Q3 2019 Earnings Call

It's over to your speaker today, Molly sort vice President of Investor Relations. Thank you. Please go ahead.

Thank you and good morning, everyone welcome to Mr. Energy's Investor webcast covering third quarter, 2019 result, which is being broadcast live from the Investor Relations section of our website at Www Dot Mr. energy Dotcom also available on our website or a copy of today's investor presentation, Our 10-Q and the related earnings release.

Joining me for today's call or 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 slide two and three in the Investor presentation on our website that explain the risks the forward looking statements limitations of certain industrial 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 believed 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 Mali and good morning, everyone on the call as always we appreciate your interest in district energy.

We expect this call to be lengthier than usual.

I have to cover including Q3 results 2019 guidance 2020 got its with a glimpse of 2021 and operations performance initiative update and a 10 year view based on our detailed fundamental analysis, so let's get started.

Turning to slide six this for a finished the third quarter of 2019 reporting strong adjusted EBITDA from an ongoing operations of $1.064 billion results that are once again in line with the management's expectations for the quarter and results I'm pleased to see relative to guidance that already incorporated.

Hi, Burcon wholesale power prices, especially for the summer of 2019.

The quarter began with an unseasonably mild July follow in one of the mildest begins in over 10 years. In fact, there was a very bearish sentiment out there and our stock is sold off on our second quarter call. We outlined while we remain bullish on the markets, especially aercap and our company.

Of course, we know that August turned out to be a different stories in July as the tight supply demand dynamic in ERCOT resulted in sustained scarcity pricing. We saw 12 15 minute intervals clear at the price cap of $9000 per megawatt hour during the month to give you some perspective the magnitude of the difference between July and August .

Pricing at her caught the average seven by 24 price in August was $131 a megawatt hour more than four times higher than the average July several price of approximately $30 a megawatt hour.

Our fleet performed well during the summer peak period, resulting in August favorability in our ERCOT generation segment offsetting the headwinds from July and importantly, bringing realized prices for the quarter back in line with management expectations for the year. This is a key 0.1 I want to emphasize.

In ERCOT in order for a peak hour forward curve that is well above $100 per megawatt hour to be realized the market has to see some level of scarcity pricing materialize.

In fact for peak forward curves to trade at these levels a certain number of scarcity pricing intervals are assumed in order to achieve financial projections that are based on the forward curve going into the year, we need to see some of these high priced intervals occur in short each high priced interval is not necessarily additive to financial results on a stand.

Alone basis as some of this volatility is required to achieve the expected outcome.

Scarcity pricing did materialize in August in ERCOT in September of this year investors integrated model performed well our net length in ERCOT was able to capture scarcity pricing in the market. While also covering swings in our retail load, including the incremental Korea slowed we acquired on July 15th.

Various came to us like many other standalone retailers under hedged for the ERCOT summer and right in the sick of it as a result decreased book was more exposed to summer volatility in 2019, and it would have been under our ownership.

In fact, as the scenario that materializes summers exactly why we prefer to be net long Antarctica.

Our incremental length is first available for risk mitigation to ensure we have the appropriate amount of generation available to covered forward sales from our generation assets and our retail load requirements incremental generation is then available to capture any scarcity pricing in the market providing upside opportunity.

Of course, the overwhelming majority of our generation position is used to hedge resale and much of the excess generation is hedge before we arrive at the prompt periods, creating a lower risk more stable earnings profile. We believe this is the right way to run our business, especially in a market like archive that exhibit such extreme follow.

Hilli and energy pricing in fact, we expect we will see even more volatility in ERCOT in the coming summers as the market relies more heavily on intermittent renewable assets as a result, the types of volatility products that have historically been available for retailers are becoming more expensive and difficult to fund.

Given the change in composition of the generation mix in ERCOT and the expectation for increased volatility, we will likely want to go into future summers carrying at least as much length. As we have historically a topic I will discuss in more detail momentarily.

Turning now to year to date results. This year as adjusted EBITDA from ongoing operations for the first nine months of the year is two point Fivex $6 billion, which is in line with management expectations that already incorporated robust summer wholesale power prices in ERCOT as I previously discussed.

With our strong performance for the first nine months of the year combined with the addition of the creosote business as of July 15th and the and that business, which we just closed last Friday November onest, where both narrowing and raising the midpoint of our full year 2019 ongoing operations guidance range, we expect we will finish.

The year delivering adjusted EBITDA in the range of $3.32 billion to $3.42 billion in the top half of our prior 2019 guidance range in effect our base business is generally tracking as originally projected for the year with Korean and that provide an EBITDA upside to our prior guidance range.

We are similarly, narrowing and raising our adjusted free cash flow before growth guidance range to the top end of our prior guidance range of $2.2 billion to $2.3 billion are improved outlook for adjusted free cash flow before growth is a result of the expected increase in adjusted EBITDA for the year.

You will also see in the guidance table on slide six a column highlighting illustrative guidance for 2019. This illustrative guidance is $40 million higher than our updated 2019 guidance range as it backs out the negative impact per caught retail backwardation, we expect to realize in the.

Year.

When we talk about retail backwardation, we're referring to the near term impact of long dated contracts Ics executed with retail customers supplied by our native generation.

For example, if we execute a new three year contract with a retail customer.

Often the pricing under that contract is flat for the entire three year term.

Given the backwardation that exists in current ERCOT market curves that usually means the contract is out of the money compared to the market in the early period of the contract the meaningfully in the money thereafter, such that the net present value of executing the transaction is favorable while we have historically realize some level of retail backwardation in.

Our results. The total impact has typically been minor however for 2019 and 2020, we are projecting a much larger impact as a result of the greater curve backwardation entering into both years, coupled with increased interest by market participants to enter into long dated contracts and Urca for 29, King we are estimating.

The impact of the ERCOT retail backwardation to be approximately $40 million. If we were to exclude this negative end year financial impact our adjusted EBITDA guidance range would have increased to $3.36 billion to $3.46 billion, reflecting a midpoint that would have been at the high end of our guidance range.

We wanted to provide this illustrative range to give you a sense, we're exactly how well our integrated operations are executing in 2019 in fact, we believe excluding the adverse backwardation impact from 2019 adjusted EBITDA is the proper way to look at our 2019 results as we do not plan for the volume.

Jim or the impact of long dated contracts in our initial 2019 guidance and Moreover, the future favorable impact from these retail transactions will be included in our prospective guidance range.

Our core business demonstrated stability in a volatile summer market.

And with the additions of ambit increases, we are expecting incremental upside to our base results.

Turning now to slide seven we're also announcing today our guidance ranges for 2020.

We have been reiterating for the past year are believed to 2020 results could be relatively flat 2019.

In part because we were confident the historical 2020 forward curves remain dislocated from fundamentals and would improve after we got past 2019 summer a phenomenon. We have witnessed in recent years as depicted on the next slide and one we expect to continue for the foreseeable future.

Well the forecast summer reserve margin of 10.5% Summer 2020 is expected to remain tight and in March of next year. The loss of low probability in ERCOT operating reserve demand curve shift by another quarter of a standard deviation, which should further increase the probability of scarcity pricing intervals during the.

Summer.

The recent uplift in the 2020 forward curve as well as the addition of decrease in AMD businesses has raised our prior expectation of relatively flat to a projected increase it adjusted EBITDA year over year, specifically for 2020.

We are projecting adjusted EBITDA in the range of 3.285 to 3.5, a $5 billion and adjusted free cash flow before growth of $2.16 billion to $2.46 billion. Similar to 2019, we have provided on this slide and illustrative guidance range, excluding the projected negative impacts of our ERCOT Reid.

Well backwardation.

2020, we expect these impacts will be approximately $70 million higher than what we expect to realize in 2019, partially due to the addition of ambit, whose portfolio will also be impacted by contracts with retail backwardation in ERCOT.

Excluding these impacts our 2020 guidance midpoint will be approximately $3.5 billion a significant increase over our expected 2019 results.

In fact, many of you will recall the five year financial projections, we published in our joint proxy statement and prospectus in connection with the Donaji merger announcement in the first quarter of 2018 at that time, our board of directors evaluated the merits of the Donaji transaction, assuming the 2020 adjusted EBITDA of the combined business.

It would be $2.81 billion, which included an estimated 350 million of value levers announced in connection with the merger the midpoint of our 2020 got it is more than $600 million higher than that previous estimate.

In only two years, we have improved that 2020 financial outlook by more than 20%, but the vast majority of this improvement being driven by items entirely within our control and largely unaffected by commodity prices.

Specifically approximately $425 million of the improvement in adjusted EBITDA is attributable to the hard work. Our teams have done to increase the expected merger value levers by nearly 70%, while also adding incremental EBITDA through growth investments.

Two years ago, when we announced the Donaji merger the market was concerned about the long term viability of this business pointing to a $200 million decline in capacity relative knows that would materialize in 2020.

The 2020 guidance, we are providing today is just one example of the resiliency of this business model. Our teams continue to identify efficiency to maximize the value of our operations and we've been successful at identifying tuck in growth opportunities that are both EBITDA and free cash flow accretive with very attractive returns, while requiring modest levels of our free cash.

Cash flow to pursue we're confident that this business model continues to create value for our stakeholders a topic, we will discuss in more detail shortly.

I must say in our view distrust stock price does not reflect the resiliency stability and level of EBITDA and free cash flow of this business.

A final note on this slide you might notice that these guidance ranges are slightly wider than our prior guidance ranges, reflecting bands of $150 million as compared to our prior bands of $100 million. We believe a guidance range based on a percentage of EBITDA is most appropriate and a range of play.

Plus or minus approximately 5% is reasonable and in line with peers. We believe a wider guidance range also better reflects the potential range of outcome for our business.

Particularly in ERCOT with its tight reserve margins in increasing reliance on intermittent renewable resources. This market dynamic is increasing the volatility in ERCOT as well as the potential to capture value. It managed properly with the right assets. In fact is now more important than ever that we have link on the days, where there is volatile.

Really in the market, especially when taking into consideration of the size of the load we serve.

As a result, we might find it prune to carry more length is the summer 2020 and beyond than we have in years past.

Given this past summer and the likely influx of more intermittent resources the cost of managing risk in ERCOT has gone up especially for short retailers, while the range of potential outcomes Navy wider for us in Africa, we are well positioned to take advantage of the increased volatility given our high quality long asset position integrated business and come.

Partial capabilities.

Furthermore, as I will discuss in connection with our 10 year outlook. Our fundamental analysis continues to forecast a high probability of scarcity of that's occurring at orca in future years. The aircraft market is changing increasing intermittent resources will inevitably increase the appropriate level of reserve margins.

Hey cost to run the power system was significant intermittent renewables that is yet to be fully understood.

And recognized by stakeholders.

This increased volatility suits, our integrated business position and capabilities quite well. So we remain bullish on the ERCOT market and our ability to capitalize on opportunities likely to arise in the future.

Turning now to our thoughts on 2021, Directionally, we still believe 2021 adjusted EBITDA.

I would be relatively flat to or higher than 2019 and 2020.

If you take a view based solely on the forward curve 2021, adjusted EBITDA would look slightly down compared to prior years.

However, as we have discussed and as we depict on the next slide forward curves that are more than a year out tend to understate the tight supply demand dynamics and increased likelihood of volatility in ERCOT in particular.

The graph on slide eight is a helpful visual of this phenomenon.

Where there was a significant uplift in forward pricing in 2018, 2019, and 2020 as each delivery year approached this uplift was especially prominent for 2019, and 2020 appropriately reflecting updated scarcity pricing expectations, including the modification.

Runs to the O., our DC and the tight market conditions.

As you know we develop our own point of view of where we believe forward pricing is likely to materialize based on rigorous analysis of market fundamentals.

As it did for 2020, our point of view for 2021 would suggest at current market curves are not representative likely pricing outcomes. As a result, we're looking forward to 2021 in the context of our internal point of view, we believe 2021, adjusted EBITDA would exceed 2019 and 2020 results.

Recognizing that there are a range of potential outcomes for 2021, we're comfortable given our fundamental analysis at the 2021 has a very good chance of being relatively flat to 2020, if not higher it relatively flat outcome would reflect a nearly 700 million dollar improvement in the adjusted EBITDA that was forecasted.

The business at the time, we announced designs you merger two years ago.

The outlook for business continues to improve and we remain believers in our business model.

Turning now to slide nine.

I'm excited to announce today that we have identified $50 million of incremental EBITDA enhancement opportunities from our ongoing operations performance initiatives under the leadership of Jim Burke, our teams underground know that in order to remain viable as a generation landscape evolves, we must ensure our assets are operating at the highest level deficiency.

And at the lowest cost, while first and foremost prioritizing safety.

The RFP process is critical to our success in this regard and it continues to deliver results.

Incrementally within the fleet rationalization bucket of our Opie process. We have also improved our financial forecast with the retirement of for coal plants and Downstate, Illinois. As you know district was required to retire 2000 megawatts of nameplate capacity in MISO zone four in connection with an amendment to the multi.

Pollutants standard, which was finalized this summer three of the plant coughing Havana and Hennepin. We're retired effective November onest. The fourth plant Duck Creek is scheduled to retire on December 15th of this year.

As a result of these retirements district has improved its 2021 adjusted EBITDA forecast by an incremental $100 million, which is net of the previously identified ofi opportunity at these sites.

Taken together these updates improve our ob target to a total of $425 million per year up from the $125 million, we announced in connection with the Nonenergy merger.

Including synergies and LP, the EBITDA value lever targets, we have identified for the diverging merger have increased from $350 million annually to $715 million, which includes $290 million of traditional merger synergies $325 million of both the value levers identified.

And our net $100 million of EBITDA improvement in 2021 from the retirement of the four MISO plant. It has been two years since we first announced the acquisition of Donaji and the financial benefits of the transaction continue to improve.

Financial synergies, however were not the sole reason we made a decision to acquire Donaji. Another important factor was the opportunity to transition distressed generation fleet from one that was heavily weighted toward coal to one that is now approximately 64% natural gas by capacity.

We believe our relatively young low heat rate generation fleet will be able to create value for our stakeholders over the next decade and beyond which leads me to the discussion of our 10 year fundamental outlook before I get into discussion I would like to explain why we believe it is essential for us to present, a longer term view of our company and the key power markets, where we.

Operate first at a minimum we believe is important to frame the potential impact of our recently announced greenhouse gas emissions reductions targets on the business. Furthermore, we believe it is imperative to our company's valuation that we explained the long term prospects for the business.

Given our perspective on technological and climate change impacts on the sector.

Simply put there is a terminal value question for energy companies and we believe it is necessary to address it head on.

The good news is that the power sector stands of grow overtime as a result of electrification across all sectors of the economy in response to climate change and we are well positioned.

Slide 11 summarizes our 10 year view.

As most of you are aware last week Vestra announced for the first time, our long term greenhouse gas emissions reduction targets, which include our goal to achieve a more than 50% reduction in seo to equivalent admissions by 2030 as compared to a 2010 baseline notably this for has already retired or announced plans to retire 14 coal plants.

And three gas plants since 2010, resulting in a reduction of seal to equivalent admissions of approximately 42%.

As a result, and reflecting the marginal profitability of some of our coal units in particular, we expect we can achieve our 2030 emissions reduction target through incremental retirement actions wrecked resenting only 2.5% of our projected 2020 adjusted EBITDA.

While any such retirements will advance our progress toward our long term emissions reduction targets are fundamental analysis would suggest that future retirements of this magnitude will be warranted based on economics alone. In fact, we estimate generation assets, representing approximately 5% to 8% of our projected 2020 adjusted EBITDA.

Could be at risk of retirement in the next decade predominately from Newbuilds in particular renewables and expected environmental expenditures.

Importantly, this small percentage of our total EBITDA can be replacement relatively minor growth investments over the same time period as best as targeted return levels, we could replace the 2.5% EBITDA reduction projected to to achieve our 2030 greenhouse gas reduction target with less than $500 million of investment.

The incremental at risk EBITDA would require only 500 million to a billion dollars of additional investment.

To put this sizable investment into perspective, we have already more than replace the equivalent of the EBITDA at risk through our recent retail and battery investments not to mention our incremental EBITDA improvement initiatives such as Ob. In addition, this level of investment represents only about 2.5% to 7.5% of our anticipated free cash flow over the next.

It's 10 years, assuming we generate $2 billion of free cash flow each year on average.

The bulk of visitors current adjusted EBITDA is derived from is relatively young low cost highly flexible gas steel generation fleet with two of the lowest cost nuclear and coal plants in the country and Comanche peak in Oak Grove.

We believe these assets are well positioned for success in markets with increasing reliance on intermittent resources in particular, we expect our flexible natural gas assets will run more in remain critical to the reliability of the regional power markets in which we operate.

We are seeing this phenomenon play out in California, now as the percentage of solar assets in the state increases for example, resource adequacy contracts for gas assets in California are being transacted at seven to $7.50 per kw month, right now, which as a frame of reference is almost doubled.

Revenues awarded an ISO new England latest capacity auction. We also saw this play out in ERCOT during the summer peak as our gas field, peaking and steamer assets played a key role on low wind days.

Our fleet, which is approximately 64% natural gas capacity is well positioned to capture value and support market reliability as renewables or build out across the U.S. Similarly, we believe our retail business will remain stable and growing contributor of our performance over the next decade, and we project fundamentals in both.

Workout in PJM, our core markets will remain strong.

Turning to slide 12, let's start our fundamentals discussion with archive.

Any right to the punch line, our fundamental analysis projects that are cut prices are likely to remain in the mid thirtys or higher per megawatt hour through 2030 with scarcity pricing advance remaining consistent feature in the market over this time period in reaching this conclusion, our team factored in an estimated 1.5% to 2% and.

So low growth through 2030, and the scenarios that we evaluated included the addition of up to 50 gigawatts of new renewable assets, including approximately six gigawatts of battery storage with no sustain transmission capacity constraints. Although we do expect there will be price differentials by zone.

We similarly modeled potential retirement in the market based on economic factors or plant obsolescence, assuming only three and a half gigawatts of retirements over the next decade.

While we believe our analysis is conservative if it proves to be too bullish. We believe there are more than 15 gigawatts of generation in ERCOT supply stack potentially at risk of retirement, which should further mitigate any downside scenarios.

Arriving at our conclusion unexpected market price outcomes, we ran a bottoms up hour by hour simulation model with explicit assumptions around new build retirements and low growth and we calibrated our model relative to ERCOT history.

What market observers, perhaps do not appreciate as Hell markets will evolve with the rising intermittency from increased reliance on renewable assets the greater the percentage of renewable assets in the market the higher the levels of volatility we expect to see this is true even if the market has increasing reserve margins as the expansion of reserve.

Margins is driven by renewable assets, which tend to rise and fall together.

Renewable penetration effectively lowers the overall median price observed in a year as renewable assets with a zero marginal cost shift the generation stack further to the right.

However in most important.

The higher percentage of renewables in the market will significantly increase the probability of scarcity events in pricing volatility, resulting in a significantly higher average annual price relative to the median price.

If you think about it renewable assets of a lifetime in the same geographic area will generally be available or offline as a class in many instances the renewable assets will not be able to capture spot price spikes because in large part they will be the cause of the scarcity event due to the correlated nature of their failure to perform for.

Example, all solar will be offline at nine PM and all when drops when front store over geographic area.

And increasingly important metric to pay attention to intercom will be net load defined as load lesson renewables as that is ultimately what the ISO has to manage on a delivered basis net loan peaks rather than overall demand peaks are expected to be more highly correlated with scarcity events in the future. This was the key.

Yes in ERCOT. This August when price fly us were driven primarily by low availability of wind generation on days with strong, though not extreme demand as we depict on the next slide.

Slide 13 shows that on August 15th of this year.

Power prices in archive spike to the market cap of $9000 per megawatt hour. However, peak load was less than 71000 megawatts, approximately 5% lower than our cost 2019 peak summer demand.

The real driver for the price like was the low level of wind output, which was approximately 2500 megawatts or less than 15% of nameplate capacity during the intervals at the cap compared to an average output of six to 7000 megawatts for peak summer when.

Renewable resources by definition are unpredictable.

With renewable assets forecast to make up a greater percentage of the ERCOT supply base over the next decade market participants should expect sustained volatility as well as increased reliance on flexible and efficient natural gas assets of which we have many.

In short renewable penetration in ERCOT should not meaningfully depressed market pricing, rather our fundamental house now so which suggest average market price will remain stable to rising over the next decade.

Our ERCOT fleet, which is comprised of low cost baseload coal solar a nuclear assets highly flexible and low heat rate CCG Ts and.

And gas, peaking and steam units is well positioned to capture value as the marketable.

Before we leave ERCOT and move on to PJM, Let's turn to slide 14, where we back half 2019 axles to prior years in order to further demonstrate our view that 2019 is representative of Ergots new normal.

As you can see in the chart on the top half of the slide despite the scarcity pricing we observe in August and September of this year 2019 was not an outlier of extreme temperature days in Texas as I just discussed the scarcity pricing was driven more by a combination of strong load and low renewables.

Phenomenon, we can expect to see more of in ERCOT over the next decade, particularly at.

This of the supply base is comprised of.

The bottom half of slide 14 shows the result, a recast in 2011 through 2019 based on our fundamental point of view of the 2020 supply stack.

The results reinforce our expectation of persistent scarcity events going forward. For example in 2018 modeling to 2020 supply stack, we would have expected to see 14 hours, a north hub pricing above thousand dollars per megawatt hour compared to the four hours, we actually observed in the year. This back as highlights that a small.

A number of incremental renewable assets in the supplies deck can have a noticeable difference in pricing outcomes.

Last let's not forget that beginning in March of next year or DC pricing will kick in even earlier than it did in 2019 further increasing the probability of scarcity pricing outcomes.

We remain steadfast in our view that the long term forward power curve do not reflect the underlying fundamentals of the ERCOT market.

As we have discussed in the past the backwardation of the forward curve will not reflective of fundamentals do exert a certain level of disciplined on the market, especially related to merchant thermal newbuilds. It will also impact future renewable development as we reach a saturation point for renewable PA, let's not forget that merchant.

Vestments require the ability to hedge five to seven years out to secure capital. In addition, the market must support sufficient revenues to justify merchant investments. There are some that believe around the clock pricing in ERCOT will decline to a sustained low twentys per megawatt hour, but this ignores the likelihood of incremental retirement at those price levels as well.

The need to have long term pricing that supports adequate returns for the lowest cost merchant investment likely renewables. In fact, this low price draconian view is another supported by any reasonable analysis, nor can sustain the market in the long run our analysis indicates that the current market rules in ERCOT can and will provide adequate revenues.

But they will be more volatile and less predictable.

We will see if this market construct will support the level of investment, especially merchant that will be needed to maintain a minimally acceptable reserve margin as we've assumed in our fundamental analysis, we believe our existing ERCOT generation fleet with assets that are local laws flexible and well positioned on the supply stack will remain back.

And critical to ensuring a reliable cost effective grid.

Turning now to PJM Im on slide 15.

Unlike our got PJM has delivered relatively stable energy and capacity revenues over the last several years from 2010 to 2018. The average PJM CGT earned approximately nine to $12 per kw month from the combination of capacity and energy in fact capacity energy revenues has historically move in office.

As a directions, resulting in a relatively stable earnings profile in total and overtime.

The graph we depict on slide 15 demonstrate this phenomenon for example in 2016, you can see that trough capacity prices for RTL zone were offset by Onpeak spark spreads that were at a four year high. Similarly in 2017 optics spark spreads in Emac were relatively low the capacity prices in the zone, we're at a peak.

In the second half of the year.

We are seeing this dynamic play out in PJM over the years and in similar fashion. Our fundamental analysis result in expectations of flat the gradually rising overall energy and capacity pricing through 23.

Our fundamental analysis is driven by the expectation of gradually tightening reserve margins the possibility of slightly rising natural gas prices and prospects for ongoing retirement of older less efficient coal oil and gas steam units. We also assumed that the result in the capacity market will not change materially from recent clears.

As expected highs and lows.

While we expect renewables will be added to the supply stack over the next decade PJM is the lease favorable market for renewables with largely low onshore wind intensity in low center ratings. As a result, we expect renewable development will be driven by state Rps standards rather than economics.

As reflected by the consistent band historical returns in PJM with over 180000 megawatts of installed capacity. It is difficult for either incremental new supply or retirements to meaningfully move the market in one direction or the other.

Just as we have seen in recent periods. We expect total revenues to vary year to year, though to remain consistent with historical levels overall as it relates to Vista, specifically, we believe our large fleet of efficient CCG two units in PJM, we'll continue to generate a significant amount of EBITDA for our consolidated.

Operations as they collect significant revenue streams from both capacity in energy markets. However, our PJM coal units could be at risk of retirement, just as other high cost coal oil and gas units will be over the next decade, we have factored any potential future retirements into our EBITDA at risk.

Yes.

Which takes us to our last slide on our 10 year fundamental outlook Slide 16, our analysis supports our view that vestra can generate relatively stable to growing EBITDA in a wide range of scenarios, including generating approximately $2 billion per year on average of adjusted free cash flow before growth to either or.

Orders or to invest in growth opportunities.

If we invest on averaged $500 million a year on growth opportunities roughly a quarter of our projected adjusted free cash flow on an annual basis and achieve our targeted returns we could deliver an incremental $90 million to $100 million a year of EBITDA. Our track record today with the acquisition of the Odessa CCG team play.

In West, Texas, the development of the up to two in Moss landing solar and battery project and the acquisition of Chris and and then on the retail side has demonstrated that we can be successful and finding high return tuck in growth opportunities on a regular basis in fact, those projects have exceeded or expected to exceed our.

Turn levels.

Continuing this history of executing on opportunistic growth projects likely in retail renewables and battery storage with not only require only a small portion of our overall anticipated cash flows but it is expected to result in a growing business that would more than offset the impact of potential plant retirements over the next decade in back each.

Even after allocating capital to growth projects and paying at an annual dividend viscera could still have a significant amount of cash available to return to shareholders.

We expect will have meaningful cash to deploy beginning in 2021. After we achieved our long term leverage target.

As we always mentioned with any discussion of growth if we do not find opportunities to invest at attractive returns. We will return capital to shareholders. This is always our litmus test.

In summary.

Our assessment of the tenure prospect for our business reinforces confident that our business model is resilient and compelling taking advantage of the way we have positioned our company as a low cost low leverage integrated business within the money assets in attractive markets.

We have covered a lot today I hope it has been worthwhile discussion for you and I Hope you walk away from this call with a better understanding of a few key points.

First renewable penetration is not an insurmountable threat to our business, rather a higher percentage of renewables in the market will merely change the distribution of price outcomes, placing more importance on unit performance during high priced intervals and increasing the reliance of efficiency CGT assets, and peaking units of which we have many.

And we will have the opportunity to invest in the technological changes impacting our business, but in a disciplined manner second while certain of our units specifically our coal plants in MISO and PJM could be at risk of retirement over the next decade. These assets are not meaningful contributors of EBITDA today, our modeling suggests that given the.

Terrible position of our generation assets on the supplies decks in the markets, where they operate only 2.5% of our estimated 2020 adjusted EBITDA will be lost in order to achieve our 2030 greenhouse gas emissions reduction target and a modest 5% to 8% could be at risk grew 23 from new build penetration in environmental.

Expenditures.

The assets that are most exposed to a higher penetration of renewables are the older high heat rate assets of which we own very few.

And third we expect to generate a significant amount of free cash flow on an annual basis using only a small percentage of this free cash flow, we can make attractive growth investments to not only offset in EBITDA loss from future asset retirements, but to grow our business.

With our strong free cash flow and market leading position in the core competitive electric markets in the us.

We can participate in the evolving power markets, where it makes sense, while also returning capital to shareholders.

We don't I believe our business as a melting ice cube, rather through cost management and efficiencies financial discipline and execution. We believe we can continue to create value for our shareholders over the long term. We continue to believe our stock is undervalued and the math tells us that the market must be discounting our future value.

We believe this analysis is one piece of compelling evidence, suggesting that we can produce strong results on a consistent basis over a long period of time, and we have demonstrated our ability to execute.

I will now turn the call over to David Campbell.

Thank you Kurt turning now to slide 18, visceral delivered third quarter 2019, adjusted EBITDA from ongoing operations of 1 million $64 million, which as Curt mentioned is in line in their expectations.

Our third quarter results were 89 million lower in the same period in 2018.

Quarter over quarter decline was driven by lower prices and volumes in our Midwest and northeast segments.

Lower retail gross margin in 2019 was offset by higher prices and margins in our core wholesale segment.

As you know, we're expecting negative adjusted EBITDA in our retail segment for the quarter given the extreme peak in August 2019 heat rates observed in the market at the time, we're procuring power for the year, which drove up our third quarter cost of goods sold.

As we discussed in our second quarter call, we shake the cost of goods sold for our retail business with the actual power curves rather than straight line these costs over the year.

The retail backwardation, the Curt mentioned earlier with concentrated in the third quarter.

The negative 40 million dollar impact has already been fully recognized in retail year to date results in fact, the negative impact in the third quarter as little higher than $50 million with some reversal occurring by year end.

As you May recall, we realized higher retail gross margin in the first and second quarters of 29 team as compared to their respective cores in 2018.

We expect a similar results in the fourth quarter.

Year to date Mistras adjusted EBITDA from ongoing operations in $2.586 billion, which is also in line with management expectations for the period.

The next two slides set forth or 2019 in 2020, adjusted EBITDA and adjusted free cash flow before growth guidance ranges.

Given that occurred already covered our guidance announcements I won't spend much time on these pages. So I do want to mentioned the updates to our asset closure segment guidance for 2019.

You will see at our guidance ranges for the asset closure segment now assume a more negative impact as compared to our prior 2019 guns.

Primary drivers experiences the transfer of the four MISO plants retiring in the fourth quarter asset closure.

This impact flows through the asset closure segment projections in the 10 year update we have provided on slide 28 in the appendix.

It is important to remember that projected asset closure expenditures have already been accounted for in the asset retirement obligation on our balance sheet.

Retirement or the assets merely buckets, the anticipated cash flows and the asset closure segments as opposed to our ongoing operations.

Let's turn now to slide 21 for an update on our capital allocation plan.

As of October 31st we've executed 1.415 billion EUR $1.75 billion share repurchase program, leaving approximately $335 million of capital remaining for future share repurchases.

You will notice at the pace of our repurchasing slow new third quarter, which was a direct reflection of the improvement in our stock price during the period.

With respect to 335 million shares outstanding under the program, we will continue to be flexible.

At the present time, our capital allocation priority for 2020 is debt reduction.

Our focus as a company on reducing our leverage in the range of our targeted levels, which will support an upgrade to our debt ratings and keep us on the path to investment grade.

We will continue to opportunistically evaluate repurchasing shares or investing and promising growth opportunities, especially those that have minimal impact on our leverage.

Our dividend is continuing as expected we announced last week at our board approved the next quarterly dividend of 12.5 cents per share with 50 cents per share on annual basis, which we paid on December thirtyth to shareholders of record on December 16th.

Following review and approval by our board, we plan to announce the annual increase to our dividend on the fourth quarter earnings call in February 2020.

Management still anticipate to dividend will grow and an annual rate of approximately 6% to 8%.

Lastly, paying down our debt remains a key capital allocation priority for Misra, and we're continuing to track toward our long term leverage target 2.5 times net debt to EBITDA.

We believe achieving our long term leverage target will further reduce the risk profile of our business.

Port opportunistic growth investments and enhance our long term equity value by increasing the value to accompany available shareholders.

And appropriately reducing the risk premium employing our current free cash flow yield. We continue to expect that we will have significant cash available for allocation in 2021 and beyond.

Sporting a growing dividend future growth investments and meaningful excess free cash flow to return to shareholders, including repurchasing our stock when appropriate we expect to discuss this more as we progress through 2021 final comment before we open up line for questions. We've made a few changes to our hedge disclosures this quarter new disclosures can be found on slide 30, and 31 in the appendix.

Updates include the addition of power price sensitivities as well as a breakout of the hedge value is embedded in our total rewards products. We continue to try to improve our disclosures to make them more user friendly and we hope that you will find this new format helpful.

In closing, we remain confident that our business has the necessary elements to thrive now and for the long term.

The strong performance of our integrated operations during the third quarter reinforces our view that our business can generate stable EBITDA and free cash flow in a variety of market environments. Our fundamental analysis support to the core markets in which we operate will remain attractive over the next decade.

And we believe our relatively young and efficient generation fleet comprised primarily of lower heat rate flexible gas assets will be critical since forming a nation flood trisomy needs as a country transitions to lower harbor technologies are projected strong free cash flow generation will ensure that we can participate in this transition for economics are supportive of investment.

We are excited for the future and we hope you are as well.

With that operator, we're now ready to open the line for questions.

Thank you as a reminder to ask a question you need to press Star. One then your telephone to withdraw your question press the pound or hash key.

And the interest of time, please limit yourself to one question and one follow up please standby well, we compile the key only roster.

And your first question comes from the line of sharper answer with Guggenheim Partners. Please go ahead. Your line is now open.

Hey, good morning, guys.

Sure.

Just two quick questions.

First per could we get a little bit more color around the future investment.

I think in about that might arise over the next decade, I mean, the annual investment of 500 long per year sort of a big part of the growth story there.

Yes so.

I think we mentioned in his script may or may not been that prominent but I think we still view mortar near term that retail opportunities are the biggest opportunity I mean, you guys can see the.

The value that we bring and I'd say NRG, probably brings to the table given our capabilities and less in particular, given our long positions.

And we can take out.

Not only just sort of the back office and other types of costs, but we can manage the commodity price risk exposure better and then there is just inherent in that that difference. There is a much lower multiple for retail. So we see some real value I think they're going to be smaller in nature, though going forward jar I don't think there are.

Many larger than when I say larger more in the Korea's type ambit size deals out there, but there is still other ideas out there that will will likely pursue.

I do believe that we will participate at the right point in time and renewables.

And battery storage as you know we have some real opportunities.

In California to continue.

To build out our battery build at both Moss landing side in our open side I think we'll we'll probably do some investment in that we have a good pipeline of opportunities on the development side not only in Texas, but also in a few other states, where we have sites from some of our existing assets that will become avail.

Mobile all that's going to be driven heavily by economics, and I think you guys know theres a lot of capital right now flooding into green investments by people, who really don't have any business owning.

A wind project or a solar project, but they want to waive the green flag and I think that is the returns that were seeing on that are pretty low I do believe that is sort of likes of CCG to build out in the early two thousands that theres going to be opportunities. After the fact for us to take a look ahead. So I think when you think.

About the 10 year period that you mentioned.

Early on its more of a retail focus I think it will be more on a intermediate period of time theres going to be some opportunities around renewables and batteries.

And I'd also say that there may be a few little tuck in opportunities inside are caught.

On the solar front, we've got to I guess, so it doesn't really big pipeline, we've got a lotta acreage and that some really good acreage, but we have to be very selective around that to some extent that will also be in support of our growing ERCOT retail business now that we've got the EBIT brand in here. So there may be some opportunity to.

Do a project or to around that but I think thats really where the growth going to come from and I think we're just going to have to be patient and an incredibly disciplined it's going to come in my view and a lumpy.

Nature. So this $500 million years, probably of integrating modeling exercise, but it's probably not exactly how it's going to happen.

Got it and just lastly, Kurt I mean, obviously to plan you presented today should provide a lot of comfort with the agencies rights to cash flows are sustainable that EBITDA can actually grow the balance sheets Halsey, you're definitely building a solid natural hedge or the retail business, you've talked sort of in the past around your ratings and start to two phases right first.

Double B plus second investment grade Green, maybe just get a little bit of the status on how the dialogues going with the agencies your sense on timing first around the notch improvements and second best upgrade, especially in light of how you're presenting your plan today. That's that's thanks.

Yes, so we're going to go in and I think we're going to go in and talk to the agencies because we're updating obviously that would have a 10 year view, but we're also finishing up and take into our board.

In early December our updated long range plan, which is our that's generally a five year view than we need to sit down with the agencies on there that Moody's for example has asked for some of that information because I think they're going to go to committee I think they're going to talk about not only us, but maybe others in terms of upgrading we've been on.

On positive watch with them for some time, so we think that in the next quarter. So we should be at a pretty good position hopefully with all the agencies, especially with what we're we're presenting today.

To potentially get an upgrade to that equivalent of double B plus.

On the investment grade front that may be a little lumpier and may and probably you know from that point, where we would get upgraded probably a year year beyond that before we get there.

I think with with Fitch and Moody's.

Metrics, we're pretty well at 2.5 times.

And with S&P because of the way they look at certain things into two and half times were not necessarily exactly there on the metrics, but with a business.

Business rating improvement, which we believe that we we are squarely in line to too to get that would put us in the investment grade range. So I think what we're really looking at it sort of first quarter 2020 were hoping or in that range.

Of getting an upgrade across the agencies to that double B plus range and then we're looking at year to maybe a year and a half beyond that to get to investment grade with all three of the agencies, but I think that might be a little lumpier just given the way the metrics were so we're we're going to keep doing.

What we're doing because I think the more we execute the more we continue to perform the way that we say and that this business model.

Becomes more and more apparent to people just how strong. It is and then also the quality of our assets the quality of our retail business.

Thats going to be really helpful with all the agencies because I think what really is the bigger hang up is is this real are people that are they going to be disciplined and is this business model work.

And I think so thats, probably the biggest thing of anything and I think that takes a little a little bit of time, but we feel like we're in line for this next upgrade in the near future and then we're going to obviously continue to execute and we think we put ourselves in a good place for investment grade rating.

Got it congrats Kurt on this executions terrific.

Thank you sure.

Your next question comes from the line of Stephen Byrd with Morgan Stanley . Please go ahead. Your line is now open.

Hey, good morning, and congrats on a very constructive and thorough update.

Hey, Thanks, Stephen good visit here from.

Just wanted to touch on your point, you've raised about solar in a in our car you gave a lot of good color around that I guess, if you. If you run a very simple sort of solar LCL. We model you could see that maybe solar could.

Working at $30 plus market, but.

The point about practical limits on on the growth of solar I think has a pretty important one we're often asked about could you just out a little bit more in terms of the volumes that you see that's realistic in terms of actually getting ahead, it's getting financing et cetera, any any color around that would be really helpful.

Yes, that's a good question so lot of things, we've been trying to get our arms around.

I think you guys notice that the renewables that have been built in ERCOT and frankly pretty much everywhere have been PPA supported and.

That is large players that have come in and and allows basically user balance sheet to do.

Yes.

And then it does allow obviously to get financing and take lower returns, especially if you got investment grade category on the other in.

But there is a saturation point, where you start getting into smaller companies, who don't want to own.

A wind project or a solar project and at some point in time and Urca given the size I mean, we've got 50 gigawatts of renewables coming into this market.

That's more than half of the current pain play capacity in the market.

Some of that's going to have to end up being merchant I think the big question in ERCOT being an all energy market as you add more intermittent resources and during the periods between when you actually see volatility in high pricing.

Prices are going to be lower because you're going to you got intermittent resources with zero marginal cost and so the question is is there going to be enough revenue and enough frequency of that revenue to support merchant build and I don't care, what kind of merchant build it can be renewables or it can be it can be combined cycle plants now combined cycle plants are way out of the money.

Renewables that we see when you run the numbers if you can get proper leverage on them can get decent levered returns.

Currently and I expect to build the continue to see some cost decline in that but but once you get into the merchant side of things because no one really build a merchant solar plant yet and her cobble. Once you start to do that in all energy market with a backwardation in the forward curves as steep as it is it's tough to get the finance.

Thing that you need and then you've got to get you've got to get someone to come in and put in the equity dollars in the problem with that if it's just a single asset owner situation.

There is it's going to be a little white novel time between when you're actually getting.

Lower in the in the in the off peak periods lower megawatt hour pricing and then you have to wait for a good summer to come in some of my guys can do it because we can we've got to a balance sheet and we can basically.

Stand in between Inbetween cycles, but.

Someone who's a single asset owner with leverage on top of it is going to is going to be a real tough thing and I had thats. My biggest question is what's going to happen with earlier caught market as you get more zero marginal cost assets setting price for most of the hours and you see a much more volatile.

Business can you get the discounted development thats going to be necessary because I don't believe you can build this 50 gigs or so out with all PPH I. Just don't think the market has that kind of death. So that will be an interesting thing my sense of it is if we don't there's going to be further changes to the market, whether it's an increase in the RBC.

Okay, or even maybe some some changes to ancillary services to get more revenues in the market to make sure that.

That theres enough revenues I mean, I, just don't see archive going to a capacity market and when you think about outside of are caught.

You do have capacity markets, which can get additional revenues and I think you hear Gordon van Willie say this an ISO new England because he is worried about the.

The revenue stream from energy because of offshore wind coming in they still needs Dispatchable resources, mainly the gas resources in new England, and there's nothing new getting built because you can't get a gas pipeline up there. So he wants to keep those around so he knows he is going to have to get revenues stream into the capacity market because.

Thats the way to basically keep assets around and hopefully get some new build so I mean, that's kind of how we see this playing out I mean, it's going to be real interesting, obviously will that we have a big seat at the table. So we'll we'll we'll be a part of that discussion, but that's sort of how we see it.

That's really helpful. I'll, let others ask questions appreciate it thank you.

Sure.

Your next question comes from the line of Greg Gordon with Evercore ISI. Please go ahead. Your line is now open.

Thanks, Good morning, good update thank you.

Hey, Greg.

Just just to be clear.

You say you would you assume 50 gigawatts of new nameplate renewables in the Texas market I think that that just that number alone will really caused.

People a lot of heartburn, even if you're modeling.

That you can still generate stable cash flows out of that but just to be clear that unit. That's your that's your aggressive case scenario you don't necessarily believe.

That's where we're going to end up in 2030, given the constraints you just articulated.

Yes, I think what's what we try to do Greg was this is a conservative view.

Have you know the market, we didn't want to come out with something that looks real very self serving and I. Just mentioned this in I'll say it again goes I'm not sure. How this actually plays out I mean, you can model things, we sort of course function. The some of this new build to happen whether that can really have that are not on a merchant base.

Basis, I have a lot of questions about that and if that doesn't happen you are still going to see increased volatility and higher pricing is just going to be higher pricing than what we've assumed here.

And so I.

We don't really know I mean, just as a modeling exercise we wanted to be somewhat conservative on it but there's a lot of leap of faith in this that at some point when the PA market dries up there's only so much depth to that somebody's going to have to come in here and build on a merchant basis and that's tough in an all energy market and I don't.

See people like us are NRG or excellent or others, who have the ability to do it on balance sheet. We've all seen what can happen in ERCOT. If you overbuild to market. So I just don't see that happening.

And then of course, we mentioned in the script and I've said this before they are still 15, plus thousand megawatts of higher heat rate.

Oil and gas and coal units that if we did somehow overbuild, which I just don't see happening would come out of the stack. So that's why we're bullish on this ERCOT market even into what we would consider a very conservative case that we put forward here.

Great, but my second question is.

You know, you're you're obviously bullish on the fundamental value the company and hope to some degree you know the arguments around the investment thesis and merchant power.

This you know basically the durability of cash flow argument of melting ice cube argument, which are attacking had on but to the extent that you really believe you're going to generate free cash flow.

After growth investments that so over the next 10 years, that's greater than your current market cap.

Why or why aren't you plowing further ahead more aggressively with the buybacks in the short to medium term and I don't I understand that the very short term answer as you want to get to investment grade, but for the extent you're confident that these cash flows are going to.

Show up.

You know, we're basically looking at another 300, some odd million a buyback in the short to medium term and then a pause in 2020, while you sort of on the engine they get to the debt to EBITDA, two and half times right. So how do you balance.

Investors, who are saying well if you're so.

So excited about the future why aren't you ever being more aggressive with the buyback.

Yeah, I mean thats a good question and that's the balance that we're trying to strike here.

Okay, Great. There's no magic Formula here and I think is our judgment that the equity value. This company does better with a stronger balance sheet than not and with that Theres also a credibility and commitment thing and we're not just committing to equity here. We're also committed to people.

Uhhuh.

Who own our bonds and.

We're trying to satisfy.

Tire capital structure here at the end of the day, but I think I watch Calpine do this and I know, we're not where they were but I watched them do a bunch of share buybacks and the market never believed.

Their fundamental story and their stock continue to decline as they bought back shares and I think that was just the risk premium that the market required because of the concern of financial distress of the business and the business model and so I said when I first.

I hear that we needed to run this saying at a debt level that would put us in line to potentially be investment grade and that's what we're going to do so I look I understand that when you have debt this even at 7.5% and your and your trading at a free cash flow yield of 15, the math I get.

I just think that at some point, we have to focus on getting our debt down and I think this is a this was really a one year issue.

And then on the back end of 2020, I think what you'll hear from US is a discussion about what we're going to do in 2021, and depending on where our stock is trading at that point in time I would not be shocked that the board would want to do some sort of a strong buyback program.

But we I think what we are trying to tell you guys right. Now is that we we do believe that following through on our commitment to get in that range for two and a half times is important for our company and we did outline it I think as David said in his comments I think there's a lot of reasons why the equity should be supportive of us doing.

On that.

But it's a balance and.

You can make the argument.

Dave that you've made here and others.

I think this is sort of what we believe is the right balance right now.

No I actually completely agree with you I just wanted to hear you articulated thank you.

Sure.

Your next question comes from the line of Michael Weinstein with Credit Suisse. Please go ahead. Your line is now open.

Hi, good morning, guys.

Hey, Michael how are you, Hey, alright, I guess.

Just a follow up on a same line of questions.

Yes, I guess once you get a great how much you get an investment grade credit rating and.

Assuming that does improve evaluation on the equity side as well.

Yeah, you've got really good cash flow and you know from your own.

Our own profile. So is there sort of a limited amount of investment going forward retail acquisitions will be smaller I'm, just wondering where what would you do with a better balance sheet and better valuations better reception from investors at that point.

Where's the company go what can you do more than you can't deal with the current cash flow profile right.

Yes.

Yeah, Hi.

I think we've sort of outline what we think is sort of refrac of this thing and I wish I had a better sense of timing of it but.

We still believe in we still believe in the generation side of the business. We think it's still fundamentally important.

We're not going into a retail only model in a short model and so I would expect us to put some investment.

Predominantly on the renewable side, because that's going to be the workforce, but the other thing I will say that we havent. So a lot about but it's also part of this modeling thing was good for us to to understand kind of what's going on but.

There could be some small investment in what I referred to as volatility assets were either assets that actually can be around during the peak periods and they're very achieved.

Type assets, now, whether thats batteries or whether that's a gas fired peaker or something like that we would look at but that's small potatoes, I mean, I think the real thing here is that you'll you'll see our company.

Invest in generation.

In the future as we retire generation and by the way the retirement of this generation is going to be needed any with most of these coal plants, we're talking about.

Our going on 60, plus years older becoming obsolete and they're not economic and I think any business that is a capital intensive business, whether its airlines or chemicals or refining or whatever have to replace.

Their hardware at some point in time the question is going to be.

What kind of hardware are we going to replace it with I think it's going to be renewables and more important than that it's going to me when do you do it and right now I just don't there's so much money going into this that I think this is not the place I think retails a better place for us to invest at this point in time, you will see where that we'll see where the cycle.

Goes, but I think that at some point in time, though there are going to be opportunities for us whether that's PPH for come off of the renewables and they become merchant and we have the capability to run them and see more value than somebody else.

I really don't know, how that's all going to play out, but I do expect us to have a greater share of our business in renewables.

Over the next 10 years now whether we can spend that.

Roughly $5 billion that we're talking about $500 million year over 10 years I don't know if we don't then we're going to return capital shareholders and that's just the way it's going to be and we still have we still generate a heck of lot of cash I think that with this thing shows you. This tenure deal, which we think is very conservative that if we don't put it.

Dialed back into the business, we're only lose into and a half percent to maybe on average 6.5% of EBITDA, which means we are still generating a boatload of cash.

And so this is still really vibrant business.

Even if you don't reinvest in it so we don't feel like we have a gun on our head to actually go out and spend money and we're not going to do that but I think we were the good news on our company. If we've got the scale and the capabilities I think we've proven that we can buy things and we can extract value that others cannot and I think we're going to get that opportunity around renewal.

This is just a question of win.

That makes sense, we cover the renewable industry and a lot of the retailers the distributed renewable distributed rooftop solar flares are growing at 15% of year sales.

You see yourself, maybe evolving into a retailer of perhaps let's say for instance for example, centralized renewable energy, but perhaps maybe even a distributed power retailer.

Competing against these rooftop players at some point.

I think there is something that you know that we will.

Consider have considered and continue to consider I mean, I absolutely I think that is that area for our company that we will and have taken a look good.

Okay. Thanks, a lot.

Thank you.

Your next question comes from the line approximate Siddiqa. Please go ahead. Your line is now open.

Thanks, So much high guys I know I really appreciate the update.

Hey, Bravo. Thank you hi, guys. So maybe just on.

Oh, the investment that you have talked about over the next 10 years, what I find is in your position having both the retail and generation you have the opportunity to step in and buy assets rather than grow them organically wanted to understand if that's a fair view given the volatility that you're seeing or you expect to see.

Do you expect to be this opportunistic around acquisitions and and more kind of examples can you give us where you kind of have seen back in the Boston you expect to see that in the future.

Well I think everything we've done so far in my own opinion has.

Been pretty much an opportunistic there I mean, I think what we did with the Odessa plant in Texas was a good example of we had a view of the future and we had somebody that will deliver was not a natural owner of that asset that wanted to get out and I think we were opportunistic and it turned out obviously to be.

Very good acquisition for US I would say that was park skill in part.

Could we have no people were going to pay has to take natural gas, but we did have a view that natural gas would be relatively cheap in the Permian.

You know two to two other hubs. So I think that's an example of being opportunistic that I think we bill do I think the other thing is is almost day one when we took over for Don Angie we were in discussions with PGT around the battery project in Moss landing, which in our predecessor owners were not.

And I think that was because we had the cash the balance sheet.

And maybe the willingness I don't know to to do something there, but I think we will be opportunistic thats why I mentioned probable that there could be some small asset things that would fit.

Sort of like I said, the since that fit the profile of being a volatility type asset that we might take a look at that I think would be opportunistic maybe somebody that owns it today doesn't seem to save same see the same value that we do.

I think we'll continue to be that way and I believe that most of our renewable.

And I'm talking about this renewable spend is going to be pretty much opportunistic it's going to be waiting for the right periods of time.

And I've seen this business.

For a long time, and there are going to be opportunities around renewables, where somebody overpaid.

Somebody can't make it and those assets are going to come available and we will be around and pretty much. All the deal flow comes through us in most markets that we're in and we'll get an opportunity to take a look at so I do think that the large portion of what we do and what we will do will be on or more opportunistic and I do.

I think operating assets, a one thing I like about operating assets in particular retail.

Because they really don't have a lot of impact.

On credit ratings, so you can doom and but they generate cash immediately the problem with the development Big development pipeline as you've got that couple of year gestation period and that takes a while it's a drag on you until you actually get some kinda operating cash flows. So I think we do lean a little bit plus.

The cost to build something is higher than what the cost to buy something is except I'm a little worried right now that where the renewable side of things are with the number of players that have decided to enter at least right now.

Got you that's super helpful and I'm sure the balance sheet will also help your be opportunistic just a second question quickly and we've got this alone which is if there is a democratic president.

Does this change your view it anyway in terms of how Oh, god or PJM or how youre assets that position how would you think about that.

Yeah. That's a good question so you know.

Again I've been around some time I've seen.

Administrations come and go.

Because it's still difficult.

Actually make things happen.

Even when you Wouldnt, we've seen where we've had Republican controlled presidency with a Republican controlled.

Congress or a Democrat control presence in Congress things, just don't move that quickly and so I haven't really seen that big of a change.

Theres been some things obviously that.

The tax legislation was a pretty big deal for us as a company and I would say that in there could be other things, but if you're talking about just what people were speaking about.

There's a pretty big divide.

The current administration in my opinion is less of a principal administration and probably more I call them more opportunistic looking for ways to actually surgically improve the economy on the other side of the equation.

You see a fairly progressive.

You know group and sitting in front of the front runners are fairly progressive and you know some of the things that I've heard such as banning fracking and just making it very difficult for gas pipelines.

Interestingly enough is actually good for our company, we are long natural gas equivalents company and so if you stop fracking natural gas prices are going to go up that is good for our company.

Mike made me think about I wish I didnt shut down the coal plants that we did because those are obviously natural gas equivalents.

I'm not sure everybody stopped that through yet that you still have to run the on the power grid and you have to have assets in a few shutdown.

Gas drilling that's going to increase electricity costs, so, but I have not really seen a change that much I don't expected that to change that much where you know we're sort of agnostic when it comes to.

Who's in the who's in the presidency, and the Congress I saw something recently, where somebody came out and had us sort of peg I think.

Under Democrat.

Presidency in a Democrat control Congress, you know that we don't do as well I just don't see that I mean, I and I also think we'd expect to be it you know a.

Participant in the renewable side of the business.

One of the key points, we tried to make and this discussion today is that when you bring in a significant amount of intermittent resources you need some level of Dispatchable resources that you can count on and right now given where gas prices are this country natural gas efficient natural gas plants.

You know fit the bill and we purposely did a deal to get long those types of assets. So we feel very good about how we positioned ourselves and I I feel like we will do well under any administration.

Got it Thats Super helpful. Thanks, a lot guys I appreciate the color.

Thank you.

Your next question comes on line of Julien Dumoulin Smith from Bank of America. Please go ahead. Your line is now open.

Good morning team thanks for your patience.

Just wanted to run by the a the illustrative 21, then how you think about that sort of a year over year walk. If you will from 20 I know you guys have laid out a number of different pieces to that but can we talk a little bit through it and especially given the context for the updated hedges I just wanted to make sure I understand this right. So looking at the the hedges that you guys.

I just provided a late in the deck I think it's about 580 million for 2020, how do you think about that rolling off in rolling into 21 that might be a different way to ask of like what kind of embedded.

Hi, good value, putting in 21 as well.

Yes so.

First of all I want to be clear that we don't provide we're not providing guidance on 21, there's always we try to do this because I know people in particular, you drilled Julian I know that you care about.

That that that out here and so we were part of this is just to try to give people a window into it admittedly here's here's a story for 21.

I think we said this in the script, if you market to market ill just take the curve.

We'd be a little bit below where we're coming into endpoint.

Which 20 is a pretty strong year, but we would be below that when we run our when we run a very deep detail fundamental model for 21, and we did this last year and we had the same viewpoint at this stage right now we would we would say that our fundamental view is above what is above where the market is trading and so.

When we market to model.

If you will we would be above where 2020 comes in.

And if you stripped out the base business. If you stripped out the retail businesses kind of falls in that same line, we'd be a little bit below on the base business, but then on of Mark.

Mark to model, we'd be above the question is going to be are we going to see.

The curbs move up and we and we tried to show this because we've seen and has been very pronounced that 19, and 20, where when we rolled through the the the prompt period. The one year out period moved up as we went through the summer of 1920 moved up when we went through the summer of 80.

Team 19 moved up and it and it happened as people began to realize that the market remain tight.

But also they got glimpses of the volatility in the market and we expect that to happen again.

But thats, we tried to range that for you guys. The say that but we feel pretty confident that will have an opportunity to hedge 2021, but I will tell you that we're going to be patient on that.

But what we typically do is we're usually 80% to 90% hedged going in.

Into any prompt year I don't expect us to deviate from that too much I think we did try to say today that we might carry a little more length than we have in the past one because of the volatility in the fact that the volatility products that people have used to hedge swing risk in ERCOT aren't not as available because.

Everybody starting to realize this volatility, but also because we added ambit and ambit.

Also has a swing risks associated with it.

So I don't know if that gets due to an answer to your question, but I I think we're going to be patient around 21, we think it right now is below where fundamentals who would see it.

So I wouldn't expect us to move our hedge ratio up a lot right now in 2021.

But I do expect as we go through the balance of 20.

You know as we get closer to 2021 will be likely hedged about the way, we normally our somewhere between 80 and 90% going into that year.

Got it but just in terms of the year over year walk here any other large factors to kind of keep in mind I just wanted to make sure I'm here, you're clear as you kind of think about Europe illustrative outlets.

I mean, so you know so just a couple of things that are little bit different.

So when we go from 20 to 21, we'll have the battery.

You know facility out at Moss landing. So that is included will be included in 2021.

We will get to a full run rate.

On and that and Korea's.

And yet because it takes us from time to do all the integration and all that and so that that I think we've said before.

Around $50 million on the battery I would expect us to pickup of maybe 15 to.

2020 $5 million on the on the Ambit and Korea side. So you are seeing some of that that would show up which is contributing to.

Offsetting some of the lower lower curves that you have for 21, then if we mark the curves who are models. That's when you go above.

2020, but those are two things that are that it will be coming on that our new and then we will be hit it reaching full run rate.

Of Ob in 2021, so that 50 million will come on and then we'll be at full run rate by the end of 2021, but we'll be picking up some of that in 2021. So those are the things that I would say are contributing to right now offsetting relative to the orca curves and by the way the PJM.

Curves are down their backwardated, and so as ISO delaying or there they're smaller though impact.

On 2021.

And so is the real real swing on this and this is true of US you know pretty much all the time is the real swing. One this will be what deserve caught end up doing and we feel very confident that that when that our modeling is more representative of where things will come in and that will obviously push us to either be flat, but.

For the likely higher given all those other things I just went over with you that live that we would end up being higher 21 deployment.

So patients guys cheers.

Thank you.

Your next question comes from the line of Sandeep somebody with Goldman Sachs. Please go ahead. Your line is now open.

Hi, Thanks for taking my question.

On a focus on retail for a little bit or did you guys notice any increase and customer attrition on the retail business from the volatility in the summer power prices are.

I'd say its a little too early because of the up long term nature of those contracts.

So actually we did not I mean, we actually saw sort of the opposite.

Tends to happen in a high price environment. The our competition have to raise prices you know interim on.

Because most of these guys are hanging hanging on razor thin margins and so when that happens you tend to see people move from.

Sort of the fly by night, if you will to safety and T. A few energy obviously is a safe that.

So.

We actually saw through those months I think we actually grew customers during that period of time.

So and then we can that's typical for us in the good news for US is we get a customer we typically can hold a customer for a good period of time, so adding was net net beneficial to us.

Over that period of time.

Got it up the other question I had was on Oh.

How important the Ajita rating is for you guys. So as you think about achieving your leverage target of during tough times as it absolutely critical in your mind to cross over into the eyes, you territory over to just be comfortable getting to that leverage note on maintaining going forward.

Yeah. That's a good question I look I mean, we never came out incident known as a fall on the sort issue I mean, I, but what I do believe and I think we've tried to say this is that I think isn't a strong indicator of the of the risk of the business and.

Still believe there's a there's a risk premium that sits in our free cash flow yield because people were just uncertain as to whether the business model is sustainable and the businesses sustainable. So we've tried to to tap. This in a couple of ways. One is through could just pure execution.

And discipline and doing the things, we said and part of that is reducing your debt I mean, I think thats, one way to reduce that risk premium. The other one is to try to draw a picture for people about what the long term resiliency of this business is there which is why we did the tenure view so.

The I would say the investment grade is less about credit spreads and more about the risk of the business overall, which I believe then translates into a higher equity value because.

Investors view that they don't need the risk premium that they want stock they needed for this business that the risk profile. This business is much lower and they can own it at a 10% free cash flow yield not a 15% free cash flow yield and I've said this a bunch of times. This company trades at a 10% free cash flow yielded said.

1 billion plus dollars of equity value I mean, that's a huge change in the value of our company. There's nothing I'm doing every day or anybody in this company doing every day that could come close to creating that kind of value and so we're doing everything we can to prove the people because we believe it that the business the risk of this business.

Changed substantially by the way that we run it and the amount of cash we generate is enormous when it was you know who what are known it was in embedded in this.

Duration, where people had too much debt and they were blown money on bad things at the wrong time, and we've cleaned that up I think we just have to do it year over year, which we're doing.

But I think a part of that causal is getting our debt down and investment grade would be a visible tangible signs that the business risk of orbit of our company is significantly lower and I think that wouldn't would have some impact on our free cash flow yield.

Got it Thats very helpful. Thank you.

Sure.

And there are no further questions at this time I will turn the call back over to Morgan for closing remarks.

Once again, thank you for taking the time to join US. This morning, I know the long coal really appreciate the questions and the opportunity to talk to you about our business.

It's always a risk when you talk about 10 year view, but we thought it was important I think we've explained why we think there is important.

And we have always appreciate your interest in district energy and we look forward to continue in the conversation.

Thank you and have a great day.

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