Q3 2022 NRG Energy Inc Earnings Call

November 7, 2022

Yeah.

Good day, and thank you for standing by and welcome to the NRG Energy Inc.

Third quarter 2022 earnings call at this time, all participants are in a listen only mode.

After the Speakers' presentation, there'll be a question and answer session.

Ask a question during the session you will need to press star one one on your telephone. Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Kevin Cole head of Investor Relations. Please go ahead.

Thank you Catherine good morning, and welcome to NRG Energy's third quarter 2022 earnings call. This morning's call will be 45 minutes in length is being broadcast live over the phone or via webcast, which can be located in the investors section of our website at www Dot NRG dot com under presentations and Webcasts.

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.

Everyone to review the Safe Harbor in today's presentation as well as 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. Please.

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 you Kevin Good morning, everyone and thank you for your interest in NRG.

I'm joined this morning by Alberto format, All Chief Financial Officer also on the call and available for questions. We have at least have a killinger head of home, Rob Calvert head of business and market operations and Kris malls, our head of competitive markets on policy.

I'd like to start with the three key messages for today's presentation on slide four.

We're narrowing our 2022 EBITDA guidance at the bottom end of the range as we indicated on our last earnings call and we are initiating 2023 financial guidance in line with our Investor Day plan.

We continue to make good progress on.

Our strategic priorities and have now completed the initial phase of our test and learn program.

The insights we have gained from these process will inform our next phase of growing from our core energy business into adjacent essential home services.

Finally, as I committed to you we are announcing our 2023 capital allocation plan, which includes an incremental $600 million share repurchase program.

System with our long term capital allocation principles.

Our business performed well during the third quarter, which was characterized by extreme price volatility and record load in our key Texas markets.

I am very proud of our team, which once again achieved another quarter of top decile safety performance. Despite these challenging market conditions.

As you can see on slide five we delivered $452 million of adjusted EBITDA.

Entirety of the change compared to last year was previously identified with 60% coming from asset sales and transitory impacts and 40% from the unplanned outage at our doubled UA Paris facility.

With these results we are narrowing our 2022 EBITDA guidance to the bottom end of the range.

Alberto will provide additional details in his section.

We also made good progress on all our key strategic priorities.

We have now achieved our direct energy synergy target for 2022 and remain on track to achieve the full run rate of $300 million by next year.

We continue to optimize our generation portfolio by retiring on economic fossil fuel plants, monetizing noncore assets and partnering for brownfield development.

As part of this effort, we are selling the Astoria slide for approximately $200 million in net cash proceeds.

On our growth program, we continue to focus on cross selling power and gas to our existing customer network.

And with respect to our test and learn program. We have gained significant insights and are ready to start executing on our planet.

Will discuss in greater detail later in the presentation.

We also have made good progress on our $1 billion share repurchase program for 2022 with $603 million completed to date and $397 million yet to be completed.

Finally.

Today, we're introducing 2023 financial guidance of $2, two seven to $2 $47 billion of adjusted EBITDA and $1 five two to $1 $72 billion of free cash flow before growth in line with our Investor day outlook.

As I mentioned to you weather conditions in Texas, where extreme this past summer with FERC of surpassing the old peak demand record 39 times.

Driven by record heat in the early part of the summer and a strong Texas economy.

As you can see on the bottom left of the slide six power price expectations, which are shown in the light blue bars, whereas wide as I have ever seen them.

This volatility was the result of record low coupled with uncertainty around production from non dispatch a bowl of renewable generation.

Importantly.

He took record sustained heat couple.

Coupled with low renewable production to materialize into the high real time power prices, we experienced in May and July .

It is worth pointing out that even during these scarcity periods, we never triggered an emergency events.

Not even one.

This is a testament.

The Texas <unk>, the strong and working as intended with enough capacity to meet current and future demand.

Turning to the right hand side of the slide.

We continue to see strong demand from our customers with no notable increase in bad debt levels.

Retention has also remained strong driven in part by our unmatched insights to pricing and customer preference, which enables us to navigate periods of high price and high volatility.

We have also been successful in extending the average term of a new Texas customer contract to two years.

This extension is good for both our customers and our shareholders.

Have any of that stability and predictability to customer bills and our earnings.

On the supply side.

Our generation portfolio performed well during the summer while the team manage the impact of the Wi parish unit outage.

We were able to expand our maintenance program ahead of the summer, which resulted in better operational performance.

Looking ahead and as I discussed in our last call, we will increase maintenance capital in our plants.

Given higher power prices.

Now I'd like to spend some time talking about our ongoing efforts in moving closer to the customer.

We introduced the diagram on slide seven during our Investor day to capture our vision of the smart home.

As you can see from the table on the right.

We have made substantial progress in laying the foundation to execute on our vision to become the leading provider of essential services at home.

During the year, we evaluated over a dozen adjacent offerings and engage in multiple partnership pilots for Evs home solar and other home services.

By starting small it allowed us to stay nimble, while gathering critical market intelligence to inform how we approach these new customer offerings.

The result of these programs helped validate our assumptions and.

And provides confidence in how to execute our customer centric strategy.

Now.

Let me put a finer point on our key findings on slide eight.

First the.

The Internet of things this year and is enabling the smart home opportunity.

People are connecting new devices every day.

With an average of 2025 devices per home.

These number has more than doubled since 2019 and continues to grow rapidly.

Resulting in multiple interfaces that don't necessarily interact with each other.

Customers want simple connected and customized experiences.

It is clear that a single interface for the home is of increasing importance and customer attitudes around these services are shifting from nice to have to need to have.

Next.

The electrification of the economy through smart technology, and clean energy choices is real.

We are seeing an increasing number of devices and appliances connected like HVAC water heaters battery rooftop solar and other.

In addition to having greater penetration of electric vehicles.

Finally customers are demanding access to cleaner affordable and more resilient solutions.

This is in part driven by a desire to be a part of a more sustainable future.

Reinforced by a need for resiliency in the face of more extreme weather.

And importantly.

This has been accelerated by advancements in technology and policy.

With this integrated ecosystem at home there is a significant value opportunity as you can see on the right hand side of this slide.

For NRG.

We can offer adjacent products and services that leverages, our existing energy operating platform.

Allowing us to access cost savings and provide superior customer experience.

This advantage means brother insights into how customers interact with their homes.

Which translates into additional margin opportunities.

And increase brand loyalty.

Now turning to slide nine in 2023.

We will increase efforts to grow our bundle essential products and services.

Through a mix of existing offerings.

<unk> partnerships and vertical integration.

All of them aimed at making NRG, the leading provider of essential services at home.

We are also providing our capital allocation plan for 2023.

Which is in line with our long term capital allocation principles.

Our plan is to return 50% of our capital available for allocation to our shareholders.

With an incremental $600 million share repurchase program and an 8% increase in our annual dividend.

For the remaining 50%, we're allocating $331 million to identified growth investments.

And reserving $620 million to be deployed throughout the year to the highest return opportunity between growth and share repurchases.

So with that I will pass it over to Alberto for the financial review.

Thank you Mauricio.

I will now turn to slide 11 for a review of the third quarter results.

NRG delivered 452 million in adjusted EBITDA at $350 million declined versus prior year.

Similar to our Q2 results this year.

Zero already a decline was the result of a previously announced the variances.

As shown in the chart on the bottom left side of the slide $119 million of the decline was from asset sales in retirement.

So the transitory items included in our initial guidance.

The remaining 125 million variance is almost entirely due to the replacement power costs related to the unplanned produce UNITAID outage and maintenance maintenance expenses in the same unit for which we expect reimbursement from the appropriate insurance company in Q4 of this year.

Texas, the adjusted EBITDA declined $263 million compared to the third quarter of last year.

July was the second hottest month on record dating back to 18, 95, which drove extreme price volatility and higher LOE.

These amplified the financial impact of the unplanned outage given the need to replace these power with a mix of value or cost internal generation in market purchases to satisfy the weather driven increase in demand.

Q3 results in Texas were also impacted by higher operating costs in the form of increased maintenance expense.

Approximately half of the increase was could work at W. E product Shunyi Pete.

That will be reimbursed by insurance in Q4, and the remaining increase from our maintenance program that help ensure strong reliability of the rest of the fleet through a volatile summer.

Starting to the east West another segment the year over year decline of $52 million was primarily driven by the reduction from previously announced asset sales and retirement and supply chain constraints.

Now after taking those items into account adjusted EBITDA increased by $111 million.

Through Q3 of 2021 from increased revenue rate natural gas optimization and operations are comparable.

Briefly referencing yesterday to results NRG has delivered adjusted EBITDA.

The one on 1.390 billion, a $671 million decline versus prior year. The drivers of our year to date results are similar to that of the quarter with permanent and transitory items.

Plant outage of <unk> date, and increased maintenance expenses driving the decline versus prior year.

The free cash flow before growth for both Q3 and year to date results have been impacted by reduced year over year EBITDA level as discussed earlier.

And then increase in net working capital working capital requirements increase progressively during the year due to higher.

Gas and power prices and in Q3 to the combined effect of higher seasonal power receivables and natural gas inventory.

We have also seen a $32 million increase year over year in maintenance Capex driven entirely by spending 30 paid the limestone and DWA parish unit based facility.

This increase in spend will be recovered by year end.

Crew property insurance proceeds.

They want to update you on the achievement of direct energy synergies.

We have achieved our full year target of $50 million during the quarter and continue to remain focused on achieving the full 300 million run rate next year.

Now moving to the full year 2022 guidance, we are narrowing our adjusted EBITDA range to $1 95 billion to $2 two zero to $5 billion.

In line with my previous comment for success in partially offsetting the 220 million negative impact compared <unk> date unplanned outage at this time, we are at the bottom of the rig.

Now given the implied stronger Q4 results, let me provide additional details.

We are expecting over $200 million increase versus prior year.

Just 100 million coming from direct energy synergies insurance proceeds for a limestone and perish.

Other general cost reduction.

The remaining coming from power and natural gas optimization opportunity.

Leading gas to make Alberta natural gas.

<unk> fully available in Q4.

Now turning to 2022 free cash flow before growth guidance.

We are reducing our full year guidance of eight to 952 1 billion.

With one third of the reduction from the narrowing of the adjusted EBITDA guidance and two thirds from the temporary increase in working capital from higher prices and inventories.

And so as we head into the winter season, we made the conscious decision to increase our inventory levels for both natural gas and coal to provide contingency against the transportation challenges and the potential for extreme winter weather drive.

Driving a $50 million reduction in the free cash flow for the year.

We have captured the reversal of these higher inventory quantities in our guidance for 2023, which I will discuss later in the call.

In addition to the higher inventory quantities prices for natural gas and power have also increased since the last call, resulting in an additional value of our inventories and net receivables for approximately a $140 million.

Which will be reverse that with lower commodity prices.

The combined 190 million impact of these factors.

<unk> reduced expectation for 2022.

Free cash flow before growth.

I will now turn to slide 12 for an update on our planned 2022 capital allocation.

<unk> with past practice, we have highlighted changed from last quarter in blue.

Starting from the left we have updated the midpoint of our free cash flow before growth guidance by $290 million 100 million CRO lowered EBITDA guidance and 190 million from increases in working capital.

As you know cash generation is a key objective for energy and our team has been focused on offsetting these negative impacts we were able to offset a significant portion of those reduction by capturing 220.

$12 billion of net cash proceeds from the sale of Astoria, allowing us to utilize and distribute capital consistent with our equipment.

Next we expect to capture an additional 6 million from <unk> related to additional recovery.

Next we continue to make progress in executing our $1 billion share repurchase program at the end of October we have $397 million to be completed by around here.

And finally, we are committed and Dominion robotic dream Capex spend related to our $2 billion growth plan, which when coupled with our investments other investments.

<unk> 200, ADC, so capital available for allocation.

Moving to 2023, adjusted EBITDA and free cash flow before before growth guidance. We are pleased to announce that our expectations for 2023 in line with previous patterns.

We are introducing strong 2023 financial guidance of $2 27 billion 2.2 to 447 billion for adjusted EBITDA and free cash flow before growth of $1 52 to $1 $72 billion.

EBITDA guidance includes the full year impact or asset sales and other fair many banks that we capture in our guidance for 2022.

Although we expect some continued impact from cold constraints, we were able to offset those and the other transitory items that impacted our 2022 guidance.

I will now turn to slide 14 for the introduction of our 2020.

One $9 billion capital allocation plan.

As Mauricio mentioned in his section our capital allocation is directly aligned with our long standing principles NK cadence both allocation today, we are starting the conversation by allocating 50% to shareholders through both dividends and share repurchases.

And allocating a portion of the 50% opportunistic back to identify.

Leading 35% to be allocated throughout the year to the highest returning investments while maintaining a strong balance sheet.

Now moving left to right, we start with the midpoint of our free cash flow before growth guidance range.

The range of $1 62 billion plus $286 million of unallocated 2022, copper capital available for allocation totaling $1 9 billion in capital for allocation.

Next we have allocated $220 million identified toward our growth program and $111 million for other investment to fund additional investment to support the integration of the energy innovation projects in multiple acquisition.

Our return on capital, we have allocated 347 million through dividends.

With our 7% to 9% annual dividend per share growth target and announcing a new share repurchase program of 600 billion to be executed immediately following the full execution of our current $1 billion program.

Finally, this leaves $628 million for 2023 capital available for allocation to be allocated throughout the year. We look forward to providing you with updates to our progress throughout 2023.

Back to you Mauricio.

Thank you Alberto I wanted to provide some closing thoughts on slide 16.

We have made significant progress across all of our key priority this year, including the direct energy integration.

Portfolio optimization.

In our test and learn program.

And returning capital to shareholders.

Credibly proud of the team's efforts and focus over the last 24 months on executing our strategy.

As we look into 2023 and beyond we remain on track to achieve our long term goals of high grading our earnings quality by expanding our customer lifetime value.

And providing a compelling annual total return to our shareholders of 15% to 20% free cash flow before growth per share and 7% to 9% annual dividend growth.

Our platform is well positioned to deliver strong and predictable results and create significant shareholder value as the leading essential home services provider.

I look forward to updating you on our progress along the way so with that I want to thank you for your time and interest in NRG. Catherine we are now ready to open the line for questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone please standby, while we compile the Q&A roster.

Okay.

Our first question comes from Julien Dumoulin Smith with Bank of America. Your line is open.

Hey, good morning, Raytheon deemed pleasure to be here. Thank you guys.

Hey, good morning Julien.

Hey, good morning, I hope the parade made things Okay. This morning.

Well.

As Rob said traffic a little bit but.

There is nothing like a great celebration after that win.

Absolutely, absolutely well, hey, listen I, just wanted to start off strategically here.

We've been at it for a little bit here in the transformation power prices remained relatively higher how do you think about the state of the generation portfolio. Overall, how are you thinking about an evolving your decision tree on that obviously, we saw a story here in the quarter, but even beyond that how are you seeing things.

That's tied to a driven by IRR or otherwise here in terms of optimizing your generation portfolio.

Thank you Julien So let me take a little bit of a step back because obviously you need to look at the generation portfolio in.

In light of our integrated retail platform right. I mean, we have said that the goal of the generation portfolio now is to help better supply and serve our customer needs.

So when you think about our generation portfolio I think about our overall supply strategy and that is one where we have decided to diversify our supply.

So.

Some internal generation to have.

<unk>.

Third party Ppas, and obviously market purchases all of those three things make our.

Supply strategy now with respect to the generation portfolio as you mentioned higher power prices have led us to basically self insure.

To have greater reliability, because the value of each megawatt is much higher today than it was just 10 months ago.

Higher power prices and higher gas prices, so thats why youre going to see an increase in our maintenance capital because we want to make sure that.

We have greater reliability on our fleet, obviously, we're always optimizing our supply and.

Right now the value that it provides for our integrated platform.

<unk> is very high but if there is there is always an opportunity to optimize that generation portfolio, depending on market conditions and the opportunities that we see in the market.

Got it alright fair enough I'll leave it there let me pivot if I can to the other side of this equation and that is just the guidance and sort of the cadence of the guidance, but obviously the implied fourth quarter as reasonably elevated.

And certainly that despite some of the ongoing pressure points.

That we saw in third quarter can you talk about what that implies for the cadence of results in the 'twenty three here.

Do you think about the first half how do you think about third quarter going forward given the sort of evolution in your business model for the third quarter.

Into the future be perhaps a little bit more depressed relatively speaking.

You just elaborate on what the implications are maybe that's at our Alberta a question here.

Yes, well I'll turn it over to Robert but let me just give a little framework I mean, I think the big takeaway I hope for everybody is that in 2023, we go back to.

Two the guidance or the outlook that we provided during our Investor day, Our EBITDA guide us in our free cash flow guidance goes back in line with what we provided to you last year, we're turning the page.

And we're just excited about.

The opportunities that we have.

To continue growing our business, our core energy business, but importantly, adjacent products and services with respect to the seasonality of earnings I think you should expect.

Going back to where we were perhaps in 2021, but Alberto can you provide additional insight here, yes, I think more than looking at first half versus the second half I would say that probably.

You will see the two critical.

Quarters are being the second amendment.

So you will see probably more balanced and more in line as Mauricio said, we did pause and potentially even the fourth quarter that the <unk> higher than normal so I would say.

<unk> pro.

Probably get back to 2021 profile is what we should expect.

Okay excellent and that includes <unk>.

That's inclusive of some of these coal dynamics.

Annualized here in the first half.

And some of the outage dynamics still net net net 21 kind of profile.

Yes, I mean, if you think about some of these coal supply issues, we were very transparent last year, when we introduce them.

And the team has done a tremendous job in mitigating these call supply chain issues, particularly in Texas.

We continue to have some things in the east and the team is just working through it but.

I mentioned to all of you when we introduced these these are temporary.

The coal supply chain was significantly stretched.

Because of the very rapid increase in natural gas prices and I also said with time.

<unk> coal suppliers on our railroad providers scale up again there.

Their operations and that's what we're seeing in outerwear.

With our key suppliers.

Got it alright, guys I'll leave it there it goes throughout this year.

[laughter] goes through us.

Thank you Julien.

Okay.

One moment.

Our next question comes from Shar <unk>.

Rosa with Guggenheim Your line is open.

Hey, guys. Good morning, it's actually James for sure Congrats and thanks for taking our questions.

Hey, good morning.

So I guess, starting with the 2020 capital allocation plan.

What are the trigger points at the timeline expectations for the balance of the uncommitted capital.

Potentially looking at more growth as we get through the year or is this just simply a function of waiting to see how the business performs through the first half.

Well thank.

Yes, so two things the first one is as I committed to all of you. This year, we're actually announcing both our earnings guidance as well as our capital allocation. If you remember in the past we used to.

Provide the capital allocation in the fourth quarter earnings call. So the first thing is.

We're now providing this tool.

Much earlier than in the past the.

The second thing is always our capital allocation, we try to the cadence Hopkins with a cadence on when we generate cash.

This is not going to be any different but as I said on my prepared.

Marks.

The additional excess cash that we have available for allocation will be allocated throughout the year.

Based on the highest return opportunity that we have 2023, we start executing on our plan, we're evaluating opportunities, but if these opportunities don't yield.

Highest return compared to a share buyback then we will allocate that for share buybacks just that simple.

Okay.

And then I guess.

Kind of a similar question on the growth Capex.

Should we think about the timing and shape of any EBITDA accretion as you ramp up that's been something that we.

Just more color on in steps.

The coming quarters or just any color there.

Yes, well I mean remember that as we execute on our plan. We always have three options, we either build them or grow organically, we partner or we.

And by that we acquire something so.

In the.

Build organic growth there is always a lag between when you make the investment and when you receive some of those earnings.

And in the.

Similar to the partner and I would say the acquisition that really accelerates earnings immediately right. So we're right now evaluating options in our both of our business model and our go to market.

The one thing that I will say is.

So I think about the growth there are some there are some areas that well.

First of all it's a very narrow scope and I provided that scope in the slide that I presented to you today.

The second thing is there are some areas, where we know that we're not going to go with.

The business model is such that we will partner for example home solar we're not going to go into the entire value chain of home solar we are going to partner, we have a lot of lessons learned here and I have been very clear about that so the pace of which the earnings are going to come in it is really going to be dictated by how do we.

We execute our strategy and we go to market itself.

Will be provided to you.

In the coming quarter, so as we start executing those.

I will leave it there. Thank you very much guys. Thank you James.

Thank you. Our next question comes from Angie <unk> with Seaport. Your line is open.

Thank you so first.

The IRA inflammation reduction act, so I see that there is.

$45 million increase in cash taxes, and you're at 23 free cash flow guidance.

So I know that we're still waiting for the.

The IRS to provide some more clarity on cash taxes, but can you talk in general how you see it over the next couple of years.

Good morning, Angie I'll pass it to Alberto Yes first of all Andrew Let me say that the increasing the taxes the tax payment that you see for 2023 are really due to two factors one that we are forecasting the higher.

A higher net income for the year, and therefore higher federal and state taxes and the other pieces, we got a refund for the day on the <unk> side in 2022 that will not happen in 2023, and therefore, they are more or less and for now that's explained the increase year over year, we have from the IRS.

We have factored in our forecast.

The impact of the 1% taxes on the.

Share buybacks are wet.

There is no impact for the idea for the minimum tax because of this moment, we don't have any indication that the payment based on 2023, and a peak and will be done in 2023, and so when we have more information regarding when the spin if any.

Then we will we will update you.

In General I would say as we have said in the past the vast.

It's very difficult to do forecasting based on the level of information that we have but so far all the indication is for relatively modest impact in grocery as a temporary impact that will recover.

After a few years as soon as we get more detail, we will be more precise.

Okay. Thank you and then separately also related to the same legislation.

So I'm assuming that you are seeing some pickup.

Renewable power growth, especially in Texas and I'm, just wondering if that means that.

You should.

Soon announce some additional ppas.

Given that the availability of especially solar assets should increase in tungsten.

Sure.

Rob drove five LNG, Hey, Angie good morning, So when you think about the IRR youre spot on Friday It provides clarity.

To the renewable developers.

We are in the market all the time right. So it's not we've been kind of at this for a while.

So theres a couple of factors in here that we think about one is availability for them to get their panels on the ground and get them installed it's the developers and the pipeline that they are kind of working through and then the IRS provides them some clarity around their financing so what I would expect.

I haven't seen it yet, but I would expect that some of this clarity starts coming into more certainty around offers in the us and as opportunities show up we'll lock those up as they makes sense for our portfolio, but you are right. The iras should push solar wind and battery development across all markets.

In the U S and.

And particularly in Texas when you look at the.

The plan.

Aircraft provide somebody we're tracking I mean, most of the new generation is really renewable energy. So this should help accelerate.

We have this capability pretty well.

It's a well oiled machine, we have been executing before there was a slowdown in our expectation is it's going to pick up and we have great visibility as to when that happens and also the economics around it.

Okay and my last question is the.

The maintenance expense.

Capex in 2023 so.

I understand that.

<unk> spending more money in light of the higher level of pellet places, but is this a level that we should actually expect going forward is this just the.

One off year with some major maintenance.

Some something that was put forward or catch up from previous years.

Well I mean, I'll ask Alberto to address some of it might take remember 2023 has two big components right. I mean, the first one is the <unk>.

Money that goes into.

The year to date W Parish and then the second one obviously is the increase in maintenance because we want our self insure given that.

Every megawatt is more valuable with higher power prices I mean, that's something that the market is going to dictate what I will tell you. It's an incredibly proud of the team that is solely.

Both.

On our generation fleet.

During years, where gas prices were very low they tighten the belt. They adjusted the maintenance. It was the right decision because not every megawatt south valuable cities today.

We very quickly pivoted to that and as I mentioned, we put some capital.

At work before the summer that yielded really good.

Good results.

We're going to continue to build out so I don't know if theres anything else, yes, I just would like to point to two in the appendix of there is a page in which we are now to the impact on our maintenance Capex coming in 2022 from limestone and parish and also for 2023 long story short when you eliminate the impact.

Two of these.

Specific.

The capex that we spent.

You will see that there is around the $40 million to $50 million increase in the maintenance Capex and this is really due to the fact there is no reserve was mentioning that even given the current prices we think of that.

It is appropriate to increase the reliability of our fleet.

Basically casualty opportunities that the current price environment is opening to us.

Alright, thank you.

Thank you Angie.

Thank you and our next question comes from.

Michael Lapidus with Goldman Sachs. Your line is open.

Hey, guys congrats on a good quarter.

Thank you Mike.

I'm looking at slide 14, and I just want to make sure I understand some of this in a little bit of this may be more nuanced.

So the growth plan. The two 'twenty can you what assays that form one big asset or is it for lots of little things.

No it is.

I mean, this is really to support our test and learn.

So we have identified a number of opportunities and the scope of those opportunities are actually on slide seven.

Michael So when you look at.

Whether it is solar storage electric vehicles energy management protection security I mean that the scope is really around essential services and this is what we have been able to identify to that obviously, we're working through the execution of our plan and we will provide op.

As we are.

Throughout the year.

So let me kiss and this might be one <unk>. So the $2 20 in the growth plan and the 111 and the other investments.

Are these all like when I look through the three statements. At this time next year are they going to flow through capex or are they going to flow through cash from operating activities, meaning is it working capital or do some of these actually weigh on EBITDA until they start generating EBITDA.

Your guidance for EBITDA would be higher if you weren't getting if you weren't doing the spin.

No regarding okay regarding the other investment that these do not impact EBITDA.

I'll try to EBITDA when you look at the growth plans there is a series of initiatives and.

We will update you about what is going to be down or not but for the moment. It's still as Mauricio said, it's a series of different initiatives and depending on which one we would prioritize.

It will have a more of a capex impact or no.

Meaning some of the alright. So the 111 is all based on about $111 million is all capitalized and the $220 million. Some of it is capitalized and some of it is flowing through G&A, our O&M and therefore, I'm just trying to make sure because like I'm trying to think about recurring versus nonrecurring impacts on EBITDA.

So that is a very good question and what you. What you said is correct the 111 theyre announcing.

Back to EBITDA is two two anti there are some initiatives that could have an impact on opex and others that have any impact on capex and we will quantify that in.

In the next quarter.

Just to put a finer point here Michael.

And I want to highlight.

Or could impact right, but as you know we are in the process of executing on depending on.

How do we finalize the go to market will.

Any impact on whether it goes to the Capex and Opex. So that's as I say TBD to be determined Michael but we will provide that transparency as we start executing on the plan.

Got it okay. Thanks, guys I'll follow up offline.

Thank you Michael.

Thank you we have a question from David Arcaro with Morgan Stanley . Your line is open.

Hey, good morning, Thanks, so much for taking my questions.

Hey, good morning, David.

I'm wondering if you could talk a little bit to customer growth trends that you're seeing and any churn in the business are you still seeing kind of a flight to safety in this backdrop in this high commodity price backdrop.

Noticed that there was a slight decline in the total customer count versus the prior quarter. So I'm curious any.

Any information there.

Sure Lisa.

Thanks for the question David.

We're really pleased with our performance.

The team and the engine during a really volatile third quarter.

We did perform continued to perform in third quarter as we had year to date are better than our budget you may recall from prior discussions we do generally see customer attrition from large M&A, which was <unk>, which was very large as well as from small acquisitions.

We have done a handful of balance year to date, but the good news is we're performing better than expected on both CE and the customer book.

Our sales engine perspective, we are.

We have a very strong engine over performance in the quarter occurred in both our face to face and our digital channels.

And cross serve also performed very well during the quarter better than budget and from a retention perspective. We also are seeing really strong performance given the backdrop.

High prices from that.

Cost increases associated with the power to fulfill for them as well as the higher usage during some of the weather that we experienced so we're really pleased with the attrition during the quarter and looking forward to continuing to deliver for you guys.

And just I mean.

The team is also a fantastic job on.

Balancing customer account on margin and Thats, what we do everyday with a tremendous insights from our customers and as Lisa said.

Both our retention numbers on our bad debt numbers are pretty well in line and very robust and customer account is just a.

A result of a very intentional strategy around balancing customer account and retail margins. So I'm very pleased with the team.

Got it great Thats helpful. Thanks.

And then I was wondering if.

Maybe two quick ones, but does the 2023 outlook include business interruption insurance proceeds coming in I'm wondering how much that might be in the guidance and then maybe just a little more higher level or is there still more to do in terms of portfolio and real estate optimization with where the.

Where the business currently stands that's something you'll be looking at into 2023 as well.

Sure Alberto Yes regarding regarding the business insurance proceeds I can confirm what we said in the prior call and basically being negative impact appreciate in the first half of all of our 2023 will be.

Absorbed by the insurance proceeds that we our factory network.

And with respect to the portfolio optimization again I mean, this is something that we're looking at on a continuous basis. We haven't stopped I mean their story on sale on Watson is an example of what we're doing a couple of quarters ago, I said that we're going to move into evaluating brownfield development both in our mid.

West fleet as well as in Texas. The team has been working.

On looking at these opportunities and what I will tell you. It's also we're looking at potential partnering.

Opportunities because we want to make sure that we the capital that we use is.

This is the right structure I don't want to create friction in the system. If we don't have to so.

Both in terms of brownfield opportunities and in terms of partnering opportunities. We have been very busy and I hope to give you a more fulsome update in the coming quarters.

Okay, great. Thanks, so much I appreciate it.

Thank you David.

Thank you and our final question comes from Steve Fleishman with Wolfe Research. Your line is open.

Yeah.

Hi, good morning. Thanks.

No.

Just for the 2022 guidance.

I think your Texas segment is down.

$275 million, maybe from the initial guide how much of that is attributed to the.

The parish limestone outages net of anybody youre getting back this year.

Hey, good morning, Steve alternative to Alberto.

Yes.

Was that entirely the full amount that we highlighted in 220 million Steve So that's okay.

Okay, Okay, and then the $175 million boost in east West other could.

Could you just explain what's driving that.

So normally Steve we are very conservative or when.

When we plan our gas optimization activity. This year given the fact that has been a lot of volatility the performance has been.

Very good in that area and and also obviously we have benefited.

From some of our higher margin crude prices coming from our generation for the Cds.

Normally you would see that if we do better.

In the.

Driven by <unk>.

Okay.

And then just as we think about the 'twenty three guidance are you.

Assuming that that better optimization.

News are that that.

We haven't really Samsung.

Okay.

Yes, it's always I mean still with you.

We always use market some indication to guide us in terms of the profitability of our portfolio right. So if you look at the heat rates for 2023.

We use in our market.

Market prices market heat rates to inform our guidance.

Okay. Thank you and then just the 400 $397 million buyback you intend to complete that fully in the market by year end.

To do an ASR or something or.

I mean, our intention is tool to complete towards the end of the year and that's basically our plan right now okay.

And then on.

ERCOT market truck for I mean, it's kind of gotten quiet, but I think there is a lot about to happen. So just.

To the degree that they put in some kind of dispatch of ball.

Market separate market.

How are you thinking about how that impacts.

Your portfolio.

How you manage that through the retail side.

Well I mean, a couple of things and I think youre absolutely right.

It's going to get really busy I think middle of November .

There's going to be.

Our recommendation from ERCOT.

UCT.

We've been working with them alongside throughout this entire time, we provided our.

A number of initiatives I know that they are evaluating at the end of the day I think that's also be going to be informed by.

How the Texas greenhouse operated on as I said I mean, we broke the law.

39 times the assortment.

And not even once we went into EAA one emergency.

Situations. So I think degree these as well when I look at the pipeline is very robust with lots of new renewable generation so enough to meet.

Current.

Demand and future demand. So I think that's going to inform some of it at the end of the day. They end up with some sort of dispatch of old product. We've been working really hard on terms of the brownfield opportunities on our own sites and obviously that will play really well for us.

Participants like us who have.

Sites in good locations already connected to the grid and I think that gives us a cost advantage that we intend to fully utilize and monetize.

Okay. Okay. Thank you.

Thank you Steve.

Okay.

Thank you and there is no further questions in the queue I'd like to turn the call back to Mauricio Gutierrez, President and CEO for closing remarks. Thank.

Thank you Catherine well. Thank you all for your interest in NRG and I look forward to continue updating you as we move through our next phase in the company. So thank you all for your attention.

And then thank you Sir.

Patient in today's conference. This concludes the call.

The conference will begin shortly.

Raise your hand during Q&A you can dial one one.

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Good day, and thank you for standing by and welcome to the NRG Energy Inc.

Third quarter 2022 earnings call at this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.

Now I'd like to hand, the conference over to your Speaker today, Kevin Cole head of Investor Relations. Please go ahead.

Thank you Catherine good morning, and welcome to NRG Energy's third quarter 2022 earnings call. This morning's call will be 45 minutes in length 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 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. Please.

I am joined this morning by Alberto format, All Chief Financial Officer also on the call and available for questions. We have at least have been killing generic out of home, Rob Galvin head of business and market operations and Chris Moser head of competitive markets on policy.

I'd like to start with the three key messages for today's presentation on slide four.

We are narrowing our 2022 EBITDA guidance to the bottom end of the range as we indicated on our last earnings call and we are initiating 2023 financial guidance in line with our Investor Day plan.

We continue to make good progress on.

Our strategic priorities and have now completed the initial phase of our test and learn program.

The insights we have gained from these process will inform our next phase of growing from our core energy business into adjacent essential home services.

Finally, aside committed to you we are announcing our 2023 capital allocation plan, which includes an incremental $600 million share repurchase program.

System with our long term capital allocation principles.

Our business performed well during the third quarter, which was characterized by extreme price volatility and record load in our key Texas markets.

I am very proud of our team, which once again achieved another quarter of top decile safety performance. Despite these challenging market conditions.

As you can see on the slide five we delivered $452 million of adjusted EBITDA.

The entirety of the change compared to last year was previously identified with 60% coming from asset sales I'm transitory impacts and 40% from the unplanned outage at our double UA Paris facility.

With these results we are narrowing our 2022 EBITDA guidance to the bottom end of the range.

Alberto will provide additional details in his section.

We also made good progress on all our key strategic priorities.

We have now achieved our direct energy synergy target for 2022 and remain on track to achieve the full run rate of $300 million by next year.

We continue to optimize our generation portfolio by retiring on economic fossil fuel plants, monetizing noncore assets and partnering for brownfield development.

As part of this effort, we are selling the Astoria slide for approximately $200 million in net cash proceeds.

On our growth program, we continue to focus on cross selling power and gas to our existing customer network.

And with respect to our test and learn program. We have gained significant insights and are ready to start executing on our plan.

Will discuss in greater detail later in the presentation.

We also have made good progress on our $1 billion share repurchase program for 2022 with $603 million completed to date and $397 million yet to be completed.

Finally.

As I mentioned to you weather conditions in Texas, where extreme this past summer with FERC of surpassing the old peak demand record 39 times.

Driven by record heat in the early part of the summer and a strong Texas economy.

As you can see on the bottom left of the slide six.

While our price expectations, which are shown in the light blue bars were not as wide as I have ever seen them.

This volatility was the result of record low double with uncertainty around production from non dispatch a bowl of renewable generation.

Importantly.

He took record sustained heat couple.

Coupled with low renewable production to materialize into the high real time power prices, we experienced in May and July .

It is worth pointing out that even during these scarcity periods, we never triggered an emergency events.

Not even once.

This is a testament.

The Texas <unk>, the strong and working as intended with enough capacity to meet current and future demand.

Turning to the right hand side of the slide we continue to see strong demand from our customers with no notable increase in bad debt levels.

Retention has also remained strong driven in part by our unmatched insights to pricing and customer preference, which enables us to navigate periods of high price and high volatility.

We have also been successful in extending the average term of a new Texas customer contract to two years.

This extension is good for both our customers and our shareholders.

Given the stability and predictability to customer bills and our earnings.

On the supply side.

Our generation portfolio performed well during the summer while the team manage the impact of the WH parish unit eight outage.

We were able to expand our maintenance program ahead of the summer, which resulted in better operational performance.

Looking ahead and as I discussed in our last call, we will increase maintenance capital in our plants given higher power prices.

Now I'd like to spend some time talking about our ongoing efforts in moving closer to the customer.

We introduced the diagram on slide seven during our Investor day to capture our vision of the Smart Hall.

As you can see from the table on the right.

We have made substantial progress in laying the foundation to execute on our vision to become the leading provider of essential services at home.

During the year, we evaluated over a dozen adjacent offerings and engage in multiple partnership pilots for Evs home solar and other home services.

By starting small it allowed us to stay nimble light gathering critical market intelligence to inform how we approach these new customer offerings.

The result of these programs helped validate our assumptions and provides confidence in how to execute our customer centric strategy.

Now.

Let me put a finer point on our key findings on slide eight.

First.

The Internet of things this year and is enabling the smart home opportunity.

People are connecting new devices every day.

With an average of 2025 devices per home.

These number has more than doubled since 2019 and continues to grow rapidly.

Salting and multiple interfaces that don't necessarily interact with each other.

Customers want simple connected and customized experiences.

It is clear that a single interface for the home is of increasing importance and customer attitudes around these services are shifting from nice to have to need to have.

Next.

The electrification of the economy through smart technology, and clean energy choices is real.

We are seeing an increasing number of devices on appliances connected like HVAC water heaters battery rooftop solar and other.

In addition to having greater penetration of electric vehicles.

Finally customers are demanding access to cleaner affordable and more resilient solutions.

This is in part driven by a desire to be a part of a more sustainable future.

Reinforced by a need for resiliency in the face of more extreme weather.

And importantly this.

This has been accelerated by advancements in technology and policy.

With this integrated ecosystem at home there is a significant value opportunity as you can see on the right hand side of this slide.

For NRG.

We can offer adjacent products and services that leverages, our existing energy operating platform.

Allowing us to access cost savings and provide superior customer experience.

This advantage means broader insights into how customers interact with their homes.

Which translates into additional margin opportunities.

And increase brand loyalty.

Now turning to slide nine in 2023, we will increase efforts to grow our bundle essential products and services through a mix of existing offerings strategic partnerships and vertical integration.

All of them aimed at making NRG, the leading provider of essential services at home.

We are also providing our capital allocation plan for 2023.

Which is in line with our long term capital allocation principles.

Our plan is to return 50% of our capital available for allocation to our shareholders with an incremental $600 million share repurchase program and an 8% increase in our annual dividend.

For the remaining 50%.

Allocating $331 million to identified growth investments.

And reserving $620 million to be deployed throughout the year to the highest return opportunity between growth and share repurchases.

So with that I will pass it over to Alberto for the financial review.

Thank you Mauricio.

I will now turn to slide 11 for a review of the third quarter results.

NRG delivered 452 million in adjusted EBITDA at $350 million declined versus prior year.

Similar to our Q2 results this year.

Zero already a decline was the result of previously announced the variances.

As shown in the chart on the bottom left side of the slide $119 million of the decline was from asset sales and retirement.

So the transitory items included in our initial guidance.

The remaining 125 million variance is almost entirely due to the replacement power costs related to the unplanned pattis UNITAID outage and maintenance maintenance expenses in the same unit for which we expect reimbursement from the property insurance company in Q4 of this year.

Texas, adjusted EBITDA declined $263 million compared to the third quarter of last year.

July was the second hottest month on record dating back to the weekend, 95, which drew extreme price volatility and higher load.

Q3 results in Texas were also impacted by higher operating cost in the form of increased maintenance expense.

Approximately half of the increase was called work W.

Patrick Shunyi Pete.

That will be reimbursed by insurance in Q4, and the remaining increase from our maintenance program that help ensure strong reliability of the rest of the fleet through a volatile summer.

Starting to the east West another segment the year over year decline of 52 million was primarily driven by the reduction from previously announced asset sales and retirement.

Supply chain constraints now after taking those items into account adjusted EBITDA increased by $111 million compared to Q3 of 2021 from increased revenue rate natural gas optimization and operations are comparable.

Briefly referencing year to date results NRG delivered adjusted EBITDA of one.

<unk> 1.319 billion, a $671 million decline versus prior year.

So of our year to date results are similar to that of the quarter with permanent and transitory items. The unplanned outage of W. A parachute date and increased maintenance expenses driving the decline versus prior year.

The free cash flow before growth for both Q3 and yesterday's results have been impacted by reduced year over year EBITDA level as discussed earlier.

And then increase in net working capital working capital requirements increase progressively during the year due to higher.

Gas and power prices and in Q3 to the combined effect of higher seasonal power receivables and natural gas inventories.

We have also seen a $32 million increase year over year in maintenance Capex driven entirely by spending 30 paid the limestone and DWA parish unit based facility.

This increase in spend will be recovered by year end.

Through property insurance proceeds.

First I want to update you on the achievement of direct energy synergies.

We have achieved our full year target of $50 million during the quarter and continue to remain focused on achieving the full 300 million run rate next year.

Now moving to the full year 2022 guidance, we are narrowing our adjusted EBITDA range to 195 billion to $2 $205 billion.

In line with my previous comment of success in partially offsetting the $220 million negative impact compared its unit date unplanned outage at this time, we are at the bottom of the rig now.

Now given the implied strong Q4 results, let me provide additional details.

We are expecting over a 200 million increase versus prior year about 100 million coming from direct energy synergies the insurance proceeds for limestone and perish and other general cost reduction.

The remaining coming from power and natural gas optimization opportunity.

Leading gas to make our natural gas fleet.

Available in Q4.

Now turning to 2022 free cash flow before growth guidance.

We are reducing our full year guidance of eight to 952 1 billion.

With one third of the reduction from the narrowing of the adjusted EBITDA guidance.

Two thirds from the temporary increase in working capital from higher prices and inventories.

So as we head into the winter season, we made the conscious decision to increase our inventory levels for both natural gas and coal to provide contingency against the transportation challenges and the potential for extreme winter weather dry.

Driving a $50 million reduction in the free cash flow for the year.

We have captured the reversal of these higher inventory quantities in our guidance for 2023, which I will discuss later in the call.

Which will be reverse that with lower commodity prices.

The combined $190 million impact of these factors.

<unk> reduced expectation for 2022.

Free cash flow before growth.

I will now turn to slide 12 for an update on our planned 2022 capital allocation.

<unk> with past practice, we have highlighted changed from last quarter in blue.

Starting from the left we have updated the midpoint of our free cash flow before growth guidance by $290 million 100 million for lower EBITDA guidance and 190 million from increases in working capital.

$12 billion of net cash proceeds from the sale of Astoria, allowing us to utilize and distribute capital consistent with our commitment.

Next we expect to capture an additional <unk> 6 million from <unk> related to additional recovery.

Next we continue to make progress in executing our $1 billion share repurchase program at the end of October we have $397 million to be completed by turnaround year.

And finally, we are committed and dominion over our recurring capex spend related to our $2 billion growth plan, which when coupled with our investments other investments.

<unk> 200, ADC, so capital available for allocation.

Moving to 2023, adjusted EBITDA and free cash flow before before growth guidance. We are pleased to announce that our expectation for 2023 in line with previous pad.

We are introducing strong 2023 financial guidance of $2 27 billion to point to $2 47 billion for adjusted EBITDA and free cash flow before growth of $1 52 to $1 $72 billion.

EBITDA guidance includes the full year impact through asset sales and other fair many banks that recapture in our guidance for 2022.

Although we expect some continued impact from cold constraints, we were able to offset those.

The transitory items that impacted our 2022 guidance.

I will now turn to slide 14 for the introduction of our 2020.

One $9 billion capital allocation plan.

As Mauricio mentioned in his section our capital allocation is directly aligned with our long standing principle NK cadence both allocation today, we are starting the conversation by allocating 50% to shareholders through both dividends and share repurchases.

And allocating a portion of the 50% opportunistic back to identify.

Leading 35% to be allocated throughout the year to the highest returning investments while maintaining a strong balance sheet.

Now moving left to right, we start with the midpoint of our free cash flow before growth guidance.

The range of $1 62 billion plus $286 million of unallocated 2022 capital capital available for allocation totaling $1 9 billion in capital for allocation.

Next we have allocated $220 million identified toward our growth program and $111 million for other investment to fund additional investment to support the integration of the <unk> energy innovation projects and multiple acquisition.

Next our return on capital, we have allocated 347 million through dividends consistent with our 7% to 9% annual dividend per share growth target and announcing a new share repurchase program of 600 million to be executed immediately following the full execution of our current $1 billion.

Okay.

Finally, this leaves $628 million for 2023 capital available for allocation to be allocated throughout the year. We look forward to providing you with updates of our progress throughout 2022.

Back to your knowledge.

Thank you Alberto I want to provide some closing thoughts on slide 16.

We have made significant progress across all of our key priorities this year, including the direct energy integration.

Portfolio optimization.

In our test and learn program.

And returning capital to shareholders.

Credibly proud of the team's efforts and focus over the last 24 months on executing our strategy.

As we look into 2023 and beyond we remain on track to achieve our long term goals of high grading our earnings quality by expanding our customer lifetime value and providing a compelling annual total return to our shareholders of 15% to 20% free cash flow before growth per share.

And 7% to 9% annual dividend growth.

Our platform is well positioned to deliver strong and predictable results and create significant shareholder value as the leading essential home services provider.

I look forward to updating you on our progress along the way.

So with that I want to thank you for your time and interest in NRG. Catherine we are now ready to open the line for questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone please standby, while we compile the Q&A roster.

Okay.

Our first question comes from Julien Dumoulin Smith with Bank of America. Your line is open.

Hey, good morning, Raytheon deemed pleasure to be here. Thank you guys.

Hey, good morning Julien.

Hey, good morning, I hope the parade made things Okay. This morning.

Well.

As Rob said traffic a little bit but.

There is nothing like a great celebration after that win.

Absolutely, absolutely well, hey, listen I, just wanted to start off strategically here.

We've been at it for a little bit here in the transformation power prices remained relatively higher how do you think about the fate of the generation portfolio. Overall, how are you thinking about evolving your decision tree on that obviously, we saw a story here in the quarter, but even beyond that how are you seeing things.

Thats tied to human driven by IRR or otherwise here in terms of optimizing your generation portfolio.

Thank you Julien So let me take a little bit of a step back because obviously you need to look at the generation portfolio.

In light of our integrated retail platform right. I mean, we have said that the goal of the generation portfolio now is to help better supply and serve our customer needs.

So when you think about our generation portfolio I think about our overall supply strategy and that is one where we have decided to diversify our supply.

So have.

Some internal generation two.

<unk>.

Third party Ppas, and obviously market purchases all of those three things make our.

Supply strategy now with respect to the generation portfolio as you mentioned higher power prices have led us to basically self insure.

To have greater reliability, because the value of each megawatt is much higher today than it was just 10 months ago.

Higher power prices and higher gas prices, so thats why youre going to see an increase in our maintenance capital because we want to make sure that.

We have greater reliability on our fleet, obviously, we're always optimizing our supply and.

You know right now the value that it provides for our integrated platform.

<unk> is very high but a very sudden theres always an opportunity to optimize that generation portfolio, depending on market conditions and the opportunities that we see in the market.

Got it alright fair enough I'll leave it there let me pivot if I can do the other side of this equation and that is just the guidance and sort of the cadence of the guidance, obviously, the implied fourth quarter as reasonably elevated.

And certainly that despite some of the ongoing pressure points.

We saw in third quarter can you talk about what that implies for the cadence of results into 'twenty three here.

How do you think about the first half how do you think about third quarter going forward given the sort of evolution in your business model should third quarter and into the future be perhaps a little bit more depressed relatively speaking.

Can you just elaborate on what the implications are maybe thats at a Alberto question here.

Yes, well I'll turn it over to Robert but let me just give a little framework I mean, I think the big takeaway I hope for everybody is that in 2023, we go back.

And we're just excited about.

The opportunities that we have.

To continue growing our business, our core energy business, but importantly, adjacent products and services with respect to the seasonality of earnings I think you should expect.

Going back to where we were perhaps in 2021, but Alberto can you provide additional insight here, yes, I think more than looking at first half versus the second half I would say that probably.

You will see that.

Two critical.

Quarters are being the second and then so you will see probably more balanced and more in line as Mauricio said, we did pause and potentially even the fourth quarter that the <unk> higher than normal so I would say.

Gain probably get back to 2021 provide us what we should expect.

Okay excellent and that include.

That's inclusive of some of these coal dynamics.

Annualized here in the first half.

And some of the outage dynamics will still net net net in 'twenty, one kind of profile.

Yes, I mean, if you think about some of these coal supply issues, we were very transparent last year, when we introduce them.

And the team has done a tremendous job in mitigating these call supply chain issues, particularly in Texas.

We continue to have some things in the east and the team is just working through it but.

I mentioned to all of you when we introduced these these are temporary.

The coal supply chain was significantly stretched.

Because of the very rapid increase in natural gas prices and I also said with time.

<unk> coal suppliers on our railroad providers scale up again there.

Their operations and that's what we're seeing in our.

With our key suppliers.

Got it alright, guys I'll leave it there.

[laughter] Gulf Straws.

Thank you Julien.

Okay.

One moment.

Our next question comes from Shar <unk>.

<unk> with Guggenheim Your line is open.

Hey, guys. Good morning, it's actually chance for sure congrats and thanks.

Thanks for taking our questions.

Hey, good morning.

So I guess, starting with the 23 capital allocation plan.

What are the trigger points that timeline expectations for the balance of the uncommitted capital.

Potentially looking at more growth as we get through the year or is this just simply a function of waiting to see how the business performs through the first half.

Well thank.

Yes, so two things the first one is a side committed to all of you. This year, we're actually announcing both our earnings guidance as well as our capital allocation. If you remember in the past we used to.

Provide the cost allocation in the fourth quarter earnings call. So the first thing is.

We're providing this tool.

A much earlier than in the past the second thing is always our capital allocation, we try to the cadence Hopkins with a cadence on when we generate cash.

This is not going to be any different but as I said on my prepared remarks.

The additional excess cash that we have available for allocation will be allocated throughout the year.

Based on the highest return opportunity that we have 2023, we start executing on our plan, we're evaluating opportunities, but if these opportunities don't yield.

Highest return compared to a share buyback then we will allocate that for share buybacks just that simple.

Okay.

And then I guess.

Kind of a similar question on the growth Capex.

Should we think about the timing and shape of any EBITDA accretion as you ramp up that spend.

Get more color on in steps as we will.

The coming quarters or just any any color there.

Yeah, well I mean remember that as we execute on our plan. We always have three options, we either build them or grow organically, we partner or we.

We buy that we acquire something so.

In the.

Build organic growth there is always a lag between when you make the investment and when you receive some of those earnings.

In the.

Similar to the partner and I would say the acquisition that really accelerates earnings immediately right. So we're right now evaluating options in our both our business model and our go to market.

The one thing that I will say is.

So I think about the growth there are some there are some areas that well.

First of all it's a very narrow scope and I provided that scope in the slide that I presented the use of it.

The second thing is there are some areas, where we know that we're not going to do it.

We execute our strategy and we go to market itself.

Be provided to you.

In the in the coming quarters as we start executing those.

I will leave it there. Thank you very much guys. Thank you James.

Thank you. Our next question comes from Andrew <unk> with Seaport. Your line is open.

Thank you so first on <unk>.

The IRA and inflation reduction act. So I see that there is a $45 million increase in cash taxes, and you're at 23 free cash flow guidance.

I know that we're still waiting for the.

The IRS to provide some more clarity on cash taxes, but can you talk in general how you see it over the next couple of years.

The higher net income for the year, and therefore higher federal and state taxes and the other pieces. We got 35 before the day on the <unk> side in 2022 that would not happen in 2023, and therefore, they are more or less and for now that's explained increase year over year, we have from the IRS.

We have factored in our forecast.

The impact of the 1% taxes on the <unk>.

Share buybacks. However, there is no impact for the higher for the minimum tax because of these moments we don't have any indication that the payment based on 2023, and a peak and will be done in 2023, and so when we have more information regarding when these payments debt if any.

Then we will we will update you.

In General I would say as we have said in the past that.

It's very difficult to do forecasting based on the level of information that we have but so far all the indication is for a relatively modest impact in grocery as a temporary impact that will recover.

After a few years as soon as we get more detail, we will be more precise.

Okay. Thank you and then separately also related to the same legislation.

So.

Anything that you are seeing some pickup.

Renewable power growth, especially in Texas and I'm, just wondering if that means that you should.

Soon announce some additional ppas.

Given that the availability of especially solar assets should increase in tungsten.

Sure.

Rob drove five LNG, Hey, Angie good morning, So when you think about the IRI youre spot on Friday It provides clarity.

To the renewable developers we are in the market all the time right. So it's not we've been kind of at this for a while.

So theres a couple of factors in here that we think about one is availability for them to get their panels on the ground and get them installed it's the developers and the pipeline that they're kind of working through and then the IRS provides them some clarity around their financing so what I would expect.

I haven't seen it yet, but I would expect that some of that clarity starts coming into more certainty around offers and to us and as opportunities show up we'll lock those up as they make sense for our portfolio, but youre right. The iras should push solar wind and battery development across all market.

In the U S and particularly in Texas when you look at the.

The plan that aircraft provide somebody we're tracking I mean, most of the new generation is really renewable energy. So this should help accelerate.

We have these capability pretty well.

Okay and my last question is.

The maintenance expense.

Maintenance Capex in 2023.

I understand that you are spending more money in light of the higher level of kind of places but is this a level that we should actually expect going forward is this just the.

One off year with some major maintenance.

Some something that was put forward.

Chat from previous years.

Well I mean, I'll ask Alberto to address some of it might take remember 2023 has two big components right I mean, the first one is the.

Money that goes into that.

The year to date that W. Parish and then the second one obviously is the increase in maintenance because we want our self insure given that.

Every megawatt is more valuable with higher power prices I mean, that's something that the market is going to dictate what I will tell you is on I'm incredibly proud of the team that is so nimble on our generation fleet.

During years, where gas prices were very low they tighten the belt. They adjusted the maintenance. It was the right decision because not every megawatt as valuable as it is today, we very quickly pivoted to that and as I had mentioned, we put some capital.

At work before the summer that yielded really good.

Good results.

We're going to continue to build out so I don't know if theres anything else, yes, I just would like to point to two in the appendix or there is a page in which we are aligned to the impact on our maintenance capex coming in 2022 from limestone and parish and also for 2023 long story short when you eliminate the impact.

Two of these.

Specific.

The capex that we spent.

You will see that there is around the $40 million to $50 million increase in the maintenance Capex and this is really due to the fact there is no risk it was mentioning that even given the current prices, we think could that be.

It is appropriate to increase the reliability of our fleet.

Basically casualty opportunities that the current price environment is opening to us.

Great. Thank you.

Thank you Angie.

Thank you and our next question comes from.

Michael Lapidus with Goldman Sachs. Your line is open.

Hey, guys congrats on a good quarter.

Thank you Michael.

Looking at Slide 14, and I just want to make sure I understand some of this in a little bit of this may be more nuanced.

So the growth plan. The two 'twenty can you what assay is that for one big asset or is it for lots of little things.

No it is.

I mean, this is really to support our test and learn.

So we have identified a number of opportunities and the scope of those opportunities are actually on slide seven.

So when you look at.

As we are.

Throughout the year.

So let me kiss and this might be one <unk>. So the $2 20 in the growth plan and the 111 and the other investments.

Your guidance for EBITDA would be higher if you weren't getting if you weren't doing the spin.

No regarding okay regarding the other investment that these do not impact EBITDA.

I'll try to be done when you look at the growth plans there is a series of initiatives and.

We will update you about what is going to be down or not but for the moment. It's still as Mauricio said, it's a series of different initiatives and depending on which one we would prioritize.

It will have a more a capex impact or no.

Meaning some of the alright. So the 111 is all base about $111 million is all capitalized and the $220 million. Some of it is capitalized and some of it is flowing through G&A, our O&M and therefore, I'm just trying to make sure because like I'm trying to think about recurring versus nonrecurring impacts on EBITDA.

So that is a very good question and what you. What you said is correct the 111.

Back to EBITDA is two two anti there are some initiatives that could have an impact on opex and how does that have any impact on capex and we will quantify that.

In the next quarter.

Just to put a finer point here, Michael I mean, the two.

And I want to highlight.

Could impact right, but.

We are in the process of executing on depending on.

How do we finalize the go to market will have.

Any impact on whether it goes to the Capex and Opex. So that's as I say TBD to be determined Michael but we will provide that transparency as we start executing on the plan.

Got it okay. Thanks, guys I'll follow up offline.

Thank you Michael.

Thank you we have a question from David Arcaro with Morgan Stanley . Your line is open.

Hey, good morning, Thanks, so much for taking my questions.

Hey, good morning, David.

I noticed that there was a slight decline in the total customer count versus the prior quarter. So I'm curious any.

Information there.

Sure Alicia thanks.

Thanks for the question David.

We're really pleased with our performance.

The team and the engine.

I really volatile third quarter.

Year to date, but the good news is we're performing better than expected on both the E and the customer but.

From a sales engine perspective, we are.

We have a very strong engine over performance in the quarter occurred in both our face to face and our digital channels.

And cross serve also performed very well during the quarter better than budget and from a retention perspective. We also are seeing really strong performance given the backdrop.

High prices.

Cost increases associated with the power to fulfill for them as well as the higher usage during some of the weather that we experienced so really pleased with the attrition during the quarter and looking forward to continuing to deliver for you guys.

And just I mean.

The team is also a fantastic job on.

Balancing customer account on margin and Thats, what we do everyday with a tremendous insights from our customers send us aliza that said.

Both our retention numbers on our bad debt numbers are pretty well in line very robust and customer account is just a.

A result of a very intentional strategy around balancing customer account and retail margins. So I'm very pleased with the team.

Got it great Thats helpful. Thanks.

And then I was wondering if.

Maybe two quick ones, but does the 2023 outlook include business interruption insurance proceeds coming in I'm wondering how much that might be in the guidance and then maybe just a little more higher level are you seeing is there still more to do in terms of portfolio and real estate optimization with where the.

Where the business currently stands that's something you'll be looking at into 2023 as well.

Sure Alberto Yes regarding regarding the business insurance proceeds I can confirm what we said in the prior call and basically being negative impact appreciating the first half of 2023 will be.

Absorb the bi insurance proceeds as we our factory network.

West fleet as well as in Texas. The team has been working.

On looking at these opportunities and what I will tell you. It's also we're looking at potential partnering.

Opportunities because we want to make sure that we the capital that we use is is is the right structure I don't want to create friction in the system. If we don't have to so.

Both in terms of brownfield opportunities and in terms of partnering opportunities. We have been very busy and I hope they will give you a more fulsome update in the coming quarters.

Okay, great. Thanks, so much I appreciate it.

Thank you David.

Thank you and our final question comes from Steve Fleishman with Wolfe Research. Your line is open.

Hi, good morning. Thanks.

Just for the 2022 guidance.

I think your Texas segment is down.

$275 million, maybe from the initial guide how much of that is attributed to.

The parish limestone outages net of anybody youre getting back this year.

Hey, good morning, Steve alternative to Alberto.

It's almost entirely the full amount that we highlighted in 220 million Steve So that's okay.

Okay, Okay, and then the $175 million boost in east West other.

Could you just.

Explain whats driving that yes.

Yes anomaly, Steve we are very conservative or when.

When we plan our gas optimization activity. This year given the fact that it has been a lot of volatility the performance has been.

Very good in that area and and also obviously we have benefited from.

From some of our higher margin crude prices coming from our generation for <unk>.

Normally you would see that if we do better.

In the east.

Driven.

<unk>.

Okay.

And then just as we think about the 'twenty three guidance are you.

Assuming that that better optimization.

News are that that.

We haven't really.

Okay.

Yes, it's always I mean, Steve you.

We always use market as an indication to guide us in terms of the profitability of our portfolio right. So if you look at the heat rates for 2023.

We use in our market.

Market prices market heat rates still inform our guidance.

Okay. Thank you and then just the 400 $397 million of buyback you intend to complete that fully in the market by year end.

To do an ASR or something or.

I mean, our intention is tool to complete towards the end of the year and that's.

Basically our plan right now okay.

And then on.

ERCOT market structure, I mean, it's kind of gotten quiet, but I think there is a lot about to happen.

To the degree that they put in some kind of dispatch of ball.

Market separate market.

How are you thinking about how that impacts.

Your portfolio.

How do you manage that through the retail side.

Well I mean, a couple of things and I think youre, absolutely right its going to get really busy I think middle of November .

There's going to be.

Our recommendations from ERCOT.

UCT.

We've been working with them alongside throughout this entire time, we provided our.

A number of initiatives I know that they are evaluating at the end of the day I think that's also be going to be informed by.

How the Texas greenhouse operated on as I said I mean, we broke the law.

39 times the settlement.

And not even once we went into EAA one emergency.

Situations. So I think degree these as well when I look at the pipeline.

Very robust with lots of new renewable generation so enough to meet.

Current.

Demand and future demand. So I think that's going to inform some of it at the end of the day, they end up with some sort of dispatch of old product.

We've been working really hard on terms of the brownfield opportunities on our own sites and obviously that will play really well for us.

Participants like us who have.

Sites in good locations already connected to the grid and I think that gives us a cost advantage that we intend to fully utilize and monetize.

Okay. Okay. Thank you.

Thank you Steve.

Okay.

Thank you and there is no further questions in the queue I'd like to turn the call back to Mauricio Gutierrez, President and CEO for closing remarks.

Thank you Catherine well. Thank you all for your interest in NRG and I look forward to continue updating you as we move to our next phase in the company. So thank you all for your attention.

And then thank you first patient in today's conference. This concludes the call.

Q3 2022 NRG Energy Inc Earnings Call

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