NRG Energy Q2 2024 Earnings Call Transcript

Good morning Shar.

Is that one question Shar or three, but all great questions. And look, at this date has talked about -- I think you probably saw the Governor and the Lieutenant Governor talk about adding a second tranche to the TEF [Phonetic] and I think we'll then see what happens and what the availability is. I think the bigger question, Shar, is, first of all, how much of these are real, and we don't know yet. We know that ours are shovel-ready. But if you look at people who've applied for transmission studies and the like, it's an awful lot less than 40 gig. I think it's about 12 to be exact. And so -- there's a long way to go before a lot of those projects become real and ready to go. Some of them, I'm sure will, but many will not.

So I don't see the -- while in the short term, we've seen some fluctuation in curves. I don't see what we've seen from the TEF filings to have a major impact on what the long-term market is going to look like. I'm sorry, there was a second half to your question, Shar, I think?

Absolutely, we do. Our customers and clients continue to need it and is optimal for our portfolio strategy. Though remember, as we've talked about before, the lead times for development, primarily because of turbines and other equipment is several years. So if you don't have a place in the turbine queue today, there's no way you're getting a new project online before 2030 at the earliest.

My thoughts have evolved. I'll let Bruce expand on how my thoughts have evolved.

Shar. I guess, in short, Larry's thoughts have evolved such that there has been no change in terms of what we're thinking about. I think what we had indicated last time is that we are working towards making that transition. We see our third quarter earnings as being the optimal time to be able to do that, and that's what we're currently working towards.

Well, Shar, I mean the thing has taken off like a rocket ship, you want to wait until you get to the stars before you get off. [Speech Overlap]

Thanks Shar.

Sure. Good morning Angie, I'm going to let Rob kind of take you through that because it's something we talk about a lot. But Rob, maybe?

Yes. So Angie, we -- obviously, we've seen the same moves and curves that you have. You know as well as I do that to start with, the long-term curve gets impacted by the noise of whatever is going on in the front end of the market. We've had a warm but not very pricey summer, and that's kind of impacted things out the curve. What I would tell you is as we look at these curves, regardless of whether or not you see a bunch of demand come into ERCOT or not, the back end of the curve actually looks like a place where we would be buyers, right?

So '27 and '28 summers look cheap. The market itself is constructive or would be constructive, and we think these are the right levels that for us to step in because we think they're undervaluing what the curve looks like. And that's before you add demand. So I'm pretty bullish on what you -- what the market looks like. We feel very strongly about where our portfolio is. And we think that our retail business will continue to churn out the earnings that it's done over time. So I'm not very concerned about that curve.

Good morning Angie, this is Rasesh. To put the context of what's happening in the Northeast. Our retail business overall performed really -- delivered a very strong quarter, right, 8% subscriber growth, double-digit growth in volume and strong margin performance. In the Northeast, there are a couple of things going on that we watch very carefully. The regulatory environment and some of the changes in the specific states, as an example, Massachusetts ended up not making any changes. In Maryland, where we have seen some changes as a result of [Indecipherable] that's a very, very small part of our overall earnings stream. And so the impact of that will be negligible to our results. But we watch that -- the environment very closely.

Angie, I'm going to let Rob expand on that. But remember that we have the ability to contract and use all of the power -- this isn't a merchant build for us. We have the ability to cross it to ourselves or utilize it ourselves. And so we're not doing speculative merchant bill. That's not the business that we're in. This is part of the supply stack that Rob and team are really crucially putting together to meet all of our customers' needs going forward. But I don't know, Rob, do you want to?

Larry covered it. This is for our portfolio. Like these assets were designed, built and planned to support the retail portfolio regardless of what we see kind of long term. We have a long-term consumer-facing business, and we support that.

So Angie, as we consider the sites and the strategy that we do with the sites, right? So as we've disclosed before, 2/3 of those at least are up in PJM, where we don't play with generation quite as much as we do down in Texas. All of the answers that Larry and I just gave were in reference to the three new build projects that are on the way. When I think about the sites themselves, if we have an opportunity to build generation on one of those sites and it's for a customer, then we obviously will be thinking about PPAs and different structures to support the capital for those.

Sure.

Thanks Angie.

Thank you.

I mean, Antoine, I think our strategy isn't changing, but I've never really liked the description, asset-light. I have always considered it to be supply optimal. I mean, a good mix of our own generation and other instruments or tolls in order to be able to do that. And that's continuing. One of the reasons we would like to have more iron than we did a year or two ago is because our customers and clients are demanding more electricity. And so as we construct the appropriate supply portfolio or supply stack, and when we optimize that having more hard metal in the ground is a good thing for us. And so we're doing that. But we're also going to have more of the other types of instruments that we use as well because as you can see from this presentation, and I know you follow the industry, so you don't need me to tell you. The growth in power demand is continuing, and we need to be in a position to meet our clients' needs to do that.

Look, Antoine, one of the things we did was we were getting so many inbounds that we just kind of pulled back for a strategic review of it all. And you can see the kinds of things we're contemplating on that slide in the appendix, say, is it 18 or.

21.

21, sorry. And I think as we land on a strategy, we're obviously going to share that with you. And I'm sure that'll be sometime probably before the end of the year. But we were getting lots of people throwing us bids for our sites, and we're like, well, we know they think we're just a bunch of power guys who don't know anything about data centers. So if that's what they're bidding us, we really need to look at this because it means there's a lot more value in there than the bids that we're receiving. So can't really comment too much more on it now, but look forward to sharing more with you as we have it.

I'm sorry, can you just repeat that last part, Antoine?

Where do you expect to allocate that?

Yeah. So look, yeah. We'll -- from an allocation standpoint, we'll certainly provide more visibility around the allocation once we close and we get the proceeds in place. But you should expect that we'll remain consistent with our capital allocation principles.

Thank you.

Thank you, Steve. Appreciate it. Good morning.

Hey, Steve, it's Rob. We don't talk about it often, but we also do manage to the downside. The great thing about our portfolio is that we have those assets that we can turn down in markets that aren't constructive, like you've seen for the last two quarters. As far as the way we look forward into the year, we contemplate both up and down scenarios and where we feel we're going to land on guidance.

Yes. So the BRA print for this last auction is, indicative of kind of the supply-demand structure that we kind of see across the country. So it's going to provide additional dollars towards generation. We don't have a very large portfolio in PJM. So it is what it is. On the C&I and retail sides, think about our consumer business as very short-term, so don't expect a lot of impact there. And then on the C&I side, we contract with these guys, and depending on what changes in the markets, we can use change in law depending on what happens if we chose. But as we look at the impacts to the book, on the retail side, it's de minimus[Phonetic] state. It's nothing that I would even talk about.

I know you don't mean any forward curves.

If we actually believed that a depressed curve was reality, that would -- a depressed curve[Phonetic] here was reality, that would obviously impact our decision. But as Rob discussed earlier, what we're really seeing in terms of increased demand is somewhat belies the short-term blip in the curve. But we look at that all the time, and there is a place where we wouldn't do the project. I don't think we're not there today.

Steve, the one thing I would add to the math, or as you think about like the value of these assets, flexible gas generation is a function of both power price, but it's also a function of volatility, right? And so the volatility curves, which are not very transparent, you can't see them by looking into megawatt daily. Those are still up. And so the value of these projects is something that can move around with our load continues to support us developing them and putting them into the portfolio.

We're pushing to do that, but it's a slow and iterative process a bit, Steve. I'm sure we'll have some updates. It may not be as complete one as you all would like, that may have to wait till the first quarter of next year or some conference in between. But we are working expeditiously, but it's more important that we get it right than do it fast.

Thanks, Steve.

Hey, Neil, this is Rasesh. Good morning. We delivered a really strong quarter with 5% year-over-year subscriber growth, 7% revenue growth for the Smart Home business. And that sort of -- think of that as that's in an environment where we have high interest rates and a slowdown in housing activity. As that normalizes, we would expect that to potentially deliver a tailwind to the business and I think it's largely a function of the fact that we've got a business that has a very high-quality customer base with an average FICO score of greater than 700.

And so you saw, we posted near all-time record results for retention -- customer retention, which is almost at 90% on an annualized basis. And we're still largely in an underpenetrated market. And so we see opportunities to not only continue to grow the customer base at the mid-single digit rate but also grow the number of devices and services we provide to the customer within the home. And so we feel really -- really good about our position and with a potential for a tailwind if rates normalized and housing activity picks up.

Thanks, Durgesh. Appreciate it.

Hey, this is Chris. Yeah. What we've been led to believe is that the PUCT will have either an order or a draft order, which would list the assets, the projects that are moving forward towards due diligence. And that has been targeted for the August 29th meeting.

Look, I mean, we always look to optimize everything we own. I guess there's nothing on the horizon that I see that would be divestable. But sometimes people walk in the door with very attractive offers for things that we own. And we would be silly not to take a look at those, especially given we have a broad and amazing range of opportunities, number one, in which to invest capital. And number two, we have a very undervalued stock in which to invest capital as well. So when we look at those two things, if we can make a transaction that makes sense, we'll obviously do that. I don't see anything on the horizon today, but if the opportunity arises, we will certainly look at it hard and try to take advantage of it.

Hey, it's Rob. So the print is constructive as it comes to actually highlighting the supply demand picture in the market. So I think that's a positive. We have new build sites which regardless -- or we have sites, regardless if you new build them or not, that print is definitely supportive in the overall value as we think about them from a development perspective, whether that's for load or for generation. The one thing I would tell you, David, is that one print isn't going to get a bunch of generation running into the market. So I wouldn't expect to see a whole bunch of people applying to build generation based on one PJM print. But we do have another mark in December, which I expect would be supportive. And so the supply dynamics in PJM aren't going to improve anytime soon. But I believe that ultimately competitive energy players are rational and will build when it makes sense.

So there's two challenges in PJM. One is PJM-specific, and that's the interconnection queue, right? It's very deep and very slow, and so it's probably frustrating a lot of people. The second piece is the one that is a global issue, which Larry alluded to earlier, which is if you want to build a power plant today and you're not in the queue, you're not going to get anything on the ground before 2030. So demand is coming faster than that supply window. So I expect tight markets, both from a capacity and an energy perspective over the next several years.

Thank you, David. Appreciate it.

Thank you all for being on the call and for your interest in NRG. And on a more personal note, for all the kind words and congratulations on my appointment. I'm here and we're all here because we are super excited about the future of NRG. I think you all know that I've been here for 20 years and I've never been more excited or more optimistic about the prospects. So I hope you'll stick with us and join us as we continue to execute well and take advantage of the amazing strategic opportunities and initiatives in front of us. Thank you all very much.