Vistra Corp. (VST) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Vistra Energy's Fourth Quarter and Full-Year 2019 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] Thank you. I would now like to hand the conference over to your speaker today, Molly Sorg, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to Vistra Energy's investor webcast covering fourth quarter and full-year 2019 results which is being broadcast live, from the Investor Relations section of our website at www.vistraenergy.com. Also available on our website are a copy of today's investor presentation, our 10-Q and the related earnings release. Joining me for today's call are Curt Morgan, President and Chief Executive Officer; and David Campbell, Executive Vice President and Chief Financial Officer. We have a few additional senior executives in the room to address questions in the second part of today's call, as necessary. Before we begin our presentation, I encourage all listeners to review the Safe Harbor statements included on Slides 2 and 3 in the investor presentation on our website that explain the risks of forward-looking statements, the limitations of certain industry and market data included in the presentation, and the use of non-GAAP financial measures. Today's discussion will contain forward-looking statements, which are based on assumptions we believe to be reasonable only as of today's date. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected or implied. We assume no obligation to update our forward-looking statements. Further, our earnings release, slide presentation, and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures are in the earnings release and in the appendix to the investor presentation. I will now turn the call over to Curt Morgan to kick off our discussion.

Thank you, Molly, and good morning to everyone on the call. As always, we appreciate your interest in Vistra Energy. We know this is a busy time of the year, so we intend to keep today's remarks concise, focusing on what we believe are the key drivers of Vistra's success, past, present and future. First and foremost, as we will discuss shortly Vistra has a strong track record of execution supporting our conviction that we have the right strategy and business model for long-term success. Second, I believe we have demonstrated that we know how to grow the company and create value for our shareholders. Experience and execution will be essential in the years ahead. And last, our underlying fundamentals remain sound making Vistra well positioned to continue to deliver consistent results. Not only weathering future volatility but also capitalizing on it. I'm going to star on Slide 6, as you can see in the last row of the table, Vistra finished 2019 reporting adjusted EBITDA from its ongoing operations of $3,393 million, results that are above the midpoint of Vistra's recently increased guidance range of $3.32 billion to $3.42 billion. Perhaps more important however is that this is the fourth year in a row that Vistra has delivered financial results above the midpoint of its guidance range For those of you counting, that is all four years Vistra has been a public company, meaning that we have established a consistent track record of delivering on our commitments and not only that, in the same timeframe we have also grown EBITDA by more than 100% and returned nearly $5 billion of capital through our equity and debt holders. All of this against the backdrop of a wide array of commodity prices in prompt and forward periods and changing customer preferences. As we lay out on the next slide, Slide 7 Vistra has been able to double its adjusted EBITDA from ongoing operations in just over three years through a disciplined approach to growth investments and a relentless focus on reducing costs and improving plant operational performance. We have grown our business through both acquisition and investment, with the acquisitions of Odessa, Crius and Ambit and investments in solar and battery storage and Upton 2 site in Texas, and at our Moss Landing and Oakland sites in California, all of which are forecasted to delivery very attractive returns utilizing conservative assumptions. And as you know, the investment we announced in 2017 that continues to exceed expectations and offer outsized returns as the acquisition of Dynegy. Since the time we announced the acquisition we have more than doubled our EBITDA synergy and operational performance improvement targets from $350 million to $715 million. We have also increased our after tax free cash flow target by nearly 5 times and preserved the utilization of Dynegy's net operating losses resulting in a net present value benefit of approximately $900 million, applying and 8 multiple to the synergies and an 8% free cash flow yield to the free cash flow synergies would imply that we created more than $8 billion dollars of value from the Dynegy merger alone, not to mention we have increased the expectation for 2020 financial results by more than $600 million above the 2020 adjusted EBITDA target projected in connection with the merger announcements, substantially more than filling the gaps adjusted by forward course and from the Dynegy business due to a lower PJM capacity cleared. This increases large delivery results of the growth items I just discussed as well as our relentless focus on cost management and planned performance. Including the Dynegy merger value leverage we have identified nearly $1.5 billion of cost savings in just over three years. This impressive EBITDA growth, couple with our high free cash flow conversion ratio of approximately 65% to 75% has supported our diverse capital allocation plan, where in addition to making prudent growth investments, Vistra has returned nearly $5 billion of capital to its financial stakeholders in just over three years through a combination of dividends, share repurchases, and debt reduction. While in 2020 we are focusing on reducing debt to achieve our long-term leverage target 2.5 times net debt to EBITDA, we expect we will be in a position to roll out our long-term capital allocation plan in the second part of this year. As I have mentioned in the past, Vistra's robust free cash flow should enable us to both reinvest in our business at modest levels while returning a significant amount of capital to stakeholders. More to come on this topic later in the year, but suffice it to say that we are confident that this business model will continue to generate meaningful free cash flow for allocation year after year. Our teams have a proven track record of identifying efficiencies that maximize the value of our operations and we have been successful of identifying tuck in growth opportunities that are both EBITDA and free cash flow accretive with very attractive returns while requiring only modest levels of our capital to pursue. In short, this is a business model we believe can endure. Turning now to Slides 8 and 9, we wanted to spend a few minutes reviewing the six key tenets of our business model, as these tenets have formed the base line of our success over the past four years and importantly remain intact to support our positive outlook for the future. They include financial discipline, low cost operations, diversification, a leading retail platform, and in the money generation fleet and commercial optimization. Starting at the top, financial discipline is the foundation of our business model. It is imperative that commodity exposed businesses operate with more leverage. A strong balance sheet allows a company to weather commodity cycles without creating financial distress and allows management teams to make sound investment decisions at the right times in the business cycles. Vistra is committed to achieving its long-term leverage target of 2.5 times net debt to EBITDA and we are equally committed to being good stewards of capital, making investments only when projected returns meet or exceed our investment threshold and returning a significant amount to our financial stakeholders. Just like I dubbed 2019 the year of execution, 2020 is the year of financial strength and capital allocation clarity and of course execution will always underpin everything we do. Vistra's financial strength is similarly supported by its commitments to low cost operations and its diversified revenue streams. Vistra is a market leader in low cost operations. Through our operational performance improvement program we have identified $425 million of annual EBITDA enhancements putting our generation fleet in a position to remain viable as the supply landscape evolves. Our scale also enables us to operate with comparatively low overhead costs and gives us the unique ability to leverage our platform to create synergies when attractive growth opportunities present themselves. Vistra's scale and diversification further lessens any potential negative impacts from one time whether events or regulatory changes for example. With operations in six competitive markets in the U.S. and diverse revenue streams from retail, capacity and energy, Vistra believes it is well positioned to deliver stable earnings in a variety of market price environments. It is also important to note that we have taken steps to transition our generation business to compete in the age of climate change, going from mainly coal just a few years ago to mainly gas today, while prudently investing in renewable and batter storage technologies. On the retail front, following the closing of Crius and Ambit acquisitions in 2019, Vistra is now the largest competitive residential electric provider in the country, serving nearly 5 million customers up from the approximately 1.7 million we served at that time our predecessor emerged from bankruptcy in October of 2019. Our Texas retail operations continue to demonstrate strength and stability with our legacy residential business in Texas growing accounts in 2019 for the second year in a row. We now have 12 brands and more than 200 product offerings and operate in 19 states and the District of Columbia. Our growth in retail, both organically and via acquisitions, has resulted in our retail business being the consumer of nearly 60% of our generation output on an annual basis. Our retail segment is the most attractive channel for us to sell our generation LinkedIn as a result of the higher margins it offers and collateral and transaction efficiencies we realize when transacting on an integrated basis. Here in retail and wholesale also helps to create more stability in our cash flows, which we believe makes for a predictable and attractive investment. This is true in part because of the nature of the assets in our generation fleet. Vistra's generation assets are relatively young, low heat rate assets with over 60% of our capacity coming from gas fuel generation and more than 50% of our fleet comprised of highly efficient and flexible combine cycle gas turbines. This is important for two primary reasons, first because our assets are generally in the money meaning they are low enough on the supply stack that they learn most of the time. We have a greater opportunity to hedge our forward commodity exposure at favorable pricing periods and create higher and more stable earnings. Second, as the country continues to transition to lower carbon technology, our flexible natural gas assets are very likely to remain an integral part of the generation mix. We expect our gas asses will be a critical backstop for the grid and is becoming increasingly reliant on the intermittent renewable resources. We have seen this phenomenon pointing out in renewable heavy California and Texas in the past year. As intermittent renewable resources become a greater percentage of the supply stack, the market is introducing risk of entire class assets underperform in a correlated fashion, meaning the grid is more likely to lose a significant percentage of its generation all at once. Historically, asset underperformance was predominantly a function of uncorrelated power plant forced outages. In order for the grid to remain reliable in this circumstance we will need these low-cost, dispatch able gas assets. As a result, we believe Vistra's generation fleet is well-positioned to continue to drive meaningful EBITDA from energy, ancillary services and capacity revenues in the future. The last component of Vistra's integrated business model is commercial optimization. Our ability to take advantage of the volatility and forward curves to hedge our open generation position at attractive pricing generally insulates our financial results from near-term fluctuations in commodity pricing, in particular natural gas prices. We saw this play out in 2019 and expect it to in 2020 as well. Importantly, our commercial team executes our hedging strategy with an approach to manage risks and our goal to create a stable earnings profile. And it has a proven track record of success in this regard. When you combine in the money assets, price volatility and the financial strength to forward hedge, Vistra can construct a rolling, stable earning profile and we now have a four year proven track record of success to support this thesis. Turning now to our full year results on Slide 10, Vistra ended the year delivering adjusted EBITDA from ongoing operations $3,393 million, results that exceeded our increased guidance midpoint from November. And when you back out the negative $40 million impact from ERCOT retail backwardation, we talked about on our last earnings call, our 2019 adjusted EBITDA from ongoing operations would have been $3,433 million, which is higher than the upper end of our guidance range for the year. Recall that we did not plan for the volume or the impact of these long dated contracts in our initial 2019 guidance, meaning that our integrated operations absorbed this impact and still delivered financial results at the high end of our guidance range, another testament to the strength of this integrated business model. It is also notable that this drag on 2019 earnings will reverse itself in future years as increased EBITDA and the underlying transactions are NPV positive. Our 2019 ongoing operations, adjusted free cash flow before growth was $2,437 million, results that are $187 million above our guidance midpoint at $137 million above the high end of our guidance range. This favorability in our 3019 adjusted free cash flow before growth is a result of higher adjusted EBITDA as well as continued capital expenditure disciplined by our operational teams. The favorability was also due in part to the early receipt of an alternative minimum tax credit refund of $93 million which we have planned to received in 2020 and included in our 2020 guidance. This robust free cash flow generation translates to a free cash flow conversion ratio of approximately 72% in 2019. Consistent with our past practice, we are reaffirming our 2020 guidance range as shown on Slide 10, including the adjusted free cash flow before growth guidance range despite the timing of the AMT refund. We are very early in the year and a lot can change to improve our view of cash. As the year progresses, we will evaluate whether an update to our free cash flow before growth guidance range is warranted due to the timing impact of this tax refund. Before we move off of this slide, I want to once again comment on the outlook for 2020-2021. The 2021 forward curves in ERCOT have come down from where they were trading in October of last year. We continue to believe that the forward curves are dislocated from fundamentals and not reflective of where pricing will ultimately settle, a view we have been accurate on for the last few years. Our fundamental view continues to support our belief that 2021 results have a good chance of being plateau if not better than 2020 results. I'm going to wrap up this morning on Slide 12 and 13. Given the spotlight in recent months on the sustainable footprint of public companies and specifically public companies with exposure to coal, we thought it would be helpful to provide some numbers behind our exposure while emphasizing where we think this trajectory is headed. As you can see on Slide 12 in just three years with the retirement of seven coal plants and growth in retail, gas assets, and renewables in storage, Vistra has reduced its exposure to coal by nearly half with less than 30% of our capacity, approximately 20% of our revenues, and only 17% of our EBITDA forecast to come from coal assets in 2020. This is a dramatic shift in a short period of time and one we expect will continue over the next decade. In fact if we turn to the next slide, you will see a picture of what we believe our business could look like in 2030 based on the 10 year view we introduced on our third quarter earnings call in November. Clearly, this is and illustrative outlook, but it is rooted in rational market principles and fundamentals, a recognition of current power technology, and a future asset mix that will be necessary to ensure system reliability and an expectation for realistic investment in the company at reasonable returns. Assuming economic and environmental challenges result in the retirement of another approximately 7200 MW of coal assets over the next 10 years and we invest approximately 25% of our free cash flow in renewable and battery assets and retail over that same time period, 10% or less of our EBITDA and capacity would come from coal assets in 2030. Under this scenario, not only would we transform our generation fleet to be nearly 20% renewable and batteries, we would also expect to drive more than 50% of our EBITDA from retail, renewables and batteries and nuclear. As we have mentioned many times, we believe natural gas generation will remain a key dispatch able resource needed for power system reliability with proliferation of intermittent renewables. We have as efficient a gas fleet as anyone and we expect it will continue to be a strong component of our EBITDA contribution. Importantly, this business mix and market outlook is expected to grow EBITDA and result in approximately $15 billion of capital available to be returned to shareholders. And if we do not identify investments that meet our hurdle rate, we will return that capital as well. As we announced in October last year, we have a clear line of sight to achieving a greater than 50% reduction in our CO2 equivalent emissions by 2030 as compared to 2010 base line. Coal economics continue to be challenged and I expect Vistra's exposure to coal will further decline meaningfully over the same time period. Our business is already participating in the energy transition and I believe we will continue to be leaders in this effort in the future. Our unique capabilities with expertise managing risk, operating assets with scale and efficiency and providing innovative products and services to our retail customers make us well positioned to capitalize on the transition to a lower carbon economy, improving our environmental footprint while continuing to create value for our shareholders over the long term. Before I turn the call over to David, I feel compelled once again to comment on our stock price. Setting aside the rent sell off due to the coronavirus, not surprisingly we believe the recent decline in our stock is unwarranted and what was a significantly undervalued stock prior to this decline is now an absurdly undervalued stock. In our view, there is no rational explanation for an over 20% free cash flow yield especially when compared to other commodity expose, capital incentive, capital companies with far more risk in the climate change age. Nevertheless we believe we are on the right track and we are committed to unlocking value. I will now turn the call over to David Campbell.

Thank you, Curt. Turning now to slide 15, Vistra delivered 2019 adjusted EBITDA from ongoing operations of $3,393 million exceeding the midpoint of our guidance range. As you know, during our third quarter call we increased our 2019 guidance reflecting expected impact of the Crius and Ambit acquisitions. The favorability relative to our provided guidance was driven by higher gross margin from our ERCOT segment compared to planned results. Our adjusted free cash flow before growth from ongoing operations also exceeded expectations, coming in above the high end of our guidance range of $2,437 million. This favorability was due in part to the early receipt of alternative minimum tax credit refund of $93 million which we previously expected in 2020. After excluding the AMT refund, our free cash flow before growth still exceeded the high end of our 2019 guidance range. This outperformance was driven by higher adjusted EBITDA as well as capital expenditure discipline reflecting the impact of our ongoing operations performance improvement efforts. Focusing on the fourth quarter, our 2019 results were $55million higher than the same period of 2018 driven by the additions of Crius and Ambit and higher gross margins in ERCOT generation, partially offset by lower capacity revenue in our PJM and New York, New England generation segments. Before we move on to our final slide this morning, I will note that due to the retirement of four coal plants in our MISO segment in the fourth quarter, we moved the financial results of those plants out of the MISO segment and into the Asset Closure segment. We have similarly recast our 2018 results to account for this shift, which is why you will see that our fourth quarter adjusted EBITDA for 2018 is $1 million higher than what we reported at this time last year. Slide 16 provides a summary of capital allocation. As of February 24, we have executed $1.418 billion for our $1.75 billion share repurchase program, leaving approximately $332 million of capital remaining for future share repurchases. You'll recognize that this is virtually the same amount of capital we had available under our share repurchase program as of our November earnings call. During the 2019 calendar year, we returned a total of $899 million to shareholders through dividends and share repurchases. As we emphasized during our November earnings call, our capital allocation priority for 2020 is debt reduction. We believe the achievement of our targeted leverage levels will support an upgrade to our debt ratings, and keep us on the path to investment grade. We also believe that advancing toward an investment grade credit rating can be one of the most powerful catalysts to rerate our equity, as it will be yet another proof point that the new business model we are operating is significantly de-risked from the IPPs of the past. We have heard from many investors, they will be more inclined to invest in our equity or will be more comfortable taking a larger position in the equity with an investment grade credit profile. We believe 2.5 times net debt to EBITDA is the appropriate leverage level for our enterprise in order to withstand business cycles and maintain investment flexibility independent of the consideration of investment grade credit rating. As a result, we remain committed to debt reduction in 2020 and delevering will be our near term capital allocation priority. However, we will continue to opportunistically evaluate repurchasing shares, or investing in promising growth opportunities, especially those that have a minimal impact on our credit metrics. Turning to our dividend, we announced earlier in the week that our Board of Directors approved an 8% increase in our annual dividend, resulting in $0.135 quarterly, or $0.54 per share on annual basis. Our first $0.135 quarterly dividend will be paid on March 31 to shareholders of record as of March 17. As we look ahead, we expect to have significant cash available for allocation in 2021 and beyond. We plan to layout our long-term capital allocation plan in the second part of this year. Our history has demonstrated that we have the discipline to be good stewards of your capital, returning meaningful excess cash to our stakeholders while investing in growth only when attractive opportunities arise. You can expect that long-term capital allocation plan will reflect a similar philosophy, including the significant return of cash annually to shareholders. We remain optimistic that with the ongoing successful execution of our business plan, our stock price will ultimately reflect its fundamental value. And with that operator, we are now ready to open the lines for questions.

Thank you. [Operator Instructions] Your first question comes from Shahriar Pourreza from Guggenheim Partners. Your line is open.

Hey, good morning, guys. You just raised your dividend by 8%, you're delevering is on pace, could you just get a directionally talk about the scale of the next buyback with another $2.3 billion, $2.4 billion of free cash flow that's kind of at your disposal in 2021? I guess I'm trying to get a sense on what you mean by significant annual return of capital to shareholders. An exact timing when you're going to initiate, not announce, the new program with 21 story being sort of going to IG ratings. I mean, can you start incremental buybacks this year versus the current 322 that remains under the old program?

Thanks Shahriar. So look, I think to be very clear about this, in 2020 we are focused on paying down our debt and getting debt to our leverage targets. And look, I think a time like this frankly, essentially for me reconfirms that where we're headed whether our leverage is the right thing. When you get into situations, like what's going on with the pandemic, and it seems to be growing, I think financial strength is going to be proved out to be very key. And so, while we would like to buy our shares back, I mean, let's just be honest, we know that we're trading now, 20 and plus some change. It's a very attractive buy. We're also File 7 Higher gross margins in ERCOT generation partially offset by lower capacity revenue in our PJM in New York, New England generation segments. Before we move on to our final slide this morning, I will note that due to the retirement of four coal plants in our MISO segment in the fourth quarter, we moved the financial results of those plants out of the MISO segment and into the Asset Closure segment. We have similarly recast our 2018 results to account for this shift, which is why you will see that our fourth quarter adjusted EBITDA for 2018 is 1 million higher than what we reported at this time last year. Slide 16 provides a summary of capital allocation. As of February 24, we have executed $1.418 billion or $1.75 billion share repurchase program, leaving approximately $332 million of capital remaining for future share repurchase. You'll recognize that this is virtually the same amount of capital we had available into our share repurchase program as of our November earnings call. During the 2019 calendar year, we returned a total of $899 million to shareholders through dividends and share repurchases. As we emphasized during our November earnings call, our capital allocation priority for 2020 is debt reduction. We believe the achievement of our targeted leverage levels will support an upgrade to our debt ratings, and keep us on the path to investment grade. We also believe that advancing toward an investment grade credit rating can be one of the most powerful catalysts to rewrite our equity, as it will be yet another proof point that the new business model we are operating is significantly de-risked from the IPP of the past. We have heard from many investors, they will be more inclined to invest in our equity or will be more comfortable taking a larger position in the equity with an investment grade credit profile. We believe 2.5 times net debt to EBITDA is the appropriate leverage level for our enterprise in order to withstand business cycles and maintain investment flexibility independent of the consideration of investment grade credit rating. As a result, we remain committed to debt reduction in 2020 and delevering will be our near term capital allocation priority. However, we will continue to opportunistically evaluate repurchasing shares, or investing in promising growth opportunities, especially those that have a minimal impact on our credit metrics. Turning to our dividend, we announced earlier in the week that our Board of Directors approved an 8% increase in our annual dividend, resulting in $0.135 quarterly, or $0.54 per share on annual basis. Our first $0.135 quarterly dividend will be paid on March 31 to shareholders of record as of March 17. As we look ahead, we expect to have significant cash available for allocation in 2021 and beyond. We plan to layout our long-term capital allocation plan in the second part of this year. Our history has demonstrated that we have the discipline to be good stewards of your capital, returning meaningful excess cash to our stakeholders while investing in growth only when attractive opportunities arise. You can expect that long-term capital allocation plan will reflect a similar philosophy, including the significant return of cash annually to shareholders. We remain optimistic that with the ongoing successful execution of our business plan, our stock price will ultimately reflect its fundamental value. And with that operator, we are now ready to open the lines for questions.

Thank you. [Operator Instructions] Your first question comes from Shahriar Pourreza from Guggenheim Partners. Your line is open.

Hey, good morning, guys. You just raised your dividend by 8% you're delevering is on pace, could just get a directly talk about the scale of the next buyback with another 2.3 billion, 2.4 billion of free cash flow that's kind of at your disposal in 2021. I guess I'm trying to get a sense on what you mean by significant annual return to capital shareholders. An exact timing when you're going to initiate not announced the new program with 21 story being sort of going to IG ratings. I mean, can you start incremental buybacks this year versus the current 322 that remains under the old program?

Thanks Shahriar. So look, I think to be very clear about this in 2020, we are focused on paying down our debt and getting debt to our leverage targets. And look, I think a time like this frankly, essentially for me reconfirms that where we're headed whether our leverage is the right thing. When you get into situations, like what's going on with the pandemic, and it seems to be growing. I think financial strength is going to be proved out to be very key. And so, while we would like to buy our shares back I mean, let's just be honest. We know that we're trading now, 20 and plus some change. It's a very attracted buy. We're also equally committed to get our leverage to where we said we were going to do it and we're committed to do it in 2020. So beyond that we've said later this year we will give a little more clarity about what we're going to do in 2021 and beyond. But I think we've given a little bit of a view of that, by saying we think we can invest in our business about a quarter what we believe on an ongoing basis will be about $2 billion plus of free cash flow. So I mean, the math just tells you that that's $1.5 billion that we can return to shareholders. I think the real question is going to be for our company is how do we do that. And I think that's a mix of recurring dividend and whether we side with the Board to change the yield that we're paying on the dividends that will definitely be on the table. And then, clearly if we're trading below value and our thought of what fundamental values this company, then the remainder that will go to buy back shares. I mean, it's not rocket science, and I'm not, speaking out of turn, it's just that's the way we think about it. And so – I think that's the – the next couple of years that's what it looks like. But we need to get the debt down to where we want it to be and we're committed to do it in 2020. We pushed it out once before, and we're not going to do it again. I think this is the right thing and I think to strengthen the company from a financial standpoint, it's the right thing to do. I’d also think it's very – and David alluded to this in his comments that we believe that ultimately, getting the debt down to where we want it to be will also be very accretive to the equity. So that's what we're doing in 2020 and 2021 and beyond. We have a substantial amount of capital return and it will be a mix of a recurring dividend and probably share repurchases.

Got it, got it and that's because they are obviously looking at inorganic opportunities, the thresholds aren't there yet, okay. Let me just ask you Curt one more question is, there's obviously been a lot of headlines about strategic opportunities, including privatization, which we get given these obviously very high or irrationally high free cash flow yields. What's your sort of updated thoughts there? What's your trigger point? Are you sort of patient right now? Do you want to see what happens with your free cash flow yield once you go to IG before making this decision I guess, what's, yours and the Board's level of patience on these valuation models?

Yes, so very good question Shahriar. Thanks for asking that. So look, I think we are patient. We believe that getting our debt down to the 2.5 times net debt to EBITDA range this year is very important. And then I think also giving clarity to that long-term capital allocation plan, putting another year behind us and showing that we can meet or exceed our expectations, I think is also helpful. That's helpful to the agencies as well. I think one of the things they'd like to see is whether we can withstand the business cycles, including things like what's going on with coronavirus right now, which I think in 2020 we're going to have a very good year despite what could be, symptoms of a recession off of that, off the coronavirus. So I think we're very strong company, I think we’ll show that in 2020, but I think it's very important, for us to do that. Now, in terms of the direct question about, strategic options, I think we'll be patient through 2020 and into 2021 to see that play out. But I can also assure you that, the Board continually thinks about what's the best way to unlock value. You know that I spent a lot of time in private equity. And for me, the only difference between being a public company and a private company, is that every day I wake up I get a scorecard. I get my report card, it's in the form of our stock price. And from a private equity standpoint, they market on a quarterly basis, but I can assure you that most of those companies are marking their quarterly mark of their value based on what the public markets are creating at. And frankly at the end of the day, you unlock value the same way in both private and public market settings. You either do it over the long run or you do it at particularly with the private equity firms, you look for an exit, and the exit is limited. You know this right now, there's many private equity firms that would love to exit their generation, but there is no exit for them. And if they try to exit into the public markets, they have too much leverage and they don't have an integrated business model, which is what it takes to compete in the public markets. So, we think we can unlock this value in a public market setting it just may take a longer period of time. And we've got to be patient to do that, but I don't see that if there some silver bullet by becoming a private company that all of a sudden there's going to be this huge value uplift, because you've monetized the value of a company the same way whether you're public or private.

Got it, that's helpful and I completely agree with your exit strategies are the hindrance. Thanks so much, guys, I appreciate it.

Thank you.

Your next question comes from Steve Fleishman from Wolfe Research. Your line is open.

Thanks. Good morning.

Hey Steve.

Hey, so just maybe just curious, Curt if you can give us a little color on, as you mentioned feel good on Texas market, I assume mainly Texas market fundamentals. So could you just give - a little bit of an update on just overall the U.S. supply/demand impact of solar adds that you're seeing and things like that?

Yes, so just you know that Steve that we do our own point of view, when it comes to reserve margin. We have – I don’t know if this is well known, but we have a very good development team. And one of the best ways to get intelligence on what's going on in terms of development in any market is to have a team that's actually out there and doing it. And so, we have a pretty good sense of things. Plus we know historically, in particular in Texas, kind of what the build out rate has been, from the CDR to what actually gets built, which has been a little bit below 50%. And what happened in the CDR this time, which I think most people know what that is, right. It's not, I wouldn't take that to the bank, anybody that invest on, by looking at the CDR is foolish. I mean at the end of the day, it doesn't have an economic overlay to it. And so, what happened though, is everything that was supposed to get built that didn't get built 2020 got pushed into 2021and that's kind of what happened and so it just keeps rolling out. So the CDR actually shows a big uptick in building and we think there's probably a little bit less than 50% of that, that's actually on the ground getting built for 2020. What that results in is a very manageable reserve margin going into, from 2020 into 2021, which in our view, if you look at low growth, and that's the big key really in Texas. But we've got some people who think it's going to be 3%, some people – around more like us about 2%. Either way, that new build is barely going to cover load growth in the State of Texas. So that's why we feel that the market is still fundamentally strong. The last point I'd make about that is that, the growing intermittent nature of the new build, because all that new build by the way, is going to be solar and wind and wind is dropping off by the way, just because the PTC is going away. And so wind – excuse me solar is the build out. And we all know that, there's an intermittent nature to that, depending on how the sun shines on any particular day. And we saw this last summer. And the reserve – overall reserve margin is not as important frankly, as the reserve margin ex, the intermittent resources. How much steel is on the ground, and especially in the summer months, when neither the wind or the sun are not performing at expectation. And that's really what's key to figuring out what the increase in pricing is going to be in the summer. And when you look at that, the market is really tight for those types of resources during those periods of time. And we expect we're going to get, probably four or five, maybe even up to 10 of those in any given summer and we're going to see high pricing. Then the key for us, frankly, is that we have assets that can perform. And we had – our commercial availability, which is basically, when you're available when you're in the money weighted by margin opportunity was almost 95% this year, which is extraordinarily high when you've got older coal in your fleet. So, we have to have that same performance. If we do that, and we see these same kind of fly-offs and given the supply/demand in Texas, we're going to see another good summer. And you can boil our company down in terms of the range that we give you guys on any given year, given the way that we hedge, you can boil it down to the summer months in ERCOT. That's really the game for us. And we think we're well positioned to that. We like the links that we have, especially given the fundamentals in Texas. And so, we're looking forward to this summer. We think with the ORDC, the core increase in standard deviation, this is going to be a real interesting summer again and there's going to be a great opportunity for our company.

Okay, and then I guess separately, just want to get more color how the Crius and Ambit deals are going in terms of just meeting the performers you had and overall dynamics in ERCOT retail market - market share things like that?

Sure, Steve, you know Jim Burke he is here. I was going to have Jim address that for you please.

Certainly, good morning Steve. Yes we obviously started to integrate Crius ahead of Ambit. I think both integrations are going really well. We have $45 million to $50 million of synergy opportunities with those two. Some of that is technology driven. So it's a multiyear process, but from a hedging and supply standpoint or customer behavior standpoint, and the initial cost synergies achieved those were on track. We’ll continue to build synergies over the next two to three year timeframe. But we like how those two books are operating at this point and I think we feel really good about the multiples with which we acquired them and the long-term value for this generation to retail match, particularly in ERCOT.

Okay, thanks that’s it from me.

Thanks Steve.

Your next question comes from Julien Dumoulin-Smith from Bank of America. Your line is open.

Hey, good morning, Jim. Can you hear me?

You're a little fade, but we can hear you. Okay, Julien, how you doing?

Good excellent, thank you very much. I’m quite well, Happy Friday. Perhaps just to come back to your commentary about the cash flow this year and the taxes, can you talk about some of the strategies to minimize taxes, not just this year, but especially on an ongoing basis. I mean, this has been something you've been successful at in the past. You made an allusion to it, if I heard you right on the call, what kinds of strategies, what kind of opportunity exists there – well I'll ask it open ended?

Okay I’ll take a shot and then David, I'd like you to comment too, but you’re just talking about like federal taxes right, I mean Julien that's what you're talking about.

You made some comments about AMT earlier as well.

Okay so.

An improvement to the overall FCF [ph] this year?

Sure that AMT refund really came from the Dynegy acquisition. We're all too happy to have it, but that was really where that came from, that opportunity. But just to remind everybody, we haven't been and we are not a taxpayer, I think through 2023 roughly. And, and then after that, we always are looking, we have very good tax group and we're always looking for opportunities to minimize our taxes. But we are not a tax payer and have not been paying on the TRA and won't be until we project probably out into 2024. And then, we will obviously we'll have plenty of time to try to see what tax strategies we might be able to deploy to minimize that. But, we at least on the forecast right now, it looks like we'd be a tax payer again in 2024. And so, we've really had, there's a couple of things happened, one the NOLs that we received, and there were some, what I'll call esoteric, sort of integration between new tax law and old tax law. We had a window of opportunity that happened and then closed right after closed the Dynegy deal, but since we closed before that, we were avail to the opportunity to be able to use 100% of the Dynegy's roughly $4 billion plus dollars of NOLs which as we've said many times has an NPV of about $900 million. So that has been a big contributor to us not paying taxes. David, do you have anything to add?

I’ll add – just to reemphasize Curt’s point, this is David, that we, our tax group is very active managing this other than property taxes and some state franchise taxes we do not pay. And we do not have federal income tax liability or cash payments in 2019. And we don't expect to be a cash taxpayer for the next few years. And we're going to keep manage – actually managing that, keep that trajectory going as long as we can, very important to us. And as we noted, we received an AMT payment of $93 million in the fourth quarter. We also received another $35 million in the first quarter this year related to as Curt described some AMT claims from the Dynegy situation. But we’ll continue to very actively manage down our cash taxes.

Awesome, excellent guys. And then looking at the slides here on the hedging front, 2021 versus 2020, just as you provide the sort of initial look here, the expected output is backward dated. I assume that's just tied to the forwards here, but just want to understand if there's anything changing in how you view things?

You have it just right, Julien. These were based on forwards, if we were to shows, you know our proprietary point of view, you'd see very similar volumes to what you have in 2020. And so, I think what the big key will be is just what ultimately plays out in the market. But we feel pretty confident that our point of view, which has played out over the last four years will play out again for 2021. And of course, then we'd have the same level of production volumes that we've had from 2020 to 2021.

Excellent, all righty, I'll pass it off. Thank you very much, guys.

Thank you.

Your next question comes from Michael Weinstein from Credit Suisse. Your line is open.

Hi, guys. Along those same lines about production volumes, on Page 25, the hedge portfolio and portfolio sensitivities, it looks like generation, total generation output is declining especially in ERCOT and a little bit in PJM from 2020 to 2021. And I'm wondering how I can, how do you square that with the comment on Slide 10 that says that the EBITDA for 2021 will be, at or above 2020?

Yes so, Michael it’s a good question. And I tried to address it there with Julien, but I'll try it again, I obviously didn't do a very good job of it. If you were to take a - strictly mark the curve off the curves, you'd get what we're showing on Page, what is it Page?

25.

So, on a pure marked basis, because of the backwardation and the curve, and I think you know this, but what this is showing is our delta position, which effectively means, what is in the money at a particular curve. And so, and then what's the production resulting production from our power plants. And what we based the comment on Page 10 is our point of view, which - if we were to put the two curves out.

Now I get it.

2020/2021 point of view versus 2021 market, you would see and we've said this, we think there is a decoupling between where the curves are and where our point of view has been. We've also said that we've been saying this now for about four years where, and we've been accurate on this where the market has actually as we rolled into the prop year. For example going from 2020 to 2021 we've seen those curves pop up, as the market understands that the market remains tight, and that the supply/demand fundamentals are strong, which we expect to happen given our intelligence of what new build is going to look like and our understanding, of what load growth looks like. So again, that's the Page 10 comment is based on our view of the world, and Page 25 is based on a strict mark of the curves.

I get it, I get it, so over the course of the year, we'd expect this page to change with those numbers coming up?

Yes that’s correct.

As it catches up with the point of view, right? And then also nothing is...

Hey Michael, can I mention one of the things really important?

Okay yes.

So as the forward curves, because they're going to be volatile, and there'll be periods of time where the price will pop up. And that's what, this is what we try to tell people, that's when we will hedge. And so, whether the market settles there or not, we are able to capture that value by hedging at the high points of where the curve is. And so, that's another key piece of how we create value in this company.

Well that makes sense, that's the value of having a point of view, I guess.

Yes.

Also the natural gas position, I guess is this a normal thing just in the early part of the year to see a very big short position out in the 2021 timeframe for ERCOT or does that represent something?

[Indiscernible] once a year, you're pointing out the short position that we have on natural gas in 2021, but it's pretty natural and we think about hedging our natural gas equivalent position. So we went into in looking at our forward position, we went in with a point of view that we wanted to hedge more of our gas position relative to our power position. So that's why you see the big, relatively sizable short position on natural gas. So we're fully hedged for relative natural gas of 2020 in our view we’re about 85% hedged in our natural gas position for 2021. And that's just a view on how we like to – we want to put that hedge on and we're pleased that we did. So that just reflects the desire to hedge the natural gas equivalent position, and we can do that separately in ERCOT relative to the underlying heat rate or power position.

And all I add Michael. So we're various gas and that we have been various gas that’s proven out to be right. And we hedge that and then we continue to be bullish the heat rate and that's how power trades, that's where the liquidity is in ERCOT. That's not true with all the markets, but in ERCOT power sort of trades, gas and heat rate. And so, we are less hedged on the heat rate as you could tell, and we are more hedged on gas. And that is because we had a pretty strong conviction around just some bearishness around gas and frankly, it's sort of proven out to be the case.

Right hey, just a follow-up on Steve's question about retail. And I think I've asked you this before, but has there been any consideration towards going into residential solar or some of the higher growth sectors of the retail energy complex? I mean, the residential solar players are looking at growth rates anywhere from 15% to like 60% year-over-year. It's really pretty impressive and their stories get a lot of traction. I'm just wondering if that's something you might consider just from a strategy point of view?

We have studied that. I mean, there is growth rates, and then there is making money. And so, we want to put our money where the best returns are, and we just haven't found them in that part, but we have our eyes on that. I don't think we felt like we wanted to be an early mover on that, that we felt like if we wanted to get into it, we could probably buy our way into it at some point in time. But we have looked at that, we’ve looked at some other things as well like behind the meter type investments. And we just can't quite get to the hurdle rates and get comfortable with the acquisition, but it is something we take a look at, and it's a good point on - from your standpoint, that there are a lot of growth rates and we do expect, for example in California, we expect obviously that to be a burgeoning part of the business, it's right now it's kind of dispersed in a number of different players. And no one really has a particular business model that seems to work. There are some good companies out there that are performing, but we just haven't found that it meets the hurdle rate that we have. Jim, do you have a comment?

Yes Curt, I would just add, Michael, this is Jim Burke. From a customer interest standpoint, we do need a lot of their need, particularly in ERCOT with some of our designs or products that we did off of our Upton 2 solar farm. And those products don't require an install on the roof and you can still obviously get the solar energy. When you look at rooftop in most markets it’s a savings play and in Texas, there's not full net metering. So the savings opportunities are not as attractive to put the rooftop solar on the house. And then when we've looked at these business models, we have partnered with, so we will sell those systems through partners. But we've seen companies commit to a fixed capacity of sales and installation resources, and then that becomes its own cash burn that you have to be able to keep up with through the install base. So as Curt noted, we know what the customer interest is. We participate in that sale, but we have not put the fixed cost structure in place to execute against it. And we will continue to monitor that. And if that becomes a bigger play for us, we will obviously be in front of it because we've got the customer insights to do so.

Great understood. Thank you very much.

Thanks a lot.

Your next question comes from Jonathan Arnold from Vertical Research. Your line is open.

Good morning, guys and thanks for taking my question.

Hey Jonathan.

Hi, I just kept, Curt can I ask you to give us a little update on your views on - fundamentals updates on PJM and maybe policy as well as New England. I see you have a slide on FCA-14 and maybe you could just kind of speak to that a little bit?

Yes, so I assume, you're talking specifically PJM, about the PJM capacity order now that had recently come out. Is that correct, Jonathan?

Yes I mean, unless you feel there is other things you want to touch, but that would be top of my list.

Okay yes so, I mean that's probably the biggest thing I mean, I know we have fast start that we're waiting on that had a technical kind of glitch to it that I think will get resolved. And then the ORDC that’s pending up and we’re at FERC that we think those two things will be I'd say, modestly helpful on the energy side. But if you put those aside, I mean, the elephant in the room is what's going to happen given the PJM order from FERC. As we know, many, many people are asking for rehearing. Recently, I think people got a little bit confused by an order tolling for FERC to give – tolling that the rehearing decision, which effectively means that they're going to continue consider whether they're going to rehear anything, they probably will rehear some things. But that final decision has not been there. I think the next big milestone frankly, is the compliance filing that's coming out, from PJM. Our own take on this has been, and continues to be. And I think it's even further reinforced by some of the analysis that a lot of people were putting out, including the IMM and our own analysis. That when you look at the net ACR, which is the net go forward cost for many of the different assets, such as renewable, such as nuclear, that it is unlikely to have much of an impact on the capacity clears and it's not, this big windfall that I think states we're worried about and some of the generators we're celebrating. We think there's a really a modest impact. And what's probably bigger is how much new bill do you get in any given year? And how much retirement do you get in any given year. And those fundamentals are what should drive the market, and what should not drive the market or subsidized resources. And nor do we think that the market, the ruling that came out of FERC should have also given us a big windfall. I mean, at the end of the day, we've got a market that's got nearly 30% reserve margin. And for a combined cycle plant, it returns about three quarters of new build cost. I'd say that's a functioning market. And so, we didn't expect a big windfall and I don't think that's what's going to happen. Now, having said that, there's a lot of hyperbole and a lot of emotion going on about this and there's hearings going in the state Illinois which we are going to be a part of and others. And there's a lot - people throwing around FRR. What I have heard, when I talked to people in Maryland and – let's put New Jersey on the side, because let's just say this, what this really is about at the end of the day is offshore wind. Those are the folks that are likely to get screened out, because of the high cost of offshore wind, and other types of renewables are still going to clear the market. And so, we don't think it's a big deal other than offshore wind, and that's where the big argument is going to come in. But given that there is also an opportunity through FRR for some people to push things like a clean energy agenda. However, we've been saying this too, that in Illinois, you can break apart clean energy, and FRR. We're not opposed by the way to FRR if that's what the state of Illinois wants to do. We can compete in that world as well. We just don't think that it is necessary. But we're happy to compete in an environment with FRR. And we are trying to work with all stakeholders including Exelon who we have a very good relationship with and others in Illinois to bring. If there's going to be legislation to bring proper legislation and make sure that the elected officials understand what's at stake when they make that decision. So I'll wrap up with what I said on the beginning, which is we don't really see the order really changing much in terms of capacity price clears. And I think – just like I said, there has been a lot of emotion around it. But when you put the pencil to paper, the analysis shows that it's really not going to make a big difference. And on FCA-14, obviously a disappointing clear, not a very big impact for us. But nevertheless, a very disappointing clear our bidding behavior was a large piece of that. And that's true of most of these capacity clears. We do think there is some fundamentals if in fact mystic units are able to come out from FCA-15. We think there will be an uptick, a potential uptick from the $2. If for some reason, that mystic cannot come out, because ISO New England is not able to get their new weather based order in place through FERC. And the market adjustments that they want to make, then we might be down to $2 again. However, what I would say is there's a number of units that probably cleared at the $2 and decided to be a price taker, who are not going to be able to stay in this market for multiple years of $2 players. And so that's the next piece in the next shoe to drop as do people come out – do they come out of the market? I would expect that some way, but we cannot control that. So I think we're in this place where we're somewhere between, maybe the low 3s to $2. We can run our business that way most of our plants can make it in that environment. And we still make decent money up in ISO New England. But I have to admit, it's a disappointing clear and I don't think indicative of the value of the units that are necessary there to keep reliability in that system. And I suspect that ISO New England is somewhat worried about that as well.

Great, thanks for the fulsome answer, Curt. And then just one quick housekeeping thing that probable maybe more for David on the CapEx side. The growth, I think you just reshuffled things a little bit, but can you just confirm that?

Yes, thank you, Jonathan for raising that so you’re referring to Slide 22.

Yes.

Included in prior versions of this chart we had not shown what we described as growth CapEx, we only included a portion of it. So for example, the Moss Landing battery, so the way we've recast this page is to include all of our capital expenditures, including the growth capital expenditure. So for example, we've shown the row of growth CapEx $104 million in 2019 and $315 million in 2020. The significant majority of which is relates to our Moss Landing development, the battery development in California. So we just wanted to give folks a complete picture of CapEx because there was some confusion on that part of presentation, so it's an attempt to add to clarity.

Okay, so it's not that you've added things, it’s that you've just shown things [indiscernible]?

Yes.

The ones in [indiscernible] particular.

Yes these were things that you could piece together previously, but you had to piece together in different places, but we've not added CapEx, we've just tried to show a holistic picture on this page in particular.

Perfect, thank you very much.

Yes if you look back from a year ago, our capital expenditures in 2019 were about $30 million lower than what we showed about a year ago. So the team showed good discipline on how they approached it and relative the last quarter for example, all in CapEx for 2020 is unchanged from what we showed.

Perfect, thank so much.

There are no further questions at this time. I'll turn the call back over to Mr. Curt Morgan. Please go ahead, sir.

Okay, yes thanks, everybody for taking the time this morning. As I stated earlier, and as we always say, we really do appreciate your interest in Vistra and we look forward to continuing the conversation about our company. Have a great day and a great weekend.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.