NRG - NYSE

Good day and thank you for standing by. Welcome to the NRG Energy Inc.'s First Quarter 2025 Business Update and Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today’s conference is being recorded. I would now like to hand the conference over to Kevin Cole, Head of Treasury and Investor Relations to read the Safe Harbor and introduce the call. You may begin.

Thank you. Good morning, and welcome to NRG Energy's first quarter and business update call. This morning's call is being broadcast live over the phone and via webcast. Today’s webcast, presentations and press release can be located in the investor section of our website www.nrg.com under Presentation and Webcast. Please note that today's discussion may contain forward-looking statements, which are based upon assumptions that we believe to be reasonable as of this date. Actual results may differ materially. We urge everyone to review the Safe Harbor in today's presentation, as well as the risk factors in our SEC filings. We undertake no obligation to update these statements as a result of future events, except as required by law. In addition, we will refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to today's presentation and earnings release. And now with that, I'll now turn the call over to Larry Coben, NRG's Chair, President and CEO.

Thank you, Kevin. Good morning everyone and thank you for your interest in NRG. I'm joined today by Bruce Chung, our Chief Financial Officer. Other members of the management team are also on the line and available for questions. This morning marks a defining step for NRG. Alongside our outstanding first quarter results, we are announcing the acquisition of a portfolio of assets from LS Power comprised of 13 gigawatts of natural gas generation and a 6 gigawatt commercial and industrial Virtual Power Plant platform located across the Northeast and Texas. This acquisition expands our generation base, improves our ability to serve customers, positions us naturally long versus our retail load in all core markets, and increases our asymmetric exposure to demand growth across U.S. Power markets. Let's turn to Slide 4 for the key takeaways of today's call. We delivered the strongest first quarter adjusted EBITDA in company history, surpassing last year's record by 30%. We are reaffirming our 2025 financial guidance ranges. Second, the acquisition of the LS Power Portfolio reshapes our competitive position. It improves how we serve customers by doubling our own generation and materially strengthening our virtual power plant operations. This significantly expands our earnings potential and positions us to capture meaningful upside as power markets tighten. Third, we are raising our five year adjusted EPS compound annual growth rate to 14%, a 40% increase to the base plan we presented in February, reflecting the combined contributions of today's acquisition and the Rockland Portfolio addition. This outlook maintains a flat view of power and capacity prices and does not include potential upsides such as rising prices, data centers and other large load contracts or success in our full TEF pipeline. Finally, we remain disciplined in capital allocation. We are maintaining a strong balance sheet, returning substantial capital to shareholders, investing in growth and positioning the business for sustained long-term value creation. Turning to slide 5 with the quarterly results and key highlights, Adjusted EPS for the first quarter was $2.68, an 84% increase compared to the first quarter of last year. This improvement was driven by strong asset performance, expanded consumer margins, favorable weather and natural gas optimization in the Northeast. We are reaffirming our 2025 financial guidance reflecting strong year-to-date performance and the expected contribution from the Rockland acquisition. First quarter results were exceptional and we are already tracking at the upper end of our full year guidance ranges. This reflects disciplined execution on margins, supply optimization and strong operating performance across every aspect of our business. We delivered top decile safety performance and outstanding fleet reliability. Our third Texas Energy Fund Project Greens Bayou was selected for due diligence review in March, bringing all three of our brownfield projects into that program totaling 1.5 gigawatts of capacity. Separately, we secured an additional 1.2 gigawatts of GE Vernova turbine reservations, a direct result of accelerating customer conversations and rising demand signals. We now hold a total of 2.4 gigawatt of total slot reservations for projects that are expected to begin operations in 2029 and 2030. These slot reservations demonstrate confidence in our commercial discussions and ensure we can act quickly where long-term premium power purchase agreements support new development. Finally, we completed $445 million in share repurchases through April, leaving $855 million remaining to be completed through the end of 2025. With that, let's turn to the details of the acquisition starting on slide 7, we are acquiring 13 gigawatts of natural gas capacity and a 6 gigawatt C&I virtual power plant platform from LS Power for an enterprise value of approximately $12 billion. This is a highly strategic acquisition that strengthens our position as one of the nation's leading competitive power generators. We're acquiring these assets at a significant discount to new build cost, at an attractive valuation and at the strategically opportune time to be adding high quality, difficult to replicate resources into our portfolio as the sector enters into a period of sustained demand growth. We would also note that LS Power will receive a meaningful portion of the transaction consideration in NRG shares. LS Power will receive approximately $2.8 billion of equity as consideration and own approximately 11% of NRG at closing. This is LS Power's largest single equity investment in firm history, which I think speaks for itself in terms of their confidence in our company's future. We welcome them as a future large shareholder in our company. The acquisition is built on four key pillars. First, it more than doubles the size of our generation fleet, creating a pro forma portfolio of 25 gigawatts of owned capacity. Second, it enhances and magnifies our opportunity to create value in the emerging power market super cycle by expanding our scale in key competitive regions to strengthening our large load strategy and increasing our asymmetric upside opportunities. Third, it improves our credit risk profile, supporting a long-term net debt to adjusted EBITDA target of less than three times and a balanced capital allocation plan including $1 billion in annual share repurchases through our deleveraging period. Fourth, it delivers immediate and substantial accretion while establishing an even stronger foundation for sustained long-term growth. Let me take you through each of these pillars in detail beginning on slide 8. This transaction transforms our portfolio. We are acquiring the largest privately held natural gas generation fleet and the leading C&I virtual power plant platform. In the East, we are adding approximately 11 gigawatts of natural gas fired capacity with 75% of that in PJM and the balance in NYISO, and NYISO-NE. These assets include some of the highest capacity factor combined cycle units and most efficient peakers in PJM. Several of the peakers also present opportunities for conversion and upgrades to combined cycle plans, improving long-term flexibility and value. In Texas, we are acquiring more than 2 gigawatts of capacity in the North

Thank you, Larry. Before turning to our exciting announcement today, I am going to provide a brief overview of our fantastic first quarter financial results. Turning to Slide 13, I am pleased to share that NRG delivered record first quarter financial results with $2.68 in adjusted earnings per share and over $1.1 billion in adjusted EBITDA. Adjusted net income was $531 million and free cash flow before growth was $293 million. Compared to the first quarter of last year, we achieved an impressive 84% increase in adjusted EPS and a 30% increase in adjusted EBITDA. Each of our segments executed exceptionally in the first quarter and produced strong financial results over the prior year. Our results were driven by a mix of expanded margins, favorable weather and excellent commercial optimization in our east, west and Texas segments, as well as continued customer growth and net service margin expansion in our smart home segments. First quarter 2025 free cash flow before growth exceeded the same period in 2024 by $333 million, largely driven by our strong EBITDA growth and the timing of certain working capital items. With the strong performance delivered in the first quarter, we are reaffirming our 2025 financial guidance across all metrics while also noting that we are trending at the upper end of our guidance range. I look forward to providing you updates on subsequent earnings calls. Turning to 2025 capital allocation there are minimal changes to our original capital allocation outlook compared to what I shared in our February call. We began 2025 with $525 million in unallocated excess cash from the prior year, largely driven by the Airtron divestiture that closed in the fourth quarter. When combined with the midpoint of our free cash flow before growth guidance that brought the starting 2025 capital allocation capital available for allocation to over $2.6 billion. Our plan to execute $1.3 billion in share repurchases remains unchanged. Through April 30th we executed $445 million in share repurchases. We generally manage our share repurchases through periodic 10b5-1 trading plans, which enables a more programmatic and regular approach to when we are buying in the market. We enter into these plans during open windows when we do not possess material non-public information. These plans will execute over several months or longer and are designed to allow for the continued execution of share repurchases if or when we come into possession of material non-public information during such period. Wrapping up the slide we are showing a slight change from the chart presented during our last earnings call to reflect financing fees related to our liability management program and incremental capital for our new build program, which includes amounts for turbine reservation slots through the GE Kiewit partnership we announced last quarter. Finally, we are showing 40 million of unallocated capital, which we will allocate over the course of the year. Moving to Slide 15 for a look at the key terms of the acquisition, we are announcing today. I echo Larry's excitement that NRG will be acquiring a transformative 13-gigawatt portfolio, adding diversity and scale to our generation strategy while also acquiring the premier C&I VPP platform in the U.S. This is a highly complementary and strategic acquisition and a very compelling transaction from a financial perspective. As you can see on the slide, Enterprise Value for the portfolio is $12 billion representing a very attractive multiple of 7.5 times 2026 EBITDA. The Enterprise Value includes $2.8 billion of stock consideration, which is based on 24.25 million shares that we will issue to LS Power multiplied by the 10-day trailing volume weighted average price as of last Friday. In addition to the stock consideration, the Enterprise Value includes $3.2 billion of existing debt at the acquired companies and $6.4 billion of cash consideration paid to LS Power, less approximately $400 million of the NPV of tax benefits generated directly as a result of the acquisition. The acquisition is highly accretive with 18% accretion to adjusted EPS in year one and adds $1.85 per share on a run rate basis on free cash level for growth per share the transaction is more than 20% accretive in year one and adds $3.25 per share on a run rate basis. As a result of the highly accretive nature of the acquisition, we are raising our long-term adjusted EPS and free cash flow per share growth rates to greater than 14% and that's before upside opportunities. The acquisition significantly enhances NRG's credit profile and helps support a long-term leverage target of less than three times net debt to EBITDA. We expect all three rating agencies to affirm our current credit ratings. From a capital allocation perspective, we remain committed to maintaining both a strong balance sheet and a robust return of capital program. As such, we expect to execute $1 billion in annual share repurchases while aggressively repaying $3.7 billion of debt over 24 months to 36 months post closing until we achieve our target credit metrics. Upon achieving our target credit metrics, we expect to return to our 80/20 capital allocation framework. Finally, we anticipate closing this transaction during the first quarter of 2026 after the receipt of various regulatory approvals. Turning to an overview of our acquisition-financing plan on slide 16, the acquisition will be funded through the issuance of NRG stock to LS Power, $6.4 billion of new secured and unsecured debt financings and the assumption of $3.2 billion of existing debt. The stock consideration represents 23% of the Total Enterprise value and reflects LS Power's strong conviction in NRG's post acquisition value. The funding plan for the new debt is designed to preserve credit quality and maintain our commitment to a strong balance sheet. We expect to be opportunistic in the market between now and the anticipated closing date to place permanent financing at compelling rates while also maximizing prepayment flexibility given our aggressive deleveraging plan post closing. Our investment grade senior secured rating will allow us to tap the very liquid and cost effective investment grade debt market which greatly enhances our ability to place permanent debt for the transaction. As always, the strength of our balance sheet remains a top priority. Consistent with the views of the rating agencies, we firmly believe this acquisition enhances our credit profile and mitigates key financial risks. We intend to reduce debt by $3.7 billion within 24 months to 36 months after closing to ensure we achieve our long-term target investment grade credit metrics. Based on our analysis, this is very achievable and does not rely on any significant power and capacity price increases, nor does the plan rely on achieving any cost or revenue synergies associated with the acquisition. Furthermore, we expect the transaction to provide at least $500 million of potential collateral efficiencies translating into tens of millions of dollars in carrying cost savings annually. We have not included any of this in our pro forma. The combination of the strong free cash flow generation of the combined businesses, our financing plan and its associated debt reduction creates tremendous flexibility to maintain a robust return of capital program post closing. As I said earlier, we intend to execute $1 billion of share repurchases annually through the deleveraging period while continuing to grow our common dividend per share 7 to 9%. On slide 17, we provide an overview of how the transaction impacts our long-term adjusted EPS growth trajectory. The transaction is immediately accretive by 18% in year one and will add $1.85 per share of incremental run rate earnings by 2029. Combined with the recent acquisition of the Rockland Texas portfolio, this acquisition will increase our long-term adjusted EPS growth rate from greater than 10% to greater than 14%. What is noteworthy is that 80% of our long-term growth will come from our previously announced organic growth plan and the accretive earnings from our acquisitions, with the remaining 20% attributed to our return of capital program. Recall that this mix was closer to 50:50 back in our third quarter earnings call, thereby demonstrating how this transaction significantly enhances the source of our long-term earnings growth and substantially reduces the impact that an increasing share price would have on our ability to achieve our adjusted EPS growth targets. For example, if today our stock price were to only partially close its valuation discount and reach $200 per share, our compound annual growth rate would be around 12%. Furthermore, this uplift in our growth rate only considers the accretion of the transaction itself based on flat power markets. Consistent with the 10% CAGR we unpacked in our third quarter 2024 earnings call, our raised adjusted EPS growth rate does not account for any potential upside related to increases in energy and capacity prices as well as any impacts from our data center and large load strategy. Moving on to pro forma capital allocation on Slide 18 as highlighted earlier, the portfolio we are acquiring will add $1 billion of annual free cash flow on a run rate basis. This results in $4 billion of incremental free cash flow before growth for the 2026-2029 period, which when added to our standalone capital available for allocation, results in $13.3 billion of excess cash. As discussed earlier, we will aggressively reduce debt by $3.7 billion over the next 24 to 36 months. Despite the incremental debt reduction, our return of capital program remains largely unchanged from what we discussed on our third quarter earnings call. The pro forma plan provides for $7.4 billion of return of capital comprised of $5.7 billion in share repurchases and $1.7 billion of common dividends. Forecasted expenditures for growth investments remains at $1.3 billion for the period. The free cash flow from the acquired portfolio will materially enhance NRG's capital return and growth investment flexibility following the deleveraging period in 2029 and beyond, putting NRG on solid footing for sustained earnings per share growth. Finally, we forecast $400 million of remaining CAFA, which we will allocate as appropriate in the given period. Turning to slide 19 for a brief overview on pro forma credit profile. The physical attributes of the acquired generation assets, additional earnings diversity from the portfolio and incremental scale to NRG's platform will translate into a more enhanced credit position for NRG as a whole. The aforementioned credit enhancing attributes of this acquisition support a long-term investment grade, target credit metric of less than 3 times net debt to EBITDA, up from our current target range of 2.5 times to 2.75 times. As you can see from the table, both our stand-alone and pro forma plans ensure that we achieve our targeted credit metrics. On a pro forma run rate basis, we will add $6.4 billion of incremental debt supported by the additional EBITDA from this acquisition and the Rockland portfolio acquisition. The $3.7 billion of incremental debt reduction in the pro forma column will be done through internally generated cash flows over a 24 months to 36 months period after closing. This debt reduction is an important component of our pro forma capital allocation plan and demonstrates our commitment to a strong balance sheet. We expect all three rating agencies to affirm our credit ratings, which was a critical component to our evaluation of this transaction. Our high BB unsecured and investment grade secured credit ratings have historically provided advantageous access and pricing in the debt markets. Our acquisition, financing and pro forma debt reduction plans were carefully crafted to ensure that we will maintain good access to those markets. NRG continues to produce impressive financial results and the highly complementary and accretive transaction we announced today further enhances our earnings profile while enabling NRG to maintain a strong balance sheet and continued significant return of capital. I look forward to updating you throughout the balance of the year. With that, I'll turn it back to you, Larry.

Thank you, Bruce. I think you can see our Bruce is not dancing in the dark. Beginning on slide 21, our long-term outlook. As we have outlined today, this acquisition supercharges our outlook to 14% compound annual growth in adjusted EPS and free cash flow before growth per share through 2029 while reducing our overall risk. These are very achievable targets built on a stronger platform, greater scale and a more flexible asset base. Our increased growth forecast reflects contributions from the acquisition portfolio and Rockland being added to our base plan that we rolled out last November. Again, it does not include upside from rising power prices, premium large load contracts or execution of our full TEF development pipeline. We have the scale, reach and balance sheet to lead through the most dynamic period this sector has ever seen. Today's announcement significantly strengthens our earnings power, improves our risk profile and expands our ability to return capital to shareholders. But more than that, it unlocks significantly more potential in a market entering a period of sustained structural growth. Before we open the line for questions, I want to recognize Rasesh Patel who is retiring this week. Rasesh played a central role in the successful integration of Vivint and in building the country's leading smart home and retail energy platform. His strategic clarity, steady hand and focus on execution have helped define the NRG we are building today. We will miss him for that and for his friendship. On behalf of all of us, thank you Rasesh. We wish you and your family the very best and we are proud to have you remain part of the NRG family as a customer and long-term shareholder. We expect to name Rasesh's successor by the end of the second quarter. Operator, we are ready for questions. Thank you.

Thank you. [Operator Instructions] Our first question comes from Julien Dumoulin-Smith with Jefferies. Your line is open.

Hey, team, good morning. Thank you guys so much for the time. Nicely done.

Thank you. Julien, good morning. How are you?

Hey, great, Larry. Thank you so much. Let's dig right in here. First off, in that EBITDA real quick, I just want to make sure I heard a couple things right. And if you can clarify. So you're assuming $50 and $47 for the PGM and ERCOT, respectively. I think that's below market forwards today. I just want to try to understand a little bit on that. And then separately in that EBITDA, what portion is CPower and how do you think about growth? There's as well as how do you think about the synergies? I think you are not including anything in that 1.6 number, but do you want to just break down that EBITDA and the acquisition a little bit and just think about the various meaningful levers, if you don't mind?

Sure. I can start and then go on. I think there's about four questions in there, Julien, but let me try to get to them all. We wanted to use the same pricing that we've been using when we rolled out our plan so that it would be simple for shareholders to compare them apples to apples, to really show the power of this acquisition. Obviously, if we raise the pricing to current market, all the numbers would be significantly higher but we choose not to do that to make the comparative life for everybody far, far simpler. Second question was CPower I think. We are really excited about what CPower represents. I think we've seen VPP be a very powerful tool for us already both on the C&I and beginning to roll it out now on the residential side. And I think stay tuned, we'll be rolling out some more thoughts on VPP as the year goes on. There was a third question, Julien. I'm sorry, I can't remember what it was.

Actually. What's the…

Yes, exactly. Synergies was the third one, Julien. We expect to find some synergies, but this is not a deal predicated on synergies in any way, shape or form. And if we we're assuming zero and still showing the power, anything else will be additional benefit to our stockholders.

Then separate more strategic one. How do you think about doing more? You've done a couple things here in quick succession here. And I mean that both in power, but also specifically retail. How do you think about this enabling you? Because this kind of flips the equation from earlier to do more retail, conceivably, whether that's organically build out more resale presence or inorganically. Any thoughts there?

You want more, Julien? It's Monday morning. Look, Julien, I think what it does is give us enormous amounts of optionality across all of our customer bases, be it in the home or in the C&I book. It enables us to customize longer-term solutions for people who want those who CPower markets. So I think it actually puts us in a position where we can grow across our spectrum of customers. Again, we didn't really assume that in this beyond the growth plan that we had rolled out a couple months back. But putting all that together, we're super confident about the opportunity set that this provides to us. I mean, I think it's exponentially higher. I mean, we have doubled the portfolio, but we've more than doubled the opportunity.

Yes, absolutely. And clarifying there, the amount of growth reflected in retail or CPower, what have you in your projected assumptions here. Can you break that down and clarify that within the organic piece of your longer-term target?

Yes. If you take zero and then multiply it by zero, that's the answer. It's zero.

Okay.

We have not put any.

Just needed to clarify.

We have not put any gross into that. Sorry, Julien, zero is the correct answer.

Great. Excellent. Thank you guys for that. I appreciate it. Nicely done again.

Thank you, Julien.

One moment for our next question. Our next question comes from Shahriar Pourreza with Guggenheim Partners. Your line is open.

Hey, guys. Good morning.

Morning, Shah. How are you?

Good. I don't think I'll ever question whether Bruce is working hard enough after today's announcement.

Yes, street sure. Damn straight. He's trying to get that bonus back. There he goes.

Larry, this deal seems like it's another huge vote of confidence, I guess for the industry in the eastern generation, I guess. What has changed? What was it that changed the company's views on your position in Eastern markets? Is it capacity, energy volatility, the price? Just trying to understand a little bit more on your views on Eastern markets, how that's evolved, especially on the heels of some of the PJM states floating opportunities for wires companies to own generation, which to me seems like a bit of a tail risk. Let's pass it to you. Yes.

Look, Shah. I think we've always, as we said, liked PJM market. We just weren't really in a position to be a strong generation player in it. The developments that are going on, be they for data centers, be they for beat large load, be they for tightening capacity markets, be they for the recent settlement on capacity, all give us a great deal of comfort on where this has to go. And Shah, we also, we run a lot of sensitivities. It won't surprise you. We don't need exorbitant capacity or energy prices for this to be an exceptionally, exceptionally accretive transaction. PJM is probably where we have the most asymmetric gearing to the upside and so that's why we like it. We don't see any way that market can't tighten, but even if it doesn't, this is an exceptionally accretive transaction.

Got it, Got it. And then are there any large, is there any large customer or colocation deal tied to these assets? Are there ones you're inheriting from LS or ones that you've been working on but just didn't previously have the Gen 4?

Nothing yet, sure. But we believe it will definitely enhance our large load and data center strategy, but nothing we're prepared to talk about at this time.

Okay, perfect. And then just lastly, I guess, how do you go about unlocking the $500 million in collateral efficiency? Does it require you to hit IG first? Any. Just rough guidance on how to at least think about potential synergies there. Thanks.

Yes, no Shah, it’s Bruce. I think that's really just a function of having generation now alongside a pretty significant C&I book and being able to sort of match that up appropriately. That's something that we're going to be able to do just by our own internal means.

Got it. Perfect. Big congrats, guys. Larry, everything. Bruce, I'm very proud of you this morning. Thanks guys.

Thank you, Shah. I feel like such a good son now.

Thanks.

Thanks.

One moment for our next question. Our next question comes from Steve Fleishman with Wolfe Research. Your line is open.

Yes. Hi there. Congrats. Congrats to Larry and team. So I guess my data center question was just asked Just a couple other details. The shares that you are issuing is there. That's just that fixed amount of shares. There's no like collars or anything else like that related to it.

Correct.

That is good. And then just. Could you just go through the path of deleveraging in terms of just like where are you after year one of closing and then how do you then get down to the three times?

Yes, I see. So like I said, we're going to be deleveraging through internally generated cash flow. Year one after close will probably be right around 3.5 times. And then we'll tick down steadily over the following two years until we get to three times.

Okay, so not that far off to three. Yep. Good. And then I guess you touched on it a little bit, but just on the data center strategy that you have been talking about. Well, I guess the two strategies you've been talking about previously. First the data centers, it sounds like you're hoping to lock Those up in Q2, the Menlo and the PowLan. And then also just the new build strategy. So even you are still bullish on pursuing continued new build generation even as we have seen prices go up and the like for the cost of new build?

We are. We think that, additionality is still going to be a big part of people's data center strategies going forward. And we now have the optionality to be able to do that. And we're continuing to all the things we said about, data centers in the last call. Let me just reaffirm and reiterate those. Our view on data centers hasn't changed. Obviously, we didn't spend much time on it in this presentation because there were some other things to talk about.

Understood. Great. Congrats again.

Thank you. Steve.

One moment for our next question. Our final question comes from David Arcaro with Morgan Stanley. Your line is open.

Oh, hey, thanks so much. Good morning.

Hi David, how are you?

Good, good. Congratulations. Hey, I was thinking, or I was wondering, at a, at a higher strategic level, how does your, how does the overall NRG portfolio look in your view right now? There have been, it seems like a bunch of transformations now over the last couple of years after this acquisition. Is this a good balance? Are there holes or opportunities versus what you think the overall kind of ideal NRG portfolio looks like?

Yes, look, I think we really like where we sit in portfolio both in terms of exposure to markets, large loads, data centers, then layering in on top of that the optionality we have with GE and Kiewit to provide additionality. We really like where we sit in every segment of the market, be it generation, be it large load, be it data center, be it retail. We are really quite pleased with the way this portfolio enables us to compete across the board in every competitive market we want to be in.

Okay, great, understood. And then I was wondering, is there, if you were to, are you able to give, if you were to mark to market just what the EBITDA and cash flow output would be on the current forward curves and maybe a bit of a follow on to that. But, a lot of the new assets are peakers and you've got a decent amount of exposure here to the PGM capacity auction. Wondering if you could talk about just how much exposure there is. What's the sensitivity to capacity prices here? And kind of, how do you, how do you look at the outlook for PGM capacity?

Look, I don't think the assumptions that we've utilized and that you can see in some of the appendices really are particularly aggressive or require high levels of capacity. Auction, you could run this across a series of sensitivities, David, and you are still going to get this incredible double-digit accretive outcomes that we're looking at here. So I think we'll end up providing some more color over time as to exactly how those sensitivities work but we're super confident that across a wide variety of potential outcomes in the market, this is an outstandingly good transaction. Bruce, do you want to add anything to that?

Yes David, in terms of your point about this portfolio having a good number of peakers. That's correct. But if you think about the gross margin associated with the portfolio, it's actually probably more 55% energy, 45% capacity, and that's in large part because of the CCGTs that are in the portfolio are very efficient and have very high runtime. So you can think about it that way.

Got it, got it. That's helpful. Thanks. And maybe just sneak in one more. Just thinking about the incremental free cash flow before growth, it seems like a good portion of the incremental free cash flow is going toward debt pay. But essentially as you get out after that 24 months to 36 months, that's going no further commitments at that point. At that point it’s incremental, kind of be used toward your overall capital allocation framework, the 80/20.

Yes, that's right. That's what we said. We said post the deleveraging period we would expect to go back to that 80/20 framework.

Excellent. Thanks so much. Appreciate it.

And pardon me, we did have someone else queue up for a question. So one moment for our next question. Our next question comes from Carly Davenport with Goldman Sachs. Your line is open.

Hey, good morning. Thanks so much for taking the questions. Maybe just one for me. Just on the standalone business, on the home VPP opportunity, can you just talk a little bit about how that's tracking post launch in terms of the uptake and how you feel about the ultimate margin opportunity there relative to what you've laid out on prior calls?

Carly, I'm going to let Rachish answer that because this is going to be the last question he gets to answer on a call. So thank you for asking.

On that note, Carly, I feel incredibly bullish about where we sit on the home BPP opportunity. If you recall the third quarter earnings call, we had stated that we expect to exit this year with about 20 megawatts of VPP capacity, growing to 300 by the end of 2027. We are right now expecting to exit this year with 150 megawatts of residential demand response capacity. So we're tracking really well. The reception from consumers has been outstanding because essentially, this is incremental value add to the customer. They are getting a smart thermostat, adorable camera, a free installation, all as a part of being an NRG customer. And in fact, we have been moderating our demand just so that we can hire enough installers in Texas to fulfill the customer demand. And then lastly, in terms of kind of the margin and earnings part of this, the thing that has really surprised us in a positive way is of the customers that have taken this value proposition from us, close to half were already upgraded to other recurring revenue services within the NRT family. And so this not only helps us moderate supply costs, gives us a differentiated and a stickier value proposal with the retail customer, but we're now getting incremental recurring revenue and margin for the customer. So all systems are a go. We launched the offering across the state and across all channels at the start of this month, and we are hiring as fast as we can to ensure that we can fulfill the demand. That's great. Appreciate that. And I'll leave it there. Thank you.

Thank you.

I'm not showing any further questions. I'd like to turn the call back over to Larry Coben.

Thank you all for your interest in NRG. I think you can hear the palpable excitement that we have in the room for this transaction and the opportunities that it provides us. We look forward to providing you more information in the days and quarters ahead. And really thank you all for being shareholders of NRG.