Q3 2019 Earnings Call
At this time all participants are in listen only mode. Following management's prepared remarks, we will host a question answer session in our instructions given at that time after and your conference taking your <unk> operating systems. Please press Star then Gerald an opera I'll be happy to assist you as a reminder, this conference call may be recorded for replay purposes. It is now my pleasure and the conference over to Mr., Kevin Cole head of Investor release.
And Sir you may begin thinking.
Thank you Brian Good morning, welcome to NRG Energys third quarter 2019 earnings calls this morning's call. The schedules were 45 minutes in life and it'd be broadcast live over the phone via webcast, which can be located in the investor section of our website at www Dot NRG dot com under presentations and Webcasts. Please note todays discussion.
They contain forward looking statements, which are based on assumptions that we believe to be reasonable as of the state actual results may differ materially we urge everyone to read the safe Harbor in today's presentation as well as risk factors in our as you see filings we undertake no obligation to update these statements as result of future events, except as required by law. In addition, we will refer.
Both GAAP and non-GAAP financial measures for information regarding our non-GAAP financial measures reconciliations to the most directly comparable GAAP measures. Please refer to today's presentation and with that I'll turn the call over Jim received the terrorists Energy's President and CEO . Thank you, Kevin and good morning, everyone and thank you for your interest in NRG.
I'm joined this morning by Kirk Andrews, our Chief Financial Officer, and also on the call and available for questions. We have at least seven killing you're kind of our retail mass business and Chris Moser of head of operations.
I would like to start the call with our key messages on the slide three the highlight the simplicity off our value proposition and demonstrate the predictability of our platform, particularly after the summer we experienced in Texas with significant weather and price volatility.
First our integrated platform performed well during the summer, allowing us to narrow our 2019 guidance around the midpoint of our range and validating again, the resilience of our business.
Second we're initiating 2020 guidance that further demonstrates our ability to deliver robust and predictable results through varying market conditions.
[noise] and third we're providing additional clarity on our capital allocation philosophy, given the financial flexibility that we have afforded ourselves.
We are introducing a framework consistent with our goal of growing up perfecting our business, while returning meaningful capital for shareholders.
These framework targets, 50% of excess capital towards growth and 50% to be returning to shareholders supported now by a more significant dividend policy.
So moving to our third quarter results on highlights on slide four.
As you can see on the left hand side of this life during the quarter, we remain a top that's I'd safety performance and delivered $792 million off adjusted EBITDA or 33% higher than last year on a same store basis.
This was primarily driven by higher realized power prices.
Margin enhancement and retail customer growth, partially offset by higher retail supply cost and higher unplanned outages.
I mean this summer in Texas was particularly challenging given the extreme weather on price volatility that resulted in record prices and record demand.
Hi, I'm very proud of our generation in retail teams for their ability to deliver a strong financial performance during a period of extreme price volatility.
Exactly in this price environment that our platform demonstrate the benefits of the integrated model.
Our year to date adjusted EBITDA results now stand up $1.6 billion, a 19% increase from last year, allowing us to narrow our 2019 guidance range around the midpoint to $1.9 billion to $2 billion.
During the quarter, we continue to execute on our on our capital light strategy signing an additional 100 megawatts of solar PV ace, bringing the total to 1.4 Gigawatts this year.
Well, we continue to personal additional saw RPP ace, which allows us to better serve our customers and further balance our integrated platform.
Also during the quarter, we completed 55 million of our current $250 million share repurchase program, leaving 100, a 95 million to be completed over the balance of the year.
Moving to the right side of the slight renegotiating 2020, adjusted EBITDA guidance of 1.9 billion to $2.1 billion and free cash flow before growth guidance of 1.275 billion to 1.475 billion.
This guidance further demonstrates our ability to deliver stable and predictable results through a very market conditions.
Kurt will provide additional details on both guidance ranges later in the call.
Finally, as part of the long term capital allocation policy that I will discuss in more detail later in the presentation I am pleased to announce that beginning in the first quarter of 2000 and plenty, we will increase our annual dividend from 12 cents per share to $1.20 per share or about 30% yield we.
Target annual growth.
Of the long term capital allocation policy that I will discuss in more detail later in the presentation.
As a summer in Texas.
Police to announced that beginning in the first quarter of 2020.
Moving degree days by month.
As you can see summer weather was mixed.
Mild temperatures are early in the summer with warmer weather in August and September .
From 12 cents per share to $1.20 per share or about 30%.
Power prices significantly different from their forward indications.
Yes.
As you can see in the lower chart.
Now turning to slide five for a closer look at the summer in Texas.
While August September came in significantly above.
Sure represented us cooling degree days by month.
Bubble with lower than expected wind generation.
But there was mixed.
Plant outages.
Mild temperatures are early in the summer.
Okay.
With warmer weather in August and September .
Yeah.
Incented unique challenges for the power grid.
She unit six after running reliably for over 200 consecutive days.
Occasions, as you can see in the lower.
The one off.
In July .
We do not expect to see a repeat in the future as the circumstances, where specific to that unit.
Forecast, while August and September came in significantly above.
At September .
Driven primarily by warmer weather.
From higher prices.
Lower than expected wind generation.
Turning to the right side of the slide our integrated platform provided stable results.
Okay.
Food July's low low low price.
We also experienced an increase on planned outages.
Oh, Hi price.
It's notable one.
Underpinning our success was strong supply and risk management enhanced customer outreach and be able management tools provided to residential and commercial customers.
Yes.
They are running reliably for over 200 consecutive days.
With volatile forward.
Most of the outage was a one off.
This.
And we do not expect to see a repeat in the future.
The opposite.
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At this.
However.
Well straight at.
Uh huh.
Most of August and September .
Great and model.
We're seeing our ability to benefit from higher.
Conditions.
Now turning to the right side of this line.
Underpins our confidence.
Platform provided a stable results.
Our business.
Hi, guys low low low price.
So 2020 with limited calls on our topic.
Price environment.
I'll take a moment to review our capital allocation track record on the slide.
Siam risk management.
Particularly in light of the financial flexibility.
Neil management tools provided to residential and commercial customers.
We have outlined three distinct face us on our.
From 2018 with volatile forwards.
Turning to 16 and 2017.
And the summer of 2019 with almost the opposite.
So selling more closing underperforming assets.
We have now demonstrated.
Support integrated.
A few of our integrated model.
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Two very different market conditions.
My first commitment to you nearly four years ago.
Therapies our confidence.
Well down in our balance sheet strength.
It's really two of our business.
That is where we could meet at our excess cash.
So 2020 with limited calls on our capital.
Cash during this period.
Okay and to review our capital allocation track record on slide six.
Legacy commitments.
Equally in light of the financial flexibility.
18.
Good for ourselves.
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Thanks, three distinct face us on our.
Duration, we retail.
Your first.
During this period.
And 16 and 2017.
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Stabilizing the business.
Operation portfolio by 50%.
They are performing assets.
Our balance sheet.
Focusing on our core integrated business.
Creating tremendous financial flexibility.
If you recall.
And with these financial flexibility.
You will nearly four years ago.
Midsized reset transaction.
Our balance sheet strength.
18% of our excess cash.
Where we committed our excess cash.
Our dislocated stock price.
Is 70% of excess cash during this period.
Returning capital to shareholders.
Okay, and 20% to result legacy commitments.
Next.
Now as we move into our next phase of redefining our.
So with a focus on rightsizing the portfolio.
Yes.
To better integrate and aligned generation we retail.
Hi.
During this period.
It's held.
Executed over $3 billion in asset sales.
I see on the right hand side.
Our generation portfolio by 50% and strengthen our balance sheet.
Okay and balance sheet.
Great credit.
On.
Exceeding tremendous financial.
I just meant today will focus on growing our business.
Really team.
Okay, and returning capital to shareholders.
Nice retail transactions.
I've said in past calls.
18% of our excess cash.
Cash flow company like ours.
Of our dislocated stock price by allocating.
The full.
A 50% doors returning capital to shareholders.
Create discipline.
In our share count by over 20%.
Overall value proposition.
Now as we move into our next phase of redefining our business.
Seven.
And with significant financial flexibility.
You can see our updated capital allocation framework water.
Payment.
We have come a long way in achieving our goals.
We continue to maintain top decile safety and operational excellence and have achieved what we believed to be investment grade credit metrics.
Today.
We are establishing a target allocation mix of 50% or created growth investments and 50% to return of capital.
In top this health safety and operational excellence.
So the NRG story.
Yes.
Prior to today.
But we believe to be investment grade credit.
This was primarily viewed through the last of unallocated growth capital, which is no longer the case.
I believe a long term commitment through a strong dividend policy complemented by share repurchases is an important attribute for both value creation and broadening our shareholder base.
First on growth.
As you can see on the waterfall there is no change in our investment investment criteria.
These capital will either be deploying good sound investments that meet our financial thresholds and not consistent with our strategy or they will be returned back to our shareholders.
Next on return of capital, we are increasing our annual dividend from 12 cents.
Dollar 20 per share beginning in the first quarter of 2020, and targeting a 7% to 9% annual growth rate.
Well I continue to see our stock as one of the most compelling investment opportunities I also believe a more significant dividend policy provides added visibility in returning capital to shareholders and helps broaden our investor base as we continue to execute and validate the stability and predict.
I really do you have cash flows.
We will also complement the dividend with significant and programmatic share repurchases.
On the rights idle Thislife.
We want to illustrate the magnitude of the excess cash.
Pack of our refined capital allocation policy.
If we simply maintain the existing earnings power of our business.
While deploying 50% of our excess cash at the midpoint of our hurdle rate.
And the remaining 50% of excess cash used to grow the dividend and for share repurchases.
You can see in this scenario that over the next five years, we would generate over 8 billion of excess cash or 80% of our market cap.
Grow our annual free cash flow before growth by 50%.
And shrink our share count by 30%.
We are running Chris increasingly stable and predictable cash flow company.
Through the combination of compelling growth investments and share repurchases are on track to double our free cash flow per share over the next five years, while paying a compelling and affordable dividend with 7% to 9% growth.
So with that I will turn it over to parent for the financial review.
Thank you Mauricio.
Turning to financial summary on slide nine NRG delivered 792 million adjusted EBITDA for the third quarter and 433 million in free cash flow before growth.
This brings total adjusted EBITDA for the first nine months to around 1.6 billion was 637 million in free cash flow.
After adjusting for 57 million dollar reduction EBITDA for asset sales and deconsolidation in 2018, our third quarter results were $198 million higher than 2018, driven by generation, which benefited from higher realized power prices in Texas lower costs from transformation plans.
These elements were partially offset by lower capacity revenues in generation volumes in the east West.
While retail remained flat for the quarter with higher supply cost and milder weather at the beginning in the quarter offsetting our margin enhancement initiatives in contribution from acquisitions.
The bulk of third quarter retail boat and EBITDA was generated during the back half of third quarter.
Resulting in higher working capital driven by receivables.
As a result of a greater portion of the cash flow associated with third quarter retail EBITDA.
That cash will be realized during the fourth quarter as a receivable balance unwinds.
And we've already begun to see this significant cash will materialize over the month of October .
With these results today, we're narrowing our 2019 EBITDA guidance range to 1.9 to 2 billion EBITDA.
As I alluded to last quarter higher power prices in burkart have driven higher realized an expected EBITDA for the generation segment, while the corresponding higher cost drives lower expected EBITDA for retail.
These elements are reflected in the revised segment components of our narrowed consolidated guidance, which nonetheless remains centered around our original midpoint.
While midpoint EBITDA guidance remains unchanged, our revised 2019 free cash flow guidance midpoint is lower by 50 million due to the cash flow impact from outages during 2019, including W.A. parish.
Although the EBITDA impact of these outages was offset by other items, our free cash flow outlook is slightly lower primarily due to increases in maintenance capex, resulting from the outages.
During the third quarter, we finalize the contractually required onetime leverage test for our Petra Nova project.
Although as I indicated on previous earnings call NRG is obligation could have been up to 124 million.
We were able to keep the amount required from NRG to only 107 million.
We satisfied this obligation in two parts first 95 million of cash was contributed by NRG to the project in the third quarter and second NRG posted a $12 million letter of credit, which may be drawn by the project future date.
Having now satisfied our legacy obligation under the leverage test the guarantee supporting this obligation is now eliminated and the remaining debt at the project is non recourse to NRG.
Finally, since the announcement in August of our $250 million share repurchase program. We've completed 55 million in additional share repurchases at an average of $37.62 a share.
We expect to complete the remaining $195 million of repurchases under that program over the balance of the year.
Turning to slide 10, you'll find our new we announced guidance ranges for 2020.
Specifically, we expect 1.9 to 2 billion in adjusted EBITDA for 2020.
As shown in the table in the right hand side of the slide based on the midpoint of our guidance ranges. This implies about 50 million of year over year increase in adjusted EBITDA driven by the final component of our margin enhancement program or 80 million and the full contribution from the stream acquisition.
These are partially offset by higher year over year retail costs.
We expect 1.275 to 1.375 billion in free cash flow before growth in 2020.
Converting approximately 70 cents EBITDA into cash.
Our 2020 guidance ranges exclude any EBITDA or free cash flow associated with our we're calling in today as we are targeting the sale of our remaining stake in that project during 2012.
Turning to slide 11 for a brief update on 2019 capital allocation.
Changes since the prior quarter are highlighted in blue and include a slight adjustment total capital to reflect the midpoint of our revised free cash flow guidance.
Growth investments now reflect a $95 million in cash contributed to Petra, Nova as well as a small increase associated with the purchase of retail books.
As a result, we have about 80 million of 2019 excess capital remains to be allocated which we'd expect to allocate using the newly announced guideline Mauricio outlined earlier were approximately 50% for growth and 50% to share repurchases.
Finally, as I mentioned during my review of third quarter results, we've seen significant positive cash flow since the end of the quarter in order to show. This more clearly on the upper right of the slide of included a liquidity table to show the significant change and liquidity, which is the sum of cash in credit facility availability as of November onest as compared to the.
Quarter end.
Over the month of October our liquidity improved by over 450 million.
Net of the noncash reduction in letters of credit posted over 50% of this improvement liquidity represents free cash flow for growth during the month of October .
And finally, turning to slide 12.
The midpoint of our newly announced 2020 guidance range places is on track to achieve the low end of our target investment grade metrics for about 2.5 times net debt to EBITDA, making 2020, the second year of investment grade metrics for NRG.
We continue to believe that these consistent and strong credit metrics combined with a continued execution and active dialogue with ratings agencies places us in a position to earn an investment grade rating and then next 12 to 18 months.
With that I'll turn it back from regional Thank you Kirk.
Turning to slide 14, I want to provide you a few closing thoughts on our 2019 priorities on expectations.
Our top priority for some time has been to demonstrate the predictability and stability of our integrated platform.
And this summer marks another year of delivering stable earnings through volatile market conditions.
As you can see on our scorecard, we've made significant progress across all their priorities.
From perfecting our business and reducing that to delivering on our transformation goals.
We will continue to simplify our disclosures to help better understand the value proposition of our integrated platform going forward.
As we move into 2020, I am confident our platform coupled with a clear and compelling capital allocation principles is well positioned to deliver a strong and predictable results and create significant shareholder value.
So with that I want to thank you for your time and interest in NRG.
Brian We're now ready to open the line for questions. Thank you, Sir ladies and gentlemen, this time, if he would like to ask the question over the phone. Please press Star then one on your telephone keypad. If your question has been answered you wish loop yourself in the Q.
The pounds.
And our first question will come from a lot of Julien Dumoulin Smith with Bank of America.
Line is now open hey, good morning team congratulations thank you Julie and good morning, Hey, Phil perhaps first off I'm curious on on the new growth strategy. If you could elaborate a little bit how do you think about finding investments that that achieved those hurdle rates and how do you think about sort of overtime from contrast in that against your own levered none.
Unlevered yield as it as it stands today.
Yes, well I don't think there you say new growth strategy I think what we're doing here is to provide more clarity on their return of capital policy that we have long term.
International growth I don't think anything has changed from my perspective.
In the near term I continue to see opportunities seen the primarily in the retail space I will say you know.
Small to medium sized companies similar to what we executed the past year on a hub with Sumant stream.
And you know that number of those opportunities our steel limited, but that's where we're going to focusing the in the near term I mean medium and long time, we will see where these opportunities that we see opportunities are I mean, as we continue to perfect. Our model. Obviously, we're looking at how do we enhanced the products and services that we provide to our customers, but I wonder.
I'd characterize it as a new growth strategy is just providing more clarity on our return of capital to shareholders.
There's still opportunity to to acquire retail platforms. This point.
Given just the consolidation we've already seen and then maybe I'll ask the same time, the 7% to 9% dividend growth. That's basically predicated on not just the repo, but also finding these platforms and deploying cancer.
Yes, so I mean, we still see some opportunities I mean, where as you as you mentioned I mean, very some you know there's a pretty fair activity in terms of consolidation in the retail space. We're evaluating you know what will be complement threat to our business in terms of pro.
Products regions channels, just like we did with silver stream, which.
Gets a gets us.
Infill the referral you know the federal federal sales channel, where evaluating what else where are these other opportunities that can complement and enhance.
And grow our our retail business, but that's where I see right now the most immediate opportunities obviously, you know where steel executing on our capital light strategy to continue perfecting on balancing our portfolio, but you know I said I mean desktop infosight.
No absolutely okay. Thank you very much guys I'll pass it off.
Thank you and our next question will come to light of Greg Gordon with Evercore ISI. Your line is now open.
Thanks, Good morning.
Good morning, how are you I'm good I'm good so I guess.
Just to follow up on Juliens point I mean, you you are you are reiterating a pretty high hurdle rate for.
For growth capital investments and it would seem to me that the depth of the of the market for either assets or businesses that those type of returns could be pretty shallow. So you are committed if you can't.
Deploy that capital in any given year or two to two pivoting to buybacks would that money I mean, I know you maybe just talk to your thought process on that and how you will communicate that.
Yeah, I mean, they loved our capital returns the return of capital falling through the people that were providing today.
Let's have some flexibility embedded in it I mean, if we cannot find growth opportunities that meet our financial threshold and importantly that is superior to buying back our on the step a stock then we'll return that capital to shareholders seem to form of share buybacks. So that's where the flexibility is embedded in our in our.
But again, what I wanted you know the goal of today is to provide more clarity in past. So what is that return of capital philosophy that supports the value proposition of NRG, Greg ASI setting the past I mean, the value proposition of the company's to have.
A business model that is balanced that provides stable and predictable earnings.
We are an investment grade type of balance sheet, and a very clear and transparent capital allocation principles and part of those principles eastern returning a meaningful a part of our excess cash to shareholders. What we are doing today is providing.
That clarity in times of what is meaningful and what I'm, saying through these 50 cents off every dollar of excess cash.
We'll go to shareholders in the form of the evidence.
And share repurchases.
And 50%, we'll go to grow but if we cannot find growth opportunities that meet the threshold that I just said.
Then you know will return dot capital to shareholders.
Great are there any is there any type of investment that's that you would say sort of off limits like are you not interested in.
More power generation or in the right markets. If you have the right retail load.
Mixed is our power generation assets potentially part of.
The capital deployment scenarios.
I mean at this point to you know we're being very so so successful with our topic the light strategy on the generation side.
Given where we're seeing the economics I don't see immediately opportunities in generation that doesn't mean that we're creating optionality within our portfolio. I mean, we have a lot of assets, we have a lot of power plants across our fleet.
But I don't see that today, I mean, I think that the most immediately actionable opportunities are within the retail space.
Right.
Oh. Thanks, one last question when I look at the when I look at the hedges I see that you've rolled.
The the hedges for the 21 and it looks like you've got some pretty good marks in there you also mentioned that you're going to continue however to evolve. Your disclosures can you can you maybe give us a little bit more on where do you think you're heading there so two questions sorry.
Yes, I mean, when I think about the business I don't think about a two different you know you know business I mean generation on rate, though I actually think about it on a semi integrated platform.
So one of the improvements on we're going to do on the disclosure sees how do we think about that integrated platform. I think we've been very good up providing disclosures on the generation side of the business, but now we have to do a better jogging providing the.
Holistically for the integrated model that's the whole.
All right can you comment on on the hedge position it looks like you have some pretty good marks there.
Yeah, I mean, I think we've taken advantage of some higher prices as we always have the deal today, that's obviously improved our position for remindful of affected.
The balance of that with whether we hedge or whether we remain open.
That obviously provides.
Backdrop, we're or support for the retail supply, especially around around her current but yet certainly a product of of.
Well timed hedging taking advantage of rally in market prices beyond the problem here certainly.
Thank you guys.
Thank you Greg.
Thank you and our next question will come from modest inflation with Wolfe Research. Your line is now open.
Yes, hi, good morning.
So maybe just hey, Murray's here, so maybe just a little more color on.
You know I, obviously retail has been hurt by the supply cost and the light, but just how's retail performing both in terms of.
The traditional are caught business, you know customer count things like that and also how would you characterize how.
The acquisitions have gone so far in retail.
Yes, Steve well, let me turn it to a at least of it. So first I'll start with the acquisitions. We are very pleased with both the zoom and stream acquisitions. They have integrated very seamlessly into our organization and in this case has set records in selling once it was under our ownership and strain is integrating well.
They're both culturally and from a team and business process perspective, and that's going very well, we do have some noise in our customer account inter quarter really because of the acquisitions or some of the small bulk transactions.
Which include expected early attrition and so we will we thats part of our valuation model and overall I'm very pleased with the strength and the performance of our acquisition and retention engine.
In light of some customer price pressure, because our bill Bill shop pressure that customers have experience. So I will continue to run this business and balance both EBITDA and customer account with an eye towards long term growth, which we have demonstrated here in your out both on the earnings and customer count.
Okay and.
And then just at a high level I mean, do just to try and simplify what you're seeing in the mix here is just the supply cost retail going up because of higher copper prices and.
You are capturing that essentially a generation.
With better numbers 1920 that you might have initially expected.
So is that correct Ah that's absolutely correct me if I mean this is a complimentary on counter cyclical nature of these two businesses, but as I've said in the past I mean.
I am focus on total gross margin for the company less focus on all the segments and making sure that that the top off that gross margin is stable and predictable regardless of market conditions.
And then just lastly on the P.A. strategy. So you had at a little bit.
More in Texas, just what where should we maybe see that.
Going over the next year, so how much more do you want to do.
Yeah.
Well I mean as you as you noted I mean, we only executed 100 megawatts this quarter.
And I think that's an indication of the slow though that we're seeing on on solar development.
We're just not seeing the the attractiveness you know the solar PV that we saw initially I mean, there is being you know and increasing cost for some of the solar developers to Paris, So I think thats.
Having a very active strategy like these just gives us a lot of visibility intentional the speed at which in a solar development is happening and what I'm, telling you is slowing down a little bit in terms of how much more from the 1.4, you know the governing a number here is the size of our.
Retail business. So if you look at our retail business people all the versus our generation and I would feel comfortable if we execute let's close to two to taught a hockey sticks, but obviously that's going to depend on the economics that we can achieve on the on the PBM case so.
But I think you know that's a good observation Steve.
And is it just less you're not seeing kind of somebody irrational.
Price offers I guess that might have been there before in terms of.
Yeah, I mean, I think you know some of the offers that we saw earlier you know we don't see it any more and I think it's a function of two things one I mean keep in mind that the counterparty that we're talking about a pretty you know high quality counterparties because we can provide M&A you know an average of 10 year contract weve balance sheet that.
These investment grade so we actually enabled them and put them at a higher competitive position vis vis other developers, but I think it's also impact that by perhaps you know higher you know higher costs due to tires that have been impose.
Thank you.
You're welcome Steve.
Thank you and our next question will come from line as well Granger with Citi. Your line is now open.
Hi, this is actually problem from Citi.
So on the EBITDA profile that you provided.
Over the longer term as you think about your capital allocation just wanted to understand you think about any degradation of EBITDA in that profile, especially if there's any replacement needed for existing assets at a existing generation assets that need to be replaced how do you think about that in that mix.
Yes, no good morning problem.
So the way I think about it is perhaps we need to do it on a regional basis in Texas I see it very stable, because we have pretty well balanced.
Portfolio between generation and retail so you know whether you have a contango or a backward dated occur you know your retail margins kind of expand while your generation contracts and the other way around so I see that very stable a in Texas for the foreseeable future. The east. This is slightly different because our generation continues to be bigger than our retail.
And is primarily driven by capacity prices. The good thing in the east is that we know exactly what it is in the next three years. So we have good I mean, everybody has good visibility on that beyond that is going to depend on what happens with FERC and the action that they take around the out of market subsidies for a nuclear.
Resources and you know, that's that's really going to depend on the regulatory outcome. What I will say that we have actually seen a let's call. It a nice or price in California capacity prices have increased significantly. So why do we have seen some pressure in capacity in the east we actually have seen some gains in the west that have balance each.
Other out so.
I will say that or you know I, just feel very comfortable with with the with the guidance that we have provided for 2020 as a base to go the calculations and obviously when we provided whats illustrative, but I feel very very comfortable with that.
Okay. That's super helpful. Context, then in terms of what you said on the gross Capex and retail given you a pretty balanced as you said in the Texas market already should we think about the incremental retail that you're looking to acquire in the near term to be in different markets other than Texas or how should we think about that.
No I think it will be both I mean, obviously I want to I want to grow the east to you know if the better balance, but I will say that it's not that were not a you know we're not growing in Texas I mean, we get we have a a pretty commanding lead I mean, a little over 30% of market share. So you know I mean, there's still.
So you know if we can grow Texas, I mean think about Texas in the context of various organic growth in Texas as a whole the market is growing 2%. So you know we can grow with the market and then number two if we can add additional market share from competitors either through organic initiatives or inorganic acquisitions.
I mean, we're going to do that but you know values value from me, regardless of where the region and ER and then on the rebalancing, citing Texas I mean, we're going to continue to take advantage of these new technologies that are coming into the market. Then you know I mean, we're doing it at very attractive levels were participating on that then and.
All these dogs is just lower our cost of a you know serving lot. So.
Got it with them.
Gotcha Super Helpful. Then just finally in terms of like the breadth of retail would you look at distributed generation or some some of those types of assets as well as part of your broaden retail makes or are you kind of some going going to stay more focused in terms of what you acquire.
Yes, I mean, if your question of distributed you know generation you saw something like residential solar no I'm not a I think we have been there we have dhondup, we're focused on continuing to establish a much closer relationship with our customers, creating more loyalty aligned feeney, providing more products I'm sorry.
Yes.
We don't have to vertically integrate every single product that we offer to our customers. I mean, you know I'm OK partnering and actually today, we offer we offer in residential solar we just offer through partners and what is important to me is that we maintain their relationship with a customer.
That we give them best in class interface to all the products and services that we provide a whether you know.
Whether we.
Do them all in house or not and in the case off some of the distribute the.
Resources I, rather partner then vertically integrate.
Gotcha Super helpful. Appreciate it thanks, so much.
Thank you.
Thank you at our last question will come to light of Ali I caught with Suntrust. Your line is now.
Thank you good morning.
Good morning only.
Good morning first question.
Yes, you're correct as fuel.
Where do you all to the higher on more aggressive dividend policy wondering if you had discussions with the rating agencies does it have any implications on their thinking regarding investment grade and just from a priority point of view when it is investment grade or achieving that fit then horses capital allocation et cetera.
Well I mean first of all its hurt.
We've obviously allocated to the capital necessary to achieve the metrics both in 2019 and sustain them into 2020, so from a capital allocation perspective, we feel very comfortable that we put our money where our metrics need to be in our if you will.
As far as the dividends is concerned with based on our ongoing though with the rating agencies. I think certainly there are very focused on capital allocation, our first priority, which we say to you and say to them. Notwithstanding the fact, we don't foresee the need for capital. It Doesnt change. The fact that our priority goes first to maintain this balance sheet metrics. That's very important part of the dialogue movement, both with our investor.
As as was the agencies and we feel comfortable that the dividend commitment is right size relative to our confidence in the overall magnitude of free cash flow still affording us a lot of financial flexibility around that.
And because as the chart research showed depicts the combination or the benefit of ongoing share repurchases to a significant degree I use shrinking the denominator keeps us for meaning to grow the overall dividend at the same magnitude as the as the as the as the growth on a per share basis, and then also.
Keeps the capital necessary for that very manageable. So I think all that factors in the door thinking about the dividend as well as the dialogue with reduces run that topic.
Gotcha, and then secondly.
Coming back to the end of this integrated model.
So as you do us on slide 21 at least on the wholesale side Youre seeing there is currently this downward.
Trend 21 over 20.
When you think about the retail business, how much of that roughly do think thats offset them on an integrated basis.
Just big picture wise.
There's plenty one today look deal relative to plenty.
Yeah, I would say pretty flat I mean, we have the ability to.
Expand margins on data on that environment. So when I say that is complimentary on Conversely, we call I mean, I mean, if the very say if there is some backwardation in the curve and thus putting some pressure on generation I expect retail to expand those margins and keep in mind that were also in 2021, we're going to start seeing.
The benefits of the PPA that we have also signed so they tend to be you know somewhat a somewhat or.
Very attractive compared to market. So all the daus is we're serving all at a lower cost of you know our cost of goods sold for a lack of a better worth now.
Like I said I mean, you also have to look out the east is slightly different right like I said, I mean is driven primarily by capacity revenues.
But we provide you know very clear visibility in terms of what those capacity revenues are for the next three year, they're locked in so there's no surprise us and we can adjust our maintenance programs. We can adjust our cost structure, depending on you know what the earnings profile of those assets in these would be so I mean, that's.
That's a lever that youre, perhaps you know actually you that you don't see indeed, you know one dimensional sensitivity that we provide.
What else can we dual around the cost structure of the company to ensure that we maintain competitiveness in our fleet.
Gotcha and final question, we show one of your peer companies talked about this concept of retail backwardation, where they're seeing negative margins in the first couple of years turning to positive as this line fixed price longer term contracts. Just curious are you seeing any of that in your portfolio in your markets.
Well everything that we though I mean, I'm, assuming you're talking about commercial and industrial long term long term transaction and stuff that you're talking about.
Yeah. So I mean, I guess, a couple of things number one or you know when we go any CNR transaction, we back to back it with supply. So we basically locking a gross margin for the term of the of the transaction.
We always have the option to either source said internally through our generation our source it from the market depending on what's the most optimal way for US and then number three you're always going to see the impact of Ah you know, though that business in our earnings. So you know transparency clarity visibility leasing.
Born and so you know while I can you know I mean in a bit in a contango market on a backwardated market when you're doing upturn deal. You know is there a are you level ice in the you know the curve and it creates you know a a different dynamic yes of course, but.
I am thing here is supply we're trying to lock in a margin through the you know through the term of the deal and ER and we want to you know we want to make sure that supply and the and the I guess the the seasonality of deal. The revenue line on the cost line is you know.
Pretty consistent.
Okay. Thank you. Thank you.
Thank you ladies and gentlemen. This concludes our question answer session for today. It is now my pleasure had a conference back over to customer receptivity areas for any closing comments or remarks. Thank you well. Thank you very much for your interest in NRG and look forward to talking to you in the coming weeks. Thank you.
Ladies and gentlemen, thank you for your participation today's conference. This concludes the program.