NRG Energy Q1 2023 Earnings Call Transcript

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May 4, 2023

There are 5 speakers on the call.

Operator

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

Speaker 1

Thank you, Sean. Good morning and welcome to NRG Energy's Q1 2023 earnings call. This morning's call will be 45 minutes in length is being broadcast live over the phone and via webcast, which can be located in the Investors section of our website at www.nrt.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.

Speaker 1

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, please see the reconciliation in the back of the earnings presentation. And with that, I'll turn the

Speaker 2

call over to Ray Cebutierrez, 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 Alberto Fornaro, Chief Financial Officer and also on the call and available for questions are other members of our management team, including Rashish Patel, Head of Vivint Smart Home. I'd like to start on Slide 4 with the 3 key messages for today's presentation.

Speaker 2

First, our wholesale and retail businesses performed well during the Q1 and delivered strong financial results. We are focused on our core energy operations and have taken steps to make our platform more predictable and resilient. This brings me to my second point. We are seeing improving market fundamentals that should benefit our portfolio as we head into the summer. Finally, we completed the Vivint Smart Home acquisition and integration efforts have now begun in full.

Speaker 2

We are also updating our 2023 guidance ranges to account for this acquisition. Moving to the Q1 results on Slide 5. We delivered top decile safety performance and $646,000,000 of adjusted EBITDA. This is a 28% improvement from last year when adjusted for asset sales and retirements. These results were driven primarily by strong operations in our core energy business, Direct Energy Synergies and the addition of 1 month of dividend earnings.

Speaker 2

During the quarter, we made good progress advancing our The priorities, we are on track to achieve the full synergy target for Direct Energy this year. We continue to be opportunistic with our portfolio optimization efforts with the sale of Astoria and we closed the Vivint acquisition in early March. Integration efforts for Vivint are now fully underway. Day 1 activities went well and we have now defined the growth synergy target of $30,000,000 for 2023. We will share additional details for the total program at our upcoming Investor Day.

Speaker 2

I want to take a moment and welcome the Vivint team to the NRG family. I continue to be impressed with the business and particularly The alignment in our corporate values that focuses on safety and customer experience. Finally, We are updating our 2023 guidance ranges to include Vivint and the alignment of adjusted EBITDA between our two companies. Alberto will unpack this in more detail, but let me provide you a quick overview. We're updating our full year guidance to $3,010,000,000 to $3,250,000,000 adjusted EBITDA and $1,620,000,000 to $1,860,000,000 of This includes 10 months of dividend, expected growth and cost synergies for this year.

Speaker 2

This also reflects the harmonization of adjusted EBITDA to align both companies more with the consumer services industry. Excluding the impact of these changes, the traditional core energy business of NRG remains unchanged with previous standalone 2023 guidance ranges. Now turning to Slide 6. I want to provide a brief market update for Texas. We continue to see robust demand growth on a weather normalized basis, north of 3%, driven by population growth and a strong state economy.

Speaker 2

We expect this trend to continue in the foreseeable future. As you can see in the chart on the left hand side of the slide, the Q1 was characterized by mild weather and much lower natural gas and power prices, which settled well below market expectations. These benefited our integrated platform by allowing us to bring down our power plants during periods of low prices and perform additional preventive maintenance while buying power from the market cheaper than our own generation. This resulted in margin expansion, fully offsetting lower weather driven demand and this is exactly how our platform was designed to perform. Looking ahead to this summer, Our portfolio is well positioned to deliver stable results.

Speaker 2

Supply chain constraints are for the most part behind us and our power plants are ready to run as we progress on our 2nd year of increased maintenance spend. We are also more conservative on our hedging and the operating assumptions we're using for our power plants. Importantly, W. A. Parish Unit 8 remains on track to return to service before the summer.

Speaker 2

As you can see, we have taken steps to make our portfolio more predictable. Finally, I want to provide a brief update on After considering many alternatives during 2022, The Public Utility Commission of Texas unanimously approved the Performance Credit Mechanism or PCM. This is a market based solution that is widely supported by competitive entities and regulators. The Texas Legislature is currently reviewing the PCM and other enhancements. We expect market design resolution by the end of May with the Texas legislative session concluding on May 29.

Speaker 2

We anticipate that PCM will take a few years to be implemented. In the interim, ERCOT and the PUCT are considering a bridge solution that enhances the operating reserve demand curve or ORDC to increase online reserves. We applaud the efforts by the governor, legislature, PUCT and ERCOT to improve the reliability of the grid through market based solutions. We have several brownfield projects in various stages of development, but all of them will require regulatory certainty before they can move forward. Moving to Slide 7.

Speaker 2

I want to provide an update on our consumer facing businesses. Beginning with our retail energy and services platform, Margins were up year over year by 7%, driven by lower supply costs and stable customer count. This was somewhat offset by lower load due to mild weather during the quarter. In the East, We grew through our customer acquisition efforts to provide consumers an alternative to rising incumbent utility prices. We continue to see no material increase in bad debt, which is a direct result of the essential nature of the services we provide.

Speaker 2

Finally, we launched a modernized digital experience on our web and mobile app that enables customers to manage their energy usage and provide actionable insights that we are uniquely able to generate regarding uses of energy in their home, for their EVs and through their solar solutions. While we have only owned Vivint for 1 month, I want to provide a full first quarter statistics for comparison. Vivint grew customers by 9% and revenue by 14% compared to the same period last year. Like NRG, Vivint continues to experience strong retention and stable bad debt. The company was also busy in the quarter enhancing their products and introducing innovative offerings, 2 of which I want to highlight.

Speaker 2

First, the Vivint app now includes solar production data, so our customers can actively monitor their energy conservation and cost savings. 2nd, they introduced a do it yourself product called Vivint Basics that makes it easy for owners and renters alike to get the starter system for less than $300 Having a viable DIY and single point solutions is key to our strategy of creating more entry points for customers that we can later upgrade to our fully integrated smart home offering. Now with respect to synergies, we are reaffirming our cost and growth targets for both 2023 and the full plan. Cost synergies are primarily the result of the combination of 2 public companies and are expected to total $100,000,000 in recurring run rate free cash flow before growth. Growth synergies of $300,000,000 will be achieved through targeted cross sell, vivid organic growth and sales channel optimization.

Speaker 2

In total, we expect $400,000,000 of recurring synergies to be achieved over the next 3 years. The synergy and integration plan is now fully underway and is led by the same team responsible for the transformation plan and the DIRECT Energy integration. On the right hand side of the slide, you will see the scorecard for Vivint. We have now introduced 2023 growth targets and cost to achieve. We plan to update this quarter in the coming quarters to provide further transparency and keep you informed on our progress.

Speaker 2

I know I have said this before, but we are very excited about the opportunities for the combined company moving forward. Vivint brings a complementary business that expands our customer network by nearly 40% and adds smart home technology and infrastructure to strengthen our platform. Together, we create the leading essential home services provider in North America, serving a network of nearly 7,500,000 customers And the acquisition also accelerates the plan we laid out at our 2021 Investor Day and creates the opportunity to deliver significantly shareholder value. During the 1st 3 years of integration, this value will be created through both cost and Growth synergies, which are laid out on the slide. In the medium and long term, I see even more opportunity to create value through growing customer count nationally, increasing the average number of solutions per customer and materially extending the customer lifetime.

Speaker 2

So with that, I will pass it over to Alberto for the financial review.

Speaker 3

Thank you, Mauricio. Energy experienced a good start to the year and delivered strong results during milder than expected weather conditions. We entered the winter season seeing high forward gas and power curves. Moderate weather and relatively geopolitical stability translated into much lower power volumes in Texas and in the East and much lower actual prices in most markets with exception of California. Additionally, Energy Liquidity has significantly improved due to lower collateral requirements after the winter season and the proactive management of our collateral utilization.

Speaker 3

We also completed the acquisition of Vivint SmartHome and have included Vivint's March performance in our financial statements. Before we continue, let me provide a little bit more detail about Vivint. At close, the EBITDA metric for the 2 companies was not identical. Therefore, we have harmonized it. I will go into more detail in the guidance section, but please note that all the figures including prior year reflect a consistent EBITDA across segments.

Speaker 3

Let's go now to the Q1 results. Energy consolidated adjusted EBITDA of $647,000,000 is $137,000,000 higher than the Q1 of 2022. As you can see in the chart at the bottom of the page, Legacy Energy results include the anticipated negative impact of asset sales and retirements in the Q2 of 2022, totaling $30,000,000 On a like to like basis, legacy Energy EBITDA increased by approximately 67,000,000 Last year, transitory items including the Limestone Unit 1 extended outage, coal and chemical constraints and the temporary spike in ancillary cost impacted our profitability. Our Q1 2023 results show that these items have been fully recovered. We have also included Vivint March results in our Q1 financials, which contributed $73,000,000 of additional EBITDA.

Speaker 3

The remaining $27,000,000 increase is related to EBITDA We have in general experienced an expansion of unit margins that have been mitigated by lower volumes and usage. Starting with taxes, adjusted EBITDA increased by $43,000,000 versus prior year and gross margin was $120,000,000 higher. Opportunistic plant outages, insurance premium and pension cost increases and the return of bad debt to historical levels contributed to an increase in operating expenses compared to the Q1 of 2022. In the East, West and Services and Other segment, Adjusted EBITDA declined $6,000,000 versus last year, driven primarily by asset sales and retirement. Similar to Texas, gross margin increased year over year and lower power supply costs more than offset the negative impact of a volume decline.

Speaker 3

As said, we have included March results in our Q1 EBITDA and these results were better than prior year on a comparable basis. While we are not reporting full Q1 quarterly results for Vivid, we are very encouraged by the results. On a standalone basis, all major KPI including profitability metrics have improved compared to the prior year. We have begun integration and cross selling activities and targets have been confirmed and are expected to be realized as planned. Energy free cash flow before growth was $203,000,000 in line with our expectation, but impacted by mild Temperatures that drew power purchases up and power generation down, thus increasing fuel inventory levels.

Speaker 3

We have identified the initiative to reduce inventories, but expect to defer any action until after the summer season. Lastly, on Energy balance sheet, cash collateral received by counterparties oddly mark to market of the derivative portfolio and the account receivable and the account payables are all trending down. This is an inversion of the trend that we have seen in the last 6 quarters. Let's move now to Slide 10 to discuss the guidance for 2023. As mentioned, we are providing Additional detail for adjusted EBITDA.

Speaker 3

Prior to the acquisition, Energy and EBIT accounted for items within adjusted EBITDA differently and we are now harmonized what will be included in this metric going forward. Capitalized costs can be split into acquisition costs and fulfillment costs. The amortization of capital customer acquisition costs, mostly sales commission paid by both Energy and Vivint will be excluded from adjusted EBITDA. The amortization of capitalized fulfillment cost, Mostly, the current product and installation expenses will no longer be excluded from adjusted EBITDA. Stock based compensation expenses will also be excluded from adjusted EBITDA.

Speaker 3

There are no impacts to free cash flow. Moving to the walk at the bottom of the page, legacy Energy 2023 guidance is substantially unchanged compared to our Q3 earnings call. The only exception is a $120,000,000 increase due to EBITDA harmonization. For Vivint, guidance includes pro form a 2022 EBITDA unchanged from December. This has been prorated for 10 months of ownership.

Speaker 3

We have added $65,000,000 in expected 2023 synergies and growth, minus $35,000,000 from the EBITDA harmonization. Overall, the net impact on 2023 is positive and we are updating guidance accordingly. Free cash flow before guidance is simply the sum of the legacy Energy guidance and the $110,000,000 pro form a Free cash flow number from December 2022. This has increased by the growth contribution and prorated for 10 months. As a reminder, the original 2022 pro form a, free cash flow before growth for Vivid included the free cash flow before growth, the impact of synergies and the additional interest on the acquisition debt.

Speaker 3

Lastly, given the addition of EBIT to our guidance, We have incorporated a slightly higher range of plus or minus $120,000,000 from the guidance midpoint on a consolidated basis. Now turn to Slide 11 for a brief update on our 2023 capital allocation. Moving left to right with blue shading indicating updates, 2023 excess cash equals $1,999,000,000 This includes roughly $250,000,000 of excess cash for 2022, including $209,000,000 in proceeds from the sale of Astoria and the full year free cash flow below growth of $1,700,000,000 $740,000,000 inclusive of Energy's standalone guidance of $1,620,100,000 plus $120,000,000 for Vivint. This also captured the expected impact of the additional debt finance. There is no change to the $500,000,000 target of leverage neutral net inflow from asset sales.

Speaker 3

Moving on to cash utilized for Vivint. This includes the additional requirement of $100,000,000 in the cash minimum balance, About $250,000,000 of energy cash utilization, net of EBIT cash, dollars 145,000,000 in EBIT integration expenses and $900,000,000 of expected debt reduction. Next, we have the remuneration of our equity holders and the dividends to the preferred issued in March. The allocation of cash to investments totaled about $190,000,000 including $90,000,000 for growth initiatives. Now moving to the far right bar, we expect a total of $506,000,000 available for future allocation.

Speaker 3

This will fund the remaining share repurchase program upon full visibility of achieving our 2023 target credit metrics, which are detailed in the next slide. Quickly turning to Slide 12, we We remain committed to a strong balance sheet. This slide has not substantially changed since our last update. We just updated partially We updated the higher Energi EBITDA partially mitigated by lower adjustment and the slightly lower debt in the year. We are focused on achieving our 2023 target trading metrics, which include a leverage ratio of approximately 3.2 times Net debt adjusted EBITDA and we are on track for investment grade credit metrics by later 2025 2020 Sigs?

Speaker 3

Through both debt reduction, Andrew, back to you, Mauricio.

Speaker 2

Thank you, Alberto. Turning to Slide 14, I want to provide a few closing thoughts on today's presentation. We delivered strong results for the Q1 and are well positioned for the balance of the year. With the Vivint acquisition complete, we turn our focus to integration, growth and synergies. Our efforts are well underway and it is now all about execution.

Speaker 2

I look forward to providing you a comprehensive update on our home business and strategy at our upcoming Investor Day. So with that, I want to thank you for your time and interest in NRG. Sean, we're now ready to open the lines for questions.

Operator

Thank you. And at this time, we will conduct the question and answer to withdraw the question. Please stand by while we compile the Q and A roster. And our first question comes from Julien Gumbelan Smith with Bank of America.

Speaker 4

Hey, good morning team. Thank you guys very much for the time. Appreciate it. Nice to be done here.

Speaker 2

Hey, good morning, Julien.

Speaker 4

Good morning, Mauricio. Pleasure. Just wanted to follow-up on the synergy scorecard here and Thinking through Vivint here, I mean, you're laying out, you've got the $300,000,000 $100,000,000 in revenue and cost synergies respectively. How do you think about that translating back to consolidated EBITDA for Vivint here again? And or how does that fit with the 12% to 15% FCS targets as well.

Speaker 4

Just want to try to tie it out at least through 25% as best you can today, if we can be a little bit more specific.

Speaker 2

Yes. So Julian, I'm assuming that you're talking about the That we provide on our free cash flow per share that supports the 18% for 20% growth. And when you look at the EBITDA and free cash flow generation capability of NRG and then you lay on top of that the $400,000,000 Cost synergies and revenue synergies, we feel very confident that we're going to be on path to achieve that 15% to 20% free cash flow per share return. As a matter of fact, The acquisition of Vivint now gives us a little bit more control on achieving that. Remember, Before, we have tremendous financial flexibility and we generate excess cash well beyond what the traditional energy needed That we have used to reduce the denominator.

Speaker 2

The one variable that we cannot control there is at the price that we can buy back our stock. Now with the Vivint engine and the opportunity to create this 4 $1,000,000 of incremental value, we just increased the tools that we have to increase the numerator And put more in control the achievement of this $12.50 that we have laid out for 2025. So I feel very comfortable that with what we laid out today and And in previous call that we are on track to achieving that $12.50 a share by 2025.

Speaker 4

Right. Sorry. Yes, clearly 15% to 20%. And more to the point, as you think about layering on additional assumptions rolling out, potentially updated guidance with this Analyst Day. Any initial thoughts on what else can be done with the Vivint platform to continue to grow it?

Speaker 4

I'll note that the commentary here at the outset is really focused on synergies. You talked about revenue growth here. In the 1st couple of years, how do you think about compounding that beyond the 2025 period that you're providing here today? And maybe any initial thoughts of how far you can go at this prospective Analyst Day?

Speaker 2

Right. Well, the first thing that I will say is when I think about the dividend business, There are 3 big leverages that we're going to be focused on. The Vivint business was had high leverage. It has a high acquisition cost and there was also an opportunity on the consumer financing. So these are 3 specific buckets that we're focused on optimizing.

Speaker 2

And for me, it creates an opportunity for value creation. Now right now, we're focused on optimizing the 7,500,000 network customers that we have. We have opened the lines of communication across our sales channels. We're going to continue to optimize them. We're going we have introduced Bundling, we now are doing cross sell between our call centers and our digital assets.

Speaker 2

We are testing in the market bundle. So that is the focus right now. When I think about 2025 and beyond, is really about how do we bring the energy experience that we currently have with the smart home experience that we have and we create a Best in class product for customers that is going to drive the growth on 2025 and beyond. This is something that we're going to be talking more about on our Investor Day on how this vision comes together with the 2 offerings that we have, 1 in energy, 1 in a smart home. So we will make it more tangible and real for all our Investors are the upcoming investor days.

Speaker 4

Right. I'll leave it there. Thank you guys very much. Have a great day.

Speaker 2

Thank you, Julien.

Speaker 3

At this time, I would like

Operator

to turn it back to Mauricio for Closing comments.

Speaker 2

Okay. Well, thank you. Thank you for your interest in NRG. I look forward to hosting all of you in our upcoming Investor Day that we should have In early summer, we're going to be talking about the smart home strategy. We're going to provide additional details on our growth plan and provide you more transparency on our key performance indicators that will help you better model the business.

Speaker 2

So with that, I want to thank you for your interest and look forward to speaking with you soon. Thank you.

Operator

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

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