NRG Energy Inc (NRG) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the NRG Energy, Inc.

first-quarter 2014 earnings call.

(Operator Instructions)

As a reminder, today's call is being recorded.

I'd 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 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 and press release and this conference call.

In addition, please note that the date of this conference call is Tuesday, May 6, 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 will refer to both GAAP and non-GAAP financial measures of the Company's operating and financial results.

For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures, and a quantitative reconciliation of those figures please refer to today's press release and this presentation.

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

Thank you, Chad.

Good morning, everyone, and thank you for joining us today.

Joining me today are Mauricio Gutierrez, Chief Operating Officer, and Kirk Andrews, our Chief Financial Officer.

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.

If you're following on the presentation, turning to slide 3, 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 a reaffirmation of the point we've 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 baseload 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 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 side line and applaud.

Second, I'm 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 was little consolation I can offer these customers in respect of 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 baseload plants 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 and articulate a fully thought out asset plan.

The less good news is that it will take us more than the five weeks 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 on my comments focused almost exclusively on the fact that I perceive 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 of federal 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 subsidies is to insure that enough existing baseload 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 and flexible 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 baseload complement to all of 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 begs the question of how do we maintain baseload 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 existing coal plants post combustion.

Today I'm very pleased to inform you -- and this is shown on slide 6 -- of Petra Nova, our carbon capture to enhance 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 among the youngest and most important of all of the coal plants in our fleet, each sit astride oil fields that are candidates for enhanced oil recovery 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 [moth-ers] 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 homeowners in all of the markets in which we participate.

We have been hard at work growing our mass retail business organically, adding net customer accounts, staying top decile in customer satisfaction surveys, and expanding into new markets.

And, importantly, becoming good at 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'm 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've been hard at work since the NRG Yield IPO last summer and, making sure that NRG Yield is the highest-quality vehicle of its kind, with the most diverse set of operating assets and an attractive growth pipeline.

All of 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 utilities scale deals that have previously been our principal 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 at B2B and B2C deals will be an enduring competitive advantage for NRG.

Let me conclude on slide 9 with a bit of a situational analysis of NRG's positioning within the American energy industry from the perspective of a potential investor in this space.

I've 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 an 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 risk.

You are betting that the early movers continue 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 break out 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 in.

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 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 that is 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 using our nearly 3 million retail customers, conventional retail franchise, with our emerging residential solar capability, as I 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're an investor contemplating investing in this space, we hope you'll 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.

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're 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're 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 off setting 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 Casper, 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 a [big cage on conomo] and our New Jersey peaking assets, all of which are on schedule and on budget.

In total we're still projecting $326 million in environmental expense over the next four years, excluding any impact related to the closing of Edison Mission.

With respect to Edison Mission, we're also working diligently to optimize the existing environmental compliance plan 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 time frame.

With respect to the Casper decision, the Supreme Court reversed the lower court's decision that had vacated the rule, and is sending 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 Casper.

We anticipate the existing care program to remain in place for some time, while some of the legal and procedural issues are addressed.

Turning to our operational performance on slide 12, we had another quarter of top-quartile safety performance with 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 to 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.

Total generation was significantly higher from last year driven primarily by the East region which was up 39%.

Colder weather in the East, coupled 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 by 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 can take full advantage of the pre-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 these outages done with little opportunity cost, and increasing the reliability when it matters the most, more than offsets the negative impact on our annual availability metric.

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 league 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 this 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 an increase in 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 serve throughout the quarter with a 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 continue to execute as we leverage the strength of our marketing and sales channels as well as our margin management and integrated wholesale retail capabilities.

The result 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 Dominion's 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 back-up generation, solar, and demand response.

With 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 cold 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 TCF.

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, benefiting 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 [unclear] coal megawatts are positive signs in PJM.

Finally, as you know, we have not been overly bullish on the prospect of the Midwest but COMED is becoming a growing source of opportunity for us.

In fact, we think this opportunity goes beyond driving value to our proven synergy model.

We have seen a nice rally in the market over the past few months, potentially signaling a state of transition in the market dynamics.

Accordingly, we're 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 their respective impact on the sensitivity chart.

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 winter, our commercial team remained focused on integrating the Edison portfolio.

At the end of 2013, we recognize 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 insure 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'll turn it over to Kirk.

Thank you, Mauricio.

Turning to the 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 wholesale business, which generated $639 million in adjusted EBITDA as NRG's expanded East fleet, in particular, delivered strong operational performance during extreme cold weather and volatile power prices in 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'll review in detail shortly.

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 had 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 objectives.

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're 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 wholesale business, driven primarily as a result of the first-quarter outperformance, 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'd 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 costs 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 costs, 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 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 2015, 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 increased 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 to GenOn this quarter in order to rebalance liquidity across the various GenOn entities.

Turning to slide 20, I'm pleased to announce that we have executed a definitive agreement to complete the first drop-down of assets through 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 under 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 10 times adjusted EBITDA of approximately $100 million.

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 drop-down 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.

Finally, updating our capital allocation progress on slide 21, the net proceeds from the first three drop-down assets, combined with a $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 the 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 costs 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 an 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.

With that I'll 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, if you could open the lines we would be happy to take everyone's questions.

(Operator Instructions)

Julien Dumoulin-Smith of UBS.

Good morning.

Congrats on the first 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?

Of course I'm 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.

We see 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 -- 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 we're getting to the point, both on the generation side and on the retail side, where we have all the capabilities we need.

We're 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'll add to what we have.

But we're getting to the 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 we continue to perceive -- which I'm 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 set up let me turn it over to Kirk.

I don't know that I'd add very much to that other than the fact that the capital that we amass, as I know you're 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 back end of the year.

Which is why we're deferring addressing the return of capital to shareholders question until we've realized 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 price is, combined with realizing that capital later in the year, we take all that in consideration in terms of balancing opportunistic deployment of capital on the M&A side or acquisition side with returning to share repurchases.

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?

Julie, I don't want to give a wrong answer.

Could you say the question?

Where are we most constructive on --?

Yes.

I heard some comments from Exelon, amongst others, saying we see X amount of upside in the market, et cetera Are you still as constructive on Texas?

Or are you shifting towards PJM?

And where do you see the most amount of upside or do you continue to see upside in the power market?

It's like going to a movie, Julien.

Everything is relative to your perceptions going in.

We went to great pains when we bought the Edison Mission portfolio to say -- don't confuse this with us with being bullish on the situation in the Midwest on the wholesale side.

But as Mauricio said in his comments, there's signs of life in the COMED market.

But I have to tell you, if you're 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 look at and reach out and feel and touch, we remain bullish on Texas.

The demand growth in Texas on a weather-adjusted basis was enormous.

It was in 11% in non-weather adjusted, 3% weather adjusted.

Announcements like -- I was out in California last week on the day that Toyota announced that they were moving 5,000 -- they had people 5,000 people employed in North America and they were 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're most bullish on remains Texas.

Great, thank you.

Jon Cohen of ISI Group.

Congratulations, guys.

I don't see how that quarter could have gone any better for you guys.

The first question is maybe for Mauricio.

We've seen in the past couple 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.

I think I referred to it on my script but the moving power is actually, I would say, the two points.

The first one is on the back of natural gas.

And as you've 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 up on natural gas.

So, that's the first driver of power prices.

And, as you can appreciate, that has helped significantly dark spread or baseload generators like us.

The second one, which is probably a little bit more recent, is an expansion in heat rate.

We saw that right after the Casper announcement.

So I think markets are realizing that there may be more scarcity and better fundamentals, shorter than what they believed in the past.

That clearly benefits some of the spark spread plays.

Those are the two very discrete drivers that we've seen in the power space.

With respect to liquidity I will tell you that liquidity is probably the worst I've seen in 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 we're seeing because I think they are affected by liquidity.

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 that the volume has been relatively decent.

Having said that, I think the most that you have seen are supported by the fundamentals.

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 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?

Jon, one, I don't want to be totally specific about it.

But the second thing is -- well, let me just tell you the way we're thinking about it.

Some of this is anticipatory in terms of where we see the price going, in terms of the expansion to the legendary price competitive with the retail price electricity in 20 to 25 states.

The way I think about it is, 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 a roof, with all of the tools we need to create value and bring the value to us.

One of the problems in the residential solar space for the last few years is there's always someplace in the value chain where value is being created but it's usually being created somewhere else.

So, for awhile it was the installers that were capturing the benefit of solar module prices dropping like a stone and all that.

And so we want a platform where the value that exists in the value chain comes to us, not to somebody else that we've enabled.

So, we want to have our capabilities totally in place in all of the markets we want to be in by the end of the year.

And then 2015 we want to execute, and we want to be a market leader, whatever lead in the market is.

In an industry that's facing exponential growth I'd 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 the 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's a market opportunity there that's just almost infinite in its potential.

Are there any capabilities that you think you're still lacking or are all of the pieces in place now?

There's one or two.

Thank you for the question.

(laughter)

Thanks a lot.

And congratulations again.

Stephen Byrd of Morgan Stanley.

Good morning.

Congratulations.

I wanted to talk about capacity prices in general, and talk about your EME assets.

I know you're going to come also 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?

Stephen, Chris Moser will answer that.

Hi, 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.

FERC has accepted the hard caps on DR, they've accepted the capacity import limits there.

I know there's still a couple of things pending in terms of the operability of changes to the incremental auctions.

Last year at $59 out there in RTO, and that was on the low end of things.

Obviously we're hoping for better numbers than that.

But keep in mind, there's both energy and capacity, as well.

So, it's the combination of those two.

We would like it obviously to hit good numbers in both of those.

A lot of the forecasts out there now have the capacity moving up against that $59 mark from the 2016-2017 auction.

And we're certainly hopeful that it does.

But don't forget, the wind in the sales back there is, as David said, selling coal at natural gas prices.

And as gas continues to move up, that's going to help those assets, as well.

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 still struggle with seeing some of the new build costs relative to, I think, where we expect to see them, or where we look at when we are looking at projects ourselves.

I think that's what that reference is to.

Okay.

So, as you see the capital costs, even with the improvement in energy margins, you struggle to see how the new build can make sense potentially.

Steve, I've got to tell you, it doesn't matter what market you're in, even in Texas.

We're acquiring assets at a deep discount to replacement cost.

And so, as prices get better, we obviously have an opportunity to earn back the money we put in them.

But we're not seeing things approach, pricing approach, new entrant pricing.

So how people are doing greenfield in the merchant market, it's baffling to us.

Great, thank you very much.

Neil Mehta of Goldman Sachs.

Good morning, David, Kirk, Mauricio.

Can you review the changes in strategy of what assets you're going to drop down into NYLD in Q3?

Originally it was CVSR but it sounds like it might be some 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?

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 that if we have a bias within that portfolio, we would lean towards the shorter duration assets within that portfolio as being 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 the convert 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 in the back half of the year.

But we'll revisit that in greater detail as circumstances unfold.

Very helpful.

And then on coal, Mauricio, you talked about how you were able to address the rail disruptions to insure 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?

PRB for shorter term has been oscillating close to their marginal cost of production.

Historically there's been a contango, though that has been tempered over the past 12 months.

So, as gas prices go up, and certainty with the announcement of Casper, lower sulfur and coal becomes more desirable for generators.

We're 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 2015 and beyond.

We like the position that we're in with the 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's 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.

We got in front of it.

We had very constructive dialogue 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 can not give you any more specifics.

We haven't in the past disclosed inventory levels on a unit by unit basis, and we're not going to do that given the competitive nature of it.

But I think it's fair to say we feel comfortable as we are approaching the summer months.

Well done and congratulations.

Neel Mitra of Tudor, Pickering, Holt.

Hi, good morning.

Congrats on the good quarter.

My question is directed towards Mauricio.

You 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?

I think it's more on the generation side than the load.

The load hasn't been particularly impressive in the Midwest, and to that extent the Northeast.

We think that, given some of the economic challenges and the high penetration of wind and negative pricing, we believe that there is probably, we're entering a transition period where additional retirements from baseload resources that can't cycle will happen, particularly on units that are marginal, small, with high fixed costs, with little flexibility.

I think the market is starting to recognize that.

And you can clearly see it on the heat rate expansion.

I put the chart on the historical pricing and the forward pricing on COMED, and I think that clearly has an upward 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, so that has also something to do with it.

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.

Is there an update on any the repowering opportunities in California?

We remain optimistic but there's not really any specific update but certainly I would hope to have one by the next quarterly call.

Great, thank you.

Steve Fleishman of Wolfe Research.

Great, thanks.

Just first curious if there's any update on the Maryland environmental rules going into the auction.

Good morning, Steve.

What I can tell you is that we've had a very constructive dialogue with MDE.

We're taking that into consideration with the plans that we have around our Maryland units.

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 dialogue between the two of us as of late.

Okay.

So, you have more clarity, you think, on the future of those two units at least?

I think in relative terms we have more clarity.

We don't have absolute clarity.

But 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 another.

The other question is just, you mentioned we have the revival of Casper 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 refocus on environmental rules?

I'm not sure this answers the question but 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, our environmental strategy is geared towards the amount of time that we expect the assets to continue to perform their function.

With respect to the specific rules, we think we have a good -- we're not spending an insubstantial amount of money in complying with the various environmental laws that seemingly come and go.

But we're also not investing stuff thinking that these plants are going to be here 40 years from now.

So, I'm not sure if there's something more specific about that that you would like me to focus on.

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 Casper 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?

Since we're in pretty good compliance position with the new rules, to be Machiavellian about it, if the new rules drive other people's plants out of the market, then that will be beneficial to us.

What I would say is one of the big lessons for us, and hopefully for the public policymakers -- and I tried to make this point in the context of Illinois -- is that we've always made a virtue of being multi-fueled.

The conventional system is clearly trending to an all gas, all the time system.

And the gas network is simply not prepared for that to happen.

And, so, to us, there's tremendous value in not only having gas plants but having coal plants continue and nuclear, and even our oil plants.

We ran our oil plants more this last winter than I think in the last several years cumulative.

But first and foremost, no matter how much we focus on sustainability and being green and all, the first 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.

We certainly are going to try and do that.

But you can't keep plants open if they're just losing money hand over fist.

And you don't want to invest hundreds of millions of dollars in an asset that's in its last couple years of life.

That's the reality that we juggle every day at this Company, and I think every other power company does, as well.

Anyway, I'm sorry, but I think we've got to go.

We're a few minutes late for our shareholders meeting.

But thank you all very much.

And if there are any questions that we could not answer, my friend Chad here sitting next to me would be happy to answer your 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.