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Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vistra Energy 2018 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]
Thank you. Molly Sorg, Vice President of Investor Relations at Vistra Energy, you may begin your conference.
Thank you and good morning, everyone. Welcome to Vistra Energy's investor webcast discussing 2018 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 Bill Holden, Executive Vice President and Chief Financial Officer. We also have 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 two and three in the investor presentation on our website, which 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. Further, our earnings release, slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures are in the earnings release and in the appendix to the investor presentation.
I will now turn the call over to Curt Morgan to kick off our discussion.
Thank you, Molly and good morning, to everyone on the call. As always, we appreciate your interest in Vistra Energy.
Turning to slide six, I am happy to announce today that Vistra concluded the year reporting adjusted EBITDA from its ongoing operations of $2.809 billion. Our results that are both above consensus as well as slightly above our 2018 guidance midpoint of $2.8 billion.
When compared against our original 2018 guidance, which utilized October 2017 curves, we finished the year more than $180 million above the comparable midpoint. Vistra achieved these results through strong cost management across all markets which help to offset a relatively mild August in ERCOT.
In fact, as you can see on the next slide, Vistra finished 2018, $25 million ahead of plan on achieving its Dynegy merger EBITDA value lever targets, $20 million of which we realized in the year. This relentless focus on cost management flow through to various capital projects we have forecasted for 2018.
The Vistra operating team has exhibited meaningful CapEx spending discipline throughout the year enabling Vistra to achieve ongoing operations adjusted free cash flow before growth of $1.611 billion results that were $61 million above the high-end of our guidance range, reflecting an EBITDA to free cash flow conversion ratio of nearly 60% for the year.
Since the close of Dynegy merger in April of 2018, we have developed an understanding of the operations and maintenance expenses and capital expenditures necessary to maintain the fleet of generation assets that we project will allow us to uphold this spending discipline into the future.
Including the cumulative impact of the partial buybacks of the Odessa power plant earn-out, Vistra's adjusted EBITDA from ongoing operations would have been $2.791 billion and its adjusted free cash flow before growth from ongoing operations would have been $1.589 billion.
As a reminder, when we executed the Odessa earn-out buybacks which we view as a growth expenditure, the economic benefit net of the premium paid was approximately $25 million which we largely locked in around the time of the buyback execution.
Before we turn to our Dynegy merger synergy tracking update, I want to briefly highlight our recent retail growth initiatives. As I'm sure you are all aware, earlier this month we announced that we execute an agreement to purchase Crius Energy Trust, a retail energy provider with approximately 1 million residential customer equivalents in 19 states and the District of Columbia.
We estimate the purchase at approximately four times EV to EBITDA and we project the acquisition will be immediately accretive to EBITDA and free cash flow per share. The transaction meets our internal investment return threshold and is expected to further approve our free cash flow conversion ratio as we estimate the Crius portfolio will convert approximately 90% of its EBITDA to free cash flow.
As I'm sure everyone on this call is also aware, we did increase our purchase price for Crius due to an unexpected and hostile bid for the company. While unfortunate especially because this hostile bidder had an opportunity to be the successful bidder in the competitive auction process conducted by Crius leading up to the signing of our agreement. We continue to believe Crius is attracted to Vistra at this new price point. It is not our desire to get into a bidding war.
We have put in place stronger breakup protections and together with Crius are moving quickly to obtain all necessary approvals including the shareholders proven to close the transaction, both of which support our bid over any potential future hostile one. Any hostile bidder, that would step in to the process now would have to justify the higher price including the increased termination fee and the delay in the approvals in overall closing timeline a tough thing to accomplish in our view.
I would also like to emphasize that we are fully prepared to take any necessary legal action that we believe is available to us to defend our acquisition of Crius against any efforts by the hostile bidder to disrupt and interfere with our acquisition. Jim will provide more details about this transaction later on the call. But suffice it to say, we are very excited about the quality of the Crius portfolio and its strategic fit with our existing integrated platform.
Last, I'm excited to announce that our retail team grew organically residential customer accounts in ERCOT by approximately 15,000 customers in 2018. This is the first year the team has achieved net growth on an organic basis since 2008 a tremendous outcome for the team and further proof that our marketing programs and customer satisfaction and service efforts in the ERCOT market have been effective.
Let's now turn to slide seven for an update on our progress achieving the Dynergy merger value lever targets. On our last earnings call in November, we increased our synergy value lever target to 290 million from 275 million. And we increased our operations performance initiative value lever target to 275 from 245 million, we are reaffirming these EBITDA value lever targets today, anticipating we will achieve the full run rate of $565 million EBITDA per year by the end of 2020.
I'm happy to report, as you can see on slide seven, that we finished 2018 tracking ahead of schedule capturing these merger value levers, realizing a $195 million of EBITDA targets in 2018 ahead of our initial forecast by $20 million. We achieved a run rate of $385 million by the end of 2018, $25 million ahead of our plans.
Last, as a result of our latest balance sheet optimization transaction that closed earlier this month, we have increased our forecast annual after-tax free cash flow benefits by another $15 million to $310 million. We continue to believe there could be upside to the $275 million OP target. So, stay tuned for further updates on this topic in the second half of the year.
Moving on to 2019. As you can see, on slide eight, we are reaffirming our 2018 adjusted EBITDA and adjusted free cash flow, before growth guidance for our ongoing operations. We are calling 2019 the year of execution. As we complete the full integration of Dynergy merger and capture the value leavers implement our capital allocation plans and hit our targeted numbers. Of course, closing and integrating Crius will be important as well.
We do not expect to update 2019 guidance to reflect the pending Crius acquisition, until after the acquisition closes, which we estimate will be in the second quarter of this year, perhaps even as early as April. Given that the Crius unitholder vote is scheduled for March 28. And as I mentioned earlier, the teams have already filed for the regulatory approvals. We do not expect any issues with obtaining regulatory approvals from the DOJ or FERC.
Importantly, our 2019 ongoing operations adjusted EBITDA guidance range of $3.22 to $3.42 billion, and our 2019 ongoing operations adjusted free cash flow before growth guidance range of $2.1 to 2.3 billion represent a free cash flow conversion ratio of approximately 66%.
As Bill will discuss later, we are significantly hedged in 2019 and have materially increased our hedges in 2020. We purposely have dry powder available in ERCOT in 2020, given our expectation that the more significant move in ERCOT prices due to the ORDC change will occur in that year.
I have said it before, and I'll say it again. The 66% free cash flow conversion ratio is a highly attractive feature of our company and significantly higher than that of other commodity-based capital-intensive energy industries. As a result, we continue to believe that this evaluation should shift away from the historical EV to EBITDA multiple, which no longer reflect the value proposition of the sector for the free cash flow yield valuation metric at a proper yield.
We believe our future valuation will eventually reflect this new reality as the financial markets continue to gain confidence in the new integrated power company model with the attractive features of low leverage, low cost and industry leading retail operations paired within the money generation all leading to relative earnings stability.
Beyond 2019, we anticipate our integrated business model will enable us to continue to realize relative earnings stability as we are expecting 2020 adjusted EBITDA to be approximately flat to 2019. Our expectation for generally consisted adjusted EBITDA year-over-year is a marked improvement from Dynegy's pre-merger forecast which reflected declining EBITDA in 2020 and 2021 due principally to lower capacity revenues in PJM.
Through curve improvements, changes to the operating reserve demand curve in ERCOT and enhance management expectations for merger value lever achievement, the previous Dynegy declining EBITDA forecast now reflects expected EBITDA strength and stability.
In the near-term, we are continuing to focus on achieving our financial and leverage targets, returning capital to shareholders and meeting or exceeding our merger synergy targets.
As it relates to returning capital to shareholders, our capital allocation plan remains on track as of February 15th, we had executed a total of $937 million of our aggregate 1.75 billion share repurchase program authorization slightly ahead of where we thought we would be at this point in time because market technical gave us an opportunity to repurchase shares at an attractive price at the end of 2018.
We now have 486 million shares outstanding as of February 15th, a 7% reduction as compared to the number of shares outstanding at the time the Dynegy merger closed with 830 million still available for opportunistic repurchases under the program. So long as our stock is trading at such a high free cash flow yield and what we believe is a meaningful discount to fair value, we expect we will continue to allocate capital towards share repurchases.
We also announced earlier this week that our board has declared Vistra's initial quarterly dividend of $12.50 per share or $0.50 per share on an annualized basis. The dividend is payable on March 29, 2019 to shareholders of record as of March 15, 2019. Management expect to grow the dividend at an annual rate of approximately 6% to 8% per share.
As a reminder, the payment of the dividend of this size represents just more than 10% of Vistra's forecast 2019 free cash flow before growth from the consolidated business and less than 35% of forecast 2019 free cash flow before growth from our stable retail operations.
We believe our targeted 6% to 8% per share dividend growth rate is supported by our projected free cash flow including tuck-in EBITDA growth initiatives such as our recently announced mass landing, battery storage project and the Crius acquisition. Importantly, the Crius acquisition is not expected to delay Vistra's achievement of its long-term leverage target of 2.5 times net debt-to-EBITDA by year end 2020.
Balance sheet strength is a core tenant of Vistra's operating model that we plan to manage our business in cash flows accordingly. We believe the execution of our diverse capital allocation plan will continue to attract new long-term investors while providing our shareholders with an attractive total shareholder return over the years. In fact, we now consider 15 out of our top 20 shareholders to be long-term investors and Vanguard and Fidelity are now our second and third largest shareholders respectively replacing Apollo and Oaktree.
Before I turn the call over to Jim to discuss highlights of our plan, Crius acquisition I would like to spend a few minutes giving a market update. In January, the Public Utility Commission of Texas approved important updates to ERCOT scarcity pricing formula known as the operating reserve demand curve or the ORDC. The update simplifies the ORDC from 24 different curves for different seasons and time of day to a single curve and shifted the loss of wealth probability by half of standard deviation in two steps a quarter of a standard deviation in 2019 and another quarter of standard deviation in 2020.
What all this means in plain English is that the market participant should expect to see modestly higher prices during peak periods as the scarcity pricing formula should now better pricing the risk of load shedding events.
The goal of the market changes was twofold to better reflect significantly higher reliability risk in the market, as well as to provide better pricing those with an aim to help avoid additional retirement from marginal generators and to support new investment in generating capacity.
We are fully supportive of the market changes as ensuring ERCOT has sufficient generating capacity to meet Texas demand for electricity is critical to the reputation of the growing Texas economy. We estimate the potential impact of these changes to the around the clock forward curves could be approximately $2 to $3 per megawatt hour in 2019, and approximately $3 to $4 per megawatt hour in 2020 modest overall increases in price that should support generation investment in the market. Well, not meaningfully increasing the price of power to Texas consumers.
It is difficult to estimate the potential impact of these changes to district as it is difficult to do how the forward markets have already responded and will react in response to the new market design. Assuming the market fully values the impact of these changes and appreciates the risk inherent in the tight reserved margins forecast and we expect Vistra could see upside in 2020 where we are much less hedge than in 2019.
In fact, some of the improved 2020 outlook that flattens EBITDA is due to the ORDC improvement. We have hedge some of our open position as we believe the 2024 workers had moved up in anticipation of the PUC potential action, especially prior to the action as there was speculation of a larger move. We believe this action by the Public Utility Commission of Texas was a necessary step to ensure the long-term success of the Texas competitive electric market and we continue to like our meaningful position in the ERCOT market where we forecast, we will derive more than half of our EBITDA in 2019.
It is the right move balancing the need to support new and existing assets and cost to customers. With the end result to maintaining a healthy supply demand balance. Another market update has occurred since our last earnings call declaring of the most recent ISO New England capacity auction. This year's auction cleared at a price of $3.80 per kw-mo from $4.63 in the last year's auction.
Despite the lower price district cleared nearly 500 more megawatts in the current auction, making the estimated negative impact Vistra of the lower clearing price approximately $60 million or less than a half a percent of Vistra's forecast 2019 adjusted EBITDA from ongoing operations. By the lower clearing price and the auction is certainly not ideal. It is relatively immaterial to Vistra given the diversity of our revenue sources from energy capacity and retail in multiple competitive electric markets across the U.S.
More fundamentally, we continue to be confounded that anyone would be able to raise capital to advance a new gas plant and ISO New England at a capacity price of only $3.80 of kw-mo per month.
As many of you know, a new 650-megawatt combined cycle plant cleared the latest capacity auction for calendar years 2020 and 2023. I cannot emphasize this point enough. Since the restructuring of the power markets began in the late 1990s. We are hard pressed to find merchant power plants for the original equity owner received an adequate return and many suffered financial distress and bankruptcy.
Rather, it is the developers who earn sizable upfront fees to site, permit and construct new thermal resources that make money. Maybe the third-party debt and equity investors owning an uneconomic asset. One can only hope this reality will start to sink in with the financial community. So, debt and equity investors start making irrational investments like this latest gas plant slated for development and ISO New England.
Our analysis is just that the entire equity and likely some portion of the debt will be underwater, the daily ISO New England plan is put into operation, if it ever is. In our view, something is wrong with the market design that allows a plant like this to clear and suppress prices with a high probability, it never gets built.
The last relevant market update is, of course, the status of the pending PJM capacity auction reforms. Unfortunately, we don't have much to say on this topic as the devil will really be in the details after we hear from first. However, we continue to believe the outcome of any capacity market reforms will be at worst neutral to the current state. We call that in June of 2018 FERC label, the existing PJM capacity auction is unjust and unreasonable given the impact of subsidized resources have on the auction.
As a result, it would see very counterintuitive to FERC's original intent to land and an outcome that is meaningfully worse for existing generators. History tells us that FERC has consistently promoted balanced market reforms that support competitive markets which by the way is their first order of priority despite political affiliation.
States can formulate their own energy policy, but they cannot destroy competitive markets in doing so. Like all of you, we are anxiously awaiting FERC's decision on this issue and remain cautiously optimistic for a constructive outcome.
We continue to believe that Vistra will be in a position to provide relatively robust and stable earnings in the years to come, given our strong balance sheet and low-cost integrated operations in the money generating fleet and market leading retail operations, which are about to become even more diverse with the closing of the pending Crius acquisition.
On that note, I will turn the call over to Jim Burke to talk a bit more about the Crius transaction
Thank you, Curt. Turning to slide 11, as you can see from the high-level bullets on the slide. We're very excited about the strategic fit of the Crius portfolio with Vistra's existing retail and generation platform. Importantly, as Curt mentioned at the beginning of the call, we believe the economics of this transaction are very attractive, exceeding our internal investment threshold and valued at approximately at four times enterprise value to EBITDA multiple, pro forma for the full run rate forecasted synergies.
In fact, as a National Integrated Power Company, the generation of retail assets in multiple states, Vistra is uniquely positioned to create value with the Crius platform. We project we'll be able to achieve approximately $15 million in annual EBITDA synergies and approximately $12 million in additional annual free cash flow synergies following the closing of the transaction.
The acquisition will also accelerate Vistra's previously announced organic growth strategy enabling us to forego approximately $29 million of expenditures through 2023 from this effort. Financial benefits aside, we're particularly excited about this transaction as a result of the quality of the portfolio we will be acquiring.
The Crius portfolio has recognized established brands, market leading attrition rates and a demonstrated track record of successful customer acquisition through multiple sales channels. The portfolio compliments Vistra's was long generation position in the Midwest and Northeast markets and it's just mentioned will accelerate organic growth strategy in these regions.
In addition, the composition of the portfolio is largely residential and small business should command a higher multiple due to the inherently higher margins in these segments.
Let's dive a bit deeper into some of these points on the next slide. Crius with its approximately 1 million residential customer equivalents has demonstrated success with its high growth, high margin retail strategy focusing on higher value residential and small business customers, Crius has an impressive track record of new customer gains through various sales channels across multiple brands. And its attrition rates are the lowest among the peers and the markets where it operates.
Crius has been successful in its customer acquisition and retention efforts as a result of leveraging its diverse sales channels and exclusive partnership strategies. These partnerships strategies are primarily executed through its energy rewards platform where Crius partners with established providers to cross-sell its retail electricity offerings.
These integrated energy platform offerings will expand Vistra's existing sales and marketing channels, enhancing a strategic fit with our organization. Following the acquisition, Vistra will have a retail presence in 19 states in the District of Columbia with dual energy market offerings in many states.
As you can see on slide 13, this rule now has a retail gas product portfolio in 13 states which we believe will be a great addition to our existing operations. Retail gas tends to have similar margins with electricity with gas customers tend to be a bit stickier as bill sizes often meaningfully lower in the segment due to lower overall volumes. Being able to sell a customer to services electricity and gas leverages the cost of acquisition by adding incremental margin to the customer relationship.
In addition, retail gases are a naturally synergistic business for Vistra, as we are already one of the largest purchasers of natural gas in the country. To give you a bit of background on how the retail gas business works, the local utilities are responsible for ensuring that natural gas can be delivered to residents in their service territories.
As a result, the local utilities contract for the necessary gas pipeline and transport capacity as well as for local gas storage and allocate the applicable transportation and storage assets to entities providing the retail gas product to the end users. Vistra therefore will only be responsible for procuring and delivering the actual commodity, which is very easy for us to do an affordable manner because we already are a bulk purchaser of natural gas necessary for the operation of our gas plants.
In short, though the retail gas portfolio is only, approximately 15% of the Crius retail business by volume, we find it to be strategic fit for the organization. And we are excited to be meaningfully expand our retail gas operations as the transaction close.
Finally, one of the greatest benefits of the Crius transaction is the incremental retail load Vistra will be acquiring, which meaning improves our expected generation for match. In closing and default service mode Vistra had contracted, we forecast we will be nearly 50% match in 2019 with approximately 90% of that forecast load being sold through our preferred retail channel.
As we depict on the right-hand side of slide 14, our commercial team can sell Vistra's long generation through three primary channels, directly to one of our retail subsidiaries to utilities in default service options or directly to third parties in the wholesale markets.
Of these channels we prefer selling our link directly to our own retail subsidiaries, as we are able to eliminate transaction cost leakage on the bid ask spread and reduce the total cost of the collateral postings.
The other sales channels are effective, but marginally less attractive. With sales through default service options and third-party sales in the wholesale markets being the next most attractive channels in that order.
The incremental load we will be acquiring with the Crius acquisitions primarily located in the Midwest and Northeast markets, which is exactly where we are planning to focus our organic growth efforts giving established brands sales channels and infrastructure as a platform for this organic growth.
Over the last several weeks, the Vistra's management team has been working diligently with Crius to ensure a smooth transition. As our team have continue to interface and share best practices, we're even more excited about this transaction.
The Crius and Vistra teams emphasize a high-performance culture with the primary focus on the customer. I have no doubt the Crius operations are right fit for organization and I look forward to announcing the closing of the deal hopefully in the second quarter.
I am hopeful we can quickly close the transaction to avoid any further disruption that has a potential to erode the value of the business.
I will now turn the call over to Bill Holden to cover fourth quarter and full year financial results.
Thank you, Jim.
Turning now to slide 16. As Curt mentioned, Vistra concluded 2018 delivering 2.809 billion of adjusted EBITDA from our ongoing operations. These results reflect a full year of operations from legacy Vistra and results from legacy Dynegy operations for the period from April 9, 2018 through December 31, 2018.
Including the negative $18 million net impact of the partial buybacks of the Odessa power plant earn-out that we executed in February and May, Vistra's adjusted EBITDA from its ongoing operations would have been 2.791 billion for the year.
Vistra's strong results coming in above consensus and just above the midpoint of management guidance were directly attributable to robust cost management across all markets, offsetting a relatively mild August in ERCOT. Retail also exceeded management's expectations for the year, driven by residential customer count growth and margin and cost management.
For the full year, CAISO exceeded expectations due to favorable prices, higher generation volumes and lower SG&A expenses. While PJM was also favorable as a result of the NETCO [ph] plan retirement and subsequent move to the asset closure segment.
Vistra's 2018 adjusted free cash flow before growth from its ongoing operations was 1.611 billion, which as Curt mentioned is $61 million above the high end of the management prior guidance range. The favorable results are primarily attributable to CapEx spend discipline during the year.
Including the negative $22 million net impact of the partial buybacks of the Odessa power plant earn-out, Vistra's 2018 adjusted free cash flow before growth from its ongoing operations would have been 1.589 billion.
For the fourth quarter of 2018, Vistra's adjusted EBITDA from its ongoing operations was $719 million or $721 million including the positive $2 million net impact of the partial buybacks of the Odessa power plant earn-out. Both segment results for the quarter can be found on slide 22 in the appendix.
As Curt mentioned that today we are also reaffirming our 2019 guidance ranges and we still believe 2020 adjusted EBITDA from ongoing operations is tracking relatively flat to 2019. Our confidence in our 2019 guidance range is and the improvement in our 2020 outlook is due in large part to the incremental hedges we have added for those years.
As you can see on slide 17 and 18, as of December 31, 2018, we were largely heading for 2019 in our core markets, of ERCOT, PJM and ISO New England. And as of last week, we are nearly fully hedged in these markets for the year.
Generally, as of December 31, 2018, we were largely hedge for natural gas in ERCOT in 2020, and we improved our ERCOT heat rate position to 42% from 28% at September 30. Also, on the fourth quarter of 2018, we improved on New York, New England and PJM hedge percentages by 8% and 32% respectively.
As our commercial strategy is to take advantage of the volatility and forward curve, to hedge prices that are at or above our fundamental point of view, we have improved the 2020 hedge percentages even further in the first two months of 2019. The 48% for ERCOT heat rate and 32% and 66% for New York, New England and PJM respectively. We expect our hedging activities to further lock-in a stable EBITDA profile for the business in the out years.
Finally, let's turn to slide 19 for a brief capital structure update. As you can see in the table Vistra had approximately $11.1 billion of long-term debt outstanding as of December 31, 2018, reflecting debt reduction and as a result of approximately $120 million of open market repurchases of senior notes in the fourth quarter.
In February of this year, we completed a bond issue and senior notes tender offer and redemption that reduced our annual interest expense by $20 million on a pre-tax basis. We will continue to look for opportunities to optimize our balance sheet and reduce our total debt as we work toward achieving our long-term leverage target of 2.5 times net debt to EBITDA by year end 2020.
And as Curt mentioned, we have now executed approximately half of our aggregate authorized $1.75 billion share repurchase program, leaving approximately $813 million available as of February 15, 2019.
Following our share repurchases, Vistra had 486 million shares outstanding as of the same date. Despite our stock price recently achieving a new 52 week high to continue to view our stock price is undervalued. As a result, we expect we will continue to allocate capital towards opportunistic share repurchases under our existing program as previously announced.
Our diverse capital allocation program is in full swing as we initiated our dividend program this month, continue to repurchase shares under our authorized share repurchase program delever and execute on tech and growth opportunities, including the Moss Landing battery storage project and the Crius acquisition. All of this is possible because of their relatively stable EBITDA and meaningful free cash flow generated by our integrated operations.
We will continue to focus on execution and delivering on our commitments in 2019 all in an effort to create value for our investors.
With that operator, we are now ready to open the lines for questions.
[Operator instructions] Your first question comes from the line of Greg Gordon with Evercore ISI. Greg, your line is open.
Thanks. Good morning. Sorry, I did hop on the call just a tad late. So, if I'm asking you the question you already answered, my apologies. When you talk about the upside that you think you see in ERCOT from the change in the ORDC rules, how much of that do you think is already priced into the curves and how much of that do you think is needs to be sort of validated by volatility that we might see this summer that would cause the curves to move to where you think intrinsic value is?
Yeah, so this may be more than you're marketing for. I think it's worth just talking about how the curves have move, Greg because back after the summer we came out, there was a lot of chatter about needing to improve the ORDC or some other reform as you may recall, and then there was chatter out there that may be a one standard deviation move, no discussion about whether it be a single curve or the 24 curve but we were pretty certain at that point in time some amount of that was factored into the curve. I think people felt like they were a high probability that something would get done.
We took some advantage of that in particular a little bit in 2020, but a little bit also we had some 19 still low, but we took advantage of it. And then if you remember, there was two or three times the PUCT sort of put it up on the schedule and then delayed it. I think curve is kind of drifted off a little bit because there was some uncertainty around it. And of course we finally got it through.
And then there was a response pretty positive response after that and the reason I tell you all that is that I think it is ebbed and flowed and then recently - and this is not - this is pretty typical it's kind of - the curves are kind of drifted off a little bit and it happens sort of this time of the year. I fully expect that as we get close to the summer, we see our first hot day and people start to see how the market is going to react that we'll probably see another move up in power prices for 2019.
And then typically when you get into 2019 summer, if you see a hot summer you'll see 2020 move up, but as it happen this year we didn't really have in August the summer we thought we would, but we still saw a move up in 2019 because as we rolled out, liquidity went from 2019 into 2020, so that's a factor but also people realize that reserve margins were actually going to go down not up. I think we'll see that same thing happen in 2020.
So that's a long way of saying that. It's hard to really know for sure and I'm not trying to avoid the question, it's just very hard to know. But I would say right now, there is room to move in both the 2019 and the 2020 curves, for summer of 2019 and 2020 respectively. Just where the curves are today that's partly just due to - just how the market tends to move.
But it's also I think the market has not fully realized the impact of the ORDC and I think one thing is probably still being digested, so this is all kind of esoteric step at the end of the day this whole single curve versus multiple curves and basically it really comes down to this loss of load probability and the mean of the loss of load probability and if it's on the single curve versus multiple curves, the standard deviation around that mean is actually higher which means the effect of the 0.2 and the 0.5 is actually higher than it would have been if it was under multiple curves.
I'm not sure the market has digested it, because I don't know if they really know how that's all going to play out. So, I think this maybe a little bit of wait and see to that we're going to need to see how the market reacts. I think that the market is a little bit warm and we start to see scarcity in the ORDC comes into play. I think you could really see 2020 and 2021 off to the races.
So, I think some of this is going to be driven a little bit by how weather turns out, but we do believe there is still some upside around the ORDC given where the curves are currently.
Great. And Bill could you reiterate where you said you are in terms of how much you've hedged for 2020 in ERCOT and I presume you used those are mid in run up sales opportunities but also can you I think you guys do when you talked about hedging that's net of a significant amount of megawatts that you hold back and take the spot during the summer to sort of self-hedge. So, can you just talk about that as well so we can understand how much exposure you have as the curves do move in your favor?
Yeah so, the hedging that we've done through or 2020 since the end of the year, it would take us up to 48% hedge against ERCOT heat rates.
And that's in what we're building.
And that's for 2020.
Yeah 2020.
Okay, so - but that's so you're 52% open but aren't you do I need to sort of take into account back that you're holding back that like 1200 megawatts or does that taken into account in that hedge percentage?
I can answer that. This is Stephen Muscato here.
So, go ahead.
Yeah, this is Steve Muscato. The way to think about it is, yeah, we do hold back some generation for basically potential outages or weather changes that make our load move up pretty rapidly with temperature. The way to think about it is, it gives us the opportunity to capture any deviations between the day ahead in the real time, because if the day ahead clears at a particular level, we could typically cover our load changes in the day ahead which then gives us a lot of that open generation for changes in the real time market.
Can we just - Greg just asked a simple question. In our hedge percentage, does it include the 1250 in it, so that open position or not. I think it does.
It does.
So, Greg just asking is that against that, because you've got this whole back. And it does include it.
Right. Okay.
Okay. That's clear guys.
And Greg ...
Thank you for - yes.
One other thing just to tell you, we've sort of purposely held some open here in 2020, because I think, you've got in front pick that up from what I was saying is that. We think there is room to move, pretty significant room to move in 2020, we don't see, it's hard to see that much new build coming on and between now and 2020 and we also don't think that the market has fully absorbed the ORDC effect, but we do think there is some movement and so that we have - we're kind of sitting a little bit on 2020.
If the curves move, you should expect us and they move up, you should expect us probably to take some more off. If they don't, then we're going to be patient.
Great. One more quick question for you, it might be a curve ball, because I don't know, you probably didn't see it, but NRG in their release this morning talked about how they are reducing their net debt to EBITDA target of between 2.5 and 2.75. So, they're coming down to sort of where you guys already are in terms of your net debt to EBITDA aspirations and they're explicitly targeting eventually getting to an investment grade credit rating.
So, can you just reiterate, because it seems like in terms - people had been pushing you in the past to sort of - why don't you go towards NRG and go to three times and buy back more stock. But now it seems like NRG has figured out that they need to come in your direction. So, can you just reiterate, what your aspirations are in terms of capital allocation, credit metrics, and do you aspire also to ultimately get to IG?
Yes. So, look, the first thing I'd say is limitation is the sincerest form of flattery. So, but more importantly, and to the point. We've been pretty steadfast, and we did move, and you know this, we did move being to 2.5 times out a year because we felt like just where our stock was trading, that it made sense to reallocate capital in 2019. And, so we did do that. But we are absolutely committed to get 2.5 times and we believe, I think it's going to take time and I think the first step is actually to get an upgrade from where we are today.
I think we - that squarely in our sides. I think we executed that will happen and that will then lead us to the position where we can get investment grade. We do want to get to investment grade. The credit spread at least today probably don't say that that's something that's a big deal. But it's not about that, I think it would be good for the equity. And it also would open up opportunities on our commercial, industrial retail business where at times we have to sleep, or we may not even get to see the business.
So, there is a business proposition in here. And I think the reason and one of the reasons I believe we have such a high free cash flow yield is the risk premium in our business. I think that has been driven in the past overtime, because we carry too much leverage and there was the risk of financial distress in these stocks.
And I think we want to put that completely in our rearview mirror. And I think 2.5 times is a right place to get to have that discussion with the agencies and then we'll see what we do from there. But we feel like given the metrics at that at 2.5 times and just the absolute level of debt it feels to us like that's the right place to be in order to have a serious discussion about investment grade.
Right. And then that drives a lower free cash flow yield on a higher share price. So that's sort of the magic potion of...
Yes, exactly right.
Okay. I've taken way too much time, guys. I'll hop off. Thank you.
All right, thanks Greg.
Your next question comes from the line of Abe Azar with Deutsche Bank. Abe, your line is open.
Good morning. Congratulations on a successful year.
Thanks, Abe.
Any thoughts on timing of refinancing the rest of the high cost's legacy Dynegy debt or any key dates to focus on or some of that that becomes callable?
Yes. So I think in terms of just refinancing the two new bond issues that we did have covered most of the amounts that we would need to refinance with new money at lower costs, so the remaining amount of the debt reduction or the lion share of it will be done with redemptions from cash, I think you can look at when the redemption premium steps down, I think a large number of some of those are in November each year.
We would do the math when we're planning getting close to redemption days about whether it makes sense to do it earlier or wait till this to step down in the redemption premium. But I think, we we've laid out in the cash payable at the end of the presentation that we planning to do about $800 million this year and then the balance of to get to the 2.5 times we would do in 2020.
Got it and then can you provide an update on the status of the Moss Landing battery. One was spending supposed to ramp up and is there something you're waiting for before putting capital to work there?
Yeah, so good question. As you know that's a bit of a fluid situation, and with the NextEra sort of throwing the seams in our and bankruptcies in our sector, there's an obligatory federal versus state fight that always seems to go on. FERC versus the state. That's kind of blow some things down and it's created what I'd say just, a little more hair on how PG&E wants to proceed.
But what I can say Abe, because we're in constant contact with these guys, is one the state one of this project number two, the CPC approved it, number three, it doesn't suffer from what others have, which is it's not wildly out of the matter in fact, it was it was by far the lowest, cost deal because of the Moss Landing site. So, there's no mark to market gain by rejecting the contract.
And so, what we're hearing from PG&E is, full steam ahead. What the real question is when they are going to assume these types of contracts. And there is a little concern, I believe in how they're going to handle that given this jurisdictional issue with FERC, and the battle that's going on there. So, we're moving forward, and we've talked to them, they want to move forward in the contract.
We still have a valid contract, it's not been rejected. The question is, when will it be assumed, and we're hopeful that sooner rather than later. I think what we have to remember is that we do have a contractual commitment here. And then we have to weigh the odds of whether it whatever be rejected. And at this point in time, we feel like it's an extremely low probability that it would be rejected, given the discussions that we've had directly with PG&E
Got it. Thanks guys.
Thank you.
Your next question comes from a line of Praful Mehta with Citigroup. Praful, your line is open.
Thanks so much. Hi guys.
Hey Praful.
Hi, Curt. I got so just following up on Moss Landing, it doesn't sound like the decision to reject or a zoom is going to be taken anytime soon. Because they probably have to figure out what the exit looks like. It could take time. Let's just put it that way. So, if it does take time, is the assumption that you would continue on the current course assuming that it will at some point get resumed? Or do you have to hold and wait for the decision which could slow down the entire process?
Yeah, so I because we're an active discussion with PG&E I don't feel like, it would be fair for me to have that discussion, but I think your observations are correct. That's what I was trying to convey. And I'll be just very direct about it. The assumption of contracts could be pushed out. And we have a contract right now.
The only thing that would change that as if it was rejected. I think the likelihood of that is very, very low. And so, we'll work with our board and we'll work with PG&E when we get to the point, which is going to be in the April to May, late April, sort of May timeframe where we would have to actually sign, the big contract for the equipment. And we'll make our decision then what we have to do.
There is a number of different things we could do either in front of the bankruptcy court or working with PG&E in order to make sure that we move forward. We're committed to the project, I just, I can't tell you right now what that ultimate decision will be if we have to make a decision come may to sign an EPC contract or equipment contract.
And we'll have to - we'll have to see what that is. And I'm going to do it when consultation with our - we have bankruptcy attorneys on board because we have to understand, the process. And so, we'll have to consult with them. And then ultimately, I'll have to go to the board.
But most importantly, I think it's the active dialogue that we have with PG&E and working with them on certain things that will give us the comfort that, we're going to continue on with this project and have no issues or no risk of rejection. All that is still playing out, but we intend, and we're moving forward with the intent of completing that project.
Understood. Thanks. And then maybe on Slide 28, you have these realized estimated - prices, and it seems to be now - a $6 forecasted premium that you've kind of estimated for 2020. I know this number is moved around quite a bit. Could you just give us some perspective on what that $6 now reflects? And there's obviously something for the ISO New England as well so some color on the confidence around that number would be helpful.
Yeah. So, I just want to make sure, because this - it's even confusing for me, by the way. We always struggle with what's the best way to show you guys this kind of information. So, part of this part of that number is, what I call sort of realized actual realized premium relative to, where the market came in. And as it relates now, most of it in 2020 obviously, all of it is, is really projected.
There is a significant amount of option value or intrinsic value that is, in the market and we model what that value is, relative and you lose that value. That value decays overtime. And then ultimately, as you go from real time, I mean from day ahead to real time, you don't have that anymore you don't have that flexibility. Part of it is the value of being able to back down unit in times and optimize by buying from the market.
There's a number of different options that you can go after that we have historically proven that we're able to do it. It's also our ability to hedge at the periods of time, where there's just higher pricing that where our spot prices come in.
And that's why it's so important as a company that we have a point of view and that we had when prices are at or above that point of view and have a very good modeling capability so that we feel comfortable that we are hedging at prices above spot. And we've also had a very good track record of being able to do that. So, it's a combination of things, Steve Muscato is here with me. Steve, is there anything you would add to that?
Yeah, it's basically I think you captured it. It's the ability to an essence capture different points along the forward curve that we call extrinsic value selling into strength or anytime the price moves up. And also, as we take the portfolio into the day ahead and real time market, being able to optimize around whatever price signals were given. And so, it's a combination of existing hedges we have on and the combination of hedges we hope to put on in the future.
And you know, - probably you're it's a good observation - So that value does, it does move around. I think we've been able to demonstrate I hope I believe we have is that, we've been able to capture a lot of that along the way as we hedge. And so, in 19, we've locked a lot of that that that volatility. The reality of situation is in an increasing price environment, that premium will shrink as you would expect. Because we're managing risk as much as we are absolute price.
We're trying to create a state stable setting earnings and steady earnings stream. And we're not looking for the highs of the highs. So, you may see that premium will shrink, but once the market patois out and it hits the sort of highs of the market, then it's much easier than to create that that premium.
And then in the years past when prices were actually declining, then that we were able to hedge ahead of some of the declines because again our fundamental view showed that the market was actually on a decline. And we went out as fast as we could and tried to hedge as much as we could in the forward market. And then that actually proved out to work out for us in a big way. So that's kind of how we think about it approaching it
And I think you asked about New England as an example. We've all seen a material drop off and gas volatility in New England. And so that's really the component that's impacting the New England pricing going into the winter there was a lot of discussion on what's going to happen and all Conklin. And obviously our Conklin volatility wasn't necessarily didn't materialize, and that's reflected also in the forward market at this point in time.
Got you. That's super helpful. And clearly your track record helps confirm or at least get comfort around those numbers. I guess just one final thing around the shareholder base, it was very helpful to hear the change in shareholder base. Given you have dry powder right now to buyback more shares. Is there any expectation of any kind of block deal or any broader deal with some of these shareholders and looking to exit? Are they still looking to exit any color or perspective on that?
So, look, I think we - I think the big thing is, you guys probably saw this. I mean, when the 13 after they came out, we've seen a dramatic change in our shareholder base, obviously, since we came our bankruptcy, but even recently. We've got to that are - to the largest shareholders we had number 2 and number 3 shareholders that are now down to 6%. And I think one of them is probably below that at this point in time. And then we've got Vanguard and Fidelity, who have now come up to number 2 and number 3.
And then when we look at our shareholder base and we couldn't say this coming out bankruptcy. I think it was about what 16, I think out of the 20 now or 15, sorry, 15 out of the 20 or what we would consider long-term investors, people who are coming in because they desire to own the stock and a long run, they believe in the strategy and they liked the price point they're able to get in on. And the other thing I like about is as many of those folks came in at lower levels and have actually increased in a significant way their holdings.
Now we're not done, and this is why we're going to be in Boston and New York next week, we're going to Europe. We wouldn't even have been able to go to Europe had we not had a dividend. So that opened up doors in Europe, we're going to go there and hopefully you'll get people interested long investors, you guys know this, and we went up to Canada. Canada or more long-term oriented investors. And we're hitting about is every long-oriented investor that we can hit. And I'm doing it personally, because I think, it's important to hear the story directly from us.
It's the only way in my mind that you get this rotation and you get it without having your stock price suffer is you got to create demand for the stock. We can do buybacks. We can do all those things. But in the end of the day, we've got to create demand and the only way, we create demand is get out and tell the story. And I think we've had really good success on that and I'm willing to do whatever it takes, and I know Bill is as well and Molly will get out on the road if we have to and we'll talk to anybody that is interested in our stock. I think it's the only way we know how to do it.
Super helpful, guys. Thanks so much.
Thank you.
Your next question comes from the line of Angie Storozynski from Macquarie. Angie, your line is open.
Thank you. Good morning. So, two questions. The 813 million less for buyback, is there any timeline attached to it? Is it still the end of 2019?
Well, this will depend right on just where our stock price is. But, it's probably - it could - it could leak into the first quarter of 2020 just and this is all dependent Angie and I'm not trying to avoid the questions it just depends on where our price is, because as you probably know we have different volumes of buyback at different price points. And so, as you might expect, our stocks moved up some and so we're buying less at that point in time. But I think our projection is it could leak over a little bit into the first quarter of 2020.
Yes, that's right and Angie that's consistent with what we said last quarter we said we thought the program be completed either Q4 of this year likely Q1 of next year and somewhere in that time frame depending on where the stocks trading.
Okay. Number two is back in December when we met you guys talked about 2020 EBITDA being above 2019. I know that there's upside - potential upside to ERCOT power curves. But as they look right now, do you still think that 2020 would be above midpoint of your current 2019 guidance?
Yes, so good question. I want to be clear about this. So, we're - I'm going to talk about this not including Crius. But we see sort of flattish over now - over 2019 and 2020. And you know this I think Angie, but you know, for us that's a big deal, because, Dynegy had a huge cliff because of PJM capacity clear and we've been able to bridge that gap and create a more stable earnings profile. As driven by our value levers from the Dynegy merger to some extent as driven by curves and our ability to hedge some of that.
So, we - and that's where we are today. I would say that depending on where the curves come, and you heard that long winded - answer I gave to Greg. But I do think there could be some upside in the curve. I think that is more of a 20 upside. And so, we could see some of that in 20. At this point in time though, where we are as we think that you were sort of flattish, because part of that when we mark that - when we didn't give you that comment and we have marked that particular plan, it was including some of the uplift that had already occurred from the ORDC.
So, part of what's getting us to that flattish nature is the higher curves. And part of that, I believe, is some of the expectation of the ORDC, but there could be some upside. We're going to wait obviously through 2019, when we see the 20 curves move more significantly to leave that out. And of course, we'll wait all the way to October, November timeframe, before we give guidance on 2020.
Okay. And my last question just a quick one, I know we talk - you talk about the battery project the PG&E. But how do you think about the fact that the project returns most likely you were planning to add some project level dead. I would assume that the cost of that, that is not going to go up and the offtakes credits have plunged. So, I mean, do you still think, it's an attractive return taking that into account?
Yes. So, first of all, we're not going to do project level debt. We made the decision not to project level finances. I mean, I've been in this industry too long and I remember when everybody was doing project level debts and it got confusing and we don't want to capital structure is confusing and we like to return. I think we said this, when we came out, these are on a non-levered basis, these are returns that are in the mid-teens that's very attractive to us. And so, it'll be on balance, we still believe in those returns.
I think it's important to know that the absolute - so we do benefit from the price or, excuse me, from revenues from power. So, we get it we get a resource adequacy payment as part. And then we also can optimize using the battery in the energy market the key on that is, it doesn't - it's not about absolute power price. It's about the volatility and power price and our ability, when prices in the day or low because there's all this solar generation and other generation. And then the solar generation comes off because the sun's going down and goes down and then prices go up if that arbitrage that occurs in there that we get.
So, prices theoretically could be zero during the day, and then, $10 or $20 during the night. And that's where we capture that, that value. So, we feel very comfortable about the value in the returns on this. And so, nothing's changed in our mind in terms of the value of this. And in fact, we know that California needs more of this type of investment, which actually is an opportunity for us as well.
But that just gives you a sense of just what the demand is. And if there's a higher demand for battery, that means that pricing when you go from the heavy solar period to where the sun goes down, that means that pricing is going to be high until they get all that new capacity on it.
Thank you.
Your final question comes from a line of Julien Dumoulin-Smith with Bank of America. Julien, your line is open.
Hi, good morning. Can you hear me?
Yes. Hey Julien, how you doing?
Hi, good. Thank you. So, a couple quick ones. I'll make it snappy here. So firstly, just go back to the hedges, just want to understand the change New England, the price it just on the '19 just wanted to understand a little bit more detail on that. And then also the expected Jen moved around a good bit. I get that power curves moving that shift things around. And even to mention, given that it was around it was across all the regions but ERCOT especially the Northeast?
Yes. So, on the - I think on New England, a lot of what you saw there was really the when Steve was describing earlier that the extrinsic value was come down because of lower volatilities. And so that's just had the effect of reducing the realized price without having a corresponding benefit from hedges because the extrinsic values not fully hedge. Now look at the Steve on the and whether if there is anything of loads in the volumes.
What we're seeing in volumes is as we do, as we continue to go through our operational improvements; we are seeing some changes in how the fleet runs at night. Whether they are start based or run based or hours-based machines and so that's causing some volume changes that you'll see. It's not having material gross margin impact at this point, because it's really just whether they run through night or cycle on and off.
And one thing I'll add in New England it's really associates with, if you look at Conklin pricing, it was pretty contained this winter compared what you've seen historically during cold snaps, like if you look at 2014 as an example and that decline in volatility is participating through market. And the big reason for it there was some L&G tankers brought in at the gateway terminal upside of Boston. So, it's something that we have to monitor from year-to-year how L&G impacts that market and perception on how it's going to impact the market.
And the only thing I just add onto what Steve said is, some of those price increases for - hours which is the sect of the dispatch and to the extend we dispatch more on the off peak and its lower the average realized price because we're earning margin but we're running more at lower price hour.
Got it, alright excellent. And then lastly just really quickly on the - situation, obviously somewhat dynamic in - here, given the MPS and the process of legislation and your own process on, examining the portfolio. Can you give us a little bit of a more of a sense on timeline and then what the potential common combinations here are? Legislation is just, is probably at some point during the session this year MPS is, at the some point this year question mark, but just help us understand that your decision if you will.
So, big question, I think you guys know that there is a new administration in Illinois, Governor Pritchard [ph] he has a fairly aggressive green agenda for the state. They signed onto the Paris Accord. He made a big announcement on that. And the governor has asked us, at least that's our understanding through the Illinois EPA that have further discussions with the EPA about the multi-pollutant standard that the Illinois pollution control board had set forward for hearing.
We agreed to that. I think whenever a governor asks you to do something for state you typically do it and that has not slowed anything down yet. And we've said that, we gave them 45 days that's March 15th coming up. I think the discussions have been very good and so, we are working toward what we hope is, and I feel, I'd say cautiously optimistic a compromised with everybody involved including environmental groups and the AGs office on something that allows us to move forward.
So, I would tell you that we are still on the timeline that we would be making decisions around our portfolio in sort of the mid-year timeframe. And I think things will become in some ways, could even become clear to people what we're doing even sooner than that. But I think action would probably be taken more in the middle of the year.
I have been very open about the fact that we've got an older, an aging fleet there and the capacity market design is horrid. And it's just not a very good market and we've got to challenge the assets. So, we're trying to build something where we can have a sustainable business. And I think part of that is making some hard decisions like we did in Texas to retire plants.
We'll see about that but that's on the horizon for 2019 and I've been very clear with everybody involved at Illinois that this company is going to take action one way or another, because we're not going to continue to bleed cash and bleed EBITDA. We're going to clean up this portfolio and we're going to move with our business. It takes a tremendous amount of time relative to the EBITDA that improvised to the company. And that can't, that's not sustainable and it won't be. So, and that's about of what I can say at this point in time on that drilling.
Got it. All right. Thank you all very much.
Thank you.
This conclude our question-and-answer session. I would like to turn it back over to Curt Morgan for closing remarks.
Hello once again, thank you for your time this morning and we appreciate you being on our call and we look forward to the next time we have the opportunity talk about our company. So, thank you.
This concludes today's conference call. Thank you for your participation. You may now disconnect.