BC: NRG AND UTILITY SCALE SOLAR PV
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
Now I'd like to turn it over to David Crane, NRG's President and Chief Executive Officer.
David Crane
Thank you, Nahla, and good morning, everyone, and thank you for joining us on this third quarter call. I'm joined here today by Mauricio Gutierrez, our Chief Operating Officer; and Kirk Andrews, our Chief Financial Officer, both of whom will also be participating in the presentation. Also joining us are Jason Few, who runs Reliant, our principal retail company at NRG; and Chris Moser, who runs the commercial operations of that group. Both Jason and Chris will be available to answer your questions.
I'm going to get right into my presentation. I'm going to be referring to a slide presentation, which you can refer to on our website. And kicking off with Slide 3. I mean, during this call, we want to look back at the results for the quarter that just concluded, but even more so, we want to look ahead at where the company is headed over the months and quarters to come. As we look forward, and I want to tell you this upfront so you're not surprised, my call is to convince you that the company is extremely well positioned to take advantage of and benefit from the opportunities available to it in this market environment and under current commodity prices. During 2011, we have committed a substantial amount of the company's growth capital and a series of value-enhancing investments in areas where the company has both special confidence and competitive advantage. Importantly, given the commodity price environment that we live in, all of these projects and businesses offer revenue streams that either do not rise and fall in correlation with the short-term fluctuations in natural gas prices, or in the case of retail, actually are negatively correlated with natural gas prices. Three of these growth areas are highlighted on Slide 3. With the 400 megawatt GenConn peaker projects, which came online in this summer, the 660 megawatt Old Bridge CCGT, which secured a long-term capacity offtake agreement in the New Jersey state solicitation earlier this year, and the 550 megawatt El Segundo repowering project have achieved financial closing this quarter. We have almost 1,500 net megawatt of advanced gas-fired project with long-term offtake agreements, which are going to contribute steady streams of earnings and cash flows to the company for decades to come.
With respect to renewables, we had previously signaled to the market over the past several quarters that as a result of the expiration of the Section 1705 federal loan guarantee program at the end of the third quarter and the expected expiration of the 1603 cash grant ITC at the end of the fourth quarter, there would be a surge of renewable projects that would begin construction before the end of this year. I'm quite pleased to report to you that our big 3 solar projects, Ivanpah, Agua Caliente and CVSR, successfully navigated the very challenging DOE loan guarantee application process and are now being constructed at full speed. Led by these 3 projects, we now have a total of 881 net megawatts of utility-scale solar projects in operation under construction or in the final stages of advanced development, all 881 megawatts with long-term offtake agreements with highly creditworthy load serving entities.
And finally, there's the acquisition of Energy Plus Holdings, a young but very fast-growing retail electricity provider concentrated in the Northeast United States. Energy Plus' unique approach to the retail electricity market is based on its exclusive partnership relationships, with a long list of airlines, hotel chains and affinity organizations that enable Energy Plus as part of its home electricity supply offer to offer frequent flyer miles, frequent gas points and other targeted benefits that customer classes with the preexisting relationship or loyalty to the airlines, hotel chains and other groups with whom Energy Plus have partners. These 3 areas, gas-fired, conventional, generation large-scale solar both with offtake agreements and expanded retail, are going to provide significant growth to the company's bottom line over the next couple of years, and they're going to do it in a way that does not depend upon a recovery in natural gas prices. In addition to where we stand in terms of the deployment of our growth capital, I'm also very pleased to report of where the company stands in terms of our buyback program. Since our announcement of an additional buyback on our second quarter call, we have aggressively executed against that plan such that year-to-date, we have deployed $378 million in buyback from the market, 17.5 million shares of NRG stock, which had an average price of about $21 per share is a price far below what we, the company management and Board of Directors, believe to be the intrinsic value of the company. We believe this actual yield break the events for all NRG Energy remaining shareholders as we resume our EBITDA growth in 2012 with the financial benefits be spread more generously across a substantially reduced share count.
And that leads to my final point on this slide, looking ahead to 2012. With 2011 adjusted EBITDA projected to come in between $1.8 billion and $1.85 billion, we are initiating EBITDA guidance for 2012 with an uptick to a range of $1.825 billion to $2 billion and with free cash flow before growth of $800 million to $1 billion. This upswing in our annual guidance is important because we are projecting this increase not as a result of higher-priced gas hedges entered into long ago and not because of a higher gas market price. In both cases, the truth is quite to the contrary. But because the company expects greater contribution from contracted assets, because we will benefit from the first really significant contribution of EBITDA from our new business areas, and most importantly, because of the bullish prospects for the other key component of our wholesale pricing equation, namely Texas heat rates. Our plan for 2012, key elements of which are shown in a little more detail on Slide 4, is focused on making sure that we benefit from both the rising heat rate environment in Texas and any market design changes that will be implemented to incent more production in that state. While it's impossible to predict what type of weather Texas will experience in 2012, we believe the supply-demand equation is very tight and we expect substantial volatility. Forward heat rates still have ways to go before they incent any new power generation, so the burden is on the incumbent fleet to stand and deliver flawlessly. And our Texas operations team is hard at work preparing to do that.
On the retail side, with Reliant leading the charge towards another banner year for retail at NRG, we are seeking more of the same: healthy and sustainable margins, low bad debt write-offs and a customer count between that Reliant, Green Mountain and Energy Plus is growing at a healthy pace. In terms of our conventional Brownfield/Repowering program, the challenges faced by various incumbent coal and nuclear generation assets in our core regions have created greater opportunity for new projects at our existing sites. Beyond GenConn, Old Bridge and El Segundo, the nearly 1,500 net megawatts of projects with offtake agreements that I previously mentioned, we have another 1,500 megawatts of permitted gas-fired CCGTs within the load pockets in New York City and California and other CCGT projects earlier in the development pipeline. We will be moving forward on these projects so long as we can secure long-term offtake agreements.
So to give you a sense of how we are setting our management priorities for 2012, please turn to Slide 5. Mauricio will be providing you more details in these areas, but I want to give you my personal assurance that our management focus in 2012 will be squarely on forceful implementation of what we started in 2010 and 2011. First and foremost, we need to deliver on the full promise of our combined generation and retail potential in Texas in the same way that we have done for 8 of the first 9 months in 2011 in Texas in a way which we regrettably did not do in August.
Secondly, we are focused on making sure that both El Segundo and our big solar projects are constructed on time and under budget. On the solar projects, we have a very high level of confidence in our technology partners, BrightSource, SunPower and First Solar. We have a high degree of confidence in Beckville, [ph] which is involved in 2 of the big 3 projects, and we have a high degree of confidence in our own project management personnel, who are providing oversight to these massive construction projects. So far, our experience in solar construction has been very highly positive. But given the sheer scale of the projects that we now have under construction, we are taking nothing for granted.
Finally, and as we have discussed on previous calls, the date is fast approaching when we can look to refinance our 2017 bonds and be free to allocate our excess capital in a manner that maximizes value to our shareholders. As we prepare to enter this new era of reduced adult supervision from our bondholders, I want to emphasize a few points. First, we continue to believe in a balanced approach to capital deployment. Second, we continue to subscribe in the overriding principle of prudent balance sheet management. And finally, we believe our capital deployment program in 2011 adhere to these fundamental principles, and we fully intend to adhere to these principles in 2012. Having said that, at this share price level, we see enormous value to be had in investing in NRG stock.
Beyond these 3 top near-term priorities, we will continue to push our effort to position NRG into first mover status in key areas that we believe have the potential to transform the energy business over the next several years. Time constraints preclude me from going into all these areas in too much detail right now, but I do want to expand the discussion and little bit more about our solar strategy. I do this in part because of the significant capital commitment that we had made to our solar program, depicted on Slide 6, during 2011. And I do this in part because it is inevitable that in the highly politicized, post-cylindrical [ph] world that we live in, you have probably already heard or read in the popular media a great deal about solar power that is distorted, misinterpreted or just flat-out wrong. So let me start with some basic facts that underpin our fast-moving and generally successful effort to be a leader in solar power generation in the United States.
Fact #1. Solar generation is a domestic energy resource installed locally by American workers, built on the strength of American technological innovation and tapping into America's abundant solar resource, which for all practical purposes is inexhaustible.
Fact #2. Solar generation, and particularly solar photovoltaic, puts less strain on other scarce commodities than any other form of power generation, particularly when it comes to what I like to call the big 3 of sustainability: freshwater, arable land and clean air.
Fact #3. While solar is an intermittent resource, the sun is more reliable and predictable than the wind. And solar energy's availability is more coincident with the all-important peak summer load that the wind is.
Fact #4. While large-scale solar power development in the United States has been very substantially assisted by a variety of federal government programs, beginning with the Energy Policy Act of 2005 passed by a Republican-controlled Congress and signed by President George Bush, the primary driver for the U.S. solar industry has in fact been renewable energy portfolio standards enacted at the state level by red and blue states alike, led by California with its 33% renewable portfolio standard passed into law and signed by Republican Governor Arnold Schwarzenegger, which leads to my fifth and last fact about solar, and this by far the most important to us as a company.
The price of solar panels, in particular, and of solar installations, more generally, is dropping like a stone. And for NRG, as probably the single largest consumer of solar panels in the United States, that is a very good thing. Moreover, we are convinced that the cost of solar installations is going to continue to drop precipitously both in absolute terms and relative to other forms of power generation.
Most forms of power generation, including wind, depend on brute force in the form of thermal energy or kinetic energy to make electricity. Increased size equals increased scale. Certainly, the wind industry has followed this approach. But solar photovoltaic is different. Solar PV is in essence a nanotechnology. As such, we believe some offshoot of Moore's Law applies to solar photovoltaic technology. Call it, if you will, crane solar corollary to Moore's Law, but we believe the delivered cost of energy from solar PV, which has been cut in half in the last 24 months, will be cut in half again in the next 24 months. The ramifications of this price trend will be far reaching. We will be in a situation where within 2 years the price of delivered power from solar installations will be able to undercut the retail price of grid power in roughly 20 states. Many of these high-priced retail states are in our core regions. This low-cost solar power installed in every increasing volumes on a distributed and semi-distributed basis in a way that obviates the need for a lot very long high-voltage transmission lines has the potential to revolutionize the hub-and-spoke power system, which currently makes up the American power industry.
There's a perception of Wall Street investors that the solar industry is completely a creature of government financial largesse and market support. And that perception is largely true, but it's only true if you're looking backwards. As I've stated previously, our big 3 utility scale solar projects could not have occurred without the federal loan guarantee program and the California State renewable portfolio standard. And as all of us have seen over the years, when government rubs up against business, that the blessing of government support for any particular industry is inevitably followed by a curse when the government yanks away that support usually without warning, without reason and at a time when the industry can least afford it.
But if we look forward, we see a solar industry that's going to trend strongly towards distributed and residential installation. And while market penetration for distributed and residential solar can and should be enhanced by enlightened government policies, the fact is that distributed and residential solar is a free-market construct. And solar energy at its present and certainly at its future price point will achieve explosive growth and substantial market share as a matter of consumer choice.
NRG is positioning itself competitively through NRG Solar's warehouse group start program with [indiscernible] and the DOE and through its 3 retail electricity providers to lead this transformation and to secure the benefit of it for our shareholders.
===== |
