NRG Energy, Inc. (NRG) Q3 2014 Earnings Report, Transcript and Summary

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 remains at the high end of our original guidance for fiscal year 2014 even when excluding the impact of the acquisitions we closed earlier in the year. This is highlighted in the bar chart on the bottom right quadrant of Slide 3 in order to permit an apples-to-apples comparison. What makes me more positive than the revised 2014 guidance are 2 other factors: first, notwithstanding the third quarter headwinds associated with the weather, our Wholesale generation fleet performed up to our very high expectations on virtually every metric and that is a result of the culture of continuous improvement instilled by Mauricio and his operations team; and secondly, I feel good about our prospects to grow the business in 2015 and beyond across all of our various lines of business. As such, I'm pleased to announce the 2015 adjusted EBITDA guidance range of $3.2 billion to $3.4 billion. This guidance, I would note, excludes the impact of our fast-growing Home Solar business, which is, at this point, in the evolution of the residential solar business build-out, a sector in which negative EBITDA is the norm for the leading industry players and financial success is measured by other metrics, which Kirk will discuss later. Lastly, as we acknowledged on our last quarterly call, we recognize and appreciate that NRG is a complicated company to understand and properly value at this stage. We are dual focused, both on winning the short- to medium-term future of our business based on the current 20th century conventional grid-based paradigm while also preparing to win the medium- to long-term future of our industry as its 21st century paradigm takes shape. So rather than expand on my thoughts on this earnings call, I'm pleased to announce that we will be hosting our first Investor Day in over 5 years this coming January. You will hear more of the details from Chad and the IR team about this must-attend event in the coming weeks. Moving to Slide 4 and coming back for a moment to our strength of execution. Last quarter, we spoke about the Edison Mission transaction and how our integration and asset optimization capabilities led us to an improved outcome from our original expectation. We've also stated on several occasions that our efforts on integrating the Dominion retail acquisition were also trending favorably, as well. As these 2 acquisition integration efforts, which I might point out we're implementing almost simultaneously, reach their completion, I'm pleased to report that, in each case, we have not only delivered on our commitment to you but exceeded our expectations. We are ahead of schedule and we are exceeding our targets in respect of key financial and operating metrics. I think our success in a management and systems-intensive endeavor like large-scale integrations demonstrates that this company and our people across the organization continue to be singularly focused on getting the task at hand done quickly and efficiently. Moving to Slide 5. We are pleased to announce today that NRG West has been awarded a number of contracts totaling 440 megawatts in aggregate in Southern California Edison's recent RFP for fast-start gas units and what they refer to as Preferred Resources. The 178 megawatts of Preferreds' Resources, which encompasses demand response and energy efficiency, is a particularly important win for us because we believe, California, as it has so often in the past, is a trendsetter in this area. In just California alone, the public policy is shifting towards Preferred Resources, making it 50% of all future resource procurement. By winning this award and winning big, we are positioning NRG for first-mover advantage with all the benefits that, that entails as Preferred Resources become a more significant part of the energy mix for load-serving entities across the United States. The other part of the award, the 262-megawatt Mandalay project now joins our 600-megawatt Carlsbad project, which is currently awaiting CPUC approval, as critical examples of how NRG is replacing and updating its aging conventional generation assets with smaller, more flexible, renewable-friendly, fast-start peaking units on long-term contract. It also obviously demonstrates our ability through intrinsic growth from development to restock the pipeline of NRG Yield-eligible assets, ensuring that NRG can maintain NRG Yield's double-digit growth profile into the next decade. Most of all, our success in this critical solicitation from SCE, one of NRG's most valued customers, shows that NRG is prepared to fulfill our role as an integral player in the critical California market now and well into the future. Turning on to Slide 6 to the Residential Solar business. We've made no secret of the importance that we attach to success in this area. We've been developing our capabilities in residential solar for a few years, but we have been very light on detail when it comes to speaking with you on how we think you should be thinking about this business embedded as it is within NRG. Obviously, a good deal of our reticence was driven by our desire to build the capabilities we felt we needed in this area outside of the public eye. As a big player relative to the companies currently in the field, we did not want to telegraph our approach to the business. While there continue to be many market-sensitive details of our approach that we are not prepared to disclose, on this Slide 6, we begin to pull back the curtain. The first thing you need to know is that while the graphs on Slide 6 focus almost exclusively on home solar performance metrics, you will see that our home solar business is going to be about so much more about than just solar panels on the roof and we consider that one of our greatest advantages. Our homes solar business is going to be about marrying up, cross-selling and seamless integration of solar-driven home energy solutions, including complementary grid system sales, backup generation and other energy products and services. And in this regard, unlike other residential solar companies that talk about offering more than just solar to their customer base, we already have the capabilities in place to offer effectively many of these complementary products and services. You can safely assume that we will expand upon our efforts to provide an appropriate level of detail about our home business -- our home solar business at our Investor Day. So let me just give you a brief overview of where we are and where I see our activities leading over the coming year. Focusing, as I said, purely on the home solar business itself for today, we have created a very strong business platform. Starting with our original NRG residential solar solutions and now combined with both RDS and Pure Energies through acquisition, we now believe we have the premier one-stop shop for customers seeking a high-quality solar experience at their homes. We have the multichannel customer acquisition engine necessary to achieve the appropriate scale. We have the systems necessary to accommodate rapid expansion and we have the financial acumen in place to finance our growth in an optimized manner. Specifically, on the financing side, we are ramping up with tax equity financing, either closed or in negotiation, to support nearly $600 million of residential leases in the near term. On the operations side, we are driving down installation timing and improving the customer adoption process so that we can reduce substantially the wait times from customer sale to install completion. By the end of this year, we expect to have over 10,000 installations, which is about 70 megawatts. By the end of 2015, we expect to grow that amount by 3x with an objective of a total of 35 to 40,000 installations or roughly 280 megawatts. Lastly, and given our focus on operational excellence and continuous improvement, we see our costs coming down to where we can install and offer residential solar between $3.20 to $3.30 per watt in 2015 with further cost reductions occurring in the years beyond. We look forward to updating you more on that -- on these efforts in January. And with that, I'll turn it over to Mauricio.

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 pricing in the East. This again highlights the value of our balanced portfolio between contracted and merchant assets during periods of low power prices. Turning to Slide 9. Our Retail business performed quite well and met our expectations for the quarter when factoring in both the impact of the Dominion acquisition as well as continued organic growth relative to the same period in 2013. More importantly, however, we achieved these results by realizing higher retail margins despite the introduction of the Dominion portfolio, which generally came in with lower-margin customers. As David mentioned earlier, the Dominion integration is now complete and performance has exceeded expectations. Since the close of the deal, Retail has retained higher-than-planned customer count and realized favorable EBITDA contributions with customer retention and expense management being the key drivers of much better-than-planned results on EBITDA and customer count. The Northeast drove the customer count overperformance with Texas driving the cost efficiencies. Lastly, with the closing of the Goal Zero acquisition in September and momentum building with NRG Home Solar, we have expanded the breadth of bundled products offerings across our markets. Our Home Solar team began selling system power along with residential solar and experienced nearly 50% success rate in cross-selling. At the end of the third quarter, 20% of Texas customers were buying more than 1 product from NRG and were gaining momentum with cross-selling in the Northeast. Overall, as more and more customers subscribe to multiple products and services, we expect our Retail platform to demonstrate enhanced growth and improved retention, allowing us to realize more value from each customer. Moving on to Slide 10, and as we mentioned before, it was another summer of weak prices and lack of weather across the country. While, on the surface, weather was slightly below normal in the Northeast and close to normal in Texas, the number of hot days was unusually low and as you can see in the lower left-hand chart. In some cases, like in Texas, the first 100-degree day occurred well into the summer, resulting in much lower spot power prices, particularly when you compare them against the same forward prices before the third quarter. This milder weather, combined with lower gas prices due to the higher production coming out of the Marcellus Shale, put some downward pressure on forward power prices during the summer. Since then, we have seen some recovery in forward prices, particularly in the Northeast, where they are back to presummer levels due in part to upcoming environmental regulations and concerns of cooler weather this winter. I want to take this opportunity to remind everyone about our summer hedging policy. While we increased our hedges in the aftermath of the polar vortex, we maintained a long reserve opening for the cash markets as a matter of prudent risk management. These megawatts were affected by the lack of scarcity pricing and therefore exposed to weak spot prices. This is something we implemented a few years back to ensure NRG would benefit from higher wholesale prices despite operational issues or higher retail levels. While we manage the size of this open position based on prices, we will continue to lean long in future summers consistent with our view. Moving on to Slide 11 and starting with PJM. We see a number of positive trends in our Wholesale business. The implementation of environmental rules like MATS, IPP or CSAPR next year, in combination with the uncertainty around demand response, most likely will take megawatts out of the supply stack and provide a positive momentum for both energy and capacity prices. In addition, PJM is in the process of making significant improvements to their capacity markets. It was clear that in the aftermath of the polar vortex event, units that provide a reliability and fuel certainty were at risk of retiring due to economics under the existing market structure. PJM recognized this shortcoming and it is recommending improvements to explicitly recognize the value of these units provided to the system. The new capacity performance market, while still under works, is designed to compensate generation resources that provide fuel certainty and reliability during peak weather conditions. We believe this is an important and necessary enhancement to the capacity markets, particularly if the system becomes more dependent from natural gas for power generation. We continue to work closely with all stakeholders and believe the market redesign is getting close to achieving the desired objectives. In Texas, fundamentals remained strong, particularly on the demand side. Demand grew 2.7% on a weather-normalized basis for the year and market design changes, including higher price caps and the implementation of an operating demand curve, are positive improvements for the energy-only market. Although we continue to believe they're not adequate long-term solutions to address resource adequacy issues, these measures should improve pricing as to better dispatch the electric system. As you can see on the upper right-hand chart, neither historical nor forward prices support long-term greenfield development. Market participants continue to focus on brownfield sites where cost advantages are necessary to manage the low-price environment that we have seen in the past couple of years while getting access to the fundamentally robust Texas market. Earlier this year, we announced the mothballing of our Bertron plant in Houston given the lack of support for capacity markets. With the benefit of hindsight, it proved to be the right decision given the lack of scarcity pricing this summer. But as we move forward, we need to renovate our fleet to remain competitive in the evolving Texas market. Our development efforts are predicated on either long-term contracts or units with a significant cost advantage where we don't have to take disproportionate market risk. Today, we are announcing the construction of a 360-megawatt peaking facility at the former PH Robinson brownfield site, which will be operational in late 2015. In natural gas, fast-start combustion turbines will help the state of Texas integrate the growing intermittent renewable generation while using no water for cooling and taking advantage of higher price caps and potential scarcity pricing. The plan meets our criteria of an ideal location in Houston and it is suspected to be built at a significant discount to traditional, new-build economics. Finally, on October 23, the D.C. court lifted the stay imposed nearly 3 years ago on the CSAPR rule. All arguments to address open issues are scheduled for March of next year. While this rule will continue to be contested and it is difficult to speculate on the final outcome, particularly pertaining to Texas, the EPA intends to start the rule in January 1, 2015. Our compliance program is a multi-pronged strategy, which includes using allowances, optimizing existing back-end controls, fuel switching and the use of low-sulfur PRB coal. We don't expect the rule to have a significant impact on this batch economics in the near term, but it could become a catalyst for additional coal retirements in lignite-heavy states like Texas, if implemented. Turning to our hedge disclosures on Slide 12. We decided to increase our coal and nuclear hedge levels for both gas as a proxy for power and heat rate for 2015 and 2016 in light of the weak summer prices and increasing gas production. We now stand at 94% hedge in 2015 and 45% in 2016, significantly reducing our exposure to near-term market dynamics. Coal hedges remain well balanced and fuel inventories are being replenished ahead of the winter months despite some of the rail performance issues that have affected our industry. We're focused on executing our fall outage season and reassessing the asset optimization projects that we have shared with you in previous calls in light of the changes in capacity markets across our core regions. We will update you in the near future once these changes have been finalized. With that, I will turn the call over to Kirk.

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 and 11 are in effect. In addition, following the quarter end, NRG closed a new tax equity facility permitting us to immediately monetize future tax benefits, consisting largely of PTCs to be generated primarily by the NRG Yield-eligible wind assets we acquired earlier this year as a part of the EME transaction. NRG received approximately $190 million in net cash proceeds from the transaction, in effect, representing an advance on monetizing these assets through future drop-downs to NRG Yield and further replenishing capital to NRG in 2014. This tax equity facility is structured to maintain the level-ized cash available for distribution from the wind assets, thereby preserving our ability to monetize these cash flows from the assets through drop-downs to NRG Yield beyond 2014. Finally, while executing on value-enhancing, bolt-on transactions and completing our refinancing of NRG's unsecured notes during the third quarter, we maintained NRG's continued strong consolidated liquidity position, which is largely unchanged at $3.6 billion as of quarter end and now further enhanced by the wind tax equity proceeds, which closed subsequent to the quarter. Turning to the guidance overview on Slide 15. As I mentioned on our second quarter call, in the absence of warmer summer weather and higher prices over the balance of the year, our expectations for 2014 adjusted EBITDA were trending to the lower end of guidance. The lack of extreme heat and scarcity pricing and resultant lower EBITDA over the balance of the summer, combined with expected results over the balance of the year, has placed our 2014 expectations now at or modestly below our prior guidance range, and we are revising and narrowing our 2014 EBITDA guidance to $3.1 billion to $3.2 billion. The reduction in Wholesale guidance is partially offset by NRG Yield, which has been revised upward to reflect the partial year impact of the Alta Wind transaction, which closed during the third quarter while Retail remains on track with prior guidance with a slightly tighter range of $620 million to $650 million. Our 2014 EBITDA guidance also includes the impact of approximately $50 million in negative EBITDA from the home solar business, reflecting overhead and customer acquisition costs as we position the business for significant growth next year. Our revised EBITDA guidance range net of the contribution from the EME transaction, which as you'll recall was approximately $250 million this year, still places us on track to the upper end of our original guidance range for 2014 as the positive impact from operational performance during the first quarter more than offset the impact of lower prices and generation later in the year. We are also reducing and narrowing our guidance range for 2014 free cash flow before growth, based in part on the reduction in EBITDA guidance as well as other revisions to free cash flow expectations over the balance of the year. These revisions total approximately $150 million and consists of 3 elements: first, the impact of interest expense from both the Alta Wind transaction as well as interest expense resulting from the timing of the final redemption of our 2019 senior notes completed in September; second, mindful of the critical need for preparedness, which benefited us during the colder weather in the first quarter, we've accelerated a portion of our oil and coal inventory build from 2015 into 2014 in advance of the winter months in order to insulate the portfolio from any delivery challenges, which may result from higher rail demand or other potential transport disruptions over the winter; finally, changes in working capital largely due to the expected timing of Wholesale revenue now later in the year, partially offset by changes in timing for environmental capital expenditures, make up the balance of the expected changes for free cash flow this year. The majority of these changes are timing-related and should reverse as we move into 2015. Importantly, the proceeds from the wind tax equity transaction more than offset these largely temporary differences in cash flow, helping to maintain over $1 billion in consolidated excess cash available for allocation over the balance of the year, which I'll review in greater detail shortly. Turning to 2015. We are initiating full year consolidated adjusted EBITDA guidance of $3.2 billion to $3.4 billion, including Wholesale EBITDA of $2.025 billion to $2.125 billion; Retail, which is expected to deliver $625 million to $700 million in 2015. NRG Yield, which makes up the balance of our guidance range, reflects an increase of $130 million primarily due to the full year impact of the Alta Wind transaction. Our 2015 guidance excludes the anticipated impact of NRG Home Solar, which we expect to generate approximately $100 million in net operating costs as overhead and customer acquisition costs reflect the rapid growth in lease volume only partially offset by gross margin from leases in service through 2015. Next year, we expect an incremental 25,000 to 30,000 home solar installations, which, net of tax equity proceeds, will require less than $150 million in incremental NRG capital in 2015. Including fully allocated overhead, we expect NRG return, net of tax equity, in excess of 8%, positioning NRG to capitalize on low-cost opportunities for further lease monetization at a premium to fully installed costs. And we will provide further details on this at our upcoming Investor Day in January. Our 2015 free cash flow before growth guidance, which is net of maintenance and environmental capital, including planned spend on Midwest Gen fuel conversions and back end controls, remains a robust $1.1 billion to $1.3 billion for 2015. Turning to Slide 16, I'll review in greater detail the second drop-down of assets to NRG Yield for $480 million in cash. These assets represent the first drop-down and monetization of Yield-eligible assets acquired from Edison Mission consisting of Walnut Creek, a fast-start natural gas-fired facility under a 10-year contract with Southern California Edison; Tapestry, a portfolio of wind assets in West Virginia and Oklahoma under 20- to 25-year PPAs; and Laredo Ridge, a Nebraska-based wind facility under a 20-year PPA. This second drop-down portfolio is expected to generate approximately $120 million in adjusted EBITDA and $35 million in cash build for distribution at NRG Yield, helping to drive near-term dividend growth at Yield. An additional $100 million in cash available for distribution remains available through drop-downs over the balance of the NRG ROFO assets and the EME-eligible wind assets beyond 2014, providing Yield the means to deliver on its long-term growth targets. In connection with the transaction, at closing, NRG Yield will also assume approximately $746 million of nonrecourse project debt. This debt balance includes a pro forma increase of $40 million of incremental debt at Laredo Ridge, resulting from a pending refinancing of the existing project debt, which will close prior to drop-down. This refinancing, which takes advantage of the lower prevailing financing rates, maintains existing debt service and CAFD while cash proceeds from the increased project debt will be paid as a dividend to NRG prior to the drop-down, supplementing the $480 million in proceeds from the transaction. The cash purchase price and assumed debt implies a transaction enterprise value of approximately $1.2 billion or just north of 10.2x 2015 adjusted EBITDA while the equity purchase price implies a CAFD yield of 7.3%. NRG Yield will fund the transaction using excess cash on hand of approximately $280 million with the balance of the purchase price funded to be a temporary draw on NRG Yield's revolving credit facility, which had approximately $420 million in capacity at quarter end. NRG Yield expects to repay the revolver in 2015 from the proceeds of its next capital raise. And finally, updating our capital allocation progress on Slide 17. NRG's 2014 remaining consolidated cash build for allocation, which is net of $2 billion of capital previously committed, stands at approximately $1.1 billion. $700 million of this cash resides to GenOn level and is primarily earmarked to fund committed growth investments at GenOn beyond 2014, specifically the planned fuel conversions at Portland, Shawville, Avon Lake and New Castle. Following the closing of the new tax equity facility and the fourth quarter drop-down to Yield, the remaining $400 million in excess cash will reside at the NRG level as NRG Yield will use its excess cash to help fund the drop-down. This NRG level excess cash provides a base of support for our growing residential solar business and Midwest Generation investments next year. We'll provide an overview of the 2015 capital allocation in the first quarter. And with that, I'll turn it back to David.

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, very good at this end of the business, but we won't chase deals that may look good upon announcement, but end up destroying shareholder value once implemented. We are confident that this is an area of further value creation for NRG Renew in the years to come. Indeed, we remain very bullish on business-to-business solar, specifically single-customer, multisite opportunities that we can scale up and believe that our platform is well positioned to capture meaningful value in the near to medium term. With respect to share buybacks, as you know, for a variety of reasons, we have not had the opportunity to buy back shares this year and this being for only the second time in the 11 years that I have worked at NRG. As we look forward to 2015, clearly, we already have committed a significant amount of our available capital to investment opportunities which we believe will create significant shareholder value over time. Equally clearly, a mismatch currently exists between the multiple sources of shareholder value currently embedded within the NRG Group of Companies and the NRG share price, which, as it traditionally has done, continues to move primarily in correlation to volatile, near-term natural gas prices no matter how modest and declining in relevance those short-term swings in gas pricing are to our performance or to our prospects. As we continue to replenish our coffers after taking into account the current program of committed investments, we will revisit share repurchases as part of our capital allocation plan throughout 2015. With that, I will turn the call over to the operator. Shannon?

[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.