Good day, ladies and gentlemen, and welcome to the NRG Energy Incorporated Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Kevin Cole, Head of Investor Relations.
Sir, you may begin.
Thank you, Joelle. Good morning, and welcome to NRG Energy's Q3 2018 earnings call. This morning's call 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 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 turn the call over to Mauricio Gutierrez, NRG's President and CEO.
Thank you, Kevin, and good morning, everyone, and thank you for your interest in NRG. Joining me this morning is Kirk Andrus, our Chief Financial Officer. And also on the call and available for questions, we have Elizabeth Killinger, Head of our Retail Mass Business and Chris Moser, Head of Operations. I'd like to start the call by highlighting the 3 key messages for today's presentation on Slide 4. First, we continue to demonstrate the earnings predictability of our integrated platform.
We are narrowing our 2018 earnings guidance to the upper half of the range and initiating 2019 financial guidance above our transformation plan pro form a. 2nd, we achieved a significant milestone in our efforts to right size our business by closing on the sale of energy yield and renewables. With the transformational plan asset sales and cost savings nearly behind us, we're now pivoting to margin enhancement in 2019. Finally, we are announcing an incremental $500,000,000 share repurchase in addition to the $1,000,000,000 announced earlier in the year. This brings our total share repurchase program to $1,500,000,000 and completes our 2018 capital allocation plan.
Moving to our Q3 business update on Slide 5. As you can see on the left hand side of the slide, during the Q3, we delivered $677,000,000 of adjusted EBITDA or 23% higher than last year. This was primarily driven by higher realized power prices and continued execution on accretive cost savings initiatives, while achieving top quartile safety results. I am very pleased with the operational and financial performance of our integrated platform during a period of extreme price volatility. As we have discussed with you in the past, during periods of high prices, our generation business benefits while our retail business experiences some margin compression.
It is exactly in this price environment that our platform demonstrates the benefits of the integrated model. Our year to date results now stand at $1,580,000,000 a 34% increase from last year, allowing us to narrow our 2018 guidance range to $1,700,000,000 to $1,800,000,000 which is at the upper half of our previous range when adjusted for asset sales. This is also the Q1 that our financial statements start reflecting our new simplified business model. Our total corporate debt is now at $6,500,000,000 or almost 60% lower than the previous quarter. This number includes $640,000,000 of deleveraging completed in the last 2 months.
During the Q3, we also launched the 2nd $500,000,000 share repurchase following the close of energy yield and renewable transactions, which we expect to be completed by the end of the year. I continue to believe that our current stock price does not reflect the fundamental value of our business and presents the best return opportunity for our capital at this time. Looking ahead into 2019, we're initiating adjusted EBITDA guidance of $1,850,000,000 to $2,050,000,000 This range reflects the strong fundamentals in our core markets and the confidence we have in achieving our transformation goals. This is yet another example of the stability and strength of our integrated platform, which will provide close to $2,600,000,000 of excess cash to be allocated in 2019. Later in the call, Kurt will provide additional details on both guidance ranges.
Turning to Slide 6 with our transformation plan update. We continue to execute on the plan initiatives during the quarter and remain on track to achieve our full year 2018 targets. To September 30, we have realized $375,000,000 in cost savings, dollars 24,000,000 in maintenance CapEx reductions and $6,000,000 in margin enhancement. Over the remainder of the year, we will continue to focus on executing our cost savings and maintenance CapEx programs while ramping up our margin enhancement initiatives. We continue to put in place the foundation for realizing margin improvement through multiple avenues, including expanding sales channels and products, streamlining transactions and enhancing IT systems for more sophisticated customer analytics.
With respect to asset sales, during the quarter, we closed on the sale of energy yield and renewables. We expect to close out Central by year end as it is moving through the approval process with the LTSC and FERC. And Carlsbad will reach COD in the Q4 and is expected to close in the Q1 of 2019. We are also narrowing our asset sale proceeds from up to $3,200,000,000 to $3,100,000,000 This is the result of having only Agua Caliente and the remaining assets with clear line of sight to close by year end 2019. All other assets will remain in the portfolio at this time given improving market conditions.
Finally, we are well on our way to achieve our leverage target of 3x net debt to EBITDA by the end of 2018 after having executed our deleveraging objectives. Now turning to Slide 7 for a closer look at this summer. As you can see on the slide, weather was warmer than normal across our core markets, which led to higher demand, particularly in Texas, where we set a new record peak load of 73,000 megawatts. While load were robust, actual prices were mixed across markets compared to expectations. In ERCOT, real time prices came in significantly lower, as you can see on the upper right hand chart.
A combination of near perfect performance by generators during the July heat wave and milder temperatures in August resulted in prices 77% lower than the ones expected at the beginning of the summer. In the West, California was a different story with prices settling well above expectations. This was mainly due to restricted gas deliverability. Looking ahead, we observed that the combination of once through cooling unit retirements and the emergence of community choice aggregators have resulted in recent increases to Western capacity prices. In the East, energy prices were pretty much in line with expectations, and the focus is really on market reforms of both capacity and energy.
Now looking forward on Slide 8 and starting with our market outlook for ERCOT. As we have seen over the past year, reserve margins continue to tighten, driven by load growth, asset retirements and additional delays or cancellations of new builds as developers are unable to justify long term investments. On the top left hand chart, you can see that reserve margins continue to be significantly below ERCOT's target for several years, highlighting the need for additional generation. Currently, the PUCT is considering positive changes to the ORDC scarcity pricing mechanism to ensure the right price signals are sent to market participants. These potential regulatory changes combined with low future reserve margins have pushed forward prices higher, particularly in 2019 2020.
This move has been almost entirely driven by increases in the summer prices, where the market is now implying between 8 to 9 hours of prices at the cap. We have actually taken these as an opportunity to increase our hedge levels in 2019 2020, providing us with even more predictability on our earnings going forward. One area worth noting is that most of the current reserve margin is made up of capacity that comes from renewable generation. As you know, this is non dispatchable capacity and therefore could potentially lead to fluctuations in the actual amount of generation available to serve load. Now moving to the East.
The focus is on regulatory changes for both capacity and energy markets. As you know, FERC stated that the existing capacity market in PJM is unjust and unreasonable due to the negative impact of subsidized units. Let me reiterate that we believe a strong MOPR is the simplest and most effective way to reduce the harmful impact of subsidies on the capacity market. PJM and New England are also focusing on fuel security, which should lead to additional revenues for generators that have on-site fuel capabilities. This is very much at play, but all these regulatory changes are designed to improve the current status quo and are positive for our portfolio.
Next month, it will be 3 years since I became CEO of the company. And while this is not the quarter where we provide our capital allocation plan, I wanted to spend a minute talking about our capital allocation philosophy and track record, particularly in light of the financial flexibility that we have afforded ourselves in the past few years. Turning to Slide 9, you can see our capital allocation for the past 3 years. As you may recall, we initially focused on stabilizing our business by selling or closing underperforming assets, focusing on our core integrated business and strengthening our balance sheet. This resulted in most of our excess cash to be allocated to debt reduction in 2016 2017.
With the announcement of our transformation plan and the rightsizing of our business, we created significant excess capital that we returned to our shareholders in 2018 through share repurchases given the undervaluation of our own stock. As we move into 2019 and given the excess cash potential of our business, which will be close to $2,600,000,000 even after the incremental $500,000,000 share repurchase announced today, I want to reiterate to you that we will be absolutely disciplined in following our capital allocation principles that we have articulated to you and that you can see on this slide. I look forward to providing you with our 2019 capital allocation plan on the 4th quarter earnings call as we have done in the past. With that, I will turn it over to Kurt for our financial summary.
Thanks, Maurizio. Turning first to the financial summary on Slide 11. For the Q3, NRG delivered $677,000,000 in adjusted EBITDA, a 23% increase over last year. Having successfully closed the sale of NRG Yield and Renewables in August, our quarterly and year to date results now no longer include the contribution from these businesses, which are now treated as discontinued operations as a result of the sale. Through the 1st 9 months of 2018, NRG has delivered nearly $1,600,000,000 in adjusted EBITDA, with approximately $375,000,000 of cost savings realized, which places us on track to achieving our 2018 cost savings target of 500,000,000 dollars With these solid results and the important summer months now behind us, we're also narrowing and revising our 2018 guidance toward the upper half of our previous range, which I'll discuss in greater detail shortly.
With the closing of NRG Yields and Renewables transaction, combined with $640,000,000 in discretionary debt redemptions, which I'm pleased to announce are now completed, we have now removed approximately $10,000,000,000 of debt from NRG's balance sheet in 20 18. This not only significantly simplifies NRG's balance sheet for our investors, but makes the achievement of our 3 times net debt to EBITDA target in 2018 all the more transparent. As you'll recall, part of our plan to achieve our target balance sheet ratio in 2018 included $640,000,000 in debt repayment, which we achieved following the Q3 in 2 parts. First, in October, we redeemed the remaining $485,000,000 balance of our 2022 senior notes, eliminating our nearest maturity in the process. 2nd, we replayed $155,000,000 of our term loan facility.
We are required under the terms of this facility to offer a portion of the proceeds from certain assets sales to the lenders at par. In keeping with this requirement, we have made this offer and through an arrangement with a financial institution, effectively capped the amount of redemptions for which NRG is responsible at $155,000,000 which represents the balance required to achieve our debt reduction target for 2018. As Mauricio mentioned earlier, we've now fully funded the second phase of our $1,000,000,000 share buyback program. Following the closing of NRG Yield and Renewables, we put in place a $500,000,000 accelerated share repurchase program or ASR with the financial institution. NRG initially received a base number of shares, which will be supplemented with additional shares based on the average price of our stock over the program.
The financial institution is continuing to execute share repurchases under the ASR, which will be completed by the end of 2018. In addition, we now have a new authorization for an additional $500,000,000 in share repurchases, which will be executed between now and into 2019. This brings the total amount of 2018 excess capital allocated to share buybacks to $1,500,000,000 or nearly 40% of our 2018 excess capital. Turning next to an update on our 2018 guidance, which you'll find on Slide 12. Given the significant impact of deconsolidation resulting from asset sales on our reported results in 2018, I'd like to first take a moment to provide you some context of our revised 2018 guidance.
Looking at the table at the top of the slide and moving from left to right, we start with our previous guidance for 2018, which has remained unchanged since we first provided it about a year ago. That consolidated guidance included the expected full year contribution from all of our businesses, including those which have now been sold. As you may recall from previous quarters, we have disclosed to you the full year impact to the midpoint of our guidance from these 2018 asset sales, which included everything we've closed on to date, such as NRG Yield, Renewables and our Boston Trading Business or BEDM, as well as our South Central business. Following the closing of South Central, which we continue to expect toward the end of 2018, the results of this business will also be treated as as discontinued operations and will not appear in our results for the year. That second column reflects the midpoint EBITDA and free cash flow from these businesses based on our prior guidance or 1,200,000,000 dollars $590,000,000 in EBITDA and free cash flow, respectively.
Deducting these amounts from our prior guidance allows you to see the contribution to that prior guidance range from businesses retained in 2018, which is reflected in the 3rd column entitled previous guidance adjusted for asset sales. This should provide you some context and reference for comparison for our revised 2018 guidance shown in the last column on the right. Based on the performance of our remaining businesses and our expectations for the balance of the year, our updated and narrowed guidance for 2018 is $1,700,000,000 to $1,800,000,000 in adjusted EBITDA and $1,050,000,000 to $1,150,000,000 in free cash flow. Importantly, this revised guidance reflects the upper half of our previous guidance range adjusted for asset sales. Finally, at the bottom of the slide, there are a couple of items to note with respect to our 2018 revised guidance, which should also provide you some context when I review our 2019 financial guidance in a few moments.
First, our revised guidance for 2018 still reflects the contribution from Agua Caliente, which we expect to sell to NRG Yield or Clearway in early 2019 as well as the partial year contribution from Bedham, which was sold during 2018. In total, these two items represent approximately $120,000,000 in adjusted EBITDA included within both the Generation segment as well as our consolidated revised guidance. As Bedham has now been sold and we expect Agua Caliente to be sold early in 2019, neither of these two items will contribute to our results going forward and are thus not included in our 2019 financial guidance. 2nd, as you recall, we closed on Zoom Energy in mid-twenty 18, we expect to contribute approximately $25,000,000 to our 2018 results. However, as we indicated when we announced the Zoom transaction during Analyst Day, we expect the full year impact of Zoom to be approximately $45,000,000 and our 2019 guidance reflects that.
So with that as a backdrop, I'd like to turn to 2019 guidance, which you'll find on Slide 13. 2019 will be the 1st year since we announced the transformation plan that our financial results will reflect our retained businesses and our simplified and further strengthened balance sheet. Our guidance for 2019 is $1,850,000,000 to $2,050,000,000 in adjusted EBITDA, with $850,000,000 to $950,000,000 from Generation and $1,000,000,000 to $1,100,000,000 from Retail. In the upper right of this slide, we provided a walk to help you understand our 2019 EBITDA guidance compared to our previous 2018 pro form a that was based on our original 2018 guidance. Our previous 2018 pro form a EBITDA, which was most recently found in our Q2 presentation, was $1,600,000,000 To bridge to the $1,950,000,000 midpoint of 2019 guidance, we add 2 items.
First, our 2019 guidance reflects the incremental impact of Transformation Plan initiatives versus 2018, which totaled $195,000,000 As you may recall, this consists of $500,000,000 in 2018 cost savings, increasing to the $590,000,000 run rate in 2019 $30,000,000 in 2018 margin enhancement, which increases to $135,000,000 in 2019. 2nd, to arrive at the midpoint of 2019 guidance, we add $150,000,000 which reflects the combined impact of increased power prices in 2019. Specifically, these increased prices benefit generation EBITDA, just partially offset by higher supply costs that they represent for retail. While we expect these higher supply costs to modestly impact 2019 retail guidance, we expect them to be recoverable beyond 2019. Next, on Slide 14, I'd like to provide a brief update on 2018 capital allocation.
As usual, you'll find all the changes to this update versus the update we previously provided in the Q2 highlighted in blue. As you can see, primarily driven by a $500,000,000 increase in capital allocated to share repurchases, which reflects a reserve for our new buyback authorization, we have now fully allocated our 2018 excess capital with approximately $80,000,000 of total capital allocated toward our deleveraging targets and returning capital to shareholders, primarily through share buybacks. The remaining changes since our last update are summarized in the upper right of the slide and primarily consist of the following. First, as shown in Item A, based on discussions with NRG Deals or Clearway and the expected COD for Carlsbad later this year, we now expect to close on the sale of that asset in the Q1, which shifts about $365,000,000 in capital from 2018 to early 2019. Next, based on the increase in 2018 EBITDA, which positively impacts our leverage ratio, we are able to reduce the temporary cash reserve needed to achieve this ratio in 2018 by approximately 150,000,000 dollars This is partially offset by about $45,000,000 of debt premiums and fees associated with both the $640,000,000 in debt redemptions I mentioned earlier as well as other liability management activities year to date.
Finally, we've reduced the expected allocation to Transformation Plan cost to achieve by $60,000,000 which we now expect to incur as a part of 2019 capital allocation, which I'll review next on Slide 15. Turning to 2019 excess capital on Slide 15, we begin with capital available of $1,400,000,000 which is comprised of the midpoint of our 2019 free cash flow guidance, plus about $70,000,000 of unallocated 2018 capital from the previous slide. Next, we had $485,000,000 in 20 19 asset sale proceeds, which consists of approximately $365,000,000 for Carlsbad and $120,000,000 for Agua Caliente, both of which are expected to close in the Q1. Next is the full release of the remaining $915,000,000 in 2018 cash temporarily reserved to ensure our 3x ratio. Our higher midpoint EBITDA for 2019 allows us to fully release this remaining balance next year for capital allocation as we will not require any excess cash in 2019 beyond simply our $500,000,000 minimum cash balance to achieve our 3 times net debt to EBITDA ratio.
I'll review all of this in further detail on the next slide. However, it's important to note that as you may recall, our previous expectation, which was based on our pro form a cash walk, was that we would still need to reserve about $450,000,000 dollars in capital or cash in 2019 for credit ratio purposes, making this capital previously unavailable until 2020. Our more robust EBITDA reflected in that 2019 guidance allows us to release this capital for allocation from our previous loss at 2,600,000,000 from our previous loss at $2,600,000,000 Finally, turning to an update on our corporate credit metrics on Slide 16. In column 1, we've updated our 2018 ratio calculation to reflect our increased revised pro form a EBITDA, which again allows us to reduce our 2018 cash reserve while maintaining 3 times net debt to EBITDA. Our pro form a 2018 debt reflects the 3rd quarter balance reduced by $640,000,000 in debt redemptions now completed, leading to $6,500,000,000 in total corporate debt at year end 2018, which after deducting our minimum cash of $500,000,000 $915,000,000 of additional cash temporarily reserved in 2018 leads to $5,100,000,000 in 2018 net debt.
For debt ratio purposes, we have adjusted our midpoint of our revised 2018 guidance range to reflect the removal of EBITDA from asset sales, which still remains in our 2018 guidance, specifically, Agua Caliente and Dedham. And we've also added $20,000,000 to adjust for the full year effective Zoom. In total, this net adjustment of $100,000,000 leads to pro form a adjusted EBITDA for ratio purposes of $1,650,000,000 for 2018. As we've done in prior quarters, we continue to adjust the EBITDA for ratio purposes to reflect the impact of Midwest Gen capacity monetization, which will only be necessary through 2019 as that is the final year of capacity sold forward, after which we will count 100 percent of Midwest Gen EBITDA towards this ratio. Turning to 2019.
As I mentioned earlier, that $300,000,000 increase in adjusted EBITDA based on the midpoint of 2019 guidance allows us to fully release that remaining $915,000,000 of cash reserve or basically 3 times the increased EBITDA. Making this cash available for further allocation in 2019 while permitting us to maintain that important 3 times net debt to EBITDA ratio. Finally, as a reminder, in 2020, we still expect an additional $80,000,000 in EBITDA for margin enhancement programs, which increases to $215,000,000 in 2020 versus $135,000,000 in 2019. This additional upside, combined with the strength and resiliency of our integrated retail and generation platform, helps ensure that we can maintain and improve on our credit metrics without the need for additional capital in 2020. And with that,
I'll turn
it back to Mauricio for his closing remarks.
Thank you, Kirk. A few closing thoughts on our 2018 scorecard on Slide 18. As you can tell, it has been quite a busy year so far and we have made excellent progress across the board on our 2018 priorities. I am very pleased with what our team has been able to accomplish. As I look forward to 2019, we're focusing our efforts into 3 key areas: redefining our business by further perfecting our integrated model shifting the focus of our transformation plan to margin enhancement and completing the announced asset sales, and finally, disciplined allocation of the significant excess capital that we will have available.
I am very excited about the future of our company and want to thank you for your time and interest in NRG. So with that, Joel, we're ready to open the line for questions.
Thank you. You. Our first question comes from Julien Dumoulin Smith with Bank of America Merrill Lynch. Your line is now open. [SPEAKER JULIEN
DUMOULIN SMITH:] Hey, good morning, team. How are you? [SPEAKER JULIEN DUMOULIN
SMITH:] Good morning, Julien. [SPEAKER JULIEN
DUMOULIN SMITH:] Excellent. I wanted to follow-up a little bit on just the hedges here. I wanted to understand a little bit what's going on in Texas on 2020. There's been a little bit of a change in the weighted average hedge price there on a per megawatt hour basis. It seems as if you've largely kept the hedge percentage intact, but if you could elaborate a little bit here.
Sure. Well, as we were discussing, I mean, we're seeing power prices increase in 2019 2020. We actually have taken this opportunity to increase our hedges. And most of the move have been around the summer, so you can expect that the hedges that we have put in place have been really around the June through September strip. But Chris, are there anything else more details around our hedge strategy and then some of the dynamics you're seeing particularly in 2020?
Yes. I think when we're looking at hedging, we're looking at trying to lock in good numbers against expected generation with the idea that we'll still leave some to cover up operational risk and load variability, obviously, in combination with buying options and weather options and outage insurance and the rest of that. What you're probably and we can dig into this later, Julien, but what you're probably looking at is as we try and take off the summers, especially in 2019, we were also doing longer dated pieces, not just summer, those are done at a lower level. Obviously, I'm selling April off peak or around the clock. That's going to move the number down a little
bit. Got it. So that explains
the move from 42% to 36%?
Yes.
Bulk of it. Okay, excellent. And then just secondly here, Maurizio, I mean, I think folks are taking note this morning of some of the changes on the Board, but I also take note of your commentary earlier with respect to continued execution of the transformation plan. You've announced for the first time here your 2019 full year EBITDA. How do you think about continuing some of the cost savings that we've seen in 2018 into 2019?
How do you think about what's reflected? And ultimately, is there anything to be read from the changes on board here, I mean, on the board composition this morning too?
Well, I don't think there is anything to read on the Board composition. The entire Board supported the transformation plan, including myself. Management is committed to executing our transformation plan, and I think we have done excellent progress. With John decided to step down from the Board, and what I can tell you is that he's been a good and insightful Board member. And I look forward to continue having him as a long term shareholder.
So I think we have the support from our shareholders in terms of our transformation plan, the direction that we are going. Did that answer your question, Julian? I know that it was, I think, a 2 or 3 part question.
Yes. Well, I mean, maybe to be a little bit more direct about this, how are your transformation plans shaping up for further cost savings into 2019? Obviously, you're holding on to a few more assets than you originally anticipated. Does that provide for incremental cost savings? And are you continuing to evaluate that at a Board or even within the company from a cost savings perspective?
Yes. So with respect to the cost savings from our transformation plan, we have line of sight on the $590,000,000 We're executing to that, and that's going to start doing in we're going to do that in 2019. Obviously, our cost savings, this is something that is a continuous improvement process. It doesn't end with a transformation plan. We're always looking at doing things more efficiently.
So we're going to continue doing that. And if there is an opportunity to reduce the cost on some of the assets that we're retaining, believe me, I mean, we're already looking at that and evaluating that. So I am very confident that we're going to achieve our numbers by in 20 19, and I am very confident also of the culture that we have on continuous improvement that I believe before transformation plan was for NRG, and this is something that we all feel very strongly. So I don't think you should expect that after the transformation plan, this is basically done and over.
Excellent. All right. I'll leave it there. Thank you all.
Thank you, Julien.
Thank you. Our next question comes from Greg Gordon with Evercore ISI. Your line is now open.
Good morning, guys. It's actually Phil here for Greg.
Thank you, Greg.
Phil, but Phil, I'm sorry.
We're getting a little echo here on our end.
Okay. Let me try to adjust my headset. Anyway, congrats on the quarter. Just want to clarify a couple of items you discussed. So to be clear, the incremental $500,000,000 announced today, that's not allocated.
It's not eating into the $2,600,000,000 CAFA that you're allocating for 2019.
That is correct.
So theoretically, if you were to use all that for buybacks, you can allocate north of $3,000,000,000 from here?
Yes. I mean the $500,000,000 plus the $2,600,000,000 yes, that's correct.
Got you. And the 2019 guidance you laid out, is that mark to end of the quarter curves?
Yes.
Okay. So is it fair to say that where we sit from here today that curves look still a little bit better on a fresher mark to market? Or how are you what are you seeing there?
Yes. I mean, I would say that they are just a tad better. But keep in mind, when you're looking at the 2019 guidance, you have to take a few things into consideration. Number 1 is power curves. Number 2, the level of hedges that we have.
So I mean it's not just 1 and obviously supply cost for our retail business. So I mean there is a multiple there's a multiple things that you need to take into consideration. So it's not just one dimensional.
Understood. And I guess to that point, I mean, yes, Kirk, your commentary on retail, essentially, with the higher wholesale prices going into 2019, you won't be able to capture that one to 1 on the retail side next year. But as you move through time, you can start to work that into future rates. So it's kind of a margin lag. Am I thinking about that correctly?
Yes, that's correct. And I mean let me just I mean as we have seen different prices, is going to change a little bit the distribution between generation and retail on our earnings. But keep in mind, I mean from my perspective, what we are focused on is having an earnings profile that is stable and predictable for the integrated platform. So if power prices are increasing, it benefits our generation business perhaps more than it impacts our retail business and the true is the other way. So but at the end of the day, what we are focused on is the total earnings line of the integrated platform.
And this is what we want to demonstrate, the stability and predictability of our platform, which I think we have done in 2018. And with the guidance we're providing today, it's a reaffirmation of that.
Sure. And you've done a good job of that so far, for sure. Last question and then I'll cede the floor. Can you just provide any color or commentary around the 20 20 trajectory from here relative to 'nineteen?
I mean, what I will tell you since we're only introducing 2019 guidance today is some of the drivers that you should be looking at for 2020, obviously, is power prices, the hedges and something that Kurt was mentioning, which is some of the compression that we get by higher power prices in our retail business. But aside from that, I will not obviously, if the assumptions are the same in 2019, then you can make an inference of that. Obviously, you also have the incremental transformation plan targets that we have going in 2020. But I'm not going to be providing 2020 guidance in the call.
Understood. Thanks, guys. Congrats.
Thank you.
Thank you. Our next question comes from Abe Azar with Deutsche Bank. Your line is now open.
Good morning. Congratulations.
Thank you, A. Good morning.
Thanks. With the backwardation in the Texas prices, at least the ones that are quoted right now, can you remind us what retail's positive sensitivity is to lower prices and absent the margin enhancement program?
Yes. I mean, we haven't provided the specific sensitivity on our retail business because I mean, there is a number of things that come into play. It's not just the cost of sales, but also you have to look at where your margins are, your attrition rates, your bad debt. So it's not I wouldn't say that it's as direct or directly correlated as it is in the generation business. I mean there is a lot more variables that need to be taken into consideration.
So I think what I will tell you is the benefits that we see on the generation business tends to be 1 to 1 when power prices increase. And we have ability to pass some of that to our retail customers. So it's not one to 1. That's why we say our generation business tends to benefit more than it impacts our retail business. But that's I think that's the dynamic that and the complementary nature of our business, and that's the level of detail that we're comfortable providing.
Got it.
And then on 2018, the implied Q4 guidance is a lot lower than retail and generation have done in the prior years. Is there something unique about this year in Q4?
No. Nothing unique at all. Kind of difficult to extrapolate from there because remember and again, I'm not sure if you're referencing, when you talk about retail and generation, those two being the significant component parts of our overall performance in our guidance. In the past, retail is basically same store from that perspective. But as a reminder, generation, which we used to call generation and renewables for an obvious reason, included everything.
So I'm not sure whether you're accounting for the fact that we've significantly streamlined and changed the overall makeup of the portfolio. But in the context of the assets that remain, which is the phrase or term that I used in my remarks, 4th quarter is in line with what we would normally expect. Just a lot of noise with things moving in and out this quarter.
Understood. Thank you.
Our next question comes from Angie Storozynski with Macquarie.
So two questions. So one is, in the past, you've mentioned that, you were planning to acquire some retail businesses in the Northeast. Well, you haven't announced anything yet. And just wondering if we're waiting for cash to come in from the Louisiana assets or if there's any other limiting factor here. And also, if you could put it in the context, so you have $2,600,000,000 in cash to be allocated.
I understand that there are only really 2 ways to allocate it. One is that retail acquisition and the other one is buybacks. And is it fair to say that given the size of retail books that are available, only about maybe $700,000,000 of that could be spent on retail?
Yes. Good morning, Angie. So let me tackle your the first part of your question. Just to be completely clear, what I have said in the past is that we're going to be looking at perfecting our integrated model. In the East, we have more generation than retail.
So we can actually achieve that rebalancing 2 ways. We can either grow our retail business or we can reduce our generation business. Both are available to us. And we know that the retail space has been very active. But and if we see something that is consistent with our portfolio and meets our capital allocation and hurdle rates, then we're going to evaluate.
But there are different ways that we can perfect our model, and we're not locked in to one specific one. To your second question around what we can do with our excess cash in 2019, I would say that there are 3 different ways that we can allocate it. One, we can always find opportunities to grow our portfolio, our business if they are compelling. 2, we can return capital to shareholders both ways, share buybacks, given the undervaluation of our stock it is today and that's the preferred one. But we also have another avenue and we are open to it if it's dividends.
And then finally, we also have to evaluate continue paying down debt. And while we are completely comfortable with 3 times today, that doesn't mean that in the future is something that we just set it and forget it. So that's what I would characterize our capital allocation for 2019 or at least the philosophy.
Okay. And on an unrelated note, Midwest Gen, so PJM will be reforming its moper role. It does sound like Illinois might be leaning towards stripping out all of their nuclear plants from the PJM auction, keeping the Illinois customer basically neutral as far as their capacity payments, which I understand that the capacity payments would be coming then from coal plants like the ones that Midwest Gen owns. So in that context, how do you see the earnings power of this portfolio going forward?
Okay. Chris, you want to take it?
Yes. Angie, for that to happen, you need to believe 2 different things. You need to believe that Illinois is willing to quintuple the number of nuclear subsidies that they're already providing from 2,000 to give or take 10,000, which is hopefully a stretch. And then you also have to believe that FERC would allow a state to subsidize one particular set of generation and crush wholesale prices, which is in direct opposition to what they've written in the past previous three orders. So I mean, I think that's very theoretical, and I think there's a lot of wood to chop to get from here to there.
Okay. Thank you.
Thank you, Angie.
Thank you. Our next question comes from Praful Mehta with Citigroup. Your line is now open.
Thanks so much. Hi, guys.
Hey, good morning Praful.
Good morning. So I maybe wanted to get to the hedging a little bit and link that with the drop we saw in the 2020 hedge prices. I guess you talked about and we all know about the tight reserve margins in ERCOT. Given that tight reserve margin, I would guess that your preference would be to keep it more open to benefit from tightening prices in the curves in 2020 and clearly the curves right now backwardated. So I guess just wanted to understand more broadly the hedging policy views.
And then secondly, a little bit more clarity of the almost $6 drop in 2020, kind of what prompted that hedging if you're kind of seeing this more broader tightening in ERCOT?
Okay.
Praful, Chris again. So if you're looking at back on Page 24 and you look at total generation portfolio and you look at the open heat rate, you see that 2020 went from pretty darn low to 27%, and nuclear went from relatively low to 36%. So what you have is 2 different moving pieces here. What you've got is a big hunk of hedges that went in that were arguably not just summer, but they were full year on peak around the clock kind of numbers. And you also have the law of small numbers, which is if you have a small number that was only summer and then you mix that with a full year piece, which was in that second quantum was bigger than the first quantum, you're going to get a move there.
Trust me, when we're selling 2020, the summers are included. So we're locking in big chunks of value.
Got you. That's helpful. And so more broadly, just understanding the 2020 and just the hedging policy in general, is there a view that Perkoa is going to tighten further and that curves don't reflect that today and you want to keep more open? Or do you feel that the curves are relatively opportunistic or wherever there is an opportunity you would go in and lock in for the hedges?
No, fair question. I mean, I think if you look at the position where we're sitting 30%, basically 27% to 36% hedge depending on which chunk of the portfolio coal and nuke or total, I think that we're saying that this thing has some room to run still for only 27% hedged. Now I will say that we've seen a nice price rally since the summer and there's plenty of expectation that the PUCT later today may make some changes to the ORDC pricing mechanics and we're hopeful that they do because new builds are either being pushed off or canceled. So something needs to happen and again I encourage the PUCT to take action.
Praful, and let me just add. In 2020, we are 70% open. I think that should give you an indication, our view in the Texas market. We continue to see that it's very constructive, but we want to be prudent. We saw a pretty significant increase in 2020 on prices.
We reacted to it. We were opportunistic. We laid out some hedges, but keep in mind, we're still 70% open.
Got you. That's helpful. And then just on capital allocation more broadly, clearly there is both a growth opportunity and a potential to buy back shares. From a growth perspective, is retail the only direction you see? Or are there other avenues of growth that we should be thinking about that would hit your return thresholds?
Of growth that we should be thinking about that will hit your return thresholds that you could also kind of look at? I mean, there is we see multiple avenues.
I mean, clearly,
the one that has been getting more headlines is retail just because of the value proposition where retail is retail just because of the value proposition where retail is today, the implied valuations that we have and the fact that we can actually put it in our retail business that is scalable, so we can achieve significant cost synergies. But we see opportunities in other areas. We're evaluating them, particularly on the business solution side, working with our customers. And the one thing that I will say is generation perhaps is limited given the very long term nature of the investments and the fact that we have we're adhering to our capital allocation principles. So I would characterize it that way, and that informs more or less where we start we're looking at where we are looking at possible opportunities.
Got you. Super helpful. Thank you, guys.
Thank you.
Thank you.
Our last question comes from the line of Ali Agha with SunTrust. Your line is now open.
Thank you. Good morning. Good morning, Ali.
Good morning. First, Kirk, I guess, just wanted to clarify the Slide 12 numbers you gave us as you walked from the pro form a to the items for 2018. So if I read that right, there's about $145,000,000 of EBITDA that you're adding back in for the Betum and so on and so forth. But the midpoint of the 2 adjusted guidances only went up by 55,000,000 dollars So what am I missing there in that math?
I think the way that you've summarized that is effectively correct, right? Nominally speaking, you have a significant a more significant increase. But thinking about and perhaps this is where you're going, thinking about the ignoring the non recurring elements, right? When I talk about non recurring elements, I'm talking about Agua Caliente, I'm talking about the Bedham, the Boston Energy Trading business, which still is reflected in our numbers even though it was sold intra year. Yes, you've got about $50,000,000 of sort of same store outperformance, which is why I characterize it as towards the upper half of our previous range or an apples to apples basis, right?
That was part of the reason why I unpack that because nominally speaking, relative to the $1,600,000,000 pro form a, it looks like $150,000,000 higher. But when you adjust that for the asset sales, your number is probably the right way to think about that on a same store basis, if that makes sense.
Yes. But then, Kirk, if you take it to your next column, the updated and narrow guidance column, that number, shouldn't that if you took the column before that, this previous guidance adjustment column and moved right, shouldn't that have gone up by that $140,000,000 that you're adding in there?
No, it's the opposite.
Okay. I'll come back to you guys on that.
Yes. I know we got a follow-up call, but I'm happy to try to make that clear.
Yes. Separate question. I know that obviously you guys are not giving 20 guidance here, But just in the context of your net debt EBITDA targets, certainly on the 'nineteen numbers, you're hitting those targets as the way you've laid out to us. But if this backwardation in the forward curve continues, even with the margin enhancement improvement, I mean, the sense is directionally 2020 EBITDA is likely lower than 'nineteen. So does that figure into your calculations, thinking about net debt to EBITDA if you were to use a 'twenty denominator versus 2019 and how you may think about capital allocation in 2019 and maybe pay down more debt than you're currently showing us?
Is that a fair way to think about this dynamic?
Yes. I know the direction you're coming from. A couple of things of note, right? As I mentioned, you've got $80,000,000 of margin enhancement from 2019 to 2020. That's $135,000,000 of margin enhancements in the 2019 number going to $215,000,000 in 2020, right?
That's $240,000,000 of debt capacity right there. And I think we'll certainly take that as it comes going forward. But certainly, that provides a pretty significant cushion having achieved that in 2019 to get to that 3 times net debt to EBITDA ratio. But I don't feel at all that we're going to need to allocate additional capital to maintain the 3. As Mauricio said, we will always continue to reevaluate the 3 as we move forward.
So my bias would be if there is any additional delevering, it would be by our choice as opposed to, for lack of a better phrase, by necessity in terms of just maintaining the 3x, if that makes sense.
That makes sense. Yes. Last question, Mauricio. As you look at all this excess capital that you are accumulating and as you said, the growth opportunities are fairly limited, retail right now makes sense, but there isn't that much retail. If we keep going down this road, and I'm not just talking 'nineteen, but longer term, is there a scenario where you just buy out just take the company private?
I mean, if you keep buying back stock with excess capital, where do we end there?
Well, I mean, I think our focus right now, like I said in the past, is to execute on our transformation plan. And then as we laid out the long term strategy of the company, it's very compelling. This is where we believe we can create maximum shareholder value. I will tell you, as you just mentioned, the excess capital that we have, and it's going to be it's a priority for the Board and for us how to allocate this capital. I said it on the call and I will reiterate that again.
From where our stock is valued today, it does not reflect the fundamental value. And buying back our stock is still the most compelling opportunity. So this is where we're focused. And as we progress in 2019, if we see opportunities, if we see other alternatives, we always have to look at them through the prism and through the barometer of the implied returns that we have in our own stock. So we believe that we're on the right track.
We have the right priorities. We're executing well. We have the right team, and I'm just very pleased where the company is going. Thank you.
Thank you. I would now like to turn the call back over to Mauricio Gutierrez for any closing remarks.
Thank you, Joel. Well, I want to thank you all for your interest in NRG. Look forward to talking to you in the future. Thank you and have a great weekend.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a great day.