Good day, ladies and gentlemen, and welcome to the NRG Energy's Second Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to turn the conference over to your host for today, Mr. Chad Plotkin, Vice President of Investor Relations. Sir, you may begin.

Thank you, Ben. Good morning, and welcome to NRG's second quarter 2014 earnings call. This morning's call is being broadcast live over the phone and via webcast, which can be located on the Investors section of our website at www.nrg.com under Presentations & Webcasts. [Operator Instructions] As this is the earnings call for NRG Energy, any statements made on this call that may pertain to NRG Yield will be provided from NRG's perspective. Please note that today's discussion may contain forward-looking statements, which are based on assumptions that we believe to be reasonable as of this date. Such statements are subject to risks and uncertainties that could cause actual results to differ materially. We urge everyone to review the Safe Harbor statement provided in today's presentation, as well as the risk factors contained in our SEC filings. We undertake no obligation to update these statements as a result of future events, except as required by law. During this morning's call, we will refer to both GAAP and non-GAAP financial measures of the company's operating and financial results. For information regarding our non-GAAP financial measures and reconciliation to the most directly comparable GAAP measures, please refer to today's press release and this presentation. With that, I'll turn the call over to David Crane, our President and Chief Executive Officer.

Thank you, Chad, and good morning, everyone. Today, I'm joined here by Mauricio Gutierrez, our Chief Operating Officer; and Kirk Andrews, our Chief Financial Officer. They will both be giving part to the presentation as usual. I'm also joined by Chris Moser, who runs Commercial Operations for the company; and Elizabeth Killinger, who's responsible for our Retail business for all of our brands, and both of them will be available to answer any questions that you might have. I'd like to start on Slide 3 by giving a quick -- my quick take on our second quarter performance. I'm going to be quick about it because both Kirk and Mauricio will be discussing these results in more detail, but also because I want to spend a little more of my allotted time than usual on the strategic positioning of NRG going forward. I'm choosing this opportunity to talk about strategy because some of our most recent developments in our business provide a good context for how we think about the plentiful value-creating growth opportunities that we see in front of us and what is sometimes loosely called the alternative energy sector at a time when we see weakening long-term fundamentals in our traditional, conventional generation grid-based business. But first, let me start by focusing on our performance year-to-date. Never before in my 11 years at NRG do I recall a first half of the year where we were so whipsawed by the weather. A severely cold winter followed by a summer, which, to date, through the second quarter and so far into the third quarter, has been completely devoid of extreme weather in any of our core markets. Fortunately, to some degree, our diversification away from being exclusively a wholesale generator, first, into retail and then into clean energy, has…

Thank you, David, and good morning, everyone. During the second quarter, we were focused in executing our spring outage plan, a significant endeavor now that we have over 50,000 megawatts in operation, and particularly important given the hard rounds we had this past winter. We were busy integrating the Edison Mission plants into our operations. And finally, we were focused on evaluating operational improvements in our Midwest generational fleet. All of this was done while maintaining an excellent safety record well within the top decile of our industry, an accomplishment that makes us all very proud at NRG. As David pointed out, mild weather so far this summer has affected spot and forward curves, but I am pleased to say that we fared well during the second quarter. We continue to monitor and assess the prospects for the balance of the summer, but I take some comfort in the fact that our commercial team took advantage of the opportunity provided by the market after the polar vortex to increase significantly our hedges in 2015 and 2016 at prices above the current market. Finally, we continue to execute on our fleet-wide revitalization program, and most importantly, as we promised you during our last earnings call, our plants around the Edison Mission portfolio. Today, we are announcing a comprehensive operational improvement and environmental compliance plan for the Midwest Generational plants. We're doing this after only 4 months of ownership and are confident that we're putting the pieces in place for a long successful ownership. Turning to Slide 11. As you may recall, in June of last year, as part of the outcome of our operational improvement plan around GenOn acquisition, we embarked on an effort to economically optimize certain of our older facilities by converting them to different fields, with a purpose…

Thank you, Mauricio, and good morning, everyone. Turning to the financial summary on Slide 18, NRG is reporting second quarter 2014 adjusted EBITDA of $671 million, including $389 million from Wholesale, $173 million from Retail and $109 million from NRG Yield. Through the first half of the year, adjusted EBITDA totaled $1.487 billion, approximately $1 billion from Wholesale, $281 million from Retail and $201 million from NRG Yield. Turning to highlights. At the second quarter end, we successfully completed the first drop-down transaction with NRG Yield for the first 3 ROFO assets previously announced in the first quarter. This transaction resulted in $357 million in cash consideration, increasing capital available at the NRG level. NRG now intends to offer this quarter a second set of additional assets to NRG Yield, representing approximately $120 million in adjusted EBITDA and $35 million in annual cash available for distribution, or CAFD, allowing us to target closing the transaction and the resulting NRG capital replenishment by the end of this year. Over the past 2 weeks, NRG Yield successfully priced and closed its first-ever equity follow-on offering in an inaugural green bond offering resulting in approximately $1.1 billion in total net proceeds, not only fully funding the cash needs for the upcoming close of the Alta Wind transaction, but providing a significant capital surplus at NRG Yield, which can be used to fund future drop-downs. Finally, as Mauricio reviewed earlier, we have now completed our review of capital expenditures for the 4 Midwest Generation assets and plan to spend approximately $545 million in total to ensure not only environmental compliance, but efficient operations and long-term financial performance at these facilities. Approximately $130 million of the total capital spend from Midwest Gen will take place in 2014 and is already reflected in environmental CapEx in…

Thank you, Kirk. And Ben, I think that we used a lot of time, but I think we've got 15 or 20 minutes left for questions. So why don't we open the phones for Q&A.

[Operator Instructions] Our first question today comes from the line of Julien Dumoulin-Smith of UBS.

This is actually Paul Zimbardo. Question on Slide 12, with the $545 million compliance plan, can you kind of share some background on your thoughts for where that splits up between those plants and just kind of what your thought process was on undertaking each plant's project.

Mauricio, go ahead.

Yes, so we took a couple of things in consideration. One of the gating items, clearly, was the capacity auction results from the '17, '18 auction, but more importantly, the previous 3 years that gave us some visibility and some comfort on the outlook that we have for the PJM market. For us, the value proposition for Powerton and Waukegan is to remain on call and make the investment on the back-end controls to comply with MATS and CPS. Joliet, clearly was a -- we cannot justify putting the back-end controls. We looked at which of these assets have better access to natural gas supply, and Joliet was the one that had the best location for that. And with respect to Will County, first, is the, I guess, justifying the environmental CapEx for Will County was just not possible under the current market conditions. We're moving forward to retire that Unit 3 on '15 and then we'll continue to operate Unit 4 so long it just -- it complies with MATS. But we did a comprehensive analysis of all the plants. We look at which ones could be converted to a different fuel. We took into consideration capacity and current market prices. We look at the spend optimization that we could do given the -- we did a pro forma benchmark analysis on all of these facilities to evaluate what fixed cost we could take out, and basically, this was a result of that entire analysis.

Okay, great. And do you have a timeline for the testing on Will County Unit 4?

You mean, how long it can continue operating with -- do we have a specific timeline on it?

Yes, we're looking at -- we're doing the testing, as we speak, right now. We believe that we will be in compliance for MATS and that's why we're laying it out for operation through 2018.

Paul, I mean, I do want to just generally add to what Mauricio said. I mean NRG on the wholesale generation side, I've always thought that the best way to be in that market was with a fuel-diversified portfolio, and certainly, the lessons from the polar vortex this winter was having a fuel-diversified portfolio was definitely the way to go. So we've taken into account all that Mauricio mentioned, but we also -- we very much want to continue to be multi-fuel in all of our core markets because we think that's the best way to play constraints on the fuel side, whether -- particularly within natural gas, whether it be with the commodity itself or with the transportation in times of scarcity. So we think, both with the GenOn assets and now with the Midwest Gen assets that, that's sort of the overriding theme that we're trying to accomplish.

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

You didn't mention anything about California. We saw in late July that San Diego Gas & Electric requested the approval for a PPA for your Carlsbad Energy Center. And also, we haven't really heard from SoCal Ed [ph] about their portion of gas-driven replacement for SONGS. Could you comment on your potential contracts there?

Well, Angie, it's always best to -- we always like to promise things that we know we can deliver on it. We're very pleased with San Diego Gas & Electric's submission of the power purchase agreement. But if we were to comment on, we would have been commenting on when do we think it'll be approved by the California Public Utility Commission and predicting when government acts is something that we just don't get in the business of. But we're very excited about that project. We think it's a very good project for the state of California. We think it's a very good project, ultimately, for NRG Yield, and we look forward to the day that the California Public Utility Commission acts upon that PPA, so that we can continue to add to the stability of electricity supply in Southern California. As to the Southern California Edison procurement, I think that, adversely, everything that happens in the Southern California Edison procurement is subject to confidentiality agreements. So I think I would limit myself at this point to say we don't know when they will make decisions. I think it would be fair for you to assume that NRG was responsive to virtually every aspect of what Southern California Edison was looking for in their request for a proposal. And we'd actually be very excited to participate in both conventional generation and what I think they referred to as preferred resources. So you may have to ask them as to what their timing is, but certainly we're excited about it.

So -- but SoCal Ed [ph] has made announcements about renewables. How much of gas-fired capacity are they trying to procure?

I'm not sure I can answer that question, Angie. Let us -- we'll get a response back to you on that.

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

Dave, you wrote on your blog a bit about carbon and some of your thoughts there. I'm wondering if you could just apply that to Texas and give us at a high level your thoughts on the implications, if the EPA rule passes as is enacted as proposed, how you think about the implications for the Texas business. Obviously, Petra Nova is a great strategic step to consider that, but can you just talk more broadly about your Texas business in carbon?

Well, I mean the first thing, which is -- I think it's fair to say we submitted comments to the EPA rule, and we don't think that the EPA rule is currently promulgated as fair, and we particularly think it's unfair to the Gulf States and to Texas. So I would start by saying my hope that the rule doesn't get promulgated exactly as it is today. If it does get promulgated, it sort of depends on where the price of carbon lays out to. It's clearly not good for the coal-fired plants in Texas. I'm not sure that there's a way for Texas to comply with the rule as provided without significant retirement on the coal side. What knock-on implications that has for a state that -- contrary to my sort of doom and gloom in my opening comments about how they're weakening fundamentals, sort of Texas is the exception with 300,000 people moving into Texas every year and all that. So I would definitely call a strain on the system from our perspective. I mean that's -- as you alluded to, that's why Petra Nova is such an important project because coal plants in the United States are getting to a point where it's very Darwin-istic, it's survival of the fittest. And if putting carbon capture on the back of Parish, which is our biggest coal plant in our entire fleet, I think it's the biggest coal plant or the second biggest coal plant in the entire country, if that can help Parish and certainly we've contemplated the same at Limestone, survive in a market where other plants are having to come offline, it should just add to the value of those plants. And so that's our strategy, Stephen.

Understood. And shifting over to solar, it sounds like in the coming months, you'll speak more specifically to it. I wondered if you could just talk at a high level in terms of how competitive you see the playing field there. It looks like it's a very large addressable market and very small penetration rates. But just curious, as you look at both commercial and residential opportunities, does it -- do you often run into competitors? Is it relatively competitive? Or does it feel like the -- because the penetration level is so low, that the opportunity set's pretty rich?

Yes, there's a lot there, Stephen. And you're right. For the most part, we're sort of trying to avoid too much discussion about our strategy and our implementation plan and the sort of distributed solar space until we're fully ready to go because it is a highly competitive market and it's a very fluid market right now. With the success that SolarCity has had in the -- basically on Wall Street, there's a lot of shaking out just within the residential solar space. So what I would say there -- and the market does actually divide quite neatly on that front, is that residential solar, it seems a lot like distributed solar in terms of business-to-business, but apart from the solar panel, it's really a completely different business. It's sold differently, it's financed differently and all that. And in our company, you'll be handled by 2 different parts of the company. So you're right, even though there's very little penetration, I think I don't -- I think SolarCity, who's obviously the biggest player in the field, is saying they're going to do 80,000 installations this year. That's in a market, an addressable market that's been estimated across 20 states as 16 million homes. And so while you do focus on the next guy more for sort of internal morale purposes, more than one company has room to succeed in the residential solar space, and certainly, we expect to be one of those companies. And like I said, we'll talk more about that in the future. For us, on the business-to-business side, Stephen, the key is how do you downsize and do a lot of projects quickly, and our focus in that area is because, the age-old maxim, a 1 megawatt project requires as much structuring as a 100 megawatt project. That applies in renewables, as well as in conventional. But what we're looking to do -- and we've announced sort of starter deals with Starwood and Unilever is sort of getting into a world of one customer, multiple projects. So our first deal with Starwood was 3 hotels within their chain, but it's not lost upon us or them that they have 1,200 hotels worldwide. So that's really our -- what we're focused on in the business-to-business side, and it's early days there, but we certainly hope to be very successful and have a lot to talk to you about in the future.

Our next question comes from the line of Neel Mitra of TPH. Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: On the Midwest Generation side, does the asset optimization include kind of all the synergies that you guys have looked at in the business? Or is there possibly more kind of cost reductions to make that imply the EV-to-EBITDA multiple look better?

No, I mean, we took a holistic view of the entire Midwest Generation portfolio, and it does include all the operational synergies from reducing fixed costs to the spend optimization initiative to field conversions and the current market conditions, given the outcome on the capacity auction and the recent dark spread. So I mean, it is a comprehensive look at the value proposition for Midwest Gen. Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Got it. And then with the Dominion retail customers, you mentioned that you're getting better-than-expected earnings and customer retention rate. Can you just outline the drivers behind that? What has kind of been the upside surprise?

Neel, Elizabeth Killinger is going to answer that question for you.

Yes, so we are seeing better-than-expected retention, in particular in our Northeast markets, driven probably by the experience they're having with the transition and that is that we're delivering on their commitments and giving them a warm welcome. On the earnings side, we attribute that to our effective margin management and understanding what the customer segments need to -- in order to stay with us. So we're real excited about that and look forward to that being a very successful integration over the coming months.

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

Question, one of your competitors on their earnings call just announced a big new combined cycle project in PJM, and on current forward curves, it looks like it's a pretty decent return on equity near term. But given your view on how the power market is going to evolve with low demand and more distributed generation, is that something that you would ever consider, like putting that much money to work in baseload assets, 20-year life assets?

Mauricio?

Look, I mean the way we understand the project, it's a brownfield development and it has a cost competitive advantage vis-à-vis a greenfield development project. So I think I said that the market in PJM is getting close to cost of new entry. We had very strong capacity results. Spark spreads have been trending closer to greenfield development. The one thing -- and you pointed it out, I mean these are investments that have gone over 25-, 30-year length -- in length. Clearly, one data point is not going to justify making that investment. What we're seeing is, we're just very constructive on the PJM market. We think margins and -- capacity prices and margins are more sustainable than what we may have heard from other folks, and that's why we also went ahead and did the investment on the Midwest Generation fleet.

And do you -- I mean, have you looked for similar sort of brownfield-type opportunities where you have some cost advantages for new build or...

Jon, yes, I mean, look, I think in terms of building new power plants, our advantage -- I mean, we have more projects than anyone. I mean basically -- in fact, brownfield versus greenfield, I can't actually remember the last time that we actually looked at a greenfield. I guess it was the one in [indiscernible]. So we are looking at brownfield all the time, and we ask and expect through our regional organizations that every power plant that we have had sort of the best option for either repowering, renewal, and so we're all about brownfield. But every brownfield we've done, we take advantage of the cost advantage in brownfield just like our competitors because it's real. But I mean every one we've done in recent years has a long-term contract. I do think there would be opportunities to make money in terms of conventional wholesale generation in the future, but particularly in the Northeast, they're going to come up because there's going to be imbalances created when sort of too many plants like -- retire. And I think if you look at the history of the curve, cost of new entrant pricing is not reached as often as -- the peaks are much more limited than the valleys. And so when the peaks come, you pretty much have to be there with megawatts at that time. You can't sort of say, well, this is a good time for me to start permitting a plant and then take 3 years to build it. And so one of the things I like about the -- we're not -- certainly, as you know from today in terms of the investment in the Midwest Gen fleet, we are by no means starving the Wholesale side of our business from capital to sort of succeed over the next 20, 30 years. But in terms of even where the business is repositioning, one of the things I like about the Retail side of the business is the best earned is large in terms of hundreds of millions of dollars in a merchant plant, hoping that you'll be right over the next 30 years. So I very much like the balance of our capital allocation in terms of how we're investing sort of across from Wholesale to Retail.

Okay. And just a high-level question. It seems like over the last few years, NRG has kind of evolved and has become a very big and complex company, multifaceted and fingers in a lot of different pies. Do you worry that at some point, the company becomes too difficult to analyze or the story becomes too difficult to tell and that you start to turn off certain investors?

Yes, I mean I think we were -- I mean I think that the -- I mean I think that's a different way of saying what I tried to say today is that, I mean the revelation for us for Yield, which we -- we struggled with the Yield idea for 2 years and worried about how the market would ever value our contracted solar assets, and we knew the market didn't pay any attention to our contracted assets, which I think, before Yield, consist of about 15% of our -- the market can only look at so many things. So even just within generation, they look at the 85% merchant exposure rather than the 15% contracted. So we actually think that while sort of the way we're organizing that was announced today may seem more complex, to us it simplifies the story, both from the investor's perspective but also from a management perspective. The way we're organized going forward allows senior executives of the team to sort of focus in their area and win in their area because each area is pretty distinct. I mean they're mutually reinforcing, but each has different competitors. And each -- as Kirk was going through, you can't value residential solar success on an EV-to-EBITDA basis. So we actually are very mindful of we want to get the benefits of having the multiplicity of assets and opportunities we have, but we want to simplify it for purposes of investment and value recognition, as well as value creation. So we're trying, Jon. And any advice you have on that, feel free to send us an email. Ben, we've gone past 10:00 and knowing it's August, I don't want to burn people too much, but we'll take 2 more calls if we can, and I'll try and be briefer in my answers.

Our next question comes from the line of Michael Lapides of Goldman Sachs.

Can you give us a little bit of the puts and takes when we start thinking about capital spending for next year and maybe even for '16? What's different now than anything you've kind of previously disclosed? Just trying to kind of balance things up in terms of what's happening on the CapEx side for the next couple of years and what that means for free cash flow.

Well, first of all, we'll certainly provide you specific guidance around free cash flow in '15 as we normally do in the third quarter of the year. But looking ahead of that, which is why, as David talks about priorities and I, in answer, disclosure around exactly where that remaining capital resides, and as I said, those priorities are a little different. I think how it's evolved is we're much more focused on the future of the business, not ignoring opportunities to continue to enhance generation. But as we've said, the capital allocation focus is going to be on kind of smaller bolt-on -- bias towards a smaller bolt-on acquisition side as far as M&A is concerned. And the capital spend, certainly, we're mindful of, in the relatively near term, rounding out and completing the capital spend for Midwest Gen optimization and also the expanded asset optimization from the GenOn portfolio I spoke to you before. So I think we're much more focused on the future of NRG, especially around NRG Home on the Retail side, that's a small bolt-on acquisition, and just completing the optimization plans as we move forward.

Okay. And if I think about what's happening on just CapEx and not total capital allocation, but just -- and I know this is just kind of one narrow window of it, but it seems that there's what could be a pretty decent and material uptake in CapEx in 2015 and maybe 2016 on the existing fleet before things start kind of coming back down in the 2017 and beyond time frame. I mean, I'm just trying to -- I think about maintenance capital then the CapEx on Edison Mission, really the Midwest Gen units, as well as some of the work Big Cajun related and then things could -- should kind of tail off. Am I kind of just directionally thinking about that right?

I think you're thinking about it exactly right. I mean in 2015 and 2016, it would represent the bulk of that remaining largely environmental CapEx, and in addition, that environmental CapEx is actually, as you know, above the line in terms of what we define as free cash flow and then obviously allocating it towards the operational improvements we spoke about before. So I think the capital intensity on that front is really most acutely focused in those 2 years, '15 and '16.

Well -- and Kirk, asking Michael's next question for him, I mean, but -- and even between '15 and '16, with the real focus, the blip that Michael's referring to actually being driven by this Midwest Gen and the -- and even finishing off the GenOn asset management, I mean that's much more '15 and '16, isn't that right?

Yes, the bulk of that, especially on Midwest Gen, is certainly in '15 and then it begins to tail off a little bit more in '16, yes.

Yes.

Our final question will come from the line of Gregg Orrill of Barclays.

So on the Joliet repowering and synergies on the Midwest Gen portfolio, the $120 million of asset optimization, et cetera, how much of that is the Joliet conversion in there? And then I had one other question.

Yes, I mean I would say that we're not going to break out the overall $545 million across individual assets. But obviously, that $545 million, within that number is the smaller subset that we previously committed to as part of the PoJo leases. So that obviously conforms to what we committed to the lease holders, therefore, Powerton and Joliet as well.

Okay. So a decent share of the $100 million to $120 million?

Yes. I mean I would say it's relatively ratable across those, but I'm not going to break out the asset optimization impact that comes off of that on an individual asset basis.

Okay. And then maybe the elephant in the room a little bit, just in terms of the capital allocation, just following up there. You didn't mention anything about a buyback of any size. How are you thinking about that?

Well, I think the way we're thinking about that right now, and it sort of goes back to Michael's -- the answer to Michael's question is, as we look forward in the immediate future, we see a need for available capital that we think have greater long run value than share buyback. We have a record of doing a lot of share buybacks over the last 10 years and so -- I think 7, in fact, in the 10 years that I've been here. So we'll come back to that issue in 2015, but I think for now we -- or the capital allocation is going to be pretty much like laid out by Kirk at the end of his -- of the presentation. Anyway, Ben, thank you very much, and I appreciate everyone taking the time, and sorry, we went 10 minutes over, but enjoy the rest of your summer, and we'll look forward to talking to you in the fall. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.