Q2 2019 Earnings Call

You've joined the NRG energy Inc. second quarter 2019 earnings call at this time, all participants Arnie listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time.

Should you require any additional assistance during the call. Please press Star then zero on your Touchtone telephone.

As a reminder, this conference maybe recorded.

I would now like to turn the call over to your host head of Investor Relations, Kevin Cole you may begin.

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 that are at 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 records 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 Murray cemeteries Energy's President and CEO .

Thank you Kevin Good morning, everyone and thank you for your interest in NRG.

I'm joined this morning by Kirk Andrews, our Chief Financial Officer.

Also on the call and available for questions. We have at least seven killing your head of our retail mass business and Chris Moser head of operations.

Over the past three and a half years, we have made significant progress in transforming our company from a traditional IP 20 integrated power company focused on our customers.

We monetize Rx a generation and rebalance our portfolio.

We streamlined our operations.

We slashed our debt.

We achieved our target the credit metrics.

We are perfecting our business to make it more stable.

And through all of these efforts, we created tremendous financial flexibility.

As you can see we have come a long way and I am very pleased with our progress and excited about the opportunities that lie ahead.

However.

The recent stock price performance does not reflect our confidence in the resiliency of our integrated model to deliver predictable and robust results.

Our confidence in the business remains absolutely on change.

We will continue to demonstrate the value of our business year after year.

So without on slide three 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 qualified prices.

And today, we are reaffirming our full year financial guidance.

Second we continue to perfect our integrated platform with the acquisition upstream energy and the execution of approximately 1.3 Gigawatts of solar BPAC America.

And third.

We're making good progress on our capital allocation plan.

During the quarter, we fully completed our debt reduction program and we finally achieved our targeted investment grade credit metrics.

In addition, we are announcing an incremental $250 million share repurchase program.

Which brings our total 2019 share repurchases to $1.5 billion.

Moving to the financial and operational results for the second quarter on slide four.

We achieved top decile safety performance and the lever $469 million of adjusted EBITDA.

The second quarter results were driven primarily by higher wholesale power prices.

Offset by higher retail supply cost and my weather.

Demonstrating the complementary nature of our generation and retail business.

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 million or 7% higher than last year.

Now beyond these financials, we made significant strides in further perfecting the stability and predictability of our platform.

We launched our previously announced capital light strategy.

Signing approximately 1.3 gigawatts of solar BPAC Nerco at an average length of 10 years, which complements our generation portfolio allows us to better serve our customers and further balances our integrated platform.

In addition, we closed on the acquisition of stream energy.

This acquisition increases our national multi brand retail leadership position.

And that's more than 600000 residential customer equivalents or Rcs.

With a run rate EBITDA of $60 million to $65 million.

We also achieve our investment grade credit metrics by reducing our total debt by $600 million.

And executed on a number of transactions in the debt markets at very attractive levels.

This completes our balance sheet strengthening program.

And Kurt will provide additional details in his section.

Also during the quarter, we completed the latest $1 billion share repurchase program.

Bringing our total year to date to one point $25 billion.

In addition.

We are announcing an incremental $250 million share repurchase program to be completed by year end.

We will address our plans for the remaining $259 million up 2019 excess cash.

As we usually do on the third quarter earnings call.

However, we're reserving up to $124 million of this capital for the Petra Nova project.

Let me give you some context.

Back in 2014, when we closed the financing for this project.

NRG and our 50 50 partner JX Nippon.

Provided a financial guarantee to Petra Nova lenders.

These guarantees were to remain in place to support a onetime debt service ratio test, which prescribed a prepayment of principle 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 the prepayment in the third quarter.

Although the final prepayment amount has not yet been determined.

Our obligation is limited to the guarantee amount.

Wasn't that prepayment dismayed.

The guarantee will terminate and the remaining that will become non recourse to NRG.

So now moving on to our summer I'll begin on slide five.

I wanted to provide you a brief update on the position of our integrated model, even though we are only in the middle of the summer.

As you can see on the left hand side.

Second quarter weather was milder than normal, particularly in June which impacted both prices and low.

Our portfolio, so far is performing well.

Starting with retail.

I suspect that low.

We're also providing energy conservation alerts and the mine management programs, which help consumers manage globe during peak hours.

The milder weather during the second quarter has resulted in lower volumes. Unlike any other consumer business, if we sell less of our product it will impact our results.

For generation.

We are maintaining excess length to help ensure against unplanned outages and load spikes.

We expanded our pre summer maintenance program to ensure our units can withstand increased run thanks.

And we returned to service our Gregory plant.

At 385 megawatt combined cycle plant, which provides additional reliability to our blossom.

And to the Oracle ERP system ahead of these tight summer.

Given how we hedge our portfolio.

We expect to have limited exposure to price or volume metric risk.

I know, we're only traveling through the summer.

And that's we're seeing these weak third parties 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.

Okay.

Now turning to slide six.

I want to provide you an update on the aircraft market.

The supply demand balance remained the tightest than it has ever been given strong loan growth.

Previous asset retirements.

And lack of new bills.

In may.

But really the semi annual capacity demand and reserves report or CVR.

Which outlines the expected supply demand balance in this system.

As shown in the upper left side of this slide.

As you can see.

Future a future reserve margins are dependent on new builds, particularly wind and solar.

Well the CDR report is helpful. In understanding what are your plans or possible.

It has historically been a poor indicator of what actually gets built in the problem here.

In fact.

We have seen less than 50% of renewable projects included in the CVR reports completed.

You know a closer look at the report revealed that 1.7 Gigawatts.

Our included from three natural gas plants.

That have already been delayed by an average of five years.

With no signs of moving forward.

The report also does not yet include.

Nearly 1.4 Gigawatts of thermal generation that has already announced plans to retire.

[noise] together.

These accounts for 4% of the reserve margin.

Keep in mind that a little more than half of the seven gigawatts of solar included in the report.

Hi post the financial security for interconnection.

In the table on the lower left hand side.

We tried to adjust for some of these factors.

An estimate.

What is the amount of megawatts would require from solar.

To maintain our reserve margin of 10% to 12%.

As you can see in the table.

We estimate over 17 gigawatts of new renewables.

Our necessary to achieve those reserve margins in the next three years.

We see these as a challenging.

Given our recent experience signing so RPP ace.

And the backward dated forward power prices.

Let me be clear.

The ERCOT market needs a tremendous amount of investment to just simply maintain the low reserve margin. It currently has.

Now from our platforms perspective, we're looking to facilitate.

Solar new builds to improve reliability and rebalance our portfolio by entering into medium term PBX.

These BPAC.

He will enable developers to obtain cost effective financing and tax equity to economically develop the project.

And for Us.

They complement our generation profile.

Lower our cost structure and allows us to better serve our customers.

From a market perspective.

We expect ERCOT to remain tight and follow up on for the foreseeable future.

Even in the face of a large renewable build up.

These price environment.

Should prove difficult for pure retailers or generators.

That will be exposed to swings in the market.

Our integrated platform is well positioned to thrive during these volatile.

And emerging renewable new build cycle.

And you can expect us to deliver strong and predictable results.

I want to get one last comment regarding our markets.

As you all know FERC issued an order earlier this month direct in PJM to delay the August capacity auction.

Well, we're hopeful a final order will be issue by the end of the year.

The timeline for FERC action remains uncertain.

We continue to view a strong moelfre as the simplest and most cost effective way to reduce the harmful impact of subsidies on the capacity market.

Yes, I mentioned at the beginning of the call.

We have come a long way in achieving our goals.

Slide seven summarizes how we have transformed our business.

We have significantly rebalanced, our portfolio and streamline our operations.

Today, we have two complimentary and counter cyclical businesses that provides a stable and predictable earnings on their various market conditions.

We are focused on perfecting our business.

And make it even more stable with a generational fleet that supports our retail operations.

The more balanced we are.

The less exposure, we have to the market.

And the more synergies we can achieve between the two businesses by crossing more generation with retail.

We are no longer your traditional I'd be exposed to the feast and famine of power cycles.

Now having deliberately change the risk profile of our business.

We have also realigned our balance sheet.

And achieved investment grade credit metrics.

Now our focus will turn into achieving investment grade rating.

We recognize that this business model is relatively new.

But we're working hard to demonstrate the stability of our platform.

Finally, we have created tremendous financial flexibility for our business with our actions.

Now with our Devin de leveraging program behind us.

We will focus our excess cash in 2020 and beyond.

On perfecting our model and returning capital to shout out to our shareholders.

With that I will turn it over to Kurt for the financial review.

Thank you Mary Sue.

Turning to financial summary on slide nine for the second quarter NRG delivered 469 million in adjusted EBITDA and $230 million in consolidated free cash flow before growth.

This brings total adjusted EBITDA for the first half of the year to $801 billion.

As we did last quarter, we provided a walk from our first half 2018 results to 2019.

To provide some additional details behind the year over year drivers for our results.

Starting with our first half 2018 results, we again eliminate the impact of asset sales retirements in D. consolidations from our prior years results.

Deducting 103 million dollar impact of these items from 2018 results.

Provides a baseline for comparison to our reported results for the first half of this year.

Year to date, our results are positively impacted by incremental savings and margin enhancements from the transformation plan, which positively impact results by $66 million versus the prior year.

Next year to date retail results are $123 million lower primarily due to higher costs, which impacted gross margins with the remaining variance coming from Xoom energy, which closed June onest of last year and weather as 2018, so a positive benefit while the milder weather through June negatively impacted our 2019 retail results, leading to a $35 million year over year impact.

Year to date generation results were $108 million higher as more robust wholesale prices drove higher gross margins offsetting the opposite impact of supply cost on a 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 from $1.85 billion to $2.05 billion in EBITDA and 1.25 to 1.45 billion 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 mid point well generation is trending above its midpoint.

As in years past, we expect a bulk of our EBITDA to come in the third quarter, which consistent with past performance is expected to represent more than 40% of our annual results.

We will update and narrow our guidance ranges on third quarter earnings call.

During the second quarter, we deployed over 1 billion in excess capital continuing to return capital to shareholders as well as achieving our balance sheet targets.

Specifically, we completed the remaining $500 million of our share repurchase program announced on our fourth quarter earnings call, bringing year to date share repurchases to 1.25 billion.

Reducing share count by over 10% or 32 million shares at an average price of $38.80.

And as Maria mentioned earlier, we are announcing an additional $250 million share repurchase program, which brings total 2019 capital allocated to share repurchases to 1.5 billion.

This past quarter, we also successfully execute a number of transactions in the debt markets through which we completed $600 million in debt reduction in order to achieve our target investment grade metrics extended our nearest maturities and significantly reduced our interest costs.

Part of our refinancing included repaying our secured term loan in its entirety using both the $600 million in cash with the balance funded with the new secured notes.

These new secured notes contained fall the way covenants, which automatically release the collateral making the notes unsecured upon NRG receiving investment grade ratings from two ratings agencies.

This covenant feature allows us a clear path to ensure the profile of our balance sheet aligns with that of investment grade without the need for additional refinancings in order to do so.

Our refinancing and debt reduction activities. This past quarter. In total will also result in over 25 million in annual interest savings.

Turning to slide 10 for an update on capital allocation.

With our refinancing activities during the second quarter, we have completed the allocation of 2019 capital toward improving our balance sheet, enabling the achievement of our targeted investment grade metrics and further improving our overall maturity profile.

Our new $250 million share repurchase program announced today brings total up capital allocated to return of shareholder capital to over 1.5 billion in 2019 or more than 50% of 2000, nineteens excess capital return to shareholders.

On August Onest, we closed the stream energy retail transaction, which including transaction costs and working capital adjustments totaled $325 million.

With the closing of stream and our new $250 million share repurchase program.

Based on the midpoint of our reaffirmed guidance, we expect approximately $250 million in 2019 capital remaining to be allocated as we generate the remainder of our free cash flow over the balance of the year.

As Mario mentioned earlier during the third quarter, we now expect to finalize the contractually required onetime leverage test for our Petra Nova project, which provides a formula for principal repayment in the event the debt service ratio falls below the define minimum threshold.

Having successfully extended the deadline for this one time test originally scheduled for 2018 as the operator of the oilfield had taken steps to improve production. Our expectation was the extended timeline would allow time for the ratio to exceed that threshold and avoid or delay any repayment.

As the year progressed, despite the production improvement initiatives oilfield production continued to lag expectations.

And based on our latest discussions with the lenders and the updated reserve forecast. They provide we are now unable to further extend the deadline to allow more time for improvement and expect that this test will result in NRG being required to fund our 50% share of the required prepayment in the third quarter.

Although the exact prepayment amount is not yet finalized NRG is obligation can be up to $124 million or 50% of the project debt.

As a result up to 124 million of our remaining excess capital is now reserve to fund this obligation during the third quarter.

Following the prepayment of the Petra, Nova which is not consolidated NRG balance sheet. The guarantee supporting the contingent prepayment obligation has been eliminated and any remaining debt is non recourse to NRG.

Finally, turning to slide 11, with our targeted deleveraging now complete NRG is total debt is now under 6 billion.

Were approximately 5.4 billion net of our only our target $500 million minimum cash balance.

That of course assumes that all capital is fully allocated.

Based on the midpoint of our 2019 EBITDA guidance. 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 your question.

Thank you Kirk.

Turning to slide 13.

I want to provide a few closing thoughts.

During the quarter, we made significant progress on our priorities perfecting our platform.

Maintaining a secular appropriate capital structure and disciplined capital allocation.

Today I am pleased with the conclusion of our nearly four year chapter of strengthening our balance sheet.

I want to thank Kirk and that entire team for their relentless discipline in getting us to a best in industry investment grade balance sheet.

The financial flexibility that we enjoy today.

Enabled us to further perfect our platform through the recent acquisition of stream energy.

Pursue our capital likely be a strategy.

And take advantage of the current dislocated spot price through incremental share repurchases.

NRG is clearly stronger than it has ever been.

We now have the stability and financial flexibility to thrive and take advantage of opportunities through all market cycles.

So with that.

I want to thank you for your time and interest in NRG.

Letif, we're now ready to open the line for questions.

Yes, Sir ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone.

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Our first question comes from the line.

Julien Dumoulin Smith.

Bank of America. Your line is open.

Hey, good morning, James.

Hey, good morning Joanne.

Hey pleasure.

Wanted to first ask about the solar PPA announcements, that's certainly very interesting strategic decision here. How are you thinking about scaling these commitments over time, both with respect to PPA is rather than necessarily owning assets outright and then secondly, probably relatively more critically how do you think about this shifting your perspectives on further build out of solar in Texas that 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 in the in the fate of the portfolio that you have.

Yeah.

Well first of all I'm very pleased with the execution of these capital light strategy kudos to the origination team as we disclosed today, we closed on 1.3 Gigawatts.

Thats a good progress, but what I can tell you is that we continue to be in the market executing on additional volumes. Our goal is to complement the existing generation portfolio that we have to better match, our retail low. So when you think about how much more you need to think about the retail load as the guideline on you know how much we are going to pump Lemon Moore, our our generation proto portfolio, either through solar BPAC or other efficient ways of.

Acquiring a 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 we think is the minimal.

Okay 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 one or the other or is the.

Pricing those will change that will make a thermal generation or conventional generation being built.

What I can tell you is that.

Eric needs a lot of generation it needs a lot of investment uneven the numbers that were providing you.

Our only sufficient to maintain a.

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 ERCOT market to continue to be robust over the foreseeable future, but more importantly to be pretty volatile and we know that our business does well when we have both a lot of volatility and perhaps less about the robustness because we have really.

Reduce our exposure to market by balancing our generation and retail businesses.

Okay excellent and then if I could just follow up here real quickly strategically I mean, we've seen some comments from your peers of late about their views about the depressed market environment and valuations.

Anything comparable that you would offer up at this point I mean, just goes back to.

You're deferring business models and take private scenarios et cetera, just any any commentary there.

Well, that's a lot of questions in one question Julien So let me see if I can just touch.

Hey, good as you will.

You know the integrated model or you know our view on.

On how we are positioning our company given the market trends that we're observing today.

You know 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 two complimentary and counter cyclical business so to the extent that we matched them better.

They become even more complimentary on a relative basis.

Not when I say better balance it also brings other benefits.

We can actually increase the matching internally between our generation and retail which maximizes the synergies that we have talked about now for 10 years collateral synergies friction cost synergies.

To the extent that we better match those two we reduce our exposure to the market.

I mean, we will continue to interact with the market would we don't necessarily have to if it's perfectly match.

Which makes our platform a lot more stable, which is one of the goals that we're trying to achieve with these new.

Integrated platform stable and predictable earnings.

You know the fuel if you look at the.

At the better.

Balance you know we have as I said, you know more complimentary anything important on a relative basis. So if you think about where we were lets say five years ago. When our generation business was outsized from our retail business.

We actually got excess generation and that excess generation was exposed to.

Wholesale power prices.

Yeah, now we have reduced significantly.

Portfolio like we do.

In our rising commodity price environment.

Obviously, our generation margins will increase on our retail margins will slightly decrease.

And when the commodity prices are declining.

The opposite happens our generation margins decrease on 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 exist in the market.

So.

I mean, I hope that that at least provides view.

That provides you a a I guess, a perhaps a slightly different perspective.

On how I think about how were repositioning the company going forward.

Indeed, thank you for the detail.

Our best.

Thank you. Our next question comes from Greg Gordon of Evercore ISI.

Your line is open.

Thanks, a couple of blocks blocking and tackling questions first when I look at it.

Slide in the back of the slide deck.

Slide three your guidance for.

Cash flow from operations and free cash flow before growth is unchanged and it has a.

$95 million working capital.

Assumption for the year, but in the quarter there was a fairly large working capital a collateral posting on slide 35 to 46.

So is that is that basically expected to reverse out over the year can you give us some color.

On a full year guidance is still okay.

Yes, I agree it's Kirk.

Thats correct I mean, typically speaking we're in the sort of the middle of our our collateral or liquidity intensive period, and it's always the case as we come through the summer and enter into the fall. That's when we intend to get that collateral back from those postings or hedging is that are more acute in the summer. It obviously the amendment to the power price affect that so short answer is yes, and the only other change the that I've known for is obviously readjusted the interest payments a little down to reflect a partial year impact of some of the refinancing we did.

And we have a slight uptick.

In not really working capital budget changes and 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 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 to collateral to return and were in line with our year's expectations on cash flow.

Thanks, Great and Maria when I look at slide 15 in the.

The realized.

Realized cost savings margin aspects working capital improvements et cetera on the scorecard.

You Didnt 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 and 19 and 20.

Yes, absolutely I thought we got something.

On the priorities, but I'm very comfortable hitting our cost savings targets by the end of the year margin enhancement this year or next year. So everything is on track.

Correct.

Great and then.

When when we when we talk about these.

The the potential for the up to 124 million.

Petra Nova Reserve guarantee it's obviously, it's in the 10-K, it's been in the 10-K, but probably still surprised some people.

What is going to.

You said that there was a there is a prescribed calculation is it is it a fair is it a certainty that you'll have to post or a 124 million or are there is there sort of a sliding scale of potential.

Payments you have to make inside a range so to speak and then she is it should it be our expectation that whatever the remaining katha is net of that.

Obligation that you'll allocate that on the Q3 call.

I mean, I know that answer that question. This is Kirk.

I think as Mauricio said, we we will update our plans for our excess capital for you on their core costs answer their questions yes.

As to the 124 million that is the maximum amount that is not necessarily the expectation is depends on the finalization of that calculation.

But as I indicated once that calculation is made in that prepayment amount is set which we do expect to happen in the third quarter. The obligation falls away. It is a onetime test it's a onetime guarantee in any remaining debt is non recourse to NRG. So.

In short what I would say is we expect to make a payment we cannot tell you exactly what that payment is except to say it is absolutely limited to the amount of our guarantee which is that 124.

Okay. My last question.

So sort of a different question along the lines of the solar.

Contracts that you've entered into the.

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.

Fundamentally matched retail.

You are these is this.

Strategy fundamentally reducing your run rate cost of goods sold in the marketplace.

And you know.

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, you can you talk about what that does in terms of offsetting people's concerns that.

Perhaps over time.

Retail margins might decline might be if retail revenues come down.

If your cost of goods sold it 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 you're confident that.

That you.

Got you.

Perfected the model.

Yes, I mean thats exactly the goal of this strategy I mean, when we look at our total generation portfolio. Our goal is to reduce as you said the cost of the cost of goods sold which now becomes our cost of generation and I will tell you that we have executed you know some of these PPH a very attractive levels.

Compared particularly to the market you know I mean, we are in the process right now of executing in the market and and you know depending on the location because all of these pbms are spread out depending on where we have the loads. So you know they have very different pricing also the tenure is different I mean on average is 10 years, but some of them on a little longer than that some of them on a little shorter than that.

The impact of these BBAM will call meaningful full earnest sometime in 2021.

I can give you I cannot give you any more details you know in terms of where we are where we have entered into lease PPH. Because obviously, we're stealing the market, but what I can tell you just from a.

Order of magnitude of you know so far you know we have reduced our basically our cost of goods sold which translates into you know EBITDA.

You know, let's say about 2% of our of our EBITDA. So I mean that at least gives you some order of magnitude in terms of what to expect.

And as you said as we lowered our cost of production you know we have a lot more degrees of freedom in terms of the we maintain the ER.

Savings that we caught or the cost compared to your competitors that we have the we pass it to our customers to gain market share I mean, but but then it crazy I mean, it creates a lot more optionality for us and just keep in mind that you know this notion that you know if wholesale prices will decrease you know they will decrease our margins. It assumes that we basically will do nothing.

Will do nothing to change the cost structure and the repositioning of our company and I have to remind everybody that you know starting in 2020, we have basically full financial flexibility, we don't have to wait one or two or three years, starting in 2000 <unk>. Even this year you know we have financial flexibility, but do you will you know.

So if you if you think about our stable platform. This year, we produce you know between 1.3 $1.4 billion.

You know by the time 2021 roll scene, I mean, we're going to have over two and a half billion dollar that we can deploy.

To continue perfecting.

You know our platform. So I just I think it's important to put it in context, you know the position that we have put ourselves in in place.

We're done with our de leveraging on our strengthening you know off our balance sheet program and now we have this full financial flexibility to allocate into perfecting our model and returning capital to shareholders, which I think is incredibly important I'd say stable cash flow business that we have.

Really okay. Thank you.

Thank you Rick.

Thank you. Our next question comes from the line of Angie Storozynski of Macquarie. Your line is open.

Great. Thank you. So I have only one question. So so given what you've just said right that you have plenty of levers to to react to.

Lower power prices.

Can you tell us it's.

You can.

You know a large deal fully mitigate the backwardation.

And the impact of the backwardation in solar power curves on your EBITDA free cash flow I E.

There isn't some basic shape you have all the earnings is not a you know a similar to the one that we see kind of the in OCA power curves.

Yes, Angie what I can tell you on equivocally is that we have created a platform that is a stable and predictable.

That means a stable and predictable leaves you know year in year out we're going to produce the excess cash that we produce to that now you know we are going to crowd. These incredible financial flexibility that we have afforded ourselves too huh.

So incremental so you know the value proposition that we have today.

East to have a stable.

Cash flow business that grows at a 2% to 4% a year.

With any investment grade balance sheet.

And significant excess cash.

To grow the business.

You know in a in a in an accretive way and to return capital meaningful capital to shareholders. We think that the combination of those three things will eventually change and reread the valuation of stock, which I'm not if I'm not mistaken right now is somewhere in the mid teens to high teens free cash flow yield.

We don't believe that the business that I described to you today, you know should be there and if it gets re rated closer to where we think should be.

Then our stock price will be much much higher than it is today.

Obviously.

We also appreciate that this is the first year that we are.

You know showing the benefits of these platform 2018 was a good test.

You know, we had a very volatile summer.

2019 is very important because he continues to demonstrate that our platform.

You know performance on there a lot of different price scenarios.

So now you know it is off to all of that you know if this continues to happen and we taking care of our balance sheet and we can demonstrate that to our shareholders and the rating agencies then we're on a path.

To re rate the stock.

Okay and just one last question I was definitely the one surprise by the Petra Nova a mention is there any other legacy business that might have any types of casual implications like.

I don't know Ivan Paul something else to where there is a personal guarantee.

And you start no at the two remains our legacies. In addition, I will call you and say that we have obviously a minority stay with the remainder being owned by a clear way formally yield and the balance with Midwest generation that debt that is non recourse to NRG. So there are no financial guaranty business Petra Nova leverage test is Ah.

Is is a is a product that's unique if you will turn to Petra Nova.

Okay. Thank you.

Thank you. Our next question comes from the line of Sharp Peraza of Guggenheim Partners. Your question. Please.

Hi, guys two quick questions here.

First just on the on the hygiene status.

Can you maybe just elaborate a bit further on how the conversations are going with the agencies and.

Obviously outside of Kurt you presenting very healthy metrics. Today can you just get can you get the agencies to look past their fill cellphone philosophical issues about having an idea weighted IP are they still trying to gain comfort around the retail business and as you're thinking about timing or we think in the back half of 2020.

[noise] Charlotte I'll answer the last part of your question I think that's probably the realistic case back half of 2020 is probably the the early time on you know in fact of when we would expect that movement to make obviously we will.

An unsecured basis were two notches away from the the minimum threshold of industry that being triple B minus thats not to say, that's our aspiration that sort of a.

Although the inflection point between some investment grade investment grade, but I think on that timeline is probably reasonable.

Certainly between now and then we need to see at least a one notch uptick to be with less than one notch away and I think in much the same way as that although were more frustrated with the reaction of 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 weve now reaffirmed for this year, which reaffirms that notwithstanding the sell off the probably represent some a crisis of confidence in 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've said to you or others before we've been very pleased with the level of dialog with the rating agencies I think Dave they dug into 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 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.

Two notches behind us on our way to three base.

Got it and then just lastly on this token dividend do you guys still keep it.

What point do you make a decision to either grow it or remove it completely.

[noise] yeah well.

When you think about capital allocation, because I mean that does really your I think your your question Sherry how do we think about capital allocation going forward and what I will tell you is that we have no changes either neither 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, we cheese achieve 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 earlier I do believe that a business that is a stable and throwing a lot of excess cash.

Needs to provide needed to return a meaningful part of the up to its shareholders.

Today that formed the most efficient way to do it.

It's through share buybacks.

I think we speak you know a with that 250 million incremental share buyback that we announced today.

To take advantage of what I believe is an undervaluation of our stock without any changes to the fundamental drivers value drivers of our business.

Now you know 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 all them. What I will tell you that our goal is to re rate the stock.

Two is fundamental value and we're going to evaluate all options that we have available to us to ensure that we do that.

Right and then just more so one last on on the capital allocation I just want to confirm because obviously certain retailers have hit the block right now that you're at from a capital allocation standpoint, you are sort of out of the market and you're not looking at further inorganic retail acquisitions.

That we are out of the market.

Right I'd 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 I mean, I don't comment on you know M&A are neither and specific processes or anything what I will tell you is that.

You know 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 threshold the financial thresholds that we have and they have to be a better investment than investing in our own stock.

You know I have said before that while we have rebalanced our portfolio.

Pretty good the past couple of years.

We can steal perfect that platform.

You know in Texas.

Retail is a little bit bigger than our generation and in the east our generation in our generation is bigger than our retail so.

Where we're executing we are executing on our on our capital light strategy in Texas to rebalance our portfolio, we acquire stream to rebalance our retail and we're going to continue to look at all the opportunities I mean that is the the I guess the benefit that we have afforded ourselves with the financial flexibility that we have today, we can be opportunistic about when to do it but obviously.

Where the stock price is today.

The bar is a little bit higher.

Then it was you know not too long ago, when our stock price was starting to reflect the fundamental value of our business.

Okay. Thank you very much guys.

Thank you. Our final question comes from the line of crossover Mehta of Citigroup.

Your question please.

Thanks, so much guys.

Hey, peripheral 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'll have the wholesale gross margins, which clearly have come down a little bit from Q1, given the drop in the power prices.

But I'm, assuming as you talked about in your business model points that some of this drop in the wholesale gross margin will be made up for on the retail side in 2020 is that a fair way to think about how we should look at slide 20 today.

Yes, I think the way you need to think about Urquhart is an integrated model. So while you while we only give you one side of the Atlantic. They generation. We Havent provided you the retail sensitivity to it then you know to be candid I mean, that's been up you know its own it's off to a loss to to improve our disclosures.

When I think about our business.

I don't think about it as two completely separate businesses one generation one retail our disclosures have been really good on generation I think where we need to do 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 they the gross margin. The combined gross margin is what matters.

I care less about where it comes from.

You know, whether a generational retail I care about delivering the total gross margin year in and year out you know I mean, there is other puts and takes I mean in the northeast you have capacity, a little bit lower and but that's been offset by margin enhancements and then we have you know the impact of stream I mean my point here is.

You cannot look at our business just on a static basis with the amount of the financial flexibility we have to improve it.

It's like saying that we're not going to do anything but we have you know all these you know excess cash available to deploy it in the most meaningful way that creates value for our shareholders.

So.

Yeah, I'm very comfortable with you know with or without platform you know in 2020 and beyond and as I said our goal is to provide stable earnings stable excess cash will be you know a modest growth that's our goal.

Gotcha, Yeah, I know that 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 EPA sign for solar.

I guess, it's a little bit.

Different from your perspective, because you obviously have the option to sign more solar PPH that pretty low prices, which is helpful. For your retail, but then you're bringing a lot more generation.

At pretty low pricing, but you're kind of drawing more solar into the market. How do you balance that were right. There is the benefit from your perspective as you said to have volatility. So just bringing in a lot of solar generation by offering them PPS may not be the right solution from a holistic business perspective.

Okay, well I say.

In Assai may not be I think it is and the reason why is.

You know them, we have a very valuable franchise in America.

And we want to ensure that the competitive market continues to work and work well in the state.

We need so much capacity.

To even maintain this current reserve margin.

It really doesn't matter if we bring you know 10 or 15 gigawatt. So you know.

Renewals.

You are going to continue to have tied reserve margins, which is not going to affect.

The scarcity conditions in the system I mean, or this is not going to be affected if you basically keep your reserve margin of eight 9% that either is administratively set so I actually think that ER.

We if the mine is a 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 too.

To meet the needs of the system.

And if that happens you know, whether it's solar wind or conventional with high ramping capacity.

We think that that's a that's going out you know that's going to require some time and that's why I say for the foreseeable future in America I expect re Fi conditions, we've we've strong prices and tremendous amount of volatility Chris is there anything that you want to know I was just going to point out that we've seen our DC is really been doing its job since the commission tweaked. It earlier. This year there has 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 five dollar after last year when July was spoken hot.

Or the last couple of days, where we've seen 100 to $200 tacked on in these hot days of August .

Our DC just like Mauricio said, just doesn't need costly marginal cost units too.

To impact its administrative reset and and to the extent that you could build almost 20 gigs of renewables and that you need to do that just to stay flat in terms of reserve margin.

Yes, I'm not too worried about it and don't forget that there is another quarter turn of our DC common next March two so.

I think we're I think I think we should be okay for a while.

Gotcha, all great points and then just finally.

Clearly you guys are executing on the business model and the market I agree needs time to understand and fully see the execution of the business model, but if at some point you don't see the stock price performance.

And you are in and we are still having the same conversation is hit a point when you look at that go private asset transaction, that's possible or is that something that's not on the table at this point.

I'm sorry, the going private is this is a growing preference.

The market doesn't [laughter], yeah Wow.

Yeah, I mean right now our focus is on executing the strategy that we have as I already mentioned to you before I mean.

You know we believe that this is a very compelling value proposition I also recognize that this is a new business model for the competitive or power sector.

I, rather no longer referred to also IBP, but after an ITC you know were truly now an integrated power company.

And you know sort of extend that are you know we continue to demonstrate the viability and the stability of this platform.

Not just to our shareholders, but also to.

The rating agencies.

You know I think that there is an opportunity to rewrite the star.

Well, obviously if that doesn't happen.

You know once we feel that we calm down AXOS that all our efforts to demonstrate the stability of our business.

Then we will explore all options.

To maximize the value of our shareholder of our shareholder. So I mean, that's something that we just have to do.

But I don't think that time is yes, I mean, we've only had provided we proven this technology for two 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 ourselves our shareholders and and the rating agencies. Some time to digest this strategic shift.

And you know when we feel that we have given enough time in the market is not responding which I.

I'm still hopeful that it will and I'm convinced that it will because we have a very strong value proposition.

Then we will evaluate something else, but right now all our focus 100% of our focus is on executing this strategy.

Gotcha understood Super helpful. Thank you guys.

Thank you at this time I'd like to turn the call back over to the see the CEO of NRG energy Inc., Murray's yoga chairs for any closing remarks Sir.

Thank you well it was Ah that's always a good to give you an update thank you for the questions and for your interest in NRG and look forward to a talking to you in the near future. Thanks.

Thank you, Sir ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may disconnect. Your lines at this time.