Good morning, welcome to NRG Business Update Call. This morning's call is being broadcast live over the phone and via webcast, which can be located in the investor section of our website at nrg.com under Presentations of Webcasts. As this is a call for NRG Energy, any statement made on this call that may pertain to NRG Yield will be provided from NRG's perspective. Please note that today's discussion may contain forward-looking statements which are based on assumptions that we believe to be reasonable as of this date. Actual results may differ materially. We urge everyone to review the safe harbor in today's presentation, as well as the risk factors in our SEC filings. We undertake no obligation to update these statements as a result of future events, except as required by law. In addition, we will refer to both GAAP and non-GAAP financial measures.
For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to today's presentations. Today's call will end sharply at 9:00 A.M. to allow participants to dial into NRG Yield's 9:00 A.M. call. With that, I'll turn the call over to Mauricio Gutierrez, NRG's President and CEO.
Thank you, Kevin, good morning, everyone, thank you for your interest in NRG. Also on the call and available for questions is Kirk Andrews, our Chief Financial Officer. Today, we're taking a significant step in simplifying our value proposition, optimizing our portfolio, and strengthening our balance sheet. Starting on slide three, I am pleased to announce the agreement to sell our renewables business, including our interest in NRG Yield and our South Central business, known to many of you as Louisiana Generating, resulting in $2.8 billion in cash proceeds and the removal of $7 billion of debt from our balance sheet. This outcome is the result of rigorous and highly competitive sale processes that culminated in today's announcement. I want to commend everyone in the organization for their focus and commitment to operational excellence during this critical period.
Our objective was to maximize the value of these high-quality businesses, I am very pleased to have achieved this outcome. In addition, we were able to attract highly knowledgeable, well-capitalized, and experienced buyers, which makes me confident in our ability to bring these transactions to a swift close. Second, with these agreements in place, we now have greater visibility into total expected asset sale proceeds and are revising our target to $3.2 billion. Importantly, the transactions announced today, coupled with those completed in 2017, now bring our cumulative asset sale proceeds close to $2.9 billion. Finally, our comments during this call will be limited to the transaction details announced today. We will have an opportunity to provide you with greater detail on our transformation plan progress in just a few weeks during our next earnings call.
You can also expect us to provide you with a comprehensive capital allocation plan by our Analyst Day in late March. Turning to slide four for an overview of our renewables and yield transactions. Together, these transactions will generate almost $1.8 billion in cash proceeds and remove $7 billion in debt from our balance sheet. We have signed an agreement to sell our renewables business, including almost 7 gigawatts of operating and in-development assets, and our interest in NRG Yield to Global Infrastructure Partners for $1.375 billion in cash proceeds. Consistent with our objective to maximize value and deconsolidate debt, we found that a 100% sale of our interest in NRG Yield, coupled with our entire integrated renewables platform, to be the most valuable outcome after having considered a full range of options.
This was a process that was both exhaustive and well-coordinated. We worked closely with Yield's independent directors, management, and financial advisors towards a transaction that is highly beneficial for both companies and results in a new strategic sponsor for NRG Yield. GIP has an excellent track record in this space. They have a complementary business that is well-known, well-capitalized, and can provide the support necessary to foster NRG Yield's growth strategy. We're confident in our ability to work with GIP to bring this transaction to its expected close in the second half of the year. As part of this transaction, we're also announcing new drop-downs and amendments to our ROFO with NRG Yield.
We're accelerating the drop-down of Carlsbad and Buckthorn Solar and have executed agreements with NRG Yield to monetize these assets for additional cash proceeds of $407 million, resulting in additional $500 million in debt to be removed from NRG. Upon closing with GIP, we will amend the ROFO agreement to no longer include Ivanpah. Last, we will maintain our ROFO agreement for Agua Caliente, but expect to monetize this asset by early next year. Turning to slide five. We have agreed to sell our entire South Central business to Cleco Corporate Holdings for $1 billion in cash proceeds. This transaction includes our Cottonwood, Big Cajun One, Big Cajun Two, Bayou Cove, and Sterlington assets. It also includes associated load contracts with co-ops and munis, with an average weighted contract length of over 7 years.
As part of this transaction, we will be leasing Cottonwood, a highly efficient 1,300-megawatt combined cycle plant, back from Cleco through May 2025. NRG will continue to operate and commercially optimize the plant during the lease term in exchange for a rent payment to Cleco. This structure is an opportunity to enhance value for both parties. Cleco currently has sufficient generation in the region, while NRG's commercial operations group has nearly a decade of experience trading Cottonwood and creating significant value, selling power and capacity within MISO. This is truly an outcome that strengthens the economics of the deal for both parties. Importantly, this structure will not impact our balance sheet metrics. We are pleased to have Cleco as the new owners of the business, and we look forward to working with them to close this transaction by the second half of this year.
Turning now to the financial details behind today's announcement on slide six. I want to briefly review and summarize our updated asset sales scorecard and revised target proceeds. The asset sales announced today, combined with those completed over the second half of 2017, bring our total transformation plan-related transactions to over $2.9 billion. With another $275 million expected from additional targeted asset sales, our revised target comes to $3.2 billion, significantly enhancing capital available for allocation. These transactions also represent significant progress toward our objectives to deleverage and simplify our capital structure. The sale of our interest in Yield, as well as our integrated renewables business, will result in the removal of approximately $6.5 billion in consolidated debt. We're also able to eliminate debt related to the accelerated drop-down assets to NRG Yield.
Additionally, our remaining stake in Agua Caliente, as a continued ROFO asset, is included in our remaining target asset sales and also provides another opportunity to remove its nearly $1 billion in associated debt from our balance sheet. In total, these transactions will result in $8 billion in consolidated debt removed from the balance sheet and represent over 90% progress toward our goal of removing of nearly $9 billion in consolidated debt announced as part of the transformation plan rollout last year. Turning to slide seven, we have provided an updated pro forma view of the impact of asset sales on EBITDA and free cash flow using the midpoint of our 2018 consolidated financial guidance. As you may recall, on our third-quarter call, we provided a similar walk based on the full-year impact of targeted divestitures.
This updated slide provides greater detail based on today's announcement and revised asset sale target. First, today's announcement represent approximately $1.135 billion in 2018 EBITDA and $520 million in consolidated free cash flow before growth, $175 million of which is at the NRG level. The remaining assets targeted for divestiture represent an additional $170 million of midpoint 2018 EBITDA, $120 million of consolidated free cash flow, and $90 million of NRG level free cash flow. The impact of these announced and planned assets sales brings our 2018 pro forma midpoint EBITDA to $1.6 billion and free cash flow to $1 billion. These pro forma results also include the full-year impact of our 2018 cost savings and margin improvement targets, as noted in the lower right of the slide.
Importantly, by 2020, we remain on track to fully achieve our run rate target improvements, representing an additional $275 million in EBITDA and free cash flow benefits beyond those expected in 2018. Before I turn to Q&A, I want to quickly summarize the excellent progress we have made to date. With these transactions, we have now announced over 90% of our revised target cash proceeds and have identified over 90% of our target debt to be removed. Throughout the organization, we remain focused on achieving best-in-class operations and strong financial results while comprehensively strengthening our business. I am pleased with our progress to date and confident on our ability to fully execute on our plan. Finally, I want to remind you that our comments today will be focused exclusively on our announced transactions.
Further detail on our full transformation plan scorecard and detailed capital allocation plan will be announced over the next several weeks. Thank you again for your interest in NRG. With that, operator, we can open the lines for questions.
Thank you. If you have a question at this time, please press the star and the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from the line of Greg Gordon of Evercore. Your line is open.
Thanks, guys. Patience has finally been rewarded. We appreciate it.
Thank you, Greg.
Can you give us a sense of what the remaining asset portfolios that you're looking to monetize, what general framework is, in terms of the remaining assets that you're looking to sell, the types of assets or businesses?
Yeah. It's a combination of conventional and renewables assets. I think we provided some specifics on the renewables. These are the smaller plants that we have, St. Croix One, other small renewable assets. Obviously we have the additional monetization of Agua Caliente. On the conventional side, we haven't provided specifically the assets. We have some processes that are ongoing, for competitive reasons, we choose not to disclose the specifics. We provided already the general guidelines, in terms of the total of megawatts. I think it's fair to say, like I mentioned in the call, the vast majority of these asset sales have already been achieved, from what we have line of sight today. 90% of asset sale proceeds now have been announced and based on our revised targets.
Great. You said that today's announced transactions are expected to close in the second half of 2018. Is it still the expectation that the asset sale process in its totality will be complete by year-end 2018? Or do you think that the last round of proceeds might come in in early 2019?
Well, our expectation is to continue to target 2018. Obviously, in the case of Agua, that will be in 2019. Our plan is to have all these announced by 2018.
Great. Final question. You may want to punt this to the earnings call. While the asset sale proceeds numbers have come in and they may be a little bit lower than your initial aspirations, when we look at other aspects of the business, especially what's happened in Texas in terms of the outlook and underlying fundamentals for the core assets, is it fair to say that the outlook's demonstrably improved since you gave us the last update?
Well, I think if you look at what has happened in Texas, the improvements in spark spreads and power prices, the fundamentals have been stronger. In the next 45 days, we'll have an opportunity to have an earnings call and then an analyst day just a few weeks after. At that time, we will provide you with a comprehensive update on our transformation plan on the three big objectives: cost savings, margin enhancement. Now we will fold the impact of the asset sales announcements that we're making today, and provide you a fuller picture.
Okay. Thank you, guys.
Great. Thank you, Greg.
Thank you. Our next question comes from the line of Abe Azar of Deutsche Bank. Your line is open.
Good morning. Congratulations.
Thank you, Abe. Good morning.
I have a couple of kind of detailed questions. How much equity, if any, does NRG need to invest in Carlsbad and Buckthorn between now and the COD dates?
Over the course of the remainder of the year, that equity, those are we haven't disclosed the specific amount, but if you look at the growth investments section going forward in 2018, that's all subsumed within that. The capital would go out during this particular year to complete primarily Carlsbad, which has a COD date in late this year. At COD, that's when the Carlsbad transaction closes. Think about it this way, it's dollars in for Carlsbad, then replenished on the basis of the pre-wired monetization that's simply subject to arriving at COD later this year.
Yeah.
It's literally neutral plus in the context of the confines of 2018 in terms of capital allocation.
That's the important part. The COD is late in this year, it's just a temporal use of capital.
Great.
What is your plan for Ivanpah, are there any other renewables left at NRG, besides Agua Caliente, which looks like you'll be selling later this year?
Yeah. Agua Caliente, we will be monetizing that, in early 2019. We are now in the process of marketing the other renewable projects, and we're evaluating all options for Ivanpah.
Okay. That's all I have. Congratulations again, guys.
Great. Thank you, Abe.
Thank you. Our next question is from the line of Steve Fleishman of Wolfe Research. Your line is open.
Yeah. Hi, good morning.
Good morning, Steve.
Hey, Mauricio. Just one clarification question. The 2018 pro forma for divestitures, the adjusted EBITDA is $1.6 billion now, and when you gave this last time, it was $1.5 billion, so it's gone up $100 million. Can you just explain that change?
Yes. Well, Kirk can elaborate specifically. What I will tell you is, and I think the key message here is, when you think about that $1.6 billion and the incremental benefit from the margin enhancements and cost savings, we're very comfortable with the targets that we provided to you as part of the transformation plan. Kirk?
Sure. Steve, it's Kirk. No change in, obviously, the underlying guidance, that being the beginning point. That's basically the impact of what we've now announced, being removed on a pro forma basis, and then aspirationally. Specifically, aspirationally, as Mauricio said, includes conventional renewables. All of which were a part of the original list of assets that we had earmarked for sale as a part of the transformation plan. The primary notable exception, as was identified in the previous question, is Ivanpah. If you think about that variance, it's the difference between Ivanpah previously being included in the assets that we earmarked and marketed for sale, and now having removed Ivanpah, at least from the ROFO and line of sight in terms of monetization.
That's the primary difference between what the pro forma number was you saw in the third quarter call and the one six that you're looking at today.
Okay. I guess one way to look at it is that maybe the relative to your initial up to $4 billion, the asset sale number was lower, but now we also have more remaining EBITDA.
Correct. That is exactly it. There were some ins and some outs.
Okay
Puente. Yes, that's the right way to look at it.
Okay. I know you weren't ready to talk on capital allocation, but you did on the initial plan, talk to the 12%-15% unlevered return targets. Is that still the kind of high level plan?
Yeah, our philosophy on capital allocation has not changed, in terms of our priorities of first running the business and operating the business safely, in achieving our credit metrics, and then the returns of 12%-15% for growth capital. That philosophy remains the same, and we will have an opportunity to provide you a more comprehensive review of our capital allocation plan in the weeks to come.
Okay. Thank you.
Thank you, Steve.
Thank you. Our next question comes from the line of Michael Lapides of Goldman Sachs. Your line is open.
Hey, guys. Just real quick one, Kirk. With all the asset sales, can you give us, and with the guidance, what does that imply debt to EBITDA and net debt to EBITDA is for 2018?
Yeah. What I'd refer you back to there, Michael, as recently as the third quarter call, I think we gave you a pro forma view there. Obviously, that includes not only the impact of what we still plan on allocating, consistent with the original transformation plan, that's at $640 million of incremental deleveraging, but supplemented in the net debt equation by the significant amount of surplus capital that we have. Certainly, we have capital, if you do the math on that page now that we've made this announcement, well in excess of that which is necessary to achieve that three times on a net basis. What we'd look to do is obviously maintain that three times, and then that would inform that surplus, if you will, on the ratio. That would inform the amount of excess capital we have for consideration for other allocation moving forward.
As Mauricio said, we'll provide you a comprehensive summary in the analyst day. For the avoidance of doubt, we are very confident in our ability to be at three times net debt to EBITDA in 2018.
Got it. Just one quick question to follow up. Why three times? I'm just curious how you got to that as the benchmark versus another number. The only reason why I ask is I compare sometimes to some of the other energy or other cyclical industries and just want to make sure I have the framework in mind.
Yeah, totally understand the question. Well, first of all, as we've said before, that's not a static number. It's something we constantly review. We won't look at it philosophically as a set it and forget it, if you will. In context, I think that strikes the right balance in terms of flexibility, reasonable degree of leverage so you get the right amount of performance on the equity side of the equation. Preserves our ratings, which are very important to us, that BB rating, so we have reliable access to capital going forward. I've heard this before, and we obviously look as you do, comparatively speaking, within and outside of our industry. One of the things that informs our thinking, while EBITDA is obviously important, nominally speaking, when it comes to that ratio, there's no substitute for cash.
What really fuels that difference, and I think is important, and we look through, it's the quality of that EBITDA turning into cash. If I'm looking at a lower leverage ratio on EBITDA, for example, if $0.50 or less of every one of those dollars is turning into free cash flow, that informs the quality of that metric. We look at it through the lens of, on a pro forma basis, at least two-thirds of every dollar of EBITDA translates into cash. To me, that's the real deleveraging power and flexibility. That also, even though we don't talk about it nominally in the three, is what helped inform the process to get comfort with that net debt to EBITDA at three times. It is the power of translating EBITDA into cash on a pro forma basis.
Got it. Thank you, Kirk.
Thank you. This does conclude today's call. Due to time, I would now like to turn it back over to Mauricio Gutierrez for closing remarks.
Thank you. Well, thank you for your interest in NRG, and I look forward to speaking with you in just a few weeks on our fourth quarter earnings call. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.