NRG Energy, Inc.

Good day, and thank you for standing by. Welcome to the NRG Energy, Inc. first quarter 2024 earnings call. At this time, all participants are in 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Kevin Cole, Head of Treasury and Investor Relations. Please go ahead.

Thank you. Good morning and welcome to NRG Energy's first quarter 2024 earnings call. This morning's call will be 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.nrd.com under Presentations and Webcasts. 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 Dr. Larry Coben, NRG's Chair and Interim President and CEO.

Thank you very much, Kevin. Good morning, everyone, and thank you for your interest in NRG. I'm joined this morning also by Bruce Chung, our Chief Financial Officer, and we also have members of the management team on the call who are available to answer questions. Let's begin with the three key messages for today's presentation on slide four. First, our business performance exceeded expectations in the first quarter. I'm incredibly pleased with our strong start to the year and in reaffirming our 2024 financial guidance ranges. Second, electrification trends compounded by GenAI data center growth forecast a signal of transformative rise in power demand. As a result, we expect competitive markets to realize outsized benefits driven by business-friendly environments, available resources, and the ability to site projects quickly. Finally, NRG is well positioned to capitalize on tightening supply and demand in our core markets. Our technology-led consumer platform, our diversified generation portfolio, our leading business energy platform, and a real estate site portfolio present a unique opportunity to create significant shareholder value. I'm going to give you visibility into this later in the presentation. Let's move to slide five, because I want to share again our value proposition, which may not be familiar to those of you who are new to NRG, and I understand there are several of you on this call. We serve nearly 8 million residential customers and operate the second largest CNI energy and natural gas retail business by volume in the United States. Our company sits at the intersection of energy and technology in the home and the grid. We generate significant excess cash well beyond our current business needs. resulting in the financial flexibility to grow earnings while returning significant capital to our shareholders and maintaining a strong balance sheet. The strength of our business and financial outlook has us uniquely positioned to capitalize on what we believe to be the beginning stages of an exceptional time for our industry. It's an exciting time for our company, We remain on track to achieve our 15 to 20% free cash flow before growth per share CAGR target, even as our rising stock price means buying shares at higher prices than projected a year ago. Turning to slide six, in recent months, we've received numerous questions about the impacts of the forthcoming power demand growth super cycle on the industry and in NRG in particular. Today, I'd like to talk about what we are seeing. Bruce will then discuss the first quarter results later in the presentation. Starting with macro trends, we're seeing clear signs of a step change in the long-term fundamentals of power demand from multiple catalysts. This marks the departure from an extended period of stagnant power demand, during which energy efficiency outpaced usage growth. For the first time in decades, and perhaps in my 40 years in this business, we are experiencing fundamental improvements driven by demand rather than commodity prices. We, along with every other forecasting expert I have read, are now expecting a step change in long-term power demand. This increase in demand is attributed to several factors, including electrification, manufacturing on-shoring, LNG, crypto, greater industrial loads, and data center growth. Recent advancements in Gen AI are compounding and accelerating these factors, leading to the formation of the next power demand super cycle. At the same time, the U.S. power supply that is expected to accommodate this growth will increasingly depend on intermittent resources. which highlights a growing and unprecedented imbalance between dispatchable supply and demand. To be clear, it takes only a fraction of what is being forecasted to nudge us into this super cycle. And this super cycle will require an all of the above supply approach, including retaining existing generation assets, developing new generation, and approaching supply and demand differently through the adoption of technology by shifting large loads, residential VPP, and other forms of demand and energy management. This is a transformative opportunity for our sector and for NRG. If you turn to slide seven, You'll see why competitive markets such as those in which NRG operates are best positioned to realize outsized benefits of this large load growth. It's due to the competitive framework that offers speed to market, affordability, and resource availability. We see Texas and portions of the Northeast as the most favorable markets. Texas stands out as it is already a preferred destination for large loads, including crypto, LNG, and manufacturing onshoring, which all have experienced substantial growth in recent years and are exhibiting strong outlooks on the future. Texas benefits from its business-friendly practices, favorable regulatory environment, tax incentives, and large land footprint, positioning it as a winner in the era of generative AI and other large load growth. Furthermore, coupled with our ability to site projects years faster than in regulated markets and its proximity to main fiber channels, I expect Texas to continue to be a leader in load growth. On slide eight, I'd like to highlight four of the many key opportunities for value creation that exist across our platform. To leave no doubt, Each of these opportunities represents upside to our June 2023 Investor Day growth plan, and it's not reliant on potentially transitory subsidies or Inflation Reduction Act funding. First, we're the only company to have residential energy and smart technologies at scale, with nearly 8 million customers. We're a trusted provider and have the unique capability to provide novel energy management through our smart home ecosystem, a capability that will be necessary and increase in value in a tightening market. Second, you may not be aware or fully cognizant of the opportunity that it represents, but we are the second largest business-to-business electricity and largest natural gas provider by volume in North America. Beyond selling customers more of our products, we are a leader in premium services. We offer tailored energy management solutions that focus on optimizing and stabilizing energy costs. We're also able to commercially help our customers achieve their sustainability goals. These customers include many of America's largest industrial players and corporations as well as the hyperscalers. Third, Our Texas generation fleet mix is a diverse set of assets that enable us to deliver stable supply costs while maintaining insurance for volatility through higher cost units that are not economical in the current year. These uneconomic units are primarily higher heat rate natural gas assets that in recent low price times may have run for only a few peak hours per year. We primarily use our generation fleet to supply our residential retail portfolio, with customer fixed price contracts typically lasting a year or two. As a result, our generation fleet is mostly open 18 to 24 months out. This creates a significant opportunity to swiftly capitalize on rising power prices and rising demand. As the value of our product increases, and equally importantly, Units that have historically operated only a few hours annually could now see increasing run times and, of course, profitability. Lastly, our real estate portfolio has several potential development sites for co-location of large loads or power plants. We own 21 sites with 21,000 acres of retired and existing generation facilities that generally have existing facilities or access to grid interconnection. They are in competitive markets, and given the extreme focus on project speed, potentially provide another avenue of value creation. Let's try to impact each of these a bit. Turning to slide nine, we operate one of the leading business-to-business power and natural gas platforms in North America. We serve nearly 100 terawatt hours, of electricity and almost 1.8 trillion cubic feet of natural gas annually. As demand growth scales, we anticipate increasing electric and natural gas sales volumes. Through our business platform, we help large load customers accomplish their intended goals through tailored plans, including stabilizing their energy costs, delivering specific attributes for their sustainability commitments and optimizing their usage through services such as demand response. At heart, these customers are looking for a partner to help them navigate complicated energy markets while minimizing their risk. We stand ready to provide the services they need as a large market participant with a best-in-class commercial operations platform and a track record of high-quality customer experiences. With respect to data centers, it is still the early days, but we are seeing signs that they are planning to ramp up capacity in the current years. As an anecdotal example, a data center customer approached us about increasing their capacity by three times at an existing facility in the next 36 months. We are seeing and experiencing demand growth in real time. Moving to slide 10, our Texas generation fleet is diverse in technology, age, and merit order. We operate 8.5 gigawatts of generation capacity in Texas, supplemented by 1.6 gigawatts of long-term power purchase agreements. We also have 1.5 gigawatts of shovel-ready brownfield projects in development. This strategic diversification across technologies, fuel types, and merit orders ensures near-term stability and positions us to capitalize on opportunities for medium to long-term margin expansion driven by higher power prices. On the right hand of the slide, we provide our Texas generation open gross margin sensitivity to changes in around-the-clock power price scenarios. This sensitivity provides insight into our generation portfolio's earnings power as economic generation increases in value and currently uneconomic generation becomes not only economic but very profitable. On slide 11, provide a more detailed look at our Texas generation gross margin sensitivity. This analysis focuses on changes in power prices, assuming flat natural gas pricing and normal weather. On the left side of the slide, we have included Texas's around-the-clock and peak pricing forwards for July 2023 and April 2024, which represents the assumed pricing in our 2024 guidance and are compared to today's forwards. As you can see, ERCOT forward pricing has moved up significantly. The only explanation for this is that the market is starting to reflect increased power demand from large load growth. Also noteworthy is that the curve is no longer backward-dated, suggesting a view and a long-term view of sustained tightness in the Texas power market. Building upon last quarter's additional modeling disclosure, on the right side of the slide we have provided the necessary components to directionally model the gross margin opportunities for our Texas fleet in a dynamic pricing environment. We begin with the 2024 Texas generation base gross margin and include expected hedge positions of nearly fully hedged in year one, roughly half in year two, and less than 25% in year three for economic generation respectively. We have also included an open gross margin scenario which assumes no hedges. You will observe that our price sensitivity doesn't follow a linear pattern. Units become economically viable at different price levels, resulting in disproportionately larger benefits from increases in power prices compared to decreases. With ERCOT forward pricing rising $10 in the outer years on an open gross margin basis, this implies more than $400 million of margin benefit compared to 2024. Assuming we are 25% hedged in the year that that move occurs, it translates to approximately $350 million of upside compared to 2024. And this is simply the beginning. This sensitivity analysis demonstrates that our portfolio is well positioned to capture significant margin upside in a rising price environment and that the underlying fundamental value of our fleet has materially increased. Supported by our diversified supply strategy, we have the agility and flexibility to leverage these market dynamics and translate them into significant and durable shareholder value. On slide 12, I want to close by providing details of our site portfolio. Driven by the need for more capacity and the highly valued attributes these sites possess, we are incredibly excited about their potential value. We have 21 sites with 21,000 acres of land within competitive markets that are prime locations for new large loads and power plant development, with co-location opportunities both behind and in front of the meter. These sites offer a mix of valuable and critical access to infrastructure, including transmission, interconnection, water, abundance of land, and proximity to long-haul fiber networks. of particular significance to data centers, these attributes offer expedited construction timelines measured in years of time savings. We have established a dedicated team focused on maximizing the value of our site portfolio. When the analysis is complete later in the year, you can expect to hear more information from us regarding the potential for these sites and what would be required to turn them into new capacity, data center locations, or behind-the-meter projects. With that, let me turn it over to Bruce for the first quarter review.