NRG Energy, Inc. (NRG) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the NRG Energy Incorporated Q4 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to disperse this conference call. Mr. Chad Plotkin, you may begin.

Thank you, Kevin, and good morning everyone, and welcome to NRG's full year and fourth 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. Because this call will be limited to one hour, we ask that you limit yourself to only one question with one follow-up. 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 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, NRG’s President and Chief Executive Officer.

Good morning, everyone, and thank you, Chad. Even before I go through the familiar ritual of introducing my colleagues, I want to draw your attention to the latter part of today’s earnings release, where we announced that Chad Plotkin is stepping down from being Head of Investor Relations from both NRG and NRG Yield in order to take up a position as Head of Finance for NRG Home Solar. Chad came to the IR position three years ago as a rising star in our strategy and M&A group at a time when we decided that our company and our investors were best served by an IR Head who had been deeply and directly involved in the business of the company. And in two years, Chad has worked tirelessly to explain the complexities of NRG to our current and hopefully future investors, but Chad has been more than that during his tenure, he has been a trusted advisor to Kirk, Mauricio, myself, and the rest of the Executive Leadership team. As he moves through a clerically important finance position in Home Solar, our loss becomes Kelcy Pegler and Steve McBee’s gain. For our part, we wish him well in this new position and for your part as investors in the NRG group of companies; I think you should expect doing counter him again. Chad’s successor Matt Orendorff who liked Chad before him rises out of our strategy and M&A group is similarly a rising star deeply immersed in and familiar with the key initiatives of the company. But I will wait to see other good things about him until he proves himself in his new position. As always, joining me today are Kirk Andrews, our Chief Financial Officer; and Mauricio Gutierrez, our Chief Operating Officer and President of NRG Business. Additionally in making his first appearance on earnings call, I am pleased to have Steve McBee, President of NRG Home with us as well. Additionally and available for questions are Chris Moser, Head of Commercial Operations; Elizabeth Killinger, Head of Home Retail; and Kelcy Pegler, Jr., Head of NRG Home Solar. Before I begin I first want to thank everyone for participating in our investor event just six weeks ago. And since our strategy hasn’t changed appreciably in the intervening weeks and since there have been no strategy altering intervening event since then, I will keep my prepared remarks as brief as possible. So let’s get to it. Turning to slide 3, as we’ve discussed over the past few quarters, our core power markets experienced quite a roller coaster ride in 2014 with a particularly severe winter and an extraordinarily mild summer. I am pleased to report today that due to faultless execution across our core wholesale and retail platforms, we successfully delivered on our fiscal year 2014 financial guidance as revised our last year’s third quarter call. Further and as we indicated at our Investor Day, even in the phase of continued softening of our core commodity prices, we again are reaffirming our 2015 financial guidance with its prospect of the year-over-year growth from 2014. There has been concern about softening commodity prices in the early days of this year, but our excellent operational execution over the past few months combined with the benefits of our diversification away from 100% reliance on conventional wholesale generation makes this possible for NRG, makes reaffirming guidance possible in a way that is not always possible for our pure play IPP peer group. Building on that theme and turning to slide 4, our strategic actions in 2014 continue to lay the foundation for NRG as we build the future of our company in response to transition that we now believe to be clearly underway in our industry, by the way I am still on slide 3. Following the strategic blueprint provided to us by the winners in the telecom revolution, we have been a big and successful consolidator in the conventional power sector while pushing forward into key phases of the new more, distributed more sustainable and carbon-constrained world of personal power. We deliver on all of our integration targets for our two most significant 2014 acquisitions and did so more quickly than we originally thought possible. We enhanced NRG Yield and we began to process through NRG carbon 360 of providing a long-term future for our younger coal plants even in a de-carbonizing world. Now, you should turn to slide 4. Furthermore, we have been on a strategic path at least since 2010 to diversify our financial performance away from pure commodity risk. Back in 2007 or 2008 if you would ask me to explain in the most simple terms what NRG did to make money, I would have told you that we sell coal and uranium at natural gas prices. And while I still believe that for the most part in most markets, it’s preferable to sell coal and uranium at natural gas prices than it is say to sell natural gas at natural gas prices, NRG has in the ensuing five years become so much more in just a natural gas commodity play. As illustrated on slide 4, we have grown our economic gross margin by 70% over those five years all in a relentlessly subdued natural gas price environment while reducing the contribution of natural gas exposed margin by roughly 30%. This is a trend both in terms of growing gross margin and reducing natural gas price correlation that we are working hard to perpetuate. So in a market like we have seen over the past few months, where natural gas has again declined to under $3 per million BTU, we remind you that NRG is not just a natural gas story but it’s increasingly an investment in the clean energy future which means among other attributes that we are built to weather volatility in gas prices while preserving the upside in the power markets when they materialize. Moving to slide 5, because I’ve referenced our Investor Day and recognize that not all of you were able to join us in Houston, let me close by reiterating what we took 7 hours to tell you down there into 70 seconds. Here is my pitch and hopefully this becomes your NRG investment thesis. Our industry is in the early, but unmistakable stage of a technology driven disruption of historic proportion. This disruption ultimately is going to end in a radically transformed energy industry where the winners are going to be that those who offer their customers whether they be commercial, industrial or individual customers, a seamless energy solution that is safer cleaner and more reliable, more convenient, and increasingly wireless. And I might add just generally more personally and what is currently being offered to energy consumers through our current commanding control centralized one size fits all, wire and wooden pole system invented by Thomas Edison and seemingly last improved upon in his era. NRG through our multiple initiatives in the Smart Home with Home Solar distributed generation reliability solutions micro grids, electric vehicle charging in portable solar and energy storage products is positioning itself to win this long term future in a way that no other power company is attempting. In the short-to-medium term, we continue to execute across our consolidated and unrivaled asset platform in a manner that will allow us to win the next few years as the power plants of the Post World War II era create a retirement tsunami washing across our core markets that will benefit us as one of the last man standing. Thanks to our substantial investment in environmental remediation over the past 10 years. With that I will turn it over to Mauricio.

Thank you, David, and good morning everyone. The extreme market conditions that prevailed in 2014 highlighted some of the strength of our integrated platform. Our diverse fleet in the Northeast benefited from the severe cold weather earlier in the year and our integrated wholesale retail platform combined with our commercial and operational performance help mitigate the impact of a very mild summer and allowed us to deliver our 2014 financial results. Perhaps more relevant to you today is the fact that we aggressively hedged the portfolio for 2015 during the fourth quarter allowing us to reaffirm guidance. While it is still early in the year, I am pleased to say that we are off to a good start with a solid performance during the most recent quarter. Slide 7 returns to goals that I provided to you last year and as you can see with the levered across the board on our safety operational and commercial metrics. We successfully integrated Edison Mission’s 8 gigawatt portfolio delivered on operational synergies and announced a comprehensive asset optimization plan for the mid-west fleet at attractive economics. On our distributor generation efforts, we successfully integrated the Omaha District Energy System and were awarded a contract for 178 megawatt for preferred resources in California. We now have a full suite of distributive solutions for businesses. These combined with our commercial wholesale platform and access to low cost capital through Energy Yield, positions the growth for a significant growth in 2015. You will hear more about these efforts in the months to come. The critical part of our strategy is the repositioning of our portfolio to out survive the current way of retirements and benefits from changes in capacity markets and repowering opportunities. Slide 8 provides a summary of our comprehensive asset optimization and development plan. We current have close to 12,000 megawatts of generation targeted for fuel conversions, environmental retrofits or repowering opportunities. These initiatives are consistent with our goals of streamlining cost, maintaining or expanding field diversity, reducing the environmental foot print of our portfolio and extending the economic life of asset. The projects are progressing as planned, but some of them are driven primarily by capacity revenues. The outcome of the upcoming capacity performance auction in PJM could change our plans going forward. Turning to our operational metrics on slide 9 and beginning with our most important metrics, safety. I want to take a moment to thank all of my colleagues for another great year of safety performance finishing in the top quartile. We have 128 out of 161 facilities without a reportable injury. This is an outstanding result considering the significant winter conditions in the east and the Edison Mission integration efforts beginning in April. It was the second best performance in the last eight years at a rate of 0.73. While our fleet continues to grow in size and diversity the one constant continues to be our strong safety performance. I want to recognize our distributor group for a perfect safety record with fewer recordable injuries. Well done. Our overall generation was up 4% year-over-year on a normalized basis despite the lack of summer demand. The increase was driven primarily by higher generation in the west, the record production year at STP Unit 2 and the higher runs experienced during the polar vortex in the east. This highlights the importance of our well diversified portfolio. We continue to balance operational performance with marginal risk and overall spend throughout this low commodity price environment. Our coal and nuclear availability was down year-over-year to 82%. However, the fleet showed strong performance during peak pricing periods. This is evident in the improved year-over-year coal and nuclear reliability performance. In the third and final year of the current fornrg program we leveraged best practices from the operational synergies efforts in the general facilities and expanded that for the rest of the organization. We achieved an outstanding result of $198 million for the year, compared to a goal of $100 million. This success was driven primarily by improvement delivered by plant operations and Texas retail. Thank you to you all, of our colleagues who provide the commitment and execution behind our continuous improvement culture. We are confident we can continue to deliver the same value to our shareholders in the next iteration of the fornrg Program. Moving to our market update on slide 10, I want to start with natural gas, given the recent decline in prices. As David mentioned, we have been very successful in diversifying our margins away from natural gas, but it continues to be an important driver, so let me share a few thoughts. In the start of the Shale gas revolution six years ago the industry has focused almost exclusively on the amount of supply flooding the market. While impressive by any standards there has been very few catalysts on the demand side until now. Over the next few years gas demand will likely see a swift change coming primarily from four sources, the power industry, LNG, Exports to Mexico, and industrial demand. This incremental demand would commence earlier this year with additional coal to gas switching and the implementation of more stringent environmental regulations that will drive coal and oil retirement. Our current head position allows us to weather this low commodity cycle and be ready for a more favorable market environment. Turning to the east markets, the IFOs are redefining the capacity products and requiring generators to perform during shortage conditions. The changes will allow for higher compensation, but will also hold them for higher penalties for non-performance. As a generator with a large diverse portfolio, strong operational track record, and fuel onsite we support and welcome these improvements. The result from the recent New England capacity auction for 1819 were quite encouraging with prices increased significantly year-over-year. PJM still awaiting resolution from FERC on each proposal, which is expected to happen sometime in early April. We are excited about our prospects for our portfolio with 17 gigawatts of generation in the region, not only for the many option, but also for the transition auctions for the year that have already cleared. The recent coal front in the northeast once again proved the value of our diversified portfolio where unlike gas generation our coal and oil assets benefited from spikes in gas and power prices. Our strategies extent the life of our assets and maintain a cheap option on energies that can benefit from short-term dislocations in the market like the once we experienced in the past two winters. Now moving onto Texas on slide 11, demand grew by 2.4% on a weather normalized basis in 2014, driven primarily by the residential and commercial sectors. While low oil prices will undoubtedly have an impact on the Texas economy. This will be somewhat muted by the diversification that Texas has been able to achieve in recent years. A lot has been said about the robust demand in Texas and the need to build new generation, but given the implementation of new environmental programs like maps, CSAPR, and EPAs proposed regional hedgerow [ph] for Texas it is important to talk about the potential impact to the supply stock. Make no mistake, we expect coal to be impacted by these regulations. But as you can see in the table, our portfolio is well positioned to comply with these rules and not only out survive the competition but benefit from the retirement of our units. That leaves me to the forward market where prices seem to reflect very little risk premium for the next few summers as you can see on the upper right hand chart. For the past three years, we have experienced no scarcity pricing despite having single digit operational reserve margins every year. From our perspective, Texas fundamental remain robust and you will not take much change in the supply demand balance to lead to scarcity pricing in the near term. Turning to our hedge disclosures on slide 12, we increased our hedges prior to the winter which insulated us from the recent drop in natural gas prices. 2015 is well hedged leaving us in good shape to weather the current downturn. We expect to see some coal to gas switching but the financial impact will be muted for us. Just like we did in 2012, we are diligently working with fuel and transportation suppliers to ensure that our coal plants remain competitive during this extreme low natural gas price environment. Finally, our goals for 2015 are pretty clear; execute on our asset optimization and development plan, and grow our distributor generation business by leveraging our wholesale portfolio. With that, I will turn it over to Steve for the NRG Home review.

Thank you, Mauricio, and good morning everyone. As we discussed recently at our Investor Conference in Houston and as David mentioned this morning in his remarks, it’s our view at NRG that traditional centralized energy service models are significantly at risk. We believe that the future eventually will belong to demand driven decentralized models of service that empower individual consumers through sustainable energy solutions that are affordable, personalized, convenient and reliable. NRG Home will continue to serve our customers through a robust traditional retail electric service franchise while at the same time position the business to win in a world where we believe at growing share of the market is going to want and expect to generate and manage a larger share of their own energy. As you can see from the data on page 14, our strong performance in 2014 positions us well to achieve both our near and longer term strategic and financial objective. Our Home Retail platform delivered at the upper end of our original financial guidance with adjusted EBITDA of $604 million enabled in part by customer and product growth as well as by our ongoing commitment to continuous operational improvement to drive material reduction both in per customer cost and in bad debt. Our recurring customer account grew by 28% driven primarily by the Dominion acquisition which included customer contracts in the Northeast as well as the Cirro business in Texas. We are pleased with the success of the Dominion acquisition which beat estimates of earnings and customer count delivered in 2014. We expect to continue to report the Dominion customer contracts separately to 2015 as many of the Northeast customers will roll off during the year’s precious term contracts expire. Our customer growth also positions us retail business to accelerate and deepen cross selling of new products and services that will strengthen our business going forward. In that regard, we are exciting that our Home Retail platform which currently provides retail electricity and Home Solar will be in the market with new offerings this year that include portable power solutions, new battery products, and a variety of additional home services. In 2014, NRG Home also established NRG Home Solar, a leading residential platform formed to the combination of NRG’s legacy residential solar solutions team and the acquisition of RDS and of Pure Energies. We ended the year with over 13,000 Home Solar customers. Our success in ramping the business was a result of rapid and successful integration of our new and legacy Home Solar businesses, our strong kitchen table and telephone sales capabilities, our ability to leverage our key strategic partnerships and our ability to integrate additional NRG home services into our conventional Home Solar offering. We also demonstrated early cross selling success between Home Solar and Home Retail with about 50% of eligible Home Solar customers supplementing their solar production with NRG’s retail electricity. The strong foundation established for a residential solar business in 2014 positions us to be a top tier player in this rapidly growing space in 2015 and beyond. If you flip to page 15, I’ll quickly outline our priorities for 2015 before turning it over to Kirk. In 2015, we are confident that we will deliver on our Home Retail financial expectations and that we will establish our Home Solar business as a tier 1 player in the rapidly growing residential solar market. We will also operationalize the NRG Home platform towards our longer term goal of strengthening per customer EBITDA by further accelerating cross sell systems that increase tenure and by establishing common operating systems wherever we can to continue to incrementally reduce cost structure, and we will seek and pursue opportunities to scale our organic customer advantage and to enrich our existing product portfolio as we position NRG Home to become the dominant brand for clean and sustainable personal power solutions and services. Thank you very much for your time this morning. And with that, I will turn it over to Kirk.

Thank you, Steve. Getting with the financial summary on slide 17, NRG is reporting fourth quarter 2014 adjusted EBITDA of $625 million, with $382 million from Business & Renew, or $165 million from Home Retail, a $34 million negative contribution from Home Solar as we continue to position that business for growth, and $114 million from NRG Yield. For the full year, adjusted EBITDA totaled $3.128 billion with $2.134 billion from Business & Renew combined, $604 million from Home Retail, a full year of negative contribution from Home Solar of $65 million, and $455 million from NRG Yield. Compared to the fourth quarter of 2013, Business & Renew performance was down $26 million primarily from milder weather but partially offset by the acquisition of the EME assets, full commercial operation of CVSR and Ivanpah in 2014, and lower operating cost across the fleet. Retail EBITDA was lower by $15 million also driven by milder weather which was partially offset from the incremental margin from increased customers following the Dominion acquisition. Yield results improved by $21 million driven by the acquisition of the Alta Wind assets while we increased our investment in Home Solar by $32 million in the fourth quarter as compared to 2013. Free cash flow before growth totaled $951 million for the full year with $139 million inflow in the fourth quarter. Turning your attention to our 2015 guidance and as discussed at our Investor Day, given our hedge levels, we are again reaffirming our adjusted EBITDA guidance range of $3.2 billion to $3.4 billion which now excludes the expected negative contribution of $100 million from investment in our growing Home Solar business. Free cash flow before growth guidance is also reaffirmed as we continue to expect between $1.1 billion and $1.3 billion in 2015. Turning to slide 18, I’d like to review a shareholder proposal by NRG Yield which is contained in the preliminary proxy statement filed by Yield last evening. This proposal which has been recommended by the NRG Yield independent directors and has the full support of NRG involves an important recapitalization of NRG Yield intended to achieve two important objectives. First, to preserve and maintain the strong strategic support of NRG Yield by NRG; and second, to enhance NRG Yield’s flexibility to efficiently access capital to fund growth without the need for capital allocation by NRG towards additional investment in NRG Yield. This proposal which requires the vote of a majority of the Class A shares of NRG Yield involves the creation of two classes of low vote NRG Yield stock which will be issued through a recapitalization of Yield’s equity. NRG Yield would intend to use this new low vote as its primary means of raising equity capital to fund growth going forward. Basically the proposed recapitalization will take the form of 2:1 stock split of both classes of NRG Yield’s stock. The Class A stock which is held by the public as well as the Class B stock which is held by NRG, thereby doubling the total number of NRG Yield shares outstanding. The new low vote shares will be issued in two distinct classes due to the two classes stock current held by NRG and the public shareholders. NRG totaled approximately 42.7 million Class B shares will receive an equal number of Class D shares each with 1/100th voting right. As NRG’s economic interest is held exclusively through its direct interest in NRG Yield LLC, the new low vote Class E shares to be issued in NRG will have no economic rights. Each Class A shares held by the public will receive one share of Class C stock with the same economic rights as the Class A stock and a 1/100th voting right. Immediately following the stock split, each shareholder will through their combined ownership of the classes of stock at the exact same economic and voting rights as they do today. Going forward NRG yield will be able to issue third party equity using C shares to fund acquisitions without the need for investment by NRG, as these types of acquisitions are best suited for NRG yield, while the focus of NRG’s capital allocation to fund growth is focused on other core areas. The enhanced flexibility this provides is consistent with the rationale behind the original creation of NRG yield and preserves the important strategic partnership. NRGs economic ownership will be diluted through future issuances of Class C shares by NRG Yield to help fund growth. However, the proposed plan will allow for approximately $21 billion of equity to be issued based on today’s share price before NRG’s voting interest would fall below 50%, providing substantial headroom for additional equity capital. In addition to the proposed recapitalization plan, NRG has agreed to add additional assets to the Right of First Offer Agreement. This expanded ROFO pipeline provides additional visibility in the NRG Yield to long term dividend growth and total return in order to preserve its low cost of capital advantage. The assets added to the expanded ROFO pipeline include NRG’s Carlsbad and Mandalay repowering projects, recently awarded in the ongoing RFOs for new contract to generation in California. Following CPUC approval, NRG will develop and construct these assets, which at COD may be offered to NRG yield, providing additional asset diversity in the years beyond the expected completion of the original ROFO pipeline. These types of projects enabled by and a testament to the strength of the NRG and NRG Yield partnership underscore the need for the enhanced flexibility for proposed recapitalization we will provide. In terms of next steps, NRG Yield expects to file and distribute a definite proxy statement on/or about March 26. NRG Yield has conditioned the proposal so it does require the approval of majority of the Class A shareholders at its Annual Meeting on May 5 of this year. NRG strongly supports the proposal as approved by the independent directors of NRG Yield and we ask for the support of the public shareholders of NRG Yield in this important step in building on the tremendous success of the NRG, NRG Yield relationship. Finally updating our capital allocation progress on slide 19, NRG ended 2014 with an excess cash balance of $1.26 billion. This excess cash balance, which is net of minimum cash at NRG GenOn and NRG Yield when combined with NRG’s increased 2015 free cash flow before growth investment guidance leads to $2.46 billion in consolidated cash available for allocation during 2015. Of this amount, we have committed nearly $1.7 billion of capital, including $250 million or approximately 20% of our 2015 free cash flow to be returned to shareholders through the combination of our recently completed stock buyback program announced last December, and a 4% increase in our annual dividend. Our growth investments guidance of $900 million for 2015 is primarily driven by operational improvement initiatives across the fleet. Approximately $150 million of investment in Home Solar installations, as well as continued investments in Solar, Carbon 360 and eVgo. $800 million in remaining cash available for allocation, which is prior to any proceeds from NRG Yield drop downs in 2015 consisted $600 million at the GenOn level versus intended to fund our ongoing fuel conversation initiatives with the remaining $200 million at the NRG level. Importantly, this balance does not reflect the impact of NRG Yield dropdowns in 2015. As we intend to offer NRG Yield, the next portfolio of ROFO assets, which we expect to consist of the remaining wind assets from the EME acquisition during the first half of 2015. The capital replenishment from this transaction will further increase NRG’s excess capital. Specifically, when combined with the residential solar lease drop down, currently under evaluation at NRG Yield, the proceeds from the wind assets are expected to generate between $250 million and $300 million in cash to NRG. Once this drop down is finalized in the first half of the year, we will revisit further capital allocation decisions based on conditions and opportunities at that time, which maybe further augmented by a second ROFO portfolio likely the remaining in stake in CBSR in late 2015. With that I will turn it back to David for his closing remarks.

Thank you Kirk. Let me close by turning to slide 21. Every year on this call I set forth my overarching goals across the enterprise so that you can follow our progress during the year. Given the reorientation of NRG into the NRG Group of companies, this year I’m providing our key goals, or summarizing our key goals in the context of each of our businesses. Now in the sphere of my opening remarks because we have taken up a lot of your time already, I will spear you from going through each of these sets of goals, but I will leave with the following. We remain steadfast as in orientation delivering on our commitments and while there are many goals on this page, we hope in excess effect that by the end of the year many of the newer initiatives that we have been nurturing and growing over the past few years will reach a size in the level of momentum where they will start to have a meaningful positive value impact on the overall NRG group alongside the intrinsic value of our almost 50,000 megawatts of conventional generation and our nearly 3 million retail customers. And with that, Kevin, we are happy to take questions.

[Operator Instructions] Our first question comes from Angie Storozynski with Macquarie Capital.

Yeah thank you. I have two questions here. First of all on the new share structure at NRG Yield, I mean it seems relatively complex and I’m a little bit struggling here why wouldn’t NRG be willing to simply accept a share of future equity issuances from NRG Yield, I mean in lieu maybe for cash and that way you could maintain not only your voting rights, but also the economic interest and best cash flow that will be flowing from NRG Yield. So, why wouldn’t you want to actually keep the share of cash going forward?

Angie do you want to give us your second question too, so we can get time to think about.

Yeah the second one is about residential solar, so it seems like NRG Yield would be just a tax equity investor in those projects and also it seems like you might have actually augmented the size of the residential portfolio since the Analyst Day. Thank you.

Well, so I think Kirk is going to answer the first question and half the second in terms of - I think you had a question about the growth trajectory of Home Solar as well?

Yes.

Yes, so Kelcy will address that as well, but Kirk can you go ahead.

Sure. Angie the first part of your question as I think you know largely due to the successful equity issuance to fund the Alta Wind acquisition that being a third party acquisition, our current ownership stake in NRG Yield was about 55% and while we recognized the possibility at the offset that when we dropped down assets in the NRG Yield we may take some portion of that consideration in kind, it is a different proposition entirely to consider the possibility of incremental cash investment in NRG Yield to help support that ownership relationship. What I mean by that is if you extrapolate it forward on a potential third party acquisition the size of the Alta Wind for example, in order for NRG to remain - to maintain its 50% plus ownership that would require NRG to actually allocate capital and invest in Yield equity, effectively investing in those types of projects over the long run and while certainly those projects are financially compelling. It was a very motivation behind the creation of NRG Yield to separate those kind of investments so that they reside in a vehicle that’s properly positioned for that kind of risk in a return profile. So - because those assets are high EBITDA multiple that would be tandem out to NRG investing capital or allocating capital towards a high EBITDA multiple. This allows us to allocate that capital appropriately towards the types of investments conventional in the life and towards some of the growth initiatives at NRG that are more appropriately our core focus. I think on the second part of your question although I think we’ve outlined the structure within the relationship between NRG and NRG Yield the important distinction here is we plan of tax equity financings, primarily the tax attributes from residential solar leases as they drop down to NRG Yield. NRG Yield’s participation in that is actually investing in the residual equity after tax equity. So, NRG Yield is not providing tax equity and using tax equity allows us to manage effectively the duration of that tax holiday or that tax run way if you will. We have the flexibility from time to time to drop down assets without tax attributes giving NRG Yield the ability to augment its tax yielding ability, but I think given the nature of the broader portfolio we use tax equity to out manage that.

Kelcy, do you like to say about sales.

Sure. So in 2014, we’ve really focused on building out and optimizing our platform for the residential solar space as we talked about in Investors Day, and we finished 2014 with over 13,000 cumulative customers of which 9,000 were acquired in 2014. As we look forward to ’15, we will continue this momentum and we continue to target 35,000 to 40,000 cumulative customers for 2015.

Okay and then just one follow-up to that again David, the recapitalization of NRG Yield, should we imply from it that there is basically a big third party acquisition coming that you don’t want to chip in with cash and hence the change in the share structure.

Angie, Angie, Angie. Do you know, we never comment on anything that…

I have to try.

May or may not be happening, but having said that I won’t comment on it – I don’t think that that’s the right premise in terms of any specific thing. This recapitalization is just forward-looking looking at how suboptimal it is to use high cost NRG equity capital in NRG Yield, but we are trying to maintain alignment on the control side. I would say though while you’re not going to wake up tomorrow and read about some massive NRG Yield acquisition, it is a target rich environment for NRG Yield, small, medium, large, there is a lot of things knocking about. So we are active in that market, but this was not driven by any specific transaction that may or may not happen.

Thank you.

Our next question comes from Greg Gordon with Evercore ISI.

Thanks. Good morning.

Morning.

Looking at the full year results and then trying to compare them back to the third quarter guidance ranges for the segments and then bridging for the new segments, just want to make sure I am reading correctly that Business/Renew came in more or less inside the range but it looks like you’re may be still a little bit more upfront on Home Solar and you are initially projected and came in a little light in Retail. Is that the correct read or the wrong read because while the outlook for ’15 looks great, you came in on a low side of the guidance ranges for adjusted EBITDA and free cash flow before growth in ’14.

Sure. Greg, its Kirk. And I am just referring you back to some of my remarks at the Investor Day presentation where we went through recasting the components of those segments. We’ve recast the segments on a historic basis in 2014 to reflect Home Retail as oppose to what we used to call for Retail. That segment that was Retail that was comprised of our guidance contain about $50 million of EBITDA from the C&I business. That $50 million, that portion of our performance, is now reflected in the business segments. So that $604 million you see from Retail in 2014 is simply the mass retail component of that. And yes, the $65 million in negative EBITDA contribution from Home Solar is slightly ahead of what we expected, but that was due to some advanced investments in cost initiatives and marketing like as we position ourselves continually to realize that significant growth objective in 2015.

Great. And on that front, it does seem to appear that you’re slightly ahead of plan in terms of the number of Home Solar customers you signed up into the end of the year, is that right or not?

I think we are right within the ballpark of the growth trajectory through the full year of 2015.

Great. And the cross selling opportunities you mentioned earlier, are they significantly accretive to the base case plan you laid out. Are you seeing more cross selling opportunities than you would have expected in the base case plan at this juncture or is it more or less along the trend of that plan?

Greg, I would think that the way you should think about cross selling and I got to tell you the number of ways within our company that see cross selling opportunity is the number of permutations and combinations. I mean the obvious one may be between system power retail and solar power, but the correlation between solar power, Home Solar and electric vehicle charging is a 58% correlation. But in terms of impacting our results, what I would tell you right now is, we feel in the cross selling area that we have to prove with you and get it to a scale where it’s actually having impact before we start asking you to value it. And I will say right now, we will consider ourselves more in the demonstration phase. Kelcy is working with Elizabeth, they’re going to be working with the electric vehicle charging folks and so we are just proving things out and we are just telling you that stay tuned. Kirk, do you?

Yeah. I think, Greg, one of your questions about our performance in 2014 if I recall I think I may have missed addressing the question you had on free cash flow, is that correct?

Yeah.

Yes. Our free cash flow before growth in 2014 of $951, obviously that’s within the range of guidance we provided obviously towards the lower end of that range. That’s primarily due to the fact that despite when we guided in the third quarter in anticipation of potential colder weather learning from the lessons and the success we had of the polar vortex. We chose to make some additional investments in a be prepared strategy specifically in our fuel inventory going into 2015 actually around oil in anticipation of potential colder weather, and that’s primarily the reason why the free cash flow before growth for 2014 although within our range was trending toward the lower end.

Got it. Thank you guys.

You bet.

Thanks, Greg.

Our next question comes from Paul Zimbardo with UBS.

Hi, thank you, good morning.

Good morning, Paul.

A follow-up question on the proposed change in share classes? Just a high level question, where there any kind of lessons learned from some of the subsequent yield curves that you tried to add to the structure or was there some reason why you didn’t opt to try and add some permutation of incentive distribution right.

Well, I think in terms of the other structures that are out there, I think we feel comfortable with the incremental impact on the governance perspective that’s quite in line with the governance provisions contained in some of the yield curves that followed. But as I’ve said a number of times, our primary goal is to ensure that NRG Yield has a maximum competitive advantage and low cost of capital. And from our perspective, the best means to do is for NRG Yield to realize the maximum incremental potential CAFD without the drag if you will of an IDR. The other element of that is that the NRG level because the IDR would basically be cash flow or EBITDA back to NRG which obviously goes back to an entity with a lower EBITDA multiple, we wanted to maximize that portion of the cash flows that was associated with those contracted plans to ensure that it traded at the higher valuation. And we think the absence of an IDR addresses that issue as well as the fact it ensures the NRG Yield can be more competitive and we will have a competitive advantage from a realization of accretion relative to some of the other competitors out there whose IDRs can deter or detract from the accretion when we compete for assets and third party market.

Hey, Paul, can I just add something more general to what Kirk saying because this question of IDR, while Kirk just tried to explain the IDR is about 16 times and I am just mentally and capable of understanding. But I would tell you in general terms when it comes to yield curves, we monitor closely all the activity in the general yield coal market. And it seems to me and you probably could tell me, you can certainly tell me better if this is true or not that the market is now to the point where as oppose to buying every yield curve that comes out, they are starting to differentiate between quality yield curves and lesser quality. And we are committed at NRG that NRG Yield is going to be a top quality yield curve. So on every basic metric that the yield community is looking at, we want ours to be in the top tier and so we are constantly following the situation, that’s goal and we’re going to stick to it.

Okay great, thanks. I appreciate the color. And then a follow-up question on the Home Retail and Home Solar, for the target of the 35,000 to 40,000 customers, is that based primarily on conversion and cross selling of existing customers or is that expansion to new customers.

Kelcy?

No, it’s not based on cross selling. I think the cross selling initiatives that Elizabeth and I are working with Steve on are really in the developmental phase where we are getting proof of concept. The customer count of the 35,000 to 40,000 in ’15 is not based on the cross selling initiatives.

Okay, great. Thank you very much for the time.

Thank you.

Our next question comes from Stephen Byrd with Morgan Stanley.

Good morning.

Steven.

I wanted to start on Texas and just get your thinking on environmental regulations, looks like your coal fleet is in very good shape. Just curious as you think about all of the rules that are coming down the road here CSAPR and regional haze and clean power. Which in your mind are likely to be most impactful to your competition and what’s the general timeframe we should be thinking about in terms of the impact to your competition in the state?

Steven, thanks for the question and Mauricio is going to do the heavy lifting and answer the question. But I do want to say as a general rule may be for some of the investors on the phone that don’t follow this space as closely as you, because all of these environmental regulations either proposed in the court stay federal level, it’s very complicated. But I would say to you a general rule, even with the coal plants that we own because of our investment in the back and controls as you alluded to in Texas. For us as well as the rules that are imposed in a fair and reasonable way, tightening environmental regulations actually enhances relative to our competition. So with that general statement as to your specific question about I think you asked what is the most impactful of the environmental rules that may or may not come back. And is your question specifically about Texas or across the fleet?

Texas.

Okay.

Hey, Stephen, good morning.

Morning.

I think from our perspective and your question was the most impactful to our competitors.

Really more to your competitors and thinking about…

I think it was primarily our competitors given that as you already alluded and we tried to highlight that on our earnings slide. Our portfolio is pretty well positioned to comply with both maps, CSAPR and I think the latest one is regional haze. I think it’s fair to say that regional haze will have a significant impact on our competitors and not necessarily at NRG. With respect to Parish, we don’t think that is going to be applicable because even if we install scrubbers don’t have a significant impact on visibility. So take Parish shop and Langston will require minimal upgrades on the scrubbers that we have today. So I mean all of them will have some impact, right. The question is the timeline and the implementation of all these rules. But I think during Investor Day, we actually quantify the potential impact of each of these regulations on coal markets and what I would say is, most of that impact will happen on coal plants that are not owned by NRG.

Okay, great. Thank you very much.

Thanks, Stephen.

Our next question comes from Steve Fleishman with Wolfe Research.

Yeah, hi, good morning.

Hi, Steve.

Hi, couple of quick ones. First, at the Analyst Day I think you said you are tracking to the upper half of the 2015 guidance range. I don’t think I heard you say that again, is that still true?

To correct the record, we actually said to the upper most quartile. So, okay, Kirk, Steve Fleishman has called you out. What you’re going to say now?

Yes, Steve. You can infer which I’ll confirm right now by reaffirming our guidance that we also did on the Investor Day that, yes, our expectations are still consistent with that upper quartile.

Okay. Thank you.

Steve, what I deal with here, how hard it is to get him to say something.

And then just on the new structure for NRG Yield, I guess it’s for Kirk, will you still be consolidating it from an accounting standpoint and also does it change anyway that it’s treated from credit rating standpoint for you guys?

First of all, we don’t expect that to have much of an impact on the credit rating although early days and so we get some feedbacks from the rating agency, but I would not expect that to have an impact other than the fact that obviously it doesn’t entail or give some greater transparency of the lack of at least necessity for capital allocation towards maintaining that ownership by buying more NRG Yield shares if you will. So I don’t expect that to be the case. And forgive me, Steve, would you remain me your other question?

Accounting consolidation.

Oh sure, yes. Because this structure is really a structure that impacts economics and not vote and it is vote that is the determinant of consolidation from a GAAP perspective, we will continue to consolidate NRG Yield going forward.

Okay. And then lastly, I think Mauricio mentioned on the repowering and the like something about GCP capacity auction outcome maybe being reported to data point for some of them at least and continuing them, could you elaborate a little bit more on that?

Yes, Steven. Good morning. As we articulated on the Investor Day, we are looking at repositioning the portfolio particularly around field conversions and environmental CapEx. And as you can appreciate, some of those investments are focused primarily on capacity revenues. So the outcome of the capacity performance auction is pretty important. Now, we are encouraged by the data point that the most recent New England capacity auction provided to us. So while we have all the economic analysis and we have put out – we have outlined the asset optimization plan, we want to have some certainty in terms of what is the final rule and I guess the rules of the game before we make any incremental capital commitment.

Okay. Thank you.

Thanks, Steve. And Kevin, we want to end really at 10 o'clock as we have a 10:30 NRG Yield call, and we got some things to do in the meantime. So we will take two more questions please.

Our next question comes from Jonathan Arnold with Deutsche Bank.

Hi guys. Quick one on, you are not going to need to purchase more NRG Yield shares, but could you and under what circumstances might you consider selling down some of your interest post the conversion or should we just anticipate that the ownership percentage of decline is yield growth?

Addressing that reverse order, yes, that is what the expectation is, is that our ownership stake will reduce overtime as NRG Yield issues equity, not as NRG sells down equity. The latter of those two is not our intention, however just to be clear the structure affords us the ability to do so. We have to convert the units that we own into shares but that is not our intention at this time moving forward.

Thanks. Is the split is simply just for liquidity and future issuance optimization, is that right?

Basically, yes, that’s right.

Okay. Thank you.

Thanks, Jonathan. So last question.

Our next question comes from Gregg Orrill with Barclays.

Hi, thanks for taking my question. Just following up on the Carlsbad comments, you said you expect that to come online in fall of ’17. Just I guess may be more specifically how do you expect to run the facility and how much would your – the powering cost and how should we think about the benefits of that?

Sure, Gregg. It’s Kirk. We haven’t yet provided the capital cost of that. The best thing that I can give you is that, the Carlsbad project is a little over 600 megawatts in total size for that. And the one thing I can say is that and I provided guidance similar to this when folks have asked us about some of the conventional plants that were in the ROFO portfolio and how to think about things like CAFD. And certainly we expect the project to finance that using a construction facility in permanent amortizing loan in similar fashion we’ve done in the past. My expectation is that the cash available for distribution or the equity cash flows coming off of that project will be similar on average cash flow per megawatt basis. And to give you a sense if you look back and I’ve made these remarks before in addressing this question with respect to the assets that are in NRG Yield today, that range on our equity cash flow or CAFD per megawatt basis is in the $35 to $45 kw range.

Thank you.

So, Kevin, I think we are reaching the top of the hour. So I just want to thank everyone for participating in the call and for those who are going to participate in the NRG Yield call at 10:30, I am not sure there will be all that much more new information there, but at least you will get to see us wearing our NRG Yield hats if you choose to join. And thank you very much and we’ll look forward to talking to you next quarter.