NRG Energy Inc (NRG) — Q4 2016 Earnings Call Transcript

Thank you, Vince. Good morning and welcome to NRG Energy's full year and fourth quarter 2016 earnings call. This morning's call 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. As this is the earnings call for NRG Energy, any statement made on this call that may pertain to NRG Yield will be provided from the NRG perspective. 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 press release and this presentation. Now, with that, I'll turn the call over to Mauricio Gutierrez, NRG's President and Chief Executive Officer.

Thank you, Kevin, and thank you, everyone, for your interest in NRG. Joining me this morning is Kirk Andrews, our Chief Financial Officer. Also on the call and available for questions, we have Elizabeth Killinger, Head of our Retail business; and Chris Moser, Head of Operations. Before I turn to our presentation, I would like to acknowledge Howard Cosgrove and Ed Muller for their years of service as directors on the NRG board. I want to thank them for their dedication and wish them well in their next endeavors. Let me also congratulate our current Director, Larry Coben, on his appointment as Chairman of the Board. I'd also like to welcome our two new board members, John Wilder and Barry Smitherman. I look forward to working with both of them on all of the exciting opportunities ahead for NRG. 2016 was a pivotal year for our company. Just one year ago, I made a commitment to simplify our business, strengthen our platform and restore confidence in our direction and decision-making. We have made significant progress on all fronts. Today, NRG is in a much better place to continue executing on our multiyear strategic plan to solidify our position as the premier integrated power company in the country. Let's move now to slide 3, where I'd like to summarize the key highlights from today's call. First, we delivered on our numbers. Our track record of strong results and execution continued in 2016. We had our second-best safety performance year on record and our integrated platform delivered earnings that were even stronger than last year. We grew both adjusted EBITDA and free cash flow before growth despite the difficult commodity price environment that reduced our total generation by 14% from 2015. Our Retail business delivered its third consecutive year of EBITDA growth with a record adjusted EBITDA of just over $800 million. NRG's best-in-class platform has again demonstrated its ability to provide strong, stable results despite challenging market conditions. For these reasons, I'm also able to reaffirm our 2017 financial guidance. I want to thank all my colleagues for a job well done on a very successful year. Second, we executed on our priorities. Our focus over the past year in simplifying and streamlining our business resulted in over $0.5 billion in cost reductions. We made progress in repositioning our portfolio by selling assets at value, and executing several capital projects on time and on budget. We strengthened our balance sheet by reducing corporate debt by $1 billion and extending $6 billion of debt maturities well beyond 2020. Last, we reinvigorated our strategic partnership with NRG Yield by putting in place a dedicated management team and expanding our Renewables business and ROFO pipeline. Third, we're not done yet. As we closed out the first phase of deleveraging, cost-cutting, and business optimization efforts, we now turn to the next phase of our plan. We're in a much better position today to benefit from market opportunities than we were one year ago. But before discussing details of our 2016 results and 2017 plans, I want to remind you of what underpins our continued strong results and sets NRG apart from others in the industry on slide 4. NRG's differentiated business model is simple and focuses on our competitive advantage; the integration of Generation, which includes Renewables and Retail. This integrated platform and the touch points between these primary businesses allow us to capture operational and commercial synergies in a way that makes the whole of our business greater than the sum of its parts. NRG's unique value proposition centers on stability. Our diverse portfolio minimizes our exposure to market and fuel-specific downturns, while our diverse business lines create a stable base of free cash flows, particularly the natural hedge between Retail and Generation. In 2017, we're estimating that three-quarters of our gross margin will come from stable sources, such as retail, contracted assets, including NRG Yield, and capacity revenues. We have built a business that is not dependent on commodity prices to deliver strong results, but that remains well-positioned to benefit from the upside in a commodity market we cover. As we manage our business for stable, visible free cash flows, we maintain the ability to grow and quickly replenish capital. We achieved these through our strategic partnership with NRG Yield, which serves as another unique differentiator of our business and is an important driver of our ability to participate in the growing Renewable segment.

Thank you, Mauricio, and good morning, everyone. Beginning with the financial summary on slide 11, before I review the full-year results, I'd like to take a moment to highlight a change we've made to both our segment disclosure for 2016 and our guidance breakdown. We're now combining both Mass Retail and Business Solutions into a single Retail segment in order to bring all of our direct customer-facing businesses together as a single segment. Business Solutions, which consists of our C&I, demand response, and other B2B initiatives, was previously part of the Generation segment. Our results for 2016 as well as our guidance for 2017 now reflect this change, which we believe will provide greater clarity of disclosure in helping our investors better understand the NRG value proposition. Turning to 2016 financial results, NRG delivered $3.257 billion in adjusted EBITDA and $1.2 billion in consolidated free cash flow before growth. Our results highlight the benefits and resilience of our integrated platform as the low commodity price environment helped Retail deliver $800 million in adjusted EBITDA. Mass Retail contributed $755 million of this total, in line with the midpoint of our latest guidance for Mass Retail, which was announced on our third quarter call. Generation and Renewables achieved $1.547 billion in adjusted EBITDA, while NRG Yield, aided primarily by robust wind conditions through the year, contributed $899 million. We ended 2016 having completed $1 billion of our $1.4 billion corporate debt reduction program, the balance of which is part of our 2017 capital allocation to retire the remainder of our 2018 bond maturity. When combined with the retirement of our convertible preferred and the extension of corporate debt maturities at more favorable rates, including the recent refinancing of our term loan, which occurred in January, our deleveraging efforts have generated in total almost $100 million in annual interest and dividend savings, significantly improving NRG-level free cash flow.

Hi. Good morning.

Good morning, Stephen.

Thanks for the additional disclosure on the cost structure, and congrats on exceeding your cost-cutting targets. Just a few questions on your SG&A, for 2017, what is built into overall guidance in terms of your overall SG&A position?

Let me turn it to Kirk, specifically. But for 2017, on our guidance, we included the $400 million target that we had on our cost reduction initiatives. Is that what you wanted, Stephen, or what level of specificity do you need?

Well, I was thinking just in terms of the – just the aggregate SG&A amount for the entire company for 2017. How should we be thinking about that aggregate level in 2017?

Well, as we move into 2017, I think when you look at the additional disclosures that we have on the, I believe it was, slide 6, for 2016, you should expect that we're going to continue to focus on reducing our cost structure overall. And at the very least, when it comes to SG&A, not only are we going to hold the line, but as I mentioned in my prepared remarks, I think it's difficult given the initiatives that we're going to go through in the Business Review Committee to put a specific target as we have done in the past. So, I hope that you all indulge us with holding on to, I guess, the direction that we have provided in terms of our new forNRG program, our new cost initiatives. But there is a lot that we're going to go through in the next couple of months in revising our entire business around the company.

Very much understood. Shifting gears over to something you mentioned in your remarks about asset dispositions. You mentioned that there's potential for additional asset dispositions. Without getting too specific, what types of assets should we be thinking about in terms of the most logical candidates for disposition?

I think it's similar to what we did in 2016. We went through a very thorough review process on assets that were not necessarily core in specific regions, that were single assets that have been underperforming. But the most important thing to me is, if we can actually monetize assets at value. And that's what we're going to be focusing on, on the next steps of asset dispositions. As I've said in the past, we ended up with a portfolio of close to 50,000 megawatts of generation through a number of acquisitions, and it is time now to be pruning around that portfolio and to recalibrate and resize that portfolio. But we will only do that if we can actually monetize assets at value, like we did last year where we set a target of $500 million and we came in a little over $550 million. So, I think that's how you should be thinking about the asset optimization efforts going into 2017. And of course, I mean, now that we have a new framework around the Business Review Committee, we will have a conversation about single assets. But every part of our business and – evaluate that and make a determination in the next couple of months, which I will be in a position to announce to you later in the year.

Hey, guys. This is Antoine actually covering for Julien. How are you?

Good. Good morning. How are you?

Good. First, can you expand a little bit on where the incremental $139 million savings were made, both in terms of O&M versus SG&A and also by business unit?

Yes. So, the first thing I think it was important to – as we go in through this period of asset rebalancing and asset optimization, I feel it was important to provide you with the total cost reduction on the platform, and not only focusing on one specific category. So, what we attempted to do was provide you with the entire cost platform of the company. Some of the additional cost reductions happened around asset dispositions that we've made. And it is important, as we go in through this asset rebalancing, that we have the transparency to provide you the level that you need to be able to compare where we were before and where we are today. I will also say that a lot of the over-performance happened just across all the different categories; SG&A, O&M, selling, and marketing. So, there is not just one area to pinpoint. But I think it was, as I mentioned, completely across the organization.

And just to add on – it's Kirk. I mean I think this is part of one of the pages that Mauricio spoke to in the total cost comparison versus the baseline, on which those cost targets were set. This is what we achieved in 2016. And I think we had about $130 million in SG&A and marketing savings, about $300 million in O&M, and another $100 million of rounding in development. If you recall, I mean our original target of $150 million, as we said in the reset, which was a part of that $400 million, was to come from G&A, marketing, and development. So pursuant to what I just described, the combination of those two elements in terms of savings between the baseline and 2016 is more like $230 million. So, that gives you a directional sense of at least where that component of the overage came from.

Thanks. Just wanted to be – sort of make sure I state the obvious and understand that the guidance you've given for EBITDA and free cash flow this year does not include anything that might result from the strategic review currently underway in terms of incremental cost reductions, asset sales, etc.?

Yes, Greg. Good morning and, yes, that is correct. I mean, the guidance does not include anything that will come from the review that we're going to undergo in the next couple of months. That is correct.

Okay. So, it basically assumes the benefits you've achieved through cost-cutting are sort of stable, but don't improve materially until you can give us a more detailed update on where you think you can go?

Yes.

So, if I got the CDR right from December of 2016, there's about 18,000 megawatts or so that was on when they published that in the early part of December. By the time we get to the summer of 2017, they're looking at about 20,000 total, give or take. The split is 18,000-ish in the non-coastal and 2,000 and just a little bit over on the coastal side of things. Interestingly, that puts the non-coastal areas at very, very close to the CREZ limit of around 18,000. So that looks relatively full from our perspective. But yeah, I mean, we've got a chart in here. I don't remember what page it is. It's early in the section.

24.

Yeah, on page 24, where we've laid out some of the past peaks when we hit basically 71.1 last year. The forecast right now unadjusted is 72.9. And just to make it clear, what we could be staring at if August of 2011 comes back down around on the roulette wheel, we took the previous adder for high temperatures and tacked it on to their new one, you're pushing almost 76,000 megawatts, which would be an incredibly impressive kind of a number out there. Having said that, you've got Wolf Hollow and Colorado Bend coming on this year, two very efficient new CCGTs, which should keep things down a little bit. And then the question that you end up with, which was the $1 million question last year was, which was how much does the wind blow. The expectation that they built into the CDR is 14% and 58%, depending on whether you're talking about non-coastal or coastal. We obviously got more than that last year on the non-coastal piece, and that remains to be seen. I will say that, just one last thing, I will say that, I mean, we've seen them raise their load forecast by a couple thousand megawatts for the next couple of years, which ate into the reserve margins, CDR over CDR kind of a thing, and that load growth is real. I mean that's part of the chart that we put there on page 24 as well.

Yeah. Hi. Good morning.

Good morning, Steve.

First, one clarification. The guidance for 2017, does that include the $400 million prior cost target or the $539 million updated number?

It includes the full impact of the latter, the $539 million.

Thank you, and thank you for your interest in NRG and spending some time with us this morning, and look forward to talking to you in the next earnings call. Thank you.