Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

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 and Executive Vice President

Lee Davis - Regional President of East Region

Kirkland B. Andrews - Chief Financial Officer and Executive Vice President

Analysts

Angie Storozynski - Macquarie Research

Neil Mehta - Goldman Sachs Group Inc., Research Division

Jonathan Cohen - ISI Group Inc., Research Division

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Gregg Orrill - Barclays Capital, Research Division

Wayne Manning Cooperman - Cobalt Capital Management, Inc.

Jeffrey Rosenbaum

Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Stephen Byrd - Morgan Stanley, Research Division

Steven I. Fleishman - Wolfe Research, LLC

NRG Energy, Inc. (NRG) Update on Operational Synergies Conference June 24, 2013 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the NRG Energy, Inc. to Provide an Update on Operational Synergies Conference Call. My name is Tehesha, and I will be your operator 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, Tehesha. Good morning, everyone, and thank you for joining us on this call to update you on our operational synergies, as well as updates to our financial guidance.

This 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] Additionally, because this call is occurring prior to the end of the second quarter and given the restrictions of the SEC with respect to the recent registration statement filed by NRG Yield, we also ask that you limit your questions primarily to the information that has been provided in today's press release and presentation material.

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 materials.

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 June 24, 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.

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

David W. Crane

Thank you, Chad. Good morning, everyone, and thank you for joining us. I want to start by apologizing for disrupting your schedule off the normal earnings cycle as it were. But we wanted to make sure that you had a -- that we had a chance to explain, to your satisfaction, what we believe is a significant success for us, for our company, which is the result of our intensive and focused approach to asset management.

So let me give you some sense of what we're going to do here today. We're going to update the operational synergy estimate, which has been part of our previous estimates arising out of the GenOn transaction. And we're going to do this based on the considerable analytic work that's been done internally since the transaction closed 6 months ago. And then, based on that change to our operational synergy estimate, we're going to be walking you through the revisions to our 2013 and 2014 guidance.

So following brief introductory remarks from me, Mauricio will set the stage for the discussion of our operational synergies initiative by providing you with the market context for what we propose to do.

Today's announcement follows our East Region generation fleet and particularly our base intermediate load assets in PJM. So Mauricio will be focused on providing you both an overview and analysis of trends underway in the PJM market in order to put the asset decisions, which underpin our operational synergies initiative, into the proper context.

Then, Lee Davis, who's the President of NRG's East Region, will break down for you the operational synergies themselves, and that will break down generally into 3 broad categories, with details of the plants impacted in these 3 categories. Finally, Kirk will give an update on our efforts in other phases of our synergy initiatives and the modified near-term prospects for our core wholesale and retail businesses in order to give you as complete, accurate and up-to-date an estimate of our 2013 and 2014 guidance as it's reasonably possible at this time. We promise to be relatively succinct -- Chad said that we won't take up more of an hour of your time. We certainly hope that we can use less of your time as possible, as we understand that there's a lot going on in your world today.

So if you're looking at the slide presentation, looking at Slide 3, the Executive Summary slide. As you can see, we've identified a very considerable amount of operational synergies, increasing the recurring estimate from $25 million per year to $125 million per year starting in full year 2014, with significantly more to come in 2015 and the years to follow as we put various assets that are part of this operational synergy initiative in a position to make a positive contribution to the company's financial performance. Beyond the adjusted EBITDA contribution, there is the impact on free cash flow. For the 10 years I've been at NRG and dating back to our very first earnings call in March of 2004, I have said that NRG management will always manage this business for cash, and the operational synergy exercise we have been engaged in for the past 6 months has been reflective of that focus.

In addition to the $125 million of EBITDA improvements in 2014 arising out of these operational synergies, I am very pleased to announce $175 million of improved free cash flow in 2014 arising out of these same operational synergies, which, when added to the increased cost synergies of $200 million a year and balance sheet efficiencies already realized of $142 million a year, means that the GenOn transaction synergies alone have enabled us to increase annual recurring free cash flow by a whopping $467 million a year starting in 2014. And in the same manner that the recurring EBITDA contribution from operational synergies will increase significantly in 2015 and beyond, so will the recurring free cash flow contribution from these operational synergies.

All these synergistic benefits that are arising out of the GenOn transaction enables us to increase materially EBITDA guidance for 2014 and even more materially, free cash flow guidance in that year. Obviously, taking into account the softness in the current commodity price environment, we have not been able to pass through all the benefits of our synergy initiative dollar for dollar into our forward guidance, but the fact that we can substantially improve our financial prospects and in particular, increase our free cash flow before growth guidance by almost 20% during this period, which we still consider to be the bottom of the commodity price cycle, is, in my opinion, a testament to the resilience of our combined wholesale, retail business model.

On Slide 4, I attempt to detail the process which led to this point, which, in turn, explains why it has taken us so long to come forward with this revised estimate of operational synergies arising out of the GenOn transaction. In all likelihood, the details of the process are not particularly important to you, but it is important that you appreciate that the process that we have undergone has been comprehensive, thorough and inclusive. As such, we have a very high degree of confidence that with prompt implementation of our operational synergy capture plan, that the financial benefits projected in this presentation will be realized in a timely fashion.

Our focus to date has been on our East Region and the bigger facilities in that region. But based on what we have identified and analyzed so far in the course of this exercise, there will be more to come as we extend the synergy process to all of our plants in the East, across all of our other regions and to the extent applicable, into our other businesses. While the fruits of this additional labor are unlikely to match in magnitude what we are announcing here today, they, nonetheless, are likely to be meaningful numbers in their own right. Now I assure you that this company and this management team will not rest until we have realized all the benefits to be derived from the GenOn transaction. We see achieving these benefits not only as a good way to enhance shareholder value over the short to medium term, but also as the best way to put NRG in a position of competitive advantage over the long term.

With that, I cede the floor to Mauricio.

Mauricio Gutierrez

Thank you, David, and good morning, everyone. Before I turn it over to Lee for a detailed review of our expanded asset optimization and operational synergies initiative, I want to provide you some comments about the latest capacity auction results in PJM for the planning year '16, '17, our outlook on some of the key drivers and what it means to our portfolio and asset optimization efforts.

In general, the results continue their volatile and somewhat unpredictable path. At the risk of being repetitive with many industry analysts, Slide 6 provides our internal assessment of the key drivers affecting this capacity auction. As you can see from the table on the lower left-hand corner, the weak results in the RPM auction were driven primarily by a significant increase in new generation and imports, which more than offset the additional coal retirements and lower demand respond levels compared to previous years.

A few observations are worth noting about these auctions. First, coal generators continue to exert discipline in their bidding behavior with the significant increase in coal retirements and nuclear price-sensitive megawatts. This provides an interesting dynamic in the incremental auctions around capacity buybacks, even more so given the challenging economics for new builds and potential tighter rules for DR and imports. Second, PJM continues to rely significantly on demand response and now, on an increasing number of imports to meet its reserve margin target. We were encouraged by the lower demand response megawatts that were offered and cleared in the auction and expect this trend to continue as stricter compliance rules may be adopted in the future. With respect to imports, we believe to be close to maximum capacity without significant upgrades to the system. And similar to demand response, there may be tighter requirements around foreign transmission to be considered a capacity resource in future auctions.

Third, the exemptions provided by PJM on the minimum offer price rule may have led some developers to bid significantly lower than the MOPR. As a result and given the low capacity prices, particularly in RTO, it is uncertain how much new investment will show up at these levels. On that front, we have provided our now usual disclosure around cost of new entry in the lower right-hand table. We have expanded this analysis to cover units within the RTO region that could benefit from lower gas prices. It is important to note that the market has already recognized these trends, and delivered gas prices at these locations already trades below Henry Hub prices.

Even under this favorable gas basis environment, economics continue to be challenged and will require additional price advantage to close the gap against new build economics. While we recognize the market currently does not need new generations through this planning period for reliability, it is important to understand the uncertainty around demand response and non-firm imports that makes up half of the reserve margins, and we should not rush to judgment on prospects for new generation or forward energy prices.

So what does all this mean for our PJM portfolio? Well, we believe our portfolio remains well positioned in the market. You can see on Slide 7 over 80% of our generation portfolio is in the higher-priced MAAC and ATSI regions. Furthermore, the results of these auctions were further mitigated, first, by clearing 1 gigawatt of reactivated generation in the ATSI region with the gas addition projects at Avon Lake and New Castle. This is the direct result of the excellent work done by the Northeast development team on identifying low-cost opportunities that allow us to extend the life of our coal assets and positioning them to thrive in a low-gas-price environment; second, by opportunistically enhancing the value of our entire portfolio and participating in revenue streams that we will not have otherwise in other regions. Finally, I want to reiterate that our asset optimization plans have not changed by the auction results. In fact, they reaffirm our plans and reinforce our conviction to continue creating value through low-cost alternatives and operational synergies across our diverse portfolio of assets.

With that, I will turn it over to Lee to provide you greater detail on these efforts.

Lee Davis

Thank you, Mauricio. Good morning. It is a pleasure to join the call today to discuss this important initiative with you. First, I'd like to personally thank our asset management, operations, engineering and construction and environmental teams that have, through their tireless effort, put us in a position to make this value-enhancing activity become a reality.

On Page 9, we summarize for you, in basic financial terms, the outcome of the operational synergies actions that David highlighted in his opening comments. By acting on these initiatives early, we have created considerable value realized by improved sustainable earnings and free cash flow. First, we began with a focus on operational improvements, which is the result of taking the best practices from legacy NRG and GenOn programs designed to optimize O&M and capital spend across the fleet. As part of these efforts, we initially focused on improving the profitability at facilities in the East Region. Specifically, we identified over 6 gigawatts of generation with the highest degree of financial benefit [ph], including Cheswick, Morgantown, Chalk Point, Dickerson, Seward and Indian River. At each facility, we systematically reduced annual planned outage days, improved our forecast of operating performance, reduced O&M and ranked spend based on its earning potential for the company.

It is important to note that none of what we are discussing today or the actions we have or will take will negatively impact the long-term reliability of our facilities. Rather than creating a paradigm of starving our facilities of necessary funding at the expense of reliability, we instead have chosen to allocate O&M spend and capital to these facilities in a disciplined way to economically thrive during a period of persistently low commodity prices and then position these facilities as important long-term contributors to our future success. As a result of these efforts, we were able to increase our 2014 estimated annual adjusted EBITDA by $70 million and free cash flow by $95 million.

We are, of course, not finished with improvement across the East Region or across our national fleet. We will build upon this effort during the course of this year, expanding our effort across the national fleet.

Secondly, we have undertaken a number of gas additions and reactivations across the East Region, which we will discuss in more detail on the following slide. While we have been able to improve financial performance through new reliability contracts with the National Grid at our Dunkirk station, this initiative primarily focuses on gas additions and reactivations to allow our fleet to thrive in the near term while positioning ourselves for growth in the future by preserving dual-fuel capability at a number of our facilities. It is important to note that these gas additions, which will require incremental growth capital, will contribute to earnings and cash flow beyond our current guidance period, so they are not necessarily captured in the figures you see on the slide.

Lastly, in light of challenging dynamics in several of our markets in the East, we weighed the relative merits of deactivating facilities versus other options at our disposal. As a result, we chose to accelerate previously announced deactivations and deactivated additional facilities, further enhancing EBITDA and returning substantial amounts of cash to NRG, allowing us to invest in other projects across our business. We will provide more detail on Page 11 regarding this initiative. In total, the actions taken to date allow us to increase the EBITDA from operational synergies to $125 million and free cash flow before growth to $175 million by 2014.

Turning to Slide 10. I will elaborate on the reactivations and gas additions of certain facilities across the East Region. Before I discuss these projects, I would like to point out that the combination of NRG and GenOn created a unique platform, allowing us to invest in accretive gas additions. While many coal-burning facilities may reside near natural gas supply, not all coal facilities are created equally, especially as it relates to the ability for companies to convert to or add gas-firing capability at existing coal loaders. With that said, NRG's merged portfolio of coal facilities is plentiful with units that are capable of economically efficient gas additions.

In the case of most gas additions we have reviewed across our unique portfolio, we believe that we can execute conversions to dual fuel at costs far below what others may pay to build new combined-cycle facilities and more importantly, at highly attractive economics. Frankly, these gas additions tend to be far less capital-intensive with lower construction and permitting risks than new build projects. Both Avon Lake and New Castle, located in PJM's ATSI zone, are prime candidates for these types of gas additions. As a result and as Mauricio stated earlier, we bid and cleared both facilities in the last PJM auction. We expect both facilities to be converted to dual-fuel operations by the summer of 2016. Conversely, as not all facilities are created equally, we ruled out a conversion of the Elrama facility, which faces lower RTO pricing, as well as a more complicated gas addition project. As a result, we did not bid it until the most recent PJM capacity auction.

In the case of Dunkirk, we successfully negotiated an additional 2-year reliability agreement with National Grid in western New York. This agreement provides a win-win solution for regulated customers, as well as our shareholders, as it provides improved economics to our business, as well as much-needed reliability to the local grid. It is worthwhile to note that Dunkirk successfully competed against a number of alternatives to supply reliability. Dunkirk won this contract based upon NRG's proven track record of reliability, coupled with its overall cost competitiveness.

Finally, we don't want to leave you with the impression that this list is fulsome and incomplete as we continue to advance other gas addition projects at sites with favorable conversion characteristics I discussed earlier. Due to a number of commercial reasons, we will not discuss these projects on today's call. Nevertheless, we remain optimistic about these prospects and hope to update you in the future on further advancements in this area.

Moving to Slide 11. As many of you are already aware, we have decided to accelerate certain existing deactivations, and we have announced new deactivations at 4 facilities in PJM and New England. Generally speaking, facilities that we considered for deactivation fell into 3 buckets: those with large unprofitable capital requirements, assets residing in markets with large downside risk but little upside and assets already slated to retire. First, we will discuss new deactivations at Norwalk Harbor and Werner and then the accelerated deactivations at Titus and Portland.

In light of the weak fundamentals at the New England market, New England ISO's aggressive stance on punitive performance rules and Norwalk Harbor's weakening financial performance, we bought back Norwalk Harbors' forward capacity obligations and deactivated the facility this summer. In doing so, we were able to avoid increased operational and market risk evolving through New England ISO's expected new rules concerning performance and importantly, improved the financial profile for the overall portfolio.

At our Werner combustion turbines located in New Jersey, we canceled uneconomic environmental capital projects associated with New Jersey's High Energy Demand Day program. Instead of proceeding with the additional SCRs [ph] for these 40-year-old units, we were able to improve the cash flow characteristics in the region, whereby enabling us to redeploy capital to more attractive investments.

Finally, we accelerated the previously announced deactivations of both Titus and Portland. At Portland, in light of the settlement of longstanding New Source Review-related litigation with the states of New Jersey and Connecticut, we agreed to accelerate Portland's deactivation while preserving the ability to convert the station to natural gas at a future date. At Titus, we explored multiple options to continue operations, and we ultimately decided to deactivate the facility early and buy back our forward capacity obligations.

On Slide 12, we show the annual EBITDA and free cash flow impacts of our operational synergies initiatives. As a result of the initiatives that we've laid out for you today, we believe, with a high degree of confidence, that we will achieve a run rate increase in 2014 adjusted EBITDA of $125 million, $100 million above our previously announced $25 million target, and free cash flows of $175 million. Most importantly, this process is not static. On the contrary, we will aggressively build upon this operational synergies initiative while forcefully executing and expanding it within the East Region, as well as expanding it into other areas of the country.

And now to recap the operational synergies initiatives on Slide 13. What we have completed, thus far, is a program that delivers significant increases in earnings and free cash flow through a 3-pronged approach of operational improvements, gas additions and reactivations and deactivations. More importantly, we will continue to deliver on our commitment to our investors to create more value. We will execute on our existing initiatives, continuously improve our regional fleet and expand this initiative to all regions.

And now we'll turn the presentation over to Kirk to discuss the overall update to guidance.

Kirkland B. Andrews

Thank you, Lee. Before reviewing our updated guidance ranges, I'd like to briefly summarize where we stand with respect to our ongoing efforts to exceed our synergy targets for the GenOn transaction. Turning to Slide 15. In addition to the substantial increase in operational synergies, which places us at that run rate of $125 million beginning in 2014, NRG's EBITDA and free cash flow before growth will be further enhanced by increases in both cost synergies and cash flow benefits from balance sheet efficiencies. NRG is increasing its run rate cost synergies by $15 million to $200 million beginning in 2014.

This increase is a result of continued efforts in identifying areas for further improvement in combined company costs, including the consolidation of corporate functions and policies, reducing spend on third-party vendors and consultants, as well as the consolidation of railcar leases across the combined fleet. These cost improvements when combined with increased asset optimization will contribute a run rate of $325 million in adjusted EBITDA beginning in 2014, $125 million increase over our initial estimate announced in connection with the GenOn transaction.

Turning to the balance sheet efficiencies. During the second quarter, on the strength of an improved credit profile and reaffirmed ratings, NRG took full advantage of the robust credit market conditions in executing a multifaceted and well-timed refinancing, from which we expect to generate incremental annual cash savings of nearly $50 million. This savings brings total annual cash flow benefits from balance sheet efficiencies to $142 million, a 40% increase over our original target.

In addition to reducing the cost of both our revolving credit facility and our term loan by 50 basis points each, we also enhanced NRG liquidity by expanding our revolving credit facility by $200 million, improved our maturity profile by extending NRG's revolver by 2 years and raised an additional $450 million in new capital at NRG by expanding our term loan at the reduced rate. Finally, we reduced overall leverage and interest expense by completing the redemption of GenOn's $575 million of senior notes due 2014, making efficient use of excess cash at the GenOn level.

Our efforts in exceeding synergy targets across the board will contribute $467 million in annual cash flow benefits beginning in 2014.

Turning to the retail update on Slide 16. While we are maintaining our overall 2013 adjusted EBITDA guidance and increasing guidance for 2014, we are reducing the retail component of adjusted EBITDA by $75 million in each of 2013 and 2014. In 2013, this reduction is primarily due to un-seasonally milder weather year-to-date, particularly in Texas, as well as higher supply costs. Looking ahead to the remainder of this year and next year, as we continue to see rising wholesale prices, which benefit NRG overall, we are entering the phase of the market cycle where retail price changes lag that of wholesale, resulting in margin contraction as retail prices take more time to catch up.

However, as we remain focused on realizing the long-term benefits of expanding our product offerings beyond grid power, NRG will continue to invest in our mass business to profitably grow customer count while focusing on operational improvements and efficiencies to continue to deliver our bottom line objectives. This long-term focused approach will position NRG's retail platforms for enhanced performance as margins widen and our product offerings continue to expand.

On the C&I side of the business, we are currently seeing load growth moderate as competitors are demonstrating a willingness to accept margins, which does not fully compensate for the total cost to serve load, resulting in lower-than-expected C&I load for NRG over the near term. As this type of competitive dynamic is not sustainable through this cycle and long term, we will maintain our discipline in capturing profitable opportunities while resisting the temptation to chase C&I load, which does not deliver value-enhancing return.

And finally, turning to the guidance update on Slide 17. For 2013, we are maintaining our overall guidance range for adjusted EBITDA at $2.615 billion to $2.815 billion and increasing our free cash flow before growth guidance range by $50 million to $1.05 billion to $1.25 billion. For 2014, we are increasing our guidance range for adjusted EBITDA by $90 million to $2.85 billion to $3.05 billion and significantly increasing our free cash flow before growth guidance range by $200 million.

On the wholesale side, we are increasing our 2013 guidance by $75 million as a result of a $50 million increase in operational synergies, with the remaining increase coming from our Gregory plant acquisition in Texas and other forecasted wholesale increases. This amount offsets the reduction in our retail guidance I reviewed on the previous slide. This $50 million overall increase in 2013 free cash flow before growth investments is due to lower maintenance CapEx as a result of our asset optimization efforts in the East Region. For 2014, we are increasing wholesale guidance by $165 million due to $115 million increase in operational and cost synergies as previously discussed, acquisition of the Gregory plant in Texas and other forecasted increases.

Net of the revision to retail guidance, this results in a $90 million increase in the overall 2014 adjusted EBITDA guidance range. This EBITDA increase, when combined with $49 million in cash interest savings from balance sheet efficiencies and reduced maintenance CapEx resulting from our asset optimization efforts, allows us to increase our free cash flow before growth investment guidance, which is the primary driver of 2014 capital for allocation by $200 million.

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

David W. Crane

Thank you, Kirk, and before we do open the floor for a few questions, on Slide 19, I do have a couple of concluding thoughts. First, we're having a very busy summer here at NRG. We're in a key phase of the GenOn integration effort, with several fundamental system crossovers in process. And it's an "all hands on deck," whole company engagement, making sure that these transitions occur seamlessly and the company continues to perform as efficiently as it has in the past.

Secondly, we have NRG Yield to do, and you'll be hearing more about that in the future. Third, we have several key construction projects that are in the absolute final stages of completion and commissioning. And of course, the summer still lies ahead, in most of our markets, we need to capture any opportunities that may come to us as a result of summer heat.

But beyond this, here and now at NRG, we also continue to invest in the future, planting seeds and building businesses on both the wholesale and the retail sides of our business and in both the conventional and in the clean energy fields. So I want to close by telling you that I'm very pleased by what we're announcing here today, and I'm excited to report -- and we'll be excited to report back to you from time to time both on our progress with our existing projects and initiatives and on the successes I expect that we will have on our initiatives not yet announced.

So with that, Tehesha, we'll be happy to take a few questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Angie Storozynski from Macquarie.

Angie Storozynski - Macquarie Research

I have a question about Slide 7. You talked about imports. I understand it's from outside of PJM. Could you tell us which of your plants actually cleared the auction, which -- outside of PJM?

David W. Crane

No, Angie. No, we can't. So we did participate in the import market, but for commercial reasons, we rather not discuss in what ways we did. So Mauricio, do you want to continue with that non-answer or...

Mauricio Gutierrez

No, I think you've hit it right on the point. Angie, I mean...

David W. Crane

Anybody here in the room who want to answer Angie's question? No, Angie, we're good with that answer. We're sticking to it. But you get a second question since we didn't answer your first question.

Angie Storozynski - Macquarie Research

Yes, okay. How about cash deployment? Because you keep showing us growing free cash flow. And how should we think about the deployment of additional free cash flow?

David W. Crane

Well, I mean to turn that to Kirk. But I would say the incremental free cash flow that we've talked about today, I mean, it's largely in 2014, so it's still a ways away. We'd like to earn it before we spend it. But with that, Kirk, go ahead.

Kirkland B. Andrews

Although difficult for me to expand upon that because I would have echoed exactly that, and that is the preponderance of that is coming in 2014, which I alluded to. And as you know, Angie, it's the -- one of the fundamental building blocks of capital for allocation, so we'll provide an update on that around 2014. But for right now, the $50 million increase just obviously increases our cash expectations for 2013, but no further update at this point in terms of specifics on allocation in '13.

David W. Crane

I'm sorry, Angie, we can't do better for you. But we have been very focused on trying to figure out how to get the cash and less time spent and spent on exactly what we will do with it.

Operator

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

Neil Mehta - Goldman Sachs Group Inc., Research Division

So how should we think about the capital spending associated with New Castle and Avon Lake, either on a dollar per KW basis or just in terms of raw dollar millions?

David W. Crane

Go ahead, Kirk.

Kirkland B. Andrews

Well, first of all, Neil, the dollars associated with those 2 items are reflected in our breakdown, which, I believe, actually is in the appendix of the slide. We've expanded our growth capital to include an additional category. Previously, we've showed conventional and solar. We've added a line item for capital associated specifically with asset optimization. I believe that's on Slide 22 in the appendix. The capital associated with those 2 projects is reflected in that uptick, although a larger portion of that capital is associated with the improvements necessary to generate the $125 million or the incremental increase of $100 million in asset optimization EBITDA starting in 2014.

Neil Mehta - Goldman Sachs Group Inc., Research Division

That's great. And my follow-up question is, if I'm looking at this right, you highlighted another $75 million of operational synergies potentials in 2015 and beyond on Slide 12. Where can those incremental synergies be realized? It sounds like the big focus right now has been on the East. Are those synergies geographically more focused on the West?

David W. Crane

Lee, why don't you start with that.

Lee Davis

Yes, looking at the slide, what we have focused on there is really the East Region, and so what you see there is really the results of efforts that we've taken so far in the East. And those additional dollars that you see out in the back end, our gas conversion, gas addition projects such as Avon Lake and New Castle and some other initiatives that we're undertaking that we haven't yet identified today.

David W. Crane

Yes. So to -- so as we've said, we are going to extend this to the other regions, which was part of the thrust of your question, and we do think that we can achieve more than what you're seeing on this page. But without putting too fine a point on it because we don't have a specific number for you or a timetable or a cost to achieve yet, but we don't think the -- we think the number that we can achieve by doing this across the whole country is a significant number, but not of the same magnitude of what you're seeing here.

Operator

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

Jonathan Cohen - ISI Group Inc., Research Division

Just a quick clarification or a follow-up to the previous follow-up question. That pink bar on Page 12, does some of that include the full year impact from plants that you're planning to deactivate in '14 and also plants that are slated for closure in '15?

David W. Crane

Yes, that's correct.

Jonathan Cohen - ISI Group Inc., Research Division

Okay. And then, I guess, the other question was, it looks like now you've done to date $469 million of open market repurchases versus I think you had $200 million in your Q1 capital allocation plan. How much more do you think there is to go on that for the year? Are you pretty much where you want to be?

Kirkland B. Andrews

Jon, it's Kirk. You're referring to the open market purchases on the bond side?

Jonathan Cohen - ISI Group Inc., Research Division

On the bonds, yes.

Kirkland B. Andrews

I think, at this point, although, clearly, we have additional surplus capital for allocation, at this time, I think we're satisfied with the opportunities that the market has presented to us on a de-levering front, but we'll continue to be, as what I've called, opportunistic. It's just that 2014 has presented a near-term opportunity to do that, but we don't have any specific plans beyond that at this point.

Jonathan Cohen - ISI Group Inc., Research Division

Okay. And David, just one last question. Obama is supposed to outline his comprehensive strategy for climate change tomorrow. What are your expectations on that? And did this strategic review take into account what he might say tomorrow?

David W. Crane

Well, I mean, it's very hard to answer the question with any great knowledge based on what the President of United States is going to say tomorrow. Certainly, when -- we would be amongst the vast group of people that have not been consulted as to what he's going to say. But I mean, look, our sense of climate change under the Clean Air Act amendments involving a lot of rule-making from the EPA and a lot of litigation following the rule-making is that this -- we continue to believe that this is -- whatever he announces is not going to be a significant impact to our fleet until the next decade. And so we're -- Jon, I'll just be surprised if something was going to be announced tomorrow that was going to cause a major change in direction on anything we were doing. And we certainly did this analysis that led to this decision with respect to the assets knowing that something was going to be done about climate change. And so I don't know, if there's a dramatic change in chorus, we'll revisit it, but we don't really expect that.

Operator

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

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

First question here, perhaps a clarification, if you will. What needs to happen to achieve the 2015 numbers that you guys alluded to, particularly on the $250 million in free cash flow? Is all of that already embedded into what's contemplated here? Or are there future conversions and deactivations that need to happen in order to achieve that?

David W. Crane

So let me -- yes, so, I think, why don't we ask that question on 2 parts. First, what needs to happen in terms of the expenditure of capital? Kirk, if you'd answer that question. And Lee, I think the question people have about the pink bar, as you've specifically mentioned 6 Eastern plants that has been the focus of this. I think people want to know, to achieve the numbers in the pink bar, is that all from the 6? Or are there other Eastern assets that we have to do things to that we haven't announced for commercial reasons but are embedded into those pink bars? So Kirk, why don't you go first? Was that a good paraphrasing of your question, Julien?

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Absolutely.

David W. Crane

Thank you, Julien. I aim to please. I'm a full service CEO here. Okay, Mr. CFO, answer the question.

Kirkland B. Andrews

Julien, just to clarify, the $200 million and the $250 million that you're referring to, those are obviously representative of an incremental $75 million over the run rate number that's in 2014. For that uptick, the capital associated with that, although we're not providing a specific number at this time, just to frame it for you on the order of magnitude, I would characterize it as a very low-single digit multiple.

David W. Crane

A very low-single digit multiple?

Kirkland B. Andrews

In other words, the EBITDA increase is a low-single digit multiple of the capital required to produce it.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

So there are indeed further conversions that would need to be highlighted in order to achieve that, just to be clear?

Lee Davis

Yes, Julien, on the pink bar that you see, the third bar, it's a combination of the 6 facilities we identified today, including additional gas conversions at these low multiples that Kirk had just discussed across the East portfolio. And there are some additional type of operational improvements that we're undertaking as well in there, but it's really a pretty simple story for us on the gas conversions and the improvement side.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

And perhaps just to clarify there, when you think about these conversions, why not move forward, for example, with Portland today? Just give us a sense as to; what perhaps is the delay or when you would potentially make these decisions.

Lee Davis

Yes, I mean, the first thing we needed to do at Portland is resolve that litigation, and so that's where we've been focused on Portland. And given the short turnaround, Julien, on facilities as we went into the auction cycle for PJM, we actually focused on the highest-value conversions, additions first, and then the rest of them, we're focusing on that.

David W. Crane

I mean, well, and one thing that in terms of gas conversions, in terms of the timing of it, you have to calculate some of these plants there actually needs to be a gas line added to the plant. In most cases, it's not a very long gas line, but you still have to get it there. There's no point converting to gas if there's no gas at the site.

Lee Davis

That's absolutely true.

David W. Crane

So that -- so Julien, that's another aspect of this. And these are all the things we've been assessing over the last 6 months, getting the gas to the site, the conversion of the boilers, the burners and all. So -- but believe me, we realize the time value of money here, so we're moving as quickly as possible on all these things.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

What is actually the timeline that it takes to actually convert one of these, building the pipe, et cetera?

Lee Davis

Yes, Julien, it depends on the facility, obviously, but on short pipeline conversions, they can be anywhere between 2 to 3 years. And permitting and other issues like that play into the timing for these facilities.

David W. Crane

But 2 to 3 years, I mean, we're showing -- realizing this within 2 to 3 years, so some of them can be shorter as well.

Lee Davis

That's right.

Operator

Your next question comes from the line of Gregg Orrill from Barclays.

Gregg Orrill - Barclays Capital, Research Division

I wanted to ask about just how you're going to manage the process and/or communication of going through the other regions to look at incremental reactivations and/or synergies?

David W. Crane

Well, I mean, if I'm understanding and responding to your question literally, how will we manage the process? To us, to be frank, as we've discussed whether we should have this call based on this level of operational synergies was very close internally to whether we should just put out a press release that detail what we're doing or we can have a call so we could explain it, and we chose the latter. Since we believe that the types of enhancements we can get in the other regions are essentially smaller than what we can achieve here, I would -- I think the way we're going to handle it from an announcement perspective is we'll let you know on the quarterly calls. And to be frank, as I sit here, I don't know that we'll be prepared to talk about those other regions on the next quarterly call, which, at this point, is just 5 or 6 weeks away. So I would guess that you would probably hear more about it on the call after that, which is the call at the beginning of November. And I've just made all that up as we were talking, but so -- I think that's when you -- I don't think we had discussed that before, but I think that's basically when you would hear about. Mauricio, I mean, in terms of all the benchmarking and everything, that's about right, wouldn't you say?

Mauricio Gutierrez

Yes, and we are going to look at it on the FORNRG framework that we've had, the discussion with you and the other investors about our continuous operational improvements and now synergies. So as David alluded, we will touch about -- on these on the quarterly calls and give you an update.

Operator

Your next question comes from line of Wayne Cooperman from Cobalt Capital.

Wayne Manning Cooperman - Cobalt Capital Management, Inc.

I think you got most of my questions about capital allocation. On the PJM, I mean, I know it's a little far out, but if you were looking out the next 5 or so years, do you have any different view today than you would have had 3 months ago about the EBITDA further out?

Mauricio Gutierrez

You mean, do we take any longer-term lessons from the sort of -- from the data points provided by the [indiscernible]?

Wayne Manning Cooperman - Cobalt Capital Management, Inc.

Yes, I mean, it was a disappointing auction. Does that change your view on the longer-term potential of PJM? Because it seems like more people are somehow lower-cost gas generations coming into the market than we would have thought.

Mauricio Gutierrez

Yes, Wayne, this is Mauricio. I would say that the data points provided by these auctions more than changing 5 years ahead our point of view. We believe that equilibrium probably have been pushed out given the new generation that we experienced and some of the demand response and imports. I wouldn't say that, that has changed the economics that we expect on the cost of new entry, and we provided what we believe is the required margin and spark spread to be able to meet our hurdles. I think, and I mentioned that on my prepared remarks, I wouldn't rush to judge the PJM upside just based on 1 data point and given that has been very volatile. So I would just continue following the behavior of these 2 important groups, either demand response or imports in order to make your forecast on NRG margins.

David W. Crane

Yes, and Wayne, could I add to it -- I mean, Mauricio. I don't know, Wayne, it actually sounds a little bit like you might be driving. I don't know if you have the slides in front of you, but I think one of Mauricio's slides, Slide 6, is very important. And this idea of new gas build in PJM, I mean, we could be missing something dramatically here. But particularly, in the RTO, we hear rumors in the marketplace more from investors than -- from our sector that there are people offering gas. And what Mauricio shows on Page 6 is that at a capacity price of $59 a megawatt-day, which is the price that RTO cleared at, you have to have a gas supplier that agreed to a severe discount to Henry Hub almost in perpetuity. And maybe the joke is on us, but we have not seen a gas provider sitting on top of the Marcellus Shale, who's going around offering to lock in a massive discount for a decade or 2 decades.

Wayne Manning Cooperman - Cobalt Capital Management, Inc.

Yes, so how do you explain that low price that the guys bid? Do you have an explanation?

David W. Crane

I don't have an explanation.

Mauricio Gutierrez

There may be lower hurdle rates for them. But based on the economics that we're seeing, it's hard to have an explanation on it.

David W. Crane

It could be greater mullet [ph]. Maybe the people think that they can sell out the position before -- it's like your world, it's all about timing. So in terms of fundamentals, in terms of putting metal on the ground, we have no explanation for it.

Wayne Manning Cooperman - Cobalt Capital Management, Inc.

As long as I got you on the phone, and we're taking retail down a bit because of cooler weather in Texas, although the forecast I saw was for a hot summer. What can you tell us about retail in the GenOn territories? And how is that going? And is that in the synergy numbers? Or is that all kind of gravy if you can build that business out?

David W. Crane

Well, I mean, one thing I can tell you is that we saw the forecast of a hot summer, too. I don't believe your weather forecaster because it hasn't happened yet, but again, we'll focus on the weather.

Wayne Manning Cooperman - Cobalt Capital Management, Inc.

It is only June.

David W. Crane

That's right. And yes, we're hoping for a turnaround in July and August. But I'm sorry, I missed the second part.

Wayne Manning Cooperman - Cobalt Capital Management, Inc.

Just about retail in the PJM, in the GenOn territory?

Mauricio Gutierrez

No, they're not built in the synergy numbers. And as you put it, I think it's all gravy as we build on the Northeast retail on top of the GenOn portfolio in the Northeast.

Wayne Manning Cooperman - Cobalt Capital Management, Inc.

You want to talk about that at all at this point or too early?

David W. Crane

A little too early.

Operator

Your next question comes from the line of Jeff Rosenbaum from York Capital.

Jeffrey Rosenbaum

I think you've commented in the past on -- I mean, obviously, you've done a great job in creating value via synergies. But on additional portfolio opportunities versus single assets, can you just comment on the landscape that you see today?

David W. Crane

Well, I mean, yes, there are plenty of assets for sale out there. We've always said, and I can't tell you, Jeff, that I would say anything different, that we have an occasional win like with the Gregory acquisition in Texas, but for the most part, there still seems to be a fair number of people out there that when there is a single asset, there's a fair degree of competition. And I would say our competitive advantage in terms of acquisition of assets still lies in the bigger portfolios, particularly the ones where, as I think we're demonstrating amply with the GenOn transaction, we can sort of cut out the overhead -- we can create to serve economies of scale. So we're constantly looking to upgrade our portfolio and enhance it wherever we can, and we -- there's always things we're working on. But I won't say that we've seen a dramatic change in the single asset where everyone is selling and we're the only buyer. We'd love to see that, but that's not really what I would say that we're seeing.

Operator

Your next question comes from line of Neel Mitra from Tudor, Pickering.

Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

I had a question on the gas additions and reactivations for the 2014 EBITDA. Is that all coming from the Dunkirk contract? Or are there other new plants? And does that include the Gregory acquisition in Texas or is it just PJM?

Lee Davis

Neel, it does not include Gregory. And for the most part, it's Dunkirk-related with a couple of other small projects kind of intermixed there.

Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then...

Kirkland B. Andrews

Just to add onto that, the impact of the Gregory acquisition is embedded in the broader guidance number. It's just not counted in the separate synergy number that Lee was speaking to.

Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Right. And then second question on the repowerings and looking at capacity prices, with a lot of your portfolio weighted towards ATSI, longer term, do you expect ATSI to clear higher than RTO if we continue kind of at this $59 megawatt-day prices? Is there something built into ATSI that will allow it to sustain the impact of some of the imports, et cetera, that's really plaguing RTO right now?

Mauricio Gutierrez

Yes, Neel, we believe there is going to be price separation, and we took that into consideration when we bid our reactivation and gas conversion on those 2 specific units. I think Lee already alluded that we scratched plans on 1 asset that was on the RTO, given the downside potential that we saw.

Operator

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

Stephen Byrd - Morgan Stanley, Research Division

So I wanted to just walk through retail a little bit further. You gave good disclosure on Slide 16. I was just curious if you had commented in terms of the EBITDA weakness with respect to Texas versus the Northeast in terms of which was the predominant driver. Is it largely Texas with a fairly small negative impact from the Northeast? Or is it fairly balanced in terms of the impact between the 2?

David W. Crane

No, Steve, it's mainly Texas. I mean, Texas is -- still, when it comes to retail and energy, it's obviously the straw that stirs the drink. There's a lot more there to begin with. And the impact of cooler weather, less volume has been felt there and of course, gas prices sort of rising in the first part of the year, but gently. So it really didn't support retail price increases, but charged some compressions. So I'd say the overwhelming majority of it is Texas. And then there was the aspect that, as Kirk talked about, the C&I space seems to be particularly challenging, and I would say that is actually consistent across both the Northeast and Texas.

Stephen Byrd - Morgan Stanley, Research Division

Okay, great. And then Kirk, you had mentioned briefly the railcar lease synergies, I believe. Wondering if you could just talk a little bit more about as you've integrated the GenOn fleets, what those synergies related to on the railcar side of things.

Kirkland B. Andrews

Sure, and I'll let Mauricio speak specifically to the contractual element of that in consolidating those railcar leases. But suffice it to say, that's the representation of savings associated with eliminating some of the redundancies in those. But I'll let Mauricio expand on the particulars there.

Mauricio Gutierrez

Yes, I mean, I think, Kirk, I think you hit it. I mean, it is -- when you have a much larger fleet and the amount of rails that we have, Steve, we looked at optimizing that. And in particular, there was an opportunity to use some rail sets that we had in other facilities and move them to one of the coal assets in PJM. I won't disclose which was one specifically, but I think it's fair to say that some of the benefits of the scale of the portfolio that we have today allows us to do these kinds of optimization.

Operator

Your next question comes from the line of Steven Fleishman from Wolfe Research.

Steven I. Fleishman - Wolfe Research, LLC

Just a question on the conversions of Avon, New Castle and others that you might be looking at to gas. How should we think about how these plants are going to run? Are these essentially peakers? What's the expected heat rates? And is most of the value coming out of kind of capacity payments?

David W. Crane

Yes, yes and yes. Yes, we don't expect converting old boilers to gas that they're going to be that somehow waves a wand over them and they become 7 heat rate fast our combined cycles. So you're correct in all your supposition.

Lee Davis

Yes, they're basically low-cost conversions, where we're taking annual O&M out to give us a very inexpensive capacity play in the market.

Mauricio Gutierrez

Yes, I would it's a life extension of a coal asset that allows you to not have the environmental CapEx and participate on the capacity.

David W. Crane

Steve, did you have another question? Or is that...

Steven I. Fleishman - Wolfe Research, LLC

No, that was really it. I just wanted to confirm that. So the heat rates would be 11,000 to 12,000?

Lee Davis

Yes, it depends on boilers, but basically unchanged from the coal heat rates you would expect to see, yes.

David W. Crane

Thank you, Stephen. Thank you, all, for taking time out of your summer months to listen, and we'll be back in a few weeks with the second quarter earnings. So 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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: NRG Energy's CEO Hosts Operational Synergies Update Conference (Transcript)
This Transcript
All Transcripts