NRG Energy, Inc. (NRG) Q2 2014 Earnings Report, Transcript and Summary

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 increased the resilience of our earnings in the face of mild weather and tepid wholesale electricity demand. Under these circumstances, I am very pleased with the $671 million of adjusted EBITDA that we are reporting for the second quarter and the $1.487 billion of EBITDA year-to-date. As this summer has so far failed to materialize in the forward commodity prices affecting our wholesale generation business have weakened, NRG share price in recent weeks has dropped 20%, reflecting the continued strong correlation between NRG share price and natural gas prices. At the same time that NRG's stock prices dropped under the pressure of weakening commodity prices, NRG Yield has stood strong with the share price well more than 100% above the price that it IPO-ed at just 12 months ago. As NRG stock has dropped, NRG Yield, in just the past 2 weeks, has gone to market with 2 vastly oversubscribed capital market issues, a 10-year green bond that priced at 5 3/8% and upsize due to market demand and a secondary equity issue that priced at $54 a share, even though the stock had closed at under $52 a share at the beginning of the day of announcement. NRG Yield, of course, consists of contracted and regulated assets not subject to commodity price risk. But for this purpose, what interests me is that many of the assets of NRG Yield had existed within NRG for many years. Before Yield, the value of our contracted assets has never been recognized by the Street as they were buried under the weight of close to 50,000 megawatts of wholesale generation assets that were subject to merchant price exposure. Now as we look at the exciting opportunities that present themselves to us outside of the merchant generation space, we are intent on taking the first step to duplicating the success of NRG Yield with the other high-growth segments of our business. If you would turn to Slide 4, you will see how we are thinking about NRG and our businesses going forward with, from the shareholder's perspective, as many as 6 distinct value propositions, each with exciting growth opportunities of its own, each with a focused management team dedicated to win in its own competitive environment and each, ultimately and down the road a bit, a candidate for value recognition on Wall Street in the same manner as NRG Yield. We call this new structure the NRG Group of Companies, and in shorthand, the 3 plus 2 plus 1 structure, to reflect the fact that we are organizing into 3 main businesses called NRG Business, NRG Home and NRG Renew, which are differentiated from each other principally by the nature of the energy consumer that they each serve. The way energy is procured at the office is obviously quite different from the way it is procured at the home. The 2 and the 3 plus 2 plus 1 represents the 2 special purpose companies, Petra Nova and eVgo, that have very distinct businesses, capital structures and technological bases, but also have symbiotic connections to our 3 core businesses. In the case of Petra Nova, through turning our coal plants' greatest liability, their carbon emissions, into a highly profitable revenue-generating asset, and in the case of eVgo, by creating a legion of forward-leaning, clean transportation enthusiasts into end-use energy consumers aware of, and hopefully, loyal to NRG. The 1 and the 3 plus 2 plus 1, obviously, is NRG Yield, which already has its distinct identity and value proposition on Wall Street. NRG Yield going forward is a critical member of the group in enabling and enhancing the value of all the 5 companies by providing a highly competitive source of capital for their contracted assets. Today, that means NRG Yield acquires from NRG contracted, combined cycle assets, opportunities in our new structure, which will arise through NRG Business, and also utility scale renewable projects, opportunities in the new structure that would arise through NRG Renew. But as we go forward, we expect to offer NRG Yield an even broader range of assets benefiting from long-term contracts and arising, not only out of NRG Business and NRG Renew, but also possibly out of NRG Home or even NRG Petra Nova. This, of course, would be in addition to NRG Yield having continued success in its own third-party acquisitions, which has the advantage of providing enhanced cash distributions back to NRG. There is more about this new structure that can be illustrated on this Slide 4 or installed in the time I have available, so I'm going to concentrate my remaining time today with a brief explanation of NRG Home and NRG Petra Nova. As to the other 4 companies and the full rationale behind the totality of this reorganization, we will lay that out for you in considerable detail over the coming months. Let's start with NRG Home on Slide 5. At NRG, our Retail businesses have been working for some time to differentiate themselves, first, through offering renewable energy at Green Mountain, through offering affinity programs at NRG Plus. And most recently, our focus has been on becoming a key player inside the smart interconnected home of the future. And with the formation of NRG Home, we aim to focus on this objective all that much harder. NRG Home, in short, is going to combine under one roof the almost 3 million retail customers currently served through all of NRG's retail brand, with our much smaller but fast-growing residential solar company, NRG Home Solar, in order to realize the obvious synergistic benefits that each can bring to the other and to capture the sustained double-digit growth that we believe will be realized by the top tier companies in the residential solar space, as the American public increasingly embraces the idea that they can make a difference in the race to the clean energy economy with their individual energy decision-making. Even though as depicted by the name, the initial focus of NRG Home will be on bringing seamless energy solutions, both systemwide solutions and distributed solutions, into the stationary environment of the home. NRG Home will also be focused, as Reliant already has begun to do, on bringing mobile and clean energy solutions to the end-use energy consumer with the ultimate goal for us being wherever you are, whatever you are doing, for however how long you are doing it. And without regard to whether you are able to tether yourself to an electric outlet through an electric cord, we want to be your energy supplier. You should expect to hear a lot more about this aspect of NRG Home in the weeks and months to come. Now turning to Slide 6 and shifting gears, let me turn your attention from the end-use energy consumer end of our growth opportunity spectrum back to the other end of the spectrum, wholesale generation, and specifically, the future of big, solid fuel-fired power station that represent the backbone of both NRG and of the status quo grid-centric hub-and-spoke power system that Americans have relied on since the 1930s. When it comes to conventional utility scale generation, a lot of the trends are not good. Since electricity remains the only commodity that cannot be stored, wholesale generation is, at its core, a primitively basic business completely ruled by supply and demand fundamentals. Rebecca Smith recently reported a front-page story in the Wall Street Journal about the rupturing of the historic correlation in the United States between GDP growth and electricity demand growth, quoting the CEO of AEP as referring to this as the lost decade of electricity demand growth. Her article focuses on the fact that the utility business model is under strain because it is entirely dependent on more or less continuous demand growth in order to cover the ever-rising cost of operating and maintaining the grid. What her article did not mention, but is obviously also true, is that while the long-term supply-demand wholesale fundamentals and trends paint a bleak picture for vertically integrated utilities, the same future is bleaker still for the purer wholesale IPPs, which face the same weak fundamentals but lack the iron dome of rate-based regulation protection that covers the investor-owned utilities. On top of the challenge of weak long-term supply-demand trends, there is the particular challenge to coal plants raised by potential environmental regulation. While it is early days yet in the promulgation of greenhouse gas regulations by the EPA from stationary sources, the long-term trend towards a carbon-constrained world is clear. And to state the obvious, that trend is commonly perceived as not being good for coal plants, and to be equally obvious, at NRG, we own a lot of coal plants. However, if we can turn carbon emissions from a long-term liability into a high-margin, free cash flow generative, commodity risk-mitigating, long-term assets, then we will have accomplished quite a bit in terms of enhancing the longevity and the value of our coal-fired fleet. This is exactly why we are investing $300 million of NRG cash and in-kind equity in the WA Parish carbon capture to enhance oil recovery project. The Parish project, first and foremost, is a carbon monetization play. In this case, we monetize through oil. Our economic return will be a function of the increased productivity of the carbon-flooded field times the realizable price of the oil produced. NRG, which currently has minimal commodity price exposure to crude oil, gets paid through the oil sales with the current forward price curve, providing sufficient cushion against an oil price downdraft, as depicted in the bottom right of this Slide 6. The secondary benefit of the Parish project, obviously, is that it is a highly effective carbon hedge and the way we think about that is shown on the upper right portion of Slide 6. If and when a carbon price is imposed, the impact on Parish will be to reduce the oil price necessary for NRG to earn its minimally acceptable equity return on the project. But in light of the problems and costs -- turn to Slide 7. In light of the problems and cost overruns at other carbon capture projects, we are being asked, what about the risk? The key features of the Petra Nova project, as depicted on Slide 7, that distinguish it from the 2 other high-profile CCS projects built in recent years in Indiana and Mississippi is that the Parish project involves more established post-combustion carbon capture technology rather than precombustion IGCC technology. And the Parish project makes no attempt to alter the steam balance of the existing coal plant to provide energy for the carbon separation process. Instead, at Parish, steam for the process will be provided by a dedicated gas-fired steam generator. And that is why Parish is actually a gas-to-oil price arbitrage play rather than a coal-to-oil project. Finally, what distinguishes Parish from the projects in Indiana and Mississippi, which were both built by rate-based utilities, is that Parish is structured on classic project finance terms, with the various risks of the project warned by the partner best able to mitigate them. The technology and EPC risk of the project, in particular, is borne by Mitsubishi Heavy Industries under a fixed price, fixed schedule guaranteed performance contract. We have a very high degree of confidence in MHI and their technology, which underpins our investment in this project. In short, our Wholesale and our EPC group are very focused on making the Parish project a success, not only because it represents a sizable investment for NRG, but also because harnessing the potential of this technology is likely to be the key to the long-term longevity of our coal plants in a world where electric demand is tepid and carbon constraints, in the form of carbon pricing, are an ever-growing risk. So let me conclude my part of the presentation on Slide 8 with a few bullet points. First, our core businesses have executed superbly in the first half of the year, with solid first half financial results to show for effort. But in this, the commodity end of our business, we remain subject to the vicissitudes of the weather. Second, as we have said repeatedly over the past few years, ever since the Great Recession in fact, we see the potential for value creation in our space swinging from the wholesale side to serving the end-use energy customer, and today, NRG is taking the next big step in organizing ourselves in a manner that gives us the best chance to capture that opportunity to the maximum of our potential. Third, our sector, which is already modestly carbon constrained on the regional level, is certain -- eventually to become more carbon-constrained, and we are taking affirmative steps now not only to prepare for it, but to profit from it. And fourth, and while I did not have the time to discuss this in my comments today, the leading corporations of our time, like Unilever, all have made major commitments to sustainable behavior, including mass adoption of clean energy, and NRG is very well positioned to assist these companies in achieving their global sustainability goals. And fifth and finally, we applaud the success of NRG Yield, which continues to serve as a critical cost of capital competitive advantage for the NRG Group, and we will continue to act to ensure that NRG Yield remains the premium company in the emerging class of publicly traded yield vehicles. The future indeed is bright for NRG. So with that, I'll turn it over to Mauricio.

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 to reduce costs, comply with the new environmental regulations and respond to pricing as provided by the market. As such, I want to provide you an update on this important strategic initiative. Previously, we announced the field conversions at Avon Lake and New Castle and the reliability contract for Dunkirk. We're now moving forward with 2 additional field conversions at Portland and Shawville, one to oil and the other to gas. These units will provide needed capacity and fuel diversity to the PJM system, as well as demonstrating during the winter months. In addition, we have executed a 10-year agreement with National Grid to repower the Dunkirk station with natural gas. Moving to Slide 12. We are announcing today our optimization and enhancement plan for the Midwest Generation portfolio. This plan takes into consideration the prevailing market conditions, environmental regulations and the impact on our communities and our employees. As a result of the actions we're taking today and the $545 million that we're investing, this plan will significantly reduce our environmental footprint by lowering emissions for carbon dioxide by 60% and for SO2 and NOX by 90% and 65%, respectively. All these while expanding fuel diversity in the region. You can see the details of the plan on the left side of the slide. Powerton and Waukegan will remain on call, with upgrades to the back-end controls, specifically dry sorbent injection or DSI to control SO2 and enhancements on the electrostatic precipitator to improve particulate collection to enable us to comply with the more stringent air regulations under MATS and CPS. Joliet will be converted to natural gas, with an expected online date of 2016. Finally, and after careful consideration, we have made the difficult decision to retire Will County Unit 3 by April 2015, and we plan to keep the second unit in operation as long as we can comply with all applicable environmental requirements. The closure of Will County is a difficult decision for us, but the economics simply do not work in the current price environment, given the back-end capital investment that would be required. We will do everything we can, as we have done in the past, to make open positions around the company available to the dedicated employees at Will County, and Midwest Gen will be affected by this decisions. This plant is consistent with our core strategy of streamlining costs, repowering or closing marginal facilities given the current market environment, maintaining or expanding fuel and geographic diversity in our portfolio, reducing the environmental footprint and extending the life of existing assets that otherwise would have shut down due to more stringent environmental regulations. Importantly, and as you can see on the right side of the page, this plant and the investments required to implement will be completed with an attractive economic profile, driven by optimizing the cost structure of the remaining coal plants, driving out fixed costs through fuel conversions and by taking advantage of improved market fundamentals. We believe our investment will be completed at a very low multiple, driving significant accretion to you, our shareholders. Turning to operational performance on Slide 13. We had another quarter of strong safety results with 113 out of 126 facilities without a recordable injury, ending the quarter well within top decile performance, a significant accomplishment given the fact that we executed 171 planned outages and 614 maintenance outages so far this year. Generation for the quarter was down slightly from last year, driven primarily by a combination of planned and unplanned outages, including an extension on the refueling outage of South Texas Project Unit 1, but we had to do additional work in the stator at the main generator. The unit returned back to service in time for summer operation and has been running well. Unit 2 has also been running well, with 99.5% availability factor for the year. With the size of our fleet, it is easy to overlook great performances by individual plants. On this note, I want to take a moment to recognize the entire team at Limestone for the recent run at Unit 1, which lasted 340 consecutive days. Congratulations on a great accomplishment. As we have mentioned before, given current market conditions, we have increased our number of maintenance outages during low price periods to ensure we are available when it matters the most. This, of course, has an impact on our availability metrics, but we have been able to improve on our reliability performance during those periods, as you can see on the bottom left chart. Our gas fleet continues to perform exceedingly well with over 97% starting reliability for the year and 950 more starts compared to last year. Moving on to Slide 14. Our Retail business delivered a solid second quarter with adjusted EBITDA of $173 million, $33 million higher than last year. We delivered another quarter with robust customer growth, demonstrating the continued momentum we have in attracting and retaining customers. In addition, we were able to maintain retail margins with operations and maintenance cost per customer for the quarter down over 13% year-over-year, demonstrating results from operational improvement efforts and the scalability of our Retail platform. On a regional basis, we grew customer count in Texas by 16,000 customers for the quarter as a result of effective execution and expansion of innovative products and services, where we have observed retention rates improving by up to 25% for the customers enrolled in these products. Total volumes compared to last year were relatively flat, with the mass volumes up 26% quarter-over-quarter due to the Dominion acquisition and the C&I down by 15% due to continued discipline and commitment to profitability. In the Northeast, we grew customers by 19,000 organically for the quarter, in addition to the Dominion customer growth. Overall, the integration of Dominion's retail energy business is going well and we're seeing better-than-expected earnings and customer retention. Now turning to Slide 15, and starting with ERCOT. The second quarter was 8% cooler than the 10-year average, and so far this summer, we have not seen a single day above 100 degrees in Houston. In our power markets, it is not unusual to see an overreaction in the forwards to what is happening in the spot markets, and we believe that is the case in ERCOT, where mild weather has impacted both spot and forward prices. As you can see in the upper left chart, forward pricings are well below new build economics and do not reflect the near-term fundamentals in the market. We show spark spreads, both historical and forwards, plotted against the number of days above 98 degrees in Houston as a proxy for hot weather. Only 1 year in this chart supported new build economics. Difficult to rationalize in a market where historical net operating reserve margins have been in the single digits and forward reserve margins are at or below targets. This summer, we have the implementation of the operating reserve demand curve, designed to improve price formation during scarcity events. So far, a major disappointment to the market where the ORDC price adder has averaged less than $0.10 per megawatt hour across all hours through July. As we said on previous occasions, we support any structural changes that improve price formation in the market, but it is clear to us that ORDC is a scarcity price formation mechanism and not a resource adequacy solution. The weather forecast for next week looks better as temperatures will move into a normal range, pushing 100 degrees in several Texas cities. We believe there is plenty of time still for ORDC to be of some value this summer. As I said, the near-term fundamentals in ERCOT remains strong, as you can see in the lower chart, with reserve margins hovering around the current target reserve margin. This, in part, due to the new generation brought online this summer, which we believe was, in large part, from the hope for a potential capacity market and the expiration of the production tax spreads for wind. The natural question is, what could potentially change this perceived stable outlook? First, is the decreasing likelihood of new projects moving forward given the current and historical prices, as well as the lack of any headway on resource adequacy; second, is the increasing possibility of additional retirements, given the lack of scarcity pricing; and finally, increased probability that low growth saw prices to the upside, especially compared to what, from our perspective, looks like a low official forecast. Now moving to PJM. The results of the capacity auction was somewhat dated now, where a key component of the asset optimization plan that I discussed previously. We saw strong prices driven in large part by a decrease in imports and demand response, disciplined portfolio bidding and unit retirements offset somewhat by new gas generation. Given these capacity results, the spark spreads required to incentivize new builds are getting close to current market, and in some cases, were achieved briefly after the polar vortex. We believe the market is providing the right price signals, given the amount of generation that it needed to replace marginal coal units, and we applaud PJM for letting the market work. We remain constructive that PJM market and forward prices support our plans for the Midwest Generation fleet. Turning to our commercial update on Slide 16. We took advantage of the rally in power and gas prices resulting from the cold weather -- winter and increased our power hedges during the quarter by 33% and 15% for 2015 and 2016, bringing our total hedge levels to 84% and 40%, respectively. With respect to coal, we felt it was prudent to rebalance our coal hedges to match our power position and lock in large spreads for our plants. Coal inventory levels remain adequate for the summer, with rate performance showing some improvement. Some brief comments on the PJM '17, '18 capacity auction. There were some speculation about the number of megawatts that we clear in the auction. While in the past we have not provided specific numbers, I wanted to provide you some assurance that the results were a net positive for NRG and that we clear virtually all megawatts that we offer into the auction. As we move through the summer, all of us at NRG stand ready to take advantage of any summer weather and its corresponding market opportunity. We're moving to execute on the plan that we laid out for you around the Midwest Generation fleet and will continue to manage our commodity exposure, given current market conditions for 2015. With that, I will turn the call over to Kirk.

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 our free cash flow before growth investments guidance. Turning to guidance on Slide 19. We are maintaining our guidance ranges for both adjusted EBITDA and free cash flow for 2014. However, absent above-average weather over the balance of the summer or colder weather later in the year, we expect our actual financial results for 2014 would be towards the lower end of these ranges. While our guidance range for Retail remains unchanged, we've made equal and offsetting changes to both Wholesale and NRG Yield guidance to reflect the impact of the successful completion of our first ROFO drop-down on June 30. Specifically, we're reducing the Wholesale component of guidance by $100 million with a corresponding increase to NRG Yield guidance. This shift in EBITDA is based on GAAP accounting requirements and reflects the full year contribution of the 3 ROFO assets to NRG Yield's financial results. We will follow this approach, which merely reflects the accounting impact to both historical results as well as guidance for each drop-down, regardless of when these transactions might close within a given year. Our EBITDA and free cash flow guidance also reflect the expected impact of our growing residential solar business. In total, the residential solar component of 2014 EBITDA contained within the Wholesale guidance is approximately $40 million in negative EBITDA. As I mentioned on our first quarter call, the residential solar business does not lend itself to traditional financial metrics such as EBITDA, which, largely, in that business, consist of customer acquisition and overhead expenses incurred in driving robust lease revenue growth in future periods, while current revenue is a function of leases previously placed in service. As the business grows and matures, we expect the positive cash flow from leases augmented by cross-selling benefits from the NRG Home platform will outpace expenses to deliver positive cash flow to NRG. We will be providing additional detail in the coming months on how we see this business adding to shareholder value, including our expectations for lease volume growth, plans for monetizing future cash flows to realize cash benefits on a more immediate basis, cross-selling opportunities, capital cost and net value to NRG. Turning next to the liquidity update on Slide 20. NRG's total liquidity on a consolidated basis stands at approximately $3 billion as of June 30, 2014, prior to the impact of the excess proceeds from the NRG Yield equity and debt offerings following the quarter end, which we expect to contribute an additional $188 million to overall liquidity. During the second quarter, we continued our efforts to extend NRG unsecured debt maturities, while taking advantage of market opportunities to reduce overall interest cost on an opportunistic basis. NRG's issuance of $1 billion of 10-year senior notes permitted us to redeem approximately $780 million of our 2019 senior notes via tender offer during the past quarter, and we have subsequently issued a call notice to redeem the remaining $225 million of the 2019 notes. In addition to more than doubling the maturity versus the notes redeemed, this refinancing transaction will result in additional interest savings of $16 million annually, which, when combined with our successful refinancing of $400 million in the first quarter, represents approximately $25 million in total annual interest savings from refinancing transactions this year. Subsequent to the quarter end, NRG Yield successfully completed its first follow-on equity offering, raising $630 million in net proceeds at a share price of $54, and just last week, Yield successfully completed its first-ever bond offering, a green bond, raising approximately $500 million in 10-year notes at a 5 3/8% coupon. These 2 capital raises by NRG Yield generated approximately $1.1 billion in net proceeds, which significantly exceeds the estimated $934 million cash funding needs for the Alta Wind transaction, which we expect will close this quarter. The resulting $188 million of additional surplus liquidity at NRG Yield can be used to support future growth, including NRG's planned offer to NRG Yield of a second group of assets this quarter. Turning to an update on progress and intended timing of future drop-downs to NRG Yield on Slide 21. NRG intends to offer a second set of assets from the portfolio of NRG Yield eligible assets we acquired on April 1 for acquisition by NRG Yield later this quarter, building on the success of our first-ever drop-down and anticipated to further increase capital available at the NRG level. Specifically, during the quarter, we intend to offer NRG Yield Walnut Creek, a 500 megawatt natural gas-fired asset, under a 10-year capacity contract with Southern California Edison; Tapestry, a 200 megawatt portfolio of wind assets under 20-year contracts with various off-takers; and Laredo Ridge, an 81 megawatt wind asset also under a 20-year PPA. These assets, comprising approximately 800 megawatts in total, are expected to generate around $120 million in annual EBITDA and approximately $35 million in annual cash bill for distribution, bringing the total CAFD made available to NRG Yield by NRG from drop-downs to $65 million in 2014. Following the second drop-down, which we are targeting to negotiate and close prior to year end, NRG still has NRG Yield eligible assets totaling approximately 1.3 gigawatts and representing an additional $100 million of CAFD and $215 million of adjusted EBITDA, which we intend to offer to NRG Yield over the course of the next 5 years, hoping to drive dividend growth at Yield, while continuing to replenish capital at NRG. Given the strong liquidity at Yield now augmented by the excess cash from recent offerings and our current equity ownership of approximately 55% following the recent equity issuance at Yield, we would expect a consideration to NRG for the second drop-down later this year to consist entirely of cash. Finally, updating our capital allocation progress and plans on Slide 22. The excess cash proceeds from the NRG Yield debt and equity offerings serve to increase overall 2014 capital available for allocation by $188 million versus the prior quarter update. To date, we have allocated approximately $1.8 billion of 2014 available capital, $1.1 billion of which has been towards value-enhancing acquisitions such as Edison Mission, with the remainder balanced across debt repayment activities, which now includes the cost related to our successful unsecured refinancing at NRG earlier this year; return of shareholder capital via dividends; and reinvestment in optimizing our generation assets. The remaining $1.1 billion to $1.3 billion of available capital, which is important to remember is the projected number at the end of 2014 rather than the excess cash available right now, resides at 3 different levels of the consolidated capital structure for which we have different priorities based on the needs and opportunities at each level. I've broken out these 3 levels at the bottom of the slide based on the midpoint of our total remaining excess cash across 2014. First, at GenOn, we expect to deploy approximately $440 million of the $650 million 2014 excess to fund completing the previously announced fuel conversions at Avon Lake and New Castle and our latest fuel conversion projects at Portland and Shawville, hoping to improve the future cash flow profile at GenOn. Turning to NRG Yield, we expect approximately $280 million in excess cash by year end, which can be used to help fund the purchase of the second set of drop-down assets I spoke about earlier, the total purchase price for which we increase capital dollar-for-dollar at the NRG level. Finally, at the NRG corporate level, where we expect the balance of $305 million and remaining excess cash, which would be augmented by drop-down proceeds, we continue to see potential opportunities on the M&A front, but expect this would be more likely taking the form of smaller bolt-on type transactions across all of our businesses rather than acquisitions from big conventional power plant portfolios. The remaining surplus capital provides potential base for our 2015 commitments, which include the majority of the capital spend for Midwest Gen optimization. With that, I'll turn it back to David to move to Q&A.

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.