NRG Energy Earnings Call NUGGETS: Wholesale and Retail Synergy, Growth Prospects

On Wednesday, NRG Energy Inc (NYSE:NRG) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Wholesale and Retail Synergy

Jon Cohen – ISI Group: Just had a couple of questions. First on retail. It looks like you’ve had some pretty strong sequential quarter-over-quarter growth in customer numbers. Can you give us some indication of how much of that is in Texas versus some of the Northeast markets?

David Crane – President and CEO: Mauricio, do you have that information available?

Mauricio Gutierrez – EVP and COO: David, I don’t have it handy, but we can get back to you Jon and given you the breakdown on the growth.

David Crane – President and CEO: Jon, I mean, my rough sense is, it’s about equal. It’s not a particularly remarkable outcome, but we will get you the exact numbers.

Jon Cohen – ISI Group: Mauricio, on the Northeast load, is there any rule of thumb or way to think about how much your supply costs would go down by having generation to backup load?

Mauricio Gutierrez – EVP and COO: The way we always portray the synergy value between wholesale and retail (indiscernible) which is what we’re trying to replicate in the Northeast is, one, the collateral savings that we get by crossing generation on loads. Then the second is, just providing or being more comfortable capturing the load following premium using our retail vehicle as opposed to managing or hedging our portfolio in the wholesale market. I would say that those are the two main drivers and it is different depending on the market dynamics, but specific numbers I think it will be very difficult to tell you at this point what is the incremental value. In the past, we have provided some guidance in terms of what are those benefits in Texas, and as we continue to integrate the Northeast platform and expand our retail business in the Northeast we’ll provide you additional clarity on that.

Jon Cohen – ISI Group: Then one question for Kirk, on Page 15 there’s about $250 million or $260 million of conventional CapEx in ’12 through ’14, is there an EBITDA contribution associated with whatever those investments are in your guidance of $1.8 billion?

Kirkland Andrews – EVP and CFO: In the $1.825 billion to $2 billion in 2012…

Jon Cohen – ISI Group: I’m thinking more about the ’14.

Kirkland Andrews – EVP and CFO: Okay. Once you get to 2014, the bulk of those repowering projects, which is the biggest component of that is our El Segundo project out in California, which is online in 2014. So, that contributes to a (full boat) of EBITDA in 2014. I don’t think we provided specific guidance as to what that is. I think the best way to think about is just a little less than $100 million on an annualized basis once it reach its run rate in 2014.

Jon Cohen – ISI Group: But El Segundo I think the remainder of the spend is going to be project financed, right, so there should be other stuff as well? I know you are thinking about expanding some plants in Texas, I was just wondering if there’s any EBITDA contribution in there?

Kirkland Andrews – EVP and CFO: The bulk of El Segundo or the bulk of the repowering project is El Segundo. I mean, there’s some minor degree of capital expenditures around eVgo and some of the new businesses, but the lion share of the EBITDA contribution from the repowering investments comes from El Segundo.

Session 2:

Angie Storozynski – Macquarie: I know I asked this question last time, but I just want to go back to it again, so you’re showing us $320 million to $330 million EBITDA contribution from solar by ’14, could you tell me what their corresponding total debt for NRG for those projects?

David Crane – President and CEO: Kirk?

Kirkland Andrews – EVP and CFO: Sure, once you get out to 2012, the total amount or 2014, I should say, the total amount of debt or the total capital associated with that is about $4.3 billion. Of that number, about $3 billion of that is the total amount of solar debt.

Angie Storozynski – Macquarie: Okay, but what’s your share, is that $3 billion your share of that, of the solar debt?

Kirkland Andrews – EVP and CFO: That would be on consolidated basis.

Angie Storozynski – Macquarie: So, what is the NRG service portion of the solar debt?

Kirkland Andrews – EVP and CFO: If you go through Ivanpah for example, Ivanpah is about $1.5 billion in total debt. We obviously own 50.1% of that particularly project, so if you were looking for an allocation of our percentages it’s about half of that. Agua Caliente is just under a $1 billion worth of debt and we own 51% of that by virtue of the transaction with MidAmerican. So, that’s basically half of those two components from the total.

Angie Storozynski – Macquarie: So, roughly speaking about $2.1 billion of that debt would be serviced by NRG?

Kirkland Andrews – EVP and CFO: I think that’s probably, it’s probably a good number.

Angie Storozynski – Macquarie: Secondly, I know you are not trying to give us any more inside into your retail growth prospects in PJM, but I mean, how should we think about it? I just (data that) Mauricio I doubt that you’re merging with GenOn for cost synergies only. I think that there is – their growth prospects is embedded in the plan and could you give you us a sense of where we are now for PJM volume-wise and how should we think about it volume-wise not margin-wise but volume-wise going forward?

David Crane – President and CEO: Mauricio, do you want to give that information?

Mauricio Gutierrez – EVP and COO: David, I think at this point we’re not prepared to give information around the growth prospects in the Northeast. I think that is – Angie, I mean, that’s something that we will provide you in the coming months. What I would say and just to try to provide a little bit more of the growth that we have seen on our retail business, half has been outside of Texas, particularly in the Northeast. Green Mountain with some of the premium products have been very effective in the Northeast markets, particularly around mass customers. So, we are very encouraged by those results, but I think you should expect from us more disclosure around our growth prospects in the Northeast. I will say that on the plans that we have provided and the forecast that we have provided today through ’14, the growth assumptions that we have are pretty conservative across the retail businesses.

David Crane – President and CEO: Angie, let me add to what Mauricio is saying, because I think if there is any single thing that surprise us in terms of investor and analyst reaction to the propose combination with GenOn is the extent to which people are interested and even excited about what this greater generation platform in the Northeast will do first on the retail side and we are happy with that because we agree with that, but I will tell you as we have done the evaluation of the combination with GenOn since the matter first came up a couple months ago, our first focus was on the cost synergies and the other synergies that were announced two weeks ago, and that the second focus was then on the synergies we could achieve with GenOn just on the generation side of the business. To be frank, no part of the evaluation that the NRG Board did or NRG management did say, well wow! If we own all those other megawatts in the Northeast we can grow our Northeast retail platform at twice the speed. That’s all going to be upside and we will be evaluating that going forward and talk to you more about that, but I would say, most of our customers in the Northeast come from Energy Plus and virtually all of Energy Plus’ customers are on month-to-month basis. One of the advantage is this allows us to do is it will make it easier for Energy Plus through their platform and our other retail platforms to offer fixed-price contracts, and that’s going to be an upside, because how many more customers that will attract and the profitability of that we’ll be talking about in the future, but none of that’s built into the basic calculation of why we wanted to do this transaction.