NRG Energy, Inc.
Q1 2012 Earnings Call Transcript

Published: 3 May 2012

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 NRG Energy Earnings Conference Call. My name is Tahisha, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Chad Plotkin, Vice President, Investor Relations. Please proceed.

[Chad Plotkin:]

Thank you, Tahisha, and good morning, everyone. I would like to welcome you to our First Quarter 2012 Earnings Call. This morning's call is being broadcast live over the phone and through webcast, which can be located on our website at www.nrgenergy.com. Additionally, you can access the call, presentation and press release through a link on the Investor Relations page of our website. A replay of the call will also be available on our website. This call, including the presentation and Q&A session, will be limited to 1 hour. [Operator Instructions] Before we begin, I'd like to remind everyone to review the Safe Harbor statement provided on Slide 1 of the presentation. During the course of this morning's presentation, management will reiterate forward-looking statements made in today's press release regarding future events and financial performance. These forward-looking statements are subject to material risk and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. 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 Thursday, May 3, 2012, and any forward-looking statements that we make today are based on assumptions that we believe to be reasonable, as of this date. We undertake no obligation to update these statements, as a result of future events, except as required by law. During this morning's call, we will refer to both GAAP and non-GAAP financial measures of the company's operating and financial results. For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today's press release and this presentation. With that, I'd like to turn the call over to David Crane, NRG's President and Chief Executive Officer.

[David W. Crane:]

Thank you, Chad. And good morning, everyone, and thank you for joining us for this -- our first quarter 2012 earnings call. This morning, I'm joined, as usual, by Mauricio Gutierrez, our Chief Operating Officer; and Kirk Andrews, our Chief Financial Officer, and both -- and you will be hearing from both of them, as they give part of this morning's presentation. Also with me in the room are Jason Few, who runs Reliant, the largest of NRG's retail companies; and Chris Moser, who's responsible for commercial operations at the company, and they will be available to answer your questions. So let's begin. Today, notwithstanding the market challenges that we faced during the first quarter of 2012, I'm pleased to speak with you about the state of our company and its prospects looking forward, and that's because it feels to me like we have reached, during this quarter, an inflection point in the commodity price down-cycles that have gripped the wholesale portion of our business since the great recession 4 years ago. We have a long way upward to climb just to get to mid-cycle, much less to an up-cycle, but looking forward, this is a very positive development for us. We have had to attack relentlessly against the headwinds of constantly lower commodity prices in order to produce reasonable financial results out of our wholesale business for 4 years. We look forward to have the commodity price winds at least partially at our back, as we seek to improve our financial results from the current $1.8 billion a year EBITDA trough that we are in. Regarding the first quarter of 2012, notwithstanding that we were significantly down on the spectacular cold-weather driven results we achieved in the first quarter of 2011, we are right on track with our internal projections for the year and as such, today we are reaffirming our full year 2012 guidance. The first quarter was interesting in that it showed the resilience of our integrated wholesale retail business model in a quarter where there was literally no winter weather anywhere in our geographic footprint at any time. The first quarter also showed what happens in the market when prompt gas falls below $2 per million BTU. The market and NRG experienced very substantial switching from coal to the natural gas. As a result -- but I think the question that all of you as investors have to ask yourself, is in a $2 gas environment, to what effect? When wholesale electricity power price off dirt cheap natural gas results in $20 to $30 per megawatt hour peak prices, as it did in the first quarter this year, then the obvious conclusion is that it doesn't really matter what year your portfolio is made up of coal plants or a natural gas plant. It doesn't really matter that the coal plants are running less and that the capacity factors of the gas plants are shooting it up because in a $2 per million BTU gas world, nobody is making much money running power plants, whether those plants be coal or natural gas-fired. For us, that's why I'm pleased that with each day and each passing quarter our business becomes more balanced on the 3 pillars of the first, multi-fuel multi-market conventional wholesale generation. Second, multi-brand multi-market retail electricity and third, an increasingly clean energy particularly, PPA-based renewable power. And all of those 3 segments of our business, as depicted on Slide 4, position themselves strongly during the first quarter of 2012 for a near-term growth, not just medium to long-term growth but near-term growth. So let's start with the wholesale generation, the foundation upon which we're building our customer-facing retail and clean energy businesses. When I alluded at the beginning of my remarks to an inflection point, signaling the bottom of the market with signs of an upswing in the early stages, I was not attempting to call the bottom of the market for near-term gas prices. Like a lot of market analysts, we would not be surprised to see natural gas prices go down even further over the next few months given the extraordinarily high levels of gas currently in storage. But near-term natural gas prices are not the point. Even though our stock price recently has traded in a high degree of correlation to near-term gas prices, as a result of our hedge program as Mauricio will demonstrate, near-term gas prices are amongst the least relevant of all commodity prices to our financial performance. The good news in the news that is relevant to our near-term financial performance is that the commodity price indicators, that are relevant to our financial performance, have risen and risen substantially and the fundamentals namely, the almost complete absence of a supply-side response in terms of plants under construction, suggest that these prices should continue to rise. Turning to Slide 5, you will see the Texas heat rate story. You have heard of more of this recently from analysts, as the market is beginning to appreciate that there are 2 sides to the wholesale price equation in Texas, natural gas prices and heat rates. In anticipation of what is shaping up as a very tight summer in Texas, we have been singularly focused, as a company, on preparing for the summer season. And certainly -- and while things can happen, we are as well-positioned as we possibly could be at this point in time. The South Texas 2 nuclear plant, after a long outage, is fully back online. [indiscernible] which missed all of last summer, as a result of a steam turbine failure, is back and running smoothly. In response to higher heat rates, we have brought back for the summer 3 units totaling 1,100 megawatts from mothball status. We had increased maintenance capital spend on our gas fleet in an effort to make them more reliable, in the event that they experience the extended runs in the many starts that they were subjected to last summer. And finally from a commercial operations perspective, we are going into the summer conservatively long in our overall wholesale retail position. Mauricio will go further into the details of the Texas story, so let me move on to cast some light on a couple of other tight supply and demand situations moving in our favor, in California and New York, as shown on Slide 6. In California, as many of you know, the San Onofre nuclear plant is experiencing some difficulty and is in the midst of an extended outage. SONGS, as is it is commonly called, acts both as a big southern anchor to the transmission system of the Los Angeles Basin and as a big northern anchor to the grid of San Diego County. With SONGS out, only one plant is well-positioned in that area and that is our Encina plant in Carlsbad, California. Encina has been experiencing significant runtimes already, and has performed magnificently and we expect that to continue. Once again, as what's demonstrated during the Southern California wildfires a few years back, the SONGS outage demonstrates the importance of maintaining a substantial amount of reliable generation locally. Similarly, our El Segundo Repowering Project strategically positioned on the grid near LAX, is progressing through construction on time and on budget and as such, will contribute to the company's bottom line in 2013. Turning east, in New York City, tightness in the market as a result of supply retirements away from NRG has caused zone J capacity prices to double in the past 6 months. Our Astoria and Arthur Kill plants are benefiting from this trend. As the state of New York moves towards a decision about the future of Indian Point nuclear plant, we are fully prepared to assist the state in providing system reliability and affordable energy with our fully permitted in-city Astoria repowering project. And with our underutilized baseload units located in western New York. In short, we see capacity payment upside for NRG in New York and that upside is not linked to the near-term price of natural gas. Moving on to Slide 7 and the retail assets we are building on top of our wholesale foundation. Reliant, our flagship retailer, continues to perform very well for us in our key ERCOT market. Not only did Reliant deliver another robust quarter in the face of less volumetric business, as a result of the mild weather, our Reliant continued its recent string of net customer additions and its industry-leading customer satisfaction scores. Green Mountain and Energy plus continued to deliver growth against their differentiated platforms of clean energy, in the case of Green Mountain, and loyalty and affinity-linked mass electricity sales, in the case of Energy Plus. Remember, it is our objective to build a suite of complementary retail brands that are able to compete successfully in the various retail markets that they compete in, on qualities other than just reduced price. And we are pleased with the progress being made in this end of our business. In the third leg of our strategy, the fast-growing clean energy space, as shown in part on Slide 8, NRG Solar continues well on track across a range of initiatives that it has underway. Most notably and most importantly, its utility-scale construction program remains well on track, on budget and well ahead of schedule. Last week in fact, we celebrated Agua Caliente officially becoming the largest operating solar PV plant in the United States, even though it is still something less than 50% of its eventual size. Agua Caliente, at this point, is several months ahead in its construction schedule. As you know, last quarter we sold 49% of Agua Caliente to MidAmerican at a premium to our invested and committed capital, demonstrating that even if the market does not see the value of the solar assets in our generation portfolio, Saudi strategic investors increasingly do, which leads me to my brief editorial comment for the morning for all of you on the investment side. I know that the solar space may look blighted with the loss of market capitalization over recent months with First Solar and the recent pulling of the BrightSource IPO. But that's because the public markets are overwhelmingly invested in the solar industry through the solar manufacturer link in the value chain, and that has been a very tough end of the business to be in recently. NRG, on the other hand, is not a solar manufacturer, but rather is a producer of solar power and is a consumer of solar module for effectively resale to businesses and consumers alike. That is a very different part of the solar value chain and one of prospects for which are extremely bright. As we turn into the second half of 2012, we intend to provide much greater detail about our plans to address this exciting market opportunity in solar. So finally let me end my opening remarks by making a few comments on capital allocation to reinforce the more conservable discussion we engaged in on this topic on our last quarterly earnings call. We reaffirm our intent to initiate a dividend in the third quarter of this year, which I don't need to point out to you begins 8 short weeks from now, and Kirk will provide some details that should allay concerns raised by some investors about the adequacy of the RP basket. Let me reiterate in a simple declarative sentence, the point that I made on the call last quarter when we announced the dividend. The RP basket will not act as an effective constraint on our ability to pay the proposed dividend now or in the foreseeable future. Moving on, we have not ruled out a share buyback in 2012/2013, but as we mentioned last quarter, we want to hold off on any such decision until later in this year. In that regard, we will continue to reserve several hundred million dollars of excess cash on our balance sheet for a return to stakeholders, whether they'd be debt or equity, or both. Next, while it's premature to be too specific, we remain on track to realize during 2012, additional capital from the sale of non-core assets; capital which we believe can be put to better use for the benefit of NRG shareholders. Moving on, we will continue to look to add to the asset portfolio where it can be done at a value to NRG shareholders, as we felt we had done in every one of the limited number of acquisitions NRG has made over the past 8 years. So with that summary, let me turn it over to Mauricio.

[Mauricio Gutierrez:]

Thank you, David, and good morning. The first quarter proved to be a challenging one, but despite the mild weather across all our regions, gas falling below $2 and much lower generation, I am pleased to report that we continue to be on plan, thanks in large part to the execution of our hedging strategy. I will expand on these later, but as always, let's start first with safety. We had another quarter of top decile performance across the fleet. We have 47 facilities out of 51 without a recordable injury, and 0 loss time incident this quarter. Our safety culture continues to serve as the foundation for achieving superior operating results. Safety is a constant effort, and even with our strong track record, we cannot afford to become complacent, particularly going into the peak summer months. Moving onto our generation for this quarter, we were down 26% compared to last year. Most of this decrease was driven primarily by 3 factors. First, the forced outage at STP accounted for 1/3 of the decline. I'm happy to report that unit 2 returned to service on April 24 and is running well. Second, we experienced higher coal to gas switching in Texas, particularly in January. However, since that time, we have seen improved dispatch on our coal units. And finally, we doubled the number of maintenance outage dates compared to last year. We opportunistically expanded these outages in order to take advantage of the low-price environment and to reduce outage-related overtime pay. The benefit of getting these outages done with little opportunity cost more than offset the negative impact on our availability metric. On the positive side, production in the West more than doubled compared to last year, led by our Encina plant, which has become critical to the Southern California grid given the SONGS outage. In the South Central region, production gains were driven by our Cottonwood combined cycle plants. As I indicated on the last call, this quarter we're launching a new FORNRG program. This time, the focus will be on asset optimization of non-economic units, as we deal with our Dunkirk facility; our retail business in recalibrating the cost structure to the low gas price environment. Our target is to deliver $100 million of EBITDA by 2014. Moving on to Slide 12, our retail business delivered planned EBITDA despite milder weather compared to last year, and it achieved another quarter of customer growth with 31,000 more customers than year-end 2011. We maintained strong retail margins with the disciplined approach to targeted marketing and pricing actions. However, unit margins were slightly lower due to intensified competition in C&I and the benefit in our mass segment from extreme weather events in February of last year. We continue to innovate, reduce bad debt and provide superior customer service as demonstrated by our growing customer accounts on the smart energy products and other value-added services. The result for the quarter is that we struck a balance between customer account and margin, consistent with our long-term strategy. And this strong performance enabled NRG to remain the largest retailer in Texas. Normally during these calls we focus almost exclusively on ERCOT and natural gas. But I thought it would be worthwhile to highlight a few other areas where we're seeing some upside not correlated with gas prices. So let me expand on David's comments on Slide 13. First on the left panel, in New York, the capacity market is a barometer for the balance of supply and demand. Without getting into the technical details of the demand curve, the key concept is that when supply and demand are in equilibrium, the cost of new entry will be achieved. What we're seeing, in both New York City and rest of the state, is that asset retirements are bringing the market back into equilibrium. Since October 2011, summer capacity prices have nearly doubled, with May spot prices clearing over $17 per kw month. Likewise, rest of state capacity has increased 150% over the same period. The market believes this increase is more than a temporary phenomenon, as 2013 prices have moved up as well. Moving onto California, the SONGS outage and the uncertainty around the timing of its return, coupled with normal in-state hydro levels have driven heat rates higher. In the past, most of our portfolio have been contracted or under tolling agreements, but not this year. Our in-base and merchant fleet of 2,000 megawatts is ready to meet critical summer demand and benefit from potential higher prices. Now moving onto Texas on Slide 14, an area that we have covered extensively is the market changes proposed by ERCOT and the PUCT. In September of 2011, heat rates and spark spreads have continued to increase, but remained below our estimates to support new build economics. Upon closer look, most of this increase in heat rates has come from on-peak hours during the summer months. As you can see, our baseload portfolio earns most of its margin during off-peak hours, irrespective of gas or low gas prices. And that is exactly where we have seen the uplift in heat rates. So we're confident that our low position will translate into higher margins. Given this price signal and the commitment of the PUCT and ERCOT have shown to make the energy-only market work, we have decided to bring 1,100 megawatts out of mothball status by June 1. We will bring this capacity to service at a fraction of the cost of Brownfield development. Finally, during this outage season, we have done extensive work to ensure a higher level of reliability of our gas fleet for this summer. Moving on to our hedging disclosure on Slide 15. As heat rate has become a more important and exciting driver of our portfolio, we wanted to increase the level of transparency of our baseload position, by including not only our natural gas, but also our heat rates hedge levels. Just to be clear, these levels are for the entire baseload portfolio and include the coal contracts in our South Central region. From these, you can infer our position in ERCOT is more open than the levels shown in this chart. Turning to coal, and given the weakness in the commodities market, we have increased our coal hedges in 2013 and 2014, effectively closing the second leg of our dark spread that we initiated back in December. We continue to work with our coal suppliers to have flexibility into our contract, in case we see a sustained low gas price. We have again included the sensitivity for both our baseload portfolio and our Texas gas fleet, which is shown on an open basis. As we have said in previous calls, with respect to our gas fleet, we continue to have a long bias positions for the balance of the year. Beyond 2012, and consistent with our view, our gas fleet remains significantly open. We believe these 2 disclosures will provide you with additional tools to value our portfolio. Finally, Slide 16 summarizes the goals for the operations group. We have taken all the necessary steps from a commercial and operational standpoint to ensure we capture the potential opportunity of higher heat rates in our core markets. With that, I will turn it over to Kirk for the financial review.

[Kirkland B. Andrews:]

Thanks, Mauricio. Beginning with the financial summary on Slide 18, NRG is reporting first quarter 2012 adjusted EBITDA of $300 million, with $188 million from the wholesale business and $112 million from our retail platforms. The first quarter results which are consistent with our expectations, lead us to maintain our full year EBITDA and free cash flow before growth guidance ranges for 2012. Meanwhile, total liquidity improved by over $300 million, as compared to year-end 2011 liquidity, driven by the partial sale of Agua Caliente, which yielded cash proceeds of $122 million and a release of LCs representing the assumption by our partner, MidAmerican Energy Holdings, of postings related to their share of equity commitments for the project. As our business continues to evolve in order to better align our financial reporting with our management and strategic focus, NRG has realigned the segments of our business into 4 primary areas

[David W. Crane:]

Thank you, Kirk. Let me end as I usually do on the first quarter call with the scorecard, which appears on Slide 28, indicating what we are particularly focused on achieving this year at NRG. We have touched upon most of these objectives during the presentation today so I will not belabor them. I do want to say to all of the shareholders on the phone, that all of us in the management of NRG and on the NRG Board of Directors are acutely conscious of the fact that an investment in NRG during the past few years has not been a good one for our shareholders from a total shareholder return point of view. While I'd like to stand before you and guarantee that from this day forward, the stock price will go in only in one direction and that is up, I obviously cannot do that. I can tell you that, with near-term gas prices having the potential for only a little further drop on the downside, the gravitational pull downward on our stock price from natural gas seems to be near or at an end. And with the new shoots of spring that are popping up elsewhere around our conventional wholesale business, with the growing strength of our retail platform, and with large blocks of our industry-leading solar program achieving commercial operation over the next few months, we seem poised for a little upward momentum around the stock price. I also can tell you that all of us at NRG are doing everything in our power, everyday, to create that momentum and then to build upon it, all for the benefit of NRG shareholders. So thank you very much. Tahisha, we'd be happy to answer questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Jon Cohen from ISI Group.

[Jonathan Cohen:]

Just a quick question, what is the risk of a warmer -- sorry, a more mild summer in 2012? It seems like especially given all the investments that you're making, bringing units out of mothball and leaving yourself with a more open -- if we have a mild weather, aren't we leaving a lot on the table given where heat rates have risen to?

[David W. Crane:]

Well, Jon, look I'll ask Mauricio if he wants to quantify, I mean, it's a good point. I mean, this is a business that's based on volume and we do better. We're supposed to do better in extreme weather environments and that's what we're prepared for. So an unusually mild summer in Texas would have a negative effect, but I think the amount is fairly modest. And Mauricio, do you want to -- I mean, it's hard to speculate specifically on how mild you're talking about, but if you want to venture or guess it...

[Mauricio Gutierrez:]

No, what I would say is that the investments that we have made are not only just for one summer, Jon. I mean, we think that there is an opportunity for the next couple of years given the tight supply and demand situation in ERCOT. So I mean, clearly there is some risk of a mild summer. I'll say the position that we're taking to be longer than we have been in the past but again, I think you need to look at what is the perspective in the next 3 to 5 years.

[Jonathan Cohen:]

Right. And then just one other question on retail, can you talk a little bit about the competitive dynamics in that market. You mentioned that the competition on the C&I side was picking up. Is that for block products or for full requirements? And also for the guys that are marketing to the mass-market, that don't have peaking generation to back up their load, how is it that they're hedging the super peak risk in the summer?

[David W. Crane:]

Well, Jon, Jason is obviously going to answer your question, but the second part of your question, I think is particularly interesting, because I can tell you we wouldn't want to be going into this Texas summer without the wholesale to back up the retail. But Jason, you want to answer both parts of John's question more thoroughly than I did?

[Jason Few:]

Sure. When you look at competition on the C&I side, we are seeing a change in the product mix. We're seeing more customers taking block- and index-type products, which tend to, from a competitive standpoint, be more price competitive and at a lower margin. We're also seeing customers from a competitive -- or competitors in the marketplace driving price competition in the C&I space. So we're seeing both those things happen in the market and customers are willing to take more risk on their side of the ledger, as it relates to pricing given the current power prices in the market. On the other part of your question with respect to how retailers are going after the mass market, absent having the ability to be backed up by the fully integrated model like we have with generation, clearly, I mean, you're seeing that their prices from a cost standpoint are going up because of what's happened with heat rate. And I think as they work with their Sleeve Providers, I think you're going to see more cost for the smaller retailers or non-integrated retailers, as those prices increase in the market, and I know at least from a -- from an advocacy standpoint, we're seeing a lot of, at least feedback from the group not wanting to see the price cap elevations that the PUC is talking about, which clearly states that there are some challenges for them in terms of managing that side of their business. And we would expect to see pressure for them in terms of pricing, as well as their ability to have liquidity to support growth during the summer months.

[Operator:]

Your next question comes from the line of Angie Storozynski from Macquarie.

[Angie Storozynski:]

I just wanted to start maybe with the reconciliation of the year-over-year change in earnings from Texas generation. Okay, so I understand that the February 2011 events contributed about $20 million to $25 million to your retail business. Could you give us a sense of how big of an impact did the Texas generation see in the first quarter of '11?

[David W. Crane:]

So, Angie, I mean, just for other people following along, I mean, you're asking Kirk to provide a little bit more detail on Slide 19, right, in terms of, I mean, basically how much did 2011 first quarter outperform what we expected 2011 on a normalized basis, both on the wholesale and the retail side?

[Angie Storozynski:]

That's correct.

[David W. Crane:]

Kirk, if you want to give that answer?

[Kirkland B. Andrews:]

Yes, I mean, Angie, the wholesale side of that equation is effectively the difference between the $155 million and the variance that we had described being the retail side of that equation. So the wholesale side is about a $100 -- a little more than $100 million and the retail side is about $50 million.

[David W. Crane:]

That's not the answer to it. She wants to know how much did 2011 first quarter outperform what we expected in 2011.

[Kirkland B. Andrews:]

Oh, our expectations. Forgive me. We were up by about $65 million versus our expectations in the first quarter.

[Angie Storozynski:]

For generation?

[David W. Crane:]

For generation and retail. And you said $20 million, because retail was $25 million, so generation was -- assuming that Angie is right about the $25 million so...

[Kirkland B. Andrews:]

And the remainder of that was $40 million, I think.

[David W. Crane:]

Yes.

[Kirkland B. Andrews:]

I didn't realize you were talking about the first quarter of last year. Yes.

[Angie Storozynski:]

Okay, that's fine. And secondly, you mentioned coal-to-gas switching impacting the results. I'm actually a little bit surprised because if anything, it would have been a positive impact because you were hedged for baseload. You run your coal plants less, so you would have had a benefit of lower O&M from running the coal plants, and then you were buying power at a lower cost than it would have been -- than the cost at which you would have generated the electricity from your coal plants. So I don't quite understand why there would be a negative impact.

[Mauricio Gutierrez:]

Angie, this is Mauricio. I think that it changes year-over-year, so in the first quarter of 2011 you got significant price spikes that we were able to monetize during that time. I think you're correct. There is an opportunity in this quarter where we bought back our obligations below our generation cost.

[Angie Storozynski:]

Okay, and lastly you mentioned accelerated maintenance of your -- of the gas plants. Any quantification of the O&M impact in the first quarter? So how much more in O&M did you spend to maintain the gas plants?

[Kirkland B. Andrews:]

Well, on the O&M side of the equation, the number was about $7 million.

[Angie Storozynski:]

Okay. And the -- I promise this is the last question, the solar $330 million by 2014, what level of that will it be associated with for solar?

[Kirkland B. Andrews:]

The tier 1 solar portfolio, once it reaches that levelized $330 million, the associated total debt will be approximately $3.4 billion.

[Operator:]

Your next question comes from the line of Jay Dobson from Wunderlich Securities.

[James L. Dobson:]

David, in your preamble, you talked a bit about M&A, and there's always lots of rumors floating around there. I was wondering if you could address any of those rumors and if you're unwilling to do that, maybe just talk about your willingness to use your stock at current prices to execute upon that desire.

[David W. Crane:]

Well, Jay, M&A is a broad topic. Let me just -- I think everyone just think about M&A the way we think about M&A, which is basically bifurcated. And I've made comments on both in the past, and let's talk about what I would call cash M&A in the past. And Jay, that's a very simple concept. I mean, this -- particularly the power plant side of the business, capital-intensive, commodity-based, cyclical business, it's very easy to demonstrate that the people who have made the most money in the power plant, these are the 20 years for the people who buy assets when they're cheap and they sell them when they're expensive. The points I've made in the past is that we're at a cyclical low point in the commodity price cycle. That's usually with assets are cheap. They problem is that the reason they're cheap is because there's very little money sloshing around to chase those assets. So the point I made on last quarter's call, is it's nice to have a little bit of cash in case you have an opportunity to buy assets at a low price. So that's the cash side. And I stand by the fact that we like to have a little extra liquidity to see if there are opportunities that fill out our portfolio. You also mentioned I guess -- I can't remember what you've mentioned Jay, you just [indiscernible] but corporate transactions are which implies using the company stock as an acquisition currency. And what I would say about that is, Chad tells me I've sort of fanned the flames of speculation in this area in the past, because we get asked these questions by investors all the time. And for some reason the way that investors ask the questions they say, do you think that if you put 2 independent power companies together, that there are significant cost synergies to be achieved? And of course, I answer that question in the affirmative that, that's incontrovertible. That if you put 2 IPPs together, there are big cost synergies to be achieved. And of course those cost synergies become more relevant in the scheme of companies, as their market cap shrinks. So the answer to that question is positive. But what I would say to you, Jay, is that you also have to keep in mind the other side of the question when you're thinking about NRG and large-scale acquisitions, which is we're obviously reluctant to use our stock as an acquisition currency at a time when it trades at a value that we believe is well below the fair value of the stock. And so never say never, but we do have that reluctance. Did that clarify anything Jay, or did that just obscure things further?

[James L. Dobson:]

No, I guess it did clarify. I guess the way I'd punctuate it, is if you're looking down the potential, you're saying you never say never versus buying your stock back, and it's trading right now at 16, 13, what do you do?

[David W. Crane:]

Okay, so -- I'm sorry.

[James L. Dobson:]

I'm just asking you, you buy back stock at current prices? Or do you use it as a currency?

[David W. Crane:]

Well, that's a hard question to answer. We obviously would like to buy back as much stock as we can at $16 because we think it's undervalued. But at this point, we look at the relative value of everything in terms of how much value it will create for the shareholders. So it's hard to answer that question -- I mean, we know what we think the stock is worth relative to the value we can create for the shareholders by doing share buybacks. I can't compare that to a theoretical use of the stock for an acquisition without sort of knowing what value could be created from a specific acquisition.

[James L. Dobson:]

Right. No, I appreciate it. That's really helpful. And then Mauricio, just one last follow-up, the $7 million in O&M you talked about in the last question for additional maintenance, I assume that didn't include or only partially included the return from mothball, the 3 assets in Texas? So maybe just talk us through what the cost of returning those to service are?

[Mauricio Gutierrez:]

Yes -- no, it did include some, but keep in mind that the full cost to return those units were -- I mean, there is a timing issue. It just didn't happen in the first quarter. There were some in the fourth quarter and some in the -- that are spilling over the second quarter. So it does include some, but it's not the total amount that we used to bring those units out of mothball.

[David W. Crane:]

But the total amount of bringing those 3 back is what, $15 per kw, we'd say.

[Kirkland B. Andrews:]

For the full year, the total amount of capital is about $15 million.

[Operator:]

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

[Stephen Byrd:]

I just want to follow up quickly on the last question, just on the cost to bring the Texas units back? So that was $15 million in total cost to bring these units online?

[Kirkland B. Andrews:]

Over the course of the year, yes.

[Stephen Byrd:]

Okay, so that's obviously a very small fraction of new build cost. And what's the approximate heat rate of those units?

[Mauricio Gutierrez:]

That heat rates vary between 10 through 13 heat rates. I mean, this is I guess, by 5 and version 1 through 4. Most of that cost was really around the boiler. We did expensive structural work and tools, we expect the generator. So the goal is really to make these units reliable for the next couple of years given what we expect as higher runs in the summertime.

[Stephen Byrd:]

Okay, and then just on the sale of non-core assets, when I think about those assets, would the international assets be natural candidates there, and are they generally transactable assets?

[David W. Crane:]

The first part of that, Stephen, is yes is the answer, astonishingly succinct by my standards of non-brevity. The second part is in terms of the transactability, as you yourself well know that those are highly structured transactions with partners and things like that. What I would tell you is, I can't guarantee that they're transactable now, but they appear to be a lot more transactable now than they were 2 or 3 years ago. And so we're optimistic. How is that?

[Operator:]

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

[Julien Dumoulin-Smith:]

First question here on the lower interest expense in the guidance, just if you could walk through. It's a pretty big delta there, as far as I'm concerned, $45 million?

[Kirkland B. Andrews:]

Yes, Julien, the principal component of that change in expectation is the result of lower LC costs, that are the combination of the new facility that we put in place at repowering holdings, were primarily the release of the LCs that resulted from the sale of Agua Caliente.

[Julien Dumoulin-Smith:]

Right, and a follow-up there on the '17 notes just again, kind of following up on the M&A discussion, how are you thinking about timing on potentially refinancing those that this year versus potentially transacting and how would that play into it?

[Kirkland B. Andrews:]

Yes, looking specifically at the 2017 note refinancing, I would look at that at this point as -- they're primarily driven by the attractiveness or the refinancing cost we see in the market place. So that would be governed by the degree to which we see an opportunity to refinance them at attractive rates. And obviously as you've seen over the course of the last few months, we've seen some significant volatility in the trading of our bonds. At some point, those rates go as high as 9%, sometimes they go down closer to the 8% range. Obviously, lower is better, so as we move closer to an attractive range of refinancing cost, that would be the driving factor that would cause us to make that decision.

[Operator:]

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

[Gregg Orrill:]

I was wondering if you could come back to the Texas availability in the quarter and I think you mentioned that you brought forward some maintenance plan, maintenance days, and maybe you can touch on sort of the difference between where you would have wanted to be in a normal quarter of availability and how much of that was made up by bringing forward those maintenance days to where you ended up?

[Mauricio Gutierrez:]

Right, I think we quantify that, Gregg. I mean, we doubled the number of outage days compared to the first quarter of last year. When I -- the color that I will provide is when our coal units are significantly in the money, every megawatt hour counts, and we try to shorten the length of the outage by paying some overtime. In this case, since the opportunity cost was minimal, we decided to extend the outage to avoid paying those costs, and so that was one of the main drivers. The other one was, be opportunistic about bringing some additional outage work that we needed to do. I think in the subsequent quarters, we will provide additional guidance on what that meant for the remaining of the year in terms of the reduction of planned outages.

[David W. Crane:]

Yes, Gregg, just to add to what Mauricio said, I mean, while it was most pronounced in Texas -- I mean, that was really a philosophy that we took across the generation fleet because really there was so little money to be made on the wholesale side during the first quarter. That the normal paradigm that the plants operate on is that you got to get these outages done in the shortest possible time. It really made it -- it didn't make sense to rush plants back into service so that they could produce megawatts at 0 margins. So some of the statistics don't look as good in that way, but the opportunity cost, as Mauricio is saying of keeping the plants out, just didn't exist. So we made sure that everything got all the work done that needed to get done.

[Gregg Orrill:]

I guess, I'm still struggling with the idea that your long capacity against the retail business in Texas heading into the summer, with Slide 15, maybe you could hit that again for me? It just looks like you're hedged on baseload, so -- and not pulling on price for the load, and so is it just with the gas assets, are getting into a net-long position?

[Mauricio Gutierrez:]

Right. Well, let me see if I can elaborate. I guess, you're referring to the green bar on the baseload generation chart?

[Gregg Orrill:]

Yes.

[Mauricio Gutierrez:]

Okay, the green -- what that means is that, we are fully hedged against our price load or where we have certainty on our retail business in terms of price. There is a portion that we still have no certainty on price. And we know we have that low, it is -- for the most part, these are the month-to-month customers that we try to hedge as we are approaching the delivery dates. So what we have said in the past is we run flat book on retail. All the price load we hedge it, and the variable component, which is the month-to-month customers we had a programmatic way of hedging that, as we approach to the delivery month. Would that clarify that bar chart?

[Operator:]

Your next question comes from the line of Steve Fleishman from Bank of America.

[Steven I. Fleishman:]

A couple of things. David, I thought I heard you say in your prepared remarks that the $1.8 billion or so EBITDA this year is a trough. Is that? Did you say that? Is that what you expect?

[David W. Crane:]

Well, it's not a formal multi-year guidance of the company, but certainly that's what I expect, yes.

[Steven I. Fleishman:]

Okay, because I think there's a lot of expectation that there's further decline as hedges roll off and retail margins maybe shrink over time?

[David W. Crane:]

Yes.

[Steven I. Fleishman:]

But is that...

[David W. Crane:]

Well, I mean, the marketplace is made up of people with different expectations. So -- and -- but I mean again, I'm looking at this, Steve, as a 3-pillar thing. There's -- I'm not saying that it's -- that this is the bottom. And when you mention hedges rolling off, you're obviously talking about something that is going to impact the wholesale side of the business. I mean, we do have a natural built-in uplift that comes in from the solar, the $300 million plus of EBITDA that was referred to earlier, I think by Angie, and discussed with Kirk. So there are -- I'm looking at the totality of the picture, not just the wholesale side.

[Steven I. Fleishman:]

Okay, but I just wanted to confirm that, that was the comment you made. It's not just like prices are at a trough, it's the EBITDA that's at trough.

[David W. Crane:]

Yes, I mean, my goal is that not withstanding this downward pressure in prices with hedges rolling off, that between solar, between the heat rate expansion, better capacity prices, the retail expansion both in terms of adding customers in the markets we're in and expanding the markets we're in the Northeast, that I don't want or expect to see the company to do worse than $1.8 billion. Again, and that's not formal guidance. That's just -- that's David Crane speaking.

[Steven I. Fleishman:]

Okay, secondly, did you just give us an update on like, coal inventories and is there any risk that you end up having to force-burn any coal?

[David W. Crane:]

Force-burn coal. Mauricio?

[Mauricio Gutierrez:]

I might have rested there. Yes. A couple of things. One, we certainly are above the -- or on the upper end of our range. But what I will say is most of the coal-to-gas switching happened in the month of January. Since that time we have seen an increased number of ramps in our coal generation particularly in Texas, so at this point, we don't expect to be forced to take any coal. And the second thing that I will add is -- and we're working very close with all the coal supply chain participants and it's been a very constructive discussion. Coal suppliers want to ship coal to us. They want to sell coal. Railroads want to ship coal, and I think we're all trying to make sure that coal stays competitive on a cost basis and that they provide us enough flexibility in case we see a sustained low gas price environment throughout the summer. So I think the combination of those 2 things makes us comfortable managing our inventory for the balance of the year.

[David W. Crane:]

Yes, I mean, Steve, Mauricio said it quite articulately, but I just want to make sure that everyone on the phone hears what Mauricio said because in the 8 years that I've been running this company and there's a lot of talking about the coal supply chain and difficulties with it. But I have never seen a situation where the whole coal supply chain was working as constructively with each other as it is now, and I want to commend those upstream from us on the coal supply chain for working with us to make sure that coal is as competitive as it can be in this natural gas price environment. The final thing I want to say, Steve, is it's good to have you back on the calls.

[Steven I. Fleishman:]

I have one more question, though. You spoke too soon. And I'm not sure you can answer this, but you're probably aware there's one party in the dispute with PJM regarding the application of Mopar for a new plant in this auction. Can you comment on whether that's you?

[Mauricio Gutierrez:]

I mean, the only thing that I will say is we have not been notified on anything and, I don't believe -- we can't comment on it. So I mean, that is pretty much all I can say. Everything else will be a speculation.

[David W. Crane:]

So thank you all for taking the time this morning to join us on this call. We look forward to talking to you next quarter.

[Operator:]

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.