NRG Energy, Inc. (NYSE:NRG) Q4 2023 Earnings Call Transcript
NRG Energy, Inc. (NYSE:NRG) Q4 2023 Earnings Call Transcript February 28, 2024
NRG Energy, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the NRG Energy, Inc. Fourth Quarter 2023 Earnings Conference 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 speaker today, Kevin Cole, Head of Treasury and Investor Relations. Please go ahead.
Kevin Cole: Thank you. Good morning. And welcome to NRG Energy’s fourth quarter and full year 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 upon assumptions and 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 Larry Coben, NRG’s Chair and Interim President and CEO.
Larry Coben: Thank you, Kevin. Good morning, everyone. And thank you for your interest in NRG. I'm Larry Coben, and I am the Chairman, Interim President and CEO. I'm joined this morning by Bruce Chung, our Chief Financial Officer and we also have members of the management team on the call and available for question. While I have been CEO for three months, I have been Chairman for seven and on the Board for 20 years. I have never been more excited about NRG as a company than I am today. Let's begin with the NRG value proposition on Slide four. We are the trusted partner to almost eight million residential customers earned every day through unique and differentiated offerings that simplify and improve our customers lives. We have 5.9 million energy and 2 million smart home customers and manage the second largest C&I Energy and Natural Gas retail portfolio in the country.
We have taken the necessary steps to position NRG to win the energy transition. At the convergence of energy and technology in the home and grid, with the evolution of smart devices and generative AI data centers. We generate significant excess cash well beyond our current business needs, resulting in financial flexibility to return significant capital to our shareholders while maintaining a strong balance sheet. Our business and financial outlook has never been stronger. And I've never been more excited about the future of the company than I am today. Turning to Slide five. First, in 2023 we delivered record free cash flow before growth and near record adjusted EBITDA. We exceeded our Investor Day outlook and our previously increased 2023 guidance ranges.
This is the direct result of the strategic initiatives and actions we've taken in recent years to strengthen and stabilize our business. Our outlook continues to get better and better, and today we are reaffirming our 2024 financial guidance ranges. Next, we made significant progress advancing our long term energy transition and electrification strategy. We have line of sight to achieving our current $550 million by 2025. And we are now turning our attention to the next phase of our growth. Lastly, we continue to execute our disciplined capital allocation strategy, which involves both a strong balance sheet and returning significant capital to you, our shareholders. Turning to Slide six. We delivered $844 million of adjusted EBITDA for the fourth quarter, 82% higher than the prior year.
This brings our full year results to $3.282 billion of adjusted EBITDA, 76% higher than last year, primarily driven by improved operational performance of our Integrated Energy platform and the addition of our Smart Home Business. Our 2023 adjusted EBITDA was $152 million above our original guidance midpoint, and at the high end of our adjusted guidance, while free cash flow before growth came in above the high end of our increased guidance range at $1.92 billion, or $185 million above our original guidance midpoint. This resulted in $9.25 of free cash flow before growth per share in 2023, well ahead of the $8.50 per target provided at our June Investor Day. Bruce will provide more details certainly, but again, this performance is the direct result of our strategic initiatives and actions taken to strengthen and grow our business.
And I know that these took place even with share purchases occurring at higher levels than projected about Investor Day. Turning to our 2023 scorecard, we delivered across our strategic priorities. As you know, safety is our top priority, and I'm pleased to share that we achieve top decile safety performance through a year with many distractions. I'd like to thank all of our employees for their focus, and dedication and hard work to making this happen, as well as the making our financial results happen. Next, we made progress in our continuous improvement goals for cost excellence. We completed the $300 million Direct Energy Synergy program announced earlier in the year, and we quickly turned our attention to identify and execute our previously announced next phase of cost initiatives $250 million by the end of 2025.
Turning to growth, our success in achieving the $9.25 of free cash flow before growth per share versus our $8.50 target was primarily driven by faster execution of our growth plan. We are incredibly pleased with the results of our Smart Home acquisition and believe our current growth plan is just the beginning. We are only starting to scratch the surface. Lastly, on capital allocation, we executed over $1.5 billion in debt paid down and returned another $1.5 billion to shareholders. Turning to Slide seven, let's take a look at our 2024, outlook. Today, we are reaffirming our 2024 financial guidance ranges, and our Investor Day 15% to 20% growth strategic roadmap. We are well positioned across each of our businesses to deliver on our commitments.
In consumer energy we expect the momentum gained in 2023, to continue into 2024, with volume margins and earnings growing across residential and small commercial as well as commercial and industrial customer segments. They success will be driven by our diverse and efficient marketing and sales engines, our leading care and retention capabilities, and our best-in-class innovative digital experience. We are also seizing numerous opportunities as they arise or as we create them. An exciting example is Lubbock, Texas, a market of just over 100,000 customers that opened in early January, with 65% of customers having already made their electricity provider choice. So far we are exceeding expectations for our success and winning customers and look forward to bring our innovative offerings and experiences to that market.
We also continue to see momentum with Community Choice programs, as a way for customers to experience the benefits of electricity competition in markets that don't have favorable political and regulatory sentiment that would allow customers to have the ability to freely choose their electricity providers. Next, our diversified supply strategy manages our retail exposure in multiple scenarios to include events, like the extreme summer of 2023 and Winter Storm Heather this past January, well, at the same time handling the mild weather that we have seen most of this winter. Our targeted investments for reliability and flexibility across our fleet led to material improvements in the performance of our generation when we needed it, and we expect to realize continued improvements.
We continue to evaluate various ways to enhance our supply strategy. We have three brownfield sites ready to go in Texas with dispatch flexibility, and we are considering additional storage options for the portfolio, primarily through longer term structured transactions, rather than outright ownership. And finally, the smart home business delivered a strong year driving impressive top and bottom line growth, recurring revenue and margin per customer increased through selling more products and services while simultaneously reducing net service costs per customer, we will continue to drive toward the horizontal expansion of our eight million customers wallet. Our customer retention is the best in the industry with an average customer life in the Smart Home Business of nine years, driven by unmatched customer engagement and world class, product performance and reliability.
We continue to focus on integrating Smart Home and Energy in achieving the initiatives we have previously communicated to you. Turning to Slide 8, for a closer look at growth and cost initiatives. In 2023, we advanced our energy transition electrification, and continuous improvement strategy and delivered $138 million of incremental earnings, which was more times than twice our original $65 million target. We exceeded our goals for both growth and cost savings resulting in more than $100 million of growth in our core businesses and sales channel optimization and more than $35 million in cost savings. This outperformance was primarily the result of realizing synergies faster than originally anticipated. And today, we are reaffirming the full plan target of $550 million of growth and cost initiatives by the end of 2025.
Outside of this $550 million program, we have also identified additional attractive initiatives that are in early development, leveraging the significant value creation opportunity from the convergence of energy and technology in the home in the grid. First, is for example, Virtual Power Plants are VPP, where we are uniquely positioned given our customers scale and reach, our data science, proficiency and decades of commercial market -- commercial and market experience. Importantly, VPP will increase in value as the grid tightens, and our Integrated Energy Business will allow us to monetize this value without requiring regulatory change. Second on data centers and AI. Today, we are one of the largest competitive providers of power to the hyperscalers and other data center managers.
And we have been in direct conversations with several of these customers about using more load. We see this as a significant opportunity for NRG and for competitive markets more broadly. Finally, we continue to evaluate strategic dispatchable new build, with 1.5 gigawatts of brownfield projects in Texas ready to go. As you may know in November, Texas voters approved the Texas Energy Fund, which provides support for new dispatchable generation. We expect the rules for that to be adopted earlier this year with applications beginning mid-year. We anticipate providing an update on these projects over the coming months. With that I'd like to turn it over to our Chief Financial Officer, Bruce Chung, for a financial review.
Bruce Chung: Thank you, Larry. Moving to Slide 10. For 2023, NRG produced adjusted EBITDA of $3.282 billion, exceeding our original guidance and at the high end of our upward revised guidance range. And free cash flow before growth of $1.925 billion, exceeding the high end of our upward revised guidance range. Our 2023 free cash flow before growth and adjusted EBITDA represent the highest and second highest respectively in NRG’s history. This strong financial performance is a direct result of excellent execution across our businesses, and made possible by the continued focus and effort from each of our employees in a year full of potential distractions. Our 2023 adjusted EBITDA improved by $1.4 billion as compared to 2022, driven by strong performance in our Texas region, the addition of the Vivint Smart Home Business and execution of our growth and cost efficiency plans.
Taking a closer look at the drivers within our segments, and beginning with Texas. Our full year adjusted EBITDA increased by $806 million over 2022. This was driven by higher revenue rates coupled with lower supply costs. Our diversified supply strategy worked as designed throughout a volatile year, lowering our supply costs during the mild start to the year and providing stable pricing through the summer's extreme heat. As we discussed throughout 2023, the margin expansion we saw across both our residential and C&I energy businesses, was produced through a combination of careful revenue rate management, and providing our customers with differentiated products that address their needs for affordability, comfort and peace of mind. We believe this margin expansion will be durable over the foreseeable future, and this view is reflected in our 2024 guidance.
In addition to improved margins, our Residential Energy business delivered strong customer retention of nearly 80%, while maintaining average customer tenure of six years. This is a testament to the strength of our brands, and customer experience. Our East/West services segments were lower by $142 million versus the prior year. This was due to $60 million from asset retirements in sales, with the remainder of the variance from the combination of lower average realized pricing at the Cottonwood facility, as well as a challenging housing market and more conservative consumer discretionary spending impacting our HVAC and Goal Zero services businesses. Finally, the addition of Smart Home contributed $753 million in adjusted EBITDA, finishing above the high end of our upward revised guidance for this segment.
Throughout 2023, Smart Home delivered across all of its key metrics. Most notably, Smart Home achieved 6%, ending subscriber growth in an otherwise challenging macro environment. In addition to improving monthly recurring service margins at 9%, through increasing average monthly revenue per subscriber coupled with a continued focus on cost efficiency. Turning to free cash flow before growth. NRG achieved $1.925 billion in 2023, setting a new record for the company. This represents an improvement of $1.4 billion over the prior year, primarily driven by our stronger EBITDA performance, along with improved working capital initiatives across our businesses. At our Investor Day in June, we communicated the 2023 target of $8.50 of free cash flow before growth per share.
Our strong performance in 2023 resulted in $9.25 of free cash flow before growth per share, even after repurchasing shares, at a 25% premium to what we had originally assumed in our Investor Day plan. Our platform is designed to generate significant cash flow, and based on that $9.25 per share, and our current share price that represents an implied free cash flow yield of 18%. Given this dislocation repurchasing our shares remains one of the best investments we can make. And as such, we remain firmly committed to staying the course with our capital allocation framework. Throughout 2023, we have demonstrated the strength and resiliency of our strategy, and coupled with the compelling long term macro tailwinds for the increasing electrification of the economy, and convergence of energy with smart technologies, we are confident in the outlook for our share price.
Turning to the next slide, I'd like to provide some additional context for 2023 financial results. On the left side of the page, we highlight the resiliency of our core energy business. Our Texas fleet performed well through the second hottest summer in Texas history, and most recently continued to perform through the volatility experienced during January's Winter Storm Heather. Over the last few years, we have strategically invested capital in improving the reliability of our facilities and anticipation of volatility across both summer and winter conditions. And we are seeing the impact of those investments through material improvement in our -- in the money availability factor. This is a performance measure illustrating the availability of our generation assets during periods when we need them the most.
As you can see in the bar chart, we realized a 14% and 13% improvement in summer and winter respectively in this metric. Furthermore, we saw a nearly 20% improvement in this metric on comparing the fleet performance during a Winter Storm Heather versus Winter Storm Elliott. This level of improvement was and will be critical to ensuring we're able to serve our retail load cost effectively. Moving to the right side of the page, our Smart Home Business surpassing original expectations, primarily driven by expanded monthly recurring service margins. Notably, the margin expansion was a function of both higher average revenues per subscriber coupled with lower cost to serve. We're also seeing higher take rates on Smart Home products and services at the point of sale, which is a testament to the effectiveness of our Smart Home sales channels, and Smart Home customers recognizing the benefit of increasing the intelligence of their homes through additional seamlessly integrated devices.
Turning to Slide 12, for an updated view of our 2024 capital allocation. As you can see from the slide, not much has changed since our third quarter earnings call, where we provided our initial view on 2024 capital allocation. We are still planning on $500 million of debt paid down in 2024, and expect to return nearly $1.2 billion to shareholders in the form of share repurchases and common dividends. Coupled with the 2023 share repurchase program, we will have executed nearly 75% of the current $2.7 billion authorization by the end of 2024. We expect the 2023 accelerated share repurchase program to conclude by the end of Q1 this year, at which point we will begin executing our 2024 repurchase plan on a more regular and programmatic basis throughout the year.
As I mentioned earlier, at an implied yield of 18%, we see our shares as an excellent investment for shareholder capital. And as such, remain committed to the 80-20 principle we rolled out during an Investor Day. In terms of incremental changes since our last earnings call and moving from left to right, 2024 excess cash increased $74 million because of the over performance in 2023. Other investments increased $33 million, primarily from a calendar year shift in integration costs and capital deployed to small book acquisitions in our Residential Retail business. Finally, we have $41 million of unallocated capital available for allocation in 2024, which we will evaluate the use of as we move along the year. Before I hand it back to Larry, I'd like to point out that we included some new slides in the appendix of today's presentation, which provide more disclosure around our energy business.
We believe this disclosure will enable investors to model our energy business with a level of granularity they did not have before. These slides will be updated with each earnings call we have going forward. We hope you find them helpful, and our Investor Relations team is more than happy to answer any questions you may have regarding the new disclosures. With that, I will turn it back to you, Larry.
Larry Coben: Thank you, Bruce. On Slide 14, I want to provide a few closing thoughts about 2024, our priorities and our expectations. We are laser focused on delivering on our financial and operational commitments and adhering to our capital allocation principles. We will continue to integrate Smart Home with our energy businesses and deliver on our growth and cost initiatives. All while advancing our energy transition and electrification strategy. I have never been more excited about the future of energy. We are seeing signs of step change improvement in fundamentals across our platform, including the convergence of energy and technology in the home and grid through smart devices and generative AI. We believe this will put a spotlight on the scarcity of the critical products and services we sell and the durability of our platform.
Said bluntly, I believe this step change will signify a change in the depressed valuations for NRG in our sector that have resulted in 20% plus cash flow yields. This will be good for NRG and the sector and its very exciting times. I look forward to updating you on our progress along the way. With that thank you for your time and your interest in NRG. We're now ready to open the line for questions.
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