Q2 2023 Vistra Corp Earnings Call
Okay.
Okay.
Good morning, and welcome to the Vista second quarter 2023 results conference call. All participants will be in listen only mode should you need assistance. Please take another conference specialist by pressing the stocky followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May press felt then one on your touchtone phone to wheat.
Your question. Please press Star then two please.
Please note basically back to speed the quoted I would now like to turn the conference over to Megan who is vice President of Investor Relations. Please go ahead.
Good morning, and thank you all for joining distressed investor webcast discussing our second quarter 2023 results. Today's discussion is being broadcast live from the Investor Relations section of our website at Www Dot Dot com.
Can also find copies of today's investor presentation and earnings release.
Leading the call today are Jim Burke.
<unk>, Chief Executive Officer, and Chris I'll bet that she was executive Vice President and Chief Financial Officer.
We're joined by other senior executives to address questions. During the second part of today's call as necessary.
Our earnings release presentation, and other matters discussed on our call today include references to certain non-GAAP financial measures reconciliations to the most directly comparable GAAP measures are provided in the press release and in the appendix to the.
The investor presentation, all available in the Investor Relations section at <unk> website.
Today's discussion contains forward looking statements, which are based on assumptions, we believe to be reasonable only as of today's date.
Forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied due some no obligation to update our forward looking statements I encourage all listeners to review the Safe Harbor statements included on slide two of the Investor presentation on our website that explains the risks of forward looking statements.
Patients of certain industry and market data included in the presentation and the use of non-GAAP financial measures.
I'll now turn the call over to our President and CEO Jim Burke.
Thank you Megan and good morning, and thank you all for joining our second quarter 2023 earnings call.
The second quarter proved to be another strong one for the business as we delivered $1.008 billion in ongoing operations adjusted EBITDA.
Typically we do not formally adjust our guidance ranges until after we get through the critical summer months, but based on performance to date and our forecast for the remainder of the year. We are confident in our ability to deliver in the upper half of the guidance ranges introduced on the third quarter earnings call last year.
Accordingly, we are narrowing that original range, which was 3.4 to 4.1 billion to a new range of three six to 4.1 billion for ongoing operations adjusted EBITDA.
Looking beyond 2023, the market curves continue to support a strong consistent outlook as well.
Our commercial team is working to strategically lock in these opportunities employing comprehensive hedging strategies to provide better line of sight to our earnings over our planning horizon, which in turn allows us to plan for capital return to our shareholders that is consistent and predictable.
In addition, I am proud of the great strides we are making in the expansion of <unk> zero carbon generation portfolio with our 350 megawatt addition to the Moss landing energy storage facility that came online this quarter.
I'll speak to that milestone momentarily, but first I'd like to turn to slide five where we once again highlight our four strategic priorities.
I think it's important to continue to reiterate our focus on these priorities each quarter with some notable accomplishment is I believe these are critical to long term value creation.
This quarter saw continued strong generation and commercial team execution combined with our retail business that continues to deliver strong counts and margin performance.
<unk> proving it can consistently deliver substantial and resilient earnings in a variety of power price and weather conditions.
Just as last quarter on average we saw power prices this quarter clear lower than our realized hedge prices. This is highlighting the significant downside risk protection to our earnings at our comprehensive hedging strategy across the integrated business can and does consistently provide.
These derisked consistent earnings gives history, the confidence to announce aggressive shareholder return programs, and then stick with those programs and amounts equal to or higher than those originally announced.
I'll, let Chris provide the detailed update on our capital allocation plan, but are the aggregate Upsized $7.75 billion capital return plan. We originally announced in November of 2021, we've already returned $3.35 billion through August four 2023, which is approximately 250 million.
Dollars ahead of the originally announced planned levels.
We regularly evaluate how best to bring value to our shareholders and we expect to continue buying back stock and paying dividends that grow each quarter based on a reduced share count.
Our balance sheet strength remains a top focus as well.
This quarter that we structured a $450 million P cap transaction, which is unique and allowing us to post treasury securities as barge in deposits.
Returning more cash to the balance sheet, we expect to utilize that cash plus the margin deposits that had been returned as expected as our hedges have settled throughout this year to fund a significant portion of the purchase price we expect to pay in the fourth quarter for energy Harbor substantially reducing the amount of acquisition debt to be issued.
Finally, as it relates to our opportunities with the energy transition. In addition to the progress we are making on the energy Harbor acquisition, which I'll speak to in a minute I would like to turn to slide six regarding our Moss landing facility.
The district team did an excellent job in bringing online an additional 350 megawatts to add to the existing 400 megawatts at our Moss landing site in California, which is the largest energy storage facility of its kind in the world.
This addition came online ahead of schedule and on budget, despite a challenging supply chain environment and extreme rainfall.
This is now a total of 750 megawatts of energy storage back by contracted revenues do R. P. G any resource adequacy agreements.
Importantly, we continue to see additional opportunities to add batteries to decide in the future.
The facility is located in the queso energy market, which is experiencing significantly higher gas price volatility as well as the potential for scarcity pricing due to high demand and import competition from the neighboring balancing authorities.
These factors result in favorable conditions for the earnings outlook for Moss landing battery facility and our co located combined cycle plant, which has 1020 megawatts of capacity.
This was a tremendous site and a great example of our ability to invest in a disciplined way industry zero, while also providing for reliable and affordable energy customers need.
Moving to slide seven the 1 billion $8 billion of ongoing operations. Adjusted EBITDA achieved this quarter was a result of strong performance by each of our generation retail and commercial teams with retail achieving attractive counts and margin performance in all customer categories in our generation team delivering commercial availability of approximately 95.
At our.
Our people are working hard in this extended high eat environment and they continue to perform extremely well.
When we originally announced 2023 guidance in the third quarter of last year, we estimated a range of $3.4 billion to $4.1 billion in adjusted EBITDA from ongoing operations.
As mentioned earlier, we are confident in our ability to deliver in the upper half of that range, leading us to formally update our guidance to reflect the new range of $3.6 billion to $4.1 billion in adjusted EBITDA from ongoing operations and a new range for adjusted free cash flow before growth.
Of course, there was a lot of execution still to go in the balance of the year and our people remain focused on delivering for our customers and our shareholders.
Turning to slide eight I just wanted to reiterate that all three key agencies continue to work on the necessary approvals to close the energy Harbor acquisition, we are working constructively with each agency and in all involved parties and as I mentioned before we continue to anticipate a fourth quarter closing.
We believe energy Harbor is a terrific transaction for district.
Adding a substantial amount of nuclear generation with the support of the production tax credit.
We continue to expect significant contributions from energy harbor, including the opportunities for synergies.
Think back to the announcement of the Dynegy acquisition, when we projected annual ongoing operations adjusted EBITDA of approximately $2.8 billion.
Through the hard work of the history, and Dynegy teams and including the acquisition and successful integration of Korea and ambit.
Together with the expected closing of energy Harbor later this year. It is exciting that we could see ongoing adjusted EBITDA on average in the 24 to 25 time frame of $4 $5 billion, including synergies and out year prospects potentially even higher Chris.
Chris I'll now turn the call over to you to discuss our quarterly performance in more detail.
Thank you Jim starting on Slide 10, Mr delivered $1.008 billion in ongoing operations adjusted EBITDA in the second quarter.
<unk> $510 million from generation and $498 million from retail.
Generations results were favorable compared to the second quarter of 2022, primarily due to higher energy margin achieved through our comprehensive hedging strategy and as we did last quarter, our ability to capture value by backing down generation in times when prices are below unit cost.
Retail results were also favorable as compared to the second quarter 2022.
While the segment was impacted by less favorable weather.
This was more than offset by continued strong counts and margin performance.
And as I discussed last quarter, the intra year shaping that dampen the first quarter's earnings contribution to the overall year was offset as expected in the second quarter.
Turning to slide 11, as Jim mentioned, we have been consistently delivering on our capital allocation plan.
As of August 4th we have executed approximately $2 $9 billion of share repurchases since beginning the program in the fourth quarter of 2021, we.
We expect to utilize the remaining approximately $1.35 billion of the total four point to $5 billion authorization by year end 2024.
Notably our outstanding share count has been reduced to approximately 367 and a half million shares as of August 4th and impressive approximately 24% reduction in the number of shares that were outstanding in November 2021.
This meaningful and consistent share reduction has led to robust dividend growth. For example, the recently approved third quarter 2023 common stock dividend of <unk> 26 per share represents an increase of approximately 12% per share as compared to the dividend paid in the third quarter of 2022.
Finally, as Jim mentioned, we remain focused on maintaining a strong balance sheet and a disciplined approach to growth.
We are fully allocated the net proceeds from the December 2021, Green preferred stock issuance and are now turning to securing nonrecourse project or portfolio level financing to.
Among other things support the growth capex needs of the company.
We anticipate launching the first such financing in the coming months.
To wrap up on slide 12, we provided an update on the out year forward price curves as of August 4th.
As you can see the forward curves continue to hold together well.
Specifically since our last call we've seen forward curves increase in ERCOT in 'twenty, four and 'twenty five.
Increasing our confidence in our ability to achieve the previously disclosed 3.7 to $3 8 billion dollar ongoing operations adjusted EBITDA midpoint opportunities in those years.
As a reminder, we are significantly hedged in years 'twenty to 'twenty three through 2025, approximately 86% on average of expected generation across all markets with the balance of 2023 expected generation hedged at approximately 98% in 2020 for expected generation hedged at approximately 95%.
Finally curves in the outer years continue to provide opportunities to lock in significant earnings, especially during times of scarcity. Our commercial team continues to work to Derisk. These opportunities by executing on our multiyear comprehensive hedging strategy, which strategy continues to be supported by your standby liquidity facilities.
We are proud of the performance of our generation retail and commercial teams. Thus far this year and are excited to continue our work towards executing against our remaining 2023 goals and long term strategic priorities as we translate that success into shareholder returns.
We look forward to updating you on our progress on our third quarter call.
With that operator, we're ready to open the line for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if you like using a speakerphone. Please pick up your handset before pressing the keys do we throw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Okay.
Yeah.
Our first question comes from the line of sharper razor with Guggenheim Partners. Please go ahead.
Hey, guys good morning.
Hey, good morning Shar.
Good morning, So first off I guess, you know obviously the third IPP to report stronger retail margins do you just unpack a little more of what you saw this quarter kind of within the strength as we're thinking about optimization versus actual margin on margin expansion and the <unk>.
Greta, which I guess you guys see this as being durable.
Sure sure.
Sure I'm going to start and I'm actually going to have Scott Hudson give a little bit of perspective on the market dynamics as well have you realized last year. When we were in a climbing power environment due to the conflict that we saw with Russia, Ukraine and the commodity curves moving up so retailers in general were climbing the hill.
In 2022, we.
We started to see that obviously come off at the beginning of this year.
And the team does a very nice job of looking at the multi year nature of the contracts for large commercial to 12 months to 24 month range for residential and their objective of course is to have normalized margin. We tend to buy forward as a company we try to normalize the experience for customers.
Because our experience has been if you move the customer's price too much it's not the expectation that they had when they signed up with you. So even on renewals. We're careful about how we manage this so from a durability standpoint, the retail business has earned strong margins in volatile years and in stable years and I think.
As part of the brand power of the business is that we're not selling an index type product. That's just floating with a spot price, we're actually taking some of that predictability risk by hedging forward and getting that benefit to the customer. So I feel very good about the durability and I Wouldnt Scot I'd like for you to add about that.
Market dynamics sure sure. Thanks for the question I would just add to what Jim said is that.
We've got multi brands at play in New York Hot markets in each of those brands are designed to attract.
A different customer segment, but in general in ERCOT on the residential side transactions remain at historical levels. So there were a lot of moves in switches and opportunities to win.
Emerging market. This really reflects the health of the Texas market migrations to consumers to it as Jim said prices have come down materially compared to this time last year and the number of offers in the market has increased as had the number of competitors in each market, so very robust, but I think.
You were successful in both accounts and the margin side is the differentiation of our products and services across those brands. So our summer campaign.
Features three distinct products are seasonal discount product are first to market and time of use product and then also an electric vehicle, you'll product, which really is doing well on the gains in helping us mitigate losses as well, yeah, and I would add sharp that the annual view for retail that outlook has improved.
When we originally set our guidance for 2023 as Chris noted the Q1 to Q2 effect is more about the shaping of the cost of goods sold because retail will buy power. According to the shaped by months for the year. So the winter costs much higher than the spring.
The summer costs are much higher than the fall and into December so we see that retail profitability much higher though in our results in two to you and <unk> and we see less from retail and <unk> and <unk>. So I was giving you the annual view as to how I think about the durability, but there is a quarter to quarter.
The difference because of how we.
By power for retail, reflecting the shape of tower Cos I hope that helps.
No. It does and that's helpful. Thank you for that and then just lastly, and I don't want to push too far but with such great color on 24, and 25 can you just speak to how the EBITDA opportunity that looks for twenty-six or at least the degree to which you've been able to hedge that far and just just maybe refresh us on the energy Harbor EBITDA.
The opportunity that far out are you still seeing things north of 900 million. Thank you guys.
Yeah, you bet. So shar, we have obviously continued our progress of hedging.
As we said we would we consistently look for opportunities to to provide a predictable earnings stream and so first of all of them on 'twenty four 'twenty five we feel good about where we are from a outlook standpoint for <unk> Standalone and that's really the data that we are operating with here sure.
Don't have a view into updates regarding energy harbor and how they look at the moment for 'twenty four 'twenty five because we're going through the regulatory process and so we the data we have is more the data we had at the time of the announcement and but our view is because we have.
Obviously in the market and we view the curves is that we're set up well for Vista Standalone for 'twenty four 'twenty five.
We still feel good about raising that range that we mentioned where it was originally.
Three five to three seven and now we're looking at 3738, so I feel good about where we sit in terms of extra Standalone Energy Harbor, we noted had something out of the money edges at the time that we announced 'twenty four 'twenty five.
And so our view there was that on a combined basis, we were at 4.35 or so on a combined basis recognizing they had some hedges that were out of the money.
We believe that there's an opportunity for our business because of our update that we gave because we were at three six when we gave you the update for dish for Standalone. If we're at 375 now for district stand alone again being between 3738 that puts the combined enterprise isn't that for four five to four five range you know so for.
$5 billion.
On average in that 'twenty four 'twenty five timeframe twenty-six we're pretty open still in fact, I would say steep mosquitoes here when we look at the markets, we look for opportunities, but when we last talked to you. We were seeing curves in a D hub for instance in PJM that were pretty.
Attractive they were in sort of the $50 range those have come off now to about $44 in that 'twenty 'twenty six timeframe very close to the acquisition case that we announced so I think we're on track for that $900 million the upside to that for that piece would need some <unk>.
The port from the 26 curve, because we've seen that move around from $45 up to the low fifty's and back to that sort of 44 range and we're still pretty open we assume they're still open again, we don't know what hedging they've done for the long term, but I think 900 is still a solid number for 2026 spread energy Harbor.
And in terms of our business district stand alone.
We've seen PJM come off we've seen ERCOT come up in ERCOT come up and it's been attractive and Steve I'd be interested in your sharing some thoughts about how you have seen these markets unfold even in the last month or two sure we've seen ERCOT because of the heat that we've been experiencing in the periodic bouts of scarcity that had been kind of a route.
<unk> issue here the last several weeks with the heat in Texas. It has rippled into the forward curves and so fixed price is holding in there. So we're heavily hedged some of our solid feel free and we're also seeing sparks to your point, Jim expand as we move out into that period, and so we're opportunistically hedging ERCOT where available as you can.
<unk> 26, and somewhat illiquid, but where we are having some success within our retail and wholesale channels and increasing those hedge percentages when the opportunities present themselves and of course with the a D hub and with energy Harbor, we'd have some PTC support ultimately shar we all.
Viewed as meaningful because it's kind of all all the cards are close to at the money right now on that but that's one of the reasons the deal was attractive as well as the support to the downside if we had it so.
Thank you Steve for that and Scott for the context on that sure. Thank you for the questions. Yeah terrific guys, Congrats and very good color I appreciate it.
Yeah.
Yeah.
The next question comes from the line of Michael Sullivan with Wolfe Research. Please go ahead.
Yeah.
Yeah.
Hey, good morning, everyone.
Thanks for all the color on those last couple of questions Hey, Jim.
Wanted to shift over to from the debt from the EBITDA side more to the debt side pro forma I think Jim you were mentioning.
You did the P. Tap and then you have some some margin collateral posting coming back.
Can you just give a better sense of like how much new debt you will ultimately have to issue and if that's changed.
From when you announced the deal and then what you know on a pro forma consolidated basis, where the the dead is going from where you are today.
Sure Michael I would say that that the conditions, obviously in terms of margin deposits.
The return of cash has been pretty favorable this year.
I'll turn it to Chris to talk about how that influences. The way, we think about financing energy Harbor and the overall credit.
Credit metrics and targets that we're looking at.
Yeah. Thanks, Michael for the question I'll put it into two buckets as we when.
When we announced the transaction we had we had shown a N a.
Something that we would use $600 million of cash and $2 $6 billion of debt and of course, we knew that there was going to be some more cash coming back from margin deposits or we expect it to come back for margin deposits, but we wanted to be conservative.
And make sure that we maintain sufficient liquidity.
We have settled those hedges throughout this year that money has returned as expected but that number also included.
They plan to do some nonrecourse financing at Mr Zero, which we still intend to do so I would say over the balance of the year Theres really two different things that we're looking at there's the acquisition financing.
You can bet that has with the return to the margin deposits and the cash and the P. Caps transaction that has also returned cash.
That has brought that to $6 billion down too.
Again, assuming we go to the next stage on the on the nonrecourse financing, but that's probably brought that number down to 1 billion, two 1 billion and a half somewhere in that range and then and then we still have nonrecourse financing and the and the work that was in our plan that was assumed in those numbers.
And I think as we said and as we've said in the remarks that we still expect to see a transaction in the coming months and so that will fill in the rest of we still have enough commitment that.
Yeah, we're we're still being conservative with our the financing commitment that we have in place, but that's really it in from a debt perspective.
As we said, we're still targeting sub three times.
At the closing I think we continue to believe that we're going to be.
Just above that and as we look forward you do it through a combination of debt repurchases and increasing EBITDA. We think we can get to that sub three times in the 2020 as early as 2020 for potentially leaking into the first part of 2025, but we don't see there being a long way for us to get to.
The target levels that we're looking at.
Yeah.
Okay. Thanks, I appreciate all the color there and then.
Maybe just on on ERCOT looking forward here obviously.
Been pretty hot down there what are you seeing in terms of.
Just the grid holding up for the rest of the summer and then thoughts on potential Newbuild response later this year around the.
The referendum vote.
Sure.
Yes, Michael it's been it's been a very active you know kind of last three weeks.
I would say it's a daily.
The area of focus for US Steve would say, it's a minute by minute focus and that's really because the grid as you know in Texas is.
It's been a robust low growth market.
And the additional resources that have been added over the last three years to five years has largely been wind and solar.
Solar move has been consequential you know 45000 megawatts year over year, which is helping that evening period, and we're getting to the point, where solar is filling in that six to eight hour range fairly well and we are all focused on the wins ability to pick up where solar left off.
And that sort of seven to eight o'clock hour in beyond a couple of good points is that earlier in June .
While wind overall was lower than third in second quarter. This year in ERCOT than last year at peak times. During this evening hours wind actually when the grade was at 80000 megawatts of higher wind actually performed relatively well in the early part of the summer we didn't see much price format.
Sure.
In July late July and early August we're starting to see that.
That the wind in those periods of time is returning more to kind of normal expectations and we're starting to see that tightness in those late evening hours and of course, we're talking about the marginal resource of wind or solar that assumes nuclear coal gas are all operating the way they need to be and.
We sometimes lose focus on that because that's the majority of the grid.
The units are running hard.
No end in sight for that for this heat that we're in and so.
The team is doing a terrific job keeping these units online and I would say overall, the ERCOT grid and the operators have done a nice job keeping the grid supplied but theres, an asymmetric risk to the upside on on prices. When you look at how tight the grid actually is and we're starting to see those fall.
Words.
24, 25, I think start to reflect that there actually is meaningful supply demand tightening that's occurring in ERCOT and as far as whether gas newbuild.
Comms.
Three year process for the most part from the time you get started.
And the loan referendum is is in November the PCM, which was part of the house Bill 1500, the Sunset Bill. It has a net billion dollar cap that was inserted as part of that legislation. It could be several years to three years before that could be implemented.
The PCM. So there are a lot of variables that are moving at the moment that developers would have to get comfortable with in terms of are they seeing enough to build because the curves are still backwards, even though we're saying the courage. It moved up in 'twenty four 'twenty five and we're working through at ERCOT still has.
There is still an assumption in this market is going to get overbuilt or theres going to be a lot coming that's just going to be potentially supported by P. T CS and create downward pressure on pricing. So I think it remains to be seen what kind of queue theres going to be for gas fired generation, but there clearly was support in this legislative says.
And to try to keep existing.
Generation and tried to incentivize new not all stakeholders agreed on what the right solution is to do that but at least there's recognition that those thermal resources existing and new are important and that and that that was a good outcome, but theres still a lot of work to do with the PUC in ERCOT at various stakeholders.
Groups to get this over the finish line.
Yeah.
Thanks, so much appreciate it.
Thank you Michael.
Yeah.
The next question comes from the line of Julianna.
Anthony with Bank of America. Please go ahead.
Hey, good morning team. Thank you very much for the time appreciate it just.
Just wanted to follow up a little bit on the on the conversation on the 24 25 to four and a half there can you elaborate a little bit on what the retail assumptions are there I know you are trying to get at this little bit, but it seems like you're just collapsing the transaction and there ultimately they come up with that new number in the mid force how do you think about these other retail piece.
There and ultimately just also what were you alluding to on 26 I know you said it was quite open I'm just what does that transpose into 26. If you can start to go there just quickly in terms of the puts and takes sure.
Well, if you look at our revised guidance for 2023.
If you look at that sort of mid point, if you take that and add the energy harbor numbers to it that I shared with you for 'twenty four 'twenty five youre getting to that 4.5 billion dollar number.
And what we've seen in our business model Julian It is because of where we've hedged and how we've been able to hedge the realized kind of margin expectations are pretty flat from this kind of 'twenty three 'twenty four 'twenty five timeframe and a split between retail and Jen might vary a little bit, but not materially and I think that's one of the.
<unk> parts about our model is and we saw it last year and we're going to see it a little bit. This year is that you may see a little bit of movement between retail and gen based on market conditions, but retail is retail is very solid in this kind of billion dollar range over that horizon and I would expect you know the DIFM.
<unk> being the wholesale to get to that 3.8, and that's actually I think one of the things that we've been excited to share is that the business is stable. It doesn't mean, we're not working hard everyday to hold onto it I don't want to make it sound like it just because we've hedged it it's going to be realized we have to deliver every <unk>.
Good day on the on the business.
But the outlook is actually above where we were in may of last year, when we announced it and stable and we will be adding energy harbor to it and so that line of sight with those hedge percentages, we feel really good about where we are in that 'twenty four 'twenty five timeframe certainly twenty-six is more open.
And as I mentioned earlier ERCOT looking favorable relative to last time, we talked but PJM is down on fixed price power at this point in 'twenty six but then we also have some PTC PTC support for that for the energy Harbor length. It doesn't look like ERCOT would be in that PTC range.
Right now because of where the curves have moved up to but we've got kind of geographic flexibility segment, you know flexibility in or I should say diversification and how I think you know 2026 will play out.
Got it and then if I can ask you to clarify your or Florida cat expectations. I mean, we've got a few different programs yet to be implemented I suppose is the procurement program.
With a certain level of subsidy baked in there.
<unk> I suppose at some point curious on your sense of timing on that for any real impacts and then related we have other reserve programs yet to be fully implemented I'd be curious on your initial assessment of some of these programs like the special reserves for instance.
Sure.
I'll start I think by subsidy I think youre, referring maybe to the loan program and the grants.
Could be coming Julien yeah.
So yes that obviously the referendum in November the initial amount that was shared as part of the Bill was $10 billion. The amount that has been provided for in the budget is $5 billion and then the amount of the $5 billion, that's going to be allocated to to building new.
Gas plants is unknown at this point, so let's say, it's something in the three to $3 5 billion range potentially when we've looked at the math the 3% interest on a 60% loan to value. It can move your returns a couple of points. So it is helpful. But it does not make up for potentially missing revenue.
<unk> in a backward dated market and that gets to your other point, which is do these other programs, whether it's in or D. C Bridge PCM being implemented E. Crs was just implemented Drs will be implemented by the end of 2024 do those cumulatively add a recognition.
Reliability for the assets that can provide it and if so can.
Can we get enough line of sight.
To build into that.
And I think we don't know yet for US I mean, we were still evaluating it Steve in terms of how the new ancillary like E. C. R. S. Drs, how you see that playing an Arctic bridge be interested in and share your thoughts on how you see the market adapting to these sure I I think let's let's start with ECR S. Because its the later.
Just in and we've actually seen how it's been implemented and they're they're putting it in when I say, they ERCOT is dispatching it and only when critically needed and so I think it's serving well from a reliability perspective in terms of keeping ERCOT.
Out of an E situation.
But one of the other things Ive seen is it it hasn't necessarily impacted price formation too much. So I really think it gets into how ERCOT handles these reserve products, if they handle them and in a way that their design, which is really when the grid is approaching tight conditions and it's not necessarily used.
To for price formation, which is what we're seeing so far when it when I see ECSEC R. S dispatched its been on the very hot days at the peak hours when needed and it hasnt been very price suppressive. So we think it's it's.
It's working the way it's intended and you know we'll have to see how these new reserves that they're putting in but to the extent they use them in the same way as E. Crs I think we are in the best of both worlds, where we're avoiding you know what I'll call emergency conditions on the grid, but we're still seeing very solid price formation. When it does get tight and I think it's too early to call D. R. S.
This point I mean, it's still early stage to think about that one Julien that was one of the ones that some certain stakeholders, we're pushing as kind of a market solution and so I believe Pete the PUC in ERCOT have enough tools.
I can work with to try to build some incentives for existing and new assets to be recognized and rewarded for their reliability, including affirming requirement for assets that come on to the grid. After January one 'twenty seven.
If they have to effectively be able to backstop the expected generation that they are committing to those were all the right I think.
Concepts. It's just early stage for us to know at this point, how that's going to affect prices.
Right now net net though there does seem to be some kind of timing discrepancy between when these reserve programs come in and then he ultimate effect of any kind of.
Procurement program here.
I think so the procurement program or the loan program and grant program alone like I said is marginally it's beneficial but it does not solve the broader problem that we entered the session trying to solve and I think that's why we ended up with a menu of things and frankly, it's a ton of work for the pulp.
Click utility commission in ERCOT.
To work through this and they're going to have their play more than full.
There's real time co optimization that has to fit in there before even PCM. So there is a lot still to I think figure out and work as we can be active and work with stakeholders involved to try to bring clarity to it but yes on a calendar basis its multi year at this point.
Excellent guys. Good luck. Thank you so much talk to you soon.
Yeah.
The next question comes from the line of <unk> Chopra with Evercore ISI. Please go ahead.
Hey, good morning team. Thanks for taking my questions Hey, just.
On the Hey, good morning, Jim just on the hedges I think you answered part of my question in your prepared remarks, but the 22 to 25 hedges data at 86% and no change since the Q1 update call is that just you willing to stay more open given the market conditions you mentioned that.
The archive curves or is it just more normal course of business and you you you you're going to be you're going to opportunistically hedge more just any thoughts there.
Yes.
Very good question and yes, I would say there's a combination of factors one is.
We've actually added some length given that the curves have moved up so that's a good thing there's more hours in the money for the fleet.
So that means there's actually more to edge that that's ultimately a good thing and so when you look at the percentage, it's not a static amount of generation.
So that's one element the second element is that as of 630 <unk>.
That we were giving you. These percentages we've continued to hedge since 630, particularly into 2025 time frame.
I don't feel that where we sit but working with our team that we feel 26 is that a place where you have to go lock it all in because of the dynamics, we talked about earlier, we think there's still upside in some of these markets and we feel good about the visibility we've given for 'twenty four 'twenty five in <unk>.
We've got time to work on 26, so the curves as I mentioned in 'twenty six for PJM had come down ERCOT has gone up but not anything that we need to go rush out and move materially on 26 at this stage.
Yeah.
How about just within that 22 to 25, Peter I guess, what the message here is that 86% should move higher.
As we get a little easier it's already it's already higher since 630 or gas and and so the 26 hasn't moved much but we have moved up on 25, and we're you know we're nearly fully hedged obviously for 24, so but these percentages do move because again being in the money.
It means you have more hours to hedge because there is gross margin. So the hedge percentage could drop but your earnings forecast could go up as a function of just simply looking at the opportunity set. So some of it's just the timing and the fact that these curves do move around.
Understood. Thanks, and then Jim one of the questions. We consistently get from investors. Obviously as you look at the stock right I mean since I believe you initiated this buyback program that was a Q3 Q4 'twenty one the stock was in mid teens.
You broke 30 today, just your updated thoughts on capital allocation share buyback versus growth opportunities. How how are you thinking about all of that here. The stock is at 30 Bucks sure.
Well your guess.
It is good to see that the stock has moved up we view this as a long term strategy when we initiated it and we still feel that way if.
If you look at the stock price move and this is a very imprecise science, but a good portion of the move you could explain by virtue of the reduction in the share count and not necessarily seeing the enterprise value move that materially now that's still a good thing for the existing shareholders and it's an opportune.
For existing shareholders that are effectively increasing their percentage of ownership in desktop.
I also believe that since the may timeframe of last year, and where we are today, we have materially improved the earnings outlook of the company, which.
In theory would result, potentially in a multiple expansion and we really haven't seen that much of a multiple expansion and I'm not here to argue what the right multiple actually is but I still feel there's recognition that I believe the market will continue to see as we put I call. It.
Points on the board delivering on our on our scorecard and our results and at some point in time when folks are comfortable that the earnings power is sustainable for the in the duration of our horizon beyond even the the two to three years, we talk about you might actually see some multiple.
Expansion, we're not really there yet and so our capital allocation plan for the foreseeable future and I would put that and partly the high class problem. If we have to revisit it but we feel very good about the capital allocation plan and we might lean in a little more aggressively on the pace of the buybacks if we continue to own.
Perform and see where we are.
With our obviously cash needs to do that fund energy Harbor, which is which is our focus is to get this transaction closed in the fourth quarter and then we're being disciplined on the Vista zero projects and when we're reflecting that and we want our shareholders to be confident that we do things and we do look at the buyback has an alternate use.
Capital.
Capital.
Relative to the growth options for the growth options need to be attractive and so we will pace the district zero projects to make sure that we're hitting the best ones and not chasing just the renewable projects and I like our portfolio there.
<unk> 350 was was an excellent.
Project to bring online an excellent job by the team so capital allocation plan is intact and we're excited to.
I would say hit the gas pedal on the capital allocation plan, because we they get to the right. It's the right mix for our shareholders as well as you know our debt holders.
Got it.
I just I would just add obviously you were talking about as you mentioned $30. We do as you would expect internally have our own valuation of what management and the team feels like the stock is worth that I think as Jim said, we're we're still comfortable buying and potentially landing in.
At these prices and so it gives you a feel for where we think fair value is and where we're not there yet.
Got it thank you both and congrats on a solid execution here on several quarters. Thanks.
Thank you for your cash.
Okay.
The next question comes from the line of David <unk> with Morgan Stanley . Please go ahead.
Oh, thanks, so much good morning.
Good morning, David.
Let's see I was wondering I noticed a decline in the Capex for 2023 for solar and storage development wondering what's driving that and then similarly, just looking out to the development plan some of the in service dates moved out.
For for several of the solar and storage development projects I'm wondering if you could give some color around that dynamic yes, absolutely. Those two are related David we have.
The Illinois coal to solar we had the majority of that reduction that you see with some movement out of 2023 and the end of 'twenty four 'twenty five we're still working the procurement cycle with working with vendors on E. P C.
And obviously the equipment.
And we're still working that process in Illinois. So it's more just a deferral at this point for the coal to solar projects and that was a.
That was that was about two thirds of what was moving out. The other is as I mentioned on a couple of previous calls.
On the ERCOT solar we're starting to see the solar hours kind of cannibalize the solar hours and so we will move forward on solar projects with a PPA, but we're not going to move those into just in a merchant type model and that really was the other part of what lowered the capex now as I've.
And as well we own these projects the pacing of these projects may not be right now could be right three years from now depending on market conditions and depending on how some of these rules played out that we talked about on one of the earlier questions, but it's that is really a reduction at this point.
This year, that's a deferral on the coal to solar, but I would say in.
In Texas solar, but I would say next year, we'll probably still in this kind of 600 million numbers. So we're not pushing the number down this year to then take the next year number up fully we're showing that discipline because the Texas piece in particular is something that we want to keep a close eye on so.
I think even for next year, you're going to see a development number for Capex, that's pretty close to this year.
Got it got it.
That's that's helpful and I guess I'm just maybe following on to that how do you think of you know if there is.
Now maybe this is a little bit separately I imagine if that growth Capex number goes down that was gonna be largely financed with nonrecourse project financing anyway. So that's where I'm open up additional cash available for allocation at the at.
The overall best route density.
No you have that right as we as we look at this is the amount.
Of of equity of <unk>.
Okay.