NRG Energy, Inc. (NYSE:NRG)
Q1 2014 Results Earnings Conference Call
May 6, 2014 8:00 AM ET
David Crane – President, Chief Executive Officer
Kirk Andrews – EVP, Chief Financial Officer
Mauricio Gutierrez – EVP, Chief Operating Officer
Chris Moser – Head of Commercial Operations
Chad Plotkin – VP, Investor Relations
Julien Dumoulin-Smith - UBS
Jon Cohen - ISI Group
Stephen Byrd - Morgan Stanley
Neil Mehta - Goldman Sachs
Neel Mitra - Tudor, Pickering, Holt
Steve Fleishman - Wolfe Trahan
Good day, ladies and gentlemen, and welcome to the NRG Energy Inc. First Quarter 2014 Earnings Call. At this time all participants are in a listen-only mode. (Operator Instructions) As a reminder, today's call is being recorded. I would now like to turn the conference over to Chad Plotkin, Vice President, Investor Relations. Sir, you may begin.
Thank you, Shannon and good morning everyone. I’d like to welcome you to NRG’s first quarter 2014 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 a replay of the call on the Investor Relations section of our website.
Because this call, including the presentation and Q&A session will be limited to one hour, we ask that you limit yourself to only one question with just one follow-up. In addition, as this is the earnings call for NRG Energy, any statements made on this call that may pertain to NRG Yield will be provided from NRG’s perspective.
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 this conference call.
In addition, please note that the date of this conference call is Tuesday, May 5, 2014 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’ll 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.
Thank you, Chad. Good morning everyone and thank you for joining us. Joining me today are Mauricio Gutierrez, our Chief Operating Officer, and Kirk Andrews, our Chief Financial Officer, and both of them will be participating in the presentation. Also with me is Chris Moser who runs Commercial Operations for the company and will be available to answer any specific questions you have in that regard.
So let's get right into it because as usual we have a lot to talk about today. So if you are following on the presentation, turning to Slide 3 I mean clearly we had a good first quarter. The strength of our financial performance which you anticipated has been commonly attributed to the severe weather which we experienced during the quarter no more by you out there than by we ourselves. Indeed, in the first draft of the quarterly press release I think the exceptional weather was mentioned at least eight times.
But there are lessons to be learned from the different financial outcomes experienced by the power companies active in our core markets that operated their businesses under the very same weather conditions. First and foremost of these lessons is the reaffirmation of the point that we have been making about the merchant generation business for the past decade which is that the best way to out earn your cost of capital in the IPP business is to operate and trade a base load fleet that runs on multiple fuels.
In other words, from a commodity perspective, NRG makes money by selling coal and uranium at natural gas prices. And that proposition worked very well for us in the first quarter of 2014. The atmospherics, if you will, around the first quarter weather also have tended to obscure the fact that it took an exceptional operating performance from both our plant operations folks and our commercial operations team to navigate successfully through the unprecedented technical challenges and commercial volatility that we experienced this quarter.
So first I want to express my profound gratitude to Mauricio and his entire operations team for their total dedication and magnificent performance during the quarter. NRG's success is their success. Personally, I had absolutely nothing to do with it. My role was only to sit on the sideline and to applaud. Second, I am very mindful of the fact that our customers had a difficult time of it this winter. Individual monthly energy bills this winter averaged hundreds of dollars in excess of recent winters. There is little consolation I can offer these customers in respect to this past winter but in terms of the future, I want our customers to know that NRG is moving fast to put itself in a position to offer a full range of distributed generation and comprehensive home and efficiency solutions that have the potential to meaningfully reduce people's energy bills over time.
Now turning to Slide 4. While we were very focused during the quarter on keeping the lights on for our customers and delivering a positive upside to our shareholders, it also was a very active quarter for us in terms of positioning NRG for future success. Most notably through the three strategic acquisitions which appear on this page. The biggest of the acquisitions to close was obviously the Edison Mission Energy transaction. With respect to EME's base load plans in and around Chicago, we are well into duplicating the evaluation process we used during the early post-closing stage of the GenOn integration.
As you will recall, in GenOn it took us six months to fully assess our options and only then did we announce our asset synergy plan. In the case of Midwest Gen, the good news is that we do not believe it will take us another six months to develop an articulate a fully thought out asset plan. The less good news is that it will take us more than the five weeks that we have had to date. So I promise you that as soon as we have an asset plan with respect to Midwest Gen that we are comfortable with, we will brief you on its contents and its projected financial impact on the company.
Moving to Slide 5. I would like to make one observation about the political and regulatory situation in Illinois as it affects the Midwest Gen fleet. A few weeks back at an event in Chicago, I made some comments on Exelon's public policy positions with respect to their distressed nuclear assets in Illinois. Press reports of my comments focused almost exclusively on the fact that I perceived great irony in the fact that Exelon seemed to be seeking some sort of subsidy for their existing nuclear plants, ostensibly on the grounds that nuclear is zero carbon energy, at the very same time that Exelon was actively lobbying for an end to several tax breaks for zero carbon wind and solar.
My main point that day in Chicago however was different and it's worth clarifying here today. I am not fundamentally opposed to subsidies if the primary goal of the new subsidy is to ensure that enough existing base load capacity is retained in the market to provide reliability even during severe weather events affecting the system. But in this regard I would note that our coal plants on the outskirts of Chicago can keep the lights on as well if not better than operationally inflexible nuclear plants located further away from the load center. As a result, it is our opinion that any scheme devised in the future to keep existing solid fuel fired capacity alive in Illinois as a necessary base load complement to all the wind generation coming into Illinois from the Dakotas, should treat Midwest Gen's fleet as well if not better than economically marginal nuclear plants.
What is going on in Illinois is basically a question of how do we maintain base load fuel diversity long-term across all markets in a world which is becoming increasingly carbon constrained. The obvious solution is to take the carbon out of the existing coal plants post combustion. Today I am very pleased to inform you, and this is shown on Slide 6, of Petra Nova, our carbon capture to enhanced oil recovery or CCEOR project at our giant Parish coal-fired plant outside Houston. The Petra Nova project effectively will sequester 1.6 million tons per year of carbon into nearby oil fields. In so doing, it will enable oil production that will provide the economic return we need in an environment where there is not yet a price on carbon.
Petra Nova is scheduled for financial closing and notice to proceed in just a few short weeks. Petra Nova is a win-win-win project and that’s just from NRG's perspective. First it's a win for us because it provides a meaningful carbon hedge for Parish. Second, it's a win for us in that it diversifies our commodity exposure and allows us to realize our economic return from the project through the price of crude oil. And third and finally as you can tell by the map on this page, our three major coal plants on the Gulf Coast which are amongst the youngest and more important of all the coal plants in our fleet. Each sit astride oil fields that are candidates for enhanced oil recovering using CO2.
In my opinion, the ability to economically capture carbon post-combustion at these three plants is not only a potentially lucrative source of additional revenue for the company. It means that the average remaining life of these coal assets or their residual value for the (indiscernible) will be significantly greater than it was before carbon capture became a reality. We will brief you more fully about Petra Nova at the time of the deal closing, which as I said we expect later next month.
Now turning to Slide 7. We have made no secret in recent years of our belief that the future of competitive retail energy supply lay in providing a broader range of energy and energy related products and services, both inside the home and on the home. And the key to future success in retail will be to win the hearts and minds and loyalty of home-owners in all of the markets in which we participate. We have been hard at work growing our mass retail business organically. Adding net customer counts, staying top decile in customer satisfaction surveys and expanding into new markets. And importantly, becoming good and leasing and the other critical behind the scenes aspects of residential solar.
In the second quarter this year we bought Roof Diagnostics Solar which is involved all across the residential solar value chain but whose particular strength is both customer acquisition and installation. These areas of expertise are both critical points of differentiation for NRG from the perspective of turning residential solar from a primarily local business supplied largely by self-employed roofers and HVAC companies to a big, fast-growing and exciting business being performed by reputable companies like NRG which are in a better position to stand behind their performance for the long term.
We have worked with RDS as partners even before the acquisition and I am convinced that working together under one roof so to speak, we will build a top tier residential solar franchise that both will benefit and benefit from very close association with our conventional retail businesses. Our goal of course is to seamlessly offer residential solar to our three million conventional retail customers and conversely to offer system power and other energy products and services to our much smaller but very fast growing roster of residential solar customers.
Finally, on Slide 8, we are highlighting one of the most value optimizing opportunities from within the EME deal, the high quality wind asset portfolio with long-term contracts which provides yet another substantial pipeline of contracted assets eligible for drop-down to NRG Yield. We have been hard at work since the NRG Yield IPO last summer and making sure that energy yield is the highest quality vehicle of its time with the most diverse set of operating assets and an attractive growth pipeline. All these goals were amply served by the EME acquisition.
We remain convinced that the highest growth opportunity for NRG in solar, wind and other clean energy solutions is migrating from the utility scale deals that have previously been our principle focus, to the business to business and business to consumer solar markets, both of which are potentially enormous. In these markets, NRG Yield and the certainty and competitive cost of capital that it can offer for bundled portfolios of B2B and B2C deals, will be an enduring competitive advantage for NRG.
So let me conclude on Slide 9 with a bit of a situational analysis on NRG's positioning within the American Energy industry from the perspective of a potential investor in this space. I have been very open over the past several months in stating my conviction that our industry is on the cusp of disruptive change. That new energy technologies now cost effective and available to be deployed at scale will transform the traditional power sector and the vertically integrated utilities which have dominated it since the 1930s.
Every day I see developments in our business and our society that convince me that this disruptive change is now upon us and that there is no turning back. As a result, our priority internally has been to move faster and more effectively so that we can win in energy future that is going to be significantly cleaner, more distributed and less uniform than the present command and control, one size fits all system. From your perspective as investors it must be an incredibly exciting time filled with investment opportunity. Think of 50 million American homes each with a distributed solar system at $20,000 a pop on average. That represents a trillion dollar market opportunity. And certainly the valuation levels ascribed by the market to early movers in the distributed generation space indicates that the stock market recognizes the extraordinary blue sky potential of distributed generation.
But trying to invest in the market opportunity of distributed solar right now as a public company investor basically means investing in the very few pure play residential solar companies that have gone public. And that strategy is not without risks. You are betting that the early movers continues to be the market leaders even in the face of bigger companies like NRG coming into the space. You are betting that the distributed generation market has a breakout sooner rather than later and you are betting that the path to real and sustained profitability in the distributed generation space not only eventually reveals itself but reveals itself in the business of the company that you have chosen to invest.
On the far other side of the power industry sits the traditional investor-owned utilities and independent power producers. As the EEI itself correctly foretold in January last year, investors in the conventional power sector contemplating a long-term investment in the electric supply industry will soon realize that they are not being paid enough to take the risk of systemic disruption that suddenly confronts the conventional power companies. There are plenty of power companies in addition to NRG who performed well during the Polar Vortex and achieved a strong first quarter result. But what is the long-term future for companies that depend exclusively on the sale of system power delivered over an increasingly obsolete and unreliable grid to a population of consumers and businesses that more and more will be relying less and less on grid delivered power for their energy needs.
Conventional power companies should have a long-term strategy for that and as we look around the industry we just don’t see it. And that leaves the field clear, at least clear of incumbent power companies for NRG. So NRG in my opinion represents a very different and increasingly unique value proposition. A proposition that is demonstrated both in terms of current financial performance as measured in the incontrovertible reality of our robust free cash flow. And the almost limitless future potential growth opportunity that distributed energy represents for us. We expect to realize on this opportunity by harnessing the reciprocal benefits of fusing our nearly 3 million retail customers, conventional retail franchise, with our emerging residential solar capability as I have mentioned before.
No one else has the platform we have in this regard and we intend to leverage our strategic advantages quickly and as completely as possible. So if you are an investor contemplating investment in this space, we hope you will consider investing in NRG, NRG Yield or both and come along on what we expect to be an exciting ride into the clean energy future.
With that I will turn it over to Mauricio.
David, thank you and good morning everyone. As you all know during the quarter we experienced extreme weather conditions and unprecedented price volatility in our core markets. But it was the diversity of our generation portfolio, our integrated business model, and most importantly the excellent performance from our plant operations and commercial operations teams that allowed us to deliver record financial results for the quarter. I want to thank all my colleagues for their outstanding performance. And while we are only now sharing this success with you, I want to assure you that everyone at NRG has already turned the page and we are now focused on getting ready for the summer.
The events of this past quarter brought out the best of NRG but it also helped highlight some of the shortcomings of our electric system. It is clear to us that we need to improve the coordination between power and gas markets, recognize the value of fuel diversity through competitive market signals as David pointed out, and ensure a reliable transition as we implement new environmental regulations that could lead to significant capacity retirements. We are working closely with regulators and stakeholders to continue improving our competitive markets.
Our integrated platform performed significantly well during the quarter with the wholesale business more than offsetting the challenges faced by retail, given the increased price volatility and higher loads. But the fact that we were able to sustain retail margins under these circumstances is an example of how robust our risk management capabilities are.
With all the changes that we have made in our portfolio over the past 18 months and since I know many of you have asked about the recent ruling by the Supreme Court regarding CSAPR, it seems appropriate to provide you an update on our environmental compliance plan. This is an important year for us with over $230 million of CapEx planned for this year, primarily at Big Cajun, Conemaugh and our New Jersey [peaking] (ph) assets. All of which are on-schedule and on budget. In total, we are still projecting $326 million in environmental spend over the next four years excluding any impact related to the closing of Edison Mission.
With respect to Edison Mission, we are also working diligently to optimize the existing environmental compliance planned for the Midwest Generation assets. We are applying the same optimization process used with GenOn across all the new assets not just environmental compliance, and expect the same good results in terms of operational synergies but in a much shorter timeframe. With respect to the CSAPR decision, the Supreme Court reversed the lower court's decision that had vacated the rule and extending it back to the lower court for further proceedings. This is clearly a win for EPA but there is still a number of open issues that need to be resolved. We do not expect any significant change to our current environmental compliance plan from the resurrection of CSAPR. We anticipate the existing [care] (ph) program to remain in place for sometime while some of the legal and procedural issues are addressed.
Turning to operational performance on Slide 12. We had another quarter of top quartile safety performance with a 110 out of 121 facilities without a recordable injury. This is particularly gratifying given the severe weather conditions under which our plant operations people were exposed through during the quarter. While these results don’t yet reflect our newest assets, Edison Mission has a strong safety culture and we look forward to integrating them into NRG and the opportunity to learn from each other to continue improving our program.
Solar generation was significantly higher from last year driven primarily by the east region which was up 39%. Colder weather in the east couple with gas supply constraints proved out the value of fuel diversity and optionality as we saw unprecedented dispatch in many of our units from coal to oil to gas. Right behind it but no less impressive was Texas with generation 30% above last year, driven primarily colder than normal weather and improved availability at our South Texas project plant. It is important to note that we continue to optimize our maintenance outage days during lower price periods. So that we take full advantage of the peak price opportunities such as the ones caused by the Polar Vortex.
Over the past three years, we have increased the number of maintenance outage days and believe that the benefit of getting this outage is done with little opportunity cost and increasing the reliability when it matters the most, more than offsets the negative impact on our annual availability metrics. For example, during peak price days in January and February, our coal and nuclear availability was over 90% demonstrating the value of our strategy. Coal and nuclear reliability improved 30% year-over-year to 9% for the quarter and our gas fleet also performed exceedingly well with 97% starting reliability while doubling the number of starts.
Once again, this performance was achieved under severe weather conditions. With a portfolio of over 53,000 megawatts of generation and more than 140 plants, the execution of our planned outages are critical. We have been focused on executing the 159 outages that we have planned for the spring season in order to get ready for the important summer months.
Moving on to Slide 13. We were quite pleased with the performance of our retail platform. Despite increasing wholesale prices, extreme weather and ongoing competitive pressure in the C&I segment, we delivered $108 million in adjusted EBITDA, $5 million more than the first quarter of 2013. Extreme weather conditions covered all the markets we served throughout the quarter with the Polar Vortex in the Northeast and sustained cold weather in Texas. At the same time, power prices were up between 50% and 150% year-over-year. Challenging conditions to say the least.
Through these, however, we continued to execute as we leveraged the strength of our marketing and sales channels as well as our margin management and integrated wholesale and retail capabilities. The results is that we held retail unit margins overall and increased them in Texas while growing customer count in both Texas and the Northeast. This is one of the key reasons why we felt comfortable expanding our platform even further with the closing of the Dominion retail electricity business.
This acquisition extends our leading multi-brand business in Texas and nearly doubles our Northeast customer base, enabling us to bring innovative products and services to an additional 500,000 mass customers. In the C&I segment, we continued to maintain our discipline in this intensely competitive segment and are extending our product offering to include advisory services and comprehensive solutions to our customers beyond system power, including backup generation, solar and demand response. We have now 14 consecutive quarters of customer growth, our ability to maintain margins and customers along with the overlap of our generation portfolio and our retail footprint, we are well positioned to continue expanding our franchise and extend the value of our customer relationship.
Moving to our market update on Slide 14. Overall, we are seeing some bullish signals in our markets. Unlike what we have seen in quite some time. Starting with gas and the obvious impact that this whole winter had on storage levels, we remain at 50% of the five-year average, levels not seen in a decade. Real concerns about the ability to refuel storage to a reliable level will develop unless injections begin to ramp up soon. And if we experience a hot summer, strong injections may be very difficult to incent without further increasing prices. You can see the insert chart in the upper left hand chart showing historical weekly injections and the high level that is necessary to achieve the storage number we saw in 2013 of 3.8 Bcf.
This fundamental picture and the strong pricing we saw in Q1 have affected the forward power markets. Both dark spreads and spark spreads have expanded benefitting well diversified portfolios like ours. The upcoming PJM capacity auction continues to highlight many changes that extend our bullish view. The combined effect of higher requirements and limits on demand response, the limits on capacity imports and the significant levels of un-cleared coal megawatts are positive signs in PJM.
Finally, as you know, we have not been overly bullish on the prospects of the Midwest. But COMED is becoming a growing source of opportunity for us. In fact, we think this opportunity goes beyond driving value for our proven synergy model. We have nice rally in the market over the past few months potentially signaling a state of transition in the market dynamics. Accordingly, we are looking forward to updating you in further detail over the quarters as we refine and complete our operational synergy assessment.
Moving to our hedging disclosures on Slide 15, we now have added the expected fuel and generation numbers for the Edison Mission assets and the respective impact on the sensitivity charts. As you can see, we have increased hedges in our coal and nuclear fleet for the balance of 2014, where we took advantage of the commodity rally and executed hedges against the Midwest fleet. Beyond 2014, the hedge levels have decreased slightly reflecting the open position in the Midwest. During the quarter, and despite the additional demand from this [cold] [ph] winter, our commercial team remained focused on integrating the Edison [portfolio] [ph].
At the end of 2013, we recognized rail performance issues with some carriers that could impact operations in 2014. As a result and in collaboration with the railroads we took the necessary steps to ensure adequate levels of inventory as we go into the summer peak burn periods. Another example of the strength in our scale and ability to react quickly to emerging risks.
Before I close, I once again want to say, hats off to the entire operations team for extraordinary performance in this record quarter. A quarter never before witnessed by many of us who have worked in this industry for many years. Thank you all and with that I will turn it over to Kirk.
Thank you, Mauricio. Turning to financial summary on Slide 17. NRG delivered record adjusted EBITDA of $816 million in the first quarter of 2014 or more than doubling our EBITDA performance of a year ago. The bulk of this increase was driven by outstanding results from our wholesales business which generated $639 million in adjusted EBITDA as NRG's expanded east fleet in particular delivered strong operational performance during the extreme cold weather and volatile power prices in the first quarter.
Despite the colder weather and the resulting increase in supply costs, our retail businesses also performed well delivering EBITDA of $108 million for the quarter while NRG Yield delivered $69 million. For the quarter, NRG generated nearly $500 million in free cash flow before growth or nearly half of our previous guidance for the entire year. These strong quarterly results lead to increased expectations for 2014 financial performance which I will review in detail further.
Our total liquidity after adjusting for the cash used to fund the EME acquisition which closed on April 1 now stands at approximately $3.2 billion. Continuing our focus on prudent balance sheet management, we took advantage of the continued strength in the debt markets and through April successfully executed two senior unsecured notes offerings, totaling $2.1 billion both at a 6.25% rate, a new low for us in terms of unsecured coupon. These financings not only provided the $700 million in cash funding from new corporate debt we have planned for the EME transaction, the remaining proceeds permitted us to fully refinance our 2019 senior notes, reducing annual cash interest by $26 million and further extending corporate maturities in the process.
Finally, we have now executed a definitive agreement for the first drop-down of three right of first offer assets to NRG Yield for $349 million. We expect this all cash transaction to close later this quarter augmenting NRG's capital for allocation while helping NRG Yield deliver on its dividend growth objective. The proceeds from NRG Yield's successful issuance of $345 million in new convertible debt will be used to fund the transaction. And with the recent $390 million increase in NRG Yield's revolver to $450 million, NRG Yield now has increased capital flexibility to help fund additional drop-downs for NRG later this year.
Turning next to the guidance overview on Slide 18. Following our record first quarter results and taking into account the expected contribution from strategic acquisitions, we are pleased to announce a substantial increase in both our adjusted EBITDA and free cash flow before growth guidance for 2014. We now expect 2014 adjusted EBITDA of $3.2 billion to $3.4 billion. This $500 million increase over our previous guidance is driven in equal parts by the change in outlook for our wholesales business driven primarily as a result of the first quarter out performance and by the expected impact of our recently completed acquisitions.
The expected contribution from Edison Mission makes up substantially all of the $250 million expected EBITDA impact from acquisitions as we do not expect any significant contribution from Dominion Retail as we transition the Northeast customer base through the remainder of the year. Beyond 2014, however, we expect the net addition of $500,000 retail customers from the Dominion Retail acquisition which also includes the Cirro franchise in Texas to deliver a run rate of $40 million to $50 million in adjusted EBITDA.
I would also like to touch briefly on our expectations for residential solar following the acquisition of the Rooftop Diagnostics Solar platform this past quarter. The RDS acquisition represents an important step in better positioning NRG to benefit from the growing opportunity we see in residential solar. Specifically, RDS provides us expanded sales and installation capabilities which are critical in managing customer acquisition and system installation cost in order to realize the net returns from residential solar leases. As many of you are aware, the infrastructure and near term cost of growing this business do not translate into positive EBITDA in the near term. Rather, the value proposition is realized by growing the portfolio of long-term lease cash flows.
As a result, we would expect a modestly negative EBITDA impact as we ramp up our efforts in this area. Which is taken into account in our 2014 revised guidance. Later this year we expect to provide you with additional details regarding our residential solar efforts including cost, expected returns and capital requirements beyond the current year.
Finally, turning to NRG Yield. Our adjusted EBITDA guidance of $292 million is unchanged as we will update guidance to reflect the impact of the drop-down following the expected closing of the transaction later in the second quarter. As a reminder however, any changes to NRG Yield EBITDA guidance resulting from the drop-down will not impact consolidated NRG guidance. Our 2014 free cash flow before growth guidance is also increased by $250 million or more than 20%, driven by our increased expectations for adjusted EBITDA and partially offset by an increase in maintenance and environmental capital expenditures as we begin to deploy the capital necessary to ensure environmental compliance at the Powerton plant acquired as a part of the EME transaction.
In addition, cash lease payments associated with the Powerton and Joliet plants also impact free cash flow over the remainder of 2014. Beyond 2014, cash lease payments will fall to less than $1 million per year delivering run rate free cash flow accretion from the EME acquisition.
Turning to Slide 19. After taking into account the net cash component of the EME acquisition, NRG's current liquidity is approximately $3.2 billion. Cash used to fund the EME transaction represents approximately $1.5 billion of the $1.725 billion in acquisitions and growth investments shown in the sources and uses table to the right of the slide. In addition, as an update on the cash balances at GenOn, which I reviewed on our fourth quarter call. Driven by the solid first quarter results in the east, GenOn consolidated cash increase by $149 million during the quarter and now stands at just over $900 million. Taking into account the first quarter results, GenOn has now passed the trailing 12-months restricted payments test and is able to make distributions to NRG should we decide to do so.
GenOn Mid-Atlantic which at quarter end held $337 million in cash has also passed its restricted payment test and we expect GenOn Mid-Atlantic to make a distribution of $250 million for GenOn this quarter in order to rebalance liquidity across the various GenOn entities.
Turning to Slide 20. I am pleased to announce that we have executed a definitive agreement to complete the first drop-down of assets from NRG Yield. Pursuant to the terms of this agreement, upon closing which we expect later this quarter, NRG Yield will purchase three ROFO assets for $349 million in cash plus the assumption of approximately $650 million in aggregate project debt. These assets include El Segundo, a 550-megawatt combined cycle plant under a tolling agreement with Southern California Edison with just over nine years remaining on the contract. And the TA High Desert and Kansas South solar facilities of 20-megawatts each, each with 20-year PPAs.
The transaction purchase price of $349 million which will be funded by NRG Yield using cash on hand will enhance capital for allocation at NRG and represents approximately 1.6 times the $225 million of net NRG equity invested in these three projects, all of which either came online or were purchased within the last year. In addition, we also expect NRG will receive an additional $15 million in cash for aggregate working capital balance at closing.
The purchase price of $349 million combined with debt assumed implies a total transaction value of approximately $1 billion and represents slightly more than ten times adjusted EBITDA of approximately $100 million. And on a combined basis these projects will add approximately $30 million in annual cash available for distribution helping NRG Yield achieve its dividend growth objectives. Taking into account our revised expectations for NRG's financial performance, we expect our balance sheet metrics will remain in line with targets and do not anticipate the need to allocate any of the proceeds from this transaction towards delevering.
The successful process towards completion of the first ever drop-down to NRG Yield represents an important initial step towards realizing the true potential of this important part of NRG's long-term growth. We anticipate announcing additional drop-downs by the end of the third quarter which we expect will likely include some of the EME assets while deferring the dropdown of the remainder of CVSR to 2015. However, at a minimum, we expect to execute additional drop-downs of assets representing at least the remainder of the $55 million in cash available for distribution we originally announced as being earmarked for drop-down over the course of this year.
And finally, updating our capital allocation progress on Slide 21. The net proceeds from the first three drop-down assets combined with the $250 million increase in 2014 free cash flow before growth, served to increase expected 2014 cash available for allocation to $2.7 billion to $2.9 billion. $268 million of this capital will fund scheduled debt amortization largely at the project level. Approximately $1.45 billion of capital has been allocated towards M&A and growth investments including $840 million of cash towards EME and other acquisitions including Dominion retail. While integration costs now also include expected cost related to EME and Dominion.
Finally, taking into account the 12.7 million shares issued in connection with EME, $181 million of capital is allocated to NRG's recently increased common dividend of $0.56 per share on annualized basis. After these allocation items over the course of 2014, NRG has $823 million to $1.023 billion in excess capital remaining. We would expect to revisit any potential increases in return of shareholder capital following the second drop-down transaction which we would expect to take place in the third quarter. And with that I will turn it back to David for his closing remarks.
Thank you, Kirk. Shannon, I don’t have any closing remarks because we want to make sure we have about 15 minutes for questions. So please if you could open the lines we would be happy to take everyone's questions.
(Operator Instructions) Our first question is from Julien Dumoulin-Smith of UBS. You may begin.
Julien Dumoulin-Smith - UBS
Congrats on a great quarter. Following up on all the announcements here, I'd be curious, when you think about future capital deployment opportunities, how do you think about buybacks relative to further acquisitions to enable the DG renewable growth that you've been talking about? And in particular, how did you think about redeploying the cash that you're getting out of the NRG Yield sales of late?
Well, I am going to turn that to Kirk to answer or not answer the question as he sees fit. But Julien what I would tell you from my perspective is that, to your question, number one, it's actually a pretty good time right now to be a buyer in the market. I mean we see sort of opportunities to create value. I guess someone who did three acquisitions in the first quarter would say this, but we do see opportunities across our space. What I would say though is, to the extent that you know for a long time on the generation side we wanted to have a bigger and better core generation fleet in PJM and that was a big, strategic priority.
But what I would say right now is, well, again to the point both on the generation side and on the retail side, where we have all the capabilities we need, we are in all the places where we need to be. And so it's a question of executing with what we have. And so I would say as a general rule, my view towards acquisitions right now is pretty opportunistic. If we can see something at a price that really makes sense, we will add to what we have. But we are really -- we are again at a point where we have a very limited number of gaps that we see to fill in terms of the capabilities we need to have. And even the gaps that we continue to perceive, which I am not going to tell you what they are because we don’t want people to see us coming. The amount of money that it would take us to fill those gaps from outside acquisition is not a huge number compared to the amount of cash that Kirk has amassed over there. So with that sort of set up, let me turn it over to Krik.
Well, I don’t have to add very much to that other than the fact that the capital that we amassed as I know you are aware Julien, both with the combination of the actual receipt of the drop-down proceeds as well as our free cash flow generation, tends to be disproportionately loaded towards the backend of the year. Which is why we are kind of deferring addressing the return of capital to shareholders question until we realize the bulk of that free cash flow and drop-down proceeds. And I think depending on how the opportunities that David spoke to play out over the course of the year, as well as where our share prices combined with realizing that capital later in the year, we take all that into consideration in terms of balancing between opportunistic deployment of capital on the M&A side or acquisition side with returning to share repurchases.
Julien Dumoulin-Smith - UBS
Great. And, Dave, just a quick follow up here. As you think about power, I just heard your comments about COMED. Where do you remain the most constructive on power upside, if you will?
Julien, I don’t want to give a wrong -- could you say the question -- where are we most constructive on the...
Julien Dumoulin-Smith - UBS
Yes. I suppose we have heard some comments from Exelon amongst others, saying we see x amount of upside in the market, etcetera. I suppose are you still as constructive on Texas or you're shifting towards PJM? And where do you see the most amount of upside or do you continue to see upside in power market?
Well, you know everything -- it's like going to a movie Julien. Everything sort of relative to your perception is going in. I mean we went to great pains when we bought the Edison Mission portfolio to say, don’t confuse this with us being bullish on the situation in the Midwest on the wholesale side. But as Mauricio said in his comments, there are signs of life in the COMED market. But I have to tell you, if you are just looking across our portfolio, clearly the east has been a pleasant surprise for us since the GenOn acquisition. But in terms of just basic fundamentals that you can sort of look at and reach out and feel and touch, we remain bullish on Texas. I mean the demand growth in Texas on a weather-adjusted basis was enormous.
While it was 3% -- I mean 11% in non-weather adjusted, 3% weather adjusted. You know announcements like -- I was out in California last week on the day that Toyota announced that they were moving 5000 - you know they had 5000 people employed in North America and they are picking up shop, closing shop in California and moving to Texas, so if you look at fundamentals I would say that the part of the country we are most bullish on remains Texas.
Thank you. Our next question is from Jon Cohen of ISI Group. You may begin.
Jon Cohen - ISI Group
Congratulations, guys. I don't see how that quarter could have gone any better for you guys.
Okay. Thank you for your question, Jon.
Jon Cohen - ISI Group
I guess the first question maybe is for Mauricio. We've seen in the past couple of weeks or the last week particularly, a pretty huge move in the forward power markets. I was wondering if you had any color on what's going on there exactly? How much of this is real fundamental buying, how much of it is maybe some other technical factors?
Good morning, Jon. So I think I referred to it on my script but the move in power is actually, I would say there are two points. The first one is on the back of natural gas. And as you have seen natural gas has gone through a pretty significant rally and given the storage levels where we are, we think that if we get some early heat, we will see probably another leg off on natural gas. So that’s the first driver of power prices. And as you can appreciate that has helped significantly dark spread or base load generators like us.
The second one which is probably a little bit more recent is an expansion in heat rates. And we saw that right after the CSAPR announcement. So I think markets are realizing that there may be more scarcity and better fundamentals shorter than what they believed in the past. But that clearly benefits some of the spark spread price. Those are two very discrete, I guess drivers that we have seen in the power space. With respect to liquidity, I will tell you that liquidity is probably the worse I have seen in many, many years. The balance of 2014 remains probably the best market and I think the prices, the market prices reflect to some extent decent volume. But beyond 2014 I would caution about the pricing that we are seeing because I think they are affected by liquidity.
Jon Cohen - ISI Group
Okay. So, you're saying we've seen a big move but on pretty poor volumes in the out years.
In the out years, yes, but in the front years I think the volume has been relatively decent. Having said that, the move that you have seen are supported by the fundamentals.
Jon Cohen - ISI Group
Okay, great. And then one other question on the distributed generation strategy. I was wondering if you had any, David, internal milestones or goals about how quickly you want to grow that business. I think on the last call I think you said it would be two years before you had cobbled together enough of a portfolio to drop into NRG Yield. Since then you've announced a few acquisitions. I wonder if maybe the timing of that has accelerated. So, what should we be looking for in terms of how you're executing there?
Well, Jon, one, I don’t want to be totally specific but the second thing is -- well, let me just tell you the way we are thinking about it. And some of this is anticipatory in terms of where we see the price going you know in terms of the expansion to the, sort of legendary price competitive with the retail price electricity in 20 to 25 states. The way I sort of think about it, by the end of this year we want to be in a position to compete in all the states where it makes sense for people to put residential solar on the roof. With all the tools that we need to sort of create value and bring the value to us. I mean one of the problems in the residential solar space for the last few years is, there is always some place in the value chain where value is being created but it's usually being created somewhere else.
So for a while it was the installers that were sort of capturing the benefit of solar module prices dropping like a stone and all that. And so we wanted a platform where the value that exists in the value chain sort of comes to us not to somebody else that we than enable. So we want to have our capabilities in place, totally in place in all the markets we want to be in by the end of the year. And then in 2015 we want to execute and we want to be a market leader. And whatever lead in the market is and in the industry that’s facing exponential growth, I would rather not put a number on it other than to say, if you think of at least 2 million American homes that economically should have solar on their roof by 2015 and the current market leader Solar City is doing 30,000 a year, I don’t need to take business away from Solar City to see that there is a market opportunity that’s just almost infinite in its potential.
Jon Cohen - ISI Group
Right. Are there any capabilities that you think you're still lacking or are all of the pieces in place now?
There is one or two. Thank you for the question.
Thank you. Our next question is from Stephen Byrd of Morgan Stanley. You may begin.
Stephen Byrd - Morgan Stanley
Good morning and congratulations. I wanted to talk about capacity prices in general and talk about your EME assets. I know you're going to come back with a more specific plan but we had, I guess, it's fair to say, fairly disappointing pricing last year. Would you need to see materially better capacity prices for the entire fleet at EME to be economically viable or do you think, given where we've seen recent trends, that they would be viable? Do we need to really see an uplift there to see the entire fleet viable?
Hey, Stephen, Chris Moser is going to answer that.
Hey, Stephen, it's Chris. First things first, I think PJM is moving a lot of levers to try and make sure that we see good prices out there. I mean FERC has accepted hard caps on DR. They have accepted the capacity import limits there. I know that there is still a couple of things pending in terms of the operability and changes to the incremental auctions. Last year at $59 out there in RTO, and that was on the low end of things, obviously we are hoping for better numbers than that. But keep in mind there is both energy and capacity as well. So it's the combination of those two. And we would like it obviously to hit good numbers in both of those. And a lot of the forecasts out there now have the capacity moving up against that 59 mark from the 16, 17 auction. And we are certainly hopeful that it does. But don’t forget the wind in the sails back there is as David said, selling coal at natural gas prices and as gas continues to move up then that’s going to help those assets as well.
Stephen Byrd - Morgan Stanley
I see. So, the improved energy margin helps in that equation as well. As a follow up, just on your chart on page 14, looking at the PJM auction. I was curious about one of the remarks you made about new generation facing challenging economics, especially given the improvement in forward margins that we've seen. Could you expand on that a little bit?
I think on the challenging economics side I think we struggle with seeing some of the newbuild costs relative to I think where we expect to see them or where we look at when we are trying to do are looking at projects ourselves and I think that’s what that references to.
Stephen Byrd - Morgan Stanley
Okay. So, as you see the capital costs even with the improvement in energy margins, you struggle to see how the newbuild can make sense potentially.
Yes, I mean Steven, I got to tell you, it doesn’t matter what market you are in, even in Texas. I mean we are acquiring assets at deep discount to replacement costs. And so as prices get better we obviously have an opportunity to earn back the money we put in but we are not seeing things approach, pricing approach new entrant pricing. So how people are doing Greenfield in the merchant market, it's baffling to us.
Thank you. Our next question comes from Neil Mehta of Goldman Sachs. You may begin.
Neil Mehta - Goldman Sachs
Can you review the changes in strategy of what assets you're going to drop down into NYLD in 3Q? I know originally it was CVSR but it sounds like it might be some of the Mission assets now. And I don't know if you can answer this question from NRG's perspective, but in your view will NYLD require equity to fund that next round of drop-downs?
Well, in terms of the assets as I mentioned in my remarks, yes. Having now closed the EME transaction we expect the next phase of drop-down to include some EME assets and defer CVSR to 2015. I think it's safe to say if we have a bias within that portfolio, we would lean towards the shorter duration assets within that portfolio as being kind of the first in the queue if you will among the EME portfolio for drop-down. As far as equity issuance is concerned, certainly having basically used the proceeds from this first drop-down, additional drop-downs will require obviously additional capital at NRG Yield. We have the ability to some extent to bridge that capital using the expanded revolver I spoke to but ultimately the anticipation is, I think it's likely we will probably see an equity issuance kind of in the back half of the year. But we will revisit that in greater detail as circumstances unfold.
Neil Mehta - Goldman Sachs
Very helpful. And then on coal, Mauricio, you talked about how you were able to address some of the rail disruptions to ensure adequate supply in 2014. Can you talk about how you did that? And then PRB prices seem to be ticking up here as you look at the forward curve, particularly 2015. So how does that impact the way you think about contracting?
Yes, well, you know PRB in shorter term has been oscillating close the marginal cost of production. Historically there's been a [contango] (ph), though that has been tempered over the past 12-months. So as gas prices go up and certainly the announcement of CSAPR, you know lower sulfur coal becomes more desirable for generators. We are evaluating our hedge profile. As I said, we wanted to take care of 2014 given the increase in gas prices. We are now in the process of assessing 15 and beyond. We like the position that we are in. We have constructive gas fundamentals I already explained. So at the end of the day we are more concerned about the dark spread and less concerned about the absolute price of each of the commodities.
With respect to the railroad I think it is fair to say that we have, given the size and the scale of our portfolio, we were able to identify these potential risks in terms of deliveries. Regarding front of it, we have very constructive dialog with the railroads and we were able to bring our units at inventory levels that we feel are adequate as we go into the summer. I mean I cannot give you any more specifics. We have in the past disclosed inventory levels on a unit by unit basis and we are not going to do that given the competitive nature of it. But I think it's fair to say that we feel comfortable as we approaching the summer months.
Shannon, we have a shareholders meeting in about 5 minutes, so I think we will take two more calls.
Our next question is from Neel Mitra of Tudor, Pickering, Holt. You may begin.
Neel Mitra - Tudor, Pickering, Holt
Congrats on the good quarter. My question is directed towards Mauricio. You kind of talked about how maybe NYHUB heat rates moving up have a fundamental reason to them and there could be something changing with the load around that area. Could you maybe talk about what's changing that could maybe make you more bullish on the Midwest market?
Look, I think it's more on the generation side than the load. The load hasn’t been particularly impressive in the Midwest and to the extent in the Northeast. We think that given some of the economic challenges and the higher penetration of wind and negative pricing, we believe that there is probably -- we are entering a transition period where additional retirements from base load resources that can cycle will happen particularly on units that are marginal, small with high fixed costs with little flexibility. So I think the market is starting to recognize that and you can clearly see it on the heat rate expansion. And I put the chart on the historical pricing and the forward pricing on COMED and I think it clearly has a awkward momentum to it. Now keep in mind the other one is, as I already said a couple of times, natural gas is right behind the price of power sold. So that perhaps is also something to look at.
Neel Mitra - Tudor, Pickering, Holt
When you talk about these units are you speaking more about nuclear, coal or what type of generation?
Yes, all of the above. I think coal and nuclear.
Neel Mitra - Tudor, Pickering, Holt
Is there an update on any kind of the repowering opportunities in California?
Well, we remain optimistic but there is not really any specific update. But certainly I would hope to have one by the next quarterly call.
Thank you. Our next question is from Steve Fleishman of Wolfe Trahan. You may begin.
Steve Fleishman - Wolfe Trahan
Just, first curious if there's any update on the Maryland environmental rules going into the auction.
Do you want to answer that?
Yes. Good morning, Steve. What I can tell you is that we have a had a very constructive dialog with MDE. We are taking that into consideration with the plans that we have around our Maryland units and I think that’s pretty much about as much as we can say around the state of the Maryland units. But I can assure you that it's been a very positive dialog between the two of us as of late.
Steve Fleishman - Wolfe Trahan
Okay. So, you have more clarity you think on the future for those two units at least?
Well, I think in relative terms we have more clarity, we don’t have absolute clarity. So I think that’s really all we can say right now, Steve. But since we didn’t really answer your question, why don’t you take (indiscernible)?
Steve Fleishman - Wolfe Trahan
Yes. The other question is just -- you mentioned that we have the revival of CSAPR in some form and we're going to get these EPA THG proposed rules soon. When you think about the context of NRG overall in light of some of these new environmental rules, could you just maybe, again, give us your messaging on how you think about your company in context of kind of refocus on environmental rules?
Well, I am not sure if this answers the question but I mean we are, in terms of the conventional system and the generation assets, I think we have to keep in mind that the average age of an NRG coal plant is 41 years old. So when we think of the long-term strategy of the company, it's not built around 41 year old assets but those 41 year old assets are very critical to the short to medium term and to keeping the lights on this year and next year. So I mean our environmental strategy is geared towards the amount of time that we expect the assets to continue to perform their functions. So with expect to the specific rules, we think we have a good -- you know we are not spending and insubstantial amount of money. And so we are complying with the various environmental laws that seemingly come and go. But we are also not investing in stuff thinking that these plants are going to be there 40 years from now. So guess I am not sure if there is something more specific about that that you would like me to focus on.
Steve Fleishman - Wolfe Trahan
You know I was thinking more in terms of the breadth of portfolio of assets that you have and your non-power. Net-net, do you think, obviously we don't know the details of how CSAPR will be implemented or how THG rules might be implemented. But do you think overall your portfolio benefits net from these rules or gets hurt by it?
Well, I mean since we are in pretty good compliance position with the new rules, to be Machiavellian about it, the new rules drive other peoples plans out of the market than that will be beneficial to us. What I would say is one of the big lessons for us and hopefully for the public policy makers and I try to make this point in the context of Illinois is that, we have always made a virtue of being multi-fuel. The conventional system is clearly trending to an all gas all the time system. And the gas, now it's simply not prepared for that to happen. And so to us there is tremendous value in not only having gas plants but having coal plants continue and nuclear and even our oil plants. I mean we ran our oil plants more this last winter than I think in the last several years cumulative. And so the first and foremost, no matter how much we focus on sustainability and being green and all, the focus of a power company is always on keeping the lights on. And to me having a multi-fuel fleet of generation is the way to do that. So we certainly are going to try and do that but you can't keep plants open if they are just losing money, hand over fist. And you don’t want to invest hundreds and millions of dollars in an asset that has left couple of years of life. And so that’s the reality that we juggle everyday at this company. And I think every other power company does as well.
Anyway, I am sorry but I think we got to go. We are a few minutes late for our shareholders meeting. So thank you all very much and if there are any questions that we could not answer, my friend Chad here is sitting next to me, he would be happy to answer to questions at length. So thank you very much.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.
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