Q2 2021 NRG Energy Inc Earnings Call
We are positioned to grow and leverage our existing operating platform to achieve higher margins.
And longer tenured customers.
We have the financial flexibility to invest capital.
<unk> returns, while returning significant capital to shareholders.
And we have the right people and the right platform to create sustainable value for all stakeholders.
So with that.
I want to welcome Alberto for narrow to the call and provide a brief introduction.
Alberto joined NRG on June 1 following on expensive CFO search.
Alberto you say see some finance expert who brings over 30 years of experience and a unique combination of consumer technology manufacturing and risk management experience.
I believe our virtuous expertise is the ideal feed to enhance our transition into a consumer services company Alberto.
Alberto welcome.
And I will turn it over to you for the financial review.
Thank you Mauricio for your kind words and good morning, everyone.
I am excited to be reviewed this morning and to join NRG. During this transformation to become a consumer services company.
Now more than ever estimate experience and engagement are key priorities for leading companies and I feel fortunate to be part of an organization that is completely focusing on the customer to continue to grow.
I look forward to the value of local with our analysts and investment community over the months to come.
Hopefully, we will be able to meet in person sometime in the near future.
Moving to the quarterly results I will now turn to slide 9 for a brief review of our financials.
For the quarter NRG delivered $656 million in adjusted EBITDA of 82 million higher than the second quarter of last year.
The increase in consolidated earnings was driven by the acquisition of direct energy.
And the related additional synergies achieved in Q2.
Specifically by region.
<unk> benefited from the expected contribution from the direct energy acquisition.
In addition, favorable weather resulted in outperformance by both our electric and natural gas businesses.
Finally, we enjoyed favorable intra year timing of demand response revenues.
Next our Texas region, partially offset these benefits due to lower residential demand driven.
Driven by milder weather and a return to work trends as well as to higher retail supply costs.
As a reminder, we benefited last year from exceptionally low market power prices realized during the start of the Covid driven economic shutdown.
On a year to date basis, our progress in terms of incremental profitability was even more significant.
It demonstrates the value of our diversified consumer services platform and.
And its ability to absorb the potential the possible impact of headwinds such as the current force outage, we are dealing with at limestone unit, 1 which will expand and TRA.
Our expectation for the net impact from winter storm jewelry remains at $500 million to $700 million.
We were down $85 million increase in onetime costs offset by a similar increase in the range of expected mitigates.
This is primarily due to the positive development of the Texas securitization legislation during the quarter.
The total negative cash impact is still expected to be 3.
$350 million to $550 million in 2021 and $150 million in 2022 due to the estimated bill credits on 2 large commercial and industrial customers.
Now turning to direct energy integration, we are confirming our goal to achieve a run rate of $300 million synergies by 2023.
We are on track to achieve $135 million of synergies for 2021 with $89 million realized year to date.
Synergy expectations as well as synergies achieved so far are fully embedded respectively in our 2021 guidance and year to date actuals.
Overall, we are off to a great start in the first half of the year and we are reaffirming guidance at 2.4 to $2.6 billion for adjusted EBITDA.
And 1 point to 44% to $1.64 billion.
For free cash flow before growth.
I will now turn to slide 10, where we are updating our planned 2021 capital allocation.
As in the past our practice on this slide is to highlight changes from last quarter in blue.
Starting from the left on the third column the net capital required for the direct energy acquisition was increased by $35 million.
Based on the latest estimate of the post closing working capital adjustments.
We anticipate finalizing the working capital adjustment during the third quarter.
Moving on the next column and as discussed on the previous line the midpoint for net estimated cash impact from winter storm Uri remains at 450 million.
This includes the Inc. The increase of $85 million.
For 1 time costs in 2021, and similar increase in expected media against driven primarily by the latest Texas legislation as you are aware the.
On the match anticipated securitization bills, HB, $44, 92, and SB $50 <unk> have been approved and they are being finalized by year end <unk>.
Clarity about the expected completion should come later this year.
Moving to the next caller to achieve a 3.0 net debt to adjusted EBITDA ratio, we expect to deleverage by $255 million plus early redemption fee of $9 million.
Total, Inc, 2000, 264 million on capital to be allocated.
This leaves $461 million of remaining capital available for allocation.
A large portion of this capital is dependent on the successful conclusion of the aircraft securitization processes.
Finally, as a reminder, today's capital allocation waterfall does not include the Deepak from malware pending 4.8 gigawatt asset sales, which is expected to close in the fourth quarter net.
Net cash proceeds will be utilized partly for debt reduction $500 million to maintain leverage neutrality.
On the remaining $100 million to $150 million.
After purchase price adjustments to be available for general capital allocation.
Finally on slide 11, after reducing our corporate debt balance for the expected 2021 debt reimbursement aim for the minimum cash.
Our 2021 and net debt balance will be approximately $7.9 billion.
Which when based on the midpoint of the adjusted.
EBITDA implies the ratio 3 zero net debt to adjusted EBITDA.
As discussed during the Investor day, given our growth profile, we have revised our timeline to achieve investment grade metrics of 2.5 to 275 times net debt to adjusted EBITDA ratio.
We plan on achieving a strong 3.0 ratio by year end to 2021 and growing into 1 our longer term targets of 2.5 to $2.75 ratio by 2023, primarily through the full realization of the Rex energy run rate earnings.
We remain committed to a strong balance sheet and to achieve credit metrics aligned with an investment grade rating.
We are very comfortable in achieving our target and our continued to maintain a constructive dialogue with the rating agencies.
For your models.
Marco.
Turning to slide 13, I want to provide a few closing thoughts on today's presentation.
During the quarter, we made significant significant progress on our priorities integrating direct energy perfecting on growing our platform on executing disciplined capital allocation.
NRG has never been stronger.
We have a stability on financial flexibility to thrive and take advantage of opportunities through all market cycles.
At our Investor day, we outlined for you the tremendous opportunity to deliver value for shareholders and I have never been more excited about the future of this company.
I look forward to updating you on our progress along the way.
So with that Ray will open the line for questions.
Yes.
On the reminder to ask a question here, maybe just on star 1 on what's on the phone call final question.
Keith.
Please standby, while we compile the Q&A roster.
The first question comes from the line of Julien Dumoulin Smith from that.
Thank you.
Line is open.
Hey, good morning team, thanks for the opportunity and growth.
We can comment on the nuclear peak nuclear.
Federal nuclear efforts, perhaps since that's been defined you can comment on that just some brief on what that might mean for your specific opportunities. There if you don't mind.
I'm, sorry, Julien you were breaking up a little bit.
Are you talking about the nuclear PTC.
Exactly indeed, and what that might be at a federal level for your assets.
Right well I mean, the so first off let me just say that in terms of.
Regional or market specific out of market subsidies, whether it's for nuclear or any other technology, we'd rather see competitive incentives.
In our respective markets now, having said that a very say national PTC, obviously that changes our perspective.
We'll look at participating through our South Texas project facility down in Texas, and obviously that has.
A positive impact on our on that particular assets. So that's how I would think about the.
The national PTC, but.
Need to highlight.
The national aspect of it I mean, I think if it is just regional it creates a lot of <unk>.
Dynamics intra markets that are not necessarily in the best interest on competitive markets.
Just wanted to get your perspective on that.
And if you don't mind.
Perhaps a bigger picture taking my question here can you comment on the commodity backdrop here.
Theres been a lot of movement in the various forward curve. Obviously your position is not always obvious from a net shorter net long perspective, depending on the specific market can you comment a little bit on on the overall position today as you think about the later David years, and just how that positions you against the targets you articulated earlier.
Sure Julien.
Tried to highlight in the past our integrated platform really has reduced exposure to the underlying commodity prices.
Whether it is increasing and natural gas, which we have seen on increasing in power prices.
These 2 effects on.
All market participants all retail providers, so to some extent all of these.
Increasing commodity prices can be passed through to customers, whose nobody's just affecting loss are affecting somebody else I.
I will say that.
Given the addition of the natural gas.
Is this.
With the acquisition of direct energy.
He has been a very complementary and it highlights the strength of our diversified portfolio in the east if you look at it.
It's actually even even more noticeable if gas prices are increasing perhaps that has some impact on in the near term on our power business, but these contracts will be a benefit on our natural gas business, which is incredibly sizeable so thats why.
I think investors need to think about our business somewhat.
Insulated from increases in commodity prices now I don't know, Chris if you have any comments around adjusted direction of the price more than what perspective, I think I already addressed the impact on our portfolio. Yes. The only thing I would add is I mean look gases has been strong because there's a lot of increased demand out there.
LNG is going crazy overseas with the Europe on bid against Asia, Thats driving things up I think that the U S. Just recently became the largest exporter of LNG in the world passing Australia, which is a hell of a thing haven't seen that before storage is low right. Now so yes, we're in a bit of an up cycle right here, but like <unk>.
You said, it's something that we can price it right. So if we're pricing to our customers off of the curves that we see and we're covering it off of the curves as they happen or off of our generation. We're in a good spot where we tack on the margin move on our Merry way. So I think I think ratio is right. The integrated platform is a great way to play this whether it's an up cycle or down cycle.
Right.
The last quick clarification, if you don't mind.
Are you confident with respect to the the transition I know, we're still early right. After your analyst day here, but.
Back to some of the early indications on our strategic pivot on the retail side.
Any level of confidence or comments, you can offer I know I know it from.
Getting out a little bit earlier.
Yes.
Okay, Julian I want to understand your question I mean any confidence on our PMO early planning as you think about executing against the full $700 million uplift on okay got it. So I mean, we are we're very confident on that and actually we have already started a number of initiatives both on power services.
And home services, but as I said I mean, our number 1 priority right now.
And I want to be unequivocal about it is integrating direct energy and achieving the $300 million on Phoenix.
On the lease path resistance to value and we're focused on that then we're going to look at the low hanging fruit opportunities like optimizing our dual fuel customers.
We have good visibility on them, we want our power customers to buy natural gas on we 1 of our natural gas customers to buy power. So the cost of acquisition is actually pretty pretty compelling.
And then on I think that would be the focus on.
For the rest of 2021 on in 2022.
You need to think about those.
Those opportunities on power on home services.
We are testing and learning right now.
And if we think that the opportunity is very attractive then we will accelerate the scale up if it's not then we will kill that quickly.
But I expect that most of that investment will happen in the second half of our planning period towards let's say 'twenty 3 and beyond but we're very very excited we actually have a pilot program right now on.
On the home solar which is very exciting and we're learning a lot about what customers want. So we are waiting we're not waiting we're starting DSR initiatives were very small deploying very little capital.
But we're learning a whole lot.
Excellent I'll leave it there best of luck.
Thank you Julien.
Your next question comes from the line on fiber laser from Guggenheim Partners. Your line is now open.
Hey, guys. Good morning, it's actually James for sure Congrats on results.
Hey, guys I want to come on.
Good how's it going on sort of a few housekeeping questions.
On the quarter can we just unpack that February impacts shifts a little bit more.
It looks like the buckets moved around $85 million on the growth side, what's the breakdown there between resettlement and bad debt and then just on the mitigation side entirely securitization recovery assumptions.
Yes, so as Alberto mentioned.
Baucus mobile at all on a gross basis, even more by $85 million I mean, the majority of it is just reached settlements in I would say.
70% 70, 30% between reached settlements and then 30% about that.
So we feel very confident with the now with the clarity that we have around securitization.
We're going to be able to offset that so net net there is no change in the impact of the witness from jewelry, although as I mentioned before I mean things like on a more a little bit up and down.
You can just happen also on this quarter, but we have the upcoming 180 day settlement and.
Justin.
And on a couple of weeks and we're monitoring that but I actually think that that's going to be very small.
Nonetheless.
I expect things to move just a little bit whether it's up or down but.
Now that we have this visibility on on the securitization just gives me a lot of comfort to maintain the range that we have.
Gotcha.
And then just on the PJM strategic review could you provide.
Any guidance on the timeline for the balance.
The balance on the fleet.
Well I mean, you saw a little bit of a step back because I think context is important here. So when you look on the PJM fleet, you're really talking about the Midwest generation fleet, the lion's share of it.
As we have quantified for you in the past I mean, that's about 5% of our.
Earnings. So it's important just to put the context on the magnitude of that.
I think everybody has seen the auction results. They were very disappointing that basically resulted in the announcement of.
50% of our our coal fleet.
Retirement, the announced retirement of 50% of our coal fleet I think given the changes in capacity prices in PJM is just prudent that we do on deep dive review of the rest of the portfolio is ongoing at this point and we're looking at everything in terms of.
Sure.
Reliability is theyre needed for reliability, what on the development prospects I mean, we're looking at just about everything for that on that strategic review on all.
As we progress I'll keep you all updated but thats, where we are.
Gotcha.
That's all I had thanks, congrats again on Bocom Oberto.
Thank you James Thank you.
Your next question comes from the line of Michael Lapides from Goldman Sachs. Your line is now open.
Hey, guys. Thank you for taking my questions.
A couple of things first of all the biggest investor concern about NRG is youre short position in Texas.
Meaning the fact, you don't have as much generation issue might have retail load. How do you anticipate changing your disclosures going forward to help get people comfortable with the short position, meaning whether you'll outline ppas you have <unk> tolling agreements or the <unk>.
Aging of future demand simply because while I doubt, there's going to be another Yuri.
So im not a weatherman, so I can't predict it but I kind of doubt it.
But there will be whether I've been summer and winter down the road, maybe not as violent as Yuri but they will happen.
Great just a couple of weeks ago was actually forecasting 1 in Texas and clearly the short exposure is the single biggest risk outstanding free NRG. So how do you plan on changing your disclosure going forward.
Your your longer short position as a mix of contracting physical assets.
And other hedging.
Brian Good morning, Michael and let me just be clear here NRG doesn't have a short position.
When I talk about running on integrated model every megawatt that we are selling for our customers. We're back to backing whether it is with on generation or whether it is on.
On tract in generation in the market or just buying on the open wholesale market. So I want to be clear, Michael because I think that is a misconception of NRG.
We are not short electricity, we're not sure the products that we're selling to our customers. We have back to back them. All so that will be the first point. The second point is we don't have to on every single megawatt that we have I mean that is we can actually achieve the same attributes of owning generation by contracting them.
A number of renewable ppas that we have we contract.
With other counterparties.
And whether it is a tolling deal or some.
Physical transaction, we can actually bind the open market in the forwards. So I mean, there is a number of things I would say that the biggest lesson.
Coming from Winter Storm Yuri.
Is the diversification of our supply.
If I if I owned 1 big power plant.
And you would basically say, okay, well now they're not sure that that 1 power plant will be a single point of failure. That's what we're trying to avoid that was the big lesson from winter storm. So I actually feel a lot more comfortable that we have.
Best in class commercial team that is looking at sourcing those megawatts from our power plants from other People's power plants and from the open market that is the best strategy that we can I mean, we got.
And if we can do it in a capital light way that.
Free Sop or our cash and maintains the strong free cash flow to EBITDA ratio that we have the better. So that's how I think about it Michael but this this notion that you're describing that somehow the biggest risk is the short position of NRG I just I just don't share that same view.
Right. Thank you can I follow up on that real quick just on.
I'm going to try and keep it simple.
Do you have enough megawatt hours of your own generation or under multiyear contracts to meet expected peak demand summer and winter.
Alright.
And we know that's what it's balancing running a balanced portfolio now.
I expect the commercial team when we go into the shorter term to position the hour to adjust our position based on their sometimes based on their commodity based.
On weather based on.
Prices, but youre talking about optimization around the edge not necessarily a position going forward. So.
I mean, if you're asking me do we have.
Have enough megawatts I would say, yes on a nameplate capacity our portfolio is sufficient to cover just.
As much of the of the network that we sell but that's not what we're trying to do what we're trying to do is optimize our supply to make sure that we put the position.
Have the company positioned in the best possible way, given where we think.
On the market.
Got it okay. Thank you guys much appreciate it I'll follow up off line no problem Michael.
Super.
Your next question comes from the line of Keith Stanley.
Your line is open.
Hi, good morning.
First on capital allocation.
Would you expect the $461 million of cash available from the slide to be fully allocated this year or is it more likely a good chunk of that gets pushed to next year, just because you need the cash back from theory offset still.
Yes, good morning.
I think I mean al.
Well first of all we allocate capital when we actually have interest cash available to us. So while we have created some financial flexibility given the changes that we did on the glide path to achieve our investment grade.
Credit metrics.
They are still underpinned by when we're going to receive.
The money from the.
A mitigation plan and then secondly from the sale of our Eastern California assets. So those on the 2 big triggers.
As soon as we have that excess cash I am going to apply our capital allocation principles and I expect to provide all of you on another update on the third quarter call.
And I expect these money to start coming in towards the towards the 4 quarter. So.
As we have always done in the past and I don't think this should be a surprise to anybody.
Allocate that excess cash when we actually have the cash.
That's how that's how you should think about dosing from some timing Q.
Got it.
Second question, just can you give an update curious how retail margins.
Ignoring the changes on power prices. If you isolated just our retail margins are tracking after the shakeout from the winter storm or are you seeing less competition in the Texas market given the volatility event or just any comment on trends in margins.
So I think margins have been relatively stable.
As we even though the winter storm was on.
Pretty impactful, particularly on the regulated side, but.
But also on the on regulated many of the retail providers.
Either credits needs for back to back so we saw just the.
A handful of people.
On.
<unk> exposed to the open market on I think they they fell through.
Through that process, but they were the net.
Sure.
The minimum number of participants I wouldn't say that there wasn't a big number of participants that were on their tremendous stress on the on the retail side. So margins have been relatively stable. The competition is still on.
Are there similar to what we have seen in the past.
Thank you.
Your next question comes from the line of Jonathan Arnold from vertical Research. Your line is now open.
Good morning, guys good morning, Jonathan.
Can I just.
On the mitigation.
Has any of that been realized already or is it all.
Sales to come.
Most of it is.
Total <unk> I mean, as you know the securitization process still ongoing while they passed the law.
What we expect you saw in August to we're going to have hearing and then in October we need to have on order that is going to define how they're going to allocate that money. So.
I expect that by October we'll have even more line of sight in terms of the allocation methodology.
So that would be on the securitization and then on the other 2 of the bad debt.
The newest process and then I think everybody knows that.
In the heat rate call option that we had I mean, that's going to take a little bit more time, given the legal route that we're taking.
Okay, great. Thank you for that and then.
Just hold on.
On.
Looking forward and just thinking about some of the new targets and the strategy laid out at the analyst day.
Should we anticipate that.
We'll start to provide sort.
On a more disclosure around.
Granularity between different types of customers single fuel dual fuel et cetera.
Some ways to just on.
Tracking your performance on that plan over time.
So when when do you think we might start to see some of that incremental disclosure.
Yes.
An excellent point, Jonathan on as I said to you before we're going to be increasing our disclosures, we're actually working on net right now given the.
The piece of the strategic update that we provided to all of you and just.
A month ago so.
I think what you should expect to see transparency and visibility in terms of how we go from the margin that we calculate from the margin that we want to have in 2025 and the steps that we're taking we're going to have conversations around the different initiatives to deploy $2 billion on capital.
In the test and learn period right now, but as we we started scaling up in any of these initiatives. We will have a conversation with all of you ahead of time in terms of what the opportunity quantifying the opportunity what is the confidence on that is required and what is the EBITDA associated with so.
There is a lot more disclosures to come both in terms of the $2 billion.
Capital deployment that we expect on the opportunity that that represents but also the makeup of our portfolio around customers, what we're seeing around.
On.
The the longevity of these customers on our portfolio.
Moshe do you see that as something that will be sort of part of our regular quarterly cycle when you get to that.
Or something you will do it.
Once a year or so something like that.
No my goal will make it part of the quarterly updates and.
I think that in earnest will come probably towards the end of the year and start the new year with fresh financials.
We're already working on it now and I think you should expect.
A more disclosure as we go into 2022.
Thank you.
Our final question comes from the line of from small.
On ski.
Your line is now open.
Thank you I was actually about to ask similar question about disclosures it seems to me at least that.
On the business has become a bit of a black box.
All of US I don't think that we really appreciate some exposure to gas.
Margins and hence some increased seasonality of direct energy, especially so let's.
So we would definitely appreciate the disclosures and again I did here and what we see is a comment about the fact that you guys on not sure Tyler I understand that at least.
And the long term, but how.
How can you reconcile.
The movement in forward power curves and the fact that you are relying on market based purchases.
Sure.
On your.
Medium term margin than the REIT on the retail side.
I understand that you match your contract with <unk> and the market purchases.
I don't think that it's possible to time it just right. So again directionally explain how the day move infill occurs Kurt.
Would have impacted your retail margins sure Angie. So I mean, I think you need to make the distinction between customers that are on their fixed price and the customers that are under fixed price with back to back that so the minute we sign on customer on their fixed price we have the supply we lock in the margin and.
That is very simple I mean, we price every customer based on the forward curve. So.
I don't think that.
That doesn't create any exposure.
Perhaps you are talking about the variable rates the month to month, and whether or not we can buy that.
But keep in mind I mean, a variable rate is exactly that you have the ability to change the price is the underlying commodity price in the market changes. So thats why I was saying we have the ability to to pass through some of these costs and we're not the only once exposed to it every single retail energy provider electric.
<unk> is exposed to this.
Changes in power prices, so it's not like.
This puts us in a disadvantage.
It impacts.
Is the supply cost of all retail electric provider. So you would expect a similar move.
To offset that increase that's why I would say.
I still don't understand this concept around why.
Some investors or some of you think that we're short power I mean.
Having a variable price customer allows us to change prices, whether it's all 4 down if prices are coming down perhaps we can move the customers pricing down, but if prices rise we can do the same so.
In the medium term when youre talking about the medium term I'm, assuming you're talking about 12 to 18 months I mean, thats plenty of time to take price actions and that's what we have done in the past week, we consistently see that so.
That's how I think about the exposure and on the fixed price.
I always go back to back so I'm not concerned about fixed price customers that go multiyear, particularly for C&I customers.
Okay, and then just 1 last follow up on on.
Capital allocation.
I mean, im really glad to see EBIT.
You will be restarting your share buyback.
Now is that in any way.
Implicitly stating that your.
Investment grade rating is.
Sort of delayed inherently given the.
On the UE storm and as such there is no point in trying to.
Delever as quickly as possible, hence you have some more flexibility.
Because again I would have expected that you could not try to go back to that say 2 and a half to 275 net debt to EBITDA as quickly as possible and clearly buybacks are not going to help on this.
Well I mean, I think what we said is we have adjusted our glide path to on a half to 275, we havent change our targets of the investment grade credit metrics.
We changed the trajectory on how to get there and that was informed by our conversations with rating agencies in the aftermath of winter storm euros. So it's very consistent with the conversations that we've had with the rating agencies I don't control the credit rating.
<unk>.
It's not on US that's on the rating agencies, we believe that 3 times is a strong a very strong balance sheet.
We still are targeting to on a half to 275, but given these changing glide path.
Cash provided some financial flexibility tool, if we have excess cash, which we anticipate total by the end of the year than we outlook, we will allocate that through the guidance on principles that are very transparent on that we have communicated to all of you. So.
That's how I expect to to start allocating this excess cash which includes share buybacks towards the end of the year. When we start having some excess cash, but I mean, that's going to be contingent on when do we close the asset sale and when do we start seeing the money from the Euro medians.
Thank you.
Well all the time, we have for questions I will now pass the call over to Mauricio for Canada for closing remarks.
Great. Thank you well. Thank you for your interest in NRG and look forward to continue updating you in visa Inc.
Exciting new opportunity on phase for NRG. Thank you everyone.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program.
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