Good day, and thank you for standing by. Welcome to the NRG Energy Inc. Fourth Quarter 2022 Earnings Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin Cole, Head of Investor Relations.

Thank you, Josh. Good morning, and welcome to NRG Energy's Fourth Quarter 2022 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 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 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 Mauricio Gutierrez, NRG's President and CEO.

Thank you, Kevin. Good morning, everyone, and thank you for your interest in NRG. I'm joined this morning by Alberto Fornaro, Chief Financial Officer. And also on the call and available for questions, we have Elizabeth Killinger, Head of Home, Rob Gaudette, Head of Business and Market Officer; and Chris Moser, our Head of Competitive Markets and Policy. Starting on Slide 4 with our key messages for today's presentation. We have made significant progress in advancing our strategic priorities in 2022. And while our financial results were lower than expected, our business is well positioned in 2023. Today, we are reaffirming our 2023 financial guidance ranges. The Vivint Smart Home acquisition is on track to close by the end of the first quarter. Today, we are providing further disclosures around revenue synergies to ensure you have additional tools to properly value the transaction. Finally, the core of NRG is strong, supported by favorable fundamentals. The acquisition of Vivint enhances our ability to achieve our free cash flow before growth per share targets. Now turning to Slide 5 for the financial and operational results of 2022. Beginning with our scorecard for the year, we executed well across our strategic priorities. We delivered our second consecutive year of record safety performance. For me, it always starts and ends with the wellbeing of our people. I want to thank everyone at NRG for staying focused during a challenging year. Our retail group took deliberate actions to manage price volatility and delivered record customer retention and extended the average term of a new customer to 2 years. Also, our bad debt remained below historical levels despite higher inflation and tightening financial conditions. Our plant operations performance was below expectations, primarily impacted by the outage at [indiscernible] Paris right before the summer. We are taking…

Thank you, Mauricio. I will now turn to Slide 11 for a review of 2022 results. During our third quarter call, we stated that higher profitability in the fourth quarter would enable us to deliver an adjusted EBITDA at the bottom of our 2022 full year guidance range. To realize this, we mentioned that the higher profitability was partly related to insurance proceeds for Limestone Unit 1 and Paris [indiscernible], additional synergies and other cost reductions and the remaining from the opportunity to generate additional gross margin from the planned utilization of our gas fleet. Our forecasting process is based on forward market curves and at the time, the forward curves included higher power prices for the fourth quarter which would make the planned utilization of the gas fleet economical. Unfortunately, prices in the fourth quarter fell significantly below short of expectation. On peak prices in Texas were 45% below expectation, resulting in lower profitability from our generation fleet. Near the end of December, winter storm Elliott brought sharp reduction in temperature for a short time, December 20-24. During the storm, flood surge was faster and significantly higher at the upper level of the expected range in both ERCOT and PJM for several hours. This drove spikes in power prices. Our gas generation fleet in Texas, which was largely unutilized in the fourth quarter was called in to action. Given the significant gap between actual and expected load, the fleet was unable to completely match the additional demand. As a result, we portrayed additional power in the market at higher prices. In the East, higher load led to a PJM reliability core for our units without any notice. Several of our larger units were reserved started the event and have longer startup times, which led to capacity performance, a negative…

Thank you, Alberto. On Slide 15, I want to briefly outline our 2023 priorities and expectations. First and foremost is delivering on our core energy business goals. We will continue to strengthen our integrated platform and further optimize our portfolio. Second, we are focused on closing the dividend acquisition, integrating the business and delivering on our synergy commitments. Finally, we will stay disciplined on our capital allocation plan as we execute on our strategic priorities. I am excited about this next phase of our evolution and look forward to providing you a comprehensive update at our Investor Day later this year. So with that, I want to thank you for your time and interest in NRG. Josh, we're ready to open the line for questions.

[Operator Instructions]. Our first question comes from Julien Dumoulin-Smith with Bank of America.

Listen, I wanted to talk to you guys about the '25 outlook and just clarify this. As it pertains to the original conversation around, call it, $12.50 a share of , is this an implicit increase in expectations or roughly in the same ballpark? As I look at sort of what's implied on the numerator and denominator, seems like there could be a slight increase there. I just want to come back and clarify that as best you guys see it. And I have a quick follow-up.

Yes. I mean let me see if I understand the question. The pro forma that we show here could source in line with the free cash flow before growth targets that we provided you at Investor Day of 15% to 20%. So as you mentioned, what Vivint does is complements our share buyback and capital allocation program with a very attractive growth engine that we articulated in the call today. Now, the Vivint transaction, I'm expecting that it's going to produce $400 million of free cash flow before growth, on top of the 2023 pro forma or guidance for NRG. So when I think about the 2025 pro forma, I will say that I'm very comfortable with the energy pro forma now that we have communicated the contribution of dividend, I will tell you that we have pretty good line of sight to deliver on that commitment of 15% to 20% growth.

Excellent. And just clarifying this. I know you discussed an Analyst Day here, would you expect to roll that 25 forward at the time of the Analyst Day? Or could we get something sooner with the close and then considering that closed -- just super quick, if I can, we've seen some litigation out there around and what is possible, if you will, in recent days. Can you clarify how that may be impacting the process itself at this point? Just if you don't mind for a moment?

Yes. So I think what you should expect is at Investor Day, we'll provide you the 5-year plan that will go beyond 2025. I think that's the right time to articulate it obviously, the close and in subsequent weeks after the close and most likely on the earnings call, we will provide additional clarity in 2023 with respect to event, right? So with respect to the litigation that you're mentioning on the , we actually have looked at that, evaluated it, and we see very little risk in terms of closing the transaction. So keep in mind that this is not only for our industry, this is for all SPAC across all industry. And I see this more as just a clean of process than anything else. So the risk of impacting the closing of the transaction, I would say, is minimal.

Our next question comes from Angie Storozynski with Seaport.

So maybe first on the '23 guidance. I mean it seems like it's a pretty good setup for the year. I mean power prices have fallen, you should have an advantage with gaining market share on the retail side, especially in the East, given the collapse in power prices and natural gas prices, there's been an improvement in working capital, there is the cost to replace the power for the WA Parish outage should have come down, and yet you kept the guidance range. So what's the offset to these positive drivers?

Yes. No, Angie, I mean I'm glad that you went down the list because when I think about 2023, I would say that it's more conservative than we have did in 2022. Not only from what we control. So if you think about the characteristics of our plans, the assumptions that we use in our forecast are more conservative we have also -- remember now this is the second year that we have increased maintenance CapEx around our plans. So we expect greater reliability on them. And there is a lot of tailwinds on our guidance. You already mentioned the dynamics in the East where prices for the default service utility providers are much higher, and I think we're going to have a great opportunity to gain market share. With the falling gas prices, that creates really good environment for us for managing our retail margin. So all of this is positive. Now, let's just -- it's only February, right? So I want to make sure that we see at least a couple of months, and we have greater visibility on the rest of the year before we can provide you additional adjustments. But I think it's fair to say that I feel very confident that we can achieve our guidance and perhaps we are hearing on the conservative side with the number. But I think it is -- I think it's prudent given the type of volatility and extreme weather that we have seen in the past couple of years.

That's good, especially after this whole year. Okay. And then on the PJM capacity penalties. So it's my understanding that the disclosures that the generation companies were provided by PJM on Slide 8 only talked about penalties. So any sort of bonus capacity payments haven't been disclosed or calculated. So I know that, that's a '22 issue. But just talk to us about how you accounted for those offsets to the penalties on the capacity side.

Sure. I'll let Alberto cover.

Yes. No, I mean it is -- from the penalty side, it is relatively simple because we have considered based on our record, what is the potential penalties that they can [indiscernible] in to account. On the bonus side, there is a lot of variables, including potential bankruptcy that can change the amount that will be distributed. And therefore, what we have done with the limited information available, we have estimated what is the best case scenario, the worst-case scenario and we have chosen a level we are comfortable. And therefore, we have, at the end of the day, risk adjusted the bonus for -- that we could get at the end of this process. We will know more in the in the next months, but we are comfortable with what we have done.

Yes. So I think it's fair to say that penalties -- we have taken all of that into consideration and bonuses, we need more information from PJM. So we have risk adjusted down for that.

Okay. And then lastly, so when you announced the event, there was a plan to execute on share buybacks a pretty meaningful $360 million. I mean, looking at the share count, you haven't done it. I understand that there is a plan for '23 to finish that $1 billion of the share buyback allocation. So just talk to me about the timing, why it hasn't happened yet. Were you waiting for the proceeds from Astoria? Is it somewhat of a reflection of the weak free cash flow generation for '22? And again, just roughly about when we should expect those buybacks to happen.

Yes. No, I mean that's correct. So my expectation is that it will happen this year and obviously being very consistent with our capital allocation principles, we want to focus first on achieving our credit metrics and then we will -- once we have the visibility in terms of achieving that and obviously, as we get cash proceeds in the door throughout the year, we will be executing on the share repurchases. So my commitment to everybody is that we will execute them, but we need to have first assurance is that we have -- that we meet our commitment on credit metrics and that we have the cash available. So that's how we're thinking about it.

So it's not like the fact that you deferred the buyback -- it's in no way does that reduce the amount of financing that you will need to raise for the Vivint transaction.

No.

Our next question comes from David Arcaro with Morgan Stanley.

I was wondering if you could elaborate on what assets might be considered for sale and what the potential timing might look like in terms of executing any processes related to that?

Yes, David. So as you know, we actually have been optimizing our portfolio for a number of years. I think we have a pretty good track record on doing that. And the way I think about it is you have core assets and non-core assets, right? So core assets are whatever helps us best serve our customers. And if there is an asset that doesn't do that function, then it becomes a non-core asset, and we'll look at monetizing that. There is a second set of things that -- if there is an asset that is more valuable in somebody else's business, we will definitely take a look at that and evaluate all the options. So what I can tell you is, this is an ongoing process. We sold and monetized some assets last year. We're going to do that. What I wanted today was to provide you more specificity around the amount that we are targeting and that this will be executed throughout 2023. In terms of timing, obviously, these will require 2 people coming to an agreement and -- but we will be updating you as soon as we have available information.

Okay. That's helpful. And then I was wondering if you could speak a bit to just fleet reliability and resilience here. Wondering -- just if you could talk to the strategy to improve the risk profile of the business during extreme heat and cold events. Are there further investments that you could make in your fleet to improve their resilience or more you could do to beef up the supply side of the equation?

Yes, David. So when you think about the reliability and resiliency, I actually -- if you take a step back, and you think about our supply strategy to serve our retail loan, I think about it in 3 big buckets. The first one is the generation that we own, the second one is medium-term PPAs and then the third one is obviously, you complement that with market purchases. Today, we are roughly 50% of the megawatts that we serve, we supply with our own generation, 50% with third-party either tools or purchases. So what we have done on the -- on our own generation is twofold. Number one, we have been a little bit more conservative when we run our forecast and what we use to hedge our node in terms of plan characteristics and that gives us a little bit more push on so we're self-insuring. The second thing is we have actually invested additional maintenance CapEx to increase the reliability on the units, specifically in areas where we have seen issues during scarcity conditions. So those 2 things really mitigate what I described as the operational risk on our units. The other tool, we actually trade these operational risk or counterparty risk, credit risk. So while it's perhaps more firmer in terms of the megawatts, it also -- we have to monitor the health of the entities that we're transacting with. So what I like about this approach is that we're diversifying our risk that is not a all-generation, all-operational risk. So we actually diversify the risk. And this one was one of the big lessons during winter storm Yuri. So I feel very comfortable the risk adjustment that we have made. And then lastly, in terms of hedging our loans, we are being a little bit more conservative. So we're leaning perhaps longer than we have done in the past and to make sure that we manage some of the scarcity periods where we see higher load. But obviously, you cannot derisk completely the business because it would be cost prohibitive. So we've been very, very intentional and very thoughtful about.

Our final question comes from Steve Fleishman with Wolfe Research.

I appreciate the time. Just a question on the 2023 kind of base pre-Vivint, what are you assuming in there, I guess, obviously, you're expecting a big recovery from '22 and some of the issues, just but what are you assuming in there for outages, any lingering outages and then the related insurance money? And then also are you including any asset sale gains or losses in the guidance for '23? I think you've sold Astoria already at a decent price. Can you talk about that?

Yes. So we already sold Astoria. And let me just give you my view on the 2023 guidance, which I started talking to and about it, and then I'll pass it on to Alberto to tell you exactly what's the amount. But the way to think about the 2023 speed is more conservative forecast that we have done in the past, both from an operational productivities of the power plants, how we're managing our retail load but also because of the dynamics that existed in 2022 that don't exist today, like if you remember, we have the supply chain issues on coal and chemicals. That has abated for the most part. We are falling to stable natural gas prices now that allows us to better manage our retail margins. We have an environment in the East where we feel very comfortable that we can gain market share on our retail business. So I think in general, I would say that 2023 is a lot more conservative. The guidance is right on top of what we provided to you back at the Investor Day when you adjust for asset sales which we provided you the bridge back then. So actually, in the Investor Day deck, you have the ins and outs, given the portfolio optimization that we have done. And we're literally on top of where we should have been so -- 2 things. One, I feel very confident that this is in line with what we provided you. And two, that is taking -- we're taking a little bit more of our conservative approach in so the number. Obviously, we will update you throughout the year. But just keep in mind that we're just at the beginning of the year. But I don't know if there is anything else that we need to add.

I mean Parish, part, like outage cost insurance and asset sales. Could you identify what's in the guidance for those?

Yes. So in the guidance, obviously, we have the Parish that is not in the first half of the year because it's on average. What I will tell you in Parish and I think that's probably the largest risk. The progress that we have made is pretty significant. As a matter of fact, I think just last week, we've had the generator now on site and has been listed and put in the deck. So we're making really, really good progress on what I'm seeing today, I'm confident that we will come back on time. Obviously, the commercial team is monitoring very closely that with the plan. If there is any delays or there is any acceleration that we either mitigate the risk in the market or that we take advantage if it comes in earlier. But in fact, that it's already embedded in guidance but Alberto?

Yes. And just to be a little bit more specific, Steve, regarding Parish outage, we said that there is no impact in 2023. And the reason is because of the impact of the availability of the plant was matched by business insurance. We have received a little bit more than the business insurance in 2022. However, we are recalculating the margin. And net-net, it's still completely hedged by -- the loss margin is hedged by what we're going to receive as insurance, and therefore, no change compared to the prior scenario, which was in the third quarter when we provided the guidance.

And then asset sales?

The upsell, we have factored Astoria basically which happened in January. And we are -- for the moment, until there are news, obviously, we are not adjusting.

But it's already -- Astoria, it has already been taken into consideration.

Astoria has been considered because it was a -- should have happened at the end of 2022. It happened just a few days after '23 and we took it into consideration in our guidance.

Okay. And how much is that?

It's fairly small at the full impact. Consider that we have a tool for the remaining short period. So it's very, very small.

Okay. Great. Appreciate it. So it's really the core business, yes.

Thank you. This concludes the Q&A session. I'd now like to turn the call back over to Mauricio Gutierrez for any closing remarks.

Thank you. Thank you for your interest in NRG, and I look forward to updating you once we close the transaction on Vivint. Thank you.

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