NRG Energy (NRG)

Participants

Kirk Andrews, CFO of NRG Energy (NRG)

Nate Abercrombie, The Stock Podcast

Interview Transcript

Nate:         Kirk, thank you very much for coming back onto the program. It’s always a pleasure to have you on the Stock Podcast, so thanks a million for coming back on for a follow-up interview.

Kirk:           You bet. Nate, happy to join you.

Nate:         For listeners who maybe haven’t heard the first Kirk Andrews interview, could you provide us with just a very brief overview of what NRG does and who you are by the way?

Kirk:           Sure, absolutely. First of all, I’m Kirk Andrews the chief financial officer at NRG Energy whose ticker is NRG. I’ve been chief financial officer here for the last eight years actually and NRG in a nutshell we are a power company, but that always tends to make people think of utilities and the distinction there is in some parts of the country the price of electricity, the price you pay on your power bill is completely regulated by the state that you live in. In other parts of the country, like in particular the Northeast and Texas where is the predominance of our business, power is deregulated. Which means the only charge on your bill that is regulated by the state is the charge for the owner of the poles and the wires and that’s basically what we would still refer to as the utility. Everything else, the generation, the power plants are all privately owned by different companies, including ourselves, sometimes private investors, sometime public companies, and the right to sell power to end use customers, which we refer to as retail is also deregulated, so if you lived in one of those states, you may have seen advertisements for soliciting you to consider changing your electricity provider and that means you’re not changing off the utility in that state, which because there’s only one owner of the poles and the wires, but you are changing who you’re getting the electricity from.

Kirk:           NRG is in both ends of that value chain. We are in the deregulated power plant business and we have a large retail business. The power plant business, the price of wholesale electricity as we call it is determined by what the marginal cost of the next unit that needs to be incented to turn its plant on in order to supply the next megawatt of demand and the retail price of electricity is really completely driven by market forces that can be set by individual retailers and it is a truly competitive market on that end.

Nate:         Yeah, thanks for that explanation. For many years NRG and a few other companies were known as the IPPs or the independent power producers and I believe it was you guys at NRG who really started kicking off… well, you’ve created this new business model, which is an integrated power producer, which really focuses on those elements that you just described but I’m curious how over the past couple of years now, how have those conversations been going with investors. Is it hard for them to wrap their heads around what you guys are today compared to what you guys were before, whatever it was, 2016, 2015? I mean you were the same company but it was this new message that you were getting out and I’m curious if it’s hard for investors to wrap their head around.

Kirk:           Yup, but what makes that challenging where investors are concerned are twofold. Number one, NRG and other companies like it, we generate a significant amount of excess free cash flow. That’s the cash that our business generates above and beyond what’s necessary to kind of keep the existing business afloat, if you will, which gives us a lot of degrees of freedom and in the past we call that capital allocation, i.e. what are we going to do with those dollars? Those dollars were invested in all sorts of different early stage evolving technologies and very difficult to get your head around the business model and where the capital was going. That was one challenge we faced that I think we’ve largely remediated in sort of refocusing on our core competencies, which I’m happy to go into. The other challenge about that is you mentioned IPP or independent power producers. NRG and companies like it didn’t start out in both the power and the retail business. We were simply in the power generation business and when that’s the case, as I mentioned in response to your earlier question, since the price of electricity rises and falls with whatever the marginal costs of the next megawatt that has to switch on in order to supply the demand, the wholesale price of electricity can be relatively volatile.

Kirk:           It tends to be the case that the, what we call the marginal unit or the next megawatt of power plant that needs to turn on in the past and that’s still largely true today tends to be a power plant that’s fueled by natural gas and when that’s the case, that means the price that that power plant or the cost of that power plant to generate that megawatt is simply what is the price of natural gas and how many BTUs of natural gas does that power plant need in order to produce a megawatt of electricity. Which means that since the price of power is a derivative of natural gas, then the price of power rises and falls with natural gas prices, and there’s also a supply and demand and a weather element of that obviously, but it produces when you simply are in the power plant business, a business that’s very much commodity cyclical and I think a lot of investors remember the days where the price of electricity rise and fall and so it is also the profitability of the underlying company.

Kirk:           What makes that different in today’s world is we talked about retail. Starting in about 2009 we were a first mover and beginning to acquire retail businesses. We’ve built up a retail franchise that especially within our core market and that’s Texas, we are almost perfectly matched between the amount of megawatts of power plants that we own on the ones hand and the number of customers or load and that’s megawatt hours that we serve in that same market, and while the underlying price of electricity can still rise and fall, the price to the end use customer is a lot less volatile, right the retail price of electricity. That means in days where the price of electricity is relatively high, the power plant side of the business tends to show a high degree of profitability and because you’re not necessarily going to pass through every single change day to day in the power price onto your customers, that means the revenue rates on the retail side of our business stay relatively flat and you get a little bit less profitability out of the retail business.

Kirk:           Now, obviously if the power price falls, the opposite holds, right, you’ve got less profitability, what we call the generation side of the business, and you’ve got expansion in your margin holding that price constant to the end use retail customer, so that really retail in essence, a lot of people talk about retail being a hedge to wholesale and it is in a way, it’s really a volatility mitigant and the challenge that we’ve had is helping our investors understand how our fortunes from a profitability standpoint, unlike the IPP model of the past don’t necessarily rise and fall financially one-to-one with the price of electricity. They are a lot more steady, a lot more predictable and a lot more resilient than if it was the case as we were in many of our competitors were in the past simply an owner of electric generation or power plants.

Nate:         Yeah, thanks for that. If there’s one thing that I miss about being back at Janus, it’s having the opportunity to sit down in some of these conferences where you explain it because you do a really good job of explaining it but I guess that’s also because you have so much practice.

Kirk:           I was going to say, I get you. You took the words out of my mouth. We do get a lot of practice obviously.

Nate:         Yeah. I would like to hear about just changes over the past 12 months or since the last time you came onto the podcast, but you mentioned core competencies and I would like to hear you just highlight what NRGs core competencies are.

Kirk:           Sure, and they speak directly to the two pieces of our business, which we tend to, still externally the way I just did in response to your question have to talk about wholesale or power generation of a power plant side of the business on the one hand and the retail side of the business on the other hand but internally we tend to operate on a much more integrated basis and if you think about it in a nutshell, the input cost is hey, what are the efficiencies of all my plants? What is the fuel costs and how much of that I can manage and fortunately those prices and costs are relatively steady and what price am I charging to my end use customer? Everything that happens in the middle, right, between the wholesale business and the retail business is really not as impactful to the bottom line or the performance of the business and as we often say we are sourced agnostic as to some years more of our profitability is going to be from what you call the retail business and less of it from the wholesale, in other years the opposite is true but we’re focused on delivering the bottom line performance of the consolidated profitability and the core competencies that allow us to do that are really two fold.

Kirk:           I am 100% confident saying we are best in class on the retail side of the business. First of all I mentioned before we were the first mover into the retail business. We have acquired retail businesses that are complimentary and we pursue a model where we market power complemented by other products and services to end use customers through what we call a multi-brand multichannel strategy. We don’t market everything under reliant, we don’t market everything just under NRG. We have multiple brands that appeal to different consumers preferences as you would in any consumer product type business and through multiple channels, right. We don’t just solicit things over the phone. Sometimes we sell door to door. Sometimes we generate a lot of customer leads through our relationships with the NFL. For example, NRG stadium is where the Houston Texans play, so we have multiple channels and multiple products through which to sell the retail side and we are the best in the business in terms of how to manage that and how to serve our customers well. Our number one goal around NRG, aside from safety, which is always number one once you move beyond that, our number one operational goal is being customer focused and I think we’re the best in the business on that. I also believe because we have a breadth of experience in managing the power plant business, we operate power plants of practically every fuel type, whether that’s nuclear, coal, oil, natural gas, renewables, experience in all of those different things and our operational excellence in managing those plants both safely and reliably is also best in class. Our core competencies and our competitive advantages speak directly to what strengths you have to have in order to manage effectively both sides of that total value equation.