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NRG Energy, Inc. (NRG)

October 03, 2011 10:00 am ET

Executives

David Crane - Chief Executive Officer, President, Executive Director and Member of Nuclear Oversight Committee

Kirkland B. Andrews - Chief Financial Officer and Executive Vice President

Mauricio Gutierrez - Chief Operating Officer and Executive Vice President

Nahla A. Azmy - Vice President of Investor Relations

Analysts

Angie Storozynski - Macquarie Research

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Jonathan Cohen - ISI Group Inc., Research Division

Gregg Orrill - Barclays Capital, Research Division

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Ameet I. Thakkar - BofA Merrill Lynch, Research Division

James L. Dobson - Wunderlich Securities Inc., Research Division

Anthony C. Crowdell - Jefferies & Company, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the NRG Energy's Texas Update. My name is Stacy, and I'll be your conference moderator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today, Ms. Nahla Azmy, Senior Vice President, Investor Relations. Please proceed.

Nahla A. Azmy

Thank you, Stacy. Good afternoon, and welcome to our call to discuss the impact of extreme weather events in Texas on NRG's 2011 guidance. This call is being broadcast live over the phone and from our website at www.nrgenergy.com. You can access the call presentation and press release through a link on the Investor Relations page of our website. A replay of the call will also be available on our website. In the interest of time, we ask that you please limit yourself to one question with just one follow-up. With our earnings call to be held within the next few weeks, we also ask that you please focus your questions primarily on the Texas event and impacts to 2011 financial guidance that are addressed in our press release and presentation provided today.

And now for the obligatory Safe Harbor statement. During the course of this presentation, management will reiterate forward-looking statements made in today's press release regarding future events and financial performance. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. 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 October 3, 2011, 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 afternoon's call, we will 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.

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

David Crane

Thank you, Nahla, and thank you, ladies and gentlemen, for joining us on such short notice for this afternoon's call. We have convened this call to report to you on the impact of the fierce August heat wave in Texas on our financial results for that month. First, Mauricio Gutierrez, our Chief Operating Officer, will explain in some detail how the record heat and extraordinary price spikes in ERCOT had a negative impact on both our Texas retail businesses and our fully hedged wholesale generation business. Then Kirk Andrews, our new Chief Financial Officer, who actually joined us just a few weeks ago and after the events of August, will talk about how the company's August performance will impact our full year 2011 guidance.

Finally, I will make a few comments on the prospects for our business longer term, because the message which I believe that you should take away from this call is that while the company stumbled significantly in August, the cause of that stumble, a wholly unexpected surge in heat rates and wholesale power prices in Texas, actually is a trend that stands to benefit NRG in the future, and not just the distant future, but the short- to medium-term future. But to benefit from that trend, we have to position the portfolio properly in terms of our hedging strategy, and that is something that we emphatically did not do going into the extraordinary Texas heat wave of August 2011.

Without further delay, I'm going to pass the floor to Mauricio so he can describe to you in somewhat greater detail what happened. Mauricio?

Mauricio Gutierrez

Thank you, David. Starting with the impact to our retail portfolio on Slide 4. And as Dave just mentioned, Texas experienced unprecedented weather in terms of intensity and duration throughout the summer. It was the warmest August on record in at least the last 100 years, with Houston and Dallas over 40% warmer than normal. These conditions led to a significant increase in power demand, primarily from our residential customers, as you can see on the upper-right chart.

As we have said in the past, our retail portfolio is run with a fully hedged position against expected growth under normal conditions. That is, we purchase enough power, either from our plants or the open market, to cover the expected demand. In addition, we purchase some insurance in the form of options to cover weather variability. In these efforts, we must strike a balance between the cost and benefits of derisking the portfolio while maintaining price competitive in the market. The incremental demand that we experienced during August more than exceeded the protection that we have purchased and forced us to go to the open market to buy very expensive power during periods of extreme price volatility. It was particularly prevalent during the peak hours of the day, where we experienced the largest load spikes.

This retail hedging strategy results in some earnings variability across months, having materially outperformed during the first 6 months of the year, when prices were low and demand high, and underperformed in August, when both demand and prices spiked. However, given the magnitude of the August variance and our expectation of tightening reserve margins in Texas, we will adjust our retail hedging program to incorporate a higher level of protection going forward.

Turning to Slide 5, on the impact to our wholesale portfolio. It is well known that we manage our generation portfolio actively. Our baseload hedging program focuses on capturing structural long-term changes in the market while we take a more tactical approach around our gas portfolio.

During the month of July, we saw a dramatic increase on August forward heat rates, as you can see on the left chart. Given how large of a premium this represented compared to actual clearing prices throughout the year, and in particular, in July, this presented our commercial group an opportunity to hedge our gas portfolio at what were then viewed as attractive price levels. This short-term optimization activity left no room for operational issues or unplanned outages. While our gas fleet have performed exceptionally well for the most part of the year, the increasing cycling of our units throughout the year took its toll during the second half of August, forcing some units out of the market, and required us to replace these power at significantly higher prices than where we had originally hedged.

The position that we took on the Wholesale side, while consistent with our market view at the time, failed in 2 ways: first, to properly account for the level of operational risk in our portfolio; and second, to recognize that the retail business already has an embedded risk of being short. Therefore, our wholesale position provided no relief to the short position of our retail business. As a result of this performance, we have focused most of our attention in changes to ensure that in the future, our integrated model performs well during severe summer conditions. The most noteworthy change is that we will keep a portion of our gas fleet on hedge as insurance to mitigate both operational and weather risks inherent in our integrated business model.

As we look beyond 2011, fundamentals for our core business continued to look very promising in the Texas market, as you can see on Slide 6. The MACT continued to outperform the rest of the country with year-on-year growth of 2%, and supply remains anemic, given low forward power prices that still do not incentivize new-build economics. In addition, and depending on the outcome of the various EPA rules, we expect the Texas market to be quite tight as early as next year. These dynamics provide, first, organic growth to our retail business, and second, a solid fundamental platform to our wholesale portfolio.

Finally, let me just say that all of us at NRG hold ourselves to a higher level of performance than the one we have shown during the month of August. We have made the necessary changes in our risk management framework to ensure that NRG benefits from tighter power markets in the months and years to come. With that, I will turn it over to Kirk for financial review.

Kirkland B. Andrews

Thank you, Mauricio. If you'll turn to the Slide 7, you'll find a summary of our updated guidance ranges for 2011 adjusted EBITDA and free cash flow before growth investments. We are revising our 2011 EBITDA guidance range by $125 million to $150 million to $1.775 billion to $1.850 billion and are making a commensurate revision to our free cash flow before growth investments guidance, resulting in a new range of $875 million to $950 million. These revisions reflect the impact of the events of August which Mauricio has just described. As you will see, $55 million of these revisions reflect changes to our outlook for our wholesale, with the balance coming from our outlook for our retail businesses. The impact of these revisions places our guidance range back in line with our original 2011 guidance provided prior to our second quarter earnings call on August 4.

Importantly, we believe our revised guidance still continues to demonstrate the strength of our overall wholesale and retail platform, and specifically, the Reliant retail business, which, despite the events of August, remains on pace to exceed $550 million in EBITDA for 2011. NRG's free cash flow before growth investments remain strong, and, based on Friday's share price of $21.21 and our outstanding share count as of June 30, implies a yield of nearly 20%.

We will provide details regarding the progress of both our share repurchase activity and solar programs as well as the overall performance of our businesses when we release quarterly earnings in early November. I look forward to speaking with all of you then. With that, I'll turn it back over to David for some closing remarks.

David Crane

Thank you, Kirk. Ladies and gentlemen, I'd like to leave you with just a few concluding observations. First, as Mauricio discussed, the greater part of our problem was that we overhedged our peaking portfolio, which triggered losses both in retail, which had to buy system power during the super peaks, and in our wholesale power generation business itself, when we had to buy in-power to cover the loss output from units that experienced unplanned outages, particularly during the latter part of the month. Had we kept a good portion of our gas peaking fleet open and sold it into the day-ahead or realtime market, the financial outcome for the company would have been substantially different.

And as Mauricio said, when we look at the type supply situation that we see in the ERCOT market for the next 2 to 3 summers, that is exactly what we intend to do going forward, and not just as a matter of management preference, but as a matter of company risk policy. The robust growth in electricity demand in Texas should be a good thing for NRG shareholders. The tightening of reserve margins in Texas should be a good thing for NRG shareholders,, and we will make sure that we will use all the levers at our disposal on both the wholesale and the retail sides of our business to make sure that NRG shareholders realize the benefit of our unique, competitive position in this, our biggest and most thriving market in the future.

The second and final point I want to make is to amplify on Kirk's comments about the 2011 financial performance of the company and its constituent parts. Even after taking into account the August results, Reliant is on track to generate over $550 million in fiscal year 2011 EBITDA. Even after taking into account the August results, the company expects to post a free cash flow yield for 2011 in the 18% to 19% range.

And perhaps most importantly, even after taking in account August results, NRG's liquidity position, our cash flow generation and our ability to monetize a portion of our growth portfolio at value puts us in a very strong position to pursue both our growth and our capital allocation objectives going forward.

With that, Stacy, I believe we have time to take a few questions from the listeners.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ameet Thakkar with Bank of America.

Ameet I. Thakkar - BofA Merrill Lynch, Research Division

I guess I just -- well, it wasn't really clear. I understand there's going to be an update on like kind of where you stand on the share repurchases on the November third quarter call. But just to be clear, you upsized your share repurchase program on the second quarter call. Does that share repurchase program still -- is that still unaffected?

Kirkland B. Andrews

Ameet, it's Kirk. The events of August have not affected our share repurchase plans for 2011. And we expect to provide an update on our progress on that, but we are on pace with respect to the $300 million of share repurchases we announced for the remainder of the year from our second earnings call.

Ameet I. Thakkar - BofA Merrill Lynch, Research Division

Okay. And then just thinking ahead, one of the things that you guys had contemplated before was either calling the 2017 bonds, kind of the last piece with the risk of kind of onerous restrictive payment basket and the covenants or tendering for those earlier. I mean, your bonds are -- the yield's had kind of just gone out. I mean, how are you thinking about that now?

Kirkland B. Andrews

Well, I mean, as you pointed out, those 2017 notes are really the last remaining step towards more efficiently being able to allocate capital. And we do expect to retire those by the first quarter. So what I'd say is we'll be able to provide more specifics on the share repurchase plans and the capital allocation strategy that would result from that once the 2017s are cleared away.

Ameet I. Thakkar - BofA Merrill Lynch, Research Division

Okay. And just one quick last question. Mauricio, you mentioned potentially utilizing more kind of higher-heat-rate call options as a way to kind of mitigate this sort of thing going forward. I guess will that -- should we view that as a potential additional cost for your Reliant retail business? And how should we think about that potentially impacting kind of the long-range rate of EBITDA you've given for that business in the past?

Mauricio Gutierrez

Ameet, I mean, right now, as you know, we buy some insurance to protect for some load variability. We're going to evaluate case by case in terms of the fundamentals. This primarily sent pass-through cost to our customers, and we intend to do that. I don't believe -- well, it doesn't change our expected outlook for retail in terms of financial performance.

Operator

Your next question comes from the line of Angie Storozynski with Macquarie.

Angie Storozynski - Macquarie Research

I understand that the August weather was exceptional. Now you mentioned the tightening of the power market in Texas. We are awaiting updates from Texas regulators regarding the dispatch of the non-spend reserve, potential increase in caps in electricity prices. And again, the market is tightening, be it cast for the [ph] economy. So even without those extreme weather conditions going forward, we should anticipate that there should be more spikes in power prices in Texas. So how are you going to manage your business in this new environment, your retail business?

David Crane

Well, Angie, I think you did quite a good summary of all the same dynamics that we see. I mean, you mentioned potential regulatory changes in the Texas market, and I believe that for us, there are 2 important lessons of those. First of all, I think that they generally -- I mean, any changes in the regulatory environment that are designed to essentially incent more generation into the market is going to be more good for NRG, given our 11,000 megawatts that we trade into the Texas market. So that's a positive development. But as you say, I mean, one of the things that we can count on, and clearly, we were taken a little bit by surprise this summer, was that when it gets tight in Texas, we're going to see some extreme volatility, and we have to take steps to make sure that we can manage it better than we did this summer. So I would say we're going to do a wide variety of things, but by far I think the most noteworthy thing that we mentioned today that we're going to make part of company policy is we are not going to put in a position again, as we were this summer, where we had sold 100% of our gas peaking units going into the heat wave. We will keep a certain amount of that capacity to take into the day-ahead or the realtime market. And so that will help us. I mean, if we have those assets, we should be able to take advantage of those super spikes that we saw this last August rather than have them punish us like they did this last August. Mauricio, do you have anything to add to that?

Mauricio Gutierrez

I mean, the only thing is that we're going to probably buy more insurance to manage that price volatility and potentially load variability on our retail business.

Angie Storozynski - Macquarie Research

And you're saying it's going to be reflected on your retail rates?

Mauricio Gutierrez

Correct. I mean, that is a cost to the energy, so that will be a pass-through to the retail prices.

Angie Storozynski - Macquarie Research

And my last question, my perception was that the majority of your customers had actually flexible rate plans, and as such, they should have absorbed at least a portion of the spikes that you guys faced. Is that true?

Mauricio Gutierrez

No. There is a -- the way I would characterize it is probably half and half. We have some fixed-price customers, primarily in the C&I side. The residential is month-to-month. And then we have some heat rate or fixed price on them. There is a lag on the pricing decisions that you can make, and we are evaluating whether or not we take steps on that to reflect the higher cost of supplying those customers in the coming months.

Operator

Your next question comes from the line of John Cohen with India Sam India Group (sic) [ISI Group].

Jonathan Cohen - ISI Group Inc., Research Division

Sorry, I was trying to give them the phonetics for ISI Group. But my question, I guess, is, I would imagine that some of your competitors in Texas with smaller balance sheets and who don't know generation would have fared a lot worse. Are you seeing any of the aftermath of that yet? Have volumes in Reliant ticked up at all? I mean, didn't it...

David Crane

Well, I have to say, I mean, we probably shouldn't -- someone who didn't manage August well shouldn't speculate on how other people did. But your -- I mean, your supposition is one that we agree with. It was a very, very difficult month to be a retailer in Texas. And so, to be frank, we have been surprised that we haven't seen more visible fallout from that in terms of other participants in the markets, particularly the type that fit the profile that you mentioned. But we've seen very little, and we don't have a good explanation for that.

Jonathan Cohen - ISI Group Inc., Research Division

Is there a timing-related issue as to when you would see it? Is there a certain lag as to when they get billed from ERCOT for stuff they have to buy in the realtime market?

David Crane

Well, there was some speculation about there a certain lag in settlement dates and the like. But I mean, we're more than a month past it now, so I don't -- we are baffled, here.

Jonathan Cohen - ISI Group Inc., Research Division

Okay. And I guess my second question is, Mauricio, you said that you'd be buying more insurance in the form of high-heat-rate call options. Isn't another way to frame this is that the peak price at which you hedged was just too low and didn't really include a lot of the super peak that we experience in the summer, and that maybe going forward, the peak price will include that? So even if you were to hedge it out, you probably will be realizing value that's more akin to what the real value is for those products?

Mauricio Gutierrez

Well, I mean, when we look at the options that we buy to manage that weather variability, we look at the last 25 years of actual weather, and we target, let's say, 2 standard deviation. What we have today was a 6 Sigma move on weather and, therefore, demand. On Slide 4 of the presentation, I gave the comparison between 2010 and '11. 2010, we roughly moved about 5% to 6% total megawatt hours served. In 2011, it was 17%. So while we purchased some insurance to manage that variability, it was not enough to cover the entire 17% increase, which we basically had to go to the market and purchase when there were price spikes prevalent.

Jonathan Cohen - ISI Group Inc., Research Division

Okay. So do you have any idea of how much generation length you'd like to carry to the market now?

David Crane

Well, let me answer that. I think Mauricio would do a pretty good job of not answering that question. It's really going to be variable depending on the circumstance, because I think one of the other mistakes we made is in treating all megawatts like in our portfolio equally. And one of the units that we were trading into the market was 53 years old and had been brought out of mothballs, and it was not wise for us to have assumed that it would be as reliable as all the other units, particularly when it was run and cycled harder than anyone ever had anticipated that it would be. So I think we're going to -- we're building it into our risk process on a day-in, day-out basis to make sure as we look at the portfolio that's running at that day as to what we need to hold and reserve. I mean, we can be in a situation where one of our most reliable units, and I want to emphasize that our baseload coal units ran astonishingly well during the month, thankfully. But we could have had a situation where one of our most reliable units would be sort of nursing a tube leak and be trying to limp through to the weekend or something and in that situation, we'd hold more in reserve in case that assessment didn't prove out to be right. So we don't want to give a specific number, but we want our investors to have confidence that we are going to keep a physical backup in these types of summer situations.

Operator

Your next question comes from the line of Gregg Orrill with Barclays Capital.

Gregg Orrill - Barclays Capital, Research Division

The EBITDA guidance reduction looked to be around half wholesale and half from the other businesses. Could you talk a little bit about the drivers that led to the Wholesale reduction in terms of cycling impacts and margins?

Mauricio Gutierrez

Sure. Gregg, I mean, as we already said, we basically went into the month completely hedged not only for our baseload and our entire gas portfolio, given the premiums that we saw in the forward heat rates for the month of August. Some of our units have been running very hard starting since April. As you know, the April through August has been the warmest on record in Texas. They were run and cycled hard. By the second half of August, we had some operational issues on our gas units, which created a short position, and we had to go to market and buy those at pretty high prices.

Gregg Orrill - Barclays Capital, Research Division

Okay. And then separately, just to follow up on an earlier question, I wasn't clear that -- whether you were looking to take out the debt early so that you could proceed to a higher buyback this year or whether you were focused on getting it done after the call date in February.

Kirkland B. Andrews

Gregg, it's Kirk. As you're aware, obviously, we've got a call date looming or coming in the early part of the first quarter. Certainly, we'll continue to follow what has been pretty consistently the strategy on the financial side of the table around being opportunistic with situations such as the 2017s. And so the best I can say is we will continue to monitor the markets, and we'll take actions accordingly but are certainly focused on the first quarter as kind of the outside date to address the 2017s, which, again, as I've said before, are the last remaining step towards implementing free and clear, more efficient allocation of capital.

Operator

Our next question comes from the line of Julien Dumoulin-Smith with UBS.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

A quick question. You seemed to suggest earlier in a prior response that you would be raising pricing in the Reliant service Territory to reflect the higher costs. I mean, one, could you give us a sense of how much it would cost you incrementally to achieve the higher levels of hedges you described? And then secondarily, am I correct in my initial understanding there that this would likely lead to price increases at Reliant?

Mauricio Gutierrez

I mean, we're going to evaluate the level of insurance that we need to buy. And given the tightness in the market for the next 3 years, most likely, we will increase that insurance. That is a pass-through cost, and it is going to have an impact on retail rates, as any other energy cost have in our rates.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Great. And then secondarily on that, where have you guys seen margins, especially at the mass business, trending this year? Where do you see them going forward? And how does this play into your thoughts, call it longer-term margins structurally in the ERCOT region?

David Crane

Well, I think that we've seen margins -- if anything, they've been -- well, I think they've been more stable than anything else is the way you would characterize this year relative to last year, possibly trending down a little bit, tightening a little bit. But I would say that there is a question about not how Reliant, but how the entire retail sector is going to respond in terms of everyone's pricing policy to a situation where this volatility exists, because, again, I would think from a retail perspective, and I can't say how other retailers are going to respond to this, but we are actually in a better position to deal with the circumstances, as Angie described a little bit earlier in the call, in terms of where we see ourselves going into in the next 2 to 3 summers in Texas. So you would expect, I think, that almost anyone who is a retailer, and particularly if they don't have any generation to point as a retail, is going to have to take significant steps to protect themselves against those high peaks. And I imagine that gets even more certain if ERCOT actually raises the top wholesale rate from $3,000 to, what's the proposal on the table? Possibly $6000.

Mauricio Gutierrez

$4000 to $6000.

David Crane

So we actually think that this circumstance notwithstanding, our performance in this August is to our competitive advantage going forward.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Great. So maybe if you can clarify, just going forward, where do you see the long-term earnings power for the line of business, if you're ready to comment on that?

David Crane

Well, I mean, we haven't changed our point of view on that, because remember, we -- about the only forward assessment we give at the earnings power of Reliant is what we call the sort of the midcycle, and we're saying midcycle, it's $400 million to $500 million of EBITDA per year. Now this -- as you know, prices in Texas, wholesale prices in Texas, are a function of heat rates and natural gas prices. So we just experienced a situation in August where we saw some extraordinary things on heat rates, but natural gas prices stayed subdued throughout the month. So now we're saying that we're seeing this tightness that's showing up in heat rates overall, we would continue to think from the wholesale perspective that you would characterize this is in the bottom half of the cycle. And that's why $400 million to $500 is midcycle. But we're expecting over $550 million this year. So...

Operator

Your next question comes from the line of Anthony Crowdell with Jefferies & Company.

Anthony C. Crowdell - Jefferies & Company, Inc., Research Division

Just 2 quick questions, I guess more related to the gas assets. I mean, one, on an operational issue, it seemed that the units towards the second half of August, you had some outages there. I mean, should we look at it as there's going to be some increased CapEx or more maintenance to make sure these units, when you do call them in the future, will be there? And the second question is, you spoke about had you not hedged all your gas assets, the results would have been considerably different in Texas. Would you want to quantify or like sort of give us a range of what type of, like, earnings potential just from these gas assets if they're not fully hedged?

David Crane

Well, I think the short answers to your 2 questions or on the first question about will we be doing more maintenance on our gas assets, I think we're going to be reviewing the maintenance plans for the gas assets one by one in acute detail, as we always do, having seen their operating profile during the last summer. But in the scheme of our overall spend on maintenance, which has been relatively consistent over the years, I don't think you'll see a material bump up in that regard. It probably would be more a question of sort of reallocating money on the margin from the -- all around the fleet. To your second question, it's really impossible to give any sense of what the upside would have been, because when the price of power is moving within the hour from $3,000 a megawatt hour to $50 and then back to $500, you can almost make it come out any way you want, depending on when you assume that your plans would have been more reliable as opposed to if they had -- as opposed to assuming that they still would have been out a little bit in the scheme of things. So I don't think we have a number here that we've calculated, because we're pretty sure that based on whatever we wanted to calculate, we could have calculated and come out with that number.

Operator

[Operator Instructions]

Our next question comes from the line of Brandon Blossman with Tudor, Pickering.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Let's just see if I just try to dial down to a more detailed level on a couple of things. One, thinking about the higher-heat-rate gas portfolio that you have. How far are you, if you were to clearly point that to the retail load, are you from being able to hedge just with physical asset?

Mauricio Gutierrez

I mean, the way I would characterize it, we have about a little over 5,000 of gas generation and about 5,000 of base load. We think that is sufficient to manage the level of our Reliant and Green Mountain in Texas. Clearly, it really depends on the weather conditions. I'm going to say on a normal weather scenario or even something like we saw last summer, we are within the range. If you're thinking about 1 in 100-year event, then there are some hours that stress the integrated models that we have.

David Crane

I mean, Brandon, just to give you a sense of how much stress, I mean, in Texas, in 23 of the 30 days in August, the peak demand exceeded what ERCOT said would be the peak demand for the Texas summer just 2 months before. So 23 out of the 30 days that they broke the record.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Fair enough. But obviously, this is pretty iterative where if more generation had been available, power prices would have been lower. It wouldn't have cost as much to cover.

David Crane

Yes, true.

Kirkland B. Andrews

Correct.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

So on a 6 Sigma event, fair to say that quite a bit of that could be handled with physical generation with some small amount of coverage on upside option or insurance?

Mauricio Gutierrez

I think that's fair to say on average.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And in this particular -- on the trailing quarter here, it sounds like you had gone to market with quite a bit or a substantial amount of your physical generation, and, therefore, it wasn't available for the retail portfolio. Is that fair?

Mauricio Gutierrez

That is fair. I mean, when you think about the options and the insurance that retail buys, most of it came from our generation portfolio. What was available then was hedged in the market during July. So it was pretty much completely committed, whether it was internally through the retail businesses or third-party sales.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And then, second question, just on the comments about retail level pricing, it sounds like you're saying given the events of August, insurance will be more expensive. Therefore, as a broad market, you expect retail prices to go up, not necessarily that you'll pass through your costs.

Mauricio Gutierrez

Correct. I mean, it is -- specifically, it's a pass-through. But it will be a pass-through across all retailers in the market.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

So you're projecting that, right? I mean, there is a margin component that can get squeezed, and it is conceivable that retail power prices wouldn't go up. Retailers would just make less money.

Mauricio Gutierrez

If the other retailers choose to protect and buy some insurance, yes. If they choose to have the earnings variability and be subject to realtime prices, then they're going to have a different earnings profile. But our expectation is that all retailers will embed some of this insurance in their pricing, and it's going to affect the entire market.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then this is not a fair follow-up, but I'll ask it anyway. So does that mean that Reliant is willing to cede incremental customer attrition in the short term while the market kind of sorts itself out?

David Crane

Reliant once offered a competitive retail rate, and they've had a very good record with customers. So I think that the sort of cause and effect that you're supposing is a little bit too direct. So -- I mean, there's all different pricing plans and all different types of customers. So I don't think we can generalize as to what that point of view is. But certainly, I would say on the biggest customers, I mean, the ones that are using a lot of volume, we have to make sure that we have the wholesale protected.

Operator

Your final question comes from the line of Jay Dobson with Wunderlich Securities.

James L. Dobson - Wunderlich Securities Inc., Research Division

Mauricio, I didn't hear. Did you mention what the availability factor was for the month of August in the gas fleet in Texas?

Mauricio Gutierrez

No, we didn't. I didn't provide it. What I will tell you is that during the second half, we saw significant issues with some of our gas units. And look, I mean, Jay, I mean, it's not useful to give you an average number, because at the end -- if you recall, the pricing in Texas was really stressed during the top 2 or 3 hours of the day, and that's what really mattered. The rest of the day, it was clearing in between $25 and $50 per megawatt hour. So it's really -- an average number, I don't think, is going to get you to solve a potential impact to the wholesale business. I mean, you have to look at it almost on an hour-by-hour basis.

James L. Dobson - Wunderlich Securities Inc., Research Division

Oh, okay, okay. Fair enough. And then, Mauricio, maybe to the wholesale business, we focused a lot on the retail business, and I think what you're saying is the profitability long term is unchanged in that business. And certainly, as you indicated, it will depend others' decisions around hedging. But if we think about the O&M costs, even though maybe they'll be low incrementally going forward, and then the length you'll carry into the market each year, should we think of the Texas wholesale assets as being somewhat less profitable than they might have otherwise been in light of the changes that you're making here?

Mauricio Gutierrez

No, I think -- to the contrary, I think the fundamentals in the Texas market will be beneficial to our wholesale business long term. And we think that, that is going to start next year because of the changes you're seeing on the EPA rules and some of the regulatory changes on the market design. I think what we are seeing is that we are going to ensure that we have a long bias on our wholesale portfolio as we go into the day-ahead or realtime market by keeping some of these gas units unencumbered from hedges.

David Crane

So, Stacy, we'll wrap up here. We want to thank everyone for taking time out of their day on a short notice to participate on this call. And again, to repeat what Mauricio said, we expect our shareholders expect more from us, and we will do better in this area in the future. So thank you very much.

Operator

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day.

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Source: NRG Energy, Inc. - Shareholder/Analyst Call
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