Q3 2020 NRG Energy Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the N. R. G Energy, Inc. Third quarter Twenty-twenty, Our news conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you would need to press star one of your telephone.
Please be advised that today's conference is being recorded if you require further assistance. Please press star Zero I would now like to hand, the conference over to Mister Kevin Cold ahead of Investor Relations. Thank you. Please go ahead Sir.
Good morning, and welcome to NRG energy third quarter of 2020 early skull, it's more just call us scheduled for 45 minutes away.
Past lives over the phone and via webcast, which can be located in the investor section of our website www dot NRG dot com under presentations and webcast.
Please note that today's discussion, making a forward looking statements, which are based on assumptions that you believe to be reasonable as of this date actual results may differ materially.
He highlighted throughout the presentation mode.
Most notably is the updated financing plan for the direct energy acquisition and our commitment to investment grade credit metrics.
Moving to the right hand side of the slide we deliver $752 million of adjusted EBITDA in the third quarter.
Bringing our year to date results to $1.674 billion, a 5% increase from the same period last year.
We recognize the need to rethink our work environment in a more permanent way to leverage technology and better meet the needs of an increasing hybrid society.
This is why during the second quarter, we fourth of task force called workplace 21.
With the goal of redesigning our office work space to create an optimal long term work environment through and post COVID-19.
On the right hand side of this slide we have estimated the year on year weather normalized changes in low across Iso's.
As you can see electric demand continues to be impacted across the country, but it gradually recovering in all markets Ah states have entered various phases of reopening.
Eric got continues to display the most resilience down just 1%.
Within the hour.
We continue to see significant variances in electric demand by customer pipe.
Residential customers are still positive compared to normal.
While commercial industrial users remain negative.
Potential shutdowns loan we remain diligent in mitigating the impact if you were to occur.
Got me lighting continues to impact the fine line of sight bps to achieve commercial operations.
In Kabul with strong power plant performance.
Our portfolio was fully hedge against priceless, but on the margin, we weren't able to modestly lower our supply costs through opportunistic market purchases.
Overall, the business performed well the summer.
A retail business mix continues to provide stability would stay at home trends offsetting milder weather and in fact from COVID-19 on small and large TNI customers.
We got now demonstrated the strength of our business over the past three summers on their various different market conditions.
2018 saw volatile forwards wood real with low real time pricing.
2019 is so low forwards with high realtime price.
And 2020, so a recessionary factors, including both low real time pricing and customers in financial distress.
These offerings just one more example of what underpins our confidence in the stability and predictability of our business model.
Moving to slide seeks for an update on our ongoing efforts in perfecting our platform and the direct energy acquisition.
As you know over the last four years, we have been evolving our platform to be closer to the customer.
During this time, we simplify streamline our portfolio achieved a strong balance sheet stablish, a transparent and compelling capital relocation framework and made sustainability, an integral part of our foundation.
While our stock price does not yet reflect the full measure of our success, we continue to strengthen and streamline our portfolio.
We have significantly rebalance our portfolio by reducing generation and growing retail.
But we're not done yet.
To that effect, we expect to realize a minimum of $250 million in net equity proceeds net of debt repayment associated with us it sold over the next six to 12 months.
While we will not be providing details of the specific assets or businesses that we're targeting.
You should expect a comprehensive update Ah south of our reach.
Well the acquisition and welcome direct energy employees into the NRG family.
The integration process is well underway as our experience of cross functional integration team is focused on day, one activities and preparing for system some processing issues.
We look forward to bringing NRG is a strength in risk management and customer experience with the retro standard platform of products and services to create value for customers and shareholders. We.
With that I will pass it over to Kirk for the financial review.
Thanks, Horacio turning to slide eight for a review of the third quarter results and 2020 guidance update year to date NRG delivered $1.674 billion in adjusted EBITDA and 1.2 billion in free cash flow before growth.
20.
In addition, given our higher pension contributions in 2019 as well as planned asset appreciation. We've also differed over $30 million of pension contributions into 2021.
Finally is Mauricio mentioned in his opening remarks, we're narrowing or 2020 consolidated adjusted EBITDA guidance range to 195 to 2.05 billion.
And as a result of our efforts to accelerate cash to help fund the direct acquisition, we're both narrowing and increasing our consolidated free cash flow before growth guidance to 145 billion to $1.55 billion.
Representing $125 million increase versus the midpoint of our prior guidance.
Capital allocation.
As shown on the left of the slide 2020 capital available for allocation has increased by $155 million as.
As the result of our more robust 2020 free cash flow as well as the sale of the bulk of the remaining elements of our legacy distributed solar business, which is in the process of being finalized and we expect to close later this quarter.
After a minor increase in identified investments largely resulting from the offsetting effect of an investment in our a story of Repowering project and a reduction in the deferral of Gen on pension contributions.
Our 2020 remaining excess capital has increased by over $150 million, putting the cash reserve for direct energy in excess of $800 million in.
Importantly, this increase is part of our revised plan to improve our financing mix for direct by eliminating the need to issue new equity, which I'll review in greater detail on the next slide.
Turning then to our updated sources and uses for direct which you'll find on slide 11, and starting with the original expected sources of cash capital. We shared with you on our July 24th call.
Our plan to eliminate the need for $750 million in new equity linked securities has three components.
First through the combination of increased to 2020 cash and a reduction in financing cost associated with the elimination of equity issuance, we reduced our equity needs by $181 million.
Second from a ratings perspective half of the previously planned $750 million and convertible equity was treated as debt for ratings purposes, allowing us to increase the permanent debt financing for direct on a ratings neutral basis.
The final component necessary to complete new equity or just under $200 million will be an increase in new bonds. However, this element will be temporary as we intend to repay the same amount of our consolidated debt in 2021, using the net proceeds from non core asset sales on the portfolio optimization initiative.
From ratio discussed earlier.
Net proceeds represents the amount of proceeds from these asset sales after giving effect for the repayment of debt at our target leverage ratio.
Based on the EBITDA from assets sold.
As you May recall NRG has over $2 billion of callable debt in 2021, representing both our highest coupons and nearest maturities.
By issuing new lower cost bonds and then subsequently repaying this legacy corporate debt, we create a more cost and maturity efficient way to achieve this debt reduction without relying on a traditional asset sale bridge.
We are confident in our ability to generate at least this amount of excess capital from asset sales in order to return to our target credit metrics in 2021.
Which remains our capital allocation priority as we are committed to maintaining these metrics as we continue to target investment grade rating by late 21 or early 22.
Finally as noted on the slide we've made significant progress in increasing liquidity in connection with the transaction and are on track to completing the total of $3.5 billion in additional facilities prior to closing the acquisition.
We also remain on track to issue the debt financing for direct prior to the closing the transaction as well.
Turning to 2021 capital allocation on slide 12 to update the combined 2021 capital allocation provided on our July 24th call. We have adjusted the 2021 excess cash to reflect the reduction in the midpoint 2021, NRG free cash flow associated with that pull forward.
Cash flow into 2020.
After giving effect for the $150 million increase in minimum cash following the direct acquisition. This leads to just over $1.5 billion in 2021 capital available for allocation.
Our expected 2021 dividend is unchanged and after giving effect for a modest increase in investments from the historical Repowering project and a reserve for continued small retail book acquisitions, we continue to commit all remaining capital or approximately $950 million to debt reduction in order to achieve our objective.
Returning to our target metrics in 2021.
Finally, I'll turn to a brief update on those 2021 credit metrics, which you'll find on slide 12.
This is now based on our updated financing plan, which is shown in the middle column.
After adjusting our pro forma corporate balance for debt reduction from 2021 capital allocation.
As well as the reduction in temporary debt using net proceeds from asset sales.
Our 2021 pro forma net debt balance is approximately $7.2 billion, which based on the midpoint adjusted EBITDA implies a pro forma ratio of just over 2.7 times net debt to EBITDA.
And with that I'll turn it back to Maria.
Thank you Kirk.
Next to slide 15, I want to provide you a few closing thoughts on our 2020 scorecard.
As you can see we have been quite visa.
Our team has remained focused on execution as we delivered strong results.
Advance the completion of our three year transformation plan.
And our next phase of our transformation perfecting on growing the integrated platform.
Our company stronger today than it has ever been and what gets me excited is that the best deal yet cellphone.
I look forward to sharing with you a more fulsome rollout of our customer focus platform at our analyst day in early 21.
So we have absolutely show, we're ready to open the line for questions.
And as a reminder to ask a question you will need to press star one of your telephone so what's on your question. Please go ahead and please.
Please stand by while we compile became under roster.
And your first question comes from the line of Julien Dumoulin Smith with Bank of America.
Putting team and congratulations on all the uptick there.
If I can just started off on just the here and now can you elaborate a little bit more on the asset sale piece here.
Basically how much EBITDA or cash flow loss should we be thinking about given that you talk and also by real estate, which may not necessarily contribute little recap.
And then related if I can how are you thinking about this.
Dare I call. It initial asset sale into the broader picture of any further transformation of the company.
Yes, good morning, Julien So let me start by just saying that any of that portfolio optimization asset sales that we will do.
We are going to be value accretive and credit neutral.
That's going to be the overall the overarching.
Goal and framework now.
Taking just if you don't mind I'd like to take just a little bit of step back kind of start with your second question. So you understand.
Better what we're doing here.
When I think about perfecting the integrated model.
What that means is growing our retail business, which we've done very successfully over the past three years.
But also optimizing our generation assets and our service our portfolio services too.
To best meet the needs of our customers.
That that criteria.
Now, we're going to be using to evaluate our platform.
And yes, we I think everybody recognizes the capabilities that we have in commercial operations that is a strength, we have the ability and the opportunity to evaluate given market conditions, whether we want to be owners of assets, whether we wanna rands assets or if we want.
To partner with other service providers.
I don't think there we need to always be thinking about vertically integrating and generating every single megawatt that we sell to our customers or every single service that we provide.
And the Best example, that I can give you a software renewal DBA strategy.
Added close to 6100 megawatts very efficiently add value and we felt that that was the best way on tools continue meeting the needs of our customers and we're going to do the same on the services side. So hopefully that provides fuel at leaves the general.
Our framework and some of the guidelines around how I think about value our entire so they have to be value accretive and they have to be credit neutral.
Let me see if I can I'd love to hear a little bit of your initial thinking as you think about the transmission considering you have this more comprehensive update early next year.
Specifically, let I'd like to hear about if you can is how are you thinking about expanding this retail business that you talked about being customer oriented customer focus.
On the services, you're offering you specifically mentioned partnerships a moment ago can you will at least initially elaborate on where you are thinking about taking this obviously with direct here, perhaps you have a little bit more exposure on the commercial industrial side and you did previously.
On the gas side, you had a little bit more exposure.
Please if you can.
Sure Joe that well I mean, if you think about direct energy ha actually Advaxis accelerates.
That transformation to become more customer focus on I would say almost a consumer service type of company.
If you look at the direct energy acquisition, a doubles the size of our.
Retail operating folio, we're now going to have a network of 6 million customers just think about that.
So we need to be thinking.
What you are going to be hearing on the out of these days, how we're going to optimize that network of 6 million customers. In addition.
Not only were just looking at an increase if you will.
With the acquisition, we expanded the natural gas our retail platform with the racks, which is one of the.
Most recognized and best in class on natural gas retail platforms.
We enhance also the products or services that we offer.
Around the customer and here. The goal is how do we create more stickiness, how do we by combining the core offering than we have.
And sharing.
The.
A common platform retail platform, whether it is customer Wheeling invoicing customer care commercial operations.
How do we create a multiplier that's not only allows us to access greater.
Margins, but makes them more stickier and makes our customers more loyal I think you need to start thinking about in a lifetime value of customer and we're going to be talking about on beyond the state. The second thing is it also helps us.
Gives us the opportunity to achieve $300 million of synergies.
This acquisition.
We have the team that has proven.
To achieve these kind of synergies and we have done over the last three years and we're going to do it again over the next three years so.
Yeah. This is how we are setting up their company when I say customer focus we have that we believe the value going forward given the macro trends that we're seeing are moving closer to the customer and ever on Staten network of customers is going to have an opportunity to maximize it in a way that I believe constant didnt.
In the energy space.
And sorry, if I did I hear you talk about cost spoken as well here. That's just another thing that the last time you get to the transmission I just want to harp on that a little bit here if I can.
Yes, absolutely I mean, we're going to maintain our cost excellence. It took us a lot to get to where we are today over the past three years to caba, our best in class and.
Our cost structure, we're going to maintain it and.
And but as I said before.
We have an opportunity that we direct our energy to achieve significant synergies on our processes and systems are.
Expand our platform better balance our portfolio in the east So I'm really excited about what the saw acquisition is going to bring to NRG and eyewear.
Goal of continued transforming the company.
Excellent. Thank you guys. So much for the time best of luck in that few months great.
Great. Thank you Jim.
And your next question comes from the line of Jonathan Arnold of vertical research.
Hi, good morning, guys.
Hey, good morning, Jonathan a quick one on ESA use as you are saying that you.
Currently thinking lower end of the ranges, but 21.
Well I think you also said you happy to offset the pressures you've identified some kind of it. So I just wanted to if you could update on to them.
You know what you are looking at doing and whether you feel that it's possible to move yourself back more comfortable with the range and then could we maybe break down the headwinds between the delayed PPA project. The fact and other factors event.
Yes, Jonathan so as we mentioned on our prepared remarks 2021 was impacted by the delays on the EPA start date due to cope in 19.
You know, where we know that we're early.
In the game I mean, we're not even in 2021 so.
Just like we did in 2020, where we mitigated most of the impact of probably 19, we're already focus in mitigating the impact for 2021 and but.
But obviously depends also on on.
Uncovered 19 as a whole how long is the pandemic until last what is the impact that he's done a half on.
Our sales channel.
But I I believe that we have been conservative on our assumptions and if it lasts longer it will have an impact bloodied last but he is shorter than we will have an opportunity Kurt.
The only thing I'd add is for personal you use.
Use your words shunted break down the headwinds.
The delay in the PVH that look we've talked about I call that the trials primary driver for that directional guidance.
The balance of the potential headwinds are the possibilities of both coded.
Across the board I'd call I, even mentioned this selling and marketing costs was one element of that.
It to reinstate or reinforce our sales channels either by enhancing digital if you know we find ourselves in a position that we can't return to a robust face to face environment from a selling standpoint, or just ultimately returning to a regular clip.
And maybe the near to our more robust on face to face selling and marketing.
To continue to drive customer growth in particular in the east, which has probably been disproportionately impacted by the lack of the ability to sell face to face. So those are a couple of the components of those headwinds, but again returning far in a way I'd say the PPA delay is the biggest piece of that directional guidance. If you will.
Perfect. Thank you very much you bet.
And your next question comes from the line of Stephen Byrd of Morgan Stanley.
Thanks, Good morning, Hey.
Hey, good morning, Stephen.
Thanks for a really thorough update on a lot of topics.
I wanted to to build on a prior question and receive you talked about.
So the broader strategy and I'm, just thinking about the expansion outside of or caught and and especially in places like PJM. How you think about sort of the risk the risk in that market on one end, especially given sort of some uncertainties around the capacity market construct but on the positive side I guess I could I could see some you know a lot of synergy potential, especially.
On the retail side, which has proven to be quite effective but what's generally your appetite for expansion. How do you think about sort of risk reward in in some of the other power markets.
Yes so.
Answering a specific to the PJM and I would say that northeast.
The whole.
With the acquisition of direct energy, we're able to rebalance or too much better balance our generation with our retail business.
While I recognize that the northeast is not accessing types of Joe's the openness and competitiveness of the retail market. It's a good market and it has the opportunity to get better and to improve and I actually believe that it will happen for our two things one is the.
Just a smart technology the internet of things is going to empower customers a lot more than what they have been done and we dot coms more energy choice and energy choice means more open.
Interest bearing competitive retail markets. So I think the windies b. It's on our is on our backs on dock, so and but having said that there is something particular in these which is we can actually access multiple products and services. So we not only sell electricity, but we also sell natural gas other products on sale.
It is so that so the margin opportunity in the east vessel stacks us, which you know, Texas is more it's a bigger house footprint when it comes to electric consumption.
Then the marketplace is very open in the east we have the opportunity to sell these multiple products and services, which rivals that margin opportunity for us in in Texas.
So thats the answer to your question I know that you had also another one on on capacity did I hear that correctly.
Well, that's that's where I think you partly addressed it in terms of just focusing on the overall level of attractiveness, but how do you think about I guess on.
Expanding in terms of your power plant position.
Outside of Texas in places like PJM, just given that there is some uncertainty around the you know the future of the PJM capacity constructs.
I mean right now as I said I mean, we're not much better balanced portfolio. After the direct energy acquisition, we were a lot longer generation than retail that we're not a lot more balanced but ASI assigning said previously our goal is to continue to optimize our generation portfolio and our services portfolio.
To best meet the needs of our customers that the over arching criteria that we're going to be using and as.
As I mentioned I mean, we're going to continuously look at on the makeup of our generation portfolio to see.
Do we have the right mix, given where our customers are and.
And if not then we are going to be very aggressively.
Changing that.
That makeup and I think one thing that is important these.
We don't have to own every single network.
And I think Thats critical we have a commercial operations capability that is second to none in the industry that allows us to leave their rents through bps or tolling agreements access that market opportunistically on generation.
And that's what we're going to be you know we're.
We're going to continue we're going to be doing continuously.
This is not just a.
It happens now and it stops we're going to continuously optimize our portfolio.
That's very clear pretty soon maybe just one last one on non high level on renewables would you mind, just talking to the sort of competitive playing field for renewables and any anything changing there how do you think about sort of.
The level of risk you're willing to take in terms of sort of incurring costs before.
Securing offtake contracts, how about sort of thinking about tax attributes just any other dynamics around the competitive playing field for renewables.
Well I mean, let me just start by saying that we have been quite active.
But now on the.
On the contracting side, that's what most of the developing renewal of contract in renewables. So we have a lot of.
Market intelligence in terms of where these projects are what are some of the.
You know the economics, where you can actually execute this projects and quite candidly some of the operational challenges I mean, that's why we saw the delay here in 2021, we were talking about it if you remember a couple of earnings calls ago that.
There could be any impact of probably 19 in these projects now we're seeing it fortune I mean, we were very keen on these dcs volume neutral because I mean, we wanted to provide this flexibility for developers and these are very well known developers, but we wanted to make sure that we did it add value neutral so.
I mean, my take is that renewable side going to continued to along.
To be the.
That marginal megawatts to develop in the country as a whole.
Yes, I think it's fair to say that a smart technologies and clean energy will continue to grow.
In the coming years, and I think we are.
We really well position for what that means to the electric grid on one hand, we given the strength of our balance sheet, we're able to talk to some of these renewables have very attractive economics economics for a term that is better for our retail.
Business and and the EPS in all the other kind of it.
If that impacts.
The.
Prices than we have we have an opportunity to access capital lower supply costs. So I'm very very comfortable where we are Chris Moser anything particular that youre seeing in the markets around renewables and then perhaps Kirk something on tax equity.
Okay.
Right. This is Chris the only thing that I would mention is that really what you're talking about is two different kind of business models. We're looking for the to assign the deals and and have the offtake. We don't we don't I wouldn't expect us Stephen to go out and build a bunch of renewables with our cost of capital right. That's that's not a game that I think is kind of our approach. So I would just say.
That there's there's a lot of renewable is going to get built theres, a big slug, that's coming in.
In Texas here in the next couple of years and.
We are happy to be the off taker and not only on the backend.
Yes, the only thing I'd add on on the financing side I think we've talked about this before in various conversations I mean, we've.
We've seen a little bit of a pullback or a tightening around the tax equity market, a little bit more scarcity around that obviously thats going to impact the cost of financing which in turn.
Tracks, the appetite for PV Ace and if that.
That headwind or that that governor if you will that drives the PPA appetite up.
It doesn't change our disciplined around where where we see value in pricing new PPA is relative to where the market is at the end of the day, but I think that.
In addition of receives comments are very kind of gives a little bit above a pacer. If you will for the pace of new build as far as renewables are concerned in terms of the.
The the less liquid aspect to that market because some of the banks kind of pull back a little bit from tax equity perspective.
Oh I see that's helpful. Thats sort of the is somewhat of the limits are and also probably helps you on the on the PBM side, well, that's great color and a lot of fronts. Thank you very much.
Thank you Steve.
And our final question comes from Keith Stanley with Wolfe Research.
Hi, good morning, I'm, sorry, if I missed this but of the 1.6 gigawatts of renewable tt's, how many of megawatts of that is to lead and roughly how long is the delay floor.
Yes, so I mean right now we have 1.7 gigawatts.
Assigned Anda.
You know the delays are I would characterize it.
Six to eight months so.
A lot of these projects were impacted in the first six.
Six months of the year, giving some of the supply chain disruptions and.
And just a shutdown orders stay at home orders. So our expectation is that they will be available to us for 2022.
And you.
In terms of the megawatts I would say that for 21, while the vast majority of megawatts that we were kind of slated for 21 had been delayed I don't think we have provided the breakdown by by year end, we're not going to provide the breakdown by year.
Okay. Thanks, and then one quick one just the story a repowering that you you mentioned in the slides on capital allocation are there any details you can provide on that project, just timeline and financing or contracting for that.
Sure Chris.
So it's working through the permitting and environmental impact statement process right now so its going through that kind of stuff and if you remember going back to the the Peaker rule the existing historian site goes out at.
In <unk>.
I think it's right before the summer of 2003.
So that would be kind of the timeline for expecting it to be online.
Great. Thank you.
Thank you.
And that is all the time, we have for Q1 day I would turn the call back over to Mr. them or we see other two assets.
Thank you for the Asia. Thank you for your interest in NRG I look forward to speaking with all of you in the coming weeks and months.
As you can hear as long as you can tell we're very excited about the future on the prospects of the company. Thank you and talk to you soon.
And ladies and gentlemen, thank you for participation in today's conference. This concludes the program.
Yeah.