Q3 2021 NRG Energy Inc Earnings Call
Good day, and thank you for standing by welcome to the edge.
<unk>, Inc, third quarter 2021 earnings call.
At this time all right.
This is Vince.
Vince for analytics.
There'll be a question and answer session.
To answer your question during the session you will need to press star one on your telephone.
Today's conference is being recorded.
Sorry for the string.
During the conference Please press Star zero.
I would now like to hand, the conference over to your host today, Kevin Cole head of Investor Relations to read the Safe Harbor and introduced a call.
Thank you Benjamin good morning, and welcome to NRG Energy's third quarter 2021 earnings call.
Mornings call is being broadcast live over the phone and via webcast, which can be located in the investors section of our website at www Dot NRG dot com under presentations and webcast.
Please note that today's discussion may contain forward looking statements, which are based on assumptions that we believe to be reasonable as of this date actual results may differ materially we urge everyone to review the safe Harbor in today's presentation as well as the risk factors in our SEC filings. We undertake no obligation to update these statements as a result of future events, except as required by law.
In addition, we will refer to both GAAP and non-GAAP financial measures for information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures. Please refer to today's presentation and with that I'll now turn the call over to Mauricio Gutierrez Nrg's President and CEO. Thank.
Thank you Kevin Good morning, everyone and thank you for your interest in NRG.
Joined this morning by Albert before now our Chief Financial Officer also on the call and available for questions. We have Elizabeth Killinger head of home retail and create small so our head of operations.
I'd like to start on slide four.
Today's presentation.
Our consumer services platform performed well through the summer and deliver stable results.
We are narrowing our 2021 financial guidance at the low end of the range and initiating 2022 financial guidance.
Our platform is navigating the unprecedented supply chain constraints and we are actively working to mitigate the financial impact.
Finally, we continue to make progress on our five year growth plan in the near term. We are focused on the direct energy integration organic growth in power and gas and expanding our customer base with dual product options.
Moving to the financial and operational results for the third quarter on slide five.
Beginning on the left hand side of the slide I want to start with safety.
We delivered another quarter of top decile safety performance.
This marks 10 straight quarters at this level of performance at test.
Testament to our strong safety culture.
As we continue our return to the office the safety and wellbeing of our employees remains our top priority.
During the third quarter, we delivered $767 million of adjusted EBITDA, which brings our year to date results to $1 99 billion.
2019% higher than the previous year, driven primarily by the acquisition of direct energy.
We are however, narrowing our 2021 guidance to the lower half of the range, primarily as a result of unanticipated supply chain constraints impacting fourth quarter results.
This will also impact 2022 guidance, which I will address shortly.
During the quarter, we made good progress on our key strategic initiatives.
First direct energy integration is well ahead of pace.
Achieving $144 million year to date or 107% of the original full year plan.
We are increasing our 2021 target to $175 million, which reflects the early realization of synergy targets in 2021.
We are maintaining the full plan target of $300 million run rate in 2023.
Next in the.
<unk> continues to advance necessary actions to improve market reliability.
In October the PUC implemented phase one of the winter weather is <unk> standards, which will be in effect for this upcoming winter.
These whether it's Asian standard adopt best practices and address as weather related issues that occurred during <unk>.
We are making the necessary investments in our fleet to be in compliance and ready for winter operations.
On market design the.
<unk> remains focused on a comprehensive solution to improve reliability and incentivize the spectrum resources.
At NRG, we support this direction and have taken a leading role in offering ideas for the Puc's consideration.
We have proposed a comprehensive solution to prioritize reliability and achieve it through competitive solutions.
The PUC also approved the final orders for securitization to ensure a healthy and competitive markets.
I want to commend and thank the Governor legislature MP UCT for tirelessly working to address the issues urea exports and two higher than the aircraft system and protect the integrity of the competitive markets that have benefited consumers over the years.
Now turning to retail.
We continue to advance our best in class customer experience during the quarter.
Our rely on brand was recognized with two awards during the quarter.
The North American customer Centricity in.
In the crisis management category.
And then 2021 innovation leader impact award for them make it solar offering which is a renewable energy initiative that allows customers to support solar energy without installing panels.
Now moving to the right hand side of the slide to discuss 2022.
First as.
As we detailed during our June Investor day two.
<unk> 2022 is a staging year for high grading, our business and achieving our five year, 15% to 20% free cash flow per share growth plan.
In 2022, we remain focused on integrating direct energy and achieving the blast high quality synergies.
Removing or streamlining our generation business.
Continues to weigh on our valuation given earnings and terminal value concerns that otherwise would have masked our retail growth.
Deploying small amounts of capital to prepare the platform for growth.
And returning a significant amount of capital to shareholders.
With that.
We're introducing 2022 financial guidance of $1 $95 billion to $2.25 billion of adjusted EBITDA.
And free cash flow before growth of 114 to 144 billion.
This guidance reflects our plan to fully realize our planned synergies and to streamline our east generation business.
Also impacting these guidance are temporary impacts from all foreseen supply chain constraints ancillary services charges in ERCOT and our previously announced limestone unit one outage through April 2022.
But leave no doubt.
Now that we have identified these near term headwinds we are focused on mitigating these impacts into 2022.
Finally, we are also announcing an 8% increase in our 2022 dividend in line with our stated dividend growth rate of 7% to 9%.
Now, let me turn the call over to Alberto for a more detailed financial review and laughter I will discuss how we are advancing our consumer services five year roadmap Alberto.
Thank you Mauricio.
Moving to the quarterly results I will now turn to slide seven for a brief review of our financials.
For the quarter, NRG delivered 767 million and adjusted EBITA or $15 million higher than the third quarter of last year.
The increase in consolidated earnings was driven by the acquisition of direct energy and the related additional synergies achieved in Q3.
Partially offset by the impact of the outage at tower limestone unit one facility.
Other headwinds related to the onset of supply chain constraints.
Specifically by region, the east benefited by $89 million driven by the expected contribution from the direct energy acquisition, and some incremental synergies and cost savings.
This benefit was partially offset by reduced volume.
The sale of power as well as lower profitability for a while where PJM core fleet due to supply chain constraints for chemical necessity to run environmental controls.
Next our Texas region decreased by $68 million.
Due to the higher supply of cost to serve our retail load.
The output with the outage of limestone unit, one we had to purchase higher priced supply to supplement these lost the generic.
This increase in supply cost was partially offset by the contribution from the direct energy acquisition.
As a reminder, we benefited last year from exceptionally low market power prices realized during the COVID-19 driven economic shutdown.
And a favorable mix in usage between home and business customers.
The free cash flow before growth in the quarter was 395 million a reduction of 230 million year over year, driven primarily by two factors a $75 million our increase in cash interest due to the $3 billion in direct energy financing in late <unk>.
And in 'twenty.
Second is the movement due to movement in inventory during Q3, 2020, we reduced inventory by $60 million driven.
Driven by seasonal trends and coal utilization.
While during Q3 2021, we built up inventories by 75 million, mostly for the seasonal needs of the gas business.
These overall resulted in a 135 million negative cash flow balance.
On a year to date on a year to date basis, our progress in terms of incremental profitability is significant and driven by the acquisition of <unk>.
Our expectation for the net impact from weakness from annuity remains at the 500 to 700 million with a $10 million increase in one time costs offset by a similar increase in the range of expected meet against now that positive development.
Texas legislator have increased the probability of recouping some of our Ut losses.
The total negative cash impact as the shift is slightly as the estimated bill credits all old to large commercial and industrial customers have been reduced by higher billings in 2021.
As a consequence.
The 2021, you already negative cash impact has increased by $85 million with a corresponding movement in 2022.
We expect to receive the majority of the securitization proceeds.
During the first quarter of 2022 with a possible first tranche later this year.
Now turning to the direct energy integration, we are confirming our goal to achieve a run rate of 300 million synergies by 2023.
During 2021, we have identified proud of their areas for cost synergies and we're able to realize certain synergies.
Earlier than anticipated.
Overall, we are on track to achieve $175 million of synergy for 2021 $144 million realized year to date synergy expectation as well as one time cost savings achieved so far are fully embedded respectively in our 2021 guidance and yesterday.
Eight actuals.
As you are all familiar supply chain constraints are affecting many industry across the country and they are affecting our operation as well in.
In addition to our limestone unit, one outage, which is now extended to meet the April 2022.
Constraints in the availability of coal are impacting both costs and volumes. In addition, our Midwest generation coal plants.
Are impacted by a shortfall in necessary chemicals to run good environmental controls of the fleet.
Due to these constraints constraints, we are now narrowing our guidance to the lower end of our original guidance to $2 four to $2 5 billion.
We are currently near the bottom of this range, but we are working intensively to improve our results.
Sequentially. We are also on average our free cash flow before growth guidance to 1.44 billion to 1.54 billion.
Moving to slide eight we are initiating guidance for 2022 to 1.9 dollars 95 billion to $2.25 billion.
This is a significant decrease from our current 2021 results driven by three elements as laid out on this slide plant.
Planned divestiture of east and West power plants, and the activation of our Midwest generation already highlighted in Investor day.
The reduction in the New York City capacity level revenues and the impact from the transitory cost that are related to 2022.
As mentioned above the contribution from direct energy would increase in 2022 by $130 million driven by the anticipated increase in synergies.
We are already there.
<unk> more synergy benefits in 2021, accelerating some action and therefore, we believe that we can achieve our targets for 2022 of $225 million.
Next we anticipated the sale of our east and West assets to close next month for a net of $620 million in sales proceeds.
Using EBITDA by $100 million going forward.
With the retirement of our coal assets in the east in mid 2022, EBITDA will decrease by $90 million in the year.
In addition, due to changing New York capacity market parameters capacity prices have decreased on a more permanent basis affecting our astoria and <unk> facilities.
We are using EBIT EBITDA by your factor proud of the $30 million.
As mentioned above we are experiencing a onetime extended forced outage at our limestone unit unit, one facility and what we believe to be transitory supply chain constraints that are negatively impacting 2022 results.
And we expect to correct them in 2023.
With increased power prices the extended outage at our limestone facility is increasing our supply cost by $50 million to April 2022.
With the advent of constraints on coal and chemical deliveries and commodity prices, we expect fuel and supply costs increased by $100 million in 2022, while returning to normal levels in future year.
Lastly, with the change in the ERCOT market, we are expecting an increase in ancillary charges that were initiated after we contracted customer and were not included in our margin price.
In the future of these costs will be included in that future contract prices.
During 2022, we will incur an incremental $70 million of ancillary costs.
The company's negative to us in our management team is working tirelessly to mitigate these incremental costs as best as possible, including further one time cost savings opportunity.
Given increased volatility in this environment. We are also increasing the range of our guidance with the expectation that we can identify enough meat against in 2022 to offset a portion of these costs.
The reduction in EBITDA as the primary driver for the lower free cash flow before growth.
I will now turn to slide nine where we are updating our planned 2021 capital allocation is in the past our practice on this slide is to highlight changes from last quarter in blue.
Starting from the leftmost column, we've updated the 2021 excess cash with the latest the free cash flow midpoint to $1 49 billion using available cash by $50 million.
Moving to the winter storm Ut and as discussed before the midpoint for the net estimated cash impact for winter storm Uli remains at $600 million, but given the increased utilization of customer credit in 2021, the net cash impact.
Assuming <unk> is increased to 500.
$35 million in 2021 and decreased by the same amount in 2022 to only $65 million as you are aware the much anticipated securitization builds HP.
<unk> hundred 40, <unk> 92, and SB 150 have been approved and the regulation has been finalized by the PUC and the PUC.
We anticipate that the main portion of the financing and release of funds will occur during the first quarter of 2022.
Moving to the next column to pursue our targeted net debt to adjusted EBITDA ratio, we completed the delivering a $250 million.
Plus early redemptions fees of $64 million in Q3 totaling $319 million.
Finally, we have added the anticipated sale of four eight.
Gigawatts of generation in the east the west regions. The net cash proceeds of $620 million will be utilized partially for debt reduction 500 million to maintain leverage and interest.
After incremental fees of $16 million, the remaining $104 million will be available for general capital allocation.
This leaves $375 million remaining capital for allocation and this capital is dependent on the successful conclusion of the securitization process.
Finally on slide 10, after reducing our corporate debt balance for 2021.
De levering and for the minimum cash our 2021 net debt balance will be approximately $7 9 billion.
Which when base at the midpoint of adjusted EBITDA imply.
<unk> ratio slightly above three times net debt to adjusted EBITDA.
As discussed during Investor day, given our growth profile. Our goal is to achieve investment grade metrics of two five to $2 75 net debt to adjusted EBITDA ratio remained we remain committed to a strong balance sheet and continue to target two five to $2 75 ratio primarily through the full realization of that.
Energy run rate earnings back to you.
Thanks Alberto.
So turning to slide 12, I want to provide an update on our progress executing our five year growth roadmap.
As I told you at Investor Day, two of our strategic priorities are to optimize the core and to grow the core.
Optimizing the core we will focus on strengthening our power and gas businesses.
Leading the direct energy integration and continuing the de carbonization of our generational fleet.
The direct energy transaction significantly increase our scale and materially enhance our natural gas capabilities.
This created two near term opportunities.
Increasing our number of pure natural gas customers and expanding our dual product capabilities within our existing network of customers.
Airports in both of these areas are well underway and we will leverage the collective experience of NRG and direct energy teams to execute on our growth in these targeted areas.
In addition to natural gas and dual product customer growth, we will continue to invest in our core power business to extend our market leading position in competitive retail electricity by continuing to meet the customers, where they are and to deliver the innovation that customers have come to expect from NRG and his family.
Brands.
The direct energy integration is well on track and today, we are reiterating our full synergy plan targets.
Upon closing direct energy, we immediately began rationalizing offices in areas with significant employee geographic overlap and completed a number of critical system consolidations without any meaningful impact to the operations of the company.
Given that the integration is being led by the same team are responsible for executing the transformation plan. We are highly confident in our ability to achieve the synergy targets that we have shared with you.
Our portfolio de carbonization efforts remain ongoing.
Four eight gigawatt asset sale to arc light remains on track to close by year end with only knew your PSC approval outstanding.
We have one six gigawatts of coal assets in PJM slated to retire in mid 2022 with the remainder of our PJM fleet under strategic review.
We continue to execute on our renewable PPA strategy, having signed two seven gigawatts nationally.
And expect to procure more renewable power through additional RF force for solar wind and battery storage in our core markets.
Now shifting to grow the core.
Our objectives are centered around distinct customer experiences in both power services and home services.
As we work to shape. These distinct customer experiences, we will break them down into discrete pieces and apply a test and learn discipline in order to refine our customer value proposition optimal business model and go to market strategy.
By starting small it allows us to stay nimble and deploy limited capital while gathering critical market intelligence to inform how we approach these new customer offerings for sustained long term growth.
2022 will serve as a staging year, where we will be focused on the test and learn environment I just discussed.
Although this staging year will not BSI growth capital intensive as the later years.
It is a crucial year in which we will need to develop data back conviction in our initiatives in order to have the confidence to deploy more significant capital in 2023 and 2024.
We will be sure to share more on our 2022 efforts as the year progresses.
Now.
I've worked turning our attention to 2020 tool with limited calls on our capital.
I wanted to take a moment to review our capital allocation framework and capital available for allocation.
Beginning on the left hand side of this slide.
We expect to have over one 6 billion in capital available for allocation, including $375 million of unallocated cash from 2021.
We will apply our capital allocation principles that are outlining the right side of this slide.
Beyond safety and operational excellence, our first use of capital for allocation is to achieve and maintain a strong balance sheet.
Our focus is to grow into our target metrics of two five to 275 times by the end of 2023.
<unk> in the vast majority of our excess cash to be available for allocation through our 50% return of capital and 50% opportunistic frameworks.
I look forward to providing you a comprehensive capital allocation update on our next earnings call.
But this should give you a good idea of our financial flexibility.
I am proud of the strength of our platform that despite near term supply chain constraints.
<unk> to provide our customers differentiated products and services and for our shareholders and the financial flexibility to both execute our ambitious five year growth plan, while returning significant cash to our investors.
Now turning to slide 14.
I want to provide a few closing thoughts on today's presentation.
During the third quarter, we continued to make significant progress on our strategic priorities.
But we still have work to do this year.
Over the remainder of the year, we expect to close on our announced asset sales and subsequently execute on our capital allocation priorities.
As we move into 2022, I am confident our platform is well positioned to deliver strong and predictable results and create significant shareholder value.
So without Benjamin will open the line for questions.
Thank you. Thank you Tien tsin.
And then any progress star one on your tenants.
Okay.
Forgive me.
Do we have.
Yeah.
Your first question comes from the line of Julien Smith from Bank of America.
Yeah.
Hey, good morning team thanks for the time.
Hey, good morning, Julien good morning.
Good morning, So just to kick things off real quickly.
I understand the markets are dynamic and turbulent here can you just walk through a little bit more on the coal supply chain basically and when are you expecting this to resolve itself and more specifically how much of this is realized versus unrealized I just want to understand really the level of further exposure that could exist here as you think.
Bob.
Your level of confidence in getting the supplies that you are anticipating the gap if you will.
Yes, Julien So let me start by.
We all seen and experienced a pretty sudden increase in natural gas prices. So when natural gas prices move up.
Our cogeneration flex of saw and <unk>.
Cost.
The stress in the coal supply chain, because we have been for the past four five years.
Generating a certain level not only us, but the entire coal generation industry. So when you rapidly flex up your coal supply chain doesn't flex office quickly.
You would like it to be whether it's the commodity the delivery, which is rail or chemicals, which is to control.
The emissions.
Now when that happens.
In a normal circumstance, we will use that.
Incremental generation to serve our month to month or customers that are on their variable pricing.
Now when we are constrained when we cannot flex saw because of the supply constraints that we have to go to market and and procure at higher and higher prices.
Which means that we have to make a decision how much of these higher costs, we pass through our customers keep in mind that we are balancing here margin stability.
And retention, so and one of the objectives that we have when we see the solid increases short term solid increases we don't want to cause of bill shock for our customers, we want to make sure that we.
Maintain that we pass some of the costs, but not all of the costs, obviously in the mid and the long term you can pass all the costs, but in the short term.
You really want to avoid deal shocks because if you lose the customer Youre also going to show.
Spend money in acquiring back the customers. So that's why this is a very deliberate this is a balancing act between.
Margin stability and retention now in terms of the duration of these I expect this to be.
Primarily in the first half of the year I think this will ease off in the second half because supply chain at the coal supply chain will respond to.
To increasing pricing levels.
Now to your question around realize on a realized most of these right now is on realized but.
Because these are month to month customers. So.
We have some levers to mitigate the impact I mean, the first one is obviously.
How do we optimize our coal generation should we be looking only at running when you have really high margin hours and then backing down in low margin hours, we are in constant communication.
Uh huh.
And testing the market in terms of our retail pricing.
Our strategy and priorities.
I mean, the other lever is direct energy synergies and we're going to continue looking at if we can expand our direct energy synergies and then finally as you mentioned I mean this is a very evolving story. So things can change fairly quickly just like the entire system moved up in the back of natural gas.
It can come back down to more normal levels and therefore these will these constraints will ease.
And we'll be back to a more normalized.
I guess environment. So I hope that these provide you that.
I guess that framework and that explanation on what we're seeing today.
Excellent.
Just to be clear about this basically it was more about the gas price increase and when you want them to ramp.
Per coal to gas switching your cold Jen such that when you think about the existing commitment that you had on rail et cetera. Those remain intact here. If you will coming into this this fall season.
In the next year and also if I can throw out just.
The third question is people quickly.
Can you just reaffirm here your expectations on 'twenty, three and otherwise I think I heard that already in the commentary you want to make sure. We're crystal clear on the transient nature of these factors here, especially as after 'twenty three.
Absolutely and I think that's what that's how we wanted to lay it out for all of you I mean, we.
Of these as transitory specifically for 2022, both some of the supply chain clause.
The outage in lifestyle I expect that to normalize in 2023, and that's why we wanted to provide you the earnings power of our platform.
On the normalized basis 23 and beyond.
Okay, we'll leave it there thank you guys.
Thank you Julien.
Your next question comes from the line of Michael <unk> from Goldman Sachs.
Hey, guys. Just curious you talked about a lot of these things being kind of abnormal or one off items.
Think about.
The opportunity set for investing capital.
Would you be willing to push out the date you get to the two two and a quarter to 275 net debt to EBITDA.
Use capital for either our gross initiatives that generates a really high return.
Or to use it to repurchase equity, which may generate an.
And equally higher even higher return how do you evaluate when the market gives you opportunities.
That may be transient in nature about the timing of wanting to do debt paydown versus the timing of other more accretive investments.
Yes, Michael I mean, we're always have to be flexible and.
Where all the opportunities that we have right I mean, we cannot be tone deaf to what is happening around the organization around our markets I believe that the value proposition.
Value proposition of NRG. It is this balanced approach of maintaining a strong balance sheet, returning capital to shareholders and growing the company now and that we have a tremendous opportunity of growing into.
These.
Sure.
Customer service, our consumer service opportunity that we see in the market. So we're very very excited about that now having said that I expect 2022.
To perhaps be a little bit lighter on the investing in grow as opposed to 'twenty three 'twenty four 'twenty five.
What that means is.
The business is our business that is generating tremendous excess cash.
Over $1 $6 billion.
We're going to be using our capital allocation principles, which is going to be returning capital to shareholders and growing.
But since we're going to be only deploying I would say a smaller part in 2022 I think you should expect.
Our share of returning capital to be.
Bigger than the 50% that we have indicated in the past. So that's how I would think about it now we continue we remain committed to our two five to $2 75 by 2023, and we expect to achieve that through growing our EBITDA and we grow the EBITDA by.
Executing on the direct energy synergies and now we.
The incremental growth EBITDA that we can generate so yes.
Yes.
That's how I would frame it Michael obviously, we'll remain flexible we will remain opportunistic and we are not going to be tone deaf to what the opportunities that we will see in the market.
Got it how do you think about for the 2022.
Cash available for acquisition for per allocation.
About when you would make the decisions on the other 50%.
Well I mean, our plan would be to provide you a lot more clarity in the next earnings call.
We would have at that point identify what goes to growth investments and what what we're going to do to return capital to shareholders, but I think I hope that the number that we provided you today gives you a pretty good idea in terms of the magnitude of the excess cash that we have and where are we lead.
And where do we see the opportunities to create value I have said in the past I believe that buying back our shares at deep discounts creates value for our shareholders. Since I took over as CEO, we have bought back close to 25% of all the shares outstanding.
So I mean this is something that we're going to continue doing is part of our value proposition and we're going to remain opportunistic about.
Got it and then last question I'll be quick here just curious when the board and we can look at the various financial metrics in the proxy that outline kind of.
The goals of the company, but just curious when you have conversations with the board what tends to be most important EBITDA growth free cash flow per share growth or is there. Another metric we should think about.
Well, Michael I will tell you.
It's always free cash flow per share growth because.
That's what matters to our shareholders the per share metrics, and we've outlined a 15% to 20% free cash flow per share growth in our five year plan I think that's very very compelling we have the excess cash to execute on that both in terms of growing the numerator.
And then reducing the denominator, while maintaining a strong balance sheet. So I think this balanced approach serves us well in the long run I mean, perhaps in the short term may.
There may be other things that people want to do but I am looking at long term value creation for our shareholders here.
Got it. Thank you guys appreciate them or ECS.
Thank you Michael.
Your next question comes from the line of <unk> from Guggenheim.
Hey, good morning, guys.
Good morning.
We're just starting to sort of sort of beat on this a little bit, but I just wanted to get a bit of a stronger sense im still getting questions here on the.
The 'twenty two guidance walk.
Is the normalized 22, EBITDA before transitory cost kind of a fair run rate target as we're thinking about future years and sort of the significant coal supply chain cost.
Can maybe mitigate if this isn't a short term headwind I mean, why assume this as transitory, especially if the gas curve has longevity.
And then the Texas ancillary service charges and bucket two what are those exactly again.
The ancillary service was aircraft instituted a short term.
Increasing ancillary is to maintain the reliability of the system.
Chris do you want to provide a little bit more specificity around that before I go into that but before I pass it on to you I just wanted to make sure that.
Everybody understands our run rate, we actually have it on slide eight we have normalized that to around 232 billion and we say that transitory because.
Terry supply chain.
Is when you are flexing up your generation your coal generation the supply chain takes a little time I think about mining railroads that are.
Allocated to to call and chemicals, So you can while there.
While the plant can.
Flex off fairly quickly a supply chain that has been sized for the type of generation that we have experienced over the past five or six years.
It doesn't flex solve that quickly. So that's why I said, it's going to take a little bit of time I expect this to be in the first half of the year. I think this is going to ease off in the second half of the year.
That's why I refer to them as transitory, but Chris can you just go into detail around the ancillary services.
Sure.
Moved up responsive a little bit couple of hundred megawatts, but the big change that they made in the middle of the summer last year was they moved up the non spin requirements and that was by a factor depending on the hour and the day kind of between 2% and <unk>.
That's been the bigger of the two impacts in terms of the ancillary changes that they've made so far now we're still waiting to see rate PUC T has had working sessions and we've seen a memo from chairman Lake detailing his thoughts there's plenty of debate about what do we want to do on ancillary is going forward and certainly on the <unk> parameters.
Two Brattle group is coming in and they're going to study various combinations of at what part of reserves should you start.
Our D C to kick in at what slope should it climb and where is the cap kind of a thing so.
There's a lot of moving pieces right now in terms of market design that should be according to the schedule that ive seen nailed down by mid to late December I think that they are planning on posting something around December 20th, which which will be kind of their pick of our D. C changes.
Whether or not they have a winter fuel ancillary in there which is different in these two ancillary as I'm talking about what level. They want for the non spin and then also we've been.
Then.
Advocating for and LSE obligation that would phase in over a couple of years in.
Chairman Lai concluded that in his memo too so there's a bunch of market design stuff.
Moving that we will be getting to here as we get as we get to the end of the year and now Sean just to be.
So to be clear I mean, some of these ancillary costs that Chris was describing.
Lot of them, we put them through already for our customers some of them.
Like I said, we don't want to create a bill shock so in the medium to long run all of these ancillary as well.
To be pass through to customers, but in the short term we are managing these bill shock versus.
Stability of.
Of margin and and our retention numbers. So just keep that in mind Thats why I call. These transitory and over the medium to long run.
All make it too.
We pass it up.
And then just lastly, you added.
<unk> 500 megawatts of Ppas in ERCOT last quarter.
Maybe just unpack this a little bit whats behind this what are you seeing in the market right now and more importantly, some of these input cost pressures and specifically the renewable space could that potentially impact your future PPA opportunities. Thanks, guys.
So I mean once again I mean, I think thats a short term we are seeing.
So some are supply chain issues in the solar particularly in solar.
We are going to be constantly in the market running rfps to get solar solar wind and we're actually now looking at batteries vacant.
They continue to be very attractive from an economic standpoint.
We are probably taking off hour.
Our FIFA the pedal just because it's.
We are aware of the supply chain. So we are slowing down a little bit on these ppas, we want to see how these works out and then re engage I think that's the prudent thing to do I am I am very pleased with where we are today in terms of the.
The ppas that we have been able to sign in the economics that we have been able to achieve but I also recognize that there is a transitory issue right now with supply chain.
I don't want to be signing Ppas are the higher cost that we've been very disciplined in terms of where we actually execute these ppas. So my expectation is that it has slowed down over the past couple of months I think he is going to continue like that and we're going to start picking up when we start seeing the supply chain issues you saw a little bit great. Thanks, guys.
I appreciate it thank you Sean.
Your next question comes from the line of Steve Fleishman from Wolfe Research.
Hi, Good morning, good morning, Steve.
So just.
Another.
Rising cost as gas prices, which is also lifting up power prices.
And.
Don mentioned that pressure.
Pressure in 'twenty, two is that something that you feel like youre able to.
Pass along.
Customers essentially or.
Or is that also because there is some lag in.
Things and everything like how much is that additional pressure.
Yes, I mean, so think about this in two buckets now that we have a power and the gas business. So let me start with the gas business for hospitals as the newest.
For all of you on the on the our ownership our gas business think of it as a logistics business, we don't take commodity price risk every time, we sign a customer we back to the market with natural gas.
As part of that we get a tremendous amount of.
Call it asset pipeline storage LDC relationships, so that infrastructure.
It gives us the ability to to manage some of the volatility that exist less on the price of Nymex and more on the basis. So I feel very confident that our team has the ability to manage because of that very large.
Infrastructure network natural gas network that we have so I'm actually quite comfortable with.
Exposure of a higher natural gas prices on our natural gas business and then on the power side I think we are.
I already described it Steve in terms of higher gas prices you have this issue on the coal constraints, but in general I think of this almost as inflationary pressure, we can pass it through.
And we actually chose to pass some of that in the long term and the medium for longer you pass everything and he's going to be a balancing act between.
You don't want a cost of below it build a sharper our customers at the same time, you want to manage stable margins and good retention numbers, which are very very compelling on our business. So that's how I'm thinking about it and that's why.
If it's a structural.
Structurally higher gas prices I don't have a big issue with that I mean, the issue. It always comes when gas prices move up very very quickly and then you have these constraints on the coal supply chain and Thats what were addressing these here is transitory.
Okay, and then just more explicitly asking I think what others may be where earlier.
So obviously when you look at debt to EBITDA targets.
The EBITDA is lower.
Yes.
Perfect.
Meaningfully where you are so just as 22 EBITDA guidance.
Are you.
Going to be targeting off of that are you just going to say this is.
This is.
Not normal.
Just going to ignore it.
No I mean, I think you need to recognize that 'twenty two is a transition year and our commitment is achieving this in 2023, which we expect to go back to our normalized earnings so when youre thinking about our trajectory from where we are today to how we get to 2023.
You always have to take into consideration.
On anticipated.
Issues that we're seeing on the on the supply chain. So we.
We remain committed for 2023, we believe that we can get to those saw credit metrics by growing into them now not only direct energy synergies, but also additional growth in EBITDA that we that we can execute on.
And that's how I think about it so I wouldn't be I wouldn't read too much into the number in 2022 I think what is important is our objective in 2023.
Okay. Thank you.
Your next question comes from the line of Angie <unk> from Stifel.
Thank you.
So I wanted to start with a question about.
Buybacks.
They need to support the stock clarity.
Okay, well I understand that the board usually makes those decisions.
Fourth quarter.
Well.
Argue that given that todays update.
An earlier decision would have been badly needed.
Your peer made some.
Decisions on that on that front.
You guys.
It seems like most of the money that would go to the.
Buybacks is not going to materialize anytime soon and again there is a need to support the stock. So would you be open to some.
Somewhat unorthodox.
Solutions here to again accelerate the buyback.
I don't know either use a revolver or something else.
So point to stop now.
Well I mean.
As I said Angie is the first thing is I think the value proposition of NRG has always been this balanced approach between our strong balance sheet.
Returning capital and growing.
So what youre, describing is basically levering up to buy back stock and at this point that's not our our focus our focus is on continue executing on this balanced approach, but like I said I mean, we are.
Generating tremendous excess cash in the next 13 months.
We're going to be deploying that consistently with our capital allocation principles that already gives you an indication I describe it as the floor on share buybacks.
Because you can clearly see the $1 seven $1 6 billion of excess cash you can look at that's a 50 50 then.
What the dividend number is you can you can be confident that the share buybacks that gets us to the 50% that's.
You should think of that as the floor and then on the opportunistic deployment of the other 50%. That's what we're talking about right. I mean, that's what we're going to be flexing up we want to be opportunistic about it but I also want to.
I wanted to stay true to the value proposition that we have indicated to our shareholders, we're not going to be tone deaf LNG and we're going to evaluate all the options that are available to us and I think our record of execution that should tell you about.
If there is a deep discount on our shares we will we will react accordingly, and we have done that in the past.
Okay and then the second question so.
My initial take when I read the press release was that all of these issues.
Weighing on that two points of view to normalized EBITDA related to generation, but really if you listen to them.
The discussion so far on this call. It seems like all of them are retail related and again I know that you are no longer differentiate between generation and retail, but it seems like you.
You are.
You purchase an attempt to protect those retail margins.
All of these charges that we're talking about.
Should have been weighing on the profitability of the retail book and again I understand you don't that separate but.
I mean.
Again to me it just seems like there is.
A weakening of the profitability of that retail book for various reasons, some of which you cannot control.
I just feel like you are attempting to make it seem like it's on the generation side when it that seems like it's more on the retail side.
While it is stands from the generation side, because when you actually if we actually in a normal circumstance. If our cogeneration was able to flex up we always plan to use that additional megawatts to cover our month to month customers. We don't have it in the market indicate that we should.
But because we have these constraints we cannot flex that up we have to buy it as we played in the past so I wanted to.
I wouldn't characterize it as a retail thing I mean, I think that's the.
I am trying to connect the tools. So you understand the reason why this is happening it stems from the generation slide, but if I actually had a heat rate call option on gas I wouldn't be having this conversation right. I mean, we wouldn't be able to flex all of those megawatts on serve our month to month customer so.
Just wanted to be careful that.
I actually wouldn't characterize it as a retail concern.
This is basically starts with a.
A.
Uh huh.
Nishu on coal supply that impacts our our generally our cogeneration economics, which then impacts how we were thinking about managing those month to month customers in your pricing.
<unk>.
Every month.
Continuous basis.
Okay. So just one follow up here.
I guess.
I don't quite understand that the hedging strategy here, because I would've thought.
Your you had your retail book using economics generation at the time of the hedge and so in light of the higher power prices. The economic generation from coal plant has co plants has increased.
We have many gas plans, but there is not much of a detriment.