NRG Energy Inc (NRG) — Q4 2015 Earnings Call Transcript

Thank you. Good morning, and welcome to NRG Energy’s full year and fourth quarter 2015 earnings call. This morning’s call is being broadcast live over the phone and via the webcast, which can be located on the Investor Relations section of our website at www.nrg.com under Presentations & Webcasts. As this is a call for NRG Energy, any statements made in 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. Actual results may differ materially. We urge everyone to review the Safe Harbor in today’s presentation as well as the risk factors in our SEC filings. We undertake no obligation to update these statements as a result of future events, except as required by law. In addition, we will refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and the reconciliation to the most directly comparable GAAP measures, please refer to today’s press release and presentation. With that, I’ll now turn the call over to Mauricio Gutierrez, NRG’s President and Chief Executive Officer.

Thank you, Kevin, and good morning, everyone. Joining me today to cover the financial part of the presentation is Kirk Andrews, our Chief Financial Officer. Elizabeth Killinger, Head of Retail, and Chris Moser, Head of Commercial Operations, are also available for questions. I would like to formally welcome Kevin Cole as our new Head of Investor Relations. He is familiar to many of you, having spent several years in the energy sector on both the buy and sell sides. I also want to thank Chad Plotkin for his transitional support over the past few months and wish him well as he takes on other responsibilities within the Company. Before we begin, I want to acknowledge and thank David Crane for his years of service at NRG. We are grateful for his contributions over more than a decade, and I wish him well in his future endeavors. Today marks my first address as CEO of NRG. I will slightly deviate from the usual earnings agenda to not only report on our exceptional business results but also share my perspective on the Company's strategic direction and immediate priorities. Let’s begin with slide four, which outlines the key messages from today’s call. First, our financial performance has consistently demonstrated that we have the right portfolio and platform to succeed in this environment. Our business generates strong results during periods of low prices, and importantly, our generation fleet remains well-positioned until the market recovers. Second, we will benefit from a stronger balance sheet in this environment. We have initiated a comprehensive plan to reduce debt, streamline costs, and replenish capital, proactively taking advantage of short-term market opportunities to benefit from a market recovery in the medium to long term. Third, to allow maximum flexibility in our capital allocation decisions, we are recalibrating our dividend to align with the capital-intensive and cyclical nature of our industry. Finally, we are focused on concluding the GreenCo process in a manner that maximizes value for our shareholders. We are reintegrating business renewables back into the NRG platform without changing our financial guidance and reinforcing our strategic relationship with NRG Yield. We are in the process of selling EVgo and NRG Home Solar. All of these actions support our objective of continuing to build and operate the best integrated competitive power company. Now, let’s delve into the details. Starting with slide six, I am very pleased to report that we achieved the upper range of our adjusted EBITDA guidance for 2015, despite challenging power markets, a company-wide restructuring, and management changes. We remained focused on our business and delivered top quartile safety, with our retail business having a record year, demonstrating the value of our integrated platform. So, to my colleagues, great job. I want to highlight a few points. We are reaffirming our financial guidance for 2016, now including our business renewables. Our commercial team has executed exceptionally and mitigated the impact of lower prices this year. We are making good progress on strengthening our balance sheet, having retired close to $700 million in high-yield debt at a significant discount since November. We aim to reduce an additional $925 million in debt, which Kirk will discuss further. We are focused on replenishing capital with $500 million in targeted asset sales in 2016 and are accelerating our cost savings timeline. As previously mentioned, we are reducing the annual dividend to $0.12 per share from $0.15 per share, allowing maximum flexibility in our capital allocation during this market period. Now, let’s discuss the strategic portion of the presentation and my view of where NRG stands today and what distinguishes us from others in the industry. Stakeholders have expressed that NRG's story and capital structure are too complex and that the company spends too much on non-core businesses. I take this feedback seriously, and I am here to emphasize that simplifying our business is crucial for both external perception and internal focus. Efforts are already underway to address this concern. We will greatly simplify everything from our market approach to our information disclosure and platform operations in the coming quarters. Simplification begins with how we view the business. The graphic on the left side of slide seven represents our focus on two main areas: generation, including all renewables, and retail. However, it is not only these businesses individually that create value for NRG, but their interactions through our scalable operating platform. This unique integration enhances our overall value proposition. Our generation fleet, diversified in location and fuel price, minimizes exposure to downturns while being flexible enough to capitalize on specific regions’ advantages, as evidenced during the polar vortex. About two-thirds of our economic gross margin comes from non-correlated sources to gas, such as retail and capacity revenues. Our ability to generate cash flow is strong, even amidst challenging commodity cycles, bolstered by our capacity to replenish capital through NRG Yield. I believe our shared platform, which enables us to grow and realize cost synergies, is not fully appreciated but is crucial for success in this sector. In summary, I view our business as simple, focused, and differentiated within the competitive power sector. Now, on slide eight, let’s discuss my perspective on the competitive power industry and what I believe drives success. This industry is undergoing a significant shift. We are facing sustained low natural gas prices, sluggish load growth in most regions except Texas and the Gulf Coast, and new technologies entering the grid altering traditional dispatch. Market growth is focused on reliability, especially as retirements occur, while renewables are increasingly entering as regulations aim to limit emissions. Being a pure Independent Power Producer is no longer sufficient for success today or in the future. Companies that successfully navigate risks and changes in the competitive power industry need to be diversified, not just in their generation portfolio but across business lines. It is too easy for any single fuel type or business line to face turmoil in the current shifting market. As I mentioned, our operational platform has become a critical value differentiator and a source of incremental revenue. Operational excellence is non-negotiable in any industry, but in ours, creating a platform that provides economies of scale is even more essential. For NRG, this operational platform serves as a distinctive means to enhance margins as complementary businesses intersect, creating opportunities to operate across various markets. However, this is just the foundation. In our industry, companies must remain proactive by consistently assessing market dynamics and the viability of growth opportunities as markets evolve. This means investing in areas where we can gain a competitive edge rather than trying to serve everyone. Lastly, financial discipline must take priority in our sector. It is imprudent to manage the balance sheet and capital allocation with a narrow perspective; these decisions must reflect the entire portfolio, aligning them with current market conditions. How do we align our strategies with these principles? I am pleased with our operational execution across NRG. We have made significant progress in diversifying our revenue streams to protect against low gas and power prices while remaining well-positioned for growth through low-cost development opportunities and asset monetization via our partnership with NRG Yield. These attributes position NRG for sustained success in the industry. As mentioned earlier, we have identified cost control and financial discipline as key improvement opportunities. While we have initiated cost-saving measures, I believe we can achieve more, and I am actively engaging teams to uncover additional opportunities. Our other focus lies in how we approach capital allocation and manage our capital structure to ensure alignment with current market cycles. We plan to maintain transparency in our capital allocation, ensuring clarity in our capital deployment. Our immediate focus needs to be on reducing debt to stay ahead during this market cycle to seize future opportunities. We have already made significant progress and will continue until market conditions improve. As discussed, NRG operates a large, diversified integrated portfolio with environmentally controlled assets. While a solid foundation is crucial, there is no one-size-fits-all solution for regional dynamics. On slide nine, I present our go-to-market strategy reflecting specific trends and dynamics in each region. In the East, reliability and capacity revenues are paramount. System operators are supportive of capacity products that reward reliability and performance, particularly amid retirements and extreme weather events like the polar vortex. In the first capacity performance auction, we cleared nearly 90% of our fleet, increasing capacity revenues by 80% over three years. We are repositioning our portfolio to shift margin mix from energy to capacity via fuel conversions that significantly lower operating costs and environmental retrofits, maintaining favorable options on key assets for capitalizing on higher power prices. In the Gulf, our integrated platform continues to perform well in a lower price environment, with our Texas retail operation being nearly impossible to replicate due to its scale and connections with generation. Over the past seven years, we have proven the value of our retail franchise, with 2015 being our best year yet. This differentiates us, and we will continue to nurture and expand this aspect. Our generation fleet possesses the scale and environmental controls needed to endure the weak price environment while anticipating further supply adjustments. There is potential for the market to self-correct, bolstered by structural improvements and feed pricing. The West region centers on renewables and distributed resources, maintaining a capacity fleet that supports the grid due to their variable nature. There is demand for quick-start, well-placed assets, areas in which NRG has found success. Securing contracted assets and developing sites in favorable locations that can then be monetized through NRG Yield gives us a long-term dividend flow. So far, we have developed over 1,800 megawatts of quick-start generation and won nearly 800 megawatts of repowering at Carlsbad and Puente sites. We continue to expand our renewable and distributed portfolio, and with the reintegration of the renewables group into NRG, this will be a continued growth area. Moving to slide 10, we focus on streamlining the organization. I am satisfied with our efforts to cut around $350 million in costs, but we are not done, and we continue to seek more efficiencies. Today, I announced an accelerated timeline for our target of $150 million in cost savings under our core continuous improvement process. We expect these EBITDA-accretive savings to be realized by the end of 2017. Additionally, we are pruning our portfolio to reinvest capital back into the Company, having executed $138 million in asset sales and on track with our $500 million target. Lastly, we are nearing the end of our current generation fleet modernization program, reducing our CapEx commitment by around $650 million in 2017, providing more flexibility on capital allocation in the coming five years. On slide 11, I understand there are many questions about my views on renewables and their relation to the GreenCo process we announced last year. Let me clarify. As the CEO of the largest competitive generation owner in the country and one of the largest renewable companies, I see this market as a significant growth opportunity due to renewable targets, customer demands, our competencies, and financial incentives. It is essential for us to participate in this space. However, I am committed to ensuring our efforts align with our skills and capabilities in a way that creates shareholder value. I am mindful of the careful process around GreenCo to determine the best way to generate value in these business areas. To summarize our current position: going forward, we will not refer to GreenCo as we did in our September update call. As we evaluate individual business strategies, grouping them under one umbrella no longer makes sense. Not all renewable businesses fit NRG similarly in terms of value. Today, I announce the reintegration of our traditional NRG business, excluding utility scale, as that was never part of the GreenCo process, back into the Company to maintain our advantageous skills for engaging with the evolving power industry landscape. Many of our commercial and industrial customers expect us to integrate renewables onsite and offsite. Our renewable efforts will reflect the strengths of our integrated platform. Supported by our partnership with NRG Yield, our renewable business is cash positive on a full-year basis and does not require permanent capital from NRG. I am also pleased to share that NRG and NRG Yield have reallocated $50 million in previously committed cash equity from the residential solar partnership to the business renewable partnership. This change further aligns our mutual focus on renewable energy development with NRG Yield. Lastly, we are actively negotiating strategic transactions for Home Solar and EVgo, and I expect to wrap this process up in the second quarter. Moving to slide 12, I will outline our revised approach to NRG's dividend. We launched the dividend in 2012 for several reasons: to highlight the value of our contracted assets, to allow ownership by dividend-restricted income funds, and to add yield support. Today, the context is quite different than it was in 2012. We now have NRG Yield as a dedicated dividend-paying vehicle to showcase the value of contracted generation, and the assumed volatility in the Independent Power Producer sector has lessened our ability to provide yield support. Therefore, we believe a static dividend is not the best use of capital given the cyclical nature of our sector. As such, we are reducing the dividend to $0.12 per share from $0.58 per share, or about 1% yield. I want to be clear: this reduction is not due to balance sheet constraints; it simply aligns our dividend strategy with our broader focus on adaptability while maintaining a differentiated platform that appeals to a wide range of investors and creates shareholder value across all cycles. Turning to slide 13, one of the most critical topics today is my foundational view on capital allocation, which is to remain focused on our future goals. Given the sector's cyclical nature, we must first assure our balance sheet's strength when deploying capital. We are proactively taking steps to guarantee our robustness during this cycle and to capitalize on opportunities that may arise during market disruptions. Kirk will dive into more specifics, but I want to highlight three key points: First, the nearing end of our significant capital reinvestment program allows us to effectively harvest robust free cash flows through our asset optimization initiative, as we foresee strong market prices and environmental requirements through the end of the decade. Second, reducing debt is essential as it provides assurance to our equity holders of NRG's flexibility to generate significant returns when the market rebounds and assures our customers of a reliable partner. My goal is to eliminate any doubt about our balance sheet strength. Therefore, maintaining our current target ratio of four and a quarter corporate debt to corporate EBITDA gives us sufficient leeway to meet our covenants and aligns with our credit ratings. Finally, I remain dedicated to returning cash to shareholders when we believe our capital structure is robust enough for flexibility in the event of prolonged downturns in commodity and capital markets. Please do not interpret our focus on deleveraging in 2016 as a sign that NRG has shifted away from returning capital to shareholders. Instead, I see it as a way to ensure our shareholders can have confidence in our position to benefit from opportunities when conditions improve. I will now hand over to Kirk for the financial review.

Thank you, Mauricio, and good morning everyone. Beginning with the financial summary on slide 15, NRG delivered a total of $3.34 billion in adjusted EBITDA and $1.127 billion in free cash flow before growth in 2015. Our 2015 results highlight the benefits and resilience of our integrated platform as the low commodity price environment helped Home Retail deliver $739 million in adjusted EBITDA, exceeding our original 2015 guidance for that segment by more than 20%. Business and Renew achieved $1.881 billion in EBITDA for the year, while NRG Yield, which was aided by robust wind conditions in California late in the fourth quarter, contributed $720 million. NRG completed $786 million in dropdowns to NRG Yield in 2015, helping expand capital available for allocation and allowing us to return over $1.3 billion to stakeholders. $628 million of this capital was returned to shareholders, including the repurchase of approximately 7% of shares outstanding. Having shifted our capital allocation focus late in 2015, since November and through this past month, NRG has retired approximately $700 million in unsecured debt, including over $400 million at the NRG level and $274 million at GenOn. Our reduced unsecured debt allowances will also help increase recurring cash flow, with over $50 million in annualized interest savings realized so far as a result of these efforts. I’d also like to briefly address one element of our 2015 results outside of EBITDA and free cash flow—that is the non-cash impairment charges we took in the fourth quarter. On an annual basis, we test our long-lived assets and goodwill for potential impairment. Given the prolonged low commodity price outlook, we adjusted our long-term view of power prices, which resulted in a non-cash impairment charge of approximately $5.1 billion, consisting of a write-down of certain fixed assets as well as goodwill. Due to the lack of robust forward prices in ERCOT, this charge is primarily related to impairments of our two coal plants in that market, as well as goodwill related to the 2006 acquisition of Texas Genco, of which these two coal plants were a part. Based on the robust commodity price outlook at the time of the acquisition, we allocated a substantial portion of the Texas Genco purchase price to the coal plants with minimal value allocated to the gas plants. And although since that time, the Texas Genco portfolio has delivered over $8.5 billion of unlevered free cash flow and provided the platform for our expansion into retail with the acquisition of Reliant in 2009, the outlook in the ERCOT market has nonetheless shifted substantially, currently favoring gas over coal. The impairment of our two ERCOT coal plants aligns the book value of these assets with their forward cash flow profile, as implied by the current market environment. And while the shift in market dynamics implies that the value of our gas portfolio in Texas now substantially exceeds its book value, as many of you are aware, accounting rules permit only the write-down of asset book values and do not permit a write-up. These impairment charges also resulted in cumulative net income for the prior three-year period falling below the threshold prescribed for evaluation allowance against our net deferred tax asset balance, largely associated with NRG’s tax NOLs. As a result, our one-time fourth quarter charges also include a $3 billion non-cash charge to tax expense, resulting from a contra asset entry on NRG’s balance sheet, as required under GAAP as a valuation allowance offsetting our net deferred tax asset balance. That said, this accounting charge has no bearing on our ability to utilize our NOLs against future taxable income, and we continue to fully expect to do so. Finally, turning to our 2016 guidance, we are reaffirming the previously announced guidance ranges for adjusted EBITDA and free cash flow before growth, which, as Mauricio indicated earlier, reflect our expectations for consolidated 2016 results including business renewables, which was previously part of GreenCo. A point of clarification: business renewables, NRG’s commercial and industrial distributed solar business, and our utility scale renewable assets were not part of the GreenCo business previously excluded from our guidance. Turning to slide 16, I’d like to briefly summarize our capital allocation progress in 2015, focusing on the NRG level, which excludes cash and capital projects at various excluded subsidiaries, primarily GenOn and NRG Yield. Total NRG level capital available through 2015 was $1.7 billion that is shown on the left of the slide. Capital available to NRG includes three components: First, NRG level excess cash at the end of 2014, which is basically cash and cash equivalents less our $700 million minimum cash liquidity reserve net of any cash collateral posted as of the year-end; second, the portion of our consolidated free cash flow before growth at the NRG level, which in 2015 was just over $800 million; and finally during 2015, as I mentioned earlier, NRG received $786 million proceeds from NRG Yield. This comprises the third component of capital available. During 2015, NRG level capital allocated totaled approximately $1.2 billion, with more than half of that amount returned to our shareholders. Having shifted our focus late in the year toward debt reduction, we ended 2015 by retiring $246 million of principal across various maturities of NRG’s unsecured notes, which significantly expanded the reduction of corporate debt beyond the amortization of our term loan facility. And as I mentioned earlier, we continued that deleveraging process through the first two months of the year, which I’ll address more comprehensively when we turn to the 2016 capital allocation in a moment. The remaining $312 million was allocated toward growth investments. Importantly, this amount represents a reduction of over $450 million versus our original growth investments forecast provided on our first quarter 2015 earnings call. At that point, we projected approximately $960 million in consolidated growth investments, with nearly $800 million of that amount expected at the NRG level. This reduction in NRG level spend was the result of both the slower pace of Home Solar as well as the elimination of other growth investments. Turning to our 2016 NRG level capital allocation plans on slide 17 and building on the deleveraging progress we’ve made since November 2015, I will say 2016 will see a more significant shift towards further debt reduction, leaving no doubt that our balance sheet strength and credit ratios will remain resilient even if the current low commodity prices continue beyond the current year. We expect approximately $1.5 billion of capital available for allocation at the NRG level in 2016, which again represents excess capital beyond our minimum cash balance reserve for liquidity, which is further supplemented by our $2.5 billion credit facility. 2016 capital available for allocation consists of the excess cash balance at the NRG level at year-end 2015, plus the midpoint of our NRG level free cash flow before growth guidance, and expected proceeds from dropdowns to NRG Yield of approximately $125 million in 2016. These expected dropdown proceeds consist of the substantial portion of what remains under our residential solar and business renewable or distributed generation partnerships at NRG Yield, and represent the return of the portion of our 2016 growth investments toward these two businesses. This month, in order to align the size of these two partnerships with NRG’s strategic priorities, we have reached an agreement with NRG Yield to shift the amount of capital between the Home Solar and the business renewables partnership. As a result, the Home Solar partnership was reduced by $50 million to $100 million, with a corresponding $50 million increase to the business renewables partnership, reflecting the more robust and reliable pipeline of business renewables, which has now been reintegrated within NRG. We expect to allocate approximately 75% of our 2016 NRG level capital, or over $1 billion, towards further debt reduction in 2016. This consists of ongoing term loan amortization as well as over $150 million in NRG corporate debt already retired year-to-date. We plan to supplement this deleveraging in two ways: First, we will allocate $600 million of capital towards NRG debt retirement through open market purchases or tenders. And second, being mindful of our next NRG bond maturity in 2018, which is now approximately $1 billion in principal outstanding and the backdrop of the current dislocation in the high yield market, we will reserve an additional $325 million toward the retirement of our 2018 notes in connection with the coincident refinancing of the balance when market conditions are more favorable. While our current priority is to ensure an efficient retirement and refinancing of our 2018 notes, as conditions evolve, we will continue to evaluate the best use of this debt reduction capital and may choose to allocate it towards different maturities, should this alternative prove more favorable. In any event, we expect this capital to ultimately be allocated toward corporate debt reduction in order to meaningfully advance our efforts to further strengthen our balance sheet and ensure adherence to our target balance sheet metrics even through an extended low cycle of commodity prices. As Mauricio indicated earlier, we have now adjusted our dividend rate to a level consistent with both our capital allocation priorities and the cyclical and capital-intensive nature of our business. While the current depressed level of our share price undoubtedly represents the compelling return opportunity, we believe it is prudent to continue our progress in right-sizing corporate debt and strengthening ratios, which will enable us the flexibility to capitalize on value-enhancing opportunities for shareholders. Such opportunities are only made truly compelling by first ensuring the strength of the balance sheet which supports this. For 2016, we expect just over $300 million of growth investments, consisting primarily of our P.H. Robinson peaker project, Carbon 360, and our commitment pursuant to the California EVgo settlement. During 2016, we are also focused on executing on opportunities to further expand capital available for allocation, including $250 million of non-recourse financing included as part of our reset announcement last year. As I indicated on our third quarter call, we are now fully prepared to launch this financing when market conditions are more favorable. In addition, we continue to expect the next utility-scale dropdown offer to NRG Yield to be our remaining stake in CVSR, and plan to offer this yield in 2016. We are currently exploring the best means to efficiently finance this dropdown and prudently manage its liquidity while continuing to replenish capital to NRG. I expect we’ll have more to share with you on the timing and the payment structure later this year. And finally, turning to slide 18, in light of our significant deleveraging progress and having provided an extended look at our 2016 capital allocation plan, I would like to update the information we provided last quarter regarding NRG’s capital structure and 2016 corporate credit metrics. Focusing on recourse debt at the NRG level, which prior to deleveraging, we had expected to be approximately $8.8 billion as of year-end 2016. In our third quarter call, we indicated our intention to reduce that debt by at least $500 million. Having completed half of this objective during the fourth quarter alone, we ended 2015 with just over $8.5 billion in recourse debt. Since then and through February, we completed an additional $171 million in debt reduction, as shown on the far right column of the slide. As a result, based on the midpoint of our guidance, our implied 2016 corporate debt to corporate EBITDA ratio is already nearly in line with our four and a quarter target. However, our goal is to maintain adherence to that target in 2017 and beyond, taking into account the possibility of sustained low commodity prices. This objective drives our continued focus on further debt reduction over the course of 2016. As I indicated previously in reviewing 2016 capital allocation, we expect to further reduce corporate debt by at least another $600 million this year. Taking that additional deleveraging into account, we are on track to drive corporate debt below $8 billion by the end of the year, which would place our corporate debt to corporate EBITDA ratio at approximately four times. Finally, factoring in the effective release of the $325 million of additional capital we have currently reserved for further reducing our 2018 maturity, that 2016 ratio would be reduced to 3.8 times. One way to consider that number is that it allows us to maintain adherence to our four and a quarter target ratio, even if corporate EBITDA were to be reduced by approximately $200 million as a result of sustained low commodity prices. With that, I’ll turn it back to Mauricio.

Thank you, Kirk. We've taken a lot of time this morning, so let me just end with our priorities for 2016 on slide 20. We have the right portfolio and the right platform to succeed in this environment. With the further strengthening of our balance sheet, we will be in a great position to seize opportunities during this challenging market and greatly benefit when it turns around. I look forward to the next phase of NRG. Thank you. Operator, let’s open the lines now for Q&A.

Thanks. Good morning, guys, a few questions. I’ll start with the detailed one. So, I just want to be clear on page 10, when you talk about the $150 million of EBITDA by year-end ‘17. Should we assume that that’s an aspiration to improve your run rate EBITDA by that amount?

Correct.

Or is that just the accumulative impact on EBITDA of 150?

No. Good morning, Greg. The objective here is to make it a recurring $150 million cost reduction that will impact EBITDA directly.

Great, thanks. And on page 17, when you talk about the CVSR and non-recourse funding below the lines; if those are not included in your available capital, should you be successful in achieving those, would that be accretive?

That’s correct. Those would be incremental to capital available for allocation, Greg.

Okay. And that would be my big picture question, Mauricio. So sort of the first thing that happened after you took over the CEO role was we saw that in terms of a capital allocation decision as we saw that you cleared a new power plant in the New England auction, which was a little bit disconcerting to investors who are looking for a capital allocation program that was more focused on shrinking the balance sheet. Obviously, that’s the core message that you’re giving us today. So, can you characterize if you were to disburse that free up this incremental dropdown money on non-recourse financing, how do you think about each incremental dollar for capital allocation going forward and how do you characterize what you’re doing in New England in the context of the message you are giving us today?

Thank you, Greg. The timing with the New England capacity auction is something that I don’t control. Let me just start by providing you kind of my general take on capital allocation and then I’ll go into the specifics of Canal. As you can see from all the actions we’re taking today, one of my key priorities in the first 90 days of being the CEO was to focus on capital allocation, first being mindful and aware of the current commodity cycle that we are in, and then second, the dislocation that we have in our capital markets. It was important to me to afford us the maximum flexibility when deploying capital and to exert absolute financial discipline. I already talked about the actions that we’re taking, one on deleveraging and strengthening our balance sheet, and ensuring that we go through this cycle with a strong position to capitalize on opportunities; but importantly, that we’re ready when the market turns around; two, the recalibration of the dividend; and then three, the focus on cost savings and streamlining the cost structure in the organization. So, when I think about Canal, it is not a capital allocation decision for 2016, it’s a capital allocation decision that we will make in 2018 and at that point, we will evaluate the current environment. From that perspective, we'll determine the best use of our capital. I want to ensure that we continue generating low-cost options at good returns, given the opportunity that we have to lock for seven years a very constructive capacity price. As I mentioned in the prepared remarks, our focus in the Northeast, and particularly in New England, is capacity revenues. Now is a dual fuel peaker that is needed in that market at good returns, and it’s a capital allocation decision that we will make not today, where we are focusing all our attention on strengthening the balance sheet but in two years.

Hi, good morning. Congratulations Mauricio and Kevin.

Thank you, Julien. Good morning.

So, perhaps first the follow-up on Greg’s last question on capital allocation. Can you elaborate on your latest thinking on the wholesale portfolio itself? Obviously it’s been under a good bit of strain. How do you think about reinvesting in your existing asset portfolio and timing for rationalization as you continue to see current pressures manifest?

Yes, Julien. So first of all, we are actually in the last year of what I consider a high water mark regarding reinvesting in our portfolio. After acquiring GenOn and EME, we increased our portfolio significantly to close to 50,000 megawatts. We went through a process where we optimized that portfolio through fuel conversions and environmental retrofits. As you know, we have been executing that plan and this year is the last year of that. What I expect in the next couple of years is really to harvest on that investment. All the market dynamics that we were expecting when we made those investments are playing out, particularly around reliability and capacity for all three Northeast markets, whether it’s PJM for capacity performance, New England, and New York. We are moving forward that; we saw that during the polar vortex, we acted upon that. It’s playing out the way we thought it was going to play out. Now, with respect to other parts of the country, you know that I will expect absolute financial discipline when it comes to the profitability of our assets. If it’s not economically viable, we will shut them down, just like we have done in the past and just like we are doing today in New York. If the market conditions don’t support our generation portfolio, we will take action on it. We need to also take into consideration not only the current state of the commodity cycle but also the prospective opportunities that we see.

And then coming back to what you were just talking about, the expansion was done on the EME. How do you think about the auction that’s on here? I mean, obviously, it’s a dynamic situation, but you paid down some debt there and cash on hand. What do you think about the next step and the timing of that?

Right. Look, I mean Julien, most of the bulk of the GenOn portfolios are in PJM. We value significantly our strategic position in the Northeast, in particular in the PJM area. But what I’ll tell you is, in the spirit of streamlining our organization, that applies to streamlining our capital structure. I would like to see that; but we will only do it if it adds value and does not have a negative impact on our credit profile. And that’s the option that we are going to continue to maintain going forward. Kirk, do you have any additional comments?

Sure. I mean, first of all, I agree with that obviously. We have taken an important step obviously towards deleveraging, as you acknowledged, Julien. But as I have indicated in my past remarks at various conferences and one-on-ones, that order of magnitude is certainly helpful and necessary but sufficient to bring about the rightsizing that balance sheet. I’ll remind folks, certainly we have got some near-term maturity with GenOn. We are focused on that as part and parcel of why we went at the delevering that we did. As you saw in Mauricio’s remarks, we have a continuation of our asset sale program, which as we have indicated previously going back to the reset, is focused on the Northeast. So, we’d expect it’s likely, more likely that that would probably come out of the GenOn complex, which would enhance liquidity. As the year progresses, I would believe 2016 is the key inflection point, given those loan maturities. We recognize—we recognize that we have got secured debt capacity there that provides us with some alternatives as well. So, what I would tell you is that as the year unfolds, I would expect you to hear more from us regarding our plans to execute there. And we are hopeful in addressing and rightsizing the capital structure, but as strongly reiterating what Mauricio said, we are only going to do that while preserving the integrity of the NRG balance sheet.

One quick one, Mauricio. I think when you talked about the dividend, you talked about a static dividend being inappropriate in the context of the reduction. But, could you just clarify what we should be expecting going forward from this lower level? Is it just to stay here as a token to allow yield investors to own the stock, or do you look to grow it modestly over time?

Yes. No, Jonathan, I mean first of all, the actions that we are taking on the dividend are based on two main reasons. One, I think this level is consistent with the nature of power industry; it is capital-intensive and cyclical. But certainly, when I look at the current dividend that we have and the underlying premises or principles that we used to implement it in 2012, a lot of them are not valid anymore. If you recall, when we announced the dividend back then, it was to highlight the value of contracted assets. Since then, we created NRG Yield; one of the objectives was the yield support. In this current market environment and with the level of volatility that we’re seeing in the stocks, it really doesn’t accomplish that objective. So, when I put the two together, one the nature of our industry and two, some of the principles that we had when we initiated, it’s just inconsistent. I think you should expect this number is the right number today, and it affords us the maximum flexibility for capital deployment and capital allocation. That is my assessment right now on the dividend.

Okay, makes sense. And just another topic, you’ve obviously been streamlining management structures out of the cost reductions, et cetera. Can you just maybe give us a little more insight into what some of the key changes have been; where you are in that process; are they largely behind now; just some of the operational changes that may have gone on?

Look, I mean I think with respect to streamlining the organization, we started at the end of last year. We went through significant efforts to reduce the cost structure. Over the past three months, I have continued with that effort on rationalizing and focusing the organization into our core strengths as I articulated already in my remarks, focusing on what I think is the core value of energy, which is putting together generation and retail and the complementary advantages surrounding it. I am very comfortable today with the management team that I have. This is an area that I am going to continue evaluating in the weeks to come. You should expect from me additional announcements as I solidify our line of business, particularly as we undergo the outcome of the GreenCo process.

Hey, guys. Two questions; one capital structure related. I'm curious, you’ve announced a lot of debt reduction at the NRG level for 2016. Curious about your thoughts on the debt reduction targets at the GenOn level in 2016. The only reason I ask that is you highlight the NRG debt maturity coming in 2018, but obviously GenOn has some too, and some of the growth for NRG, meaning the Canal expansion that just cleared, or even the Mandalay repowering that has a contract, those are actually assets owned within the GenOn box. So, just curious about kind of the balance between debt reduction at GenOn and some of those growth projects of assets that are at the GenOn box that are actually part of NRG, Inc.’s growth trajectory?

Good morning, Michael. Let me pass it to Kirk to answer the first part of the GenOn question, and I’ll take the next.

Sure. Thanks, Mauricio. Michael, first of all, on the Canal, which as I said in addressing Julien’s question, we’ve obviously begun to make progress in terms of deleveraging, as you’ve acknowledged. That’s been our confidence in doing that. We’re mindful of balancing maintaining adequate liquidity at GenOn with the need to obviously attack the capital structure at the same time, which is why the asset sale process kick-started that. We got a head start on it at the end of the year having announced a couple of asset sales, and we’re moving forward obviously to close the second of those two and continuing to focus on completing the remainder of the 500 that we announced on the reset. Given that’s focused on the Northeast, the expectation is, more likely that that would probably come out of the GenOn complex, which would enhance liquidity. But as the year progresses, we expect 2016 as the key inflection point, given those loan maturities. We’re recognizing that we’ve got some secured debt capacity there that provides us with alternative opportunities as well. So, what I would tell you is that as the year unfolds, we’re going to focus on those alternatives and utilize the best means possible while remaining mindful of preserving the integrity of the balance sheet of NRG.

Got it.

Michael, with respect to your second part of the question, we’re going to continue developing options to grow the portfolio. When we have long-term contracts, we’re going to do it in close partnership with NRG Yield to continue replenishing capital; when it doesn’t have the profile to be able to be dropdown, that’s not a capital decision—capital allocation decision that we need to make today. We’re going to evaluate it when we have to actually deploy that capital. It is important to continue to generate these projects in the context of growing our portfolio at good economics.

Got it. And one follow-on Texas related, I’m just curious. Our view is that coal plants in Texas are struggling to have cash break even right now. Even more importantly, nuclear plants are generating limited cash flow, maybe positive but limited. At what point do you start considering coal retirement at ERCOT?

That’s a great question, Michael. So, let me give you my perspective. The current market in Texas has been very disappointing, despite what I consider are still pretty strong fundamentals, strong demand, and pricing that doesn’t incentivize new build economics—even though we have seen some plants close, which I consider out of not economical decisions. When I look at our portfolio, particularly Parish and Limestone, they are very large in scale; they are environmentally controlled; and I would say they are probably one of the most cost-advantaged based load plants or coal and nuclear plants in the state. We have identified what we believe are the least competitive assets in the supply stack when it comes to coal. We believe that if the market continues to be at these levels, it will not be possible to sustain the operation of some of these assets. So that’s why I think there is going to be supply rationalization in the immediate term and we should see a recalibration of the market. I feel comfortable right now with our three baseload plants. But I think we have a pretty good track record for if and when these plants are not economic and their prospects are not positive, we will act upon it. We have done that in other regions, and there is no reason why we would not do it in Texas. But right now still not the time, and I think the supply stack will react before we get to that point.

The $513 million of available capital at year-end that you are using in 2016, is that above kind of your normal cash levels? And if so, what cash do you have kind of available beyond that?

It is, Steve. I’ll let Kirk give you specific details, but this is above the cash reserve that we have for both NRG and GenOn.

Sure. Good morning, Steve. This is one of the reasons why I think in a couple of points in my prepared remarks I made specific reference to contextualize capital available for allocation, which we consider to be a cash surplus versus cash on the balance sheet. When we calculate that, we start with the minimum cash balance that we reserve at the NRG level. We set aside $700 million for liquidity. Now that part of that liquidity is what we need for cash collateral, for example. So, as we post cash collateral, we consider that a utilization of the minimum cash reserve. If you think about it as the $700 million minimum cash minus the amount of cash collateral we posted, comprehensively this is outside of capital available for allocation; we focus on liquidity separately. So, liquidity is that $700 million of minimum cash at the NRG level plus the $2.5 billion corporate credit facility. That’s separate and apart from what we consider excess capital, which is that $513 million that you referred to.

Yes, I think so. One other question, just on NRG Yield. Mauricio, as you thought about NRG Yield, what is your view of kind of a long-term strategy around it? If it stays at a relatively depressed stock price, what are your options?

Yes, Steve. I mean, I'll answer it from the NRG standpoint, and we are going to have the NRG Yield call in about 30 minutes. So, let me just say that the relationship between NRG and NRG Yield is there are a lot of synergies, and it’s a symbiotic relationship. It’s of great importance for NRG. This is a way for us to access low cost of capital to replenish our capital, particularly on the development front in this type of commodity cycle. We need to have a good development platform for NRG Yield to have clear line of sight in terms of the growth and the potential dropdown that we have. That will benefit NRG Yield, and a healthy NRG Yield is good for NRG in terms of our ability to stay competitive in developing new sites. That’s kind of my take on it. I want to be very careful that I give you the answer from kind of the NRG perspective, and we can go into more detail when we conduct the NRG Yield call.

Hi, good morning. I just had a follow-up question on the ERCOT coal power plant. Are there any opportunities to renegotiate the transport agreements or lower your PRB coal costs, so that those plants are more cost-advantaged at this point?

Good morning, Neel. I will discipline myself to pass the mic to Chris Moser, who is the Head of Commercial Operations. Although under my watch, COO, I renegotiated a number of rail contracts. They have been good partners in this downturn of this commodity cycle. But Chris, what are your thoughts on that?

No, I think that’s fair. I think we continue to work with our coal supply partners, both the mines and the railroad company as well, to make sure that we add to the plant's competitiveness, to the extent that we can. They, as Mauricio just alluded to, have been good partners with us so far, and we continue to look forward to working with them in the future.

Thank you. I recognize that you may have a lot more questions. We will get to them, and Kevin and the IR team will be available for any follow-ups. But unfortunately, we have a hard stop; we have to get NRG Yield call ongoing. So, thank you, and I look forward to continuing this conversation. Thank you, operator.