Good day. Thank you for standing by. Welcome to the NRG Energy's Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Kevin Cole, Head of Treasury and Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to NRG Energy's third quarter 2024 earnings call. This morning's call will be 45 minutes in length. It will be broadcast live over the phone and via webcast, which can be located in the Investor 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 Larry Coben, NRG's Chair and CEO.

Thank you, Kevin, and good morning, everyone. I'm joined this morning by Bruce Chung, our CFO; and Rasesh Patel, Head of NRG Consumer, who will share an exciting update on our virtual Power Plant initiative. Other members of our management team are also on the call, and available to answer questions. Let's start with today's three messages as shown on slide four. First, our strong performance this year led us to raise our 2024 financial guidance by $175 million in late September, the second consecutive year we have surpassed our original earnings target. Today, we're reaffirming this elevated outlook for 2024 in initiating strong guidance for 2025. Second, we're excited to announce a strategic partnership with Renew Home and Google Cloud, supported by Google's AI platform to accelerate our Virtual Power Plant efforts. This partnership strengthens our ability to meet evolving customer needs, and marks the beginnings of our effort to scale VPP. Finally, we're enhancing our guidance framework by introducing adjusted EPS. We're also presenting a multiyear outlook supported by a new organic growth program, and highlighting additional opportunities to exceed those targets and drive further shareholder value. On slide five, let's review our 2024 performance and 2025 guidance. Our year-to-date results and increased guidance are driven by strong plant operations, effective supply risk management throughout the summer, margin growth across all of our business segments, and continued success in smart home. These results underscore the strength of our business model, and position us exceptionally well for the future. I'd also like to note that in response to investor feedback, we are now including all amortization costs related to Vivint Smart Home and retail home energy in the depreciation and amortization line of the income statement. Bruce will provide more details and clear disclosures on this change, which is…

Thank you, Larry. Turning to slide 10, I am thrilled to announce our strategic partnership with Renew Home and Google to develop a 1 gigawatt residential virtual power plant or VPP in Texas. This partnership brings together leaders across the energy and consumer technology industries to develop an innovative energy management solution for NRG and our customers. Our intention is to combine NRG's consumer reach and supply management expertise with Renew Home's residential demand response capabilities and Google's advanced AI technology. This will enable us to deploy smart thermostats and other devices that will allow our customers to optimize their energy use and save money while enhancing the stability and flexibility of our supply strategy and the Texas grid. On slide 11, you will find the key components of our partnership. We will develop a compelling personalized energy management platform that provides near real-time dispatch of capacity at a fraction the cost of a generation plant. Renew Home will provide the demand response capabilities and will fund a significant portion of customer acquisition costs, minimizing NRG's capital outlay. This collaboration also positions NRG as the partner for all new Google Nest VPP enrollments in Texas. NRG will manage the customer relationship, experience, and dispatch of VPP events. As illustrated in the VPP capital efficiency metrics at the bottom left of the slide, this is an economically attractive approach to supplementing our generation portfolio. The upfront investment is roughly one tenth of a new peaker plant while delivering an IRR greater than 50%, which is significantly higher than traditional alternatives. On the right-hand side of the page, you can see our plan to scale this program with the goal of reaching 650 megawatts of dispatchable capacity by 2030 and a gigawatt by 2035. Now, let's turn to slide 12, where we…

Thank you, Rasesh. Before I discuss our third quarter results, I'd like to provide a few updates on our key financial performance and valuation metrics. As you can see on the slide, we are introducing adjusted net income and adjusted earnings per share as part of our reporting framework. These metrics offer additional context for NRG's profitability and growth, capturing both underlying business growth driven by investment into our platform, as well as the impact of our robust capital allocation program. For 2024, we are on track to deliver $1.3 billion of adjusted net income, equivalent to $6.35 per share of adjusted EPS. The midpoint of our raised adjusted EPS guidance represents a 12% increase over the midpoint of our original guidance, reflecting the strong business performance. We are pleased to provide these additional tools for investors to use in their evaluation of the investment merits of NRG. We believe these new metrics, coupled with our preexisting metrics, such as free cash flow before growth per share, will continue to shine a spotlight on NRG's attractive valuation. We will continue to provide adjusted EBITDA and free cash flow before growth alongside these two new disclosures for the foreseeable future. Going forward and including today's third quarter results, adjusted EBITDA has been updated to recast all amortization of capitalized customer acquisition costs from SG&A and cost of operations into the depreciation amortization line item. This change addresses a point of common confusion that investors have given us direct feedback on. This is part of our ongoing commitment to provide better visibility into our businesses and simplify the modeling process. More details are available in our 10Q, as well as in the Reg G tables appended to this presentation and this morning's press release. As you can see on the right-hand side…

Thank you, Bruce. Turning to slide 22, we provided you today a detailed view of our compelling five-year financial outlook enhanced with additional disclosures for clear insights into our earnings and growth trajectory. Our plan is simple, transparent, and backed by durable recurring cash flows and a strong balance sheet. We're confident in achieving our long-term targets of at least 10% growth in adjusted EPS and free cash flow before growth per share, with numerous opportunities to significantly exceed these goals. In closing, on slide 23, 2024 has been another year of strong execution, where we have delivered financial, operation, and capital allocation results well ahead of guidance and expectations. I'm exceptionally proud of the work of our 18,000 employees across all of our organization who have driven these results. I'm deeply committed to driving NRG forward to creating additional significant shareholder value. We are seeing a long-term step change improvement in fundamentals across our platform. You can expect a continued and remaining heightened focus on operational excellence, prudent growth, and being good stewards of our investors' capital. I have never been more excited about the potential of NRG than I am today. Thank you for your time and continued interest. Operator, we're now ready to open the line for questions.

Thank you. [Operator Instructions] And our first question is coming from the line of Shahriar Pourreza from Guggenheim Partners. Your line is now open.

Hey, guys, good morning.

Morning, Shahriar, how are you?

All right. Quite an update, Larry, quite an update. Let me just start just, I want to touch on the process around the sites. Some of your peers this week mentioned portfolio approaches to hyperscaler deals. You have the ability to provide a degree of additionality with the gas units. Is it still your plan to update the Street in January, and how are you seeing -- are you seeing more interest in one region versus the other? Thanks.

Yes, and yes -- no, sorry, Shahriar.

[Multiple Speakers] -- before, by the way.

It worked.

I got tongue-tied for the first time.

No, we are -- so, we are going to provide an update, as we said, by the fourth quarter call. And we're seeing a lot of interest across our sites, both in PJM and in Texas, both in portfolio approaches and in individual approaches. Look, I think it's a very complex process, rapidly changing. We're still figuring out exactly it is that we want. And I think by stepping back, as we did, and now diving back in, we're really in a position to optimize the value of what we have, so still super-excited. We've done a lot more site analysis, as you can see in the appendix here. And we look forward to updating you when that time comes.

Got it. And then, as we get more disclosures, you plan on layering in the optionality into the numbers through time or how do we get an update --

Yes, I mean I think as we know what the numbers are, we will layer them in. Now, remember how we talked about before some of this may be things that we never ever disclosed because someone comes to us and they want an extra 1,000 megs of something, and then we decide we're going to build the plant and some hyperscalers may or may not want those two events tied together. So, one of the ways that you may see that we're doing this is all of a sudden raising our estimates, raising our CAGR, all of those kind of things rather than one-off announcements. Could go either way, but that's where you'll see it.

All right, perfect. And then, just lastly, coming back to sort of the identified growth component of the plan, appreciate obviously the breakdowns between the segments through '29. Some of these are obviously familiar to investors like the C&I margin, customer counts, but some aren't. Where do you see kind of the most room for variability within these three verticals? And then, any color on cost to achieve? Appreciate it, guys.

Sure. Look, I think we've put out a plan that we're really excited to and feeling really good about signing up for. And I think we see bias to the upside across all of these things. I mean, if there's a world recession or something, are people going to move less and maybe purchase less energy or fewer smart home? Anything is possible same in the industrial sector. But we feel really good, Shar, about what we've signed up here for. And to achieve this $750 million of annualized EBITDA over the next five years, we're going to invest $1.6 billion in total. So, that's the cost to achieve.

Perfect. I appreciate it guys. Congrats on the results and it's good to see that Bruce was busy. Appreciate it.

Once a year whether he needs to or not, Shar. Thank you, Shar.

Thank you. And our next question is coming from the line of Julien Dumoulin-Smith with Jefferies. Your line is open.

Hey, Larry, team. Good morning, guys. Nice to chat. Just following up a little bit on -- hey, good, good, good, pleasure guys; nicely done. Maybe just following up a little bit on what Shar picked you on first here. Let me needle you a little further on this in terms of, just the update timeline and more specifically what that could look like as you think about, what to set expectations around. Should we say January or otherwise here, right? Is it principally are your efforts geared principally towards this additionality and leveraging those two additional sites, or are you still thinking it seems earlier that you were principally focused on the Midwest portfolio, the site value there? We've seen a lot of excitement in the Midwest. Is that more of where we should be thinking about again? I know there's 20 plus sites here. Tell me what permutation may be.

Julien, I think it's both. I mean, I think what's happened is we were obviously still laser focused on the 21 sites and we remain so. But when the TEF decided that they were only going to give one loan per customer as they did that we felt for us that opened up the additionality potential for those two shovel ready projects. And so, we kind of just put them into the mix post the TEF announcement which was around the end of August you'll recall. And there's I think a fair amount of interest because as you know, I think you've written about additionality is going to be critical going forward to the development of these kind of sites and to have shovel ready additionality is rare.

Right. Yes, indeed. And actually just to clarify that even, with respect to TEF, would you expect TEF part 2 here to include those sites here? I mean, is sort of the idea to double dip, if you will, between TEF and additionality next year potentially with the customer?

We haven't put out any guidance at all about TEF II. We don't know if it's going to occur. So, we're going to push forward right now as if there is no TEF II for those projects. But if that shows up, obviously that's one option that we will consider. I don't know that you'll be able to double dip. We'll have to wait and see what the rules are. But we don't need to double dip to make those very attractive to somebody who's looking for additionality.

Yes. Okay, excellent. Thank you. And VPP, out of that $1.6 billion I think, how much does it cost you to do the VPP? I think you said $100 a kilowatt, so it's like $65 million for the 650 kilowatt?

Yes, Julien, one of the unique things about VPP is we don't have to wait to get the benefit as we acquire customers and put the assets to work. We actually start to realize the value. And so, think of it as, we ramp up investment, and it stays below $50 million for us because we start to gain benefits from the deployed assets.

All right. Excellent, guys. Thank you so much. All the best.

Thanks, Julien. Talk to you later.

Excellent, guys. Thank you so much. All the best.

Thank you, Julien. Talk to you later.

Thank you. Now, our next question is coming from the line of Angie Storozynski with Seaport. Your line is now open.

Thank you. It's kind of funny that all these questions are focused on what else do you have to say, even though the entire call was filled with announcements.

Well said, Angie.

Anyway, the bar is set really high, I guess. So, my question is about the VPP, Virtual Power Plant. So, we're seeing some cooling off in, like, battery investments in Texas, right? I mean, there is this realization that existing batteries are starting to cannibalize on peak power prices and that eats into the pricing arbitrage that these batteries rely on. And so, why shouldn't the same be true for the VPP? And I understand that the biggest component of the profitability of this business is basically customer retention, so the energy component is relatively small, but why shouldn't that be true that in a sense, the curve gets sort of flatter and your ability to actually capture this additional energy benefit is lower?

Hey, Angie, it's Rob, and great observation. What I would tell you or remind you is, because we serve consumer energy customers, we're always building our portfolio and we're including that component that I've called insurance, right, the options on the back end. What VPP does is it self-provides that, right? So as we think about the customer and as we think about how we insure against an extreme event, the beauty of VPP is it is the perfect hedge for that kind of exposure. So, when I look out the curve and as we're building the portfolio over time, what VPP does is it helps me manage the risks of a consumer energy business without having to go to a third-party or dropping a lot of money to build massive peakers to meet that same obligation. So, I feel really good about the economics that we've got here and as far as the long-term perspective, this is absolutely the best tool to manage the risk of a home-based energy book. Does that help?

Okay, so basically it's the most cost-effective way to hedge against spikes and super peaks, right? I mean --

Absolutely.

Not that we've seen it, and that's my other question, is that we -- I mean, keep hearing those incredible announcements. It's almost hard to even believe that they can be said with a straight face, right, 80 gigs of load in Texas from non-core. I mean, and yet the curve is just not reacting at all. It's almost as if -- and again, could it be that this load is not going to impact '28 or even '29, and that's why we're not seeing any response or how can you actually reconcile the lack of response in forward power curves in Texas?

Yes, so I look at both of those things. And what I would tell you is that I am with you. I don't believe that the curve reflects the load that we expect or the supply-demand picture that we would expect in the future. As far as how we think about it and whether or not it's going to show up, I believe that the load is coming. I don't know if it's 80 gigs and honestly, we don't need 80 gigs. But part of the curve, remember, in the reaction inside of pricing is pretty short-sighted viewing or just looking a little bit into history. This summer was a little less warm than last year. We didn't have any real price formation like we did last year, and then everybody kind of lost sight of what could happen. If you look into the future and you think about, okay, well, if you just add a little bit of incremental load into the ERCOT market, you have a real opportunity giving a renewables profile and call it just abnormal weather to really get price formation. And then, everybody will be excited again and the curves will go to the moon and we'll be managing through it. You've seen this before. We've all seen it. I just don't think that these curves in '28, '29 and beyond reflect reality.

Okay. And the last question. So, maybe to both Bruce and Larry, so is there a free cash flow yield that below which you think that the share buybacks are just unwarranted and there is some other way of capital return or maybe M&A or some other strategy change?

Angie, there is one, but I don't think we're anywhere close to it. I mean, we're still in the double digits. So, when we get to the mid-single digits, maybe we can have that kind of a look again, depending on what the opportunities in the world looks like. But right now, given the undervaluation of the stock, it's still a pretty high hurdle rate for us. But we all look forward to the day, and I'm sure you do too, that when the stock is trading so high that that becomes a real question for us.

Yes, to infinity and beyond. Okay. Thank you.

To infinity and beyond.

Thank you.

Thank you, Angie.

Thank you. And our next question is coming from the line of Michael Sullivan with Wolfe Research. Your line is now open.

Hey, good morning.

Good morning. How are you?

Good, good. Congrats on all the announcements here. Just, I know, so you gave this 10% plus and said it can vary year-to-year, but just to clarify, does that mean you can go below it, below 10% in some years, or it's just going to be 10% or better in every year and how much better can vary?

Yes, I mean, Mike, I think the reality is there may be some years where it might go below, there might be some years where it's going to go above, but generally speaking on a long-term basis, we see visibility around that plus 10% over the long-term.

Okay. And just specifically on that, so if we go to slide 19 with the tax impact, does that all fall away in '26? So should we think of like '26 as being a lower year and then you kind of catch back up again in the out year or?

I mean, there is an incremental increase in the tax rate after '25 because of expiring tax credits. I think the way that we think about that growth is to the extent that there's a drag as a result of an incrementally higher tax rate, we probably see some business performance and business growth offsetting that drag.

Okay, great. And then, yes, the VPP announcement, good to see there, and maybe just -- is it fair to kind of bifurcate it as you broke out the 80 million component as being more stable and then locked in, and then that 30 million component, it looks like would have been a lot better in '23 if you get a summer like that, and then if we got this summer, maybe wouldn't have been around that level. Is that fair?

Hey, Michael. This is Rasesh. Yes, that's a good way to think about it. The customer value is going to be stable and very sustainable. The supply value, which Rob can add a little more color on, that can be significantly higher in years of tighter markets. And so, I think that's the right way to think about it. Rob, would you add anything?

Yes, so the thing I would have you think about from the supply perspective, remember that we're using this in lieu of some form of insurance, right? So the values on the page represents what it would cost me, right? On the top part of the slide, this is what we would have, this is what we save by not having to go and replace this with a heat rate call option or something like that, the representation down at the bottom where we talk about the different years. So, in '23, the value of that insurance would have been considerably more valuable than say this year, where we didn't have any real price formation. But when you think about it long-term with NRG and how we build it in the portfolio, I'm going to buy that insurance regardless. So, I'm building the book 12 to 18 months out. We're putting in the insurance to protect our business. And so, we're going to capture the values up at the top. And then, the representation at the bottom is just the value that, that protected me from, right? So, I bought insurance in '23. It was really valuable. I bought insurance this year, and I didn't need it. That's the examples at the bottom. So, the value that we see around VPP is consistent year, every year, regardless of the circumstances, because I'm going to buy that insurance to protect the portfolio anyway. Does that make sense?

It does. Thanks, Rob. That's really helpful. Okay. And the last one, just to round it out there too, I mean, it's pretty sizable. Can you maybe just give us a sense of, are there any competitors out there or other people looking to do this or how big does that VPP market get in Texas overall, outside of what you were doing?

That's a great question. And one of the reasons I think NRG is so uniquely positioned is we have a skilled customer base. We have the supply management expertise. And now partnering with Renew Home and Google, we're partnered with the largest demand response platform in North America. The partnership also gives us exclusivity to all new Nest thermostat enrollments and to demand response in Texas. And to give you context around that, there are already a million Nest thermostats deployed in ERCOT, almost 300,000 of which are overlapped with the NRG customer base. And so, this is a very unique opportunity for NRG. And two, everything that we've outlined today is showing you the thermostat opportunity. But we will be working with our partners to tie in batteries, electric vehicles, other things onto the platform where we can leverage already deployed resources into this platform. And so, Michael, I think it'd be very hard for anybody else to replicate this at scale.

Okay, awesome. Thank you so much.

Thank you. And our final question comes from the line of David Arcaro with Morgan Stanley. Your line is now open.

Hey, thanks so much. Good morning.

Hi, David. How are you?

Good, good. Hey, I was wondering if there's an organic growth kind of opportunity at the retail energy business that could be potential upside from here. How is that incorporated in there? I mean, it seems like we're seeing pretty good residential growth in Texas over time, plus all of the C&I growth potential from new data center load. I didn't really see that maybe clearly called out as one of the components of the EBITDA growth opportunity. So, wondering how you're thinking about that?

Yes. It's a great question. The way I would really think about this is we have very strong market share on the residential energy side in Texas. Nearly 40% share of the market. And so, the larger opportunity we see is how do we leverage that household relationship to actually expand share of wallet with customers. And through the launch of Homes Base Essentials, we're giving our existing skilled customer base a lot of incremental value. And in the trial that we've seen over the summer, where we've provided customers this new bundle, 20% of them have already bought incremental smart home services from us. And that's very attractive. So, I would just characterize that as there will be opportunity, obviously, with modest household growth. But, the larger opportunity for NRG is to expand the share of wallet, leveraging the near 40% market share we have in home energy.

Yes, got you. Absolutely. Makes sense. And maybe on that data center side, is there growth coming to your service territory that would boost the commercial and industrial side of the business in terms of retail contract opportunities and retail growth? Are you seeing data centers show up in the retail business coming to you with multi-year energy contract opportunities?

Short answer is yes. We are definitely seeing data centers coming with long-term contract requirements. And then, the way to think about how it affects the rest of the C&I marketplace is that in a market where there's growing tightness and there's competition for those megawatts, I've said it before and we've talked about it, there's a flight to quality that occurs amongst large industrials and commercial customers where they want additional service. They want skilled operators on the other side of their contracts. And so, we see an uplift into our opportunity set as we see this trend continue in ERCOT and honestly in PJM.

Got it. Okay, great. Thanks so much.

Yes, sir.

Thanks, David.

Thank you. And I'm showing up for the questions in the queue at this time. I will now turn the call back over to Mr. Larry Coben for any closing remarks.

I want to thank you all for your interest in NRG. As you can tell from our releases, our slides, and our presentation, we are all super excited about our business. And, we look forward to keeping you up-to-date on it going forward. Have a great day and have a great weekend.

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