NRG Energy Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 10 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the NRG Energy, Inc. Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

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 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, to read the Safe Harbor and introduce the call.

Speaker 1

Great. Thank you, Darion. Good morning and welcome to NRG Energy's Q3 2023 earnings call. This morning's call will be 45 minutes in length This is being broadcast live over the phone via webcast, which can be located in the Investors 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.

Speaker 1

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 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.

Speaker 2

Thank you, Kevin. Good morning, everyone, and thank you for your interest in NRG. I'm joined this morning by Bruce Chong, Chief Financial Officer. Also on the call and available for questions, we have members of the management team. Before we go into the quarterly review, I'd like to start with an overview of our value proposition.

Speaker 2

Over the last 6 years, we have taken the necessary steps Position NRG at the center of the energy transition. A consumer energy business that benefits from the increasing electrification of our economy, while generating significant excess cash well beyond its business needs. A complementary smartphone business that increases the lifetime value of our customers and enables greater optimization of our customers' energy demand And the financial flexibility to return significant capital to our shareholders while maintaining a strong balance sheet. As you can see, we delivered compelling value today and importantly, we have positioned our business to deliver value well into the future. So with that, I'd like to turn to the 3 key messages of our earnings presentation on Slide 5.

Speaker 2

First, we are raising our 2023 financial guidance, driven by strong financial and operational results, both in the Q3 year to date. 2nd, we are initiating 2024 financial guidance above the plan we shared with you at our June Investor Day. And finally, with line of sight to achieving our 2025 growth roadmap, We are accelerating our focus on behind the meter load management opportunities for homes and businesses. Starting with our Q3 results on Slide 6, we delivered top decile safety performance And $973,000,000 of adjusted EBITDA, a 103% improvement from the same period last year, driven primarily by strong operational performance across the business and the addition of Vivint. This brings our year to date results to $2,438,000,000 of adjusted EBITDA, a 74% increase above the prior year.

Speaker 2

On our last earnings call, we indicated that we were trending toward the top end of the guidance range. With strong third quarter performance and our current outlook for the balance of the year, we are increasing and narrowing our 20 23 financial guidance ranges, which includes the close of STP and an increase in the company's annual incentive plan Given the expected outperformance for the year. During the quarter, we continued to make good progress on our strategic priorities. Vivint integration is well underway and with early success on our growth initiatives, we are raising again our 2023 target from $60,000,000 to $75,000,000 This is a 150% increase from our original $30,000,000 target set in May. Also during the quarter, we continue executing on our portfolio optimization efforts With the retirement of the Joliet Power Station and the sale of Gregory and our interest in SVP.

Speaker 2

Turning to capital allocation, we are raising our 2023 share repurchase target by 15% to $1,150,000,000 We have completed $200,000,000 of share repurchases year to date And with the close of SPP, expect to execute the remaining $950,000,000 under an accelerated share repurchase program. Next, we have executed $800,000,000 of debt reduction as part of our liability management program. Bruce will provide more details in his section. Finally, we're initiating 2024 financial guidance ahead of our new Investor Day plan. This earnings expansion is durable and represents High quality growth and overall strengthening of our business.

Speaker 2

On capital allocation, we allocated $500,000,000 to debt reduction And the remaining excess cash allocated 80% to return on capital and 20% to growth. Now turning to Slide 7 for an update on our integrated energy business. We the hottest summer on record in our core Texas market, breaking the previous peak demand record 10 times. While the power grid was stressed given record demand, it performed quite well with only a few periods of scarcity pricing when renewable output was low. Importantly, the efforts we undertook in our summer readiness and spring outage program resulted in a significant increase in our planned reliability.

Speaker 2

In the bottom left hand chart is our in the money availability, Indicating the availability of our units during periods when they are profitable, which is a relevant metric for our business and shows a significant improvement. Retail saw strong performance through the quarter with in line customer growth And better than expected retention. We continue to improve our digital experience with customers engaging more, Increasing monthly average app usage by 20%. Moving to retail supply, The steps we have taken to enhance our diversified supply strategy were successful in providing predictable supply costs on the different load and price scenarios. Beyond investing in our plans, we adjusted our hedge ratios to lean long in key summer and winter months.

Speaker 2

Finally, we are beginning our efforts in residential demand response and have increased participation by 10% this year. We also manage a large C and I demand response business with 2.5 gigawatts of capacity under management. I will provide more color on the behind the meter opportunity later in the presentation. Our smart home business also performed well with strong customer growth And margin expansion as you can see on Slide 8. We continue to advance our technology platform with the launch of new innovative products, Improving our customer experience that is consistently recognized as best in the industry by consumer publications.

Speaker 2

On the right hand side of the slide, you will see the key performance indicators that we introduced in our last earnings call. We continue to see exceptional performance in Smart Home with 7% subscriber growth, 9% revenue growth A 9% service margin improvement versus the same period last year, consistent with the improvements we reported in our 2nd quarter results. Acquisition costs are higher due to the impact of more products being sold and higher interest rates, But we're more than offset by higher revenue on new subscribers. Our customers are engaging more with our platform and are staying for a longer period of time. We are very encouraged by the performance we're seeing across the business and the opportunities that are arising inside the home.

Speaker 2

Now, I want to provide an update on the opportunity for demand management We see behind the meter or virtual power plants on Slide 9. We have been managing energy optimization programs commercial and industrial customers for years. And now we are seeing a growing opportunity in the residential space. New distributed technologies and a growing penetration of connected smart devices in the home have materially changed the industry, providing greater control to the consumer. Grid reliability has also played a role in accelerating adoption As flexible demand represents instantaneous peaking capacity when the grid is at peak low or in scarcity conditions.

Speaker 2

We see 2 primary pathways for us to create value in this market. 1st, through optimizing our existing customer In ERCOT and PJM, where we can benefit from both energy and capacity value as well as reduced market risk. 2nd, through VPP services for smart home and utility customers, both in regulated and competitive markets. We are uniquely positioned to win this space. We have the scale with 7,600,000 customers, decades of commercial and market expertise And an integrated energy business that allows NRG to monetize the value without having to go to the wholesale market All requiring regulatory change.

Speaker 2

We also have vast data and insights from running the 3rd largest commercial and industrial demand While our focus in the near term continues to be optimizing our core and integrating business, Over the medium and long term, we see a significant value opportunity from these programs. This value is not included in our June Investor Day plan and I look forward to providing you updates on our progress in the future. Moving to Slide 10 for an update on our integration efforts. We are making good progress across our initiatives and are reaffirming the full plan targets totaling $550,000,000 of recurring free cash flow before growth by the end of 2025. Our growth and cross sell efforts have yielded strong results, allowing us to increase our 2023 growth target $75,000,000 On the right hand side of the slide, you will see the increasing number of customers buying 2 or more products.

Speaker 2

I want to highlight that this is not exclusively cross sell between energy and smart home, but includes other consumer products sold across NRG that generate recurring revenues. We have been hard at work executing dialogues and collecting critical insights as we prepare to scale energy and smart home cross selling in 2024 and beyond. In the appendix of today's presentation, you will find our latest growth and cost plan scorecard, so you can track our progress. So with that, I will pass it over to Bruce for the financial review.

Speaker 3

Thank you, Mauricio. Turning to Slide 12, NRG's 3rd quarter and year to date financial performance significantly exceeded the same periods last year. NRG produced adjusted EBITDA of $973,000,000 in the quarter, which is $493,000,000 higher And the Q3 of 2022. As you can see in the chart at the bottom of the page, even when normalizing 2022 results For transitory items and the WA Parish outage, 2023 adjusted EBITDA still exceeded the prior year by $350,000,000 Compared to a normalized 2022, Q3 2023 performance was driven by 125,000,000 of improved operations and margin expansion in our core energy business and $225,000,000 of Vivint EBITDA, which was not included in our Similar to the 1st 2 quarters of the year, our core energy business continued to benefit from expanded margins, Near record retention and increased customer count. Our diversified supply strategy and solid plant performance continue to provide Looking at our segments and starting with Texas, Adjusted EBITDA increased by $356,000,000 versus the prior year on the back of higher gross margin of 378,000,000 Continued unit margin expansion from lower supply costs coupled with improved plant performance were the primary drivers for the increase in gross margin.

Speaker 3

This increase in gross margin was partially offset by increased OpEx from higher selling and marketing in home energy, where we increased 50,000 customers year over year. In the East West segment, adjusted EBITDA declined $88,000,000 versus last year, Driven primarily by lower spark spreads at Cottonwood, discontinuation of equity earnings treatment for Ivanhoe and an increase in accruals as part of the company's annual incentive plan, reflecting the expected financial outperformance for the year. In Q3, Vivint continued to deliver strong financial results, contributing $225,000,000 in adjusted EBITDA. Revenue grew 9% year over year driven by subscriber growth of 7%, favorable retention and higher recurring monthly revenue per subscriber, which combined with reductions in monthly service costs per customer drove a 15% increase in adjusted EBITDA compared to 3Q 2022. NRG's free cash flow before growth was $355,000,000 for the quarter, bringing our year to date total to 983,000,000 This represents a significant improvement over 2022 totals driven by growth and adjusted EBITDA.

Speaker 3

As a result of our year to date financial performance, we are raising and narrowing our full year 2023 guidance ranges, $3,150,000,000 to $3,300,000,000 for adjusted EBITDA and $1,725,000,000 to $1,875,000,000 of free cash flow before growth. The midpoint of our new guidance represents a $95,000,000 increase and adjusted EBITDA and a $60,000,000 increase in free cash flow before growth to the midpoint of our original guidance ranges. Turning to Slide 13 for an update on our 2023 capital allocation. We have updated our 2023 excess cash to reflect the final net proceeds of divesting our interest in STP, the net proceeds from the sale of Gregory and the increase to our free cash flow midpoint for the year. The remaining numbers on this slide are largely consistent with the update we gave on the Q2 earnings call with a few notable exceptions.

Speaker 3

Moving from left to right, we have updated the capital we will spend on Vivint integration from $145,000,000 to $50,000,000 This does not reflect lower cost associated with the integration, but rather a shifting of those dollars to 2024 2025. Much of the move is driven by systems integration decisions, which shifted the timeline for those costs to be incurred. Continuing on, as you can see in the debt reduction column, we have made significant progress toward our target of $1,400,000,000 in debt reduction with $800,000,000 achieved through October 31st this year. With the closing of the STP transaction, we will complete the remaining $600,000,000 of debt reduction by the end of 2023 through a targeted liability management program. Finally, moving to the share repurchases column, You will see that we have completed $200,000,000 of share repurchases thus far in 2023.

Speaker 3

This includes the $50,000,000 we completed at the time of the Q2 earnings call and the $150,000,000 we recently completed on October 31. With the closing of the STP transaction, we intend to launch a $950,000,000 accelerated share repurchase program imminently. Between the $200,000,000 already completed and the $950,000,000 accelerated share repurchase program, Our total share repurchases for the year will be $1,150,000,000 which is $150,000,000 more than what we had communicated at Investor Day and 2Q earnings. Moving to Slide 14, we are excited to introduce our guidance for 2024. We are guiding 2024 full year adjusted EBITDA with a range of $3,300,000,000 to 3,550,000,000 representing a midpoint of $3,425,000,000 We are also guiding 2024 free cash flow before growth with a range of $1,825,000,000 to $2,075,000,000 representing a midpoint of $1,950,000,000 As you can see in the chart at the bottom of the page, there are several drivers of year over year guidance.

Speaker 3

Incremental dividend EBITDA reflecting a full year's worth of ownership Is effectively offset by the lost EBITDA from the STP and Gregory asset sales. Our growth plan and cost synergies contribute 2 $40,000,000 of incremental EBITDA, but is partially offset by an increase in the Vivint EBITDA harmonization adjustment. The final driver reflects a continuation of the improved operations and margin expansion impacting our 2023 results and contributes $160,000,000 to our 2024 midpoint. As you can see, with the impact of improved operations and margin expansion, Our 2024 guidance midpoint exceeds the pro form a we provided in our Investor Day plan. On Slide 15, we are providing our 2024 capital allocation plan.

Speaker 3

As you can see, our capital allocation plan adheres to the eightytwenty principle of return of capital versus growth, while ensuring we continue to meet our debt reduction commitments. Our plan currently calls for debt reduction of $500,000,000 in 2024. As we've always said, we are committed to a strong balance sheet And this debt reduction ensures that we remain on the path to achieving our target credit metrics by the end of 2025. Our return of capital plan is comprised of $825,000,000 of share repurchases and $330,000,000 of common dividends. The common dividends reflect an 8% increase in the common dividend per share from $1.51 to 1 $0.63 Between capital returns in 2023 and the expected capital return in 2024, we will have executed over 70% of our current share repurchase authorization and returned $2,650,000,000 to shareholders.

Speaker 3

In summary, our Q3 and year to date results show robust financial performance across the company. And with our increased 2023 guidance, We are poised to close out the year in a strong position and enter 2024 on a similarly high note. We remain committed the Investor Day plan we shared back in June and our focus on maintaining a high level of operational performance will not waver as we head into the end of the year. With that, I'll turn it back to you, Mauricio.

Speaker 2

Thank you, Bruce. I want to provide a few closing thoughts on today's presentation on Slide 17. As you can see, we have made significant progress across all of our key priorities And are also ahead of the 5 year plan we provided to you during our Investor Day. I want to take a moment to thank all my colleagues at NRG For keeping focus on execution and for their hard work in achieving these results. We have the right strategy And the right team to deliver exceptional value today and well into the future.

Speaker 2

So with that, I want to thank you for your time and interest in NRG. Darian, we're now ready to open the line for questions.

Operator

Thank you. At this time, we will conduct the question and answer session. Our first question comes from the line of Shar Pourreza of Guggenheim. Your line is now open.

Speaker 2

Hey, guys. Good morning. Hey, good morning, Shar.

Speaker 4

Good morning. Richie, can we just unpack the $160,000,000 in improved ops and margins that you're calling out in the 2024 EBITDA guidance walk a little more. How much of that is margin expansion and how Sticky is that overall as we look to refine our models for 2025 and beyond?

Speaker 3

Sure. Bruce? Sure. Hey, Shar. Good morning.

Speaker 3

So I would say that really when you think about the 160, it's Pretty much margin expansion across the entirety of the complex. So if we think about our home energy business, We're really seeing margin expansion there is really on two fronts. 1 is on revenue management and on the cost of supply. So when you think about the durability of that, the revenue management side of it is really a function of the efforts we have done over the past several years around Data driven analysis to really make sure that we're targeting proper revenue rates for customers. And then on the cost of supply, That's really representing the benefits of our diversified supply strategy and just general better plant performance relative to history.

Speaker 3

On the C and I side, we are seeing margin expansion there, which we would also believe is durable. As we know there has been volatility in the market and customers are locking in higher revenue rates reflecting that volatility and obviously those contracts Tend to be longer tenor and so that should also provide durability. And then lastly on the smart home side, As you saw with the KPIs, we are seeing margin expansion both on the revenue front and higher revenue per subscriber as well as lower cost to serve As we continue to optimize that piece of the business and again given the long duration nature of those customers, we would That to also continue to be durable. So all in all, higher expansion on the margin side with durability.

Speaker 2

So Shar, I mean, this is really just a reflection of the improvements we have done in the business and I see them as durable, sustainable

Speaker 4

Perfect. And then Mauricio, the 24 free cash flow conversion rate, it looks like it's in the mid to high 50s. I know you've indicated at the Analyst Day your target is to step up through the plan into the mid to high 60s. Can you just walk us Drew, how you see that stepping up and what kind of shape that may take I. E.

Speaker 4

Linear as we also continue to update our models? Thanks.

Speaker 2

Sure. Bruce, do you want to add? Yes. I would say, sure.

Speaker 3

I think we continue to remain focused on that conversion rate. I don't think it will be linear because if you Most of that conversion improvement is going to come from increasing the conversion at Vivint, right? And so If you remember, we provided some information that showed a free cash flow growth profile at Vivint going from 100 and $40,000,000 to $445,000,000 by the end of 2025. So that's a pretty steep Increase in the cash flow at Vivint, which is really going to help to drive that conversion higher on a go forward basis.

Speaker 4

Got it. Perfect. And then lastly, Mauricio, just on a just a strategy question, I guess, can you just update us on how you're kind of approaching The prospects for new builds in ERCOT, I know there's obviously a lot of existing assets in the market right now. We've seen Talend, we've seen TexGen. Would you have any interest in secondhand plants?

Speaker 4

Thanks guys. Appreciate it.

Speaker 2

Sure. Well, as you know, Shar, we actually Improve our diversified supply strategy. Some of it will be to own generation, some will be to rent And to complement with market purchases. So the team is constantly looking at the economics between Buying from the market, renting or buying assets from other and creating options internally to develop those facilities Peter of Brownfield Development. So we're looking at all of it.

Speaker 2

We are evaluating the economics. At the end of the day, we Our balancing, operational risk, market risk, counterparty risk, That criteria permeates the evaluation that we're doing on all of these options. We are still awaiting to see Changes in market design and other improvements to incentivize dispatchable generation, that also is going to shape the decision that we're going to make. So as you can tell, this is not just a linear and a myopic view on assets to be bought in the market and development. We really also need to see what incentives are available given the changes in the regulatory construct in ERCOT.

Speaker 2

So I have said before that towards, I would say the end of the year, we're going to have more visibility on those changes in ERCOT That is going to inform the next steps we're going to take.

Speaker 4

Fantastic guys. Congrats on the results. See you soon.

Speaker 2

Thank you, Shahriar. Appreciate that.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Julien Don Balan Smith of Bank of America, your line is now open.

Speaker 5

Hey, guys. Good morning. Thank you very much for taking the time. I appreciate it. Look, just checking in first on the buyback here, just a technicality.

Speaker 5

Can we talk a little bit, you have a big portion remaining for what you call 2023. You want to talk about your ability to get that done? And then also how that might prove to be additive to kind of 2024 here, Especially given the higher numbers that you're looking at guidance versus initial plan?

Speaker 2

Sure, Julian. So Yes. As we mentioned, we're going to do the ASR imminently. That means as soon as possible. And what I will To characterize the execution of that ASR, we're going to do it as fast and as efficient as we can.

Speaker 2

So I think that's the spirit and the intent of launching this ASR as soon as possible.

Speaker 3

Yes, Julien, I would just add that as you know, when you do an ASR, we obviously realize The vast majority of the shares that having been bought in pretty much on an immediate basis, but it takes time for the banks to be able to Go and purchase those shares properly. And so my guess is we would probably anticipate That the program will be completed inside of the Q1 of next year. But to us that's actually a pretty situation because then that provides the ability to then roll into a regular way share repurchase program related to our 2024 capital allocation plan To really continue to maintain the momentum on the repurchase front.

Speaker 5

Got it, guys. Thank you very much. I appreciate that. Maybe just pivoting a little bit back here. I mean, obviously, very nicely done on 20 4, nicely done on the comments on keeping it sticky.

Speaker 5

And then, Mauricio, next piece of this is, you've talked up this virtual power opportunity on the call today and prior remarks, how do you see that feeding into, A, what you're talking about in 'twenty four? I presume that's not really necessarily reflected In size, but at the same time, you talk up an opportunity there. I presume that is a certain degree of customer election and choice in that, but how do you see that scaling here? When does that really meaningfully impact things? And How meaningful are we talking here?

Speaker 5

I mean, I've heard some of your comments earlier, if you could elaborate?

Speaker 2

Yes. So, well, the first thing that I will say is that, This opportunity is not included in the investor in the plan that we provided at Investor Day. The second thing I will say is just given the focus and the Availability of technologies today, we are accelerating the scale up of this opportunity. I initially thought that this Going to be a 5 plus year opportunity. What we are experiencing is that this is going to be able to We implemented and scaled up faster than that.

Speaker 2

I would say it's probably a 3 plus year. And Yes, I provided some initial numbers that I think are very realistic on what we can accomplish. So if you look at a 1 gigawatt Doctor position in Texas this past summer, it represented close to $200,000,000 of gross margin. And 1 gigawatt for our portfolio is basically less than 10% of the peak load that we currently serve. So it's very achievable.

Speaker 2

And that gives you just some indication that you're not talking here about a small opportunity, you're talking here about, a very large opportunity. The other thing that I will say is that this product that we're talking about is really leveraging the devices that we use to protect homes, Plus the distributed technologies available today to help consumers optimize demand. Don't think of these as a conservation effort, opt in conservation effort. This is about Optimizing and about convenience for our customers. So it is a very different product from the traditional VR.

Speaker 2

That's why we're calling it more as an optimization of the energy demand behind the meter as opposed to a traditional demand response. That's Why we're so excited because this is something that consumers want and this is something that NRG is uniquely positioned Not only to provide to consumers, but to be able to monetize that value in the wholesale market. There is no other entity with the scale Of NRG that can do that today. That's why we are an early mover on this.

Speaker 5

Awesome. Excellent. Thank you. Just quick clarification from the last question from Shar. When he asked you about Acquisitions and divestments on gas.

Speaker 5

I presume that what we saw with Gregory here is perhaps an indication of the margin of continued divestment On the margin of your portfolio as you move over time, right? We should set the expectation that more of these kinds of transactions are in the wings. Again, I get that Gregory was a very specific fact pattern here with Cheniere.

Speaker 2

I think we're for the most part done on the optimization front. I mean, remember, the The limitation of our portfolio is driven by what we need to serve our load in the best possible way. STP, I already talked that our great length is blocked power, it's not necessarily it's not flexible, it doesn't move, We can replace that in the market. Gregory was also very specific. This is basically a plan that was built to provide steam to a host.

Speaker 2

So it really didn't do provided the attributes or the characteristics that we wanted from a flexible asset. I think after Gregory and SPP, I would say our optimization efforts are largely done.

Speaker 5

Awesome guys. Thank you.

Speaker 2

Thank you, Julien.

Operator

Thank you. And one moment for our next question. Our next question comes from the line of Angie Storozynski from Seaport. Your line is now open.

Speaker 6

Good morning, guys.

Speaker 2

Good morning, Angie.

Speaker 6

Good morning. So first on Vivint. So one, I was just wondering if you heard any feedback from your activist investor about how Holding on to Vivint is working out for you and the stock. So that's one. And number 2 is, so you mentioned a number of Positive updates on Vivint.

Speaker 6

One of the main ones at least that stuck up with me is the Basically lower attrition. So is it fair to say that the higher interest rates and thus lower migration is actually what's Benefiting your platform, again, not something I would ever think to link higher interest rates as a benefit for a business like yours, but it feels that way.

Speaker 2

Yes, Angie. So let me take the first one and then I'm going to ask Ashish to answer your second question. The focus of the management team and the company is to execute on our consumer strategy. And I think what you're In the last two quarters is that we're basically delivering on the commitments that we provided to all of you at Investor Day. That's our focus.

Speaker 2

I have been on the road talking to investors to help them better understand the strategy, to help them better The value proposition that this consumer strategy represents and not just to the activists, but to all Shareholders. And that has been our focus. That's what we can do as a company, as a management team. And I am very pleased with the results that we're delivering. And I think shareholders in general are appreciating The value of our consumer strategy and but I will say that also market participants as a whole, whether it's ISOs or whether it is The regulators, they're starting to see the benefit and the opportunity that the demand represents To better manage the entire power grid, given the greater electrification that we're going to see in the years to come.

Speaker 2

So I think that's finally happening. But, Rashid, the second question, can you address it?

Speaker 7

You bet. Antti, good morning. I think the results reflect The strong value proposition that we provide to consumers, if you think about 7% subscriber growth, We are also seeing an increase in the number of products each subscriber is actually taking and so 5% growth in recurring revenue. Simultaneously, the cost to serve customers is down 19% on a unit basis year over year. And as you mentioned, one of the most powerful So the value proposition is the near this is a record low attrition Rate for us, in this economy to have a 9 year customer life.

Speaker 7

When you bring these things together, combined with the fact that the average consumer Is engaging with our products 33% more than they were this time last year. It's a really Robust flywheel that results in just improving customer lifetime value. And so we feel really good about the business and we think there A long runway ahead for growth.

Speaker 6

Okay. Just one follow-up on Vivint. So, Arushi, you remember, as you said yourself, You're bringing forward the CR driven growth on the Vivint side. I thought that the reason why we had the growth to materialize on the A25 and beyond was because you actually needed some software upgrades, Some sort of investments to facilitate that growth. So have you pulled those forward, hence the growth is materializing earlier?

Speaker 2

Yes. So I will say and we literally just finished a pilot where we are connecting Our smart home technology to our commercial operations. So let me take a little bit of a step back. We already have our residential demand response program on our traditional energy business And that is connected to the backbone of our commercial operations to make sure that we optimize the system. What we've been doing the last couple of weeks And then, is to connect now the smart home technology platform to our commercial operations backbone.

Speaker 2

That was very successful. That's why I said that we are accelerating those efforts. And instead of being a 5 plus year opportunity, I see that as 3 plus year opportunity. The improvements and the investment that we need to do on the technology backbone is included in that 20% of growth. We're not going to increase that.

Speaker 2

What I'm saying is that there is the need and the By the consumer and quite candidly, by the power grid to accelerate these efforts. So really, really good progress there, Ajay.

Speaker 6

Okay. And then the last question, and again, I understand the The explanation behind the divestiture of STP, and I see that the EBITDA contribution from Gregory was very small, but You're getting shorter and shorter power in Texas. I mean, and again, I know that not for a given summer because you hedge, but We just survived this summer, I mean better than survived. But anyway, I mean all of these conservation alerts from ERCOT are Causing anxiety among us and your investors, I'm sure. So just strategically speaking, getting rid of more power plants in So how do we manage this risk of matching the retail load with self generation in Texas?

Speaker 2

Yes. So, Andy, let me just say 2 things. Number 1, we are when we serve our customers, we're not short. We're We don't have to own every megawatt or produce every megawatt that we sell to our customers. That will be the first thing.

Speaker 2

The second thing is, and perhaps to your point about ERCOT, when I think about the market, My view is that the marginal unit, which means the most cost efficient unit today is renewable energy. It's going to be wind and solar intermittent generation. That's 0 variable cost generation. What that means is that For the most part of hours in the market, it's going to clear at a very low price, except for those periods Where perhaps renewable is not performing as normal because the wind is not blowing and the sun is not shining. So you're going to see very few periods of scarcity conditions.

Speaker 2

But for the most part, the rest of the intervals, the rest of the hours are going to be very low priced. So that's why demand response and optimizing demand management is so, so important Because that basically gives you instantaneous peaking capacity exactly for the duration that you want, which is very short durations. I think we have the improvement that we have made on our supply strategy is very consistent with what we expect the market will behave in the future. And the opportunity around demand management is again completely consistent with that expectation in terms So price formation and market behavior. So I believe we have positioned the company very, very well For the foreseeable future.

Speaker 2

And I will just say one more thing. We literally experienced the hottest summer on record in Texas. And the grid handle it very well. The only time when we saw a scarcity pricing Was really a period where we have low renewable output. And even there, Erkotis was managing the grid very conservatively.

Speaker 2

So I will say that for those of you who really wanted to test the aircon market and The improved supply strategy that we have at NRG, this was the test and we passed with high flying colors, I think.

Speaker 6

Great. Thank you.

Operator

Thank you. Please wait one moment for our next question. Our next question comes from Michael Sullivan of Wolfe.

Speaker 5

Your line is now open.

Speaker 8

Hey, everyone. Good morning.

Speaker 2

Good morning, Michael.

Speaker 8

Hey, just wanted to follow on one of the questions from earlier in terms of the growth target realization, looking like that's coming in a little Sooner than expected, does that indicate any potential upside to the 2025 number of $300,000,000 run rate?

Speaker 2

I think right now we're comfortable accelerating the 2023 target just given the success on our growth and cross sell. Yes, I think it's early to start thinking about moving the $300,000,000 by 2025. What I will say is that, that roadmap Does not include the VPP or demand side management potential, and that's something that we're going to be Talking to all of you quantifying it and how big can it be and when can we start realizing it. So that's more to come there.

Speaker 8

Okay, great. And then just specifically on the ERCOT portfolio, Next week's vote on the loan build, does that drive any decision making in terms of optimization of the fleet or

Speaker 2

I mean, it is one more data point that we're going to take into consideration. I think the first step For the loan program, it is the vote. And then the second step is the rules around how the loan program is going to work. Obviously, all market participants are looking at it and we will again, it will be one more data point For us to inform our supply strategy, but it is only one more data point.

Speaker 8

Okay, great. Thank you.

Speaker 2

Thank you, Michael.

Operator

Thank you. One moment for our next question. Our final question comes from the line of Ryan Levine with Citi. Your line is now open.

Speaker 9

Good morning. Hoping to start off something more on the strategic side. At the Analyst Day, you indicated an aversion Larger strategic acquisitions, given that the free cash flow picture is becoming more favorable and maybe pricing for assets is going down, How committed are you to that vision? And you think you highlighted some potential EPP and power plant Opportunities, is there any scope around what type of incremental capital that could enable?

Speaker 2

Well, the first I will say is, and as I mentioned on Investor Day, we don't see any more acquisitions. 2nd, we are completely committed to this capital allocation framework of 80% of return, 20% to growth. And 3rd, the 20%, each inclusive of the opportunity that we see on VPP. So we will continue On packing, what that opportunity is and the investment, but it will be contained within the 20% during the planning period that we provided to you.

Speaker 9

I appreciate the clarification. And then one more on the modeling side in terms of the Vivint subscriber acquisition cost coming up and net subscriber acquisition costs coming up. What's driving that and what are you seeing from a trend standpoint in terms of customer acquisitions?

Speaker 7

Yes, it's really a function of 2 things. 1 is the increase in interest rates year over year and 2 It's a function of the consumer buying more products when they take our service. And On the second point, we feel very good about both the payback period as well as the IRR. You see the boost in recurring revenue per subscriber that's disclosed in the KPIs. I want to remind you that that's across the entire 2,100,000 subscriber base.

Speaker 7

If you were to only look at the new customer acquisition cohort, the revenue increase, the service revenue increase is even more substantive than that. And so we feel very good about the payback of that incremental investment in the consumer as they take more product from us.

Speaker 9

Is the customer composition or customer mix evolving or any comments you're able to make Around the characteristics of your new subscriber cuts?

Speaker 7

No. Other than the new Customers are sort of taking more product as we continue to expand our product portfolio. There's no change in the mix. We have a very, very high quality subscriber base, high credit scores. And It's a very resilient business from that standpoint.

Speaker 9

Okay. Appreciate taking my questions.

Speaker 2

Thank you, Ryan.

Operator

Thank you. This concludes the question and answer session. I would now like to turn it back to Mauricio Gutierrez for closing remarks.

Speaker 2

Thank you, Gary. Well, I'd like to thank all of you for your interest in the company and your support and look forward to providing you updates in the future. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program.

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Earnings Conference Call
NRG Energy Q3 2023
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