Good day, and thank you for standing by. Welcome to the NRG Energy, Inc. First Quarter 2024 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 first speaker today, Kevin Cole, Head of Treasury and Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to NRG Energy's First Quarter 2024 Earnings Call. This morning's call will be 45 minutes in length and is being broadcast live over the phone and via webcast, which can be located in the Investors section of our website at www.nrg.com under Presentations & Webcasts. Please note that today's discussion may contain forward-looking statements, which are based upon assumptions that we believe to be reasonable as of this date. Actual results may differ materially. We urge everyone to review the safe harbor in today's presentation as well as the risk factors in our SEC filings. We undertake no obligation to update these statements as a result of future events, except as required by law. In addition, we will refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to today's presentation. And with that, I'll now turn the call over to Dr. Larry Coben, NRG's Chair and Interim President and CEO.

Thank you very much, Kevin. Good morning, everyone, and thank you for your interest in NRG. I'm joined this morning also by Bruce Chung, our Chief Financial Officer. And we also have members of the management team on the call who are available to answer questions. Let's begin with the 3 key messages for today's presentation on Slide 4. First, our business performance exceeded expectations in the first quarter. I'm incredibly pleased with our strong start to the year and in reaffirming our 2024 financial guidance ranges. Second, electrification trends compounded by Gen AI data center growth forecast a signal of transformative rises in power demand. As a result, we expect competitive markets to realize outsized benefits driven by business-friendly environments, available resources and the ability to cite projects quickly. Finally, NRG is well positioned to capitalize on tightened supply and demand in our core markets. Our technology-led consumer platform, our diversified generation portfolio, our leading business energy platform and a real estate site portfolio present a unique opportunity to create significant shareholder value. I'm going to give you visibility into this later in the presentation. Let's move to Slide 5 because I want to share again our value proposition, which may not be familiar to those of you who are new to NRG, and I understand there are several of you on this call. We serve nearly 8 million residential customers and operate the second largest C&I energy and natural gas retail business by volume in the United States. Our company sits at the intersection of energy and technology in the home and the grid. We generate significant excess cash well beyond our current business needs, resulting in the financial flexibility to grow earnings while returning significant capital to our shareholders and maintaining a strong balance sheet. The strength…

Thank you, Larry. Turning to Slide 14. Our top decile safety and strong operating performance resulted in first quarter adjusted EBITDA of $849 million, exceeding the first quarter of 2023 by $203 million. This represents a 31% increase in our adjusted EBITDA from the prior year. $150 million of the year-over-year increase was the result of the inclusion of a full quarter's worth of Smart Home EBITDA. The remaining increase was attributable to outperformance in our East and West segments, driven by lower realized supply costs, partially offset by a slight decline in our Texas region due to mild weather. Our consumer energy and smart home platforms increased customer counts year-over-year by 8% and 6%, respectively. Most notably, we added 35,000 customers from the newly opened Lubbock market in Texas, representing a healthy share of the available customer base. This is a testament to the hard work of our consumer energy team over the past 2 years to position NRG and its brands as the electricity provider of choice in Lubbock. Similar to 2023, our Smart Home platform continued to demonstrate strong execution. In addition to growing customer count 6% year-over-year, service margins increased 5% year-over-year, and monthly recurring revenue per subscriber grew 5% over the same period. It is clear that customers recognize the value of our Smart Home services as evidenced by our growth in the face of various macro headwinds affecting the consumer discretionary sector. Our diversified supply strategy continued to deliver, ensuring that we sustain the level of margin expansion we saw in 2023 while also providing the necessary coverage against potential volatility in the winter months. As we discussed in our last earnings call, our fleet performed well in the first quarter, demonstrating a 12% improvement in our in-the-money availability factor winter-over-winter. We have taken…

Thank you very much, Bruce. On Slide 17, I want to provide you a few closing thoughts on our 2024 priorities and expectations. We remain laser focused on execution and on delivering on our financial, operational and safety commitments. We are seeing a step change improvement in fundamentals across all of our platforms. We believe that this will put a spotlight on the scarcity of the critical products and services we sell and the durability of that platform. We are uniquely positioned to deliver significant shareholder value for years to come. Again, we are the only company to combine residential, energy and smart technologies at scale, with nearly 8 million customers and the necessary capabilities to create sustainable value through both tightening and loosening power market conditions. We operate the second largest business-to-business electricity and largest natural gas platform in North America, positioning us as a leader in premium services and tailored energy management solutions. Our integrated supply strategy provides incredible capabilities to stabilize near-term earnings while capturing medium- to long-term margin expansion opportunities from higher power prices. And we own a large Latin portfolio with premium attributes for what is to come in the super cycle of power demand. In my 20 years at the company and over 40 years in power, I have never been more excited about the future of our sector at NRG. The step change in demand should lead also to a change in the depressed valuations for NRG and its peers. These depressed valuations have resulted in double-digit cash flow yields such as ours. This revaluation will be good for NRG and others in our space, and it's very exciting times. I look forward to updating you on our progress along the way. With that, I want to thank you for your time and interest in NRG. We're now ready to open the line for questions.

[Operator Instructions] Our first question comes from Shahriar Pourreza with Guggenheim Partners.

Just Larry, on the curves themselves. There's, obviously, a lot of chatter in the industry right now about some large generators like nukes to go behind the meter. Is this something, I guess, that concerns you as you look at your length in the Eastern markets? So as you go out to the market to match load, are suppliers raising any kind of concerns there?

Shar, it's Rob. Like it doesn't raise any concerns for us as far as trying to purchase supply so that we can meet retail obligations. Even if they do go behind the meter, there's plenty of players in the East. It's a very liquid market.

Okay. Got it. Perfect. And then maybe just a little longer dated. But as you're kind of highlighting the Texas fleet heavily here, it seems warranted. How would you -- the recent sort of the EPA regs as they stand, impact your generation profile maybe over the next couple of years, right? Is it just additional CapEx? Could we see an acceleration of gas development work beyond the 1.5 gigs that, obviously, Bruce was highlighting of shovel-ready proposals. Just more color on how these items are kind of interacting.

Sure. So when you think about the regulations that were promulgated, the first thing I would say, Shar, is that they're all going to be litigated, right? AG, states, ISOs, consumers, everyone has a view and a reason to make sure that these rules get set in place in a way that works for the system and provides reliable and affordable power over time. As far as specifics around us, some of the rules will have to see how they pan out at the end. But what I would tell you is that our decisions to invest around the gas fleet or the 1.5 gig that Bruce talked about earlier, have nothing to do with these regs. It's all about the opportunity that we see in the markets, and we'll continue to drive that way. Does that make sense?

Yes. That was perfect. And then, Larry, it sounds like you're having a really good time on the job right now. So maybe you're not in a rush. But is there anything as far as any updates on the CEO search? Or are you having too much fun?

Well, Shar, I am having a lot of fun. But look, it's a great team, and it's a great company and it's -- look, it's a fantastic job. The committee continues to do its work. I think they're still on the time frame that I talked to you about, but there's no rush. I've told them that, to take their time and that I will continue in this position as long as necessary, until they find the right person that they're happy with to be the next CEO of NRG. But given all the opportunities that we have and everything that we've been talking about on this call, you're right, Shar, I am having fun. And I think you're supposed to have fun.

Perfect. Really big congrats to Elizabeth. She's been such a fantastic phase for NRG for some time.

The next question comes from Angie Storozynski with Seaport.

So first, for the last maybe 20 years, you were trying to convince us that you are power price-agnostic. Clearly, not any longer. That's number one. So how do we think about it, this new backdrop, how it impacts your retail business versus wholesale business? Is this additional margin going to be realized by selling this more expensive power to the retail arm? So that's number one. Number two is, so this is gross margin. Is there like an additional O&M layer, we should think about or on maintenance, both on the cost side and CapEx side? Just to get a sense of how big an impact you will have on the EBITDA of the sway in power prices.

And let me have Rob talk a little bit about the CapEx and repair side. And then I'd ask Rasesh to talk a little bit about the margin side .

Angie, when you think about taking the gross margin expansion that you see on the chart and then trying to translate that across over to EBITDA, I would point out -- so think about it in 2 pieces, right? So on the plants that are the generation that's currently running today, right, the stuff that we've built into our numbers and are running today. When you see a step change in power that has zero impact on OpEx for those megawatts because they're already running. The place where you'll pick up additional OpEx and translate that down to EBITDA is on the stuff that's running more. So we talked to you guys historically about an increase in run times on some assets, given a change in price. It's those additional hours that actually cost you more. And the way that I would translate that down would probably be at the same kind of rate, which is Bruce, correct me if I'm wrong, 80%.

Yes, we would probably see something like an 80% translation to EBITDA and then probably like a 75% translation of the free cash flow.

Does that answer your question?

Yes.

And then, Angie, on the retail margins, I mean, I think we've proven our ability to maintain strong retail margins over time. Increasing power prices really affect our competitors as well, and they historically proven to be rational in pricing. And so when you look at quarterly move up of the curve like we're experiencing now, it gives us ample time to pass that through to consumers. And in fact, energy prices have gone up almost 75% caused from 2017 to 2023. We've actually been able to increase margin over that period. And so we feel confident in our ability to do that.

Okay. And then one other question. So you're talking about the gas-fired new build. I mean I was just doing some -- running some simple math here. Given growing supply of renewable power, right, you probably can't necessarily count on very high capacity factors for these assets, which would suggest that power prices need to be multiples of what we are seeing in the forward curve, in order to justify construction of these new gas plants. So I'm just wondering how you see it. Even in Texas, those peakers and combined cycle gas plant that you're pitching. Even with subsidized loans, it's hard to imagine that these assets would be economic at a $60 around-the-clock or north price.

Angie, it's Rob again. I would tell you that the assets are economic. The way to think about the beauty of peakers, or CCGTs, is that they can flex meaning they can move. And they can capture the value in the hours that matter. We've been trying to transfer our portfolio to something like that for a few years now. And so when you see prices move, right, so as you see the curves go up, particularly in ERCOT, it doesn't mean that every hour goes up by that same amount. It's the very tight hours that go up those exponential amounts that you're talking about. Is that cleared up? So think about the afternoon in Texas in the summer. That is going to go up 5 or 6x versus morning of that same day may have gone up once. And peakers are the things that make money in that [ work ].

Yes. Angie, let me just add that every one of these projects, even on a sort of -- without thinking about lots of rising pricing, without thinking about [indiscernible] instruments costs or things, pencils out to be -- they all pencil out to be over our stated hurdle rate. And everything I just mentioned and the things that Rob just mentioned or upside on top of that.

So but in light of that, I'm sorry, I'm asking [indiscernible] line questions. But in light of that, the fact that the new build is materializing at these prices, wouldn't that suggest that there's a cap on the upside to power prices? Because that's usually what it suggests, right, that the new build materializes and that sort of deflates the tightness of power markets.

Angie, I think if you look at the tightness versus the 1.5 gigawatts, the tightness far exceeds it. And so yes, at some point, of course, if there's enough new build that might exclude the tightness. But if you look at the number of projects that are on the books, not just ours, but everybody's, the time it's going to take to complete those, I don't worry about that tightness being loosened in any significant way for the next several years.

The next question comes from Steve Fleishman with Wolfe Research.

So just, I guess, following on Angie's first question, I just want to try to reconcile kind of NRG in the old world of low prices for longer versus NRG now in this new world. I don't recall you talking about hedges rolling off and then suddenly being exposed to low power prices. There was the integrated model and the customers kind of side to kind of hedge the low prices. So just how do I -- why wouldn't I still not have to think about some kind of integrated model and maybe the retail margins coming down against the lower, against the higher power prices? Or just how do we reconcile the two?

Steve, I think what it has to do with really is the step change in the market. I mean before we have prices moved and really commodity-driven, those were sort of transitory, and we were managing for the steadiness. I think what you're seeing here is a step change where the flexibility of the integrated model allows us to gear ourselves, in order to take advantage of the higher prices. So the model hasn't changed. It's one of the things -- the reason we never talked about it is we never saw a step change like this. But one of the benefits of the integrated model that we've been pursuing is that it allows us to gear to price increases like this.

Got it. Okay. And then on the kind of sites opportunity and also on the new build generation. Could you give us maybe a little bit more color on how you're thinking about funding for those opportunities? And how much might come from NRG versus kind of third-party buying stakes or making the investment? Just maybe some kind of broader overlay how you're thinking about that.

Yes. So Steve, it's Bruce here. First, on the new builds. Obviously, from a funding perspective, we intend to access the Texas Energy Fund. So that's going to be 60% of the capital costs related to the new builds right there. The other 40% of equity, we feel confident that we can fund that from our own cash and cash flow, without impacting any of our capital allocation commitments, in terms of share repurchases and deleveraging. So from our perspective, we feel pretty well capitalized to be able to handle all of that by ourselves. Obviously, as we've always said, to the extent that these projects are getting built and there's a unique opportunity to potentially attract third-party capital at a very attractive proposition, then we would certainly give that some consideration. But right now, as we sit here today, we feel good about our ability to fund those projects on our own. As far as the 21 sites, it's still early days. How it is that, that ultimately translates into what sort of opportunities that results in are still to be discovered. And so don't really have a perspective on any capital need in that regard as we sit here today.

Okay. And just last quick one. Obviously, the higher stock price, you mentioned still reaffirming the 15% to 20% growth. So that, I assume means you're expecting a better numerator there in terms of free cash flow to support that? And what is driving that? Is that mainly the higher power prices?

I always have my opportunity to give you a warmer answer [indiscernible] Larry Coben but -- well, the first part of your answer, yes. Look, I mean I think we see, obviously, not only continued execution against our $550 million growth and cost program. But I think as you can see here, based on the sensitivities we provided you, there is going to be -- we do see upside as a result of the forward curve.

The next question comes from Durgesh Chopra with Evercore ISI.

Just maybe can you help us just frame very high level on the 21 sites that you discussed. How many -- if there's a way to think about how many potential gigawatts that you can add over time? And then also address how quickly you can add the gigawatts. Just the reason being that the demand, like you just said Larry, this is a step change in demand. I'm just thinking about how quick the response can lead to that.

Yes. It's a great question, Durgesh, and it's one that we're working on and it's why we've set up this sort of new group to deal with data centers. I don't know the answer yet. I don't -- we're trying to figure that out. We see ginormous potential, but obviously, there's a ton of work to do in terms of -- to figure out exactly how quickly, what's best on this site? Is it better for a data center or a power plant? Is it better for colocation behind the meter, in front of the meter? So we're spending a lot of time working through those. And I think when we have more color on them, we'll certainly provide that to you all, but I'm not sure that will be in the next 2 or 3 months. It will probably be closer to the end of the year. As you know, the power plant development is an awful lot of work.

That makes sense. I appreciate that, Larry. And then maybe just -- I know this is going to be another tough question, but just can you share your calculus or how you're thinking about buybacks here, given how the stock has kind of gone up in valuation versus investing in these in these opportunities, which obviously, have a tremendous run rate. How do you think about that?

Let me begin by repeating what Bruce said, which is we are reaffirming our capital allocation that we promised everybody. Obviously, when your stock is trading at a 25% free cash flow yield, it's an easy decision, but we still believe we have enough capital to both do our investing and return capital to our shareholders. And I don't see that changing in the short or medium term. So I think we're going to just continue to be disciplined in terms of returning capital and given -- especially given the rises that we've been talking about here will likely should actually have more capital to invest ourselves. And it won't surprise you to hear that there's an awful lot of people who also now want to co-invest with us in a lot of these kind of projects. So I think the possibilities for doing accretive generation and related projects are there, regardless -- irrespective of our capital allocation principles.

Next question comes from David Zimmerman at Morgan Stanley.

Dave Arcaro here. Following up on one of the earlier questions. I was wondering, just on the ERCOT market and pricing in the market and the forward curves. Do you have a view from here on where ERCOT prices could go? Is there still room for upside? Do you think in terms of where the forward curve is currently pricing?

David, it's Rob. Yes. The markets can definitely go up. If you look at the large loans that are coming to the state into the system, ERCOT is already beginning to monitor and take a look at it. It's a lot. And you're seeing that price in. There is more upside in the curves from here.

Okay. Got it. And does that -- as you're kind of hedging into that, then, is that a view that you're embedding as you start to layer in hedges and firm up some of your out-year EBITDA forecast?

So when we think about our out-year EBITDA, remember that a big part of our hedging program is through the retail book, right? So as we sell to our 8 million consumers, that ultimately takes a lot of that value and translates it over through the retail revenue rates. We're always looking way out the curve, David. If I thought that something was really high and out of whack, then I would say that we could take something off the table. But we like the position, we like the trend and we like where our portfolio is.

Got it. And could you touch on what the competitive dynamics are that you're seeing in the retail energy business right now, in terms of any pressure from new entrants or pricing pressure in the market that might push margin one way or the other right now?

It's been a very stable performance. As you saw, we had strong performance in terms of customer growth year-over-year. We saw similarly good performance and load growth and our margins. And so we feel very good. I think there are a couple of new entrants in the market, but as we look at our outflow reports, we don't really see any meaningful traction there.

The final question comes from Ryan Levine with Citi.

A follow-up on some of the capital -- just a follow up on some of the capital allocation framework. Is there a price where you would reconsider buybacks? Or are you not trying to take any view on the value of the energy security?

Brian, there is no price that we would necessarily sit here and tell you is the absolute line at which we would stop buybacks. We're always going to be looking what is implied in the share price with respect to our free cash flow yield, and we'll make the termination from that standpoint. But as we sit here today, we see plenty of room to run for us to continue to be buying back shares.

Okay. And then as you're looking at on investment opportunities related to power generation growth in your service territory. Are you are you focusing -- you mentioned a number of opportunities for new build and partnerships. Do you have a preference for partnerships? Or would you prefer to own the assets out right?

I think for us, it's just a maximization and optimization process. And so I don't think we have a preference, one way or another. It's related to cost of capital, operational flexibility. And at the end of the day, what falls best to our bottom line.

Okay. And given the economic outlook that you suggested was attractive for these new builds, are there any customer commitments or duration of demand that you're looking for the data centers to commit to, to underwrite some of these new builds?

It's Rob. The answer to that is no. The new builds that we talked about are not set up for data centers or forward to meet that load. The conversations we are in early days with around colocation or use of our sites. Those will be a case-by-case basis as to whether or not it's a long-term deal or not, right, with a data center or other large load. But that's going to come as we evaluate each opportunity. But the things we've talked about thus far are for our book and our portfolio.

And just one last question in terms of retail margin on electricity. The movement in ERCOT forward prices, do you think that will have any impact on the margin that you'll ultimately be able to realize on that part of your business?

Well, we've proven the ability to maintain strong retail margins through various curves. And so we have a very sophisticated analytic engine that gives us insights into the price sensitivity of customers. And when you have sort of these orderly shifts in power prices, we're able to pass them on to consumers over time. So we feel good about our muscle there.

This concludes our question-and-answer session. I would like to turn it back to Larry Coben, Chairman and Interim President and CEO, for closing remarks.

Thank you all very much for joining us. I think you can hear the palpable excitement that we all feel here at n NRG for the potential, and we look forward to continuing to deliver great results and executing on that upside in the days, months and years ahead. Thank you all.

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