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NRG Energy Inc (NRG) Q3 2018 Earnings Conference Call Transcript


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NRG Energy Inc (NYSE: NRG)
Q3 2018 Earnings Conference Call
Nov. 08, 2018 , 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the NRG Energy Incorporated Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference Mr. Kevin Cole, Head of Investor Relations. Sir, you may begin.

Kevin Cole -- Head of Investor Relations

Thank you, Joel. Good morning, and welcome to NRG Energy's third quarter 2018 earnings call. This morning's call 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 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 -- Chief Executive Officer

Thank you, Kevin, and good morning, everyone, and thank you for your interest in NRG. Joining me this morning is 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'd like to start the call by highlighting the three key messages for today's presentation on slide four. First, we continued to demonstrate the earnings predictability of our integrated platform. We are narrowing our 2018 earnings guidance to the upper half of the range and initiating 2019 financial guidance above our transformation plan performance.

Second, we achieved a significant milestone in our efforts to right size our business by closing on the sale of NRG Yield and Renewables. With the transformation of planned asset sales and cost savings nearly behind us. We're now looking into margin enhancement in 2019. Finally, we are announcing an incremental $500 million share repurchase in addition to the 1 billion announced earlier in the year.

This brings our total share repurchase program to $1.5 billion and completes our 2018 capital allocation plan. Moving to our third quarter business update on slide five. As you can see on the left-hand side of the slide during the third quarter we delivered $677 million of adjusted EBITDA or 23% higher than last year.

This was primarily driven by higher realized power prices and continued execution on accretive cost-savings initiatives while achieving top-quartile safety results. I am very pleased with the operational and financial performance of our integrated platform during the period of extreme price volatility.

As we have discussed with you in the past during periods of high prices our generation business benefits while our retail business experiences some margin compression. It is exactly in this price environment that our platform demonstrates the benefits of the integrated model. Our year-to-date results now stand at 1.58 billion, a 34% increase from last year, allowing us to narrow our 2018 guidance range to 1.7 billion to 1.8 billion which sits at the upper half of our previous range when adjusted for asset sales.

This is also the first quarter that our financial statements start reflecting our new simplified business model. Our total corporate debt is now at $6.5 billion or almost 60% lower than the previous quarter. This number includes $640 million of deleveraging completed in the last two months. During the third quarter, we also launched the second $500 million share repurchase following the close of NRG Yield and Renewables transactions, which we expect to be completed by the end of the year.

I continue to believe that our current stock price does not reflect the fundamental value of our business and presents the best return opportunity for our capital at this time. Looking ahead into 2019, we're initiating adjusted EBITDA guidance of $1.85 billion to $2.05 billion. This range reflects the strong fundamentals in our core markets and the confidence we have in achieving our transformation goals. This is yet another example of the stability and strength of our integrated platform, which will provide close to $2.6 billion of excess cash to be allocated in 2019.

Later in the call, Kirk, will provide additional details on both guidance ranges. Turning to slide six with our Transformation Plan update. We continue to execute on the plan initiatives during the quarter and remain on track to achieve our full year 2018 targets. Till September 30th, we have realized $375 million in cost savings, $24 million in maintenance CapEx reductions and 6 million in margin enhancement. Over the remainder of the year we will continue to focus on executing our cost savings and maintenance CapEx programs, while ramping up our margin enhancement initiatives.

We continue to put in place the foundation for realizing margin improvement through multiple avenues including expanding sales channels and products, streamlining transactions, and enhancing IT systems for more sophisticated customer analytics. With respect to asset sales during the quarter we closed on the sale of NRG Yield and Renewables.

We expect to close South Central by year-end. It is moving through the approval process with the LPSC and FERC and Carlsbad will reach COD in the fourth quarter and is expected to close in the first quarter of 2019. We are also narrowing our asset sale proceeds from up to $3.2 billion to $3.1 billion. This is the result of having on the Agua Caliente of the remaining assets with clear line of sight to close by year-end 2019.

All other assets will remain in the portfolio, at this time, giving improving market conditions. Finally, we are well on our way to achieve our leverage target of three times net debt-to-EBITDA by the end of 2018 after having executed our deleveraging objectives. Now turning to slide seven for a closer look at this summer.

As you can see on the slide weather was warmer than normal across our core markets, which led to higher demand particularly in Texas where we set a new record peak load of 73,000 megawatts. While loads were robust, actual prices were mixed across markets compared to expectations. In ERCOT real time came in significantly lower as you can see on the upper right-hand chart.

A combination of near-perfect performance by generators during the July heat wave and milder temperatures in August resulted in prices 77% lower than the ones expected at the beginning of the summer. In the West, California was a different story with prices settling well above expectations. This was mainly due to restricted gas deliverability. Looking ahead, we observed that the combination of once-through cooling unit retirements and the emergence of community choice aggregators have resulted in recent increases to Western capacity prices.

In the East, energy prices were pretty much in line with expectations, and the focus is really on market reforms of both capacity and energy. Now looking forward on slide eight and starting with our market outlook for ERCOT. As we have seen over the past year, reserve margins continue to tighten driven by load growth, asset retirements and additional delays or cancellations of new-builds as developers are unable to justify long-term investments.

On the top left-hand chart you can see that reserve margins continue to be significantly below ERCOT's target for several years highlighting the need for additional generation. Currently, the PUCT is considering positive changes to the ORDC scarcity pricing mechanism to ensure the right price signals are sent to market participants. These potential regulatory changes combined with low future reserve margins have pushed forward prices higher particularly in 2019 and 2020. This move has been almost entirely driven by increases in the summer prices where the market is now implying between eight to nine hours of prices at the cap.

We have actually taken this as an opportunity to increase our hedge levels in 2019 and 2020 providing us with even more predictability on our earnings going forward. One area worth noting is that most of the current reserve margin is made up of capacity that costs from renewable generation. As you know this is non-dispatchable capacity and therefore could potentially lead to fluctuations in the actual amount of generation available to serve load.

Now moving to the East. The focus is on regulatory changes for both capacity and energy markets. As you know FERC stated that the existing capacity market in PJM is on just unreasonable due to the negative impact of subsidized units.

Let me reiterate that we believe a strong MOPR is the simplest and most effective way to reduce the harmful impact of subsidies on the capacity market. PJM and New England are also focusing on fuel security which should lead to additional revenues for generators that have on-site fuel capabilities.

This is very much at play, but all these regulatory changes are designed to improve the current status quo and are positive for our portfolio. Next month it will be three years since I became CEO of the company. And while this is not the quarter where we provide our capital allocation plan. I wanted to spend a minute talking about our capital allocation philosophy and track record. Particularly, in light of the financial flexibility that we have afforded ourselves in the past few years.

Turning to slide nine. You can see our capital allocation for the past three years. As you may recall, we initially focus on stabilizing our business by selling or closing under-performing assets, focusing on our core integrated business and strengthening our balance sheet. This resulted in most of our excess cash to be allocated to debt reduction in 2016 and 2017.

With the announcement of our Transformation Plan and the rightsizing of our business we created significant excess capital that we returned to our shareholders in 2018 through share repurchases given the under valuation of our own stock. As we move into 2019 and given the excess cash potential of our business, which will be close to $2.6 billion even after the incremental 500 million share repurchase announced today.

I want to reiterate to you that we will be absolutely disciplined in following our capital allocation principles that we have articulated to you and that you can see on this slide. I look forward to providing you with our 2019 capital allocation plan on the fourth quarter earnings call as we have done in the past.

With that I will turn it over to Kirk for our financial summary.

Kirkland Andrews -- Chief Financial Officer

Thanks, Mauricio. Turning first to the financial summary on slide 11. For the third quarter, NRG delivered 677 million in adjusted EBITDA, a 23% increase over last year. Having successfully closed the sale of NRG Yield and Renewables in August our quarterly and year-to-date results now no longer include the contribution from these businesses, which are now treated as discontinued operations as a result of the sale.

Through the first nine months of 2018, NRG has delivered nearly 1.6 billion in adjusted EBITDA with approximately 375 million of cost savings realized, which places us on track to achieving our 2018 cost-savings target of 500 million. With these solid results and the important summer months now behind us, we're also narrowing and revising our 2018 guidance toward the upper half of our previous range, which I'll discuss in greater detail shortly.

With the closing of NRG Yield and Renewables transaction combined with 640 million in discretionary debt redemptions, which I'm pleased to announce are now completed. We have now removed approximately 10 billion of debt from NRG's balance sheet in 2018. This is not only significantly simplifies NRG's balance sheet for our investors, but makes the achievement of our three time net debt-to-EBITDA target in 2018 all the more transparent.

As you recall part of our plan to achieve our target balance sheet ratio in 2018 included $640 million in debt repayment, which we achieved following the third quarter in two parts. First, in October we redeemed the remaining 485 million balance of our 2022 senior notes eliminating our nearest maturity in the process. Second, we repaid 155 million of our term loan facility. We are required under the terms of this facility to offer a portion of the proceeds from certain assets sales to the lenders at par.

In keeping with this requirement we have made this offer and through an arrangement with the financial institution, which effectively capped the amount of redemptions for which NRG is responsible at 155 million which represents the balance required to achieve our debt-reduction target for 2018. As Mauricio mentioned earlier we've now fully funded the second phase of our $1 billion share buyback program. Following the closing of NRG Yield and Renewables we put in place a 500 million accelerated share repurchase program or ASR with the financial institution.

NRG initially received a base number of shares, which will be supplemented with additional shares based on the average price of our stock over the program. The financial institution is continuing to execute share repurchases under the ASR, which will be completed by the end of 2018. In addition, we now have a new authorization for an additional 500 million in share repurchases, which will be executed between now and into 2019. This brings the total amount of 2018 excess capital allocated to share buybacks to 1.5 billion or nearly 40% of our 2018 excess capital.

Turning next to an update on our 2018 guidance, which you'll find on slide 12. Given the significant impact of deconsolidation resulting from asset sales and our reported results in 2018, I'd like to first take a moment to provide you some context of our revised 2018 guidance. Looking at the table at the top of the slide and moving from left to right we start with our previous guidance for 2018, which has remained unchanged since we first provided it about a year ago. That consolidated guidance included the expected full year contribution from all of our businesses including those which have now been sold.

As you may recall from previous quarters we have disclosed to you the full year impact to the midpoint of our guidance from these 2018 asset sales, which included everything we've closed on to date such as NRG Yield, Renewables and our Boston Trading business or BETM as well as our South Central business. Following the closing of South Central, which we continue to expect toward the end of 2018, the results of this business will also be treated as discontinued operations and will not appear in our results for the year.

That second column reflects the midpoint EBITDA and free cash flow from these businesses based on our prior guidance or 1.2 billion and 590 million in EBITDA and free cash flow respectively. Deducting these amounts from our prior guidance allows you to see the contribution to that prior guidance range from businesses retained in 2018, which is reflected in the third column entitled previous guidance adjusted for asset sales. This should provide you some context and reference for comparison for our revised 2018 guidance showing in the last column on the right.

Based on the performance of our remaining businesses and our expectations for the balance of the year our updated and narrowed guidance for 2018 is 1.7 billion to 1.8 billion in adjusted EBITDA and 1.05 billion to 1.15 billion in free cash flow. Importantly, this revised guidance reflects the upper half of our previous guidance range adjusted for asset sales. Finally, at the bottom of the slide, there are a couple of items to note with respect to our 2018 revised guidance, which should also provide you some context when I review our 2019 financial guidance in a few moments.

First our revised guidance for 2018 still reflects the contribution from Agua Caliente, which we expect to sell to NRG Yield or Clearway in early 2019 as well as the partial year contribution from BETM, which was sold during 2018. In total, these two items represent approximately 120 million in adjusted EBITDA included within both the generation segment as well as our consolidated revised guidance. As BETM has now been sold and we expect Agua Caliente to be sold early in 2019 neither of these two items will contribute to our results going forward and does not include it in our 2019 financial guidance.

Second, as you recall, we closed on XOOM Energy in mid-2018, which we expect to contribute approximately 25 million to our 2018 results. However, as we indicated when we announced the XOOM transaction during Analyst Day, we expect the full year impact of XOOM to be approximately 45 million and our 2019 guidance reflects that.

So, with that, as a backdrop, I'd like to turn to 2019 guidance, which you'll find on slide 13. 2019 will be the first year since we announced the Transformation Plan that our financial results will reflect our retained businesses and are simplified and further strength in the balance sheet.

Our guidance for 2019 is 1.85 billion to 2.05 billion in adjusted EBITDA with 850 million to 950 million from generation and 1 billion to 1.1 billion from retail. In the upper right of this slide, we provided a walk to help you understand our 2019 EBITDA guidance compared to our previous 2018 pro forma that was based on our original 2018 guidance.

Our previous 2018 pro forma EBITDA, which was most recently found in our second quarter presentation was 1.6 billion. To bridge to the $1.95 billion midpoint of 2019 guidance we add two items. First, our 2019 guidance reflects the incremental impact of Transformation Plan initiatives versus 2018, which totaled 195 million. As you may recall this consists of 500 million in 2018 cost savings increasing to the $590 million run rate in 2019 and 30 million in 2018 margin enhancement, which increases to 135 million in 2019.

Second, to arrive at the midpoint of 2019 guidance, we add 150 million which reflects the combined impact of increased power prices in 2019. Specifically, these increased prices benefit generation EBITDA just partially offset by higher supply cost that they represent for retail. While we expect these higher supply cost to modestly impact 2019 retail guidance, we expect them to be recoverable beyond 2019.

Next on slide 14, I'd like to provide a brief update on 2018 capital allocation. As usual you'll find all the changes to this update versus the update we previously provided in second quarter highlighted in blue. As you can see primarily driven by a $500 million increase in capital allocated to share repurchases, which reflects a reserve for our new buyback authorization.

We have now fully allocated our 2018 excess capital with approximately 80 million of total capital allocated toward our deleveraging targets and returning capital to shareholders primarily through share buybacks. The remaining changes since our last update are summarized in the upper right of the slide and primarily consists of the following. First is shown in item A, based on discussions with NRG Yield or Clearway and the expected COD for Carlsbad later this year, we now expect to close on the sale of that asset in the first quarter, which shifts about $365 million in capital from 2018 to early 2019.

Next based on the increase in 2018 EBITDA, which positively impacts our leverage ratio, we are able to reduce the temporary cash reserve needed to achieve this ratio in 2018 by approximately 150 million. This is partially offset by about 45 million of debt premiums and fees associated with both the 640 million in debt redemptions I mentioned earlier as well as other liability management activities year-to-date.

Finally, we've reduced the expected allocation to Transformation Plan cost to achieve by 60 million, which we now expect to incur as a part of 2019 capital allocation, which I'll review next on slide 15. Turning to 2019 excess capital on slide 15, we began with capital available of 1.4 billion, which is comprised of the midpoint of our 2019 free cash flow guidance plus about 70 million of unallocated 2018 capital from the previous slide.

Next, we add 485 million in 2019 asset sale proceeds, which consists of approximately 365 million for Carlsbad and 120 million for Agua Caliente, both of which are expected to close in the first quarter. Next is the full release of the remaining 915 million in 2018 cash temporarily reserved to ensure our three times ratio. Our higher midpoint EBITDA for 2019 allows us to fully release this remaining balance next year for capital allocation, as we will not require any excess cash in 2019 beyond simply our $500 million minimum cash balance to achieve our three times net-debt-to-EBITDA ratio.

I'll review all this in further detail on the next slide. However, it's important to note that as you may recall our previous expectation, which was based on our pro forma cash walk that we would still need to reserve about 450 million in capital or cash in 2019 for credit ratio purposes making this capital previously unavailable until 2020.

Our more robust EBITDA reflected in that 2019 guidance allows us to release this capital for allocation effectively one year earlier than previously expected. And is the reason why although we've now allocated an additional 500 million toward share repurchases our cumulative excess capital through 2019 remains unchanged from our previous one at 2.6 billion.

Finally, turning to an update on our corporate credit metrics on slide 16. In column one, we've updated our 2018 ratio calculation to reflect our increased revised pro forma EBITDA, which again allows us to reduce our 2018 cash reserve while maintaining three times net debt-to-EBITDA.

Our pro forma 2018 debt reflects the third quarter balance reduced by 640 million in debt redemptions now completed leading to 6.5 billion in total corporate debt at year-end 2018, which after deducting our minimum cash of 500 million and 915 million of additional cash temporarily reserved in 2018 leased a 5.1 billion in 2018 net debt.

For debt ratio purposes we have adjusted our midpoint of our revised 2018 guidance range to reflect the removal of EBITDA from asset sales, which still remains in our 2018 guidance specifically Agua Caliente and BETM. And we've also added 20 million to adjust for the full year effective soon. In total, this net adjustment of 100 million leads to pro forma adjusted EBITDA for ratio purposes of 1.65 billion for 2018. As we've done in prior quarters, we continue to adjust the EBITDA for ratio purposes to reflect the impact of Midwest Gen capacity modernization, which will only be necessary to 2019 as that is the final year of capacity sold forward after which we will count 100% of Midwest Gen EBITDA toward this ratio.

Turning to 2019. As I mentioned earlier that $300 million increase in adjusted EBITDA based on the midpoint of 2019 guidance allows us to fully release that remaining 915 million of cash reserve or basically three times the increased EBITDA making this cash available for further allocation in 2019, while permitting us to maintain that important three times net-debt-to-EBITDA ratio.

Finally, as a reminder in 2020, we still expect an additional 80 million in EBITDA for margin enhancement programs, which increases to 215 million in 2020 versus 135 million in 2019. This additional upside combined with the strength and resiliency of our integrated retail and generation platform helps ensure that we can maintain and improve on our credit metrics without the need for additional capital in 2020.

And with that I'll turn it back to Mauricio for his closing remarks.

Mauricio Gutierrez -- Chief Executive Officer

Thank you, Kirk. A few closing thoughts on our 2018 scorecard on slide 18. As you can tell it has been quite a busy year so far and we have made excellent progress across the board on our 2018 priorities. I am very pleased with our team who have been able to accomplish.

As I look forward to 2019 we're focusing our efforts into three key areas. Redefining our business by further perfecting our integrated model, shifting the focus of our Transformation Plan to margin enhancement and completing the announced asset sales and finally disciplined allocation of the significant excess capital that we will have available. I am very excited about the future of our company and I want to thank you for your time and interest in NRG.

So, with that, Joel we are ready to open the line for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Julien Dumoulin-Smith with Bank of America Merrill Lynch. Your line is now open.

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

Hey, good morning, team. How are you?

Mauricio Gutierrez -- Chief Executive Officer

Good morning, Julien.

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

Excellent. Hey, wanted to follow up a little bit on just the hedges here. I wanted to understand a little bit what's going on in Texas on 2020? There has been a little bit of change in the weighted average hedge price there on a per megawatt hour basis. It seems if you largely kept the hedge percentage intact, but if you could elaborate a little bit here?

Mauricio Gutierrez -- Chief Executive Officer

Sure. Well, as we were discussing, I mean, we are seeing power prices increase in 2019 and 2020. We actually have taken this opportunity to increase our hedges. And most of the move have been around the summer. So, you can expect that the hedges that we have put in place have been really around the June through September's trip. But Chris are there anything else more details around our hedge strategy and then some of the dynamics you're seeing particularly in 2020?

Chris Moser -- Head of Operations

Yes, I think, when we're looking at hedging we're looking at trying to lock in good numbers again expected generation with the idea that will still leave some to cover up operational risk and load variability obviously in combination with buying options and weather options and outage insurance and the rest of that. What you probably -- and we can dig into this later Julien, but what you are probably looking at is, as we're trying to take off the summers especially in 2019, we are also doing longer dated pieces not just summer, with those are down at a lower-level. Obviously, I'm selling April off peak or around-the-clock that's going to move the number down a little bit.

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

Got it. So, that explains the move from 42 to 36?

Chris Moser -- Head of Operations

Yes.

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

Bulk of it. Okay, excellent. And then just secondly here, Mauricio, I mean, I think, folks are talking this morning some of the changes on the board. But I also take note your commentary earlier with respect to continued execution of the Transformation Plan. You've announced for the first time here your 2019 full year EBITDA. How do you think about continuing some of the cost savings that we've seen in 2018 into 2019? How do you think about what's reflected? And ultimately is there anything going to be read from the changes on board here, I mean, on the board composition this morning too?

Mauricio Gutierrez -- Chief Executive Officer

Well, I don't think there is anything to read on the board composition. The entire board supported the Transformation Plan including myself. Management is committed to executing our Transformation Plan. And I think we have done excellent progress with John decided to step down from the board. And what I can tell you that he's been a good and insightful board member, and I look forward to continue having him as a long-term shareholder. So, I think, we have the support from our shareholders in terms of our Transformation Plan the direction that we are going. Did that answer your questions Julien, I know, that it was, I think, a two or three part questions.

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

Yeah, well, I mean, maybe to be a little bit more direct about this. How are your Transformation Plans shaping up for further cost savings in the 2019? Obviously you see more assets than you originally anticipated. Does that provide for incremental cost savings? And are you continuing to evaluate that at a board or even within the company from a cost savings perspective?

Mauricio Gutierrez -- Chief Executive Officer

Yes. So, with respect to the -- our cost savings on Transformation Plan we have a line of sight on the $590 million. We are executing to that and that's going to start doing, we're going to do that in 2019. Obviously, our cost savings this is something that is a continuous improvement process. It doesn't end with the Transformation Plan. We're always looking at doing things more efficiently.

So, we're going to continue doing that. And if there is an opportunity to reduce the cost on some of the assets that we are retaining -- believe me I mean we're already looking at that and evaluating that. So, I am very confident that we're going to achieve our numbers by in 2019. And I am very confident also of the culture that we have on continuous improvement that I believe before Transformation Plan was for NRG and this is something that we all feel very strongly. So, I don't think you should expect that after the Transformation Plan. This is basically done and over.

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

Excellent. All right. I'll leave it there. Thank you all.

Mauricio Gutierrez -- Chief Executive Officer

Thank you, Julien.

Operator

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

Phil Covello -- Evercore ISI -- Analyst

Good morning, guys. It's actually Phil here for Greg.

Mauricio Gutierrez -- Chief Executive Officer

Thank you, Greg.

Phil Covello -- Evercore ISI -- Analyst

Phil, but.

Mauricio Gutierrez -- Chief Executive Officer

Phil, I'm sorry. We're getting a little echo here on our end.

Phil Covello -- Evercore ISI -- Analyst

Okay. Let me try to adjust my headset. Anyway congrats on the quarter. Just want to clarify couple of items you discussed. So, to be clear the incremental 500 million you've announced today that's not allocated, that's not eating into the 2.6 billion cap that you're allocating for 2019?

Mauricio Gutierrez -- Chief Executive Officer

That is correct.

Phil Covello -- Evercore ISI -- Analyst

So, theoretically, if you were to use all that for buybacks, you can allocate north of 3 billion from here?

Mauricio Gutierrez -- Chief Executive Officer

Yes, I mean, the 500, the 2.6, yes, that's correct.

Phil Covello -- Evercore ISI -- Analyst

In the 2019 guidance you've laid out. Is that marked to end of the quarter curves?

Mauricio Gutierrez -- Chief Executive Officer

Yes.

Phil Covello -- Evercore ISI -- Analyst

Okay. So, is it fair to say that where we sit from here today that curves looks still a little bit better on a fresher mark-to-market or how are you -- what are you seeing there?

Mauricio Gutierrez -- Chief Executive Officer

Yes, I mean, I would say that they are -- just to start better, but keep in mind when you're looking at the 2019 guidance you have to take a few things into consideration. Number one is power curves, number two the level of hedges that we have. So, I mean, it's not just one and obviously supply cost for our retail business. So I mean there is a multiple things that you need to take into consideration. So, it's not just one dimensional.

Phil Covello -- Evercore ISI -- Analyst

Understood. And I guess to that point, I mean, Kirk your commentary on retail essentially with the higher wholesale prices going into 2019, you won't be able to capture that one-to-one on the retail side next year. But as you move through time you can start to work that into future rates, so it's kind of a margin lag, and I think you've got that correctly?

Mauricio Gutierrez -- Chief Executive Officer

Yes. That's correct, I mean, let me just, I mean, as we have seen different prices, it's going to change a little bit of distribution between generation and retail on our earnings. But keep in mind, I mean, from my perspective what we are focused on is having an earnings profile that is a stable and predictable for the integrated platform. So, if power prices are increasing, it benefits our generation business perhaps more than eating part of our retail business and the true is the other way, so but at the end of the day, what we are focused on is the total earnings line of the integrated platform and this is what we want to demonstrate the stability and predictability of our platform which I think we have done in 2018 and with the guidance we are providing today is a reaffirmation of that.

Phil Covello -- Evercore ISI -- Analyst

Sure. And you have done a good job with that so far for sure. Last question and then I'll see the floor. Can you just provide any color or commentary around the 2020 trajectory from here relative to 2019?

Mauricio Gutierrez -- Chief Executive Officer

I mean what I will tell you since we're only introducing 2019 guidance today is some of the drivers that you should be looking at for 2020 obviously is power prices, the hedges and something that, Kirk, was mentioning which is some of the compression that we get by higher power prices in our retail business. But aside from that I will not obviously if the assumptions are the same in '20 than in 2019 then you can make an reference of that. Obviously, you also have the incremental Transformation Plan targets that we have going in 2020, but I'm not going to be providing 2020 guidance in the call.

Phil Covello -- Evercore ISI -- Analyst

Understood. Thanks, guys. Congrats.

Mauricio Gutierrez -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Abe Azar with Deutsche Bank. Your line is now open.

Abe Azar -- Deutsche Bank -- Analyst

Good morning. Congratulations.

Mauricio Gutierrez -- Chief Executive Officer

Thank you, Abe. Good morning.

Abe Azar -- Deutsche Bank -- Analyst

Thanks. With the backwardation in the Texas prices at least the ones that are quoted right now. Can you remind us what retail's positive sensitivity is to lower prices and absent the margin enhancement program?

Mauricio Gutierrez -- Chief Executive Officer

Yes, I mean, we haven't provided the -- a specific sensitivity on our retail business because I mean there is a number of things that come into play. It's not just cost of sales, but also you have to look at where your margins are, your attrition rates, your bad debt. So, it's not, I wouldn't say, that it's a direct or directly correlated a series in the generation business. I mean there is a lot more variable that need to be taken into consideration. So, I think, what I will tell you is the benefits that we see on the generation business tends to be one-to-one when power prices increase. And we have ability to pass some of that to our retail customers so it's not one-to-one. That's why we say our generation business tends to benefit more than it impacts our retail business. But that's, I think, that's the dynamic and the complementary nature of our business and that's the level of data that we are comfortable providing.

Abe Azar -- Deutsche Bank -- Analyst

Got it. And then on 2018 the implied Q4 guidance is a lot lower than retail and generation have done in the prior years. Is there something unique about this year in Q4?

Kirkland Andrews -- Chief Financial Officer

No. It's nothing unique at all. It's kind of difficult to extrapolate from there because remember and I think I'm not sure if you're referencing when you heard about retail and generation those two being the significant component parts of our overall performance in our guidance. In the past retail is basically same-store from that perspective. But as a reminder generation, which we used to call generation and renewables for an obvious reason included everything. So, I'm not sure whether you're accounting for the fact that we've significantly streamlined and changed the overall makeup of the portfolio. But in the context of the assets that remain which is the phrase or term that I used in my remarks, fourth quarter is in line with what we would normally expect. Just a lot of noise with things moving in and out this quarter.

Abe Azar -- Deutsche Bank -- Analyst

Understood. Thank you.

Operator

Thank you. Our next question comes from Angie Storozynski with Macquarie. Your line is now open.

Angie Storozynski -- Macquarie -- Analyst

Thank you. So, two questions. So, one is in the past you've mentioned that you were planning to acquire some retail businesses in the Northeast. Well, you haven't announced anything yet and just wondering if we're waiting for cash to come in from the Louisiana assets or if there is any other limiting factor here? And also if you could put it in the context, so you have $2.6 billion in cash to be allocated. I understand that there are only really two ways to allocate it. One is that the retail acquisition and the other one is buybacks. And is it fair to say that given the size of retail books that are available only about maybe 700 million of that could be spent on retail?

Mauricio Gutierrez -- Chief Executive Officer

Yes. Good morning, Angie. So let me tackle your -- the first part of your question. Just to be completely clear what I have said in the past is that we're going to be looking at perfecting our integrated model. In the East, we have more generation than retail. So, we can actually achieve that rebalancing in two ways. We can either grow our retail business or we can reduce our generation business. Both are available to us.

We know that the retail space has been very active. But and if we see something that is consistent with our portfolio and meets our capital allocation and federal rates then we're going to evaluate. But there are different ways that we can perfect our model and we're not locked in or to one specific one.

To your second question around what we can do with our excess cash in 2019? I would say that there are three different ways that we can allocate it. One, we can always find opportunities to grow our portfolio, our business if they are compelling. Two, we can return capital to shareholders in both ways share buybacks given the undervaluation of our stock it is today and that's the preferred one. But we also have another avenue and we are open to it if it's dividends.

And then finally we also have to evaluate continue paying down debt. And while we are completely comfortable with three times today that doesn't mean that in the future it's something that we just sell it and forget it. So that's what I would characterize our capital allocation for 2019 or at least the philosophy.

Angie Storozynski -- Macquarie -- Analyst

Okay. And on an unrelated note Midwest Gen. So, PJM will be forming its MOPR rule. It does sound like Illinois might be leaning toward stripping out all of their nuclear plants from the PJM auction, keeping the Illinois customer basically neutral as far as their capacity payments which I understand that the capacity payments would be coming then from coal plants like the ones that Gen owns. So, in that context, how do you see the earnings power of those portfolio going forward?

Mauricio Gutierrez -- Chief Executive Officer

Okay. Chris do you want to take that?

Chris Moser -- Head of Operations

Yes, Angie, for that to happen you need to believe two different things. You need to believe that Illinois is willing to quintuple the number of nuclear subsidies that they're already providing from 2,000 to give or take 10,000 which is a hopefully stretch. And then you also have to believe that FERC would allow a state to subsidize one particular set of Generation and crush wholesale prices which is in direct opposition to what they've written in the past previous three orders. So, I mean, I think that's very theoretical and I think there is a lot of wood to chop to get from here to there.

Angie Storozynski -- Macquarie -- Analyst

Okay, thank you.

Mauricio Gutierrez -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Praful Mehta with Citigroup. Your line is now open.

Praful Mehta -- Citigroup -- Analyst

Thanks so much. Hi, guys.

Mauricio Gutierrez -- Chief Executive Officer

Hey, good morning, Praful.

Praful Mehta -- Citigroup -- Analyst

Good morning. So, maybe wanted to get to the hedging a little bit and link that with the drop we saw in the 2020 hedge prices. I guess you talked about and we all know about the tight reserve margins in ERCOT. Given that tight reserve margin, I would guess that your preference would be to keep it more open to benefit from tightening prices in the curves in 2020, and clearly the curves right now backward dated. So, I just wanted to understand more broadly the hedging policy views and then secondly a little bit more clarity of almost $6 drop in 2020 kind of what prompted that hedging, if you kind of seeing this more broader tightening in ERCOT?

Mauricio Gutierrez -- Chief Executive Officer

Okay.

Chris Moser -- Head of Operations

Praful, Chris again. So, if you're looking at back on page 24 and you look at total generation portfolio and you look at the open heat rate you'll see the 2020 went from pretty down load at 27% and nuclear went from relatively low to 36%. So, what you have is two different moving pieces here. What you got is a big hunk of hedges that went in that were arguably not just summer, but they were full year on peak round-the-clock kind of numbers. And you also have the lot of small numbers, which is if you have a small number that was only summer and then you mix that with a full year piece which was in that second quantum was bigger than the first quantum you're going to get a move there. Trust me when we are selling 2020 the summers are included. So we're locking in big chunks of value.

Praful Mehta -- Citigroup -- Analyst

Got you. That's helpful. And so more broadly just understanding the 2020 and just the hedging policy in general. Is there a view that ERCOT is going to tighten further and that curves won't reflect that today and you want to keep more open? Or do you feel that the curves are relatively opportunistic or wherever there is an opportunity you would go in and lock in for the hedges?

Chris Moser -- Head of Operations

No, fair question. I mean, I think, if you look at the position where we are sitting 30% basically 27% to 36% hedge depending on which chunk of the portfolio coal and nuke or total. I think they were saying that this thing have some room to run so for only 27% hedge. Now I will say that we've seen a nice price rally since the summer and there is plenty of expectation that the PUCT later today may make some changes to the ORDC pricing mechanics and we're hopeful that they do because new builds are either being pushed off or canceled. So, something needs to happen and I encourage the PUCT to take action.

Mauricio Gutierrez -- Chief Executive Officer

Praful, and let me just add. In 2020 we are 70% open. I think that should give you an indication our view in the Texas market. We continue to see that is very constructive, but we want to be prudent. We saw a pretty significant increase in 2020 on prices. We reacted to it. We were opportunistic. We laid out some hedges. But keep in mind we're still 70% up.

Praful Mehta -- Citigroup -- Analyst

Got you. That's helpful. And then just on capital allocation more broadly. Clearly, there is both the growth opportunity and potential to buyback shares. From a growth perspective is retail the only direction you see or are there other avenues of growth that we should be thinking about that will hit your return thresholds that you could also kind of look at?

Kirkland Andrews -- Chief Financial Officer

I mean there is we see a multiple avenues. I mean clearly the one that has been getting more headlines is retail just because of the value proposition where retail is today the implied valuation that we have and the fact that we can actually put it in our retail business that is a scalable so we can achieve significant cost synergies. But we see opportunities in other areas.

We're evaluating them particularly on the business solution side, working with our customers and the one thing that I will say is generation perhaps is limited given the very long-term nature of our investments on the fact that we have, we are gearing to our capital allocation principle. So I would characterize it that way and that informs more or less where we start, we are looking at where we are looking at possible opportunities.

Praful Mehta -- Citigroup -- Analyst

Got you. Super helpful. Thank you, guys.

Mauricio Gutierrez -- Chief Executive Officer

Thank you.

Operator

Thank you. Our last question comes from the line of Ali Agha with SunTrust. Your line is now open.

Ali Agha -- SunTrust -- Analyst

Thank you. Good morning.

Mauricio Gutierrez -- Chief Executive Officer

Good morning, Ali.

Ali Agha -- SunTrust -- Analyst

Good morning. First, Kirk, I guess just wanted to clarify the slide 12 numbers you gave us as you walk from the pro forma to the items for 2018. So, if I read that right there's about 145 million of EBITDA that you were adding back in for the betterment on and so forth. But the midpoint of the two adjusted guidances only went up by 55 million. So what am I missing there in that math?

Kirkland Andrews -- Chief Financial Officer

I think the way that you summarized that is effectively correct, right. Nominally speaking you have a significant or more significant increase. But thinking about and perhaps this is where you're going. Thinking about ignoring the nonrecurring elements right? When I talk about nonrecurring elements, I'm talking about Agua Caliente, I'm talking about, the BETM, the Boston Energy Trading business which still is reflected in our numbers even though it was sold into a year.

Yes, you got about 50 million of sort out of same-store out-performance which is why I characterize it toward the upper half of our previous range on an apples-to-apples basis, right. That was part of the reason why I unpacked that because nominally speaking relative to the $1.6 billion pro forma looks like $150 million higher. But when you adjust that for the asset sales your number is probably the right way to think about that on a same-store basis. If that makes sense, Ali?

Ali Agha -- SunTrust -- Analyst

Yes. But then currently if you take it to your next column the updated and narrow guidance column. That number shouldn't that if you took the column before that, this previous guidance adjustment column and moved right shouldn't that have gone up by that 140 million that you're adding in there?

Kirkland Andrews -- Chief Financial Officer

No. It's the opposite.

Ali Agha -- SunTrust -- Analyst

Okay. I'll come back to you guys on that.

Kirkland Andrews -- Chief Financial Officer

Yeah, I know we get a follow-up call, but -- I'm happy to try to make that clear.

Ali Agha -- SunTrust -- Analyst

Yeah, a separate question. I know that obviously you guys are not giving '20 guidance here. But just in the context of your net debt EBITDA targets certainly on the 2019 numbers you're hitting those targets as the way laid out to us. But if there is backwardation in the forward curve continues even with the margin enhancement improvement, I mean, the sense is directionally 2020 EBITDA is slightly lower than 2019.

So, does that figure into your calculations thinking about net debt-to-EBITDA if you were to use the '20 denominator versus '19? And how you may think about capital allocation in 2019 and may be paid on more debt than you're currently showing us. Is that a fair way to think about this dynamic?

Kirkland Andrews -- Chief Financial Officer

Yes, I know, the direction you're coming from. A couple of things to note, right? As I mentioned you've got $80 million of margin enhancement from 2019 to '20 that's 135 of margin enhancements in the 2019 number going to 215 in 2020 right?

That's $240 million of debt capacity right there. And I think we'll certainly take that as it comes going forward. But certainly that provides a pretty significant cushion having achieved that in 2019 to get to that three times net-debt-to-EBITDA ratio. But I don't feel at all that we're going to need to allocate additional capital to maintain the three.

As Mauricio said we will always continue to reevaluate the three as we move forward. So, my buyers would believe will be if there is any additional delivering, it would be by our choice, as opposed to, I got a better phrase, find necessity in terms of just maintaining the three times. That makes sense.

Ali Agha -- SunTrust -- Analyst

That make sense, yes. Last question, Mauricio. As you look at all the success capital that you are accumulating and as you said the growth opportunities are fairly limited retail right now makes sense, but there isn't that much retail. If they keep going down this road and I'm not just talking about 2019 but longer term is there a scenario where you just buyout, just take the company private? I mean if you keep buying back stock with excess capital where do we end then?

Mauricio Gutierrez -- Chief Executive Officer

Well I mean I think our focus right now like as I said in the past to execute on our Transformation Plan and then as we laid out the long-term strategy of the company is very compelling. This is where we believe, we can create maximum shareholder value. I will tell you as you just mentioned the excess capital that we have and it's going to be -- it's a priority for the board and for us how to allocate this capital.

I said it on the call and I will reiterate that again from where our stock is value today it's just like the fundamental value. And buying back our stock is still the most compelling opportunity. So, this is where we are focused. And as we progress in 2019, if we see opportunities, if we see other alternatives, we always have to look at them through the presence, through the parameter of the implied returns that we have in our own stock. So, we believe that we're on the right track. We have the right priorities. We're executing well. We have the right team. And I'm just very pleased where the company is going.

Ali Agha -- SunTrust -- Analyst

Thank you.

Operator

Thank you. I would now like to turn the call back over to Mauricio Gutierrez for any closing remarks.

Mauricio Gutierrez -- Chief Executive Officer

Thank you, Joel. Well, I want to thank you all for your interest in NRG. Look forward to talking to you in the future. Thank you and have a great weekend.

Operator

Ladies and gentlemen thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a great day.

Duration: 60 minutes

Call participants:

Kevin Cole -- Head of Investor Relations

Mauricio Gutierrez -- Chief Executive Officer

Kirkland Andrews -- Chief Financial Officer

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

Chris Moser -- Head of Operations

Phil Covello -- Evercore ISI -- Analyst

Abe Azar -- Deutsche Bank -- Analyst

Angie Storozynski -- Macquarie -- Analyst

Praful Mehta -- Citigroup -- Analyst

Ali Agha -- SunTrust -- Analyst

More NRG analysis

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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This article appears in: Personal Finance , Stocks
Referenced Symbols: NRG



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