NRG Energy, Inc. (NRG) Q1 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the NRG Energy First Quarter 2010 Earnings Conference Call. My name is Channel, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Ms. Nahla Azmy. Please proceed.

Thank you, Channel. Good morning, and welcome to our first quarter 2010 earnings call. This call is being broadcast live over the phone and from our website at www.nrgenergy.com. 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 formal presentation and question-and-answer session, will be limited to one hour. In the interest of time, we ask that you please limit yourself to one question with just one follow up. And now for the obligatory Safe Harbor statement. 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 risks 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 this press release and this conference call. In addition, please note that the date of this conference call is May 10, 2010, 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 now with that, I'm pleased to turn the call over to David Crane, NRG's President and Chief Executive Officer.

Well, thank you, Nahla, and let me add my welcome to everyone. Good morning. Welcome to our first quarter 2010. While I'm speaking to you from Tokyo, joining me in Princeton and speaking on this call are John Ragan, our Chief Operating Officer; Gerry Luterman and Chris Schade, our outgoing and incoming Chief Financial Officers. Also, with us in Princeton and available to answer any specific questions you might ask on the call are Mauricio Gutierrez, who runs our Commercial Operations business; and Jason Few, who is responsible for our Retail business. So let's begin. Ladies and gentlemen, the shareholders of NRG, thank you for being patient and waiting until the very end of the first quarter reporting period for our earnings release. Today, we're pleased to bring you exciting news, both about the extraordinary financial results, which we achieved in the first quarter 2010 and also about the agreement signed today here in Tokyo with Tokyo Electric Power Company to invest in the South Texas Project, STP 3 & 4. First, with respect to the quarter, Gerry and Chris will report to you more fulsomely in a few minutes. But I simply want to emphasize you the magnitude and significance of what the women and men who make up NRG have achieved: a 26% increase in the first quarter compared to what was considered by most to be a very strong first quarter 2009. Our $601 million of adjusted EBITDA for the quarter was fueled by strong operating performance across all regions and all business segments. Of course, the two factors which made this number most possible in the face of a declining commodity price environment and generally weak economic conditions were our effective and farsighted forward hedging program and the exceptional performance, financially and operationally, of our Retail Energy business in Texas. We have spoken to the financial community repeatedly in the past about the strength of our wholesale and retail combination in Texas. Our strength that is unique among competitive power generation companies and today, you have another data point which visibly demonstrates that strength. In a quarter that was challenging for our Generation business as a result of macroeconomic conditions, our Retail business more than picked up the slack financially. Indeed, our Retail business, ably led by Jason and his team, not only posted exceptional results, they also largely stabilized the Mass business from a customer-account perspective and took giant strides towards resurrecting our C&I business in Texas. You will hear more about our strength and improved performance across all performance metrics in the Retail segment in the months to come. So with ample liquidity and newly simplified capital structure, our core Generation business that's hanging tough in a challenging environment; our Retail business, which has been stabilized with respect to its mass customers and is now growing in C&I; and now with Chris Schade joining us to take up the crucial position in our management structure as CFO, I'm pleased to say that NRG is no longer in transition as we have been for the past several months. We're ready to springboard off our core Wholesale Retail business, which is second to none. So turning to the future, under normal circumstances, I'd be reporting to you at some length about the great strides that we have taken on our renewable initiatives, the exciting opportunities that we are acting upon and the enormous market potential in the renewable space, a market which becomes more exciting and more real these days thanks to the Washington's push towards renewables, with discussions about projects like our DOE award for post-combustion carbon capture, leading to enhanced oil recovery at Parish, or about the enhanced prospects for our NRG Bluewater Wind subsidiary, as a result of Salazar's Cape Wind announcement will have to wait another day, as I want to focus my comments on today's TEPCO [Tokyo Electric Power Company] announcement. For the reason shown on Slide 4, TEPCO quite simply is the best possible equity partner for us in the STP 3 & 4 project. Their participation will enhance the prospects for success across many critical aspects of the project, including development, financing, construction and of course, operations. With their Kashiwazaki 6 and 7 plants, they were the first nuclear plant owner in the world to bring an advanced nuclear project online, on time and within budget. And of course, the Kashiwazaki units are ABWRs [Advanced Boiling Water Reactors]. TEPCO has been a technical adviser to the STP Project for several years, but now as an owner and development partner, they will be directly and actively involved in all phases of making this project a tremendous success for our shareholders and as a result of today's announcement, for their shoulders as well. Slide 5, details terms of the investment. TEPCO expects to pay $280 million in two phases over 12 months to acquire an effective 18% interest in the STP 3 & 4 Project. They will also pay their proportionate share of the ongoing cost of project development. They will deploy immediately several commercial and technical personnel deeply and directly experienced in ABWR construction operation to the United States to be part of the project development, including the EPC negotiations. The U.S. team will be backed up all of the very considerable resources of TEPCO in Japan. So in summary, we are very, very pleased and indeed honored to have TEPCO as a partner in the STP 3 & 4 Project. But of course, the mere participation of TEPCO will not by itself provide an absolute guarantee of the success of STP. This, after all, is project development, and several important steps need to be taken to ensure the success of the project. Indeed, TEPCO's financial participation in STP 3 & 4 is predicated on receipt of a conditional loan guarantee from the Department of Energy. After you hear from John, Gerry and Chris, I will be reporting in greater detail about the current status of our loan guarantee application and our plans to carry this project forward or not, based on the DOE's decision. So over to you, John Ragan.

Thank you, David. Good morning, everyone. During Q1, NRG continue to sustain solid operating and commercial performance. Slide 7, summarizes these events for the quarter. Beginning with safety, the company has started 2010 with a very positive record by achieving top decile performance with a quarterly OSHA [Occupational Safety and Health Administration] recordable rate of 0.85. We had 31 plants that had no recordable incidents and sustained one of our longest continuous stretches without a recordable incident across the entire fleet. We believe the disciplined commitment and emphasis on safety sets the cultural foundation required at our company and provides the catalyst to achieve superior operating results. Moving on to our fleet operating performance. Baseload equivalent availability during the quarter was 88%, which was lower than the 2009 operating result. This was due to several unplanned outages in January and February, which I will discuss on the next slide. We continue to make progress on our construction projects in the Northeast. The Indian River environmental control project has been re-scoped for Unit 4 only, following the cancellation of the Unit 3 portion earlier in the quarter. The Devon repowering project is scheduled for completion in June and the commissioning phase of this project is now underway. On the renewables front, we have completed all of our operational and commercial due diligence in the South Trent wind project, and awaits the completion of the Texas PUCT [Public Utility Commission of Texas] approval process and certain tax and financing requirements necessary to close this transaction. Our commercial operations and retail organizations continue to maximize value for NRG by combining the strengths of our Wholesale Generation and Retail portfolios. Additionally, we have continued to be successful in winning additional load contracts in the regions where we have generation resources. These longer-term contracts provide another vehicle to hedge our generation position and the opportunity to develop longer-term relationships with customers. Turning to Slide 8, our total Generation for the quarter was slightly ahead out of our output from a year ago. The addition of Cedar Bayou 4 and the Elbow Creek and Langford wind farm help to make up for lower generation that occurred due to retirement of Somerset Unit 6 and the unplanned outages in b rates [ph] with some of our baseload plants. These outages occurred at three plants and consisted of boiler and fan issues at Big Cajun II, a stuck-control rod at STP Unit 1 and a generator rotor ground at Dunkirk. All three plants significantly improved their performance in March, moving back into top-quartile operating performance. Turning to our Retail business. We have continued to see strong results, and customer count has become more stable in the first quarter, as compared to the previous quarters as shown by the continued reduction in customer attrition during Q1. Overall, our Mass sales volumes were higher due to colder-than-normal weather, and stronger margins were achieved due to falling gas prices during the quarter. The Retail group has continued to increase the renewal of existing C&I customers and has won several key customer accounts that extend the term and diversity of our Retail portfolio. Reliant remains the largest C&I provider in Texas and their strategic economic and operational success that the Reliant acquisition has exhibited over the past year, continues to reinforce our belief that combining these two entities creates a highly efficient counter-cyclical business model that enhances the total value for NRG. Turning to market fundamentals on Slide 9. Quarter-on-quarter demand growth for ERCOT showed greater strength relative to PJM East, indicating a faster recovery from the recession as compared to other parts of the country. ERCOT set a new winter peak demand record of 55,878 megawatts in January, which was 10% higher than the previous winter peak set in 2007. Houston heat rates continue to be well supported due to increase in demand recovery, tighter supply and uncertainty around future regulations. In 2009, coal-to-gas switching was concentrated in the Southeast and Northeast markets. However, due to colder weather and higher gas prices in the first quarter relative to a year ago, this situation was reduced significantly. Looking forward and under normal weather conditions, we see coal-to-gas switching being particularly concentrated in Eastern PJM due to increasing CAPP [Central Appalachian] coal prices, which reflect a more international price, as well as lower natural gas prices and tighter basis spreads. We expect negligible coal-to-gas switch in ERCOT for the year. Lastly on the bottom right, I would like to discuss what we consider NRG's coal portfolio advantage. Our coal fleet primarily burns PRB [Powder River Basin] and lignite coal, and our assets are located in regional markets where gas sets the price of power in most hours of the year. Generally speaking, NRG's coal mix is less expensive and cleaner-burning than the CAPP coal that other eastern IPPs [independent power producers] burn. Additionally, concentrated in gas marginal markets allows coal units to earn the spread between the generation cost of a coal unit and a gas unit. This results in NRG achieving a stronger dark spread compared to other IPP fleets concentrated in the coal marginal markets, where prices are closer to the coal-unit market-generation costs. Before I conclude the operations section, I want to discuss NRG's environmental strategy. As outlined on Slide 10, our current environmental CapEx program is designed to meet the stringent state regulations in New York and Delaware, as well as anticipated federal mercury-control requirements and the original CAIR [Clean Air Interstate Rule] Program. Upon completion of these projects, NRG will be one of the cleanest coal fleets with very low NOx [Nitrogen oxide] and low-to-moderate SO2 [sulphur dioxide] emission rates. Mercury reductions will be state-of-the-art. So what projects would be left after this work is complete and additional rules are put in place? Turning to Slide 11, as you know, the EPA [Environmental Protection Agency] is creating rules that will cover air emissions for acid gases and mercury, all combustion by-products and a fluent water standards associated with the current 316(b) policies. The likely outcome for the industry is additional investment for air quality controls, the elimination of wet surface impoundments for ash disposal and the mitigation of once-through cooling. Because NRG has already invested in environmental control improvements, the potential remaining investment is manageable. The largest impact to NRG energy would be the installation of maximum available control technology for acid gases, which is thought to be an SO2 removal system. EPA is currently collecting data and is not expected to propose a rule until next March. A worst-case analysis for NRG would be to install six-drive scrubbers and an additional baghouse at our remaining unscrubbed units. But we believe there are mitigating factors to be considered. Our current emission rates are relatively low and could be lowered with some operational changes. Additionally, EPA regulations may offer some flexibility. We recently proposed MACT [maximum achievable control technology] standard for industrial boilers, allows facility averaging across the same type of units. A similar provision for electric generators would provide greater flexibility to meet the new stringent limits. Finally, we believe that the demand for controls across the industry result in continued technological advances and lower costs. With regard to ash landfills and water, these new rules should have relatively limited impact on NRG. Our coal facilities currently employ dry disposal practices for fly ash. And with one coal unit in Big Cajun II and the Encina and El Segundo gas plants do not have existing or budgeted mitigation for once-through cooling. In summary, do we have future environmental investments to make? Most likely, yes. When the rules are available, NRG will implement plans to meet the requirements through a mix of repowering, controls, operational flexibility and emissions averaging where possible. However, we don't expect the worst-case scenario to become NRG's base-case scenario for environmental spend. Assessing our current state of environmental controls and any potential future obligations, we see ourselves very well-positioned, as compared to other coal-fired peers within the sector. Switching now to the hedge profile of our portfolio on Slide 12, our Wholesale and Retail segments continue to be well-hedged over the next few years. Our baseload generation is more than 100% hedged this year, 70% next year and greater than 50% the following. We have continued to actively hedge our Baseload portfolio during Q1. But given the current gas environment, we have been focused on using option structures like we did back in 2006. This strategy helps to protect us from further downward gas price movements, while retaining some upside through positive price movements. We will be in a better position to provide you with more detail on our 2011 hedge strategy during our next earnings call. Concerning our Retail position, we increased our hedge percentages due to the growth in fully priced retail load. Since we are talking about hedging, let me spend a minute on the potential impact of the Financial Reform Bill on our hedging program. We anticipate that new legislation will require financial derivatives to be traded on exchanges. But we also expect that end-user exemption that will allow us to continue transacting over the counter and therefore, continue using our first lien structure as collateral for hedging. In a very unlikely case that we do not qualify as an end-user, we will rely less on our first lien and more on our matching our Generation and Retail portfolios, which provides NRG a significant competitive advantage by having a natural offsetting position for our supply portfolio. The chart at the top right shows our coal and transport hedge positions. While we are well-positioned through 2011, we are currently working on firming up a few contracts, which are rolling off in the near future. The bottom left chart illustrates our baseload gas price, heat rate and coal sensitivities. As you can see, NRG tends to be more leveraged in natural gas changes than equally probable heat rate and PRB coal changes. The negative gas sensitivity in 2010 is caused by NRG being more than 100% hedged for our Generation business. Finally, we have added a coal price sensitivity to this chart, which shows our exposure to unhedged market-commodity coal-price movements. The sensitivity describes the gross margin impact of $1.50 per ton upward movement in PRB commodity prices, which is our predominant coal fuel. Given what we have shown on our use of PRB and lignite coal on Slide 9, our sensitivity is fairly limited, particularly through 2012. In closing, Slide 13, sums up our near-term goals. I want to specifically mention two. First, we will stay very focused on achieving top-quartile to top-decile safety and operational performance throughout our fleet. Based on the tragedies we have all seen in the power generation, coal mining and offshore drilling sectors during the first four months of 2011, it is imperative to continuously improve our safety programs and always keep safety over production as our defining DNA structure within the NRG culture. Secondly, our Commercial Operations group will continue to look for attractive opportunities to hedge the forward portfolios in the most collaterally efficient way. We continue to believe it is still early in the year and we'll remain vigilant in looking for opportunities to hedge more of 2011 and 2012 portfolio positions, as long as the strategy meets our fundamental price outlook within our different regions. Now I will turn it over to Gerry, who will discuss our financial results.

Thank you, John. Good morning, and thank you once again for joining us today to discuss NRG's first quarter 2010 financial results. Since this is my last conference call as Interim Chief Financial Officer, a role I greatly enjoyed, I will talk to this quarter's actual results, while Chris Schade, my very able replacement, will address 2010 guidance and his priorities as NRG's new Chief Financial Officer. I will continue to serve on the NRG Board of Directors. Turning to our financial summary on Slide 15. The company delivered record financial results in the quarter with adjusted EBITDA of $601 million, a 26% increase from a year ago. This increase was driven by the excellent performance of Reliant Energy, which contributed $190 million of adjusted EBITDA. During this quarter, the company made payments on its Term Loan B, as well as settling Common Stock Finance I or CSF I, resulting in its total outflow of $471 million. It should be noted that the decision to settle the CSF I four months earlier than planned resulted in savings of $7 million. Total liquidity now stands at $3.2 billion, including over $1.8 billion in cash. Chris will be discussing in more detail the adjusted 2010 guidance. But in summary, we are leaving EBITDA guidance unchanged at $2.2 billion, and increasing free cash flow guidance by $112 million to $462 million. Turning to Slide 16. The quarter-over-quarter adjusted EBITDA bridge or waterfall slide is presented. This slide reinforces the complementary benefits of owning both Wholesale Generation and Retail in the state of Texas, as well as the two businesses contributed a net favorable variance of a $142 million quarter-over-quarter. Reliant Energy had a $190 million of adjusted EBITDA for the quarter, driven by colder-than-normal weather with a 31% increase [indiscernible]. Reliant also benefited from improved performance in customer retention, as well as a reduction in bad debt expense as we began to see improved customer payments behavior. Texas generation declined $48 million from $320 million in the first quarter of 2009 to $272 million for Q1 2010. The combination of a decline in hedge prices on our baseload assets, an 8% decline in nuclear generation and an 18% increase in delivered coal costs at WA Parish and Limestone, led to lower energy margins of $37 million. Additionally, O&M costs were higher this past quarter at STP by $9 million, as the plant prepared for its Unit 2 refueling and maintenance outage that began this past month. The Northeast EBITDA results for Q1 2010 were lower by $30 million to $76 million from $106 million in 2009. The major drivers of this performance included the decision to retire Indian River Unit 3, lower-average baseload-hedged prices and a decline in generation. The plan to retire in Indian River Unit 3 by December 31, 2013, announced on February 3 resulted in $14 million of costs related to the write-off of construction in progress and termination fees. Energy margins meanwhile, were unfavorable, $38 million, driven by a decline in baseload hedge prices and a 9% decline in generation. Partially offsetting these unfavorable variances were capacity price increases in 2010 for New York and PJM totaling $8 million and a favorable operating cost, including lower maintenance and chemical costs of $14 million. Turning to international results, decline of $11 million quarter-over-quarter is mainly as a result of MIBRAG's first quarter 2009 earnings contribution of $12 million, which were subsequently sold in June of that year. And finally, the sale of the Padoma announced on January 21, resulted in a $23 million positive impact on EBITDA as shown in [indiscernible]. Before closing and although not highlighted, adjusted EBITDA for the South Central region was lower by $3 million to $26 million. The decline was as a result of an 8% increase in load requirements, due to colder-than-normal weather and a 2.4% decrease in generation at Big Cajun. Slide 17, illustrates our first quarter 2010 free cash flow generation. Cash from operations for the quarter totaled $114 million, $25 million lower than 2009. Driving the decline quarter-over-quarter were both higher interest payments and changes in collateral postings. The $54 million increase in interest payments is related to the early termination of the CSF I, which included accrued interest payments of $52 million. Moving to free cash flow from recurring operations, preferred dividend payments were substantially reduced quarter-over-quarter at both the 5 3/4% and 4% convertible preferreds converted to common stock during the past 12 months. Turning to free cash flow. Environmental CapEx, net, totaled $38 million in the quarter and was mostly due to spending in Indian River for air quality control system for AQCS controls that are being installed. And finally, RepoweringNRG net cash expenditures are primarily related to STP 3 & 4 nuclear project. Last year, Repowering investments of $115 million included $32 million for NINA, $28 million for Langford and $11 million for Cedar Bayou. Slide 18, outlines the company's liquidity position as of March 31, which excluding funds deposited by hedge counter-parties, stood at $3.2 billion. The driver of changes in liquidity are as follows: The Term Loan B paydown of $237 million, of which $229 million was related to the 2009 excess cash flow sweep. As you remember, during the fourth quarter conference call, we announced that we made an early payment of $200 million. In total, the 2009 excess cash flow sweep payment was $429 million. And $109 million of debt paydown, excluding interest of $52 million related to the early settlement of CSF I and $185 million of CapEx or capital expenditures. During the quarter, NRG issued $157 million net from the Synthetic LC Facility to support routine business activities, as well as replace Merrill Lynch as guarantor with certain Reliant Energy counter-parties. These items were offset by cash from operations of $114 million and $29 million of proceeds from the sale of Padoma, as well as $59 million increase in availability of the first lien revolver as a result of finalizing the Dunkirk bonds at 5 7/8%. All in all, the company has sufficient hedging capacity within the lien structure to support its activities. Turning to Slide 19. At the November 2009 Analyst Day held in Houston, I addressed a number of items that were going to occur that would simplify our capital structure. We've already spoken about the excess cash flow sweep, the early settlement of the CSF I and the conversion of the 4% preferred. But here you can see the impact to NRG's overall capital structure. With the strength of our balance sheet and strong liquidity position, NRG is positioned to take advantage of future growth opportunity. I'm also pleased that recognition of these efforts was confirmed by Fitch last week, as the firm upgraded their ratings on NRG reflecting both the stable outlook and the relative strength of our balance sheet. With that, I'd like to turn the call over to the new CFO, Christian.

Thank you, Gerry. Before turning to the next slide, I would like to say that I'm very happy to be here at NRG and look forward to working with David and his team, as we continue a proven track record of business execution and prudent financial management. I would like to start with our 2010 outlook on Slide 21. The company recorded record results in the first quarter while on a low gas price environment. These results reinforced our Texas-based strategy of owning both wholesale and retail and as such, we are reaffirming our full year EBITDA guidance of $2.2 billion. The company generally has not changed guidance during the first quarter as it is still early in the year, and the summer months can be primary drivers of full year results. With that said, the company is off to a very good start. I would like just to briefly cover our capital expenditure plans for 2010, our Repowering Investments guidance of $92 million includes $54 million into GenConn Energy, a 50-50 joint venture with United Illuminating as the repowered facility of Devon, Connecticut is expected to soon start commercial operations and contribute to results this year. $40 million for the installation of the combined heat and power system at the new University Medical Center at Princeton at Plainsboro, $10 million for demolition work at our El Segundo, California facility, $7 million for electric vehicles and $5 million for offshore met [meteorological] towers as part of our offshore wind initiative. As for our nuclear development program, our net cash spend is estimated to be $328 million. With that, free cash flow is forecast to be higher than projected last quarter by $112 million to $462 million, reflecting the anticipated proceeds from Tokyo Electric, which David will cover in greater detail later in the presentation. Finally, based on Friday's closing stock price of $22.64, the recurring free cash flow yield currently stands at just over 18% or $4.10 per share. Slide 22 provides an update on the company's 2010 capital allocation program. During the first quarter, significant progress was made on the plan including capital management and growth initiatives. While Gerry has already addressed the capital management portion of the plan, I would like to briefly address share repurchases, NRG's growth initiatives and my priorities for the coming year. Although there weren't share repurchases completed in the first quarter, NRG is committed to the previously announced $180 million Board-approved repurchase plan and we look to complete it by year end. Second, in the first quarter, the company made significant progress moving its clean energy initiative forward through; the pending acquisition of the South Trent Wind Farm in Texas, which brings the company's wind portfolio to approximately 450 megawatts; the Department of Energy's selection of NRG to receive over $150 million from the American Recovery and Reinvestment Act for WA Parish's post-combustion carbon capture demonstration project; and the agreement announced today with Tokyo Electric to invest in NINA's STP 3 & 4 project, which greatly enhances the company's financial flexibility as we move through the second half of 2010. Now before turning it back over to David I want to address a few of my top priorities for the year. My experience from my 10-year at Medarex is that liquidity is king. And it will be a priority to manage carefully our balance sheet and liquidity requirements. NRG consistently generates strong free cash flow. And in my mind, there is distinct balance between managing liquidity, continuing to invest in the company and returning value to shareholders through share repurchases and debt reductions. To the extent our restricted payments basket covenant on outstanding debt impacts our ability to efficiently or best allocate capital for stakeholders, then NRG must consider solutions to relieve such restrictions. However, in my view, any consideration must also be based on market conditions affecting our operations. Second, NRG has a history of financial transparency in its reporting practices and I expect to maintain that level of detail, while improving our practices as needed. And finally, as I continue to integrate myself into NRG's business, I look forward to meeting many of our investors and analysts as possible over the coming weeks and months. With that, I'll turn it back to David for closing comments and questions.

Well, thank you, Chris, and John. In particular, I want to thank you, Gerry, for pitching in for the last six months and we look forward to continuing to work with you on the Board. Now turning back to the presentation in nuclear development on Slide 24. The current status of the STP 3 & 4 project is really quite simple. Everything depends on actions, which will be taken in Washington sometime in the next several weeks. Almost two years after we filed our application for a Federal loan guarantee and a full five years after such loan guarantees were authorized by the Energy Policy Act of 2005, which is what triggered our development of STP 3 & 4, we are now in the absolute final stage of DOE consideration of our loan guarantee application. As the DOE process has been both very demanding and highly iterative, we are confident that we have done everything reasonably requested of us to satisfy the government's concerns, which have been ably and forcedly expressed by the DOE staff and their consultants on behalf of the American taxpayer. An Act, which has been focused on ensuring the credit quality of the proposed loan guarantee. As such and while we have no assurance that at this time from the DOE or from any other branch of the U.S. government that we will be awarded a guarantee, we are and we remain confident in our position. The issue that exists is one of appropriations and timing. While the Obama administration is seeking to expand the Nuclear Loan Guarantee Program in the next budget cycle. The next budget cycle is months away and right now, they have two projects, our project and Constellation's Calvert Cliffs project, which are at the same place in the process and each asking for about $7 billion in loan guarantees when there is a little more than $10 billion of currently appropriated and available. Moreover, while not NRG and we don't believe Constellation based on statements they have made, are in a position to carry their project through to the next budget cycle at a cash burn rate that will keep their project or our project on track. We believe there is very strong bipartisan support across a broad swath of the executive and legislative branches to make it possible for the U.S. government to support both projects without disruption. We believe our public policymakers in Washington recognize and appreciate that much has been invested by Constellation and NRG in these massive greenhouse gas reducing infrastructure projects, and that these projects represent a large number of present and future American jobs. As the vanguard of the nuclear renaissance, the success of these projects is essential to the buildout of the domestic nuclear supply chain that will be needed for the United States to be cost competitive in the burgeoning global market for nuclear power plants. But as we all know, it can be a very long way in Washington from good intention to positive outcome. So we at NRG are prepared both for a positive result and a negative result. Our plans for both outcomes is outlined in broad-brushed terms on Slide 25. If we get a full loan guarantee, we move forward to the next steps in a cash-prudent manner. If we do not, we essentially suspend work on the project and reduce the external cash burn to near zero, while we seek to mitigate our exposure to the project today. Notwithstanding our contingency plan for what we do if we don't win, you should walk away from this conference call knowing that, we, the management of NRG, are very confident that we will secure Federal loan guarantee. It is equally important for you to understand that such a win would indeed be a big win for NRG shareholders and would not be a de facto loss as some of you may be previous to today's announcement might have thought. If we win, we will pursue the project vigorously on all critical path items. But we nonetheless, will significantly reduced our planned burn rate on project engineering. Recognizing that we don't need to be as far along as the time our CLO [collateralized loan obligation] is expected to be granted as we had previously planned. Moreover, as depicted on Slide 26, in part due to the buy-in and participation of TEPCO, and as a result of various additional sources of project funding, we expect to fund STP through the critical stages of 2010 with a call on NRG's cash resources, which is while still significant, very manageable relative to the size of the project opportunity. If we get past the loan guarantee, there are two more critical steps in 2010 as outlined on Slide 27. First, as we outlined at our Analyst Day last November, we need to confirm that Toshiba and Flor [ph] can and will build the project for $10 billion or less. Very detailed work is being done on this issue as we speak and it's progressing satisfactorily. Then armed with a reliable EPC number, we then need to confirm off-take with the off-take partners with whom we currently have Memorandum of Understanding for a significant portion of the new plants output. In this respect, I know there is concern in the market that those off-take agreements will not be available at a viable price level, as a result of the decline in natural gas prices over the past couple of years. While of course, I cannot provide you assurance until binding agreements have been signed, our analysis indicates that if you take into account, first the fact that the natural gas forward curve is in contango. Second, the $18 per megawatt hour production tax credit under the Energy Policy Act of 2005. Third, the benefit of fuel diversification to load serving entities in Texas, many of whom are almost entirely dependent on gas-fired generation at this time. And fourth, if you ascribe a modest amount of value to the future value of the full carbon hedge provided by nuclear, we believe we have a very good chance of success at arranging sufficient off-take for this project and ensure project viability at an equity return that makes it worthwhile from the perspective of NRG. And I should say, that's at a risk adjusted return of equity that is appropriate for a nuclear power plant. Which brings me to the last point, which I wanted to address directly, before opening the lines for questions. And I wanted to address the issue of shareholder value in the context of our nuclear development project. All of us on this call, whether you're a regular shareholder of NRG or an employee shareholder of NRG as all of us from the company are, we can agree on one thing and that's it we're unhappy with the company's share price performance over the past several months. This is particularly frustrating for many of us in the company because as depicted on Slide 29, we feel that our stock has been under pressure over the past months despite several obvious wins, which we have achieved. It has become increasingly clear to us that we cannot hope to create upward momentum in our share price simply by posting more and more achievements in the win column. We need to address directly the factors which overhang our stock, namely bearish stock price settlement and concern about the cost risk and prospects of our nuclear development. With respect to gas prices, there obviously is nothing we can do about the trajectory of gas prices themselves but we can diversify our expected cash flow streams away from near total dependence directly or indirectly on natural gas prices as existed as was the case for NRG before we bought Reliant. A key differentiation point between us and our current peer group of merchant generators now and increasingly in the future, is that we see the path to maximum shareholder value creation as something different from just lining up as many power plants as you can get your hands on. So that you can sell as many megawatt hours that you can at natural gas derived prices. We see the future in terms of a dual strategy, which we depicted on Slide 30. That is using our core wholesale generation plus retail strength, as a platform to spring board into a range of non-natural gas correlated revenue and free cash flow streams, such as renewable energy credits, carbon credits, payments for capacity, firming and other auxiliary services and green energy service business, whether associated with smart meters, electric vehicle infrastructure or both. And in most if not all these areas, our unique position in wholesale and retail and in Texas, gives us a substantial competitive advantage. We began the process last November by showing Slide 31 at our Analyst Day, of laying out for you our objective that by the latter part of this decade, we will roughly double the company's recurring free cash flow to our first mover push into the areas I just mentioned. That push is led from a free cash flow perspective by what we hope and expect to achieve in low carbon base load power, principally nuclear and in renewables, principally solar. You can expect that as we go forward on the quarterly calls and Analyst Days to come, that we will fill out this picture and demonstrate to you how we are going about achieving this financial objective. Doubling our recurring free cash flow in a few years may strike you as ambitious. But of course, that is what we achieved from 2006, our first year with Texas Genco through 2009. So finally, in conclusion, on Slide 22 (sic)[32], new advanced nuclear power plays a fundamental part in our plan, as I believe it does in the future energy mix of our increasingly low carbon society. Nothing has more confirmed that to me than the Obama Administration's announcement earlier this year that it was seeking $54 billion of nuclear loan guarantee authority, being that support for new nuclear in Washington is now fully bipartisan. $54 billion of loan guarantees mean $70-plus billion of new nuclear projects, enough to fund eight to 10 new plants. I believe that the United States starts to build 10 new nuclear plants, then inevitably, our country will build 100 as we need to do. That means new nuclear power will be a $500-billion to $700-billion market, and we at NRG have the opportunity through the STP 3 & 4 projects to be the first mover in an industry, which certainly will follow the lead of the successful first movers. That is why we have taken on this challenge in order to access this once-in-a-business-lifetime opportunity. We will pursue this opportunity aggressively but I hope you are convinced after today's presentation, we will not pursue it irrationally or in a manner that is financially imprudent. And we will not proceed without a near-term Federal loan guarantee commitment. With that, Chanel, we'd be very pleased to take any questions.

[Operator Instructions] Your first question comes from the line of Daniel Eggers of Crédit Suisse.

David, I guess just kind of in this conversation, just to make sure we're fully clear. Your view is that you're not going to go forward with South Texas without getting the Federal loan guarantees, this time through and the next few weeks. And if you do not get those, then you go on a cold stop. Does that mean you would reconsider going forward in building if the President's budget is expanded?

Obviously, Dan, it's a good question, it's a hypothetical question. I mean, I think if we do not get awarded the loan guarantee at this time, probably what we would do and this is first addressing your characterization as a cold stop, is that and we would have to see what the cost of this would be. But we would probably shut down everything except we might keep the license process going. Our initial estimate is just see the license through would cost less than $10 million a year. And given where we are and the fact that certainly, one thing we would be doing would be trying to mitigate the amount we've spent through sort of selling the intellectual property to other people who might want to be pursuing that type of project. We probably would try and carry through to get the license done, unless it was too expensive. Apart from that, if they came back a year from now, when the -- further money has been authorized and said, you can have your loan guarantee now and we basically wound down everything, we would have to look at them. We would have to look at the circumstances at the time. One thing is when you unwind an effort like this, as they say, it's hard to put Humpty Dumpty back together again. So I wouldn't be overly confident that we could come back and resurrect the project a year from now.

David, one of the lines in your presentation suggests that maybe some sort of additional appropriation on the short-run basis to give both of you and Constellation, your full loan guarantees now. Is that something you're hearing actual work on or it's just a hope as a way of trying to keep two good projects alive?

Well, I think there's a lot of work being done. I think there are a lot of people in Washington, Certainly, people in our end and I would presume on Constellation, that are suggesting various ways that this dilemma could be solved. And additional appropriations outside the normal budget cycle is probably most prominent on that list, as the government does do appropriations outside of the budget cycle. And while the amount of money that we would be talking about, the shortfall of the $14 billion needed minus the $10 billion they have, $4 billion sounds like a very large number. My understanding of the appropriations that they would actually have to put through the process, would actually just be essentially the cost of the loan premium, which is a number that I've heard -- that less than $100 million. So that is definitely not insurmountable. But at this point, I'm not in a position to preclude any of the variety of ways that people inside and outside the government have suggested that, for the government to resolve this conundrum. We'd be happy with any of the ones that work.

Your next question comes from the line of Ameet Thakkar of Bank of America.

David, could you just kind of help us kind of reconcile, I guess, the seemingly different, I guess, dollar per KW valuations that CPS recently paid, and then what TEPCO is paying today? And then I guess kind of what the original transaction with Toshiba. Could you kind of help us understand that or how we should at least look at it?

Well, I'm not sure, Ameet, I saw the -- I think that the number that TEPCO has paid, it's quite comparable to the number that Toshiba paid a couple of years ago. I've seen attempts to analyze it against what CPS or what we have -- what do you mean by what we proposed to pay CPS, the $80 million that we would pay if we get the loan guarantee?

The $80 million that you would pay to them to get the loan guarantee program. Plus, I mean they're going to get, I guess, roughly 7% or 8% of the capacity of the project in return for the capital if they had kind of spent when they kind of exited the project. I believe that was around $300 million?

Ameet, it's very to do this without sort of going through a spreadsheet. And we would be happy to make a best effort at doing that. Because one of the problem is, with development is that the money being invested at this stage is neither very valuable or it's really worth nothing. It's fairly binary. I mean, what I would tell you is on its phase, us paying $80 million to CPS for their 40-some percent interest that we're gaining from them. Obviously, TEPCO paying $280 million to get 18% of project, one looks much better than the other. But it's really hard to compare. As you say, then you have this sort of present value, what the carried interest that CPS would have starting in 2017. So we will try and put some thing like that together. But it's very much an apple and orange comparison.

Your next question comes from the line of Neel Mitra of Simmons & Company.

I was wondering if you can comment on the chances that the DOE would split a loan guarantee with you and Constellation, and what exactly would happen if that were the case? Would you proceed or would you stop the project at that point?

Well, I think it's a very, very good question, Neel. And I would say that I think the chance of the DOE and I could be wrong about this. Again, it's the government and I'm not necessarily an expert. But certainly, we have never gotten any indication from the DOE that they would do that. Because if you think about the government's position, the people at the DOE and then the government generally have worked this hard on this over the last couple of years as we have. And I think that the last thing that the government wants to do is announce two partial awards, two $5 billion awards for two companies that were seeking $7 billion. And then have both companies respond the next day by essentially suspending their project. Because while $5 billion sounds like a large number, if you think of the delta between the $5 billion and the $7-plus billion, that's an enormous amount of equity to raise. And so we again, we cannot speak for Constellation even though I've tried to do that several times during this call. But on behalf of NRG and NINA's perspective, we have run the numbers and we've conveyed to the government that we cannot go forward with half of the existing money.

Are the put options that you're using to hedge, are they being reflected in the hedge percentages now going forward?

No, They're not reflected yet. I think, when we go into our second quarter earnings call, you will see it.

Your next question comes from Brandon Blossman of Tudor, Pickering, Holt.

I guess just following up Neel's question on hedging. The incremental hedge position for '10, does that reflect a reduction in plant generation or is that actually incremental positions?

No, you're right. I mean, that reflects basically the lower generation that we're seeing because of lower gas prices. At this point, as we're going into the summer season, we have decided to keep the imbalance between our hedges and our respective generation and we will rebalance as we go through the summer.

Jason, can you give any color or comment on quarter-over-quarter Mass, Retail margins? I mean you obviously, a stellar performance in Texas retail this quarter.

We don't give margins between Mass and C&I. But overall, we talked about our margins in the November Analyst Meeting, we talked about being able to maintain $20 margins throughout 2010. And obviously to the first quarter, we've been able to perform better than that. But we really do try to manage against the value equation and take the opportunities when they present themselves to perform better than we outlook back in November. And so during the first quarter, we're able to achieve that between both the Mass and the C&I business.

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

David, on the additional 10% that TEPCO has an option on for the $30 million, are there any other terms associated with that other than the contingency for the loan guarantees?

As you could tell from my -- the way that I expressed it. I take TEPCO's investment to be the full amount, which is essentially paid in two stages. There are no conditions precedent, attached to the second piece, the second tranche. But obviously, and as you saw the way it was structured, they are paying $30 million as part of the first payment in order to have that option. So certainly, legally, contractually, they have the right to stick at the original amount. But certainly, I have no expectation that if the project is proceeding, they will do that, they will come forward with the second portion. Because the comfort zone in terms of the size of the project they wanted was in the 20% range.

I'm not sure if this question is for Chris or Gerry. In reading or understanding your comments around the RP basket, it sort of sounded as if you are backing away from a commitment to sort of solve that this year. Did I misinterpret that or is it a little bit unfocused?

Well, I'll turn that one to Chris. But, Jay, I would say I don't think we've ever made a firm commitment to actually at any price get the RP basket issue resolved. But you're right, just to make sure that semantically we're on the same page, that we certainly have said we would undertake to give it the old college try, to do it at a reasonable price, if we could do it at a reasonable price. But, Chris?

I just amplify what David said. Certainly, I understand the issue at hand. And I will be looking into it in the very near term to make a decision. But any decision we make, as I said in my prepared remarks, is going to be based on the overall business and the current market we're operating.

Your next question comes from the line of Michael Lapides of Goldman Sachs.

Can you quantify the impact of weather on the Retail business during the quarter? And two, am I reading that the Padomo win gain on sales is included in the adjusted EBITDA number?

I'll take the easy answer, Michael, and then ask Jason do the -- well, actually they're both pretty easy. But he'll do the first one. The second one, the answer is yes. That the gain on sale at Padomo is in the adjusted EBITDA. Jason, do you want to talk about the impact of weather?

Sure, David. We saw a colder winter than normal in Texas. And so that created an opportunity for us against not only our month-to-month customer base but our fixed-price customers on the Mass side, actually, expand margins given the lower gas prices. And so the one thing about weather is that it has more of an immediate impact in our performance even though we've showed strong results with respect to our attrition rate on our customer count. Weather has had a much bigger impact on our first quarter results given the colder winter.

Can you quantify that in either terawatt hours or in kind of dollars, millions, just throw some numbers around that?

What I'd like to do maybe we can take that offline and I'll take you through it in some more detail.

That concludes the Q&A session. I now like to turn the call back over to management.

Chanel, I think that as you say we're done. We appreciate everyone taking the time this morning. And we look forward to speaking with you again next quarter. Thank you very much.

Ladies and gentlemen, that concludes the presentation. Thank you, for your participation. You may now disconnect. Have a great day.