NRG Energy, Inc.
Q3 2010 Earnings Call Transcript

Published: 4 Nov 2010

[Operator:]

Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 NRG Energy Earnings Conference Call. My name is Zumira, and I'll be your operator for today. [Operator Instructions] I would now like to turn this conference over to your host for today's call, Ms. Nahla Azmy, SVP of Investor Relations. Please proceed.

[Nahla Azmy:]

Thank you, Zumira. Good morning, and welcome to our third quarter 2010 earnings call. This call is being broadcast live over the phone and from our website at www.nrgenergy.com. You can access the call presentation and press release through a link on the Investor Relations page of our website. A replay of the call will be available on our website. This call, including the formal presentation and question-and-answer session, will be limited to one hour. In the interest of time, we ask that you please limit yourself to one question with just one follow up. And now for the obligatory Safe Harbor statement. During the course of this morning's presentation, management will reiterate forward-looking statements made in today's press release regarding future events and financial performance. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important risk factors contained in our press release and other filings with the SEC that could cause actual results to differ materially from those in the forward-looking statements in the press release and this conference call. In addition, please note that the date of this conference call is November 4, 2010, and any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of future events except as required by law. During this morning's call, we will refer to both GAAP and non-GAAP financial measures of the company's operating and financial results. For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures and quantitative reconciliation of those figures, please refer to today's press release and this presentation. And now with that, I'd like to turn the call over to David Crane, NRG's President and Chief Executive Officer.

[David Crane:]

Thank you, Nahla, and good morning, everyone. Let me start by introducing my colleagues here participating in this presentation. I’m joined by Mauricio Gutierrez, our Chief Operating Officer; and by Chris Schade, our Chief Financial Officer. Also available to answer your questions will be Jason Few, who runs our Reliant Retail Business on our behalf; and Chris Moser, who is responsible for commercial operations at NRG. So to begin, as we know, the equity markets are relentlessly forward-looking, so I am going to spend most of my time looking forward as well. I do want to go over for a moment, and you should be looking at Slide 3, if you're following along in the presentation on what this company accomplished in the third quarter of 2010 and what we are in the process of accomplishing here today. We had another exceptionally strong performance with our second best-ever quarter from an EBITDA perspective with an able assist from favorable weather. But most importantly, thanks to our exceptional operating performance and robust hedge position, we largely mitigated the impact of gas prices trending relentlessly downward and heat rates moving sideways to post $777 million of adjusted EBITDA and $536 million of cash from operations. Certainly, our already strong current liquidity position was enhanced during the quarter by the bond financing that we did in August, but our liquidity was also strengthened as it has been for many quarters in a row by a very substantial contribution of free cash flow from the company's operating assets and businesses. Our strong performance year-to-date allows us to narrow our full year 2010 guidance to the top end of the present range. And while I had in my aspirations from the beginning of the year to reach the $2.6 billion level, which would've put us flat against our record-shattering performance in 2009, I am nonetheless very proud given the gravitational pull of near-term gas prices that we are on our way with performance in the $2.5 billion range. Indeed, you may recall that 12 months ago in the course of announcing an initial EBITDA guidance for 2010 of $2.2 billion, I conveyed to you that as a management team, we were not satisfied with that number. And we made a commitment to you, our shareholders, that we would not rest until we had improved substantially on that number. I feel that under the circumstances, we have delivered on that commitment. Today, I'm here to make another such commitment. As Chris will outline for you, we are initiating guidance for 2011 in the $2 billion range. Our financial prospects in the third year of commodity price recession, once again being subjected to the downward pressure of the significantly lower gas curve, our commitment to our shareholders again this year is that we will not rest until we have substantially improved our performance against the standard of this initial guidance. I can't promise you anything specific today with respect to our next fiscal year, which obviously doesn't begin for another two months. But if you check our record over the past six years, I think you will find that we have been pretty successful in exceeding expectations regarding our current operating and financial performance. I'd like to devote the remainder of my time to comment on a few important comments of our strategic positioning of this company, many of these areas of our business figure prominently in the thoughts of our investors since they have been introduced recently or will be in the near future. The company's strategic approach is in general terms depicted on Slide 4, five conventional priorities and five transformational green energy priorities. I feel that we've made significant progress against all ten of these priorities year-to-date. And during Q&A, I would be happy to talk about any or all of that. But due to time constraints, I'm going to limit my prepared remarks to the four Rs

[Mauricio Gutierrez:]

Thank you, David, and good morning, everyone. As you all know, the third quarter is critical for both our generation and retail segments. This summer, we experienced some of the warmest weather on record across our Northeast, South Central and Texas regions. I am very pleased to report that we had another strong quarter from both an operational and financial perspective. Slide 17 highlights a few of the accomplishments achieved during the third quarter. As always, we remain focused on safety across the organization. And for the third quarter, we posted an ocean recordable rate of 0.88, a significant improvement from last summer and just shy of subsea levels. Our top performance improved across our entire fleet for the third quarter. Starting with our coal plant performance, the equivalent availability factor or EAF increased to 94.9% in the third quarter from 92.3% for the same period in 2009. This improvement was lead by our Limestone and facilities. Nuclear generation at STP had another outstanding quarter with 99% availability, and our oil and gas portfolio responded to the significant fees experienced in Texas, South Central and the Northeast by starting over 2,500x with a 99% reliability during these critical summer months. With respect to our construction projects, the Indian River environmental control project, continues to be on track and within budget to begin operations in January 2012. Our middle pound repowering project to build 200 megawatts of peaking capacity is somewhat scheduled to be operational by the summer of 2011. This is the second repowering project in our New England fleet. Our first project at Devon have been running successfully since it began operation this past summer. The BBA for El Segundo energy complex in California received CPUC approval in October. Demolition of work has started to make room for the construction of the new units, which I expected to be in service by the summer of 2013. Our core energy program stands at $83 million year-to-date and is on track to achieve the $98 million free cash flow goal for the year. Also, we have already identified projects and cost savings that will bring this program to completion by achieving the full goal of $150 million ahead of our 2012 for regional base. Finally, our commercial operations group took advantage of some market opportunity during this summer to increase our hedge profile in 2011, which I will discuss in more detail later in the presentation. In addition, they have successfully managed our retail supply under volatile market conditions, delivering strong financial results for two consecutive summers. Moving on to our client operations on Slide 18. Net generation increased by 8% this quarter over last year. This increase came primarily from our northeast plants, which benefited from lower than normal weather and a decreasing coal to gas switching, which was most prevalent in 2009. Also, nuclear generation was higher due to much improved availability from the third quarter of last year. Our base line portfolio, which includes both our coal and nuclear assets experienced significant reliability improvements during the third quarter compared to last year. Limestone and Indian River led the coal fleet with a clear and forced outage rates of 2.6% and 4%, respectively. Turning to our retail operations on Slide 19. We experienced another solid performance during the third quarter. Record weather in August and September across Texas created an opportunity to deliver higher volumes and stronger margin from our Mass segments. The Mass segment drove significant improvement in this customer attrition with the launch of the advertising campaign and innovative products. In addition, we maintained our low customer complaint rate through strong performance in retail operations. We continue to balance customer count and pricing to deliver higher than run rate margins that are more sustainable in the long term. In the C&I segment, we continue to improve win rates during the third quarter and extended the terms and diversity of our portfolio. Reliant remains the largest C&I provider in Texas, and we continue to leverage the strength of NRG to provide innovative products and services for our business customers. In summary, we're optimizing margin and customer count by delivering innovative products and excellent customer service. Turning to our hedge profile and commodity sensitivities on Slide 20. As illustrated in the chart on the upper left, we had increased our hedge profile for 2011 to 96% from 86% last quarter. This is consistent with our view that the gas markets continue to be under pressure given the high and resilient domestic production levels despite of low gas prices. With gas producers beginning to show some drilling restraint, hedged positions rolling off and indications that drilling to both acreage may be ending, we have chosen to remain relatively open beyond 2011 to benefit from an expected recovery in the gas markets. If we decide to add additional hedges in the other years, we would likely lean towards using option structures that allow us to participate in some upside, while protecting the portfolio for further decreases in gas prices. With respect to retail, we have increased our price, though, to 57% in 2011 from 50% in the second quarter. We continue to match as much generational load as possible to strike maximum synergies between our Retail and Wholesale portfolios. In order to match our incremental power hedges, our growth hedges increased over 2011 from 78% last quarter to 88% as illustrated on the upper right chart. We also remain well hedged in terms of coal transportation for some time. We continue to limit our commodity price sensitivity in 2011 as illustrated in the lower left chart with 2012 to 2013 through '15 largely unchanged. Moving on to Slide 21. The quarter-on-quarter demand growth for continues to the positive trend for the weather normalized load growth for the year at around 2%. In August, set multiple consecutive big loads and achieved a new all-time record big load of 65.7 kilowatts, an increase of almost 4% from the previous record set in July of last year. In PJM, the weather normalized load growth continues to be fairly present. However, the warmer than normal weather drove significant load increases across the Northeast, and total load off was up 7% to 9% higher as compared to third quarter of 2009. In Texas, recovery remains to be well supported during the first half of the year. There's a continued robust demand, higher supply, time retirement and the continued lack of capital for merchant projects. We expect the Texas market to continue showing robust fundamentals. Moving on to the environmental front. 2011 will provide a lot more clarity around environmental growth and requirement for our facility. As we have mentioned in previous presentations, we currently have a plan to invest approximately $700 million over the next four years in the environmental projects, failure to comply with these future regulations. Starting with Cedar, the proposed rules does not require additional capital for compliance. With respect to MACT, our client considers mercury controls on local units. While a worst-case scenario to control acid gas could result in additional environmental capital for 1,900 megawatts at Parish and 1,500 megawatt at Big Cajun. We don't expect this to be the likely scenario. In terms of master pulling, intake qualifications on reborrowing are expected to achieve desired results. For example, originating targets today with extreme qualifications at our Arcotil [ph] plant in New York. Finally, NRG does not face the challenges of converting from web surface implants to landfills as we have assets also at all our core facilities. Our near-term operational priorities are listed on Slide 22. As we move into 2011, we remain focused on excellence in safety and operational performance. We will continue to constantly evaluate the impact of various environmental regulations and our term maintenance and capital spend, particularly in the face of a challenging commodity price environment and determine the best cost benefit decision for each of our assets. With that, I will turn it over to Chris, who will discuss our financial results.

[Christian Schade:]

Thank you, Mauricio. Good morning, and thank you all for joining our discussion of NRG's third quarter and year-to-date financial results. Beginning with Slide 24, our financial results remained strong with $777 million of adjusted EBITDA for the third quarter and $2.071 billion of adjusted EBITDA year-to-date. During the quarter, Reliant Energy contributed $209 million of adjusted EBITDA to our results compared to $306 million in EBITDA for the third quarter of '09. This difference is largely explained by lower margins on newly acquired customers and existing customer renewals as well as lower customer accounts. Meanwhile, the Wholesale business contribute $568 million of adjusted EBITDA during Q3. The $32 million decline compared to Q3 2009 Wholesale performance can be largely attributed to the following. In the Northeast region, lower base load hedges were partially offset by a 37% increase in generation due to warmer than expected weather during the quarter. In Texas, a 5% increase in generation and the benefits of lower operations and maintenance costs were offset by a 20% increase in fuel costs, driven by new coal transportation contract at our Parish facility. Meanwhile, the south-central region benefited from the addition of a new contract with the regional municipality, leading to a 17% increase in megawatt hour sold and a 23% increase in the average realized energy price per megawatt hour. Also contributing to the results of south-central region was an 8% increase in load due in part to warmer weather. Turning to year-to-date results. Reliant Energy contributed $594 million of EBITDA, $58 million greater than 2009 EBITDA of $536 million. Excluding the $227 million of EBITDA generated in the first four months of 2010 for comparative year-to-date analysis since the acquisition was completed in May of '09, EBITDA results were lower by $169 million. This decline is driven by a 19% decline in mass margins, which were the result of price reductions following the acquisition and lower margins and customer renewal and acquisitions, reflective of the current competitive marketplace. The Wholesale business year-to-date generated $1.477 billion in adjusted EBITDA, $116 million lower as compared to the first three quarters of 2009. The comparative year-to-date decline is largely explained by lower base load hedges in the Northeast, lower margins in Texas, caused by higher transportation costs, offset somewhat by better contributions from the south-central region. At September 30, the company's liquidity position stood at approximately $4.8 billion. Impacting this liquidity position during the third quarter were the following items. We repurchased $130 million of NRG shares at a volume weighted average cost of $20.80 per share. These shares, combined with the $50 million repurchase in the second quarter, brings the 2010 share repurchase program to a close at $180 million or 8.4 million shares purchase at a volume weighted average cost of $21.26 per share. On August 20, the company issued $1.1 billion of 8.25% senior notes due 2020, with the proceeds we use for general corporate purposes, including a funding of a recently announced acquisitions. And on October 12, NRG completed $190 million tax exempt financing in relation to the environmental work to be completed at our Indian River facility, which is not yet reflected in current liquidity. The company closed the third quarter in a strong financial position to complete the three recently announced acquisitions of Dynegy assets, Cottonwood and Green Mountain Energy totaling $2.238 billion. Now turn to Slide 25. As I mentioned a moment ago, total liquidity, excluding funds deposited by hedged counter-parties remained strong at nearly $4.8 billion, an increase of nearly $1 billion from the year end 2009. The increase is principally driven by $1.1 billion increase in total cash and largely explained by continued strong cash flow from operations and proceeds from capital market transactions of about $1.3 billion. During the first three quarters of 2010, we also made debt repayments of $529 million, which include a reduction of a Term Loan B debt of $247 million and the early settlement of the common stock finance fund of $190 million and completed capital expenditures excluding those in NINA of $274 million, consisting largely of $119 million of normal maintenance and $132 million of environmental CapEx. Finally, before turning to the next slide, as you can see in the lower right, we continue to have ample capacity under our first lien to execute hedges on our base load business when appropriate. The first lien remains a very useful tool to both execute such hedges and preserve other sources of liquidity necessary to assist future growth. Now turning to our 2010 full year guidance update on Slide 26. As a result of a strong performance of the business in the third quarter, we have narrowed our guidance to the upper end of the original range to $2.5 billion to $2.55 billion. At the same time, because of the increase in EBITDA expectations, lower than anticipated income tax of $50 million, $92 million of debt funding for the Indian River environmental work, all offset by an increase in collateral postings during the third quarter of $86 million, we have increased guidance for free cash flow before growth investments to about $1.2 billion to $1.25 billion. Meanwhile, we are lowering our free cash flow guidance for the full year to about $700 million to $750 million. The decrease is a result of increased growth investments of $225 million in the fourth quarter, which includes our El Segundo repowering project and the majority balance for projects, both previously announced and currently planned. Based on Wednesday's closing stock price of $20.4 and our updated outlook, the free cash flow before growth yield currently stands at between 24% to 25% or $4.77 to $4.97 per share. Now turning to preliminary guidance on Slide 27. As you can see, we currently expect our full year 2011 consolidated EBITDA guidance to be in a range of $1.9 billion to $2.1 billion. Included in this guidance range are Wholesale expectations of $1.35 billion to $1.45 billion, which includes our announced acquisitions. In comparison to the current 2010 Wholesale EBITDA forecast, our Wholesale guidance for 2011 is largely impacted by low overall hedge prices, lower expected capacity prices in the Northeast and normalized weather. Somewhat offsetting these decreases are reductions in our anticipated O&M and G&A spend across the company, which is expected to come in 6% lower in 2011 than in 2010. As Mauricio discussed earlier, we are nearly 100% hedged for 2011 and are just confident of our forecasted results. As we look forward to our Wholesale business in 2012, we are currently in excess of 50% hedge, but at significantly higher prices in 2011 as indicated in our current SEC filings. Due to this position, coupled with the current commodity market conditions, we expect flat to marginally lower year-on-year Wholesale results in 2012 from 2011. For our Retail business in 2011, our current expectations, assuming normal weather, are an EBITDA range of between $480 million to $570 million. The decrease in 2011 guidance compared to current 2010 forecast is largely explained by lower unit margin Reliant Mass business. Reliant C&I business margins are also expected to decline but be partially offset by higher territorial reserve reflecting our continued dedication to this growing client base. Finally, we expect Green Mountain Energy to contribute between $70 million to $80 million of EBITDA. As David discussed earlier, we are very excited about enhancing the growth prospects for new our Green Energy Retail business. We are similarly excited by our solar development prospects. And on Slide 28, this illustrates this potential. This slide represents our four-year net equity commitment to 500 megawatts of solar projects, both announced and planned the coming months, as well as their respective EBITDA contribution of $175 million by 2014. We are committed to investing in this financially value-enhancing promising pipeline of projects and look forward to sharing with you both our current progress and future opportunity as we have identified to extend our solar footprint. On Slide 29, we have provided our projected year end cash position for 2011 of approximately $1.5 billion. Assume in this calculation, our cash flow estimates from guidance, the completion of outstanding acquisitions of $2.238 billion and expected debt repayment under our Term Loan B agreements. As such, when reviewing our capital allocation plans, we usually maintain a minimum cash balance of $700 million, largely for margin working capital, margin requirements, the timing of cash payments of interest, property taxes and the like as well as equity for the project that we have under construction throughout the year. Thus, in 2011, estimate a balance of about $785 million to allocate between share buybacks and further investments in high growth opportunities. The decision to deploy these funds in 2011 will be dependent on a number of factors, such as the size of our restricted payment basket and continued availability of attractive projects to invest in. We would hope to update this allocation with improved precision at our 2010 year-end results call. In closing, we are very proud of our ability to continue to deliver solid results despite the current commodity market climate. As we move forward, we remain committed to a prudent allocation of capital to create further opportunity for business growth and to return value to our shareholders. Now I'll pass it back to David for final comments.

[David Crane:]

Thank you, Chris. Before we open the line for questions, let me just make three quick points for you to keep in mind. The first is I think that we're demonstrating, as I said, even three years into the commodity price down cycle, we're showing uneven in these circumstances the company is demonstrating substantial free cash flow generation. Secondly, we do have investment opportunities lead by solar, which are very attractive in absolute terms and from a risk perspective and also are much shorter in terms of how soon they contribute to EBITDA because of the shorter construction cycle. And finally, to follow on Chris' last point, we do have substantial liquidity to deploy. And I think our track record over the last six years has indicated our ability to allocate and deploy capital in a manner that enhances the value of the company from medium to long term. So we hope and expect to continue to do that for the benefit of NRG shareholders. So with that, Zumira, we'd be happy to take any questions that you have on the line.

[Operator:]

[Operator Instructions] And your first question comes from the line of Jon Cohen from Morgan Stanley.

[Jonathan Cohen:]

Can you comment on how Constellations exit from Unistar might have impacted the timing of your DOE loan guarantee process? And also weather there's been any progress on how the additional capital from Toshiba is going to be structured in the end term?

[David Crane:]

I can actually answer the first question, Jon. I mean, our process with the DOE has gone on and served occurrence with the schedule we've had with them. If it's affected the way the government looks at these loan guarantees internally, we're just not in a position to -- I don't know, I don't know. It's like the old iceberg. We don't see what happens beneath the surface. So we have not picked up any sort of meaningful, visible, tangible change in the way the government's approach to us as a result of the Constellation Calvert Cliffs situation. If you have another question on that, I don't like to not be able to answer it.

[Jonathan Cohen:]

The second question was whether Toshiba had come to an agreement on how the capital contributions were going to be structured. If the answer to that is no as well, I have a third question --

[David Crane:]

Well, right now, the arrangement with Toshiba is that their capital contributions have been put into projects through credit facilities, to NINA. But we will probably be able to give you more final details on that on the next quarterly call.

[Jonathan Cohen:]

And then finally, the $600 million of equity that's going to lead to $180 million of EBITDA for the solar projects, how much of that is from projects that are either have been completed or have been announced?

[Christian Schade:]

I would say that half of that are from projects that have been either in the ground or announced and, the rest are the ones that we would expect to announce very soon to qualify for the cash grant.

[Operator:]

And your next question comes from the line of Lasan Johong from RBC Capital.

[Lasan Johong:]

David, believing what you said, [indiscernible] bouncing along the bottom of the trough cycle, and you think there's significant potential upside into 2012 and you already have massive cold exposure anyway. Can you give us kind of an idea as to why you didn't go after the entire company and just picked off the California CCGTs?

[David Crane:]

Well, first of all, the significant upside in '12, we could not -- first of all, I think that what I said was that we're bouncing along the bottom of the trough. I'm not sure that I predicted a full recovery in the year 2012, but maybe a guy will hung up on that. I mean, why did we not go after the full company of Dynegy, I would say that we didn't feel that with the exposure that the company has in terms of the coal assets, and I think that you know from the SEC filings that Dynegy is listed in terms of the description of the discussions that occurred with that. We made it very clear from the beginning that we were not interested in owning the Midwest coal assets. And that was really a factor, two factors that caused us to feel that way. One, as you yourself mentioned, we have a significant amount of that in our own portfolio already. And the second thing, and we've been consistent about this ever since the response to the Exelon situation, as we consider the Midwest, in my seven years in this company, we have never been attracted to the Midwest as a place where we really want to be very active. And I would say that lack of interest in the Midwest has gotten greater over those years because we find the prospects for demand growth in the Midwest. In the Midwest, the country are more challenging than on the coast, and we also think that the Midwest market is being coal-on-coal competition for the most part. That's not very attractive to begin with. But also, we think it's subject to a risk from a build out of wind capacity coming out of it. And so that just wasn't our cup of tea. And obviously, those a big part of the overall value of Dynegy.

[Lasan Johong:]

The other question is RI Energy, I'd say, saw very big increases in heat rates relative to demand change. Did you see something similar in your key regions, Northeast Texas? And can you tell us kind of what impact you saw from demand increases on heat rates?

[David Crane:]

Yes, I may ask Chris mostly to answer that question. And on your previous comment, feel free to call me if you want to discuss.

[Christian Schade:]

Certainly, in the Northeast, in PJM, we saw heat rates clearing at a fairly high level than certainly in Texas as well. We saw good heat rate expansion, both in the prompt and in the future quarters.

[Lasan Johong:]

Can you give us a magnitude of scale versus like what you saw in, let's say, third quarter of '09 versus the demand change? In other words, if you're now within 5%, how much did heat rates go up?

[Christian Schade:]

Yes, I don't have that in front of me right now, but we can follow up off line.

[David Crane:]

We'll get you something on that, too, Lasan.

[Operator:]

Your next question comes from the line of Anthony Crowdell from Jefferies.

[Anthony Crowdell:]

Hopefully just two quick ones. One is the wholesale guidance of 1.35 to 1.45. What are you assuming as the contribution from the Dynegy assets in that number? And my second question is related to the Reliant Retail guidance. I mean, it seems that you're still going to a long-term run rate of $300 million. But when I look at the options here from $300 million on a rapid increase in gas to $700 million to tops, it would make so the midpoint there would be closer to the $500 million even the graph below seems like more of the time in that $400 million to $500 million time frame.

[David Crane:]

I'm going to ask Chris to answer the second question. But I'm going to throw my body in front of him on the first question. I mean, with where the Dynegy transaction is right now in terms of the shareholder vote coming up, we'd rather not talk at all about what we see as the earning power of Dynegy next year or the year after, anything like that. We would give you more information about that, probably the next time we talk, assuming the next time we talk is after November 17 or whatever the day is. But we just really would rather not get into that right now. But, Chris, on the Reliant question.

[Christian Schade:]

Yes, I mean, we view the steady state for Reliant business to be a $400 million to $500 million business. So I think given our experience now in the business, we view that that would be, that the base case with the upsides to improvement in that would be, and I would assume normalized weather. The upside there would be that the weather is as it’s been for the last couple of years, which favors the results. Also, if there is a lower than forecast decline in volumes and our ability to hold customers at higher margins. So given our experience over the last two years with Reliant, I think I would take exception to your $300 million baseline and say that we're certainly targeting $400 million to $500 million of steady state.

[Operator:]

And your next question comes from the line of Ameet Thakkar from Bank of America.

[Ameet Thakkar:]

Mauricio, when, I guess, the retail line, I guess, some of the worst case scenarios for additional environmental capital spending. I guess, one of the things that I didn't hear and I was just -- will be tracing at your thoughts on -- how do you guys see, I guess, the EPA's approach to burning of lignite fuel especially that you utilize at Limestone?

[Mauricio Gutierrez:]

Could you be more specific?

[Ameet Thakkar:]

I mean, are you guys going to be able to burn lignite there, I mean, kind of with some of that, I guess, proposals on more stringent proposals on mercury? Is there any risk that you'll have to shift to burning PRB there?

[Mauricio Gutierrez:]

As you know, we really blend PRB at Limestone. It's too early to tell how stringent EPA is going to be on MACT. I'd rather wait for the first quarter of 2011 to adjust our planning if we need to adjust it. What I will say is, our fleet is primarily PRB based. PRB, as you know, has low hydroflourine acid, and we believe that our current plan already takes into consideration Mercury control and the fact that our base load fleet is primarily PRB that we are not going to need any incremental capital. But I mean that remains to be seen as the rules come out next quarter.

[Ameet Thakkar:]

And then just real quick, as far as kind of thinking about the 2011 capital allocation plan, is that something we should look forward to in the next call?

[David Crane:]

That would be the plan, yes, at our year-end call in, I would assume, February.

[Operator:]

And the next question comes from the line of Julian D-Smith from UBS.

[Julien Dumoulin-Smith:]

I have noticed in the past that you guys have typically hedged yourself with gas. But given the expansion in heat rates year-to-date, especially for 2011 in Texas, can you perhaps comment to what extent that has helped bolster the '11 outlook?

[Mauricio Gutierrez:]

Certainly heat rates have been pretty well supported and the high -- the warmer than normal weather that we have experienced in Texas over the past two summers have helped boost them up. What we have been trying to do is match as much generation as we can from load, and this matching comes in the form of not on the ancillaries and options between generational load but also heat rates. So as our Retail business is fixed pricing their low into 2011, we've been selling more from the generation to the Retail business and at prices that reflect current markets.

[Operator:]

And your next question comes from the line of Greg Orrill from Barclays Capital.

[Gregg Orrill:]

I was wondering if you'd consider a question about the implications of the Dynegy transaction getting voted down, if that were to happen and sort of how you think about the change in value of the assets since you had agreed to purchase them. And maybe if that didn't happen, what you might do with the cash.

[David Crane:]

Well, Greg, I can only comment, I mean, think what I'm going to tell you is something that if you avidly followed the trade press, you would've already seen in the press. I'm not sure it's going to be that illuminating. But if the Dynegy transaction was defeated, a, obviously we would have no idea why it was defeated or what the plan of Dynegy would be going forward and whether the assets that we had contracted to sale would be available for sale from someone else. If someone offered those assets to us, we were free of our obligation -- when were free from our obligation to Blackstone to consider, we obviously would consider it. And to me, it's a blinding glimpse of the obvious. But given the change in the gas curves since August, we would be offering a lower price. I'm not going to talk about how much of a lower price. But there is another factor is that, we would have to be certain that whoever we were buying the assets from, the transaction was structured in a way that was bankruptcy remote, that we were not subject to a potential unwinding of the transaction due to fraudulent conveyance. So that would be a potential obstacle as well. So the potential permutations of what might happen are so great. That's about all I can tell you right now. On the alternative use of the liquidity, I'll just repeat what we've said. We have a lot of investment opportunities. The Dynegy assets were particularly attractive to us, but they're not the only combined cycle power plant in the United States that are on the market today. And I previously stated in many meetings that I actually thought that the absolute best time to be buying combined cycle power plants most probably can be in the first part of 2012. And then of course, there's the possibility of redeploying the capital in terms of return of capital to stakeholders. And obviously, there is the possibility for share buyback. But as we did borrow money in August in order to finance the Dynegy transaction, there's also the possibility of paying down some debt. So, Chris, did you want to...

[Christian Schade:]

Yes, certainly, we have some calls coming up particularly in the near maturities like the 2004 maturities, which look attractive or beginning to look attractive come the February call date, which I think are about (inaudible). So if there was no other use for the cash, as David said, then certainly we would love to pay down and/or redeem those bonds.

[Operator:]

And your next question comes from the line of Brandon Blossman from Tudor Pickering.

[Brandon Blossman:]

I guess following on '11 capital allocation, assuming all of the transactions do close, $1.5 billion of cash left over on the balance sheet at the end of '11. Is that a balance that you're comfortable with? Or I mean, does that leave any room for incremental asset purchases or stock buybacks, et cetera?

[David Crane:]

Yes, I mean, it certainly is a comfortable cash balance for us. As I said during the prepared remarks, of the $1.5 million, we typically like to keep about $700 million for working capital and margin calls and the like. And the rest of that, so the other $785 million odd are available for both share repurchases and investments and other opportunities, repowering assets, other solar opportunities or other green opportunities. So we think we've got ample fire power both to look at the opportunities that David thinks would be available as well as to return to shareholders as well.

[Brandon Blossman:]

And then real quick moving to retail. Looks like customer count quarter-over-quarter was just slightly down. Does that represent maybe a change in strategy towards keeping customers and shaving margin a little bit?

[David Crane:]

Jason Few is going to answer.

[Jason Few:]

If you look at the third quarter results, we have about $20,000 down on mass that certainly were over the last couple of years, and that's quite an improvement. We've been very aggressively on the strategy to stabilize our customer base, we still maintain a pretty aggressive balance between margin and count and we'll continue to that. But I think with our new product introductions and particularly our compensate plan. We had very solid customer reaction to that plan, which is unique in the market. No one else offering that type of product, and that certainly help us stabilize the customer base as well as what we're doing in terms of our smart energy what we call our smart energy initiatives and the set of products that we've rolled out against our customers that are helping us reduce attrition beyond just the things that we've done from a pricing standpoint.

[Operator:]

And we only have time for two more question. And your next question comes from the line of Brian Russo from Ladenburg Thalmann.

[Brian Russo:]

Just curious, David, you mentioned earlier the 2011 guidance that you look to improve upon it. And I think historically, the company has a tendency to achieve the preliminary 2011 guidance. And just that you're already 96% hedged on the base load generation side, I'm just wondering, what are the potential drivers for upside? Is it greater utilization of gas plants just tied to weather? Or maybe you can give us a little more color on that.

[David Crane:]

Well, I mean, you hit two. I mean, yes, to me, there's the fact that we tend to be a little bit cautious in everything we do. So there could be a little bit of cushion built in. There's the fact that one thing we've never understood about the way the outside world looks at this industry, it's not like we as a management team are seeing on our hands. It's just sort of clipping coupons. I mean, we're a pretty active company in terms of reshaping the portfolio and improving upon it. And so there's the fact that we as a management team may actually do things to improve at which, of course, we like to prove our own value-added. Chris, what else from your perspective?

[Christian Schade:]

Sure. I mean, just to look at the Wholesale business first. I mean, as you said, we're nearly 100% hedged. But, however, if there's an upturn in gas, then we would expect to see an increasing result of around $60 million during the year. There's also some variability in our gas leak results. So with an increase in both gas prices and heat rates, there could be an upward revision of sort of $15 million for them. Also, as we said during the presentation, we have built-in a 6% decrease in costs across our O&M and G&A with about $1 billion of costs. If there are additional 1% to 2% decreasing cost, then that can obviously add to our results as well. And as David said, the management team, we're very much focused on the improvements we can squeeze out of the business. In retail, the range that we have in there contemplates certain load variability due to weather. And then also, if we see lower than expected attrition rates than we previously forecast, that would increase results. Also, if there is a decline in gas and this speaks sort of to the hedge against our Wholesale business, then that would most likely improve results for Reliant. And finally, it's very clear that we guided $500 million of EBITDA for 2010, and we've exceeded that by nearly $200 million we expect to for the year. So changes in weather and other changes to the exogenous markets, obviously, have a very large influence on those results.

[Brian Russo:]

Then just on Green Mountain, can you give us a sense of what's the market penetration there? I guess, on your $70 million of EBITDA, what kind of growth potential is available for Green Mountain going forward?

[David Crane:]

Well, I think that there is growth in the last four or five years. They have averaged a compound annual growth of the 20% to 25% range. And so again, being cautious people as we sort of project forward, we don't project that type of increase because again we're cautious people. But they demonstrated that over each of the last four or five years. And certainly, we think that as I mentioned in my comments, the Green Mountain can penetrate into markets that they haven't, and they've been moving outside of Texas. Their principal area of expansion to date had been in New York City, and we wanted to think in a sort of methodical way. But certainly, we think there are other markets in the Northeast that they can move into. But I think the most obvious thing is that as a small company in the C&I business, Green Mountain has focused on very, very small commercial customer. And our sense and I think there are a lot of anecdotes and data points on this, I'll spare you my Philadelphia cream cheese example, but -- so it seems that a growing number of businesses in the United States that are facing the American consumer are seeing the benefit of sending a Green Energy message. And we think that's the trend it's going to accelerate in, and we expect Green Mountain to be a big part of that trend. So we think there's multiple avenues for growth with Green Mountain, and really, the most challenging one is which ones we prioritize and focus on so we don't spread too fast.

[Operator:]

And our last question comes from the line of Jay Dobson from Wunderlich.

[James Dobson:]

David, most of my questions have been answered, and I did drop off the Q&A, so apologies if this was asked and thanks for the detail on Page 6. But you mentioned the fisher cut date on nuclear, and I was trying to get an idea what exactly you're talking about. Is that loan of guaranty driven because obviously you wouldn't have a PPA by then or some of the other old frames you mentioned?

[David Crane:]

To me, we have that one slide in the presentation, on Slide 6, that sort of talks about five exits. But really, to me, it comes down to basically two sort of interconnected exits. One is the loan guaranty and the others the that PPA obligation, and they're tied together because the PPA obligation has the condition of the loan guarantee. And, Jay, what I can say is it's always hard to predict the development business, and we clearly get subject to complete impact in Washington, where there's just no money that's appropriated for nuclear loan guarantees even though I think President Obama yesterday said that when I'm told, I didn't see despite when he was asked, which areas does our room for cooperation with the Republic, and I think I would sell a nuclear with the first thing of the second thing that you've said. And so in a sense, we should think that there's a scenario, where the election result is beneficial. But the nuclear needs, the loan guaranty appropriation, and if that doesn't happen, obviously, that's a very, very clear exit ramp. The slightly less clear exit ramp is, okay, we got the loan guaranty, but conditional on offtake and what I would tell you about that is that our sense because we're working the offtake question very hard right now is that within a few months of getting the loan guarantee, we'll know whether or not the offtake is going to happen. And if we don't get that within a few months, the fact we have always said to our shareholders that we would not go forward with STP 3 & 4 as a fully emerging plan. The amount of offtake that's being required by the DOE is pretty much the same as what that we were going to insist exist upon anyway. So the exact timing is uncertain, Jay. But I certainly expect that by the summer of 2011, assuming we got the loan guaranty well before that, we should know whether or not the offtake's going to happen or not going to happen.

[James Dobson:]

And then the last question is share repurchases. I know there are some uncertainty given the RP basket calculation at year end and the like. But assuming there's cash, you've historically bought back stock, David. I just understand I want to understand in '11, would there be a reason to expect if there's been any change on that front?

[David Crane:]

Well, I mean, RP basket is the main pacing item. And so apart from that, I wouldn't expect any huge change in the company's policy today. But Chris, do you have...

[Christian Schade:]

Yes, the basket currently stands at about $150 million. As we said, we completed the 2010 plan. And they're obviously, at this time, when we look at 2011, what appear there is liquidity for us to execute a share repurchase program. And we'll get to that announcement with some precision when we do our year-end call in February.

[David Crane:]

Well, thank you very much, and thank you all. I know there are other earnings calls that are already going on. So we appreciate you taking time to listen to the NRG story. Thank you very much.

[Operator:]

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.