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NRG Reports Retail Customer Growth

Will Be On The "Look Out" To Acquire Retail Customers As A Result of Texas Summer Conditions

Says Retail Records Fifth Consecutive Year Of Earnings Growth

NRG Announces Additional $1 Billion Share Repurchase Authorization

Announces Up To $600 Million Reserved To Achieve Investment Grade Metrics

February 28, 2019

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Copyright 2010-19
Reporting by Paul Ring •

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In reporting earnings today, NRG reported that its recurring Retail mass market customer count was 3.3 million as of year-end, versus 3.167 million as of Q3 2018, and 2.9 million a year ago

NRG Retail delivered volumes for 2018 were 67.0 TWh (45.8 TWh mass, 21.2 TWh C&I), versus 62.8 TWh a year ago

In discussing the upcoming Texas summer, NRG said that it has, "prepared Retail for varying price conditions," through actions including customer outreach and assistance with high bills and expanded demand response programs

Given expected summer conditions in Texas, NRG said that it is, "positioned to acquire customers at-value."

During an earnings call, Mauricio Gutierrez said that NRG would be on the "look out" to acquire retail customers due to expected tight summer conditions in ERCOT

Asked about retail M&A, Gutierrez further said that the company would be "very disciplined", and, in reviewing transactions, would have a "realistic" view of earnings potential for any acquired retail business

Gutierrez highlighted retail as an area for capital allocation, both organic and via M&A, especially as the company further tries to match generation to retail load in markets where it is long in generation

Gutierrez also said the company is targeting 2-4% annual retail growth organically

For NRG's Retail segment, fourth quarter 2018 Adjusted EBITDA was $197 million, $13 million lower than the fourth quarter 2017 ($210 million), driven by higher margin enhancement costs, higher bad debt and higher supply costs, offset by higher gross margins from our margin enhancement initiatives, growth related to M&A activity, and cost savings.

For Q4 2018, the Retail segment reported operating revenues of $1.6 billion and Economic Gross Margin of $430 million

For Q4 2018, the Retail segment reported Income From Continuing Operations of $331 million, reflecting mark to market gains on economic hedges, versus $497 million a year ago

For NRG's Retail segment, full year 2018 Adjusted EBITDA was $952 million, $127 million higher than 2017 ($825 million), driven by margin enhancement and cost reduction initiatives, increased usage and growth related to M&A activity, and higher gross margins from increased demand response MWs sold, partially offset by higher supply costs and higher operating expenses related to margin enhancements.

NRG said that the $952 million in Retail Adjusted EBITDA represents the 5th year in a row of earnings growth

NRG reported that Q4 2018 YTD Net Capital Expenditures for "growth" in the Retail segment were $71 million. This is separate from $208 million in Q4 2018 YTD Net Capital Expenditures for the Xoom acquisition and integration

NRG's Board of Directors has authorized an additional $1 billion share repurchase program to be executed in 2019. In total, since March 2018, NRG has repurchased $1.5 billion of shares for an average price of $36.24/share

NRG said that it is revising its balance sheet target ratios in order to further strengthen its balance sheet. Although the company is not targeting a specific credit rating improvement at this time, the company will seek to maintain the following credit metrics, consistent with investment grade ratings:

• Net Debt/EBITDA: 2.5x - 2.75x

• Adjusted Cash from Operations / Net Debt: 27.5% - 32.5%

• Interest Coverage: 5.5x - 6.5x

"In order to achieve the revised balance sheet targets, the Company is reserving up to $600 million in 2019 capital which may be allocated toward additional debt reduction," NRG said

NRG said that it realized $532 million of its 2018 cost savings target and $32 million in margin enhancement, as part of its previously reported Transformation Plan. Recapping previously reported asset sales, NRG noted that on February 4, 2019, the company completed the sale of its South Central Portfolio to Cleco, for approximately $1.0 billion, and on February 27, 2019, completed the sale of Carlsbad to Global Infrastructure Partners III (GIP) for $387 million. NRG's total asset sale proceeds to date are approximately $3.0 billion

On November 1, 2018, NRG, which indirectly owns a 35% interest in Agua Caliente, a 290 MW utility-scale solar project, offered to Clearway Energy, Inc. (formerly known as NRG Yield, Inc.) its ownership interest in Agua Caliente Borrower 1, LLC, for approximately $120 million. The offer expired on January 31, 2019, with no action taken by Clearway Energy, Inc., as previously reported. As a result, the right of first offer agreement with Clearway Energy, Inc. has expired and NRG's interest in Agua Caliente is no longer subject to a right of first offer thereunder.

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