Q1 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to the District Energy first quarter 20, turning earnings call.
At this time, all participants are in listen only mode.
After this because presentation there will be a question and answer session to ask a question. During this session you would need to press star one I guess telephone.
If you require any further assistance. Please press star zero I when I like to have the conference over to your speaker today Molly's toward Vice President of Investor Relations. Thank you. Please go ahead.
Thank you and good morning, everyone welcome to Mr. Investor webcast every first quarter 2020 results, which is being broadcast live from the Investor Relations section of our website at Www Dot Vista Energy Dotcom also available on our website or a copy of today's investor presentation, our form 10-Q.
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 had a few additional senior executives available to address question in the second part of today's call as necessary.
Well, we began 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 industry and market data included in the presentation and the use of non-GAAP financial measures. Today's discussion will contain forward looking statements with 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 provide.
I didn't and the earnings release and in the Appendix tore Investor presentation, I will now turn the call over to curtain, we're getting to kick off our discussion.
Thank you know <unk> good morning, everyone on the call as always we appreciate your interest in district, especially during these extraordinary touch.
First and foremost the Vista family since our hartfield thoughts and prayers to those adversely impacted by the code at 19 virus.
We know the northeast U.S. has been hardest hit and many view on the call may have been affected.
As tough as it is there is hope as I'm convinced that we will get through this and we will be better than ever.
I never thought I'd be hosting and earnings call for my home with our management team dispersed across the North, Texas Metroplex, and yet that is where we find ourselves today.
These are challenging times as we faced the highly disruptive cobot 19 disease, which is already created unprecedented harm to society threatening to help but not only the population sort of our economy and businesses as well.
No more than ever I'm proud to lead a company that is providing such an essential services society, the electricity that powers our lives.
Roughly 3000 power plant team members had bistro have no choice, but to go to work everyday to fulfill our obligation to society and they have done it with pride and without question.
We would not be able to work from home power medical equipment and devices and keep critical infrastructure running without electricity.
Since the onset of Cobot 19 in the U.S. This for has been focused on keeping our people healthy and say well maintaining or a central business operations.
Mr took actions early on to prepare the company for a cobot 19 environment, putting us in a position of relative strength as we sit here today in fact, we sold the seeds of financial strength.
Long before cobot Nike ever arrived.
As we've been levered like the IP piece of the past.
Back in October 2016, when we emerged from bankruptcy, we may be having a very different discussion today.
A strong balance sheet is as important as ever and we intend to continue on our path to 2022 or leverage target.
We have log well over 100 do activities that we are performing on a daily and weekly basis because of Kogan 19, and we have provided a high level list as some of these actions on slide six.
Through steps such as being one of the first U.S. generators to implement temperature testing and entry questionnaires that our locations and contact Tracy.
Instituting a work from home policy for all employees with remote worked capabilities and non specific work location requirements required based coverings, and social distancing thoroughly cleaning facilities between shifts and emphasizing hygiene.
And executing commercial transactions to better position district for the anticipated market moves we have been able to maintain the level of operational excellence, our stakeholders expect from us and our customers deserve.
It is very important to note that these health and safety procedures must be implemented in a holistic manner.
We're continuing to evolve our health and safety guidelines with an eye toward widespread testing.
About three weeks ago. We also launched our planning ahead to evaluate coming back to work for the non specific work location team members. This team has already started developing the necessary plans in the end the productivity of our team members working from home has been so strong that we can afford to be very deliberate about our returning to work and frankly we.
I will not return until we feel that it is safe to do so.
On the generation side. In addition to go into work locations to continue to perform their normal functions. Our team members also completed on schedule to complete 86 maintenance outages. This spring in the midst of the pandemic to ensure plant reliability for the critical summer months ahead.
We analyze the necessity and scope of each outage rescheduling and scaling back if possible for the sake of our people without sacrificing reliability.
On the retail side, our call center operations maintain service levels at greater than 90% for the first quarter and greater than 92% for the month of April while managing the transition for most to working from home.
Perhaps most important I'm proud that as of today. These procedures have contributed to eliminate our coke at 19 positive test the only two in a population of approximately 5500 employees in over 3000 contractors on our site in 20 States and the district of Columbia with both of these cases contracted.
Outside of work Fortunately both of these affected individuals have fully recover.
I'm also proud that we have been able to help our customers in communities. During this difficult time by implementing programs to waive late fees extend payment dates and provide payment plans for those impacted by the cobot 19, We're also offering additional payment assistance to those needs through our T X you energy aid program and we donated $2 million for co. Good night.
Teen relief efforts to nonprofits and social service agencies in the communities. We serve this is not just good business is the right thing to do and reflects one of our guiding principles.
I know the potential financial ramifications of Cobot 19 on businesses is front of mind for investors today, which is why we have dedicated most of our prepared remarks to this topic. We believe Vista is well positioned to deliver strong financial results in 2020, even in the face of lower demand driven by Kogut 19. In fact, we are really.
Firming, our 2020 financial guidance today, our confidence in our ability to continue to meet expectations in 2020. Despite the challenges imposed by Cobot 19 is a result of a few critical points all set forth on slide seven.
First our generation business is now approximately 99% hedge from direct commodity price risk exposure for the balance of 2020 limiting the impact of near term price volatility on our 20 Twond Your financial results second our retail business derived approximately 90% of its adjusted EBITDA from the residential and mass business customer classes and we expect.
Residential load will increase in 2020 mitigating the expected negative impact of lower business volumes last approximately 70% of distress. Adjusted EBITDA is derived from New York up market, which is proving to be relatively resilient as compared to the other markets, where we operate.
Historically, Texas has outperformed other U.S. markets during and coming out of economic downturns, and we expect it to be no different this time around.
Our strong balance sheet and favorable position heading into the cobot 19, driven economic downturn gives us confidence in our working capital and liquidity position and through the operations preparedness actions. We have implemented our fleet is ready to deliver safe and reliable power in the months ahead.
While cobot 19 is making it virtually impossible for businesses and various sectors, such as retail real estate airline and hospitality to estimate the potential negative impacts of the pandemic on their operations. Fortunately Vista offers and a central product electricity, which is critical to a well functioning society.
Strong balance sheet and highly efficient generation fleet have supported our ability to opportunistically hedge minimizing the impacts of near term price volatility and our lean integrated operations have created a foundation for us to produce relatively stable financial results in a wide range of wholesale power price environments.
Unfortunately, you wouldn't be able to come to this conclusion, just by looking at our stock price over the past several months.
It remains perplexing to me why our stock would trade at such a high free cash flow yield with our 2020 guidance intact and a relatively robust long term outlook.
As always we will continue to focus our efforts on execution.
Hopefully with time the financial markets will begin to appreciate the relative stability. This low debt integrated model can deliver which when combined with our nearly 70% free cash flow conversion ratio, we believe make for a very attractive investment.
While our stock price is disappointing I am optimistic as we approach our leverage target this year announce our long term capital allocation plan.
Still scheduled for September of this year and continue to execute and deliver in a variety of markets that we will unlock the value of this company.
Turning now to slide eight.
Given the focus by the financial community on the impacts of covert 19 on electricity demand. We are summarized in a chart on this slide the impacts we are seeing across each of our markets as of mid to late April.
Similar to what we observed during the 2008 to 2009 recession and consistent with my earlier comments ERCOT is proving to be relatively resilient. This is an important point for Vista given that as I mentioned previously approximately 70% of our adjusted EBITDA is derived from the ERCOT market.
Moreover, while on their face these demand declines could appear to be significant we expect visitors' hedges and substantial residential retail portfolio will mitigate what would have otherwise been a more dramatic negative financial implications from the cobot 19, let economic downturn.
Turning to slide nine.
Let's start with our generation segment.
Early in the first quarter.
Mr is exceptional commercial team read the tea leaves early on and executed a few opportunistic commercial transactions in anticipation of some of the market volatility. We're now seeing materialize. These transactions resulted in a positive benefit this year in the first quarter. In addition, our commercial and generation teams were able.
Just back to our Permian Basin Cts in the first quarter to capture high prices in the West zone, resulting from low gas prices and local congestion. These actions put Vista ahead of our financial plan for the quarter contributing to a positive variance to original 2020 guidance range for our commercial segments, which we depicted morgue.
Well on our guidance walk forward on slide 11.
For the balance of the year this or is approximately 99% heads from direct commodity price risk exposure limiting the impact of changes in price levels to our 2020 financial results.
Mr is primary exposure to commodity price movements for the balance of the year is to the ERCOT summer, where we typically retain some generation length in order to protect from the downside risk of being caught short on a volatile summer day.
As has always been indicates we continue to expect we will be able to manage this commodity price risk within our guidance range, particularly as we value. This open position at well below market forward prices for planning and guidance purposes.
And while we do expect lower peak demand in 2020 as compared to ERCOT latest estimate publish and its by annual supply demand forecast fold the capacity demand and reserve or CDR report in December 2019, we have already accounted for this anticipated lower demand and its expected impact on site.
For power prices in today's guidance reaffirmation.
We continue to believe whether it will be a critical variable driving the incidence of scarcity pricing intervals. This summer as we saw during the summer 2019, low wind or high temperatures have the potential to drive scarcity pricing and this impact could be even more pronounced in 2020 now that the operating reserve demand curve or DC.
Has shifted by another quarter of a standard deviation as you may recall the Omar DC is an administrative construct designed to provide additional revenues to the market as real time operating reserves diminished a scarcity levels.
Importantly, while we're observing decreased demand across all markets residential demand is coming in slightly higher than weather normalized expectations and residential demand as both relatively inelastic and more sensitive to temperature swings due to increased air conditioning load.
Especially as more people are working from home.
In short, even if lower business demand brings down the aircraft peak in 2020 higher residential load on the Hot Summer day in Texas could still result in scarcity pricing intervals, and we estimate that it could take only two degrees the increase summer temperatures to offset the lower demand impact from covert 19.
As usual.
Hot Summer, we'll continue to be a critical driver of distressed financial results for the year. However, we believe our guidance is conservative as we have already embedded risk from lower demand or mild weather in our financial guidance.
Let's turn our attention now to our retail segment.
On slide 10.
We do expect that lower demand across our markets will have certain negative impacts on our retail segments results for the year.
Specifically, we are anticipating higher bad debt expense in 2020, as a result of cobot 19, driven financial distress among some of our customers.
This risk of higher bad debt expense resides primarily in our ERCOT portfolio as in markets outside of Texas. The local utility generally controls the bill and assumes a customer collection risk.
An archive the public utility commission of Texas recognize that retail electricity providers could be unduly harm, but continue to supply power to customers, who cannot pay their electric bills due to unemployment or lower income and enacted a cobot 19 electricity relief program and response.
This program includes among other things and mechanism for retail electric providers to recover four cents per kilowatt hour for non payment by a qualifying set of customers in exchange for not just connecting these customers.
Well the program applies only to a limited set of customers that must go through a number of steps to qualify we expect it will provide meaningful mitigation to what would otherwise have been even higher bad debt expense in 2020.
Next we similarly expect our retail segment will be negatively impacted by lower volumes, including lower recovery of fixed capacity costs on our Midwest and northeast large business portfolio and lower margins driven by reduced consumption across our business customer classes.
We expect these negative variances to be partially offset by a higher residential volumes among our existing customers.
We are more focused than ever on maintaining superior customer service levels. During this pandemic our customers depend on us to keep their lights on and to power their daily lives recognizing that some of our customers will find themselves in financial distress. As a result of the cobot 19, we have already instituted programs too late wave late fees extend.
Payment dates and provide payment planned alternatives.
We're continuing to offer bill payment assistance to our partner, TX you energy, a which uses donations from customers employees and other Texans to help around 20000 families keep their lights on each year, our commitment to our customers is as high of a priority as ensuring the safety of our people.
As we turn now to slide 11.
You can see all of the variables. We just discussed accounted for in our 2020 guidance walk forward table.
While we are reaffirming our 2020 ongoing operations adjusted EBITDA and adjusted free cash flow before growth guidance ranges. Today. There are some puts and takes that get us there primarily or above planned performance in the first quarter of 2020 offset by anticipated cobot 19 impacts specifically, we expect our.
Generation segment to be up approximately $60 million with some potential for upside as compared to our initial guidance forecasts as a result of the opportunistic hedging and generation dispatch activities, we executed in the first quarter, which I just discussed as well as lower fuel expense, partially offset by the potential.
So for lower power prices driven by Cobot 90.
We expect this positive variance in our generation segment to be potentially offset by a $60 million negative variance in our retail segment as compared to our initial guidance forecast.
This forecasted retail variance is comprised of an expected $10 million benefit from lower costs and an accelerated capture of synergies from our anda and creates acquisitions offset by $70 million of expected headwinds related to covert 19. These cobot 19 headwinds reflect an estimated $40 million.
Increase in our bad debt expense for 2020, as well as an estimated $30 million driven by lower volumes in our business segments, partially offset by expected higher volumes from our residential retail customers.
In total we had a strong first quarter and we're tracking strong for the full year with the expectation that our 2020 ongoing operations adjusted EBITDA will be well within the range of the $3.285 billion to $3.585 billion, which is yet. Another example of the resiliency of the integrated model.
We're also reaffirming our ongoing operations adjusted free cash flow before growth guidance range of $2.16 billion to $2.46 billion.
Now that we've covered 2020, let's turn the discussion toward the potential impacts cobot died team could have on future market environments.
Despite what is on its face a dampening market effect of lower demand from cobot 19 that we expect to continue into 2021, albeit at a lower level. The economic slowdown could have some ancillary impacts that are constructive to market dynamics, starting with our card which is a market.
With relatively tight supply demand fundamentals, we're already seeing evidence that renewable development is slowing for projects that were slated to come online in 2021 and beyond.
Circuit as an energy only market was already difficult for market developers to secure merchant project financing.
The uncertainty that has been created by the Cobot 19, let economic recession is exacerbating this challenge.
We have received calls from a number of developers seeking to sell the development rights to their projects for very nominal fees given a lack of competencies project will be able to advance in today's environment. We're also observing that the appetite to execute power purchase agreements has decreased among investment grade offtakers as these entities begin to meet their goals are refining.
Program, so that their projects are located near their actual load as opposed to serving as virtual offsets.
As a result, we estimate the 2021 supply estimates in ERCOT December 2019, CDR report are almost two and a half times, what we believe will be feasible to develop in this environment.
If we do impact see renewable development slow this will be a meaningful offset to any decreases in peak demand that could flow through to 2021 as a result, ERCOT reserve margins could be very tight when demand growth returns to pre cobot 19 levels.
Similarly, the decreased oil drilling activity, we are observing is reducing the supply of associated gas, making a somewhat bullish on natural gas prices in 2021 and beyond.
Higher natural gas prices could further push up the price of power in the markets, where we operate.
With these factors as a backdrop combined with the relative resiliency, we're observing in Texas demand, we continue to like our position in New York up market.
Moving onto PJM, and ISO New England markets. We similarly expect cobot 19 to have an impact on the supply side of the equation both as it relates to the likelihood of new thermal development as well as the potential for incremental returns on the new development side in RV market economics.
Did not support new thermal development prior to the cobot 19 related demand declines and the current forward outlook is even less supportive of Newbuilds. As a result, we would not expect any new thermal development in either in this environment further.
We could see incremental retirement as energy markets are challenged by lower demand expectations. The recent capacity auction clear in ISO new England and the uncertainty related to the upcoming capacity auction in PJM are not helpful for development and also present challenges for inefficient existing generation.
Taking all of these factors into account, we expect we could see a range of outcomes in our 2021 financial results with the midpoint shifting somewhat lower.
As we described on slide 13, many uncertainties remain including the duration and severity of the cobot 19, let economic downturn, which makes predicting a likely outcome for 2021, even more challenging.
Prior to cope with 19, our fundamental point of view suggested 2021 ongoing operations adjusted EBITDA could track in line with or potentially higher than 2020 expected results.
As of April Thirtyth, we're now 57% hedged in ERCOT, and approximately 60% to 70% hedge and all other markets, which helps to limit the range of outcomes, we expect to order to balance risk with potential upside, we're continuing to opportunistically hedge, albeit at.
Places, even with this incremental hedging activity. However, given the distribution of potential outcomes. We still expect there is a meaningful chance that 2021 guidance could be flat to 2020 guidance midpoint.
Just looking at forward curves as of March 30, Onest, 2020, which already reflected a level of uncertainty around cope with 19 impacts would suggest 2021 ongoing operations adjusted EBITDA would be approximately $200 million to $250 million lower than our 2020 guidance midpoint or about a 6% to 7% reduction.
As we have seen however, ERCOT forward curves have shifted upward in the back half of each of the past three years as the curve begins to reflect fundamentals and becomes more liquid.
We believe there is still a possibility we could once again see this play out for the 2021 forward curve. This fall below the probability is likely lower due to the cobot 19 related uncertainty. In addition to looking at current forward curves. We also modeled fundamental supply and demand drivers in a number of economic downturn scenarios in order to better and.
Form our views on the potential range of outcomes for 2021 financial results.
Over the past two months ERCOT peak load has trended in the range of 2% below expectations.
As the Texas economy begins to Riocan, we may see this gap start Panera, however, given the risk of slower economic recovery. Our review of downturn scenarios included two consecutive years of peak demand trends below or across most recent forecast in its CDR report.
On the supply side. The current environment has clearly impacted the prospects for new generation investments. Nevertheless, in an effort to be conservative when testing the potential risk to our 20 401 results are downturn scenarios assume that the majority of the projected supply additions from the CDR will come online despite the historical trend of the.
CDR significantly older overstating, new supply additions as its purpose is not as a forecast tool, but as a representation of new generation in the development pipeline that have met certain criteria.
As a result of our analysis of these fundamental drivers. We currently estimate that even in our most punitive downside case that holds supply constant to pre cobot 19 levels and demand growth to a quarter of the pre cobot estimates from 2019 to 2021.
Only 21 results would still be within 10% of our 2020 guidance midpoint and with so many different variables influencing the range of potential outcomes. We still think there is a meaningful possibility. We can achieve flat EBITDA from 20 to 20 to 2021.
Importantly, this means that even in our most punitive modeled case, we still expect we will be able to deliver approximately $3.1 billion or more or more of adjusted EBITDA from our ongoing operations in 2021, with an expected 65% to 70% free cash flow conversion ratio this would translate to more than $2 billion of.
Adjusted free cash flow before growth, meaning that even in a recession.
Created by an extremely low probability pandemic tail events, we expect to maintain very strong liquidity and we expect we will have significant free cash flow to return to shareholders through dividends and share repurchases.
I suspect not many businesses today can say this.
The market appears to be discounting our relative resilient, even more than before we believe the recent decline in our our stock is on warranted in our view Vista should have been a stock investors fled to for relative safety in these economically uncertain times and yet our stock has continued to trade with a free cash flow due in the range of.
20% to 30% it is frustrating to say the least.
The fundamentals of our business are strong, we supply and essential product and our LOE costs low debt integrated business model comprised of leading retail businesses and advantage generating assets is designed to manage risk and mitigate volatility our robust free cash flow should enable us to both reinvest in the business at modest levels, while returning a significant amount.
Out of capital to investors.
However, we are keeping the faith that as we pay down our debt and announce our capital allocation plans in 2020, we will be on the path to reach our our fair and full value.
As always we will keep our eye on the bowl of execution and continued to prove out. This thesis I will now turn the call over to David Campbell.
Thank you Kurt.
Turning now to slide 15, Mr delivered first quarter 2020, adjusted EBITDA from ongoing operations of $850 million.
Results that exceeded management expectations for the quarter.
The favorability was driven by our ERCOT segment, reflecting the opportunistic hedging and generation dispatch activities as Curt mentioned previously.
Our first quarter 2020 results were $26 million higher than the same period in 2019.
Our retail segment up $54 million in our generation segments down in a collective $28 million.
The positive year over year variants for our ongoing operations was driven by the acquisitions of creates an anda, partially offset by lower results in our MISO and New York, New England generation segments, driven primarily by lower capacity revenue.
As a reminder, do the retirement of for coal plants in our MISO segment in the fourth quarter.
Our first quarter 2019 results have been recast increasing by $9 million to account for the movement of the financial results of those plants out of the MISO segment and into the asset closure segment.
Next on the topic of liquidity Mr had total available liquidity of approximately $1.834 billion as of March 30, Onest, which includes cash cash equivalents of $717 million and $1.117 billion of availability under our revolving credit facility.
In April we repaid $550 million and borrowings under our revolving credit facility. Additionally, on make first we notified the holders of our 5.875% senior unsecured notes due 2023 that we will redeem the entire $500 million principal amount outstanding on June Onest.
Our teams have modeled very assuming the company's strong cash generation profile. We're confident we will have ample liquid.
Would it be to operator business either.
Before we conclude today's call I'd like to offer a brief reminder of our capital allocation plan for 2020, and 2021, a summary of which.
It's set forth on slide 16.
As we have consistent.
At reduction.
In fact it.
We're in right now where the value of having us.
Strong balance sheet is even more pronounced.
Despite the low levels, where our stock has been trading in recent months, our investors and stakeholders.
Remain supportive of our commitment to advance toward our long term leverage target of approximately 2.5 times net debt to EBITDA.
Last week, we announced that our board of directors approved our second quarter dividend of 13.5 cents or 54 cents per share on annual basis, which represents an 8% increase from the annual dividend we paid in 2019.
As we look ahead, even with the economic uncertainty created by the coated 19 pandemic, we still expect to have significant cash available for allocation in 2021 and beyond.
We plan to lay out our long term capital allocation plan in late September of this year, the basic tenets of which we have been articulating for several quarters now.
Specifically, we expect we will allocate approximately 25% of our capital available for allocation to growth investments on an annual basis.
But only if our investment thresholds are met.
If we do not find projects that we believe aren't attractive use of capital we plan to return that capital to shareholders.
We expect that the remaining 75% available capital will be returned stakeholders through a quarterly dividend.
With an attractive dividend yield combined with share repurchases.
Please stay tuned for more specific details on our long term capital allocation plan in September of this year.
In closing we are proud of our team members for their unwavering commitment to producing and delivering power to our customers through these challenging times, our business remains resilient and we believe we're well positioned to continue to deliver stable results on an annual basis, even in the face of unprecedented economic challenges.
Our hope is that the successful execution of our business plan in this environment will further until confidence investor of our many stakeholders.
Ultimately unlocking what we believed as a true value of our company.
With that operator, we're now ready to open the lines for questions.
That's a reminder to ask your question. Please press star.
And then number one I guess telephone.
Let's turn your question press the pound our Heskey.
Yes, that's your limits your question to one quick follow up please stand by while we capacity on a roster.
Your first question is from shore releases with Guggenheim partners.
Hey, good morning, guys.
Is your our Korean.
Oh, not too bad month glad to shake.
Can we just a couple of questions here can we talk about sort of the landscape of potential retail growth opportunities as we look at the second half of the year to 21 does that TCT rate relief program and kind of your lower estimates around peak demand maybe take some of the pressure off the smaller are caught books to sell and.
Attention, we shipped your focus back to buybacks each at 25 like David just mentioned.
That present further opportunities as you shift towards buybacks with sort of credit metrics on pace to think about that growth portion and given some repreve that's been given to the retail providers.
So it does help I mean, if we if they did not put the program in place.
You know I think our view is sure that it would have been carnage no doubt about here, but to be clear about what's happening is there is what is being recovered by retailers is the energy component or the or the generation component and the tandy component the margin that retailers.
Typically get is not embedded in that so while it is helpful.
For some of them some of the retailers there are smaller.
Not as well capitalized.
Maybe not as sophisticated from risk management standpoint.
There are still risk and there continues to be in our view significant risk going into the summer months.
And given the situation it may be harder also for them to hedge and post collateral. So I do believe that there is still some risk to retailers in this market.
And we've seen a little bit of that whether that.
Turns into some kind of an opportunity.
We'll see but there's certainly.
Some movement of foot by some retailers given that this isn't exactly everything that you know a retailer would have wanted in this situation.
The other part of this is is that the margin that is being forgone you can collect on.
Afterwards, but this is a customer class that is very difficult and will be difficult to collect on so the ability for the retail to actually try to ER to claw back. If you will that loss margin is gonna be extremely difficult. So we'll see.
Or not.
That's certainly something that we are.
Keep an eye outdoor but it's hard to predict that at this point in time I think we're still comfortable show are really with the.
Roughly a quarter of our.
Free cash flow on an annual basis, although you know it's going to be a bit lumpy just depends on opportunities and depends more importantly on the economics of any deal.
That we might want to get into ours or a project we might want to do.
But we still think that quarter eight of our free cash flow a year.
You know it seems reasonable I think in September were going to put a more made on that bone both.
The growth side of it but also I think could.
More detail around what the three quarters is which I think most important part of our capital allocation plan and I think September will be of a big time period for that and then the other thing I think in September is that we get some things that we want to talk about in terms of our overall portfolio positioning as.
The company.
Our asset mix and how we're going a bit.
Out sort of the future, but but I think all of that is going to happen.
You know, we're only now it seems like.
Years away, but we're only five months away now from that happening.
This is the point in time that I've been waiting for since I've been here to get to the point, where we can actually be at a steady state.
Right.
So just to follow up so how can imagine that you know the sustainability of the model that you are displaying today should provide some level of comfort with the agencies right.
Is there any updates with your conversations regarding your ratings upgrade to I'd also any potential for the timeline to slip.
Due to cold that are you still kind of shooting for that Q4 21 for IBG, So how sort of the dialog going with the rating agencies, because I have to imagine this quarter should provide a little bit of repreve and whatever concerns they have some business risk.
Yeah, well, what I understand is that when I finish I think S&P.
Made comments to this effect, but but I think it slipped a little bit star because what I heard is is that S&P is probably going to wait to see how the year turns out.
To move us another notch annual that and then I expect them to add to it to be at least a year and probably a little bit more so I think we've slipped a little bit on the I'd, but you know my own view is exactly yours, which is I think when the dust settles I asked.
You don't think this is going to end up being a negative period of time, but actually a highly positive period of time.
And the agencies are going to look at this and say in a and what is I don't think anybody can argue that this is not a tale of the this is truly a tale of there probably is bad.
Or as close to as bad as the Great Depression in terms of what it's doing to unemployment and they're gonna have to step back and look at that that's not you know like a just a normal run of the mill recession here and just the resilience of our business model I am I would I believe and I think this.
Is incredibly important for our company is that the business risk that has been ascribed to the sector for so long because of the poor execution. The bad strategies I think when they look at this model and the execution that we've put forward that it's actually going to end up being a positive in the long run so I still have some hope that by the end.
You are 21, we could get to investment grade, but I actually believe based on comment that I have heard we may have slipped a little bit.
Got it. Thank you guys. Congrats on the results I will jump back into queue appreciate it.
Alright, thank sharp.
Your next question is from Stephen Byrd with Morgan Stanley.
Hey, good morning, and hope you all are well.
You too saving hot.
That's on the good results in a challenging time you gave some really good color on the state of the renewables market and I. Just wonder does does that make you want to potentially be more aggressive in terms of crows, just because of the opportunities I just want make sure I kind of understood how you're thinking about the implications of what's happening there.
Well I think there.
A number of implications that we were trying to get across I think one of them was that we just think the the growth in renewables. In particular are caught may have slowed down a bit but I will tell you that we when we stressed to get to that within 10% in 2021.
We really didnt cut back the amount of renewables stat.
We had previously thought we're going to come in back when we gave guidance back in November timeframe. So in my view, it's a bit punitive but.
We want a distressed.
We wanted to stress the system a little bit. So I think that's one point in terms of the point that you're making.
I think we have some ideas about what we would like to do around renewables and.
I don't know that this has really changed that much.
We still have a strong cash flow that if we want to do some projects we're going to follow through I think you saw that we increased.
The battery opportunity.
You know out at our Oakland side, I think there maybe some other opportunities that are Moss landing site, and then certainly some potential opportunities in ERCOT.
And so I don't know really Steve I don't think it's changed our view I think the difference is is that we have the ability to do the things we want to do whereas some people I think it's going to be more difficult just because it's difficult to attract the capital to support.
They are there plans the developers are having more difficulty and we know that because they're approaching us.
For us to take over there they are projects.
And then pay them a small nominal fee to take them over so I think I think there is an opportunity there.
And that we're working on that opportunity, whereas maybe there's some good.
Projects that may come to market at a relatively no cheap price and we'll take a look that and add that to our backlog. We don't talk much about just the amount of projects we have around renewables in particular in Texas, but we also have them in other states of course, we have the coal to solar thing.
Going on in Illinois, but this company has a fairly de backlog of opportunities to invest in renewables.
But we're gonna be deliberate about it and we're looking for those kinda opportunities that offer they're trying to returns that we expect that sort of five to 600 basis points above cross the equity.
And we have some of those and we'll talk more about that in September.
Oh, that's helpful. It sounds like it's a pretty a target rich opportunity sets will stay tuned on that and just on.
Yeah since I'm not in this the same room with everybody I'll I'll ask David if he has that but they between David <unk> Campbell and Jim Burke, we probably have to folks that can put a little more detail to that so David you want to start and then Jim If you have anything to say police jump in.
Sure. So this is David Thanksgiving with respect to residential what we've seen is impacts actually in the second quarter or so for the past month or so it's been into five or 6% range. We've model it relatively conservatively around 2% for the back nine months of the year, but we've actually seen increases reflect.
And people working from home and the five 6% range.
And that's what we're expecting the second quarter, and and and moderating the back half of the year, we've kept pretty conservative assumptions around low declines in other segments, but we can be conservative. We we had that moderating so the overall increase for the back nine months was about 2%.
[noise] understood and I guess just assault on I mean, that's that sounds that makes sense that sounds reasonably conservative. So if if demands actually if if demand for residential is stronger presumably that's that's relatively meaningful given a given your business mix.
That's exactly right Stephen the it's our.
Especially in our caught where a residential demand is whether sensitive and it's our highest margin segment.
We think that there's potential upside there that particularly it's folks.
Arrows, whereas businesses reopen you'd still have a large segment of the workforce working from home so you'll.
See some uptick or or moderation in that band declines.
[laughter]. That's helpful. Thank you very much [laughter] and and see one of the thing we have one other thing I'll mention at this point.
You know I think you know we've tried to be pretty conservative you know we're only at the beginning of May here and you know we typically you know aren't gonna change guidance. This early in the year, especially given just how important deer caught summer is and how volatile can be but you know there were words.
In my script in their words and David and then also on the slides about tracking strong and and and and we're we're well within the range and and you know what that really means is I think we've been conservative on our estimates for 2020.
And you know, we we feel very good very good.
About the midpoint and.
Or earnings calls when we have a better insight as to what the summer <unk> going to look like but from where we stand today, even with the Cobin 19, you know 2020, you know is.
Looks to be a pretty strong year, if we can execute the way we believe we can.
Really appreciate that thank you.
Thank you.
Yeah next question is fancy Flashman <unk> research L.L.C.
[noise] Hi, good morning, hope everyone is doing well.
You to create and you hear me to more Oh.
Oh, Thank I can hear yeah, yeah, yeah right.
Great. So it just one question in thinking about capital allocation. So.
If if the.
[noise] rating agencies are gonna take longer to determine investment grade.
I just wanted to kind of get a sense when you make your next decision on capital allocation.
Are you going to focus mainly I'm, just hitting your death even metrics.
Or you're going to be trying to kind of do things to keep.
Getting to just the investment grade I, what is it the metrics or the investment grade that of the priority.
In in making that decision.
Yeah. That's a very good question see look I I think the the simple way to think about this and of course I've got to you know we've got a whole session coming up in July with our board. So I don't you know I really don't like to get out in front of them, but I I'll I'll explain if this way you know we've dedicated 2020 to pay down debt.
And we're gonna, we're going to do that.
And you know that that's a bit of a sacrifice to you know also returning a some money to our shareholders, which we would like to do especially in this environment, but we also had to balance those priorities.
And I think what you can expect from US you know in September is a capital allocation plan that is focused on returning capital to shareholders.
And reinvesting in our business.
And given that it appears that things may be pushed out a little bit and the fact that we've never started this this venture to get to investment grade that was an outcome that kind of came up that you know, we're not going to change things around we're going to get to where we think the capital structure. This company leaves us in a position to be as strong as possible and we.
Just so happened believe to believe that with our business risk, which we are demonstrating you know it's quite solid through all this and just the metrics themselves. They speak for themselves and you know we still have we still have to make a jump to double b. plus with S. and p.
And so you know we want to get to that next and then we'll get into dialog with them about what it's gonna take you get to investment grade, but I think the focus for us in September is gonna be squarely around you know the two big buckets that I just talked about reinvestment in the company and some opportunities that we have that we think are quite good.
But more importantly is a big three quarters of our shit of our free cash flow talking to our investors about returning that in some form or fashion and it's not rocket science it'll be a mix of you know what are we do with our dividend and what are we do with potential you know probably potential share repurchase.
So that's you know and we'll see where we're trading obviously and all that will go into it but I suspect that's that will be the two big buckets and you know I I think there's all the <unk>. The details we're gonna get into on that call as well that I think are important for people about what's you know the long term focus of our company and how we think about.
Managing our portfolio of assets for the future so a lot going to be packed into that.
Yeah, I think we want to get through the summer.
See how things go and then we're ready to go in September, but that's how we were thinking about it.
That's great that makes sense or not I don't think you want to be.
Chasing the rating agencies all the time.
Okay, and then just on the.
Yeah. The unfortunately have to ask since the C.D.R.'s become a bit of event in recent times.
I think it's coming out maybe next week for for the summer just.
Any sense on what we should expect for that and you think we'll actually see this reduction.
And some of the renewables or delays or is it likely not to show up in that it just any color on the C.D.R.
Boy I tell you I I I have a hard time predicting what <unk>, it's going to come out of that city are because you know, it's not all that difficult.
For people to get projects.
You know to the point, where it shows up in the C.D.R. and and as you know there's no economic overlay.
And I think even you know even ever caught his tried to distance themselves you know from this being some something to use for forecasting purposes.
So it's hard to say I do think there may be some pullbacks d., but I also believe what's likely going to happen is is it may it may be deferral more than it is anything actually leaving and so you may seem more kind of like it did last year when everything got pushing 20 into 21 and there was a big bucket of projects. It showed up there and then I think they're meant you may see.
Some get defer to even again.
But I wouldn't be surprised honestly that you know people were still working you know developers are working on projects and getting them you know in the queue and you know interconnection q. and that they meant more may show up for for me, it's less about that yeah. We haven't development team on the ground. We have yeah. We know this market very well.
It's more about what we're seeing in terms of you know real activity on the ground and and getting equipment signing contracts are getting financing and that's where we're seeing you know things really pull back and I think the other area, where we've seen you know pretty big pullback is just the support on the P.P.A.'s.
Side.
And you know that we have yet to see for example on solar we have yet to see a merchant solar plant get financing in the <unk> market, It's just really difficult with an all energy market.
To do that and so without or P.P.A. behind these you know <unk>. It just makes it more and more difficult and we've seen that mark that P.P.A. market slow down quite a bit.
So even though the the the CDR it'd be a wildcard and all this and I know that we're going to have to deal with whatever comes out of that for us. It's more about what's really going on you know on the ground and and for me you know that's why our team is constantly not just looking to develop things, but also to try to get intelligence about what else is going on.
Okay. Thanks, so much.
Thank you said.
Yeah. Next question is some chillier do modeling Smith like the bank of America.
Hey, good morning came thanks to the time up you all are Wow.
Wanting to follow up on some of the are.
Various ways, it's been asked <unk> prior questions, but when you talk about the 21 outlook and you've put a few comments and your slides I won't repeat them.
But what do you, reflecting with respect to first the latest uptake in power prices. Even in recent days. When you think about 21, even a relative to 20 as well as you just talked about an improvement in residential sales for instance, how does that also secure in.
To the <unk> meaningful chance that 21 guidance could be flat shoe 20 at this point.
What are you soon yeah, yeah, and and and ER drilling I'm going to take that is being you know largely focused on her cod is that correct.
Yeah, you you tell me what that means all factors our friends Oh parents, yes outlook I mean so.
2020, <unk> actually what we've seen is is that.
From where our fundamental view is.
You know 20 2021 summer pricing in her car, which is really always the big ticket for us that that will really end up being the swing that we'll either get us too flat or something less than that now you know those prices had come off.
The hard over the last a few weeks and now it's that's liquidity. It's it's a whole bunch of different reasons why that that has come off we we don't we don't believe it's fundamentally driven and so it will we're really depend on kind of how quickly we come out of this you know.
Out of this the cope in 19 of that and and how quickly recovery is and so that's why we're being a bit cautious and trying to draw distribution around the outcomes, but you know it. If we were if we saw pricing you know up <unk> near where our fundamental view is.
You know we would we would you be very much closer to a flat year over year, if prices stay where they are now it'd be more like in the what we had talked about in the in the presentation. You know in that 3.1 to 3.2 billion. So it. It just really depends on where are caught pricing comes out and you know.
I think on on the retail side the numbers that you're a year from 20 to 21 or not that you know not that not that big in terms of our retail [noise] ER outlook that that's really just swing factor, it's really going to end up being summer are caught pricing that will end up being the big.
Ticket item and the other markets, it's really not they're not that big of a a player and this either.
So are they give you really draw a circle around it it's really going to end up being where does the summer 21.
And ER ER come out and you know, we we see you know a distribution around that and still a fairly good chance that you could see you know a pretty strong year, especially if the development that we talked about doesn't come to fruition.
And that <unk>, an economy in Texas recovers quickly which could happen.
You know you could really see another tight situation in are caught and then we're talking about a very different you know a set of numbers, probably something more closer to flat year over year, you know relative to our guidance and 2020, but if we if we see a more prolonged effect from the covert 19 virus.
You know that and prices stay more depressed going into the summer weather doesn't show up then you could be on the lower end you know that that kind of 3.1 to 3.2 range.
And David I don't know if you want to add anything in in in on that or not.
I think you're covered occurred.
Okay.
Alright, excellent Hey, if I can just quickly follow up on the scene I exposure to the extent to which obviously 90% of business <unk> Master I just want to understand how how you all are thinking about that exposure work in terms of the margin impacts even on that small piece that would seemingly be the the partial opposite.
<unk>, otherwise very positive trembled Rosie side.
Yeah, David you want to take that one.
Sure. So <unk> you saw the we we noted that there's some downticks from Lcnine that we we started on slide 11.
And it's a combination of factors the margin from that segment is pretty low so a part of it as lost margin part of it is the last of the hedge position. So we we valued reselling back that power into the market lower prices and part of it is some of the impacts of certain fixed costs like a passing transmission, particularly Midwest northeast. So that's what.
Gets you up to that sum total of.
The 30 million for the year with partially offset thoughts and higher residential volume. So that's some total the various impacts a margin is a relatively small piece of that.
And again, that's our projection for the full year. It's it's with you know a view that we could have sustained impacts the downturn. So.
We've tried to be pretty conservative assumptions, but at the sum total of those are syntactic about segment.
Got it or so hey, Kurt just real quick clarification for the sake of the call when you're talking about growth. Your real quickly and you made some comments earlier about gross expectations renewables et cetera, and just reconciling against against obviously with the stock is et cetera. How committed are you seeing through growth relish.
Two allocating capital of back to buybacks dividends et cetera, it's gonna be x., just exceptionally clear about grow capital right now.
Yeah. So look I mean, we look at we we we balance that <unk> so <unk> they.
The priority for US is obviously to use capital efficiently.
But at the same time, you know you got a balanced out a little bit in terms of you know growing to accompany overtime.
And because we are a going concern and buying back or shares, but we do an economic analysis, it's very it's very simple.
Real key drill in you know this is what <unk> what share price do you assume when you do the economics of buying back her own shares and that is a really that's an art more than a science. So we look at a variety of share prices.
When you look at the return that you get for buying back your own shares and we don't just look at one price and we try to be realistic about it and we have to look at that over a period of time and and so you know depending on how long. The period of time is you know that dilutes the return on on buying back shares.
But we try to balance that and we try to mm.
If we're going to invest in our company, we want to fit in you know back into our company, we want to make sure that those returns also staff and up to <unk>, you know by the alternative of buying back or shares and I'm pretty happy to say that when we have done that returns have been you know definitely in the range of what we thought the value of buying.
Or shares has been and we're going to continue to do that kind of analysis. Knowing that we also have to balance that we have to you know we're gonna have to to invest in our company. Our company is going to you know we're gonna see coal plants retire we've already been very straightforward on that front, you know we'd like to replace.
<unk> economically obviously, the but from that and we'd like to grocery but at the same time, we know our stock is cheap and so it's a balancing effective no you know simple formula to it but we do do the math that you would expect us to do to try to see the relative returns of investing back into business.
And investing in buying back our shares.
Excellent. Thank you got.
Thank you.
Oh, and I like to trying to call back over to <unk> Morgan for closing remarks.
Well once again I Wanna, Thank everybody for being on the call I hope everybody is stay safe and healthy and this difficult time <unk> I can't tell you that enough. How we appreciate your interest in our company now given the extraordinary covert 19 virus work side.
That our company and a work side about the month coming ahead and a until next time, please be safe and be healthy.
Maybe send content <unk> today's conference call. Thank you for participating you may now this kind of <unk>.