NRG defends business model, blames ERCOT flaws for estimated $750M loss

NRG Energy Inc. defended its integrated business model and instead placed blame at the feet of the Electric Reliability Council Of Texas Inc. for a reversal of fortune that sent the company's stock into a nosedive.

NRG's stock opened down more than 13% on March 17 after the company announced it is now estimating an interim financial loss of $750 million from the deadly winter storm that swept through Texas in February causing a near power grid collapse in ERCOT.

"Most of the financial impact that we're talking about today, it has to do with how ERCOT ran the system," NRG President and CEO Mauricio Gutierrez said on a March 17 conference call. "The defaults from market participants, the uplift charges that we have received and how the grid was operated."

NRG also withdrew its full-year 2021 financial guidance for adjusted EBITDA, adjusted cash from operations and free cash flow before growth investments due to current uncertainties.

"My expectation is that the number that we have put in front of you today ... the way I would characterize it is perhaps it has a moderate downside and significant upside," Gutierrez said.

The independent power producer said about 15% of its financial impact is tied to ERCOT's latest system-wide default of $3.1 billion.

"Our previous assumption was based on $1.3 billion of ERCOT defaults," Gutierrez said. "Finally, the balance of the impact is an increase in uplift charges to load, changes in ancillary payments to generators and natural gas adjustments."

Just weeks earlier, NRG management told analysts and investors that a stress-test analysis showed a potential positive or negative $100 million impact to 2021 guidance ranges of $2.40 billion to $2.60 billion for adjusted EBITDA and $1.44 billion to $1.64 billion for free cash flow before growth.

"We based our original estimate on the seven-day preliminary settlement data from ERCOT," Gutierrez said. "Over the past two weeks, we now have received resettlement data for 99% of residential load and just over 80% of [commercial and industrial] load."

"We almost felt like there was a whipsaw from the information that we received from ERCOT," the CEO added.

NRG said the latest estimated financial impact could cause the company to extend its debt reduction program and delay the achievement of its investment-grade credit metrics to 2022.

"Details matter here and it will take time to fully understand the positive and/or negative impacts by potential changes in the market," Gutierrez said.

Still, NRG management said they expect the company and the grid to become stronger in the wake of the energy crisis.

"We believe this one-time event will only improve the resilience of our business, the long-term strategy of moving closer to the customer and the strength of the ERCOT market," Gutierrez said. "I think the probability that we're going to experience something like we experienced in terms of the impact to the energy system is going to be reduced significantly."

Not in favor of repricing

During the February storm, the Public Utility Commission of Texas ordered electricity prices to the $9,000/MWh cap after load shedding artificially reduced power demand.

Texas politicians are in a fierce debate about whether to retroactively bring down the electricity prices to prevent more bankruptcies among market participants.

Despite these exorbitant prices and the company's latest disclosure, NRG's top executive said he does not support repricing $16 billion in transactions that took place over the course of the storm.

"I think we need to make sure that we maintain the integrity of competitive markets," Gutierrez said. "I think that it is in the best interest of our business and the best interest of consumers and shareholders to have as minimum government intervention as possible in these markets."

NRG and Texas-headquartered independent power producer Vistra Corp. are believed to have had the most exposure to generation outages and price spikes 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.

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

"I believe this has created an opportunity for very well-established brands like ours to get additional customers," Gutierrez said. "I think consumers are going to have some sort of flight to safety to the brands that they know, to the brands that they trust ... That will benefit our business overall."

Wall Street, however, is not as optimistic.

Guggenheim Securities LLC on March 17 downgraded NRG and Vistra to "neutral" as the firm said it is "moving to the sidelines" until it gets more clarity on the situation in Texas.

"We believe in both management teams and see both companies as fundamentally sound, but the news from NRG only further underscores the fluidity of the data points in Texas and unknowns around storm impacts," Guggenheim analyst Shahriar Pourreza wrote in a research report. "We believe investors will remain justifiably wary of Texas until more clarity comes on all fronts and the curves fully reflect the risk of operating in a state where resource adequacy is dependent upon the frequency of scarcity."

To further cloud the picture, the sole remaining member of the Public Utility Commission of Texas resigned March 16, effective upon the appointment of a replacement, following the release of a recorded call with Wall Street investors about repricing decisions.

Pourreza said NRG's disclosure highlights the need for caution.

"We see this as further evidence that the ERCOT market is broken, with the political process only heightening the uncertainty over the construct and environment for generators in the state," the analyst wrote. "While the repricing of energy markets does not appear to be a priority, we note that [Arthur] D'Andrea's departure now leaves open major questions on ancillary services repricings and other ISO items such as the latest systemwide default balance."