NRG Energy, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the NRG Energy, Inc. fourth quarter and full year 2020 earnings conference 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 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to one of your speakers today, Mr. Kevin Cole, Head of Investor Relations. Sir, please go ahead.

Thank you, Michelle. Good morning and welcome to NRG Energy's fourth quarter and full year 2020 earnings call. This call is being broadcast live over the phone 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 risk factors in our SEC filings, and 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 now 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 Gaetan Frotte, our Interim Chief Financial Officer. Also on the call and available for questions, we have Elizabeth Killinger, Head of Home Retail, and Chris Moser, Head of Operations. I'd like to start this call by expressing our utmost concern for the millions of Texans impacted by winter storm Uri. We're actively working in our communities and with our customers to provide support and relief to those in need. I also want to recognize all the men and women from NRG who, under frigid conditions, were working tirelessly to keep our power plants running and those employees who work day and night through this event to inform and support our customers. all while facing their own hardship at home. From everyone at NRG, thank you. Let's move on to slide three for the three key messages of the call. First, above all else, our top priority and core focus today is helping our Texas communities recover from the devastating winter storm. The system-wide energy failure that occurred in Texas is unacceptable. and we are committed to working with all stakeholders to prevent this from happening again. Next, our integrated platform continues to deliver stable results through unprecedented events like the COVID-19 pandemic and extreme weather events, further validating the strength of our model. Finally, we continue to advance our customer-centric strategy by redefining our platform to better serve our customers. In January, We closed on the direct energy transaction, forming the leading North American integrated energy and home services company, now serving a network of 6 million customers. Today, we are announcing the sale of a 4.8 gigawatt portfolio of noncore fossil assets, which I will detail later in the presentation. Turning to slide four. Starting on the left-hand side, winter storm Uri was simply historic. It was the third coldest three-day stretch on record in Texas, blanketing the state for days with record cold temperatures and precipitation, putting unprecedented stress on the entire energy system. This winter storm exceeded all planning parameters and highlighted the interdependency between the natural gas and power systems. unadjusted estimated peak load of 77 gigawatts, surpassing not just the winter peak, but the all-time peak. And due to weather-related system and plant-specific issues, 52 gigawatts of capacity in the market were forced offline at one time or another. Last week, we committed to work with regulators and legislators on a comprehensive and exhaustive root cause analysis of what went wrong in the energy system. from fuel supply to the production and delivery of electricity. Our goal is to have a system that is more resilient to prevent this from happening again. Turning to the right-hand side of the slide, our work to prepare for winter conditions began well before the onset of frigid temperatures. As part of our winter readiness program, we execute a comprehensive winterization program That starts with the lessons learned from prior winter seasons. Then, every September, our power plants in each of our markets, including Texas, begin a well-defined process of preparing for winter operations. The results are presented to me in early November by the head of operations and each plant manager. We then submit our declaration of completion of the winter weatherization preparations to ERCOT and the PUCT by November 30th. In early February, we recognized the threat of this significant winter storm. Safety of our employees, customers, and communities is always our top priority. For our customers, we sent cold weather alerts and energy conservation notifications across all of our retail brands and worked with our large CNI customers to proactively reduce their load. For our generation fleet, we put all plants at the highest level of alert, made all operational units available to the market, and secured additional critical supplies at our sites. This included moving personnel from the Northeast with extreme cold weather experience and technical expertise to Texas plants. Ahead of the storm, we also took the additional steps of increasing our available generation capacity by bringing back nearly two gigawatts of power generation, typically reserved only for summer months. We also executed additional natural gas and power hedges. Our available generation portfolio performed at roughly 80% capacity factor on average. When comparing our generation production to a similar period earlier in the month, we produced almost twice as much electricity. Despite our best efforts to winterize the fleet, we suffered our share of unit-specific and system-related problems that will be part of our root cause analysis. Turning to slide five, our strategy is to maintain a balanced portfolio between retail load and supply to protect both our customers and our business. In Texas, we have a significant retail footprint across the state supported by diverse generation assets and third-party agreements. During the storm, we aimed at maximizing the output of our power plants while maintaining a fairly balanced position across the portfolio. Importantly, none of our residential customers will be exposed to the real-time wholesale power prices that occurred during the storm. We don't offer these products to our residential customers, and we also don't believe they should be available to them. And like I said earlier, we're focused on recovery efforts across our communities. We have pledged an initial $10 million in relief to our communities, customers, and employees. Now, turning to the right side of the slide, we expect our balance platform to deliver stable results. Our preliminary analysis of the winter storm financial impact is expected to be within our current guidance range. This preliminary assessment incorporates internal estimates on customer meter and settlement data, which have not been finalized yet. It also makes assumptions on potential customer and counterparty credit risk and ERCOT default allocations. We have also performed a stress test on our assumptions resulting in a potential outcome, although at a lower probability of plus-minus $100 million to our guidance ranges. As information becomes available, we'll be able to narrow this kind of outcomes. Moving to the 2020 operational and financial highlights on slide six. Beginning with our 2020 scorecard, we executed on all our priorities. We delivered strong financial and operational results and had our best safety year ever. I want to take a moment to thank and commend all of my colleagues as this is now the third straight year we set a new record for safety, an incredible accomplishment. Our three-year transformation plan goals were fully achieved in 2020. 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. Over the last five years, we have been evolving our platform to move closer to the customer. In 2020, we took major steps towards this goal, with key highlights including the acquisition of direct energy and diversifying our supply strategy through signing renewable PPAs in ERCOT and launching RFPs in the east we have significantly rebalanced our portfolio by growing retail and reducing generation. I look forward to sharing with you the next chapter during our Spring Analyst Day. Now, moving to the financial results on the right-hand side of the slide, we delivered $2 billion of adjusted EBITDA, slightly above the midpoint of our guidance range, and $1.547 billion of free cash flow before growth, which includes the pulling forward of certain items from 2021 into 2020 in order to fund the direct energy acquisition. Gaten will provide more detail on the free cash flow later in the presentation. I want to note that our 2020 carbon emissions came in below our 2025 50% reduction goal. We're not adjusting our 2025 targets today. but this highlights our efforts in reducing carbon emissions. Finally, as I previously stated, we're maintaining our guidance ranges for 2021. Turning to slide seven, I want to provide an update on the direct energy integration. This transaction presented a step change for us as we move closer to the customer by significantly expanding our customer network and home services. Given the complementary nature of both businesses, it also provides a significant opportunity to leverage our operating platform and achieve significant synergies. This transaction advanced our plan to rebalance our portfolio, reorganize around the customer, and continuously improve our business and cost structure. With direct energy close, NRGE now has the strongest collection of competitive power brands offering energy products and services in North America. The direct energy acquisition significantly expands our residential and business footprint beyond electricity and outside of Texas. Both residential and business customers are able to leverage our platforms for solutions that fit their specific needs, elevating consumer choice to a whole new level. Our integration efforts are well underway, and today we are reaffirming the planned targets. We are already making significant progress on talent assessment, collateral management, and systems integration. Throughout this integration process, we are focused on high-grading our organization through retaining the best and diverse talent and further deepening our customer-focused culture. The integration is being led by the same team responsible for executing the transformation plan and has a similar governance structure. I am highly confident in our ability to achieve the synergies outlined on the slide. On the right-hand side of the slide, you will see a scorecard that looks familiar, and that is because it is how we reported our transformation plan progress to all of you. We plan to update this scorecard with our results in order to provide transparency and keep you informed of our progress. Next, turning to slide eight for an update on our ongoing portfolio and real estate optimization efforts. I highlighted last quarter that we were actively focused on monetizing non-core assets with a target to realize a minimum of $250 million in equity proceeds within six to 12 months. I am pleased to announce that we have reached an agreement with Generation Bridge, an affiliate of Arclight Capital Partners, to sell a 4.8 gigawatt portfolio of fossil fuel assets across New York, Connecticut, and California for $760 million in cash proceeds, or roughly four times EBITDA. As you can see on the bottom right-hand side of the slide, Many of these assets are nearing end of life and with economics dependent upon capacity markets. Excluding Sunrise, the average expected capacity factors ranges between 0% to 6%. This is a good transaction for us. It further streamlines our business and addresses terminal value and earnings concerns that otherwise would have masked our retail growth. Our portfolio repositioning and optimization is a continuous process. We are committed to our business model and will continue to provide updates on our progress. The asset sale is targeted to close in the fourth quarter of 2021. Net cash proceeds after associated debt reduction will be allocated using our capital allocation framework. Before turning over the call to Gaten for the financial review, I want to thank Kirk Andrews for his decade of service at NRG. Over the last 10 years, Kirk has not only been a colleague, but also a trusted friend, and I believe I speak for the entire organization when I say that we all wish him well and the best in his future endeavors. Our finance team is in capable hands with Gaetan Frotte, our treasurer, stepping in as interim CFO. With that, I will pass it over to Gaetan for the financial review.