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NRG Energy Inc. (NYSE:NRG)

Q4 2013 Earnings Conference Call

February 28, 2014 9:00 am ET

Executives

David Crane –President, Chief Executive Officer

Kirk Andrews – Executive Vice President, Chief Financial Officer

Mauricio Gutierrez – Executive Vice President, Chief Operating Officer

John Chillemi – Senior Vice President, Regional President – West

Elizabeth Killinger – Head, Texas Retail

Chris Moser – Head of Commercial Operations

Chad Plotkin – Vice President, Investor Relations

Analysts

Jon Cohen – ISI

Stephen Byrd – Morgan Stanley

Paul Zimbardo – UBS

Angie Storozynski - Macquarie

Neil Mehta – Goldman Sachs

Steve Fleishman – Wolfe Research

Operator

Good day ladies and gentlemen and welcome to the Q4 2013 NRG Energy Inc. Earnings conference call. My name is Grant and I’ll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session toward the end of this conference. If you wish to ask a question, please press star followed by one on your touchtone telephone. If your question has been answered or you wish to withdraw your question, press star followed by two. If at any time during the call you require assistance, please press star then zero and an operator will be happy to assist you. As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Chad Plotkin, Vice President, Investor Relations. Please proceed.

Chad Plotkin

Thank you Grant and good morning everyone. I’d like to welcome you to NRG’s full year and fourth quarter earnings call. This morning’s call is being broadcast live, over the phone and via webcast which can be located on our website at www.nrgenergy.com. You can access the call, associated presentation material, as well as a replay of the call on the Investor Relations section of our website.

Because this call, including the presentation and Q&A session will be limited to one hour, we ask that you limit yourself to only one question with just one follow-up. In addition, as this is an earnings call for NRG Energy, any statements made on this call that may pertain to NRG Yield will be provided from NRG’s perspective.

Before we begin, I urge everyone to review the Safe Harbor statement provided in today’s presentation which explains the risks and uncertainties associated with future events in the forward-looking statements made in today’s press release and presentation materials. We caution you to consider the important risk factors contained in our press release and other filings with the SEC that could cause actual results to differ materially from those in the forward-looking statements in the press release and this conference call.

In addition, please note that the date of this conference call is Friday, February 28, 2014 and any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. 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’ll refer to both GAAP and non-GAAP financial measures of the company’s operating and financial results. For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today’s press release and this presentation.

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

David Crane

Thank you Chad, and good morning everyone. As always, joining me today and also presenting are Kirk Andrews, our Chief Financial Officer, as well as Mauricio Gutierrez, our Chief Operating Officer. Additionally and available for questions, we’re joined by our Head of Commercial Operations, Chris Moser; Elizabeth Killinger, who is Head of Texas Retail for us, and Jim Steffes, who is Head of Northeast Retail.

While as we sit here in sub-Arctic Princeton, New Jersey waiting for another 12 to 18 inches of snow on Sunday, it’s an exciting time for us in the power business, which doesn’t happen that often, so let’s get right into talking our results. So if you’re following with the presentation, beginning on Slide 3, I actually want to start with an apology to you, our shareholders. You may recall back in August during our second quarter earnings call, based largely on the relentlessly moderate summer weather across all of our core markets, we shifted downward our original 2013 financial guidance as we felt at the time that we did not have enough levers within management control to compensate for the weak summer and the time remaining in the year. That was a bitter pill for us to swallow because never before had we had to reduce guidance outside of the original range, so you may recall at the time I also vowed to you that NRG management would do everything within our control to try and get us back to our original guidance range.

Today, I’m very pleased to report that with a very timely assist from early winter weather, we actually succeeded in getting back within our original range with $2.636 billion of adjusted EBITDA and an above-target outcome for free cash flow before growth of $1.282 billion. This performance was the result of an entire team effort across all functions, regions and businesses within NRG, and I want to thank all 8,500 of our employees for finishing strong, achieving this robust financial result, and for having done it with a top quartile safety record. As I said, I want to apologize to you, our shareholders, for having reduced guidance in the first place. I promise in the future to think twice before I underestimate what the amazing people at NRG can accomplish.

To continue on the execution front, as I know this is a question likely on the top of your minds, I want to acknowledge that our success in the fourth quarter of 2013 has in fact carried over into the start of 2014. Our plant operations and commercial operations folks have performed magnificently and in certain circumstances literally heroically to keep our plants fueled and operating during the extraordinary cold spells of January and beyond. Now you’re probably sitting there asking yourself, how magnificently – can we put magnificently or heroic into financial guidance terms? And the answer to that question is that I’m not going to do that, not today, and neither is Kirk or Mauricio. There are multiple reasons why I’m not going to quantify our winter results – we’re only 8 weeks into the year, it’s still a summer-weighted business, the winter is not even over yet. Maybe most notably, we’d have to re-guide anyway in a couple of months in order to take into account the Edison Mission acquisition. You can pick the reason you like the best – I’ll tell you the one I like the best, which is that we have a lot of other good things to talk about here today, like the 17% increase in dividend at the NRG corporate level, and I’d rather talk about that.

So with all the attention paid to NRG Yield over the eight months since it went public, we wanted to make sure to remind the market with this dividend increase being announced today that we also remain focused on ensuring that the shareholders of NRG parent also get a fair and regular return on their investment in NRG.

Beyond the dividend increase, there are other highlights, there are creative and effective activities in the financial markets that Kirk can talk about. We have completed the GenOn integration on time so that our team can be ready for Edison Mission, and we have built out the capabilities of our retail team in the way we hoped to do when we talked about that at the beginning of 2013. I have a bit of reputation internally at NRG for being a bit hard to please, but I’m very pleased with the overall performance of NRG in 2013 and through to where we stand in 2014.

So moving to Slide 4, there’s much good news here on this slide as well, perhaps the best of which is my promise to you that this will be the last time you ever have to look at this slide. But it is important that I give you a final accounting of our internal scorecard for the GenOn integration so you can appreciate the financial results achieved as a result of all the hard work led by the NRG integration team and literally involving every single person at the company. Bottom line, we delivered $484 million of cash flow benefits, or over 60% higher than the original targets announced when the GenOn deal was announced; and what is not captured in the numbers is that in a number of important ways, we used the GenOn transaction as a springboard to strengthen the company’s systems, our management depth, and the range of our expertise.

Clearly all those capabilities are already being put to good use planning for the integration of Edison Mission Energy, and as the closing of that transaction fast approaches, you should note that every key work stream is proceeding smoothly and we expect very positive tangible and intangible results arising out of our combination with Edison Mission Energy.

Turning to Slide 5, you will find the typical pie charts and bar charts illustrating the size and portfolio diversity of our fleet once the Edison Mission transaction closes a few weeks from now. I resurrect this slide here now because I think it’s a good reminder of the business segment that underpins all of NRG’s business initiatives in the short to medium term, and even into the longer term.

In the short term, by which I mean in this case the remainder of the winter and then the summer of 2014, I can tell you based on our experience over the past several weeks, never have I been more happy to have the type of generation fleet we have, the size of the fleet, the geographic distribution of the assets, the strength across the merit order, and most importantly the fuel diversity. And by fuel diversity, I’m not just talking about the ability to fire a little bit of propane at some gas plants. I’m talking about real fuel diversity – gas, coal, nuclear, and even oil. The fuel diversity of our fleet has been an immensely positive asset in the winter of 2013 – 2014, but it’s also not just the type of plants we own, it’s the specific plants and the people who run them. Let it suffice to say at this point that I would not swap our fleet, megawatt for megawatt, or our operations team for anyone else’s in the entire industry.

Longer term, you may be aware that much of what I say in public these days tends to center on where our industry is headed and what we at NRG believe is the inexorable trend towards a distribute generation-centric, disaggregated future featuring individual choice and the empowerment of the American energy consumer. That this future is going to occur is, in my opinion, inevitable; that it’s going to occur faster than almost every person thinks it’s going to occur is highly probable. But even if distribute generation is to be our destiny as a company, as an industry and as a society, that future is going to take a fair amount of time to be realized. So at NRG, we are positioning ourselves to succeed during a prolonged period during which the traditional centralized grid-based power system coexists with the fast emerging, high growth distributed sector, much like how fixed line long distance graciously gave way to cellular world dominance only after a couple of decades of relatively peaceful coexistence.

As American energy customers, business and individuals alike, turn away from the grid as their primary source of energy in ever increasing numbers, most will nonetheless stay dependent on grid power to varying degrees for years to come, either as supplemental power or as back-up, and as such our ability to serve those customers with our fleet of conventional generation with the power delivered over the traditional wires will remain the backbone of our business for some time to come, even in a world going distributed.

So if you look at Slide 6, you will get a better sense of how we’re going to organize ourselves for success in the current world as we prepare to win the future world. This organization will be done from the customers’ perspective. Our conventional generation business will not only be focused on maintaining our existing fleet in top operating condition but also in repowering select plants with flexible fast start units designed to support the increasing market penetration of renewable. These plants will be located in advantageous positions on the grid and will be commercially justified off the strength of long-term offtake agreements.

Furthermore, in response to the increasing realization in the business community that no serious industry or commercial enterprise can prudently run their business based upon 100% dependence on the traditional grid, we see a growing business-to-business opportunity for our wholesale business in terms of onsite generation for industry and large-scale commercial customers.

If we look at the central column on Slide 6, which is our mass or our main customer-facing business, we continue to believe that having a direct energy relationship with the American energy consumer is very valuable and increasingly part of our business strategy – indeed, a pivotal part of our strategy. Certainly within the confines of the existing centralized system, we have been extolling for years the virtues of matching generation in retail, and we continue to believe in those virtues; but with the pace of technological innovation aimed at the home energy consumer accelerating and the product offering getting so much better, as perhaps best exemplified by the Nest thermostat, having a positive preexisting relationship with the energy consumer is something we are working on very intently across the retail markets that we presently serve. We intend to continue to be the market leader in deploying energy innovation inside the home.

Finally on the right side of Slide 6, there is the post-centralized grid future driven by renewables, incorporating both energy storage and sophisticated localized automation to balance production and load in real time. We’re just getting started in this area, but if you read our Necker Island announcement a couple weeks ago, you’ll have a good sense of where we are going.

In short, it’s an exciting time. We have a lot going on, but as we have demonstrated in the fourth quarter of 2013 and so far into 2014, is that all depends on us taking care of business day to day, and that is what we have done in those periods – again, a great fourth quarter of 2013 and a good start to 2014.

So with that, I will turn it over to Mauricio.

Mauricio Gutierrez

Thank you and good morning everyone. As David mentioned, we were able to recover from otherwise weak market conditions for most of 2013 to deliver another year of results within our original guidance. This was largely driven by excellent execution in the fourth quarter which has continued into the important winter months of 2014.

Before I go into the results for the year, I want to take a moment to thank the men and women at NRG who in the bitter cold and snow that plagued the northeast did an exemplary job of keeping the grid stable and the lights on during the extreme cold weather conditions. Their dedication and professionalism makes us all proud to be part of this company.

On Slide 8, let me spend a few moments reviewing the goals I provided you last year for the operations group, where I’m proud to say we delivered across the board. First and foremost, we delivered on our promise to employees and shareholders with best-in-class safety and operational performance across what is now the largest competitive generation portfolio in the country. We successfully integrated GenOn’s 20 gigawatt generation portfolio into our operations, driving benefits from the additional (indiscernible) outside of Texas. Our relentless focus on cost and (indiscernible) synergies also paid off. We identified close to $120 million in operational synergies from the GenOn portfolio and leveraged that effort to achieve almost the same amount under our FORNRG program.

On the construction and development front, we finished an unusually busy year with the commissioning of the Ivanpah project in December. This brings the total number of new plants commissioned in 2013 to nine, an unprecedented number with a total generating capacity of 2400 megawatts. The program was on time and on budget, and I want to congratulate our (indiscernible) organization for this remarkable accomplishment.

Moving on to our operational metrics on Slide 9 and beginning with our most important metric, safety, even after nearly doubling the portfolio we achieved another year of top quartile performing with 82 out of 119 facilities with a single reportable injury. While our performance was not as strong as our record year in 2012, we continue to make improvements and adapt our safety program as we move out of controlled industrial sites and into (indiscernible) environment in our retail and service businesses.

Our total generation was up 2% year-over-year driven primarily by higher coal generation across Texas and the northeast. This was partially by lower nuclear and gas generation given the weak summer conditions and lower (indiscernible) across the country. We continue to balance operational performance with margin at risk and overall spend throughout this low commodity price environment. While our coal and nuclear available was down year-over-year to 82%, our performance was remarkable during peak periods of high prices. Our gas portfolio maintained a strong performance with 98% starting reliability and our newest facilities, El Segundo and Marsh Landing, have performed exceptionally well since reaching commercial operations.

As we enter into the third year of the current FORNRG program, we have made significant progress leveraging the best practices learned from our operational synergies efforts around the general facilities. We achieved an outstanding result of $119 million for the year compared to a goal of $65 million, driven primarily by cost reductions in both plant operations and Texas retail. We are pleased with the strong results and expect to leverage the program as we integrate the Edison Mission portfolio.

Moving on to Slide 10, our retail business finished the year strong, delivering $614 million of EBITDA and exceeding our guidance as a result of the higher than expected volume in the fourth quarter. Heating degree days were significantly higher than last year while power prices remained moderate, expanding retail margins for the quarter. This outperformance was also the result of reduced cost per customer served.

Overall portfolio unit margins for the year were relatively stable with Texas able to hold margins around $23 per megawatt hour. These results were driven by continued effective marketing, selling and service execution as well as the introduction of innovative products which are driving a 5 to 20% improvement in retention rates. For the 12th consecutive quarter, we increased customer counts and at the same time our cost reduction efforts continued to produce strong results with full-year operations and maintenance expense per customer down 10% and SG&A per customer down 8%.

On the C&I front, competition remains fierce and we don’t expect that to change any time soon. As we mentioned in the last call, to avoid just competing on price we’re intensifying our efforts to provide advisory services and comprehensive solutions to our customers beyond system power, including backup generation, solar, and demand response.

Turning to Slide 11, I’d like to cover some of the macro trends we’re seeing across our regions, but first let me spend a minute talking about how our portfolio has evolved over this past year. As you can see on the chart, back in 2012 our Gulf Coast generation business, which includes both Ercot and South Central, made up nearly 50% of our EBITDA. If you include our Texas retail franchise, this number was close to 80%.

Now looking at 2013, not only our earnings have increased but they are far more diversified. The Gulf Coast business accounted for only 40%, achieving a nice balance with the east, and it’s even further diversified when you consider that a significant portion of these earnings will come in the form of capacity payments. Also, with the success of NRG Yield and continued development of our alternative energy segment, the contracted portfolio made up over 10% of our net earnings. To put it simply, diversification across regions, merit order, fuel sources, and business lines are key as we have seen thus far in 2014, critical to our long-term financial performance.

Now on to the macro trends I mentioned before. Natural gas fundamentals continue to firm up. Demand has set a new record this winter and storage levels are expected to end the injection season at the lowest levels we have seen since 2013. What has been even more impressive is the reaction in the cash markets over the past several weeks with prices spiking in many northeast locations despite all the new gas production coming from the Marcellus shale. We experienced significant limitations in the gas delivery system and expect this type of regional price volatility to remain in the foreseeable future where a significant part of our portfolio is located.

In Ercot, the resource adequacy discussion has slowed down given the changes in load forecasting methodology and ongoing debate around adequate level of reliability and optimal reserve margins. We continue to see improvements in price formation with higher price cuts and the implementation of the operating reserve demand for this summer. I will cover in more detail our fundamental view, but we remain constructive that these changes will translate into actual scarcity pricing.

In the east and starting with New England, we’re pleased with the capacity auction results largely extending from the retirement of non-economic generation. In New York, the addition of the Lower Hudson Valley capacity zone recognizes the location and value of our downstate generation, and finally in PJM improvements in price formation resulted in greater scarcity pricing this winter. We also see positive changes in the upcoming capacity auction where higher requirements will be placed on demand response and imports.

Finally in the west, current drought conditions have many concerned about the states’ readiness to face the summer with only a fraction of its own hydro power resources available. In the medium term, the increasing reliance on renewable energy and the retirement of (indiscernible) cooling plants will provide a significant repowering opportunity for plants at premium locations.

Turning to Slide 12 and coming back to the Texas market, from our perspective while this debate has slowed down, we remain bullish on the overall market as very little has changed. We continue to see very strong fundamentals. As you see on the left side of the slide, demand continues to grow at a very healthy level, close to 2% a year. On the supply side, we see limited amounts of new capacity coming to the market given the high regulatory uncertainty and the low forward energy prices. In fact, there has been minimal scarcity price in the past two years, putting additional pressure on existing marginal resources. As a result of these market conditions, we do not plan to bring our Bertron units back from mothball status this summer. We remain bullish on our overall Ercot position but we need to be prudent about our investment of maintenance dollars in marginal assets.

We remain supportive of capacity markets as the most cost effective way of achieving the standard of reliability that Texas have enjoyed in the past. The (indiscernible) report released in January confirmed our position that the cost of achieving this standard, a tenth of a cent per kilowatt hour increasing customer rates, is a well worthy investment of achieving this outcome.

In the east, we have seen increasing signs of life. Demand has turned positive and changes in the market around price formation and retirement have provided a somewhat bullish energy outlook for the northeast. We have seen increasing frequency of high prices year-over-year in several markets where we have generation. Also when gas spikes to high double or even triple digits, the gas basis, power basis, (indiscernible) spreads and oil spreads go up while spark spreads crumble. If there is one lesson learned from the polar vortex, it’s the value of fuel diversification, and our portfolio is perfectly positioned to take advantage of that.

Turning to our hedge disclosures on Slide 13, you will see that we increased our coal and nuclear hedges in 2015 from 34% to 56% as we took advantage of strong gas prices in December. We remain open beyond 2015 as we did not see any compelling opportunities to add additional hedges in the market. Many of you have requested additional information to our hedging disclosures and as you will see in our public filings, we have provided a breakout of our coal and nuclear hedges between the Gulf Coast and east regions, including our forward market prices, to assist you in evaluating our portfolio. We have also included our sensitivity chart that represents the value of the portfolio as we address one commodity at a time, keeping all other commodities constant. This (indiscernible) likely in the long run as gas prices and heat rates are often inversely correlated.

The last point I will touch on is MISO integration. In late December, we successfully completed the MISO Day 1 integration, and for the first time our South Central assets and coal loads moving to an ISO2 settlement system. The move went fairly smooth and we are looking forward to working with our load partners in the new market.

As I have done now during the past three years as COO, I have laid out the priorities for the year on Slide 14. The focus is always to deliver safe and environmentally sound, best-in-class operations across our generation fleet, maximize the value of the assets, manage the supply risk of our retail portfolio, and deliver on our development by construction projects. This year, we will continue our integration efforts of not only executing on the operational synergies identified last year from the GenOn assets but we’ll apply the lessons learned to the 7 gigawatts of generation coming from the Edison Mission.

Finally and as David mentioned, we will leverage our leadership position on the district energy, CHB and back-up generation business to take a more aggressive role in the up and coming distributed generation opportunities that we see in the market.

With that, I will turn it to Kirk for the financial review.

Kirk Andrews

Thank you Mauricio and good morning everyone. Beginning with the financial summary on Slide 16, our 2013 financial results now place us proudly back in line with our original 2013 guidance. Specifically, adjusted EBITDA totaled $2.636 billion, exceeding the upper end of our most recent guidance range by $36 million, driven marginally by colder than expected weather during the last two months of the year, positively impacting both wholesale which ended 2013 with nearly $1.8 billion in adjusted EBITDA, and our retail businesses which delivered $614 million. Finally, NRG Yield finished 2013 with $244 million of adjusted EBITDA.

The favorable weather late in the year combined with operational improvements and lower capital expenditures drove free cash flow before growth to $1.282 billion in 2013, exceeding the upper end of our guidance range by $107 million and providing further liquidity improvements and a strong base for 2014 capital available for allocation. NRG’s 2013 capital allocation plan again struck a successful balance among balance sheet management, value-enhancing investments, and return of shareholder capital. We continue our consistent focus on prudent balance sheet management by paying down over $900 million of debt, which included $575 million to redeem the 2014 GenOn senior notes and $200 million to repurchase NRG senior notes of various maturities. We reinvested in the growth of our company with over $800 million in acquisition and growth investments, enhancing our generation portfolio, further increasing our renewables platform, and expanding our retail businesses and customer offerings. Finally during the year, we returned $170 million through a combination of common stock dividends and share repurchases.

Now turning briefly to 2014 guidance on Slide 17, while exceptional operational performance combined with effective risk management helped to give NRG a strong start to this year, we are reaffirming our guidance ranges for both 2014 adjusted EBITDA and free cash flow. This excludes the impact from the pending EME transaction and we will update our guidance on a combined basis following the closing, which we continue to expect by the end of the quarter. While our reaffirmed guidance demonstrates strong momentum in EBITDA growth, 2014 free cash flow guidance reflects our expectation that we will fund a majority of our current five-year environment capital expenditure forecast for NRG this year.

Turning to liquidity on Slide 18, while we made significant strides last year in deploying capital to reduce indebtedness, invest in NRG’s future, and return capital to our shareholders, we’ve increased our cash balance, maintaining a solid level of core liquidity to satisfy the company’s day-to-day working capital needs while providing a surplus to both fully fund the cash portion of the EME transaction and provide capital for further allocation in 2014. NRG’s liquidity at year-end was approximately $3.7 billion, a $333 million increase since the prior year end due to a $218 million increase in cash and $115 million increase in credit facility availability.

Finally, as many of you have inquired regarding the cash balances and liquidity at GenOn, I’ve included a table on this slide to provide some additional details on the portion of NRG’s consolidated cash balances which reside at the GenOn level. GenOn ended 2013 with $760 million in cash of which, as you’ll recall, we reserved $200 million for working capital purposes. This is the GenOn portion of our $940 million minimum cash balance across all of NRG. At year-end, $250 million of GenOn cash is distributable to NRG under the restricted payments basket provision in the GenOn bond indentures. This portion may be distributed to NRG or used for capital allocation at the GenOn level. The remaining $310 million in cash is also available for capital allocation at the GenOn entity level, a portion of which will be used in 2014 for the Avon Lake and Newcastle gas conversions we announced previously as a part of our operational improvements. Although not reflected in the consolidated NRG liquidity view, as of year-end there is also an additional $150 million available under the inter-company revolving credit facility, further enhancing GenOn’s available liquidity.

Now turning to an update on NRG’s dividend on Page 19, when we initiated NRG’s first-ever dividend in 2012, supported initially by our growing contracted solar portfolio, we committed to both sustaining and growing this important component of our return of capital to shareholders, and I’m pleased to announce our second consecutive year of double-digit dividend growth with a 17% increase in our annual dividend to $0.56 per common share, an increase of over 50% from our initial dividend of $0.36 per share in 2012. Our growing portfolio of contracted assets combined with our share of the increasing distributions from NRG Yield provides a strong base for NRG’s commitment to dividend growth. This year’s dividend increase also returns our dividend yield to 2%, delivering more than 15% of NRG’s total standalone free cash flow before growth as a current return to our shareholders.

We’re committed to continuing to grow NRG’s dividend each year by a discretionary amount toward our goal of aligning our dividend with the distributions we receive from NRG Yield. As we continue to realize the benefits of NRG Yield’s cost of capital and enhancing our opportunities to develop new contracted generation, and NRG Yield itself builds on its demonstrated ability to execute on third party acquisitions, our ultimate objective is to establish the NRG dividend as a direct pass-through of our distribution from NRG Yield, thereby allowing our dividend to reflect our broader strategic alignment with Yield.

Turning to 2014 capital allocation on Slide 20, NRG finished the year with over $2.2 billion in consolidated cash and cash equivalents. After subtracting our minimum cash balance, which also includes the $40 million in minimum cash at NRG Yield, and subtracting cash at various projects not currently distributable, we begin 2014 with nearly $1.2 billion in excess cash forming the base of our capital available for allocation. Adding our free cash flow before growth range to this balance gives NRG $2.139 billion to $2.339 billion in cash available for capital allocation this year.

During the year, scheduled debt amortization will further reduce NRG’s consolidated debt by nearly $200 million. We’ve reserved $800 million of capital to fund part of the cash needed for the EME acquisition. The balance of the cash portion of the EME purchase price will be funded by the proceeds we received from the NRG senior notes offering earlier this year and $800 million in cash acquired from EME as a part of the transaction.

We begin 2014 with $330 million in previously allocated capital towards growth investments, which includes investments in operational improvements, conventional investments, and solar. $67 million in integration costs largely represents the balance of costs associated with the GenOn transaction, and finally we’ve allocated $175 million toward our increased dividend in 2014. After these allocation items, NRG has $575 million to $775 million in remaining excess capital. We see growing opportunities for additional accretive investment in the current market environment, and NRG has ample surplus capital to take advantage of these opportunities. In addition, we expect to significantly increase this amount through proceeds to be received from drop-downs to NRG Yield during 2014, and we’ve already begun discussions with NRG Yield on the first three of these, which we expect to announce in the next 60 days.

While we remain in line with our prudent balance sheet management target ratios, as we drop down assets, a portion of the project level distributions attributable to NRG Yield decreases the denominator in our corporate debt to corporate EBITDA ratio. Following each drop down, we will evaluate the impact on our target ratios and may allocate a portion of the proceeds toward debt reduction if needed.

Finally, having increased our dividend, we will revisit share repurchases as a means to augment our returned capital to shareholder, depending on investment opportunities, our exit capital balance and market condition as the year unfolds.

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

David Crane

Thank you Kirk. As Mauricio did, the sort of overall goals and objectives for the company, which we always do on this call, appear on Slide 22. You can see our priorities for the 12 months ahead and this will allow you to follow along and hold us accountable for our progress. As you see from the list, we don’t lack either ambition or in things to do, but I think one of the things I’m proudest of is that we’ve proven in the past that we can succeed at this company on multiple fronts simultaneously.

So with that, Grant, I think we will open the phone lines for some questions.

Question and Answer Session

Operator

Thank you. [Operator instructions]

Our first question comes from the line of Jon Cohen from ISI. Please go ahead.

Jon Cohen – ISI

Thanks, good morning guys. A couple questions – Mauricio, last year, you guys left yourself pretty open to the Texas summer and the weather really didn’t show up, which caused the spark spreads to collapse early in the season, and you can see that on your Page 12, the delta between the ’13 and ’14 spark spreads. So just given that the outcomes are pretty primary and the experience you had last year, has that impacted your thinking about how you’re going to hedge the Texas summer going into ’14?

Mauricio Gutierrez

Hey Jon, good morning. As you can see on our hedge table, for 2014 around our (indiscernible) portfolio, we’re pretty hedged. Where we have maintained the length has been around our gas portfolio and that, as you can appreciate for competitive reasons, we don’t disclose particularly as we go into the summer. But what I will tell you is we are evaluating the open position that we have relative to last year. From a fundamental standpoint, it was tighter last year. We’re seeing some plants coming online this year, and we’re taking that into consideration.

Now keep in mind that we also have some positive developments. One is the increasing price (audio interference) to 7000 and then the second one is the implementation of ORDC, which would improve potential scarcity pricing. So you know, we’re balancing both the fundamental view that we have and some of the market changes, so of course it always influences our view but I would say—you know, that’s what I would give you in terms of color on how we’re approaching (indiscernible).

Jon Cohen – ISI

Okay, thanks. I think I missed about 50% of what you said. I don’t know if it was just me or everybody, but I’m sure it was good so I’ll go back and read the transcript. Then another question for Kirk – there’s been a lot of chatter among the fixed income community recently about certain coverage thresholds being breached at one of the GenOn subs and speculation as to how that’s going to impact the rest of the GenOn structure. Appreciating that there’s still a lot of uncertainties and that your first maturity is sometime away, can you talk generally about what the issue is and whether you’re concerned about it, and maybe a few of the options that you have available to deal with it?

Kirk Andrews

Sure, Jon. Well first of all, as you’ll read later as we file our 10-K, there are a number of distribution tests within the GenOn (indiscernible), most notably there are three. There’s one at GenOn which is exactly what you’re used to seeing in our unsecured notes, which is the distribution test at 5.75 times corporate debt to corporate EBITDA, and then both GenOn and REMA have fixed charge coverage ratios. GenOn’s ratio is a trailing ratio. We were kind of right on top of that, slightly over it as of the end of the year. GENMA and REMA are slightly below their fixed charge coverage ratio test, and importantly those tests are both backward looking on a 12-month basis and forward looking. So currently, the cash that I went through on the liquidity slide is subjected to those various tests, but given that we reserve a certain amount of cash for liquidity needs within the complex and there is an ample amount of cash within that, we’re comfortable in the current environment; and while certainly one could prognosticate about what the future impact might hold in terms of where the commodity price environment is, et cetera, from my perspective you look no further than the unusual events especially that occurred in the northeast, where a lot of those plants are located, and how some of the upside can change the fortunes especially from a cash and liquidity standpoint.

So currently we’re quite comfortable with the liquidity levels across the complex, and there are various means at our disposal to manage around that, most notably as I indicated in my remarks, we’ve got that inter-company credit facility between NRG and GenOn to help support the liquidity needs moving forward. But as I said, there is ample liquidity currently there today.

Jon Cohen – ISI

Okay, great. Thanks a lot, guys.

David Crane

Thanks Jon. Is there another question? Well, I don’t know if people on the phone are having communications issues, but we’re not hearing anything here.

Jon Cohen – ISI

I can just keep asking questions if you want.

David Crane

Yeah! Well Jon, that sort of depends on whether they’re easy questions, but why don’t you go ahead.

Jon Cohen – ISI

Why is NRG such a good company?

David Crane

Because it’s followed by such great sell-side analysts! Okay, go ahead, Jon.

Jon Cohen – ISI

No, I mean I guess one other question is just as you talk about your distributed generation strategy, do you see the potential for maybe some distributed generation assets being dropped into NYLD? Could that be a financing vehicle going forward for—so maybe some longer term retail PTAs?

David Crane

You know, it’s interesting, and I guess I should answer that question—well, I guess I can answer that question from NRG’s perspective. We would hope and we believe that the management of NRG Yield has discussed with the NRG Yield board of directors, their independent directors, the idea that ultimately down the road – and this is a few years down the road – that whether it’s C&I level customers or even ultimately residential customers, that they’re going to have to be looking at leases or offtake agreements that aren’t just with sort of the traditional utilities but these sort of credit bundles, if you will. So we do think that that ultimately—you know, from NRG’s perspective we would hope that NRG Yield would be able to wrap their mind around the offtake credit is going to become a little bit more varied than just utility offtakes. But I think from NRG Yield’s perspective, that’s at least two to three years away before they’re going to have to confront that, because I think it would take two to three years for us at NRG to be able to sort of bundle appropriate packages to deliver to them for consideration.

Thank you, Jon, for that entertainment moment, because I think that we can go back to the queue. Grant?

Operator

Your next question comes from the line of Stephen Byrd from Morgan Stanley. Please proceed.

Stephen Byrd – Morgan Stanley

Good morning.

David Crane

Stephen, everything we possibly could do to block you out did not work, so now it’s your chance to ask a question.

Stephen Byrd – Morgan Stanley

Yeah, you delayed as long as you could, but we still have about 15 minutes. So yeah, I wanted to just get your sense of as you look at acquisition opportunities, both for renewable assets, contracted fossil assets, can you just give a little color on the extent to which you do see opportunities? Clearly the NYLD currency must be helpful, but I’m just curious, as you seeing willing sellers, are you seeing a fairly large amount of opportunities, or are there issues in terms of whether there’s—you know, the delayed transaction? Just some color on sort of the M&A market, if you could.

David Crane

Well the M&A market—the question was specifically the M&A market for contracted assets, is that right?

Stephen Byrd – Morgan Stanley

That’s right.

David Crane

Yeah. So what I would tell you, Stephen, is that I think it is sort of a—it’s a target rich environment, and right now while there are a lot of other people that are, as you know, talking about yield vehicles, there aren’t that many others out there that actually exist, and the ones that are, are much smaller and sort of single asset or single type of asset, so we like to think not at the same quality as NRG Yield. So there are a lot of targets.

What I would tell you is that the two challenges that have to be overcome is, number one, the success of NRG Yield and what it means about NRG Yield’s cost of capital. The math can easily be done by the seller, and so my bigger concern rather than having a bunch of targets is making sure that the seller doesn’t think that all the benefit of NRG Yield’s cost of capital goes to them, because for it to work, we have to have some clearance on our cost of capital. So I think it’s raised price expectations amongst sellers of contracted assets.

The second thing, and this is an interesting area, it’s just more complicated, is that particularly when you talk about renewable contracted assets, there are a lot of thinly capitalized companies that have a portfolio of operating assets but they also have a development portfolio, and what’s interesting to me and interesting to them, but complicated, is the idea of working out an arrangement going forward where they can feed their contracted assets into NRG Yield but also have some sort of understanding with respect to their development assets when they get them finished. That could very much be a win-win, but it’s complicated.

Stephen Byrd – Morgan Stanley

That’s great color. David, I wanted to talk kind of about the future of distributed generation. You’ve written some interesting things and I think recently gave a discussion of this. One of the elements I wanted to talk about was the Stirling engine coupled with batteries. If you could just give us a sense for how that business plan is developing, what we should be looking for, how you see that potentially rolling out over time.

David Crane

Well I mean, I’m always very concerned about the precise nature of the question, Stephen. I mean, the Stirling engine, it has a few batteries in it but the beauty of the Stirling engine, which for other people on the call, we hope it to be our entrance into the distributed generation in terms of reliable distributed or non-intermittent distributed generation, is that while it does have a few batteries in it to sort of clean up the power from a voltage perspective, for us it’s a substitute for massive banks of batteries. The basic theory of it is that if you have a machine that ties to the natural gas system in the United States, you can link it up with solar on a distributed basis and you don’t need to have a basement full of batteries.

So what we’re trying to get to on Stirling, we’re in the field demonstration phase, Stephen. We expect to have 20 machines out in real-life applications by the end of the first half of this year, and that will lead to a decision to go to large-scale manufacturing in the second half of the year, and hopefully available for—you know, fully commercially available certainly by the second half of 2015. So I think you’ll be hearing a lot more about that over the next six to 12 months.

Stephen Byrd – Morgan Stanley

Great, thanks so much. I’ll let others have some time.

David Crane

Did that answer your question?

Stephen Byrd – Morgan Stanley

That answers it. Thank you very much.

David Crane

Okay.

Operator

Thank you. Your next question comes from the line of Paul Zimbardo from UBS. Please proceed.

Paul Zimbardo – UBS

Hi, good morning. I had a question about your expansion plans in California – I think you’ve called them significant repowering opportunities, what you’re seeing out there, and also your contracting efforts in New York.

David Crane

Well, in general terms I think our main goal in California is in the wake of the San Onofre closure to move forward with our project at Carlsbad, which I think it’s well on track; it’s just that things go—it takes a while in California. I’m actually—in addition to people I’ve previously said, John Chillemi, who runs California for us is here. John, do you have anything to add to that?

John Chillemi

I do. There is also an RFO ongoing right now with Southern California Edison, and two of our sites that have great repowering opportunities are participating in that. One is the El Segundo energy center second phase, which is 435 megawatts proposed, and the other is what we call the Mandalay repower in Oxnard, where there’s a station there that we’re looking to replace with 300 megawatts. So we are participating in the current SE RFO, and we’re also pursuing the Carlsbad energy center.

David Crane

Okay, thanks John. And you mentioned New York – I think it was announced recently about a refueling of Dunkirk in western New York to gas, which I think is very helpful. We have a permitted site in New York City at Astoria which we’d love to go forward. We’re just hoping basically for a long-term contract. So as I’ve said previously, I hope just in terms of intrinsic growth that over the next 12 to 18 months, we certainly can go forward with 1,000 to 2,000 megawatts in total of redevelopments of existing sites off the strength of long-term contracts so that they would be assets that over time would be – I don’t know if this is proper English – drop down-able into NRG Yield.

Paul Zimbardo – UBS

Okay, great. A follow-up question – on Slide 6, it’s really great, a lot of information there. On the bottom, if you kind of had to place your bets, if you will, where do you see the biggest growth opportunities for (indiscernible)? I know you touched on energy storage a little bit already.

David Crane

Well, I think if you’re talking about growth opportunities in terms of financial growth in the near term, the type of term that most people on the phone are probably interested in, sort of the two to five-year term, by far I think that the greatest growth effort for us would be actually in the center column where traditional retail and residential solar come together. We are big believers in this view that various analysts, maybe some analysts on the phone, have also come to the conclusion that within the next 12 to 24 months in 24 states, roughly 20 to 24 states, residential solar will be cost competitive, and where we see our advantage is in combining that with actually supply of system power. So I would say in the medium term time frame, that is the highest growth area.

Paul Zimbardo – UBS

Okay, great. Thanks.

Operator

Thanks for your question. Our next question comes from the line of Angie Storozynski from Macquarie. Please go ahead.

Angie Storozynski - Macquarie

Awesome, thank you. So I wanted to start with the year-to-date results. I know you don’t want to quantify any benefit, but you kept talking mostly about your generation assets. How did the retail perform year-to-date?

David Crane

So Angie, first of all, I should say the first draft of our comments, Chad wanted me to say about how we wouldn’t talk about year-to-date. He almost had a sentence in there saying, Angie won’t listen to our statement that we won’t talk about it.

So what I would say, we have Elizabeth and Jim here, but I would say that the cold weather that we have—I mean, there have been bouts of cold weather. It’s been coldish weather in Texas, but nothing of course like what we’ve seen in the northeast. But we’ve had good volume in Texas and so—and that by far is the biggest portion of our retail, so I’d say that they’re sort of on a positive track.

With respect to the northeast and the extraordinary weather that we’ve got up here, as we’ve talked about, the various extreme weather events in the summer or the winter, we hedge our retail book against expected weather so when extraordinary weather comes there is a road bump, so I would say that the results in the northeast retail year-to-date were not positive. But the scale of it relative to the positive side on the wholesale, it’s sort of a rounding error.

Angie Storozynski – Macquarie

Okay, that’s great. Moving on to the South Central business, there was a pretty significant drop year-over-year in the profitability of this business. The area has just joined MISO. How should we think about it going forward? Is this actually—is the MISO joining, does it actually create potential upside to your earnings power from the plants there, or is it given that there’s going to be more availability of power in the region, that’s actually going to suppress earnings further?

David Crane

It’s a good question, Angie, and that’s why it’s a tough question. I’m going to ask Mauricio to answer it.

Mauricio Gutierrez

Hey, good morning Angie. So look, year-over-year South Central was affected by lower spark spreads, and I don’t think you can—as we go into MISO, and that integration just happened at the end of the year, we’re still waiting to see how that market will develop and some of the initial pricing has been somewhat positive. But just looking at 2013, you saw in our compression of spark spreads, we didn’t have sustained weather so that affected the profitability of the business. That’s pretty much it.

Angie Storozynski – Macquarie

Okay, and my last question is you’re talking about asset drop-downs to NRG Yield, and there’s clearly a big gap in the value, which is implied in the NRG share price from the market value of NRG Yield. How should we think about your ability to bridge this gap? Is it that every time there’s a drop down of assets into NRG Yield, you’re basically going to use the cash to buy back shares of NRG, or—and that’s how you’re actually going to link the valuations of these two stocks?

Kirk Andrews

Angie, it’s Kirk. First of all, in terms of the value linkage, the only thing I would say is prescriptively in terms of our long term goals is my remarks about the dividend. In terms of the specific proceeds from NRG Yield drop-downs, we look at that as just capital replenishment, and we would deploy that capital towards the opportunities as we see them across the three categories as we typically describe them. I made a couple of remarks about the impact on drop-downs on our credit ratios, which of course we take that into consideration as to what, if any, portion of those proceeds would go towards maintaining those target ratios, and then we approach the remaining capital, which would be the substantial portion of that from any drop-down as we would any capital allocation decision between NRG and NRG Yield.

But certainly we’re mindful of the fact that the cash proceeds are easier for the market to grasp in value than is our stake in NRG Yield, but our focus is certainly in driving the success of that moving forward in part to help resonate the fact that NRG Yield as we expected to do, most notably because of some of the opportunities that John Chillemi mentioned. That is really an enabling factor to allow us to drive our success and be more competitive in realizing the benefits of the opportunities that present to us in our markets for redevelopment, which is largely going to be on a contracted basis.

Angie Storozynski – Macquarie

Okay, but just going back to the original statement you made about watching your credit metrics, there is so much debt that is moving with these assets, like if these are highly levered solar assets, a lot of them actually, so the drop-downs into the NRG Yield should significantly de-lever your balance sheet, so why would credit metrics worry you at NRG?

Kirk Andrews

Sure. On a consolidated basis, that’s true; however, in terms of our credit ratios, especially under our indentures there’s a very important corporate debt to corporate EBITDA ratios, the debt which is all non-recourse at those excluded project subsidiaries that make up all of the assets, both in NRG Yield as well as the assets in ROFO pipeline, that doesn’t count towards that particular ratio, i.e. the numerator of that ratio. However, as I indicated in my remarks, the one thing we do benefit from in those excluded project subs in terms of the denominator, that is the corporate EBITDA, is the distributions that we get from those subsidiaries. So when we move an asset into NRG Yield, it does not affect our corporate debt, i.e. the numerator; it does reduce the corporate EBITDA by the amount of those distributions, the denominator.

Angie Storozynski – Macquarie

Okay.

David Crane

Thank you, Angie. And Grant, I know we’re approaching if not passed the top of the house, and some of the people on the call will have another earnings call with NRG Yield in half an hour, and I know the management of that company gets really antagonized when we go over. But since we did have that disruption, I’d like to take two more calls and then anyone that we don’t get to, we apologize and please contact Chad and we’ll set up a call or try and answer your questions.

So Grant, two more callers and then we’ll be done.

Operator

Okay, thank you. Your next question comes from the line of Neil Mehta from Goldman Sachs. Please go ahead.

Neil Mehta – Goldman Sachs

Good morning. Any thoughts on the demand revisions here from Ercot: And then the preliminary CDR has come out. Any early thoughts on their views of reserve margins?

David Crane

Well, let me just say I’m sure Mauricio will have more to add to this. I think we’ve shown here, didn’t we, that—I mean, Texas was up 3.4% for the quarter, so why someone thinks Texas is going to suddenly stop—go down to 1, I mean, you tell me. We would be planning for more robust growth.

Mauricio Gutierrez

No, I think—Neil, our view is that we’ve seen over the past three years low growth, weather-normalized close to 2%. We have seen the revised new load forecasting methodology coming out of Ercot, and I think it has it around 1.3%. We disagree with that assessment. I have not seen the new CDR since I’ve been sitting I’ve been sitting here, but what I would tell you is we’re going to look at some of the other assumptions that they have embedded in their 1.3% load forecast and the variables on the CDR, particularly around energy efficiency to make sure that there is no double counting. You know, we’ll go through that in the next couple of hours, but what I will tell you is we continue to see very robust demand not only Ercot as a whole but speaking with Elizabeth and her team at retail. We don’t see the economy as slowing at all.

David Crane

Yeah, I’d actually like Elizabeth to comment on that because a big part—you know, an important sales channel for Reliant is actually people moving in, and as far as I know, I’ve heard of no abatement in terms of pace of people moving into Texas. And if we get 18 inches on Sunday, hell, I’m moving to Texas!

Elizabeth Killinger

And you’d be welcome. No, I would agree with what Mauricio said. The economy is very healthy in Texas. It was the last to go into the recession, the first to rebound, and we have new businesses coming in Houston, to the greater Houston area, and Dallas sees some of the same. From a retail perspective, our engine is strong across all of our retail brands in Texas and momentum is strong, and I’m excited about what we’re going to do this year.

David Crane

Yeah, so we don’t believe it. Did you have another question?

Neil Mehta – Goldman Sachs

Yeah, on the PTM auctions here, can you talk about pluses and minuses as you think about it as the auctions are coming up, both for RTO and then also for the eastern footprint?

Mauricio Gutierrez

Okay, Neil, I’ll pass it on to Chris Moser.

Chris Moser

Hey Neil, it’s Chris. On the BRA coming up in May, I think one of the big pieces that we’re going to see is the limits on imports – I know they’re about 7,500 megawatts that cleared in the ’16 - ’17. For the ’17 – ’18, that looks like it’s going to be capped at about 6,500. You’ve also got the cap on DR, the limited DR, which has been 90%-some of the DR that tends to get purchased, so that’s going to be capped at around 2%, so call that 2,500 versus the 10,000 or so that cleared last time. So those are two of the big ones. I know they’re still working on DR operability and a couple of other moving pieces, so those are kind of the pluses we see for the BRA.

In terms of the incremental that is closing later today, it’s going to be interesting. This is the first time we’ve seen PJM on the buy side – normally, they are reducing load forecasts and have extra megawatts available that they’ve got to spit out into the third incremental. This is the first time that PJM is actually on the buy side and will be procuring some, so that’s a swing of 1,000 or 1,500 megawatts there, and it will be very interesting to see where this one clears. I believe the numbers come out next Friday.

Neil Mehta – Goldman Sachs

Got it. Thank you guys.

David Crane

Thank you. So Grant, last question?

Operator

Thank you. Our next question comes from the line of Steven Fleishman from Wolfe Research. Please go ahead.

Steve Fleishman – Wolfe Research

Hi, good morning. I might have missed some of this in the in and out of the call, but just curious to your interest in—there’s a lot of distressed people both in conventional generation as well as more recently in retail. It seems like there’s a lot of retail businesses for sale. Could you give us at least some view of your interest in acquiring more of both?

David Crane

Yeah, what I would say about that is that—I mean, both in terms of conventional, wholesale and retail system power, they are both core parts of our businesses, particularly in the geographic areas we’re in. We look at everything, so we look at everything and we get specific on nothing on a call like this. But no – we definitely actively look at everything, and I don’t know if I would say—you sort of said distressed, but I mean, we were a little bit surprised that we didn’t actually get more questions about buybacks, why aren’t you announcing buybacks. But Kirk said it near the very end of his comments, which it is a good time, I think, to be a buyer and so—because it does seem like there’s a lot of potential opportunities out there, and at a particular price we’re interested in a lot of things.

I would say on the generation side, the times where we used to say to you, look, we really need a counterweight for our position in Texas and we’ve got this northeast but we need more in PJM, that was the one compelling strategic need we had on the generation side, and let’s face it – that was satisfied by the GenOn transaction. So I think it’s a more opportunistic approach on the wholesale side.

On the retail side, clearly we have a fantastic market leading position in Texas. It could always be better. We’re interested in more retail in the northeast, but in the northeast it’s sort of market to market, and some markets are good, some are less good. So we look at everything and we’ll see what happens over the next six months.

Steve Fleishman – Wolfe Research

Great. Thank you very much.

David Crane

Okay, thank you Steven, and thank you all for hanging in there with us through whatever troubles there were with the phone and for an hour and 10 minutes, and we’ll try and be more succinct next time. So Grant, I think that’s it.

Operator

Okay, thank you ladies and gentlemen for your participation in today’s conference. This now concludes your presentation. You may now disconnect. Enjoy the rest of your day.

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