Earnings Call Transcript - VST Q3 2023

Operator, Operator

Hello, and welcome to Vistra's Third Quarter 2023 Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Meagan Horn, VP Investor Relations. Please go ahead.

Meagan Horn, VP Investor Relations

Good morning, and thank you all for joining Vistra's investor webcast discussing our third quarter 2023 results. Our discussion today is being broadcast live from the Investor Relations section of our website at www.vistracorp.com. There you can also find copies of today's investor presentation and the earnings release. Leading the call today are Jim Burke, Vistra's President and Chief Executive Officer; and Kris Moldovan, Vistra's Executive Vice President and Chief Financial Officer. They are joined by other Vistra senior executives to address questions during the second part of today's call as necessary. Our earnings release presentation and other matters discussed on the call today include references to certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are provided in the press release and in the appendix to the investor presentation available in the Investor Relations section of Vistra's website. Also today's discussion contains 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. I encourage all listeners to review the safe harbor statements included on Slide 2 of 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. Thanks. And I will now turn the call over to our President and CEO, Jim Burke.

Jim Burke, President and CEO

Thank you, Meagan. Good morning, and I appreciate all of you for taking the time to join our third quarter 2023 earnings call. I am proud to deliver our third quarter results this morning, which was a very successful quarter for all facets of the business. We'll start this morning on Slide 5. I'll speak to this quarter's operational and financial performance in more detail in a moment, but notably, this quarter's adjusted EBITDA from ongoing operations of approximately $1.6 billion underscored Vistra's capability of achieving consistently strong earnings through its integrated business model, with excellent operational performance by each of our generation retail and commercial teams across a variety of pricing and weather environments. In the prior two quarters, we experienced average power prices clearing lower than our realized hedge prices, which highlighted the significant downside risk protection our comprehensive hedging strategy provides to our earnings. This quarter, that scenario held in the markets outside of ERCOT where milder weather kept prices lower. In these markets, we were able to capitalize on our dynamic position management of our hedged portfolio to capture significant earnings in our generation segment. We saw this paradigm flip in the ERCOT market and while we were significantly hedged, we did have some open length, and the generation fleet's operating flexibility was optimized by our integrated teams to respond to higher market prices, while ensuring our customers received the necessary air conditioning at competitive prices throughout the markets we serve. With each of our four strategic priorities, our aim is to challenge ourselves with high performance goals and then consistently deliver. To that end, this quarter, you saw us continue to advance our other three strategic priorities as well, as we focus on a strong balance sheet, our capital return program, and our energy transition goals. As of November 2, we've now returned over $3.785 billion of capital to our shareholders through share buybacks and our dividend program, since the capital allocation was first announced in November of 2021. After we close the Energy Harbor acquisition and develop a long-range plan for the combined company, we will work with our Board on a new multi-year capital allocation plan and expect to disclose the specifics of that plan in the first half of 2024. In the meantime, we continue to opportunistically invest in renewable and energy storage growth, including our expectation that we will begin construction in spring of 2024 on our three largest solar and energy storage developments located at our former Illinois Coal plant sites while maintaining our sub-three times leverage ratio. I want to move now to slide 6 to discuss our third quarter operational performance. This past quarter, we saw unprecedented heat in ERCOT. It was the highest third quarter on record, even beating the record-setting heat of 2011. Temperatures in Texas were six degrees above normal in August and early September, frequently topping 105 degrees in Dallas and over 100 degrees in Houston and San Antonio. Cooling degree days were 23% above the 30-year normal for the June through September comparable time period, and ERCOT set a new peak demand on 10 different times this summer. On August 10, ERCOT experienced its all-time record peak load of over 85,000 megawatts. It was vital for our generation team to keep the plants running in these extreme conditions to ensure that the people of Texas could continue to live and work in a healthy and comfortable environment. In ERCOT, the solar generation ramp down hours around 6 to 8 p.m., have proven to be a critical time period for the grid. It is still very hot during those times with strong customer energy demand, but it is also the time period when we see solar start to ramp down and at times the wind may not make up the difference, especially in August. The ERCOT grid is operationally complex having to predict the availability of not only dispatchable resources but also intermittent resources such as solar and wind, limited duration energy storage, and demand response activities. As the generation mix of intermittent resources increases, ERCOT needs more reserves as a backstop to ensure there is adequate generation to cover demand and avoid emergency conditions. In these scenarios, you see flexible generation fleets like ours ramp to meet as much of this demand as possible. And that is exactly what we did, exceeding 97% commercial availability on average during those critical hours. During these challenging weather seasons, our number one priority is ensuring our customers can consistently access competitively priced power to maintain their quality of life and keep the economy strong. That's where our retail business excelled. This summer's marketing campaigns featured several differentiated products tailored to our customers' needs, including a seasonal discount product that helps customers manage the size of their electricity bill during the higher usage summer months. Our customer-focused multi-brand and marketing channel strategy and responsive service allowed us to grow our ERCOT residential customer counts over the prior quarter. In addition, our business market segment grew customer volume 16% year-over-year with strong margins. While our retail and generation teams stood ready to meet these demands for our customers and the people we serve, our commercial team optimized our financial position to create significant value for our shareholders. Specifically, in August, the ERCOT market saw average real-time pricing around $196 with 43 hours in August clearing over $1,000. And during those critical hours at 6:00 to 8:00 PM in August, we saw prices clear on average around $843. Leveraging customer usage insights and our generation fleet's strong commercial availability, our commercial team optimized and managed our risk position to create significant value on our open positions. The commercial team further set us up for success in our markets outside of ERCOT where the weather was milder, strategically managing our positions and flexing our generation output to optimize our hedge positions and achieve strong results for the quarter. We see this trend of new peak demand records at ERCOT continuing for the foreseeable planning horizon, demand that we believe our retail products are designed to attract and our diverse and flexible generation fleet is uniquely positioned to serve. Moving now to slide 7. Again, I am proud of the team's exceptional, tightly coordinated performance this quarter that helped Vistra achieve its $1.613 billion of ongoing operations adjusted EBITDA. Not only did the retail team grow residential customer accounts, TXU Energy maintained the PUC of Texas five-star rating, extending its streak to 12 straight months. Our ERCOT fleet delivered 2.5 terawatt hours more than any other quarter's output in at least the past 10 years, a 10% increase over the next highest quarterly generation output achieved in the third quarter of 2019. It was a notable feat that when paired with a strong performance by the commercial team to adapt to a variety of weather conditions created significant value across all of our markets. With the important summer months behind us and only two months left in the year, today we are raising and narrowing the guidance range we announced last quarter from $3.6 billion to $4 billion in adjusted EBITDA from ongoing operations to now $3.95 billion to $4.1 billion. We are similarly increasing and narrowing the range of adjusted free cash flow before growth from ongoing operations to a new range of $2.35 billion to $2.5 billion. Turning now to slide 8. We introduced 2024 guidance ranges for Vistra stand-alone without including any Energy Harbor contributions. We are forecasting adjusted EBITDA from ongoing operations in the range of $3.7 billion to $4.1 billion and adjusted free cash flow before growth from ongoing operations in the range of $1.9 billion to $2.3 billion. Notably, our ongoing operations adjusted EBITDA midpoint for 2024 of $3.9 billion is higher than the midpoint opportunities we previewed on our most recent earnings call in the range of $3.7 billion to $3.8 billion. We are confident in our forecast as we expect consistent earnings from our retail business paired with expected strong performances from our reliable, diverse, and flexible generation fleet that stands ready to deliver in a variety of economic and weather conditions just as it has this year. Of course, we will update our guidance ranges to include Energy Harbor performance expectations after we close the acquisition. Speaking of the Energy Harbor acquisition, slide 9 provides an update on the status of the transaction. Since we last spoke, we have received approval from the NRC in September and we declared substantial compliance with the DOJ's second request on August 31. We have responded to all requests from FERC, and that process is progressing. Given our commitment to sell the Richland/Stryker generation plants, which we believe eliminates any potential remaining concerns around market competition, we continue to target a closing before the end of the year. Our team has worked with the Energy Harbor team to prepare for a smooth integration. And we are prepared to close the transaction promptly after receiving approval from FERC. As noted before, we intend to provide combined Vistra and Energy Harbor forecast and guidance information after we close the acquisition. But as shown on slide 9, we continue to expect the Energy Harbor business to deliver an average of approximately $750 million of adjusted EBITDA in 2024 and 2025 including the impact of the hedges and synergies, with that number growing to approximately $900 million when considered on an open basis. I'll now turn the call over to Kris to discuss our quarterly performance in more detail.

Kris Moldovan, Executive Vice President and CFO

Thank you, Jim. Turning to Slide 11, Vistra's performance in Q3 2023 was a reflection of available opportunities and outstanding execution throughout the country by both our Generation and Retail segments. The Generation segment exhibited the benefits of maintaining a diverse, flexible and durable fleet of assets, with the team delivering strong results in both ERCOT, where third quarter temperatures were on average the hottest on record, and outside of ERCOT where temperatures were milder. Notably, the $1.44 billion in adjusted EBITDA from ongoing operations delivered by the Generation segment in Q3 2023 was almost $400 million higher than the same quarter last year. Moving to the Retail segment. Despite the challenges of high loads and prices in ERCOT in Q3, the Retail team delivered outstanding results for the quarter by focusing on customer counts and margins and consistently optimizing its supply position throughout the quarter. Although Retail is not typically expected to contribute much adjusted EBITDA, if any, in the summer months when prices are higher, the team was able to deliver $173 million in Q3 this year. Looking at year-to-date, each of the Generation and Retail segments are outperforming compared to last year, with Vistra earning over $800 million more in ongoing operations adjusted EBITDA through the third quarter of this year compared to the same period in 2022. We are proud of the team's execution thus far this year, and we are looking forward to finishing the year strong. Turning to Slide 12. We provide an update on the execution of our capital allocation plan. As of November 2nd, we had executed approximately $3.26 billion of share repurchases, leading to an approximately 26% reduction in the number of shares outstanding since the fourth quarter of 2021. We expect to utilize the remaining approximately $1 billion of the total $4.25 billion authorization by year-end 2024. However, as Jim noted, we do expect to review our capital available for allocation shortly after we close the Energy Harbor acquisition and would expect to announce a new comprehensive capital allocation plan in the first half of 2024. Moving to our dividend program. We announced last week a fourth quarter 2023 common stock dividend of $0.213 per share, which represents a substantial growth of 42% over the dividend paid in the fourth quarter of 2021 when our capital allocation plan was first established. This growth highlights the significant returns available to our shareholders as we reduce share count while paying a constant quarterly dividend amount. Turning to the balance sheet. In light of the results achieved in the third quarter, culminating in an updated 2023 guidance ranges, Vistra's net leverage ratio currently sits significantly below three times. While net debt will increase upon closing of the Energy Harbor acquisition, we currently expect our net leverage ratio to be below three times on a pro forma basis in 2024. Finally, in addition to the transformation we are achieving with the Energy Harbor acquisition, the team has been busy with development and pre-construction activity this year at our three largest solar and energy storage developments at our former Illinois coal plant sites, for which we now anticipate construction to begin next spring. Despite some headwinds in this higher cost and interest rate environment, these projects continue to comfortably exceed our targeted return thresholds. As we've stated before, we believe in a responsible energy transition that targets disciplined capital outlays for strategic projects, and the zero carbon generation growth we will achieve with these three coal-to-solar sites is reflective of that core principle. Touching quickly on Slide 13, as we have done in prior quarters, we have provided an update on the out-year forward price curves as of November 2. While the ERCOT forward price curve continues to reflect some backwardation, the prices still remain higher than the April 29, 2022 curves when we first spoke to you about increased EBITDA earnings potential in the out years. The curves and sparks are holding together well and support our initiated 2024 guidance ranges. Those curves, together with the continued execution of our comprehensive hedging program, provide us confidence in an adjusted EBITDA from ongoing operations midpoint opportunity for 2025 in the range of $3.8 billion to $4 billion. To wrap up, Slide 14 provides some additional breakdown of our 2024 initiated guidance ranges, including midpoint expectations among the current business segments. As we have discussed previously, the acquisition of Energy Harbor will accelerate the transformation of our company, and we expect it to alter the way we analyze our business results. Accordingly, after we close the transaction, we expect to re-segment our businesses. While we will have more to say on that after closing, we do expect to provide you with more visibility into our nuclear and renewable businesses. I want to reiterate Jim's comments: We are extremely proud of the collaborative work and performance of each of our generation, retail, and commercial teams. We have great line of sight to keep that momentum going for the foreseeable future, and we will keep striving to meet the expectations of our customers and our communities to keep the lights on in an affordable and reliable manner in the markets in which we operate. And at the same time, we will manage the company in a cost-efficient and strategic manner to continue producing adjusted free cash flow yields that we are translating directly into significant returns for our shareholders. I know I speak on behalf of all our employees and partners when I say that we are striving to end 2023 on a strong note and to execute against our targets for 2024. With that operator, we're ready to open the line for questions.

Operator, Operator

Thank you very much. We will now begin the question-and-answer session. Today's first question comes from Michael Sullivan with Wolfe Research. Please go ahead.

Michael Sullivan, Analyst

Hey, everyone. Good morning.

Jim Burke, President and CEO

Hey, good morning, Michael.

Michael Sullivan, Analyst

Hey, Jim, just wanted to start with maybe what kind of gives you conviction in being able to close the deal by the year-end and we'll be able to hear something from FERC in a timely manner here?

Jim Burke, President and CEO

Yes, Michael. We've recognized the advancement we've made with this transaction. Initially, we anticipated NRC would be the primary obstacle, and we were pleased to receive that approval a few months ago. Currently, we have feedback from DOJ, and we believe we have addressed their concerns. We expect to resolve FERC's issue by selling the Richland/Stryker facility. We didn't see it as a concern when we initiated the deal and still don't believe it's a significant issue. However, out of caution, we are proceeding with the sale. We have responded to all their information requests, and the interveners have done the same. Our expectation is that FERC has all the necessary information. We've requested feedback by mid-November. We are confident we will reach a conclusion by the end of this year and are aiming to close by then. It has been a process, and we have been very responsive. From FERC's perspective, they have the information and are conducting their due diligence; no new issues have been raised to us so far, which is why we believe we will finalize this by year-end.

Michael Sullivan, Analyst

Okay. That's very helpful. And then just on the new financial outlook here I wanted to ask on some of the dynamics below EBITDA and at the free cash flow line. So it looks like the free cash flow for 2023 actually improved more than EBITDA. So I wanted to get a sense what's driving that? And then it looks like the conversion to free cash, then drops again in 2024? And just also on that I wanted to confirm like does that include the interest cost associated with the debt you issued for Energy Harbor but obviously not the EBITDA yet. Yes. Sorry that was a bunch here but...

Jim Burke, President and CEO

Thank you, Michael. I'll begin by noting that our results for this year have continued to improve as we progressed through the year. This enhancement is primarily driven by EBITDA, and we effectively navigated the third quarter amid significant challenges related to pricing and weather, especially in ERCOT. The increased EBITDA is expected to positively impact our bottom line; at the start of the year, we did not anticipate the sort of weather conditions that actually occurred. Consequently, our free cash flow in the short term will reflect this improvement in conversion. Initially, we expected a lower conversion rate because we didn't foresee such EBITDA opportunities arising in a more typical weather scenario. During our discussions of our plans, we mentioned that free cash flow conversion might be somewhat lower in 2023 and 2024, largely due to the capital needed to operate the units, including expenditures related to long-term service agreements. As indicated in the capacity factors in the back of the presentation, our units have been performing very well, but they have also been working hard. Therefore, we anticipate spending some capital in 2024 and likely in 2025 to ensure our fleet remains in excellent condition. The unexpected aspect was not how we see 2024 shaping up regarding free cash flow conversion; we actually experienced some positive free cash flow conversion due to the EBITDA opportunities that arose in 2023. Regarding Energy Harbor and how we are considering the financing and its impact on our results for 2023 and 2024, I will ask Kris to elaborate.

Kris Moldovan, Executive Vice President and CFO

Yes, Michael, I believe you are correct. There are a couple of factors involved. For 2023, we had planned for some financing that would incur interest this year. However, we did not carry out the financing until later in the year, and the first interest payment will occur next year. It may seem counterintuitive, but compared to our initial plan, we are actually benefiting from interest for 2023. As for 2024, the figure you see here includes the interest expense from the debt we raised for Energy Harbor, which we are currently holding. Additionally, as you mentioned, we are not receiving any contributions from Energy Harbor's results.

Michael Sullivan, Analyst

Okay, super helpful. Thanks a lot.

Jim Burke, President and CEO

Thank you, Michael.

Operator, Operator

Thank you. The next question is from Julien Dumoulin-Smith with Bank of America. Please go ahead.

Julien Dumoulin-Smith, Analyst

Hey, good morning team. Thank you guys very much. Really appreciate the opportunity to connect here. Just coming back to the capital allocation update commentary from the call real quickly. I mean obviously you're going to be introducing a new year in the first half of the year I think you said. But can you give us a little bit of a sense as to what the parameters are? I mean is it just really about how to capitalize the business? Are you thinking about this vis-à-vis new and novel growth avenues that could be emerging here pro forma for the acquisition and/or any other directions there? I just want to make sure I'm understanding what you're saying there? Is this more about addressing the potential 2025 and 2026 $1 billion buybacks? Or is there something more that you're kind of alluding to in terms of how you think about the future growth of the business here?

Jim Burke, President and CEO

Thank you for the question, Julien. Good morning. I appreciate the thorough question about capital allocation. There are several points to consider. Firstly, as mentioned earlier, we aim to finalize the Energy Harbor acquisition to ensure we fully understand the long-term potential of that business and the synergies we expect to achieve over time. Additionally, since we've raised the Vistra stand-alone guidance, we have more cash available for allocation. We plan to combine all these factors and discuss them with our Board when we have a complete picture. We have highlighted some Vistra Zero opportunities that we will continue to pursue. The buyback program is progressing slightly ahead of schedule, and we anticipate that the Board will support this program when it comes time for approval, possibly at the current or even a faster rate than we've been executing. At this moment, we believe it's not appropriate to project too far ahead regarding specific buyback amounts in 2025 or 2026 since we need to wrap up the acquisition and formulate the full plan. However, we remain committed to our four strategic priorities, and our performance against these has been on track or even exceeded expectations, which I expect will continue. Regarding growth opportunities, many possibilities lie ahead that we are still evaluating, especially in light of the Inflation Reduction Act. We are exploring chances to leverage behind-the-meter opportunities and hydrogen initiatives. We still own nearly 60 sites with land and interconnections, providing many avenues for growth, but they must align with our return requirements. This is the discipline we wish to maintain, and it underscores the importance of presenting a comprehensive capital allocation plan. We need to assess all available options and prioritize the best ones, not just those we’ve been focused on so far. I believe we will stay committed to our four core principles, which have been effective, and our investors recognize our approach. We look forward to presenting additional opportunities for our investors to understand how we will create value after finalizing the Energy Harbor acquisition.

Julien Dumoulin-Smith, Analyst

Yes, absolutely. And just speaking of which, right? I mean obviously, the 2024 guidance today is not apples-to-apples with maybe what Street is using out there. I mean any chance that you could give us a little bit of a sense of what the EH impact is mark-to-market today even in a ballpark sense to try to kind of square your guidance?

Jim Burke, President and CEO

I think, Julien, it is a little bit from a timing standpoint, an apple and an orange, but I do think you can take a couple of pieces and add them together. So if you look at our stand-alone guidance for next year, we're looking at a midpoint of $3.9 billion. And then we unpacked the Energy Harbor 2024 and 2025 numbers, because we wanted to do we gave you an average last time of 750. Now we're unpacking it saying approximately 700 for 2024. That's still using some data that we got originally, through our cases, but we're tracking curves. We have a sense of things being about where they were at the time we announced the deal from a power price standpoint. So there alone, you're taking the 3.9 and the approximately 700 here, you're getting to 4.6. We had been at a midpoint of 4.35 on average when we gave you that direction when we announced the deal. So, I think the two pieces just added together put us north of where we have been signaling the combined opportunity. And this still has the targeted synergy levels in here. I think we could potentially exceed those targeted synergy levels, but we need to get into the business fully to have the details around that execution plan before we would upsize anything there, Julien. So, I do appreciate you calling out because I think there's been some consensus that is included. Energy Harbor in some that has been stand-alone. Our stand-alone is well north of anything that we have signaled at this point and we think our Energy Harbor at this point is on track. And when we get into it, I think we might be able to find some additional upside. But at this point, we're not reflecting that.

Julien Dumoulin-Smith, Analyst

At least, on track with those synergies, it seems. But thank you very much again for time, guys. Appreciate and I’ll pass it.

Jim Burke, President and CEO

Thank you, Julien.

Operator, Operator

Thank you. The next question comes from David Arcaro with Morgan Stanley. Please go ahead.

David Arcaro, Analyst

Hi. Thanks. Good morning. Thanks for taking the question.

Jim Burke, President and CEO

Good morning, David.

David Arcaro, Analyst

Could you comment on the retail trends that you're seeing? Do you expect this retail strength to continue? And I guess looking into the 2024 guidance, you've got some solid growth that you're reflecting year-over-year in the Retail segment. Wondering if 2024 could be potentially considered kind of a new baseline, I guess for the performance of that segment?

Jim Burke, President and CEO

Yes, David, I'll start off. I'd like Scott Hudson, our President of Retail, to add some commentary. I think the business – obviously, we break our business apart, quite a bit. There's different geographies in the business. ERCOT has its own unique design. The other markets obviously have a different one, more with the TDU, the wires company doing the billing. Our business has a very heavy residential footprint from an earnings profile standpoint, but a very large-scale business and profitable business in the Commercial & Industrial segment. The business has performed better than we expected it to perform this year relative to our plan. And next year is pretty flat to that. So I think it's actually more stable is how I would describe the retail business, not a large growth assumption or a moonshot required for us to be delivering in our 2024 guidance. And the team has done a really nice job adapting to a variety of weather conditions – extreme weather in ERCOT and actually milder than normal weather in most of the rest of the country. But I think the underlying trends are a function of the creative products and the marketing channels. I'd like Scott to comment on that, so you get a feel beyond just the numbers of how the team actually executes dynamically to meet customer needs.

Scott Hudson, President of Retail

Yes. Thank you, Jim, and thanks for the question. We did see strong margins and growth across all of our customer segments and geographies in the quarter-over-quarter. On the residential side in ERCOT, which is a large concentration of what we do, Jim mentioned the summer campaigns that we had – very successful across six brands we have in the markets across multiple different products, our seasonal discount product, which helps flatten the customer bill with the discount in the summer for the customer is very popular. And then on the retention side, we have an advanced analytics team that actually identifies customers that we give customer credits to. We call them comfort credits and that's also a way to retain customers in these very extreme summer periods. That's a program we've had in place for several years, but we continue to refine. On the C&I side, what we see is that really strong margin performance. When there's volatility in these markets and power costs are up and down, this is really an opportunity for us for providers at scale that have reliable generation and sophisticated commercial capabilities. So we saw some nice margin expansion both in ERCOT and in the Midwest and Northeast market. So those are just a few examples to give you a flavor, but to Jim's point, we're always looking to optimize our customer counts, our margins, our risk capabilities along with the customer experience. And it really is that optimization that allows the business to be consistent and stable.

Jim Burke, President and CEO

And David, the thing I would conclude on Scott's remarks, which we're spot on with how we think about the business is the customer could be put under a lot of pressure with volatile pricing. With the hedging strategies, which we've described before are pretty conservative about the way in which we procure to handle extreme weather. Our goal is to insulate the customer as much as possible from those kinds of bill shocks. That helps franchise value in the long run. It helps customers sort of get through the seasonal events. But it does take resources to hedge at that level. It takes capital; you have to post collateral at times. You have to be a little bit more conservative about how you think about some of your pricing structures. But I think it pays off in the long run. And that's why the business not only had a really strong financial quarter, they grew accounts in the quarter. Growing accounts in the quarter as being one of the largest market share participants is not an easy thing to do. But if you provide that stable value proposition to the customer, the customers do respond well. And I think that's where we shine better is when we've got this kind of volatility that's when the model I think really differentiates itself.

David Arcaro, Analyst

Yes. Excellent. Yes, I appreciate that color. And thanks for the clarification on the trajectory into 2024. And could I ask just, does the retail contribution as you look into 2025 and the indicative midpoint guidance there? Does it stay flat into that year off of $24 million?

Jim Burke, President and CEO

David, we haven't put anything out specifically on retail, but we've given you a sense of where we see 2025 on a combined entity. But, yes, we see it staying fairly flat. And most of the delta that we'd expect to see, if any, in 2025 would be more driven by where the generation segment is. We're highly hedged in 2025, but we have to carry more open there. So you might see a little bit more variation there than we'd expect to see in retail.

David Arcaro, Analyst

Yes. Got it. Understood. And just to push out even further, just any directional thoughts on 2026 how much might be hedged at this point and just directional trend off to 2025?

Jim Burke, President and CEO

Sure. Yes. If you look at the curves, David 2026 is looking stronger than 2025. That particularly has moved in the ERCOT region from the last time we spoke. In fact, when we had our call in August, it was August 9 and August 10 was the all-time peak in ERCOT. So we were busy and we talked about how we needed to make sure that we got through the summer. Most of the pricing volatility in ERCOT came in the back half of August. And I think the forward curve started to reflect that the sort of on-paper level of reserve margin may not actually be what the actual reserve margins are under stress conditions. So we have seen the curves move up. As Kris noted, they are higher than where they were in May of 2022, still backwardated, but they are higher. And I think that's a reflection of the supply-demand calculation that folks are revising for ERCOT. We are still majority open out in the 2026 time period. We have not provided a hedge position, but our anticipation at the moment is that Energy Harbor also has largely remained open in 2026. That's why we were comfortable saying we expect it to be around that $900 million range. And then we see upside from where we sit today for the rest of the Vistra stand-alone for 2026 relative to 2025.

David Arcaro, Analyst

Okay. Excellent. I appreciate it. Thanks for the time.

Jim Burke, President and CEO

Thank you, David.

Operator, Operator

Thank you. The next question comes from Angie Storozynski with Seaport. Please go ahead.

Angie Storozynski, Analyst

Good morning.

Jim Burke, President and CEO

Good morning, Angie.

Angie Storozynski, Analyst

Good morning. I just had a question about market power issues if any and how those could prevent you from any additional transactions. So you were clearly surprised by the issue that came up with Energy Harbor at the FERC level. And again, is there any lesson learned from it? Again, do you think that you have grown to the point where you might encounter those issues in other PJM zones?

Jim Burke, President and CEO

Angie, I don't think we've really gained any specific insights from this, other than the fact that deals undergo significant scrutiny. We have completed all necessary filings and screenings to ensure everything is in order. We don't see and still believe that these assets are critical in this context. Therefore, we still view the situation the same way we did when we announced it. However, we want to move ahead and finalize this deal, which is why we made the adjustments we did. In ERCOT, our market share is now about 14% to 15%, which allows us room to take further action there, as we have a relatively larger presence compared to others. So, the field is still open, Angie. We would love to conclude this and proceed, and we aim to work constructively with regulatory bodies to achieve that in a manner they find acceptable. But at this point, I don't think there's anything significant to interpret. We haven't received final feedback from FERC on this matter yet, but we feel confident about our position and believe we have the capacity for additional transactions across all markets.

Angie Storozynski, Analyst

Great. And then you mentioned that you guys are waiting for some clarifications around the IRA, especially as those relate to the behind-the-meter installations. So I'm just wondering if that's specifically referring to nuclear PTCs and how transactions with affiliates or non-affiliates will be counted towards the energy growth whatever receipts or margin that is currently in the role. Again, a little bit more clarity around what you're waiting for to see.

Jim Burke, President and CEO

We are awaiting guidance from the IRS on several issues, particularly regarding hydrogen and whether existing nuclear will qualify as a clean energy source, whether it's behind the meter or through contracted arrangements like PPAs. We don't currently have growth assumptions built into our plans for that and are not anticipating any upside at this stage. We expect more immediate guidance on the nuclear PTC and how revenue will be determined for assets to qualify for it, especially since the realized revenue rate is below the required floor. We anticipate receiving this guidance by spring, although we cannot confirm the timeline. This guidance will take effect next year, but we have not factored any PTC value into our long-term plan. At present, the curves are hovering around where we see the PTC floor, making its application uncertain. There is some indexing related to the PTC, so if the curve remains flat, there's potential for us to qualify for some of it. The intricacies of how transactions with affiliates will be treated are still unclear. However, there has been some acknowledgment that market values should reflect actual power prices, not just the results of transactions at the portfolio or asset level. Considering real-time or day-ahead market prices may offer a more accurate benchmark for power value. We are still waiting for this guidance, and it is not yet integrated into our plan. While we are not certain about the extent of this potential upside, we recognize the opportunity the IRA presents for our nuclear assets across various states like Texas, Pennsylvania, and Ohio. However, we still lack clarity on the extent of this opportunity at this time.

Angie Storozynski, Analyst

Great. And if I could ask one last one. So, there's some additional media scrutiny around the supply of nuclear fuel and the reliance on Russia here. I remember that you mentioned that Energy Harbor is well hedged for nuclear fuel. But given that, you're doubling down on nuclear power, I'm just wondering if you have a way to manage the Russia risk, either direct or indirect exposure to 10x especially…

Jim Burke, President and CEO

Thank you for your question, Angie. This is an issue that the entire industry is monitoring because it could influence prices for both domestic and global sources, including those from Russia. The implications extend beyond just sourcing from Russia. We have increased our nuclear fuel purchases at Vistra, addressing our own needs and preparing for the closing of this transaction. I'm confident in our financial and physical supply, regardless of any Russian exposure in the coming years. Vistra stands strong for the next four to five years. However, since we don’t have detailed information from Energy Harbor beyond a couple of years, I believe our fleet-wide purchases will help mitigate any combined risks. We've been proactive in tackling this issue, having started our efforts even before announcing the Energy Harbor deal, as this conflict has been ongoing. Our team has effectively managed both the physical and financial aspects, with hedging for nuclear fuel costs rising to around $9 to $10 per megawatt hour. Historically, we were closer to $5, moving to $6 for Vistra on its own until 2026, which still holds true. We lack full details on Energy Harbor's costs since their restructuring, but there might be some exposure to price changes towards the end of our five-year planning due to rising curves. There are also discussions about increasing domestic non-Russian supply that may affect our planning horizon. Overall, I believe we have significantly reduced risks, both physically and financially.

Angie Storozynski, Analyst

Great. Thank you.

Jim Burke, President and CEO

Thanks, Angie.

Operator, Operator

Thank you. The final question comes from Durgesh Chopra with Evercore ISI. Please go ahead.

Durgesh Chopra, Analyst

Hey. Good morning, Jim. Thanks for taking my questions. Hey, Jim, just a more pointed question on the capital allocation, and I appreciate you're going to go to the Board and we'll have a plan here in the first half of next year. But given the move in the stock and I asked you this on the last call as well, do you kind of still view that the security is undervalued here as we think about buybacks prospectively beyond 2024?

Jim Burke, President and CEO

Yeah. Durgesh, it's always difficult for management teams to predict where things will go. But yes, if you look at the multiples and ours now raised EBITDA guidance levels and our expected free cash flow generation, I think the multiples are just staying where they've been. And we're just reflecting a much stronger business profile. I think you can obviously make your case as to what's the right multiple to put on the business. I think there's been a view that the free cash flow yields need to be 20-plus percent in order to compensate for the risk of being in the business. I think our integrated model has shown a real stability to the business model. And we've seen various weather conditions and pricing conditions play out over the course of this year. And I think our team has managed through that exceedingly well, and we've raised the out year. So I know Kris put in more of an exclamation point on this on the last call, and I'd love to be interested to see if his view has changed, but I'm pretty sure it hasn't. But I'd like to let him close on this because I want to make sure you guys know we're sticking with these four core principles.

Kris Moldovan, Executive Vice President and CFO

Yeah. Durgesh, I'll just point out, obviously, as you can see by the pace of our buybacks, we've actually picked up the pace in the third and fourth quarter. And as Jim mentioned, as we look forward and we still have to get with the Board and talk about a comprehensive plan. But as Jim mentioned, our intention would be to maintain the pace that we set this year and potentially look to see whether it should stay that same pace going forward or whether it should be increased. So we still feel good about the prices at which we're buying our stock today.

Durgesh Chopra, Analyst

Got it. That's perfectly clear guys. Thank you both. And then just, can I go back to the 16%, I think that was the number, one-six, of customer count growth in the retail segment. Can you just provide a little bit more color? Is that predominantly ERCOT? And then just for us to digest that what's like a five-year average, so we can see how strong this quarter was really?

Scott Hudson, President of Retail

Yeah, I can take that. This is Scott Hudson. The number that was referenced is in the appendix slide in the materials, but it's volumetric growth in our C&I market business. And we've seen a lot of success in that business both in ERCOT and in the Midwest Northeast markets through these times of volatility. I think what you find is that larger, sophisticated customers want to work with players of scale because we can structure a lot of complex products whether those be indexed, fixed, stability, and pass through, new charges in the ERCOT markets. We see a shift of customers to the larger players in this particular environment.

Jim Burke, President and CEO

Yeah, Durgesh. I think Scott, we had residential growth, but the 16% was a volumetric growth for the business. However, both businesses grew and expanded their operations not only in Texas but also outside of Texas. It was a really strong performance for the business to grow fundamentally in a very dynamic power market.

Durgesh Chopra, Analyst

Thanks. Appreciate the color guys. Thank you.

Jim Burke, President and CEO

Thanks, Durgesh.

Operator, Operator

Thank you. This concludes our question-and-answer session. I would now like to hand the call back to Jim Burke for closing remarks.

Jim Burke, President and CEO

Yes. I want to close by thanking the men and women of Vistra for their hard work and for delivering an exceptional quarter for our customers and the communities we serve. We appreciate your interest in Vistra. And as you saw in our presentation, we have a lot to still accomplish, and we look forward to laying that out for you and speaking to you again soon. Hopefully, after we have closed here on the Energy Harbor acquisition, and we wish you all a great morning. Thank you.

Operator, Operator

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.