated in the reliable operations and maintenance of our conventional fleet.

But to prepare for the future as the 21st century energy company there are three essential capabilities which we need to continue to strengthen and grow.

First, there's retail.

There simply is no substitute in the coming age of energy choice and personal energy alternatives to having a positive energy relationship with the end-use energy consumer.

And the more end-use energy consumers we can have a relationship with, the better.

Second, renewables -- and by renewables I mean mainly solar as the future is going to be increasingly solar powered and increasingly distributed.

If you think about it, it's amazing how quickly we have gone from hearing how prohibitively expensive solar power is just a couple years ago to how often we don't hear about how expensive it is now.

And, third, there's the yield vehicle because even with the recent market glut of yield paper and the ensuing selloff, NRG Yield still provides us with a competitive cost of capital to deploy for contracted assets that our immediate competitors cannot match.

So, while some of our competitors have taken steps in our direction, and certainly more will have to follow if they wish to be relevant deeper into the 21st century, at NRG we have been building these capabilities for six years now and are more equipped than anyone to not only address the changes in the industry but to make them our competitive advantage.

We have had advances and we have had setbacks, but as we sit here in the middle of 2015 I feel confident that we are advancing on all fronts, gathering momentum as we go.

And as we go, our principal focus remains to ensure that our shareholders realize the value of what we have been building and will continue to build in the months and years to come.

Finally, on slide 5 I reiterate the principles articulated on our previous earnings call, quantifying how we're thinking about capital allocation in connection with building a clean energy business on the foundation of a conventional generation platform.

We are as, Kirk will talk about later, on track this year to adhere to the 70/20/10 guideline which governs the balance of our capital reinvestment strategy between reinvesting in our foundational strength of conventional generation assets, and investing in the newer customer-facing clean energy businesses that we have been building on top of our base.

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

Thank you, David, and good morning.

Following on the good start we have for the year, our integrated portfolio delivered another quarter of strong results, allowing us to reaffirm guidance for the full year.

These highlight the strength of our diverse generational portfolio and complementary wholesale retail model despite the fact that commodity prices remain close to half of what they were last year.

The hedging program and risk management activities executed by our commercial team protected the value of our wholesale business, while our retail business outperformed expectations through good margin management and lower supply costs.

This quarter is yet again another example of how our complementary business model performs well under adverse price and weather scenarios.

During the quarter we increased our hedge levels in 2016 and 2017, effectively protecting our earnings for the next two years.

This is particularly important over the next 18 months as we progress through higher than average CapEx years while executing our assets asset enhancement strategy, which I will cover in more detail in a minute.

This strategy positions our portfolio to benefit from critical market develops like PJM's capacity performance which will be implemented later this month.

Moving onto our traditional operational metrics on slide 7, we had another quarter of top-quartile safety performance with 151 out of 167 facilities without a single recordable injury.

Conventional generation was down 6% versus the same period last year, driven primarily by an unusually active planned outage season and soft commodity prices.

The soft prices significantly influence the units dispatched throughout our fleet, resulting in an 18% decrease to baseload generation relative to the same quarter last year.

This was partially offset with a 52% increase in our gas and oil fleet output over the same period.

On a regional basis, Texas generation was higher by 8% thanks to better performance by STP and our gas portfolio; while the East and South Central were lower due to some gas switching and environmental retrofit outages.

The operations team remains focused throughout the spring completing 173 planned outages including complex environmental compliance and repowering outages.

Despite the reduction in generation of service hours, our baseload units availability improved and performed when the market needed them.

Slide 8 provides a more detailed update on the progress made on our development and asset optimization efforts.

It's been an important six months.

In the first quarter we completed the environmental retrofit at Big Cajun, Harris and Limestone.

This quarter we completed the coal-to-gas conversion at Big Cajun Unit 2, just in time for the important summer months, and the environmental retrofit at Waukegan 8, Sayreville, and Gilbert.

We also restored 388 megawatts of incremental capacity in the premium lower Hudson Valley capacity zone in New York at very attractive economics.

This was the direct result of the market providing the right price signal required to have not only reliable capacity but increased fuel certainty and fuel flexibility in a high demand zone.

Turning to slide 9, the second quarter was another strong quarter for NRG Home where we delivered the best second-quarter results for the retail segment since NRG's purchase of Reliant retail in 2009.

Total customer count was in line with expectations with a decline of 18,000 customers, driven by less than expected attrition from the lower margin Northeast Dominion customers that we acquired last year.

When excluding those contracts, the recurring customer count grew in Texas [NDs] by a total of 19,000 customers, demonstrating the continued strong momentum we achieved in attracting and retaining customers with innovative products and services.

One of the reasons for our strong retail performance has been the subdued wholesale prices in ERCOT, our largest retail market.

Very little has changed since the last update, as you can see on slide 10.

Demand in ERCOT remains strong with close to 2.5% growth for the quarter despite lower oil prices, as you can see on the upper left chart.

While we have tempered our expectations for the balance of the year, we have yet to see the impact on power demand.

On the supply side, there are not many new projects beyond the ones announced on the back of potential capacity markets and cost advantage brownfield developments.

As you can see on the lower left-hand chart, both historical and forward spark spreads now expanding over seven years do not support the economics of even brownfield projects.

This will not only make future projects less likely, but also puts existing plants at risk of mothball or shutdown.

This supply rationalization prompted by economics and potential stricture environmental rules could tighten the fundamentals even more so and increase the probability of scarcity prices sooner than later.

While our large low-cost and environmentally controlled portfolio remains competitive and well hedged for the next two years, we will not hesitate in making the right economic decision on behalf of our shareholders if the market continues to behave in such an erratic way.

For now, all eyes are on next week with temperatures rising in Texas over 100 degrees for several consecutive days.

Now moving to our hedging disclosures on slide 11, we continue our focus towards the next two years and have significantly increased our hedge levels to 84% in 2016, and 40% in 2017, effectively reducing our commodity risk and cash flow variation for the next two years.

On the fuel side, we continue to see decreases in commodity costs, fuel surcharges and transportation costs.

We continue to work closely with our coal supply change partners to layer in additional hedges to balance our power sales.

Our commercial team has done a great job in insulating us from the recent drop in gas and power prices, and has contributed significantly to our retail outperformance by effectively managing supply costs.

They are now focused on the remainder of the summer and getting ready for the upcoming PJM capacity performance auction.

So, a few words on the PJM auction on slide 12.

As you all know, FERC approved the PJM capacity performance proposal in June.

While we were disappointed by the delays in the transitional auction, the timeline is now set for the base procedural auction, with the transitional auction likely to happen in early September.

We have listed some of the main variables that participants will take into consideration during these auctions, which could provide some direction on price expectations.

We have not been shy on our support for stricter capacity market that ensures reliability.

As with any competitive market there will be winners and losers.

The characteristic of our portfolio in terms of fuel certainty, reliability, and scale, which allows us to better manage the penalty risk of underperformance, puts us in a great position to significantly benefit from this necessary change in the market and recognizes the value that our portfolio brings to the system.

So, to close, the prospects of improved capacity markets, a diverse and environmentally controlled portfolio, complemented by retail and opportunistic risk management activities are the foundation for strong results during this low commodity cycle and sets us up for even stronger results in the medium to long run.

With that I'll turn it over to Kirk.

Thank you, Mauricio, and good morning, everyone.

Beginning with the financial summary on slide 14, NRG delivered a total of $729 million in adjusted EBITDA for the second quarter and over $1.5 billion through the first half of the year.

Our second-quarter results were highlighted by a record $204 million in adjusted EBITDA from home retail, a 30% year-over-year increase, yet again highlighting the success of the integrated business model as results improved due to favorable supply costs.

Business and renew combined for $338 million in EBITDA for the quarter, while NRG Yield, which was impacted by historically low wind speeds which continued through quarter end, contributed $187 million.

Despite the subdued summer power prices and a reduction in expected wind production over the balance of the year, thanks to strong home retail performance combined with effective wholesale hedging we are again reaffirming our guidance ranges of $3.2 billion to $3.4 billion in adjusted EBITDA and $1.1 billion to $1.3 billion in free cash flow before growth for 2015.

As the next step towards achieving our objective of $600 million in dropdown offers to NRG Yield during 2015, on July 24 we offered Yield the opportunity to acquire a 75% stake in a portfolio of 12 wind projects consisting primarily of assets acquired as part of the EME transaction.

Subject to approval by NRG Yield independent directors, we anticipate the 75% stake will close by the end of this quarter with the remaining 25% to be offered in 2016.

We expect this transaction, combined with completed and ongoing dropdowns of business-to-business distributed solar and residential solar, to result in approximately $300 million in incremental proceeds from NRG Yield through September 30.

Finally, during the quarter NRG completed $107 million in additional share repurchases, which, when combined with our quarterly dividend, amounts to $156 million in capital returned to shareholders during the quarter.

We have $51 million in remaining share repurchase authorization, which we expect to be augmented by an additional $200 million in repurchase capacity, or one-third of our targeted $600 million in dropdowns, based on our previously announced capital allocation program for NRG Yield proceeds.

Turning to an update on 2015 NRG capital sources and uses on slide 15, and moving from left to right, NRG expects approximately $3.8 billion in cash available to fund capital expenditures, debt repayment and return to shareholders during all of 2015.

That cash basically consists of three components -- first, excess cash at year-end 2014, which is net of minimum cash reserved for liquidity; second, 2015 operating cash flow, which is basically the midpoint of our free cash flow guidance prior to deducting maintenance and environmental CapEx; and, third, expected cash proceeds from NRG Yield, which we continue to expect to be approximately $600 million.

2015 capital expenditures, as shown in the second column, total approximately $1.7 billion and include both maintenance and environmental CapEx as well as growth investment as a part of capital allocation.

As we reviewed last quarter about 70% of these capital expenditures represents reinvestment in our core generation fleet.

This includes approximately $800 million in maintenance and environmental CapEx to ensure reliability and environmental compliance across the fleet, while the remainder is allocated toward growth investment, primarily fuel conversions at GenOn to help ensure both ongoing eligibility for capacity payments and environmental compliance.

About 20% of 2015 CapEx is being invested in long-term contracted projects which we expect will ultimately be dropped down into Yield.

And, finally, slightly less than 10% is allocated toward high-growth investments like eVgo and our Carbon 360 project in Texas.

The remaining $2.3 billion in 2015 capital funds the balance of capital allocation.

Over $1.2 billion or slightly more than half of this amount is allocated equally towards debt reduction and a return of capital to shareholders in 2015.

This includes the expected impact from our capital allocation program relative to anticipated proceeds from Yield.

Over $600 million is expected to be returned to shareholders during 2015 and represents more than half of NRG's 2015 free cash flow before growth guidance.

This consists of NRG's $200 million annual dividend, nearly $190 million of shares already repurchased, with $51 million in remaining authorizations and up to $200 million in expected additional capacity related to the anticipated proceeds received from NRG Yield.

We expect approximately $900 million of remaining excess capital.

$500 million of this excess is at the GenOn level which we expect will help fund the completion of our fuel conversion projects across that part of the fleet, beyond 2015.

The remaining capital at NRG will be available either for additional allocation in 2015, or to help support capital commitments in 2016 towards the NRG portion of the 70/20/10 capital mix.

Turning to slide 16, I've provided an illustration to help underscore a point we first raised during our investor day, and which has been ongoing focus of discussions with many of you over the course of the year.

In short, we expect a decline in NRG's maintenance and environmental CapEx over the next few years as we complete the Midwest generation environmental projects, provides a powerful cushion to help sustain the robust free cash flow which has long been a cornerstone of the NRG story.

In order to highlight this point, we have assumed consensus adjusted EBITDA estimates beyond 2015 for illustrative purposes only, which, when combined with interest payments remaining relatively constant, and the expected substantial decline of over $400 million in annual maintenance and environmental CapEx by 2017, demonstrates NRG's ability to sustain robust free cash flow despite the near-term decline in EBITDA implied by these consensus estimates.

Importantly, our free cash flow is prior to the expected ongoing receipt of drop-down proceeds from NRG Yield, which, based on over $165 million in remaining right of first offer CAFD, and an illustrative 8% yield, implies over $2 billion in proceeds from future dropdowns, to certainly significantly augment this compelling cash flow story.

With that, I'll turn it back to David for Q&A.

Thank you, Kirk.

And, Latoya, I think we'll go directly to answering everyone's questions.

(Operator Instructions)

Dan Eggers, Credit Suisse.

Can you maybe help us understand when we should expect the Board to think about authorization and expansion of the share buyback program, and that $400 million that Kirk laid out in the slide, how you guys are looking at using that capital and when you think you might come to terms with what to do with it this year?

As to the $400 million in the second half of your question, Dan, as I indicated, that is available for further allocation in 2015.

We have, including the anticipated impact from the drop-downs of Yield, over $250 million remaining repurchase capacity, which obviously gives us the ability to utilize that towards share repurchase over the balance of the year.

As we continue to execute on those share repurchases, we would look at that remaining $400 million as additional capital allocation as we complete those share repurchases, either towards additional growth CapEx, or, if compelling, to augment our share repurchases subject to approval by the Board.

It's also, of course, available to fund the remaining growth capital which, pursuant to our conversation in the first quarter, is still relatively robust in 2016 in similar amounts as the 2015 numbers across the 70/20/10 complex.

Okay.

If you look at, as you guys showed, the mid-teens free cash flow yield on this year's numbers, how you rank out the return profile of other investments you're making, whether it be on the more green side of the business, the conventional side, versus the free cash flow yield being offered in the stock, particularly as you look out over the forward years where that number seems to get bigger.

I think, our approach, certainly, to returns on any capital allocation towards growth investments is done on a risk-adjusted return basis.

So, when we look at contracted assets, which are obviously earmarked for Yield, certainly they reflect the lower cost of capital of Yield.

But specifically in looking at more conventional traditional investments that comport with the core generation portfolio, we do, and our discussions with the Board are informed by, our current share price, which I've said in past conversations represents an opportunity cost.

So, we look and proactively compare the risk-adjusted return on our own portfolio, as represented by the opportunity to deploy capital towards repurchases, relative to the risk-adjusted return we see in similar investments on growth investments.

And that's exactly the way we think about that comparison on an apples-to-apples basis on growth investments

Okay.

So the view is that the investments you're making are risk-adjusted as compelling as buying back share at the margin today?

Yes.

Okay.

Thank you, guys.

Stephen Byrd, Morgan Stanley.

I wanted to talk about Texas a bit.

Mauricio, you had mentioned, just given the very low pricing that we're currently seeing, that over time NRG wouldn't hesitate to make the right decisions for shareholders.

But you also noted you've got an excellent hedge position.

When you think about the pain caused by low prices, there are obviously others that have generation assets in the state.

Many of those assets are not in full environmental compliance.

When you think about the pain and how that may shake out, how do you think about your portfolio relative to the competition in the state?

And over time would it be likely that others would effectively feel that pain first and there would be some more rationalization or how should we think about that?

Good morning, Stephen.

I think as I said on my remarks, and I will recharacterize it again, our portfolio, the scale of our portfolio, the size of our plants, they are environmentally controlled and they are in the low cost of the stack.

We think that we are pretty well positioned to weather these low commodity price scenario, and we expect to see other portfolios succumb to these very low prices.

Just look the second quarter as an example.

I think you would agree with me that prices were significantly low with gaps tinkering around $2.50 per MMBTU.

Our generation was higher in Texas quarter over quarter from last year to this year.

And if you dig deeper, our cogeneration was just slightly lower, I would say less than 5%.

We really didn't see a lot of coal-to-gas switching in our coal fleet.

On the other hand, our gas and oil units increased by over 60% in Texas.

So, that tells you the strength of our portfolio and the cost competitive advantage that we have.

My point is look no further to Q2 to just give you a glimpse on how competitive our portfolio is vis-a-vis other portfolios.

And, yes, while the hedges gives us a runway for three years and protects the financial outlook of our portfolio, keep in mind that we dispatch our units against market prices, not necessarily against whatever hedges we put in place.

That's great color.

Thank you.

Then just shifting over to solar, I wanted to talk about the cash drag from growth in solar.

You're making a big push into California.

Should we think about the cash drag as subsiding in 2016 as you start to get into larger scale and some of those costs start to abate and your scale increases?

How should we think about that cash drag?

Stephen, first of all, you obviously correctly identify, I think, where the extra cost is.

As we look at our options to create a stronger positioning in the California market, which, as you well know, is more than 50% of the total Home Solar market in the United States, you could acquire your way in, in which case, based on recent market comparables, you would have to pay an enormous premium, or we chose a different approach, which, as you said, was go for a bit of marketing surge.

Certainly as we sit here today, we don't have reason to believe that's a recurring cost that we'll have to duplicate every year, but we'll see how it goes.

But it was more planned as a one-off just to get the ball rolling to get the momentum.

Kirk, did you want to add to that?

The only thing I'd add is, given what we have in place currently with Yield, which we intend to continue and ramp up the pace of as our pace of installations begins to grow, the proceeds and more importantly, the comparative proceeds from a combination of NRG Yield and tax equity relative to the capital cost to put those leases in place, as I laid out that first 13,000 leases, results in approximately $100 million of proceeds from those two sources in excess of that capital.

Building that volume of installation in an order of magnitude so that the aggregate premium proceeds, if you will, meet and then ultimately exceed that overhead cost.

And our expectation is that will be the way that that offset or the positive cash flow ultimately comes to pass at NRG, especially as we move into 2016 and our volume and the installations move commensurately really higher to offset and exceed that fixed overhead, including marketing and G&A.

That's very helpful.

Thank you.

Greg Gordon, Evercore ISI.

One ticky-tack question.

The free cash flow before growth number hasn't changed despite the surge in spending in California because there's a reduction in one of the other line items.

So, can you explain what that is, that offset?

I'm looking for it in the slides here.

It was with distribution to noncontrolling interests.

There is a slight change in distributions to noncontrolling interest.

Some of that has to do with timing.

Some of it has to do with one of the tax equity facilities that we inherited as a part of the EME transaction.

But overall, in 2015, in particular relative to, let's say, 2014, are the benefits we get from the reduction in net working capital.

In particular, as you'll recall, we built greater inventories specifically on the oil side as well as on the coal side moving into 2015.

As we move throughout the year, we benefit from the fact that we have less investments in working capital -- in fact, a reduction in working capital -- and that helps to serve to offset some of that increase in Home Solar cash flow.

Great.

David, I just wanted to ask you a bigger picture question.

It's on a lot of people's minds given the significant decline in the share price.

I personally think that there's dissynergies to doing some sort of aggressive corporate separation to reposition the Company to be more attractive to investors who want a pure play green co versus, like let's say, a pure play brown co.

I think the sum of the parts are greater than their whole.

So, I agree with your perspective on it.

But how long do you wait before you say -- we know the market's not realizing the value, and even though there are dissynergies to creating pure plays, that's the way we need to go?

Greg, you hit the question on the head.

The first thing I would say is I agree with you, that while it may not be immediately apparent, there's actually industrial logic to keeping the conventional side of our business together with the renewable side.

And I tried to allude to that in my comments.

The world of energy is trending green at a very decisive pace.

But the one thing that trumps being green for everybody is making sure that the lights stay on, making sure that you have electricity.

And the best companies that can do that, given the fundamental intermittency of renewable power, are companies that are doing both conventional and doing green.

The industrial logic, to me, favors the path that NRG is on.

But we are a public company and we suffer whether you'd call it the conglomerate discount or the constant refrain that we hear that we are more complex than some of the people that Wall Street can invest in.

Value maximization for shareholders is what being a public company is about.

So I can't put a precise date on it, Greg.

What I would tell you is it's a combination of when does it become clear that Wall Street has difficulty digesting the idea of a conventional company going green.

But the second half of the equation is having a green company within NRG that not only can survive on its own feet as a public company but can win the battlefield, can be as competitive as possible.

So, we're about right now in 2015 -- and I think we're making great progress -- is building.

Everything within our portfolio is strengthening every day.

And when we get to that point -- and I don't think we'll get to that point in 2015, I would say probably in 2016 -- if we have, as you say, the sum of the parts where each of the parts or some combination of the parts is strong enough, and if that's the path that is going to result in shareholder value maximization, then we'll take it at that time.

We're looking at it every day.

Everything's on the table.

But right now, the instruction within the Company that everyone here at this table will say is the primary focus for everyone is building the strongest business that they possibly can in the area that they compete in.

Thank you, David.

Michael Lapides, Goldman Sachs.

One question, just trying to think through the hedging detail you provide in the back of the slide deck.

You've basically increased the amount of hedges pro rata, but decreased significantly the hedged price.

Is there a scenario where you would just say -- you know what?, I think the market's wrong, I'm willing to stay a lot more open than maybe I am currently -- and taking more of a directional view relative to continue hedging at what seemed like depressed pricing?

Michael, it's a good question and I can always count on you to try and ask another hedging question that you know Mauricio and Chris won't answer with any specificity.

But nonetheless, here they go, not answering your question.

Sadly, I had an answer to that question.

(laughter).

Not to throw a wrench into that.

What you have to think of, Michael, is first, yes, of course, we take an optimistic view on the hedging and we will leave things open if we think it's not priced very well.

But in direct answer to your question, some of the hedging that happened between Q1 and Q2, you have to remember that we have assets in a lot of different markets, and some of the markets are higher priced than others.

So, to the extent that we are hedging in areas which are not as highly priced, you're going to see the average hedged price come down.

And, Michael, keep in mind that the hedging positions are not just based on a directional view on the commodities.

It's also a combination of the free cash flow profile that we want to have, and, honestly, the absolute level of CapEx.

So, in the next two years we're executing a significant amount of environmental retrofits and repositioning our portfolio to benefit from very positive market developments.

We felt compelled to really have more visibility in these two years.

But make no mistake, when you go out 2017 and beyond, we're very open and I think that basically tells you a little bit, our point of view in terms of the future of commodity prices.

Understood.

One quick environmental CapEx question -- we've seen one or two of your peers, when talking about long-run environmental CapEx, they have the post MATS dip in the 2017-2018 timeframe but then a little bit of a reramp due to coal ash and maybe one or two other items.

Can you just give an update on where you stand position-wise for that?

Yes, Michael.

Look, when you look at the environmental regulations that we know now -- MATS, Casper -- we feel that the CapEx that we have provided to the Street is what we're going to require to be compliant.

When you think about the other rules, and you talk specifically about ash, there's two things that I should remind you and investors.

Number one, it was a very positive development to see EPA not to have ash as hazardous materials.

And then, number two, we at NRG don't necessarily have final disposal of wet ash in the Company.

So, it's hard to tell what would be the impact of the ash rule right now.

From what I can see, now probably will be in the tens of millions, not in the hundreds of millions.

But that's going to depend on the testing and the monitoring systems that we're going to put in place or that we're going to go through in the next two to three years before we need to put a compliance plan or remediation plan by 2018.

So, I don't expect to see the same ramp-up of environmental CapEx that we've been through the last couple of years and that we're going through right now beyond 2017.

Got it.

Thanks, guys.

Much appreciated.

Julien Dumoulin-Smith, UBS.

First a question maybe to follow up on Greg a little bit -- as you're thinking about the potential to break apart this business, what is the gating item?

Is it really going to be a decision around how the Street perceives the Company or is it more around reaching maturation in the business itself?

I suppose the key question here is, given the cash burn associated with NRG Home this year, how do you think about the spin of a company that has cash burn this year and prospectively ramps up?

What's the ideal timing?

How long do you need to wait?

The specific question about the cash burn, Kirk will add to that.

The other factors you mentioned -- what are we waiting for, or what's more important in terms of timing, the industrial logic or Wall Street receptivity or lack of receptivity to the Company as it's currently structured -- it's really hard to weigh those two since they're both important variables.

I'd say there's actually a third variable, Julien, which is how receptive is the Company to, let's call it, a green NRG based on what we see with other companies out there.

Because obviously there are pure play solar companies out there, which sometimes seem to be in great favor and other times to be seen in see less favor.

So, it's really those three factors that we have to weigh all at once.

For now, from our perspective, the key is to get ourselves in a position where we have the option to do something like that in fairly short order and then see how it goes.

In terms of the impact of the cash burn on the overall decision, Kirk, do you want to specifically address that?

What I would say is, as I mentioned in response to Greg Gordon's question earlier, that is, we are focused on the same thing with the Home Solar business within NRG that we would believe any pure play investor should be focused on, and that's demonstrating the ability to monetize those leases at a compelling premium that meets and exceeds the amount of operating cash flow drive we have there.

So, we are focused on building those volumes and demonstrating the ability that that pace of installation is on a trajectory and a run rate that will allow us to demonstrate the ability to do exactly that.

And that is have the proceeds from monetization exceed the operating cash flow so that the comprehensive cash flow story is a positive and growing one.

Excellent.

Perhaps as a follow-up, just to think about the investment, the $175 million in NRG Home, both in terms of targets, how are you ramping as you think about the expansion in California?

How does that jibe relative to what you discussed earlier this year at the analyst day?

And then, separately, related to that, to what extent is your NRG Home disclosures and prospective cash flows coming from these leases, somewhat similar?

And can we think about it in terms of guiding forward to peers in terms of the cash flow generated by these leases signed?

On the second component of that question, Julien, if I understand you correctly, partially because we believe, given that NRG, as I went through on the final slide of my presentation, is all about free cash flow, that's part of the reason why we have focused on telling the story around Home Solar as a comprehensive positive cash flow story, along the lines of what I just discussed.

That is, the receipt of proceeds from monetization of leases exceeding the operating cash flows is what we're focused on rather than necessarily focusing on the residual value on a per watt basis.

That is the reason why we've talked about things in that fashion.

And as we move closer, and I will ultimately give guidance in 2016, you should expect to see us provide you at least a more comprehensive view as we ramp into higher volumes in 2016 as to how that plays out in that positive cash flow story.

I'm not sure if that answered completely your question.

I may ask you to repeat the first part of it because I'm not sure I exactly followed what you were asking in the first piece of it, Julien.

Simply asked how are you doing relative to the targets you laid out at the analyst day given the decision to move into California.

What I would say, compared to where we are at analyst day -- and, Kelcy, I don't know if you want to add to this -- as we disclosed on the last quarter call, when we were at analyst day, we gave a target for the year.

Since our business is an East Coast business, which strongest sales channel is door-to-door, we got off to a very slow start with the weather situation in the East.

So, I would say in terms of achieving the total number of installations or bookings for the year that we talked about at the analyst day in January, it's probably too early to say whether we'll get fully to where we wanted to get because it was a very ambitious goal.

So, to get there from where we are now is a long putt.

But in terms of the rate of growth, by the end of second quarter on a daily run rate we were up 90% over the end of the first quarter.

So, we're blowing and going in terms of our momentum.

And that's really before hitting California.

And so California is upside to that.

Kelcy, do you want to add to that?

I think what's been discussed here today is we are a growth business positioned in this sophisticated corporation.

And we're tasked with building the strongest and most sustainable Home Solar business with what's complete awareness for our position in the space with our pure play competitors.

But, really, we're resolved in building a long-term sustainable approach around some of the competitive advantages that we have and certainly the customer base that exists.

I think the past year what we've seen is that the top tier has really come into focus.

A year ago if you said who are the top-tier players, there would probably be double-digit companies that were vying to be included in that.

Today I think what you've seen is top tier, which is the four or five companies, gain share, us included in that, and the rest of the space has moved backwards.

So, we're pleased with the success we have, which has mainly been built on our East Coast performance.

And we're excited about a lot of the seeding and development that we've done in half one that we believe will deliver results.

And that conviction is built on best months in business consecutively, both June and July.

So, we have a lot to be optimistic about.

Great.

Thank you.

Steve Fleishman, Wolfe Research.

Just on the PJM auction and your conversion, do you still have the flexibility to adjust your conversion plan in the event the auction goes one way or the other, or are you full bore no matter what?

The answer to that question, Steve, the shortest answer I've ever given, is yes, we have flexibility.

And you are right in assuming that the auction represents an important set of indicators for us.

So, yes, you're right, the next month is important and decisions will be made based on what we see.

Okay.

And then just maybe -- I apologize, one other question on the Home Solar -- the actual individual contracts and leases that you're signing, just how is that -- ignore the customer growth, et cetera -- how are the pricing and returns relative to what you anticipated?

From a returns perspective -- it's Kirk -- they are in line with our expectations.

The dropdowns, for example, the best illustration of that, the dropdowns that we've achieved during the second quarter are consistent on those leases that we did drop down that were installed, with the overall guidance that we showed on aggregate proceeds relative to capital expenditures.

Okay.

Thank you.

Jonathan Arnold, Deutsche Bank.

My main question was asked but I'd like to follow up on Home Solar.

On your slide you say that what you're showing is where you've either installed or contracted to install.

One of your main competitors called out the difference between installs and deployment and changed the basis of guidance this quarter.

Can you just talk to how different would your number be if it was actual installs?

And are you also seeing some challenges getting systems up and running when they're already on the roof effectively?

Kelcy will certainly be answering the second part of that question.

And he'll probably answer the first part of your question, too.

But it's a good question that we talk about here often because, as you can imagine, when you're increasing your pace of sales 90% quarter on quarter, and it's roughly -- what?

Kelcy -- somewhere between 70 and 100 days to full installation from booking, the number between bookings and installations is dramatically different by quarter.

Do you want to start with the second half of this question and move backward?

What I can say is this also would be a California-centric topic.

What you see in California is more market maturity with permit authorities and interconnection utilities.

What you see on the East Coast beyond seasonality is some longer time lines.

I think we fare well competitively as it refers to time, but we are committed to time cycle reduction.

We used to a year ago.

I think you could say it would be at least 90 days.

I think today you'd see a path to around 75 days, is where we're living, on time to install from signature to energization.

And as California becomes a more material portion of our business, and we as we continue to focus on time cycle reductions, both of those metrics will continue to improve.

And just one thing to add to that, Kelcy, correct me if I'm wrong, but if you think about how long it takes to get solar energized on your roof from the time you order, there's almost no consumer decision in America that takes longer to create consumer gratification.

So, it's something that we are very focused on.

And in fairness to the other people in our industry they're very focused on it, as well.

But the single biggest delay within that period is beyond the control of the solar installer, it's the time that the utility takes to interconnect.

There's been some recent study of that in the press that indicates at least one East Coast utility that's the worst at getting systems energized.

The more that a light is shined on the fact that that has the potential to hurt customer satisfaction, I think that's important.

I draw the analogy, it's like when you ask for the check at the restaurant and you're anxious to get home and they take half an hour to give you the opportunity to pay for your meal.

It's very frustrating to the customer.

So that's probably the main thing within the time cycle that we'd like to see shortened.

And right now it's beyond our control.

Does the pace of the energize graphics look similar, though?

That's in essence my question.

Or is the lag dampening the growth?

You mean is this a real inhibitor to sales?

The graph would look similar.

It would trail on about a quarter right now.

So if you were to look at energized systems graphically, it would show similar to booking.

With a 1,000 to 2,000 lag, by the sound of it.

That's fair.

Okay.

Thank you.

Thank you.

Latoya, we're very close to the top of the hour so I think we'll conclude the call here.

Again, we appreciate everyone taking the time starting an hour earlier.

And we look forward to talking to you next quarter.

Thank you very much.

Thank you.

Ladies and gentlemen, this concludes today's program.

You may now disconnect.

Good day.