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Executives

Chad Plotkin -

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

Mauricio Gutierrez - Chief Operating Officer and Executive Vice President

Jason Few - President

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

Christopher S. Moser - Chairman, Chief Executive Officer, and President

Analysts

Ameet I. Thakkar - BofA Merrill Lynch, Research Division

Jonathan Cohen - ISI Group Inc., Research Division

Angie Storozynski - Macquarie Research

Stephen Byrd - Morgan Stanley, Research Division

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

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

NRG Energy (NRG) Q4 2011 Earnings Call February 28, 2012 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 NRG Energy, Inc. Earnings Conference Call. My name is Chantilly, and I will be your facilitator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Chad Plotkin, Vice President of Investor Relations. Please proceed, sir.

Chad Plotkin

Thank you, Chantilly, and good morning. I would like to welcome everyone to our Year-End and Fourth Quarter 2011 Earnings Call. This call is being broadcast live over the phone and through webcast, which can be located on 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. This call, including the formal presentation and the question-and-answer session will be limited to one hour. [Operator Instructions]

Before we begin, I would like to remind everyone to review the Safe Harbor statement provided on Slide 1 of the presentation. During the course of this morning's 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 risk 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 February 28, 2012, 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 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.

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

David W. Crane

Thank you, Chad, and good job. And I want to -- before I begin, I want to start by welcoming Chad to his new position as the Head of Investor Relations. And for the many people on the call who were friends and colleagues with our former Head of Investor Relations, Nahla Azmy, I just want to say how much we appreciate the work she did here for the past 8 years and wish her well in her new position at Energy Capital Partners.

So today, in terms of the presentation, I'm joined, as usual, by Mauricio Gutierrez, our Chief Operating Officer, who will give part of the presentation. We have another member of the management making, I think, his first appearance in a speaking role, that would be Jason Few, who's the President of Reliant, who's going to say a few words about our retail business. And then we have Kirk Andrews, our Chief Financial Officer, who will also be giving part of the presentation. Also available during the question-and-answer period to give answers about what's going on in the marketplace is our Head of Commercial Operations, Chris Moser.

So as we normally do on this -- the year-end call, I'm going to spend just a little time reviewing the past year's performance before turning my attention to the period ahead. So if you're following along in terms of the slide presentation, turning to Slide 3.

For us, 2011 was a year in which we stumbled in August and the commodity price cycle moved against us throughout the year. But nonetheless, we finished the year almost exactly or close to the middle of our original guidance range for adjusted EBITDA. In so doing, the business, overall, showed its diversity and resiliency. And particularly, our solid results reflected the advantage that uniquely amongst the publicly traded IPPs. We benefit from a substantial portfolio of retail businesses, the financial performance of which tends to be inversely correlated to the direction of natural gas prices.

In terms of our clean energy business, we're very proud of the success that we achieved in 2011 and moving over 900 megawatts of new solar power generation into construction. I am also pleased to report that all these projects are progressing well in construction, with no significant cost or timetable issues having yet arisen. This may seem like business as usual to you, but to me, it's remarkable to have a construction program of this magnitude, where every project is either on or ahead of budget and timetable. You will hear and see a great deal more about these projects over the next 12 months, as units complete construction and achieve commercial operation.

Finally, in respect to 2011, it was a year in which we made a lot of progress in readjusting our liquidity position to more normalized levels, and we did so not only by investing further in intrinsic growth but also in returning capital to our stakeholders. $581 million of corporate debt was retired in the course of our refinancings and a total of $430 million of shares were repurchased in satisfaction of our commitment made back in 2006 to return at least 3% of our market cap to shareholders through share repurchases on an annual basis. I'd like to think of the supplemental 250 million share repurchase we did in 2011 as having satisfied our 3% commitment for 2012 as well, making it a 7-year unbroken streak.

So let me move onto 2012 starting on Slide 4. On this slide and on the 2 that follow, I want to address 3 of our main themes for success in 2012. These themes will prevail even in a gas price environment, which we expect to remain bearish for the short to medium term. Theme 1, Texas is tight, and something has to give. Demand continues to grow as the economy recovers and the state's population expands. Supply is generally stagnant, with no new wave of construction on the horizon, as the price signals simply are not there for people to build new generation.

Of particular interest is the table on the bottom left of the slide. It plots Texas spark spreads in the forward market against projected reserve margins for each of 2012 through 2015. You see that notwithstanding the severely and increasing supply constraints facing the market, spark spreads have a long way to go before they approach new build economics. They also have a long way to go before they reach the spark spreads actually realized in 2011 as a result of last year's extraordinary weather.

Weather, obviously, is unpredictable and equally, obviously, we have had no winter this year. But while the scorching and sustained heat of the summer of 2011 likely was an aberration, it seems equally unlikely that Texas will make it through next summer without at least one heat wave. So while gas prices remain in the doldrums, and heat rates have not expanded sufficiently in the forward market to incent new generation, we are positioning our wholesale fleet and our retail businesses to do well in a market where heat rates seem likely to expand. Specifically, we are staying long in terms of the hedge position of our peaking fleet in Texas, and we have taken further steps to insulate our retail businesses from wholesale price spikes through a variety of mechanisms.

Finally, we are ready with a portfolio of brownfield projects that we believe would allow us to bring more generation into the market faster and more inexpensively than our competitors, should peak period heat rates rise sufficiently to incent the addition of new brownfield capacity. Through a combination of these factors, we hope to turn around the outcome for us of another tight Texas summer and turn what was a substantial negative for us in 2011 into a big positive in 2012.

Theme 2 is retail, and looking at Slide 5. This is the business that investors love to discount, but in this commodity price cycle, I am not sure why. If you assume that the great risk to retail performance is on the wholesale side, subdued gas prices means that as a practical matter, the risk to retail revenue growth is not on the wholesale price side equation, but rather on the volumetric side as occurred to Reliant and Texas last August. But even having taken the heat of the ferociously hot weather last summer, Reliant ended 2011 with a full year adjusted EBITDA of $593 million, while having stabilized and actually grown their full year customer count for the first time in the deregulated era.

Our objective, with respect to our retail platforms, is to strike a balance between customer count and near-term margin realization. And in that regard, I am very pleased with the path that we are on. Our retail businesses collectively generated over $650 million of EBITDA in 2011. And between Reliant's net customer growth and the significantly higher customer account growth achieved by both Green Mountain and Energy Plus in 2011, we are positioning our retail portfolio exactly where we want to be going forward.

Our positioning in retail is most important, because it is a simple but undeniable fact that in this prolonged natural gas down cycle, the pendulum of value creation in our industry is swinging rapidly towards the end-use energy consumer, both in terms of metered customers and in terms of the beyond-the-meter market. And we, obviously, see our over 2.1 million retail customers in the metered market as one of our key comparative advantages, as we survey the opportunities available to us in the beyond-the-meter market.

More immediately, there is the EBITDA contribution from retail. Obviously, in our wholesale markets, low gas prices put pressure on dark spreads and cork spreads, reducing the financial contribution from our wholesale business and particularly from our base load plants. The low gas prices are good for business on the retail side, causing us in the bottom -- and this is shown in the bottom right quadrant of Slide 5, to modify the run rate guidance that we have traditionally given for retail in 2 important ways.

First, rather than guiding to a rather illusory mid-cycle run rate, we have shifted the market assumption to what we feel we can achieve on a sustainable basis for the remainder of this extended commodity downcycle. Secondly, we have changed our assumption to include all of retail, not just the results from Reliant. The result is that we believe our retail businesses over the next few years are good for $600 million to $800 million of annual EBITDA.

And finally, on Slide 6, in anticipation of Kirk's comments later in the presentation, let me make some preliminary comments about capital allocation. As you know, we have long anticipated the first quarter of 2012 as a time that we would refinance the 2017 bonds and announce a significantly sized stock repurchase program. The near collapse of the forward gas curve from December through mid-January has caused us to reevaluate our current position in light of our unalterable commitment to prudent balance sheet management.

On the recommendation of NRG management, our Board of Directors has made a series of decisions set forth on this page. First, we will postpone the decision on a share buyback for at least a couple of quarters to see whether the commodity price cycle corrects itself to some sort of normalized level. While we are awaiting that return to normalcy, we will hold several hundred million dollars of cash in excess of the needs of our core business in reserve for our allocation to our equity investors or to our debt holders.

Second, we will look to enhance those financial resources with additional liquidity generated by the sale of non-core assets and by the selective partial sell down of certain portions of our solar projects under construction, in a manner similar to what we achieved in the last few weeks in selling 49% of Agua Caliente to MidAmerican. We would like to amass some cash in the event the opportunity arises to acquire select assets or complementary businesses that may come available as a result of the current commodity price cycle.

Third, finally, and perhaps most importantly, after 8 years at this company, I finally have the pleasure of announcing our intention to initiate later this year a common stock dividend. The relative merits of paying a dividend are known to all of you, so I will not repeat them here, but I will tell you that one of the absolutely key factors that enables us to declare a dividend now is our confidence in the long-term reliability of the cash flow stream that will fund the dividend.

While we do not contemplate our dividend to be directly tied to the cash flow generated by our solar projects, the steady and foreseeable cash flow streams from the solar PPAs will underpin our dividend in 2012 and increasingly in the foreseeable future thereafter. Also importantly, this planned dividend announcement means that our commitment to return capital to our shareholders on a regular basis is alive and well.

And with that, I would turn it over to Mauricio Gutierrez, our Chief Operating Officer.

Mauricio Gutierrez

Thank you, David, and good morning, everyone. 2011 was a solid year in many respects, as I will discuss in the next few slides. But given the recent drop in gas prices, I want to focus most of my comments on how we are positioning our portfolio going forward.

As you know, for the past few years, we have been engaged in a process to diversify our portfolio into one that can perform under multiple commodity scenarios. We believe our generation portfolio, with its diversity and merit order, and our integrated wholesale retail platform will not only withstand the low commodity price cycle but will thrive, as gas prices return to long-term fundamental levels.

So starting with a quick look back at 2011 on Slide 8. On the environmental front, CSAPR was stayed on December 30 by the DC Court of Appeals, and while much spent much of the latter half of the year preparing to comply with the rule, the operational and financial impact of this stay on NRG is minimal.

With respect to the Air Toxic rule or MATS, the final rule was issued in December with no major changes. This is the more important rule in terms of driving older, uncontrolled units out of the market and one that we can expect to fully comply with under our current environmental plan.

After the installation of back-end controls at Indian River, our remaining capital spend for the next 5 years have decreased from $721 million to $553 million. On the development front, our EPC organization completed the Middletown project this past summer and it is in the process of testing and commissioning the Indian River back-end control projects. El Segundo Energy Center and all of our major solar projects continue to be on schedule.

Turning to our plant performance metrics on Slide 9. We're very proud to have achieved the lowest recordable injury rate in our history, a measure that includes everything, from minor incidents to lost-time injuries, and for the second year in a row achieved top decile level in our industry. I want to recognize our entire plant operations group for leading this effort across the organization. Congratulations on a job well done.

For the quarter, our generation was down 7%, driven primarily by a forced outage at our South Texas nuclear plant and some coal-to-gas switching in the Northeast. For the year, it was higher than 2010 due to the extreme weather in Texas in the winter and summer months.

On December 28, STP Unit 2 tripped offline as a result of an internal electrical fault in the main generator. Repair work is in progress, and we expect to have the units back online in mid-April. The problem was isolated to the power side of the plant, and there was never a nuclear safety issue. And impact on Unit 1, nor was anyone hurt during the incident. The financial impact of the outage was somewhat mitigated by the property damage and business interruption insurance, as well as low power prices.

Our coal baseload portfolio continues to perform exceptionally well, with 90% availability for the fourth year in a row. And our gas fleet, which saw an unprecedented number of starts, improved their starting reliability under very challenging weather conditions in Texas. We have initiated a comprehensive program within plant operations to ensure we achieve the expected level of reliability as we approach the summer months.

Now looking forward with our market outlook on Slide 10, and starting with natural gas. The warm weather, particularly, here in the northeast and record production levels have created a short-term surplus that the market is trying to rebalance through coal-to-gas switching and price-induced production costs. Some of the recent weekly production numbers are starting to show signs that producers are cutting back. But it is too early to tell how long the system will need to rebalance itself.

One positive impact on our portfolio is that domestic coal prices have fallen as much or more than natural gas. As you can see on the upper right chart, since October of 2011, PRB spot prices have dropped more than pump natural gas. The one exception you see has been coal prices, which to some extent are impacted by the ability of producers to export into the global market. These dynamics will ultimately impact eastern coal generators, making their economics more challenging, and perhaps, more susceptible to early retirements.

Now focusing on ERCOT, and just to add some comments to what David already discussed. It is clear that ERCOT needs more generation to keep up with the demand growth in Texas, and that forward prices are not high enough to justify new investments.

In the bottom left chart, we compare forward on-peak spark spreads to the gross margin required to justify investing in a new combined cycle plant. As you can see, there is a shortfall to new build economics. ERCOT and the Public Utility Commission are well aware of this situation and have proposed a series of market reforms, which we have listed at the bottom right-hand corner. These reforms are designed to ensure that the energy-only market provides the appropriate price signals to incentivize needed new generation. We were very encouraged by the changes approved last week and the market's favorable reaction.

Turning to Slide 11 on our hedging disclosure. We have increased significantly the amount of hedges for 2013 and 2014 over the last quarter to 82% and 57%, respectively. It was done through a combination of swaps and options. Our thought was to build a bridge out of the current bearish period to a future time, where we have a more constructive outlook on gas, supported by falling rig counts and production, coal retirements and LNG imports -- exports. We think such a recovery is most likely to happen in the back half of 2014 or early 2015 and have set ourselves up for such an outcome.

We will continue to be opportunistic in layering in additional downside protection. It's important to remember that we treat heat rates and gas separately and on their own merits. In this case, we chose to reduce our exposure to gas, while we continue to maintain our exposure to heat rates in Texas, where we remain bullish. As you can see in the lower left sensitivity chart, we have reduced significantly our baseload portfolio downside for the next 3 years.

Finally, I am pleased to announce that we reached commercial agreement with 2 of the 3 Louisiana co-ops, whose contracts expire in 2015 -- '14. We look forward to working with them to gain the Public Service Commission approval for these extensions.

As I mentioned earlier in my comments, I want to spend some time talking about how we're setting up our portfolio in this low gas environment and some of the levers we have that provide significant protection and even some upside.

Starting with the chart on the upper left corner on Slide 12. We have seen gas prices this winter reach PRB coal parity in some of our markets. Given our hedge position, we're very well protected over the next 3 years. At low gas prices, we can exercise our put option on buying back our hedges at prices below generation costs, thereby increasing our margins. Of course, these opportunities are limited, given the flexibility we have in our coal supply and transportation contracts and certainly not sustainable in the long run. But let me be clear, we have no plans on cycling baseload units overnight to chase small dollars. The decision will only be made if there is the right economic incentive.

Now moving onto our heat rate exposure, we get a lot of questions about the potential upside of our gas leak in Texas. The chart on the upper-right corner is an attempt to help investors understand the value for our gas portfolio under tight market conditions. As heat rates recover in Texas, we will benefit not only through the open heat rate position of our baseload portfolio, but also with our 5,000 megawatts of gas generation.

In 2011, we exceeded our FORNRG 2.0 program goal by $49 million, one year earlier than planned. The combination of reliability and efficiency improvements, along with cost savings across corporate and regional groups were the main drivers. Given the low commodity price environment, we continue to reevaluate all of our assets, and it will be a major focus of the operations group in 2012. Stay tuned, since you will hear more on this in the weeks and months to come.

And finally, our retail business have demonstrated over the past 3 years that it can outperform in a declining gas price environment. We will continue to maximize collateral and transaction cost synergies between wholesale and retail as markets dictate. Given the more volatile pricing environment that we expect in Texas, we have increased the level of protection against weather events and price variability.

With that, I will turn it over to Jason, who in this call will provide the retail update and additional comments on our strategy.

Jason Few

Thank you, Mauricio, and good morning. Moving to Reliant retail operations performance on Slide 14. In 2011, Reliant had another strong year, achieving EBITDA of $593 million. And we delivered on our customer count commitment by growing customers, providing undeniable evidence of our ability to leverage brand, sales channel strength, along with pricing to effectively balance margin and customer count. Additionally, Reliant produced its best-ever bad debt result, achieving 0.8%. Our solid operational execution was aided by the overall strength of the Texas economy.

For example, Houston, Texas was the last major metro to enter the recession and the first to exit, achieving replacement of 101% of job loss. Additionally, nonresidential electricity usage, a rough proxy for regional industrial production, increased by 2.2% in 2011 for the greater Houston service area, adding further evidence of overall Texas market strength. Building on this strength, Reliant grew volume by 6%, Q4 2011 versus Q4 2010 and by 3% for the full year 2011. Volumetric growth was achieved by growing customer count by 2% Q4 2011 and adding larger mass customers to our portfolio. Reliant also grew from virtually 0 to more than 2 terawatt hours outside of Texas.

Moving to Slide 15. We remain quite positive on the state of our retail business, especially with our prospects within the Texas market, as we are now the largest retailer by customer count and volume. We began with our leading integrated model, which provides us collateral advantages in managing our portfolio and minimizing transaction costs. We expect non-integrated and less-capitalized retailers to face increased tightening, given the circumstances that occurred last February and August. As David and Mauricio discussed, our retail companies by comparison have taken meaningful steps to mitigate tail risk.

What we believe is most compelling is the complement of our 3 retail brands that provide NRG the opportunity to occupy unique shelf space, recognizing the fact that consumers, both businesses and residential alike make buying decisions based on different factors. Harnessing the strength of Reliant, Green Mountain and Energy Plus provides NRG with an unmatched, multibrand, multichannel approach to the market and positions NRG well for cross-selling products like distributed solar, natural gas, home energy solutions and services, environmental offerings and electric vehicle charging infrastructure.

From our perspective, while much of this may be nascent, success is most demonstrated by the fact that we have been able to sustain and expand our portfolio retail margins fourth quarter 2011 versus fourth quarter 2010. Plus we continue to have success in cross-selling services with over 500,000 customers using e-Sense products and 200,000 on home services solutions, which strengthened our customers' retention and expands our share of customer spent beyond system power.

Finally, as we think about the expansion of the retail business, we want to assure you that our approach is governed by the same capital discipline exhibited across all of our businesses. In fact, our retail business is not only capital efficient, but it is also effective at acquiring and maintaining customers across all segments with high returns and very quick payback periods.

With that, I will turn it over to Kirk to discuss our financial results.

Kirkland B. Andrews

Thank you, Jason. Beginning with the financial summary on Slide 17. NRG is reporting fourth quarter and full year 2011 adjusted EBITDA results of $390 million and $1.82 billion, respectively.

For the 12 months ended December 31, 2011, our wholesale businesses contributed approximately $1.155 billion, while our retail businesses added $665 million. 2011 wholesale results benefited from a 7% year-on-year increase in generation sold or 5.2 terawatt hours due largely to acquired assets, including Cottonwood, South Trent and our solar projects, which collectively contributed 5.3 terawatt hours.

The results were, however, offset by lower energy prices, higher fuel and transport costs and lower capacity revenues compared to 2011 -- or 2010, rather. Meanwhile, retail performed well in 2011 with Reliant contributing $593 million, having added more than 30,000 net customers during the year. However, competitive offerings and higher supply costs impacted results versus 2010. The addition of Green Mountain Energy and the newly acquired Energy Plus has further enhanced our retail portfolio by adding over 470,000 residential customers in Texas and the northeast.

NRG's 2011 capital allocation plan both exceeded our expectations and struck a successful balance among the return of shareholder capital, prudent balance sheet management and value-enhancing investments. We completed the 2011 share repurchase program totaling $430 million or 20 million shares, which includes an additional $250 million above the original stated plan. As a head start on the return of shareholder capital, we intend to continue in 2012 with the dividend.

During the year, we successfully refinanced over $7 billion of debt and credit facilities, significantly simplifying NRG's capital structure and reducing corporate debt by $581 million in the process. NRG also made great strides in advancing our utility solar program in 2011, and we now have over 900 megawatts of projects in construction or operations that are supported by long-term PPAs with high credit quality counterparts.

Since year end, we have also completed the sale of a 49% stake in our Agua Caliente facilities in MidAmerican. And going forward NRG's liquidity will benefit from the sell down as MidAmerican will now fund its proportionate share of future equity contributions and other credit support for Agua Caliente, leading to a commensurate increase in NRG's 2012 capital available for allocation. Finally, we successfully expanded our retail segment through the acquisition of Energy Plus, adding its unique sales channels and expanding northeast business to our growing platform.

Turning to Slide 18. We are maintaining our guidance for 2012 adjusted EBITDA of $1.825 billion to $2 billion and free cash flow before growth investments of $800 million to $1 billion. The combination of our baseload hedges and wholesale cost management are expected to offset the impact of milder weather in early 2012 and a loss of STP Unit 2, which is expected to return to service well before the peak summer months. Meanwhile, on the retail side, we will benefit in 2012 from the first full year effect of Reliant, Green Mountain and Energy Plus growing their businesses individually, as well as from their efforts to collaborate in certain sales channel.

On Slide 19, our committed growth investments are broken down into conventional and solar investments. As I discussed last quarter, we have turned these committed growth investments to reflect projects to which we're either contractually or strategically committed. Our total expected committed growth investments for 2012 now stand at $384 million or $441 million lower than the guidance we provided on November 3.

The decreased spend in 2012 is due in part to the permanent reduction in budgeted capital, resulting from our partner share of the 49% of Agua Caliente required equity capital. The next component of the reduction in committed growth investment is simply the result of a change in the timing of equity contributions for our solar projects, the majority of which was funded in the fourth quarter of 2011. This acceleration of funding includes $130 million of capital previously expected to fund solar projects in 2012, which was accelerated into 2011 in order to fund the purchase of cash-grant-eligible solar panels prior to the expiry of the 1603 program.

Finally, the remainder of the reduction in expected 2012 committed growth investments resulted from a combination of cost savings and improvements in financing at various solar projects, resulting in an absolute reduction in committed solar investments. While we made significant strides in 2011 in deploying capital to invest in NRG's future, we have maintained a solid level of core liquidity to satisfy the company's day-to-day working capital and collateral needs as shown on Slide 20.

NRG ended 2011 with total liquidity of approximately $2.1 billion or an increase of $150 million over the prior quarter end. As I discussed last quarter our liquidity position as of September 30 reflected the full effect of our equity commitments to our tier 1 solar projects.

Changes in our liquidity in the fourth quarter were largely due to increases in LC availability, resulting from a release of solar LC postings, as we funded equity commitments to our solar projects, as well as further reductions in LC postings for ERCOT due to the significant decline in power prices after the summer months. Looking beyond year end, we have seen a further increase in LC availability following our sell down of Agua Caliente.

On Slide 21. As David mentioned earlier, we were very pleased to announce our intention to initiate NRG's first-ever common dividend, as our committed vehicle for return of shareholder capital going forward. Specifically, we intend to initiate this dividend of $0.36 per common share, which will be paid quarterly, beginning in the third quarter of 2012. Based on today's share price, this annualized common dividend represents a yield of approximately 2%, in line with the current yield on the S&P 500.

In anticipation of our investments in solar and wind reaching their run rate equity distributions, we intend to provide shareholders with a tangible current return on these investments through a common dividend, which when combined with capital appreciation from our traditional wholesale and retail platforms, will provide shareholders with a more comprehensive return proposition.

Our common dividend will be further supported by our overall free cash flow after growth investments, which based on our 2012 guidance, we expect to be a significant multiple of our intended annualized dividend. We intend to grow this dividend over time largely based on the growth in our contracted renewable platform, anchored by our industry-leading solar business.

While we intend the dividend to represent our committed vehicle for return of shareholder capital, we will continue to look to opportunistically supplement the dividend through share repurchases, providing a balanced approach for returning capital to shareholders.

Timing and magnitude of any share repurchases will depend on NRG's share price, capital requirements, as well as availability under our restricted payments baskets contained in our bond indentures and credit agreement. While currently, the 2017 notes represent the determining factor as far as RP capacity is concerned, we expect to have ample capacity under that indenture to pay the dividend following the initiation in the third quarter and permitting NRG greater flexibility to address any potential refinancing of the 2017s on a more opportunistic basis, should market conditions continue to improve.

Turning to 2012 capital allocation on Slide 22. As you can see, driven by our reaffirmed cash flow guidance and the impact of the Agua Caliente sale, our anticipated excess deployable cash now stands at $700 million to $900 million, an approximate 20% increase versus our previous expectations. The starting point for 2012 excess deployable cash is $405 million, which represents 2011 year-end cash, net of the $700 million target minimum that we will continue to reserve for NRG's working capital needs.

The reduction in excess cash versus our third quarter expectations largely due to the acceleration of $130 million invested in solar panels that I've previously discussed. This investment provides us a scalable option to leverage a cost-advantage position as solar opportunities continue to arise.

Of the $1.2 billion to $1.4 billion of cash available for capital allocation in 2012, approximately $500 million is already committed to a combination of growth investments previously discussed, scheduled debt amortization and a reserve based on our intention to initiate a quarterly dividend starting from the third quarter.

While we now view the recent severe drop in natural gas prices as unsustainable, we believe it prudent to preserve the majority of our remaining excess deployable cash of $700 million to $900 million over the next couple of quarters to ensure NRG's balance sheet strength is maintained. While we remain largely within our long-term balance sheet objectives as of the end of 2011, we will look to remain so, taking into account the potential for a sustained low gas price environment.

Finally, as David mentioned earlier, we intend to continue to augment our capital resources through additional partial sell downs of other solar projects in construction, as well as sales of non-core assets in anticipation of opportunities to acquire assets or complementary businesses, which may become available in this changing market environment.

And with that, I'll turn it back over to David for his closing remarks.

David W. Crane

Thank you, Kirk. Ladies and gentlemen, we've taken a lot of your time already, so I'm going to be brief in summation. Consistent with our past practice for the first call of the year, we have listed on Slide 24 our most important 2012 objectives across our businesses. I'm confident that we'll make meaningful and measurable progress across all 3 segments of our business during what is likely to be an eventful year in our sector.

Coupled with our focus on building and operating a set of core businesses that performs at the top of their peer groups is a focus on deploying the company's capital in a manner that generates a return to our shareholders, while protecting and enhancing our ability to increase the core value of the company for the benefit of the shareholders. We think and I think that the 2012 Capital Allocation Plan that Kirk just outlined strikes that proper balance.

Finally, on Slide 25, we have displayed a diagram that tries to capture in simple terms the type of company NRG is becoming. Our future is not just about owning power plants, assets that no matter what fuel they consume are going to struggle to generate cash flow in wholesale power markets that are weighed down by chronically low gas prices.

Our future is about owning a fleet of power plants that both enable and protect the thriving retail electricity business, which deploys a host of clean energy technologies to provide energy and environmental outcomes for individuals and businesses alike, utilizing a wide range of customized alternative energy products and services. We now have the pieces in place. Now we have to put them together and execute.

And with that, operator, Chantilly, we're happy to take a few questions.

Question-and-Answer Session

Operator

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

Ameet I. Thakkar - BofA Merrill Lynch, Research Division

David, I mean, in your remarks you indicated a desire to continue to grow the dividend. Just trying to understand, I guess, philosophically how you guys are kind of approaching that growth. I know Kirk mentioned the contracted generation portfolio will grow as the solar projects come online. But I mean, you're also looking to sell down 50% of the equity in those businesses and then El Segundo will come down -- will come online at some point. But to grow it further, I mean, what else is -- how else are you thinking about that, kind of, I guess what we see is kind of a finite number of projects in the portfolio right now.

David W. Crane

Well, Ameet, your question properly captured why we want to dodge the question that you're asking in the sense that we definitely think that this dividend can grow based off the strength of contracted assets. When you have one of these quarterly calls it looks like the solar business -- because a quarterly call is a snapshot in time, it looks like our quarterly business is static. A certain number of projects are going to throw off a certain number of cash flow. But, of course, that's not the truth, Ameet. It's a very dynamic business, with a lot of more opportunities. We’ve talked about a tier 2 and a tier 3 set of development opportunities in terms of utility scale, solar. We're in the process of fast growing the C&I in the smaller-scale distributed solar. So we believe, off the strength of those contracted portfolio, we can grow the dividend. We're avoiding the question of at what pace we feel we can grow that dividend until we settle out the very question, the very point that you reference. We have a couple of sell-down opportunities underway right now. So I think over the course of the next couple of quarters and probably when we actually get to initiating the dividend in the third quarter, we're going to try and give you a better sense at that point based on what the portfolio looks like at that time, as to the pace at which we feel we can grow the dividend.

Ameet I. Thakkar - BofA Merrill Lynch, Research Division

Okay. And then there was a comment in your presentation about not having the restricted payment basket necessarily limit you for capital allocation going forward. Besides taking out the 2017 notes, what are the other means to which you guys could kind of work around that issue?

David W. Crane

Ameet, you've been around a long time. We've -- I think over the -- since 2004, we've bought back something like $3.2 billion worth of shares, and at all times, we had the restricted payment basket in place. And so there are a wide range of things that you can do, but I think probably the most noteworthy one is the one that you mentioned is we can just refinance the 2017. So as we looked at it, and looking at the RP basket in the future, we didn't think it was cost effective for the company, for the shareholders to refinance the '17s right now. But that's clearly one option, but there's the full range of other ways of expanding the RP basket that we've talked about over the past 8 years. So I think the bottom line for people who are concerned about the resiliency of the dividend that we announced today -- or the intention to pay a dividend that we announced today is that we don't see the RP basket as an effective constraint about us being able to pay the dividend for the foreseeable and the unforeseeable future.

Operator

Your next question comes from the line of Jon Cohen of ISI Group.

Jonathan Cohen - ISI Group Inc., Research Division

David and Kirk, you mentioned that you're going to wait a few quarters to see what happens in the gas market before committing to an additional buyback. Do you have a minimum, long-term gas price in mind that would make you feel more comfortable with buying back stock rather than incremental delevering here? When I look at your Slide 22, it looks like you're pretty close to your target debt-to-EBITDA metrics on 2011 results. So how do you think about that?

David W. Crane

Jon, you came across a little bit faint, so I just want to make sure, you're asking is as we look forward and sort of think about allocating additional capital to buybacks or paying down debt, is there a minimum gas price that would cause us to pull the trigger on further buybacks?

Jonathan Cohen - ISI Group Inc., Research Division

Yes, that's right.

David W. Crane

Okay. Well, the short answer is I don't think -- I mean, I know for a fact that we haven't discussed a bright line gas price. But the factor that you focused on which was the company's ability to comfortably cover the debt-to-EBITDA metric, looking out in the future, is the key one. Kirk, do you want to add anything to that?

Kirkland B. Andrews

I mean, rather than thinking in terms of minimum gas price, I think we certainly would say we feel comfortable in the current reduced gas price environment, both as a function of the fact that we have the capital flexibility that I discussed previously, as well as the significant increases in hedging that we put in place. We don't generally give forward guidance about our outlook on gas prices, and importantly, heat rates, because certainly our EBITDA-generative power is a function of both. But suffice it to say, as I said, we feel confident in the current lower gas price environment and our ability to comprehensively manage those ratios moving forward. And it will be that management and our ability to do so that will determine the magnitude and the timing of any share repurchases that would go on to accompany that.

Jonathan Cohen - ISI Group Inc., Research Division

Okay. And one other question. Can you talk a little bit about your net income expectations for 2012? And how the RP basket could grow under the old indenture using your current EBITDA guidance? And specifically, we've been looking at how the GAAP accounting treatment for some of the solar ITCs adds to net income and also to the RP basket as the projects reach COD in 2012 and '13. So how much could that add to the RP basket?

Kirkland B. Andrews

Yes, the non-cash grant component, certainly, the ITCs would be an increase to the net income component from a GAAP perspective. And while we don't normally give guidance from a net income perspective on things, part of our outlook for the foreseeable future, in terms of net income, is what is contributing to our confidence, that as David said for the foreseeable future, we believe that net income, which as you know is the contributing component to the RP covenant under the 2017 bond indenture, it is sufficient to permit us to pay this dividend under that old indenture. And I think, importantly, that sufficiency gives us the time to pursue the flexibility of the options at our disposal, should we choose to expand that RP capacity through various means.

Operator

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

Angie Storozynski - Macquarie Research

I have a question about your retail business. Clearly, it's been an incredible investment so far. And you keep growing your customer base, but I'm trying to figure out how are you actually doing that? Is that, that you're basically lowering margins to sign up new customers? And also, how should we think about the fact that you -- I mean you clearly must be offering lower pricing in order to sign up customers, especially in Texas. And yet, you have proposed market changes that will definitely make this retail market significantly more risky for you as a retail operator, given proposed increases and price caps. So could you actually tell me how you managed the risk versus the reward in this business?

David W. Crane

Angie, that's a multi-part question. And to answer one of your questions, it's going to take the combined intellectual might of myself and Jason. So I'm going to start to talk about 2 aspects of it. Let me ask Jason to focus specifically on Reliant, because, obviously, Reliant's the lion's share of it. But I would make 2 points, Angie. First of all, one of our approaches in terms of looking at retail is that we specifically don't want to just compete with the set of offerings that can only compete on price. So when we went out and acquired Green Mountain, and obviously, Green Mountain has a very distinct value proposition that involves environmental sustainability equally. So when we went out and bought Energy Plus, Energy Plus with their exclusive arrangements with various frequent-flier programs, loyalty programs, affinity programs, they also have a different approach that's not just based on price competition. So I think those 2 companies themselves have a very distinct proposition that doesn't depend completely on price. As to -- before I hand over to Jason, I also want to comment on your -- the rules, as they're changing in Texas, are definitely favoring the wholesale. And if you look at -- in the scheme of things, that's probably not going to be positive for any retailer, but in the scheme of NRG, where the wholesale business is still bigger than the retail business, it's good for us. And I will tell you that even for NRG's retail businesses operating in Texas, those rules are going to be a particular challenge that people that don't have the benefit of the wholesale supply to support their retail businesses. So in the long run, I would argue to you that for -- even for our retail businesses, which in Texas, obviously, led by Reliant, tougher rules on retail would make for a more rationalized competitive environment, which we think that Reliant can flourish with. And with that preamble, here's the main event, Jason Few to tell you how he adds customer count, while maintaining healthy retail margins.

Jason Few

If you think about our customer base, you have to think about it not only in terms of customer acquisition, but another dimension that drives customer count is your ability to retain the customers that you have. And as I talked about in my prepared remarks, I discussed the penetration that we've driven on our e-Sense products, as well as our home services solutions, which aids to our retention. And in fact, customer base, we actually see a higher level of retention. Beyond that as we look at acquisition, we think it is important that we leverage each of our channels differently. And so there's been comments about pricing and power to choose, that's one small channel, but we operate in about 9 different channels in which we acquire customers. Each of those gives us an opportunity to present a different offer to our customers with a different value proposition. And going back to the fact that customers make buying decisions on -- based on different reasons. We believe that we'll be able continue to maintain margins. We think that our value proposition allows us to deliver margins higher than the market norm, and that's reflected as well in the comments that David made as it relates to Green Mountain and Energy Plus. And if you look at Q4 2010 versus Q4 2011, our overall retail margins even at Reliant were basically flat. So we have a large customer base in which we manage pricing against the total portfolio, and we think with 1.3 million residential customers, as well as our commercial customers, we'll be able to continue to do that.

David W. Crane

Angie, does that work for you?

Angie Storozynski - Macquarie Research

Yes, yes. I'm just wondering, because you are now showing that your sustainable EBITDA for this business in a low commodity price environment is about $600 million to $800 million. So is this driven by simply growth in your customer accounts? Or is this just a rebound in margins, because it's hard for me to believe that in a low commodity price environment, you can sustain the current level of margins. I think it's just that there's a lag effect, but those margins should actually compress eventually, right?

David W. Crane

Well, I think that what we've seen, I mean, that it's been a declining gas price environment now for 4 or 5 years and it seems that the margins have stabilized. And, of course, the $600 million to $800 million, I mean, I'm just restating the obvious here, Angie. This is more for other people on the call than for you, but clearly, we went from $400 million to $500 million in a mid-cycle to $600 million to $800 million. That's, obviously, boy, a great deal by Green Mountain and Energy Plus, both which are growing at a very, very fast rate. So there are a couple things at play here.

Jason Few

No, that's right, that number's reflective of all 3 retailers. Texas will continue to be a strong market for us, as well as the growth opportunity that we're seeing in the Northeast to aid that number. And we feel very confident that the 3 retail companies will be able to deliver in that range during this downcycle.

Angie Storozynski - Macquarie Research

And my last question is given how low PRB prices are, why haven't you added more coal hedges?

Mauricio Gutierrez

This is Mauricio. I think the drop in PRB prices have been contained to the front part of the curve. And as you know, we are pretty well hedged in 2012 and 2013. So as you go beyond that time period, the drop hasn't been that significant. So we're waiting for a better entry point to add on our hedges.

Operator

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

Stephen Byrd - Morgan Stanley, Research Division

Mauricio, you had laid out on Page 12 of the slide deck the upside to gross margin in Texas if sparks were to increase. Just to confirm, is this true with your existing hedges in place for 2012? Or would your hedge position somewhat reduce this up side, if sparks were to rise?

Mauricio Gutierrez

This is on an open basis. So think of the portfolio as completely unencumbered. What we tried to show here is what would be the incremental gross margin, moving from current spark spreads to what we believe are new build economics. And just the order of magnitude is about $150 million to $200 million, if we were to see spark spreads on the high 20s on peak for Houston.

Stephen Byrd - Morgan Stanley, Research Division

Okay, understood. So really, the sensitivity laid down on Page 11 that shows heat rate sensitivity, that shows very modest sensitivity for EBITDA to changes in heat rates for 2012, it looks like?

Mauricio Gutierrez

Well, yes, keep in mind that the sensitivity chart is only for the baseload portfolio. We don't disclose -- or we haven't disclosed in the past the position around our gas portfolio.

Stephen Byrd - Morgan Stanley, Research Division

Okay. And for 2012, would this -- given the hedges that you have for your gas portfolio, would this sort of open sensitivity be materially lower?

Mauricio Gutierrez

Well, I will say that we have kept a significant part of our gas portfolio unencumbered, as David mentioned, and as I said on our last earnings call. And so I'm going to say significantly lower than these. But certainly, it has some hedges but not in great quantity.

Stephen Byrd - Morgan Stanley, Research Division

Okay, great. And just as a follow-up for Kirk. Kirk, just as you think about the capital structure and credit profile, you laid out some very helpful metrics on Page 22. Given where we are today in terms of as you lookout at the forward curve and projected credit statistics, do you envision the need for material amounts of deleveraging? Or do you think given current market dynamics, as expressed in Forbes that you're generally in line with where you want to be from a credit point of view?

Kirkland B. Andrews

From the standpoint, while we don't normally give guidance in terms of our outlook on what those ratios look like in different environments. I think with the combination, as I'd said, of the hedges that we have in place in the near medium term, coupled with the fact that those have substantially increased, given the current market environment for natural gas and what we see moving forward on the heat rate component of things, while certainly, we feel comfortable with where we are from a balance sheet standpoint, given how that has -- how quickly that has moved around especially over the last month and the last quarter, that's the main reason why over the coming quarter or quarters, we're going to hold a little bit more of that capital back to actively manage that balance sheet moving forward. But in the current market environment, we don't see a substantial need for that.

Operator

Your next question comes from the line of Brandon Blossman of Tudor, Pickering, Holt & Co.

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

First question, David, in your prepared comments, you suggested something about building a war chest and maybe incremental non-core asset divestitures. Is there any incremental color that you can talk about as far as what non-core would be in this context?

David W. Crane

The question was what sort of non-core?

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

Yes. How do you define non-core today?

David W. Crane

Well, I'm -- it's tough to talk about that too much, Brandon, because it can be demotivating sort of internally. But I think the sort of the most obvious one is that we're clearly a domestically focused company at this point. And we have some very valuable international assets, which we've looked at selling in the past and there are structural issues that make it difficult, different types of structural issues, both with respect to Germany and Australia. But there's more room for optimism now that those structural issues can be overcome. And so I would just leave that as an example. But there are a variety of other things around the portfolio that we could look at as well.

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

Okay, that's helpful. And on the solar sell down side of things. How do you -- what is the thought process as far as selling down versus not selling down? Presumably, there's, as it stands, a pretty nice return built into those projects. So what's the thought process? And what is the alternative, as far as cash deployment in a project versus just stock buyback or…

David W. Crane

Well, Brandon, what I would tell you, we have a thriving solar development portfolio and a top rate development team. We have a finite amount of capital that we can put to work in the solar area. So one of the tried-and-true ways of being very successful in a development business is that if you can bring to financial closure well-structured power deals, there's always been a market for sell down. And if you can sell at a premium, you can sort of lock in the return that you were going to achieve from owning that project, over 20 years, you can lock it in and bring it forward. And that's, obviously, a very appealing approach. And so as we look at the solar now, and I would say this is one area where our investors should really grade our paper over the course of the year is that I think we need to demonstrate both at the utility scale, solar and at the -- in the sort of the C&I space more to distribute solar that we can arrange ways of financing these things that are optimal, in terms of use of the company's capital, because we are not a low-cost provider of capital. The other factor I would say, obviously, is the changes in the gas price environment are changing our own tax position. And so since a lot of investment in solar projects has tax attributes associated with it, we're, obviously, going to look to maximize or optimize the tax attributes of our various solar projects, both the existing ones and the ones that are coming down the path.

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

Okay, that's helpful. And then just real quick follow-on. Distributed versus utility, still thinking that near-term distributed looks like they have the biggest opportunity set? Or has that changed recently?

David W. Crane

Yes. We think over time, I mean, the way we think that the solar space is going to evolve in terms of going from big to small, absolutely everything that's happening in terms of solar economics is supporting that idea. We still have a good portfolio, as I mentioned, of utility scale, solar projects. But the size solar projects that we started in the second half of 2011, the 200, 300 megawatts sizes, that's not going to be a part of the future. It's going to get smaller, and the cost of delivering distributed solar, we feel is working its way towards, quite quickly $2.50 a watt, which again, it's impossible for anything from a grid parity perspective to compete with gas-fired generation when gas is $2.50 per million BTU. But competing in terms of retail grid parity, which distributed solar, that's the metric for it to compete against, we see solar being able to compete on a basis of retail grid parity in over 20 states within 2 years. So that's why we have to learn to go small with our individual solar project.

Operator

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

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

Mauricio, I was hoping you could give us a little more granularity on some of the comments you alluded to on the coal-to-gas switching experience you're seeing. Particularly, in Texas, and I know you're a little insulated with PRB coal there. But just what exactly you're seeing? And then also, what you're seeing in sort of the PJM regions specifically for your assets?

Mauricio Gutierrez

Well, I mean, let me start with PJM. The coal-to-gas switching breakeven price, we think that is somewhere in the $5 range, so that happened a long time ago. And in Texas, just recently, this winter, due to the -- a combination of low gas prices and really mild weather, we have seen some parity against PRB coal prices. Clearly, we try to, at least, put some range on the chart on the slide that is subject to the actual prices of coal that you're hedged at and your transportation contract. But I think it's fair to say that when you have an on-peak price below $20, you will see some coal-to-gas switching. But I mean, we clearly have seen a pickup in gas generation, but this pickup has been at very low margins. And we will look at making the right economic decision to shutting down our units. But like I said we're not going to be chasing very small dollars and potentially increasing our cost structure or the wear and tear on our machines. So if we have enough visibility in terms of when we can buy back our hedges at a reasonable price over a long period of time, we will do that and bring our units down. That's as much as I can tell you, Jay. I mean, we haven't commented in the past about specific units and the operational status of them. So I'd rather just keep it at that level.

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

Okay, great. No, that's helpful, Mauricio. And then, Jason, I know you all haven't talked very much about sort of customer growth and margin expectations, but could you maybe give us some idea what you're looking at, particularly, given the very solid experience you had in 2011 now that you're sort of including Energy Plus and Green Mountain and that legacy Reliant retail altogether, sort of what you're looking at?

Jason Few

Yes, Jay, we expect to see customer growth across our retail platform in 2012. And we feel very confident from an overall margin performance that we'll be able to maintain, if not expand margins in 2012 as well.

David W. Crane

Do you want to give a -- do you have any sense of -- are you intentionally avoiding the question of how quickly or how much you can grow customer count? You are intentionally avoiding that.

Jason Few

Yes, I am intentionally avoiding that.

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

I guess the last I'd go with is just sort of where we stand on the last Louisiana co-op. You saw contracted or recontracted, 2 of them. And what sort of indication that gives us for the last -- although, I guess that's out in 2014 as well.

David W. Crane

Well, the third one is -- Chris, you want to mention that?

Christopher S. Moser

Jay, this is Chris. The information we've received is that they're probably going to go with a separate -- with another supplier. I believe they've signed with Cleco. So I don't think that's -- I mean, from our perspective, we're happy with the 2 that we signed. We signed some other loads prior to these. I think we're in very good competitive shape, but they wanted to go a different direction. It'll have to go through the PSC as well, but I mean, we'll see where it all shakes out. But for now there, we don't expect them to sign with us.

David W. Crane

Thank you, all, for participating on the call. We'll look forward to talking with you next quarter. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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