NRG Energy Earnings Call Insights: NRG Yield Details and ERCOT Pricing

NRG Energy Inc (NYSE:NRG) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

NRG Yield Details

Jon Cohen – ISI: Couple of quick questions. I’m going to let somebody else ask about capital allocation. But on NRG Yield how are you thinking about the pace of dropdowns from NRG into NRG Yield and will that be done with an eye toward managing – toward that 10% to 15% distribution growth or some other metric? The second question is, how will those be valued, is it going to be on some premium to book value or some discount to where NRG Yield is trading ?

David Crane – President and CEO: Jon, I think from NRG parent perspective, we want to do it in a measured pace based on the assets that are part of the ROFO perspective – in the set of ROFO assets. I think the main thing that could change – we talked about maintaining a 10% to 15% growth rate over the five year period, which was something that we probably could do with the assets that are in the ROFO set. If the amount of assets that we can see that we either develop intrinsically, we have high hopes for a lot of our brownfield development projects as I talked about in my comments or if you were to get appropriate assets through acquisition, then I think we would accelerate the pace or try and make the dropdown when they occur bigger, but it’s is very early days yet. So, I would say that nothing has really changed from that relative to when we were on the road a few weeks ago on behalf of NRG Yield. In terms of the valuation, I mean, speaking from NRG’s perspective, obviously, we would like to sell the assets to NRG Yield at a price that maximizes value to NRG. But NRG Yield and its independent directors I think will probably want to follow the normal approach of getting independent valuations and making sure that they are acquiring assets that are not only appropriate, but assets that they can acquire in terms of returns that safely achieve their weighted cost of capital. The NRG Yield Board of Directors has had one meeting and an organizational meeting. So, I think there is a fair amount of work that needs to be done there to sell exactly – I’m not sure that even if this were an NRG Yield call, which it’s not, I’m not sure I would be able to be much more specific than to say something like that at this point. Kirk, is there anything that you want to add on behalf of NRG?

Kirkland Andrews – EVP and CFO: No, I think you’ve covered it, David. Certainly the point to underscore is that the ROFO assets in particular, now that we’ve provided you some additional detail, John, around those, give us a lot of confidence in terms of the tangible pipeline to drive that growth rate that you mentioned and looking at the other opportunities David had mentioned, that more than anything will drive the pace in terms of delivering all that. And from a valuation standpoint, I think that’s also a function, of course, of the independent directors, I think, as David may have mentioned, and I would expect on larger dropdowns that would also be informed the degree to which the independent directors of NRG Yield determine to access third-party advisor on the value of those assets…

Jon Cohen – ISI: And one follow-up for you, Kirk. On your Page 16 analysis, if you were to take the – where you show NYLD proportional debt, if you were to take that number including all of the current ROFO assets. I realize you are on the road, so you may don’t have it, but how much would that go up and the NRG debt go down?

Kirkland Andrews – EVP and CFO: You are correct, I can’t give you that number in detail, off the top of my head and don’t have it directly in front of me. But the order of magnitude of those particular assets from a leverage perspective should be directionally towards that leverage if not a little higher than that, just given the preponderance of those particular assets are more along the lines of the DOE loan guarantee, which tend to be a little bit larger in terms of the leverage capacity.

Jon Cohen – ISI: And that cash is just as at June 30 does not include cash flow for the rest of the year or for ’14?

Kirkland Andrews – EVP and CFO: No, that’s correct, that’s as of June 30. But importantly, if you will notice included because we are accounting for NRG Yield on a pro forma basis, which obviously didn’t close as of June 30, but on this page looking to depict that, that cash balance is both pro forma for the Gregory acquisition as well as pro forma for the cash from NRG Yield.

ERCOT Pricing

Keith Stanley – Deutsche Bank: Can you comment just a little more on ERCOT pricing this summer to-date and what you see as driving that, looking particularly at this week, for example when peak demand was actually very high, but the price stayed fairly low? Then how does this make you think about hedging heat rates differently for the outer years, as given the experience in the past two years where we see a pretty big drop in the summer period?

David Crane – President and CEO: Well, Keith let me take the first, and I’m going to turn it to Mauricio or Chris, particularly the answer to the hedging question or to not answer the question (indiscernible). I think what we saw this week is really a combination of three things because the level of – you’re right the level of demand we saw on Wednesday, when we reach that level of demand back in 2011, there was scarcity pricing. And so, why did it not happen this week, I would say three things. Number one is that a lot of times when it’s very, very high the wind situation is a dead call, but in this situation there was ample wind generation this week in Texas, so whether that’s a new weather phenomenon or not, I don’t know, maybe Mauricio has a point of view. But that’s one of the reason that the wind was there. I think the second thing is that typically what happens – what happened to us and what happened to the market in August of 2011 is sustained periods for peak, not only did the build-up demand, on the demand side for some of the power plants that are (indiscernible) operating a few days of the year they were down and they break, and so you have more outages than you normally do. That clearly hurt us and hurt the market in the second half of August in 2011, but the supply side was fully there this year because it has not been tested so far this summer. And then the third thing is just the psychological element and again Mauricio and Chris know this better than I. But there’s just no fear in the market of running out supply because things have been so calm so far. So, Mauricio or Chris, do you want to add anything to that in terms of this week’s subdued price and then also talk or say whatever you’re willing to say about hedging in our philosophy.

Chris Moser – SVP, Commercial Operations: This is Chris. Keith, when we’re looking back at the Wednesday number, which was around (67.2) peak or so, there was almost 3,700 megawatts on average of wind and that’s pretty far in excess of the expected load carrying capability of the wind even under the new construct that they’re talking about moving in from the 8.7 to the 14 and the 32. So, there was clearly, as David pointed out, a lot more wind going on out there as well. To his point as well, the (gen stack) was very healthy across the fleet. Ours and everyone else’s look like it too. So, extra wind, fairly very healthy generation. And then the load at (67.2) is a pretty good load, but it’s not near what we saw in 2011 or even – keep in mind the forecast when the (CERA) came out for the summer was for 68.4, so you’re 1,200 megawatts short of where they thought the load was going to be as well. Obviously, as guys very interested from both the wholesale and the retail side on what the load is doing, we’re digging into a lot of the moving pieces on the load side. I don’t have a lot of answers yet on that piece. But I think wind, I think a very healthy gen stack and I think the fact that – frankly, it just wasn’t as hot as 2011. I mean, the numbers I have give or take for the 7th was a Dallas high of 105 and a Houston of high of 100. I mean, the numbers we were seeing in ’11 were 109s, and 110s and 104s, and 103s in Houston. And so, it’s just a step change difference in terms of the temperatures…

Mauricio Gutierrez – EVP and COO: And Keith, I guess just a word on the hedging strategy. I mean, I want to just make sure that – point out that for the summer we were significantly hedged our coal portfolio and we have told you over the past couple of quarters that we will have long biased position around our gas portfolio given the tight fundamentals that we see in the market. And certainly, I laid out the value proposition for this summer given the regulatory changes that we have seen and the tighter reserve margins that we were expecting which hasn’t played out yet. Going forward, we are going to continue to maintain the same discipline on hedging the gas portfolio. Keep in mind that we want to have a – we will be consistent with our fundamental view and we will continue to have a long biased position so long we believe that the Texas has strong fundamentals which we believe they do.

Keith Stanley – Deutsche Bank: If I can, just one very quick follow-up. Just on the quarter, what was the driver of the $19 million in positive EBITDA of the Corporate segment, I think that’s usually a negative number and the big working capital and collateral deposit drags year-to-date on cash flow, should we expect that to reverse over the balance of the year?

Kirkland Andrews – EVP and CFO: Keith, this is Kirk. I’ll address that question on the collateral side. Some portion of the collateral that’s posted yes, is for positions that we expect to roll off of the balance of the year. But with volatility and the movements that we see in the commodities markets, obviously the additional collateral posting is obviously increasingly difficult to predict. But we expect a good portion of that to come back and another portion of that to be supportable through the posting of LCs if deemed necessary and that’s also part of the reason why we have the $900 million liquidity reserve. As to the change on the corporate side, I actually don’t have that particular number in front of me at present, but I think we can follow up with you on that one offline.

A Closer Look: NRG Energy Earnings Cheat Sheet>>