NRG Energy, Inc.

Ladies and gentlemen, and welcome to the NRG Energy's first 2020 earnings call. At this time, all participants' lines are in a lengthy mode. After the speaker's presentation, there will be a question and answer session. During the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to you today, Kevin. Thank you. Please go ahead, sir.

Thank you. Good morning and welcome to NRG Energy's first quarter 2020 earnings call. This morning's call is scheduled for 45 minutes in length and is being broadcast live over the phone and via webcast, which can be located in the investor section of our website at www.nrg.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. 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 when it's directly comparable GAAP measures. Please refer to today's presentation. And now with that, I'll 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 am joined this morning by Kirk Andrews, our Chief Financial Officer. Also on the call and available for questions, we have Elizabeth Killinger, Head of Retail Mass, and Chris Moser, Head of Operations. Before we begin, I would like to take a moment to say from everyone at NRG, we sincerely hope that you and your families are well and our thoughts are with those impacted by the COVID-19 pandemic. It has never been clear how critical electricity is to our way of life. And now more than ever, our communities are relying on the service that we provide to homes and businesses. I want to thank our essential employees who are on the front lines, safely operating our power plants and supporting our customers. These employees continue to impress me every day with their commitment and courage during this unprecedented time. Turning to slide three, I'd like to start by highlighting the three key messages for today's call. First, we initiated a comprehensive response to COVID-19 focused on maintaining safe and reliable operations. Our number one priority remains protecting the health and well-being of our employees so they can safely deliver electricity and keep the lights on for our customers and communities. Second, Given the changes that we have made to our integrated business, we were able to deliver strong results during the first quarter and reaffirm our full-year financial guidance. Third, and as we promised on our February earnings call, we are providing enhanced disclosures on our business, including the introduction of new integrated regional segments. Turning to slide four, I want to talk to you in greater detail about our response to COVID-19. As you know, our top priority has been protecting the safety and wellbeing of our employees. On January 21st, one day after the first confirmed US case, we activated our crisis management team to ensure we were prepared for any scenario. On March 17th, we closed our offices and transitioned employees to remote work. We have remained fully operational during this time with over 95% of our office personnel working remotely. While we close our offices to non-essential personnel, we also have employees who provide critical or essential services and continue to work at our power plants and offices every day. As part of our commitment to protecting their health and safety, we introduce health screening guidelines for those continuing to work on site, initiated deep cleaning protocols, enacted strict social distancing guidelines, restricted access to offices and power plants, and implemented staggered staffing for essential functions. We have also expanded health benefits for all employees to include access to virtual doctors and awarded grants from our NRG Employee Relief Fund. These additional resources are intended to protect our employees and their families. With respect to our operations, the impact has been limited. A few outages were delayed due to COVID-19 issues. However, none of them had a material financial impact or reliability implications. Our spring program included 84 outages and a nuclear refueling at STP. So we are well prepared for the summer months. We did stop work at all non-essential projects including our Encina demolition project in California. We have also paused face-to-face retail sales activities to support the safety and well-being of our team and communities. Recognizing that some of our customers have been financially impacted by COVID-19, we temporarily paused all late fees and electric disconnects and offered deferred payment plans to provide temporary relief. We also work closely with the PUCT and other Texas market participants to create a solution that extends additional assistance through mid-July to low-income customers and those facing significant financial hardship as a result of COVID-19. In April, we announced a pledge of $2 million to relieve efforts aimed at those on the frontlines who need it the most. This includes Funding and critical safety supplies to first responders who are in desperate need of personal protective equipment. Community-led relief funds for small businesses which have been devastated as social distancing and shelter-in-place guidelines have forced many to close for months. And teachers and educators who play such a pivotal role in our communities where we live and work. We have begun activities to return our employees to the new normal operations, prioritizing their safety and well-being. Now moving on to our financial and operational results for the quarter on slide five. We achieved top decile safety performance and delivered $349 million of adjusted EBITDA, almost a 5% increase from the same period last year. These results were driven by the addition of stream energy and margin enhancement initiatives partially offset by mild weather across our core markets. To put the mild weather into context, ERCOT and the Northeast saw temperatures that were 20% and 17% warmer than the 10-year normal for the first quarter. We're also reaffirming our full-year guidance based on our expectations of a gradual reopening of our economy during the summer and the stability of our integrated platforms. but these are unprecedented times and expect most of the adverse impact from COVID-19 to come from customer payment related items like bad debt. At this point, we estimate that to be around $50 million. We will look at offsetting this impact through prudent cost management and ERCOT's relief fund. During the quarter, we implemented our infectious disease and pandemic plan to ensure business continuity, as we discussed in the previous slide. We also updated our reporting segments during the quarter and are providing enhanced disclosures, which I will discuss in greater detail later in the presentation. These disclosures are intended to help you think about our business in the same way we manage it. I also believe they will help demonstrate the stability of our ERCOT platform that we have long talked about, but which was difficult to illustrate when retail and generation weren't thought of as separate businesses. Finally, on the last earnings call in late February, I spoke at length about our sustainability program and our commitment to transparency. To that end, we just published our 10th annual sustainability report. Our comprehensive sustainability framework is foundational to the long-term success of our company. One of the key metrics is the speed at which we are decarbonizing our business. As you will see, we are now 83% of the way to achieving our 2025 goal and have clear line of sight to get there. Moving to slide six. I want to highlight some of the impacts we are seeing on electric demand in our core markets. In the upper right-hand side of the slide, we have estimated year-on-year weather normalized changes in load for April. As you can see, electric demand has been impacted across the country with declines anywhere between 6% to 9%, except in ERCOT, which continues to show resilience, and it is down only 2%. Even within ERCOT, we're seeing significant differences between West Texas and the rest of the state, driven primarily by the impact of low oil prices in the Permian region. These differences are not only regional, but also by customer class, as you can see in the lower right-hand side of the slide. Residential demand, which makes up around 30% of ERCOT peak electric demand this time of the year, is up 7% for the month of April, while small business and C&I have been negatively impacted. The point I want to make here is that the impact to specific companies will depend on the customer mix in their portfolios. In our case, we are heavily weighted towards the Texas residential customer. Now, looking ahead into the summer, Texas already began a partial reopening of the economy. This suggests that the severe impact to small businesses we have seen in April may ease as the economy reopens. Conversely, the impact on the oil patch may just be getting started. I will simply remind everyone that our largest exposure in ERCOT is to residential demand, and so far that has been robust. The impact to summer load is difficult to assess at this point, but I can tell you that summer prices will be dependent on wind production and weather. Finally, the long-term outlook for ERCOT from our perspective will remain robust. We know that reserve margins are dependent almost exclusively on new renewables coming online in the next few years. No doubt COVID-19 and low oil prices will have an impact on demand. It's difficult to know how much at this point. We have no new renewables PPA this quarter, which is indicative of a slowdown in new renewable development. How much these two things offset each other is going to determine scarcity prices going forward. Now, based on where the forward curve is, not much scarcity is assuming the forward prices, which is not helpful for new renewable developments or any new development for that matter. This is why we think reserve margins will be tighter than what we have seen in the CDR. So with this market context, I want to review how we are positioned as a company to perform during this unprecedented period on slide seven. Since I took over as CEO over four years ago, we deliberately evolved our business from a highly levered IPP to a more stable and predictable integrated power company. During this time, we simplify and streamline our portfolio, achieve what we view as an investment-grade balance sheet, establish a transparent and compelling capital allocation framework, and made sustainability an integral part of our foundation. While the stock price doesn't reflect it, we expect all the good work we have done to be reflected in our stable earnings as we successfully navigate the current downturn. As you can see, we rebalanced our portfolio by selling non-core and underperforming assets to better match retail load with generation. By integrating these two complementary and counter-cyclical parts of the value chain, we have significantly stabilized our earnings. As you can see in the new segments, our business is heavily weighted towards residential consumers, which has proven to be a more resilient group during this period, particularly in Texas. Second, our balance sheet has never been stronger. Last year, we reached our goal of driving our net debt to EBITDA ratio within our target investment grade metric range of 2.5 to 2.75, and through continued operational performance, we expect to drive this ratio to the conservative end of that range this year. We remain in close dialogue with the rating agencies, and we continue to target investment grade ratings over the next 12 months. Our balance sheet strength goes well beyond these metrics. We have done a good job in managing our maturity schedule and liquidity. Our next maturity is not until 2024, and each year's maturity is sized to be less than anyone's year's free cash flow. Our liquidity also remains strong at approximately $2 billion. Next, on capital allocation, All our actions to stabilize and right-size our business have created tremendous financial flexibility. And now with our deleveraging program behind us, we're focusing all our excess cash in 2020 and beyond on perfecting our business model and returning capital to our shareholders. Last year, we established a longer-term framework built upon a commitment of value creation through disciplined capital allocation across all cycles. With this financial flexibility, we will continue to evaluate opportunistic growth that meets our financial thresholds and return capital to shareholders through growing our dividend to 7% to 9% combined with programmatic and opportunistic share repurchases. Finally, our comprehensive sustainability framework serves as a solid foundation to our portfolio as it is embedded in our culture, aligned with our strategy, and necessary for our long-term success. The bottom line is this. Our company is stronger today than it has ever been. We recognize that our business model is unique and relatively new. I look forward to further validating the stability of our platform through our strong execution. Today we're taking one additional step in the evolution of our business model and how we report results. We have moved from having two distinct businesses, retail and generation, to one integrated business with a regional focus. Therefore, we need to realign our segment reporting to match our integrated strategy and the way we operate our company. Turning to slide eight, we're introducing the new regional segments and EBITDA sensitivities. These segments will have the benefit of a common market structure, and importantly, it will better highlight the stability of our ERCOT platform. Also, the new sensitivities now capture the full impact of the integrated business at the EBITDA level. The Texas segment will include all activities in our value chain, from customer operations to market and plant operations. In this new format, revenues will be primarily driven by retail, while cost will be either the fuel that we buy for our power plants or the power we purchase from the wholesale market. This is exactly how we manage the business. The integration of these two counter-cyclical businesses results in long-term earnings stability from this segment, which is reinforced by the limited sensitivity to power prices shown in the bottom of the slide. The East segment will include all non-Texas customer activity and all generation assets in the East. This region is not fully balanced between retail and generation. Therefore, we will continue to have both revenues and costs for each business. Our focus is to better match these two parts so we can fully integrate them. The Western Nodder segment includes the conventional and renewable projects in California, the cottonwood leaves, and our interest in one international asset. This segment will only have generation revenue and cost since there is no ability to replicate our integrated model due to a lack of competitive retail markets. Because the east and west segments are not fully integrated, the sensitivity to changes in power prices are not optimized as it is in Texas. We believe this new segmented structure better reflects our operations and regional impacts. So with that, I will turn it over to Kirk for the financial review.