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

Thank you, Shannon. Good morning, and welcome to NRG's Third 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 be -- 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 assumption 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 also 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. And with that, I'll now turn over the call to David Crane, our President and Chief Executive Officer.

Thank you, Chad. Good morning, everyone, and thank you for joining us on this last earnings call of 2014. As always, joining me today are Kirk Andrews, our Chief Financial Officer; and Mauricio Gutierrez, our Chief Operating Officer and they'll both be giving part of the presentation. In addition to Kirk and Mauricio, Chris Moser who runs our Commercial Operations, Elizabeth Killinger who's Head of Retail are available for questions. And lastly, making his first, but hopefully not his last appearance on a quarterly earnings call is Kelcy Pegler, Jr. who runs NRG Home Solar. He also will be available to answer any questions you have in his area. Turning to Slide 3. On our last earnings call in early August, we noted that through the first part of the summer, there had been nothing in the way of extreme heat in any of our core markets. As a result, there had been no scarcity pricing of the type that our Wholesale generation depends upon. Scarcity pricing is particularly important in an energy-only market like ERCOT where it is intended to act as a de facto capacity payment. With the summer now well past, you know by now that across all of our power markets, summer never materialized. The predictable consequence of the moderate summer we report today, adapting of our third quarter financial performance and a softening of the forward curve near term adversely affecting the outlook for the balance of 2014. Under these weather circumstances, I think our financial results for the quarter were as good as could be expected, and while today, we are reducing our full year EBITDA guidance by 5%, and I take no satisfaction in reducing guidance, I do take a little comfort from the fact that our full year guidance, as revised, actually…

Thank you, David, and good morning. We delivered another quarter of strong results despite the lack of weather and the corresponding weak prices. More importantly, the relative varied sentiment from the summer was more than offset by the positive activity on the regulatory front. Changes in capacity markets stemming from reliability concerns, post-polar vortex, implementation of environmental regulations and the uncertainty around demand response are all contributing to a robust future across the wholesale markets. Throughout the quarter, we continue to focus on repositioning our Wholesale portfolio to win in both the short and long terms, either by extending the life of assets through fuel conversions or repowering facilities at a significant discount to greenfield economics. These actions give us an opportunity to withstand low commodity prices like the ones we experienced this past summer while standing ready to participate in market recovery. Given the circumstances, our portfolio performed quite well. The diversity in our generation portfolio, our hedging strategy, the integrated platform between Wholesale and Retail and our focus on operational improvements all contributed to achieving a solid quarter. Turning to our operational performance on Slide 8. I am particularly pleased with the safety performance of the organization. After 2 years of continuous integration, we're back to top decile levels. We had 146 out of 161 facilities that finished the quarter without a single recordable injury. Overall, generation for the quarter was slightly down, driven primarily by lower coal and gas generation in both Texas and the East despite better reliability and availability metrics. This was somewhat offset by higher gas generation in the West and South Central regions, but particularly the significant increase in renewable generation. Also our gas portfolio experienced a significant decrease in the number of starts due to lower cycling at Cottonwood and lax scarcity…

Thank you, Mauricio. I'm beginning with the financial summary on Slide 14. NRG is reporting adjusted EBITDA of just over $1 billion for the third quarter with $678 million from Wholesale, $196 million from Retail and $140 million from NRG Yield. Through the first 9 months of 2014, adjusted EBITDA totaled $2.5 billion, with $1.683 billion from Wholesale, $477 million from Retail and $341 million from NRG Yield. Despite the lack of price volatility and lower generation during the quarter, total consolidated EBITDA was flat compared to third quarter 2013 due to higher contributions from Retail, which benefited from increased margins from Dominion as well as continued customer growth. EBITDA from the newly acquired EME assets and NRG Yield, combined with these higher Retail results, serve to offset lower Wholesale EBITDA for the quarter. For the third quarter, free cash flow before growth totaled approximately $0.5 billion, driving just over $800 million in free cash flow over the first 9 months of the year. Turning to highlights and updating our progress on drop-downs to NRG Yield, we're pleased to announce that we've now executed a definitive agreement for the drop-down of a second set of assets for $480 million in cash, which we expect to close by the end of the year. This transaction, when combined with the previously executed drop-down in the second quarter, will bring total cash proceeds from drop-downs during 2014 to $830 million, providing significant capital replenishment to NRG while driving dividend growth at Yield. As previously announced, NRG Yield also closed the acquisition of the Alta Wind assets on August 12, which will further support Yield's growth through $220 million of incremental run rate adjusted EBITDA and $70 million of annual cash build for distribution by 2016 once the remaining 2 PPAs for Alta 10…

Thank you, Kirk, and thank you, Mauricio, as well. Before we open the lines for questions and I think we'll go till 10:00 because I think Duke reports at 10:00 and we don't want you to miss that, I want to turn your attention to Slide 19. As we begin to feel the cold breath of winter here in Central New Jersey, let me give you a sense of where we feel that we are in terms of our performance against our 2014 strategic goals, which we articulated in our first quarterly call last February. Obviously, 2014 remains a work in progress with 2 months remaining until the end of the year and we continue to strive against all of the goals that we articulated. While I won't elaborate on each of the 12, you will see from our self-assessment that we feel that we have been pretty successful. We've achieved meaningful and identifiable advances against each of the 4 strategic pillars of our strategy. There are only 2 of the 12 areas where we would have liked to have accomplished more and we will endeavor to do more in the months to come, and those areas are utility scale renewables and capital allocations, specifically share buyback. With respect to utility scale renewables, our relative lack of success in this area has been caused by a relative lack of opportunity as the last couple of years have witnessed an ever-increasing number of wannabe wind and solar developers piling into the big renewables space. These new entrants are making bargain basement bids based on excessively optimistic assumptions on the price track for solar equipment. We continue to look for big renewable deals ourselves, but -- where we can create value because we think that Tom Doyle and NRG Renew are very,…

[Operator Instructions] Our first question is from Greg Gordon of Evercore ISI.

Just in terms of thinking about the 2015 guidance in the light of the volatility and the guidance you had this year after a great first quarter and then the lack of opportunity in Q -- in the summer anyway, what type of extrinsic value assumptions are baked into your 2015 expectations being cognizant of the fact that you guys want to make sure that you don't have to move your numbers around a lot in the future?

Greg, I may ask Kirk to address that question specifically. But sort of the context in which you asked the question about the guidance, I'm sure that you're frustrated as everyone on the phone should be frustrated with moving the guidance around. We are frustrated as well and it just makes no sense to us, as we look at our performance. I mean, everything that we could control is right on track, yet we've had to change guidance twice this year because of weather: once up because of the winter and once down because of the summer. If we had done nothing, but announced guidance last November, right now, we'd be sitting here at the upper end of our range. So one of the things that we want to look at between now and our Investor Day and hopefully report back to you is if there's a more accurate way that we could look at guidance in terms of doing guidance with sensitivity to weather, so you could track it with your own following of the weather. But having given that slightly off-topic answer, Kirk, you want to answer the extrinsic value aspect?

Sure. The Wholesale component of our 2015 guidance is based upon the forward curves at this time in terms of what we see in our core markets, in particular, in the Northeast and Texas. If anything, I would say that the upper end of that guidance range, specifically on Wholesale, does incorporate, in a way of saying, the bandwidth of the range of guidance does incorporate some extrinsic value allowing for the possibility of volatility in the portfolio. But overall, our guidance range, especially towards the bottom end of the range is simply based on the forward curves and the implied gross margin that we see from those at this point.

Great. And then on the Retail side, you're assuming slightly higher range of outcomes in 2015 versus 2014. Is that -- can you give us sort of the puts and takes there? Is that primarily the accretion from the Dominion retail, offset by assumed margin decline in other areas? And are there assumptions about incremental product margins in there as well?

To some degree, yes. But I think overall, the way you summarized at the outset of your question, interpreting the guidance is correct, and that is that the upside includes the contribution from Dominion, which, I think, as I said, on the second quarter call, while we didn't see a whole lot coming from Dominion as we transition the portfolio this year, we saw the upside and then that's reflected in the guidance range, slightly offset by some declines or contraction on the margin side, particularly on the C&I side where I think we've consistently said we don't see compelling margins in that particular business, which is why we're repositioning our approach to C&I more comprehensively as a bundled product offering, not off the back of strictly grid power. And we'll talk a little bit more about that in greater detail at the Investor Day that David alluded to earlier.

Great. Final question and I'm sure you're getting a lot of follow-ons on this. Obviously, the growth rate from '14 to '15 in your Home Solar installation aspiration is quite high. Can you give us a sense of what you think the 3- to 5-year growth rate is? Or are we going to have to wait for the Analyst Day?

Well, I'm going to ask Kelcy. I don't know how he's going to answer the question, but I would tell you, I mean, in any of these super high-growth industries, that Kelcy is in a better position to answer your question than I am. But even his answer is going to be a guess. But Kelcy, go ahead.

So I would say that we're preparing ourselves to compete at the top tier of the sector. And we see the guidance that our industry gives for growth trajectories of the whole residential solar space and we see ourselves in the top tier of that.

And we have no reason to disagree with what the other people in the industry are saying?

Correct.

Yes, I mean, if anything, I would say, as optimistic as they are, they could be bigger. So anyway, it's obviously great. [indiscernible] It's just exceedingly high growth and what we're more focused on, as Kelcy is saying, is make sure that if the growth comes that we can accommodate it without any deterioration of service.

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

So following up a little bit on Greg's last question on the energy home business, how do you think investors should look at valuing the EBITDA and cash flow properties of the solar business in aggregate? Obviously, it's a little bit different from the conventional thermal business. What are you saying?

Julien, the first thing I would tell you is that -- answering that single question more than any other reason is why we're having an Investor Day in January so that we can go through it because I'm not sure if it's susceptible to a 30-second answer but, Kirk, go ahead. Give it your best shot.

You can start telling me now. So first of all, from our perspective, as we alluded to, which is part of the reason why we've excluded the negative EBITDA moving forward in our guidance range, it doesn't -- that business, because of the high growth and because of the long-term cash flows, doesn't really lend itself to kind of traditional EBIT to EBITDA--type metrics. And for that reason, we've started to give you a little bit of sense of what the net capital from NRG that's slightly less than $150 million is the expectation off of that lease volume next year. And given we see a pretty robust return, as I alluded to, of greater than 8% off of that residual cash flow stream, I think the rest of the story, which we'll expand upon at the Investor Day, is translating that fully installed cost into a full monetization, if you will. So the way we think about it is monetizing our cost at a premium is the best way to translate value in the near term.

Julien, if I could just add just one point. I mean, we see one of our big tasks for all of our investors and actually for our business over the next couple of years is to demonstrate what we think is this extraordinary potential synergy between what Kelcy and NRG Home Solar have to offer and what Elizabeth in NRG Retail have -- who to offer it to. So her 3 million customers with its increasingly cost-competitive and attractive idea that people can monetize the solar value of their real estate, we think that's a great combination. And how you all should be thinking about -- how you should be valuing it, that's part of the thing that we want to present to you in January. But we're also aware that we all live in the show-me state. We actually have to demonstrate to you that it actually can be done. So that's what we're really focused on in this area and that's why we've put them both together under NRG Home.

Great. Well, you've certainly whet my palate to hear what you have to say next. Separately, though, could you address briefly the PJM performance scheme as you're thinking about the opportunity to participate both in the transition auctions and in the subsequent 18, 19 auction with the portfolio and especially the GenOn assets? Will they all quantify is basically the question.

Julien, this is Mauricio. Look, I mean, as you appreciate the rules and the guidelines for the capacity performance continue to change, the first draft, as you know, was very prescriptive in terms of who qualify for that market. That have changed and that -- I guess that change we see that positively. The requirements are less. They focus on fuel certainty, and clearly, reliability will be part of the bidding cost for lack of a better term on the auctions. We provided an indication in terms of what could potentially qualify under this capacity performance on the table on the slide where we show by fuel mix, whether coal, nuclear and dual fuel and oil, I believe it's on Slide 11. But again, I mean, I think that's going to -- until we have the final rules, we'll have more certainty in terms of what can qualify and not. I think it's important to say that we are reviewing all the project that we announced in previous calls around GenOn and Edison Mission because of the capacity performance and the expectation of potentially much higher revenue stream from our capacity markets. So that process is underway right now. But until we have final rules, it's really difficult to pinpoint.

Our next question is from Stephen Byrd of Morgan Stanley.

Wanted to talk about the financing at NYLD of the asset drop-downs. Can you, Kirk, give a little bit of color in terms of what portion of that purchase price will be financed with debt relative to equity?

Well, as I said, we're going to use the NRG Yield revolver capacity to supplement the cash on hand as we move forward. And as you run the math on what I had laid out there, that's sort of, rough order of magnitude, roughly $200 million relative to a little over $400 million in capacity on the revolver. And as I characterized, that's a temporary draw, which we'd look to repay with the proceeds from financing. Given the fact right now, though, that I'm not going to be specifically predictive about exactly what form of financing we'd take, that'll depend upon the profile of the portfolio at that time. But right now, as we talked about before off the back of the Alta Wind transaction and putting in place the holdco unsecured debt, we are basically on par with our balance sheet targets there. So the extent to which we had capacity in those balance sheet targets, we'd supplement with debt. If not, we'd be biased towards the equity side and we'll make that determination next year.

Understood. And secondly, I want to follow up on Julien's question on PJM and kind of the flip side of it that, as you see the penalty language as it now stands, when you assess your portfolio, do you think there's probability of some of your assets more prudently being shut down to avoid penalties? Do think that is the very low probability situation, i.e., you're very confident that all of your plans, risk-adjusted, should stay online and be able to withstand the penalties? Just curious how you think about the penalty side of things.

So Steve, I mean, 2 -- I guess 2 dimensions on that. First one is the field certainty. And if you look at the information that we provided on the table, most of our portfolio, as long as coal, nuclear or some sort of dual-fuel capability, we feel comfortable we're bidding those assets in the capacity performance. The second one is the penalties. And if there is one concern that we have on the existing rule is, I guess, the relative size of the penalty compared to the revenue and we've provided those comments to PJM. But ultimately, depending on the expectation of reliability of these assets, that will be priced into the bids that we're submitting to the auction. So to the extent that we have an asset that is unreliable, I think that's going to be factored in. And if the market doesn't need that asset, then it won't clear. I mean, I think it's as straightforward as that.

Steve, this is Chris. Just to echo what Mauricio was just saying, too. I mean the penalties are definitely stiff at 1.5x net CONE, but the current suggestion is that the offer cap is going to be net CONE, which is a heck of a lot more space than we have today. So I would think that we'd be able to price in a lot of that risk and then we'll see where the market clears.

Our next question comes from Angie Storozynski of Macquarie.

I actually wanted to ask additional questions about this capacity -- the new capacity product. So how should we think about it? So you're showing us growing Retail and growing margins while you expect higher and probably more volatile energy prices and higher capacity prices. So how does -- how do you reconcile these 2? Do you basically assume that you price in the higher payments or how about the contracts that have already been signed?

Yes, I mean I'll let Elizabeth talk about the Retail. But I think, in general terms, the changes on the capacity performance market will be a net positive to our Wholesale portfolio. In terms of Retail, particularly in the Northeast, it's heavily weighted towards the mass residential market. That tends to be very short term in nature. So any potential market changes from the capacity performance will start happening in 2016 and beyond. And that's well within the period where you can actually price it in, but Elizabeth, I don't know if there's anything else there?

Mauricio, you covered it. We benefit from our integrated model -- in our wholesale/retail integrated model, in circumstances like this and we feel comfortable that we can manage any risk associated with that.

And Angie, this is Chris again. Don't forget that just the sheer size of the comparison of the portfolios, I mean, if we're serving 12-some thousand megawatts in Texas and we got 11.5 or so thousand megawatts down there, that's pretty well balanced. When you get to the Northeast, we are preponderantly long generation there, 17,000 megawatts in PJM alone, not counting New York and New England. And the load that we serve up there is a fraction. So really, if capacity goes up, we're a multiple winner just from the sheer leverage of that.

Now, I mean, talking about the potential upside, I mean, if you're truly -- if you truly have 15 gigawatts of capacity that's eligible and looking at the sensitivity scenarios that PJM is showing, I mean, we're talking about $400 million-plus of potential upside in earnings. I mean, my question is that does that look a little bit too good to be true and I know I'm not accounting for the penalty side here. But I mean, what type of a response and how sustainable do you think that, that level of earnings stream is actually starting in '18 and beyond when that definitely also lines up the pockets of potential new-build projects? How do you think that this pickup that you could see in incremental auctions is sustainable going forward?

Yes, Angie. Well, a couple of things. Number one, I don't think we need to wait until 2018 to see some of the impact on the capacity performance. As you know, there will be a transition period. Hard to think that the 15, 16, I think, is going to be more a target megawatts, always going to have some upside and then there's going to be some sort of pro rata for the 2 auctions that are already clear. So the impact is going to be felt before that. In terms of the size and the magnitude of that, I mean, it is really hard to pinpoint from this point, and yes, I mean, the rules continue to change. There was yesterday an open meeting with PJM in terms of getting comments back from stakeholders. Clearly, we think it's not a small change in our revenue expectation. I think it is rather large. So far, I guess, we have the quantity in terms of the number of assets that could potentially qualify under the capacity performance. We don't know the price. We don't know the bidding behavior. I already said that it is a significant change in terms of what are the items that can be now priced into your bids. And ultimately, I guess, the price will work itself out when we go through the auctions. But I think it's important to say that the impact is pretty significant for us. We think that our portfolio is well positioned. And when we get the right pricing, then we'll be in a better position to tell you that. Now keep in mind that this capacity performance also is going to attract new builds and it's just a -- I mean, at this point, we will be speculating on the absolute impact on our portfolio.

And then my last question here would be, would you consider bringing back some of your coal plants that are either already shut down or actually slated for retirements in PJM?

Angie, I mean, the plants that aren't operating, I mean, some are mothballed, some go into full retirement. Once they go into full retirement, you can't bring them back. But I mean, I'd say, in general terms, obviously we're continuously looking at the circumstances that exist and if we can create value by bring plants back or bringing them back on a seasonal basis, we've been doing that in Texas for a few years. We'd do that in the Northeast to the extent that we can. I mean, to me, that is one of the premier competitive advantages we have on the Wholesale generation side. We have such a large and varied portfolio that we can find where the value is and get after it. So we'll be constantly looking at that.

Our next question is from Paul Fremont of Jefferies.

I guess being a fan of the Texas market is a lot like being a Mets fan. It always comes down to wait until next year. What seems to be changing in your opinion, given sort your new-build announcement, Calpine new build and Exelon new-build announcements there?

Well, that's sort of a loaded question. I come from the north side of Chicago where to be a Cubs fan makes being a Mets fan look like being an optimist. But I mean, look, I think Texas, I mean, you've sort of mentioned it. I mean I would say that the new build that we're talking about today at Robinson at $400 installed capacity. It's a brownfield site with equipment obtained in the secondary market. I mean, not too many people can do that. So I'm not sure that what we've seen is a huge flood of new supply unleashed yet, so we have reason to be optimistic in the short to medium term because Texas does grow. It usually is affected by extreme weather in the summer and occasionally in the winter. So I mean we like the Texas market. But you do point to the fact that it's hard to have a sustained advantage in the Texas market on the Wholesale side for years and years because the barriers to entry in terms of new build are low in Texas. And they've always been low. And that's where I think that the premiere advantage that we have over others is the combined wholesale retail model. Because when prices are subdued on the wholesale side, Elizabeth does well. So overall, it's a good market, but you're right, I mean, Texas will never be in a multi-year scarcity of generation situation because you can build quickly there.

And then my other question is, I mean, it seems like your outlook on the core generation business seems a lot more optimistic on this call than it did on the last call. What accounts for that?

Well, what accounts for that was that I wasn't clear enough on the last call in terms of what sort of time frame that we were talking about. On the last call when I was talking about how we were going to reorganize the business -- I was talking about how we were going to reorganize the business and I sort of forgot 2 words, for the "long term." I mean, short- to medium-term, I'm quite optimistic if you look at -- I mean, not every regional market. One of the things that's been going on, on the wholesale generation side is it's very difficult to talk in broad-brush terms about all the markets as if they're the same. The Gulf Coast, the East Coast and the West Coast, they all have completely different dynamics, which is a big change in our industry from when I got going in this industry 15 years ago. So you'd almost have to go region by region, but my fundamental view on the outlook for our Wholesale portfolio short- to medium-term, has not changed between this call and the previous call. It's just I wasn't talking about the short- to medium-term on the last call and you and many other people didn't hear me sort of distinguish that and that was my fault and I'm going to try and be much clearer in the future. So I'm properly chastised. So Paul, we've got to move on. We know -- we don't want to run into, conflicting with the Duke call, so we have like one more -- we'll take one more caller, and I apologize to the callers who did not get on. But Chad and the team would be happy to follow up and if you need to get Mauricio and Kirk and myself involved in the answers, we'll get involved as well because we want to answer everyone's questions, but for now, Operator Shannon, can we take 1 more call?

Our next question is from Steven Fleishman of Wolfe Research.

Just a question on the NRG Yield side on the expansion of some of these California projects, et cetera. And I think you said you now have a growth backlog through at least the end of the decade per mid-teens. Could you just give a little more flavor on the YieldCo-eligible cash flows that you now have for NRG Yield?

Sure, Steve, it's Kirk. And I think that David's remarks about enabling us to sustain that double-digit growth into the next decade, we're clearly focused on that and we're optimistic about the potential contributions to enable that specifically from the projects that were announced around SCE. Although we're not at a point now that we're going to provide specific guidance in terms of what the CAFD and the economics. We're early days. Obviously, we have to go through the CPUC approval process and the like. But the guidance I give you, if you look at the megawatts of those different projects, with the exception for Preferred Resources, a little bit of a different profile there. But as far as the Mandalay and also the Carlsbad projects, roughly 265 megawatts and 600 megawatts, respectively, a good proxy for at least the EBITDA contributions of those is off the back of the existing projects that are down there where I think Marsh Landing, El Segundo, rough order of magnitude, kind of EBITDA per megawatt. Roughly kind of 15% of megawatts translates into EBITDA and that's probably a good proxy for how to think about the contributions from those plants.

And then also with respect to NRG Yield in the scheme of the new NRG Home Solar businesses, could you give a little bit of flavor on how they will likely participate?

Only as to say, as I've alluded to in the past, that we're focused on, as I said on this call also, monetizing the remainder of that capital and the residual cash flow stream after-tax equity. There are a number of different options available and we're evaluating all of those. But specifically for NRG Yield, we think the potential is very great for NRG Yield to play a part in that monetization, both from the standpoint of highlighting the value in the near term, as I alluded to before, and also given the return profile that the cash flows, the duration there, 20 years long-term contract, I think it has a lot of the elements that are very consistent with the NRG Yield portfolio. So I would say at this point it has high potential and more to come as we move into '15.

Thank you, Steven. And Shannon, I think we have to conclude here. And I appreciate everyone taking the time. And like I said, we'll follow up with whoever couldn't get on the call. So thank you, and we'll look forward to seeing you in January. Bye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.