NRG Energy, Inc.

Hello and welcome to the NRG Energy Inc's first quarter 2021 earnings call. Please note that today's meeting is being recorded. During the meeting, we will have a question and answer session. You can submit a written question at any time by clicking on the message icon at the top of your screen. Please note that your registered name will be announced along with your question during the Q&A session following the formal portion of the meeting. Guests will not be able to submit questions. Please also note that all participants are in a listen-only mode. If you experience technical difficulties during the meeting, please click on the support link on the broadcast screen. It is now my pleasure to turn today's meeting over to Kevin Cole, Head of Investor Relations. The floor is yours.

Good morning. Thank you, Daphne. Daphne, I believe you were referring to maybe a different earnings call. So investors, please hit star one when you want to ask a question. This is just a normal framework here. And so to get on to the call, good morning and welcome to NRG Energy's first quarter 2021 earnings call. This morning's call will be 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 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 reconciliation to the most directly comparable GAAP measures, please refer to today's presentation. And with that, I'll turn the call over to Mauricio Gutierrez, NRG's President and CEO. Thank you, Kevin, and good morning, everyone.

And thank you for your interest in NRG. I'm joined this morning by Gaetan Frotte, our Interim Chief Financial Officer. And also on the call and available for questions, we have Elizabeth Killinger, head of home retail, and Chris Moser, head of operations. Over the past few months, we have discussed in detail the unprecedented nature of Winter Storm Uri, the impact it had on the entire energy system, the steps that we took to prepare our Texas platform, and the support we provided to our customers and communities. Today, and with the benefit of additional information, we are providing more clarity on the financial impact to our company, the steps we're taking to mitigate this one-time event and reinstating 2021 financial guidance. We continue to work closely with legislators, regulators, and all market participants to introduce comprehensive solutions across the entire energy system to address issues and shortcomings that were apparent during the storm. NRG remains committed to helping our customers and communities recover from the devastating winter storm and to bring solutions that ensure an event like this never happens again. We also want to provide you an update on the progress made in advancing our customer-centric strategy by reorganizing around the customer and strengthening our platform. I want to start on slide four. We have now processed 100% of the information received from the mid-April 55-day resettlement and issued all expected invoices to our customers. The updated financial impact from Winter Storm URI, net of our mitigation efforts, is expected to be a net loss of $500 to $700 million. In order to provide you with more transparency to better understand and make your own judgment on how our platform performs, I am going to break down the components of the gross financial impact into two categories, controllable and uncontrollable. On the controllable side, throughout the event, we maintained a balanced position while absorbing very high natural gas prices, operational issues at our plants, and protecting our residential retail customers from high electricity prices. In total, our platform was positive $17 million, with estimated bad debt, primarily from CNI customers, accounting for $109 million. Moving to the three uncontrollable items. First, the recently acquired Direct Energy portfolio had a heat recall option with a counterparty that did not perform, resulting in a $393 million gross loss. Following the event, we reexamined the entire hedge book from Direct and determined that this was an isolated issue. We're currently engaging discussions with the counterparty, and if a satisfactory result is not reached, we plan to vigorously pursue recovery through all avenues. Next, we are recognizing a $95 million gross loss due to ERCOT default allocations. This loss is comprised of a $83 million cash short pay plus $12 million MPV of the remaining $102 million owned to ERCOT over the next 96 years. As a reminder, ERCOT realized defaults of $3 billion primarily from two regulated co-ops, Brassos and Rayburn. The state legislature appreciates the impact of the COB defaults in the broader market and is considering securitization as a way to soften the impact to customers and other market participants. Finally, we are recognizing a $395 million loss due to ERCOT's management of the grid, particularly during the last 32 hours when ERCOT kept the market-clearing price at the cap despite having more than 10 gigawatts in reserves. Our platform was balanced during this time, but nonetheless, we were uplifted these extraordinary charges. To help put this in context for you, over no time in history has this charge exceeded $5 million. The state legislature is considering also securitization for these charges, given they are the result of unforeseen and unhedgable actions by ERCOT. We are focused on supporting the PUCT and ERCOT in the implementation of policies and procedures to ensure the market functions properly in the future. In total, we expect our estimated gross financial losses to be reduced by $275 to $475 million through bad debt mitigation, recovery of direct energy hedge nonperformance, ERCOT default and uplift securitizations, and one-time savings. resulting in a net loss of $500 to $700 million. We have a high level of confidence in the net range and see manageable risks around the 180-day settlements and further bad debt escalations. Now I want to take some time and discuss the solutions we're focused on in Texas. We believe they will improve grid reliability, strengthen our market, and more importantly, avoid a systemic failure of the energy system in the future. Since the storm, we have actively engaged in discussions with legislative members and proposed various changes to make Texas more resilient. I want to thank the members of the Texas legislature for their continued leadership on these key issues. While there are many proposals in the Texas legislature right now, including many of which we are working actively on, I want to focus here on three concepts that the legislature has made a priority and I believe are critical to ensure what happened in February never happens again. Hardening of the system, improving communication, and market design changes. Beginning with system hardening. Weatherization of assets is key to improve the overall reliability of the grid. NRG has a strong and comprehensive winterization program. that begins with lessons learned from prior winter seasons and ends with our annual declaration of completion of the winter weatherization preparations to ERCOT and the PUCT by November 30th. The implementation of formal winterization rules enforced through penalties and audits is something we support. With that said, one of the biggest lessons learned from this storm is how interactive and interconnected the electric and natural gas sectors are And our focus is not just on hardening the power generation side of the equation. Instead, we believe the entire system, including natural gas, needs to be hardened, as they say, from wellhead to light bulb. Next, I want to talk about communications. During the storm, the lack of communication between all market participants and stakeholders was unacceptable. Formal coordination between the Public Utility Commission ERCOT, the Railroad Commission, and key stakeholders will greatly improve the amount of information available as well as inform decision-making during future events. In addition, improving the dialogue between TVUs during low-chain events and retailers will greatly improve the amount of information available to customers. Improved communication coupled with a statewide emergency alert system will ensure all Texans can stay informed about the status of the grid during times of emergency. Finally, regarding market design changes, our focus is on improving reliability through competitive solutions in the energy and reserves markets, not through regulated generation solutions with guaranteed profits or a one-size-fits-all capacity procurement. For residential customers, Banning index wholesale products, as we already do as a company, is a solution that will protect residential customers from being exposed to the volatile swings in the market. Addressing these three key areas will significantly enhance grid stability, and we look forward to continuing to engage with the Texas legislature in the coming weeks. Now moving to our regular business highlights on slide six. We have excluded the impact of winter storm URI from all our numbers as we have done previously from one-time events. Our intention is to provide transparency to the investment community regarding the recurring earnings power of our business, particularly given this was the first quarter of our ownership of Direct Energy, and separating what we believe to be non-recurring impacts of the combined business as a result of URI. Throughout today's presentation, we have made significant effort to be as transparent as possible on both the cost of URI-related losses and the one-time financial impact so that you can evaluate the financial performance in either context. Gaten will provide additional details later in the presentation. NRG delivered $567 million of adjusted EBITDA in the first quarter. excluding one-time financial impacts from the storm. This is a 62% increase from the same period last year, primarily driven by the acquisition of direct energy. Notably, the addition of direct energy's east electric and natural gas businesses helps flatten our quarterly earnings and free cash flow seasonality. As I mentioned before, we are reinstating our previous financial guidance of $2.4 to $2.6 billion for 2021, excluding URI. Just to remind everyone, on March 17, we temporarily suspended 2021 guidance to reflect the significant uncertainty of URI. While some uncertainty remains, we believe we have received enough data to provide a range of outcomes. Beyond URI, we continue to advance our direct energy integration plan. Following the close in early January, we immediately began the integration process, achieving $51 million of our 2021 synergy target. We remain very confident in our ability to achieve both the 2021 and full plan targets. As part of the direct energy integration, And to further simplify our business operations, today we're announcing the designation of Houston as the sole location for our corporate headquarters. Texas is already home to our largest customer and employee base. It's a great place to do business, and Houston continues to be at the forefront of energy and technology with one of the most diverse workforces in the country. We will continue to maintain regional offices in the markets that we serve, as we expand our business outside of Texas. We're also making good progress in executing our customer-centric strategy. In January, we closed on the direct energy transaction, forming the leading North American integrated energy and home services company, serving a network of 6 million customers. In March, we announced the agreement to sell a 4.8 gigawatt portfolio of non-core fossil assets which helps simplify and decarbonize our portfolio. And since the last earnings call, we increased our ERCO renewable purchase power agreements by nearly 400 megawatts, now totaling approximately 2.2 gigawatts. Last, on our credit metrics. Despite the impact of winter storm Uri, we expect to be at three times leverage by the end of 2021 after paying down $385 million of debt from cash available for allocation. We're working with accredited agencies to review the impact of Winterstop Urine on the timing of achieving investment grade ratings. An expansion in timeline could give us an opportunity to achieve our metrics either through debt reduction and or EBITDA growth. I will be providing more details on capital allocation and our full strategic outlook during our Spring Investor Day. Now, turning to slide seven for our summer outlook. First, from a high level, we're expecting neutral to favorable summer weather and continued economic recovery to result in a year-on-year load growth. Despite this load growth, we're expecting reserve margins to be robust, resulting in stable to lower power prices. Just to remind everyone, high load, low price is good for our business. As you can see on the upper left-hand chart, NOAA is predicting a slightly harder than normal summer within the East and Texas markets. We expect this outlook to trend towards normal with a positive bias as we near summer. Moving to the bottom left-hand side of the slide, COVID-related electric demand continues to recover across markets, with ERCOT demonstrating resilience. As a reminder, COVID's stay-at-home impact on load is most pronounced during the shoulder seasons and less in the summer. From a market perspective, we see 2021 as a recovery year across all our markets. In ERCOT, we expect a return to normal 2% annual load growth with residential usage in ERCOT remaining slightly elevated as stay-at-home trends remain while CNI usage improves throughout the year. returning to pre-pandemic levels by the end of the year. In the east, we see similar trends, although we believe CNI recovery to be pre-pandemic levels could take an additional 12 to 18 months, given stronger stay-at-home trends. Now, as it relates to NRG, we continue to see strong residential load across all markets, and we expect to be a relative winner given our multi-brand and multi-channel platforms. In ERCOT, we're seeing lower attrition rates and incremental growth opportunities through our multi-channel approach and flight to quality following URI. In the East, we're also realizing lower attrition, but given the less favorable regulatory framework, we depend more on face-to-face sales to win customers. For planning purposes, we are assuming normal customer growth in ERCOT and a slight contraction in the East as it more closely tracks the economic reopenings. On retail supply costs, we see little risk of sustained high prices this summer, given robust summer reserve margins across all our core markets. While it is still early, we're eager for the evolution and implementation of the Biden infrastructure plan, as we believe it will amplify the electrification of the economy, through smart technology and cleaner energy choices. So with this positive backdrop, we continue to make good progress in executing our customer-centric strategy, as you can see on slide eight. 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. During the first quarter, we achieved $51 million, or 38% of our 2021 synergy target. We remain very confident in our ability to achieve both the 2021 and full plan targets, and we plan to update this scorecard quarterly in order to provide transparency and keep you informed of our progress. We are on track to close on the 4.8 gigawatt asset sale in the fourth quarter. This is a good transaction for us as 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. Finally, we are preparing for our investor day. We continue to target late spring, and given the flexibility afforded by the virtual format, we will announce the event two or three weeks prior to best manage around the Texas resolution. So with that, I will pass it to Gaetan for the financial review.