NRG Energy Q4 2021 Earnings Report

NRG Energy EPS Results

• Actual EPS: -$0.97
• Consensus EPS: -$1.34
• Beat/Miss: Beat by +$0.37
• One Year Ago EPS: N/A

NRG Energy Revenue Results

• Actual Revenue: $7.05 billion
• Expected Revenue: $1.21 billion
• Beat/Miss: Beat by +$5.83 billion
• YoY Revenue Growth: N/A

NRG Energy Announcement Details

• Quarter: Q4 2021
• Date: 2/24/2022
• Time: N/A
• Conference Call Date: Thursday, February 24, 2022
• Conference Call Time: 8:20AM ET

NRG Energy (NYSE:NRG) is a North American energy and home services company headquartered in Houston, Texas. The company operates through power generation and energy retail businesses, supplying electricity and related services to residential, commercial and industrial customers.

NRG owns and operates a diverse portfolio of power-generation assets, including natural gas, coal, nuclear and renewable facilities. It also sells electricity and natural gas through brands such as Reliant, Direct Energy and Green Mountain Energy, with retail operations serving customers in competitive energy markets across the United States and Canada.

In addition to its energy operations, NRG provides smart-home, security and related connected-home services through its Vivint business. NRG was formed in 1989 and has expanded through acquisitions, including the purchase of Direct Energy in 2021 and Vivint in 2023.

NRG Energy Q4 2021 Earnings Call Transcript

Key Takeaways

• In 2021, NRG delivered $2.42 billion of adjusted EBITDA (up 21% year-over-year) and $1.51 billion of free cash flow before growth, with Q4 adjusted EBITDA rising 31% to $433 million, and the company is maintaining its 2022 guidance ranges.
• NRG reduced the net cost of Winter Storm Uri from an expected $500–700 million to $380 million through securitization and customer bad debt management, boosting 2022 capital available for allocation by $212 million.
• The Direct Energy integration achieved $175 million of run-rate synergies in its first year—exceeding the original $135 million target—and remains on track to meet or exceed its three-year synergy plan.
• NRG has cut carbon emissions by 44% since 2014, is certified on a 1.5°C decarbonization path to reach a 50% reduction by 2025 and net-zero by 2050, and has issued sustainability-linked bonds tying financing costs to climate goals.
• Disciplined capital allocation includes a $1 billion share repurchase program in 2022, an 8% dividend increase, and nearly $1.9 billion of available cash to balance growth investments, debt reduction and shareholder returns.

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the NRG Energy, Inc. Q4 and Full Year 2021 Earnings Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone.

[Operator]

Please be advised that today's conference is being recorded. If you require assistance during the conference, please press star zero. I would now like to hand the conference over to your speaker today, Kevin Cole, Head of Investor Relations.

[Kevin Cole, Head of Investor Relations at NRG Energy]

Great. Thank you, Amy. Good morning, and welcome to NRG Energy's Q4 2021 Earnings Call. This morning's call is being 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 on assumptions that we believe to be reasonable as of this date.

[Kevin Cole, Head of Investor Relations at NRG Energy]

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.

[Kevin Cole, Head of Investor Relations at NRG Energy]

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. With that, I'll now turn the call over to Mauricio Gutierrez, NRG's President and CEO.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Thank you, Kevin. Good morning, everyone, and thank you for your interest in NRG. I'm joined this morning by Alberto Fornaro, Chief Financial Officer. Also on the call and available for questions, we have Elizabeth Killinger, Head of Home Retail, and Chris Moser, Head of Operations. This is my 25th earnings call as CEO, and I wanted to start with a quick look back on what we have achieved.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Over the past 6 years, we have transformed our company from a complex industrial story into one that is much simpler and focused on our core strengths. Along the way, we have made significant progress in our strategy to get closer to the customer, optimize our generation portfolio to serve those customers, strengthen the financial health of our company, and create a significant shareholder value.

[Mauricio Gutierrez, President and CEO at NRG Energy]

We now turn to the next phase in our evolution of growing our business and realizing the potential around the customer. I am excited about the future and look forward to sharing our progress with all of you in the months to come. Moving on to the 3 key messages of today's presentation on slide 4. Our business delivered results in line with the 2021 guidance, effectively navigating supply chain constraints and volatile market conditions, further validating the strength and durability of our model.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Next, I am pleased to report that we have successfully executed our Winter Storm Uri mitigation plan, and we are increasing 2022 capital available for allocation. Finally, we continue to advance our 5-year strategic roadmap in moving closer to the customer and our commitment to being excellent stewards of shareholder capital.

[Mauricio Gutierrez, President and CEO at NRG Energy]

The 2021 financial and operational results are on slide 5. Beginning with our scorecard. We executed on all our priorities. I want to thank all the employees at NRG for maintaining focus during a challenging year, which included a global pandemic, Winter Storm Uri, asset sales, and the integration of Direct Energy.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Importantly, we were able to operate through these conditions while setting another record for safety. This is the 4th straight year we have set a new company safety record, an incredible accomplishment worthy of recognition. Direct Energy integration remains ongoing, and we are on track to achieve our run rate synergies. During the year, we outperformed our initial expectations, achieving $175 million versus our original expectation of $135 million.

[Mauricio Gutierrez, President and CEO at NRG Energy]

This integration is led by the same team and supported by the same governance as the transformation plan, which gives me the utmost confidence in our ability to reach, if not exceed, our runway targets. Following multiple years of right-sizing our business, 2021 marked a significant milestone in capitalizing our best-in-class consumer services platform.

[Mauricio Gutierrez, President and CEO at NRG Energy]

We added roughly 3 million customers to our portfolio and expanded the scale and scope of home, power, and natural gas services. Also, during the year, we monetized 4.8 GW of non-core fossil assets in our east and west regions, announced the retirement of 1.6 GW of coal assets in the east, and signed an additional 800 MW of renewables PPAs. Next, we continue to adhere to our disciplined capital allocation principles.

[Mauricio Gutierrez, President and CEO at NRG Energy]

In late 2021, we announced a $1 billion share repurchase program to be completed throughout 2022. We also increased our dividend per share 8%, in line with our stated dividend growth rate of 7%-9%. In June, we held our Investor Day, where we revealed our five-year strategic roadmap to create significant stakeholder value by moving closer to the customer while also returning significant capital to our shareholders.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Moving to the right-hand side of the slide for the financial results. We delivered $433 million of adjusted EBITDA for the Q4, 31% higher than the prior year. This brings our full year results to $2.42 billion of adjusted EBITDA.

[Mauricio Gutierrez, President and CEO at NRG Energy]

21% higher than the prior year, primarily driven by the acquisition of Direct Energy and excluding the impact from Winter Storm Uri. Finally, we are maintaining our 2022 adjusted EBITDA and free cash flow before growth guidance ranges. We are seeing promising results in mitigating winter supply chain constraints, and I look forward to updating you next quarter.

[Mauricio Gutierrez, President and CEO at NRG Energy]

As a result of our Winter Storm Uri mitigation plan, we are increasing our 2022 capital available for allocation by $212 million, which Alberto will discuss in more detail. Now, turning to slide 6 for a brief update on the ERCOT market. Following Winter Storm Uri, it was clear that market reforms from wellhead to light bulb were necessary to improve grid resilience.

[Mauricio Gutierrez, President and CEO at NRG Energy]

In the months following the event, we actively engaged in discussions with legislators, regulators, and other market participants to introduce comprehensive and competitive solutions across the entire system to address areas that failed. In 2021, Texas made significant progress in hardening the electric grid through power plant and transmission weatherization standards, improved market design with changes in scarcity pricing, ancillary reforms, and consumer protection improvements.

[Mauricio Gutierrez, President and CEO at NRG Energy]

In 2022, we expect Texas to expand its focus on hardening the natural gas infrastructure and implementation of phase 2 of power reforms, which includes resource adequacy by establishing a load side reserve requirement and on-site fuel security. I want to commend the Texas Governor's Office, Legislature, PUCT, and ERCOT for taking swift action and accelerating effective reforms that would normally take years and addressing them within months.

[Mauricio Gutierrez, President and CEO at NRG Energy]

While our work is not done yet, we believe Texas' performance through a tough winter is a strong reflection of effective actions and policies. Moving to the right-hand side of the slide for an update on the financial impact from Winter Storm Uri. I am pleased to announce that we have successfully executed our mitigation strategy.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Today, we're updating the net financial impact from the storm to $380 million from our prior expected range of $500 million-700 million. Now, turning to slide 7. It is important that we recognize our ESG principles and highlight a few of our 2021 accomplishments. We created a sustainable framework with a strong foundation based on our corporate values and a sustainability program that brings all stakeholders working together with a common purpose.

[Mauricio Gutierrez, President and CEO at NRG Energy]

From our customers to our employees to our operations, our sustainability program consistently upholds a high standard of accountability and transparency across the key pillars of environmental leadership, social focus, and strong governance. I want to start with an update on our environmental leadership. As you know, we committed to a stringent decarbonization path in line with the 1.5-degree Celsius scenarios, which have been certified by the Science Based Targets initiative.

[Mauricio Gutierrez, President and CEO at NRG Energy]

That means reducing our carbon emissions 50% by 2025 and net zero by 2050. As you can see on the right-hand side of the slide, since 2014, we have reduced our carbon emissions by 44%, and we have a clear line of sight to our 2025 goal.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Just to put this in perspective, this is equivalent to taking 5.8 million passenger vehicles off the road for a year. In addition, as advocates for the electrification of transportation, in 2021, we set a goal to electrify 100% of our light-duty vehicle fleet by 2030, further demonstrating our commitment to progress. All these efforts have resulted in the diversification of our revenue streams to cleaner solutions.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Since 2014, coal generation as a percentage of revenues has decreased by 80% and now represents less than 5% of our total revenues. If you recall, not long ago, coal made up almost 1/3 of our revenues. We still have much work to do, but I am confident we are on the right track and have the right team to succeed on our goals.

[Mauricio Gutierrez, President and CEO at NRG Energy]

On the social front, our engagement with our employees, communities, and customers continues to advance. As I mentioned in my opening remarks, in 2021, we once again achieved top decile employee safety performance. We also implemented employee programs to support financial, physical, and mental well-being.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Our diversity, equity, and inclusion value continues to shape our culture and inform our decision-making as we strive to unlock the power of DEI as a way to better understand our customers and the communities we serve, while also making our team stronger.

[Mauricio Gutierrez, President and CEO at NRG Energy]

In our communities, we supported more than 750 nonprofit organizations through our philanthropic arm, positiveNRG. We also focused our volunteer efforts on food security through virtual and in-person food donations and packaging meals for those in need. For our customers, we are always innovating.

[Mauricio Gutierrez, President and CEO at NRG Energy]

We have been a leader in facilitating renewable energy for our residential customers, as well as providing a path for small and medium-sized businesses to participate in the sustainable energy transition. And as we all know, more than ever, the home is the center of our lives. We continue to advocate for individual customers' choice in the products and services that best suit their values and lifestyle, delivered with reliability and affordability.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Finally, regarding our strong governance, I am particularly proud of our transparency in reporting and accountability on our goals. In just this last year, we released our eleventh annual sustainability report, our 5th report in compliance with SASB standards, and twelfth CDP or Carbon Disclosure Project questionnaire.

[Mauricio Gutierrez, President and CEO at NRG Energy]

We also formally issue our first TCFD or Task Force on Climate-related Financial Disclosure as a way to improve and ensure our stakeholders have the right tools to make informed decisions and track our progress. In 2021, we issued our second sustainability linked bond. If you recall, we were the first company in North America to do it back in 2020.

[Mauricio Gutierrez, President and CEO at NRG Energy]

These bonds tie our financing cost to achieving our carbon reduction goals. As you can see, our culture of sustainability is ingrained in every part of our organization, and we continue to play an integral part in our transition to a consumer services company. I am looking forward to sharing more details of our ESG journey with you later this spring in our 2021 sustainability report. Now, I wanna provide you an update on our growth program.

[Mauricio Gutierrez, President and CEO at NRG Energy]

As I shared with you during Investor Day, our focus over 2021 and 2022 is 2 fold: optimizing the core and setting the stage for growing the core. In terms of optimizing the core, we continue to remain on track to integrate Direct Energy into our business and have been successful in optimizing our generation portfolio to support our customer-facing business.

[Mauricio Gutierrez, President and CEO at NRG Energy]

We are also making solid progress on our efforts around growing the natural gas and dual-fuel customer portfolio. Let me give you a couple of specific examples for both. One, we are seeing early success in achieving our customer count by leveraging our existing and long-standing partnerships with big-box retailers to sell natural gas and expand our geographic footprint. Second, we are advancing our digital experience so customers can easily enroll in both electricity and natural gas plans.

[Mauricio Gutierrez, President and CEO at NRG Energy]

These efforts are relatively new, and I will share more details as we make progress later in the year. Now moving on to growing the core, you will remember that our plan is focused in 2 areas: energy services and home services. The house depiction on the left really gives you a sense of the various customer solutions that are on our growth roadmap. Some of these solutions are already operational, such as power, natural gas, and storage.

[Mauricio Gutierrez, President and CEO at NRG Energy]

While others, such as solar and EV, are in the pilot or development phase. The table on the right slide provides the status on each of these targeted customer solutions. The important key takeaway is that we are not starting our growth program from zero. We have meaningful existing capabilities to deliver many of our targeted customer solutions, and we are leveraging those capabilities as we speak.

[Mauricio Gutierrez, President and CEO at NRG Energy]

For those customer solutions that are not currently operational, we will use 2022 as a staging period for us to prudently test and learn, optimize our participation model, and refine the go-to-market approach, such that when we get to 2023, we will have confidence in deploying capital against that growth. Moving to slide 9. As you can see, our capital allocation track record is cycle appropriate and directly in line with our roadmap to stabilize, rightsize, redefine, and now enhance our company.

[Mauricio Gutierrez, President and CEO at NRG Energy]

During 2016 and 2017, our primary focus was simplifying and strengthening the balance sheet. In 2018 and 2019, with the balance sheet significantly improved, we were able to shift to returning capital to shareholders and grow. In 2020 and 2021, the Direct acquisition meant more of our capital shifted towards growth and debt reduction.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Now moving to 2022, we turn our focus towards achieving our per-share growth objectives and growing into our investment-grade credit metrics through the full realization of Direct Energy run rate earnings and our growth program. Like I said earlier, 2022 remains a staging year for growth, which provides significant excess cash to be returned through dividends and share repurchases. I will provide you an update on the remaining unallocated cash throughout the year. With that, I will pass it over to Alberto for the financial review.

[Alberto Fornaro, EVP and CFO at NRG Energy]

Thank you, Mauricio. I will now turn to slide 11 for a review of the full year results. We finished the year achieving our 2021 adjusted EBITDA and free cash flow before growth targets in line with guidance, realizing more than $2.4 billion in adjusted EBITDA and $1.5 billion in free cash flow before growth. Adjusted EBITDA reflects a $419 million increase compared to 2020.

[Alberto Fornaro, EVP and CFO at NRG Energy]

Primarily due to the acquisition of Direct Energy in January 2021. This is despite several unexpected headwinds, including the extended forced outage at Limestone Unit 1 power plant, additional planned and unplanned outages in Texas, and increased ancillary charges.

[Alberto Fornaro, EVP and CFO at NRG Energy]

The results include the achievement of $175 million of Direct Energy synergies in line with the most recent expectations and in excess of the initial 2021 target set at $135 million. Free cash flow before growth was $1.512 billion, $22 million ahead of the midpoint of 2021 guidance, primarily due to lower capital expenditure.

[Alberto Fornaro, EVP and CFO at NRG Energy]

Moving to the highlights, 2021 was a productive year in moving closer to the customer. We closed on the Direct Energy acquisition and successfully started the integration process. Next, in December, we closed the sale of 4.8 GW of non-core east and west fossil generation.

[Alberto Fornaro, EVP and CFO at NRG Energy]

We also reduced our debt by $755 million and further linked our financial performance to our climate goals while reducing our interest expenses through refinancing callable debt through a $1.1 billion sustainability-linked bond. Moving to the update on Winter Storm Uri impact, we have significantly improved the net impact from the storm.

[Alberto Fornaro, EVP and CFO at NRG Energy]

You may recall that at the end of Q3, our expectation for the mitigants was a range of $370 million-570 million, with a net impact of approximately $500 million-700 million. Today, we are reducing this net impact to $380 million as a result of increased mitigation of $708 million as a result of the securitization as well as effective management of customer bad debt and counterparty exposure.

[Alberto Fornaro, EVP and CFO at NRG Energy]

From a GAAP income statement perspective, we fully recognize these mitigants in 2021 through a reduction in cost of goods sold. The cash impact, however, was different, and it is highlighted on the bottom left of slide 11. First, you may recall that the unmitigated loss includes bill credits to C&I customers and other items which are going to materialize as a cash flow in 2022.

[Alberto Fornaro, EVP and CFO at NRG Energy]

At the end of December, the total amount was equal to $97 million. Second, the $696 million of proceeds from the securitization, while fully accrued in 2021, will be received in Q2 2022. Overall, the cash impact of Uri in 2021 was therefore equal to a net outflow of $979 million, offset by a cash inflow in 2022 of $599 million. Moving to the right-hand side of the slide, we are maintaining our 2022 adjusted EBITDA of $1.95 billion-2.25 billion, and free cash flow before growth of $1.14 billion-1.44 billion guidance ranges.

[Alberto Fornaro, EVP and CFO at NRG Energy]

As Mauricio said in his scripted remarks, we are seeing promising results in mitigating our previously discussed winter supply chain constraints, and we look forward to updating next quarter following the winter season. Since the last earnings call in December, we announced and immediately began executing our $1 billion share repurchase program.

[Alberto Fornaro, EVP and CFO at NRG Energy]

We executed $120 million in repurchases to date, with the $39 million in December and $81 million year to date. The remaining program will be completed through 2022. Finally, our Direct Energy integration and synergy plan remains squarely on track. I will turn now to slide 12 for a brief update on our 2021 capital allocation.

[Alberto Fornaro, EVP and CFO at NRG Energy]

Moving left to right, our realized free cash flow before growth in 2021 is $22 million above the midpoint of the guidance. Next, we are showing our actual increase in cash of $41 million instead of the $150 million previously planned. Next, during the Q4, we finalized the purchase price adjustment with Centrica for the Direct Energy acquisition, resulting in a $25 million increase for the prior earnings call.

[Alberto Fornaro, EVP and CFO at NRG Energy]

Next, the Winter Storm Uri, as mentioned before, the 2021 cash outflow was $979 million, while we expect to receive a net amount of $599 million in 2022, as shown in the next slide. Next, we completed another $500 million of debt reduction during the quarter, bringing the full year total to $755 million, using a portion of the $623 million of net proceeds received from the sale of the 4.8 GW of generation assets.

[Alberto Fornaro, EVP and CFO at NRG Energy]

Lastly, as mentioned before, $48 million were utilized for share repurchases, including $39 million towards the $1 billion share repurchase program. The capital available for allocation at the end of 2021 has therefore been fully allocated.

[Alberto Fornaro, EVP and CFO at NRG Energy]

Turning to slide 13, again working left to the right, the combination of the midpoint of our 2022 free cash flow guidance with the net cash expected from the proceeds of the securitization will provide us almost $1.9 billion of cash to be deployed in 2022. Moving to the right, we expect to increase the minimum cash to $650 million, pay approximately $339 million in dividends, then complete the remaining $961 million of the share repurchases.

[Alberto Fornaro, EVP and CFO at NRG Energy]

Please note that the dividend amount is based on current shares outstanding, and we will provide updates on future earnings calls as we progress throughout the execution of the share repurchase program. Next, in other investments column, we have committed $170 million at this point, which includes $70 million for the continued integration of Direct Energy business, $15 million for small books acquisitions, $25 million to prepare the land at Encina for an eventual sale, and the $25 million in other smaller projects.

[Alberto Fornaro, EVP and CFO at NRG Energy]

Lastly, we expect to have $310 million of remaining capital available for allocation still to be allocated in 2022. Now turning to slide 14. We finished 2021 with a net debt to EBITDA of approximately 3.2 times after adjusting for non-cash items and removing the EBITDA from the recent asset sales.

[Alberto Fornaro, EVP and CFO at NRG Energy]

Our long-term financial strategies remains unchanged, and we are committed to a strong balance sheet by continuing to target investment-grade credit metrics of 2.5-2.75, primarily through full realization of the Direct Energy right-sizing synergies and growth initiatives. We will continue to provide updates on our path to investment-grade metrics as we execute these initiatives. Back to you, Mauricio.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Thank you, Alberto. Moving to our 2022 priorities and expectations on slide 16. First, we will always be focused on the blocking and tackling of delivering on our financial, operational, and ESG commitments while adhering to our capital allocation principles. Beyond these, we're focusing our efforts in 2 key areas: provide additional disclosure to help better model our business and provide greater detail around our growth strategy.

[Mauricio Gutierrez, President and CEO at NRG Energy]

First on our disclosures. Following the Direct Energy acquisition and our move towards consumers, we're working on a comprehensive rework that will enhance your ability to model the value of the customer. In the meantime, I want to start with a new hedging methodology slide in the appendix of today's presentation, which should help shed light on our rigorous risk management and supply optimization program that helps stabilize our business.

[Mauricio Gutierrez, President and CEO at NRG Energy]

On growth, as I discussed earlier, we will be transparent in the process, and I look forward to updating you on this throughout the year. Finally, while 2021 was a challenging year, today our company is stronger and more promising than ever before. I am very excited about 2022 and the significant opportunities we have to create shareholder value. With that, I want to thank you for your time and interest in NRG. Amy, we're now ready to open the line for questions.

[Operator]

Thank you. As a reminder to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Your first question is from Jonathan Arnold of Vertical Research Partners.

[Jonathan Arnold, Partner and Head of Utilities and Power Research at Vertical Research Partners]

Oh, hi, good morning, guys.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Hey, Jonathan. Good morning.

[Jonathan Arnold, Partner and Head of Utilities and Power Research at Vertical Research Partners]

Mauricio, thank you for the mention on the new disclosures that you just made. I'm curious if you can give us some sort of gauge of when we might expect to see those. Is that kind of midyear, next quarter, sort of later in the year? Just some framework there.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Yes. No, Jonathan. You know, I hope that you find the new hedging disclosures useful. You know, obviously Kevin will be available if you have any questions, since this is new information. With respect to the disclosures to help better model the value of the customer, my expectation is that it will be done sometime either later in the year or beginning of next year we are working hard to ensure that our key performance indicators are aligned with our financial disclosures.

[Mauricio Gutierrez, President and CEO at NRG Energy]

We want to make sure that they are useful as opposed to rushing and giving you something mid-year that you have to reconcile before and after these type of changes I appreciate they're always better at the end of the year you start with a fresh slate. I would think that it would be we're gonna try to time it when we are ready when we believe is are gonna be very useful, and when we don't make do a lot of work in reconciling the before and after. I hope that this provides you some idea when we're planning to do this.

[Jonathan Arnold, Partner and Head of Utilities and Power Research at Vertical Research Partners]

Yeah. No, very, very helpful. Thank you, Mauricio. On the one thing I noticed was that you're now talking about growing into the credit metrics. I think before you'd said you anticipated being there by the end of 2023. Is that a change or just me overreading the slide?

[Mauricio Gutierrez, President and CEO at NRG Energy]

Yes. I mean, our commitment continues to be at 2.5-2.75. Obviously, we need to stay flexible. As you can appreciate, there is a lot of things moving around this year it continues to be a transition year because of the growth program that we have, the optimization that we have.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Our goal is to to grow into the metrics but obviously we have to remain flexible in this environment. Just, Jonathan, before I forget, I wanted to make sure the additional hedging disclosures are available now, and they're in the appendix of the presentation, okay? Just to make sure that, you know, that's crystal clear.

[Jonathan Arnold, Partner and Head of Utilities and Power Research at Vertical Research Partners]

Actually I had seen those. Maybe I'll just ask a quick one on those while I have you. You're obviously giving a look that shows that you're, I guess 15% over hedged effectively or covered. I don't know how you would best describe it in ERCOT. Can you give us a little bit of a insight into how does that look by season? Is that sort of skewed winter versus summer?Just anything beyond just that kind of annual look.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Yeah, Jonathan. Obviously, we feel comfortable providing you the yearly disclosures. Once you start getting into the seasons it is competitively sensitive in conversations with our commercial team we wanted to make sure that we just provided this level of granularity to make sure that we don't compromise our commercial activities.

[Mauricio Gutierrez, President and CEO at NRG Energy]

I think the two big takeaways from my perspective on the hedging slides is, number one, we're pretty well hedged against our expected load. Then number two, it is a combination of electricity that we generate plus market purchases and our commercial team is responsible for optimizing between the two so, that to me is the big takeaway on that slide.

[Mauricio Gutierrez, President and CEO at NRG Energy]

We wanted to just show how much our market purchases versus electric generation. One thing to note is this is just the economic generation and the in the money hedges so, you should assume also that we have some flex capacity that is out of the money, both on the generation that we own and some of the tolls and options that we buy from the market so, just keep that in mind.

[Jonathan Arnold, Partner and Head of Utilities and Power Research at Vertical Research Partners]

Great. Thank you very much for all the time, guys.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Thank you, John.

[Operator]

Your next question is from Michael Lapides of Goldman Sachs.

[Michael Lapides, VP and Head of Energy Infrastructure Equity Research at Goldman Sachs]

Hey, guys. Thank you for taking my question. If I look at Mauricio over the years when you've done M&A, often we get a year removed from the M&A, sometimes a little more, sometimes a little less, and you guys start talking about upside the synergy savings.

[Michael Lapides, VP and Head of Energy Infrastructure Equity Research at Goldman Sachs]

How do you think now that we're a little more than a year removed from the Direct Energy acquisition, and I know it's been a crazy year with Uri and everything else, how do you assess whether there's potential upside either on the broader cost management or cost management and synergy savings related to Direct?

[Mauricio Gutierrez, President and CEO at NRG Energy]

Yes, Michael, good morning. So obviously the integration of Direct Energy was a 3-year integration, if you remember, Michael. I am just very pleased with the performance of the team and achieving the synergies. We actually increased the synergies that we achieved in our first year and as we enter into the second year, I will tell you this, I am incredibly comfortable that we're going to achieve them.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Being mindful that this was a 3-year program, and we're literally just entering the second year. I will assess the potential of additional synergies. I think what you should expect is throughout the year we will give you an update on our performance there but I feel I remain very confident that we're gonna achieve our numbers and e'll give you an update throughout the year we decide to, as they say, to up the ante on that.

[Michael Lapides, VP and Head of Energy Infrastructure Equity Research at Goldman Sachs]

Got it. One quick follow-up. If I just look at the balance sheet, and this is gonna get a little wonky, but like current assets is significantly higher than. Meaning if I look at things like accounts receivable and accounts payable, the spread between accounts receivable and accounts payable is about $1 billion a positive, meaning AR is greater than AP.

[Michael Lapides, VP and Head of Energy Infrastructure Equity Research at Goldman Sachs]

The current asset for derivative is significantly greater than the current liability. Those would imply that there's significant working capital cash inflows coming. When I look at your free cash flow guidance, I don't think that's embedded. Am I just misreading that, or are there other things that, you know, significantly offset those items? Okay. Michael, I will turn that over to Alberto and obviously as you said, I think this was a little technical, and we can always follow up with you. Alberto, is there something that you wanna add here?

[Alberto Fornaro, EVP and CFO at NRG Energy]

I just want to point you to a couple of things, Michael. First of all, the derivative value is a combination of the addition of the gas business and increase in the gas price. That has, in this case, particularly on the asset side, increased the value of that. Regarding the comment on current assets, please consider that we have also included in the current asset, that is the proceeds from the securitization and so on.

[Alberto Fornaro, EVP and CFO at NRG Energy]

Having said that, obviously we have acquired another business and it has increased our needs in terms of working capital. We have put that under focus and rest assured that there are initiatives to keep that under control that will be taken. Overall, we are very confident about the projection that we have for it.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Michael, just to remind working capital was an area of focus during the transformation, and we were very successful on that. We kind of have the roadmap on how to optimize our working capital, and we are applying all of those lessons learned to the integration of Direct Energy.

[Michael Lapides, VP and Head of Energy Infrastructure Equity Research at Goldman Sachs]

Got it. Thank you, guys. Much appreciated. I'll follow up.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Thank you, Michael.

[Operator]

Your next question is from Paul Zimbardo, Bank of America.

[Paul Zimbardo, VP in Equity Research and Research Analyst at Bank of America Securities]

Hi. Good morning.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Hey, good morning, Paul.

[Paul Zimbardo, VP in Equity Research and Research Analyst at Bank of America Securities]

I wanted to check in on kind of your achievement on the customer growth strategy and just any insights you can share on customer counts given some of the commodity volatility and if you're seeing any change in attrition recently?

[Mauricio Gutierrez, President and CEO at NRG Energy]

I'll pass it over to Elizabeth for the attrition, but I would say it's remained pretty constant, but I think that's what we experienced during last year the, our retention numbers were really good. Elizabeth, do you wanna provide a little color here?

[Elizabeth Killinger, Head of Home Retail at NRG Energy]

Yes, thanks for the question. We definitely achieved our customer count commitments for the year than what we had planned to achieve, we actually beat it by a bit. As Mauricio mentioned, retention was extremely strong, really one of our best years ever and that is a product of some of the efforts over the last kind of five years of increasing the tools and techniques we use, leveraging the data that we have to make sure we're putting the right renewal offers in front of customers that will entice them to stay with us.

[Elizabeth Killinger, Head of Home Retail at NRG Energy]

We did have some opportunity to recover in our sales channels as well with COVID, our face-to-face channels were set back quite a bit, and so we saw some improvements there. Finally on the DE integration front, we met or beat our expectations for retaining those customers. As you all know and have seen from us over the years, as we acquire customers, whether it's through M&A or small books, you do see some attrition in the year or two following that.

[Elizabeth Killinger, Head of Home Retail at NRG Energy]

As long as we keep meeting or beating what we expect from that, we're gonna be really pleased. I'm super proud of the work the team has done from the frontline folks, either face to face or in our call centers and the digital teams for all that they've done, and I'm excited about the potential for 2022 and beyond.

[Paul Zimbardo, VP in Equity Research and Research Analyst at Bank of America Securities]

Okay. That's great to hear. A separate, unrelated question. I know you all have been very proactive with some of the strategic asset sales as you reposition the business. Do you see more opportunities to continue that trend and become more capital light, and in particular, Texas on that theme?

[Mauricio Gutierrez, President and CEO at NRG Energy]

Yes. As you know, we completed a pretty large divestiture in 2021, and the optimization of the portfolio is, it's a focus of ours. As you remember on the Investor Day presentation, I said that, in the growing the core is one of our key strategic priorities, that's going to continue. The north star of that is we're gonna have assets that better help us serve our customers.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Whatever those are, they are core. If they're not, they're not core, and we're gonna look to optimize. Now with respect to Texas, obviously we have our capital light renewable PPA strategy that has been very successful close to 2.6 GW.

[Mauricio Gutierrez, President and CEO at NRG Energy]

We're gonna continue to focus on that. We're constantly in the market. We're running RFPs basically on a continuous basis. We're going to be very selective on that, and it already has yielded tremendous value for us that's gonna continue to be a focus. Now, as Texas is changing some of the market design changes to incentivize dispatchable generation.

[Mauricio Gutierrez, President and CEO at NRG Energy]

We are definitely looking into that. We have lots of sites that we can evaluate opportunities and as we have done in the East, we're gonna do it in Texas. If we find the right partner, we're gonna do it, but we're gonna do it in a way that is a good use of our capital. I expect that that to continue. I know the teams are completely focused on evaluating additional opportunities that we have to bring additional supply to serve our customers.

[Paul Zimbardo, VP in Equity Research and Research Analyst at Bank of America Securities]

Great. Thank you very much.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Great. Thank you.

[Operator]

Our final question comes from Angie Storozynski of Seaport Global.

[Angie Storozynski, Managing Director and Senior Equity Research Analyst at Seaport Global]

Thank you. Given what's happening in Europe, and your disclosures on gas hedges, is it fair to say that, even though there's this wide expansion of the positive gas bases in New England, that should not have any negative impact on your gas retail margins in 2022?

[Mauricio Gutierrez, President and CEO at NRG Energy]

That's correct, Angie. Just to perhaps put a little finer point on our natural gas business. You need to think about it as a logistics business, okay? We serve. First of all, we don't take any commodity price risk like NYMEX Henry Hub. Most of the risk that we have is around basis.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Then within basis, as we're serving customers, we have access to a tremendous network of logistics pipeline capacity, LDC relationships. That network allows us to manage and optimize our basis risk based on the disclosures that we provided, you know, we feel very comfortable. Obviously, there is always risk to be managed, but I feel very comfortable where I sit today on that. Chris Moser, I don't know if there is anything that you want to add.

[Chris Moser, Head of Competitive Markets and Policy at NRG Energy]

No, I think you hit the high points. Thanks, Mauricio.

[Angie Storozynski, Managing Director and Senior Equity Research Analyst at Seaport Global]

Okay. Secondly, I know you're gonna be providing an update on your guidance, I think on the Q1 call. Just looking at the drivers that you showed us on the Q4 call, I mean, it seems like any issues with coal and Trona supplies have sort of subsided. Power prices in Texas this winter have been really weak.

[Angie Storozynski, Managing Director and Senior Equity Research Analyst at Seaport Global]

The outage at your coal plant shouldn't be very painful from an EBITDA perspective. I'm kind of struggling to see what are the offsets to those mitigating factors to the negatives that you showed us on the year-over-year change between 2021 and 2022 EBITDA.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Yes, Angie. So if you remember, we provided you. I think we call it transitory items on all 3, I think they're very constructive and positive signs that we're going to mitigate them. Obviously, we're just in February, so I wanna wait for the Q1 call. Alberto, can you just provide a little bit more specificity on where we are on all these 3, the 3 items that we highlighted on the last earnings?

[Alberto Fornaro, EVP and CFO at NRG Energy]

Absolutely. First of all, we can confirm that, with regards to Limestone, we still expect that Unit 1 will be back running in mid-April and the amount of the impact that we have quantified in $50 million during our Q3 call is basically confirmed. Let me just also remind you that we have not included in 2022 any reimbursement from insurance coming, both for property damages and business interruption.

[Alberto Fornaro, EVP and CFO at NRG Energy]

First of all, because it is difficult to quantify, and normally it's a long process to get there. Second, because we expect it to happen in 2023. We are working on it, but again, as I said, it's a long process.

[Alberto Fornaro, EVP and CFO at NRG Energy]

Second, regarding the coal supply chain, we quantified it in $100 million, of which $60 million in Texas and $40 million in the East. As Mauricio has said, so far we have been able to make some progress against it, but we confirm at this moment the same number, and we will update you in Q3.

[Alberto Fornaro, EVP and CFO at NRG Energy]

Regarding the Texas ancillary services, which was an impact of $70 million, we confirm the numbers and the action that we have taken, which is basically we pass through the increases in price with the exception to all the customers, with the exception where we have a fixed rate contract, and this will naturally happen when this contract will be renewed.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Right. Just to, I guess, put a little finer point on the ancillary services, as the customers that are reopening contracts will be able to pass through these ancillary services. I think of it as change in law, if you remember, Angie so, I think there is an opportunity to for those customers that we couldn't pass it through, we will in the reopening.

[Mauricio Gutierrez, President and CEO at NRG Energy]

I am just incredibly pleased with the commercial team and how they've been managing the supply chain constraints around coal we're still in the middle of the winter, but so far they've done a fantastic job and we will have an opportunity to provide you additional visibility and quantify that in the next earnings call.

[Angie Storozynski, Managing Director and Senior Equity Research Analyst at Seaport Global]

Good. Thank you.

[Mauricio Gutierrez, President and CEO at NRG Energy]

Great. Thank you, Angie. With that, I wanna thank you all for your interest and look forward to updating you on our exciting growth plan, and other priorities throughout the year. Thank you, and stay safe.

[Operator]

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

Participants

Executives

• Alberto Fornaro, EVP and CFO
• Chris Moser, Head of Competitive Markets and Policy
• Elizabeth Killinger, Head of Home Retail
• Kevin Cole, Head of Investor Relations
• Mauricio Gutierrez, President and CEO

Analysts

• Angie Storozynski, Managing Director and Senior Equity Research Analyst at Seaport Global
• Jonathan Arnold, Partner and Head of Utilities and Power Research at Vertical Research Partners
• Michael Lapides, VP and Head of Energy Infrastructure Equity Research at Goldman Sachs
• Paul Zimbardo, VP in Equity Research and Research Analyst at Bank of America Securities