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NRG Energy Inc (NYSE:NRG)
Q2 2019 Earnings Call
Aug 7, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen and thank you for your patience. You have joined the NRG Energy Inc. Second Quarter 2019 Earnings Call. [Operator Instructions]. I would like to turn the call over to your host, Head of Investor Relations, Kevin Cole. You may begin.

Kevin L. Cole -- Senior Vice President, Investor Relations

Thank you, Latif. 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.

Mauricio Gutierrez -- President and Chief Executive Officer

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 in the call and available for questions, we have Elizabeth Killinger, Head of our Retail Mass Business; and Chris Moser, Head of Operations. Over the past three and a half years, we have made significant progress in transforming our company from a traditional IPP to an integrated power company focused on our customers. We monetize our excess generation, and rebalance our portfolio. We streamline our operations. We slashed our debts. 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'm 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 we have on the 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 the 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 PPAs in ERCOT. And third, we are making good progress on our capital allocation plan. During the quarter, we fully completed our debt reduction program, and we have finally achieved our targeted investment grade credit metrics. In addition, we are announcing an incremental $250 million share repurchase program, which brings our total 2019 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 deliver $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 half 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.

Beyond these financials, we make significant [Indecipherable] further perfecting the stability and projectability of our platform. We launched our previously announced capital-light strategy, signing approximately 1.3 gigawatts of Solar PPAs in ERCOT, at an average length of ten years, which complement 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 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 debts 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 plan for their remaining $259 million of 2019 excess cash as we usually do on the third quarter earnings call. However, we are reserving up to $124 million of these capital for the Petra Nova projects.

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 prescribed a prepayment of principal in the event the ratio fell below the threshold. We have been in active negotiations with a project lenders, and we now expect to fund the prepayment in the third quarter. Although the final prepayment amount have not yet been determined, our obligation is limited to the guarantee amount. Once the debt free payment is made, the guarantee will terminate, and the remaining debt will become non-recourse to energy.

So now moving on to our summer update on Slide 5. I wanted to provide you a brief update on the position of our integrated model, even though we are only in the middle of the summer. As you can see on the left hand side, second quarter weather was milder than normal particularly in June, which impacted both prices and load.

Our portfolio so far is performing well. Starting with retail [Indecipherable]. We're also providing energy conservation alerts and man management programs, which help consumers manage load during peak hours. The milder weather during the second quarter has resulted in lower volumes, and like 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 lowest [Phonetic] price. We expanded our pre-summer maintenance program to ensure our units can withstand increased runtimes. And we return to service our Gregory Plant, a 385 megawatt combined cycle plant, which provides additional reliability to our platform and to the ERCOT system ahead of the summer. Given how we catch our portfolio, 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 remain the tightest that you have ever been given strong low growth, previous asset retirements, and lack of new builds. In May, ERCOT released their Semi Annual 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 the slide.

As you can see, future reserved 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 [Indecipherable] year. In fact, we have seen less than 50% of renewable projects included in the CDR reports completed. In our closer look at the report reveal 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 accounts form 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 try to adjust for some of these factors and estimate what is the amount of megawatts required from solar to maintain a reserve margin of 10% to 12%. As you can see in the table, we estimate over 17 gigawatts of new renewables are necessary to achieve those margins in the next three years. We see these as a challenging, given our recent experience signings Solar PPAs, and the backward data for our 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 PPAs. These PPAs help enable the 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 volatile for the foreseeable future, even in the face of a large renewable buildup. These price environment should be 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 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 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 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 making 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 return. We are no longer your traditional IPP exposed to the feast and famine of power cycles. Having deliberately changed the risk profile of our business, we have also we aligned our balance sheet, and achieved investment great 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 without debt leveraging 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.

Kirkland Andrews -- Executive Vice President and Chief Financial Officer

Thank you, Mauricio. Turning to 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 years results. Deducting the $103 million impact of these items from 2018 results provides a baseline for comparison to our portfolio 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 the higher costs which impacted gross margins, with the remaining variants 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 of 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 increase 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 are maintaining our ranges for the sub-components of our businesses as well, given year-to-date results in 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 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 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.

And 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've 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 in 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 of shareholder capital to over $1.5 billion in 2019, or more than 50% of 2019 excess capital return 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 remaining to be allocated, as we generate the remainder of our free cash flow over the balance of the year.

As Mauricio mentioned earlier, during the third quarter, we now expect to finalize the contractually required one-time leverage test for our Petra Nova project, which provides a formula for principal repayments in the event that debt service ratio falls below the defined minimum threshold. Having successfully extended the deadline for this one-time test originally scheduled for 2018, as the operator of the oilfield had taken steps to improve production, our expectation was the extended timeline would allow time for the ratio to exceed the threshold, and avoid a delay in repayment.

As the year progressed, despite the production improvement initiatives, oilfield production continued to lag the expectations. And based on our latest discussions with the lenders and the updated reserve forecasts 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 repayment amount is not yet finalized, NRG's obligation could be up to $124 million, or 50% of the project step. 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 contention prepayment obligation is then eliminated, and any remaining debt is non-recourse to NRG.

Finally turning to Slide 11, with our targeted deleveraging now complete, NRG's total debt is now under $6 billion, or approximately $5.4 billion, net of our -- of 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 displaces us at the midpoint of our targeted investment grade credit metric range, or 2.625 times net debt to EBITDA. Including, however of 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.

Mauricio Gutierrez -- President and Chief Executive Officer

Thank you, Kirk. Turning to Slide 13. I want to provide you a few closing thoughts. During the quarter, we have made significant progress on our priorities of perfecting our platform, maintaining our 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 great 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 repurchase.

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. Latif, we are now ready to open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] [Operator Instructions]. Our first question comes from the line of Julien Dumoulin-Smith of Bank of America. Your line is open.

Julien Dumoulin-Smith -- Bank of America -- Analyst

Hey, good morning.

Mauricio Gutierrez -- President and Chief Executive Officer

Hey, good morning, Julien.

Julien Dumoulin-Smith -- Bank of America -- Analyst

Hey, pleasure. I wanted to first ask you of the [Indecipherable] PPA announcements, certainly very interesting strategic decision here. How are you thinking about scaling these commitments over time, both in respective of PPAs rather than necessarily owning assets outright? And then secondly, probably relatively more critically, how do you think about this shift in your perspective on further build out a solar in Texas? Certainly, we hear a variety of different viewpoints out there. You're not necessarily using your balance sheet obviously, but you are seeing other developers pivot. How do you think about that in the fate of the portfolio that you have?

Mauricio Gutierrez -- President and Chief Executive Officer

Yeah. Well, first of all, I'm very pleased with the execution of the this capital-light strategy, kudos to the origination team. As we disclose today, we close on 1.3 gigawatts, that's a good progress. But what I can tell you is that we continue to be in the market executing on additional 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 to think about the retail load as the guideline on how much we're going to complement more our generation portfolio either through solar PPAs, or other efficient ways of acquiring, I guess, length or generation.

Now with respect to the solar, the second question that you had around the solar view, what we wanted to do was to illustrate, if we were to maintain a 10% to 12% reserve margin, which is we think is the minimum to have reliable operations over the long term, we wanted to put it in context of how much solar you will need. And as you can see, it's a pretty significant number, I mean, over 17 gigawatts including solar and wind, I can tell you whether it's going to be one or the other, or if the pricing those will change, and that will make a thermal generation or conventional generation being built, what I can tell you is that ERCOT needs a lot of generation, it needs a lot of investment.

And even the numbers that we're providing you are only sufficient to maintain 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, you know, a lot of volatility, and perhaps less of robustness, because we have really reduce our exposure to market by balancing our generation and retail businesses.

Julien Dumoulin-Smith -- Bank of America -- Analyst

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

Mauricio Gutierrez -- President and Chief Executive Officer

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

Julien Dumoulin-Smith -- Bank of America -- Analyst

Take it as you will.

Mauricio Gutierrez -- President and Chief Executive Officer

The integrated model or our view on how we are positioning our company given the market trends that we're observing today, and I'm glad you're asking that, because I do believe that we actually have a very unique and differentiated platform. As I mentioned to you, our goal is to better balance our generation and our retail businesses. I mean, these are two complimentary and countercyclical business, so to the extent that we match them better, they become even more complimentary 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 ten 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, but we don't necessarily have to if it's perfectly matched, which makes our platform a lot more stable, which is one of the goals that we're trying to achieve with these new integrated platform, stable and predictable earnings.

If you look at the better balance, we have -- as I said, more complimentary, and it's important on a relative basis. So, if you think about where we were, let's say, five years ago, when our generation business was out-sized 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 never been.

Now from a dynamic standpoint, when you have a more integrated portfolio like we do in a rising commodity price environments, obviously, our generation margins will increase and our retail margins will slightly decrease, and when the commodity prices are declining, the opposite happens, our generation margins decrease and our retail margins increase, what I can tell you is that we actually have a lot more degrees of freedom in terms of how much of the wholesale price increases or decreases, we can actually pass to our customers.

We know having been in the business now for over ten 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 at least provides you -- that provides you a -- I guess, perhaps a slightly different perspective on how I think about, how we're repositioning the company going forward.

Julien Dumoulin-Smith -- Bank of America -- Analyst

Thank you for the detail. All the best.

Operator

Thank you. Our next question comes from Greg Gordon of Evercore ISI. Your line is open.

Greg Gordon -- Evercore ISI -- Analyst

Thanks. Couple of blocking and tackling questions. First, when I look at a slide in the back of the slide deck, slide 33, 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 collateral posting on slide 35 which shows 246, so is that basically expected to reverse out over the year? Can you give us some kind of -- full year guidance is still OK?

Kirkland Andrews -- Executive Vice President and Chief Financial Officer

Yes, Greg's correct. That's correct. I mean, typically speaking, we're in the sort of the middle of our collateral or liquidity-intensive period, and is always the case as we come through the summer and enter into the fall, that's when we tend to get that collateral back from those postings or hedgings that are more accute in the summer, and obviously, the movements of the power prices affect that. So, short answer is yes.

And the only other change that I'll know for is obviously readjusted the interest payments a little down to reflect a partially reimpact [Phonetic] on 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 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 the free cash flow before growth, and we do expect that collateral to return and we're in line with our years expectations on cash flow.

Greg Gordon -- Evercore ISI -- Analyst

Thanks, great. And Mauricio, when I look at next slide 15, and it's realized Cost Savings, Margin Enhancement, Working Capital Improvements etc on the scorecard, you didn't have anything in the script with regard to your feelings on being able to hit those targets, but should we assume that you're still on track to hit those targets in '19 and '20?

Mauricio Gutierrez -- President and Chief Executive Officer

Yes, absolutely. I thought we had something on the priorities. But I'm very comfortable hitting our Cost Savings targets by the end of the year, Margin Enhancement this year, and next year. So everything is on track, Greg.

Greg Gordon -- Evercore ISI -- Analyst

Great. And then when we talk about these -- the potential for the up to $124 million turnover 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's a proscribed [Phonetic] calculation, is it a certainty that you'll have to post $124 million, or there is a sort of a sliding scale of potential payments you have to make inside a range so to speak, and then is it -- should it be our expectation that whatever the remaining capex is that of that the obligation that you'll allocate that on the Q3 call?

Kirkland Andrews -- Executive Vice President and Chief Financial Officer

I mean, the end of that question, it's Kirk. I think as Mauricio said, we will update our plans for the excess capital for you on third quarter [Indecipherable] answers that questions. Yes, as to the $124 million, that is the maximum amount, that is not necessarily the expectation, it is depends on the finalization of that calculation. But as I indicated, once that calculation is made and that prepayment amount is set, which we do expect to happen in the third quarter, the obligation falls away, it is a one-time test, it's a one-time guarantee, and any remaining that is non-recourse to Energy. 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.

Greg Gordon -- Evercore ISI -- Analyst

Okay, my last question, Mauricio, sort of a different question along the lines of the solar contracts that you've entered into the -- we 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 in your contracts and your revenue line, which now is sort of fundamentally matched retail. Are these -- is this strategy fundamentally reducing your run rate cost of goods sold in the marketplace?

And you know, is that one of the reasons why, among other things, you're confident that your EBITDA and free cash flow profile is sustainable over time. And if you can talk about what that does, in terms of, you know, offsetting people's concerns that perhaps over time, retail margins might decline -- might come -- if retail revenues come down, if your cost of goods sold that stays static, and therefore margins would come under pressure, I think what you're telling us is that you can manage the numerator and the denominator through time, and that's why you're confident that you've perfected he model?

Mauricio Gutierrez -- President and Chief Executive Officer

Yeah, I mean, that's 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 goods sold, which now becomes our cost of generation, and I will tell you that we have executed some of these PPAs at very attractive levels, compared particularly to the market. I mean, we are in the process right now of executing in the market, and depending on the location because all of these PPAs are spread out depending on where we cover the load. So, they have very different pricing, also the tenure is different, I mean, on average is ten years, but some of them are a little longer than that, some of them are a little shorter than that.

The impact of these PPAs will come in full earnest sometime in 2021. I can give you -- I cannot give you any more our details in terms of where we have entered into this PPA is because obviously we're still in the market, but what I can tell you just from a order of magnitude, so far we have reduced our basically our cost of goods sold, which translates into EBITDA, let's say about 2% of our EBITDA, so I mean, that at least gives you some order of magnitude in terms of what to expect.

And as you said, as we lower our cost of production, we have a lot more degrees of freedom in terms of, you know, do we maintain the savings that we have, or the cost competitive that we have, do we pass it to our customers to gain market share. I mean, but then it creates a lot more optionality for us, and just keep in mind that, this notion that if also prices will decrease they will decrease our margins, it assumes that we basically will do nothing, we will do nothing to change the cost structure and the repositioning of our company.

And I have to remind everybody that, starting in 2020, we have basically full financial flexibility. We don't have to wait one or two or three years, starting in -- even this year, we have financial flexibility, but it will, so if you think about our stable platform, this year we produce between $1.3 billion-$1.4 billion. By the time 2021 rolls in, I mean, we're going to have over $2.5 billion that we can deploy to continue perfecting our platform. So I just -- I think it's important to put it in context, the position that we have put ourselves in place, we're done with our the deleveraging and our strengthening of 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 as a stable cash flow business that we have.

Greg Gordon -- Evercore ISI -- Analyst

Mauricio, Kirk, thank you.

Mauricio Gutierrez -- President and Chief Executive Officer

Thank you, Greg.

Operator

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

Angie Storozynski -- Macquarie -- Analyst

Great, thank you. So I have only one question. So given what you've just said right, that you have plenty of leverage to react to lower power prices. Can you tell us if you can, largely or fully mitigate the backwardation and the impact of the backwardation in solar power curves on your EBITDA or free cash flow, i.e., there isn't basically the shaping [Phonetic] of your earnings is not similar to the one that we see currently in of power curves?

Mauricio Gutierrez -- President and Chief Executive Officer

Yes, Angie, what I can tell you unequivocally, is that we have created a platform, that is a stable and predictable, what means to stable and predictable is, year in year out, we're going to produce the excess cash that we produce today. Now, we are going to have these incredible financial flexibility that we have afforded ourselves to have, to increment that off, so 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 a creative way, and to return capital -- meaningful capital to shareholders. We think that the combination of those three things will eventually change and rerate 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, should be there.

And if we gets rerated 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 showing the benefits of these 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 on there a lot different pricing scenarios. So now it is up to all that, if this continues to happen, and we taking care of our balance sheet and we can demonstrate that to our shareholders and to rating agencies, then we're on a path to rerate the stock.

Angie Storozynski -- Macquarie -- Analyst

Okay, and just one last question. I was definitely the one surprised by the Petra Nova mentioned, is there any other legacy business that might have any types of casual implications like, I don't know, Ivanpah or something else, where there is a parental guarantee?

Kirkland Andrews -- Executive Vice President and Chief Financial Officer

Angie, it's Kirk, no. The two remains are legacies. In addition, Ivanpah [Indecipherable] that we have obviously a minority stake with the remainder being owned by Clearway [Indecipherable] and the balance with Midwest Generation, that debt is non-recourse to energy, so there are no financial guarantees. This Petra Nova leverage test is a product that's unique, if you will to Petra nova.

Angie Storozynski -- Macquarie -- Analyst

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Shahriar Pourreza of Guggenheim partners. Your question please.

Shahriar Pourreza -- Guggenheim partners -- Analyst

Hey, guys, two quick questions here. 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 [Indecipherable] presenting very healthy metrics today? Can you just get -- can you get the agencies to look past their philosophical issues about having an IG-rated IPP, are they still trying to gain comfort on the retail business, and as you're thinking about timing or are we thinking the back half of 2020?

Kirkland Andrews -- Executive Vice President and Chief Financial Officer

Shahriar, I'll answer the last part of your question, I think that's probably the realistic case in back half of 2020 is probably the early timeline, in fact of when we would expect that movement to make obviously, we -- an unsecured basis for two notches away from the minimum threshold of investment that being BBB minus, that's not to say that's our aspiration, that's sort of the inflection point between some investment grade, great investment grade, but I think on that timeline is probably reasonable, certainly between now and then we need to see it, at least a one notch uptick to be at least than one notch away, and I think in much of the same way is that, although we're 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 we've now reaffirmed for this year, which affirms that notwithstanding the sell off, that probably represents some of crisis of confidence in our ability to do so, we are able to do so.

So delivering on that this year, continue and execute. In the background, as I've may have said to you or others before, we've been very pleased with the level of dialogue with the rating agencies. I think they've dug in to understand to their credit, the retail business in particular a lot more. So I think the progression of the dialogue, and their perspectives on retail, and understanding how we operate the model, and how retail truly operates in tandem with generation has been constructive and productive. And it's up to us to continue to execute which we have every confidence to do so. But it will take probably that amount of time in order to get those two notches behind this on our way to three base.

Shahriar Pourreza -- Guggenheim partners -- Analyst

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

Mauricio Gutierrez -- President and Chief Executive Officer

Yeah, well, you know, when you think about capital allocation, because I mean, that's really your I think your question, Shahri, how do we think about capital allocation going forward, and what I will tell you is that we have no changes, 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, which is 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, Shahri, I do believe that a business that is stable and throwing a lot of excess cash, needs to provide -- needs to return a meaningful part of that to shareholders. Today, that forms the most efficient way to do it is through share buybacks. I think we speak with a $215 million incremental share buyback that we announced today, to take advantage of what I believe is an older valuation of our stock without any changes to the fundamental value drivers of our business.

Now, as we go into 2020, obviously, we're going to evaluate all the other different options. I don't know what the market is going to -- where it's going to be at the end of the year, I am going to evaluate all of them, what I will tell you is that our goal is to rerate the stock to its fundamental value, and we're going to evaluate all options that we have available to us to ensure that we build them.

Shahriar Pourreza -- Guggenheim partners -- Analyst

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

Mauricio Gutierrez -- President and Chief Executive Officer

That we are out of the market?

Shahriar Pourreza -- Guggenheim partners -- Analyst

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

Mauricio Gutierrez -- President and Chief Executive Officer

Okay. I mean, I don't comment on M&A, neither a 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 got to meet the threshold, the financial threshold that we have, and there have to be a better investment than investing in our own stock. I have said before that while we have rebalanced our portfolio pretty good 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. So 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 the opportunities, I mean, that is the, I guess, the benefit that we have afforded ourselves with the financial flexibility that we have today. We can be opportunistic about when to do it, but obviously, where the spot price is today, the bar is a little bit higher than it was, not too long ago when our stock price was starting to reflect the fundamental value of our business.

Shahriar Pourreza -- Guggenheim partners -- Analyst

Okay, thank you very much, guys.

Operator

Thank you. Our final question comes from the line of Praful Mehta of Citigroup. Your question, please.

Praful Mehta -- Citigroup -- Analyst

Thanks so much. Hi, guys.

Mauricio Gutierrez -- President and Chief Executive Officer

Hey, Praful, how are you?

Praful Mehta -- Citigroup -- Analyst

Hi, thanks, again, for all the color on the business model, it was very helpful. I guess just following up a little bit on that. 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?

Mauricio Gutierrez -- President and Chief Executive Officer

Yes, I think the way you need to think about ERCOT is an integrated model. So while we only give you one side of the leg, the generation, we haven't provided you the retail sensitivity to it, and to be candid, I mean, that's been up -- it's up to us 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 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. I mean, there's other puts and takes, I mean, in the northeast, you have capacity a little bit lower and -- but that's been offset by margin enhancement, and then we have the impact of Stream. 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 all these excess cash available to deploy it in the most meaningful way that creates value for our shareholders. So, yeah, I'm very comfortable with our platform in 2020 and beyond, and as I said, our goal is to provide stable earnings, stable excess cash with a modest growth. That's our goal.

Praful Mehta -- Citigroup -- Analyst

Got it. Yeah, I know that additional disclosure on the retail side would be super helpful to kind of complement the points you made on the business model. I guess, moving on to the PPA side for solar, I guess it's a little different from your perspective because you obviously have the option to sign more solar PPA at pretty low prices which is helpful for your retail, but then you're bringing in a lot more generation at pretty low pricing, but you're kind of drawing more solar into the market. How do you balance that -- there's the 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?

Mauricio Gutierrez -- President and Chief Executive Officer

Okay, well, I -- and I say we may not be I think it is, and the reason why is, then we have a very valuable franchise in ERCOT and we want to ensure that the competitive market continues to work and work well in the state. We need so much capacity to even maintain this current reserve margin. It really doesn't matter if we bring 10 or 15 gigawatts of renewables. You're going to continue to have tight reserve margins, which is not going to affect the scarcity conditions in the system. I mean, all this is not going to be affected if you basically keep your reserve margin of 8%-9%, that other is administratively said, so I actually think that we -- if the competitive market works well, it's going to provide the right price signal, and the cheapest technology is the one that is going to get built, the cheapest technology to meet the needs of the system.

And if that happens, whether it's solar, wind or conventional with high ramping capacity, we think that's going to require some time, and that's why I say for the foreseeable future in ERCOT, I expect really five conditions with strong prices and tremendous amount of volatility. Kirk, is there anything that you want to add?

Kirkland Andrews -- Executive Vice President and Chief Financial Officer

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. There's been a noticeable difference in pricing, whether it was like a $4.50 adder for this mild July that we had, which compares to like a $5 adder last year when July was smokin' hot. Over the last couple of days where we've seen $100 to $200 tacked on in these hot days of August, ORDC, just like Mauricio said, just doesn't need costly marginal cost units to impact its administratively [Indecipherable], 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. Yeah, I'm not too worried about it. And don't forget that there's another quarter turn of ORDC come in next March too. So, I think we should be OK for a while.

Praful Mehta -- Citigroup -- Analyst

Got it, all great points. And then just finally, clearly rather 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 in and you're still having the same conversation, is there a point where you look at that go private as a transaction that's possible or is that something that's not on the table at this point?

Mauricio Gutierrez -- President and Chief Executive Officer

I'm sorry, they're going private --

Kirkland Andrews -- Executive Vice President and Chief Financial Officer

The market doesn't.

Mauricio Gutierrez -- President and Chief Executive Officer

Yeah, 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 rather no longer refer to us as IPP but as an IPC, we're truly now an integrated power company. And so to the extent that, we continue to demonstrate the viability and the stability of this platform, not just to our shareholders, but also to rating agencies. I think that there is an opportunity to rerate the stock.

But obviously, if that doesn't happen, once we feel that we have not exhausted all our efforts to demonstrate the stability of our business, then we will explore all options to maximize the value of our shareholder. So, I mean, that's something that we just have to do. But I don't think that time is yet, I mean, we've only have provided -- we've proven these 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 our shareholders and the rating agencies some time to digest this strategic shift.

And, when we feel that we have given enough time and the market is not responding, which I'm still hopeful that it will, and I'm convinced that it will, because we have a very strong value proposition, then we will evaluate something else. But right now, all our focus, a 100% of our focus is in executing this strategy.

Praful Mehta -- Citigroup -- Analyst

Got it. Understood, super helpful. Thank you, guys.

Operator

Thank you. At this time, I'd like to turn the call back over to the CEO of NRG Energy, Inc, Mauricio Gutierrez for any closing remarks. Sir?

Mauricio Gutierrez -- President and Chief Executive Officer

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 look forward to talking to you in the near future. Thanks.

Operator

[Operator Closing Remarks].

Duration: 62 minutes

Call participants:

Kevin L. Cole -- Senior Vice President, Investor Relations

Mauricio Gutierrez -- President and Chief Executive Officer

Kirkland Andrews -- Executive Vice President and Chief Financial Officer

Julien Dumoulin-Smith -- Bank of America -- Analyst

Greg Gordon -- Evercore ISI -- Analyst

Angie Storozynski -- Macquarie -- Analyst

Shahriar Pourreza -- Guggenheim partners -- Analyst

Praful Mehta -- Citigroup -- Analyst

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