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NRG Energy (NYSE:NRG)

Q4 2012 Earnings Call

February 27, 2013 9:00 am ET

Executives

Chad Plotkin - Vice President of Investor Relations

David W. Crane - Chief Executive Officer, President, Executive Director and Member of Nuclear Oversight Committee

Mauricio Gutierrez - Chief Operating Officer

Kirkland B. Andrews - Chief Financial Officer

James Steffes - Chief Executive Officer and President

Analysts

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Jonathan Cohen - ISI Group Inc., Research Division

Neil Mehta - Goldman Sachs Group Inc., Research Division

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Keith Stanley - Deutsche Bank AG, Research Division

Stephen Byrd - Morgan Stanley, Research Division

Angie Storozynski - Macquarie Research

Operator

Good day, ladies and gentlemen, and welcome to the Quarter 4 2012 NRG Energy, Inc. Earnings Conference Call. My name is Patrick, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Chad Plotkin, Vice President of Investor Relations. Please proceed.

Chad Plotkin

Thank you, Patrick, and good morning, everyone. I'd like to welcome you to NRG's Year End and Fourth Quarter 2012 Earnings Call. This morning's call is being broadcast live over the phone and via webcast, which can be located on our website at www.nrgenergy.com. You can access the call, associated presentation material, as well as the replay of the call in the Investor Relations section of our website. [Operator Instructions]

Before we begin, I urge everyone to review the Safe Harbor statement provided in today's presentation, which explains the risks and uncertainties associated with future events and the forward-looking statements made in today's press release and presentation material. 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 the conference call.

In addition, please note that the date of this conference call is Wednesday, February 27, 2013, 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 a quantitative reconciliation of those figures, please refer to today's press release and this presentation.

And with that, I'll turn the call over to David Crane, NRG's President and Chief Executive Officer.

David W. Crane

Thank you, Chad, and good morning to everyone. I'm joined here today by Mauricio Gutierrez, the company's Chief Operating Officer; and Kirk Andrews, the company's Chief Financial Officer. They will both be giving part of this presentation and be available for questions thereafter. Also joining us, some other NRG executives who will be available to answer your questions: Anne Cleary, the company's Chief Integration Officer; Chris Moser, who runs the company's Commercial Operations, including our Trading; and Elizabeth Killinger, who runs Retail for us in Texas; and Jim Steffes, who runs Retail for us in the Northeast United States.

So let me begin by recognizing that certain dichotomies exist between what we typically focus on during this earnings call and what we, NRG management, concentrate on while conducting the company's day-to-day business. Chief of these dichotomies is the one that exists around personal safety. While safety is not the focus of the financial community, it's very much our focus. Indeed, for NRG management, it is our primary focus. As such, I'm pleased to report today that in 2012, NRG achieved the best safety performance record in its history, a 0.52 OSHA recordable rate with not a single life-altering injury. This performance places us well within the top decile of our industry and is a testament to the hard work and professionalism of NRG's now 8,000 employees.

To put this achievement into a historical context, in 2004, my first full year here at NRG, our OSHA recordable rate was 4.48, which was itself significantly down from a rate of 6.05, which was what the company achieved in 2003, the year before I came here. So having brought the rate down over 90% in 2003 to 0.52 in 2012 is extremely noteworthy. So I want to start by using this public forum to congratulate the men and women of NRG on an absolutely stellar safety performance in 2012.

Now as we turn to 2012 financial performance, I am very pleased with our overall performance in a year when our fundamental commodities were under nearly constant bearish pressure, nor did the weather give us much upside, even in terms of the Northeast winter or the Texas summer. Not notwithstanding the moderate weather that we experienced in 2012, for NRG, financially, the formula remained the same in 2012.

Solid EBITDA with a healthy contribution from retail and a growing contribution from solar, plus robust free cash flow before growth. We also made significant strides in 2012 across our three-part strategic platform of enhance generation, expand retail and go green. I'll hit the highlights in each of these 3 areas on subsequent slides.

But first, I want to focus for a moment on an achievement, which has received relatively little public comment today, and that is the actions taken around our Louisiana portfolio in 2012. A decade-long extension to a couple of critical co-op contracts; a constructive settlement with the EPA of long-standing NSR litigation relating to Big Cajun II; and the reassessment of the company's overall environmental spend in light of currently applicable environmental and economic factors, which has enabled us to reduce our public estimate of our future overall spend as a company on environmental CapEx by over $100 million. This favorable outcome was a result of the coordinated efforts spearheaded by our Louisiana management team under the leadership of our Gulf regional organization.

Now turning to Slide 4, there are 2 points here. The first point is that we, in NRG management, have long objected to the view that our stock is just a proxy for long-term natural gas prices. Clearly in the past, now and into the foreseeable future, NRG will do better in a higher natural gas price environment than in a low natural gas price environment. But our goal as a management team has been to create a business model that allows NRG not only to survive, but also to flourish no matter what the price of natural gas might be from time to time. We have made significant strides in that regard, and it seems that the separation of our stock price performance from natural gas prices in the second half of 2012 might suggest that the market is coming to believe it as well.

My second point on this slide, which is obvious from the chart on Slide 4, is that 2012 was not an evenly paced year for the company. We clearly gained momentum during the second half of the year, and we are focused right now, hard on maintaining and accelerating that momentum in 2013 as we springboard off the forceful and expedited implementation of the GenOn integration.

In that regard, turning to Slide 5, under Ann Cleary's leadership, our integration effort has jumped off to a great start. Just 8 weeks into the integration, our confidence level on what we can achieve could not be higher. And as a result, we are pleased to announce an increase in our overall cost synergy target arising out of this combination from $175 million to $185 million. 52% of our new revised target run rate for total cost synergies already has been captured, and that's $97 million a year. Plus, over 90% of our balance sheet synergies, representing an additional $93 million a year, already has been put in place. So we are well on our way to delivering what we've promised.

As to what we have not yet promised, we have not yet revised our estimate of the operational synergies that we expect to be able to achieve as a result of operating the generating assets of classic NRG and the former GenOn plants as one combined fleet. I want to assure you that such work is ongoing at a very granular level across all the plants now in our system. As soon as we have firmed up the commercial and technological viability of our asset management plan around the entire set of generation assets, we will inform you of what we think we can achieve in regards to increased operational synergies, the cost to achieve these synergies and how long it will take us to achieve them. At this point, it is still too early for me to be specific, but I continue to believe that the $25 million a year estimate is quite conservative.

Now turning to Slide 6. While we obviously are focused as a company on the GenOn integration at the corporate level and on the wholesale side of the business, there are significant movement underway within NRG's retail companies to make sure we continue to grow our retail businesses in a way that enhances shareholder value, which means to us, profitable and intelligent growth with the key wholesale supplier risk inherent in the retail business covered or partially covered by our own wholesale supply.

To do this, we have reorganized our multi-brand strategy, principally on geographic lines, with Elizabeth Killinger of Reliant assuming all responsibility for NRG Retail in Texas; and Jim Steffes at the Green Mountain, assuming responsibility for all NRG retail in the Northeast United States. For each of our retail leaders, one of their many key objectives for 2013 will be to more closely integrate new clean energy products and services of the type -- briefly described near the bottom of Slide 6, into their conventional grid-based retail business. We already have a head start in this regard with what Reliant already has accomplished with smart energy products and services for the home, and we believe an assertive expansion of these clean energy products and services aimed at the end-use energy consumer and the seamless integration of them into a conventional retail offering of system power will have multiple benefits. It will differentiate our retail value proposition, promote customer retention and act as its own distinct and attractive sales channel. I think we will be able to report on very positive developments in the retail space by the end of 2013.

Now turning to Slide 7. The other major area of management focus, which you should be tracking, is our company's very substantial construction program. For the last couple of years, we have carried forward a multibillion-dollar construction program. From your perspective to date, there has been little to show for in terms of current EBITDA contribution. In 2013 and 2014, our construction program bears fruit in a significant way. In 2013, we expect over 2,000 megawatts of utility scale conventional and solar generation to come online. These projects should generate over $500 million in incremental EBITDA, almost all of which is fully contracted. So far, all of these projects are performing fully or close to fully in line with our expectations with respect to both time and schedule. You will be hearing more from us as meaningful milestones are achieved in our construction program in the months to come.

Beyond these projects, we continue to make substantial investment in a robust development program aimed at both revitalizing our conventional fleet in key locations and continuing the attractive growth of our industry-leading solar portfolio. With respect to the latter, we have over 900 megawatts of mid- to late-stage Tier 2 utility scale solar projects in development in key markets across the United States, 72 megawatts of which are already under contract. We also see and are pursuing significantly sized solar development programs at the sub-utility scale level in industry, commercial and arising out of government procurement.

Now turning to Slide 8 and to capital allocation, which is the fourth part of NRG strategy for value-enhancing growth. As mentioned previously, the company stands to be substantially free cash flow positive both in 2013 and 2014, notwithstanding the continued weakness of the underlying gas price fundamentals, and that free cash flow generation will add to the cash already on NRG's balance sheet, which we already have acknowledged as liquidity in excess of current need. Without undermining our eternal and unyielding commitment to prudent balance sheet management, or PBSM, as it's referred to in the upper part of this slide, we are now in a position to consider our options with respect to the optimization of your capital without the artificial constraints imposed in previous years upon us by various restricted payment baskets.

You will note, and Kirk will elaborate further, that as a first salvo in this regard, we have chosen to do 2 things: An increase in our annual dividend on common stock back to a level, which approximates 2% per year, the average dividend yield of the S&P 500; plus a buyback of $200 million worth of common stock. Together, these 2 actions represent a return to shareholders of close to 5% of our market capitalization.

What we hope we have accomplished with these 2 actions is first, having initiated the common dividend just last year. This year, we are acknowledging the principle that the dividend should grow over time. And second, with the share buyback, that we will not sit indefinitely on all of our excess capital. We see a lot of opportunities across our wholesale to retail business footprint within our industry and with our industry in a considerable state of flux with our own internal development opportunities and with the clean energy industry still struggling to figure out where it fits with the conventional business. We are highly confident we can deploy the company's capital in a way that generates cash, outearns our own cost of capital and enhances the strength of our overall asset portfolio and business model going forward.

And with that, I'll turn it over to Mauricio

Mauricio Gutierrez

Thank you, David, and good morning, everyone. NRG closed 2012 on a high note and delivered another year of strong performance across the board.

I want to take this opportunity to join David and recognize every one of our colleagues at NRG for making this year the safest in our 9-year history. It was also our best year from an environmental standpoint. These are outstanding accomplishments that makes us all proud and the foundation for our best-in-class operations.

Now back to the results for the quarter on Slide 10. Our integrated platform delivered on our goal despite the low commodity price environment. Retail grew customer count and margins, and our commercial group was very successful in managing the retail loads and maximizing the value of our generation portfolio in a year where many of our markets saw the lowest electricity prices in a decade.

As we work through the integration process, it is important to start by providing you with a post-transaction view in key areas of operations, hedging disclosures and environmental spend. To that effect, the environmental capital plan of the combined company will be $630 million through 2017. This includes the $100 million reduction primarily related to mass compliance at our Big Cajun II facility that we announced during our third quarter call.

The entire operations group is very focused on further optimizing our combined spend through our successful FORNRG program and executing on operational synergies. As you know, the program has delivered significant improvement in the past, and this year was no exception. You can expect to hear from us in this area in the weeks and months to come.

Finally, on the construction front, we commissioned 280 megawatts of utility scale solar generation in 2012 with Borrego and Alpine coming online at the beginning of this year. El Segundo and Marsh Landing made significant progress in 2012 and remain on track for commercial operations in 2013. During the year, we also kicked off the construction of our Parish Peaker project for operation later in the year.

Turning to our operational metrics on Slide 11 and starting with safety, we achieved the lowest recordable injury rate in NRG's history and for the 4th year out of the last 5, achieved top decile performance in our industry. During the fourth quarter, 97 out of 104 locations were without a single recordable injury. I mentioned this post-merger count to highlight that we have combined 2 strong safety cultures, and we expect a continuation of great results going forward. A continuous improvement culture that drives our safety performance translates to results in the larger organization.

For the fourth quarter, our generation was up 8% compared to last year, driven primarily by the West region, which tripled the amount of generation in the Northeast assets. For the year, generation was down 10% compared to 2011, driven almost entirely by Texas due to coal-to-gas switching in the early part of the year, based on availability and milder weather. Our coal availability was 85% for the year. As I've mentioned in the past, in this commodity price environment, we need to balance operating performance and margin of risk by proactively taking outages during uneconomic periods with little opportunity costs.

Our gas portfolio performed well with almost 8,000 starts and 98% starting reliability. On January 8, we have failure on 1 of our 2 main transformers at STP Unit 2, caused incorrectly a unit trip while impacting one of the lube oil pumps. We experienced blade damage due to the turbine closing down without lubrication. Repair work is in progress, and we expect to have the unit back online by early May. The problem was isolated to the power side of the plant, and there was never a nuclear safety issue nor was anyone hurt during the incident.

Our FORNRG program had a very successful start with $36 million above our target for the year. A combination of recurring and nonrecurring items on asset optimization, property tax relief, retail synergies and outage optimization work helped us achieve this result. This program creates the right framework to achieve our operational synergies and one that will leverage best practices across a portfolio of now 100 plants and 330 fossil units.

Moving on to Slide 12. Our retail business has finished the year strong, delivering $656 million of EBITDA, slightly ahead of expectations, driven primarily by an increasing customer count, higher volumes and sustainable retail margins. In 2012, NRG grew customer count organically by 142,000 customers with 2/3 of them coming outside of Texas, a compelling 7% growth rate overall. These results were driven by our effective sales and service execution, as well as the introduction of additional innovative promotions, products, channels and partnerships. Our investment in geographic growth to enter and further penetrate the Northeast markets was also effective, where we grew customer count by 43% year-over-year.

2012 was another year winning best competition in the C&I markets, and we remain committed to diligently manage the business, making trade-off to ensure profitable growth. Recognizing that Texas and Northeast markets are unique and consumers have distinct preferences for brand, channel and product combination, we refocused our business regional in the fourth quarter. This will enable our multi-brand business to launch relevant promotions, sales and products for each market, while leveraging our customer operations, scale, efficiencies and bad debt effectiveness across all our bands and markets.

Finally, the result for the quarter of the year is that we once again balanced customer count and margin consistent with our long-term strategy, and this strong performance has enabled NRG to remain the largest retail business in Texas with a healthy growing presence in the Northeast.

Moving on to Slide 13, I'd like to share a few comments in 2 of our core markets. Starting with our -- at the most immediate opportunity, we continue to see reserve margins below the target level despite downward revisions in local estimates by ERCOT in their latest report. Spark spreads have improved recently and are now indicated at the top end of the 6-month trading rates, but remain below new build economics by $4 to $5 per megawatt hour, as you can see on the upper left chart.

The ongoing debate around resource adequacy solutions and the recently announced changes of the commission will likely push any long-term position, probably summer. In the meantime, we continue to work closely with ERCOT and other stakeholders to improve the real-time price formation prior to this summer. Specifically, we are addressing real-time price mitigation and expansion of operating reserves, which if properly addressed, should help to provide the appropriate economic signals to the market.

In PJM, we see potential recovery in the medium term, with tightening coming from the supply side in the form of announced coal retirements for all clear megawatts, as shown in the upper right-hand chart, with a potential to lose another 2 to 4 gigawatts of average New Jersey head units. And you can see on the chart the combination of significant retirements across a heavy reliance on demand response to meet the reserve margin target, would indicate to us the need to -- the need for some premium in the market, which is noticeably absent as we look at the spark of spreads on the chart below. Based on new build economics, the potential OpEx could be close to $6 per megawatt hour, which our fleet will be well positioned to benefit from.

Turning to our hedging disclosure on Slide 14, we have fully hedged our 2013 expected coal and nuclear generation. In the medium to long term, we retain significant exposure so as markets improve, we stand to benefit from heat rate expansion and gas recovery. On the coal supply, we remain opportunistic to hedge the remaining overexposure in 2013 and, since our last call, we executed a coal transportation agreement for our Maryland units. I'm also pleased to report that the commercial integration so far have been relatively smooth, and we expect to finalize all changes to systems and personnel prior to this summer.

Finally, Slide 15 summarizes the goals and priorities for the operations group. We are focused first on completing the integration of the GenOn portfolio and executing on operations, commercial and construction objectives; second, on delivering the operational synergies that we committed across the fleet, both of which laid the foundation for our success in 2013 and beyond.

With that, I will turn things over to Kirk for the financial review

Kirkland B. Andrews

Thank you, Mauricio. Beginning with the financial summary on Slide 17, NRG is reporting fourth quarter 2012 adjusted EBITDA of $420 million. For the full 12 months of 2012, adjusted EBITDA totaled over $1.9 billion, with nearly $1.2 billion from wholesale, $656 million from retail and $86 million from our solar projects.

Our fourth quarter and full year 2012 results include the impact of the GenOn transaction, which contributed approximately $10 million in adjusted EBITDA following the closing of the merger on December 15. Meanwhile, 2012 adjusted cash flow from operations was a robust $1.1 billion, driving free cash flow before growth of approximately $900 million for the year and leading to a $1.3 billion improvement in liquidity since year-end 2011.

Turning to capital allocation, I'm pleased to announce that we have now completed over 98% of the $1 billion debt reduction target announced in mid-2012 in connection with the GenOn transaction, significantly strengthening NRG's consolidated balance sheet. We achieved nearly $800 million in debt reduction by year-end 2012 through the combination of the 2017 refinancing and the repayment of the GenOn term loan. In 2013, NRG launched a debt open-market repurchase program, which has now been completed, resulting in the repurchase of $200 million in NRG unsecured notes of various maturities and representing the balance of our $1 billion deleveraging target.

In addition, having achieved our minimum delevering objective, we have now captured $93 million of the $100 million in annual free cash flow from balance sheet efficiencies announced in connection with the merger. Importantly, we now expect the $10 million increase in cost synergies, which will lead to at least $310 million in free cash flow benefits resulting from the GenOn transaction. The reduction in total debt, when combined with substantially increased adjusted EBITDA and free cash flow in 2013 and beyond, now places us in line with target prudent balance sheet management metrics, providing NRG the flexibility to allocate its substantial excess capital towards both enhanced return to shareholders and the continued investment in NRG's future growth.

In the third quarter of 2012, NRG initiated its first-ever dividend, as our committed vehicle for annual return of capital to shareholders at a rate of $0.36 per share. This initial dividend was based primarily on the growing contracted cash flows from our successful renewable investment efforts. With the completion of our equity investments in our Tier 1 solar projects by the end of 2012, we see all of these projects reach COD by 2014 and deliver over $300 million in adjusted EBITDA.

Finally, in the third quarter of 2012, NRG announced a 20% reduction in expected environmental CapEx, further enhancing free cash flow and capital for allocation by a total of $100 million through 2017. In 2013, with our balance sheet now significantly strengthened, our credit metrics in line, previous RT constraints now lifted and a significant portion of our cash flow synergies captured, we are now pleased to announce a $200 million share buyback program, which when combined with an intended 33% increase in our annual dividend of $0.48 per share, represent a substantial increase in total capital we return to shareholders in 2013 versus 2012.

Turning briefly to the guidance overview on Slide 18, we are reaffirming the recently announced increase guidance ranges for adjusted EBITDA and free cash flow before growth for 2013 and 2014.

Turning to Slide 19. Beginning in 2013, NRG is changing the methodology used to calculate adjusted EBITDA and free cash flow before growth. We believe this new methodology, when combined with enhanced quarterly disclosure regarding NRG's proportionate share of debt and partially owned investments, will provide investors clarity to assist in evaluating NRG's enterprise value and leverage.

The changes to adjusted EBITDA include the following: first, we will now include a pro rata portion of the EBITDA of our equity investments in unconsolidated affiliates, instead of using a pro rata portion of net income; second, we will discontinue the deduction of noncontrolling interests, and we'll provide separately the proportionate amount of adjusted EBITDA and debt attributable to our partners in consolidated investments; third, given the significant increase in plant retirements resulting from the GenOn transaction, we will now exclude nonrecurring plant deactivation cost from the calculation of adjusted EBITDA; and finally, we will now exclude interest income from adjusted EBITDA and instead report it as a reduction of interest expense in the buildup of adjusted EBITDA in our Reg G disclosures.

In addition, we will begin adjusting free cash flow before growth investments for distributions to noncontrolling interests. This was previously deducted below this line to arrive at a change in cash or capital for allocation. However, as we do not currently anticipate making distributions to noncontrolling investors until 2015, our revised methodology does not affect our free cash flow before growth investments guidance under the new methodology. With a number of our projects partially owned, we believe this new EBITDA methodology-enhanced disclosure will permit us to provide our investors with a clearer picture of NRG's adjusted EBITDA.

Slide 20 provides you a breakdown of the impact of these changes in methodology on our 2013 and 2014 adjusted EBITDA guidance ranges. The total impact of these changes is approximately $80 million in 2013 and $60 million in 2014, resulting in a revised adjusted EBITDA ranges of $2.615 billion to $2.815 billion in 2013 and $2.760 billion to $2.960 billion in 2014. These changes impact the wholesale and solar guidance ranges only, with no impact in retail adjusted EBITDA guidance under the revised method. These revised adjusted EBITDA ranges are now more closely aligned with NRG's consolidated debt balances and will also provide investors the basis for understanding NRG's proportionate share of adjusted EBITDA and debt, which I will cover on Slide 21.

Turning to Slide 21 and focusing on 2014, the year in which our Tier 1 solar projects have all reached COD. At the top of this slide and starting with our adjusted EBITDA guidance under revised methodology, we have deducted our partner's share of EBITDA to arrive at NRG's proportionate share of adjusted EBITDA guidance. In the blue section of the slide, we have also provided adjustments to our projected consolidated debt balance for 2014, deducting our partner's share of debt and adding NRG share of debt associated with investments in unconsolidated affiliates, to arrive at NRG's projected proportionate share of 2014 debt of $15 billion. This compares apples-to-apples to NRG's proportionate share of EBITDA of $2.65 billion to $2.85 billion for 2014.

Finally, in the yellow section of the slide, we have also provided separately NRG's proportionate share of both adjusted EBITDA and projected 2014 nonrecourse debt associated with our solar projects. Going forward, we will be providing our partner's share of adjusted EBITDA and debt as a part of the appendix to our quarterly presentations, as we believe this additional information will permit investors a clearer understanding of NRG's leverage, the leverage levels of our solar projects in particular and provide the basis for EBITDA multiple-based valuation of NRG.

Turning to corporate liquidity on Slide 22. NRG's current liquidity increased by $1.3 billion in 2012 to approximately $3.4 billion. This increase is primarily due to an increase in cash and cash equivalents of $983 million due to the cash acquired in the GenOn transaction, which is net of cash used to retire the GenOn term loan; and an increase in the revolver availability of $385 million, primarily due to the reduction in letters of credit resulting from the sell-down of Agua Caliente. Our 2012 year-end cash would significantly exceed our targeted minimum balance of $900 million when, combined with our substantial free cash flow generation, formed the basis for capital available for allocation, which I will review in further detail shortly.

Turning to Slide 23. As a part of our 2013 capital allocation program, we intend to increase our annual dividend by 33% from $0.36 to $0.46 per common share beginning in the second quarter of 2013. The El Segundo project, when combined with the Marsh Landing project acquired in connection with the GenOn transaction, will both be online in 2013 and will begin contributing substantial cash distributions. These significant distributions, when combined with the cash flows from renewable assets, which form the basis for establishing our initial dividend, provide an expanded base of contracted cash flows to support NRG's increased dividend rate. By 2014, we expect total distributions from these long-term contracted projects to exceed the 2013 dividend rate by approximately $25 million and expect this excess to grow to nearly $75 million by 2015, providing the basis for potential continued dividend growth.

In a market environment with reliable yield hard to come by and many utility dividend payout rates now under pressure, we are pleased to now be in a position of providing enhanced current return to our investors based on the successful prior allocation of capital of these contracted investments. Moreover, NRG's increased dividend rate also represents only around 15% of our free cash flow before growth, providing a broader base of certainty, support and potential growth for this important vehicle for returning shareholder value.

And finally, turning to capital allocation on Slide 24, NRG ended 2012 with an excess cash balance of $1.062 billion, which consists of cash and cash equivalents less our targeted cash balance of $900 million and $125 million of cash at certain excluded project subsidiaries, which is not currently distributable to NRG.

subsidiaries, which is not currently distributable to NRG. This excess cash balance, when combined with NRG's 2013 free cash flow before growth investments, leads to $1.962 billion to $2.162 billion in cash available for allocation in 2013, representing more than a 60% increase over 2012. Approximately $900 million of 2013 cash available for allocation has already been allocated through a combination of previously committed growth investments, scheduled debt amortization in 2013, the capital deployed since year end to complete the open-market purchase of NRG unsecured notes, integration costs associated with the GenOn transaction and finally, a reserve for NRG's intended increased dividend.

We have now also allocated $200 million toward an authorized share repurchase program to be deployed during 2013, which when combined with the dividend increase, represents a significant increase in returning shareholder capital. After the capital allocation measures announced today are implemented, NRG's ongoing cash flow generation through 2013 will still provide nearly $1 billion in cash liquidity in excess of current commitments. We believe that type of financial flexibility as the year unfolds is a huge advantage in the dynamic marketplace and fluid capital markets in which we currently operate. However, consistent with our commitment to enhancing cash flow, exceeding our cost of capital and providing clear shareholder communication, we will continue to adhere to be disciplined in evaluating and executing any investment decisions.

With that, I'll turn it back to David for his closing remarks.

David W. Crane

Thanks, Kirk. As has been my tradition during my 9 years at NRG, on Slide 26, which is the last slide, we're ending our first earnings deck of the year with a checklist of key objectives for the year ahead. My goal in doing this is obviously so you can follow along and hold us accountable as we succeed or fail in our effort to lead the company you own forward.

Most of these specific goals were touched upon by Mauricio, Kirk or myself previously in this presentation, so I'm not going to elaborate further on any of these individual goals, unless you want me to. So I'll end by making only one point. I think the fundamental strength of NRG is that we are not wedded to generation alone or to retail alone or to any other single link in the energy value chain. We're not wedded to one technology, to one source of fuel or to one geographic location. We can go wherever in the industry we see the potential for profitable growth and shareholder value creation, and we have built a company now that has the ability to do just that. We look forward in 2013 to building on the momentum generated by a very successful 2012 for the benefit of all of you, the owners of NRG.

And with that, Patrick, we are happy to take a few questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brandon Blossman with Tudor, Pickering, Holt & Co.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

I guess first off, David, CO2 legislations/EPA regulation, just your general thoughts about where we are, say, versus 4 years ago and where we are today versus pre-election.

David W. Crane

Well, Brandon, how much time do you have? I mean from my perspective, a considerable amount of work has been done, particularly, I mean actually on the GenOn side of the equation in terms of back-end control. I mean it seems to me that where we're at quite frankly, on the coal side of the conventional power industry, is the plants that have put on the back-end controls I think have a medium- to long-term future. The ones that don't, at this point, it doesn't make a huge amount of economic sense to put more back-end controls on. With the idea the EPA regulating carbon by regulation, I mean, I assume that's the path we're on now. I mean I don't see -- I mean there's obviously been more talk about climate change and the like with the reelection of President Obama, but I don't see any sort of legislation passing through Congress. So it's up to the EPA. And I think they'll take action, but the nature of EPA action will be so slow-moving once it works its way through the whole process, that it's almost not really even in our short- to medium-term planning horizon. It's something really virtually for the next decade. So in that sense, I don't think there has been a fundamental change as opposed to the last results of the election cycle. I don't think there's any sort of talk in any circles about a rebirth of the Waxman-Markey-style legislation. So I think we're in a pretty good place. I mean the amount of money that we're talking about spending to finish out the back-end controls, I think that's really it, and we're going to be pretty well set. Did that answer your question at all? I mean, because I could go on, but I should stop there and let you ask. You're allowed what, one backup question or a second follow-up question, right, Chad?

Chad Plotkin

Absolutely.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Yes. No, that's helpful and it may reenter the follow-up question, which is about growth. You guys have proven to be head and shoulders about the peers as far as being opportunistic around looking for newer or perhaps often senseless places for growth. Say over the next 3 years, a balance between returning cash to shareholders and new growth opportunities, where do you see that weighting, biased towards one direction or another over the next 3 years?

David W. Crane

Well, Brandon, the first way I'd answer that question is to punt and basically say it's the last 5 years that I've been in this industry, which is really actually like the 5 years before, that has proven one thing is that none of us have any idea what the next 5 years are going to be about. And I think what we've really done is built a company now with its natural resources that can go in either direction. I mean we actually do, I think maybe unlike some of the other companies in our sector, see a lot of opportunities across the space. And I would say right now, in terms of reinvesting in the business, I would say we've got a lot going on, on the generation side. But I guess what really animates me when I get up in the morning is what we can do on the retail space and around the customer and bringing together conventional retail and new clean energy and products, which will be appealing to the consumer. The thing though about those types of investments, Brandon, is they tend not to be as capital-intensive, and the bets are smaller. Hopefully, the payback is quicker or as they say, if you're going to fail at something, fail quickly and cheaply. And so as we move and try new things in that area, I think it will still leave a lot of capital for the return of capital to shareholders. I mean, obviously, we're excited about what we did today in terms of the increase of the dividend in particular. We'd like to do more of that in the future, but obviously, we're not committing ourselves to a particular rate of increase. And as Kirk talked about, it's going to be sort of tied to how much we get accomplished in terms of contracted investments. And I think that we will see more -- in this natural gas price environment, if there's going to be more built in the United States on the generation side, it's all going to be based on bilateral contract. We've got great sites, we've got the people, we've got the ability to repower, conventional and renewable. And so, hopefully, we can grow the dividend off the back of an ever-increasing amount of contracted revenue streams. So that's my long-winded answer. My short-winded answer is I think we can do both. We can continue to return capital to shareholders and really stakeholders in terms of debt paydown and reinvest across our portfolio of businesses.

Operator

Your next question comes from the line of Jon Cohen with ISI.

Jonathan Cohen - ISI Group Inc., Research Division

I have 2 questions, one for David and one for Kirk. David, do you have any sense of when we're going to get an update on the O&M synergies in 2013? How long will it take you to do your review and what that would amount to?

David W. Crane

Well, what I would tell you is that we would, Jon, probably tell you more than I should, we would like to disclose the more -- the greater synergies about the time or on the next earnings call, but I can't commit to that 100% because we have a clear idea commercially of what we would like to do. But I mean we need to do sort of a technical review of some of our plants as to make sure the plants can back up what we want to do on the commercial end. And that involves things like boiler inspections and analysis, which are far beyond my intellectual capacity to understand. And if those take longer than the next earnings cycle, then we're going to take a little bit longer because when we do come out, we want to be 100% certain that we can accomplish what we tell you we're going to accomplish. But certainly, our goal is the next earnings call.

Jonathan Cohen - ISI Group Inc., Research Division

Got you. Okay. And then -- and Kirk, what are the opportunities for further delevering aside from just open-market repurchases? So I know a lot of the debt, especially the GenOn debt, is trading at pretty high levels here. But what's the timeline on when various pieces of that become callable? And I guess the second question is, are you happy to hang on to some of that excess deployable cash until the call dates or is that kind of too far out?

Kirkland B. Andrews

Well, I'll take your questions -- the components of your questions in reverse order. No, I'm not happy to hang onto excess deployable cash for an undefined period of time for any purpose, but I feel comfortable that we've got sufficient cash flow generation and liquidity to be able to address the opportunities that may arise on the debt side of the equation. But in terms of the opportunities that I see currently, what hamstrings us, at least opportunistically, clearly, we were focused on and are pleased to have achieved the $1 billion deleveraging objective, which is what the last component of that open-market purchase program was all about, taking care of that last 200. Looking forward, given the fact that our balance sheet is in line with our targets and return to shrink, my view is in further delevering, it constitutes opportunistic delevering. And given the trading levels of our bonds, as you acknowledge the fact that, to answer your question, they aren't currently callable, our 2014 maturity at the GenOn level obviously comes due in relatively short order, but our remaining maturities are not callable until 2014. I think we've got a couple -- our 2019 -- our 2 tranches of the 2019 bonds are recallable in '14. But until that time, those call premiums are significantly lower than the current trading levels of our bonds, which in my view, don't represent a compelling level, both from a yield and total -- or both from a current return and total return perspective to warrant allocation of capital opportunistically. But we'll continue to look at alternatives around that. But for right now, I think we're satisfied with where we are.

Jonathan Cohen - ISI Group Inc., Research Division

Okay. And then just one little knit on Slide 24, you have the green chunk in the pie chart as growth investments of $226 million. Should that not be net of projects financing? So in one of your later slides, I think you had $163 million of project financing. Should that be in addition to what's shown here?

Kirkland B. Andrews

No. The growth investments of $226 million, which is in the green section, that is equity investment that is net of project financing.

Operator

Your next question comes from the line of Neil Mehta with Goldman Sachs.

Neil Mehta - Goldman Sachs Group Inc., Research Division

At a high level, what are all the options we have in terms of monetizing your solar assets? And how are you thinking about the timing there?

David W. Crane

Well, I'll answer the easier second part of the question and then drop it to Kirk to say what he wants to say about the first half of the question. Our timing is that since really we sold down part of Agua Caliente to MidAmerican, which is now over a year ago, we've been communicating with the investment community that we feel that the best time -- having demonstrated that we could sell down the assets, the solar assets, to add value, that the best time to actually do that to optimize that is around the time of commercial operation of the assets. And the bigger assets in particular are all achieving or coming very close to achieving commercial operation during 2013. So the -- to the timing -- the answer to the timing portion of your question is, our timetable is this year. As to what our options are, Kirk, how much do you want to say or not say in that direction?

Kirkland B. Andrews

I mean the only thing I'd add is clearly, as David said, we're focused on 2013, in part because these -- that's when these assets come online. And with all of them now at COD, we see the realm or universe of potential partners or investors or sell-down candidates as expanding. And the return expectations, given the fact that the perceived risk at least having achieved COD, is now lower. As far as alternatives, I think I'd only say certainly, transaction is not unlike what you saw with Agua Caliente. I certainly continue to see it as being a possibility, both at the individual asset level and though less likely, though still possible, at the sub-portfolio level. But beyond that, I wouldn't elaborate. I think those are probably the 2 most likely categories, but we're continuing to evaluate those. And like you say, I think as we get closer to COD, we're on the precipice of it right now, those opportunities will present themselves more readily.

Neil Mehta - Goldman Sachs Group Inc., Research Division

That's awesome. And the second question is around STP Unit 2, what's left to do on that project in order for it to come back in early May?

David W. Crane

Mauricio, do you want to?

Mauricio Gutierrez

Yes. So I mean right now, we're working on re-blading the turbine, the ones that were damaged, and we remain on track to be operational and available prior to the summer. So right now, our estimate is the beginning of May.

David W. Crane

And Neil, I mean Mauricio makes an important point there, and it's one of the points that sort of showed up in like our availability figures for 2012 as well. There's not much money to be made, to be frank, in the generation business during the shoulder seasons. But we are obviously focused like a laser beam on the conditions in Texas this summer. So the instructions we've given to the plant management at STP is obviously we want you to make these repairs as quickly as you can, but the most important thing is that you need to be there for the Texas summer, reliably operating. So if it takes an extra few days, take those extra days. So that's very much the sort of marching orders there.

Operator

Your next question comes from the line of Julien Dumoulin-Smith with UBS.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

So first, just following up on the GenOn subsidiary, talking about distributions and what expectations are. I know you commented already a little bit about debt paydown. But broadly speaking, what kind of distributions should we be looking for over this year and in the coming years? What's your stated policy, if you will?

David W. Crane

Julien, just to make sure, the question has to do with distributions up from the GenOn subsidiary up to the parent NRG and what you should expect in that front, is that what you're saying?

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Absolutely.

David W. Crane

Okay. Kirk?

Kirkland B. Andrews

Well, first of all, Julien, as I think you're probably aware, there are RP constraints or restricted payments calculations largely similar to those in our own NRG indentures on the GenOn unsecured notes. And the impact of that is the -- and I think we made this clear in our annual disclosure this year and we talked about this before, there's about a $250 million basket that currently exists for distributions to NRG. Clearly, we're now, of course, the only sole shareholder at this point. Beyond that, there is an intercompany agreement for shared services between GenOn and NRG, where the way to think about it is the past and responsibilities that were formerly performed and represented by GenOn standalone G&A are now being performed by NRG, and there is an intercompany payment for those services provided by NRG to GenOn. Beyond that, there is an intercompany revolving credit facility relationship between the 2, and there are certain elements of the GenOn operations, which are currently -- which are not related to the specific physical assets, which are now being performed at the NRG level. So it's a combination of -- there are changes in the operations in terms of the flows. But in terms of degrees of freedom, with that $250 million basket combined with the significant payment annually that is basically a G&A compensation payment, that is the way to think about the flows between the 2 from a distribution standpoint. Hopefully, that addresses your question.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Yes. And then just following up on capital allocation, broadly speaking, it seems like you have a number of organic investment opportunities this year, I'm thinking specifically Astoria and -- in LCAPP contracts still outstanding. How do you think about potentially pursuing those opportunities I suppose this year?

David W. Crane

Well, I mean look, the sort of development in the conventional space is the province of our regional presence. They've all -- we think we have a competitive advantage in terms of repowering at our existing sites with the cost savings and the locational advantages on the grid. Projects like Astoria, which I think is still the only fully permitted new project in the New York City zone -- if somebody gives us a creditworthy PPA, and we're off to the races. The one thing that I would say, of course, is that this goes back to the question of capital available for allocation. I mean on the conventional side, obviously, building a new power plant is an expensive proposition. But with long-term PPAs and project finance debt and all, and the equity sort of going in over the 2- to 3-year construction period, it's not likely actually to consume an enormous amount of our capital in 2013. So we would like to do as much as we can in terms of repowering, revitalizing at our existing sites. And certainly, Astoria is one of our top priorities for 2013.

Operator

Your next question comes from the line of Keith Stanley with Deutsche Bank.

Keith Stanley - Deutsche Bank AG, Research Division

In New York, can you talk about your expectations for capacity pricing as it looks like they're raising their reserve margin and also the local capacity requirement in New York City, so any sort of directional expectation on prices there? And then also just -- could you remind me, do you generally hedge New York capacity prices much in advance or should we assume you receive close to the auction prices going forward?

David W. Crane

Okay. Mauricio?

Mauricio Gutierrez

Yes. Keith, I mean we manage our capacity in a similar way as we do our energy, opportunistically and exerting some sort of market risk. So I think you already pointed out that in our rental state, the reserve margin requirement increased from 16% to 17% in New York City. Their locational capacity requirement actually moved up much higher than that, 83% to 86%. So the combination of that and then some retirement that we have seen, particularly around Vance Kammer [ph] , have really pushed off New York, both New York City and rental state prices significantly in 2013. We said in a couple of calls ago that we remain bullish in New York that we felt that the supply-demand balance could have shifted further quickly by changes in the supply side. We certainly did that. So I think it's fair to assume that we will benefit from it. But having said that, I just want to -- we do hedge our capacity portfolio, and you shouldn't account for one-to-one benefit on our portfolio.

Keith Stanley - Deutsche Bank AG, Research Division

Okay. And then in Texas, you've talked in the past about the year-round spark spread needed for a new CCGT to be economic. And there's been some news, I think about a week ago, that you were looking to potentially build some peaking capacity at the Robinson plant. How can we think about what's needed in Texas for you to move forward with the construction on peakers since that's more -- it seems like a trickier calculation based more on scarcity pricing and summer spark spreads?

Mauricio Gutierrez

Yes. So in the past, we have given what I refer to as the cost of new entry spark spread around $30 per megawatt hour. The compensation of that spark spread is heavily biased towards the summer months. And if I have to point out, it's basically heavily biased towards a few hours of scarcity pricing. So clearly, the market seems a little bit weaker right now. If any generation will be built, it's more peaking capacity rather than combined cycle baseload capacity. Having said that, I think some of the construction that we're seeing, not just from us but other developer, sees project-specific. If you have an advantage or not, a specific project, whether you're sharing common facilities or you have access to favorable debt, I think those are the projects that are going to move forward now. I think there is a finite amount of those projects, and when you look at the amount of reserve or capacity that is required to meet the reserve margin that Texas is targeting, it's a whole lot more than what have been announced today.

David W. Crane

Keith, let me just add a little bit on that, too. Because you have to recognize there's the relatively unique situation we are in when it comes to those scarcity pricing moments in Texas with -- it's an opportunity on the generation side, but it's a time to play defense on the retail side. And we have a lot of peaking generation in Texas. But because of the legacy of where those plants came from, we don't have a lot of really fast-start peaking. And sometimes, you need to be able to move very quickly to capture those 1- or 2-hour time periods. So I think there's a whole bunch of reasons why the initiative you are talking about is not really -- it's a very specific niche need and opportunity for us that I think it's hard to draw sort of systemic-wide conclusions from that one instance.

Mauricio Gutierrez

Yes. If I can just add one more thing, when we look at bringing some of these capacities, really around rejuvenating some of our older, slow-start capacity, so as we're bringing this new fast-start capacity, we're going to evaluate the -- all 3 of them and see if we need to require them or put them in low-cost price.

David W. Crane

Operator, Patrick, I mean we've gone a little bit over the hour, which is entirely our own fault because of our long-winded answers. I would like to -- I'm mindful of everyone's time. We'd like to accommodate 2 more callers, if we could. And then for the other callers in the queue, we'll get their names and Chad will follow up with myself and Mauricio and Kirk if necessary to make sure we get their questions answered. So let's take 2 more callers and then call it a day if we could.

Operator

Your next question comes from the line of Stephen Byrd with Morgan Stanley.

Stephen Byrd - Morgan Stanley, Research Division

I wanted to go back, Mauricio, to what you had mentioned about the sort of disconnect in PJM in 2015 in a sense that a large number of retirements and the forward curves don't appear to be indicative of where things would need to be. Can you speak a little bit to what catalyst might be needed to cause a correction in that regard or how you sort of see that disconnect playing out?

Mauricio Gutierrez

Well, from my perspective, it's two-fold. One is -- and I think from the chart, we break out announced retirements versus projected retirements. And when I think about projected retirements, they are generations that have been cleared, but not necessarily have been determined whether they're going to exit the market or not. So I think there is a lot of asset optimization and evaluations going on right now in the market. So that's one potential check in the supply-demand balance. The second one is demand response and whether or not we have hit acceleration point. So when you have 1/2 of your reserve margin made up by demand response, and this is probably more a regulatory rather than a market question, how quickly we're going to level the playing field between demand response and generation. So if I have to point to 2, those would be the 2 big catalysts that will spark, I guess, a recovery on spark spreads.

Stephen Byrd - Morgan Stanley, Research Division

Great. And then just a follow-up on retail, I wondered if you all could talk a bit about your experiences in expansion in the Northeast, what kind of competitive dynamics you're seeing. I know you have a number of clean energy initiatives there, but just more broadly as you expand there, what kind of competition are you seeing? Are margins in line with your expectations? Or how is that going?

David W. Crane

Great questions, Steve, and Jim Steffes is going to answer that question.

James Steffes

Sure. Thanks, David. I think in general, the Northeast markets, specifically the C&I side, they are competitive and highly competitive. As we expand, the markets give us different opportunities; each state, each market will be different. And we do see some pockets of opportunity. On the mass-market side, our margins are in line with what we're expecting, and we see continued growth in those markets.

Operator

Your final question comes from the line of Angie Storozynski with Macquarie.

Angie Storozynski - Macquarie Research

Nobody asked the question about the upcoming PJM capacity auction. You are entering the auction with a very large portfolio. The market is highly consolidated at this point. You talked about the additional coal plant retirements. Could you tell us if some of those plants would be yours? And how -- and what are your expectations for the auction?

David W. Crane

Well, look, I'll leave it to Mauricio to probably not -- first of all, Angie, it makes my day to end this call by listening to your questions, but equally it makes my day by basically not answering the questions. I'll leave that to Mauricio to talk to you about his expectations for the 2016, 2017. But let me start by not answering the first part of your question, which is in terms of future plant retirements, I mean our position going into this call is the same as before, the announcements that were previously made, which were made on the GenOn side, we have no reason at this point to sort of change the outcomes or add to that. Having said that, that's all part of the sort of asset review that we have underway, which is what's across the entire portfolio. But certainly, it's focused in the East, and specifically in the East, more in the PJM footprint than anywhere else. And so that's the sort of thing that you'll hear more from us about hopefully on the next quarterly earnings call. So the 2016, 2017 auction, Mauricio?

Mauricio Gutierrez

All right. So our price target is -- we haven't disclosed this. And all I can tell you is when we look at the parameters that were published earlier, there is a couple of plus and minuses. We actually think that the auction results may be sideways to slightly lower than the '15, '16 auctions. So I would leave it at that. In terms of asset optimization retirements, we are, as David already alluded, completely focused on doing a plant-by-plant evaluation on which units are going to continue operation and which units is not economical to put the back-end control. So that's going to be an ongoing conversation. I will tell you that earlier, we announced that the Gilbert and Werner, which were 2 plants that, in the past, GenOn had continuing operations beyond 2015, we actually have filed for the deactivation of mothball. So -- but there is a lot of, I guess, of evaluation going on right now. That's the only 2 that have been publicly announced, and I'll just leave it at that, Angie.

David W. Crane

Thank you, Angie, and thank you all for participating on the call. We apologize for going 8 minutes over, and we look forward to talking to you on the next quarter. Thank you, Patrick.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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