NRG Energy Inc (NRG) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NRG Energy Incorporated Q3 2015 earnings call.

(Operator Instructions)

I'd now like to introduce your host for today's conference, Mr. Chad Plotkin, Vice President of Investor Relations.

Thank you, Liz.

Good morning and welcome to NRG Energy's third-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 section of our website at www.nrgenergy.com, under presentations and webcasts.

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

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

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

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

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

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

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

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

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

Thank you, Chad and good morning, everyone.

Thank you for joining us on this, our third-quarter call.

Today, joining me are Mauricio Gutierrez, the Company's Chief Operating Officer; and Kirk Andrews, the Company's Chief Financial Officer.

Both of them will be participating in the presentation.

We also have available to answer any specific questions you have in their areas, Chris Moser, who runs the Company's Commercial Operations business; Kelcy Pegler, who runs our Home Solar business; and Elizabeth Killinger, who runs the Company's Retail business.

So with just over six weeks past since we hosted the NRG reset call, we're going to do our best to be brief so that we can provide you with ample time to ask the questions that you have.

However with the unabated sell-off in our stock and across the entire sector during the quarter, I wanted to begin by acknowledging how difficult a time it has been for you, our shareholders.

In truth in this market environment, I don't know that I can predict what exactly will cause the stock to turn around and recover to some level that approximates fair value.

But I can tell you that NRG's operational and financial performance has been strong and solidly within expectations.

That our current liquidity is as strong as it has ever been at over $4 billion.

And that our reset program has passed through the panning stage into implementation with every aspect of it well on track, albeit still in the early going.

It is certainly our hope and expectation that the gradual accomplishment of various aspects of the reset.

The cost cutting, the freeing up of committed capitals into various measures.

The allocation of capital particularly to the reduction of debt, all will provide a continuous impetus to the recovery of our share price.

And after that preliminary comment, let's move on to discuss how our business has performed through the third quarter of 2015.

Turning to slide 3 in the business update.

I'm pleased to report today that we are narrowing our 2015 full-year adjusted EBITDA guidance to $3.25 to $3.35 billion, solidly in the middle of the original guidance range.

Our financial performance in the ever-important third quarter was just tremendous and demonstrated once again the resilience of having a matched retail wholesale platform.

In a period of subdued wholesale power prices, our retail business alongside our outstanding Commercial Operations team excelled.

Indeed, our retail business delivered its best quarterly results since 2010, with $225 million in adjusted EBITDA for the quarter.

Regarding our conventional wholesale business, which by the way turned in another strong operational quarter, probably the most noteworthy event during the quarter has been the extensive commentary in the financial community questioning the medium to long term prospects for power plant fleets like ours.

My reaction to this point, based on the many commodity price cycles I have lived through in this industry, is that you can't ignore the underlying reliability value of locationally advantaged assets in competitive markets.

Our 48,000 megawatt fleet has a key competitive advantage in each of our three regional markets.

First, in Texas our generation portfolio's footprint closely matches and complements our thriving Texas retail business.

Second, in the East our portfolio has been shaped to focus on providing and being compensated for reliable capacity, as demonstrated by the enhanced value in earnings to NRG as a result of the recent capacity performance auction.

And the importance of which has been underlined by the recent announcement of Entergy, with respect to the closure of the Fitzpatrick plant.

Third, in the West our portfolio features a heavily contracted fast start gas capability tailored to a market moving towards 50% renewables.

In all three of our regional markets, the steady and stable operations of our generation remains critical, not only to the Enterprise but to the grid in general.

Moving on to other signs of successful execution of our business plan, I'm pleased to announced today that just yesterday we closed our most recent drop down to NRG Yield, which delivered $210 million in cash back to NRG, which as you know, we will be utilizing as part of our efforts to strengthen the balance sheet, as we discussed on our last call.

I'm also pleased to report that as we announced on September 22, we successfully executed on the $251 million share repurchase program, which in combination with all shares repurchased year-to-date brings the total shares acquired this year to 7% of our outstanding shares.

And as we will discuss in more detail in a bit, we are now shifting our immediate capital allocation focus to debt reduction, as we indicated would be the case on our NRG reset call, as a way not only to further strengthen our balance sheet, but also to unlock shareholder value.

Lastly our Home Solar business remains well on track, as we outlined six weeks ago, driven by tremendous top line growth with over 6,300 net bookings in the quarter.

And we believe one of the highest, if not the highest growth rate of the major players in this sector.

This volume places us in a fight for third with Sunrun, and not that far off from Divine in the number two position.

With respect to our installations for the quarter, which numbered 1,900 or now a total of approximately 80 megawatts, we are making progress in our concerted effort to reduce the backlog going into and through the early months of 2016.

For those tracking Home Solar's negative EBITDA contribution, projected for full year 2015 continues to track within the negative $175 million disclosed on the second quarter call.

So let's move on to discuss progress on the NRG reset and drivers behind our 2016 financial guidance, turning to slide 4. Let me start with components of the reset which are fully within our control.

We are well into the implementation phase of our company-wide cost reduction program of $150 million across G&A, marketing and development expense.

In addition, and Mauricio will provide more details on this, I'm also pleased to announced today that we have identified and are implementing an additional $100 million in O&M spending reductions across all of our businesses.

All of which can we done in a manner that does not sacrifice the reliability of our portfolio.

So when combined with the initial NRG reset cost reduction plan, our cost reduction efforts now bring on an annual basis a total cost savings target of $250 million, to be achieved in 2016 and recurring thereafter.

On the asset rebalancing component of the program, we remain focused on and highly confident in our ability to unlock, in combination with the cost reduction program, over $1 billion in capital for allocations to reduce the balance sheet.

The modifications of our plans in Portland and Avon Lake Unit 9 are complete, reducing or eliminating additional capital spend at those plants, and we are actively marketing select assets for disposition.

Given the high level of interest in these assets expressed during our preliminary marketing phase over the past few weeks, we are moving forward at a pace and in a manner that we believe will lead to an optimization of value for NRG shareholders.

You should expect in all likelihood a series of such transaction announcements over the weeks and months to come.

Regarding the GreenCo business, the $125 million GreenCo Runway around NRG Home Solar, the C&I business at NRG Renew, and eVgo is established and ready to commence on January 1, 2016.

As it relates to the process around the securing of a strategic or financial partner in GreenCo, through the initial phase of our efforts we are quite pleased with the interest we are seeing.

We continue to be in the market discovery process and remain focused on selling a majority interest in GreenCo, with a goal of financial deconsolidation and simplification at the parent company level.

However, and not unlike our approach to asset dispositions on the conventional side, our approach with respect to GreenCo is value first and speed of execution second.

The choice of partner into GreenCo is an important one, and we are focused on both optimizing current value and positioning the business, which NRG will continue to own a significant stake in for future success.

We will provide you with more material updates as the process allows.

So as we look at all of the actions we are taking and currently marry this with the ongoing benefit of our integrated platform, we are introducing 2016 financial guidance of $3 billion to $3.2 billion in adjusted EBITDA, and $1 billion to $1.2 billion in Free Cash Flow before growth, on a consolidated basis.

As an additional item and something Kirk will provide more detail around, in response to many of the questions we are receiving from investors pertaining to the complexity of our capital structure, for the first time we are now providing our expectation for Free Cash Flow before growth at the NRG level.

What this represents is the Free Cash Flow generation excluding non-recourse subsidiaries, such as GenOn, NRG Yield and the primary NRG ROFO assets.

Our hope is that providing this to you, we will eliminate at least part of the concern about the geography of our cash flows.

Now turning to slide 5, I'd like to touch upon capital allocation.

We have repeatedly stated over the past few months that our focus over the coming year is on shrinking the balance sheet, so for the avoidance of doubt let me put our thinking in this regard into some historical context.

For many years now, indeed for almost my entire time as CEO of NRG, our focus has been to establish a diversified business platform that reduces our Company's exposure to near term fluctuations, and natural gas and power prices, amongst other potentially concentrated risks.

Specifically, our goal always has been to minimize commodity price impact on Free Cash Flow, while maintaining the upside that occurs when the commodity markets move in a positive direction.

Our key tool in this regard, in addition to hedging, has been asset and business diversification.

Our diversification commenced in earnest when we entered the retail business six years ago through the acquisition of Reliant, followed with our strong move into contracted generation targeted around renewables, our redevelopment efforts at our locationally advantaged brown field sites, and most recently our asset management program aimed at maximizing our economic advantage and capacity markets like PJM.

This quarter's performance, especially with our outstanding retail performance, and next year's guidance coming as they do at a time of historically low natural gas prices, speaks to the effectiveness of our business diversification as a financial buffer.

But of course this diversification becomes a moot point if market concerns around the balance sheet persist.

It is our strongly held belief that NRG's equity investors will benefit from an absolute reduction in our debt, most notably at the NRG level, but also across our entire capital structure.

As Kirk will outline, that is the focus of our capital allocation program now.

As this slide 5 describes, as a result of our reset efforts, we aim to free up roughly $1.6 billion in total over the next 14 months to apply to balance sheet shrinking and particularly to debt reduction.

Further, as we look out beyond the next 14 months, our efforts around reducing maintenance CapEx and the material completion of our capital expenditure program will provide further capital allocation flexibility.

Our overriding goal that animates this entire effort is to put to rest the question of whether NRG is carrying an excessive level of debt, so that all of us can be on the same plane where we can focus on the cash generating power of the NRG businesses and how that cash can be put to its best use for the benefits of NRG shareholders.

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

Thank you, David.

And good morning, everyone.

Our integrated platform continued to perform extremely well during the third quarter.

Our wholesale business mitigated the impact of lower power prices through active hedging and good commercial execution, while our retail business benefited from lower supply cost, highlighting once again the strength of our wholesale retail platform.

During the quarter, we continued to take steps on repositioning our portfolio to optimize and improve economics and returns.

First, our asset optimization effort in the Northeast, which focuses on capacity revenues, was validated by the recent PJM capacity performance auction results.

Second, we continued to reduce spend across the fleet, which I will discuss in more detail in a later slide.

And finally, we have taken the necessary steps to catch our portfolio in the short-term to protect from further downside.

All of these efforts are in addition to the business diversification strategy that David already mentioned in his remarks.

So let's start with a review of our operational performance on slide 7. We had another quarter of top quartile safety performance, with 147 out of 168 facilities that finished the quarter without a single recordable injury.

We're mindful that our portfolio is going through some changes and we need to stay vigilant and redouble our efforts to ensure that safety is and remains always first.

Our total generation was up 5% for the quarter, driven primarily by higher generation in the Gulf and the West.

The East was relatively unchanged, with a slightly lower coal generation, offset by higher cash flows.

Our coal and nuclear plants improved their availability and reliability metrics.

I want to congratulate STP, Parish and Dunkirk for almost perfect runs this summer.

Our gas units continue to be called on more frequently in the market.

As you can see in the bottom right chart, we continue to maintain a remarkable 99% starting reliability on our gases.

Turning to slide 8, our retail business continued its trend of exceptional performance, delivering $225 million of adjusted EBITDA, the highest third quarter since 2010 and $58 million more than last year.

During the quarter, we captured value from lower costs to serve, effective margin management and expansion of our product offering.

We have also sustained our strong momentum in customer acquisition and retention that lead to 5,000 customer count growth, despite the continued expiration of acquired Dominion customer contracts in the East, where we continue to see better than expected retention levels.

Excluding the Dominion acquisition, our customer growth was 26,000.

As we have stated in the past six years, the ongoing success of our retail business continues to demonstrate the value of our integrated wholesale retail platform and most importantly provides NRG diversification in earnings through all faces of the commodity cycle.

Turning to slide 9, let me share a few comments on the gas market.

We have experienced pretty mild weather this past year, a warm winter followed by a mild summer.

This weather combination most likely will lead to a new record storage number in the coming weeks, at or near 4 TCF.

Combined with the expectation of an El Nino weather forecast, and you've got a market with only bears news and falling prices.

It's worth noting that El Nino is typically associated with a warmer Upper Midwest winter and a colder Gulf Coast one.

As a diversified energy company with assets in both areas, we could do well in such a scenario.

I want to remind everyone that we're very well hedged through 2016 and about 50% in 2017, giving us a nice runway to what we see as a more bullish future.

Make no mistake, we would see plenty of upside if gas prices were to rise, but have protected significantly the downside through hedging and business diversification.

Regardless of current sentiment, in our view, long term natural gas prices on the mantle looks strong.

The first half of this decade was dominated by supply growth outstripping demand.

We expect the second half to reverse that trend, with demand growth outstripping supply.

Natural gas production has been stagnant since late last year, in particular with low recounts and low prices.

In the meantime, we see growing LNG exports, increasing exports to Mexico, higher industrial production and greater demand from the power sector.

As an example, our field conversions of New Castle, Joliet and Shawville will increase our summer peak day gas consumption by [ 1/2 BCF] per day.

The gas amount from new builds and conversions is real, and it is coming.

Simply put, we're well positioned to weather the short-term low prices and remain open to benefit from bullish long term fundamentals.

Turning to slide 10 on our power market update and starting with ERCOT.

As we have discussed for several years now, market changes are needed to better reflect scarcity conditions, like the ones we experienced this summer.

During August, we saw our first real test of the operating reserve demand for mechanism and sadly, we watched it fail.

Scarcity conditions are right for a few days, and [there will] reach a new record peak was set, but aside from one $350 day ahead clear, the week was mostly disappointing.

The combination of scarcity conditions and low prices, but bolt market participants and the PUCT's attention, ORDC are expected to be a major topic of conversation at the open meeting tomorrow.

Discussions are now under way to examine potential changes that can be made to the ORDC's parameters to make it more effective in reflecting true scarcity on the system.

We're supportive of that effort, and I will actively participate in the discussion.

Otherwise, fundamentals remain strong, with low growing by 2.7% on a weather normalized basis so far this year, despite lowered prices.

Combined with a risk of additional retirements, current forward prices look too low, 10% on upside to our low cost and environmentally controlled core portfolio.

As for the Northeast, we have been repositioning our portfolio from providing base load energy to providing reliability as a capacity resource.

The recent results in PJM in New England, which we just covered in our recent call, validates our commercial strategy.

In the past couple of weeks, we've heard news of additional nuclear retirements.

It would seem that smaller nuclear plants are starting to cover cost and may lead the way to further tightening in the market.

Turning to our hedging disclosure on slide 11.

And as I mentioned earlier today, we're pretty well hedged for the next two years.

As the chart in the upper left of the slide shows, we're very well hedged against our respective production for 2016 and almost 50% hedged for 2017.

We are evaluating further entry points to increase our coal hedges and are comfortable with current inventory levels as we head into the winter months.

We like the remaining open position for the back half of 2017 and beyond, given our more constructive view of gas and power.

Finally, on Slide 12, I want to provide more details on our expanded cost reduction program across the Company, and more specifically the $100 million reduction in O&M savings that David mentioned.

As you likely have assumed, most of these will be executed on the wholesale business, for we continue our work on evaluating and prioritizing every actionable spend decision on an asset by asset basis.

Key drivers of the overall reduction relate to the asset optimization efforts that we announced around Portland and Huntley, respectively.

Changes in the way we are managing operational risk and further cost reductions on units that have lower capacity factors.

Of course we will not make any O&M reductions that jeopardizes the safe and efficient operations of our fleet.

In addition to the $100 million reduction just announced, we are introducing the fourth iteration of NRG's continued business improvement program, called For NRG.

This program is driven by employee ideas and innovation to enhance each department's bottom line.

The for stands for focus on return and is rooted in insuring all employees are empowered to find better, more cost effective ways in doing our jobs.

Our goal is to achieve $150 million of cumulative EBITDA over the next three years.

Just as we have done in the past, we remain committed to our continuous improvement program that has yielded so many benefits for NRG and its shareholders.

With that, I will turn it over to Kirk.

Thank you, Mauricio.

I'll begin with a financial summary on slide 14.

NRG delivered a total of $1.145 billion in adjusted EBITDA for the third quarter, and over $2.7 billion for the nine months ended September 30.

Our third quarter results were highlighted by $225 million in adjusted EBITDA from Home Retail, a 35% year-over-year increase.

Again highlighting the success of NRG's integrated business model, as results improved largely due to favorable supply cost.

Business in Renew combined for $722 million in EBITDA for the quarter, while NRG Yield contributed $198 million.

Despite the subdued summer power prices, our strong Home Retail performance combined with effective wholesale hedging allows us to narrow our adjusted EBITDA guidance range to $3.25 billion to $3.35 billion, still in line with the midpoint of our original 2015 guidance.

Looking to the business segment components of adjusted EBITDA guidance, the increase in guidance for NRG Yield reflects the full year impact of the closing of the wind portfolio drop down, as required under GAAP, with an equal reduction in Business and Renew guidance, which previously included the EBITDA associated with the equity stake now held by Yield.

Based on the strong retail performance for the quarter, we are also increasing the retail component of 2015 EBITDA guidance, which offsets the modest reduction in expected 2015 wholesale results.

Finally, we are also narrowing guidance for 2015 Free Cash Flow to $1.125 billion to $1.225 billion.

Turning to other highlights, and focusing first on our progress on NRG Yield drop downs, we're pleased to announce we've now closed the previously announced sale of a 75% interest in a portfolio of 12 wind projects to NRG Yield for $210 million in cash.

The remaining 25% interest continues to be part of the drop down pipeline remaining under the expanded right of first offer agreement.

NRG intends to complete the balance of the $100 million in commercial distributed solar projects and $150 million in residential solar leases under our existing partnerships with NRG Yield over the balance of 2015 and into early 2016.

As we've indicated in previous quarters, NRG also intends to offer its remaining stake in CVSR to NRG Yield in late 2015, which makes up the balance of the $600 million in expected drop down offers to Yield during 2015, as originally announced on our first quarter earnings call.

Turning to share repurchases, NRG completed the purchase of 251 million of its common stock during September and October of 2015.

Which when combined our previously completed share repurchases and annualized dividend leads to a total of approximately $630 million in capital returns to NRG common stock holders in 2015 and a 7% reduction in common shares outstanding.

Turning to 2016 guidance on slide 15.

We're initiating 2016 guidance ranges with adjusted EBITDA of $3 billion to $3.2 billion, consisting of business and utility scale renewable adjusted EBITDA of $1.545 billion to $1.67 billion, retail adjusted EBITDA of $650 million to $725 million, which is a $50 million increase over our initial 2015 retail guidance.

And finally NRG Yield adjusted EBITDA of $805 million, which includes the recently closed wind drop down.

Our Free Cash Flow before growth guidance, which is net of maintenance and environmental capital, is expected to be a robust $1 billion to $1.2 billion.

Our 2016 guidance excludes the impact of the GreenCo businesses, as identified during our reset call on September 18, for which NRG's total cash committed is limited to $125 million, which will be managed through an inner company revolving credit facility as part of NRG 2016 capital allocation, which I'll review in greater detail shortly.

As David mentioned earlier, to further clarify the cash flow and capital available at the NRG level, we are also initiating guidance for the portion of our total Free Cash Flow before growth guidance, which is available at the NRG level, which for 2016 we expect to be $750 million to $950 million.

This range is based on deducting the portion of our total Free Cash Flow guidance expected to be generated at NRG's non-guarantor subsidiaries, which consist primarily of GenOn, NRG Yield and the remaining ROFO assets.

And then finally adding back the expected cash distributions and dividends from these subsidiaries makes up the adjustment to arrive at NRG level Free Cash Flow before growth.

Turning to slide 16.

And continuing the theme of clarifying and enhancing our disclosures, in light of increasing questions and focus from our investors on leverage levels at NRG, I have provided here a deconstructed view of the consolidated balance sheet, as well as the derivation of the NRG corporate debt to corporate EBITDA ratio, which is the cornerstone of our targeted prudent balance sheet metrics.

As you recall, we target this ratio at 4.25 times, which is consistent with our targeted BB credit metrics, recently reaffirmed by S&P.

Based on the midpoint of our 2016 guidance and previously committed debt reduction from 2015, we are in line with that target.

As shown on the left of the slide, although NRG's consolidated debt balance as of the quarter end is approximately $20 billion, over $11 billion of that debt resides at our excluded project subsidiaries, which consist primarily with NRG Yield and the remaining ROFO assets, most of the debt at which is fully amortizing, consistent with the contract durations, with the remaining non-recourse debt residing at GenOn.

This debt is non-recourse to NRG, and is not counted in our corporate credit metrics, including the debt to EBITDA ratio prescribed by our credit facilities, which contain thresholds governing our ability to purchase shares and pay dividends.

Only the remaining $8.8 billion of debt, consisting of our senior unsecured notes and term loan facility is recourse to NRG and counts toward this ratio.

On the right of the slide, after adjusting for the $500 million in 2015 capital already allocated to NRG level debt reduction, which we expect to augment using 2016 capital, we anticipate corporate debt, or the numerator of the ratio, to be less than $8.3 billion in 2016.

Turning to corporate EBITDA, or the denominator of the targeted ratio, we began with the midpoint of our 2016 adjusted EBITDA guidance.

As only cash distributions from our excluded project subsidiaries count as EBITDA for ratio purposes, we next deduct the midpoint of 2016 EBITDA from these subsidiaries and then add back these cash distributions, which include our share of dividends from NRG Yield, and distributions and payments from the remaining non-recourse subsidiaries, primarily the remaining ROFO assets.

The final adjustment is an add back of non-cash components of corporate level expenses, which we're deducting in arriving at our EBITDA guidance.

What results is $1.95 billion of corporate level EBITDA, which basically represents EBITDA from assets and businesses from our recourse subsidiaries, plus the cash distributions and payments from non-recourse subs.

Based on the midpoint of our 2016 guidance and our expected corporate debt to EBITDA is no greater than 4.26 times, in line with our long term target for this ratio and significantly below both our restricted payment and default ratios.

As I mentioned earlier, we expect to augment our 2015 allocation of capital to debt reduction with additional debt reduction using 2016's capital, driving this ratio even lower and providing additional balance sheet strengthening as we move into 2017.

We remain committed to shrinking the NRG balance sheet as part of the NRG reset and leaving no doubt as to the strength and integrity of NRG credit ratios as we move into 2016 and beyond.

Turning to Slide 17.

Having initiated 2016 guidance, I'd like to next review NRG level capital available for allocation for 2016.

We are focused here on capital allocation at the NRG level, which excludes NRG Yield excess cash as well as GenOn income excess cash reserved for liquidity and the completion of our asset optimization projects at GenOn.

Moving from left to right, we have now allocated all remaining 2015 capital towards debt reduction, which we expect to execute over the balance of 2015 into 2016, totaling $500 million in discretionary debt reduction at NRG.

This balance consisted of $200 million, which is one-third of the targeted 2015 NRG Yield drop down proceeds, plus $300 million of remaining capital also announced as part of the NRG reset in September, which we are now committing to debt reduction as well.

Turning to 2016, incremental NRG level capital for allocation begins with the midpoint of our NRG level Free Cash Flow guidance of $850 million.

Total 2016 committed capital at NRG is approximately $600 million, as shown in the red bar, and is comprised of the $125 million GreenCo Runway revolver, growth investments of $250 million, primarily our PH Robinson Peaker project, Carbon 360 and the eVgo California settlement, with the balance allocated to NRG corporate debt amortization and our Common Stock dividend.

The remaining Free Cash Flow balance of $250 million, combined with $500 million of 2015 capital remaining to be deployed towards debt reduction, leads to $750 million in capital available at the NRG level through 2016, which we expect to further supplement through the execution of the remainder of the NRG reset initiatives.

These initiatives include non-recourse project financing, through which we expect to fund approximately $250 million of environmental CapEx at Midwest generation and thereby increasing capital available to NRG.

Having now completed the rating process and documentation for this financing, we are prepared to launch when market conditions are more favorable.

Targeted asset sale proceeds from the NRG reset totaling at least $500 million are expected to further augment excess capital for consolidated balance sheet reduction.

Finally and potentially supplemental to the $1.1 billion in reset capital, any proceeds from the GreenCo sell down and future NRG Yield drop downs located currently by equity market recovery would serve to further expand NRG level capital for allocation.

By way of reference, in the upper right corner of the page I've provided a walk, beginning with the remaining 2016 excess NRG level Free Cash Flow through the other components of the NRG reset, which combined now totals $1.1 billion in consolidated 2016 capital to be deployed towards shrinking the balance sheet.

Finally turning to slide 18, I'd like to briefly review and update our expectations for significant reductions in maintenance, environmental and growth capital from 2016 to 2017.

Our revised 2016 capital expenditures reflect reductions in growth CapEx stemming primarily from the $100 million in reduced spend on fuel conversions at GenOn, as well as GreenCo related growth CapEx, which is now capped at $125 million, based on the Runway amount.

Turning to 2017, due to incremental reductions in expected 2017 growth capital expenditures, including the elimination of distributed generation solar and residential solar, we now expect the year-over-year reduction of over $550 million in consolidated CapEx in 2017 versus 2016, with approximately $350 million of this reduction occurring at the NRG level.

These substantial year-over-year reductions in expected capital expenditures provide a significant cushion against continued softness in commodity prices and a potential uplift in available capital in 2017, which may be allocated to further balance sheet reductions, including debt reduction and return of shareholder capital.

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

Thank you, Kirk.

If we turn to our closing slide, which is slide 20, we end by quantifying a point previously made, which is that NRG's financial results in 2016 are not nearly as exposed to fluctuating gas prices as the market seems to be suggesting.

We have successfully mitigated the downward exposure of falling natural gas prices through our hedging program and through our asset diversification.

In the ultra low commodity price environment that currently grips our market, this strategy is what has enabled us today to guide to a healthy adjusted EBITDA and Free Cash Flow level for 2016.

And which together with the substantially increased capital flexibility arising out of the steps listed on the right side of this page, should enable us to implement a substantial capital allocation program over the months ahead.

Our goal in all of this is to make NRG a simpler, less leveraged company over the duration of the reset program.

NRG is not just an IPP.

As we have demonstrated on this call, NRG's unique advantage is that our balance wholesale retail business mitigates the financial impact of low energy commodity prices, which enables us to profitably serve our retail customers with a growing mix of products and services.

This is essential during the current low commodity price cycle, when the value pendulum in this sector clearly has swung to serving the end-use energy customer.

As I said, this wholesale retail balance is NRG's unique advantage, and all of us at NRG are excited about the opportunities we have in front of us to maximize the value of this advantage for the benefit of NRG shareholders.

And with that, Liz, we are happy to take peoples' questions.

(Operator Instructions)

Stephen Byrd, with Morgan Stanley.

Thank you for the enhanced disclosure.

It's extremely helpful.

Very well done.

Just on a couple of topics.

First on, coal supply.

Given the very low commodity environment we're in, very low gas and power prices, could you talk a little bit further to just what you're seeing in terms of potential ability, whether it be on transport or the commodity itself?

What are the dynamics, in terms of being able to continue to improve your positioning, in terms of your coal costs?

Stephen, do you want to tell us the two questions, and then we'll answer them?

So we are tipped off and we can prepare an answer to the second.

Sure thing.

My other question is just on competitive dynamics in retail.

I was curious whether you're seeing overall any competitive dynamic changes in that business, and then more specifically whether you see a potential for some of your retail competitors to try to get into solar, as you've been doing.

Into solar?

Not IPPs getting into retail, but you're interested in --

The solar.

Yes, that's right.

Well let me start by answering the last part of that question, and then Chris Moser's going to answer your coal question.

And Elizabeth, as soon as Chris finishes, you answer the question about competitive dynamics in retail.

But I would say, Stephen, given the market's reception to us getting into distribution, I don't think that's going to encourage other IPPs to get into that area.

But in terms of the other IPPs getting into retail, which is something that I've sort of been expecting for a long time, maybe Elizabeth can talk about that in terms of the context of competitive dynamics.

But Chris, why don't you start with talking about coal dynamics, and then Elizabeth, you take over from Chris.

Sure.

I would characterize it like this, Stephen.

I think we're working with our whole coal supply chain and the partners in it to make sure we've got reliable and competitively priced fuel.

There's really two pieces to that, there's the rail piece and then the commodity piece.

On the commodity side, if you've been watching over the past couple weeks we've seen a pretty decent jog down in the prices, specifically PRB but NAF as well, so that will obviously help us next year.

And then on the transportation side, without getting into too much specifics, I would say that our transportation partners have been good partners with us and want to make sure that the coal continues to flow.

So I think that's how I would answer that.

And Stephen, regarding the competitive dynamics in the retail business.

I think we continue to see intense competitive markets with over 50 players in Texas, and it varies by market in the East, but anywhere from 15 to 30 something competitors, so lots of competitive activity.

We are seeing competitors extend their product offerings to include more products than simply retail electricity.

And that takes the form of energy management solutions, natural gas, some home control type features as you noticed, home solar and otherwise.

So we expect that to continue, which is why we continue to lead the market in evaluating what consumers want and making sure we're delivering the best of it to them.

Thank you very much.

Well Stephen, I guess my reaction on your people going into solar response will flip in about IPPs, what I think and look, no one can predict the future, but I think there is a period ahead in Home Solar is going to be focused on consolidation around what I think is going to emerge as the four main players, the SolarCity, Divine, the Sunruns and ourselves.

I don't expect another IPP to come into that space any time soon, but I would actually be surprised, since I subscribe to the view that Home Solar is a mortal threat to the utility business model.

I would be surprised if in the next 18-24 months, some big utility doesn't try and buy their way into the space, but that's just my speculation.

Great.

Thank you very much.

Dan Eggers, with Credit Suisse.

Just on an update to the balance sheet.

What target metrics do you guys want to get to at the corporate NRG balance sheet perspective, and of the $1.6 billion that you're expecting between now and the end of next year for debt reduction?

Is that all NRG specific debt, or is that going to include some GenOn and some other pieces in that number?

Sure, Dan, it's Kirk.

I'll take that in reverse order.

The $1.6 billion is really a consolidated look at uplift in capital for allocation.

As you know, in particular, $500 million of that is what is part of the NRG reset in asset sales.

And depending on the mix of those asset sales, some of which we expect to be at the GenOn, because we're focused on the Northeast, that more than anything else would govern the proportion of the allocation of capital towards debt reduction at GenOn versus NRG.

As to the targeted metric, we continue to target, as I said, 4.25 times corporate debt to corporate EBITDA.

We also focused on FFO to debt, keeping that number at or below the high teens level.

And I'd say that the tertiary component of that is we look to stay around 50% debt-to-capital, although that is a book ratio.

Certainly something that we focused on, the rating agencies focused on, but I think it's probably certainly tertiary to those first two.

And so part of the reason why we focused on that 4.25 is, as I said, it comports with what based on our ongoing conversation with the rating agencies support those double B credit metrics.

It also gives us a significant cushion against the thresholds in our credit facility, above which we are no longer permitted to pay dividends or buyback stock.

So we've got a significant cushion there, and obviously even further cushion below the default ratio.

So those are the reasons that go into those target metrics.

I guess on capital allocation, can you remind us with all the resets, what growth CapEx commitments you guys have beyond 2015?

And maybe along those capital allocation lines, how you think about, is there going to be room for buybacks next year or is this all going to be debt related?

Well to answer the first part of that question, in terms of committed growth capital, I think we've laid out as we move into 2016 and what we're seeing in terms of the growth capital on a consolidated basis is primarily the completion of the GenOn repowerings.

As well as beyond 2017, the beginning of the capital allocated to our Carlsbad and Mandalay projects.

And the balance of that capital in 2016 and a little bit further into 2017 is just A, the remainders of the Carbon 360 project, which is about $150 million of capital left to go in about equal parts between 2016 and 2017, and the eVgo California settlement, which in both 2016 and 2017 is at or about $20 million in each year.

That is really the bulk.

That is all of the remaining growth capital that we have or expect to allocate at this point.

As to the allocation of capital towards the balance sheet and your comment about share repurchases, what I would say is we're, as I've mentioned, we're continuing to focus on finding opportunities to return capital to shareholders.

Certainly our dividend is something we're committed to, and certainly we look to supplement that with share repurchases.

But at the present time, we are going to focus in swinging the pendulum towards the debt side of the balance sheet, in particular to leave no doubt and to insure not only that ratio is improved in 2016, but we are confident in our ability to maintain that ratio through 2017.

I think that more than anything else will determine our focus in the near term on debt reduction.

And ultimately arriving at that ratio through that debt reduction will govern the proportion of our capital allocation, which would later go to share repurchases.

Great.

Thank you.

Greg Gordon, with Evercore ISI.

So if I'm looking at slide 17 just to be clear, thinking about the capital allocation beyond the $500 million.

Since the CapEx savings is coming at GenOn and a portion of the asset sales will probably be at GenOn, we should think about sort of $250 million maybe plus or minus, plus whatever portion of the asset sales are non-GenOn as being pointed at the reduction at the parent incremental to $500 million in 2016?

Is that correct?

I think the way you characterized it, Greg, is right.

Although certainly as I've said, we're focused near term in allocating that capital towards debt reduction, so I'd be hesitant to say prescriptively all of it.

But for right now, that's certainly where we are definitely focused.

And the way you described that in terms of the geography yes, $100 million of that CapEx savings all resides at GenOn.

The $250 million in the non-recourse financing, we expect to be at the NRG level, offsetting what would otherwise be NRG capital allocation or CapEx towards the completion of that environmental spend at Midwest Gen.

And then the asset sales, depending on the outcome will be a blend, in terms of proceeds between NRG and GenOn.

So the way you called it, that is accurate, yes.

Right.

And then your primary focus is debt reduction.

And when we get into 2017, you're looking at presumably if we could keep the EBITDA from bleeding too much, an incremental $350 million improvement in cash available for capital allocation at the parent.

Yes, that's correct.

Which as I said, that does not include at least in that calculation any anticipated proceeds from the GreenCo process or further NRG Yield drop downs, which would obviously supplement that $350 million.

Got you, and then my follow-up question.

When I look at the build up on page 16, the GenOn EBITDA of $335 million, that's net of the shared services payment.

So if I was looking at a simple EBITDA on asset performance, you're projecting it to be about $530 million in 2016?

That's right.

You'd add back that roughly $200 million to get to that asset level performance.

Correct.

Okay.

Thank you, guys.

Julien Dumoulin-Smith, with UBS.

First quick, easy question for you.

I wanted to focus on the $100 million cost savings, just what that comprises of?

And also more importantly I see a For NRG statement here of a cumulative $180 million.

Just wanted to understand that $150 through 2018.

Can you comment on how the two jive?

What should we expect in 2017 and 2018, in terms of run rate increments?

Mauricio?

So the first one is the operating expenses.

I listed some of the main drivers of that, but I will say the first is the impact of the asset optimization decision that we made at Portland, the suspension of Portland and the retirement of Huntley.

The second one is we've gone through a line by line review of every single asset, particularly those that are in more challenging markets or conditions.

And we have right-sized the cost structure to comport with those market dynamics.

And then, the third one is as we have a portfolio close to 50,000 megawatts, allows us to optimize the management of forced outage risk and what I called the contingency money that we know we're going to have to spend.

We just don't know where.

So if you have a single asset, you'll have to budget for the forced outage, but when you have 50,000 megawatts, then you can optimize across the entire portfolio.

So that is the step one.

Step two is the For NRG portfolio, and this is a target.

You're familiar with the For NRG, because this is the fourth iteration of these.

We are looking at company wide, how can we do the things that we're doing today better, in a more cost effective way?

So think of these as contract renegotiations, rail renegotiations, property tax renegotiations.

So it is a host of things that we can do that is very difficult to pinpoint today, but we've been very effective and we've been very successful in achieving in the past these cost savings, which they will flow directly to the bottom line.

And that's all -- in every part of the Company?

Everywhere in the Company, including retail, just across the Company.

Got it.

Perhaps just a quick follow-up there.

Some of your assets seem to generate negative cash flow in Texas.

I'd be curious how that might fit into that puzzle?

And then perhaps to boot with that, a more strategic question.

Coming back to perhaps what you alluded to earlier, Dave, about yourselves being in those top four residential players.

How is the strategic review proceeding?

And perhaps if you can answer one question, what is it that you need to fix quote-unquote your retail solar or your solar effort more broadly?

Is it an installation platform?

Or what do you kind of ending up in the strategic process thus far?

Okay, Julien --

I'll go first about your -- I'll take the first one, David.

So I think you're alluding to -- I don't know what particular asset you're saying, but I can tell you, Julien, I think we've demonstrated the financial discipline.

When we have an asset that number one, is in negative Free Cash Flow.

Number two, the prospects of them recovering that market are such that we cannot justify the continued operation of that plant.

And then number three, which I think is significantly important in Texas, is the prospects in terms of additional environmental CapEx to comply with upcoming rules.

We will evaluate and if needed retire, just like we did in Huntley.

What I can tell you that we're not in such conditions right now in Texas.

I have said in the past that our coal portfolio is low cost, environmentally controlled portfolio.

And I would expect that coal plants that actually have a much dire forecast in terms of environmental CapEx, we'll have to make that decision before us.

So I'll just leave it at that, but make no mistake.

We will continue with the financial discipline that we have shown over the years.

Okay, good.

And Julien, I should break your part of the question that I'm going to answer into itself into two parts.

There was sort of how is the strategic process going with GreenCo.

I think particularly as it applies with a focus on Home Solar.

And then you said, what do you need to do to fix this sort of issues within Home Solar?

And Kelcy is on the phone -- Kelcy, do you have anything to add after I finish, go ahead, particularly obviously on the second part of the question.

So on the strategic process, what I would tell you, Julien, is we've been through this our preliminary discussion stage, out there talking to multiple people who are interested.

And I think specifically road testing the idea that what we're looking to do is sell a majority stake to someone who's strategically aligned with our thinking about the prospects for the business, but maintaining a substantial minority stake, so that we can maintain the business connection with the rest of the Company and also have a second bite of the apple, in terms of value realization.

And it's early days yet, what I would tell you.

It's relatively easy for people to express interest before they have to write down a number on a piece of paper.

But I would say in the early going, there's quite a lot of interest in it and no problems with the structure we're proposing.

So that's what I would tell you about where we are now on the strategic process.

With respect to the issues in the Home Solar, what I would tell you is there are operational issues, basic blocking and tackling that sort of come with running a business that has complex logistics.

And it's growing at an annualized triple digit rate.

And so, you get this sales engine revved up and then the installation and the deployments have to follow.

And getting that exact balance right is, I think other players in the industry have demonstrated, is a constant work in progress.

But I'd say there's an enormous amount of attention on it, particularly the productivity of our installation crews right now, I think is double what it was just a couple months ago.

And then there's the paperwork from going from installation to deployment, which is obviously in terms of getting the right software and just making the process much more efficient.

Kelcy, is there anything you would want to add to that?

No, I think that's pretty good, David.

I would just say we're working on the cohesiveness.

We're satisfied with both our sales and installation increase in Q3.

Most notably what was important to us was we were able to sell and install more systems without adding significant headcount.

In fact, we ended Q3 almost exactly flat from a head count perspective, so without adding cost.

And Julien, I think what we've done is we've really focused and we're determined to achieve this 90 day from signature to energization of the solar system.

We've identified with this theme of in excess backlog, which is any job that exceeds that 90 day timeline.

And then the optimal backlog, which is all of the jobs being executed within that timeline.

We believe we're poised to be executing all of our backlog and all of our bookings to energization in the first half of 2016 within 90 days.

And so that's what I would tell you.

Great.

Thank you.

Jonathan Arnold, with Deutsche Bank.

Just picking up on the question about the GreenCo process.

I was curious, David, you made the statement in your prepared remarks -- or I think it was the prepared remarks, that you wouldn't be surprised to see utilities wanting to buy into this business.

Are you suggesting that among the parties you're talking to, there may be some utilities?

Can you give us any color, or is that more further out in time?

Well, I didn't say it in my prepared remarks, just for accuracy's stake.

I would not say that's the main body of -- I mean if you -- I guess, Jonathan, what I would say in simpler terms, if you divided the people that are interested or if you'd categorize people interested in GreenCo into financial partners and strategic partners, there is significantly more financial partners than there are potential strategic partners.

Okay, that's helpful.

And then I guess like when you announce the reset, you were talking much more broadly about potential structures, majority, minority and the like.

And it now seems to be you have enough visibility that you're pretty confident that you can do a majority deal.

Is that what we should take away from the shift in the language?

I think what you should take away is that through the preliminary phase, we got a significant amount of encouragement on that.

But I think what you should really take away is the point that was made in the prepared remarks, that first and foremost it's value that we're looking for.

So again, I'm just commenting.

People have not put numbers down on a piece of paper, so there's a significant amount of flexibility that remains around the GreenCo process.

And we won't -- I don't want to give any sort of final answer until we see numbers on paper, and then we might modify accordingly, but definitely in the non-quantified stage, there's a lot of encouragement around that structure.

Okay.

Can you just give us any sense of when, what you think the likely timing for this to play out?

I heard you say you'd prioritize value over speed.

Well, I don't remember if we said it in our prepared remarks on September 17, but I think we did, which was that we thought the whole process would be concluded within six to nine months.

And I continue to be highly confident in that time frame.

I mean, I know that some questions have happened.

Well, would we be able to give people more of an update by the end of the year?

And I just can't make a call on that, because usually right when you're in the middle -- we will clearly know more by the end of the year, but whether we share with you-- Usually you don't talk about things when you're in the middle of an active discussion, so I can't really help you other than say, Jonathan, we're confident that it will all be done within the original six to nine month time frame.

Perfect.

Thank you very much, David.

Liz, I'm sorry and I'm sorry for the people who want to continue to get in the queue, but since we have an NRG Yield call in a relatively few minutes, we're going to take one more question.

And then for the others in the queue, again I'm sorry and please call in, and we'll answer any questions that you have.

Neel Mitra, with Tudor Pickering.

Could you give us the time frame for the cost cuts?

Is the $100 million, is that for the full 2016, or is it a partial year?

And then the remaining $150 million, when does that fully kick in?

Neel, it's a good question.

I'm glad you asked it.

Because I mean, I would say within the prioritization of time, within all of the various initiatives that make up the reset, our immediate focus and something taken an enormous amount of time of the management team and across the organization has been cost cutting.

And that's precisely so that we could give you the answer I'm about to give you.

Which is we're working so hard, so quickly because we want full year 2016 FX, both with respect to the G&A cost program, which internally goes under the name DOP for doing our part, and then on the O&M cost savings portion.

Mauricio, do you have anything to add to that?

Or --

No.

I didn't think so.

Anyway Neel, did you have any follow-up question, and then we'll call it a day, Liz?

Yes, just had one quick question.

So with gas prices where they are, how are Parish and Limestone in Texas running now?

Are you seeing some displacement from gas assets?

Or what are those capacity factors look like?

Yes, Neel.

So I think the statistics that we're providing on the third quarter were pretty representative of how competitive those two assets are.

We increase our generation in Texas for our base load fleet, that includes nuclear and coal.

As we go into the shorter months, we always see a reduction in capacity factors, but that shows the normal seasonality.

I can't tell you that we're seeing an increase in coal to gas leeching that we haven't seen in previous months.

Neel, thank you for the question.

And just want to thank everyone for participating, and we'll keep you updated in the weeks and months to come.

Thank you.

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

This concludes the program, and you may now disconnect.

Everyone have a great day.