Vistra Corp

NYSE:VST

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Vistra Energy Third Quarter 2019 Results Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

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

[Molly Sorg, Vice President of Investor Relations]

Thank you, and good morning, everyone. Welcome to Vistra Energy's investor webcast covering third quarter 2019 results, which is being broadcast live, from the Investor Relations section of our website at www.vistraenergy.com. Also available on our website are a copy of today's investor presentation, our 10-Q and the related earnings release.

Joining me for today's call are Curt Morgan, President and Chief Executive Officer; and David Campbell, Executive Vice President and Chief Financial Officer. We have a few additional senior executives in the room to address questions in the second part of today's call, as necessary.

Before we begin our presentation, I encourage all listeners to review the Safe Harbor statements included on Slides 2 and 3 in the investor presentation on our website that explain the risks of forward-looking statements, the limitations of certain industry and market data included in the presentation, and the use of non-GAAP financial measures.

Today's discussion will contain forward-looking statements, which are based on assumptions we believe to be reasonable only as of today's date. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected or implied. We assume no obligation to update our forward-looking statements.

Further, our earnings release, slide presentation, and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures are in the earnings release and in the appendix to the investor presentation.

I will now turn the call over to Curt Morgan to kick off our discussion.

[Curtis Morgan, President and Chief Executive Officer]

Thank you, Molly, and good morning to everyone on the call. As always, we appreciate your interest in Vistra Energy. We expect this call to be lengthier than usual. We have a lot to cover including Q3 results, 2019 guidance, 2020 guidance with a glimpse of 2021, an operations performance initiative update and a 10-year view based on our detailed fundamental analysis. So let's get started.

Turning to Slide 6, Vistra finished the third quarter of 2019 reported strong adjusted EBITDA from its ongoing operations of $1.064 billion, results that are once again in line with the management's expectations for the quarter and results I am pleased to see relative to guidance that's already incorporated, high ERCOT wholesale power prices, especially for the summer of 2019.

The quarter began with an unseasonably mild July following one of the mildest Junes in over 10 years. In fact, there was a very, very, sentiment out there and our stock had sold off. On our second quarter call we outlined why we remain bullish on the markets, especially ERCOT and our company. Of course, we know that August turned out to be a different story than July, as the tight supply/demand dynamic in ERCOT resulted in sustained scarcity pricing.

We saw 12 15-minute intervals clear at the price cap of $9000 per megawatt hour during the month. To give you some perspective of the magnitude of the difference between July and August pricing at ERCOT, the average 7 x 24 price in August was $131 a megawatt hour, more than four times higher than the average July sell price of approximately $30 a megawatt hour.

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

In ERCOT, an order for peak hour forward curve that is well above $100 per megawatt hour to be realized. The market has to see some level of scarcity pricing materialize. In fact, for peak forward curves to trade at these levels a certain number of scarcity pricing intervals are assumed. In order to achieve financial projection as they are based on the forward curve going into the year, we need to see some of these high priced intervals occur.

In short, each high priced interval is not necessarily additive to financial results on a standalone basis and some of this volatility is required to achieve the expected outcome. Scarcity pricing did materialize in August in ERCOT in September of this year and Vistra's integrated model performed well. Our net length in ERCOT was able to cap the scarcity pricing in the market while also covering swings in our retail load including the incremental Crius load we acquired on July 15.

Crius came to us like many other standalone retailers, under-hedged for the ERCOT summer and right in the thick of it. As a result, the Crius book was more exposed to summer volatility in 2019 than it would have been under our ownership. In fact, the scenario that materialized this summer is exactly why we prefer to be net long in ERCOT. Our incremental length is first available for risk mitigation to ensure we have the appropriate amount of generation available to cover the forward sales from our generation asset and our retail load requirements.

Incremental generation is then available to capture any scarcity pricing in the market providing upside opportunity. Of course, the overwhelming majority of our generation position is used to hedge retail and much of the excess generation is hedged before we arrive at the prompt [ph] periods creating a lower risk, more stable earnings profile. We believe this is the right way to run out business, especially in a market like ERCOT that exhibits such extreme volatility in energy pricing.

In fact, we expect we will see even more volatility in ERCOT in the coming summers as the market relies more heavily on intermittent and renewable assets. As a result, the types of volatility products that have historically been available for retailers are becoming more expensive and difficult to find. Given the change in composition of the generation mix in ERCOT and the expectation for increased volatility, we will likely want to go into future summers carrying at least as much length as we have historically, a topic I will discuss in more detail momentarily.

Turning now to year-to-date results, Vistra's adjusted EBITDA from ongoing operations for the first nine months of the year is $2.586 billon, which is in line with management expectations that already incorporated robust summer wholesale power prices in ERCOT as I've previously discussed. With our strong performance for the first nine months of the year combined with the addition of the Crius business as of July 15, and the Ambit business which we just closed last Friday, November 1, we are both narrowing and raising the midpoint of our full year 2019 ongoing operations guidance range.

We expect we will finish the year delivering adjusted EBITDA in the range of $3.32 billion to $3.42 billion in the top half of our prior 2019 guidance range. In effect, our base business is generally tracking as originally projected for the year with Crius and Ambit providing EBITDA upside to our prior guidance range.

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

You will also see in the guidance table on Slide 6 a column highlighting illustrative guidance for 2019. This illustrative guidance is $40 million higher than our updated 2019 guidance range as it backs out the negative impact of ERCOT's retail backwardation we expect to realize in the year. When we talk about retail backwardation, we are referring to the near-term impact of long-dated contracts executed with retail customers supplied by our native generation.

For example, if we can execute a new three-year contract with a retail customer, often the pricing under that contract is flat for the entire three-year term. Given the backwardation that exists in current ERCOT market curves, that usually means the contract is out of the money compared to the market in the earlier period of the contract, but meaningfully in the money thereafter, such that the net present value of executing the transaction is favorable.

While we have historically realized some level of retail backwardation in our results, the total impact has typically been minor. However, for 2019 and 2020, we are projecting a much larger impact as a result of the greater curve backwardation entering into both years coupled with increased interest by market participants to enter into long-dated contracts in ERCOT.

For 2019 we are estimating the impact of the ERCOT retail backwardation to be approximately $40 million. If we were to exclude this negative end year financial impact, our adjusted EBITDA guidance range would have increased to $3.36 billion to $3.46 billion reflecting a midpoint that would have been at the high end of our guidance range. We wanted to provide this illustrative range to give you a sense for exactly how well our integrated operations are executing in 2019.

In fact we believe, excluding the adverse backwardation impact from 2019 adjusted EBITDA is the proper way to look at our 2019 results as we did not plan for the volume or the impact of long-dated contracts in our initial 2019 guidance and moreover, the future of favorable impacts from these retail transactions will be included in our prospective guidance range. Our core business demonstrated stability in a volatile summer market. And with the additions of Ambit and Crius we are expecting incremental upside to our base results.

Turning now to Slide 7, we're also announcing today our guidance ranges for 2020. We have been reiterating for the past year our belief that 2020 results could be relatively flat to 2019, in part because we were confident the historical 2020 forward curves remained dislocated from fundamentals and would improve after we got past the 2019 summer, a phenomenon we have witnessed in recent years as depicted on the next slide and one we expect to continue for the foreseeable future.

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

The recent uplift in the 2020 forward curve, as well as the addition of the Crius and Ambit businesses, has raised our prior expectation of relatively flat to a projected increase of adjusted EBITDA year-over-year. Specifically for 2020 we are projecting adjusted EBITDA in the range of $3.285 billion to $3.585 billion and adjusted free cash flow before growth of $2.16 billion to $2.46 billion.

Summer of 2019 we have provided on this slide an illustrative guidance range excluding the projected negative impacts of our ERCOT retail backwardation. For 2020 we expect these impacts to be approximately $70 million higher than what we expect to realize in 2019 partially due to the addition of Ambit, whose portfolio will also be impacted by contracts with retail backwardation in ERCOT.

Excluding these impacts, our 2020 guidance midpoint will be approximately $3.5 billion, a significant increase over our expected 2019 results. In fact, many of you will recall, the five-year financial projections we've published in our joint proxy statement and prospectus in connection with the Dynegy merger announcement in the first quarter of 2018. At that time, our Board of Directors evaluated the merits of the Dynegy transaction assuming the 2020 adjusted EBITDA of the combined business would be $2.81 billion which included an estimated $350 million of value levers announced in connection with the merger.

The midpoint of our 2020 guidance is more than $600 million higher than that previous estimate. In only two years we have improved that 2020 financial outlook by more than 20% with the vast majority of this improvement being driven by items entirely within our control and largely unaffected by commodity prices. Specifically, approximately $425 million of the improvement in adjusted EBITDA is attributable to the hard work our teams have done to increase the expected merger value levers by nearly 70% while also adding incremental EBITDA through growth investments.

Two years ago, when we announced the Dynegy merger, the market was concerned about the long-term viability of this business, pointing to a $200 million decline in capacity revenues that would materialized in 2020. The 2020 guidance we are providing today is just one example of the resiliency of this business model.

Our teams continue to identify efficiencies to maximize the value of our operations and we've been successful at identifying tuck-in growth opportunities that are both EBITDA and free cash flow accretive with very attractive returns while requiring modest levels of our free cash flow to pursue. We are confident that this business model will continue to create value for our stakeholders, a topic we will discuss in more detail shortly. And I must say, in our view, this stock price does not reflect the resiliency, stability and level of EBITDA and free cash flow of this business.

A final note on this slide, you might notice that these guidance ranges are slightly wider than our prior guidance ranges, reflecting bands of a $150 million as compared to our prior bands of $100 million. We believe our guidance range based on a percentage of EBITDA is most appropriate and a range of plus or minus approximately 5% is reasonable and in line with peers.

We believe a wider guidance range also better reflects the potential range of outcomes for our business, particularly, in ERCOT, with its tight reserve margins and increasing reliance on intermittent renewable resources. This market dynamic is increasing the volatility in ERCOT as well as the potential to capture value if managed properly with the right assets. In fact, it is now more important than ever that we have length on the days where there is volatility in the market, especially when taking into consideration the size of the load reserve.

As a result, we might find it prudent to carry more length into December 2020 and beyond than we have in years past. Given this past summer and the likely influx of more intermittent resources, the cost of managing risk in ERCOT has gone up especially for short retailers. While the range of potential outcomes may be wider for us in ERCOT, we are well positioned to take advantage of the increased volatility given our high quality long asset position, integrated business and commercial capabilities.

Furthermore, as I will discuss in connection with our 10-year outlook, our fundamental analysis continues to forecast a high probability of scarcity events occurring in ERCOT in future years. The ERCOT market is changing. Increasing intermittent resources will inevitably increase the appropriate level on reserve margins. A cost to run the power system with significant intermittent renewable that is yet to be fully understood and recognized by stakeholders. This increased volatility suits our integrated business position and capabilities quite well. So we remain bullish on the ERCOT market and are building to capitalize on opportunities likely to arise in the future.

Turning now to our thoughts on 2021, though actually we still believe 2021 adjusted EBITDA could be relatively flat to or higher than 2019 and 2020. If you take a view based solely on the forward curves, 2021 adjusted EBITDA would look slightly down compared to prior years. However, as we have discussed, and as we depict on the next slide forward curves that are more than a year out tend to understate the tight supply and demand dynamic and increase likelihood of volatility in ERCOT in particular.

The graph on Slide 8 is a helpful visual of this phenomenon, where there was a significant uplift in forward pricing in 2018, 2019, and 2020 as each delivery year approached. This uplift was especially prominent for 2019 and 2020, appropriately reflecting updated scarcity pricing expectations including the modifications to the ORDC and the tight market conditions.

As you know, we develop our own point of view of where we believe forward pricing is likely to materialize based on rigorous analysis of market fundamentals. As it did for 2020, our point of view for 2021 would suggest that current market curves are not representative likely pricing outcomes. As a result, when looking forward to 2021, in the context of our internal point of view, we believe 2021 adjusted EBITDA would exceed 2019 and 2020 results.

Recognizing that there are a range of potential outcomes for 2021, we are comfortable given our fundamental analysis that 2021 has a very good chance of being relatively flat to 2020 if not higher. A relatively flat outcome would reflect a nearly $700 million improvement in the adjusted EBITDA that was forecast for the business at the time we announced the Dynegy merger two years ago. The outlook for our business continues to improve and we remain believers in our business model.

Turning now to Slide 9, I'm excited to announce today that we have identified $50 million of incremental EBITDA enhancement opportunities from our ongoing Operations Performance Initiative under the leadership of Jim Burke. Our teams on the ground know that in order to remain viable as the generation landscape evolves, we must ensure our assets are operating at the highest levels of efficiency and at the lowest cost while first and foremost prioritizing safety. The OP process is critical to our success in this regard and it continues to deliver results.

Incrementally, within the fleet rationalization bucket of our OP process we have also improved our financial forecast with the retirements of four coal plants in downstate Illinois. As you know, this year it was required to retire 2000 megawatts of nameplate capacity in MISO zone IV in connection with an amendment to the Multi-Pollutant Standard which was finalized this summer. Three of the plants, Coffeen, Havana and Hennepin were retired effective November 1. The fourth plant Duck Creek, is scheduled to retire on December 15, of this year.

As a result of these retirements, Vistra has improved its 2021 adjusted EBITDA forecast by an incremental $100 million which is net of the previously identified OP opportunity at these sites. Taken together, these updates improve our OP target to a total of $425 million per year, up from the $125 million we announced in connection with the Dynegy merger.

Including synergies in OP the EBITDA value level of target we have identified from the Dynegy merger have increased from $350 million annually to $750 million which includes $290 million of traditional merger synergies, $345 million of OP value leverage identified, and a net $100 million of EBITDA improvement in 2021 from the retirement of the four MISO plants. It has been two years since we first announced the acquisition of Dynegy and the financial benefits of the transaction continued to improve.

Financial synergies however, were not the sole reason we made a decision to acquire Dynegy. Another important factor was the opportunity to transition Vistra's generation fleet from one that was heavily weighted toward coal to one that is now approximately 64% natural gas by capacity. We believe we are relatively young, low heat rate generation fleet will be able to create value for our stakeholders over the next decade and beyond which leads me to the discussion of our 10-year fundamental outlook.

Before I get into the discussion, I would like to explain why we believe it is essential for us to present a longer-term view of our company and the key power markets where we operate. First, at a minimum, we believe it is important to frame the potential impact of our recently announced greenhouse gas emissions reductions targets on the business. Furthermore, we believe it is imperative to our company's valuation that we explain the long-term prospects for the business, even our perspective on technological and climate change impacts on the sector.

Simply put, there is a terminal value question for energy companies and we believe it is necessary to address it head on. The good news is that the power sector stands to grow over time as a result of electrification across all sectors of the economy in response to climate change and we are well positioned.

Slide 11 summarizes our 10-year view. As most of you are aware last week Vistra announced for the first time our long term greenhouse gas emissions reduction targets which include to achieve a more than 50% reduction in CO2 equivalent emissions by 2030 compared to a 2010 baseline. Notably, Vistra has already retired or announced plans to retire 14 coal plants and 3 gas plants since 2010 resulting in a reduction of CO2 equivalent emission of approximately 42%.

As a result, in reflecting marginal profitability at some of our coal units in particular, we expect we can achieve our 2030 emissions reduction target to an incremental retirement actions representing only 2.5% of our projected 2020 adjusted EBITDA. While any such retirements will advance our progress toward our long term emissions reductions target our fundamental analysis would suggest that future retirements of this magnitude will be warranted based on economics alone.

In fact, we estimate generation assets representing approximately 5% to 8% of our projected 2020 adjusted EBITDA could be at risk of retirement in the next decade, predominantly from new build and particularly renewable and expected infrastructure [ph] expenditures. Importantly, this small percentage of our total EBITDA can be replaced on relatively minor growth investments over the same time period. At Vistra's targeted return levels we could replace 2.5% EBITDA reduction projected to achieve our 2030 greenhouse gas reduction target with less than $500 million of investment.

The incremental at risk EBITDA would require only $500 million to $1 billion of additional investment. To put this side of investment into perspective, we have already more than replaced the equivalent of the EBITDA risk through our recent retail and battery investment, not to mention our incremental EBITDA improvement initiatives such as OP.

In addition, this level of investment represents only about 2.5% to 7.5% of our anticipated free cash flow over the next 10 years assuming we generate $2 billion of free cash flow each year on average. The bulk of business current adjusted EBITDA is derived from its relatively young, low cost, highly flexibility gas fuel generation fleet with two of the lowest cost nuclear and coal plants in the country in Comanche Peak and Moss Landing. We believe these assets are well positioned for success in markets with increasing reliance on intermittent [ph] resources, in particular, we expect our flexible natural gas assets will run more and remain critical to the reliability of the regional power markets in which we operate.

We are seeing this phenomenon play out in California now as a percentage of solar assets in the state increases. For example, resource adequacy contracts for gas assets in California are being transacted at $7 to $7.50 per KW a month right now, which as a frame of reference is almost double the revenues awarded in ISO New England's latest capacity auction.

We also saw this play out in ERCOT during the summer peak as our gas fuelled peaking and steamer assets played a key role on low wind days. Our fleet, which is approximately 64% natural gas by capacity is well positioned to capture value and support market reliability as renewables are built out across the U.S.

Similarly, we believe our retail business will remain a stable and growing contributor of our performance over the next decade and we project fundamentals in both ERCOT and PJM our core markets will remain strong.

Turning to Slide 12. Let's start our fundamentals discussion with ERCOT. Getting right to the punch line, our fundamental analysis projects that ERCOT prices are likely to remain in the mid '30s or higher per megawatt hour through 2030 with scarcity pricing events remaining consistent feature in the market over this time period.

In reaching this conclusion, our team factored in an estimated 1.5% to 2% annual loan growth through 2030, and the scenarios that we evaluated included the addition of up to 50 gigawatts of new renewable assets including approximately six gigawatt of battery storage with no sustained transmission capacity constraints, although we do expect there will be price differential zone.

We similarly modeled potential retirements in the market based on economic factors or plant obsolescence assuming only 3.5 gigawatt of retirements over the next decade. While we believe our analysis is conservative if it proves to be too bullish, we believe there are more than 15 gigawatts of generation in ERCOT supply stack potentially at risk of retirement which should further mitigate any downside scenarios.

In arriving at our conclusion on expected market price outcomes, we ran a bottoms up, hour by hour simulation model with explicit assumptions around new build, retired and low growth and we calibrated our model relative to ERCOT's history. What market observers perhaps do not appreciate is how markets will evolve with the rising intermittency from increased reliance on renewable assets. The greater the percentage of renewable assets in the market, the higher the levels of volatility, we expect to see.

This is true, even if the market has increasing reserve margins as the expansion of reserve margins is driven by renewable assets, which tend to rise and fall together. Renewable penetration effectively lowers the overall median price observed in a year as renewable assets with a zero marginal cost shipped to generation stack further to the right.

However, and most important, the higher percentage of renewables in the market will significantly increase the probability of scarcity events in pricing volatility, resulting in a significantly higher average annual price relative to the median price. If you think about it, renewable assets of a lifetime in the same geographic area will generally be available or offline as a class.

In many instances the renewable assets will not be able to capture price back because in large part, they will be the cause of the scarcity event during the correlated nature of their failure to perform. For example, all solar will be offline at 9:00 PM and all wind drops when front stall over a geographic area.

And increasingly important metric to pay attention to in ERCOT will be net load defined as load less renewable, as that is ultimately what the ISO has to manage on a delivered basis. Net loan peaks rather than overall demand peaks are expected to be more highly correlated with scarcity events in the future. This was the case in ERCOT this August when price by us were driven primarily by lower availability of wind generation on days with strong, though not extreme demand as we depict on the next slide.

Slide 13 shows that on August 15 of this year, power prices in ERCOT spiked to the market cap of $9,000 per megawatt hour. However, peak load was less than 71,000 megawatts, approximately 5% lower than ERCOT's 2019 peak summer demand. The real driver for the price hike was the low level of wind output, which was approximately 2,500 megawatts or less than 15% of nameplate capacity during the intervals at the cap, compared to an average output of 6,000 to 7,000 megawatts per peak summer wind.

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

Ensure renewable penetration in ERCOT should not meaningfully depress market pricing, rather our fundamental analysis which suggests average market price will remain stable to rising over the next decade. Our ERCOT fleet which is comprised of low cost base fuel of coal, solar and nuclear assets, highly flexible and low heat rate CCGTs and gas peaking and steam units is well positioned to capture value as the market evolves.

Before we leave ERCOT and move on to PJM, let's turn to Slide 14 where we back half 2019 actuals to prior years in order to further demonstrate our view that 2019 is representative of ERCOT's new normal. As you can see in the chart on the top half of the slide, despite the scarcity pricing we observed in August and September of this year, 2019 was not an outlier of extreme temperature days in Texas.

As I just discussed, the scarcity pricing was driven more by a combination of strong load and low renewables, a phenomenon we can expect to see more of in ERCOT over the next decade, particularly as a greater percentage of the supply base is comprised of renewable assets. The bottom half of Slide 14 shows the result of recasting 2011 through 2019, based on our fundamental point of view of the 2020 supply stack.

The results reinforce our expectation of persistent scarcity events going forward. For example, 2018 modeling to 2020 supply stack, we would have expected to see 14 hours in north of pricing above $1000 per megawatt hour compared to the poor hours, we actually observe in the year. This back cast highlights that a small number of incremental renewable assets in the supply stack can have a noticeable difference in pricing outcomes.

Last, let's not forget that beginning in March of next year, ORDC pricing will kick in even earlier than it did in 2019, further increasing the probability of scarcity pricing outcomes. We remain steadfast in our view, that the long-term forward power curves do not reflect the underlying fundamentals of the ERCOT market. As we have discussed in the past, the backwardation of the forward curves were not reflective of fundamentals so exert a certain level of discipline on the market, especially related to merchant thermal new build.

It will also impact future renewable development as we reach a saturation point for renewable PPAs. Let's not forget that merchant investments require the ability to hedge five to seven years out to secure capital. In addition, the market must support sufficient revenues to justify merchant investments. There are some that believe around the clock pricing in ERCOT will decline to a sustained low 20s per megawatt hour. But this ignores the likelihood of incremental retirement at those price levels as well as the need to have long-term pricing that supports adequate returns for the lowest cost merchant investment, likely renewables.

In fact, this low price draconian view is neither supported by any reasonable analysis, nor can it sustain the market in the long run. Our analysis indicates that the current market rules in ERCOT can and will provide adequate revenues, but they will be more volatile and less predictable. We will see if this market construct will support the level of investment, especially merchants that will be needed to maintain a minimally acceptable reserve margin as we have assumed in our fundamental analysis.

We believe our existing ERCOT generation fleet, with assets that are low cost, flexible, and well positioned on the supply stack, will remain valid and critical to ensuring a reliable cost effective risk.

Turning now to PJM, I am on Slide 15. Unlike ERCOT, PJM has delivered relatively stable energy and capacity revenues over the last several years. From 2010 to 2018, the average PJM CCGT earned approximately $9 to $12 per KW month from the combination of capacity and energy. In fact, capacity and energy revenues has historically moved in opposite directions, resulting in a relatively stable earnings profile in total, and over time.

The graphs we depict on Slide 15 demonstrate this phenomenon. For example, in 2016, you can see that gross capacity prices for RTO [ph] zone were offset by on peak spark spreads that were at a four-year high. Similarly, in 2017, on peak spark spreads in EMAAC were relatively low when capacity prices in the zone were at a peak in the second half of the year. We have seen this dynamic play out in PJM over the years and in a similar fashion, our fundamental analysis results in expectations of flat to gradually rising overall energy and capacity pricing through 2030.

Our fundamental analysis is driven by the expectation of gradually tightening reserve margins, the possibility of slightly rising natural gas prices, and prospects were ongoing retirement of older, less efficient coal, oil and gas steam units.

We also assume that the results in the capacity market will not change materially from recent clears with expected highs and lows. While we expect renewables will be added to the supply stack over the next decade, PJM is the least favorable market for renewables with largely low onshore wind intensity and low sun irradiance.

As a result, we expect renewable development will be driven by state RPS [ph] standards rather than economics. As reflected by the consistent band and the historical returns in PJM with over 180,000 megawatts of installed capacity, it is difficult for either incremental new supply or retirements to meaningfully move the market in one direction or the other.

Just as we have seen in recent periods, we expect total revenues to vary year-to-year, though it will remain consistent with historical levels overall. As it relates to Vistra specifically, we believe our large fleet of efficient CCGT units and PJM will continue to generate a significant amount of EBITDA for our consolidated operations as they collect significant revenue streams from both capacity and energy markets.

However, our PJM coal units could be at risk of retirement, just as other high costs coal, oil and gas units will be over the next decade. We have factored any potential future retirements into our EBITDA at risk analysis, which takes us to our last slide on our 10-year fundamental outlook.

Slide 16, our analysis supports our view that Vistra can generate relatively stable to growing EBITDA in a wide range of scenarios, including generating approximately $2 billion per year on average of adjusted free cash flow before growth to either return to shareholders or to invest in growth opportunities.

If we invest on average $500 million a year on growth opportunities, roughly a quarter of our projected adjusted free cash flow on an annual basis and achieve our targeted returns, we could deliver an incremental $90 million to $100 million dollars a year of EBITDA.

Our track record today with the acquisition of the Odessa CCGT plant in West Texas, the development of the Upton 2 [indiscernible] solar and battery project and the acquisition of Crius and Ambit on the retail side has demonstrated that we can be successful in finding high return tuck-in growth opportunities on a regular basis.

In fact, those projects have exceeded or expected to exceed our targeted return levels. Continuing this history of executing on opportunistic growth projects, likely in retail, renewables and battery storage, would not only require only a small portion of our overall anticipated cash flows, but it is expected to result in a growing business that would more than offset the impact of potential plant retirements over the next decade.

In fact, even after allocating capital to growth projects and paying in annual dividends, district could still have a significant amount of cash available to return to shareholders.

We expect we'll have meaningful cash to deploy beginning in 2021 after we achieve our long-term leverage target. As we always mentioned with any discussion of growth, if we do not find opportunities to invest at attractive returns, we will return capital to shareholders. This is always our litmus test.

In summary, our assessment of the 10-year prospect for our business reinforces confidence that our business model is resilient and compelling, taking advantage of the way we have positioned our company as a low cost, low leverage integrated business within the money assets and attractive markets.

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

First, renewable penetration is not an insurmountable threat to our business, rather a higher percentage of renewables in the market will merely change the distribution of price outcomes, placing more importance on unit performance during high priced intervals, and increasing the reliance of efficient CCGT assets and peaking units of which we have many. And we will have the opportunity to invest in the technological changes impacting our business, but in a disciplined manner.

Second, well, certain of our units specifically our coal plants in MISO and PJM could be at risk of retirement over the next decade. These assets are not meaningful contributors of EBITDA today. Our modeling suggests that given the favorable position of our generation assets on the supply stacks in the markets where they operate, only 2.5% of our estimated 2020 adjusted EBITDA will be lost in order to achieve our 2030 greenhouse gas emissions reduction target. And a modest 5% to 8% could be at risk through 2030, from new build penetration and environmental expenditures. The assets that are most exposed to a higher penetration of renewables are the older, high heat rate assets, of which we own very few.

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

With our strong free cash flow and market leading position in the core competitive electric markets in the U.S., we can participate in the evolving power markets where it makes sense, while also returning capital to shareholders.

We do not believe our business is a melting ice cube. Rather, through cost management and efficiencies, financial discipline and execution, we believe we can continue to create value for our shareholders over the long-term. We continue to believe our stock is undervalued, and the math tells us that the market must be discounting our future value. We believe this analysis is one piece of compelling evidence, suggesting that we can produce strong results on a consistent basis over a long period of time, and we have demonstrated our ability to execute.

I will now turn the call over to David Campbell.

[David Campbell]

Thank you, Curt. Turning now to Slide 18, this year delivered third quarter 2019 adjusted EBITDA from ongoing operations of $1,064 million which as Curt mentioned is in line with our expectations. Our third quarter results were $89 million lower than the same period in 2018. The quarter-over-quarter decline was driven by lower prices and volumes in our Midwest and Northeast segments. Lower retail gross margin in 2019 was offset by higher prices and margins in our top wholesale segment.

As you know, we're expecting negative adjusted EBITDA on our retail segments for the quarter, given the stream peak in August 2019 heat waves observed in the market at the time we were procuring power for the year, which drove up our third quarter cost of goods sold. As we discussed in our second quarter call, we shaped the cost of goods sold for our retail business with the actual power curves rather than straight lining these costs over the year. The retail backwardation that Curt mentioned earlier was concentrated in the third quarter.

The negative $40 million impact has already been fully recognized in retail year-to-date results. In fact, the negative impact in the third quarter is a little higher than $60 million, with some reversal occurring by year end. As you may recall, we realized higher retail gross margin in the first and second quarters of 2019, as compared to their respective quarters in 2018. We expect similar results in the fourth quarter.

Year-to-date Vistra's adjusted EBITDA from ongoing operations is $2,586 million, which is also in line with Management's expectations for the period.

The next two slides set forth our 2019 and 2020 adjusted EBITDA and adjusted free cash flow before growth guidance ranges. Given that Curt already covered our guidance announcements, I won't spend much time on these pages, but I do want to mention the updates to our Asset Closure segment guidance for 2019.

You will see that our guidance ranges for the Asset Closure segment now assume a more negative impact as compared to our prior 2019 guidance. Primary driver experienced is the transfer of the four MISO plants retiring in the fourth quarter as a closure. This impact flows through the Asset Closure segment projections in the 10-year update we have provided on Slide 28 in the Appendix.

It is important to remember that projected Asset Closure expenditures have already been accounted for in the asset retirement obligation on our balance sheet. Retirement of the assets merely buckets the anticipated cash flows in the Asset Closure segments as opposed to our ongoing operations.

Let's turn now to Slide 21 for an update on our capital allocation plan. As of October 31, we've executed $1.415 billion of our $1.75 billion share repurchase program, leaving approximately $335 million of capital remaining for future share repurchases.

You'll notice that the pace of our repurchasing slowed in the third quarter, which was a direct reflection of the improvement in our stock price during the period. With respect to $335 million that is outstanding under the program, we'll continue to be flexible.

At the present time, our capital allocation priority for 2020 is debt reduction. We are focused as a Company on reducing our leverage in the range of our targeted levels, which will support an upgrade to our debt readings and keep us on the path to investment grade.

We will continue to opportunistically evaluate your purchasing shares or investing in promising growth opportunities, especially those that have minimal impact on our leverage. Our dividend is continuing as expected. We announced last week that our Board approved the next quarterly dividend of $12.05 per share or $0.50 per share on an annual basis, which will be paid on December 30th, to shareholders of record on December 16th.

Following review and approval by our Board, we plan to announce the annual increase to our dividend on the fourth quarter earnings call in February 2020. Management still anticipates the dividend will grow at an annual rate of approximately 6% to 8%. Lastly, paying down our debt remains a key capital allocation priority for Vistra and we are continuing to track toward our long-term leverage target of 2.5 times net debt to EBITDA.

We believe achieving our long-term leverage target will further reduce the risk profile of our business, for opportunistic growth investments, and enhance our long-term equity value by increasing the value of the company available to shareholders and appropriately reducing the risk premium implied in our current free cash flow yield.

We continue to expect that we will have significant cash available for allocation in 2021 and beyond supporting a growing dividend, future growth investments and meaningful excess free cash flow to return to shareholders, including repurchasing our stock when appropriate. We expect to discuss this more as we progress through 2020.

One final comment before we open up the line for questions. We have made a few changes to our hedge disclosures this quarter. The new disclosures can be found on Slides 30 and 31 in the appendix. Updates include the addition of power price sensitivities as well as the breakout of the hedge value that is embedded in our total realized price.

We continue to try and improve our disclosures to make them more user friendly and we hope that you will find this new format helpful. In closing, we remain confident that our business has the necessary elements to thrive now and through the long-term. The strong performance of our integrated operations during the third quarter reinforces our view that our business can generate stable EBITDA and free cash flow in a variety of market environments.

Our fundamental analysis supports that the core markets in which we operate, will remain attractive over the next decade and we believe our relatively young and efficient generation fleet comprised primarily of lower heat rate, flexible gas assets will be critical to fulfilling the nation's electricity needs as the country transitions to lower carbon technologies.

Our projected strong free cash flow generation will ensure that we can participate in this transition where economics are supportive of investment. We are excited for the future and we hope you are as well.

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

[Operator]

Thank you. [Operator Instructions] And your first question comes from the line of Shahriar Pourreza with Guggenheim Partners. Please go ahead. Your line is now open.

[Shahriar Pourreza, Guggenheim Partners]

Hey, good morning guys.

[Curtis Morgan, President and Chief Executive Officer]

Hey, Shar.

[Shahriar Pourreza, Guggenheim Partners]

Just two quick questions, first could we get a little bit more color around the future investment, kind of about, that might arise over the next decade? I mean the annual investment of $500 million per year is sort of a big part of the growth story there?

[Curtis Morgan, President and Chief Executive Officer]

Yes so, I think what we mentioned in the script may not been that prominent, but I think we still view more near term that retail opportunities are the biggest opportunity, I mean you guys can see that the value that we bring and I'd say in our view, probably brings to the table given our capabilities and less in particular, given our long position and we can take out not only just sort of the back office and any other types of costs, but we can manage the commodity price risk exposure better and then there is just inherent in that difference there is a much lower multiple for retail, so we see some real value. I think they're going to be smaller in nature though going forward Shar. I don't think there are many larger, and when I say larger more on the Crius type Ambit size deals out there, but there is other ideas out there that we will likely pursue.

I do believe that we will participate at the right point in time in renewables and battery storage. As you know, we have some real opportunities out in California to continue to build out our battery build at both Moss Landing site and our open site. I think we'll probably do some investment in that. We have a good pipeline of opportunities on the development side, not only in Texas, but also in few other states where we have sites from some of our existing assets that will become available. All that is going to be driven heavily by economics.

And I think you guys know there is a lot of capital right now flooding into green investments by people who really don't have any business owning a wind project or a solar project, but they want to wave the green flag. And I think that is – the returns that we're seeing on that are pretty low. I do believe that it is sort of like the CCGT build out in the early 2000s that there is going to be opportunities after the fact for us to take a look at it. And so I think when you think about the 10-year period that you mentioned sort of early on it's more of a retail focus.

I think it will be more sort of early on, it's more of a retail focus. I think it will be more on an intermediate period of time there is going to be some opportunities around renewables and batteries. And I'd also say that there may be a few little tuck-in opportunities inside of ERCOT on the solar front. We've got - like I said, we've got a pretty big pipeline, got a lot of acreage, and it's some really good acreage, but we have to be very selective around that to some extent that will also be in support of our growing ERCOT retail business now that we've got the Ambit brand in here. So, there may be some opportunity to do a project or two around that.

But I think that's really where the growth is going to come from. And I think we're just going to have to be patient and incredibly disciplined. It's going to come, in my view, in a lumpy nature or so despite $100 million a year is probably, I mean it's a great modeling exercise, but it's probably not exactly how it's going to happen.

[Shahriar Pourreza, Guggenheim Partners]

Got it. And then just lastly Curt, I mean obviously the plan you presented today should provide a lot of comfort with the agencies, right? Cash flows are sustainable, the EBITDA can actually grow, the balance sheet is healthy. You're definitely building a solid natural hedge with the retail business. You've talked sort of in the past around your ratings in sort of a two phases, right. First BB+, second investment grade. Can we maybe just get a little bit of a status on how the dialogue is going with the agencies? Your sense on timing first around the notch improvement and then second investment grade, especially in light of how you're presenting your plan today? That’s it. Thanks.

[Curtis Morgan, President and Chief Executive Officer]

Yes, so you know, we're going to go and - I think we're going to go in and talk to the agencies because we're updating, obviously we have a 10-year view, but we're also finishing up and taking to our Board in early December our updated long range plan, which is our - it's generally a five-year view and then we need to sit down with the agencies on that.

Moody's for example has asked for some of that information because I think they were going to go to committee. I think they're going to talk about not only us, but maybe others in terms of upgrading. We've been on positive watch with them for some time. So, we think that in the next quarter or so, we should be in a pretty good position hopefully with all the agencies, especially with what we're presenting today to potentially get an upgrade to that equivalent of BB+.

On the investment grade front, that may be a little lumpier and may - and probably, you know, from that point where we would get upgraded probably a year beyond that and before we get there, I think with Fitch and Moody's, the metrics were pretty well 2.5 times. And with S&P, because of the way they look at certain things, at the 2.5 times we're not necessarily exactly there on the metrics, but with a business rating improvement, which we believe that we're squarely in line to get, that would put us in the investment grade range. So I think what we're really looking at is sort of first quarter, 2020, we're hoping are in that range of getting an upgrade across the agencies to that BB+ range.

And then we're looking at a year to maybe a year and a half beyond that to get to investment grade with all three of the agencies. But I think that might be a little lumpy or just given the way the metrics were. So, we're going to keep doing what we're doing because I think the more we execute, the more we continue to perform the way that we say and that this business model becomes more and more apparent to people just how strong it is.

And then also, you know, the quality of our assets, the quality of our retail business, you know, that's going to be really helpful with all the agencies, because I think what really, is the bigger hang up is, is this real? Are people that, are they going to be disciplined and does this business model work? And I think, so that's probably a bigger thing if anything, and I think that takes a little bit of time. But we feel like we're in line for this next upgrade in the near future and then we're going to obviously continue to execute and we think we've put ourselves in a good place for investment grade rating.

[Shahriar Pourreza, Guggenheim Partners]

Got it. Congrats Curt on this execution. It is terrific.

[Curtis Morgan, President and Chief Executive Officer]

All right, thank you, Shahr.

[Operator]

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

[Stephen Byrd, Morgan Stanley]

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

[Curtis Morgan, President and Chief Executive Officer]

Hey, thanks David. Good to hear from you.

[Stephen Byrd, Morgan Stanley]

I just wanted to touch on your point you raised about solar in ERCOT. You gave a lot of good color around that. I guess if you run a very simple sort of solar and LCOE model, you could see that maybe solar could work in a $30 plus market, but the point about practical limits on the growth of solar, I think it was a pretty important one we're often asked about. Could you just add a little bit more in terms of the volumes that you see that's realistic in terms of actually getting a hedge, getting financing, et cetera; or any color around that would be really helpful?

[Curtis Morgan, President and Chief Executive Officer]

That is a good question. So one of the things we've been trying to get our arms around, I think you guys know this, but the renewables that have been built in ERCOT, and frankly, pretty much everywhere have been PPA supported. And as the large players have come in and allowed - basically used their balance sheet to do PPA's and that does allow, obviously, to get financing and take lower returns, right? Especially to get investment grade counterparty on the other end.

But there is a saturation point where you start getting into smaller companies who don't want to own a wind project or a solar project. And at some point time in ERCOT, given the size of at least that 50-gigawatts of renewables coming into this market, I mean that's more than half of the current nameplate capacity of the market.

Someone has to going to end up being merchant. I think the big question in ERCOT, being an all energy market, as you add more intermittent resources and during the periods between when you actually see volatility and high pricing; prices are going to be lower, because you've got intermittent resources with zero marginal cost. And so the question is, is there going to be enough revenue and enough frequency of that revenue to support merchant build? And I don't care what kind of merchant build it is. It can be renewables or it can be combined cycle plants.

Now a combined cycle plants are way out of the money. Renewables that we see when you run the numbers, if you can get proper leverage on them, can get these levered returns currently. And I expect that we'll continue to see some cost decline in that. But once you get into the merchant side of things, because no one's really built a merchant solar plant yet in ERCOT, but once you start to do that, and all energy market with a backwardation of the forward curves, as stupid it is, it's tough to get the financing that you need. And then you've got to get someone to come in and put in the equity dollars.

And the problem with that if it's just a single asset owner situation, it's going to be a little white knuckle time between when you're actually getting lower, in the off peak periods, lower megawatt an hour pricing, and then you have to wait for a good summer to come in. Someone like us can do it, because we can - we've got a balance sheet and we can basically stand in between cycles. But someone who's a single asset owner with leverage on top of it, it's going to be a real tough day.

That's my biggest question is what's going to happen with ERCOT market as you get more zero marginal costs, assets setting price for most of the hours, and you see a much more volatile business, can you get the kind of development that's going to be necessary? Because I don't believe you can build this 50 gigs or so out with all PPA's. I just don't think the market has that kind of depth.

So that'll be an interesting thing. My sense of it is, if we don't, there's going to be further changes to the market, whether it's an increase in the ORDC, or even maybe some changes of ancillary services to get more revenues in the market to make sure that there's enough revenues. I mean, I just don't see ERCOT going to a capacity market. And when you think about outside of ERCOT, you do have capacity markets which can get additional revenues.

And I think you hear Gordon [ph] and Willie (ph) say that's an ice in New England, because he's worried about the revenue stream from energy because of offshore wind coming in. But he still dispatchable resources, mainly the gas resources in New England. And there's nothing new getting built, because you can't get a gas pipeline up there. So he wants to keep those around. So he knows he's going to have to get revenues stream into the capacity market, because that's the way to basically keep assets around and hopefully, get some new build.

So, I mean, that's kind of how we see this playing out. I mean, it's going to be real interesting. Obviously, we have a big seat at the table, so we'll be a part of that discussion. But that's sort of how we see it.

[Stephen Byrd, Morgan Stanley]

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

[Operator]

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

[Greg Gordon, Evercore ISI]

Thanks. Good morning. Good update. Thank you.

[Curtis Morgan, President and Chief Executive Officer]

Hey, Greg.

[Greg Gordon, Evercore ISI]

Just to be clear, you assume 50 gigawatts of new nameplate renewables in the Texas market. I think that that – just that number alone will really cause people a lot of heartburn even if you're modeling that you can still generate stable cash flows out of that. But just to be clear, if that's your aggressive case scenario, you don't necessarily believe that that's where we're going to end up in 2013 given the constraints you just articulated?

[Curtis Morgan, President and Chief Executive Officer]

Yes, I think what we try to do Greg – this is a conservative view of the market. We didn't want to come out with something that looked very self-serving. And I just mentioned this, and I'll say it again I'm not sure how this actually plays out. I mean you can model things and we sort of force function some of this new build to happen.

Whether that can really happen or not on a merchant basis I have a lot of questions about that, and if that doesn't happen, you're still going to see increased volatility and higher pricing, it's just going to be higher pricing then what we've assumed here. And so I - we don't really know I mean this is a modeling exercise we wanted to be somewhat conservative on it, but there is a lot of leap of faith in this, that at some point when the PPA market grows up, there's only so much depth to that.

If somebody is going to have to come in here and build on a merchant basis and that's tough in an all-energy market. And I don't see people like us or NRG or Exelon are others who have the ability to do it on balance sheet, we've all seen what can happen in ERCOT if you overbuild the market. So I just don't see that happening.

And then of course we mentioned in the script and I've said this before, there is still 15 plus thousand megawatts of higher heat rate oil and gas and coal units that if we did somehow overbuild, which I just don't see happening would come out of the stack. So that's why we're bullish on this ERCOT market even in what we would consider a very conservative case that we put forward here.

[Greg Gordon, Evercore ISI]

Great but my second question is – you're obviously bullish on the fundamental value of the company and to some degree the arguments around the investment thesis in merchant power. Are this basically the durability of cash flow argument with the melting ice cube argument, which you're attacking head on. But to the extent that you really believe you're going to generate free cash flow after growth investments that, over the next 10 years, that's greater than your current market cap.

And why aren't you plowing further ahead, more aggressively with the buybacks in the short to medium term. And I don't know I understand but the very short-term answer is you want to get to investment grade, but to the extent you're confident that these cash flows are going to show up. We're basically looking at another 300 some odd million of buyback in the short to medium term and then a pause in 2020 while you sort of done the engine to get e debt to EBITDA of 2.5 times. Right so how do you balance with investors who were saying, well, if you're so excited about the future. Why aren’t you being more aggressive with the buyback?

[Curtis Morgan, President and Chief Executive Officer]

Yes, I mean that's a good question. And that's the balance that we're trying to strike here. Look Greg there is no magic formula here and I think it's our judgment that the equity value of this company does better with a stronger balance sheet than not. And – there is also a credibility and commitment thing and we're not just committing to equity here. We're also committing to people who own our bonds and we're trying to satisfy an entire capital structure here at the end of the day.

But I think I watch Calpine do this and I know we're not where they were, but I watched them do a bunch of share buybacks and the market never believed their fundamental story and their stock continue to decline as they bought back shares. And I think that was just the risk premium that the market required because of the concern financial distress of the business and the business model.

And so, I said when I first got here that we need to run this thing at a debt level that would put us in line to potentially be investment grade and that's what we're going to do. Look, I understand that when you have debt that's even at 7.5% and you're trading at a free cash flow yield of 15 the math I get I just think that at some point we have to focus on getting our debt down, and I think this is really a one-year issue. And then on the back end of 2020, I think what you'll hear from us, is a discussion about what we're going to do in 2021.

And depending on where our stock is trading at that point in time, I would not be shocked that the board would want to do some sort of a strong buyback program, but I think what we are trying to tell you guys right now is that we do believe that following through on our commitment to get in that range of 2.5 times is important for our company. And we did outline it and I think that David said it in his comments. I think there's a lot of reasons why the equity should be supportive of us doing that. But it's a balance in, you can make the argument that you've made here and others, but I think this is sort of what we believe is the right balance right now.

[Greg Gordon, Evercore ISI]

No, I actually completely agree with you. I just wanted to hear you articulate it. Thank you.

[Curtis Morgan, President and Chief Executive Officer]

Sure.

[Operator]

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

[Michael Weinstein, Credit Suisse]

Hi. Good morning guys.

[Curtis Morgan, President and Chief Executive Officer]

Hey Michael, how are you?

[Michael Weinstein, Credit Suisse]

Hey, all right. Pretty good. Just to follow up on the same line of questions, I guess once you get an investment grade credit rating and you're assuming that does improve valuation on the equity side as well, you've got really good cash flow and you know, from your own profile, so there's sort of a limited amount of investment going forward. Retail acquisitions will be smaller.

I'm just wondering where, what would you do with a better balance sheet and better valuations and better reception from investors at that point? Where does the company go? What can you do more that you can't do with the current cash flow profile?

[Curtis Morgan, President and Chief Executive Officer]

Hi. I think we sort of outlined what we think is sort of the track of this thing. And I wish I had a better sense of timing of it, but we still believe in the generation side of the business. We think it's still fundamentally important. We're not going to a retail only model and a short model.

And so I would expect us to put some investment predominantly on the renewable side because that's going to be the workhorse. But the other thing I will say that we haven't said a lot about, but it's also part of this modeling thing was good for us too to understand kind of what's going on. But there could be some small investment in what I refer to as volatility assets where either assets that actually can be around during the peak periods and they're very cheap type assets, now whether that's batteries or whether that's a gas fired peak or something like that we would look at it, but that's small potatoes.

I mean, I think the real thing here is that you'll see our company invest in generation in the future as we retire generation. And by the way, that retirement of this generation is going to be needed anyway. Most of these coal plants we're talking about are going on 60 plus years old. They're becoming obsolete and they're not economic. And I think any business that is a capital intensive business, whether it's airlines, or chemicals, or refining or whatever, have to replace, you know, their hardware at some point in time. The question is going to be, what kind of hardware are we going to replace it with?

I think it's going to be renewables and more important than that it's going to be when do you do it? And right now I just don't - there's so much money going into this that I think, this was not the place. I think retail is a better place for us to invest at this point in time. And we'll see where the cycle goes. But I think that at some point in time though, there are going to be opportunities for us, whether that's PPAs to come off of the renewables and you know, they become merchant and we have the capability to run them and see more value than somebody else, I really don't know how that's all going to play out, but I do expect us to have a greater share of our business in renewables over the next 10 years.

Now whether we could spend that, what roughly $5 billion, we're talking about $500 million a year, over 10 years. I don't know. If we don't, then we're going to return capital to shareholders and that's just the way it's going to be and we still generate a heck of a lot of cash. I think what this thing shows you this 10-year deal, which we think is very conservative then if we don’t put a dime back into the business, we're only losing 2.5% and maybe on every 6.5% of EBITDA, which means we're still generating a boatload of cash. And so this is still a really vibrant business even if you don't reinvest in it. So we don't feel like we have a gun in our head to actually go out and spend money and we're not going to do that.

But I think the good news is that our company, if we've got the scale and the capabilities, I think we've proven that we can buy things and we can extract value that others cannot. And I think we're going to get that opportunity around renewables. It's just a question of when.

[Michael Weinstein, Credit Suisse]

That makes sense. We cover the renewable industry, and a lot of the retailers, the distributed renewable, distributed rooftop solar players are growing at 15% a year sales. Do you see yourself maybe evolving into a retailer, perhaps let's say, for example, centralized renewable energy, or perhaps maybe even a distributed power retailer to compete against these rooftop players at some point?

[Curtis Morgan, President and Chief Executive Officer]

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

[Michael Weinstein, Credit Suisse]

Okay, thanks a lot.

[Curtis Morgan, President and Chief Executive Officer]

Thank you.

[Operator]

Your next question comes from the line of Praful Mehta with Citigroup. Please go ahead. Your line is now open.

[Praful Mehta, Citigroup]

Thanks so much. Hi guys and I really appreciate the update.

[Curtis Morgan, President and Chief Executive Officer]

Hey, Praful, thank you.

[Praful Mehta, Citigroup]

Hi Curt. So maybe just on all the investment that you've talked about over the next 10-years, what I find is, in your position, having both the retail and generation, you have the opportunity to step in and buy assets, rather than grow them organically. I wanted to understand if that's a fair view, given the volatility that you're seeing or you're expected to see, do you expect to be this opportunistic around acquisitions? And what kind of examples can you give us where you kind of have seen that in the past and you'd expect to see that in the future?

[Curtis Morgan, President and Chief Executive Officer]

Well, I think everything we've done so far, in my own opinion, has been pretty much an opportunistic thing. I mean, I think what we did with the Odessa plant in Texas was a good example of - we had a view of the future and we had somebody that was not a natural owner of that asset that wanted to get out and I think we were opportunistic. And it turned out, obviously, to be a very good acquisition for us.

I would say, that was part skill and part luck. Because we know people are going to pay us to take natural gas. But we did have a view that natural gas would be relatively cheap in the Permian, to other hubs.

So I think, that's an example of being opportunistic that I think we've been able to do. I think the other thing is, almost day one when we took over for Dynegy we were in discussions with PG&E around the battery project in Moss Landing which, our predecessor owners were not. And I think that was because we had the cash, the balance sheet and maybe the willingness, I don't know, to do something there.

But I think we will be opportunistic. That's why I mentioned Praful, that there could be some small asset things that would fit sort of, like I said, fit the profile of being a volatility type asset that we might take a look at, that I think would be opportunistic. Maybe somebody that owns it today doesn't see the same value that we do and I think we'll continue to be that way.

And I believe that most of our renewable that I'm talking about this renewable spend is going to be pretty much opportunistic. It's going to be waiting for the right period of time. And I've seen this business for a long time, and there are going to be opportunities around renewables where somebody overpaid, somebody can't make it, and those assets are going to come available. And we'll be around and pretty much all the deal flow comes through us in most of the markets that we're in, and we'll get an opportunity to take a look at it. So I do think that the large portion of what we do and what we will do will be more opportunistic.

And I do think operating assets - one thing I like about operating assets, in particular, retail, is they really don't have a lot of impact on credit ratings. So you can do them and that they generate cash immediately. The problem with a development, big development pipeline, is you get that couple year gestation period and that takes a while and it is a drag on you until you actually get some kind of operating cash flows.

So I think we do lean a little bit - plus just across the to build something is higher than what the cost to buy something is, except I'm a little worried right now that where the renewable side of things are with the number of players that have decided to enter, at least right now.

[Praful Mehta, Citigroup]

Got you. That's super helpful. And I'm sure the balance sheet will also help you be opportunistic. Just a second question quickly. And we've got this a lot, which is, if there is a Democratic President, does this change your view in any way in terms of how ERCOT or PJM or how your assets are positioned? How would you think about that?

[Curtis Morgan, President and Chief Executive Officer]

That's a good question. So, again, I've been around some time. I've seen administrations come and go. Because it's so difficult to actually make things happen, even when we've seen where we've had Republican controlled Presidency with a Republican controlled Congress or Democrat controlled Presidency and Congress, things just don't move that quickly and so I haven't really seen that big of a change. There have been some things obviously that the tax legislation was a pretty big deal for us as a company and I would say that and there could be other things.

But if you talk about just what people are speaking about, there is a pretty big divide. The current administration in my opinion is less of a principal administration and probably more, I call them more opportunistic looking for ways to actually surgically improve the economy. On the other side of the equation, you see a fairly progressive Group. And – the front runners are fairly progressive and some of the things that I've heard, such as ban on fracking and just making it very difficult for gas pipelines, and interestingly enough it is actually good for our company.

We are a long natural gas equivalents company. And so, if you start fracking natural gas prices will go up that is good for our company. It might make me think about I wish I didn't shutdown the coal plants that we did because those are obviously natural gas equivalents. I'm not sure everybody has thought that through yet. You still have to run the power grid and you have to have assets and if you shutdown gas drilling that's going to increase electricity costs.

So, but I have not really seen a change that much I don't expect it to change that much. We're sort of agnostic when it comes to who is in the Presidency in the Congress. I saw something recently where somebody came out and had us sort of pegged I think under Democrat - Presidency in a Democrat controlled Congress that we don't do as well, I just don't see that. I mean – and I also think we expect to be a participant in the renewable side of the business.

But one of the key points we tried to make in this discussion today is that when you bring in a significant amount of intermittent resources, you need some level of dispatchable resources that you can count on. And right now given where gas prices are in this country natural gas, efficient natural gas plants fit the bill. And we purposely did a deal to get long those types of assets. So, we feel very good about how we've positioned ourselves and I feel like we will do well under any administration.

[Praful Mehta, Citigroup]

Got it, that's super helpful. Thanks a lot guys and I appreciate the color.

[Curtis Morgan, President and Chief Executive Officer]

Thank you.

[Operator]

Your next question comes from the line of Julien Dumoulin-Smith from Bank of America. Please go ahead, your line is now open.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

Good morning team, thanks for your patience. I just wanted to run by the illustrative 2021 and how you think about that sort of a year-over-year walk, if you will, from 2020? I know you guys have laid out a number of different pieces of that, but can we talk a little bit through it? And especially given the context for the updated hedges, I just wanted to make sure I understand this right.

So looking at the hedges that you guys provided late in the deck, I think it's about 580 million for 2020, how do you think about that rolling off and rolling into 2021 that might be a different way to ask of – like what kind of embedded hedge value you are putting in 2021 as well?

[Curtis Morgan, President and Chief Executive Officer]

Yes so – first of all I want to be clear that we don't provide, we're not providing guidance on 2021. There is always, we tried to do this, because I know people and in particular you Julien, I know that you care about that out year. And so, part of this is just to try to give people a window into it. Admittedly, here is the story for 2021 and I think we said this in the script. If you market to market, just take the curve, we'd be a little bit below where we're coming in 2020 which 2020 is a pretty strong year but we would be below that.

When we run very detailed fundamental model for 2021 and we did this last year and we got the same viewpoint, at this stage right now, we would say that our fundamental view is above – where the market is trading. And so when we market to model if you will, we would be above where 2020 comes in. And if you stripped out the base business, if you stripped out the retail businesses it kind of falls in that same line. I mean we'd be a little bit below, on the base business, but then on a mark to model we'd be above.

The question is going to be, are we going to see the curves move up? And we tried to show this because we've seen it and it has been very pronounced at '19 and '20, where when we rolled through the prompt period, the one year out period moved up as we went through the summer of '19, '20 moved up when we went through the summer of '18, '19 moved up, and it happened as people began to realize that the market remained tight, but also they got glimpses of the volatility in the market and we expect that to happen again. But that's - we tried to arrange that for you guys to say that, but we feel pretty confident that we'll have an opportunity to hedge 2021.

But I will tell you that we are going to be patient on that. But what we typically do is we're usually 80% to 90% hedged going into any prompt year. I don't expect us to deviate from that too much. But I think we did try to say today that we might carry a little more length than we have in the past, one because of the volatility and the fact that the volatility products that people have used to hedge swing risk and ERCOT are not as available because everybody's starting to realize this volatility, but also because we added Ambit, and Ambit also has swing risk associated with it.

So I don't know if that gets an answer to your question, but I think we're going to be patient around '21. We think it right now is below where fundamentals who would see it. And so I wouldn't expect this to move our hedge ratio up a lot right now in 2021. But I do expect as we go through the balance of '20, as we get closer to 2021, we'll be likely hedged about the way we normally are, somewhere between 80% and 90% going into that year.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

Got it. But just in terms of the year of your walk here, any other large factors to kind of keep in mind? I just want to make sure I'm hearing you clear as you kind of think about, you're illustrative outlook?

[Curtis Morgan, President and Chief Executive Officer]

I mean - so - just a couple of things that are a little bit different. So when we go from '20 to '21, we'll have the battery facility at Moss Landing, so that will be included in 2021. We will get to a full run rate on Ambit and Crius and because it takes us some time to do all the integration and all that. And so that, I think we've said before, we're around $50 million on the battery, I would expect us to pick up maybe $15 million to $25 million on the Ambit and Crius side. So you are seeing some of that, that would show up, which is contributing to offsetting some of the lower curves that you have for '21. Then if we mark the curves through our models, that's when you go above 2020.

But those are two things that will be coming on that are new, and then we will be reaching full run rate of OP in 2021. So that $50 million will come on and then we'll be at full run rate by the end of 2021, but we'll be picking up some of that in 2021. So those are the things that I would say are contributing, to right now offsetting relative to the ERCOT curves.

And by the way, the PJM curves are down. They are backwardated and so as I saw the way, they're smaller though impact on 2021. And so, the real swing on this, and this is true of us pretty much all the time, is the real swing on this will be what does ERCOT end up doing. And we feel very confident that our modeling is more representative of where things will come in and that will obviously push us to either be flat but more than likely higher given all those other things I just went over with you that we would end up being higher '21 to '20.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

Thanks for the patience guys. Cheers.

[Curtis Morgan, President and Chief Executive Officer]

Thank you.

[Operator]

Your next question comes from the line of [indiscernible] with Goldman Sachs. Please go ahead. Your line is now open.

[Unidentified Analyst]

Yes. Hi, guys, thanks for taking my question. I want to focus on retail sort of a little bit. Did you guys notice any increase in customer attrition in the retail business from the volatility and the summer power prices or would you say it's a little too early because of the long-term nature of those contracts?

[Curtis Morgan, President and Chief Executive Officer]

So, actually, we did not, I mean, we actually saw sort of the opposite. What tends to happen in a high price environment, our competition has to raise prices intra month because most of these guys are hanging on razor thin margins. And so, when that happens, you tend to see people move from, sort of the fly by night, if you will, to safety and TXU Energy obviously is a safe bet.

So we actually saw through those months, and I think we actually grew customers during that period of time. So - and that's typical for us and the good news for us is we get a customer, we typically can hold a customer for a good period of time, so and it was net-net beneficial to us over that period of time.

[Unidentified Analyst]

Got it. The other question I had was on how important the IG rating is for you guys? So as you think about achieving your leverage target of 2.5x, is it absolutely critical in your mind to cross over into the IG territory, or would you just be comfortable getting to that leverage level and maintain it going forward?

[Curtis Morgan, President and Chief Executive Officer]

Yes, that's a good question. We never came out and said you know that is a fall on the sword issue. I mean, and what I do believe and I think we've tried to say this is that I think it's a strong indicator of the risk of the business. And I still believe there's a risk premium that sits in our free cash flow yield, because people were just uncertain as to whether the business model is sustainable and the business is sustainable.

So we've tried to tackle this in a couple of ways. One is through pure execution, and discipline, and doing the things we said. And part of that is reducing your debt. I mean, I think that's one way to reduce that risk premium. The other one is to try to draw a picture for people about what the long-term resiliency in this business is, which is why we give the 10-year view.

So, I would say, the investment grade is less about credit spreads and more about the risk of the business overall, which I believe then translates into a higher equity value because investors view that they don't need the risk premium that they once thought they needed for this business, that the risk profile is business is much lower, and they can own it, get a 10% free cash flow yield, not a 15% free cash flow yield.

And I've said this a bunch of times. This Company trades at a 10%, free cash flow yield at $7 billion plus dollars of equity value. I mean, that's a huge change in the value of our Company. There's nothing I'm doing every day or anybody in this Company is doing every day that could come close to creating that kind of value.

And so, we're doing everything we can to prove to people because we believe it, that the business, the risk of this business has changed substantially by the way that we run it. And the amount of cash we generate is enormous. Who would have known it was embedded in this situation where people had too much debt and they were blowing money on bad things at the wrong time and we've cleaned that up.

I think we just have to do it year-over-year, which we're doing. But I think a part of that puzzle is getting our debt down and investment grade would be a visible tangible sign that the business risk of our of Company is significantly lower and I think that would have some impact on our free cash flow yield.

[Unidentified Analyst]

Got it. That's very helpful. Thank you.

[Curtis Morgan, President and Chief Executive Officer]

Sure.

[Operator]

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

[Curtis Morgan, President and Chief Executive Officer]

Once again, thank you for taking the time to join us this morning. I know, a long call. Really appreciate the questions and the opportunity to talk to you about our business. It's always a risk when you talk about 10-year view, but we thought it was important. I think we've explained why we think that's important. And we always appreciate your interest in Vistra Energy, and we look forward to continuing the conversation. Thank you and have a great day.

[Operator]

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