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 Instructions] 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.

Great. Thank you, Darren. Good morning. And welcome to NRG Energy’s third quarter 2023 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 Webcast. Please note that today’s discussion may contain forward-looking statements which are based on assumptions that we believe to be reasonable as of this date. Actual results may differ materially. We urge everyone to review the Safe Harbor in today’s presentation, as well as the risk factors in our SEC filings. We undertake no obligation to update these statements as a result of future events, except as required by law. In addition, we will refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to today’s presentation. And with that, I will 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 am joined this morning by Bruce Chung, 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. Over the last six years we have taken the necessary steps to position NRG at the center of the energy transition. Our Consumer Energy business that benefits from the increasing electrification of our economy, while generating significant excess cash well beyond its business needs. A complementary Smart Home business, that increases the lifetime value of our customers and enable greater optimization of our customer’s 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 three key messages of our earnings presentation on slide five. First, we are raising our 2023 financial guidance, driven by strong financial and operational results, both in the third quarter and year-to-date. Second, 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 third quarter results on slide six. We delivered top decile safety performance and $973 million of adjusted EBITDA, 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 billion of…

Thank you, Mauricio. Turning to slide 12, NRG’s third quarter and year-to-date financial performance significantly exceeded the same periods last year. NRG produced adjusted EBITDA of $973 million in the quarter, which is $493 million higher than the third quarter 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 million. Compared to a normalized 2022, third quarter 2023 performance was driven by $125 million of improved operations and margin expansion in our core energy business and $225 million of Vivint EBITDA which was not included in our 2022 results. Similar to the first two 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 performance continue to provide predictable supply costs through a volatile load and freight conditions in Texas. Looking at our segments and starting with Texas. Adjusted EBITDA increased by $356 million versus the prior year on the back of higher gross margin of $378 million. Continued unit margin expansion from lower supply costs coupled with improved plant performance were the primary drivers for the increase in gross margin. This increase in gross margin was partially offset by increased OpEx from higher selling and marketing in Home Energy, where we increased 50,000 customer’s year-over-year. In the East/West segment, adjusted EBITDA declined $88 million versus last year, driven primarily by lower spark-spreads of Cottonwood, discontinuation of equity earnings treatment for Ivanpah 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…

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 five-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 focused 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. So, with that, I want to thank you for your time and interest in NRG. Darren, we are now ready to open the line for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Shar Pourreza of Guggenheim. Your line is now open.

Hey, guys. Good morning.

Hey. Good morning, Shar.

Good morning. Bruce, can we just unpack the $160 million in improved ops and margins that you are 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?

Sure. Bruce?

Sure. Hey, Shar. Good morning.

Good morning.

So. I would say that, really when you think about the $160 million, it’s pretty much margin expansion across the entirety of the complex. So if we think about our Home Energy business, we are really seeing margin expansion, there is really on two fronts, one 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 are targeting proper revenue rate for customers and then on the cost of supply, that’s really representing the benefits of our diversified supply strategy and just a general better plant performance relative to history. On the C&I side, we are seeing margin expansion there, which we would also believe is terrible. 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 expect that to also continue to be durable. So, all-in-all, higher expansion on the margin side with durability.

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 for the foreseeable future.

Perfect. And we should -- 2024 free cash flow conversion rate, it looks like it’s in the mid-to-high 50s. I know you have 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 through how you see that stepping up and what kind of shape that may take, i.e., linear as we also continue to update our models? Thanks.

Sure. Bruce, do you want to?

Yeah. I would say, Shar, 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 $140 million to $445 million. 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.

Got it. Perfect. And lastly, Mauricio, just on a -- just a strategy question, I guess. Can you just update us on how you are kind of approaching the prospects for newbuilds in ERCOT? I know there’s obviously a lot of the existing assets in the market right now, we have seen in Carolina and we have seen in Texas gen, would you have any interest in second hand plants? Thanks guys. I appreciate it.

Sure. Well, as you know, Shar. We actually improve our diversified supply strategy. Some of it will be through own generation, some moving into 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 either as brownfield development. So we are looking at all of it. We are evaluating the economics. At the end of the day, we are balancing operational risk, market risk, counterparty risk, that criteria permeates the evaluation that we are 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 decisions that we are 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. So I have said before that towards, I would say, the end of the year, we are going to have more visibility on those changes in ERCOT that is going to inform the next steps we are going to take.

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

Thank you, Shar. Appreciate that.

Thank you. One moment for our next question. Our next question comes from the line of Julien Dumoulin-Smith of Bank of America. Your line is now open.

Hey, guys. Good morning. Thank you very much for taking the time. Appreciate it. Look, just checking in first on the buyback here just a technicality. 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 proves to be additive to kind of 2024 here, especially given the higher numbers that your guidance versus initial plan?

Sure, Julien. So…

…you get it done.

Yeah. As we mentioned, we are going to do the ASR imminently, that means as soon as possible. And what I will characterize the execution of that ASR, we are going to do it as fast and as efficient as we can. So I think that’s the spirit and the intent launching this ASR as soon as possible.

Julien, I would just add that as you know, when you do an ASR, we obviously realize the vast majority of the shares 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 first quarter of next year. But to us, that’s actually a pretty good situation because then that provides the ability to then roll into a regular way share of repurchase program related to our 2024 capital allocation plan to really continue to maintain the momentum on the repurchase front.

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 2024, nicely done on the comments on keeping it sticky. And then, Mauricio, next piece of this is, you have talked up this virtual Power Plant distributed opportunity on the call today in prior remarks, how do you see that feeding into, A, what you are talking about in 2024? I presume that’s not really necessarily reflected in size. But at the same time, you talk up an opportunity there, I presume that there’s a certain degree of customer election and choice in that. But how do you see that scaling here? When does that really meaningfully impacting and how meaningful are we talking here? I mean, I have heard some of your comments earlier, if you could elaborate.

Yeah. 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 was going to be a five-plus year opportunity. What we are experiencing is that this is going to be able to be implemented and scaled up faster than that. I would say it’s probably a three-plus year. And I provided some initial numbers that I think are very realistic on what we can accomplish. So if you look at a 1 gigawatt VI [ph] position in Texas this past summer, it represented close to $200 million of gross margin. And 1 gigawatt for our portfolio is basically less than 10% of the load -- of the peak load that we currently serve. So it’s very achievable and that gives you just some indication that you are not talking here about a small opportunity, you are talking here about a very large opportunity. The other thing that I will say is that, this product that we are 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 this 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 VI. That’s why we are calling it more as an optimization of the energy demand behind the meter as opposed to a traditional demand response. That’s why we are 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.

Awesome. Excellent. Thank you. Just a quick clarification from the last question from Shar. When he asked you about acquisitions or divestments on gas, 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 pattern here we assume.

I think we are, for the most part, done on the optimization front. I mean remember, the optimization of our portfolio is driven by what we need to serve our load in the best possible way. STP, I already talked at great length, it’s block power, it is not necessarily, it is 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 our host. So they really didn’t do provided the attributes of characteristics that we wanted from a flexible asset. I think after Gregory and STP I would say our optimization efforts are largely done.

Thanks guys.

Thank you. Julien.

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

Good morning, guys.

Good morning, Angie.

Good morning. So first on Vivint. So one I was just wondering if you have heard any feedback from your activist investor about how holding onto Vivint is working out for you in the stock, so that’s one. And number two is, so you mentioned a number of positive updates on Vivint. One of the main ones, at least that’s 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 that would everything to link higher interest rates as a benefit for a business like yours, but it’s deals that way.

Yes, Angie. So let me take the first one and then I am going to ask Rasesh 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 are seeing in the last two quarters is that, we basically delivering on the commitments that we provided to all of you on Investor Day. That’s our focus. I have been in -- on the road talking to investors to help them better understand the strategy, to help them better understand the value proposition that this consumer strategy represents and not just to the activist, 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 are delivering and I think shareholders in general are appreciating the value of our consumer strategy. And what I will say that also market participants as a whole, whether it’s ISOs or whether it is the regulators, they are starting to see the benefit and the opportunity that demand represents to better manage the entire power grid given the greater electrification that we are going to see in the years to come. So I think thus finally happening. But Rasesh the second question can you address?

You bet. Angie, 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 into 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 aspects of the value proposition is the near -- I think that a record-low attrition rate for us and this economy to have a nine-year customer life. 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’s a long runway ahead forward.

Okay. Just one follow-up on Vivint. So, Rasesh, you remember, as you said yourself, you are bringing forward this DR [ph] driven this growth on the Vivint side, I thought that the reason why we had expected the growth to materialize on the 2025 and beyond was because you actually needed some software upgrades, some sort of investment to facilitate that growth. So have you put those forward, hence the growth is materializing earlier?

Yeah. So, I will say, and we literally just finish 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 cover 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 have been doing the last couple of weeks and then is to connect now the Smart Home technology platform to our commercial operations backbone. That was very successful. That’s why I said that, we are accelerating those efforts and instead of being a five-plus-year opportunity, I see that as a three-plus-year opportunity. The improvements and investments that we need to do on the technology backbone is included in that 20% of growth, we are not going to increase that. What I am 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, Angie.

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

Yeah. So, Angie, let me just say two things. Number one, we are -- when we serve our customers we are not short. We are actually leaning long. We don’t have to own every megawatt or produce every megawatt that we sell to our customers. That will be the first thing. 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 today is renewable energy. It’s going to be wind and solar, intermit and generation. That’s zero variable cost generation. What that means is that, for the most part of ours in the market is quite 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 are going to see very few periods of scarcity conditions. But for the most part, the rest of the intervals, the rest of the hours are going to be very low price. So that’s why demand response and the 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 be paid in the future and the opportunity around the management is again completely consistent with that expectation in terms of price formation and market behavior. So I believe we have positioned the company very, very well for the foreseeable future. And I will just say one more thing, we literally experienced the hottest summer on record in Texas and the grid handled it very well. The only time when we saw scarcity pricing was really at phase where we have low renewable output and even there ERCOT was managing the grid very conservatively. So I will say that, for those of you who really wanted to test the ERCOT market and the improved supply strategy that we have at NRG. This was the test and we passed with high flying colors I think.

Great. Thank you.

Thank you. Our -- please wait one moment for our next question. Our next question comes from Michael Sullivan of Wolfe. Your line is now open.

Hey, everyone. Good morning.

Good morning, Michael.

Hey. Just wanted to follow-on one of the questions from earlier in terms of the growth target realization looks like that’s coming little bit sooner than expected. Does that indicate any potential upsides to the 2025 number of $300 million run rate?

I think right now we are comfortable accelerating the 2023 targets, just given the success on our growth and cross-sell. Yeah, I think, it’s early to start thinking about moving the $300 million 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 are going to be talking to all of you, quantifying it and how big it be and when can we start realizing it. So that’s more to come there.

Okay. Great. And then just specifically on the ERCOT portfolio, next week’s vote on the loan bill, does that drive any decision-making in terms of optimization of the fleet or newbuild or anything like that?

I mean, it is one more data point that we are 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.

Okay. Great. Thank you.

Thank you, Michael.

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

Good morning. I am hoping to start off saying more on the strategic side. At the Analyst Day, you indicated an aversion to larger strategic acquisitions. Given that the pre-capsule picture is becoming more favorable and maybe pricing for assets is going down. How committed are you to that vision and you think you highlight some potential VPP and power plant opportunities? Is there any scope around what type of incremental capital that could enable?

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

Okay. I appreciate the clarification. And then one more on the modeling side in terms of the Vivint, subscriber acquisition cost coming up and that subscriber acquisition cost coming up, what’s driving that and what do you think from a trend standpoint in terms of customer acquisitions?

Yeah. It is really a function of two things. One is the increase in interest rates year-over-year and two is 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 2.1 million subscriber base. If you would 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 products from us.

Is the customer composition or the customer mix evolving or any comments you are able to make around the characteristics of your new subscriber cost?

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 and high credit scores. And so it’s a very resilient business from that standpoint.

Okay. I appreciate you taking my question.

Thank you, Ryan.

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

Thank you, Darren. Well, I would 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.

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