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NRG Energy Inc (NRG) Q3 2019 Earnings Call Transcript

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NRG Energy Inc (NYSE: NRG)
Q3 2019 Earnings Call
Nov 7, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the NRG Energy, Inc. Third Quarter 2019 Earnings Call. [Operator Instructions]

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

Kevin L. Cole -- Head of Investor Relations

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 Webcast.

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 with that, I'll turn the call over to Mauricio Gutierrez, NRG's President and CEO.

Mauricio Gutierrez -- President and Chief Executive Officer

Thank you, Kevin, 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. These framework targets 50% of excess capital toward growth and 50% to be returned to shareholders, supported now by a more significant dividend policy.

So moving to our third quarter results and 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. The summer in Texas was particularly challenging given the extreme weather on price volatility that resulted in record prices and record demand. I'm 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 demonstrate 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 continue to execute on our capitalized 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 a $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. These 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'm pleased to announce that beginning in the first quarter of 2020, we will increase our annual dividend from $0.12 per share to a $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 early in the summer, with warmer weather in August and September, presented unique challenges for the power grid. These 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 increase on 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 environment. Underpinning our success was strong supply and risk management, enhanced customer outreach and deal management tools provided to residential and commercial customers.

Now between the summer of 2018 with volatile forwards and disappoint in 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 two 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 calls 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 three distinct phases on our transformation. First, in 2016 and 2017, we focused on stabilizing the business through selling or closing underperforming asset, focusing on our core integrated business and strengthening our balance sheet. If you recall, my first commitment to you, nearly four 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% to resolve legacy commitments.

Next, in 2018, we enter Phase 2 with a focus on right sizing 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 these financial flexibility, we completed two accretive mid-sized Retail transactions by allocating 18% of our excess cash and took advantage of our dislocated stock price by allocating nearly 50% toward 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 view 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. These 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 per share 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 five 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 running 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 five 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.

Kirkland Andrews -- Executive Vice President and Chief Financial Officer

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 for the first nine months to around $1.6 billion with $637 million free cash flow. After adjusting for a $57 million reduction in EBITDA for asset sales and de-consolidations in 2018, our third quarter results were $198 million higher than 2018, driven by Generation, which benefited from higher realized power prices in Texas, 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 cost 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 a result of a greater portion of the cash flow associated with third quarter Retail EBITDA, that cash flow will be realized during the fourth quarter as a receivable balance unwinds, and we've already begun to see the 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 remain 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 one-time 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 two 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 that guarantee supporting this obligation is now eliminated and the remaining debt at the project is non-recourse 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 will 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 a $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% for 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, I've included a liquidity table to show the significant change in liquidity, which is the sum of cash and credit facility availability as of November 1st as compared to the quarter end. Over the month of October, our liquidity improved by over $450 million. Net of the non-cash 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 for about 2.5 times 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 dialog with the ratings agencies places us in a position to earn an investment grade rating in the next 12 to 18 months.

With that, I'll turn it back to Mauricio.

Mauricio Gutierrez -- President and Chief Executive Officer

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.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] And our first question will come from the line of Julien Dumoulin-Smith with Bank of America. Your line is now open.

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

Hey, good morning team. Congratulations.

Mauricio Gutierrez -- President and Chief Executive Officer

Thank you, Julien. Good morning.

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

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 contrasting that against your own levered and unlevered yield as it stands today?

Mauricio Gutierrez -- President and Chief Executive Officer

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 year and a half 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 where these opportunities -- this 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 is just providing more clarity on our return of capital to shareholders.

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

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 at the same time, the 7% to 9% dividend growth, that's basically predicated on not just the repo but also finding these platforms and deploying capital?

Mauricio Gutierrez -- President and Chief Executive Officer

Yes. So I mean, we still see some opportunities. I mean, where 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 right.

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

Absolutely. Okay. Thank you very much guys. I'll pass it up.

Operator

Thank you. And our next question will come from the line of Greg Gordon with Evercore ISI. Your line is now open.

Greg Gordon -- Evercore ISI -- Analyst

Thanks, good morning.

Mauricio Gutierrez -- President and Chief Executive Officer

Good morning. How are you?

Greg Gordon -- Evercore ISI -- Analyst

I'm good. I'm good. 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 -- can you just talk through your thought process on that and how you will communicate that going forward?

Mauricio Gutierrez -- President and Chief Executive Officer

Yes, I mean, the long term capital -- the return of capital policy that we're providing today, those have some flexibility embedded in it. I mean, if we cannot find growth opportunities that meet our financial threshold, and importantly, that's 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 want -- 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 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 threshold that I just said, then we'll return that capital to shareholders.

Greg Gordon -- Evercore ISI -- Analyst

Great. Are there -- is there any type of investment that's -- that you would say is 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 -- our power generation assets potentially part of the capital deployment scenario?

Mauricio Gutierrez -- President and Chief Executive Officer

I mean at this point, we're being 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.

Greg Gordon -- Evercore ISI -- Analyst

Thanks. One last question, 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 few questions, sorry.

Mauricio Gutierrez -- President and Chief Executive Officer

Yes, I mean when I think about the business, I don't think about two 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.

Greg Gordon -- Evercore ISI -- Analyst

All right. And Kirk, can you comment on the hedge position, it looks like you have some pretty good marks there.

Kirkland Andrews -- Executive Vice President and Chief Financial Officer

Yeah, I mean, I think we've taken advantage of some higher prices as we always have. At the end 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 yeah, certainly a product of well-timed hedging taking advantage of rally in market prices beyond the prop year, certainly.

Greg Gordon -- Evercore ISI -- Analyst

Thank you guys.

Mauricio Gutierrez -- President and Chief Executive Officer

Thank you, Greg.

Operator

Thank you. And our next question will come from the line of Steve Fleishman with Wolfe Research. Your line is now open.

Steve Fleishman -- Wolfe Research -- Analyst

Yeah. Hi, good morning.

Mauricio Gutierrez -- President and Chief Executive Officer

Good morning, Steve.

Steve Fleishman -- Wolfe Research -- Analyst

So maybe just -- Hey, 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 account, things like that, and also, how would you characterize how the acquisitions have gone so far in Retail?

Mauricio Gutierrez -- President and Chief Executive Officer

Yeah, Steve. Well, let me turn it to Elizabeth.

Elizabeth Killinger -- Executive Vice President, NRG Retail

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, it has set records in selling once it was under our ownership, and Stream is integrating well. They -- both culturally and from team and business process perspective, that's going very well.

We do have some noise in our customer count into quarter really because of the acquisition of some of 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, because bill shock pressure that customers have experienced. So I will 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.

Steve Fleishman -- Wolfe Research -- Analyst

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 in 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.

Mauricio Gutierrez -- President and Chief Executive Officer

That's correct. That's absolutely correct, Steve. I mean this is a complementary and countercyclical nature of these two businesses. But as I've said in the past, I mean, I've focus on total gross margin for the company, less focus on the segments and making sure that that top -- that gross margin is just stable and predictable regardless of market conditions.

Steve Fleishman -- Wolfe Research -- Analyst

And then just lastly on the PPA strategy. So 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?

Mauricio Gutierrez -- President and Chief Executive Officer

Well, I mean as you -- 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 it 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 gigawatts, 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 -- you know close to 2 gigs 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, you know that's a good observation, Steve.

Steve Fleishman -- Wolfe Research -- Analyst

And is it just less you're not seeing kind of some of the rational price offers, I guess, that might have been there before in terms of?

Mauricio Gutierrez -- President and Chief Executive Officer

Yeah, 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 two things. One, I mean, keep in mind that the counterparties that we're talking about are pretty high quality counterparties, because we can provide in a -- on average of 10-year contract with balance sheet that is investment grade. So we actually enable them and put them at a higher competitive position vis-a-vis other developers, but I think it's also impacted by perhaps higher costs due to tariffs that have been imposed.

Steve Fleishman -- Wolfe Research -- Analyst

Thank you.

Mauricio Gutierrez -- President and Chief Executive Officer

You're welcome, Steve.

Operator

Thank you. And our next question will come from the line of Will Grainger with Citi. Your line is now open.

Praful Mehta -- Citi Research -- Analyst

Hi. 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 is any replacement needed for existing assets that -- existing Generation assets that need to be replaced? How do you think about that in that mix?

Mauricio Gutierrez -- President and Chief Executive Officer

Yes. No. Good morning, Praful. So the way I think about it is, you know 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 kind of expand while your Generation contracts and the other way around. So I see that very stable in Texas for the foreseeable future.

The east is slightly different, because our Generation continues to be bigger than our Retail and is primarily driven by capacity prices. The good thing in the east is that we know exactly what it is in the next three years. So we have good, I mean, everybody has good visibility on that. Beyond that, it 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 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 -- balance 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.

Praful Mehta -- Citi Research -- Analyst

Gotcha. That's super helpful context. Then in terms of what you said on the growth capex in Retail, given a 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 near term to be in different markets other than Texas? So how should we think about that?

Mauricio Gutierrez -- President and Chief Executive Officer

No, I think it will be both. I mean, obviously I want to grow the east to better balance, but I will 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 is 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 this new technologies that are coming into the market. Then, I mean, we're doing it at very attractive levels. We're participating on that. And all it does is just lower our cost of serving load. So I'm going with that.

Praful Mehta -- Citi Research -- Analyst

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 acquired?

Mauricio Gutierrez -- President and Chief Executive Officer

Yes, I mean, 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 OK partnering, and actually today we offer residential solar, we just offered 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 rather partner then vertically integrate.

Praful Mehta -- Citi Research -- Analyst

Got you. Super helpful, Mauricio. Thank you so much.

Mauricio Gutierrez -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And our last question will come from the line of Ali Agha with SunTrust. Your line is now open.

Ali Agha -- SunTrust Robinson Humphrey, Inc. -- Analyst

Thank you. Good morning.

Mauricio Gutierrez -- President and Chief Executive Officer

Good morning, Ali.

Ali Agha -- SunTrust Robinson Humphrey, Inc. -- Analyst

Good morning. First question is for you Kirk. As you unveiled 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, etc?

Mauricio Gutierrez -- President and Chief Executive Officer

Kirk?

Kirkland Andrews -- Executive Vice President and Chief Financial Officer

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 our, if you will. As far as the dividend is concerned, based on our ongoing dialog with the rating agencies, I think certainly they are very focused on 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 maintain this balance sheet metrics. That's very important part of the dialog, both with our investors as well as the agencies. And we feel comfortable that the dividend commitment is right-sized relative to our confidence in the overall magnitude of free cash flow, still affording us a lot of financial flexibility around that.

And because of 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 meeting 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 of that factors in, both to our thinking about the dividend and as well as the dialog we have with the rating agencies around that topic.

Ali Agha -- SunTrust Robinson Humphrey, Inc. -- Analyst

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?

Mauricio Gutierrez -- President and Chief Executive Officer

Yeah, 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 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 competitive market. So all it does is, we're serving 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 three years. They're locked in. So there is 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, you know actually -- you don't see in these 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.

Ali Agha -- SunTrust Robinson Humphrey, Inc. -- Analyst

Got you. And final question. 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?

Mauricio Gutierrez -- President and Chief Executive Officer

Well, everything that we do -- I mean, I'm assuming you're talking about commercial and industrial long-term transaction, is that you're talking about?

Ali Agha -- SunTrust Robinson Humphrey, Inc. -- Analyst

Yes.

Mauricio Gutierrez -- President and Chief Executive Officer

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 or in a backward-dated market, when you're doing a term deal, is there -- 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 are trying to lock in a margin through the term of the deal and we want to make sure that supply, and I guess, the C&I deal, the revenue line and the cost line is pretty consistent.

Ali Agha -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay. Thank you.

Mauricio Gutierrez -- President and Chief Executive Officer

Thank you.

Operator

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.

Mauricio Gutierrez -- President and Chief Executive Officer

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.

Operator

[Operator Closing Remarks].

Duration: 46 minutes

Call participants:

Kevin L. Cole -- Head of Investor Relations

Mauricio Gutierrez -- President and Chief Executive Officer

Kirkland Andrews -- Executive Vice President and Chief Financial Officer

Elizabeth Killinger -- Executive Vice President, NRG Retail

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

Greg Gordon -- Evercore ISI -- Analyst

Steve Fleishman -- Wolfe Research -- Analyst

Praful Mehta -- Citi Research -- Analyst

Ali Agha -- SunTrust Robinson Humphrey, Inc. -- Analyst

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