NRG Energy Inc
NYSE:NRG
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NRG Energy Inc
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Good day, ladies and gentlemen. Thank you for your patience. You’ve joined the NRG Energy, Inc. Second Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference may be recorded.
I would now like to turn the call over to your host, Head of Investor Relations, Kevin Cole. You may begin.
Thank you, Lateef. Good morning, and welcome to NRG Energy’s second quarter 2019 earnings call. This morning’s call is scheduled for 45 minutes in length and is being broadcast live over the phone and via webcast, which can be located in the Investors section of our website at www.nrg.com under Presentations & Webcasts.
Please note that today’s discussion may contain forward-looking statements, which are based on 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 now with that, I’ll now turn the call over to Mauricio Gutierrez, NRG’s President and CEO.
Thank you, Kevin. Good morning, everyone, and thank you for your interest in NRG. I am joined this morning by Kirk Andrews, our Chief Financial Officer. Also on the call and available for questions we have Elizabeth Killinger, Head of our Retail Mass Business; and Chris Moser, Head of Operations.
Over the past 3.5 years we have made significant progress in transforming our company from a traditional IPP to an integrated power company focused on our customers. We monetized our excess generation and rebalanced our portfolio. We streamlined our operations. We slashed our debt. We achieved our targeted credit metrics. We are perfecting our business to make it more stable. And through all of these efforts, we created tremendous financial flexibility.
As you can see, we have come a long way and I am very pleased with our progress and excited about the opportunities that lie ahead. However, the recent stock price performance does not reflect our confidence in the resiliency of our integrated model to deliver predictable and robust results. Our confidence in the business remains absolutely unchanged. We will continue to demonstrate the value of our business year-after-year.
So with that on Slide 3, we have outlined the key messages for today's presentation. First, our business delivered another quarter of stable results demonstrating the value of our integrated platform during a period of volatile prices. And today, we are reaffirming our full year financial guidance. Second, we continue to perfect our integrated platform with the acquisition of Stream Energy and the execution of approximately 1.3 gigawatts of solar PPA generator. And third, we're making good progress on our capital allocation plan.
During the quarter, we fully completed our debt reduction program and we have finally achieved our targeted investment grade credit metrics. In addition, we are announcing an incremental $250 million share repurchase program, which brings our total 2019 share repurchases to $1.5 billion.
Moving to the financial and operational results for the second quarter on Slide 4, we achieved top decile safety performance and delivered $469 million of adjusted EBITDA. The second quarter results were driven primarily by higher wholesale power prices, offset by higher retail supply costs and mild weather, demonstrating the complementary nature of our Generation and Retail businesses.
On the right hand side of the slide, similar to last quarter, we have provided our EBITDA on a same-store basis adjusted for asset sales and the consolidations. As you can see, for the first half of the year, our business delivered $801 million or 7% higher than last year. Now beyond these financials, we made significant [Technical Difficulty] further perfecting the stability and predictability of our platform. We launched our previously announced capital-light strategy signing approximately 1.3 gigawatts of solar PPA generator at an average length of 10 years, which complements our Generation portfolio, allows us to better serve our customers and further balances our integrated platform.
In addition, we closed on the acquisition of Stream Energy. This acquisition increases our national multi-brand retail leadership position and adds more than 600,000 Residential Customer Equivalents or RCEs with a run rate EBITDA of $65 million. We also achieved our investment grade credit metrics by reducing our total debt by $600 million and executed on a number of transactions in the debt markets at very attractive levels. This completes our balance sheet strengthening program and Kirk will provide additional details in his section.
Also during the quarter, we completed the latest $1 billion share repurchase program, bringing our total year-to-date to $1.25 billion. In addition, we are announcing an incremental $250 million share repurchase program to be completed by year end. We will address our plans for the remaining $259 million of 2019 excess cash, as we usually do, on the third quarter earnings call. However, we’re reserving up to a $124 million of this capital for the Petra Nova project.
Let me give you some context. Back in 2014, when we closed the financing for this project, NRG and our 50-50 partner JX Nippon provided a financial guarantee to Petra Nova’s lenders. These guarantees were to remain in place to support a one-time debt service ratio test which proscribe a prepayment of principal in the event the ratio fell below the threshold.
We have been in active negotiation with the project lenders and we now expect to fund the prepayment in the third quarter. Although, the final prepayment amount has not yet been determined, our obligation is limited to the guarantee amount. Once the debt prepayment is made, the guarantee will terminate and the remaining debt will become non-recourse to NRG.
So now moving on to our summer update on Slide 5, I wanted to provide you a brief update on the position of our integrated model, even though we are only in the middle of the summer. As you can see on the left hand side, second quarter weather was milder than normal particularly in June which impacted both prices and loads. Our portfolio so far is performing well.
Starting with Retail, as expected load. We’re also providing energy conversation alerts and demand management programs which help consumers manage load during peak hours. The milder weather during the second quarter has resulted in lower volumes. Unlike any other consumer business, if we sell less of our product, it will impact our results.
For Generation, we are maintaining excess length to help ensure against unplanned outages and load spikes. We expanded our pre-summer maintenance program to ensure our units can withstand increased run times. And we returned to service our Gregory plant, a 385 megawatt combined cycle plant which provides additional reliability to our platform and to the ERCOT system ahead of this tight summer.
Given [how rich] is our portfolio, we expect to have limited exposure to price or volumetric risk. I know we’re only halfway through the summer, and as we’re seeing this week, ERCOT is in the middle of a high-load high volatility period, with the rest of August still ahead of us. We remain focused across the organization on ensuring reliable operations and a successful summer.
Now turning to Slide 6, I want to provide you an update on the ERCOT market. The supply demand balance remained tightened than it has never been, given strong load growth, previous asset retirements and lack of newbuilds. In May ERCOT released their semiannual Capacity Demand and Research report or CDR, which outlines the expected supply demand balance in the system and is shown in the upper left side of this slide.
As you can see, future reserve margins are dependent on newbuilds, particularly wind and solar. While the CDR report is helpful in understanding what is planned or possible, it has historically been a poor indicator of what actually gets build in the current year. In fact, we have seen less than 50% of renewal project included in the CDR reports completed.
And a closer look at the report reveal that 1.7 gigawatts are included from three natural gas plants that have already been delayed by an average of five years with no signs of moving forward. The report also does not yet include nearly 1.4 gigawatts of thermal generation that has already announced plans to retire. Together, these accounts put 4% of the reserve margin. Keep in mind that a little more than half of the 7 gigawatts of solar included in the report have posted financial security for interconnection.
In the table on the lower left hand side, we tried to adjust for some of these factors and estimate what is the amount of megawatts required from solar to maintain a reserve margin of 10% to 12%. As you can see in the table we estimate over 17 gigawatts of new renewables are necessary to achieve those reserve margins in the next three years. We see this as a challenging given our recent experience signing solar PPAs and the backward dated forward power prices. Let me be clear, the ERCOT needs a tremendous amount of investment to just simply maintain the low reserve margin it currently has.
Now from a platforms perspective, we’re looking to facilitate solar newbuilds to improve grid reliability and rebalance our portfolio by entering into medium term PPAs. This PPAs help enable the developers to obtain cost-effective financing and tax equity to economically develop the project. And for us, they complement our generation profile, lower our cost structure and allows us to better serve our customers.
From a market perspective, we expect ERCOT to remain tight and volatile for the foreseeable future, even in the face of a large renewable build-up. This price environment should prove difficult for pure retailers or generators that will be exposed to swings in the market. Our integrated platform is well positioned to thrive during this volatile and emerging renewable newbuild cycle. And you can expect us to deliver strong and predictable results.
I want to give one last comment regarding our markets. As you all know FERC issued an order earlier this month directing PJM to delay the August capacity auction. While we’re hopeful a final order will be issued by the end of the year, the timeline FERC action remains uncertain.
We continue to view a strong MOPR at the simplest and most cost effective way to reduce the harmful impact of subsidies on the capacity market.
And as I mentioned at the beginning of the call, we have come a long way in achieving our goals.
Slide 7 summarizes how we have transformed our business. We have significantly rebalanced our portfolio and streamlined our operations. Today, we have two complementary encounter cyclical businesses that provides a stable and predictable earnings under various market conditions.
We are focused on perfecting our business and making it even more stable with the generation fleet that supports our retail operations. The more balanced we are, the less exposure we have to the market and the more synergies we can achieve between the two businesses by crossing more Generation with Retail.
We are no longer your traditional IPP exposed to the feast and famine of power cycles. By having deliberately changed the risk profile of our business, we have also realigned our balance sheet and achieved investment grade credit metrics.
Now, our focus will turn into achieving investment grade rating. We recognize that this business model is relatively new but we’re working hard to demonstrate the stability of our platform.
Finally, we have created tremendous financial flexibility of our business with our actions. Now, with our deleveraging program behind us, we will focus our excess cash in 2020 and beyond on perfecting our model and returning capital to our shareholders.
With that, I will turn it over to Kirk for the financial review.
Thank you, Mauricio. Turning to financial summary on Slide 9 for the second quarter NRG delivered $469 million in adjusted EBITDA and $230 million in consolidated free cash flow before growth. This brings total adjusted EBITDA for the first half of the year to $801 million. As we did last quarter we provided a walk from our first half 2018 results to 2019 to provide some additional details behind the year-over-year drivers for our results.
Starting with our first half 2018 results we again eliminate the impact of asset sales, retirements and deconsolidations from our prior year’s results. Deducting the $103 million impact of these items from 2018 results provides a baseline for comparison to our reported results for the first half of this year. Year-to-date our results are positively impacted by incremental savings and margin enhancements from the transformation plan which positively impact results by $66 million versus the prior year.
Next, year-to-date Retail results are $123 million lower primarily due to higher costs which impacted gross margins with the remaining variance coming from XOOM Energy which closed June 1st of last year and weather as 2018 saw a positive benefit while the milder weather through June negatively impacted our 2019 Retail results, leading to a $35 million year-over-year impact.
Year-to date Generation results were $108 million higher as more robust wholesale prices drove higher gross margins, offsetting the opposite impact of supply costs out of Retail, further validating the effectiveness of the integrated model.
Behind the higher wholesale -- beyond the higher wholesale price impact rather, higher emissions credit sales in 2018 were offset by the benefit of the Midwest Generation asbestos settlement in 2019. While we increased major maintenance expenditures in 2019 to ensure our Texas fleet, including the Gregory plant, was fully prepared for reliable operations ahead of the valuable summer months.
With our strong outlook for the summer together with our significant hedge position for the balance of the year, we are reaffirming our 2019 guidance ranges of $1.85 billion to $2.05 billion in EBITDA and $1.25 billion to $1.45 billion of free cash flow. While we're maintaining our ranges for the subcomponents of our businesses as well, given year-to-date results and our outlook for the remainder of the year, Retail results are more likely to trend below the midpoint while Generation is trending above its midpoint.
As in years past, we expect the bulk of our EBITDA to come in the third quarter, which consistent with past performance is expected to represent more than 40% of our annual results. We will update and narrow our guidance ranges on third quarter earnings call.
During the second quarter we deployed over $1 billion in excess capital continuing to return capital to shareholders as well as achieving our balance sheet targets. Specifically, we completed the remaining $500 million of our share repurchase program announced on our fourth quarter earnings call, bringing year-to-date share repurchases to $1.25 billion, reducing share count by over 10% or 32 million shares at an average price of $38.80.
And as Mauricio mentioned earlier, we are announcing an additional $250 million share repurchase program, which brings total 2019 capital allocated to share repurchases to $1.5 billion. This past quarter we also successfully executed a number of transactions in the debt markets through which we completed $600 million in debt reduction in order to achieve our target investment grade metrics, extended our nearest maturities and significantly reduced our interest costs.
Part of our refinancing included repaying our secured term loan in its entirety using both the $600 million in cash with the balance funded with the new secured notes. These new secured notes contain fall-away covenants which automatically release the collateral, making the notes unsecured upon NRG receiving investment grade ratings from two ratings agencies. This covenant feature allows us a clear path to ensure the profile of our balance sheet aligns with that of investment grade without the need for additional refinancings in order to do so. Our refinancing and debt reduction activities this past quarter in total will also result in over $25 million in annual interest savings.
And turning to Slide 10 for an update on capital allocation. With our refinancing activities during the second quarter, we have completed the allocation of 2019 capital toward improving our balance sheet, enabling the achievement of our targeted investment grade metrics and further improving our overall maturity profile. Our new $250 million share repurchase program announced today brings total capital allocated to return of shareholder capital to over $1.5 billion in 2019 or more than 50% of 2019’s excess capital returned to shareholders.
On August 1st we close the Stream Energy retail transaction which including transaction costs and working capital adjustments totaled $325 million. With the closing Stream and our new $250 million share repurchase program, based on the midpoint of our reaffirmed guidance, we expect approximately $250 million in 2019 capital remained to be allocated as we generate the remainder of our free cash flow over the balance of the year.
As Mauricio mentioned earlier, during the third quarter, we now expect to finalize the contractually required one-time leverage test for our Petra Nova project which provides a formula for press-forward payment in the event the debt service ratio falls below defined minimum threshold. Having successfully extended the deadline for this one-time test originally scheduled for 2018, as the operator of the oilfield had taken steps to improve production, our expectation was the extended timeline would allow time for the ratio to exceed the threshold and avoid a delay in repayment.
As the year progressed, despite the production improvement initiatives, oilfield production continued to lag expectations. And based on our latest discussions with the lenders and the updated reserve forecast they provide, we are now unable to further extend the deadline to allow more time for improvement and expect that this test will result in NRG being required to fund our 50% share of the required prepayment in the third quarter.
Although the exact prepayment amount is not yet finalized, NRG’s obligation could be up to $124 million or 50% of the project’s debt. As a result, up to $124 million of our remaining excess capital is now reserved to fund this obligation during the third quarter. Following prepayment of the Petra Nova debt which is not consolidated on NRG’s balance sheet, the guarantee supporting contingent prepayment obligation has been eliminated and any remaining debt is non-recourse to NRG.
Finally, turning to Slide 11, with our targeted deleveraging now complete, NRG’s total debt is now under $6 billion or approximately $5.4 billion net of our -- of only our target $500 million minimum cash balance. That of course assumes that all capital is fully allocated.
Based on the midpoint of our 2019, EBITDA guidance displaces us at the midpoint of our targeted investment grade credit metric range or 2.625 times net debt-to-EBITDA. Including our full year’s run rate EBITDA contribution from the Stream Energy acquisition, this ratio reaches the lower ratio of our investment grade metric range or approximately 2.5 times, placing us in even stronger balance sheet position as we move into 2020.
And I’ll turn it back to you Mauricio.
Thank you, Kirk. Turning to Slide 13, I want to provide you a few closing thoughts. During the quarter we made significant progress on our priorities of perfecting our platform, maintaining a sector appropriate capital structure and disciplined capital allocation.
Today, I'm pleased with the conclusion of our nearly four year chapter of strengthening our balance sheet. I want to thank Kirk and the entire team for their relentless discipline in getting us to a best-in-industry investment grade balance sheet.
The financial flexibility that we enjoy today enabled us to further perfect our platform for the recent acquisition of Stream Energy, pursue our capital-light PPA strategy, and take advantage of the current [dislocated] stock price through incremental share repurchases. NRG is clearly stronger than it has ever been. We now have the stability and financial flexibility to thrive and take advantage of opportunities through all market cycles.
So with that, I want to thank you for your time and interest in NRG. Lateef, we're now ready to open the line for questions.
[Operator instructions]. Our first question comes from the line of Julien Dumoulin-Smith of Bank of America. Your line is now open.
I wanted to first ask you about the solar PPA announcements. That’s certainly very interesting strategic decision here. How are you thinking about scaling these commitments over time, both with respect to PPAs rather than necessarily owning assets outright? And then secondly, probably relatively more critically, how do you think about this shifting your perspectives on further build out of solar in Texas? Certainly we hear a variety of different viewpoints out there. You are not necessarily using your balance sheet obviously, but you are seeing other developers pivot. How do you think about that and the state of the portfolio you have?
Yes. Well, first of all, I am very pleased with the execution of this capital-light strategy. Kudos to the origination team. As we’ve disclosed today, we closed on 1.3 gigawatts. That’s a good progress. But what I can tell you is that we continue to be in the market executing on additional volumes. Our goal is to complement the existing Generation portfolio that we have to better match our Retail load. So when you think about how much more you need to think about the Retail load as the guideline on how much we're going to complement more our Generation portfolio either through solar PPAs or other efficient ways of acquiring I guess length or Generation.
Now we respect to the solar, the second question that you had around the solar view, what we wanted to do is to illustrate, if we were to maintain a 10% to12% reserve margin which we think is the minimal to have reliable operations over the long-term, we wanted to put it in the context of how much solar you will need. And as you can see, it’s a pretty significant number over 17 gigawatts, including solar and wind. I can't tell you whether it’s going to be one or the other or if the pricing in those will change that will make thermal generation or conventional generation being built. What I can tell you is that ERCOT needs a lot of generation. It needs a lot of investment. And even the number that we’re providing you are only sufficient to maintain a -- the current load reserve margin that we have. I think that’s the main point that we were making. Obviously the implication of that is we expect the ERCOT market to continue to be robust over the foreseeable future, but more importantly to be pretty volatile. And we know that our business does well when we have both lot of volatility and perhaps less of other robustness because we have really reduced our exposure to market by balancing our Generation and Retail businesses.
And then if could just follow up here real quickly. Strategically, we've seen some comments from your peers of late about their views about the depressed market environment and valuations. Anything comparable that you would offer at this point, I mean just with respect to your differing business models and take private scenarios et cetera. Just any commentary there?
Well, that’s a lot of questions in one question Julien so let me see if I can just touch that. The integrated model or our view on how we are positioning our company given the market trends that we’re all serving today, and I'm glad you’re asking that because I do believe that we actually have a very unique and differentiated platform. As I mentioned to you our goal is to better balance our generation in our retail businesses. I mean these are two complementary and counter-cyclical business. So to the extent that we match them better they may become even more complementary on a relative basis.
Now when I say better balance, it also brings other benefits. We can actually increase the matching internally between our Generation and Retail which maximizes the synergies that we have talked about now for 10 years, collateral synergies friction cost synergies. To the extent that we better match those two, we reduced our exposure to the market. I mean we will continue to interact with the market but we don’t necessarily have to if it’s perfectly matched, which makes our platform a lot more stable which is one of the goals that we’re trying to achieve with this new integrated platform, stable and predictable earnings.
If you look at the better balance, we have, as I said, more complementary and it’s important on a relative basis. So if you think about where we were let’s say five years ago when our Generation business was outsized from our Retail business, we actually got excess generation and that excess generation was exposed to wholesale power prices. Now we have reduced that significantly. I'm not saying that’s good or bad, all I'm saying is that that’s not the model that we’re pursuing. We’re pursuing a model that is a lot more balanced than it has ever been.
Now from a dynamics standpoint, when you have a more integrated portfolio like we do in a rising commodity price environment, obviously our Generation margins will increase and our Retail margins will slightly decrease. And when the commodity prices are declining, the opposite happens. Our Generation margins decreased and our Retail margins increase. What I can tell you is that we actually have a lot more degrees of freedom in terms of how much of the wholesale price increases or decreases we can actually pass to our customers.
We know having been in the business now for over 10 years with empirical data that consumers, that the wholesale price is only one factor that consumers take into consideration but it is not the only factor. If that was the case, we would not have seen the growth that we have experienced in any of the premium brands that right now exists in the market. So I mean I hope that, that at least provides you a -- I guess perhaps a slightly different perspective on how I think about how we’re repositioning the company going forward.
Thank you. Our next question comes from Greg Gordon of Evercore ISI. Your line is now open.
A couple of blocking and tackling questions first. When I look at slide -- in the back of the slide deck, Slide 33, your guidance for cash flow from operations and free cash flow before growth is unchanged and it has $95 million working capital assumption for the year. But in the quarter, there was a fairly large working -- collateral postings on Slide 35, it says 246. So is that basically expected to reverse out over the year, can you give us some -- and full year guidance is still okay?
Greg, it’s Kirk. That’s correct. I mean typically speaking we're in the sort of middle of our collateral or liquidity intensive period. There is always the cases we come through the summer and enter into the fall that’s when we tend to get that collateral back from those postings or hedgings that are more acute in summer and obviously moving, so the power price effect that. So short answer is yes. And the only other change to it that in know of because obviously we adjusted the interest payments a little down to reflect partially -- or impact some of the refinancing we did and we have a slight uptick in not really working capital but changes in other assets and liabilities over the course of the year, some of that has to do with the asbestos settlement. So that’s the other reason for a little bit of the changes between the lines EBITDA and adjusted cash from operations. But obviously we don’t expect that to have an impact on the bottom-line on free cash flow before growth and we do expect the collateral to return and we're in line with our year’s expectations on cash flow.
And Mauricio when I look at Slide 15 and the realized cost savings, margin, working capital improvements et cetera on the slow card, you didn’t have anything in the script with regard to your feelings on being able to hit those targets but should we assume that to be full on track to hit those targets in ‘19 and ‘20?
Yes, absolutely, I -- we have something on the priorities but I’m very comfortable hitting our cost savings targets by the end of the year, margins enhancement this year and next year. So everything is on track.
And then when we talk about these -- the potential for up to a $124 million turnover reserve guarantee. It's obviously - it’s in the 10-K, it's been in the 10-K but probably still surprises some people. What is going to -- you said that there is a proscribed calculation, is it certainty that you will have to post for $124 million or there is sort of sliding scale of potential payments you have to make inside of range so to speak? And then is it should be our expectation that whatever the remaining cap is net of that obligation that you will allocate on a Q3 call?
It’s Kirk. I think as Mauricio said we will update our plans for our excess capital for you on the third quarter to answer your questions. Yes, as to the 124 million that is the maximum amount that is not necessarily the expectation, it is dependent on the finalization of that calculation but as I indicated once that calculation is made and that payment amount is set which we do expect to happen in the third quarter, the obligation falls away. The one time test is a one-time guarantee and any remaining that is not recourse to NRG. So in short what I would say is we expect to make a payment, which I’d tell you exactly what that payment is except to say it is absolutely limited to the amount of our guarantee which is that $124 million.
My last question Mauricio sort of a different question along lines of the solar contracts that you’ve entered into the -- fundamentally as you think about managing the business you talk about really what you’re trying to do is manage the spread between your cost of goods sold which is your fleet in your contracts and your revenue line which now has sort of fundamentally matched Retail. Are these -- is this sort of strategy fundamentally reducing your run rate costs of goods sold in the marketplace? And is it one of the reasons why amongst other things you’re confident that your EBITDA and free cash flow profile is sustainable over time? Can you talk about what that does in terms of offsetting people’s concerns that perhaps over time Retail margins might -- if retail revenues come down, if your cost of goods sold stays static and therefore margins would come under pressure. I think what you’re telling us is that you can manage the numerator and the denominator for the time and that’s why you’re confident that you’ve actually perfected the model?
Yes I mean that’s exactly the goal of the strategy. I mean when we look at our total Generation portfolio our goal is to reduce as you said the cost of goods sold which now becomes our cost of Generation. And I will tell you that we have executed some of these PPAs at very attractive levels compared particularly to the market. I mean we are in the process right now of executing in the market and depending on the location because all of these PPAs are spread out depending on where we have the load. So they have very different pricing. Also the tenure is different. I mean on average it’s ten years but some of them are a little longer than that, some of them are little shorter than that. And the impact of these PPAs will come in full earnings some time in 2021. I can’t give you any more details in terms of where we have entered into these PPAs because obviously we’re still in the market. But what I can tell you just from a order of magnitude, so far we have reduced our -- basically our cost of goods sold which translates into EBITDA, let’s say about 2% of our EBITDA. So I mean that at least gives you some order of magnitude in terms of what to expect. And as you said as we lower our cost of production we have a lot more degrees of freedom in terms of the way we maintain the savings that we have or the cost comparisons that we have that we pass it to our customers to gain market share.
But then I mean it creates a lot more optionality for us. And just keep in mind that this notion that if wholesale prices will decrease they will decrease our margins, it assumes that we basically will do nothing. We’ll do nothing to change the cost structure and the repositioning of our company. And I have to remind everybody that starting in 2020 we have basically full financial flexibility. We don’t have to wait, one or two or three years.
Starting in -- even this year we have financial flexibility but it will -- so if you think about our stable platform this year we produced between $1.3 billion, $1.4 billion, by the time 2021 we are all seen. I mean we're going to have over $2.5 billion that we can deploy to continue perfecting our platform. So I think it's important to put it in context the position that we have put ourselves in place. We are done with our deleveraging and our strengthening of our balance sheet program. And now we have this full financial flexibility to allocate into perfecting our model and returning capital to shareholders which I think is incredibly important as a stable cash flow business that we have.
Our next question comes from the line of Angie Storozynski of Macquarie. Your line is open.
So I have only one question. So given what you’ve just said right that you have plenty of levers to react to lower power prices, can you tell us if you can largely or fully mitigate the backwardation and the impact of the backwardation in forward power curves on your EBITDA or free cash flow i.e. there isn't -- basic initiative of your earnings is not similar to the one that we see currently in ERCOT power curves?
Yes, Angie what I can tell you unequivocally is that we have created a platform that is sustainable and predictable. What mean sustainable and predictable is, year-in, year-out we're going to produce the excess cash that we produce today. Now we're going to have this incredible financial flexibility that we have afforded ourselves to have to increment that all. So the value proposition that we have today is to have a stable cash flow business that grows at a 2% to 4% a year with an investment grade balance sheet and significant excess cash to grow the business in an accretive way and to return capital -- meaningful capital to shareholders. We think that combination of those three things will eventually change and we raise the valuation of stock which if I’m not mistaken right now is somewhere in the mid-teens to high-teens free cash flow yield. We don’t believe that business that I describe to you today should be there. And if it gets re-rated closer to where we think should be, then our stock price will be much, much higher than it is today. Obviously, we also appreciate that this is the first year that we are showing the benefits of this platform. 2018 was a good test, we had a very volatile summer. 2019 is very important because it continues to demonstrate that our platform performs and there are a lot of different pricing scenarios. So now it is up to all that, if this continues to happen and we’ve taken care of our balance sheet and we can demonstrate that to our shareholders and to rating agencies then we're on the path to re-rate the stock.
And just one last question. I was definitely the one surprised by the Petra Nova mention. Is there any other legacy business that might have any types of cash flow implications like I don’t know, even call it something else to whether there is type of guarantee?
It’s Kirk, no, the two remains are legacies. In addition Agua Caliente that we have obviously minority stake with remainder being owned by clearly formerly yield and the balance with Midwest Generation. That debt is non-recourse top NRG so there are no financial guarantees. This Petra Nova leverage test is a product that’s unique if go through Petra Nova.
Thank you. Our next question comes from the line of Shahriar Pourreza of Guggenheim Partners. Your question please.
First just on the IG status. Can you maybe just elaborate a bit further on how the conversations are going with the agencies? And obviously outside of presenting very healthy metrics today, can you just get the agencies to look after philosophical issues about having an IG related IPP, are you still trying to gain confidence on the retail business and as you’re thinking about timing or we think in the back half of 2020?
Shahriar, I’d answer the last part of your question, I think that’s probably the realistic case. Back half of 2020 is probably the early timeline in fact of when we would expect that movement to make. Obviously on an unsecured basis we’re two notches away from the minimum threshold of the investment grade that being triple B minus, that’s not say that’s our aspiration that’s sort of the inflection point between sub-investment grade and investment grade. But I think on that timeline is probably reasonable. Certainly between now and then we need to see at least one notch uptick could be at least then one notch away. And I think in much the same way is that although we’re more frustrated with the reaction in stock pricing, we’ve obviously got to demonstrate that to our equity investors. The mandate still holds on the other side of the equation with the rating agencies. I think delivering the numbers that we’ve now reaffirmed for this year which confirms that notwithstanding the sell off that probably represents some of the prices that happens our ability to do so, we are able to do so. So delivering on that this year continuing to execute.
And the background as I’ve mentioned you this before we’ve been very pleased with the level of dialogue with rating agencies. I think they’ve dug in to understand to their credit Retail business in particular a lot more. So I think the progression of the dialogue and their perspectives on Retail and understanding how we operate the model and how Retail truly operates in tandem with Generation has been constructive and productive.
And it’s up to us to continue to execute which we have confidence to do so. But it will take probably that amount of time in order to get those two notches behind us on our way to the base.
And then just lastly on this token dividend, you guys still keep it. At what point do you make a decision to either grow it or remove it completely?
Yes, well, when you think about capital allocation because I mean that’s really -- I think your question Shahriar how we think about capital allocation going forward and what I will tell you is that we have no changes neither on our philosophy on the principal that we have provided to all of you. I think the only thing that has changed is the fact that we have completed one of our priorities which is achieve an investment grade balance sheet. That’s basically not out of the way. What that means is that we have all the excess cash that we will generate it will be to perfect our model or return capital to shareholders. Like I said Shahriar, I do believe that a business that is stable and growing a lot of excess cash needs to provide -- needs to return a meaningful part of that to the shareholders. Today that’s one of the most efficient ways to do is through share buybacks. I think we speak 250 million incremental share buyback that we announced today, to take advantage of what I believe is an undervaluation of our stock without any changes to the fundamental drivers -- value drivers of our business. Now as we go into 2020, obviously, we're going to evaluate all the other different options, I don’t know what the market is going to -- where it’s going to be at the end of the year, I’m going to evaluate all that. What I will tell you is that our goal is to re-rate the stock to its fundamental value and we're going to evaluate all options that we have available to us to ensure that we do that.
And just Mauricio one last on capital allocation. I just want to confirm because obviously certain retailers have hit the block right now that your -- from a capital allocation standpoint you are sort of out of the market and you're not looking at further inorganic retail acquisitions?
That we are out of the market?
Right, so are you looking at additional retail acquisitions similar to Stream or you’re sort of out of the market?
I mean I don’t comment on M&A either specific processes or anything. What I will tell you is that, when I think about inorganic growth I will always adhere to the capital allocation principle that we have outlined for all of you. We have to meet the threshold -- the financial threshold that we have and they have to be a better investment than investing in our own stock. I have said before that while we have rebalanced our portfolio pretty good the past couple of years, we can still perfect that platform. In Texas our Retail is a little bit bigger than our Generation and in the East our Generation than bigger than our Retail.
So we're executing on our capital-light strategy in Texas to rebalance our portfolio. We acquired Stream to rebalance our Retail and we're going to continue to look at all the opportunities. I mean that is the -- I guess the benefit that we have afforded ourselves with the financial flexibility that we have today. We can be opportunistic about when to do it. But obviously where the stock price is today, the bar is a little bit higher than it was not too long ago when our stock price was started to reflect the fundamental value of our business.
Thank you. Our final question comes from the line of Praful Mehta of Citigroup. Your question please.
Thanks again for all the color on the business model, it was very helpful. I guess just following up a little bit on that. Slide 20, you have the wholesale gross margins which clearly have come down a little bit from Q1 given the drop in the power prices. But I’m assuming as you talked about in your business model points that some of this drop in the wholesale gross margin will be made up for on the Retail side in 2020. Is that a fair way to think about how we should look at Slide 20 today?
Yes I think the way you need to think about ERCOT is an integrated model. So while we only give you one side of leg, the Generation, we haven’t provided you the Retail sensitivity to it. And to be candid, I mean that’s being up -- is on -- is up to us to improve our disclosures.
What I think about our business? I don’t think about it as two completely separate businesses, one Generation, one Retail. Our disclosures have been really good on Generation. I think where we need to do our better job is to enhance our disclosures to capture the integration of our business because when I think about how do we manage our business, I think about it as an integrated business where the gross margin, the combined gross margin is what matters. I care less about where it comes from, whether it’s Generation or Retail, I care about delivering the total gross margin year-in and year-out.
I mean various other puts and takes. I mean in the Northeast you have capacity a little bit lower and -- but that’s being offset by margin enhancement and then we have the impact of Stream. I mean my point here is, you cannot look at our business just on a static basis, with the amount of the financial flexibility we have to improve it. It’s like saying that we’re not going to do anything but we have all this excess cash available to deploy in the most meaningful way that creates value for our shareholders.
So yes, I'm very comfortable with our platform in 2020 and beyond. And as I said our goal is to provide stable earnings, stable excess cash with a modest growth. That’s our goal.
Yes, now that additional disclosure on the Retail side would be super helpful to kind of complement the points you made on the business model. I guess moving on to the PPA side for solar, I guess it’s a little different from your perspective because you obviously have the option to sign more solar PPAs at pretty low prices which is helpful for your Retail. But then you’re bringing in a lot more Generation at pretty low pricing but you’re kind of drawing more solar into the market. How do you balance that, does it a benefit from your perspective as you said to have volatility so just bringing in a lot of solar generation by offering them PPAs may not be the right solution from a holistic business perspective?
Well, I -- you may say it may not be, I think it is. And the reason why is -- we have a very valuable franchise in ERCOT. And we want to make sure that the competitive market continues to work and work well in the state. We need so much capacity to even maintain this current reserve margin. It really doesn’t matter if we bring 10 or 15 gigawatts of renewables. You’re going to continue to have tight reserve margins, which is not going to affect the scarcity conditions in the system. I mean all this is not going to be affected if you basically keep your reserve margin at 8%, 9%. That other is administratively set. So I actually think that if the competitive market works well, it’s going to provide a right price signal and the cheapest technology is the one that is going to get built, the cheapest technology to meet the needs of the system. And if that happens whether it’s solar wind or conventional with high ramping capacity, we think that that’s going to require some time. And that’s why I say for the foreseeable future ERCOT, I expect really tight conditions with strong prices and tremendous amount of volatility, Chris, is there anything that you want to add?
No, I was just going to point out that we’ve seen ORDC has really been doing its job since the commission tweaked it earlier this year, it’s been a noticeable difference in pricing, whether it was like a $4.50 adder for this mild July that we had which compares to like a $5 adder, last year when July was smoking hot. Over the last couple of days where we’ve seen $100 to $200 tagged on in these hot days of August, ORDC just like Mauricio said, just doesn't need costly marginal cost units -- unit to impact, it’s administratively set. And to the extent that you could build almost 20 gigs of renewables and that you need to do that just to stay flat in terms of reserve margin, yes, I’m not too worried about it. And don’t forget that there is another quarter turn of ORDC coming next March too, so I think we should be okay for a while.
All great points. And then just finally clearly you guys are executing on the business model and the market I agree needs time to understand and fully see the execution off the business model. But if at some point you don't see the stock price perform and you're hearing and you're still having the same conversation, is there a point when you look at go private as a transaction that’s possible or is that something that's not on the table at this point?
I am sorry, the going private?
The market doesn’t.
I mean right now our focus is on executing that strategy that we have. As I already mentioned to you Praful I mean we believe that this is a very compelling value proposition. I also recognize that this is a new business model for the competitive power sector. I rather no longer refer us as IPP but as an IPC we're truly now an integrated power company. And so to the extent that we continue to demonstrate the viability and the stability of this platform, not just to our shareholders but also to rating agencies. I think that there is an opportunity to re-rate the stock. But obviously if that doesn’t happen, once we feel that we kind of exhausted all our efforts to demonstrate the stability of our business, then we will explore all options to maximize the value of our shareholders. So I mean that’s something we just have to do. But I don’t think that time yet, I mean we only have provided -- we’ve proven this technology for two years, 2018 very successfully, 2019 we're on track to deliver very successfully. So recognizing that I think we need to give ourselves some time and we need to give our shareholders and the rating agencies some time to digest this strategic shift. And when we feel that we have given enough time and the market is not responding which I’m still hopeful that it will and I’m convinced that it will because we have a very strong value proposition, then we will evaluate something else. But right now all our focus, a 100% our focus is on executing this strategy.
Thank you. At this time, I’d like to turn the call back over to the CEO of NRG Energy, Inc. Mauricio Gutierrez for any closing remarks. Sir?
Thank you. Well it was as always good to give you an update. Thank you for the questions and for your interest in NRG and look forward to talking to you in the near future. Thanks.
Thank you, sir. Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.