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NRG CEO: 'We don't want to be gas agnostic'

Q2: U.S. Solar and Wind Power by the Numbers

Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

Rate case activity slips, COVID-19 proceedings remain at the forefront in August


NRG CEO: 'We don't want to be gas agnostic'

NRG EnergyInc. President and CEO Mauricio Gutierrez said the independentpower producer and retail electric provider is continuing to work through plansto simplify its structure and strengthen its balance sheet to position thecompany for an eventual market recovery brought on by anticipated natural gasprice increases.

While the company has long been moving to reposition itselfaway from solely relying on energy margins by securing contracted generationand capacity payments, Gutierrez said the company has deliberately structuredits fleet to benefit from higher natural gas prices.

"I believe the current gas price environment is unsustainablein the medium-to-long run, and we want to be there with scale when the marketrecovers," Gutierrez said, speaking May 5 during the company'sfirst-quarter earnings conference call. "Let me be clear: We're not gasagnostic and don't want to be gas agnostic as we believe current prices are notsustainable."

While the company has a "stable base" of earningsgenerated by fixed and contracted capacity as well as its retail energybusiness, Gutierrez said the company would still see about $500 million inadditional gross margin looking out to 2018 from an increase of 50 cents perMMBtu in natural gas prices.

Gutierrez said the company is also positioned to benefit aspower markets tighten with the largest competitive power portfolio "withboth geographic and merit order diversification." A heat rate increase of1 MMBtu/MWh results in a $403 million increase in gross margin in 2018.

"As power markets tighten due to retirements or lowgrowth, we maintain significant upside to increasing power prices," Gutierrezsaid.

Specifically, Gutierrez mentioned that NRG was"optimistic" about Texas, as it sees up to 9,000 MW of coal-firedgeneration at risk due to low prices and upcoming environmental regulations,noting that competition from solar and wind capacity is also increasing.

In addition, the company expects market changes to theoperating reserve demand curve in the Electric Reliability Council of Texas Inc. to betterreflect scarcity conditions. In the West, Gutierrez said that while the AlisoCanyon disruption will present reliability challenges, most of the segment'srevenue is supported by contracts. Further, its newest merchant plant in theregion, Sunrise,is not impacted by the disruption as it is supplied by the Current Riverpipeline.

For the first quarter, NRG Energy that 2016 adjusted EBITDA wasdown to $812 million, from $840 million in the first quarter of 2015, underwhat Gutierrez termed "very challenging market conditions." Adjustedcash flow from operating activities was $461 million, down from $525 million inthe same quarter of 2015.

The generation business, formerly known as NRG Business,contributed $429 million toward first-quarter 2016 adjusted EBITDA, down from$535 million in the same quarter of 2015. Contribution from the retail massbusiness also was down, to $151 million from $166 million in the opening monthsof 2015.

Back-to-basics planmoves ahead

With the company consolidating its business lines into twokey areas — generation and retail — NRG Energy also May 5 that it is integratingits residential solar business into its retail electric business and selling amajority stake in its electric vehicle charging network, EVgo.

NRG Energy had initially hoped to sell off a majority shareof the residential solar segment, but with little demand for the business fromthe capital markets, it instead moved to integrate it into its own retailelectric business, Gutierrez said.

As part of the move, NRG Energy will significantlystreamline the business to make it an offering of its retail energy operations,meaning that it will compete where it already has a strong base of customers.With existing retail customers, NRG believes that it will have an advantageover other competitors.

The company will also change its business model to focus onorigination and installation to simplify the financial reporting and provideimmediate revenue recognition, cutting costs for the business. To make thebusiness model changes possible, NRG Energy is partnering with and Spruce Financial,which will monetize any leases for system.

As a result of the changes, the business should be at leastearnings neutral by 2017, Gutierrez said.

Meanwhile, the company announced the sale of the EVgo stakefor $50 million, of which $19.5 million is payable to NRG and the remaindercontributed as capital to the business, subject to working capital adjustments.NRG Energy can earn an additional $70 million on the sale based on futureadjusted EBITDA targets.

Renewables and NRGYield

With the renewable energy business now integrated into its overallgeneration business, Gutierrez said the company is now ready to"reinvigorate the development pipeline" and provide certainty toNRG Yield Inc.'sgrowth potential.

While Gutierrez said that more details will be provided inthe coming months, he said he believes the company is now ready to demonstrate"the value of our integrated platform."

In the near-term, NRG Energy said it plans to offer itsremaining 51.0% interest in California Valley Solar Ranch to NRG Yield in the secondquarter of 2016.

NRG Yield noted that while it expects its investments in NRGEnergy's residential solar segment to dry out because of the change instrategy, the move "does not affect NRG Yield's perspective on residentialsolar."