Good day, ladies and gentlemen, and thank you for your patience. You've joined the NRP Energy, Inc. 2nd 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. 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, Latif. Good morning,
and welcome to NRG Energy's Q2 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 and 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 statement. Actual results may differ materially. We use 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 the
Q3 and A's presentation.
To now pass, I'll 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'm joined this morning by Sir Sanders, 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 IT clearly to an integrated power company focused on our customers.
We modified our asset generation and rebalanced our portfolio. We streamlined our operations. We slashed our debt. We achieved our targeted credit metrics. We are protecting 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 crisis. And to date, we are reaffirming our full year financial guidance. 2nd, we continue to perfect our integrated platform with the acquisition of Stream Energy and the execution of approximately 1.3 gigawatts of solar PPA in assets. And third, we are making good progress on our capital allocation plan.
During the quarter, we fully completed our debt reduction program, and we have finally exceeded our targeted investment grade credit metrics. In addition, we are announcing an incremental $250,000,000 share repurchase program, which brings our total 2019 share repurchases to $1,500,000,000 Going to the financial and operational results for the Q2 on Slide 4. We achieved top decile safety performance and delivered $469,000,000 of adjusted EBITDA. The 2nd 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 deconsolidation.
As you can see, for the first half of the year, our business delivered $801,000,000 or 7% higher than last year. Now beyond these financials, we made significant improvements in further perfecting the stability and predictability of our platform. We launched our previously announced capitalized strategy, signing approximately 1.3 kilowatts of solar PPOs in Earth Hub 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 StreamManage. This acquisition increases our national multi brand retail business position and adds more than 600,000 residential customer equivalents, or RCVs, with a longer EBITDA of $65,000,000 We also achieved our investment grade credit metrics by reducing our total debt by $600,000,000 and executed on a number of transactions in the debt market at very attractive levels.
This completes our balance sheet strengthening program, and Kirk will provide additional details in his session. Also during the quarter, we completed the latest $1,000,000,000 share repurchase program, bringing our total year to date to $1,250,000,000 In addition, we are announcing an incremental $250,000,000 share repurchase program to be completed by year end. We will address our plans for the remaining $259,000,000 of 20.19 excess cash as we usually do on the Q3 earnings call. However, we're reserving up to $124,000,000 of this capital for the Pesa Nova project. To give you some context, back in 2014, when we closed the financing for this project, NRG and our fifty-fifty partner, various unicorns, provided a financial guarantee to Petronola's lenders.
These guarantees were to remain in place to support a onetime debt service ratio test, which prescribed a prepayment of principal in the event the ratio fell below the threshold. We have been in active negotiations with the project lenders, and we now expect to fund a prepayment in the Q3. Although the final prepayment amount has not yet been determined, our obligation is limited to the guarantee amount. Once a 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, 2nd quarter weather was milder than normal, particularly in June, which impacted both prices and lows. Our portfolio so far is performing well, starting with retail and suspected load. We're also providing energy conservation alerts and demand management programs, which help consumers manage load during peak hours. The milder weather during the Q2 has resulted in lower volumes.
And like any other consumer business, if we sell less of our products, it will impact our results. For Generation, we are maintaining excess land to help ensure against on plant outages and low spikes. We expanded our free summer maintenance program to ensure our units can withstand increased run times. And we will plan to service our Gregory plant, a 385 megawatt combined cycle plant, which provides additional reliability to our platform and through the ERCOT system ahead of this tight summer. Given how we set our portfolio, we expect to have limited exposure to price or volume metric 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 low, 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. Want to provide you an update on the year on market.
The supplydemand balance remains the tightest that it has ever been given strong loan growth, previous asset retirements and lack of new bills. In May, Perko believes their semiannual capacity demand and reserve report, or CVR, which outlines the expected supplydemand balance in the system and is shown in the upper left side of the slide. As you can see, future reserve margins are dependent on newbuilds, particularly wind and solar. While the CVR report is helpful in understanding what is planned or possible, it has historically been a poor indicator of what actually gets built in the prompt year. In fact, we have seen less than 50% of renewable projects included in the CBR reports completed.
In our closer look at the report, we feel that 1.7 gigawatts are included from 3 natural gas plants that have already been delayed by an average of 5 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 class 2 refineries. Together, this accounts for 4% of the reserve margin. Keep in mind that a little more than half of the 7 gigawatts of solar included in the report has posted financial security for interconnection. In the table on the lower left hand side, we try 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 we can see in the table, we estimate over 17 gigawatts of new renewables are necessary to achieve those reserve margins in the next 3 years. We see this as a challenging given our recent experience fighting solar PPAs and the backward data forward power prices. Let me be clear. The earth of margin means a tremendous amount of investment to just simply maintain the low reserve margin it currently has. Now from our platform perspective, we're looking to facilitate solar new builds to improve rig reliability and rebalance our portfolio by entering into medium term PPAs.
These PPAs help enable the developers to obtain cost effective financing and tax equity to economically develop the projects. 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 ERCO to remain tight and volatile for the foreseeable future, even in the face of a large renewable build out. This price environment is super 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 new build 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, 1st issued an order earlier this month directing to the end to delay the August capacity auction. While we're hopeful a final order will be issued by the end of the year, the time line for first action remains uncertain. We continue to view a strong motor as the simplest and most cost effective way to reduce the harmful impact of subsidies on the capacity market. As I mentioned at the beginning of the call, we have come a long way in achieving our goals.
Slide 7 summarizes how we can transform our business. We have significantly rebalanced our portfolio and streamlined our operations. Today, we have 2 complementary and countercyclical businesses that provide a stable and predictable earnings under various market conditions. We are focused on perfecting our business and making them even more stable with a generation fleet that supports our retail operation. 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 just traditionalized to be exposed to the fixed and timing of power cycles. 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 ratings. 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 for our business with our actions.
Now with our debt deleveraging program behind us, we will focus our excess cash in 2020 and beyond on protecting our model and returning capital to our shareholders. With that, I will turn it over to Kurt for the financial review. Thank you, Nikhil.
Turning to financial summary on Slide 9. For the Q2, NRG delivered $459,000,000 in adjusted EBITDA $230,000,000 in consolidated free cash flow before growth. This brings total adjusted EBITDA for the first half of the year to $801,000,000 As we did last quarter, we provided a walk from our first half twenty eighteen results to 2019 to provide some additional details behind the year over year drivers for our results. Starting with our first half twenty eighteen results, we began eliminating impact of asset sales, retirements and deconsolidations from our prior year's results. Deducting the $103,000,000 impact of these items from 2018 results provide 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 impacted results by $66,000,000 versus the prior year. Next, year to date retail results are $123,000,000 lower primarily due to higher costs which impacted gross margins with the remaining variance coming from Zoom Energy, which closed June 1st last year and weather as 2018 saw positive benefit, while the milder weather from June negatively impacted our 2019 retail results, leading to a $35,000,000 year over year impact. Year to date generation results were $108,000,000 higher as more robust wholesale prices drove higher gross margins offsetting the opposite impact of supply costs on 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 $1,850,000,000 to $2,050,000,000 in EBITDA and $1,250,000,000 to 1,450,000,000 of free cash flow. While we
are maintaining our ranges for the sub components 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 Q3, 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 the Q3 earnings call. During the Q2, we deployed over $1,000,000,000 in excess capital, continuing to return capital to shareholders as well as achieving our balance sheet targets. Specifically, we completed the remaining $500,000,000 of our share repurchase program announced on our Q4 earnings call, bringing year to
date share repurchases to $1,250,000,000
reducing share count by over 10% or 32,000,000 shares at an average price of $38.80 And as Mauricio mentioned earlier, we are announcing an additional $250,000,000 share repurchase program, which brings total 2019 capital allocated to share repurchases to 1,500,000,000 dollars This past quarter, we also successfully executed a number of transactions in the debt market through which we completed the $600,000,000 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 $600,000,000 in cash with the balance funded with the new secured notes. These new secured notes contain fallaway covenants, which automatically release the collateral, making the notes unsecured upon NRG receiving investment grade ratings from 2 rating 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 $25,000,000 in annual interest savings.
Turning to slide 10 for an update on capital allocation. With our refinancing activities during the Q2, 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 $250,000,000 share repurchase program announced today brings total capital allocated to return of shareholder capital to over $1,500,000,000 in 2019 or more than 50% of 20 19 excess capital returned to shareholders. On August 1, we closed the Stream Energy Retail transaction, which including transaction costs and working capital adjustments totaled 325,000,000 dollars With the closing of stream at our new $250,000,000 share repurchase program, at least from the midpoint of our reaffirmed guidance, we expect approximately $250,000,000 in 20 19 capital remaining 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 Q3, we now expect to finalize the contractually required one time leverage test for our Petro Nova project, which provides a formula for principal repayment in the event that debt service ratio falls below the defined minimum threshold.
Having successfully extended the deadline for this one time test originally scheduled for 2018, as the operator of the oilfield has 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 NRT being required to fund our 50% share of the required prepayment in the Q3. Although the exact prepayment amount is not yet finalized, NRG's obligation could be up to $124,000,000 or 50% of the project's debt. As a result, up to $124,000,000 of our remaining excess capital is now reserved to fund this obligation during the Q3.
Following the prepayment of the Petrognos debt, which is not consolidated on NRG's balance sheet, the guarantee supporting the contingent prepayment obligation is then eliminated and any remaining debt is non recourse to NRG. Finally, turning to slide 11. With our targeted deleveraging now complete, NRG total debt is now under $6,000,000,000 or approximately $5,400,000,000 net of our of only our target $500,000,000 minimum cash balance. That, of course, assumes that all capital is fully allocated. Based on the midpoint of our 2019 EBITDA guidance, this places us at the midpoint of our targeted investment grade credit metric range or 2.625 times net debt to EBITDA.
Including however a 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 an even stronger balance sheet position as we move into 2020. And I'll turn it back to you, Mauricio.
Thank you, sir. 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 am pleased with the conclusion of our nearly 4 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 The financial flexibility that we enjoy today enabled us to further perfect our platform through the recent acquisition of Syne Energy, pursue our capitalized BPA strategy and take advantage of the current dislocated spot price through incremental share repurchase. NIB 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 NRT. Latif, we're now ready to open the line for questions.
Yes, sir.
Our first question comes from the line
of Julien Dumoulin Smith of Bank of America. Your line is open.
Hey, good morning, Julien. Hey, good morning, Julien. Very pleasure. Wanted to first ask about the solar PPO announcement, certainly very interesting strategic decision here. How are you thinking about scaling these commitments over time, both in respect to PPOs rather than necessarily owning assets outright?
And then secondly, probably relatively more critically, how do you think about this shifting your perspective on further build out of solar in Texas? Certainly, we hear a variety of different viewpoints out there. You're 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 that you have? Yes.
Well, first of all, I'm very pleased with the execution of this capital light strategy. We could have to be the origination team. As we 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 volume. 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 guidelines 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 with respect to the solar, the second question that you had around the solar view, what we wanted to do was to illustrate, if we were to maintain a 10% to 12% reserve margin, which is we think is the minimum to have reliable operations over the long term, we wanted to put it in context of how much solar you will need. And as you can see, it's a pretty significant number, I mean, over 17 gigawatts, including solar and wind. I can't tell you whether it's going to be 1 or the other or if the pricing will change that will make thermal generation or conventional generation being built. What I can tell you is that Airbus needs a lot of generation.
It needs a lot of investment. And even the numbers that we're providing you are only sufficient to maintain the current low 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 aircraft 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 a 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.
Excellent. And then if I could just follow-up here real quick. Because strategically, we've seen some comments from the years of late about their views about the depressed market environment and valuations. Anything comparable that you would offer up at this point to move just with respect to the different business models and take private scenarios, etcetera? Just any commentary there.
Well, that's a lot of questions in one question, Bill. So let me see if I can get processed. Thank you, Andy. The integrated model or our view on how we are positioning our company given the market trends that we're observing 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 and our retail businesses. I mean, these are 2 complementary and countercyclical business. So to the extent that we match them better, they 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 2, we reduce our exposure to the market. I mean, we will continue to interact with the market, but we don't necessarily cancel 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, 5 years ago when our generation business was outside from our retail business, We actually had 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 dynamic 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 decrease 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 is seeking 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 for the detail. All that.
Thank you. Our next question comes from Greg Gordon of Evercore ISI. Your line is open. Thanks. A couple of blocking and tackling questions first.
When I look at slide in the back of the slide deck, slide 73, your guidance for cash flow from operations and free cash flow before growth is unchanged. You're going to have $95,000,000 working capital assumption for the year. But in the quarter, there was a fairly large working capital a collateral posting on Slide 35 because it's $246,000,000 So is that basically expected to reverse out over the year? Can you give us some and the full year guidance is still okay?
Yes. 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. And as always the case, as we come through the summer and enter into the fall, that's when we tend to get that collateral back from those postings or headwinds that are more skewed in summer.
And obviously, the
movements of the
power prices affect that. So short answer is, yes. And the only other changes that I'll note for you is obviously we adjusted the interest payments a little down to reflect the
partially the impact of some of
the refinancing we did. And we have a slight uptick in not really working capital, but just changes in other assets and liabilities over
the course of the year.
So it has to do with the asbestos settlement. So that's the other reason for a little bit of the changes between the lines of 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.
Thanks. Great. And Mauricio, when I look at Slide 15 and the realized cost savings, marketing, assets, working capital improvements, etcetera, on the scorecard, do you have anything in the script with regard to your feelings on being able to hit those targets? But should we assume that you're still on track to hit those targets in 'nineteen and 'twenty?
Yes, absolutely. I thought we had something on the priorities, but I'm very comfortable hitting our cost savings target by the end of the year, margin enhancement this year and this year. So everything is on track. Good. Great.
And then when
we talk about these the potential for the up to $124,000,000 that turnover reserve guarantee, it's obviously it's in the 10 ks, it's been in the 10 ks, but probably still surprise some people. What is going to you said that there's a prescribed calculation. Is it a fair is it a certainty that you'll have to post $124,000,000 or are there sort of a sliding scale of potential payments you have to make inside of Ring, so to speak. And then is it your expectation that whatever the remaining Capa is, net of that, the obligation that you'll allocate that on a Q3 call?
I mean, to end my question, this is Kurt. I think as Mauricio said, we will update our plans for our excess capital for you on 3rd quarter call to answer that question. Yes. As for the $124,000,000 that is the maximum amount. That is not necessarily the expectation.
It depends on the finalization of that calculation. But as I indicated, once that calculation is made and that prepayment amount is set, which we do expect to happen in the Q3, the obligation falls away. It is a one time test. It's a one time guarantee and any remaining debt is not a recourse to NRG. So in short, what I would
say is, we expect to make a payment. We've said exactly what that
payment is, except to say it is absolutely limited to the amount of our GNC, which is about $124,000,000
Okay. My last question, Mauricio, sort of a different question along the lines of the solar contracts that you've entered into. I mean 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 and your contracts and your revenue line, which now is sort of fundamentally max retail. Are these is this sort of strategy fundamentally reducing your run rate cost 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 decline might come if retail revenues come down, if your cost of goods sold would stay 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 through time and that's why you're confident that you've 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 target the load.
So they have very different pricing. Also, the tenure is different. I mean, on average, it's 10 years, but some of them are a little longer than that. Some of them are a little shorter than that. The impact of these PPOs will come in full earnest sometime in 2021.
I can't give you I cannot give you any more details in terms of where we have entered into this PPAs because, obviously, we're still in the market. But what I can tell you is just from an 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 and that at least gives you some order of magnitude in terms of what's expected. And as you said, as we lower our cost of production, we have a lot more degrees of freedom in terms of do we maintain the savings that we have or the cost competitive competitors that we have? Do we pass it to our customers to gain market share?
I mean but then 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. But I have to remind everybody that starting in 2020, we have basically full financial flexibility. We don't have to wait 1 or 2 or 3 years.
Starting in even this year, we have financial flexibility, but you will so if you think about our stable platform, this year, we produced between $1,300,000,000 $1,400,000,000 By the time 2021 rolls in, I mean, we're going to have over $2,500,000,000 that we can deploy to continue processing our platform. So I just I think it's important to put it in context the position that we have put ourselves in place. We're done with our deleveraging and our strengthening of our balance sheet program. And now we have this full financial flexibility to allocate into processing 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 Andy Serafinski
of Macquarie.
Great. Thank you. So I have only one question. So given what you just said, right, that you have plenty of leverage 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 of lower power prices on your EBITDA free cash flow, I. E, there is a the future of Warwinds was 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 stable and predictable. What means stable and predictable is year in, year out, we're going to produce the excess cash that we produce today. Now we are going to have these incredible financial facilities 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 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 for shareholders.
We think that the combination of those three things will eventually change and re rate the valuation of stock, which I'm not mistaken right now is somewhere in the mid teens to hiking free cash flow yield. We don't believe that the business that I described to you today should be there. And if we get wind weighted 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 1st year that we are showing the benefits of this platform. 2018 was a good test.
We've had a very volatile summer. 2019 is very important because it continues to come up with that our platform performs under a lot of different price scenarios. So now giving it to us that if this continues to happen and we're taking care of our balance sheet and we can demonstrate that to our shareholders and to rating agencies, then we're on a path to re rate the stock.
Okay. And just one last question. I was definitely the one surprised by the Tecnunova mention. Is there any other legacy business that might have any types of cash flow implications like, I don't know, Ivan, Paul or something else where there's a tangible guarantee?
Andy, it's Kirk. No. The 2 remains
are legacies. It is Bond and Caliente that we
have, obviously, a minority stake with the remainder being owned by Clearway formerly yields and the balance with Midwest Generation. That is non recourse to anarchy. So there are no potential guarantees. This PetroNova leverage test is a product that's unique, if you will, to Petronova.
Our next question comes from the line of Saum Parezza
of Guggenheim Partners. Your question please.
Hey guys, two quick questions here. First just on the ID 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 past their philosophical issues about having an IG rated IPP? Are they still trying to gain comfort around the retail business? And is this thinking about timing? Are we thinking the back half of twenty twenty?
This is Scott. I'll answer the last part of
your question. I think that's probably the realistic pitch. Back half of twenty twenty is probably the early timeline, in fact, of when we would expect that movement to make. Obviously, we on an end to end basis, we're 2 notches away from the minimum threshold of Invest K
that being BBB minus. That's not
to 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, it's probably reasonable. Certainly, between now and then, we need to see at least a 1 notch uptick to be at least 1 notch away. And I
think in much the same
way as that although we're more frustrated with the reaction in the stock price and 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 affirms that notwithstanding the sell off that probably represents some of price to compensate our ability to do so, we are able to do so. So delivering on that this year, continuing to execute. In the background, as I may have said to you or others before, we've been very pleased with the level of dialogue with the rating agencies. I think they've been dug in to understand to their credit the 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 every confidence to do so. But it will take probably that amount of time in order to get those 2 notches behind us on our way to 3 days. Got it.
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 your, I think, your question, sorry, how do we think about capital allocation going forward? And what I will tell you is that we have no changes either on our philosophy, on the principles 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 a key an investment grade balance sheet. That's basically now 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, I do believe that a business that is stable and drilling a lot of excess cash needs to provide needs to return a meaningful part of that to its shareholders. Today, that's one of the most efficient way to do it is through share buybacks. I think we stick with the $250,000,000 incremental share buybacks 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 am going to evaluate OMN. 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.
Right. And just one last on the capital allocation. I just want to confirm because obviously certain retailers have hit the block right now that you're from a capital allocation standpoint, you're sort of out of the market and you're not looking at further inorganic retail acquisitions?
That we are out of the market?
Right. Like, so are you looking at additional retail acquisitions similar to Stream or are you sort of out of the market?
Okay. I mean, I don't comment on M and A, neither 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 principles that we have outlined for all of you. We have to meet the financial thresholds that we have, and there has to be a better investment than investing in our auto stock. I have said before that while we have rebalanced our portfolio pretty good the past couple of years, we can still present that platform.
In Teslas, our retail is a little bit bigger than our generation, and in the East, our generation is bigger than our retail. So we're executing on our capitalized strategy in Teslas to rebalance our portfolio. We acquired a 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 spot price is today, the bar is a little bit higher than it was not too long ago when our profits was starting to reflect the fundamental value of our business.
Our final question comes from the line of Praful Mehta of Citigroup. Your question please.
Thanks so much. Hi guys. Hey Praful. How are you? Hi.
Thanks again for all the color on the business model. It's very helpful. I guess just following up a little bit on that. Slide 20, you have the wholesale gross margin, 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 the list, the generation, we haven't provided you the retail sensitivity to it. And to be candid, I mean, that's been it's up to us to improve our disclosure.
When I think about our business, I don't think about it as 2 completely separate businesses, 1 generation, 1 retail. Our disclosures have been really good on generations. I think where we need to do a 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 with where the gross margin the combined gross margin is what matters. I said 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, there is other footprint. In the Northeast, you have capacity a little bit lower, but that's been offset by margin enhancements, and then we have the impact of steam. I mean, my point here is you cannot look at our business just on a starting 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 these excess cars 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. Got you. Yes, I know 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 PPA 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 where there's a benefit from your perspective, like you said, to have volatility?
So just bringing in a lot of storage generation by offering them PPAs may not be the right solution from a holistic business perspective. Okay. Well, I, in a sense, may not be, I think it is. And the reason why is we have a very valuable franchise in ERCOT, and we want to ensure that the competitive market continues to work and work well in the States. 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 high reserve margins, which is not going to affect the scarcity conditions in the system. I mean RBC is not going to be affected if you basically keep your reserve margin at 8%, 9%. That added is as an institute reset. So I actually think that if the competitive market works well, it's going to provide the 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, zinc 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 in aircraft, I expect really high conditions with strong prices and ferments on other volatility. Chris, is there anything that you want to add? No.
I was just going to point out that we've seen ORDC. It's really been doing its job since the commission tweaked it earlier this year. There'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 tack on in these hot days of August. ORDC, just like Mauricio said, just doesn't need costly marginal cost used to impact this administrative reset. And to the extent that you could build on 22 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 I don't suggest
that there's another quarter turn of OIDC coming next March, too. So I think we should be okay for a while.
Got it. All great points. And then just finally, clearly you guys are executing on the business model and the market. I think it needs time to understand and fully see the execution of the business model. But if at some point you don't see the stock price perform and we're nearing and we're still having the same conversation, is there a point when you look at that go private as a transaction that's possible?
Or is that something that's not on the table at this point? I'm sorry, the going private? This is the going private. The market doesn't. Yes.
Well, I mean, right now, our focus is on executing the strategies 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 to 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 our 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 have 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 that we just have to do. But I don't think that time is yet. I mean, we've only have provided we've proven this technology for 2 years, 2018 very successfully.
2019, we are on track to do it 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 so that there is a 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 confident that it will because we have a very strong value proposition, then we will evaluate something else. But right now, all our focus, 100% of our focus is in securing this
Got it.
Understood. Super helpful. Thank you, guys. 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 NIG 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