Earnings Call Transcript - VST Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Vistra Energy First Quarter 2020 Earnings Call. 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's investor webcast covering first quarter 2020 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 Form 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 available 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 provided in the earnings release and in the appendix to our investor presentation. I will now turn the call over to Curt Morgan to kick off our discussion.

Curt 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, especially during these extraordinary times. First and foremost, the Vistra family sends our heartfelt thoughts and prayers to those adversely impacted by the COVID-19 virus. We know the Northeast U.S. has been hardest hit and many of you on the call may have been affected. As tough as it is, there is hope, as I am convinced that we will get through this and we will be better than ever. I never thought I'd be hosting an earnings call from my home with our management team dispersed across the North Texas metroplex. And yet, that is where we find ourselves today. These are challenging times as we face the highly disruptive COVID-19 disease, which has already created unprecedented harm to society, threatening the health of not only the population, but of our economy and businesses as well. Now more than ever, I am proud to lead a company that is providing such an essential service to society, the electricity that powers our lives. Roughly 3,000 power plant team members at Vistra have no choice but to go to work every day to fulfill our obligation to society, and they have done it with pride and without question. We would not be able to work from home, power medical equipment and devices, and keep critical infrastructure running without electricity. Since the onset of COVID-19 in the U.S., Vistra has been focused on keeping our people healthy and safe while maintaining our essential business operations. Vistra took actions early on to prepare the company for a COVID-19 environment, putting us in a position of relative strength as we sit here today. In fact, we sowed the seeds of financial strength long before COVID-19 ever arrived. And we've been levered like the IPPs of the past, back in October 2016 when we emerged from bankruptcy, we may be having a very different discussion today. A strong balance sheet is as important as ever, and we intend to continue on our path to 2020 to our leverage target. We have logged well over 100 new activities that we are performing on a daily and weekly basis because of COVID-19, and we have provided a high level list of some of these actions on Slide 6, through steps such as being one of the first U.S. generators to implement temperature testing and entry questionnaires at our locations, and contact tracing; instituting a work from home policy for all employees with remote work capabilities and nonspecific work location requirements; requiring face coverings and social distancing; thoroughly cleaning facilities between shifts and emphasizing hygiene; and executing commercial transactions to better position Vistra for the anticipated market moves, we have been able to maintain the level of operational excellence our stakeholders expect from us and our customers deserve. It is very important to note that these health and safety procedures must be implemented in a holistic manner. We are continuing to evolve our health and safety guidelines with an eye toward widespread testing. About three weeks ago, we also launched our planning ahead team to evaluate coming back to work for the nonspecific work location team members. This team has already started developing the necessary plans. In the end, the productivity of our team members working from home has been so strong that we can afford to be very deliberate about our returning to work. And frankly, we will not return until we feel that it is safe to do so. On the generation side, in addition to going to work locations to continue to perform their normal functions, our team members also completed or are on schedule to complete 86 maintenance outages this spring in the midst of the pandemic to ensure plant reliability for the critical summer months ahead. We analyzed the necessity and scope of each outage, rescheduling and scaling back if possible for the sake of our people without sacrificing reliability. On the retail side, our call center operations maintained service levels at greater than 90% for the first quarter and greater than 92% for the month of April, while managing the transition for most to working from home. And perhaps most important, I am proud that as of today, these procedures have contributed to eliminating our COVID-19 positive test to only two in a population of approximately 5,500 employees and over 3,000 contractors on our sites in 20 states and the District of Columbia, with both of these cases contracted outside of work. Fortunately, both of these affected individuals have fully recovered. I am also proud that we have been able to help our customers and communities during this difficult time by implementing programs to waive late fees, extend payment days and provide payment plans for those impacted by the COVID-19. We are also offering additional payment assistance to those in need through our TXU Energy Aid program, and we donated $2 million for COVID-19 relief efforts to nonprofits and social service agencies in the communities we serve. This is not just good business, it is the right thing to do and reflects one of our guiding principles. I know the potential financial ramifications of COVID-19 on businesses is front of mind for investors today, which is why we have dedicated most of our prepared remarks to this topic. We believe Vistra is well positioned to deliver strong financial results in 2020, even in the face of lower demand driven by COVID-19. In fact, we are reaffirming our 2020 financial guidance today. Our confidence in our ability to continue to meet expectations in 2020 despite the challenges imposed by COVID-19 is a result of a few critical points, all set forth on Slide 7. First, our generation business is now approximately 99% hedged from direct commodity price risk exposure for the balance of 2020, limiting the impact of near-term price volatility on our 2020 financial results. Second, our retail business derives approximately 90% of its adjusted EBITDA from the residential and mass business customer classes, and we expect residential load will increase in 2020, mitigating the expected negative impact of lower business volumes. Last, approximately 70% of Vistra's adjusted EBITDA is derived from the ERCOT market, which is proving to be relatively resilient as compared to the other markets where we operate. Historically, Texas has outperformed other U.S. markets during and coming out of economic downturns, and we expect it to be no different this time around. Our strong balance sheet and favorable position heading into the COVID-19-driven economic downturn gives us confidence in our working capital and liquidity position. And through the operations preparedness actions we have implemented, our fleet is ready to deliver safe and reliable power in the months ahead. While COVID-19 is making it virtually impossible for businesses in various sectors such as retail, real estate, airlines and hospitality, to estimate the potential negative impacts of the pandemic on their operations, fortunately, Vistra offers an essential product, electricity, which is critical to a well-functioning society. Our strong balance sheet and highly efficient generation fleet have supported our ability to opportunistically hedge minimizing the impacts of near-term price volatility. And our lean integrated operations have created a foundation for us to produce relatively stable financial results in a wide range of wholesale power price environments. Unfortunately, you wouldn't be able to come to this conclusion just by looking at our stock price over the past several months. It remains perplexing to me why our stock would trade at such a high free cash flow yield with our 2020 guidance intact and a relatively robust long-term outlook. As always, we will continue to focus our efforts on execution. Hopefully, with time, the financial markets will begin to appreciate the relative stability this low debt integrated model can deliver, which when combined with our nearly 70% free cash flow conversion ratio, we believe makes for a very attractive investment. While our stock price is disappointing, I am optimistic that as we approach our leverage target this year, announce our long-term capital allocation plan, still scheduled for September of this year, and continue to execute and deliver in a variety of markets that we will unlock the value of this company. Turning now to Slide 8. Given the focus by the financial community on the impact of COVID-19 on electricity demand, we have summarized in a chart on this slide, the impacts we are seeing across each of our markets as of mid to late April. Similar to what we observed during the 2008 to 2009 recession and consistent with my earlier comments, ERCOT is proving to be relatively resilient. This is an important point for Vistra, given that, as I mentioned previously, approximately 70% of our adjusted EBITDA is derived from the ERCOT market. Moreover, while on their face, these demand declines could appear to be significant, we expect Vistra's hedges and substantial residential retail portfolio will mitigate what would have otherwise been a more dramatic negative financial implications from the COVID-19-led economic downturn. Turning to Slide 9. Let's start with our generation segment. Early in the first quarter, Vistra's exceptional commercial team read the tea leaves early on and executed a few opportunistic commercial transactions in anticipation of some of the market volatility we are now seeing materialize. These transactions resulted in a positive benefit to Vistra in the first quarter. In addition, our commercial and generation teams were able to dispatch our Permian Basin CTs in the first quarter to capture high prices in the West zone, resulting from low gas prices and local congestion. These actions put Vistra ahead of our financial plan for the quarter, contributing to a positive variance to our original 2020 guidance range for our commercial segments, which we depict in more detail on our guidance walk forward on Slide 11. For the balance of the year, Vistra is approximately 99% hedged from direct commodity price risk exposure, limiting the impact of changes in price levels to our 2020 financial results. Vistra's primary exposure to commodity price movements for the balance of the year is to the ERCOT summer, where we typically retain some generation length in order to protect from the downside risk of being caught short on a volatile summer day. As has always been the case, we continue to expect we will be able to manage this commodity price risk within our guidance range, particularly as we value this open position at well below market forward prices for planning and guidance purposes. And while we do expect lower peak demand in 2020 as compared to ERCOT's latest estimate published in its biannual supply-demand forecast, called the Capacity, Demand and Reserve or CDR report in December 2019, we have already accounted for this anticipated lower demand and its expected impact on summer power prices in today's guidance reaffirmation. We continue to believe weather will be a critical variable, driving the incidence of scarcity pricing intervals this summer. As we saw during the summer of 2019, low wind or high temperatures have the potential to drive scarcity pricing, and this impact could be even more pronounced in 2020 now that the Operating Reserve Demand Curve or ORDC has shifted by another quarter of a standard deviation. As you may recall, the ORDC is an administrative construct designed to provide additional revenues to the market as real-time operating reserves diminished to scarcity levels. Importantly, while we are observing decreased demand across all markets, residential demand is coming in slightly higher than weather-normalized expectations. And residential demand is both relatively inelastic and more sensitive to temperature swings due to increased air conditioning load, especially as more people are working from home. In short, even if lower business demand brings down the ERCOT peak in 2020, higher residential load on a hot summer day in Texas could still result in scarcity pricing intervals. And we estimate that it could take only two degrees of the increased summer temperatures to offset the lower demand impact from COVID-19. As usual, ERCOT summer will continue to be a critical driver of Vistra's financial results for the year. However, we believe our guidance is conservative as we have already embedded risk from lower demand or mild weather in our financial guidance. Let's turn our attention now to our retail segment. I'm on Slide 10. We do expect that lower demand across our markets will have certain negative impacts on our retail segment's results for the year. Specifically, we are anticipating higher bad debt expense in 2020 as a result of COVID-19 driven financial distress among some of our customers. This risk of higher bad debt expense resides primarily in our ERCOT portfolio as in markets outside of Texas, the local utility generally controls the bill and assumes the customer selection risk. In ERCOT, the Public Utility Commission of Texas recognized that the retail electricity providers could be unduly harmed by continuing to supply power to customers who cannot pay their electric bills due to unemployment or lower income and enacted a COVID-19 Electricity Relief Program in response. This program includes, among other things, a mechanism for retail electric providers to recover $0.04 a kilowatt hour for nonpayment by a qualifying set of customers in exchange for not disconnecting these customers. While the program applies only to a limited set of customers that must go through a number of steps to qualify, we expect it will provide meaningful mitigation to what would otherwise have been even higher bad debt expense in 2020. Next, we similarly expect our retail segment will be negatively impacted by lower volumes, including lower recovery of fixed capacity costs on our Midwest and Northeast large business portfolio, and lower margins driven by reduced consumption across our business customer classes. We expect these negative variances to be partially offset by higher residential volumes among our existing customers. We are more focused than ever on maintaining superior customer service levels during this pandemic. Our customers depend on us to keep their lights on and to power their daily lives. Recognizing that some of our customers will find themselves in financial distress as a result of the COVID-19, we have already instituted programs to waive late fees, extend payment dates and provide payment plan alternatives. We are continuing to offer bill payment assistance through our partner, TXU Energy Aid, which uses donations from customers, employees and other Texans to help around 20,000 families keep their lights on each year. Our commitment to our customers is as high of a priority as ensuring the safety of our people. As we turn now to Slide 11, you can see all of the variables we just discussed accounted for in our 2020 guidance walk forward table. While we are reaffirming our 2020 ongoing operations adjusted EBITDA and adjusted free cash flow before growth guidance ranges today, there are some puts and takes that get us there; primarily, our above-plan performance in the first quarter of 2020, offset by anticipated COVID-19 impacts. Specifically, we expect our generation segment to be up approximately $60 million with some potential for upside as compared to our initial guidance forecast as a result of the opportunistic hedging and generation dispatch activities we executed in the first quarter, which I just discussed, as well as lower fuel expense, partially offset by the potential for lower power prices driven by COVID-19. We expect this positive variance in our generation segment to be potentially offset by a $60 million negative variance in our retail segment as compared to our initial guidance forecast. This forecasted retail variance is comprised of an expected $10 million benefit from lower costs and an accelerated capture of synergies from our Ambit and Crius acquisitions, offset by $70 million of expected headwinds related to COVID-19. These COVID-19 headwinds reflect an estimated $40 million increase in our bad debt expense for 2020, as well as an estimated $30 million driven by lower volumes in our business segments, partially offset by expected higher volumes from our residential retail customers. In total, we had a strong first quarter, and we are tracking strong for the full year with the expectation that our 2020 ongoing operations adjusted EBITDA will be well within the range of the $3.285 billion to $3.585 billion, which is yet another example of the resiliency of the integrated model. We are also reaffirming our ongoing operations adjusted free cash flow before growth guidance range of $2.16 billion to $2.46 billion. Now that we have covered 2020, let's turn the discussion toward the potential impacts COVID-19 could have on future market environments. Despite what is, on its face, a dampening market effect of lower demand from COVID-19 that we expect to continue into 2021, albeit at a lower level, the economic slowdown could have some ancillary impacts that are constructive to market dynamics. Starting with ERCOT, which is a market with relatively tight supply-demand fundamentals, we are already seeing evidence that renewable development is slowing for projects that were slated to come online in 2021 and beyond. ERCOT, as an energy-only market, was already difficult for market developers to secure merchant project financing. The uncertainty that has been created by the COVID-19-led economic recession is exacerbating this challenge. We have received calls from a number of developers seeking to sell the development rights to their projects for very nominal fees given a lack of confidence these projects will be able to advance in today's environment. We are also observing that the appetite to execute power purchase agreements has decreased among investment-grade off-takers. As these entities begin to meet their goals or refine their programs so that their projects are located near their actual load as opposed to serving as virtual offsets. As a result, we estimate the 2021 supply estimates in ERCOT's December 2019 CDR report are almost 2.5 times what we believe will be feasible to develop in this environment. If we do, in fact, see renewable development slow, this will be a meaningful offset to any decreases in peak demand that could flow through to 2021. As a result, ERCOT reserve margins could be very tight when demand growth returns to pre-COVID-19 levels. Similarly, the decreased oil drilling activity we are observing is reducing the supply of associated gas, making us somewhat bullish on natural gas prices in 2021 and beyond. Higher natural gas prices could further push up the price of power in the markets where we operate. With these factors as a backdrop, combined with the relative resiliency we're observing in Texas demand, we continue to like our position in the ERCOT market. Moving on to PJM and ISO New England markets, we similarly expect COVID-19 to have an impact on the supply side of the equation, both as it relates to the likelihood of new thermal development as well as the potential for incremental retirements. On the new development side, in our view, market economics did not support new thermal development prior to the COVID-19-related demand declines, and the current forward outlook is even less supportive of new build. As a result, we would not expect any new thermal development in either PJM or ISO New England in this environment. Further, we could see incremental retirements of higher heat rate or higher-cost assets as the energy markets are challenged by lower demand expectations. The recent capacity auction clear in ISO New England and the uncertainty related to the upcoming capacity auction in PJM are not helpful for development and also present challenges for inefficient existing generation. Taking all of these factors into account, we expect we could see a range of outcomes in our 2021 financial results with the midpoint shifting somewhat lower. As we describe on Slide 13, many uncertainties remain, including the duration and severity of the COVID-19-led economic downturn, which makes predicting a likely outcome for 2021 even more challenging. Prior to COVID-19, our fundamental point of view suggested 2021 ongoing operations adjusted EBITDA could track in line with or potentially higher than 2020 expected results. As of April 30, we are now 57% hedged in ERCOT and approximately 60% to 70% hedged in all other markets, which helps to limit the range of outcomes we expect to see next year. In order to balance risk with potential upside, we are continuing to opportunistically hedge, albeit at lower than previously expected power prices. Even with this incremental hedging activity, however, given the distribution of potential outcomes, we still expect there is a meaningful chance that 2021 guidance could be flat to 2020 guidance midpoint. Just looking at forward curves as of March 31, 2020, which already reflected a level of uncertainty around COVID-19 impact, which suggests 2021 ongoing operations adjusted EBITDA would be approximately $200 million to $250 million lower than our 2020 guidance midpoint or about a 6% to 7% reduction. As we have seen, however, ERCOT forward curves have shifted upward in the back half of each of the past three years as the curve begins to reflect fundamentals and becomes more liquid. We believe there is still a possibility we could once again see this play out for the 2021 forward curve this fall. So the probability is likely lower due to the COVID-19-related uncertainty. In addition to looking at current forward curves, we also modeled fundamental supply and demand drivers in a number of economic downturn scenarios in order to better inform our views on the potential range of outcomes for 2021 financial results. Over the past two months, ERCOT's peak load has trended in the range of 2% below expectations. As the Texas economy begins to reopen, we may see this gap start to narrow. However, given the risk of slower economic recovery, our review of downturn scenarios included two consecutive years of peak demand trends below ERCOT's most recent forecast in its CDR report. On the supply side, the current environment has clearly impacted the prospects for new generation investments. Nevertheless, in an effort to be conservative when testing the potential risk to our 2021 results or downturn scenarios, we assume that the majority of the projected supply additions from the CDR will come online despite the historical trend of the CDR significantly overstating new supply additions as its purpose is not as a forecast tool but as a representation of new generation in the development pipeline that have met certain criteria. As a result of our analysis of these fundamental drivers, we currently estimate that even in our most punitive downside case that holds supply constant to pre-COVID-19 levels and demand growth to one-quarter of the pre-COVID estimates from 2019 to 2021, 2021 results would still be within 10% of our 2020 guidance midpoint. And with so many different variables influencing the range of potential outcomes, we still think there is a meaningful possibility we can achieve flat EBITDA from 2020 to 2021. Importantly, this means that even in our most punitive modeled case, we still expect we will be able to deliver approximately $3.1 billion or more of adjusted EBITDA from our ongoing operations in 2021. With an expected 65% to 70% free cash flow conversion ratio, this would translate to more than $2 billion of adjusted free cash flow before growth, meaning that even in a recession created by an extremely low probability pandemic tail event, we expect to maintain very strong liquidity. And we expect we will have significant free cash flow to return to shareholders through dividends and share repurchases. I suspect not many businesses today can say this. The market appears to be discounting our relative resilience. Even more than before, we believe the recent decline in our stock is unwarranted. In our view, Vistra should have been a stock investors fled to for relative safety in these economically uncertain times, and yet our stock has continued to trade with a free cash flow yield in the range of 20% to 30%. It is frustrating to say the least. The fundamentals of our business are strong. We supply an essential product and our low-cost, low-debt integrated business model comprised of leading retail businesses and advantage-generating assets is designed to manage risk and mitigate volatility. Our robust free cash flow should enable us to both reinvest in the business at modest levels while returning a significant amount of capital to investors. However, we are keeping the faith that as we pay down our debt and announce our capital allocation plans in 2020, we will be on the path to reach our fair and full value. As always, we will keep our eye on the ball of execution and continue to prove out this thesis. I will now turn the call over to David Campbell.

David Campbell, Executive Vice President and Chief Financial Officer

Thank you, Curt. Turning now to Slide 15. Vistra delivered first-quarter 2020 adjusted EBITDA from ongoing operations of $850 million, results that exceeded management expectations for the quarter. The favorability was driven by our ERCOT segment, reflecting the opportunistic hedging and generation dispatch activities that Curt mentioned previously. Our first-quarter 2020 results were $26 million higher than the same period in 2019, with our retail segment up $54 million and our generation segments down a collective $28 million. The positive year-over-year variance for our ongoing operations was driven by the acquisitions of Crius and Ambit, partially offset by lower results in our MISO and New York, New England generation segments, driven primarily by lower capacity revenue. As a reminder, due to retirement of four coal plants in our MISO segment in the fourth quarter, our first-quarter 2019 results have been recast, increasing by $9 million to account for the movement of the financial results of those plants out of the MISO segment and into the asset closure segment. Next, on the topic of liquidity. Vistra had total available liquidity of approximately $1.834 billion as of March 31, which includes cash and cash equivalents of $717 million and $1.117 billion of availability under our revolving credit facility. In April, we repaid $550 million of borrowings under our revolving credit facility. Additionally, on May 1, we notified the holders of our 5.875% senior unsecured notes due 2023 that we will redeem the entire $500 million principal amount outstanding on June 1. Our teams have modeled various scenarios to stress test our liquidity, and given the company's strong cash generation profile, we are confident we will have ample liquidity to operate our business even in a recessionary environment. Before we conclude today's call, I would like to offer a brief reminder of our capital allocation plan for 2020 and 2021, a summary of which is set forth on Slide 16. As we have consistently emphasized, our capital allocation priority for 2020 is debt reduction. In fact, it is in economic environments like the one we're in right now where the value of having a strong balance sheet is even more pronounced. Despite the low levels where our stock has been trading in recent months, our investors and stakeholders remain supportive of our commitment to advance toward our long-term leverage target of approximately 2.5x net debt to EBITDA. Last week, we announced that our Board of Directors approved our second-quarter dividend of $0.135 or $0.54 per share on an annual basis, which represents an 8% increase from the annual dividend we paid in 2019. As we look ahead, even with the economic uncertainty created by the COVID-19 pandemic, we still expect to have significant cash available for allocation in 2021 and beyond. We plan to lay out our long-term capital allocation plan in late September this year, the basic tenets of which we have been articulating for several quarters now. Specifically, we expect we will allocate approximately 25% of our capital available for allocation to growth investments on an annual basis, but only if our investment thresholds are met. If we do not find projects that we believe are an attractive use of capital, we plan to return that capital to shareholders. We expect that the remaining 75% available capital will be returned to stakeholders through a quarterly dividend with an attractive dividend yield combined with share repurchases. Please stay tuned for more specific details on our long-term capital allocation plan in September of this year. In closing, we are proud of our team members for their unwavering commitment to producing and delivering power to our customers in these challenging times. Our business remains resilient, and we believe we are well positioned to continue to deliver stable results on an annual basis, even in the face of unprecedented economic challenges. Our hope is that the successful execution of our business plan in this environment will further instill confidence in Vistra by our many stakeholders, ultimately unlocking what we believe is the true value of our company. With that, operator, we are now ready to open the lines for questions.

Operator, Operator

Your first question is from Shahriar Pourreza with Guggenheim Partners.

Shahriar Pourreza, Analyst

Glad you're safe. Can we ask a couple of questions here? Can we discuss the potential retail growth opportunities as we move into the second half of the year and into 2021? Does the PUCT's rate relief program and your lower estimates around peak demand alleviate some of the pressure off the smaller ERCOT books to sell, and could this potentially shift your focus back to buybacks, particularly that 25% of capital allocated to growth that David mentioned? Could this create further opportunities as it moves towards buybacks, with credit metrics on track to reach investment grade by 2021? How should we think about that growth portion given the relief provided to the retail providers?

Curt Morgan, President and Chief Executive Officer

So it does help. If the program hadn’t been implemented, we believe it would have resulted in significant issues. However, what's happening is that retailers are recovering the energy and generation components, but the typical margin they earn is not included in that recovery. While this is beneficial for some retailers, especially the smaller ones that are less capitalized and not as adept in risk management, there remains substantial risk as we approach the summer months. Consequently, it may be more challenging for them to hedge and post collateral. I believe there is still risk for retailers in this market, and we've observed some evidence of that. Whether this becomes an opportunity remains to be seen, but some retailers seem to be moving given that the situation isn't ideal for them. Additionally, the margin they forgo can be recovered later, but collecting from this particular customer base will be quite challenging. Therefore, trying to reclaim that lost margin will likely prove very difficult. We will monitor this situation closely, though it's hard to make predictions right now. We are still comfortable estimating that about a quarter of our annual free cash flow remains reasonable, even if it will fluctuate depending on opportunities and the economics of potential deals or projects. In September, we plan to provide more details on both growth and the specific allocations in our capital plan, which is a crucial aspect of our strategy. September will be significant for us. We also intend to discuss our overall portfolio positioning, asset mix, and future direction at that time. Although it feels far away, we are only five months from this pivotal moment, which I've been anticipating since I joined the company, allowing us to reach a steady state.

Shahriar Pourreza, Analyst

And so just a follow-up. So I have to imagine that the sustainability of the model that you're displaying today should provide some level of comfort with the agencies, right? Is there any updates with your conversations regarding a ratings upgrade to IG? Also any potential for the timeline to slip due to COVID? Are you still kind of shooting for that Q4 '21 for IG? So how is sort of the dialogue going with the rating agencies? Because I have to imagine this quarter should provide a little bit of a reprieve on whatever concerns they have from a business risk standpoint.

Curt Morgan, President and Chief Executive Officer

Yes. What I understand is that S&P has made some comments that suggest they might wait until the end of the year to reevaluate our ratings. I anticipate it will take at least a year, possibly longer, for another upgrade. I believe we've fallen back a bit on the investment grade aspect. However, I share your perspective that when this situation stabilizes, it may not be seen as a negative period but rather a highly positive one. The agencies will recognize that this is an extraordinary situation, comparable to the great depression in terms of its impact on unemployment. This is distinct from a standard recession, and the resilience of our business model is crucial here. I think the long-standing concerns about our sector, due to past poor execution and strategies, will be re-evaluated when they see our current model and execution. Ultimately, I maintain hope that by the end of 2021, we could reach investment grade, although it seems we may have slipped a bit based on recent feedback I've received.

Shahriar Pourreza, Analyst

Got it. Thank you, guys. Congrats on the results. I will jump back in the queue. Appreciate it.

Curt Morgan, President and Chief Executive Officer

All right. Thanks, Shar.

Operator, Operator

Your next question is from Stephen Byrd with Morgan Stanley.

Stephen Byrd, Analyst

Hey, I hope you all are well.

Curt Morgan, President and Chief Executive Officer

You, too, Stephen. Hi.

Stephen Byrd, Analyst

Congrats on the good results in a challenging time. You gave some really good color on the state of the renewables market. And I just wondered, does that make you want to potentially be more aggressive in terms of growth just because of the opportunities? I just want to make sure I kind of understood how you're thinking about the implications of what's happening there.

Curt Morgan, President and Chief Executive Officer

Well, I think there was a number of implications that we were trying to get across. I think one of them was that we just think the growth in renewables, in particular in ERCOT, may have slowed down a bit. But I will tell you that when we stressed to get to that within 10% in 2021, we really didn't cut back the amount of renewables that we had previously thought we're going to come in back when we gave guidance, back in November timeframe. So in my view, it's a bit punitive, but we wanted to stress the system a little bit. So I think that's one point. In terms of the point that you're making, I think we have some ideas about what we would like to do around renewables. And I don't know that this has really changed it much. We still have a strong cash flow that if we want to do some projects, we're going to follow through. I think you saw that we increased the battery opportunity out at our Oakland site. I think there may be some other opportunities at our Moss Landing site. And then, certainly some potential opportunities in ERCOT. And so I don't know, really, Stephen, I don't think it's changed our view. I think the difference is, is that we have the ability to do the things we want to do, whereas some people, I think, it's going to be more difficult just because it's difficult to attract the capital to support their plans. The developers are having more difficulty. And we know that because they're approaching us, for us to take over their projects and then pay them a small nominal fee to take them over. So I think there is an opportunity there and that we're working on that opportunity, whereas maybe there's some good projects that may come to market at a relatively cheap price, and we'll take a look at that and add that to our backlog. We don't talk much about just the amount of projects we have around renewables, in particular in Texas, but we also have them in other states. Of course, we have the coal to solar thing going on in Illinois. But this company has a fairly deep backlog of opportunities to invest in renewables. But we're going to be deliberate about it, and we're looking for those kinds of opportunities that offer the kind of returns that we expect, that sort of 500 to 600 basis points above the cost of equity. And we have some of those, and we'll talk more about that in September.

Stephen Byrd, Analyst

That's helpful. It sounds like it's a pretty rich opportunity set so we'll stay tuned on that. And just on the demand outlook, you gave a lot of good color in a number of ways. I wonder just on residential demand, and I apologize if you did lay it out. Could you quantify just sort of the percentage increase in residential demand you've seen or that you expect, especially down in Texas this year? What's your general kind of view on how meaningful that may be?

Curt Morgan, President and Chief Executive Officer

Yes. Since I'm not in the same room with everybody, I'll ask David if he has that. But between David Campbell and Jim Burke, we probably have two folks that can put a little more detail to that. So David, do you want to start? And then, Jim, if you have anything to say, please jump in.

David Campbell, Executive Vice President and Chief Financial Officer

Sure. This is David. Thanks, Stephen. Regarding residential demand, we've seen impacts actually in the second quarter. For the past month, it's been in the 5% to 6% range. We've modeled it conservatively at around 2% for the next nine months, but we're seeing increases reflecting more people working from home in the 5% to 6% range. That's what we expect in the second quarter, with a moderation in the latter half of the year. We've maintained conservative assumptions about load declines in other segments, but to be cautious, we've factored in that moderation. Overall, the increase for the next nine months is about 2%.

Stephen Byrd, Analyst

Understood. As a follow-up, that sounds reasonable and conservative. If demand for residential is actually stronger, that would likely have a significant impact considering your business mix.

David Campbell, Executive Vice President and Chief Financial Officer

That's exactly right, Stephen. Especially in ERCOT, where residential demand is influenced by weather and is our highest margin segment, we see potential for upside. In scenarios where businesses reopen, a significant portion of the workforce may continue working from home. This will likely lead to some recovery in the declining demand from businesses while maintaining an increase in residential demand. Therefore, this situation could have a significant impact on us, given the profitability of our ERCOT residential segment.

Curt Morgan, President and Chief Executive Officer

And Stephen, one other thing I'll mention at this point, I think we've tried to be pretty conservative. We're only at the beginning of May here. And we typically aren't going to change guidance this early in the year, especially given just how important the ERCOT summer is and how volatile it can be. But there were words in my script and there were words in David's and then also on these slides about tracking strong and that we're well within the range. And what that really means is, I think we've been conservative on our estimates for 2020, and we feel very good, very good about the midpoint and we think there's some potential for upside. But we want to be cautious about that. I think what will be a better indicator is when we get into the second and certainly the third quarter earnings calls, when we have a better insight as to what the summer and ERCOT is going to look like. But from where we stand today, even with COVID-19, 2020, it looks to be a pretty strong year if we can execute the way we believe we can.

Operator, Operator

Your next question is from Steve Fleishman with Wolf Research LLC.

Steve Fleishman, Analyst

I have a question regarding capital allocation. If the rating agencies are taking longer to decide on investment grade, can you clarify for me your next capital allocation decision? Will you primarily focus on meeting your debt-to-EBITDA metrics, or will you be taking steps to achieve investment grade? What will take priority in your decision-making – the metrics or achieving investment grade?

Curt Morgan, President and Chief Executive Officer

That's a great question, Steve. To put it simply, we've dedicated 2020 to paying down debt, which means we may have to forgo returning money to shareholders in the immediate term, though we would like to do that. We'll have a capital allocation plan ready in September that emphasizes returning capital to shareholders and reinvesting in our business. While it seems the timeline for achieving investment grade may be extended, we want to ensure that our capital structure is as strong as possible. Our business risk remains solid, and we are aiming to reach a BB+ rating with S&P before discussing what it will take to achieve investment grade. In September, we will focus on reinvesting in the company and communicating how we plan to return a significant portion of our free cash flow to investors, whether through dividend changes or share repurchases, depending on our trading position. Additionally, we will cover our long-term company goals and how we plan to manage our asset portfolio moving forward. We’ll take the summer to assess the situation and be ready for September, which will contain a lot of important information.

Steve Fleishman, Analyst

That's great. That makes sense. And I don't think you want to be chasing the rating agencies all the time. Okay. And then, just on the unfortunately, I have to ask since the CDR has become a bit of an event in recent times. I think it's coming out maybe next week for the summer. Just any sense on what we should expect for that? And do you think we'll actually see this reduction in some of the renewables or delays, or is it likely not to show up in that? Just any color on the CDR.

Curt Morgan, President and Chief Executive Officer

I find it challenging to predict the outcomes of the CDR since it's relatively easy for projects to reach the point where they appear in the CDR. Additionally, there's no economic context to consider, and ERCOT has attempted to clarify that this shouldn't be used for forecasting. It's hard to determine what will happen. I expect there might be some pullback, but I believe it will likely be more about deferrals than actual cancellations. We could see a situation similar to last year when projects were postponed from 2020 to 2021, resulting in a substantial number appearing then. Some may get deferred again, but I wouldn't be surprised if developers continue working on projects and queueing them for interconnections, which might lead to more appearing. For us, it’s less about the CDR itself; we have a dedicated team familiar with the market. The focus is on the actual activities happening, such as equipment acquisition, contract signing, and financing, as that's where we've noticed significant pullbacks. Another area of concern is support on the PPA side. For instance, we have yet to see a merchant solar plant secure financing in the ERCOT market, which is particularly tough in an all-energy market. Without a PPA, securing financing becomes increasingly challenging, and we've noticed a slowdown in the PPA market. Even if the CDR could introduce uncertainties, our main focus is on the real situation on the ground. That’s why our team is continuously engaging not only in development but also gathering insights about ongoing activities.

Steve Fleishman, Analyst

Okay. Thanks so much.

Curt Morgan, President and Chief Executive Officer

Thank you, Steve.

Operator, Operator

Your next question is from Julien Dumoulin-Smith with Bank of America.

Julien Dumoulin-Smith, Analyst

Hey, good morning, team. Thanks for the time. Hope you all are well. Wanted to follow up on some of the various ways it's been asked on prior questions, but when you talk about the '21 outlook and you put a few comments in your slides, I won't repeat them. But what are you reflecting with respect to, first, the latest uptick in power prices even in recent days when you think about '21 EBITDA relative to '20? As well as you just talked about an improvement in residential sales, for instance, how does that also figure into the meaningful chance that '21 guidance could be flat to '20 at this point? What are you assuming?

Curt Morgan, President and Chief Executive Officer

Yeah. Yeah. And Julien, I'm going to take that as being largely focused on ERCOT, is that correct?

Julien Dumoulin-Smith, Analyst

Yes. You tell me what the meaningful factors are, for example.

Curt Morgan, President and Chief Executive Officer

Yes. So, looking at 2021 summer pricing in ERCOT, which is crucial for us, it will likely determine whether we remain flat or decline. Prices have decreased significantly in recent weeks due to liquidity and various factors, but we don’t think this decline is based on fundamental changes. Our outlook hinges on how quickly we recover from the COVID-19 pandemic. If prices align closer to our fundamental expectations, we could see a year that's much closer to flat compared to last year. However, if prices stay at their current levels, we could end up in the $3.1 billion to $3.2 billion range. Ultimately, it all depends on the summer ERCOT pricing. Additionally, the year-over-year numbers for retail aren’t significantly impactful, making ERCOT summer pricing the main determining factor. In other markets, our influence is minimal as well. If we see strong recovery in Texas and the development concerns don’t materialize, we might experience a tight market in ERCOT, leading to numbers more consistent with flat year-over-year guidance. On the contrary, if the effects of COVID-19 linger and prices remain low, we could end up in the lower estimate of $3.1 billion to $3.2 billion. David, feel free to add anything if you’d like.

David Campbell, Executive Vice President and Chief Financial Officer

I think you covered it, Curt.

Julien Dumoulin-Smith, Analyst

All right. Excellent. If I can just quickly follow up. On the C&I exposure, to the extent to which obviously 90% of the business is resi and mass biz. I just wanted to understand how you all are thinking about that exposure more in terms of the margin impacts, even on that small piece that would seemingly be the partial offset to what are otherwise very positive trends on the resi side.

Curt Morgan, President and Chief Executive Officer

Yes. David, do you want to take that one?

David Campbell, Executive Vice President and Chief Financial Officer

Sure. So Julien, you saw that we noted that there's some downticks from LC&I that we cited on Slide 11. And it's a combination of factors, the margin from that segment is pretty low. So part of it is lost margin, part of it is the loss of the hedge position. So we valued reselling back that power into the market at lower prices. And part of it is some of the impacts of certain fixed costs like capacity and transmission, particularly in Midwest and Northeast. So that's what gets you up to that sum total of the $30 million for the year, partially offset by some higher residential volumes. So that's some total of the various impacts, the margin is a relatively small piece of that. And again, that's our projection for the full year. It's with a view that we could have sustained impacts in the downturn. So we've tried to be pretty conservative in our assumptions. But it's the sum total of those various impacts of that segment.

Julien Dumoulin-Smith, Analyst

Got it. Understood. Hey, Curt, I just need a quick clarification for the call. When you mention growth and your earlier comments about growth expectations, particularly in renewables, how committed are you to pursuing growth compared to allocating capital for buybacks and dividends? I want to be very clear about your current stance on growth capital.

Curt Morgan, President and Chief Executive Officer

Yes. We focus on using capital efficiently while also considering the need for long-term growth. As a company, we have to be mindful of our ongoing operations, including share buybacks. Our analysis is straightforward; the critical aspect is determining the share price we project for the buyback discussions. This process leans more towards an art than a strict science. We consider various share prices to evaluate the returns from repurchasing shares, trying to stay realistic and factoring in time periods that could affect those returns. We aim to ensure that investing back into the company yields returns that are comparable to share buybacks. I’m pleased to report that when we've made comparisons, the returns have generally aligned with our expectations for share buybacks. We will continue this analysis while also recognizing the need for company investment, especially as we see coal plants retiring. Our goal is to economically replace the EBITDA from those assets and to grow our overall EBITDA, particularly since we acknowledge our stock is undervalued. Ultimately, finding the right balance is complex, but we perform the necessary calculations to assess the relative benefits of reinvesting in the business versus executing buybacks.

Operator, Operator

I would now like to turn the call back over to Curt Morgan for closing remarks.

Curt Morgan, President and Chief Executive Officer

Well, once again, I want to thank everybody for being on the call. I hope everybody stays safe and healthy in this difficult time. I can't tell you enough how we appreciate your interest in our company, given the extraordinary COVID-19 virus. We're excited about our company, and we're excited about the months coming ahead. And until next time, please be safe and be healthy.

Operator, Operator

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