Mauricio Gutierrez
President and Chief Executive Officer at NRG Energy
Thank you, Kevin, and good morning, everyone, and thank you for your interest in NRG. I'm joined this morning by Alberto Fornaro, Chief Financial Officer and also on the call and available for questions we have Elizabeth Killinger, Head of Home, Rob Gaudette, Head of Business and Market Ops, and Chris Moser, Head of Competitive Markets and Policy. Starting on Slide 4 with our key messages for today's presentation. We have made significant progress in advancing our strategic priorities in 2022. And while our financial results were lower than expected, our business is well-positioned in 2023. Today, we are reaffirming our 2023 financial guidance ranges. The Vivint Smart Home acquisition is on track to close by the end of the first quarter. Today. we are providing further disclosures around revenue synergies to ensure you have additional tools to properly value the transaction. Finally, the core of NRG is strong, supported by favorable fundamentals. The acquisition of Vivint enhances our ability to achieve our free cash flow before growth per share targets. Now turning to Slide 5 for the financial and operational results of 2022. Beginning with our scorecard for the year, we executed well across our strategic priorities. We delivered our second consecutive year of record safety performance. For me, it always starts and ends with the well-being of our people. I want to thank everyone at NRG for staying focused during a challenging year. Our retail group took deliberate actions to manage price volatility and delivered record customer retention and extended the average term of a new customer to two years. Also, our bad debt remained below historical levels, despite higher inflation and tightening financial conditions. Our plant operations performance was below expectations, primarily impacted by the outage at W.A. Parish right before the summer. We are taking additional steps to strengthen our supply and mitigate operational risk during these scarcity conditions. The Direct Energy integration is nearing completion and on track to deliver our run rate synergy targets in 2023. We executed on our Test & Learn programs during the year, which culminated in the announcement of the Vivint Smart Home acquisition. We also continue our portfolio optimization with 2 gigawatts of coal retirements and asset sales. Finally, on capital allocation, we executed $645 million of share repurchases our of the $1 billion program. We will execute the remaining amount when cash is available and when we have full visibility to achieve our targeted credit metrics. We also increased our dividend by 8%. Since it was reestablished in 2020, we have raised our dividend more than 25% and returned almost $1 billion to shareholders this way. I view our dividend as an integral part of our return on capital policy.
Moving to financial results, we delivered $435 million of adjusted EBITDA in the fourth quarter, bringing our 2022 full year result to $1.754 billion below expectations. For the fourth quarter, we highlighted in our last earnings call that reaching the bottom end of the financial guidance included a little over $100 million of optimization opportunities. Specifically, making our natural gas units available to capture value during periods of high power prices. This opportunity did not materialize as mild weather during the quarter, the power price was much lower than expected. We were also impacted by Winter Storm Elliott in late December, primarily from PJM capacity performance payments where we risk-adjusted downward, our bonus payments, pending additional information from PJM. Alberto will provide more information on our financial results.
Turning to Slide 6 for our 2023 outlook. We are reaffirming our 2023 financial guidance. We see improving fundamentals in our business, including more stable supply costs, driven by lower natural gas prices, less supply chain issues for coal and chemicals, more favorable retail market conditions in the East and economic resilience in our customer base. In the East, we see opportunity for customer growth, given rising rates from public utilities, enabling competitive retailers to demonstrate the value of our services to customers on an equal playing field.
In Texas. The Public Utility Commission proposed market design improvements that will result in more dispatchable generation and greater reliability of the [Indecipherable]. I want to commend the Texas governor's office, legislature, PUCT and ERCOT for taking swift action to enhance grid resilience, while ensuring the integrity of the competitive market. Also, retail competition will open in Lubbock, Texas in the fall, a city with more than 100,000 electric customers. We look forward to having the opportunity to earn and serve customers in that area later this year.
In 2023, We will continue executing on our strategic priorities, focusing on strengthening our core business while growing adjacent products and services as you can see on the right hand side of the slide. We continue our focus on optimizing our portfolio to better serve our customers. To that effect, we are targeting $500 million in net cash proceeds from asset sales by the end of the year. Having completed our Test & Learn phase in 2022, we are now focused on the next phase of our strategic roadmap, growing the business. This includes completing the Direct Energy integration and increasing the number of customers that purchase multiple products from us. Today. We have sold more than one product to 50% of our customers. We are making good progress on cross-selling and will provide additional disclosures as we integrate Vivint. To support this growth, we will continue to strengthen our power supply by extending our capital-light PPA program for renewables to dispatchable generation at some of our existing sites.
Finally. We are on track to close Vivint in the first quarter with all regulatory approvals received and no shareholder vote required. We expect to close financing soon and have begun on day one integration efforts. I want to provide additional insights on how Vivint enhances our core energy platform and brings additional capabilities at scale on Slide 7. Vivint is a leader in the smart home solutions with nearly 2 million, highly-engaged customers with an average life of nine years. Their system brings together automation, security and residential solar under a single proprietary technology and data platform. This business is highly complementary to our core energy offering. We will use their smartphone ecosystem to connect all our currently isolated products and services, including grid power, batteries, EVs and other products into a seamless experience that is highly engaging and personalized. This engagement will provide tremendous insights into pricing, customer experience, and new solutions that create greater brand loyalty and longer average customer lifetime. As we leverage the smart home ecosystem, we expect to optimize energy demand inside the home, providing valuable services to the wholesale markets. In other words, NRG will be the bridge between the home and energy markets with a unique ability to optimize and monetize value between the two.
Vivint will also complement our existing energy product offerings and sales channels by adding home automation, security and residential solar at-scale, including a proven acquisition engine with a solid track record of growth and nearly 2 million customers. On the right-hand side of the slide is the virtuous cycle that we have discussed in the past. By leveraging our existing platform, we can access meaningful cost synergies. This economic advantage, coupled with better insights and more personalization, result in a better experience for our customers. All of this translates into a deeper understanding of how consumers interact with their homes, additional margin and better retention on our core products. And then the cycle repeats as we grow, creating a more valuable business.
Now. I want to discuss the valuable opportunity that this combination represents on Slide 8. We have identified three main areas of value. Growing and optimizing our network of customers, leveraging the platform to achieve cost synergies, and improving the value of our core energy customers. With respect to the growth opportunity, we are targeting $300 million of incremental free cash flow before growth by 2025. We are encouraged by the preliminary work we have done on both sets of customers and look forward to fully optimize once the transaction closes. As you can see on the left-hand side of the slide, there is some overlap in our core energy markets, but it's relatively small. This is important because Vivint already has teams ready to be deployed in our core energy markets and because the addressable market opportunity for new customers will be even greater. We expect to achieve this growth target in several ways as we target Tier 1 customers, we we define as single-family homeowners with high credit scores within select urban areas. We will focus on two immediate and actionable opportunities. One, cross-selling existing products into our combined customer network of 7.5 million customers. Two, selling bundled offers to new customers outside of our network, representing 15 million potential households. In addition, we will grow Vivint organically in line with historical levels. These opportunities will be enhanced by optimizing our combined sales channels and best practices, leveraging the strength of both NRG and Vivint.
The capital required to achieve this growth is expected to range $500 million to $600 million over the next three years. For cost synergies, we have identified $100 million to be achieved by 2025, primarily from combining two public companies. For this, we expect $160 million of one-time cost to achieve. Finally, on our existing core energy customers, cross-selling means we can have direct access to our customers in the East and the opportunity to expand margin and extend customer lifetime value. In total, we see a $400 million opportunity by '25 and a larger opportunity beyond given the size of the smartphone addressable market. I am confident in our ability to deliver these targets as we have a strong history of integration and synergy achievement. Just to remind you, since 2016, we have achieved significant value on integration synergies, cost reductions and enhancement programs. This effort will be led by the same team of the transformational plan and Direct Energy integration. I look forward to providing you a more comprehensive update later this year during our Investor Day.
Now turning to Slide 9. We want to give you an update on our pro-forma outlook and how the Vivint transaction supports our growth targets. On the left-hand side of the slide is a free cash flow before growth pro-forma walk from 2023 and 2025, including the expected growth contribution from Vivint that we just discussed on the previous slide. This illustrates the earnings power of the company and will be further on track once the transaction is closed.
On the right-hand side of the slide is the expected capital allocation through 2025. As you can see, the combined platform provides the financial flexibility to have a balanced approach between growth and return of capital, while maintaining a strong balance sheet. The acquisition of Vivint and more specifically the growth opportunity that it represents will better support our per share growth targets while materially high grading our earnings quality and customer lifetime value.
So with that, I will pass it over to Alberto for the financial review.
