NRG Energy Inc (NRG) 2019 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by.

Welcome to the NRG Energy, Inc.

Third Quarter 2019 Earnings Call.

(Operator Instructions) As a reminder, this conference call may be recorded for replay purposes.

It is now my pleasure to hand the conference over to Mr. Kevin Cole, Head of Investor Relations.

Sir, you may begin.

Thank you, Brian.

Good morning, and welcome to NRG Energy's Third 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 and Webcasts.

Please note that today's discussion may contain forward-looking statements, which are based on assumptions that we believe to be reasonable as of this date.

Actual results may differ materially.

We urge everyone to review the safe harbor in today's presentation as well as 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 with that, I'll turn the call over to Mauricio Gutierrez, NRG's President and CEO.

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

I'm joined this morning by Kirk Andrews, our Chief Financial Officer; and also on the call and available for questions, we have Elizabeth Killinger, Head of our Retail Mass business; and Chris Moser, Head of Operations.

I would like to start the call with our key messages on Slide 3 that highlight the simplicity of our value proposition and demonstrate the predictability of our platform, particularly after the summer we experienced in Texas with significant weather and price volatility.

First, our integrated platform performed well during the summer, allowing us to narrow our 2019 guidance around the midpoint of our range and validating again the resilience of our business.

Second, we're initiating 2020 guidance that further demonstrates our ability to deliver robust and predictable results through varying market conditions.

And third, we're providing additional clarity on our capital allocation philosophy, given the financial flexibility that we have afforded ourselves.

We are introducing a framework consistent with our goal of growing and perfecting our business while returning meaningful capital to our shareholders.

This framework targets 50% of excess capital towards growth and 50% to be returned to shareholders, supported now by a more significant dividend policy.

So moving to our third quarter results on highlights on Slide 4. As you can see on the left-hand side of the slide, during the quarter, we remained a top-decile safety performance and delivered $792 million of adjusted EBITDA or 33% higher than last year on a same-store basis.

This was primarily driven by higher realized power prices, margin enhancement and Retail customer growth, partially offset by higher retail supply costs and higher unplanned outages.

And the summer in Texas was particularly challenging, given the extreme weather and price volatility that resulted in record prices and record demand.

I am very proud of our Generation and Retail teams for their ability to deliver strong financial performance during a period of extreme price volatility.

It is exactly in this price environment that our platform demonstrates the benefits of the integrated model.

Our year-to-date adjusted EBITDA results now stand at $1.6 billion, a 19% increase from last year, allowing us to narrow our 2019 guidance range around the midpoint to $1.9 billion to $2 billion.

During the quarter, we continued to execute on our capital-light strategy, signing an additional 100 megawatts of solar PPAs, bringing the total to 1.4 gigawatts this year while we continue to pursue additional solar PPAs, which allows us to better serve our customers and further balance our integrated platform.

Also during the quarter, we completed $55 million of our current $250 million share repurchase program, leaving $195 million to be completed over the balance of the year.

Moving to the right side of the slide.

We're initiating 2020 adjusted EBITDA guidance of $1.9 billion to $2.1 billion, and free cash flow before growth guidance of $1.275 billion to $1.475 billion.

This guidance further demonstrates our ability to deliver stable and predictable results through varying market conditions.

Kirk will provide additional details on both guidance ranges later in the call.

Finally, as part of the long-term capital allocation policy that I will discuss in more detail later in the presentation, I am pleased to announce that beginning in the first quarter of 2020, we will increase our annual dividend from $0.12 per share to $1.20 per share or about 3% yield with a target annual growth rate of 7% to 9%.

Now turning to Slide 5 for a closer look at the summer in Texas.

On the top-left chart, we show weather represented as cooling degree days by month.

As you can see, summer weather was mixed.

Mild temperatures [surged] early in the summer, with warmer weather in August and September, presented unique challenges for the power grid.

This resulted in power prices significantly different from their forward indications, as you can see in the lower chart.

July prices came in below forecast, while August and September came in significantly above, driven primarily by warmer weather, coupled with lower-than-expected wind generation and increased unplanned outages.

Like the rest of the market, we also experienced some increased unplanned outages, the most notable one being WA Parish unit 6 after running reliably for over 200 consecutive days.

The cost of the outage was a one-off, and we do not expect to see a repeat in the future as the circumstances were specific to that unit.

However, the unit missed most of August and September, limiting our ability to benefit from higher prices.

Now turning to the right side of the slide.

Our integrated platform provided stable results through July's low-load, low-price and August and September's high-load, high-price environments.

Underpinning our success was strong supply and risk management, enhanced customer outreach and bill management tools provided for residential and commercial customers.

Now between the summer of 2018 with volatile forwards and disappointing real-time prices, and the summer of 2019 with almost the opposite higher real-time prices, we have now demonstrated the strength and predictability of our integrated model through 2 very different market conditions.

This is one more example of what underpins our confidence in the stability and predictability of our business.

Now as we enter 2020 with limited cost on our capital, I want to take a moment to review our capital allocation track record on Slide 6, particularly in light of the financial flexibility we have created for ourselves.

As you recall, we have outlined 3 distinct phases in our transformation.

First, in 2016 and 2017, we focus on stabilizing the business through selling or closing underperforming assets, focusing on our core integrated business and strengthening our balance sheet.

If you recall, my first commitment to you nearly 4 years ago, was to leave no doubt in our balance sheet strength, and that is where we committed our excess cash.

We allocated 70% of excess cash during this period to debt repayment and 20% resolve legacy commitments.

Next, in 2018, we entered Phase 2 with a focus on rightsizing the portfolio to better integrate and align Generation with Retail.

During this period, we executed over $3 billion in asset sales, which reduced our Generation portfolio by 50% and strengthen our balance sheet to investment-grade credit metrics, creating tremendous financial flexibility.

And with this financial flexibility, we completed 2 accretive mid-sized Retail transactions by allocating 18% of our excess cash and took advantage of our dislocated stock price by allocating nearly 50% towards returning capital to shareholders and reducing our share count by over 20%.

Now as we move into our next phase of redefining our business and with significant financial flexibility, I want to provide additional clarity and refinement into our long-term capital principles and priorities.

As you can see on the right-hand side, our commitment to safety, operational excellence and balance sheet remains unchanged.

Our enhancement today will focus on growing our business and returning capital to shareholders.

Like I have said in past calls, I believe a predictable cash flow company like ours should regularly and meaningfully return capital to shareholders.

It creates discipline and it is part of our overall value proposition.

Let me further unpack these on Slide 7. Starting on the left-hand side, you can see our updated capital allocation framework waterfall.

We have come a long way in achieving our goals.

We continue to maintain top decile safety and operational excellence and have achieved what we believe to be investment-grade credit metrics.

Today, we are establishing a target allocation mix of 50% to accretive growth investments and 50% to return of capital.

For those listening that are new to the NRG story, prior to today, returning capital to shareholders was primarily viewed through the lens of unallocated growth capital, which is no longer the case.

I believe a long-term commitment through a strong dividend policy, complemented by share repurchases, is an important attribute for both value creation and broadening our shareholder base.

First, on growth.

As you can see on the waterfall, there is no change in our investment criteria.

This capital will either be deployed in good, sound investments that meet our financial thresholds and are consistent with our strategy or they will be returned back to our shareholders.

Next, on return of capital, we are increasing our annual dividend from $0.12 to $1.20 per share beginning in the first quarter of 2020 and targeting a 7% to 9% annual growth rate.

While I continue to see our stock as one of the most compelling investment opportunities, I also believe a more significant dividend policy provides added visibility in returning capital to shareholders and helps broaden our investor base as we continue to execute and validate the stability and predictability of cash flows.

We will also complement the dividend with significant and programmatic share repurchases.

On the right side of the slide, we want to illustrate the magnitude of the excess cash and the impact of our refined capital allocation policy.

If we simply maintain the existing earnings power of our business while deploying 50% of our excess cash at the midpoint of our hurdle rate and the remaining 50% of excess cash used to grow the dividend and for share repurchases, you can see in this scenario that over the next 5 years, we would generate over $8 billion of excess cash or 80% of our market cap, grow our annual free cash flow before growth by 50% and shrink our share count by 30%.

We are an increasingly stable and predictable cash flow company that, through the combination of compelling growth investments and share repurchases, are on track to double our free cash flow per share over the next 5 years, while paying a compelling and affordable dividend with 7% to 9% annual growth.

So with that, I will turn it over to Kirk for the financial review.

Thank you, Mauricio.

Turning to the financial summary on Slide 9, NRG delivered $792 million in adjusted EBITDA for the third quarter and $433 million in free cash flow before growth.

This brings total adjusted EBITDA through the first 9 months to around $1.6 billion, with $637 million in free cash flow.

After adjusting for a $57 million reduction in EBITDA for asset sales and deconsolidations in 2018, our third quarter results were $198 million higher than 2018, driven by Generation, which benefited from higher realized power prices in Texas and lower costs from Transformation Plan savings.

These elements were partially offset by lower capacity revenues and generation volumes in the East and the West, while Retail remained flat for the quarter with higher supply costs and milder weather at the beginning of the quarter, offsetting our margin enhancement initiatives and contribution from acquisitions.

The bulk of third quarter Retail load and EBITDA was generated during the back half of the third quarter, resulting in higher working capital, driven by receivables.

As the results of a great portion of the cash flow associated with third quarter Retail EBITDA, that cash flow will be realized during the fourth quarter as the receivable balance unwinds.

And we've already begun to see this significant cash flow materialize over the month of October.

With these results to date, we are narrowing our 2019 EBITDA guidance range to $1.9 billion to $2 billion in EBITDA.

As I alluded to last quarter, higher power prices in ERCOT have driven higher realized and expected EBITDA for the Generation segment, while the corresponding higher cost drives lower expected EBITDA for Retail.

These elements are reflected in the revised segment components of our narrowed consolidated guidance, which nonetheless remains centered around our original midpoint.

While midpoint EBITDA guidance remains unchanged, our revised 2019 free cash flow guidance midpoint is lower by $50 million due to the cash flow impact from outages during 2019, including WA Parish.

Although the EBITDA impact of these outages was offset by other items, our free cash flow outlook is slightly lower primarily due to increases in maintenance CapEx resulting from the outages.

During the third quarter, we finalized the contractually-required onetime leverage test for our Petra Nova project.

Although as I indicated on our previous earnings call, NRG's obligation could have been up to $124 million, we were able to keep the amount required from NRG to only $107 million.

We satisfied this obligation in 2 parts.

First, $95 million of cash was contributed by NRG to the project in the third quarter.

And second, NRG posted a $12 million letter of credit, which may be drawn by the project at a future date.

Having now satisfied our legacy obligation under the leverage test, the guarantees supporting this obligation is now eliminated and the remaining debt at the project is nonrecourse to NRG.

Finally, since the announcement in August of our $250 million share repurchase program, we've completed $55 million in additional share repurchases at an average of $37.62 a share.

We expect to complete the remaining $195 million of repurchases under that program over the balance of the year.

Turning to Slide 10.

You'll find our newly announced guidance ranges for 2020.

Specifically, we expect $1.9 billion to $2 billion in adjusted EBITDA for 2020.

As shown in the table on the right-hand side of the slide, based on the midpoint of our guidance ranges, this implies about $50 million of year-over-year increase in adjusted EBITDA, driven by the final component of our margin enhancement program, or $80 million, and the full contribution from the Stream acquisition.

These are partially offset by higher year-over-year retail costs.

We expect $1.275 billion to $1.375 billion in free cash flow before growth in 2020, converting approximately $0.70 of EBITDA into cash.

Our 2020 guidance ranges exclude any EBITDA or free cash flow associated with Agua Caliente, as we are targeting the sale of our remaining stake in that project during 2020.

Turning to Slide 11 for a brief update on 2019 capital allocation.

Changes since the prior quarter are highlighted in blue and include a slight adjustment to total capital to reflect the midpoint of our revised free cash flow guidance.

Growth investments now reflect the $95 million in cash contributed to Petra Nova as well as a small increase associated with the purchase of retail books.

As a result, we have about $80 million of 2019 excess capital remaining to be allocated, which we'd expect to allocate using the newly-announced guideline Mauricio outlined earlier or approximately 50% toward growth and 50% to share repurchases.

Finally, as I mentioned during my review of third quarter results, we've seen significant positive cash flow since the end of the quarter.

In order to show this more clearly, on the upper right of the slide have included a liquidity table to show the significant change in liquidity, which is the sum of cash and credit facility availability as of November 1 as compared to the quarter end.

Over the month of October, our liquidity improved by over $450 million.

Net of the noncash reduction in letters of credit posted, over 50% of this improvement in liquidity represents free cash flow before growth during the month of October.

And finally, turning to Slide 12.

The midpoint of our newly-announced 2020 guidance range places us on track to achieve the low end of our target investment-grade metrics or about 2.5x net debt to EBITDA, making 2020 the second year of investment-grade metrics for NRG.

We continue to believe that these consistent and strong credit metrics, combined with a continued execution and an active dialogue with the ratings agencies, places us in a position to earn an investment-grade rating in the next 12 to 18 months.

And with that, I'll turn it back to Mauricio.

Thank you, Kirk.

Turning to Slide 14, I want to provide you a few closing thoughts on our 2019 priorities and expectations.

Our top priority for some time has been to demonstrate the predictability and stability of our integrated platform, and this summer marks another year of delivering stable earnings through volatile market conditions.

As you can see on our scorecard, we've made significant progress across all other priorities, from perfecting our business and reducing debt to delivering on our transformation goals.

We will continue to simplify our disclosures to help better understand the value proposition of our integrated platform going forward.

As we move into 2020, I am confident our platform, coupled with clear and compelling capital allocation principles, is well positioned to deliver strong and predictable results and create significant shareholder value.

So with that, I want to thank you for your time and interest in NRG.

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

(Operator Instructions) And our first question will come from line of Julien Dumoulin-Smith with Bank of America.

Congratulations.

So perhaps, first off, I'm curious on the new growth strategy, if you could elaborate a little bit.

How do you think about finding investments that achieve those hurdle rates?

And how do you think about, sort of over time, contrast that against your own levered and unlevered yield as it stands today?

Yes.

Well, I don't think there is a new growth strategy.

I think what we're doing here is to provide more clarity on the return of capital policy that we have long term.

In terms of growth, I don't think anything has changed from my perspective.

In the near term, I continue to see opportunities in the -- primarily in the Retail space.

I will say, small- to medium-sized companies similar to what we executed in the past 1.5 years with XOOM and Stream.

And the number of those opportunities are still limited, but that's where we're going to focus in the near term.

I mean medium and long term, we will see what these opportunities are.

I mean as we continue to perfect our model, obviously we're looking at how do we enhance the products and services that we provide to our customers.

But I wouldn't characterize it as a new growth strategy.

It's just providing more clarity on our return of capital to shareholders.

But are there still opportunities to acquire retail platforms at this point, given just the consolidation we've already seen?

And then maybe I'll ask it at the same time, the 7% and 9% dividend growth that's basically predicated on not just the repo, but also finding these platforms and deploying capital allocation?

Yes.

Yes, so I mean we still see some opportunities.

I mean we're, as you mentioned, I mean there is some -- there's a pretty fair activity in terms of consolidation in the retail space.

We're evaluating what will be complementary to our business in terms of products, regions, channels, just like we did with XOOM and Stream, which gets us into the referral -- the referral sales channel.

We're evaluating what else, where are these other opportunities that can complement and enhance and grow our Retail business.

But that's where I see right now the most immediate opportunities.

Obviously, we're still executing on our capital-light strategy to continue perfecting and balancing our portfolio.

But as I said, I mean that's capital-light.

And our next question will come from the line of Greg Gordon with Evercore ISI.

So I guess just to follow-up on Julien's point.

I mean you are reiterating a pretty high hurdle rate for growth capital investments, and it would seem to me that the depth of the market for either assets or businesses that have those type of returns could be pretty shallow.

So you are committed, if you can't deploy that capital in any given year, to pivoting to buybacks with that money?

I mean I know you -- if you can just talk through your thought process on that and how you'll communicate that going forward?

Yes.

I mean the long-term capital return -- the return of capital policy that we're providing today does have some flexibility embedded in it.

I mean if we cannot find growth opportunities that meet our financial thresholds, and importantly, that is superior to buying back our own stock, then we'll return that capital to shareholders in the form of share buybacks.

So that's where the flexibility is embedded in our plan.

But again, what I wanted -- the goal of today is to provide more clarity in terms of what is that return of capital philosophy that supports the value proposition of NRG.

Greg, as I said in the past, I mean the value proposition of the company, it is to have a business model that is balanced, that provides stable and predictable earnings with an investment-grade type of balance sheet and a very clear and transparent capital allocation principles.

And part of those principles is to returning a meaningful part of our excess cash to shareholders.

What we are doing today is providing that clarity in terms of what is meaningful.

And what I'm saying today is $0.50 of every dollar of excess cash will go to shareholders in the form of dividends and share repurchases and 50% will go to growth.

But if we cannot find growth opportunities that meet the thresholds that I just said, then we'll return that capital to shareholders.

Great.

Are there -- is there any type of investment that's -- that you would say sort of off-limits?

Like are you not interested in more power generation or in the right markets, if you have the right retail load -- mix is -- are power generation assets potentially part of the capital deployment scenario?

I mean at this point, we've been very successful with our capital-light strategy on the Generation side.

Given where we're seeing the economics, I don't see immediately opportunities in Generation.

That doesn't mean that we're creating optionality within our portfolio.

I mean we have a lot of assets, we have a lot of power plants across our fleet but I don't see that today.

I mean I think the most immediate actionable opportunities are within the retail space.

Great.

One last question.

When I look at the -- when I look at the hedges, I see that you've rolled the hedges forward to '21, and it looks like you've got some pretty good marks in there.

You also mentioned that you're going to continue, however, to evolve your disclosures.

Can you maybe give us a little bit more on where you think you're heading there?

So 2 questions, sorry.

Yes.

I mean when I think about the business, I don't think about 2 different businesses, I mean Generation and Retail, I actually think about it as an integrated platform.

So one of the improvements that we're going to do on the disclosures is, how do we think about that integrated platform.

I think we've been very good at providing disclosures on the Generation side of the business.

But now we have to do a better job in providing them holistically for the integrated model as a whole.

Great.

And Kirk, can you comment on the hedge position?

It looks like you have some pretty good marks there.

Yes.

I mean I think we've taken advantage of some higher prices as we always have.

At the end of the day, that's obviously improved our position.

But we're mindful of the fact that the balance of that, whether we hedge or whether we remain open, that obviously provides a backdrop or support for the retail supply, especially around ERCOT.

But yes, certainly, a product of well-timed hedging taking advantage of rally and market prices beyond the prop year, certainly.

And our next question will come from the line of Steve Fleishman with Wolfe Research.

So maybe just -- Mauricio, so maybe just a little more color on -- obviously, Retail has been hurt by the supply cost and the like.

But just how is Retail performing, both in terms of the traditional ERCOT business, customer count, things like that?

And also how would you characterize how the acquisitions have gone so far in Retail?

Yes, Steve.

Well, let me turn it to Elizabeth.

So first, I'll start with the acquisitions.

We are very pleased with both the XOOM and Stream acquisitions, they have integrated very seamlessly into our organization.

And in XOOM's case, has set records in selling once it was under our ownership, and Stream is integrating well.

They're both culturally and from a team and business process perspective, that's going very well.

We do have some noise in our customer count inter-quarter, really because of the acquisitions from the small book transactions, which includes expected early attrition.

And so we will -- that's part of our valuation model.

And overall, I'm very pleased with the strength and the performance of our acquisition and retention engine in light of some customer price pressure -- or bill shock pressure that customers have experienced.

So we'll continue to run this business and balance both EBITDA and customer count with an eye toward long-term growth, which we have demonstrated year in and year out, both on earnings and customer count.

Okay.

And then just at a high level, I mean just to try and simplify, what you're seeing in the mix here is just the supply cost retail going up because of higher ERCOT prices, and you are capturing that essentially in Generation with better numbers '19, '20 than you might have initially expected?

Is that...

That's correct.

That's absolutely correct, Steve.

I mean this is a complementary and countercyclical nature of these 2 businesses.

But as I said in the past, I mean I am focused on total gross margin for the company, less focused on the segments and making sure that, that gross margin is just stable and predictable regardless of market condition.

And then just lastly on the PPA strategy.

I saw you added a little bit more in Texas, just what -- where should we maybe see that going over the next year or so?

How much more do you want to do?

Yes.

Well, I mean as you noted, I mean we only executed 100 megawatts this quarter.

And I think that is an indication of the slowdown that we're seeing on solar development.

We're just not seeing the attractiveness on the solar PPA that we saw initially.

I mean there has been an increase in cost for some of the solar developers due to tariffs.

So I think that's -- having a very active strategy like this just gives us a lot of visibility in terms of the speed at which solar development is happening, and what I'm telling you is slowing down a little bit.

In terms of how much more from the 1.4, the governing number here is the size of our Retail business.

So if you look at our Retail business, peak load, versus our Generation, I would feel comfortable if we execute, let's -- close to 2 to 2.5 gigs.

But obviously, that's going to depend on the economics that we can achieve on the PPAs.

So -- but I think that's a good observation, Steve.

Is it just less -- you're just not seeing kind of some of the irrational price offers, I guess, that might have been there before in terms of...

Yes.

I mean I think some of the offers that we saw earlier, we don't see it anymore.

And I think it's a function of 2 things.

One, I mean keep in mind that the counterparties that we're talking about are pretty high-quality counterparties because we can provide them a, on average, a 10-year contract with a balance sheet that is investment grade.

So we actually enable them and put them at a higher competitive position vis-à-vis other developers, but I think it's also impacted by, perhaps, higher costs due to tariffs that have been imposed.

And our next question will come from the line of Will Grainger with Citi.

This is actually Praful from Citi.

So on the EBITDA profile that you provided over the longer term as you think about your capital allocation, just wanted to understand, do you think about any degradation of EBITDA in that profile, especially if there's any replacement needed for existing assets that -- existing Generation assets that need to be replaced?

How do you think about that in that mix?

Yes.

No.

Praful, so the way I think about it is, perhaps we need to do it on a regional basis.

In Texas, I see it very stable because we have a pretty well-balanced portfolio between Generation and Retail.

So whether you have a contango or a backward-dated curve, your Retail margins can expand while your Generation contracts and the other way around.

So I see that very stable in Texas for the foreseeable future.

The East, this is slightly different because our Generation continues to be bigger than our Retail, and it's primarily driven by capacity prices.

The good thing in the East is that we know exactly what it is in the next 3 years.

So we have good -- I mean everybody has good visibility on that.

Beyond that is going to depend on what happens with FERC and the action that they take around the out-of-market subsidies for nuclear resources.

And that's really going to depend on that regulatory outcome.

What I will say is that we have actually seen a, let's call it, a nicer price in California.

Capacity prices have increased significantly.

So while we have seen some pressure in capacity in the East, we actually have seen some gains in the West that have balanced each other out.

So I would say that I just feel very comfortable with the guidance that we have provided for 2020 as a base to do the calculations.

And obviously, what we provided was illustrative, but I feel very, very comfortable with that.

Got you.

That's super helpful context.

Then in terms of what you said around the growth CapEx in Retail, given you're pretty balanced, as you said, in the Texas market already, should we think about the incremental retail that you're looking to acquire in the nearer term to be in different markets other than Texas?

Or how should we think about that?

No.

I think it will be both.

I mean obviously, I want to grow the East to better balance, but I would say that it's not that we're not growing in Texas.

I mean we have a pretty commanding lead.

I mean a little over 30% of market share.

So I mean there's still -- if we can grow Texas -- I mean think about Texas in the context of there is organic growth in Texas as a whole, the market is growing 2% so we can grow with the market.

And then number two, if we can add additional market share from competitors, either through organic initiatives or inorganic acquisitions, I mean we're going to do that.

But that is value for me regardless of where the region.

And then on the rebalancing side in Texas, I mean we're going to continue to take advantage of these new technologies that are coming into the market.

And I mean we're doing it at very attractive levels.

We're participating on that.

And all this does is just lower our cost of serving load.

So I'm good with that.

Got you.

Super helpful.

Then just finally, in terms of like the breadth of retail, would you look at distributed generation or some of those types of assets as well as part of your broadened retail mix?

Or are you kind of going to stay more focused in terms of what you acquire?

Yes.

I mean if your question of distributed generation is something like Residential Solar, no, I'm not.

I think we have been there, we have done that.

We're focused on continuing to establish a much closer relationship with our customers, creating more loyalty and affinity, providing more products and services.

But we don't have to vertically integrate every single product that we offer to our customers.

I mean I'm okay partnering.

And actually, today, we offer Residential Solar, we just offer it through partners.

And what is important to me is that we maintain the relationship with the customer, that we give them best-in-class interface to all the products and services that we provide, whether we do them all in-house or not.

And in the case of some of the distributed resources, I'd rather partner than vertically integrate.

And our last question will come from the line of Ali Agha with SunTrust.

First question.

Mauricio or Kirk, as you unveil your higher or more aggressive dividend policy, wondering if you had discussions with the rating agencies.

Does it have any implications on their thinking regarding investment grade?

And just from a priority point of view, where does investment-grade or achieving that fit in versus capital allocation, et cetera?

Kirk?

Well, I mean first of all -- it's Kirk.

We've obviously allocated the capital necessary to achieve the metrics, both in 2019 and sustain them into 2020.

So from a capital allocation perspective, we feel very comfortable that we put our money where our metrics need to be in and are, if you will.

As far as the dividend is concerned, based on our ongoing dialogue with the rating agencies, I think, certainly, they are very focused on our capital allocation.

Our first priority, which we say to you and say to them, notwithstanding the fact we don't foresee the need for capital, it doesn't change the fact that our priority goes first to maintaining those balance sheet metrics.

That's a very important part of the dialogue, both with our investors as well as the agencies.

And we feel comfortable that the dividend commitment is rightsized relative to our confidence in the overall magnitude of free cash flow, still affording us a lot of financial flexibility around that.

And because, as the chart Mauricio showed depicts, the combination or the benefit of ongoing share repurchases to a significant degree, i.e., shrinking the denominator, keeps us from needing to grow the overall dividend at the same magnitude as the growth on a per share basis.

So that also keeps the capital necessary for that very manageable.

So I think all that factors in both to our thinking about the dividend as well as the dialogue we have with the rating agencies around that topic.

Got you.

And then secondly, coming back to the -- this integrated model.

So as you depict to us on Slide 21, at least on the wholesale side, you're seeing this -- currently this downward trend, '21 over '20.

When you think about the Retail business, how much of that roughly do you think gets offset?

And on an integrated basis, just big picture-wise, how does '21 today look to you relative to '20?

Yes.

I would say pretty flat.

I mean we have the ability to expand margins on that environment.

So when I say that it's complementary and countercyclical, I mean if there is a -- if there is some backwardation in the curve and that's putting some pressure on Generation, I expect Retail to expand those margins.

And keep in mind that we're also in 2021, we're going to start seeing the benefits of the PPAs that we have also signed.

So they tend to be somewhat very attractive compared to market.

So all it does is we're serving load at a lower cost of goods sold, for a lack of a better word.

Now like I said, I mean you also have to look at -- the East is slightly different, right?

Like I said, I mean it's driven primarily by capacity revenues, but we provide very clear visibility in terms of what those capacity revenues are for the next 3 years.

They're locked in, so there's no surprises.

And we can adjust our maintenance programs, we can adjust our cost structure depending on what the earnings profile of those assets in the East would be.

So I mean that's a lever that you perhaps -- actually that you don't see in this one-dimensional sensitivity that we provide, is what else can we do around the cost structure of the company to ensure that we maintain competitiveness in our fleet.

Got you.

And final question.

Mauricio, one of your peer companies talked about this concept of retail backwardation, where they're seeing negative margins in the first couple of years turning to positive as they sign fixed price longer-term contracts.

Just curious, are you seeing any of that in your portfolio in your markets?

Well, everything that with -- I mean I'm assuming you're talking about commercial and industrial long-term transactions?

Is that what you're talking about?

Yes.

Yes.

So I mean I guess a couple of things.

Number one, when we do any C&I transaction, we back-to-back it with supply.

So we're basically locking a gross margin for the term of the transaction.

We always have the option to either source it internally through our generation or source it from the market, depending on what's the most optimal way for us.

And then number three, you're always going to see the impact of that business in our earnings.

So transparency, clarity, visibility, it is important.

So while I can -- I mean in a contango market, on a backward-dated market, when you're doing a term deal, is there a -- are you levelizing the curve and it creates a different dynamic?

Yes, of course.

But I mean the most important thing here is supply.

We're trying to lock in a margin through the term of the deal, and we want to make sure that supply and the, I guess, the C&I deal, the revenue line and the cost line is pretty consistent.

Thank you.

Ladies and gentlemen, this concludes our question-and-answer session for today.

It is now my pleasure to hand the conference back over to Mr. Mauricio Gutierrez for any closing comments and remarks.

Thank you.

Well, thank you very much for your interest in NRG and look forward to talking to you in the coming weeks.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program.