Q4 2019 Earnings Call
The quarter and full year 2019 results conference call.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone keypad. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero. Thank you I would now like to hand, the conference over to your speaker today, Molly Sword, Vice President of Investor Relations. Please go ahead and good morning, everyone.
Welcome to victory Energy's Investor Web.
Fourth quarter and full year.
Which is being broadcast live from the Investor Relations section of our website.
Mr Energy Dotcom.
Well on our website or a copy of today's investor presentation, Our 10-K and the related earnings release.
Joining me for today's call our current Morgan, President and Chief Executive Officer, and David Campbell, Executive Vice President and Chief Financial Officer.
We have a few additional senior executive 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 line two and three in the Investor presentation on our website that explain the risks the forward looking statement limitations and certain industry in 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 statement.
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 current Morgan to kick off our discussion.
Thank you Mali and good morning to everyone on the call as always we appreciate your interest in district energy.
We know this is a busy time of the year. So we intend to keep today's remarks concise focusing on what we believe were the key drivers of this for success past present and future.
First and foremost as we will discuss shortly this for has a strong track record of execution supporting our conviction that we have the right strategy and business model for long term success second I believe we have demonstrated that we know how to grow the company and create value for shareholders.
Experience and execution will be a central in the years ahead.
And last or underlying fundamentals remain sound.
Making visitor well position to continue deliver consistent results not only weathering future volatility, but also capitalizing on it.
I'm going to start on slide six as you can see in the last ROE of the table distress finished 2019 reporting adjusted EBITDA from is ongoing operations of $3.393 billion results at or above the midpoint of distressed recently increased guidance range.
$3.32 billion to $3.42 billion.
Perhaps more important however is that this is the fourth year in a row that this for has delivered financial results above the midpoint of its guidance range.
For those of you counting that is all four years vis for has been a public company.
Meaning that we have established a consistent track record of delivering on our commitments and not only that in the same timeframe. We have also grown EBITDA by more than 100% and returned nearly $5 billion of capital to our equity and debt holders.
All of this against the backdrop of a wide array of commodity prices in prompt and forward periods and changing customer preferences.
As we lay out on the next slide.
Slide seven.
This trend has been able to double it its adjusted EBITDA from ongoing operations in just over three years through a disciplined approach to growth investments and a relentless focus on reducing costs and improving plant operational performance, we have grown our business through both acquisition and investment with the acquisitions Odessa curious and add.
But and investments in solar and battery storage at Upton to site in Texas and at our Moss landing in Oakland sites in California, all of which are forecast to deliver very attractive returns utilizing conservative assumptions.
And as you know the investment we announced in 2017 that continues to exceed expectations and offer outsized returns is the acquisition of Don Angie.
Since the time, we announced the acquisition, we have more than doubles, our EBITDA synergy and operational performance improvement targets from $350 million to $715 million. We've also increased our after tax free cash flow targeted by nearly five times and preserve the utilization of Dynasys net operating loss.
His resulting in a net present value benefit of approximately 900 million.
Applying an eight multiple to EBITDA synergies and an 8% free cash flow yield to the free cash flow synergies would imply that we created more than $8 billion of value from the donahue merger alone not to mention we have increased the expectation for 2020 financial results by more than 600 million above the 2020 adjusted EBITDA Tom.
Get projected in connection with the merger announcement.
Substantially more than filling the gap suggested by forward curves and from the dynamic business due to a lower PJM capacity clear. This increase is largely result of the growth items I just discussed as well as our relentless focus on cost management and plant performance, including the Don as you merger value levers, we have identified nearly one point.
$5 billion of cost savings in just over three years.
This impressive EBITDA growth, coupled with our high free cash flow conversion ratio of approximately 65% to 75% has supported our diverse capital allocation plan, where in addition to making prudent growth investments. This trend has returned nearly $5 billion a capital to its financial stakeholders and just over three years.
It is through a combination of dividends share repurchases and debt reduction.
While in 2020, we are focusing on reducing debt to achieve our long term leverage target of two and a half times net debt to EBITDA. We expect we will be in a position to rollout our long term capital allocation plan in the second part of this year as I have mentioned in the past. This was robust free cash flow should enable us to both reinvest in the business at modest levels.
While returning a significant amount of capital cycle.
More to come on this topic later in the year, but suffice it to say that we're confident this business model will continue to generate meaningful free cash flow for allocation year after year.
Our teams have a proven track record of identifying efficiencies that maximize the value of our operations and we have been successful at identifying tuck in growth opportunities that are both EBITDA and free cash flow accretive with very attractive returns, while requiring only modest levels of our capital to pursue in short. This is a business model, we believe can endure.
Turning now to slide eight and nine we wanted to spend a few minutes reviewing the six key tenets of our business model as these tentative form the baseline of our success over the past four years, and importantly remain intact to support our positive outlook for the future. They include financial discipline low cost operations diversify.
Vacation, a leading retail platform and in the money generation fleet and commercial optimization.
Starting at the top financial discipline is the foundation of our business model. It is imperative that commodity exposed businesses operate with low leverage a strong balance sheet allows the company to weather commodity cycles without creating financial distress and allows management teams to make sound investment decisions at the right times in the business cycles Ministry.
Is committed to achieving its long term leverage target of two and a half times net debt to EBITDA and we are equally committed to being good stewards of capital.
Making investments only when projected returns meet or exceed our investment threshold and returning a significant amount of capital to our financial stakeholders, just like I dug 2019, a year of execution 2020, as the year of financial strength and capital allocation clarity and of course execution will always underpinned.
Everything we do.
Mr. His financial strength is similarly supported by its commitment to low cost operations and its diversified revenue streams victory as a market leader in low cost operations.
Through our operational performance improvement program, we've identified $425 million of annual EBITDA enhancements, putting our generation fleet in a position to remain viable as a supply landscape evolves. Our scale has also enables us to operate with comparatively low overhead costs and gives us the unique ability to lead.
Bridge, our platform to create synergies when attractive growth opportunities present themselves.
Mr scale and diversification further lessons any potential negative negative impacts from onetime weather events or regulatory changes for example, with operations in six competitive markets in the U.S. and diverse revenue streams from retail capacity and energy. This for believes it is well positioned to deliver stable earnings in a very.
Body of market price environments.
It is also important to note that we have taken steps to transition our generation business to compete in the age of climate change.
Going from mainly coal just a few years ago to mainly gas today, while prudently investing in renewable and battery storage technologies.
On the retail front following the closing of Christmas and Ambit acquisitions. In 2019. This for is now the largest competitive residential electric provider in the country, serving nearly 5 million customers up from the approximately 1.7 million customers. We serve at the time, our predecessor emerged from bankruptcy in October 2016.
Our Texas retail operations continue to demonstrate strength and stability with our legacy read residential business in Texas growing counts and 29 team for the second year in a row. We now have 12 brands and more than 200 product offerings and operate in 19 states and the district of Columbia.
Our growth in retail both organically and via acquisition has resulted in our retail business being the consumer of nearly 60% of our generation output on an annual basis.
Our retail segment is the most attractive channel for us to sell our generation linked into as a result of the higher margins. It offers and collateral and transaction efficiencies, we realize when transacting on an integrated basis.
During retail and wholesale also helps to create more savannah stability in our cash flows, which we believe make for a predictable and attractive investment. This is true in part because of the nature of the assets in our generation fleet.
This was generation assets are relatively young low heat rate assets with over 60% of our capacity coming from gas deal generation and more than 50% of our fleet comprised of highly efficient and flexible combined cycle gas turbines.
This is important for two primary reasons first because our assets are generally in the money meeting there are low enough on the supply stack that they run most of the time, we have a greater opportunity to hedge our forward commodity exposure at favorable pricing periods and create higher and more stable earnings second as the country continues.
The transition to lower carbon technology, our flexible natural gas assets are very likely to remain an integral part of the generation mix. We expect our gas assets will be a critical backstop for the grid that is becoming increasingly Ron reliant on an intermittent renewable resources. We have seen this phenomenon play out in may.
Doable, heavy, California, and Texas in the past year.
As intermittent renewable resources become a greater percentage of the supply stack. The market is introducing risk of entire class of assets underperform in a correlated fashion, meaning the grid is more likely to lose a significant percentage of its generation all at once.
Historically asset underperformance was predominantly a function of uncorrelated power plant forced outages.
In order for the grid to remain reliable in this circumstance, we will need these low cost dispatchable gas assets.
As a result, we believe distrust generation fleet is well positioned to continue to derive meaningful EBITDA from energy ancillary services and capacity revenues in the future.
The last component of this was integrated business model is commercial optimization.
Our ability to take advantage of the volatility in forward curves to hedge our open generation position at attractive pricing generally insulates, our financial results from near term fluctuations in commodity prices in particular natural gas prices.
We saw this play out in 2019 and expected to in 2020 as well.
Importantly, our commercial team executes our hedging strategy within approach to manage risk and a goal to create a stable earnings profile and it has a proven track record of success in this regard.
When you combine in the money assets price volatility and the financial strength to forward hedge.
Mr can construct a rolling stable earnings profile and we now have a four year proven track record of success to support this thesis.
Turning now to our full year results on Slide 10 Vista ended the year delivering adjusted EBITDA from ongoing operations of $3.393 billion results that exceeded our increased guidance midpoint from November.
And when you back out the negative $40 million impact from Urquhart retail backwardation, we talked about on our last earnings call. Our 2019 adjusted EBITDA from ongoing operations would have been $3.433 billion, which is higher than the upper end of our guidance range for the year.
Recall that we did not planned for the volume or the impact of these long dated contracts in our initial 2019 guidance, meaning that our integrated operations absorbed this impacted still delivered financial results at the high end of our guidance range. Another Testament to the strength of this integrated business model. It is also notable.
At this drag on 2019 earnings will reverse itself in future years as increased EBITDA and the underlying transactions are NPV positive.
Our 2019 ongoing operations adjusted free cash flow before growth was 2.437 billion results that are $187 million above our guidance midpoint in $137 million above the high end of our guidance range.
This favorability in our 2019 adjusted free cash flow before growth is a result of higher adjusted EBITDA as well as continued capital expenditure disciplined by our operational teams. The favorability was also due impart to the early receipt of an alternative minimum tax credit refund of $93 million.
Which we had planned to receive in 2020 and included in our 2020 guidance.
This robust free cash flow generation translates to a free cash flow conversion ratio of approximately 72% and 29 team.
Consistent with our past practice, we are reaffirming our 2020 guidance range as shown on slide 10, including the adjusted free cash flow before growth guidance range. Despite the timing of the AMTI refund.
We're very early in the year in a lot can change to improve our view of cash.
As the year progresses, we will evaluate whether an update to our free cash flow before growth guidance range is warranted due to the timing impact of this tax refund.
Before we move off of this slide I want to once again comment on the outlook for 2021, while the 2021 forward curves in ERCOT have come down from where they were trading at October of last year. We continue to believe that the forward curve or dislocated from fundamentals and not reflective of where pricing will ultimately settle a view we have been.
Accurate on for the last few years.
Our fundamental view continues to support our belief that 2021 results had a good chance of being flat to if not better than 2020 results.
Im going to wrap up this morning on slides 12, and 13, given the spotlight in recent months on the sustainable footprint.
Public companies and specifically public companies with exposure to coal we thought it would be helpful to provide some numbers behind our exposure, while emphasizing where we think this trajectory is headed.
As you can see on slide 12, and just three years with the retirement of seven coal plants and growth in retail gas assets and renewables and storage. Mr has reduced its exposure to coal by nearly half with less than 30% of our capacity approximately 20% of our revenues and only 17% of our EBITDA.
Forecast to come from coal assets in 2020.
This is a dramatic shift in a short period of time and one we expect we will continue over the next decade.
In fact, if you turn to the next slide you will see a picture of what we believe our business could look like in 2003 based on the 10 year view, we introduced on our third quarter earnings call. In November clearly this is an illustrative outlook, but it is rooted in rational market principles and fundamentals.
A recognition of current power technology, and a future asset mix that will be necessary to ensure system reliability and an expectation for realist realistic investment in the company at reasonable returns.
Assuming economic and environmental challenges result in the retirement of another approximately 7200 megawatts of coal assets over the next 10 years, and we invest approximately 25% of our free cash flow and renewable and battery assets and retail over that same time period, 10% or less of our EBITDA and capacity would come from coal assets in htwo.
Third under this scenario not only would we transform our generation fleet to be nearly 20% renewable and batteries. We would also expect to derive more than 50% of our EBITDA from retail renewables and batteries and nuclear.
As we have mentioned many times, we believe net natural gas generation will remain a key dispatchable resources needed for power system reliability with proliferation of intermittent renewables.
We have as efficient a gas fleet as anyone and we expect it will continue be a strong component of our EBITDA contribution importantly, this business mix and Martin market outlook is expected to grow EBITDA and result in approximately $15 billion a capital available to be returned to shareholders and if we do not identify investments that meet.
Our hurdle rates, we will return that capital as well.
As we announced in October of last year, we have a clear line of sight to achieving a greater than 50% reduction in our CFO to equivalent admissions by 2030 as compared to 2010 baseline full economics continue to be challenged and I expect this has exposure to coal will further decline meaningfully over the same time period.
Our business is already participating in the energy transition and I believe we will continue to be leaders in this effort in the future.
Our unique capabilities with expertise managing risk operating assets with scale and efficiency and providing innovative products and services through our retail customers make us well position to capitalize on the transition to a lower carbon economy, improving our environmental footprint, while continuing to create value for our shareholders over the long term.
Before I turn the call over to David I feel compelled once again to comment on our stock price.
Setting aside the recent sell off due to the Corona virus not surprisingly we believe the recent decline in our stock is warranted and what was a significantly undervalued stock. Prior to this decline is now and absurdly undervalued stock.
In our view there is no rational explanation for an over 20% free cash flow yield, especially when compared to other commodity exposed capital intensive energy companies with far more risk in the climate change age.
Nevertheless, we believe we're on the right track and we are committed to unlocking value.
I will now turn the call over to David Campbell.
Thank you Kurt turning on to Slide 15, Mr. delivered 29 team adjusted EBITDA from ongoing operations of $3.393 billion exceeding the midpoint of our guidance range.
As you know during our third quarter call, we increased our 2019 guidance, reflecting expected impact of the creates an EBIT acquisitions.
The favorability relative to our revive provide guidance was driven by higher gross margin from a market segments compared to plan results.
Our adjusted free cash flow before growth from ongoing operations also exceeded expectations coming in above the high end of our guidance range of $2.437 billion.
This favorability was due in part to the early receipt and of alternative minimum tax credit refund of 93 million, which we previewed previously expected in 2020.
After excluding the AMTI refund, our free cash flow before growth still exceeded the high end of our 2019 guidance range.
This outperformance was driven by higher adjusted EBITDA as well as capital expenditure discipline, reflecting the impact of our ongoing operations performance improvement efforts.
Focusing on the fourth quarter, our 2019 results for 55 million higher than the same period in 2018, driven by the addition of creates an ambitious and higher gross margins in ERCOT generation, partially offset by lower capacity revenue in our PJM and New York, New England generation segments.
Before we move onto our final slide this morning, I will note that due to the retirement of for coal plants in our MISO segment in the fourth quarter.
We moved the financial results of those plants out of the MISO segment and into the asset closure segment.
We have similarly recast our 2018 results to account for this shift which is why you will see that our fourth quarter. Adjusted EBITDA for 2018 is 1 million higher than what we reported at this time last year.
Slide 16 provides a summary of capital allocation.
As of February 24th we have executed $1.418 billion or $1.75 billion share repurchase program.
Leaving approximately $332 million of capital remaining for future share repurchases.
You'll recognize that this is virtually the same amount of capital we had available under our share repurchase program as of our November earnings call.
During the 2019 calendar year, we returned a total of 899 million to shareholders.
Through dividends and share repurchases.
As we emphasized during our November earnings call, our capital allocation priorities for 2020 is debt reduction.
We believe the achievement of our targeted leverage levels will support an upgrade to our debt ratings and keep us on the path to investment grade.
We also believe that advancing toward an investment grade credit rating can be when the most powerful catalysts to rewrite our equity.
As it will be yet another proof point that the new business model. We are operating is significantly de risked from the IP piece of the past.
We have heard for many investors they will be more inclined to invest in our equity or be more comfortable taking a larger position in the equity with an investment grade credit profile.
We believe 2.5 times net debt to EBITDA is the appropriate leverage level for our enterprise in order to withstand business cycles to maintain investment flexibility independent of the consideration investment grade credit rating.
As a result, we remain committed to debt reduction in 2020 and de levering will be our near term capital allocation priority.
However, we will continue to opportunistically evaluate repurchasing shares or investing in promising growth opportunities, especially those that have a minimal impact on our credit metrics.
Turning to our dividend, we announced earlier in the week that our board of directors approved an 8% increase in our annual dividend, resulting in 13, and a half sets quarterly or 54 cents per share on an annual basis.
Our first 13 and a half cent quarterly dividends will be paid on March 30, onest to shareholders of record as of March 17th.
As we look ahead, we expect to have significant cash available for allocation in 2021 and beyond.
We plan to lay out our long term capital allocation plan in the second part of this year.
Our history has demonstrated that we have the discipline to be good stewards of your capital returning meaningful excess cash to our stakeholders, while investing in growth only when attractive opportunities arrive you can expect that are long term capital allocation plan or reflective similar philosophy, including the significant return of cash annually to shareholders.
We remain optimistic that with the ongoing successful execution of our business plan, our stock price will ultimately reflect its fundamental value.
And with that operator, we're now ready to open the lines for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone keypad to withdraw your question. Please press the pound or hash key. Your first question comes from sharper aside from Guggenheim Partners. Your line is open.
Hey, good morning, guys.
Good.
No you just raised your dividend by percentage of Delevering is on pace Kirklees, just get it directionally talk about the scale of the next buyback with another 2.3 2.4 billion of free cash flow Thats kind of at your disposal and 21, I guess I'm trying to get a sense on what you mean by significant annual return of capital share.
Our holders.
An exact timing when you when you're going to initiate not announce the new program with 21 story being sort of going to I'd ratings. I mean can you start incremental buybacks. This year versus the current 322 that remains under the old program.
Thanks, So look I think.
Very clear about this in 2020.
We are.
Focused on paying down our data and getting debt to our leverage targets and look I think a time like this frankly.
Essentially from May Reconfirms that where we're headed with our Leverages the right thing when you get into situations.
Like what's going on with the pandemic and it seems to be growing I think financial strength is going to become proved to be very key and so while we we would like to buy our shares back I mean lets should be honest, we know that were trading now 20 and plus some change it's a true very attractive by we're also.
Equally.
Committed to get our leveraged to where we've said we were going to do it and we're committed to do it in 2020. So beyond that we've said later this year will give a little more clarity about where we're going to do 2021 and beyond but I think we've given a little bit of of a view of that by saying, we think we can invest in our business about a quarter.
What we believe on an ongoing basis will be about $2 billion plus of free cash flow. So I mean do math just tells you that thats a billion a half dollars that we can return to shareholders. I think the real question is going to be for our company is how do we do that in and I think thats a mix of re.
Recurring dividend and whether we side with the board to change the yield that we're paying on the dividend that will be as that will definitely be on the table.
And then you know clearly if we're trading below value in our things are thought of what fundamental values. This company then the remainder of that will go to buy back shares I mean, it's not rocket science and I'm not speaking out to turn US just that's the way we think about it.
And so that I think thats. The you know the next couple of years, that's what it looks like but we need to get this debt down to where we wanted to be and we're committed to do it in 2020, we pushed it out once before and we're not going to do it again I think this is the right thing and I think to to strengthen the there is a company from a financial standpoint, it's the right thing.
Do I also think is very good David alluded to this in his comments that we believe that ultimately getting the debt down to where we wanted to be will also be very accretive for the equity. So that's what we're doing a 20 and 21 and beyond.
We have a substantial amount of a capital return and it will be a mix of a recurring dividend in probably share repurchases.
Got it that got and that's because obviously looking at inorganic opportunities the thresholds are aren't there yet.
Now let me just few Curt one more question is there's obviously been a lot of headlines about strategic opportunities, including privatization and which we get given these obviously very high or irrationally high free cash flow yields what's your sort of updated thoughts there. What's your trigger point or you sort of patient right now do you want to see what happen.
And with your free cash will yield once you go to I'd before making this decision I guess, what's what's yours in the board's level of patience on on these valuation levels.
Yes, so very good question, Sean Thanks for asking so look I think.
We are patient.
We believe that getting our debt down too.
The two and half times net debt to EBITDA range. This year is very important.
Then I think also given clarity to that long term capital allocation plan, putting another year behind us and showing that we can meet or exceed our expectations. I think is also helpful. Thats helpful to the agencies as well I think one of the things I'd like to see is whether we can withstand the business cycles, including things like.
What's going on with grown advisor drivers right now, which I think in 2020.
We're going to have a very good year, despite what could be a symptoms of a recession off of that off the kroner virus. So I think were very strong company and it will show that in 2020, but I think it's very important.
You know for us to do that now in terms of the equipped to direct question about.
Strategic options I.
I think I think we will be a patient through 20 and into 21 to see that play out.
But I can also to assure you that you know the board continually.
Thanks about what's the best way to unlock value you know that I've spent a lot of time in private equity and for me the only difference between being a public company and a private company is that every day I wake up I get a scorecard I get my report card. It's in the form of a stock price and from a private equity standpoint.
You'll they market on a quarterly basis, but I can assure you that most of those companies our marketing their quarterly mark of their value based on what the public markets are trading at and frankly at the end of the day you unlock value the same way in both private and public market settings, you either do it over the long run or you do it pertains.
Similar with the private equity firms you look for an exit.
And the exit is limited you know this right now there is many private equity firms that would love to exit their generation, but there is no.
Exit for them and if they try to exit into the public markets. They have too much leverage and they don't have an integrated business model, which is what it takes to compete in the public markets. So we think we can unlock this value in a public market setting. It just make may take a longer period of time and we've got to be patient to do that but I don't see.
That is there some silver bullet by Gulf, becoming a a private company that all of sudden there's going to be this huge value uplift because you monetize the value of the company the same way, whether your public or private.
Got it that's helpful and then and completely agree with your exit strategies are the endurance. Thanks, So much guys appreciate it.
Thank you.
Your next question comes from Steve Fleishman from Wolfe Research Your line is open.
Thanks, Good morning.
Okay.
Hey, so just a.
Maybe just curious Kurt if you can give us a little color on.
As you mentioned feel good on Texas market price, so mainly Texas market fundamentals. So could you just gave me give a little bit of an update on.
Just overall, if you supply demand.
Impact of solar assets that you're seeing and things like that.
Yeah, So I'm just.
You know this study that we do our own point of view when it comes to reserve margin.
We have a we have an analysis as well no, but we have a very good development team.
And one of the best ways to get intelligence on what's going on in terms of development in any market is to have a team that is actually out there in doing it and so we are pretty assented. Thank plus we know historically in particular and taxes kind of what the build out rate has been from the CDR to what actually gets built which is.
I've been here, a little bit below 50% and what happened in the CDR. This time, which I think most people know what that is right. It's not.
I wouldn't take that to the bank anybody that invest on you know by looking at the CDR.
His foolish I mean at the end of the day it doesn't have an economic overlay to it.
And so what happened though.
Is everything that was supposed to get built that didn't get built 20 got pushed into 21, and thats kind of what happened and so it just keeps rolling out so the CDR actually shows a big uptick in building and we think there's probably a little bit less than 50% of that that's that's actually on the ground getting built for 20, what that results in is.
A very manageable reserve margin going into.
From 20 into 21, which in our view if you look at low growth and that's the big key really in Texas, but we've got some people would think it's going to be 3%. Some people will get weve around more like us about 2% either way that new build is barely going to cover load growth in the state of Texas. So thats why we.
You know feels that the market is still fundamentally strong the last point I'd make about that is that the the growing intermittent nature of the new build because all that new build by the way is going to be solar and wind and when is dropping off by the way just because the ptcs going away and so when or excuse me.
Solar is to build out and we all know that there's an intermittent nature to that depending on how how the sunshine's on any particular day and we saw this last summer and the reserve more overall reserve margins is not as important frankly as the reserve margin.
Next the.
Intermittent resources, how much steel is on the ground when an especially in the summer months when needed a wind or the Sun is are not performing at expectation and that's really what's key to figuring out what is the increase in pricing is going to be in the summer and when you look.
Look at that you know the market is really tight for those types of resources during those periods of time and we expect we're going to get you know probably four or five maybe even up to 10 of those at any given summer and we're going to see hi pricing then the key for US frankly is that we have assets that can perform and we had our commercial.
Availability, which is basically when you are available when you're in the money.
Weighted by margin opportunity was almost 95% this year, which is extraordinarily high when you've got.
Older coal and your fleet. So we have to have that same performance. If we do that and we see these same kind of slabs.
Given the supply demand and taxes, we're going to see another good summer you can Boyle our company down in terms of the range that we give you guys on any given year given the way that we hedge you can boil it down to the summer months in ERCOT. That's that's really the game for us and we think we're well positioned with.
We like the link that we have especially given the fundamentals in Texas.
And and so we're looking forward to this summer we think with your DC the quarter increase some standard deviation is going to be a real interesting summer again, and what is going to be a great opportunity for our company.
Okay, and then I guess separately just wanted to give more color how the creates an ambitious deals are going in terms of just.
Meeting the performers you had in overall.
Dynamics and are caught.
Retail.
Market Marketshare, yes things like that.
Sure, Steve you know Jim Burke easier.
Going to have Jim.
Addressing weeklys morning, Steve Yeah, we obviously start integrate Korea's ahead of ambit I think both.
Integrations are going really well, we have $45 million to $50 million of synergy opportunities with those too.
Some of that is technology, driven so it's a multiyear process but.
On the hedging in supply standpoint, a customer behavior standpoint, and the initial cost synergies achieved those were on track.
Continues to build synergies over the next two to three year timeframe, but we like how those two books are operating at this point nothing we feel really good about the multiples with which we acquired them and the long term value for this generation to retail match, particularly the in O'connor.
Okay.
Thanks, that's it for me.
Thanks It.
Your next question comes from Julien Dumoulin Smith from Bank of America. Your line is open.
Hey, Good morning, Tim can you hear me.
A year little phase, but we can hear you okay drilling how're you doing.
Good excellent. Thank you very much I'm quite well.
Happy Friday that perhaps just to come back to your commentary about the cash flow this year and the taxes can you talk about some of the strategies to minimize taxes not just this year, but especially on an ongoing basis. I mean this has been something you've been successful hot in the past you made allusion to it if I. If I heard you are right on the call what kind of strategies.
Kind of opportunity exists there give well I'll ask it open ended.
Okay.
I'll take a shot in the David I'd like to use a comment too, but I know, you're just talking about like federal taxes, right. I mean drilling that's what you're talking to you made some comments about AMTI earlier as well, but okay. So and improvement heavy overall scf this year.
Sure that AOMT refund really came from the Donaji acquisition, we're all too happy to have it but that was really where that came from that opportunity but.
Just to remind everybody we haven't been it we're not a taxpayer I think through 2023 roughly.
And and then after that we will we always are looking and we have very good tax group and we're always looking for opportunities to minimize our tax our taxes, but we are not a taxpayer and and have not been paying on the tiara and won't be until we project probably out into 2024.
And then we'll obviously you have plenty of time to try to see what stack tax strategies, we might be able to deploy to minimize that but you know we at least on the forecast right now it looks like we'd be a taxpayer again in 2024.
And so we really had.
Couple of things happened.
One the noel's that we received.
There were some what I'll call esoteric.
We'll sort of integration between new tax law and old tax law, we had a window of opportunity that happened in then close after we right. After we close the Dianchi deal, but since we closed before that we have we were availed to the opportunity to be able to use 100% of the donaghy is roughly 4 billion plus.
Dollars available wells, which as we've said many times as an NPV of about 900 million. So that has been a big contributor.
To us not paying taxes.
David you anything at all added so just to reemphasize curves point of this is David that we.
Our tax rate was very active managing this other than property taxes in some state franchise taxes, we did not a than we do not have federal income tax liability or cash payments and.
2019, and we don't expect to be a cash taxpayer for the next few years and we're going to keep man it actually manage that keep that trajectory going as long as we can are important to us and as we noted we received an empty payment of 93 million in the fourth quarter. We also received another 35 million in the first for this year related to its current described.
Jimmy empty claims from the diverging situation, but we will continue to very actively managed down our cash taxes.
Awesome excellent guys and then.
Looking at the slides here on the hedging front.
21 versus 20, just as you provide the sort of initial look here be expected output is backwardated I assume that's just tied to the fourth here, but just want to understand if there's anything changing and in them how you view things.
You are adding portfolio you have a described Julien. This is based on forwards if we were to shows.
Our proprietary point of view you'd see very similar volumes to what you have in 20, and so I think what the big key will be is just what ultimately plays out in the market, but we feel pretty confident that you know our point of view, which has played out over the last four years will play out again.
For 21, and then of course, then we'd have the same levels of production volumes that we've had from 20 to 21.
Excellent Alrighty I'll pass it off thank you very much guys.
If you.
Your next question comes from Michael Weinstein from Credit Suisse. Your line is open.
Hi, guys, Hey, I'm on the same lines about production volumes.
Page 20, fives, the hedge portfolio portfolio sensitivities.
It looks like generation.
Well generation output is declining, especially in air Cod and little bit PJM from 2020 to 2021 and.
I'm wondering how I can how do you.
Square that with the comment on slide 10, it says that to EBITDA for 2021 will be at or above 2020.
Yeah. So Michael it's good question and I tried to address it there with drilling but I'll try again, that's because obviously it into very good job of it that you know if you if you were to take a strict mark.
Strictly marked the curve.
The curves you get what we're showing in.
On page what is it page 25, so yeah, so on a pure marked basis.
Because of the backwardation in the curve and I think you know this but you know the what this is showing is our delta position, which is effectively means.
What is in the money at a particular curve and so and then what's the production.
Resulting production from our power plants and what we based.
Comment on on page 10 is our point of view, which has which would if we were to put the two curves I get it 2021 point of view versus 2021 market you would see and we've said this we think theres a decoupling between where the curves are and where our point of view has been we've also said that we.
It's been saying this now for about four years, where and we've been accurate on this where the market has actually as we rolled into the prompt year. For example, going from 20 to 21, we've seen those curves pop up as the market understands that the market remains tight.
And that the supply demand fundamentals are strong, which we expect to happen given our intelligence of what new build is going to look like and our understanding of what load growth looks like so again that the attended the page 10 comment is based on our view of the World and page 25 is.
Based on a strict market the curves.
Hi, good I guess, so over the course of the year, we'd expect this page to change with those numbers coming up.
Yes, that's correct catches up with the point of view right and then also well nothing is a mine Michael can I Miss one guy really important yes, so as as the forward curves because they're going to be volatile and there'll be periods of time, where the price will pop up.
And that's when this is what we try to tell people. That's when we will hedge and so whether the market settles there or not we are able to capture that value by hedging at the high points of where the curve is and so that's another key piece of how we create value in this company.
Okay that makes sense, that's the value of having a point of view I guess, yet, but the Oh also the natural gas position I guess is this a normal thing just any early part of the year to see a very big short position out in the 2021 timeframe.
For <unk>.
Where's that.
Okay became I'll take that let's say, you're pointing out the short position that we have on natural gas and 2021. So it is pretty natural and we think about hedging our natural gas equivalent physician. So we went into.
Looking at our forward position, we went in with a plug in and we wanted to hedge more of our gas position relative to our power physicians. That's why you see the big.
Relatively sizable short position on natural gas or were fully hedged for net relative to natural gas in 2020 in our view and we're about 85% hedged in our.
Natural gas position for 2021, and that's just view on how we'd like to we were we wanted to put the hedge on and we're pleased that we did.
Just reflects the desire to hedge and natural gas equivalent position and we can do that separately in our relative to the underlying greater power position.
And ill add Michael So, we're very gas and that and we will have been various gas has proven that could be right.
And we hedge that.
And then where we continue to be bullish the heat rate, that's how how power trades, that's where the liquidity is in ERCOT, that's not true all the markets, but in ERCOT power sort of trades.
Yes, and heat rate and so we are less hedged on the heat rate as you can tell and we are more hedged on gas.
And that is because we had a pretty strong conviction around.
So just some bearishness around gas and frankly, it's sort of proven out to be the case.
Right. Okay, just a follow up on Steve's question about retail.
Yeah, I think I've asked you this before but has there been any consideration towards going into a residential solar or some of the higher growth sectors of the retail energy.
Complex.
Residential solar flares or are looking at gross rates anywhere from 15 to like 60%.
Year over year.
It's really pretty pretty impressive and.
Oh their stories getting a lot of traction I'm just wondering if that's something you might consider just from a strict the strategy point of view.
You know we have we have started then I mean, not you know.
There's there's growth rates and then there is making money and and so.
We.
Yes, we want to put our money where the best returns are and we just haven't found them and in that part, but we have our eyes on that.
You know I don't think we felt like we wanted to be an early mover on that that we felt like it we wanted to get into it we could probably by our way into it at some point in time, but we you know we have looked at that we look at you know some other things as well like behind the meter type investments and we just can't quite.
Get to the hurdle rates and get comfortable with it with the acquisition, but it is something we take a look at and it's a good point on your from your standpoint that there are a lot of growth rates and we do expect for example in California. We you know we expect obviously that to be a burgeoning.
Part of the business. It's you know right now it's kinda disperse in a number of different players and no. One had really has a particular business model. It seems to work there are some good companies out there that are.
Good are performing but we just haven't found that it if it meets the hurdle rates that we have Jim you have a comment yes, Kurt I would just said Michael This is Jim Burke from a customer interest standpoint, we do need a lot of their need particularly in are caught with some of our designs of products that we did off of our up to.
In two solar farm and those products don't required install on the roof and you can still obviously get the solar energy.
When you look at rooftop in most markets. It's a savings play in Texas. There is not full net metering for the savings opportunities are not as attractive to put the rooftop solar on the house and then when we've looked at these business models. We have partnered with so we will sell those systems through partners.
But we've seen companies commit to a six capacity of sales and installation resources and then that becomes its own cash burn that you have to be able to keep up with through the installed base. So as Curt noted we know what the customer interest is we participate in that sale, but we have not put the fixed cost structure in place.
To execute against it and we will continue to monitor that and if that becomes a bigger play for us we will obviously be as in front of it because we've got the customer insights to do so.
Great I understood. Thank you very much.
Thanks, a lot.
Next question comes from Jonathan Arnold from vertical research your line is helping.
Hi, Good morning, guys and thanks for taking my question.
Hi, Jonathan.
Hi.
Kevin what can I ask you to give us a little update on your views on fundamental update on PJM and maybe policy as well as new England that Steve you have a slide on FDA 14, and maybe you could just kind of speak to that a little thing.
Yeah, So I assume.
You're talking specifically PJM about the the FERC PJM capacity order.
That had recently come out is that correct.
Yeah, I mean, it ended up do you feel as other things you want to touch but that would be so from wireless.
Okay, Yes, so I mean, that's probably the biggest thing I mean, I know we have fast start that we're waiting on that kind of technical kind of glitch to it that I think we'll get resolved.
In any of our DC that were.
Pentagon, an order at or for that we think.
Those two things.
We'll be I'd say modestly.
Helpful on the energy side, but if you put those aside I mean, the elephant in the room is what's going to happen given the PJM order from for.
As we know many many people are asking for rehearing recently, I think people got a little bit confused by an order tolling.
For FERC to give the tolling that the rehearing decision, which effectively means that they're going to continue consider whether they're going to rehearing anything they probably will will re here. Some thing but that has that file decision has not been there I think the next big milestone frankly is the compliance filing that's coming out you know.
From PJM.
Our own take on this has been and continues to be and I think it's even further reinforced by some of the analysis that a lot of people, we're putting out including the Imam and our own analysis that when you look at the net HCR, which is the net go forward costs for many of the.
Different assets, such as renewables such as nuclear.
That it is unlikely to have much of an impact on the capacity clears and it's not this big windfall that I think states were worried about and some of the some of the generators were celebrating.
We think there's a really a modest impact and what's probably bigger is how much newbuilds do you get in any given year and how much retirement do you get in any given year and those fundamentals are what should drive the market and what should not drive the market, our subsidize resources and nor do we think that the market.
The ruling that came out a FERC should have also given us a big windfall I mean at the end of the day, we got to market. That's got nearly 30% reserve margin and it and for a combined cycle plant. It returns about three quarters of new build cost I'd say, that's a functioning market and so we didnt expect a big windfall and I don't think death.
What's going to happen now having said that there is a lotta hyperbole and a lot of emotion going on about this anders hearings going on to stay, Illinois, which we are going to be a part of and others.
And there's a lot the people throwing around fr are what I have heard when I talk to people in Maryland, and I talked and lets put Pete let's put new Jersey on the side because let's just say this what this really is about at the end of the day is offshore wind.
Those are the those are the folks that are likely to get screened out.
Because of the high cost of offshore wind and other types of renewables are still going to clear the market and so we don't think it's a big deal other than offshore wind and Thats, where the big the big argument is going to come in but given that Theres also an opportunity through fr or.
You know for some people to push things like a clean energy agenda. However, we've been saying this too that in Illinois, you can break apart clean energy and half our our we're not opposed by the way to fr or if thats, what the state of Illinois wants to do.
We can compete in that world as well.
We just don't think that it is necessary.
But.
We're happy to compete.
In an environment with Fr are and we are trying to work with all stakeholders, including excellent who we have a very good relationship with.
And others in Illinois to bring you know if theres going to be legislation to bring proper legislation and make sure that the the elected officials understand what's at stake when they make that decision.
So I'll wrap up with what I said on the beginning which is we don't really see the order really changing much in terms of capacity price clears.
And I think there just like I said that a lot of motion around it but when you put the pencil to paper. The analysis shows that it's really not going to make a big difference and on.
14, obviously, a disappointing clear not a very big.
Impact for us, but nevertheless, a very disappointing clear bidding behavior was a large piece of that.
And and that's true of most of these capacity clears.
We do think there's some fundamentals if in fact mystic units are able to come out from the FCC. A 15, we think there will be an uptick.
A potential uptick from the $2.
If for some reason that mystic cannot come out.
Because I.
ISO new England is not able to get their new whether based order in place through FERC.
And they're in the market adjustments that they want to make than we might be down to $2. Again. However, what I would say is there's a number of units that probably cleared it to $2 and decide to be a price takers, who are not going to be able to stay in this market for multiple years of two dollar clears and so thats. The next piece in the next shoe to drop.
His do people come out of the do they come out of the market I would expect that some may but we cannot control that so I think we're in this place where we're somewhere between maybe the low threes to $2.
We can run our business that way most of our plants can make it in that environment.
And and we still make decent money up and ISO new England, but you know I have to admit it's a disappointing clear and I don't think indicative of the value of the units that are necessary there to keep reliability in that system and I suspect that ISO new England is somewhat worried about that as well.
Great. Thanks to the focus of uplift.
Okay, and then just one quick housekeeping things that you portion will maybe more for David on the Capex slide the growth I think you just re read shuffle things a little bit but can you just.
Confirmed.
Yes, Thank you Jonathan for raising that wouldn't be so you're referring to slide 22.
Included in prior versions of this chart, we had not shown what we described as growth Capex meal included a portion of it. So for example, the Moss landing battery. So the way we've read we recast. This pages to include all of our capital expenditures, including the growth capital expenditure. So for example, we've shown the ROE of gross Capex has.
Our 4 million in 2019, and 315 million in 2020 to significant majority which relates to our.
Most lighting development the better development in California. So we just want to give folks are complete.
Picture of Capex, because there are some confusion on prior presentations and attempt to add to clarity.
Okay, there's not that you've added things it's that you've just shale thing well in this particular, particularly if were these where things are you could piece together previously, but you had to piece together in different places, but we've not added capex we've just.
Try to show a holistic picture on this page in particular.
Thank you very much.
Yeah, if you look back from a year ago, our capital expenditures in 2019.
We are about 30 million lower than what we showed about a year ago. So the team showed good discipline and how they approached it in relative to last quarter. For example in Capex for 2020 is unchanged from what we show.
Perfect. Thanks all.
There are no further questions at this time I'll turn the call back over to Mr. Court Kurt Morgan.
Please go ahead Sir.
Okay. Thanks, everybody for taking the time this morning.
As a as stated earlier and as we always say, we really do appreciate.
Your interest Investor and we look forward to continuing the conversation about our company have a great day integrate weekend.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
[music].