Redefining Power

I am honored to be here with all of you today. I want to recognize CECP for organizing this forum that brings companies to talk about our long term prospects. We need more of these forums. I also share many of the feelings expressed by CEOs in this forum—long-term sustainable value for our shareholders can only be achieved when we create value for all stakeholders: employees, customers, suppliers, and when we do it in a responsible way for our communities and our planet. 

The conversation today is actually very well-timed, as both our company and our industry are going through some profound changes. More than ever, we, consumers of electricity, will have an opportunity to decide what kind of electric future we want.

Today, I want talk about some of the trends affecting our industry, provide you a quick update on our transformation, our long-term strategy and finally give you our perspective on corporate citizenship. What I can say in short is that all of us at NRG are very excited about this future. We see a compelling opportunity to transform our business so it can thrive over the long run and importantly, an opportunity to redefine the electric power sector. 

A good place to start this conversation is by putting the power industry in context. I think we can all agree that electricity—or “power” as we call it inside the sector—is fundamental to running our modern economy. And its importance is only increasing. It is expected that by 2050, nearly 50% of all energy will come from electricity—this is up from about 20% today.

So, given this important role in our society, you may be asking, “What do they mean by redefining power?” Well, it is not that our electrons are better or faster than our competitors. When I say we are working to redefine power, I am talking about reimagining, reinventing and reshaping how electricity is being produced, delivered and experienced by individuals and businesses. It is about improving the way consumers engage with electricity in their everyday lives.

When we think about electricity, most people probably think about a commodity with little differentiation. That is not entirely unfair, given the power industry to date. And if we go back, say, 10 years ago—coffee was just coffee. TV was just TV. And taxis were a way to get from point A to point B. We took what was offered to us. But what happens when someone asks if there is a better option? A more convenient option? A more individualized option? One that creates more value? Well, through the forces of competition and innovation, we end up with companies like Starbucks, Netflix and Uber who completely changed the way we engage with these previously undifferentiated products. These transformations are all around us and the power sector should be no exception. 

I want to challenge everyone to take a moment and think: what would you ask for, if you had as many choices for electric power? Would you request 100% renewable energy? 100% reliable energy? Free power at night or on weekends? Perhaps earning airline miles every time you pay your bill? How about donating to a charity? Or changing your consumption depending on prices? 

At NRG, we are obsessed with asking questions like these, and we are committed to finding good answers. We want to bring the same level of customization, control and value that other consumer goods have to electricity—this product that enables so much in our lives.

NRG began as a power generation company; a spinoff that was the result of electric deregulation in the ‘90s. We were a lot smaller then, really just a regional generation company. Over time, we transformed the company from a small generator to an integrated energy company with national presence, both in generation and retail. This change was the first shift in value since deregulation. For many years, commodity prices were high and this benefited our generation business. But the shale gas revolution resulted in a collapse of natural gas prices, and this led us to diversify into retail and eventually into renewables as generation margins shrunk. This was an important and critical test of our ability to adapt, and the company we are today is a testament to that ability to assess market trends, embrace change and reposition successfully.

We are one of the largest competitive power companies in the U.S. I want to underscore the word competitive. For those of you who do not follow our industry closely, only about half of the generating capacity in the country is competitive; the rest is regulated, meaning it is served by a monopoly or utility.

We have a generation business that owns and operates enough generation capacity to power nearly 17 million homes, mostly in Texas and the Northeast. And we have the largest competitive retailer, supplying power to over 3 million homes and businesses. 

While I am proud of how the company has grown, our greatest differentiator is not just the scale of our platform, but how we approach the integration of generation and retail—which goes beyond just owning both. What makes us unique is the common platform that holds these two businesses together; the way we are able to share knowledge, costs and opportunities. Owning two complementary pieces of the same value chain is beneficial and we fully harness the power, no pun intended, of having retail and generation under one roof. For example, we can leverage and share commercial and market expertise, or procure and design effective solutions for commercial customers. We run these businesses with a common objective: to provide more value to our customers. 

Before I talk more about our strategy, I think it’s important to understand the key trends affecting our industry.

Although there are many influencers in our sector like policy or market design, I see three mega trends that are most relevant to our business. I am sure many of you can relate to them in your respective sectors, but I want to focus specifically on how they are manifesting themselves in the power industry.  

1. First is the decarbonization of our economy;
   
2. second is the digitization of just about everything; and
3. third is the era of customization.

Let’s start with the need to decarbonize our industry and the economy. This is a major trend, or better said, it is an imperative that is driving significant change in our sector. Renewable energy, both wind and solar, is the most visible technology helping us to decarbonize. These resources, once very expensive, have become one of the cheapest forms of generating electricity. And what I can tell you is that they will only get cheaper and we are only going to have more of them. And right behind them, we have batteries.

Another one, perhaps not as readily apparent as renewables, is the impact of shale-gas, which has provided us with an abundant, low-cost and domestic fuel. I believe this is one of the largest disrupters in our economy and has completely changed the game in power generation, challenging the profitability of coal and nuclear plants. As a result of these innovations, the carbon intensity of the power sector has decreased by 30% over the past 15 years. This is a good start, but there is a lot more to do. We cannot take our foot off the pedal when it comes to addressing climate change.  

Digitization is revolutionizing our sector—from connected and smart devices to big data. The internet of things is enabling the internet of electricity.

So, what does it mean when data can flow along with electrons? It means the electric grid will change from a highly centralized analog system, where power is generated in a small number of places and flows in one direction, to a decentralized, highly digital and multidirectional grid, where power can be generated in large power plants as well as on roofs or in parking lots. Imagine a day when trucks and buses are all electrified and become large sources of both power demand and supply. This is a radically new paradigm for grid management.

Digitization is also enabling real-time control of devices and making demand much smarter. We call this demand response. In essence, it allows consumers to reduce demand during peak conditions like extreme hot or cold weather, which are usually associated with high power prices, saving them money. In some cases, both large and small consumers can get paid for this service. This is the premise of the ‘smart grid,’ enabling anything from more customized rate plans to the ability to curtail large amounts of demand very quickly.

Last, we have the trend that is giving more power to the consumer. Consumers today expect a range of choice and the ability to have a personalized experience with nearly everything they consume. We get our coffee just the way we like it. And we buy anything from anywhere—with one click! We’re now used to getting services delivered the way we want them, where we want them and from whom we want them. In the power industry, this level of customization is only starting to emerge.

For example, many commercial and industrial customers want to source their power from renewable energy without compromising reliability or affordability. But to be candid, our sector doesn’t make it all that easy. Currently, companies have to sign 20-year Power Purchase Agreements that essentially force them to become industry participants, when all they want to be is electricity consumers and focus on running their businesses.

At home, consumers are also discovering new ways to interact with power. Technologies like smart thermostats, appliances and even electric vehicles are giving individuals more choices and control than ever before—all at the touch of a smart phone, or the sound of our voice.

All of these trends led us to re-think our purpose and value proposition as a company. I’ve been in the energy industry for most of my professional career, and with NRG close to 15 years. I can tell you that we are embarking on a new era in the power industry. The disruptive trends I just mentioned are causing a fundamental value shift in our industry. We are transitioning from the old model—where value creation was primarily in power generation—to a new system where value creation is in retail.

We have been transforming our business with a new sense of purpose: to provide better and more valuable energy solutions for our customers. This is guiding everything we do, from the make-up of our generation portfolio, to how we are organized and work internally. We are focused on becoming the energy partner of choice for homes and businesses, and on creating energy solutions that meet the needs of the 21st century power consumer. 

Importantly, this move takes us away from the feast or famine of a generation-centric business to a more predictable and attractive customer-centric business. It also reinforces our commitment to a better and more sustainable energy future—one that will be driven more by customers and less by utilities and generators.

This is exactly how we are working to redefine the power sector and transform our company.  

These types of transformations do not happen overnight. So I want to take just a minute to talk about the steps we have taken to date to fully achieve this vision and purpose.

First, we had to stabilize the business. As we grew, we ventured too far from our core. This created complexity and burdened our cost structure; we lacked a clear line of sight to value. So in this first phase, we refocused on stabilizing our business; reducing complexity by selling underperforming businesses; streamlining costs; and strengthening our balance sheet.

Next, we had to right-size our business. We looked at our core competencies and the most compelling trends in our industry, and put together a plan to accelerate our transformation. We are currently executing on this three-year plan and are on track with all of our targets.

That brings me to where we are today. Having taken all of these important steps to shore up our financial health and to focus our efforts on our core competencies, we are now in a position to move full steam ahead into our next phase.  

Achieving our future state depends on the successful execution of four key elements:

1. Growing our portfolio of retail brands;
2. refocusing our generation business to be more purposeful;
3. delivering predictable earnings and strong free cash flow; and
4. maintaining discipline on our capital allocation.

All of these goals will be underpinned by strong governance and a comprehensive sustainability framework, which I see not as individual pillars, but as the foundational bedrock for our strategy—something that neither we at NRG, nor anyone else, can succeed without. But I’ll come back to that.

First in our strategic transformation is the continued development of our retail brands. As I highlighted at the beginning of the presentation, we are currently the largest competitive retail company in the country. We have a multi-brand, multi-channel strategy with premium brands like NRG and Reliant, and more niche brands like Green Mountain Energy that cater to “green” customers.

We also have a comprehensive suite of solutions for commercial and industrial customers around the country. I am proud of our retail business today, and so going forward, our transformation focuses on doing what we do now—only better.

In our residential segment, we are investing in our information platform, customer experience, product offerings and sales channels—all now more digital—as a way to better serve our customers. For example, we are expanding our product offerings to include natural gas and backup power; we are using AI to improve customer service; and earlier this year, we announced the acquisition of a new sales channel.  

In our business segment, we are leveraging our market expertise and going beyond a basic commodity offering. More and more, we are providing services like demand response, renewables, and reliability, which are particularly important in a digital economy where our customers cannot afford to lose power—period. And all of these services are monitored and optimized centrally by our 24/7 commercial desk.

Second is to repurpose our generation portfolio to better serve our retail businesses. We have made significant progress in rebalancing our generation fleet in terms of scale, fuel type and location. Going forward, our fleet needs to be more flexible to match peaks in customer demand, and we need to own the right assets in the right locations—that means close to where demand is coming from. There is also the opportunity to be creative in how to serve our load. Maybe it means owning power plants, but maybe it means renting or buying power from plants owned by someone else. Our commercial knowledge of power markets will allow us to meet our customers’ energy needs in many different ways.     

The focus on retail and the rebalancing of our generation portfolio is also increasing the predictability of our earnings and our free cash flow conversion, creating a more compelling investment proposition.

Today, more than 60% of our earnings come from retail, which has more stable margins, and our EBITDA to cash flow conversion has increased from almost 30% to 70%. This is unmatched in the capital-intensive power sector. We run the business for cash, and over the next five years, we will generate excess cash equal to nearly 75% of our market capitalization today. This will provide us tremendous financial flexibility to achieve our long-term objectives.

To guide our capital allocation, we have established a disciplined philosophy with a set of clear and transparent principles that we have communicated to our investors.

To ensure we succeed at achieving our vision and creating long-term value for our shareholders and other key stakeholders, we need to have strong governance to guide and oversee our actions. Our Board is highly engaged and aligned with our strategic initiatives. As part of our transformation, the Board’s composition was reduced from 13 to 12 members, and we added two new independent directors with relevant consumer experience to help guide our new corporate vision. Today, our directors represent a diverse mix of skills, experiences and viewpoints.

With so many ambitious targets, I think it is important to highlight that nearly 80% of executive management compensation is tied to long-term performance. I’m not sure if it is common for a CEO to proactively bring up executive compensation, but I do it because I believe transparency creates trust and invites honest dialogue. I also think it’s important to show that we are not just talking about creating long-term value. Most of my executive team’s compensation—as well as my own—is actually tied to our ability to do just that. As we all know, incentives drive behavior, and this is true at all levels of the organization.

Sustainability at NRG is more than just environmental responsibility, although that’s certainly part of it, but it’s a comprehensive framework that is embedded in our vision and mission. It is integrated in our culture, in our values and actively supported by our management team and our Board. In short, it’s part of our DNA. 

Our sustainability framework outlines clear goals and priorities across five key areas and is guided by three core principles: accountability, transparency and community involvement.

It’s not enough to have good intentions; we need actionable goals that are measurable and meaningful. Let me walk you through a few of them as examples. 

Safety, our number one priority, is measured and reported each quarter. Over the past few years, we have met our goal of achieving top decile safety performance, something we are very proud of. But as you know, even one injury is too many, so we continue to strive every day for an injury-free workplace.  

We were the first in our sector to set science-based targets to reduce our greenhouse gas emissions: 50% by 2030, and 90% by 2050. We are already 70% of the way to our 2030 goal and expect to reach our full target much earlier than planned.

We are also committed to helping our customers avoid emissions with a target of 120 million tons of CO2 by 2020. To put that in perspective, that is as much as the country of Ireland emits in a year. And the good news is that we’re already more than halfway to meeting this goal.

Goals are important, but we also need to communicate with our critical stakeholders along the way. Our investors probably already know we were the first in our sector to report against the SASB standard, starting with our 2016 report. We have been including climate disclosures in our 10-K since 2010. And we committed to the principles of the TCFD last year. Our annual sustainability report is comprehensive and covers our progress and commitments across the whole enterprise. And our sustainability team and our investor relations team work hand-in-hand to ensure we are relaying the most critical and valuable pieces of information to those who need it.

Beyond our commitments to the investment community, we are also driven to improve the communities of our customers and colleagues. This expands from the large cities where we serve residential and commercial customers, to the smaller communities that are home to our power plants. 

Just over a year ago, we experienced first-hand the devastation from Hurricane Harvey, and again last week with Hurricane Florence. Extreme weather is on the rise all over the world, but Harvey hit especially close to home. We have significant operations in the greater Houston area, including thousands of employees and many more customers. Our philanthropic arm, positiveNRG, has always had a strong focus on disaster relief, and the way our team responded during Harvey was outstanding. It inspired us to think more comprehensively about the ways NRG can help. We launched a program that triple-matched employee donations for disaster relief and offered additional opportunities for NRG employees to volunteer. But we also used our core expertise as a company to build resilience in these communities and help them be better prepared for the unforeseen.

I certainly recognize that I just shared a lot of information about the evolution of the industry and NRG. I hope you can see why I feel so strongly that the future of the power sector is bright. It is a future where customers have more choice and more control than ever before. It is a future where electricity is cleaner and is powering a much larger part of the U.S. economy. It is a future we will look back at and wonder, “How did we manage without the personal power options available to us today?” 

I am excited about the way NRG will help deliver this energy future. I am confident we are taking the right steps today to be successful down the road and build lasting shareholder value in the process.

Thomas Edison put it succinctly when he urged, “There's a way to do it better—find it.” Well, we at NRG are out there working every day to find it—and to make it a reality. The strength and resilience of the American economy—your organizations and businesses—depend on a power sector that can evolve and adapt along with them. This is the purpose that drives me and all my colleagues at NRG. More than ever, the power to redefine the electric sector is going to be in the hands of us—consumers. We look forward to help you achieve it.