NRG Energy Inc (NRG) — Q2 2019 Earnings Call Transcript

Thank you, Lateef. Good morning, and welcome to NRG Energy’s second quarter 2019 earnings call. This morning’s call is scheduled for 45 minutes in length and is being broadcast live over the phone and via webcast, which can be located in the Investors section of our website at www.nrg.com under Presentations & Webcasts. Please note that today’s discussion may contain forward-looking statements, which are based on assumptions that we believe to be reasonable as of this date. Actual results may differ materially. We urge everyone to review the Safe Harbor in today’s presentation as well as the risk factors in our SEC filings. We undertake no obligation to update these statements as a result of future events except as required by law. In addition, we will refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to today’s presentation. And now with that, I’ll turn the call over to Mauricio Gutierrez, NRG’s President and CEO.

Thank you, Kevin. Good morning, everyone, and thank you for your interest in NRG. I am joined this morning by Kirk Andrews, our Chief Financial Officer. Also on the call and available for questions are Elizabeth Killinger, Head of our Retail Mass Business; and Chris Moser, Head of Operations. Over the past 3.5 years, we have made significant progress in transforming our company from a traditional IPP to an integrated power company focused on our customers. We monetized our excess generation and rebalanced our portfolio. We streamlined our operations. We slashed our debt. We achieved our targeted credit metrics. We are perfecting our business to make it more stable. And through all of these efforts, we created tremendous financial flexibility. As you can see, we have come a long way, and I am very pleased with our progress and excited about the opportunities that lie ahead. However, the recent stock price performance does not reflect our confidence in the resiliency of our integrated model to deliver predictable and robust results. Our confidence in the business remains absolutely unchanged. We will continue to demonstrate the value of our business year after year. So, with that on Slide 3, we have outlined the key messages for today's presentation. First, our business delivered another quarter of stable results demonstrating the value of our integrated platform during a period of volatile prices. And today, we are reaffirming our full year financial guidance. Second, we continue to perfect our integrated platform with the acquisition of Stream Energy and the execution of approximately 1.3 gigawatts of solar PPA generator. And third, we're making good progress on our capital allocation plan. During the quarter, we fully completed our debt reduction program and we have finally achieved our targeted investment grade credit metrics. In addition, we are announcing an incremental $250 million share repurchase program, which brings our total 2019 share repurchases to $1.5 billion. Moving to the financial and operational results for the second quarter on Slide 4, we achieved top decile safety performance and delivered $469 million of adjusted EBITDA. The second quarter results were driven primarily by higher wholesale power prices, offset by higher retail supply costs and mild weather, demonstrating the complementary nature of our Generation and Retail businesses. On the right-hand side of the slide, similar to last quarter, we have provided our EBITDA on a same-store basis adjusted for asset sales and the consolidations. As you can see, for the first half of the year, our business delivered $801 million or 7% higher than last year. Now beyond these financials, we made significant technical improvements further perfecting the stability and predictability of our platform. We launched our previously announced capital-light strategy signing approximately 1.3 gigawatts of solar PPA generator at an average length of 10 years, which complements our Generation portfolio, allows us to better serve our customers and further balances our integrated platform. In addition, we closed on the acquisition of Stream Energy. This acquisition increases our national multi-brand retail leadership position and adds more than 600,000 Residential Customer Equivalents or RCEs with a run rate EBITDA of $65 million. We also achieved our investment grade credit metrics by reducing our total debt by $600 million and executed on a number of transactions in the debt markets at very attractive levels. This completes our balance sheet strengthening program and Kirk will provide additional details in his section. Also during the quarter, we completed the latest $1 billion share repurchase program, bringing our total year-to-date to $1.25 billion. In addition, we are announcing an incremental $250 million share repurchase program to be completed by year end. We will address our plans for the remaining $259 million of 2019 excess cash, as we usually do, on the third quarter earnings call. However, we’re reserving up to a $124 million of this capital for the Petra Nova project. Let me give you some context. Back in 2014, when we closed the financing for this project, NRG and our 50-50 partner JX Nippon provided a financial guarantee to Petra Nova’s lenders. These guarantees were to remain in place to support a one-time debt service ratio test which prohibits a prepayment of principal in the event the ratio fell below the threshold. We have been in active negotiations with the project lenders and we now expect to fund the prepayment in the third quarter. Although the final prepayment amount has not yet been determined, our obligation is limited to the guarantee amount. Once the debt prepayment is made, the guarantee will terminate and the remaining debt will become non-recourse to NRG. So now moving on to our summer update on Slide 5, I wanted to provide you a brief update on the position of our integrated model, even though we are only in the middle of the summer. As you can see on the left side, second quarter weather was milder than normal particularly in June, which impacted both prices and loads. Our portfolio so far is performing well. Starting with Retail, as expected load is lower. We’re also providing energy conservation alerts and demand management programs which help consumers manage load during peak hours. The milder weather during the second quarter has resulted in lower volumes. Unlike any other consumer business, if we sell less of our product, it will impact our results. For Generation, we are maintaining excess length to help ensure against unplanned outages and load spikes. We expanded our pre-summer maintenance program to ensure our units can withstand increased run times. And we returned to service our Gregory plant, a 385 megawatt combined cycle plant that provides additional reliability to our platform and to the ERCOT system ahead of this tight summer. Given how robust our portfolio is, we expect to have limited exposure to price or volumetric risk. I know we’re only halfway through the summer, and as we’re seeing this week, ERCOT is in the middle of a high-load high volatility period, with the rest of August still ahead of us. We remain focused across the organization on ensuring reliable operations and a successful summer. Now turning to Slide 6, I want to provide you an update on the ERCOT market. The supply-demand balance remained tighter than it has ever been, given strong load growth, previous asset retirements and lack of new builds. In May, ERCOT released their semiannual Capacity Demand and Research report or CDR, which outlines the expected supply-demand balance in the system and is shown in the upper left side of this slide. As you can see, future reserve margins are dependent on new builds, particularly wind and solar. While the CDR report is helpful in understanding what is planned or possible, it has historically been a poor indicator of what actually gets built in the current year. In fact, we have seen less than 50% of renewable projects included in the CDR reports completed. A closer look at the report reveals that 1.7 gigawatts are included from three natural gas plants that have already been delayed by an average of five years with no signs of moving forward. The report also does not yet include nearly 1.4 gigawatts of thermal generation that has already announced plans to retire. Together, these account for 4% of the reserve margin. Keep in mind that a little more than half of the 7 gigawatts of solar included in the report have posted financial security for interconnection. In the table on the lower left-hand side, we tried to adjust for some of these factors and estimate the amount of megawatts required from solar to maintain a reserve margin of 10% to 12%. As you can see in the table, we estimate over 17 gigawatts of new renewables are necessary to achieve those reserve margins in the next three years. We see this as challenging given our recent experience signing solar PPAs and the backward dated forward power prices. Let me be clear, ERCOT needs a tremendous amount of investment to just simply maintain the low reserve margin it currently has. From a platform perspective, we’re looking to facilitate solar new builds to improve grid reliability and rebalance our portfolio by entering into medium-term PPAs. These PPAs help enable the developers to obtain cost-effective financing and tax equity to economically develop the project. For us, they complement our generation profile, lower our cost structure, and allow us to better serve our customers. From a market perspective, we expect ERCOT to remain tight and volatile for the foreseeable future, even in the face of a large renewable build-up. This price environment should prove difficult for pure retailers or generators that will be exposed to swings in the market. Our integrated platform is well positioned to thrive during this volatile and emerging renewable new-build cycle. You can expect us to deliver strong and predictable results. I want to give one last comment regarding our markets. As you all know, FERC issued an order earlier this month directing PJM to delay the August capacity auction. While we’re hopeful a final order will be issued by the end of the year, the timeline for FERC action remains uncertain. We continue to view a strong Market-Based Rate (MOPR) as the simplest and most cost-effective way to reduce the harmful impact of subsidies on the capacity market. As I mentioned at the beginning of the call, we have come a long way in achieving our goals. Slide 7 summarizes how we have transformed our business. We have significantly rebalanced our portfolio and streamlined our operations. Today, we have two complementary counter-cyclical businesses that provide stable and predictable earnings under various market conditions. We are focused on perfecting our business and making it even more stable with the generation fleet that supports our retail operations. The more balanced we are, the less exposure we have to the market and the more synergies we can achieve between the two businesses by crossing more Generation with Retail. We are no longer your traditional IPP exposed to the feast and famine of power cycles. By having deliberately changed the risk profile of our business, we have also realigned our balance sheet and achieved investment grade credit metrics. Now, our focus will turn into achieving investment grade rating. We recognize that this business model is relatively new, but we’re working hard to demonstrate the stability of our platform. Finally, we have created tremendous financial flexibility in our business with our actions. Now, with our deleveraging program behind us, we will focus our excess cash in 2020 and beyond on perfecting our model and returning capital to our shareholders. With that, I will turn it over to Kirk for the financial review.

Thank you, Mauricio. Turning to the financial summary on Slide 9 for the second quarter, NRG delivered $469 million in adjusted EBITDA and $230 million in consolidated free cash flow before growth. This brings total adjusted EBITDA for the first half of the year to $801 million. As we did last quarter, we provided a walk from our first half 2018 results to 2019 to provide some additional details behind the year-over-year drivers for our results. Starting with our first half 2018 results, we again eliminate the impact of asset sales, retirements and deconsolidations from our prior year’s results. Deducting the $103 million impact of these items from 2018 results provides a baseline for comparison to our reported results for the first half of this year. Year-to-date, our results are positively impacted by incremental savings and margin enhancements from the transformation plan, which positively impact results by $66 million versus the prior year. Next, year-to-date Retail results are $123 million lower primarily due to higher costs which impacted gross margins, with the remaining variance coming from XOOM Energy which closed June 1st of last year and weather, as 2018 saw a positive benefit while the milder weather through June negatively impacted our 2019 Retail results, leading to a $35 million year-over-year impact. Year-to-date Generation results were $108 million higher, as more robust wholesale prices drove higher gross margins, offsetting the opposite impact of supply costs out of Retail, further validating the effectiveness of the integrated model. Beyond the higher wholesale price impact, higher emissions credit sales in 2018 were offset by the benefit of the Midwest Generation asbestos settlement in 2019. While we increased major maintenance expenditures in 2019 to ensure our Texas fleet, including the Gregory plant, was fully prepared for reliable operations ahead of the valuable summer months. With our strong outlook for the summer, together with our significant hedge position for the balance of the year, we are reaffirming our 2019 guidance ranges of $1.85 billion to $2.05 billion in EBITDA and $1.25 billion to $1.45 billion of free cash flow. While we're maintaining our ranges for the subcomponents of our businesses as well, given year-to-date results and our outlook for the remainder of the year, Retail results are more likely to trend below the midpoint while Generation is trending above its midpoint. As in years past, we expect the bulk of our EBITDA to come in the third quarter, which, consistent with past performance, is expected to represent more than 40% of our annual results. We will update and narrow our guidance ranges on the 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. As Mauricio mentioned earlier, we are announcing an additional $250 million share repurchase program, which brings total 2019 capital allocated to share repurchases to $1.5 billion. This past quarter, we also successfully executed a number of transactions in the debt markets, through which we completed $600 million in debt reduction in order to achieve our target investment grade metrics, extended our nearest maturities and significantly reduced our interest costs. Part of our refinancing included repaying our secured term loan in its entirety using both the $600 million in cash, with the balance funded with the new secured notes. These new secured notes contain fall-away covenants which automatically release the collateral, making the notes unsecured upon NRG receiving investment grade ratings from two ratings agencies. This covenant feature allows us a clear path to ensure the profile of our balance sheet aligns with that of investment grade without the need for additional refinancings in order to do so. Our refinancing and debt reduction activities this past quarter in total will also result in over $25 million in annual interest savings. Turning to Slide 10 for an update on capital allocation. With our refinancing activities during the second quarter, we have completed the allocation of 2019 capital toward improving our balance sheet, enabling the achievement of our targeted investment grade metrics and further improving our overall maturity profile. Our new $250 million share repurchase program announced today brings total capital allocated to return shareholder capital to over $1.5 billion in 2019 or more than 50% of 2019’s excess capital returned to shareholders. On August 1st, we 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 to remain to be allocated as we generate the remainder of our free cash flow over the balance of the year. As Mauricio mentioned earlier, during the third quarter, we now expect to finalize the contractually required one-time leverage test for our Petra Nova project, which provides a formula for prepayment in the event the debt service ratio falls below defined minimum thresholds. 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 that the extended timeline would allow time for the ratio to exceed the threshold and avoid a delay in repayment. As the year progressed, despite the production improvement initiatives, oilfield production continued to lag expectations. Based on our latest discussions with the lenders and the updated reserve forecast they provided, we are now unable to extend the deadline further. We expect this test will result in NRG being required to fund our 50% share of the required prepayment in the third quarter. Although the exact prepayment amount is not yet finalized, NRG’s obligation could be up to $124 million or 50% of the project’s debt. As a result, up to $124 million of our remaining excess capital is now reserved to fund this obligation during the third quarter. Following the prepayment of the Petra Nova debt, which is not consolidated on NRG’s balance sheet, the guarantee supporting the contingent prepayment obligation will be eliminated and any remaining debt will be non-recourse to NRG. Finally, turning to Slide 11, with our targeted deleveraging now complete, NRG’s total debt is now under $6 billion or approximately $5.4 billion net of our only 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 our full year’s run rate EBITDA contribution from the Stream Energy acquisition, this ratio reaches the lower ratio of our investment grade metric range or approximately 2.5 times, placing us in an even stronger balance sheet position as we move into 2020. And I’ll turn it back to you, Mauricio.

Thank you, Kirk. Turning to Slide 13, I want to provide you a few closing thoughts. During the quarter, we made significant progress on our priorities of perfecting our platform, maintaining a sector appropriate capital structure and disciplined capital allocation. Today, I'm pleased with the conclusion of our nearly four year chapter of strengthening our balance sheet. I want to thank Kirk and the entire team for their relentless discipline in getting us to a best-in-industry investment grade balance sheet. The financial flexibility that we enjoy today enabled us to further perfect our platform through the recent acquisition of Stream Energy, pursue our capital-light PPA strategy, and take advantage of the current dislocated stock price through incremental share repurchases. NRG is clearly stronger than it has ever been. We now have the stability and financial flexibility to thrive and take advantage of opportunities through all market cycles. So with that, I want to thank you for your time and interest in NRG. Lateef, we're now ready to open the line for questions.

I wanted to first ask you about the solar PPA announcements. That’s certainly a very interesting strategic decision here. How are you thinking about scaling these commitments over time, both with respect to PPAs rather than necessarily owning assets outright? And then secondly, probably relatively more critically, how do you think about this shifting your perspectives on further build-out of solar in Texas? Certainly we hear a variety of different viewpoints out there. You are not necessarily using your balance sheet obviously, but you are seeing other developers pivot. How do you think about that and the state of the portfolio you have?

Yes. Well, first of all, I am very pleased with the execution of this capital-light strategy. Kudos to the origination team. As we’ve disclosed today, we closed on 1.3 gigawatts. That’s good progress. But what I can tell you is that we continue to be in the market executing on additional volumes. Our goal is to complement the existing Generation portfolio that we have to better match our Retail load. So when you think about how much more you need, consider the Retail load as the guideline on how much we're going to further complement our Generation portfolio either through solar PPAs or other efficient ways of acquiring additional Generation. Now with respect to solar, the second question that you had around the solar view, what we wanted to illustrate, if we were to maintain a 10% to 12% reserve margin, which we think is the minimal to have reliable operations over the long-term, we wanted to put it in the context of how much solar you will need. As you can see, it’s a pretty significant number, over 17 gigawatts, including solar and wind. I can't tell you whether it’s going to be one or the other or if the pricing in those will change, which will make thermal generation or conventional generation be built. What I can tell you is that ERCOT needs a lot of generation. It needs a lot of investment. Even the number that we’re providing you is only sufficient to maintain the current load reserve margin that we have. I think that’s the main point that we were making. 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. We know that our business does well when we have both a lot of volatility and perhaps less other robustness because we have really reduced our exposure to the market by balancing our Generation and Retail businesses.

And then if I could just follow up here real quickly. Strategically, we've seen some comments from your peers of late about their views on the depressed market environment and valuations. Anything comparable that you would offer at this point, I mean just with respect to your differing business models and take-private scenarios etc. Just any commentary there?

Well, that’s a lot of questions in one question Julien so let me see if I can just touch that. The integrated model or our view on how we are positioning our company given the market trends that we’re all serving today, and I'm glad you’re asking that because I do believe that we actually have a very unique and differentiated platform. As I mentioned, our goal is to better balance our generation and retail businesses. These are two complementary and counter-cyclical businesses. To the extent that we match them better, they may become even more complementary on a relative basis. Now when I say better balance, it also brings other benefits. We can actually increase the matching internally between our Generation and Retail, which maximizes the synergies that we have talked about now for 10 years: collateral synergies, friction cost synergies. To the extent that we better match those two, we reduce our exposure to the market. We will continue to interact with the market but we don’t necessarily have to if it’s perfectly matched, which makes our platform a lot more stable. This is one of the goals that we’re trying to achieve with this new integrated platform: stable and predictable earnings. If you look at the better balance, we have, as I said, more complementary, and it’s important on a relative basis. If you think about where we were, let’s say five years ago, when our Generation business was outsized from our Retail business, we actually had excess generation, and that excess generation was exposed to wholesale power prices. Now we have reduced that significantly. I'm not saying that’s good or bad; all I'm saying is that that’s not the model that we’re pursuing. We’re pursuing a model that is a lot more balanced than it has ever been. Now from a dynamics standpoint, when you have a more integrated portfolio like we do in a rising commodity price environment, our Generation margins will increase and our Retail margins will slightly decrease. When the commodity prices are declining, the opposite happens: our Generation margins decrease and our Retail margins increase. What I can tell you is that we actually have a lot more degrees of freedom in terms of how much of the wholesale price increases or decreases we can actually pass to our customers. We know having been in the business now for over 10 years with empirical data that consumers consider wholesale prices as only one factor, but it is not the only factor. If that were the case, we would not have seen the growth that we have experienced in any of the premium brands that exist in the market. So I hope that provides you with a slightly different perspective on how I think about how we’re repositioning the company going forward.

I have a couple of basic questions to start with. Looking at the back of the slide deck, specifically Slide 33, I see your guidance for cash flow from operations and free cash flow before growth remains unchanged, with a $95 million working capital assumption for the year. However, on Slide 35, it indicates that there were significant collateral postings amounting to 246. Will this be expected to reverse over the year? Can you provide some clarity on this? Is the full year guidance still acceptable?

Greg, it’s Kirk. That’s correct. Typically speaking, we're in the middle of our collateral or liquidity-intensive period. There are always cases we come through the summer and enter into the fall when we tend to get that collateral back from those postings or hedgings that are more acute in summer. So the short answer is yes. The only other change that I know of, because obviously we adjusted the interest payments slightly down to reflect partially the impact of some of the refinancing we did, and we have a slight uptick in not really working capital but changes in other assets and liabilities over the course of the year. Some of that has to do with the asbestos settlement. So that’s the other reason for a bit of the changes between EBITDA and adjusted cash from operations. But obviously we don’t expect that to have an impact on the bottom line on free cash flow before growth and we do expect the collateral to return. We’re in line with our year’s expectations on cash flow.

And, Mauricio, when I look at Slide 15 and the realized cost savings, margin, working capital improvements etc. on the slide card, you didn’t have anything in the script with regard to your feelings on being able to hit those targets. Should we assume that to be full-on track to hit those targets in ‘19 and ‘20?

Yes, absolutely. I’m very comfortable hitting our cost savings targets by the end of the year, and margin enhancements this year and next year. So everything is on track.

When we discuss the potential for a $124 million turnover reserve guarantee, it's mentioned in the 10-K, but it may still catch some people off guard. You indicated that there's a specific calculation involved; is it certain that you will need to set aside the full $124 million, or is there a varying scale of possible payments within a range? Should we expect that whatever the remaining cap is, after that obligation, will be addressed in a Q3 call?

It’s Kirk. As Mauricio said, we will update our plans for our excess capital for you on the third quarter. To answer your question, yes, as to the $124 million, that is the maximum amount. That is not necessarily the expectation; it is dependent on the finalization of that calculation. But as I indicated, once that calculation is made and that payment amount is set, which we do expect to happen in the third quarter, the obligation falls away. The one-time test is a one-time guarantee, and any remaining that is not recourse to NRG. In short, what I would say is we expect to make a payment, but I can’t tell you exactly what that payment is, except to say it is absolutely limited to the amount of our guarantee, which is that $124 million.

My last question, Mauricio, is about the solar contracts you’ve entered into. As you manage the business, you're focused on the spread between your cost of goods sold, which includes your fleet and contracts, and your revenue line that has aligned closely with Retail. Is this strategy effectively reducing your ongoing costs of goods sold in the marketplace? Is it also a factor in your confidence that your EBITDA and free cash flow profile will remain sustainable in the long term? Can you explain how this addresses concerns that if retail revenues decline while your cost of goods sold remains constant, your margins might come under pressure? It seems you're indicating that you can manage both the numerator and the denominator, which is why you feel confident you’ve optimized the model.

Yes, that’s the exact aim of our strategy. Our intention with the entire Generation portfolio is to lower the cost of goods sold, which now represents our Generation costs. We have managed to negotiate some of these PPAs at very favorable rates compared to the market. Currently, we are executing deals in the market, and since these PPAs are distributed across various locations, the pricing differs based on where we have the load. Additionally, the durations vary; on average, they last ten years, though some are longer and others are shorter. The full effect of these PPAs will be reflected in our earnings sometime in 2021. I can’t provide specific details about the locations of these PPAs as we are still negotiating. However, I can roughly estimate that we have reduced our cost of goods sold, which impacts EBITDA, by about 2%. This gives you a general idea of what to expect. As we reduce our production costs, we gain more flexibility in maintaining our savings and cost comparisons that we can pass on to customers to capture market share. This creates more options for us. It's important to remember that the idea that a drop in wholesale prices would lower our margins assumes we won't adjust our cost structure or reposition our company. Since 2020, we've had complete financial flexibility. We are not waiting one, two, or three years. Even this year we have the financial flexibility, and by 2021, we will be fully prepared. By that time, we’ll have over $2.5 billion available to enhance our platform. It's crucial to understand the context of the position we have created for ourselves. We have completed our debt reduction and balance sheet strengthening efforts. Now, we have the full financial flexibility to focus on improving our model and returning capital to shareholders, which is vital for a stable cash flow business.

I have just one question. Based on what you've mentioned about having various options to respond to lower power prices, can you clarify whether you can significantly or completely offset the backwardation and its effect on forward power curves concerning your EBITDA or free cash flow? Essentially, is your earnings initiative unlike what we currently observe in ERCOT power curves?

Yes, Angie, what I can tell you unequivocally is that we have created a platform that is sustainable and predictable. What I mean by sustainable and predictable is that year-in, year-out we will produce the excess cash that we produce today. Now we're going to have this incredible financial flexibility that we have afforded ourselves to have to increment that all. The value proposition that we have today is to have a stable cash flow business that grows at a 2% to 4% a year with an investment-grade balance sheet and significant excess cash to grow the business in an accretive way and return meaningful capital to shareholders. We think that combination of those three things will eventually change and we will raise the valuation of the stock, which if I’m not mistaken right now is somewhere in the mid-teens to high-teens free cash flow yield. We don’t believe that the business that I describe to you should be there. If it gets re-rated closer to where we think it should be, then our stock price will be much, much higher than it is today. We also appreciate that this is the first year that we are showing the benefits of this platform. 2018 was a good test; we had a very volatile summer. 2019 is very important because it continues to demonstrate that our platform performs under a lot of different pricing scenarios. Now it is up to all that. If this continues to happen, and we’ve taken care of our balance sheet, and we can demonstrate that to our shareholders and to rating agencies, then we're on the path to re-rate the stock.

And just one last question. I was definitely surprised by the Petra Nova mention. Is there any other legacy business that might have any types of cash flow implications like I don’t know, even call it something else, whether there is a type of guarantee?

It’s Kirk: No, the two remain legacies. In addition, Agua Caliente that we have obviously a minority stake with the remainder being owned by another party and the balance with Midwest Generation. That debt is non-recourse to NRG, so there are no financial guarantees. This Petra Nova leverage test is a product that’s unique to Petra Nova.

First, just on the IG status. Can you maybe just elaborate a bit further on how the conversations are going with the agencies? And obviously outside of presenting very healthy metrics today, can you just get the agencies to look after philosophical issues about having an IG related IPP? Are you still trying to gain confidence on the retail business, and as you’re thinking about timing, do you think in the back half of 2020?

Shahriar, I’d say the last part of your question, I think that’s probably a realistic case. The back half of 2020 is probably the earliest timeline in fact of when we would expect that movement to make. Obviously on an unsecured basis, we’re two notches away from the minimum threshold of the investment grade, being triple B minus. That’s not to say that’s our aspiration; that’s sort of the inflection point between sub-investment grade and investment grade. But I think that timeline is probably reasonable. Certainly between now and then we need to see at least one notch uptick to be at least one notch away. I think in much the same way that although we’re more frustrated with the reaction in stock pricing, we’ve obviously got to demonstrate that to our equity investors. The mandate still holds on the other side of the equation with the rating agencies. I think delivering the numbers that we’ve now reaffirmed for this year confirms that notwithstanding the sell-offs that probably represent some of the prices that happened, our ability to do so, we are able to execute. The background, as I’ve mentioned you this before, we’ve been very pleased with the level of dialogue with rating agencies. They’ve dug in to understand the Retail business in particular a lot more. I think the progression of the dialogue and their perspectives on Retail and understanding how we operate the model and how Retail truly operates in tandem with Generation has been constructive and productive. It’s up to us to continue to execute, which we have confidence to do. But it will probably take that amount of time to get those two notches behind us on our way to the base.

And then just lastly on the token dividend, you guys still keep it. At what point do you make a decision to either grow it or remove it completely?

Yes, well, when you think about capital allocation, I think that’s really your question, how we think about capital allocation going forward. What I will tell you is that we have no changes, neither on our philosophy nor on the principle that we have provided to all of you. The only thing that has changed is the fact that we have completed one of our priorities, which is to achieve an investment grade balance sheet. That’s basically now out of the way. What that means is that all excess cash that we generate will be directed toward perfecting our model or returning capital to shareholders. Like I said, Shahriar, I do believe that a business that is stable and growing, a lot of excess cash, needs to return a meaningful part of that to the shareholders. Today, one of the most efficient ways to do this is through share buybacks. I think we have a $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 of our business. As we go into 2020, we will evaluate all the different options; I don’t know what the market will be like at the end of the year. What I will tell you is that our goal is to re-rate the stock to its fundamental value and evaluate all options available to us to ensure that we do that.

And just Mauricio, one last question on capital allocation. I just want to confirm, especially since some retailers are facing challenges right now, are you currently out of the market and not considering any further acquisitions in retail?

That we are out of the market?

Right, so are you looking at additional retail acquisitions similar to Stream or are you sort of out of the market?

I mean, I don’t comment on M&A, either specific processes or anything. What I will tell you is that when I think about inorganic growth, I will always adhere to the capital allocation principles that we have outlined for all of you. We have to meet the financial threshold that we have, and they have to be a better investment than investing in our own stock. I have said before that while we have rebalanced our portfolio quite well over the past couple of years, we can still perfect that platform. In Texas, our Retail is a little bit bigger than our Generation, and in the East, our Generation is bigger than our Retail. We’re executing on our capital-light strategy in Texas to rebalance our portfolio. We acquired Stream to rebalance our Retail, and we’re going to continue to look at all opportunities. That is the benefit we have afforded ourselves with the financial flexibility that we have today. We can be opportunistic about when to do it. But obviously, where the stock price is today, the bar is a little bit higher than it was not too long ago when our stock price started to reflect the fundamental value of our business.

Thanks again for all the color on the business model; it was very helpful. I guess just following up a little bit on that. On Slide 20, you have the wholesale gross margins which clearly have come down a little bit from Q1 given the drop in the power prices. But I’m assuming as you talked about in your business model points that some of this drop in the wholesale gross margin will be made up for on the Retail side in 2020. Is that a fair way to think about how we should look at Slide 20 today?

Yes, I think the way you need to think about ERCOT is as an integrated model. While we only give you one side of the leg, the Generation, we haven’t provided you the Retail sensitivity to it. To be candid, that needs to be improved; our disclosures have been really good on Generation. Where we need to improve is in our disclosures to capture the integration of our business because when I think about how we manage our business, I think about it as an integrated business where the gross margin, the combined gross margin is what matters. I care less about where it comes from, whether it’s Generation or Retail; I care about delivering the total gross margin year-in and year-out. Various factors affect the numbers: in the Northeast, you have capacity a little bit lower, which is offset by margin enhancement, and then we have the impact of Stream. My point here is that you cannot look at our business just in a static fashion; with the amount of financial flexibility we have to improve it, it’s like saying that we’re not going to do anything, but we have all this excess cash available to deploy in the most meaningful way that creates value for our shareholders. Yes, I'm very comfortable with our platform in 2020 and beyond. Our goal is to provide stable earnings, stable excess cash with modest growth. That’s our goal.

Yes, now that additional disclosure on the Retail side would be super helpful to complement the points you made on the business model. I guess moving on to the PPA side for solar, I guess it’s a little different from your perspective because you obviously have the option to sign more solar PPAs at pretty low prices, which is helpful for your Retail. But then you’rebringing in a lot more Generation at pretty low pricing, but you’re kind of drawing more solar into the market. How do you balance that? Does it benefit from your perspective, as you said, to have volatility? So just bringing in a lot of solar generation by offering them PPAs may not be the right solution from a holistic business perspective?

I believe it is important to maintain the competitive market in ERCOT because we have a valuable franchise there. We require significant capacity to uphold the current reserve margin, and it doesn't matter if we add 10 or 15 gigawatts of renewables; we will still face tight reserve margins that won't alleviate scarcity conditions in the system. Maintaining a reserve margin of 8% or 9% is administratively set and won't change the situation. If the competitive market functions effectively, it will send the appropriate price signals, leading to the development of the most cost-effective technology based on system needs. If that occurs, whether it's solar, wind, or conventional sources with high ramping capacity, we will need time to reach that point. Therefore, I anticipate tight conditions with strong prices and significant volatility in the foreseeable future.

No, I was just going to point out that we’ve seen ORDC has really been doing its job since the commission tweaked it earlier this year. It’s been a noticeable difference in pricing, whether it was like a $4.50 adder for this mild July that we had, which compares to like a $5 adder last year when July was smoking hot. Over the last couple of days, we’ve seen $100 to $200 tagged on in these hot days of August. ORDC just, like Mauricio said, doesn’t need costly marginal cost units to impact; it’s administratively set. To the extent that you could build almost 20 gigawatts of renewables, you need to do that just to stay flat in terms of reserve margin. So I’m not too worried about it. Don’t forget there’s another quarter turn of ORDC coming next March too, so I think we should be okay for a while.

All great points. And then just finally, clearly you guys are executing on the business model and the market, I agree, needs time to understand and fully see the execution of the business model. But if at some point, you don't see the stock price perform and you're hearing and you're still having the same conversation, is there a point when you look to go private as a transaction that’s possible, or is that something that's not on the table at this point?

I am sorry, the going private?

The market doesn’t support that.

I mean, right now our focus is on executing the strategy that we have. As I already mentioned to you, Praful, I mean we believe that this is a very compelling value proposition. I also recognize that this is a new business model for the competitive power sector. I no longer refer to us as an IPP but as an IPC; we are truly now an integrated power company. To the extent that we continue to demonstrate the viability and the stability of this platform, not just to our shareholders but also to rating agencies, I think there is an opportunity to re-rate the stock. But obviously, if that doesn’t happen, once we feel that we have exhausted all our efforts to demonstrate the stability of our business, then we will explore all options to maximize the value of our shareholders. But I don’t think that time has come yet; we have only proven this technology for two years. 2018 was a good test; we had a very volatile summer. 2019 is very important because it continues to demonstrate that our platform performs in many different pricing scenarios. So now it’s up to all that; if this continues to happen and we’ve taken care of our balance sheet and we can demonstrate that to our shareholders and to rating agencies, then we’re on the path to re-rate the stock.

Thank you. Well, it was as always good to give you an update. Thank you for the questions and for your interest in NRG, and I look forward to talking to you in the near future. Thanks.