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NRG credits 'diversified supply' for ability to manage Texas risks

NRG Energy Inc. on March 1 credited a "diversified supply" and "risk management" for its ability to mitigate losses from the February arctic freeze that caused a grid crisis in the Electric Reliability Council Of Texas Inc.

As Wall Street braced for a significant financial impairment from the historic winter storm that swept through Texas the week of Feb. 15, NRG said a preliminary analysis shows the financial impact is expected to be within current guidance.

The power producer on March 1 specified that a stress-test analysis shows a potential positive or negative $100 million impact to its guidance ranges.

NRG affirmed its full-year 2021 targets for adjusted EBITDA in the range of $2.40 billion to $2.60 billion, and free cash flow before growth in the range of $1.44 billion to $1.64 billion.

"I think this is the result of really good risk management, commercial and plant operations, all around execution," NRG President and CEO Mauricio Gutierrez said March 1 on the company's fourth-quarter 2020 earnings call.

To prepare for the storm, NRG brought back "nearly 2 GW of power generation typically reserved only for summer months," the CEO said.

In addition, Gutierrez said the company's load obligations in Texas are "pretty well diversified between Houston and Dallas and the north [part of the state]."

NRG Executive Vice President of Operations Christopher Moser noted that the company's strategy is based on having a mix of physical generation and market purchases.

"And notwithstanding the problems we faced, frankly, on both sides, right, with unit outages and then counterparty issues that we're working through, this strategy of diversified supply seems to have held together pretty well," Moser said. "We were also, don't forget, able to use our gas storage and transportation contracts and our ability to find and buy what I will politely describe as obscenely expensive gas in order to keep those gas units of ours producing the megawatts that the grid needed."

Market reacts

NRG stock opened up more than 17% on March 1 and was trading up more than 14% at $41.55 in early afternoon trading. The company also announced the sale of several oil and natural gas plants on March 1.

NRG and Vistra Corp. are believed to have had the most exposure to generation outages during the week of Feb. 15 in ERCOT, given their large generation fleets in the state.

NRG operates more than 10,000 MW of coal, gas and nuclear generation in Texas, according to S&P Global Market Intelligence data.

Unit 1 at the company's 2,560-MW South Texas Project, a nuclear plant, was believed to have been offline for two days during the extreme weather event.

Meanwhile, Vistra's stock fell sharply on Feb. 26, closing at $17.25 in heavy trading, after disclosing a one-time financial hit in the range of $900 million to $1.30 billion from the historic storm.

Vistra on Feb. 17 disclosed that only about 1,000 MW of its more than 19,000 MW of generation was offline during the energy emergency. But the independent power producer said it had to procure power in the ERCOT market "at prices at or near the price cap [of $9,000/MWh] to meet its supply obligations."

As fully integrated power providers, NRG and Vistra also own large retail electricity companies in Texas.

"Importantly, none of our residential customers will be exposed to the real-time wholesale power prices that occurred during the storm," Gutierrez said.

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Despite its better-than-expected financial exposure to the ERCOT blackouts and price surges, NRG has joined the chorus of energy providers calling for market reforms.

"The systemwide energy failure that occurred in Texas is unacceptable and we are committed to working with all stakeholders to prevent this from happening again," Gutierrez said.

The CEO noted that 52 GW of capacity in the ERCOT market was "forced offline at one time or another."

Gutierrez expects "perhaps three themes that legislators and other stakeholders will be looking at."

"First is the hardening of the energy system from natural gas to power generation," Gutierrez said, pointing out that nearly 50% of total capacity is fueled by natural gas.

NRG also expects more conversation about market design.

"And the focus from my perspective should be around the reserve margins and what is the excess capacity that we want to have in the ERCOT system to make sure that this doesn't happen again with perhaps more extreme weather conditions than in the past," Gutierrez said, highlighting the need for fuel diversification.

Company management also believes improving communications between energy producers, retail providers and customers will be a key theme of stakeholder discussions.

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Asset sale

Outside of ERCOT, NRG struck a deal to sell about 4,850 MW of its fossil-fueled power plants in New York, Connecticut and California to Generation Bridge, an affiliate of ArcLight Capital Partners LLC, for $760 million. As part of the deal, NRG signed a tolling agreement for its 866-MW Arthur Kill natural gas plant in Richmond County, N.Y., through April 2025.

"Many of these assets are nearing end of life and with economics dependent upon capacity markets," Gutierrez said. "This is a good transaction for us. It further streamlines our business and addresses terminal value and earnings concerns that otherwise would have masked our retail growth."

The transaction is expected to close in the fourth quarter of 2021, subject to antitrust review under the Hart-Scott-Rodino Act along with approvals from the Federal Energy Regulatory Commission and the New York State Public Service Commission.

"I highlighted last quarter that we were actively focused on monetizing noncore assets with a target to realize a minimum of $250 million in equity proceeds within six to 12 months," Gutierrez said.

Asked about the future of NRG's remaining fossil fleet, the CEO said "portfolio optimization is a continuous process."