NRG Energy Inc. management attributes the bulk of the power provider's financial losses from a February winter storm in Texas to "uncontrollable" circumstances, including grid management.
NRG on May 6 reported a $967 million financial impact from the deadly storm, which caused a near grid collapse in the Electric Reliability Council of Texas Inc.
"The systemic failure was the result of a lack of winter stress planning, which was then amplified by poor electric and natural gas coordination and protocols to orderly restore the energy system and communicate with customers," NRG President and CEO Mauricio Gutierrez said on the company's first-quarter 2021 earnings call.
The company expects a total gross impact of $975 million from the event, or a net impact of $500 million to $700 million based on $275 million to $475 million in estimated offsets from forecast expenses and mitigation.
NRG is reinstating its 2021 guidance excluding the full-year impact of the February winter storm.
The company is targeting adjusted EBITDA in the range of $2.4 billion to $2.6 billion, adjusted cash flow from operations in the range of $1.63 billion to $1.83 billion, and free cash flow before growth investments in the range of $1.44 billion to $1.64 billion.
NRG previously estimated an interim financial loss of $750 million from the February arctic freeze.
Gutierrez provided a breakdown of "controllable" versus "uncontrollable" financial impacts from the storm.
"On the controllable side, throughout the event, we maintained a balanced position while absorbing very high natural gas prices, operational issues at our plants and protecting our residential retail customers from high electricity prices," Gutierrez said. "In total, our platform was positive $17 million with estimated bad debt, primarily from [commercial and industrial] customers, accounting for $109 million."
The CEO, however, noted that three uncontrollable factors added up to nearly $900 million of NRG's financial impact.
"First, the recently acquired [Direct Energy LP] portfolio had a heat recall option with a counterparty that did not perform, resulting in a $393 million gross loss," Gutierrez said. "Following the event, we re-examined the entire hedge book from Direct and determined that this was an isolated issue. We're currently engaged in discussions with the counterparty and if a satisfactory result is not reached, we plan to vigorously pursue recovery through all avenues."
Pressed further on this impact, Gutierrez disclosed it involved a financial hedge agreement with a single power plant.
"This was a bilateral financial deal with one counterparty that we know that they had one plant to back this financial bilateral agreement," the CEO said.
NRG also faces a $95 million gross loss from ERCOT default allocations, primarily at co-ops such as Brazos Electric Power Cooperative Inc. and Rayburn Country Electric Cooperative Inc., according to management. Brazos has sought bankruptcy reorganization.
"Finally, we are recognizing a $395 million loss due to ERCOT's management of the grid, particularly during the last 32 hours, when ERCOT kept the market-clearing price at the cap, despite having more than 10 GW in reserves," Gutierrez said. "Our platform was balanced during this time, but nonetheless we were uplifted these extraordinary charges."
Texas legislation
NRG has been "actively engaged" in talks with Texas lawmakers on changes to make the state's grid more resilient, the CEO noted.
"I want to focus here on three concepts that the Legislature has made a priority and I believe are critical to ensure what happened in February never happens again," Gutierrez said, citing "hardening of the system, improving communication and market design changes."
Several legislative proposals would mandate winterization of power plants to prevent generation failure, but none have so far made it to the governor's desk ahead of a May 31 deadline.
"The implementation of formal winterization rules enforced through penalties and audits is something we support," Gutierrez said. "With that said, one of the biggest lessons learned from this storm is how interactive and interconnected the electric and natural gas sectors are, and our focus is not just on hardening the power generation side of the equation. Instead, we believe the entire system, including natural gas, needs to be hardened, as they say, from wellhead to light bulb."
NRG also believes there needs to be "formal coordination" among all market participants and key stakeholders including the Public Utility Commission of Texas, ERCOT and the Railroad Commission of Texas.
"In addition, improving the dialogue between [transmission and distribution utilities] during load-shed events and retailers will greatly improve the amount of information available to customers," Gutierrez said. "Improved communication coupled with a statewide emergency alert system will ensure all Texans can stay informed about the status of the grid during times of emergency."
"Finally, regarding market design changes, our focus is on improving reliability through competitive solutions in the energy and reserve markets, not through regulated generation solutions with guaranteed profits or a one-size-fits-all capacity procurement," the CEO added.
NRG also supports banning index wholesale products in order to protect residential customers from market volatility.
"I recognize that Winter Storm Uri has impacted investor confidence in ERCOT's market design and the durability of our cash flow," Gutierrez said. "But I want to be clear. Given the steps being discussed in the Texas Legislature and the actions by market participants, I don't believe an event like this can happen again."
