Q2 2023 NRG Energy Inc Earnings Call

August 8, 2023

Yeah.

Good day and thank you for standing by welcome to the NRG Energy incorporated second quarter 2023 earnings call.

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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 Treasury and Investor Relations. Please go ahead.

Thank you Jonathan Good morning, and welcome to NRG Energy's second quarter 2023 earnings call. This morning's call, which 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 upon 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 you Kevin Good morning, everyone and thank you for your interest in NRG.

I'm joined this morning by Bruce Charles Chief Financial Officer also on the call and available for questions are other members of our management team, including the heads of home Smart home business and Polish.

Just over a month ago, we held our Investor day, where we provided an update on our long term consumer strategy.

We outlined the strength of our core energy business, how the acquisition of <unk> and further enhances our energy platform and position us to capitalize on the convergence of electricity on the smart technologies in the home.

Today, I am going to focus on the results for the second quarter, starting on slide four with our three key messages.

First our business delivered strong quarterly results and we are now trending towards the end the high end of our 2023 EBITDA guidance range.

Next the <unk> Smart home integration is well underway and we are realizing early wins and our combined sales efforts.

Finally, we are executing on our consumer strategy to deliver significant value to our shareholders.

Moving to the second quarter results on slide five.

We delivered top decile safety performance and $819 million of adjusted EBITDA, a 112% increase from the same period last year driven by excellent performance on our core energy business and the addition of <unk> smartphone.

Bruce will provide additional details on our specific drivers, but our business benefited from strong plant operations, our enhanced supply strategy customer growth and favorable market conditions.

During the quarter, we began the integration of <unk> Smart home, which has yielded solid early results.

Our revenue and cost synergy programs are well underway and we are reaffirming the full plan targets.

As a result of early wins in our growth initiatives, we are increasing our 2023 growth target to $60 million doubling our previous expectation.

Finally, we hosted our Investor day in June which included our five year strategic plan and an update on our capital allocation framework.

As a result of the sale of South, Texas project and our revised capital allocation plan, we are executing on a $2 $7 billion share repurchase authorization and a $2 $6 billion debt reduction plan.

Through July we were able to complete $50 million of share repurchases and $200 million of debt reduction.

As a result of the strong quarterly results and our position for the rest of the year, we are reaffirming our 2023 financial guidance.

Our EBITDA currently trading at the higher end of the range.

Now turning to slide six for an update on our energy business.

ERCOT has experienced record peak demand this summer demonstrating robust loan growth in our core Texas region on a weather normalized basis.

The electric grid has been stable through these record demand.

During the quarter thermal and wind generation performed close to expected levels, which kept power prices relatively muted.

As I mentioned during Investor day.

We implemented changes to our supply strategy that has worked well for us.

We were more conservative on our plant operations and took additional maintenance outages that resulted in better performance from our fleet.

We also purchased additional power above our expected low to give us more cushion against extreme weather.

All of these have positioned us well this summer and for balance of the year.

Parish unit eight is in testing mode and expect it to come back to full service by the end of this month.

On the regulatory front the PUC last week approved the much discussed rich solution, which establishes positive price floors at various levels of operating reserves.

This eliminates the negative pricing during many hours and should help existing dispatch of <unk> units.

Looking forward <unk> on the Puc's are moving are shared with the market design changes stemming from the recent legislative session.

These changes were made to increase reliability and incentivize new dispatch of generation.

Key among these programs is PCM.

The performance credit mechanism.

Which will now go through a rule, making process prior to being implemented.

Another major program coming from the legislator was the Texas Energy Fund.

Our program of low interest rate loans and completion bonuses for new generation.

Prior to its implementation the Texas energy must first be approve us a valid measure by the public in November election.

On.

<unk> seven.

We are introducing our new scorecard for the growth and cost initiatives.

These will be updated on a quarterly basis with our progress.

I have been very impressed with the level of collaboration and integration between our energy and smart home teams.

During the Investor Day, we discussed the makeup of our $300 million growth program.

50% coming from organic growth at historical levels, and 50% from cross sell activities.

For the quarter energy on smartphones grew at historical target levels and in line with our plan.

For the cross sell activities, we have seen some early successes.

As such we are increasing our growth target in 2023 from $30 million to $60 million.

Our energy and smart home call centers have begun transferring warm leads to each other and we are seeing positive customer conversion rates on qualified leads of around 6%.

And with the addition of the DIY system introduced during the quarter.

<unk> rates are now moving closer to 10%.

As this system is a good entry point to upsell and create more stickiness with the customer.

One of the best examples of cross selling and leveraging capabilities across NRG is dividend protection plan.

This is an equipment protection plan that Leverages nrg's current capabilities.

<unk> launch of this program in the second quarter and we are already at 120000 plants sold.

This is a new revenue stream with very little cost.

Our focus for the remainder of the year is to continue testing different bundles and offers before we scale it up in 2024.

We are very encouraged on what we're seeing across the two businesses and the opportunities that are rising inside the home.

One of the commitments during our Investor day was to provide additional disclosures on our <unk> smartphone business.

On slide eight we have provided key performance indicators comparing quarter over quarter.

As you can see.

We have performed exceptionally well during the quarter with subscribers growing 7% and recurring service margins up 9%.

Our customers are engaging more with our platform and are staying for a longer period of time.

Acquisition costs are higher due to the impact of higher interest rates and more products being sold.

But they were more than offset by higher revenue on new subscribers.

Overall, the profitability of the business is very strong.

On the right hand side is our dividend smart home pro forma free cash flow projections through 2025.

Our target is to grow customer count in line with historical performance around 7%.

While we continue to increase margin contribution and reduce overall cost of acquiring and servicing customers.

We expect to more than triple the cash flow generated from the business over the next three years.

It will provide NRG and earnings stream that is stable predictable over a long period of time and importantly, diversify from our current energy business.

Turning to slide nine.

Our investor they focus on our commitment to operating excellence disciplined growth and maximizing shareholder returns.

I want to provide you some of the key highlights of the event.

We outlined a three part strategic plan to optimize our integrated energy model.

Grow energy and smart home and increase the return of capital, while achieving an investment grade balance sheet.

Our integrated energy model has evolved in the last seven years.

Providing more durable earnings.

We have strengthened our supply portfolio with the right mix of assets to better serve our customer load.

The recent sale of our interest in South Texas project is a great example of our ability to optimize our platform and maximize shareholder value.

Through monetizing an asset whose attributes can be readily replicated and replaced in the market.

At the same time, we are signing renewable ppas and evaluating dispatcher both capacity development projects.

That better match, our hedging needs.

We outline our growth program for energy and Smart home.

Capitalizing on the convergence of electricity and smart technologies inside the home.

We are going to use veeva in smart home technology platform to connect all of our products and services into a seamless experience for our customers.

These will result in higher customer lifetime value.

Finally, we announced an update to our capital allocation framework with 80% of capital available for allocation now return to shareholders.

With the acquisition of <unk> complete we have line of sight to the investment needs of the company going forward with growth investments using only 20% of capital available for allocation.

Consistent with this change we increase our share repurchase authorization to $2 $7 billion to be completed through 2025.

We also accelerated the achievement of our investment grade credit metrics targets through 2025.

I will pass it over to Bruce for the financial review.

Thank you Murray CEO <unk>.

<unk> built on a solid first quarter with strong results in the second quarter that materially exceeded performance from last year.

The company generated consolidated adjusted EBITDA of $819 million in the quarter, which is $433 million higher than the second quarter of 2022.

As you can see in the chart at the bottom of the page legacy NRG results. Once again included the impact of asset sales and retirements in the second quarter of 2022 totaling $30 million.

The quarter also reflected $60 million of benefit compared to <unk> 2022 from the reversal of transitory items, such as coal constraints and increased ancillary expenses.

Strong performance in our core energy business resulted in $186 million of uplift from the prior year.

That uplift was driven by lower supply costs and improved plant performance relative to 2022.

Finally, the remaining year over year increase to consolidated results is attributable to <unk> EBITDA of $217 million, which was not included in our 2022 results.

Looking at our segments and starting with Texas.

Adjusted EBITDA increased by $241 million versus the prior year on the back of higher gross margin of $273 million.

As outlined earlier meaningful unit margin expansion from lower supply costs, coupled with improved plant performance were the primary drivers for the increase in gross margin.

This increase in gross margin was partially offset by increased opex from the timing of planned outages and higher insurance premiums.

And the East West segment, adjusted EBITDA declined $25 million versus last year, driven primarily by asset sales and retirements similar to Texas gross margin increased year over year, and lower power supply costs more than offset the negative impact of volume declines due to mild weather.

In Q2, <unk> continued to deliver strong financial results contributing $217 million and adjusted EBITDA.

Revenue grew 12% year over year, driven by favorable retention and higher recurring monthly revenue per subscriber, which combined with reductions in monthly service cost per customer drove a 14% increase in adjusted EBITDA compared to Q2 2022.

Lastly, with average subscriber growth of 7% year over year, driven recently achieved a key milestone surpassing 2 million customers.

Nrg's free cash flow before growth for the quarter was $425 million a year over year increase of $328 million pre.

Primarily driven by the increase in adjusted EBITDA.

In addition to improved EBITDA falling gas prices have reduced cash outflows for gas inventory that is typically built in the second quarter.

Finally building on our strong year to date results, we are reaffirming our adjusted EBITDA and free cash flow before growth guidance for 2023.

Okay.

Now turning to slide 12 for a brief update on our 2023 allocation capital allocation.

You will notice that the numbers shown on this slide aligned with the guidance. We gave during our June Investor day presentation.

I would call your attention to the progress we've made so far in debt reduction and share repurchases.

Through July 31, we have paid down $200 million of debt and remain on track to complete our target of $1 4 billion in debt reduction for 2023. Additionally.

Additionally, we executed $50 million of share repurchases purchases in July as part of our $2 7 billion share repurchase authorization through 2025.

Quickly turning to slide 13.

Our credit profile has not changed meaningfully since our last earnings call.

As a result, this slide has not substantially changed since our last update except for an update to the adjustments to capture the noncash fulfillment amortization costs that are included in adjusted EBITDA as a result of the EBITDA harmonization, we did last quarter.

We remain on track to achieve our 2023 targeted leverage ratio and we reiterate our commitment to achieving investment grade credit metrics by the end of 2025.

Before turning it back to Murray CEO I wanted to be sure to augment his earlier comments regarding our commitment to enhance disclosure, especially with respect to visit as.

As part of that commitment you will see in the appendix of the presentation. Some new disclosure, providing key metrics related to dividend. We will continue to provide these key metrics on a quarterly basis and we look forward to working with you to help you understand how these metrics drive the financial results of the business.

With that I'll turn it back to you Marcio. Thank you Bruce turning to slide 15, I want to provide a few closing thoughts on our 2023 priorities scorecard.

As you can see our team has remained focused on execution as evidenced by our strong results for the quarter.

Our core energy business is well positioned for the summer.

The integration of <unk> is off to a good start and we're working towards closing the sale of SDP by the end of the year.

We will remain focused on executing our strategic plan that creates significant shareholder value.

I look forward to updating you on our progress.

So with that I want to thank you for your time and interest in NRG data, we're now ready to open the line for questions.

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone Enlink for your name to be announced J. Your question. Please press star one again.

While we compile the Q&A roster.

Your first question comes from Julien Dumoulin Smith.

Please go ahead.

Hey, good morning team. Thank you very much for the time appreciate it as always maybe just first off just to thank you for all the details on vivid can you talk a little bit about your 6% conversion rate.

Peter just how does that compare versus expectations.

Perhaps provide a little bit of context.

Sure Good morning, Julien so in convertible kpis.

Right.

So julien in peso the conversion rates.

This is what we've been able to achieve on qualified leads so far.

This is higher than what we expected if you recall our cross sell target was around a 3% penetration so vcu's above that.

Obviously this is early but we're very encouraged by the success that we've had so far this is smart home customers buying energy and energy buying smart home.

With the addition of the DIY system of that dividend introduced we're actually seeing an increase on those conversion rates.

Casino allows us to have a an.

An entry point.

At cheaper entry point that we can use to up sell and create more stickiness with our customers. So we're very very encouraged by what we're seeing so far at the same time some of the secondary products like the protection plan from <unk> Ben.

Tremendous success and that's why when you combine all these with our organic growth.

We I felt compelled to increase our targets for 2023, so we are seeing.

Results.

Foster than what we expected initially very very encouraging.

Excellent. Thank you so much again really appreciate it sorry about the phone.

And then related can you talk a little bit about your commitment to building new generation in Texas I mean, obviously you want to see this corresponding support from the state here, just where do we stand on that investment follow through as well as just the the ROE for any potential.

Commentary around.

The petition from your co owners on SDP.

So let me start with development projects as you know we have three development projects that are in late stages of development I mean, one of them.

Shove already.

We have positioned ourselves to capitalize on the market design changes that are copies has put forward balls in PCM and the new loan program as I mentioned, we need more clarity on both of these frogs before we can actually move forward with these projects, but I am very pleased with how that.

Theme hospitalization these projects and they are ready this is exactly the type of generation exactly the right attributes that we need to manage our loan. This is midamerican, peaking capacity. So low following type of attributes and I am just very pleased that the team has put us in this position to be able to make that decision.

<unk>.

I think your second question was around the claims of our partners at STP.

Let me be very clear, we believe that.

The claims are without merit, and we expect to close the <unk>.

Sale of our interest in FTE by the end of the year.

Got it and just to clarify so youre not youre not committed yet on making the repowering investments here.

No not yet.

Alright fair enough I'll leave it there. Thank you guys.

Thank you Julien. Thank you one moment for your next question.

Our next question comes from Shar <unk> of Guggenheim Partners. Please go ahead.

Hey, guys good morning.

Good morning Shar.

Good morning.

Just one on <unk> just a quick follow up on Julians question.

<unk>.

If there is a delay and we have to book in this right. I mean, obviously there is a level of confidence we heard the prepared remarks could it delay impact anything on the capital allocation slide as we're thinking about it so even on the buyback side, assuming there could be a delay.

Yes.

Well, I mean, I'm not going to speculate on that like I said that.

Claims are without merit, our plan is to close by the end of the year.

Thank you.

And as we have done in the past, we will deploy capital when we have it right. So right now our focus is on the share buyback and the debt reduction program that we have for 2023.

As you saw.

Since we over performed during the second quarter, we were able to allocate $50 million to share buybacks is that over performance continues we will continue to allocating capital to share buybacks. All of you. We have the until we close the sale of SDP, which is really an event.

And that will increase substantially the capital that we have available to be deployed.

Got it okay, perfect and then.

You guys, obviously booked some significant margin expansion this quarter could we just dig a little bit further into the 186 Youre, calling out maybe just both geographically, Texas versus east and or by function. So does that also include near term portfolio optimization with training or is it really true.

Longer term margin expansion, so put it all together how durable is that thanks.

Yes, let me start and then I'll pass it over to Bruce for the specifics I think the team did just a fantastic job in managing margin bogey in terms of revenue optimization and also the enhanced supply diversify supply strategy that we have on our commercial team allowed us to realize.

Lower supply cost, so really really good management, all around and our plants perform as expected, which I find us.

We expect going forward, but Bruce any other additional details yes sure. So when you think about the 186 the preponderance of that really came out of Texas not surprisingly as you think about year over year with the improved plant performance, that's going to translate into a much better set up for us to be able to.

Service or supply obligations appropriately just to give you a little bit of context as you look at the power play the power price.

Landscape year over year between the two quarters Youll.

Youll see that around the clock prices in ERCOT, we're about 50% lower which.

Really helped us optimize how we service our how we service our load and then to your point about the question on durability look the reality is as long as our plants perform our margins should be durable and so thats, what we continue to intend to do.

And continue to to plan around so on the east there was a little bit of.

There was some margin expansion as well on the on the C&I side we.

We have seen C&I customers sign up.

Contracts at better margins for us alongside the optimization activities that Mauricio had referred to so overall preponderance.

Of it came from Texas, but some amount in the east as well.

Fantastic Okay I appreciate it have a good morning.

Thank you Shar.

Thank you one moment please.

Please.

Our next question comes from Angie <unk>. Please go ahead.

Thank you.

Good morning.

You guys maintained guidance range, but.

Is it fair to assume that you are tracking above the mid point from the EBITDA and free cash flow perspective.

Yes, good morning, Angie. So yes, we are keeping we are reaffirming our guidance ranges at this point.

You have indicated that we're trending toward the high end of the guidance obviously, the third quarter is a very important quarter.

We are well position for at our plants are performing well our supply strategy is working well for us but.

We'll have an opportunity to update you on our our results of the third quarter call. So far I am very pleased with how the business has performed across all business segments generation retail our smart home.

And.

Third quarter. The summer is very important as you appreciate given there.

The extreme weather that we have seen but so far.

The business is performing very well.

Okay, I'm moving on to debt.

That margin expansion on the retail side and I appreciate that most of it comes from Texas, but.

We've heard from some other retailers comment.

Comments about that particular margin expansion saw four of our client contracts remind us. Please if you actually have any of those.

That's probably more in the east, but again I don't know if I recall.

I mean, we have.

Remember the full requirement is really C&I.

We sure C&I customers across Texas and the east.

I think Bruce already mentioned, what we are seeing is higher margins.

Because there is greater volatility in the market right, both in Texas and in the east So greater volatility means higher load following premiums, which means higher margins on the customers.

This is a trend that we are also seeing in our business.

And again the Chi.

Changes that we made to our diversify surprise strategy are working really well both for C&I, but also for residential customers.

Okay, and then on dividend why is there such a meaningful increase in the acquisition cost.

For our customers.

Yes, so I mean the accuracy.

The increase is twofold number one you have higher interest rates and then number two the customers are buying more products.

And that's a really good thing now what you also it should be able to see on the Kpis that we're providing you. Our revenues are also higher and by the way much higher than that increase so net net is an increase on profitability, but ashish, perhaps you want to just provide a little bit more color yeah. Thank you Marie.

<unk>.

You said it well what we're seeing is customers more engaged in buying more services in the home.

I think you can see through the Kpis that the monthly recurring service margin per customer is up 9% and thats, 9% across the entire customer base. When we look at our customer acquisition cohort.

It's up more substantively than that and so you can think of this as the.

The increased acquisition cost will drive over $250.

Our incremental revenue over the life of the customer and so we feel very good about the engagement level and the margin expansion in the base.

Great. Thank you.

Thank you Andy.

Thank you one moment for our next question.

Your next question comes from <unk> Chopra of Evercore ISI. Please go ahead.

Hey, good morning, Thanks for taking my questions.

Hey, good morning, guys.

Good morning.

<unk> answered all the other questions I had just maybe real quick obviously you were very confident in 2023 here. So parish unit eight probably you won't see that as a meaningful impact, but the the in services.

Is getting pushed I think the last target was end of July we moved it slightly to this one just can you talk to that what's going on there.

Yes, so I mean.

We've seen top the unit in middle of July .

We are working right now through additional testing and as you can appreciate this was basically a rebuild of the entire generator.

And but I'm confident that we're in or come back at the end of August .

<unk>.

In terms of planning you are correct, we actually took all necessary steps to manage our LOE.

In the market.

Really good economics, so I feel that even if paresh comes out common stock at the end of the month is not going to have any impact on the.

Guidance that we've provided you today.

Okay. That's all I had I appreciate the color. Thank you Mauricio.

Thank you.

One moment for our next question please.

Okay.

Your next question comes from David <unk>.

With Morgan Stanley . Please go ahead.

Hey, good morning, Thanks for taking my questions.

Good morning, David.

On the on the Smart home business I was wondering if you could speak to what the free cash flow before growth was for the quarter, there or any color on the <unk>.

Free cash flow conversion you are seeing from EBITDA Im wondering how you are trending versus the full year $140 million pro forma target there.

Sure Bruce Yes, David So as you know, we we don't report free cash flow before growth for any individual segment of the company, but based on what we are seeing given the outperformance on the EBITDA side, we would expect to achieve the free cash flow before growth guide.

<unk> that we had provided in our first quarter earnings call.

Okay, great. Thanks for that.

Then on the retail side of the retail energy side of the business wondering.

If you could give an update on how customer retention and overall customer additions were trending in the quarter and curious if you've seen any new entrants start to pop up particularly in ERCOT.

And any kind of change in the competitive landscape there recently.

Sure I'll pass it over to Alicia, but I will say that our.

Our kpis on our retail energy business are pretty much in line with our expectation.

Including customer growth at least on that could you provide more details.

Sure. Thanks, David.

Actually saw really strong customer retention rates consistent with last year's performance consistent with what we expected in the budget and for customer acquisition, we have a little bit of over performance for the quarter.

And we're really building that momentum.

To achieve that that low single digit customer growth between year end 2022 and 2023.

As far as competitive landscape.

We see a normal healthy competitive market in Texas.

Pretty consistent that every year, we will see a new player and billboards and the Marquette or start doing something different but there isn't anything materially different we do see competitors like shell and.

And others that are larger competitors, which we appreciate because overall that strengthen our market. Our performance is strong and our meeting.

Digital experience in leading customer acquisition and retention and help us win in the marketplace.

Okay. Thanks really appreciate it.

Thank you.

One moment for our last question.

Okay.

Our final question comes from Ryan Levine of Citi. Please go ahead.

Good morning.

Good morning, Ryan.

Good morning.

Drove the monthly recurring net service cost per cents per subscriber a reduction by 22% and was that largely in line with what youre anticipating or is there any outsize movement this quarter.

Yes, Ryan so the primary drivers of that reduction about 50% of that really is a function of.

Fewer truck rolls and reduced supply supply chain constraints.

We probably realized about 25% fewer truck rolls and we then we had in the past.

And the other 50% or the other 50% of the favorability really results from.

The ending of our payments to alarm dot com.

Which which had started.

Towards the towards the second half last year.

In Q.

Q2 2003 number.

Are likely to continue on a go forward basis are there any trends that we should look for.

As we look into forecast tax rate.

Yes, so rajiv why don't you take that one yes, you bet and we feel very good about.

Where net service cost per subscriber is and we would expect.

The current rate at which we are to continue the favorability we've seen as a durable <unk>.

And if that is attributed perfect thing when you see customers buying more products and you see higher penetration of your service while simultaneously you see that.

Cost to serve going down and that's.

<unk>, what's driving the margin expansion and so we feel really good about the trends and we think that it's sustainable.

So if I'm hearing you correctly you continue to see.

Our truck rolls.

And decreasing number of truck rolls on a go forward basis is the driver.

Since our principle.

That's right. So you can if we think when you look at this on a per customer basis, and we would expect to see this lower rate that we've achieved for both.

Tax rate calls as well as truck rules.

To continue we recently started a virtual technician.

The pilot, which really allows us to serve the customers' needs without ever rolling a truck and we're seeing very promising results from that and so.

This is this is.

This is sort of a new benchmark for the business.

Thanks for the clarity.

Thank you Ryan.

Thank you.

I'd now like to turn the call back to Murray.

<unk>, President and CEO for closing remarks.

Thank you Dana.

Thank you everyone for your interest in.

Your time.

Today in Idaho forward to speaking with all of you in the basin weeks to come Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program you may now disconnect.

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Good day and thank you for standing by welcome to the NRG Energy incorporated second quarter 2023 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 the session you will need to press star one on your telephone.

Or an automated message advising that your management team.

Your question. Please press star one again.

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 Treasury and Investor Relations. Please go ahead.

Thank you Jason Good morning, and welcome to NRG Energy's second quarter 2023 earnings call. This morning's call, which 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.

This discussion may contain forward looking statements, which are based upon 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.

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 Bruce Chong Chief Financial Officer also on the call and available for questions are other members of our management team, including the heads of home Smart home business and policy.

Just over a month ago, we held our Investor day, where we provided an update on our long term consumer strategy.

Today, I am going to focus on the results for the second quarter, starting on slide four with our three key messages.

First our business delivered strong quarterly results and we are now trending towards the end the high end of our 2023 EBITDA guidance range.

Next the vivid smart home integration is well underway and we are realizing early wins in our combined sales efforts.

Finally, we are executing on our consumer strategy to deliver significant value to our shareholders.

Moving to the second quarter results on slide five.

Bruce will provide additional details on our specific drivers, but our business benefited from strong plant operations, our enhanced supply strategy customer growth and favorable market conditions.

During the quarter, we began the integration of <unk> smartphone, which has yielded solid early results.

Our revenue and cost synergy programs are well underway and we are reaffirming the full plan targets.

As a result of early wins in our growth initiatives, we are increasing our 2023 growth target to $60 million doubling our previous expectation.

Finally, we hosted our Investor day in June which included our five year strategic plan and an update on our capital allocation framework.

As a result of the sale of South, Texas project and our revised capital allocation plan, we are executing on a $2 $7 billion share repurchase authorization and a $2 $6 billion debt reduction plan.

Through July we were able to complete $50 million of share repurchases and $200 million of debt reduction.

As a result of the strong quarterly results and our position for the rest of the year, we are reaffirming our 2023 financial guidance.

With our EBITDA currently trading at the higher end of the range.

Now turning to slide six for an update on our energy business.

ERCOT has experienced record peak demand this summer demonstrating robust loan growth in our core Texas region on a weather normalized basis.

The electric grid has been stable through these will record demand.

During the quarter thermal and wind generation performed close to expected levels, which kept power prices relatively muted.

As I mentioned during Investor day, we.

We implemented changes to our supply strategy that has worked well for us.

We were more conservative on our plant operations and took additional maintenance outages that resulted in better performance from our fleet.

We also purchased additional power above our expected low to give us more cushion against extreme weather.

All of these have positioned us well this summer and for balance of the year.

Parish unit eight is in testing mode and expect it to come back to full service by the end of this month.

On the regulatory front the PUC last week approved the much discussed rich solution, which establishes positive price floors at various levels of operating reserves.

This eliminates the negative pricing during many hours and should help existing dispatch of old units.

Looking forward <unk> on the Puc's are moving ahead with the market design changes stemming from the recent legislative session.

These changes were made to increase reliability and incentivize new dispatch of generation.

Key among these programs is PCM.

Performance credit mechanism.

Which will now go through a rulemaking process prior to being implemented.

Another major program coming from the legislator was the Texas Energy Fund.

Our program of low interest rate loans and completion bonuses for new generation.

Prior to its implementation.

Texas Energy must first be approve is a valid measure by the public in November election.

On slide seven.

We are introducing our new scorecard for the growth and cost initiatives.

These will be updated on a quarterly basis with our progress.

I have been very impressed with the level of collaboration and integration between our energy and smartphone themes.

During the Investor Day, we discussed the makeup of our $300 million growth program.

50% coming from organic growth at historical levels, and 50% from cross sell activities.

For the quarter energy and smartphone grew at historical target levels and in line with our plan.

For the cross sell activities, we have seen some early successes.

As such we are increasing our growth target in 2023 from $30 million to $60 million.

Our energy and smart home call centers have begun transferring warm leads to each other and we are seeing positive customer conversion rates on qualified leads of around 6%.

And with the addition of the DIY system introduced during the quarter.

<unk> rates are now moving closer to 10%.

As this system is a good entry point to upsell and create more stickiness with the customer.

One of the best examples of cross selling and leveraging capabilities across NRG is dividend protection plan.

This is an equipment protection plan that Leverages nrg's current capabilities.

With <unk> launch of this program in the second quarter and we are already at 120000 plants sold.

This is a new revenue stream with very little cost.

Our focus for the remainder of the year is to continue testing different bundles and offers before we scale it up in 2024.

We are very encouraged on what we're seeing across the two businesses and the opportunities that are rising inside the home.

One of the commitments during our Investor day was to provide additional disclosures on our <unk> smartphone business.

On slide eight we have provided key performance indicators comparing quarter over quarter.

As you can see.

We have performed exceptionally well during the quarter with subscribers growing 7% and recurring service margins up 9%.

Our customers are engaging more with our platform and are staying for a longer period of time.

Acquisition costs are higher due to the impact of higher interest rates and more products being sold.

But they were more than offset by higher revenue on new subscribers.

Overall, the profitability of the business is very strong.

On the right hand side is our dividend smart home pro forma free cash flow projections through 2025.

Our target is to grow customer accounts in line with historical performance around 7%.

While we continue to increase margin contribution and reduce overall cost of acquiring and servicing customers.

We expect to more than triple the cash flow generated from the business over the next three years.

It will provide NRG and earnings stream that is stable predictable over a long period of time and importantly, diversify from our current energy business.

Turning to slide nine.

Our investor they focus on our commitment to operating excellence disciplined growth and maximizing shareholder returns.

I want to provide you some of the key highlights of the event.

We outlined a three part strategic plan to optimize our integrated energy model.

Grow energy and smart home and increase the return of capital, while achieving an investment grade balance sheet.

Our integrated energy model has evolved in the last seven years.

<unk> more durable earnings.

We have strengthened our supply portfolio with the right mix of assets to better serve our customer load.

The recent sale of our interest in South Texas project is a great example of our ability to optimize our platform and maximize shareholder value.

Through monetizing an asset whose attributes can be readily replicated and replaced in the market.

At the same time, we are signing renewable ppas and evaluating dispatch able capacity development projects.

That better match, our hedging needs.

We outline our growth program for energy and Smart home.

Capitalizing on the convergence of electricity and smart technologies inside the home.

We are going to use veeva in smart home technology platform to connect all of our products and services into a seamless experience for our customers.

This will result in higher customer lifetime value.

Finally, we announced an update to our capital allocation framework with 80% of capital available for allocation now return to shareholders.

With the acquisition of <unk> and complete we have line of sight to the investment needs of the company going forward with growth investments using only 20% of capital available for allocation.

Consistent with this change we increased our share repurchase authorization to $2 7 billion to be.

<unk> through 2025.

We also accelerated the achievement of our investment grade credit metrics targets through 2025.

I will pass it over to Bruce for the financial review.

Thank you Murray CEO .

NRG built on a solid first quarter with strong results in the second quarter that materially exceeded performance from last year.

The company generated consolidated adjusted EBITDA of $819 million in the quarter, which is $433 million higher than the second quarter of 2022.

As you can see in the chart at the bottom of the page legacy NRG results. Once again included the impact of asset sales and retirements in the second quarter of 2022 totaling $30 million.

Quarter also reflected $60 million of benefit compared to <unk> 2022 from the reversal of transitory items, such as coal constraints and increased ancillary expenses.

Strong performance in our core energy business resulted in $186 million of uplift from the prior year.

That uplift was driven by lower supply costs and improved plant performance relative to 2022.

Finally, the remaining year over year increase to consolidated results is attributable to <unk> EBITDA of $217 million, which was not included in our 2022 results.

Looking at our segments and starting with Texas.

Adjusted EBITDA increased by $241 million versus the prior year on the back of higher gross margin of $273 million.

As outlined earlier meaningful unit margin expansion from lower supply costs, coupled with improved plant performance were the primary drivers for the increase in gross margin.

This increase in gross margin was partially offset by increased opex from the timing of planned outages and higher insurance premiums.

And the East West segment, adjusted EBITDA declined $25 million versus last year, driven primarily by asset sales and retirements similar to Texas gross margin increased year over year, and lower power supply cost more than offset the negative impact of volume declines due to mild weather.

In Q2, <unk> continued to deliver strong financial results contributing $217 million and adjusted EBITDA revs.

<unk> revenue grew 12% year over year, driven by favorable retention and higher recurring monthly revenue per subscriber, which combined with reductions in monthly service cost per customer drove a 14% increase in adjusted EBITDA compared to Q2 2022.

Lastly, with average subscriber growth of 7% year over year, driven recently achieved a key milestone surpassing 2 million customers.

Nrg's free cash flow before growth for the quarter was $425 million a year over year increase of $328 million.

Primarily driven by the increase in adjusted EBITDA in.

In addition to improved EBITDA falling gas prices have reduced cash outflows for gas inventory that is typically built in the second quarter.

Finally building on our strong year to date results, we are reaffirming our adjusted EBITDA and free cash flow before growth guidance for 2023.

Now turning to slide 12 for a brief update on our 2023 allocation capital allocation.

You will notice that the numbers shown on this slide aligned with the guidance. We gave during our June Investor day presentation.

I would call your attention to the progress we've made so far in debt reduction and share repurchases.

Through July 31, we have paid down $200 million of debt and remain on track to complete our target of $1 4 billion in debt reduction for 2023.

Additionally, we executed $50 million of share repurchases purchases in July as part of our $2 $7 billion share repurchase authorization through 2025.

Quickly turning to slide 13.

Our credit profile has not changed meaningfully since our last earnings call.

We remain on track to achieve our 2023 targeted leverage ratio and we reiterate our commitment to achieving investment grade credit metrics by the end of 2025.

Before turning it back to Mauricio I wanted to be sure to augment his earlier comments regarding our commitment to enhance disclosure, especially with respect to visit as.

With that I'll turn it back to you Marcio. Thank you Bruce turning to slide 15, I want to provide a few closing thoughts on our 2023 priority scorecard.

As you can see our team has remained focused on execution as evidenced by our strong results for the quarter.

Our core energy business is well positioned for the summer.

The integration of <unk> is off to a good start and we're working towards closing the sale of SDP by the end of the year.

We will remain focused on executing our strategic plan that creates significant shareholder value.

I look forward to updating you on our progress.

So with that I want to thank you for your time and interest in NRG data, we're now ready to open the line for questions.

While we compile the Q&A roster.

Your first question comes from Julien Dumoulin Smith.

Please go ahead.

Currently <unk> here, just how does that compare versus expectations.

<unk> had a little bit of context.

Sure Good morning, Julien so in convertible kpis.

Right.

So julien in peso the conversion rates.

This is what we've been able to achieve on qualified leads so far.

This is higher than what we expected if you recall our cross sell target was around a 3% penetration so vis vis above that.

Obviously this is early but we're very encouraged by the success that we've had so far this is smart home customers buying energy and energy buying smart home.

With the addition of the DIY system of that dividend introduced we're actually seeing an increase on those conversion rates.

Does it allows us to have an.

An entry point.

Tremendous success and that's why when you combine all these with our organic growth.

We I felt compelled to increase our targets for 2023, so we are seeing.

Results.

Foster than what we expected initially very very encouraging.

Excellent. Thank you so much again really appreciate it sorry about the phone.

Commentary around.

The petition from your co owners on SDP.

So let me start with the development projects as you know we have three development projects that are in late stages of development I mean, one of them.

Shove already.

We have positioned ourselves to capitalize on the market design changes that are copies has put forward both in PCM and the new loan program as I mentioned, we need more clarity on both of these frogs before we can actually move forward with these projects, but I am very pleased with how that.

<unk>.

I think your second question was around the.

The claims of our partners at STP.

Let me be very clear, we believe that.

The claims are without merit, and we expect to close the.

Sale of our interest in FTE by the end of the year.

Got it and just to clarify so youre not youre not committed yet on making the repowering investments here.

No not yet.

Alright fair enough I'll leave it there. Thank you guys.

Thank you Julien. Thank you one moment for your next question.

Our next question comes from Shar <unk> of Guggenheim Partners. Please go ahead.

Hey, guys good morning.

Good morning Shar.

Good morning.

Just one on <unk> just a quick follow up on Julians question.

If if.

If there is a delay and we have to book in this right I mean, obviously, there's a level of confidence we heard the prepared remarks.

Could it delay impact anything on the capital allocation slide as we're thinking about it so even on the buyback side, assuming there could be a delay.

Well, I mean, I'm not going to speculate on that like I said.

The claims are without merit, our plan is to close by the end of the year.

Thank you.

And as we have done in the past, we will deploy capital when we have it right. So right now our focus is on the share buyback and the debt reduction program that we have for 2023.

As you saw.

Since we over perform during the second quarter, we were able to allocate $50 million to share buybacks is that over performance continues we will continue to allocating capital to share buybacks.

Here, we have the <unk>.

Until we close the sale of <unk>, which is really <unk>.

And that will increase substantially the capital that we have available to be deployed.

Got it okay, perfect and then.

You guys, obviously booked some significant margin expansion. This quarter can we just dig a little bit further into the one 186, youre, calling out maybe just both geographically, Texas versus east and or by function. So does that also include near term portfolio optimization with training or is it really true.

Longer term margin expansion, so put it all together how durable is that thanks.

Yes, let me start and then I'll pass it over to Bruce for the specifics I think the team did just a fantastic job in managing margin.

In terms of revenue optimization and also the enhanced supply diversify supply strategy that we have on our commercial team allowed us to realize lower supply cost. So really really good management, all around and our plants perform as expected which.

In the us.

We expect going forward, but Bruce any other additional details yes sure.

So when you think about the 186, the preponderance of that really came out of Texas not surprisingly as you think about year over year with the improved plant performance, that's going to translate into a much better set up for us to be able to service our supply obligations appropriately just to give you a little bit of context as you look at the.

<unk> power price landscape year over year between the two quarters Youll.

Youll see that around the clock prices in ERCOT, where about 50% lower which.

And continue to plan around so on the east there was a little bit of.

There was some margin expansion as well on the on the C&I side, we have seen C&I customers sign up contracts at better margins for us alongside the optimization activities that Mauricio had referred to so overall preponderance.

All of it came from Texas, but some amount in the east as well.

Perfect Fantastic I appreciate it have a good morning.

Thank you sure.

Thank you one moment please.

Okay.

Our next question comes from AMC stores in PSC. Please go ahead.

Thank you.

Good morning so.

You guys maintained the guidance range that is.

Is it fair to assume that you are tracking above the mid point from the EBITDA and free cash flow perspective.

Yes, good morning, Angie So yes, we are keeping.

We're reaffirming our guidance ranges at this point.

You have indicated that we're trending toward the high end of the guidance obviously, the third quarter is a very important quarter.

We are well positioned for at our plants are performing well our supply strategy is working well for us but.

It won't have an opportunity to update you on our results of the third quarter call. So far I am very pleased with how the business has performed across all business segments generation retail our smart home.

And but third quarter. The summer is very important thus youll appreciate given there.

The extreme weather that we have seen but so far.

The business is.

Performing very well.

Okay moving on to the margin expansion on the retail side and I appreciate that most of it comes from Texas, but.

We've heard from some other retailers comments.

Comments about that particular margin expansion saw four of our client contracts remind us. Please if you actually have any of those.

That's probably more in the east, but again, just I don't know if I recall.

I mean, we have.

Remember the full requirement is really C&I.

We sure C&I customers across Texas and the east.

I think Bruce already mentioned that what we are seeing is higher margins.

Because there is greater volatility in the market right policy in Texas and in the east So greater volatility means higher load following premiums, which means higher margins on the customers.

This is a trend that we are also seeing in our business.

And again the changes that we made to our diversify surprise strategy are working really well both for C&I, but also for residential customers.

Okay, and then on <unk>.

And why is there.

Such a meaningful increase in the acquisition cost.

Tanya for customers.

Yes, so I mean the accuracy.

The increase is twofold number one you have higher interest rates and then number two the customers are buying more products.

<unk>.

You said it well what we're seeing is customers more engaged in buying more services in the home.

I think you can see through the Kpis that the monthly recurring service margin per customer is up 9% and that's 9% across the entire customer base. When we look at our customer acquisition cohort.

It's up more substantively than that and so you can think of this as the.

The increased acquisition cost will drive over $250.

Our incremental revenue over the life of the customer and so we feel very good about the engagement level and the margin expansion in the base.

Great. Thank you.

Thank you Ed.

Thank you one moment for our next question.

Your next question comes from <unk> Chopra of Evercore ISI. Please go ahead.

Hey, Tim Good morning, Thanks for taking my questions.

Hey, good morning, guys.

Good morning.

<unk> answered all the other questions I had just maybe real quick obviously you were very confident in 2023 here. So parish unit <unk>, probably you won't see that as a meaningful impact but the the in services is getting pushed I think the last target was end of July we moved it.

Slightly due this month just can you talk to that what's going on there.

Yes, so I mean, we've seen top the unit in middle of July .

Our working right now through additional testing and as you can appreciate this was basically a rebuild of the entire generator.

And.

I'm confident that we're in and I'll come back at the end of August .

In terms of planning you are correct that we actually took all the necessary steps to manage our low.

In the market.

Really good economics, so I feel that.

Even if paresh comes out common stock at the end of the month is not going to have any impact on the.

The guidance that we provided you today.

Okay. That's all I had I appreciate the color. Thank you Mauricio.

Thank you.

One moment for our next question please.

Okay.

Your next question comes from David Arcaro of Morgan Stanley . Please go ahead.

Hey, good morning, Thanks for taking my questions.

Morning, David.

On the on the Smart home business I was wondering if you could speak to what the free cash flow before growth was for the quarter, there or any color on that.

Free cash flow conversion you are seeing from EBITDA Im wondering how you are trending versus the full year $140 million pro forma target there.

Sure Bruce Yes, David.

As you know, we we don't report free cash flow before growth for any individual segment of the company, but based on what we're seeing given the outperformance on the EBITDA side, we would expect to.

To achieve the free cash flow before growth guidance that we had provided in our first quarter earnings call.

Okay, great. Thanks for that and then on the retail side of the retail energy side of the business wondering.

If you could give an update on how customer retention and overall customer additions were trending in the quarter and curious if you've seen any new entrants start to pop up particularly in ERCOT.

And any kind of change in the competitive landscape there recently.

Sure I'll pass it over to Alicia, but I will say that.

Our kpis on our retail energy business are pretty much in line with our expectation.

Including customer growth, but at least could you provide more details.

Sure. Thanks, David.

And we're really building that momentum.

To achieve that that low single digit customer growth between year end 2022 and 2023.

As far as competitive landscape.

We see a normal healthy competitive market in Texas.

Consistent that every year, we will see a new player AD billboards in the market or start doing something different but there isn't anything materially different we do see competitors like shell and.

And others that are larger competitors, which we appreciate because overall that strengthens the market our performance is strong and our meeting.

Digital experience in leading customer acquisition and retention will help us win in the marketplace.

Okay. Thanks really appreciate it.

Thank you.

One moment for our last question.

Okay.

Our final question comes from Ryan Levine of Citi. Please go ahead.

Good morning.

Good morning, Ryan.

Good morning.

Drove the monthly recurring net service cost per cent per subscriber a reduction by 22% and was that largely in line with what youre anticipating or is there any outsize movement this quarter.

Yes, Ryan so the primary drivers of that reduction about 50% of that really is a function of.

Fewer truck rolls and reduced supply supply chain constraints.

We probably realized about 25% fewer truck rolls and we then we had in the past.

The other 50% or the other 50% of the favorability really results from.

The ending of our payments to alarm dot com.

Which which had started.

Towards the towards the second half last year.

Is Q.

Q2 2003 number.

More likely to continue on a go forward basis are there any trends that we should look for.

As we look into forecast.

Yes, so rajiv why don't you take that one yes, you bet, we feel very good about.

Where net service cost per subscriber is and we would expect.

The current rate at which we are to continue the favorability we've seen as a durable and it's attributed terrific thing when you see customers buying more products and you see higher penetration of your service while simultaneously you see the cost to serve.

Going down and that's exactly what's driving the margin expansion and so we feel really good about the trends and we think that it's sustainable.

So if I'm hearing you correctly, you continue to see fewer truck rolls.

And decreasing number of charcoal is on a go forward basis as the driver and maintenance.

Yes.

That's right. So you can see we think when you look at this on a per customer basis, and we would expect to see this lower rate that we've achieved for both.

Tax rate calls as well as truck rolls.

To continue we recently started a virtual technician.

The pilot, which really allows us to serve the customers' needs without ever rolling a truck and we're seeing very promising results from that and so.

This is this is this.

This is sort of a new benchmark for the business.

Yes.

Thanks for the clarity.

Thank you Ryan.

Thank you.

I would now like to turn the call back to Mauricio Gutierrez, President and CEO for closing remarks.

Thank you Dana and thank you everyone for your interest and your time.

Today, and I look forward to speaking with all of you in the basin weeks become thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program you may now disconnect.

Q2 2023 NRG Energy Inc Earnings Call

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