Vistra Corp (VST) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Vistra Energy First Quarter 2020 Earnings Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Molly Sorg, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you. And good morning, everyone. Welcome to Vistra's investor webcast covering first quarter 2020 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 Form 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 available 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 provided in the earnings release and in the appendix to our 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, especially during these extraordinary times.

First and foremost, the Vistra family sends our heartfelt thoughts and prayers to those adversely impacted by the COVID-19 virus. We know the Northeast U.S. has been hardest hit and many of you on the call may have been affected. As tough as it is, there is hope, as I am convinced that we will get through this and we will be better than ever.

I never thought I'd be hosting an earnings call from my home with our management team dispersed across the North Texas metroplex. And yet, that is where we find ourselves today. These are challenging times as we face the highly disruptive COVID-19 disease, which has already created unprecedented harm to society, threatening the health of not only the population, but of our economy and businesses as well.

Now more than ever, I am proud to lead a company that is providing such an essential service to society, the electricity that powers our lives. Roughly 3,000 power plant team members at Vistra have no choice but to go to work every day to fulfill our obligation to society, and they have done it with pride and without question. We would not be able to work from home, power medical equipment and devices, and keep critical infrastructure running without electricity.

Since the onset of COVID-19 in the U.S., Vistra has been focused on keeping our people healthy and safe while maintaining our essential business operations. Vistra took actions early on to prepare the company for a COVID-19 environment, putting us in a position of relative strength as we sit here today. In fact, we sowed the seeds of financial strength long before COVID-19 ever arrived. Had we been levered like the IPPs of the past, back in October 2016 when we emerged from bankruptcy, we may be having a very different discussion today. A strong balance sheet is as important as ever, and we intend to continue on our path to 2020 to our leverage target.

We have logged well over 100 new activities that we are performing on a daily and weekly basis because of COVID-19. And we have provided a high level list of some of these actions on Slide 6, through steps such as: being one of the first U.S. generators to implement temperature testing and entry questionnaires at our locations, and contact tracing; instituting a work-from-home policy for all employees with remote work capabilities and nonspecific work location requirements; requiring face coverings and social distancing; thoroughly cleaning facilities between shifts and emphasizing hygiene; and executing commercial transactions to better position Vistra for the anticipated market moves, we have been able to maintain the level of operational excellence our stakeholders expect from us and our customers deserve.

It is very important to note that these health and safety procedures must be implemented in a holistic manner. We are continuing to evolve our health and safety guidelines with an eye toward widespread testing.

About 3 weeks ago, we also launched our planning ahead team to evaluate coming back to work for the nonspecific work location team members. This team has already started developing the necessary plans. In the end, the productivity of our team members working from home has been so strong that we can afford to be very deliberate about our returning to work. And frankly, we will not return until we feel that it is safe to do so.

On the generation side, in addition to going to work locations to continue to perform their normal functions, our team members also completed or are on schedule to complete 86 maintenance outages this spring in the midst of the pandemic to ensure plant reliability for the critical summer months ahead.

We analyzed the necessity and scope of each outage, rescheduling and scaling back if possible for the sake of our people without sacrificing reliability.

On the retail side, our call center operations maintained service levels at greater than 90% for the first quarter and greater than 92% for the month of April, while managing the transition for most to working from home. And perhaps most important, I am proud that as of today, these procedures have contributed to limiting our COVID-19 positive test to only 2 in a population of approximately 5,500 employees and over 3,000 contractors on our sites in 20 states and the District of Columbia, with both of these cases contracted outside of work. Fortunately, both of these affected individuals have fully recovered.

I am also proud that we have been able to help our customers and communities during this difficult time by implementing programs to waive late fees, extend payment days and provide payment plans for those impacted by the COVID-19. We are also offering additional payment assistance to those in need through our TXU Energy Aid program, and we donated $2 million for COVID-19 relief efforts to nonprofits and social service agencies in the communities we serve. This is not just good business, it is the right thing to do and reflects one of our guiding principles.

I know the potential financial ramifications of COVID-19 on businesses is front of mind for investors today, which is why we have dedicated most of our prepared remarks to this topic. We believe Vistra is well positioned to deliver strong financial results in 2020, even in the face of lower demand driven by COVID-19. In fact, we are reaffirming our 2020 financial guidance today.

Our confidence in our ability to continue to meet expectations in 2020 despite the challenges imposed by COVID-19 is a result of a few critical points, all set forth on Slide 7. First, our generation business is now approximately 99% hedged from direct commodity price risk exposure for the balance of 2020, limiting the impact of near-term price volatility on our 2020 financial results.

Second, our retail business derives approximately 90% of its adjusted EBITDA from the residential and mass business customer classes, and we expect residential load will increase in 2020, mitigating the expected negative impact of lower business volumes. Last, approximately 70% of Vistra's adjusted EBITDA is derived from the ERCOT market, which is proving to be relatively resilient as compared to the other markets where we operate. Historically, Texas has outperformed other U.S. markets during and coming out of economic downturns, and we expect it to be no different this time around.

Our strong balance sheet and favorable position heading into the COVID-19-driven economic downturn gives us confidence in our working capital and liquidity position. And through the operation's preparedness actions we have implemented, our fleet is ready to deliver safe and reliable power in the months ahead.

While COVID-19 is making it virtually impossible for businesses in various sectors such as retail, real estate, airlines and hospitality, to estimate the potential negative impacts of the pandemic on their operations, fortunately, Vistra offers an essential product, electricity, which is critical to a well-functioning society.

Our strong balance sheet and highly efficient generation fleet have supported our ability to opportunistically hedge, minimizing the impacts of near-term price volatility. And our lean integrated operations have created a foundation for us to produce relatively stable financial results in a wide range of wholesale power price environments.

Unfortunately, you wouldn't be able to come to this conclusion just by looking at our stock price over the past several months. It remains perplexing to me why our stock would trade at such a high free cash flow yield with our 2020 guidance intact and a relatively robust long-term outlook. As always, we will continue to focus our efforts on execution. Hopefully, with time, the financial markets will begin to appreciate the relative stability this low debt integrated model can deliver, which when combined with our nearly 70% free cash flow conversion ratio, we believe makes for a very attractive investment.

While our stock price is disappointing, I am optimistic that as we approach our leverage target this year, announce our long-term capital allocation plan, still scheduled for September of this year and continue to execute and deliver in a variety of markets, that we will unlock the value of this company.

Turning now to Slide 8. Given the focus by the financial community on the impact of COVID-19 on electricity demand, we have summarized in a chart on this slide, the impacts we are seeing across each of our markets as of mid to late April. Similar to what we observed during the 2008 to 2009 recession and consistent with my earlier comments, ERCOT is proving to be relatively resilient. This is an important point for Vistra, given that, as I mentioned previously, approximately 70% of our adjusted EBITDA is derived from the ERCOT market.

Moreover, while on their face, these demand declines could appear to be significant, we expect Vistra's hedges and substantial residential retail portfolio will mitigate what would have otherwise been a more dramatic negative financial implications from the COVID-19-led economic downturn.

Turning to Slide 9. Let's start with our generation segment. Early in the first quarter, Vistra's exceptional commercial team read the tea leaves early on and executed a few opportunistic commercial transactions in anticipation of some of the market volatility we are now seeing materialize. These transactions resulted in a positive benefit to Vistra in the first quarter. In addition, our commercial and generation teams were able to dispatch our Permian Basin CTs in the first quarter to capture high prices in the West zone, resulting from low gas prices and local congestion. These actions put Vistra ahead of our financial plan for the quarter, contributing to a positive variance to our original 2020 guidance range for our commercial segments, which we depict in more detail on our guidance walk forward on Slide 11.

For the balance of the year, Vistra is approximately 99% hedged from direct commodity price risk exposure, limiting the impact of changes in price levels to our 2020 financial results. Vistra's primary exposure to commodity price movements for the balance of the year is to the ERCOT summer, where we typically retain some generation length in order to protect from the downside risk of being caught short on a volatile summer day. As has always been the case, we continue to expect we will be able to manage this commodity price risk within our guidance range, particularly as we value this open position at well below market forward prices for planning and guidance purposes.

And while we do expect lower peak demand in 2020 as compared to ERCOT's latest estimate published in its biannual supply demand forecast, called the Capacity, Demand and Reserve or CDR report in December 2019, we have already accounted for this anticipated lower demand and its expected impact on summer power prices in today's guidance reaffirmation. We continue to believe weather will be a critical variable, driving the incidence of scarcity pricing intervals this summer. As we saw during the summer of 2019, low wind or high temperatures have the potential to drive scarcity pricing. And this impact could be even more pronounced in 2020 now that the Operating Reserve Demand Curve or ORDC has shifted by another 1/4 of a standard deviation. As you may recall, the ORDC is an administrative construct designed to provide additional revenues to the market as real-time operating reserves diminish to scarcity levels.

Importantly, while we are observing decreased demand across all markets, residential demand is coming in slightly higher than weather-normalized expectations. And residential demand is both relatively inelastic and more sensitive to temperature swings due to increased air conditioning load, especially as more people are working from home. In short, even if lower business demand brings down the ERCOT peak in 2020, higher residential load on a hot summer day in Texas could still result in scarcity pricing intervals.

And we estimate that it could take only 2 degrees of the increased summer temperatures to offset the lower demand impact from COVID-19. As usual, ERCOT summer will continue to be a critical driver of Vistra's financial results for the year. However, we believe our guidance is conservative as we have already embedded risk from lower demand or mild weather in our financial guidance.

Let's turn our attention now to our retail segment. I'm on Slide 10. We do expect that lower demand across our markets will have certain negative impacts on our retail segment's results for the year. Specifically, we are anticipating higher bad debt expense in 2020 as a result of COVID-19 driven financial distress amongst some of our customers. This risk of higher bad debt expense resides primarily in our ERCOT portfolio as in markets outside of Texas, the local utility generally controls the bill and assumes the customer collection risk.

In ERCOT, the Public Utility Commission of Texas recognized that the retail electricity providers could be unduly harmed by continuing to supply power to customers who cannot pay their electric bills due to unemployment or lower income and enacted a COVID-19 Electricity Relief Program in response. This program includes, among other things, a mechanism for retail electric providers to recover $0.04 a kilowatt hour for nonpayment by a qualifying set of customers in exchange for not disconnecting these customers. While the program applies only to a limited set of customers that must go through a number of steps to qualify, we expect it will provide meaningful mitigation to what would otherwise have been even higher bad debt expense in 2020.

Next, we similarly expect our retail segment will be negatively impacted by lower volumes, including lower recovery of fixed capacity costs on our Midwest and Northeast large business portfolio, and lower margins driven by reduced consumption across our business customer classes. We expect these negative variances to be partially offset by higher residential volumes among our existing customers.

We are more focused than ever on maintaining superior customer service levels during this pandemic. Our customers depend on us to keep their lights on and to power their daily lives. Recognizing that some of our customers will find themselves in financial distress as a result of the COVID-19, we have already instituted programs to waive late fees, extend payment dates and provide payment plan alternatives. We are continuing to offer bill payment assistance through our partner, TXU Energy Aid, which uses donations from customers, employees and other Texans to help around 20,000 families keep their lights on each year. Our commitment to our customers is as high of a priority as ensuring the safety of our people.

As we turn now to Slide 11, you can see all of the variables we just discussed accounted for in our 2020 guidance walk forward table. While we are reaffirming our 2020 ongoing operations adjusted EBITDA and adjusted free cash flow before growth guidance ranges today, there are some puts and takes that get us there, primarily, our above-plan performance in the first quarter of 2020, offset by anticipated COVID-19 impacts.

Specifically, we expect our generation segment to be up approximately $60 million with some potential for upside as compared to our initial guidance forecast as a result of the opportunistic hedging and generation dispatch activities we executed in the first quarter, which I just discussed as well as lower fuel expense, partially offset by the potential for lower power prices driven by COVID-19.

We expect this positive variance in our generation segment to be potentially offset by a $60 million negative variance in our retail segment as compared to our initial guidance forecast. This forecasted retail variance is comprised of an expected $10 million benefit from lower costs and an accelerated capture of synergies from our Ambit and Crius acquisitions, offset by $70 million of expected headwinds related to COVID-19. These COVID-19 headwinds reflect an estimated $40 million increase in our bad debt expense for 2020 as well as an estimated $30 million driven by lower volumes in our business segments, partially offset by expected higher volumes from our residential retail customers.

In total, we had a strong first quarter, and we are tracking strong for the full year with the expectation that our 2020 ongoing operations adjusted EBITDA will be well within the range of the $3.285 billion to $3.585 billion, which is yet another example of the resiliency of the integrated model. We are also reaffirming our ongoing operations' adjusted free cash flow before growth guidance range of $2.16 billion to $2.46 billion.

Now that we have covered 2020, let's turn the discussion toward the potential impacts COVID-19 could have on future market environments. Despite what is, on its face, a dampening market effect of lower demand from COVID-19 that we expect to continue into 2021, albeit at a lower level, the economic slowdown could have some ancillary impacts that are constructive to market dynamics.

Starting with ERCOT, which is a market with relatively tight supply-demand fundamentals, we are already seeing evidence that renewable development is slowing for projects that were slated to come online in 2021 and beyond. ERCOT, as an energy-only market, was already difficult for market developers to secure merchant project financing. The uncertainty that has been created by the COVID-19-led economic recession is exacerbating this challenge.

We have received calls from a number of developers seeking to sell the development rights to their projects for very nominal fees given a lack of confidence these projects will be able to advance in today's environment. We are also observing that the appetite to execute power purchase agreements has decreased among investment-grade off-takers as these entities begin to meet their goals or refine their programs so that their projects are located near their actual load as opposed to serving as virtual [offsets].

As a result, we estimate the 2021 supply estimates in ERCOT's December 2019 CDR report are almost 2.5x what we believe will be feasible to develop in this environment. If we do, in fact, see renewable development slow, this will be a meaningful offset to any decreases in peak demand that could flow through to 2021. As a result, ERCOT reserve margins could be very tight when demand growth returns to pre-COVID-19 levels.

Similarly, the decreased oil drilling activity we are observing is reducing the supply of associated gas, making us somewhat bullish on natural gas prices in 2021 and beyond. Higher natural gas prices could further push up the price of power in the markets where we operate. With these factors as a backdrop, combined with the relative resiliency we're observing in Texas demand, we continue to like our position in the ERCOT market.

Moving on to PJM and ISO New England markets, we similarly expect COVID-19 to have an impact on the supply side of the equation, both as it relates to the likelihood of new thermal development as well as the potential for incremental retirements. On the new development side, in our view, market economics did not support new thermal development prior to the COVID-19-related demand declines, and the current forward outlook is even less supportive of newbuilds. As a result, we would not expect any new thermal development in either PJM or ISO New England in this environment.

Further, we could see incremental retirements of higher heat rate or higher cost assets as the energy markets are challenged by lower demand expectations. The recent capacity auction clear in ISO New England and the uncertainty related to the upcoming capacity auction in PJM are not helpful for development and also present challenges for inefficient existing generation.

Taking all of these factors into account, we expect we could see a range of outcomes in our 2021 financial results with the midpoint shifting somewhat lower. As we describe on Slide 13, many uncertainties remain, including the duration and severity of the COVID-19-led economic downturn, which makes predicting a likely outcome for 2021 even more challenging.

Prior to COVID-19, our fundamental point of view suggested 2021 ongoing operations adjusted EBITDA could track in line with or potentially higher than 2020 expected results. As of April 30, we are now 57% hedged in ERCOT and approximately 60% to 70% hedged in all other markets, which helps to limit the range of outcomes we expect to see next year. In order to balance risk with potential upside, we are continuing to opportunistically hedge, albeit at lower than previously expected power prices. Even with this incremental hedging activity, however, given the distribution of potential outcomes, we still expect there is a meaningful chance that 2021 guidance could be flat to 2020 guidance midpoint.

Just looking at forward curves as of March 31, 2020, which already reflected a level of uncertainty around COVID-19 impacts, would suggest 2021 ongoing operations adjusted EBITDA would be approximately $200 million to $250 million lower than our 2020 guidance midpoint or about a 6% to 7% reduction. As we have seen, however, ERCOT forward curves have shifted upward in the back half of each of the past 3 years as the curve begins to reflect fundamentals and becomes more liquid. We believe there is still a possibility we could once again see this play out for the 2021 forward curve this fall though the probability is likely lower due to the COVID-19 related uncertainty.

In addition to looking at current forward curves, we also modeled fundamental supply and demand drivers in a number of economic downturn scenarios in order to better inform our views on the potential range of outcomes for 2021 financial results. Over the past 2 months, ERCOT's peak load has trended in the range of 2% below expectations. As the Texas economy begins to reopen, we may see this gap start to narrow. However, given the risk of slower economic recovery, our review of downturn scenarios included 2 consecutive years of peak demand trends below ERCOT's most recent forecast in its CDR report.

On the supply side, the current environment has clearly impacted the prospects for new generation investments. Nevertheless, in an effort to be conservative when testing the potential risk to our 2021 results, our downturn scenarios assume that the majority of the projected supply additions from the CDR will come online despite the historical trend of the CDR significantly overstating new supply additions as its purpose is not as a forecast tool, but as a representation of new generation in the development pipeline that have met certain criteria.

As a result of our analysis of these fundamental drivers, we currently estimate that even in our most punitive downside case that holds supply constant to pre-COVID-19 levels and demand growth to 1/4 of the pre-COVID estimates from 2019 to 2021, 2021 results would still be within 10% of our 2020 guidance midpoint. And with so many different variables influencing the range of potential outcomes, we still think there is a meaningful possibility we can achieve flat EBITDA from 2020 to 2021.

Importantly, this means that even in our most punitive modeled case, we still expect we will be able to deliver approximately $3.1 billion or more of adjusted EBITDA from our ongoing operations in 2021. With an expected 65% to 70% free cash flow conversion ratio, this would translate to more than $2 billion of adjusted free cash flow before growth, meaning that even in a recession created by an extremely low probability pandemic tail event, we expect to maintain very strong liquidity. And we expect we will have significant free cash flow to return to shareholders through dividends and share repurchases. I suspect not many businesses today can say this.

The market appears to be discounting our relative resilience. Even more than before, we believe the recent decline in our stock is unwarranted. In our view, Vistra should have been a stock investors fled to for relative safety in these economically uncertain times, and yet our stock has continued to trade with a free cash flow yield in the range of 20% to 30%. It is frustrating to say the least.

The fundamentals of our business are strong. We supply an essential product and our low-cost, low-debt integrated business model comprised of leading retail businesses and advantage-generating assets is designed to manage risk and mitigate volatility. Our robust free cash flow should enable us to both reinvest in the business at modest levels while returning a significant amount of capital to investors.

However, we are keeping the faith that as we pay down our debt and announce our capital allocation plans in 2020, we will be on the path to reach our fair and full value. As always, we will keep our eye on the ball of execution and continue to prove out this thesis.

I will now turn the call over to David Campbell.

Thank you, Curt. Turning now to Slide 15. Vistra delivered first quarter 2020 adjusted EBITDA from ongoing operations of $850 million, results that exceeded management expectations for the quarter. The favorability was driven by our ERCOT segment, reflecting the opportunistic hedging and generation dispatch activities that Curt mentioned previously.

Our first quarter 2020 results were $26 million higher than the same period in 2019, with our retail segment up $54 million and our generation segments down a collective $28 million. The positive year-over-year variance for our ongoing operations was driven by the acquisitions of Crius and Ambit, partially offset by lower results in our MISO and New York, New England generation segments, driven primarily by lower capacity revenue. As a reminder, due to retirement of 4 coal plants in our MISO segment in the fourth quarter, our first quarter 2019 results have been recast, increasing by $9 million to account for the movement of the financial results of those plants out of the MISO segment and into the asset closure segment.

Next, on the topic of liquidity. Vistra had total available liquidity of approximately $1.834 billion as of March 31, which includes cash and cash equivalents of $717 million and $1.117 billion of availability under our revolving credit facility.

In April, we repaid $550 million of borrowings under our revolving credit facility. Additionally, on May 1, we notified the holders of our 5.875% senior unsecured notes due 2023 that we will redeem the entire $500 million principal amount outstanding on June 1.

Our teams have modeled various scenarios to stress test our liquidity, and given the company's strong cash generation profile, we are confident we will have ample liquidity to operate our business even in a recessionary environment.

Before we conclude today's call, I would like to offer a brief reminder of our capital allocation plan for 2020 and 2021, a summary of which is set forth on Slide 16. As we have consistently emphasized, our capital allocation priority for 2020 is debt reduction. In fact, it is in economic environments like the one we're in right now where the value of having a strong balance sheet is even more pronounced. Despite the low levels where our stock has been trading in recent months, our investors and stakeholders remain supportive of our commitment to advance toward our long-term leverage target of approximately 2.5x net debt to EBITDA.

Last week, we announced that our Board of Directors approved our second quarter dividend of $0.135 or $0.54 per share on an annual basis, which represents an 8% increase from the annual dividend we paid in 2019.

As we look ahead, even with the economic uncertainty created by the COVID-19 pandemic, we still expect to have significant cash available for allocation in 2021 and beyond. We plan to lay out our long-term capital allocation plan in late September this year, the basic tenets of which we have been articulating for several quarters now. Specifically, we expect we will allocate approximately 25% of our capital available for allocation to growth investments on an annual basis, but only if our investment thresholds are met. If we do not find projects that we believe are an attractive use of capital, we plan to return that capital to shareholders.

We expect that the remaining 75% available capital will be returned to stakeholders through a quarterly dividend with an attractive dividend yield combined with share repurchases. Please stay tuned for more specific details on our long-term capital allocation plan in September of this year.

In closing, we are proud of our team members for their unwavering commitment to producing and delivering power to our customers through these challenging times. Our business remains resilient, and we believe we are well positioned to continue to deliver stable results on an annual basis, even in the face of unprecedented economic challenges. Our hope is that the successful execution of our business plan in this environment will further instill confidence in Vistra by our many stakeholders, ultimately unlocking what we believe is the true value of our company.

With that, operator, we are now ready to open the lines for questions.

(Operator Instructions) Your first question is from Shahriar Pourreza with Guggenheim Partners.

Glad you're safe. Can we just -- a couple questions here. Can we talk about sort of the landscape of potential retail growth opportunities as we look at the second half of the year into '21?

Does the PUCT's rate relief program and kind of your lower estimates around peak demand maybe take some of the pressure off the smaller ERCOT books to sell and potentially shift your focus back to buybacks? I.e., that 25% of capital that's allocated to growth, like David just mentioned, could that present further opportunities as it's shifted towards buybacks with sort of credit metrics on pace to hit IG by '21? So how do we sort of think about that growth portion and given some reprieve that's been given to the retail providers?

So it does help. I mean, if they did not put the program in place, I think our view is, Shahriar, that it would have been carnage. No doubt about it. But to be clear about it, what's happening is there's -- what is being recovered by retailers is the energy component or the generation component and the T&D component, the margin that retailers typically get is not embedded in that.

So while it's helpful for some of them, some of the retailers that are smaller, not as well capitalized, maybe not as sophisticated from a risk management standpoint, there's still risk and there continues to be, in our view, significant risk going into the summer months. And given the situation, it may be harder also for them to hedge and post collateral.

So I do believe that there is still some risk to retailers in this market, and we've seen a little bit of that. Whether that turns into some kind of an opportunity, we'll see. But there is certainly some movement afoot by some retailers given that this isn't exactly everything that a retailer would have wanted in this situation.

The other part of this is is that the margin that is being forgone, you can collect on afterwards. But this is a customer class that is very difficult and will be difficult to collect on. So the ability for the retailer to actually try to claw back, if you will, that lost margin is going to be extremely difficult.

So we'll see whether something comes out of this or not, that's certainly something that we are keeping an eye out for. But it's hard to predict at this point in time.

I think we're still comfortable, Shahriar, really, with the roughly 1/4 of our free cash flow on an annual basis, although it's going to be a bit lumpy. Just depends on opportunities and depends more importantly on the economics of any deal that we might want to get into or a project we might want to do.

But we still think that 1/4 of our free cash flow a year, it seems reasonable. I think in September, we're going to put a little more meat on that bone, both the growth side of it. But also, I think, put more detail around what the 3/4 is, which I think is the most important part of our capital allocation plan. And I think September will be a big time period for that.

And then the other thing, I think in September, is that we got some things that we want to talk about in terms of our overall portfolio positioning as a company, our asset mix and how we're going about sort of the future.

But I think all of that's going to happen. We're only now -- it seems like years away, but we're only 5 months away now from that happening. This is the point in time that I've been waiting for since I've been here, to get to the point where we can actually be at a steady state.

And so just a follow-up. So I have to imagine that the sustainability of the model that you're displaying today should provide some level of comfort with the agencies, right? Is there any updates with your conversations regarding a ratings upgrade to IG?

Also any potential for the timeline to slip due to COVID? Are you still kind of shooting for that Q4 '21 for IG? So how is sort of the dialogue going with the rating agencies? Because I have to imagine this quarter should provide a little bit of a reprieve on whatever concerns they have from a business risk standpoint.

Yes. Well, what I understand is that -- and I think S&P made some comments to this effect. But I think it slipped a little bit, Shahriar, because what I heard is that S&P is probably going to wait to see how the year turns out to move us another notch. And then I expect them to it -- to be at least a year and probably a little bit more. So I think we've slipped a little bit on the IG.

But my own view is exactly yours, which is, I think when the dust settles, I actually don't think this is going to end up being a negative period of time, but actually a highly positive period of time. And the agencies are going to look at this and say, in a -- in what is -- I don't think anybody can argue that this is not a tail event. This is truly a tail event, probably as bad or as close to as bad as the Great Depression in terms of what it's doing to unemployment. And they're going to have to step back and look at that. It's not like a -- just a normal run-of-the-mill recession here.

And just the resilience of our business model -- what I believe, and I think this is incredibly important for our company, is that the business risk that has been ascribed to this sector for so long because of the poor execution, the bad strategies, I think when they look at this model and the execution that we put forward, that it's actually going to end up being a positive in the long run. So I still have some hope that by the end of year '21, we could get to investment grade. But I actually believe based on comments that I have heard, we may have slipped a little bit.

Congrats on the results.

Your next question is from Stephen Byrd with Morgan Stanley.

Congrats on the good results in a challenging time. You gave some really good color on the state of the renewables market. And I just wondered, does that make you want to potentially be more aggressive in terms of growth just because of the opportunities? I just want to make sure I kind of understood how you're thinking about the implications of what's happening there.

Well, I think there was a number of implications that we were trying to get across. I think one of them was that we just think the growth in renewables, in particular in ERCOT, may have slowed down a bit. But I will tell you that we -- when we stressed to get to that within 10% in 2021, we really didn't cut back the amount of renewables that we had previously thought were going to come in back when we gave guidance, back in November time frame. So in my view, it's a bit punitive, but we wanted to stress the system a little bit. So I think that's one point.

In terms of the point that you're making, I think we have some ideas about what we would like to do around renewables. And I don't know that this has really changed it much. We still have a strong cash flow that if we want to do some projects, we're going to follow through. I think you saw that we increased the battery opportunity out at our Oakland site. I think there may be some other opportunities at our Moss Landing site. And then certainly some potential opportunities in ERCOT.

And so I don't know -- really, Stephen, I don't think it's changed our view. I think the difference is is that we have the ability to do the things we want to do, whereas some people, I think, it's going to be more difficult just because it's difficult to attract the capital to support their plans. The developers are having more difficulty. And we know that because they're approaching us, for us to take over their projects and then pay them a small nominal fee to take them over.

So I think there is an opportunity there and that we're working on that opportunity, whereas maybe there's some good projects that may come to market at a relatively cheap price, and we'll take a look at that and add that to our backlog. We don't talk much about just the amount of projects we have around renewables, in particular in Texas, but we also have them in other states. Of course, we have the Coal to Solar thing going on in Illinois. But this company has a fairly deep backlog of opportunities to invest in renewables. But we're going to be deliberate about it, and we're looking for those kind of opportunities that offer the kind of returns that we expect, that sort of 500 to 600 basis points above cost of equity. And we have some of those, and we'll talk more about that in September.

That's helpful. It sounds like it's a pretty target-rich opportunity set so we'll stay tuned on that. And just on the demand outlook, you gave a lot of good color in a number of ways. I wonder just on residential demand, and I apologize if you did lay it out. Could you quantify just sort of the percentage increase in residential demand you've seen or that you expect, especially down in Texas this year? What's your general kind of view on how meaningful that may be?

Yes. Since I'm not in the same room with everybody, I'll ask David if he has that. But between David Campbell and Jim Burke, we probably have 2 folks that can put a little more detail to that. So David, do you want to start? And then, Jim, if you have anything to say, please jump in.

Sure. So this is David. Thanks, Stephen. With respect to residential, what we've seen is impacts actually in the second quarter. So for the past month or so, it's been in the 5% to 6% range. We've modeled it relatively conservatively, around 2% for the back 9 months of the year, but we've actually seen increases, reflecting people working from home in the 5% to 6% range. And that's what we're expecting in the second quarter and moderating in the back half of the year. We've kept pretty conservative assumptions around load declines in other segments, but we -- to be conservative, we had that moderating. So the overall increase for the back 9 months is about 2%.

Understood. And I guess just as a follow-up on that. I mean, that's -- that sounds -- that makes sense. That sounds reasonably conservative. So if demand is actually -- if demand for residential is stronger, presumably, that's relatively meaningful given your business mix?

That's exactly right, Stephen. It's our -- especially in ERCOT, where residential demand is weather-sensitive and it's our highest margin segment, we think that there's potential upside there, particularly as folks -- scenarios where, as businesses reopen, you still have a large segment of the workforce working from home. So you'll see some uptick or moderation of the demand declines on the business side, while at the same time seeing the uptick in the residential side being sustained. So I do think that it provides -- it's a meaningful impact for us given the profitability of our ERCOT residential segment.

And Stephen, one other thing I'll mention at this point, I think we've tried to be pretty conservative. We're only at the beginning of May here. And we typically aren't going to change guidance this early in the year, especially given just how important the ERCOT summer is and how volatile it can be. But there were words in my script and there were words in David's and then also on these slides about tracking strong and that we're well within the range.

And what that really means is, I think we've been conservative on our estimates for 2020, and we feel very good, very good about the midpoint and we think there's some potential for upside.

But we want to be cautious about that. I think what will be a better indicator is when we get into the second and certainly, the third quarter earnings calls, when we have a better insight as to what the summer and ERCOT is going to look like. But from where we stand today, even with COVID-19, 2020, it looks to be a pretty strong year if we can execute the way we believe we can.

Your next question is from Steve Fleishman with Wolf Research LLC.

Great. So just one question in thinking about capital allocation. So if the rating agencies are going to take longer to determine investment grade, I just wanted to kind of get a sense when you make your next decision on capital allocation, are you going to focus mainly on just hitting your debt-to-EBITDA metrics?

Or are you going to be trying to kind of do things to keep getting to just the investment grade, i.e., what -- is it the metrics or the investment grade that are the priority in making that decision?

Yes, that's a very good question, Steve. Look, I think the simple way to think about this, and of course I've got a -- we've got a whole session coming up in July with our Board, so I really don't like to get out in front of them but I'll explain it this way. We've dedicated 2020 to pay down debt, and we're going to do that. And that's a bit of a sacrifice to also returning some money to our shareholders, which we would like to do, especially in this environment, but we also had to balance those priorities.

And I think what you can expect from us in September is a capital allocation plan that is focused on returning capital to shareholders and reinvesting in our business. And given that it appears that things may be pushed out a little bit and the fact that we've never started this venture to get to investment grade, that was an outcome that kind of came up, that we're not going to chase things around. We are going to get to where we think the capital structure of this company leaves us in a position to be as strong as possible.

And we just so happen believe -- to believe that with our business risk, which we are demonstrating is quite solid through all this and just the metrics themselves, they speak for themselves. And we still have to make a jump to BB+ with S&P, and so we want to get to that next. And then we'll get into dialogue with them about what it's going to take to get to investment grade.

But I think the focus for us in September is going to be squarely around the 2 big buckets that I just talked about, reinvestment in the company and some opportunities that we have that we think are quite good. But more importantly, the big 3/4 of our free cash flow, talking to our investors about returning that in some form or fashion. And it's not rocket science, it will be a mix of what do we do with our dividend and what do we do with potential -- probably potential share repurchases. So that's -- and we'll see where we're trading, obviously, and all that will go into it. But I suspect that will be the 2 big buckets.

And I think there's also some other details we're going to get into on that call as well that I think are important for people, about what's the long-term focus of our company and how we think about managing our portfolio of assets for the future. So a lot going to be packed into that. I think we want to get through the summer, see how things go and then we're ready to go in September. But that's how we're thinking about it.

That's great. That makes sense. And I don't think you want to be chasing the rating agencies all the time.

Okay. And then just on the -- unfortunately, I have to ask since the CDR has become a bit of an event in recent times. I think it's coming out maybe next week for the summer. Just any sense on what we should expect for that? And do you think we'll actually see this reduction in some of the renewables or delays? Or is it likely not to show up in that? Just any color on the CDR.

Boy, I'll tell you, I have a hard time predicting what is going to come out of that CDR because it's not all that difficult for people to get projects to the point where it shows up in the CDR. And as you know, there's no economic overlay. And I think even ERCOT has tried to distance themselves from this being something to use for forecasting purposes. So it's hard to say.

I do think there may be some pullback, Steve, but I also believe what's likely going to happen is it may be deferral more than it is anything actually leaving. And so you may see more kind of like it did last year when everything got pushed from '20 into '21, and there was a big bucket of projects that showed up there. And then I think that you may see some get deferred even again.

But I wouldn't be surprised, honestly, that people were still working -- developers are working on projects and getting them in the queue, interconnection queue and that more may show up.

For me, it's less about that. We have a development team on the ground, we know this market very well. And it's more about what we're seeing in terms of real activity on the ground and getting equipment, signing contracts, getting financing. And that's where we're seeing things really pull back.

And I think the other area where we've seen a pretty big pullback is just the support on the PPA side. And that -- we have yet to see -- for example, on solar, we have yet to see a merchant solar plant get financing in the ERCOT market. It's just really difficult with an all-energy market to do that.

And so without a PPA behind these, it just makes it more and more difficult. And we've seen that PPA market slow down quite a bit. So even though the CDR could be a wildcard in all this, and I know that we're going to have to deal with whatever comes out of that, for us, it's more about what's really going on on the ground. And for me, that's why our team is constantly not just looking to develop things, but also to try to get intelligence about what else is going on.

Your next question is from Julien Dumoulin-Smith with Bank of America.

I wanted to follow up on some of the various ways -- it's been asked on prior questions, but when you talk about the '21 outlook and you put a few comments in your slides, I won't repeat them. But what are you reflecting with respect to, first, the latest uptick in power prices even in recent days when you think about '21 EBITDA relative to '20? As well as you just talked about an improvement in residential sales, for instance, how does that also figure into the meaningful chance that '21 guidance could be flat to '20 at this point? What are you assuming?

Yes. Yes. And Julien, I'm going to take that as being largely focused on ERCOT, is that correct?

Yes. You tell me what the meaningful factors are, for example.

Well, look, I mean -- so 2020 -- actually, what we've seen is that from where our fundamental view is, 20 -- 2021 summer pricing in ERCOT, which is really always the big ticket for us, that will really end up being the swing that will either get us to flat or something less than that. Those prices have come off pretty hard over the last few weeks, and that's liquidity. It's a whole bunch of different reasons why that has come off. We don't believe it's fundamentally driven. And so it will really depend on kind of how quickly we come out of this -- the COVID-19 event and how quick the recovery is.

And so that's why we're being a bit cautious in trying to draw a distribution around the outcomes. But if we were -- if we saw pricing up near where our fundamental view is, we would be very much closer to a flat year-over-year. If prices stay where they are now, they'd be more like in the -- what we had talked about in the presentation, that $3.1 billion to $3.2 billion. So it just really depends on where ERCOT pricing comes out. And I think on the retail side, the numbers that year-over-year, from '20 to '21 are not that big in terms of our retail outlook that that's really the swing factor. It's really going to end up being summer ERCOT pricing that will end up being the big-ticket item. In the other markets, it's really not -- they're not that big of a player in this either.

So I think if you really draw a circle around it, it's really going to end up being where does the summer '21 in ERCOT come out. And we see a distribution around that and still a fairly good chance that you could see a pretty strong year, especially if the development that we talked about doesn't come to fruition and the economy in Texas recovers quickly, which could happen. You could really see another tight situation in ERCOT.

And then we're talking about a very different set of numbers, probably something more closer to flat year-over-year relative to our guidance in 2020. But if we see a more prolonged effect from the COVID-19 virus and prices stay more depressed going into the summer, weather doesn't show up, then you could be on the lower end, that kind of $3.1 billion to $3.2 billion range.

And David, I don't know if you want to add anything on that or not?

I think you covered it, Curt.

All right. Excellent. If I can just quickly follow up. On the C&I exposure, to the extent to which obviously 90% of the business is resi and mass biz. I just wanted to understand how you all are thinking about that exposure more in terms of the margin impacts, even on that small piece that would seemingly be the partial offset to what are otherwise very positive trends on the resi side.

Yes. David, do you want to take that one?

Sure. So Julien, you saw that we noted that there's some downticks from LC&I that we cited on Slide 11. And it's a combination of factors, the margin from that segment is pretty low. So a part of it is lost margin, part of it is the loss of the hedge position. So we valued reselling back that power into the market at lower prices. And part of it is some of the impacts of certain fixed costs like capacity and transmission, particularly in Midwest and Northeast. So that's what gets you up to that sum total of the $30 million for the year, partially offset by some higher residential volumes.

So that's the sum total of the various impacts, the margin is a relatively small piece of that. And again, that's our projection for the full year. It's with a view that we could have sustained impacts in the downturn. So we've tried to be pretty conservative in our assumptions. But it's the sum total of those various impacts of that segment.

Got it. Understood. Curt, just a real quick clarification for the sake of the call. When you're talking about growth here real quickly, and you made some comments earlier about growth expectations, renewables, et cetera, and just reconciling against, obviously, where the stock is, et cetera, how committed are you to seeing through growth relative to allocating capital back to buybacks, dividends, et cetera? Just want to be -- just exceptionally clear about growth capital right now.

Yes. So look, I mean we look at -- we balance that. So the priority for us is obviously, to use capital efficiently. But at the same time, you've got to balance that a little bit in terms of growing the company over time. And -- because we are a going concern and buying back our shares. But we do an economic analysis, it's very simple.

The real key, Julien, you know this, is what share price do you assume when you do the economics of buying back your own shares? And that is a really -- that's an art more than a science. So we look at a variety of share prices when you look at the return that you get for buying back your own shares, and we don't just look at one price, and we try to be realistic about it. And we have to look at that over a period of time.

And so depending on how long the period of time is, that dilutes the return on buying back shares. But we try to balance that, and we try to -- if we're going to invest in our company, we want to -- back into our company, we want to make sure that those returns also stand up to buy -- the alternative of buying back our shares. And I'm pretty happy to say that when we have done that, the returns have been definitely in the range of what we thought the value of buying back our shares has been. And we're going to continue to do that kind of analysis, knowing that we also have to balance that we have to -- we're going to have to invest in our company.

Our company is going to -- we're going to see coal plants retire. We've already been very straightforward on that front. We'd like to replace economically, obviously, the EBITDA from that, and we'd like to grow our EBITDA. At the same time, we know our stock is cheap.

And so it's a balancing effect. There's no simple formula to it. But we do do the math that you would expect us to do to try to see the relative returns of investing back in the business and investing in buying back our shares.

I would now like to turn the call back over to Curt Morgan for closing remarks.

Well, once again, I want to thank everybody for being on the call. I hope everybody stays safe and healthy in this difficult time. I can't tell you enough how we appreciate your interest in our company, given the extraordinary COVID-19 virus. We're excited about our company, and we're excited about the months coming ahead. And until next time, please be safe and be healthy.

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