NRG Energy, Inc.

Ladies and gentlemen, thanks for standing by, and welcome to the NRG Energy, Inc.' 's third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Mr. Kevin Cole, the head of investor relations. Thank you. Please go ahead, sir.

Thank you, Felicia. Good morning, and welcome to NRG Energy's third 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 foreign-looking statements, which are based on assumptions that we believe to be reasonable as of this date. Actual results may differ materially. We urge everyone to review the safe harbor in today's presentation, as well as the risk factors in our SEC filings. We undertake no obligation to update these statements as a result of future events, except as required by law. In addition, we will refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to today's presentation. And with that, I'll now turn the call over to Mauricio Gutierrez, NRG's President and CEO. Thank you, Kevin.

Good morning, everyone, and thank you for your interest in NRG. I'm joined this morning by Kirk Andrews, our Chief Financial Officer. Also on the call and available for questions, we have Elisa DeKillinger, Head of Retail Mass, and Chris Mosser, Head of Operations. I'd like to start on slide two by highlighting the three key messages for today's presentation. Our integrated platform performed well during the summer, delivering stable results despite challenging conditions presented by COVID-19. We're narrowing our 2020 guidance around the midpoint and maintaining our 2021 adjusted EBITDA guidance. The direct energy transaction remains on track to close by year-end, And today we're providing an update to our financing plan that no longer requires new entity for the transaction. And we continue to advance our strategy to perfect our business model by optimizing our platform to better serve our customers. Moving to our third quarter financial and operational results on slide three. Beginning on the left-hand side of the slide, we once again delivered top-side safety performance. I want to take a moment to thank our employees. especially those who are on the front lines reporting to power plants and dispatch centers for continuing to prioritize safety and for keeping the lights on for our customers throughout this pandemic. During the quarter, we made good progress on our strategic priorities. The direct energy acquisition, which directly advances our strategy of moving closer to the customer, is on track to close by year-end. We remain focused on perfecting our platform through portfolio optimization, which I will discuss later in the presentation. And we continue to refresh our board of directors with five new independent directors added over the last three years, making two-thirds of our board now gender or ethnically diverse. We also continue to adhere to our capital allocation principles, which will be highlighted throughout the presentation. Most notably is the updated financing plan for the direct energy acquisition and our commitment to investment grade credit metrics. Moving to the right-hand side of the slide, we delivered $752 million of adjusted EBITDA in the third quarter, bringing our year-to-date results to $1.674 billion, a 5% increase from the same period last year. Drivers for our third quarter results include the impact from milder weather in Texas and COVID-19 offset by lower supply costs. Our strong year-to-date results allow us to narrow our 2020 adjusted EBITDA guidance to the midpoint of the range, fully offsetting the previously expected COVID-19 impacts. For 2021, we are maintaining our adjusted EBITDA guidance range while updating our forecast to reflect more conservative expectations of COVID-19. At the moment, this puts us below the midpoint of our guidance, but we are focused on mitigating the impact of COVID-19 on sales channels, primarily in the East, and delays on the solar PPAs previously expected for summer 21. Kirk will address adjusted EBITDA and free cash flow guidance in detail in his section. Turning to slide four, I want to provide an update on the impact of COVID-19. At NRG, our top priority through this public health crisis has been the health and safety of our employees and customers. Beginning with employees, we activated our crisis management team one day after the first U.S. confirmed case in January. We seamlessly transitioned over 90% of our office workforce to remote work. all while maintaining full operational status. For our customers, we have proactively expanded payment options to aid those negatively impacted by the pandemic. As we look forward, we recognize the need to rethink our work environment in a more permanent way to leverage technology and better meet the needs of an increasing hybrid society. This is why during the second quarter, we formed a task force called Workplace 21, with the goal of redesigning our office workspace to create an optimal long-term work environment through and post COVID-19. On the right-hand side of the slide, we have estimated the year-on-year weather normalized changes in load across ISOs. As you can see, Electric demand continues to be impacted across the country, but is gradually recovering in all markets as states have entered various phases of reopening. ERCOT continues to display the most resilience, down just 1%. Within ERCOT, we continue to see significant variances in electric demand by customer type. Residential customers are still positive compared to normal. while commercial and industrial users remain negative. But all of them are showing signs of returning to normal levels. For NRG, I want to remind everyone that the largest part of our portfolio in ERCOT is residential, which thus far has remained relatively resilient. As we have discussed, COVID-19 will continue to have an impact on customer demand, how we retain and grow customers, and the timeline for executing our renewable PPA strategy. As the pandemic persists, we're seeing new short-term challenges and longer-term opportunities. First, on the electric and natural gas demand side, we continue to expect increased demand from residential customers giving stay-at-home orders. This is clearly a net positive for us. Next, on how we retain and grow customers, We expect to be a relative winner given our best-in-class multi-channel platform. In ERCOT, we're seeing lower attrition rates, which help stabilize customer count, but we're also seeing fewer customers looking to move away from competitors. We continue to redirect and refine marketing dollars, but for planning, we're assuming stable customer count in ERCOT. We could see incremental growth opportunities. In the East, we're also realizing lower attrition, but giving less favorable regulatory framework. Face-to-face is an important tool in creating awareness to win customers. While our non-face-to-face channels are becoming increasingly effective, we believe our customer count will more closely track the overall economic reopening. For planning, we're assuming a contraction in customer count And as a second wave of potential shutdowns looms, we remain diligent in mitigating the impact if it were to occur. COVID-19 continues to impact the timeline of signed PPAs to achieve commercial operations. We now expect our pre-summer 21 solar PPAs to be delayed. This delay creates a headwind versus our midpoint of guidance because our load obligations will be met with more extensive market purchases. But they are value neutral, given that we negotiated lower prices to accommodate for these delays. To be clear, it is important to differentiate between the short-term impact of economic shutdowns and a socially distanced economy, versus what I believe is the stickiness of stay-at-home trends. As I stated before, I believe the former to be a near-term challenge that we will manage through. and the latter to be a medium to long-term opportunity for competitive retail. Now let's move to slide five for a closer look at this past summer in ERCO. On the top left chart, we show the cooling degree days by month. The conditions through summer were mixed, with July and August slightly above normal, but with limited extreme heat events, and September well below normal due to an active hurricane season. This resulted in lower system wide demand. Now moving to the bottom left of the slide, you can see the impact on power prices year over year from lower demand than COVID-19, coupled with strong power plant performance. Our portfolio was fully hedged against strike load, but on the margin, we were able to modestly lower our supply costs through opportunistic market purchases. Overall, the business performed well this summer. Our retail business mix continues to provide stability with stay-at-home trends, offsetting milder weather and impacts from COVID-19 on small and large C&I customers. We have now demonstrated the strength of our business over the past three summers under very different market conditions. 2018 saw volatile forwards with low real-time pricing. 2019 saw low forwards with high real-time pricing. And 2020 saw recessionary factors including both low real-time pricing and customers in financial distress. This summary is just one more example of what underpins our confidence in the stability and predictability of our business model. Moving to slide six for an update on our ongoing efforts in perfecting our platform and the direct energy acquisition. As you know, Over the last four years, we have been evolving our platform to be closer to the customer. During this time, we simplified and streamlined our portfolio, achieved a strong balance sheet, established a transparent and compelling capital allocation framework, and made sustainability an integral part of our foundation. While our stock price does not yet reflect the full measure of our success, we continue to strengthen and streamline our portfolio. We have significantly rebalanced our portfolio by reducing generation and growing retail. But we're not done yet. To that effect, we expect to realize a minimum of $250 million in net equity proceeds, net of debt repayment associated with assets sold over the next six to 12 months. While we will not be providing details of the specific assets or businesses that we're targeting, you should expect a comprehensive update as outcomes are reached. The first $200 million in proceeds will be used to fund direct energy with excess capital to be available for general capital allocation. Now moving to the right side of the slide, the direct energy acquisition remains on track to close by year end. We received approval from Centrica shareholders Canadian Competition Act, and HSR. We're now awaiting approval from FERC, which is expected by year-end. As I mentioned in my remarks, we are achieving our equity needs through increased cash-on-hand and asset sale proceeds. This eliminates our need to go to market for new equity through the previously planned $750 million Perpetual Preferred Equity Link security. We believe this benefits both debt and equity investors, given it maintains a simplified capital structure, as the preferred equity was a hybrid 50% equity and 50% debt instrument. Kurt will provide additional details on the financing plan. Importantly, our updated financing plan maintains our path to achieve investment-grade metrics. Lastly, on integration. We are excited to close the acquisition and welcome direct energy employees into the NRG family. The integration process is well underway as our experience at cross-functional integration team is focused on day one activities and preparing for systems and process synergies. We look forward to bringing NRG's strength in risk management and customer experience with the retro standard platform of products and services to create value for customers and shareholders. With that, I will pass it over to Kirk for the financial review.