Amanda. Good morning, and welcome to NRG's business update call. This morning's call is being broadcast live over the phone and via webcast, which can be located in the Investors section of our website at www.nrg.com under Presentations and 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 presentation.
Today's call will end sharply at 9 am to allow participants to dial into NRG Yield's 9 am call. With that, I'll turn the call over to Mauricio Gutierrez, NRG's President and CEO.
Thank you, Kevin, and good morning, everyone, and 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 3, I am pleased to announce the agreement to sell our renewables business, including our interest in energy yield and our South Central business known to many of you as LadGen, resulting in $2,800,000,000 in cash proceeds and the removal of $7,000,000,000 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, and 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. 2nd, with these agreements in place, we now have greater visibility into total expected asset sale proceeds and are revising our target to $3,200,000,000 Importantly, the transactions announced today, coupled with those completed in 2017, now bring our cumulative asset sale proceeds close to $2,900,000,000 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 4 for an overview of our renewables and yield transactions. Together, these transactions will generate almost $1,800,000,000 in cash proceeds and remove $7,000,000,000 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 energy yield to Global Infrastructure Partners for $1,375,000,000 in cash proceeds. Consistence 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 work 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 NIG 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 NIG yields growth strategy. We're confident in our ability to work with DIP to bring this transaction to its expected close in the second half of the year.
Now as part of this transaction, we're also announcing new dropdowns and amendments to our ROFO with NRG yield. We're accelerating the dropdown of Carlsbad and Buckthorn Solar and have executed agreements with NRG Yield to monetize these assets for additional cash proceeds of $407,000,000 resulting in additional $500,000,000 in debt to be removed from NRG. Upon closing with GIP, we will amend the ROPO agreement to no longer include Ivanco. Last, we will maintain our ROPO agreement for Agua Caliente, but expect to monetize this asset by early next year. Now turning to Slide 5, we have agreed to sell our entire South Central business to ClickCo Corporate Holdings for $1,000,000,000 in cash proceeds.
This transaction includes our Cottonwood, B Cajun 1, B Cajun 2, Bayou Cove and Sterlington assets. It also includes associated loan 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 1300 Megawatt combined cycle plant back from Cliquo through May 2025. NRG will continue to operate and commercially optimize the plant during the lease term in exchange for a rent payment to Cliquo. This structure is an opportunity to enhance value for both parties.
Clicko 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 MICE. 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 ClickUp 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 6.
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 twenty seventeen, bring our total transformation plan related transactions to over $2,900,000,000 With another $275,000,000 expected from additional targeted asset sales, our revised target comes to $3,200,000,000 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 $6,500,000,000 in consolidated debt. We're also able to eliminate debt related to the accelerated dropdown assets to energy yield.
Additionally, our remaining stake in our Caliente as a continued ROFO asset is included in our remaining target asset sales and also provides another opportunity to remove its nearly $1,000,000,000 in associated debt from our balance sheet. In total, these transactions will result in $8,000,000,000 in consolidated debt removed from the balance sheet and represent over 90% progress toward our goal of removing of nearly $9,000,000,000 in consolidated debt announced as part of the transformation plan rollout last year. Turning to Slide 7, We have provided an updated pro form a 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 Q3 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 $1,000,000,000 in 2018 EBITDA $520,000,000 in consolidated free cash flow before growth, dollars 175,000,000 of which is at the NRG level. The remaining assets targeted for divestiture represent an additional $170,000,000 of midpoint 2018 EBITDA, dollars 120,000,000 of consolidated free cash flow and $90,000,000 of NRG level free cash flow. The impact of these announced and planned assets, sales brings our total our 2018 pro form a midpoint EBITDA to $1,600,000,000 and free cash flow to $1,000,000,000 These pro form a 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 $275,000,000 in EBITDA and free cash flow benefits beyond those expected in 2018. So before I turn to Q and 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. And with that, operator, we can open the lines for questions.
Thank you. You. And 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?
Yes. I mean most of them I mean 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, SunCroid 1, other small renewable assets. Obviously, we have the additional monetization of our Caliente.
And then on the conventional side, we haven't provided specifically the assets. We're going to remain we have some processes that are ongoing. So for competitive reasons, we choose not to disclose the specifics, but we provided already the general guidelines in terms of the total of megawatts. But I think it's fair to say, like I mentioned in my 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. And you said that today's announced transactions are expected to close in the second half of twenty eighteen. 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. But we remain our plan is to have all these announced by 2018.
Great. And then final question, you may want to punt this to the earnings call, but 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 outlooks 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. And 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 3 big objectives: cost savings, margin enhancement and now we will follow 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 and 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 in those we have been disclosed the specific amount. But if you look at the growth investments section going forward in 2018, that's all subsumed within that. So 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. So think about it this way, dollars in for Carlsbad and then replenished on the basis of the sort of the pre wired monetization that's simply subject to arriving at COD later this year.
So it's literally neutral plus in the context of the confines of 2018 in terms of of capital allocation.
And that's the important part. I mean, the CLD is late in this year. So it's within it's just a temporal use of capital. Great.
And then what is your plan for Ivanpah? And are there other are there any other renewables left at NRG besides Agua Caliente, which looks like you'll be selling later this year?
Yes. So 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
Iva. Our next question is from the line of Steve Fleishman of Wolfe Research.
Just one hey, Mauricio. Just one clarification question. The 2018 pro form a for divestitures, the adjusted EBITDA is $1,600,000,000 now and when you gave this last time it was $1,500,000,000 So it's gone up $100,000,000 Can you just explain that change?
Yes. Well, I mean, if I can elaborate specifically, what I will tell you is and I think the key message here is when you think about that 1,600,000,000 dollars 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. But 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 form a basis and then aspirationally. Specifically, aspirationally, as Maurizio said, includes conventional renewables, all of which were a part of the original list of assets that we had earmarked for sale as part of the transformation plan.
The primary notable exception is, as was identified in the previous question is Ivanpah. So if you think about that variance, it's the difference between IVANPA previously being included in the assets that we earmarked and marketed for sale and now having removed IVANPA at least from the ROFO and line of sight in terms of monetization. That's the primary difference between what the pro form a number was you saw in the Q3 call and the $1,600,000,000 that you're looking at today.
Okay. But I guess one way to look at it is, is that maybe the relative to your initial up to $4,000,000,000 the asset sale number was lower, but now we also have more remaining EBITDA?
Correct. That is exactly I mean, there were some ins and some outs. Ivan, Paul, Fuente and yes, so that's the right way to do that.
Okay. And I know you weren't ready to talk on capital allocation, but you did on the initial plan talk to the 12% to 15% unlevered return targets. Is that still the kind of high level plan?
Yes. Our philosophy on capital allocation has not changed in terms of our priorities. So first, running the business and operating the business safely in achieving our credit metrics and then the returns of 12% to 15% for growth capital. So that philosophy remains the same, and we will have an opportunity to provide you a more comprehensive review of our Thank you.
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?
Yes. I think what I'd refer you back to there, Michael,
is as recently as the Q3 call,
I think we gave you a pro form a 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 $640,000,000 of incremental deleveraging, but supplemented in the net debt equation by the significant amount of surplus capital that we have. So 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 3 times on a net basis. So what we'd look to do is obviously maintain that 3 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.
But as Mauricio said, we'll provide you a comprehensive summary in the Analyst Day. But for the avoidance of doubt, we are very confident in our ability to be at 3x net debt to EBITDA in 2018.
Got it. And just one quick question follow-up. Why three times? Like I'm just curious kind of how you got to that as the benchmark versus another number? And 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.
Yes, 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 they set it and forget it, if you will. But 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. And I've heard this before, and we obviously look as you do comparatively speaking within and outside of our industry.
And 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. And what really fuels that difference and I think is important and we look through, it's the quality of that EBITDA turning into cash. So 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 form a basis, at least twothree of every dollar of EBITDA translates into cash. And to me, that's the real deleveraging power and flexibility.
And that also, even though we don't talk about it nominally in the 3, is what helped inform the process to get comfort with that net debt to EBITDA at 3x. It is the power of translating EBITDA into cash a pro form a
basis. Got it. Thank you, Kirk.
Thank you. And 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 look forward to speaking with you in just a few weeks on our Q4 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.