Vistra - Q2 2023

Transcript

Operator (participant)

Good morning, welcome to the Vistra Second Quarter 2023 Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Meagan Horn, Vice President of Investor Relations. Please go ahead.

Meagan Horn (VP of Investor Relations)

Good morning, and thank you all for joining Vistra's Investor Webcast, discussing our second quarter 2023 results. Today's discussion is being broadcast live from the investor relations section of our website at www.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 our call today include references to certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are provided in the press release and in the appendix to the investor presentation, all available in the investor relations section of Vistra's website.

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 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 two of the investor presentation on our website that explains 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. Thank you. I'll now turn the call over to our President and CEO, Jim Burke.

Jim Burke (President and CEO)

Thank you, Meagan. Good morning, thank you all for joining our second quarter 2023 earnings call. The second quarter proved to be another strong one for the business, as we delivered $1.008 billion in ongoing operations Adjusted EBITDA. Typically, we do not formally adjust our guidance ranges until after we get through the critical summer months, but based on performance to date and our forecast for the remainder of the year, we are confident in our ability to deliver in the upper half of the guidance ranges introduced on the third quarter earnings call last year.

Accordingly, we are narrowing that original range, which was $3.4 billion-$4.0 billion, to a new range of $3.6 billion-$4.0 billion for ongoing operations Adjusted EBITDA. Looking beyond 2023, the market curves continue to support a strong, consistent outlook as well.

Our commercial team is working to strategically lock in these opportunities, employing comprehensive hedging strategies to provide better line of sight to our earnings over our planning horizon, which in turn allows us to plan for capital return to our shareholders that is consistent and predictable. In addition, I'm proud of the great strides we are making in the expansion of Vistra's zero carbon generation portfolio with our 350 MW addition to the Moss Landing Energy Storage Facility that came online this quarter. First, I'd like to turn to slide five, where we once again highlight our four strategic priorities.

I think it's important to continue to reiterate our focus on these priorities each quarter with some notable accomplishments, as I believe these are critical to long-term value creation. This quarter saw continued strong generation and commercial team execution, combined with our retail business that continues to deliver strong counts and margin performance. Vistra is proving it can consistently deliver substantial and resilient earnings in a variety of power, price, and weather conditions. Just as last quarter, on average, we saw power prices this quarter clear lower than our realized hedge prices.

This is highlighting the significant downside risk protection to our earnings that our comprehensive hedging strategy across the integrated business can and does consistently provide. These de-risked consistent earnings give Vistra the confidence to announce aggressive shareholder return programs, and then stick with those programs in amounts equal to or higher than those originally announced.

I'll let Kris provide the detailed update on our capital allocation plan, but of the aggregate upsized $7.75 billion capital return plan we originally announced in November of 2021, we've already returned $3.35 billion through August 4, 2023, which is approximately $250 million ahead of the originally announced planned levels. We regularly evaluate how best to bring value to our shareholders, and we expect to continue buying back stock and paying dividends that grow each quarter based on a reduced share count. Our balance sheet strength remains a top focus as well.

You saw this quarter that we structured a $450 million PCAP transaction, which is unique in allowing us to post Treasury securities as margin deposits, returning more cash to the balance sheet. We expect to utilize that cash, plus the margin deposits that have been returned as expected, as our hedges have settled throughout this year, to fund a significant portion of the purchase price we expect to pay in the fourth quarter for Energy Harbor, substantially reducing the amount of acquisition debt to be issued.

Finally, as it relates to our opportunities with the energy transition, in addition to the progress we are making on the Energy Harbor acquisition, which I'll speak to in a minute, I would like to turn to slide six regarding our Moss Landing facility. The Vistra team did an excellent job in bringing online an additional 350 MW to add to the existing 400 MW at our Moss Landing site in California which is the largest energy storage facility of its kind in the world.

This addition came online ahead of schedule and on budget, despite a challenging supply chain environment and extreme rainfall. This is now a total of 750 MW of energy storage, backed by contracted revenues through our PG&E resource adequacy agreements. Importantly, we continue to see additional opportunities to add batteries to this site in the future. The facility is located in the CAISO energy market, which is experiencing significantly higher gas price volatility, as well as a potential for scarcity pricing due to high demand and import competition from the neighboring balancing authorities.

These factors result in favorable conditions for the earnings outlook for our Moss Landing battery facility and our co-located combined cycle plant, which has 1,020 MW of capacity. This is a tremendous site and a great example of our ability to invest in a disciplined way in Vistra Zero, while also providing for the reliable and affordable energy customers need.

Moving to slide seven, the $1.008 billion of ongoing operations Adjusted EBITDA achieved this quarter was a result of strong performance by each of our generation, retail, and commercial teams, with retail achieving attractive counts and margin performance in all customer categories, and our generation team delivering commercial availability of approximately 95%. Our people are working hard in this extended high heat environment. They continue to perform extremely well.

When we originally announced 2023 guidance in the third quarter of last year, we estimated a range of $3.4 billion-$4.0 billion in Adjusted EBITDA from ongoing operations. As mentioned earlier, we are confident in our ability to deliver in the upper half of that range, leading us to formally update our guidance to reflect the new range of $3.6 billion-$4.0 billion in Adjusted EBITDA from ongoing operations and a new range for adjusted free cash flow before growth.

Of course, there is a lot of execution still to go in the balance of the year, and our people remain focused on delivering for our customers and our shareholders. Turning to slide eight, I just wanted to reiterate that all three key agencies continue to work on the necessary approvals to close the Energy Harbor acquisition. We are working constructively with each agency and in all involved parties, and as I mentioned before, we continue to anticipate a fourth quarter closing.

We believe Energy Harbor is a terrific transaction for Vistra, adding a substantial amount of nuclear generation with the support of the production tax credit. We continue to expect significant contributions from Energy Harbor, including the opportunities for synergies. I think back to the announcement of the Dynegy acquisition, when we projected annual ongoing operations Adjusted EBITDA of approximately $2.8 billion.

Through the hard work of the Vistra and Dynegy teams, and including the acquisition and successful integration of Crius and Ambit, together with the expected closing of Energy Harbor later this year, it is exciting that we could see ongoing Adjusted EBITDA on average in the 2024 to 2025 time frame of $4.5 billion, including synergies and out-year prospects, potentially even higher. Kris, I'll now turn the call over to you to discuss our quarterly performance in more detail.

Kris Moldovan (EVP and CFO)

Thank you, Jim. Starting on slide 10, Vistra delivered $1,008 million in ongoing operations Adjusted EBITDA in the second quarter, including $510 million from generation and $498 million from retail. Generations results were favorable compared to the second quarter of 2022, primarily due to higher energy margin achieved through our comprehensive hedging strategy. As we did last quarter, our ability to capture value by backing down generation at times when prices are below unit costs. Retail's results were also favorable as compared to the second quarter of 2022.

While the segment was impacted by less favorable weather, this was more than offset by continued strong counts and margin performance. As I discussed last quarter, the intra-year shaping that dampened the first quarter's earnings contribution to the overall year was offset as expected in the second quarter.

Turning to slide 11, as Jim mentioned, we have been consistently delivering on our capital allocation plan. As of August 4th, we had executed approximately $2.9 billion of share repurchases since beginning the program in the fourth quarter of 2021. We expect to utilize the remaining approximately $1.35 billion of the total $4.25 billion authorization by year-end 2024. Notably, our outstanding share count has been reduced to approximately 367.5 million shares as of August 4th, an impressive approximately 24% reduction in the number of shares that were outstanding in November 2021.

This meaningful and consistent share reduction has led to robust dividend growth. For example, the recently approved third quarter 2023 common stock dividend of $0.206 per share represents an increase of approximately 12% per share as compared to the dividend paid in the third quarter of 2022. Finally, as Jim mentioned, we remain focused on maintaining a strong balance sheet and a disciplined approach to growth.

We have fully allocated the net proceeds from the December 2021 green preferred stock issuance and are now turning to securing non-recourse project or portfolio-level financing to, among other things, support the growth CapEx needs of the company. We anticipate launching the first such financing in the coming months. To wrap up, on slide 12, we have provided an update on the out-year forward price curves as of August 4. As you can see, the forward curves continue to hold together well.

Specifically, since our last call, we've seen forward curves increase in ERCOT in 2024 and 2025, increasing our confidence in our ability to achieve the previously disclosed $3.7 billion-$3.8 billion ongoing operations, Adjusted EBITDA midpoint opportunities in those years. As a reminder, we are significantly hedged in years 2023 through 2025, approximately 86% on average of expected generation across all markets, with a balance of 2023 expected generation hedged at approximately 98% and 2024 expected generation hedged at approximately 95%.

Finally, curves in the outer years continue to provide opportunities to lock in significant earnings, especially during times of scarcity. Our commercial team continues to work to de-risk these opportunities by executing on our multi-year comprehensive hedging strategy, which strategy continues to be supported by our standby liquidity facilities.

We are proud of the performance of our generation, retail, and commercial teams thus far this year, and are excited to continue our work towards executing against our remaining 2023 goals and long-term strategic priorities as we translate that success into shareholder returns. We look forward to updating you on our progress on our third quarter call. With that, operator, we're ready to open the line for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press Star, then One on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from the line of Shar Pourreza with Guggenheim Partners. Please go ahead.

Shar Pourreza (Senior Managing Director and Senior Equity Analyst)

Hey, guys. Good morning.

Jim Burke (President and CEO)

Hey, morning, Shar.

Shar Pourreza (Senior Managing Director and Senior Equity Analyst)

Good morning. First off, I guess you're now obviously the third IPP to report stronger retail margins. Could you just unpack a little more what you saw this quarter, kind of within this strength, as we're thinking about optimization versus actual margin, margin expansion and the degree to which I guess you guys see this as being durable? Thanks.

Jim Burke (President and CEO)

Sure. Shar, I'm going to start, and I'm actually going to have Scott Hudson give a little bit of perspective on the market dynamics as well. As you realize, last year, when we were in a climbing power environment, you know, due to the conflict that we saw with Russia, Ukraine, and then the commodity curves moving up. Retailers in general were climbing the hill in 2022. We started to see that obviously come off at the beginning of this year, and the team does a very nice job of looking at the multi-year nature of the contracts for large commercial, the 12-month to 24-month range for residential.

Their objective, of course, is to have normalized margins. We tend to buy forward as a company. We try to normalize the experience for customers because our experience has been, if you move the customer's price too much, it's not the expectation that they had when they signed up with you. Even on renewals, we're careful about how we manage this. From a durability standpoint, the retail business has earned strong margins in volatile years and in stable years. I think that's part of the brand power of the business, is that we're not selling an index-type product that's just floating with a spot price.

We're actually taking some of that predictability risk by hedging forward and giving that benefit to the customer. I feel very good about the durability. I would, Scott, I'd like for you to, to add about the market dynamics.

Scott Hudson (EVP and President, Vistra Retail)

Sure, sure. Thanks for the, the question. I would just add to what Jim said, is that we've got multi-brands at play in the ERCOT markets, and each of those brands are designed to, you know, attract, you know, a different, you know, customer segment. In general, in ERCOT, on the residential side, transactions remain at historical levels. There are a lot of moves and switches and opportunities to win customers in the market. This really reflects the, the health of the Texas market, migrations to consumers to it.

As Jim said, prices have come down materially compared to this time last year, and the number of offers in the market has increased, as have the number of competitors, you know, in these markets. Very robust, but I think, where we're successful in both the accounts and the margin side is the differentiation of our products and services across those brands.

Our summer campaign, you know, this summer features three distinct products: a seasonal discount product, a first to market time of use product, and then also an electric vehicle, your product, which really is, is doing well on the gains and helping us mitigate, you know, losses as well.

Jim Burke (President and CEO)

I would add, Shar, that the annual view for retail, that outlook has improved from when we originally set our guidance for 2023. As Kris noted, the Q1 to Q2 effect is more about the shaping of the cost of goods sold, because retail will buy power according to the shape by month for the year. The winter costs much higher than the spring, the summer costs are much higher than the fall and into December.

We see that retail profitability much higher though, in our results in 2Q and 4Q, and we see less from retail in 1Q and 3Q. I was giving you the annual view as to how I think about the durability, but there is a quarter-to-quarter difference because of how we buy power for retail, reflecting the shape of power costs. I hope that helps.

Shar Pourreza (Senior Managing Director and Senior Equity Analyst)

No, it does, and that's helpful. Thank you for that. Then just lastly, and I don't want to push too far, but with, you know, such great color on 2024 and 2025, can you just speak to how the EBITDA opportunity looks for 2026, or at least the degree to which you've been able to hedge that far. Just, just maybe refresh us on the Energy Harbor EBITDA opportunity that far out. Are you still seeing things north of $900 million? Thank you, guys.

Jim Burke (President and CEO)

Yeah, you bet. Shar, we, we have obviously continued our progress of hedging, as we said we would. We consistently look for opportunities to provide a predictable earning stream. First of all, on, on 2024, 2025, we feel good about where we are from a outlook standpoint for Vistra standalone, and that's really the data that we are operating with here, Shar. We don't have a view into updates regarding Energy Harbor and how they look at the moment for 2024, 2025, because we're going through the regulatory process. The data we have is more the data we had at the time of the announcement.

Our view is, because we're obviously in the market and we view the curves, is that we're set up well for Vistra standalone for 2024, 2025. We still feel good about raising that range that we mentioned, where it was originally $3.5 billion-$3.7 billion, you know, now we're looking at $3.7 billion-$3.8 billion. I feel good about where we sit in terms of Vistra standalone. Energy Harbor, we noted, had some out of the money hedges at the time that we announced 2024, 2025.

Our view there was that on a combined basis, we were $4.35 billion or so on a combined basis, recognizing they had some hedges that were out of the money. We believe that there's an opportunity for our business because of our update that we gave, because we were at $3.6 billion when we gave you the update for Vistra standalone.

If we're at $3.75 billion now for Vistra standalone, again, being between $3.7 billion-$3.8 billion, that puts the combined enterprise in that $4.45 billion-$4.5 billion range, you know, so $4.5 billion, on average in that 2024, 2025 time frame. 2026, we're, we're pretty open still. In fact, I would say, you know, Steve Muscato is here. When we look at the markets, we look for opportunities. When we last talked to you, we were seeing curves in AD Hub, for instance, in PJM, that were pretty attractive. You know, they were in sort of the $50 range.

Those have come off now to about $44 in that 2026 time frame, very close to the acquisition case that we announced. I think we're on track for that $900 million. The upside to that, for that piece, would, would need some support from the 2026 curve, because we've seen that move around from, you know, $45 up to the low 50s and back to that sort of 44 range. We're still pretty open. We assume they're still open. Again, we don't know what hedging they've done for the long term, but I think $900 is still a solid number for 2026 for Energy Harbor.

In terms of our business, Vistra standalone, we've seen PJM come off, but we've seen ERCOT come up. ERCOT's come up, and it's, it's been attractive. Steve, I'd be interested in, in you sharing some thoughts about how you have seen these markets unfold even in the last month or two.

Steve Muscato (President of Wholesale Operations and Development)

Sure. We've seen ERCOT because of the heat that we've been experiencing and the, you know, periodic bouts of scarcity that have been kind of a routine issue here the last, at least several weeks with the heat in Texas. It has rippled into the forward curves, fixed price is holding in there. We're able to hedge some of our solid fuel fleet, and we're also seeing spark spreads, to your point, Jim, expand as we move out into that period.

We're opportunistically hedging ERCOT, where available. As you can imagine, 26 is somewhat illiquid, but we're, we are having some success both in our retail and wholesale channels in increasing those hedge percentages when the opportunities present themselves.

Jim Burke (President and CEO)

Of course, with the AD Hub and with Energy Harbor, we have some PTC support. Ultimately, Shar, we don't view it as meaningful because it's kind of all the curves are close to at the money right now on that, but that's one of the reasons the deal was attractive as well, was the support to the downside if we had it. Thank you, Steve, and Scott, for the context on that. Shar, thank you for the questions.

Shar Pourreza (Senior Managing Director and Senior Equity Analyst)

Yeah, terrific, guys. Congrats, and very good color. Appreciate it.

Jim Burke (President and CEO)

Thank you.

Operator (participant)

The next question comes from the line of Michael Sullivan with Wolfe Research. Please go ahead.

Stephen Michael Sullivan (Director of Equity Research)

Hey, good morning, everyone.

Jim Burke (President and CEO)

Hello.

Stephen Michael Sullivan (Director of Equity Research)

Thanks.

Jim Burke (President and CEO)

Hey, Michael.

Stephen Michael Sullivan (Director of Equity Research)

Thanks for all the color on those last couple of questions. Hey, Jim, wanted to shift over to from the EBITDA side, more to the debt side, pro forma. I think, Jim, you were mentioning, you know, you did the PCAP, and then you have some, some margin collateral posting coming back. Can you just give a better sense of, like, how much new debt you will ultimately have to, to issue, and if that's changed from when you announced the deal? Then what, you know, on a pro forma consolidated basis, where the, the debt is going from where you are today?

Jim Burke (President and CEO)

Sure. Michael, I would say that, that the conditions, obviously, in terms of margin deposits and the, and the return of cash, you know, has been pretty favorable this year. I'll turn it to Kris to talk about how that influences the way we think about financing Energy Harbor and the overall, credit metrics and, and targets that we're looking at.

Kris Moldovan (EVP and CFO)

Yeah. Thanks, Michael, for the question. I'll put it into two buckets. When we announced the transaction, we had shown an assumption that we would use $600 million of cash and $2.6 billion of debt. Of course, we knew that there was going to be some more cash coming back from margin deposits, or we expected to come back from margin deposits, but we wanted to be conservative and make sure that we maintained sufficient liquidity.

As we have settled those hedges throughout this year, that money has returned as expected. That number also included a plan to do some non-recourse financing at Vistra Zero, which we still intend to do. I would say over the balance of the year, there's really two different things that we're looking at. There's the acquisition financing. That has, with the return of the margin deposits and the cash and the PCAP's transaction, that has also returned cash.

You know, that has brought that $2.6 billion down to, again, assuming we go to the next stage on the non-recourse financing, but that's probably brought that number down to $1 billion-$1.5 billion, somewhere in that range. Then we still have non-recourse financing in the works. That was in our plan, that was assumed in those numbers. I think, as we said in as we said in the remarks, that we still expect to see a transaction in the coming months, that'll fill in the rest.

We, we still have enough commitment that, you know, we're, we're still being conservative with the financing commitments that we have in place, but that's really it. From a debt perspective, as we said, we're still targeting sub three times. At the closing, I, I think we continue to believe that we're going to be just above that. As we look forward, through a combination of debt repurchases and increasing EBITDA, we think we can get to that sub three times as early as 2024, potentially leaking into the first part of 2025. We don't see there being a long wait for us to get to the, the target levels that we're looking at.

Stephen Michael Sullivan (Director of Equity Research)

Okay, thanks. I appreciate all the color there. Maybe just on, on ERCOT, looking forward here, obviously, been pretty hot down there. What, what are you seeing in terms of just the grid holding up for, for the rest of the summer? Thoughts on potential new build response later this year around the, the, referendum vote?

Jim Burke (President and CEO)

Sure. Yes, Michael, it's been, it's been a very active, you know, kind of last three weeks. I would say it's a daily area of focus for us. Steve would say it's a minute-by-minute focus, and that's really because the grid, as you know, in Texas, is, you know, it's been a robust, low-growth market. The additional resources that have been added over the last three to five years have largely been wind and solar.

The solar move has been consequential, you know, 4,000 MW-5,000 MW year-over-year, which is helping that evening period, and we're getting to the point where solar is filling in that six to eight-hour range fairly well, and we're all focused on the wind's ability to pick up where solar left off at that sort of 7o'clock-8 o'clock hour and beyond.

A couple of good points is that earlier in June, while wind overall was lower in third in second quarter this year in ERCOT than last year, at peak times during those evening hours, wind actually, when the grid was at 80,000 MW or higher, wind actually performed relatively well in the early part of the summer. We didn't see much price formation. In July, late July and early August, we're starting to see that the wind in those periods of time is returning more to kind of normal expectations, and we're starting to see that tightness in those late evening hours.

Of course, we're talking about the marginal resource of wind or solar. That assumes nuclear, coal, gas, are all operating the way they need to be. That's we sometimes lose focus on that because that's the majority of the grid.

The units are running hard. There's no end in sight for this heat that we're in. The team is doing a terrific job keeping these units online. I would say overall, the ERCOT grid and the operators have done a nice job keeping the grid supplied. There's an asymmetric risk to the upside on, on prices when you look at how tight the grid actually is, and we're starting to see those forwards in 2024, 2025, I think, start to reflect that there actually is meaningful supply-demand tightening that's occurring in ERCOT.

As far as whether gas new build comes, you know, it's a three-year process for the most part, from the time you get started. The loan referendum is in November. The PCM, which was part of the House Bill 1500, the Sunset Bill, it has a net $1 billion cap that was inserted as part of that legislation. It could be several years to three years before that could be implemented, the PCM. There are a lot of variables that are moving at the moment that developers would have to get comfortable with in terms of, are they seeing enough to build? Because the curves are still backwardated.

Even though we're saying the curves have moved up in 2024, 2025 and we're working through it, ERCOT there's still an assumption in this market it's going to get overbuilt or there's going to be a lot coming that's just going to be potentially supported by PTCs and create downward pressure on pricing.

I think it remains to be seen what kind of queue there's going to be for gas-fired generation, but there clearly was support in this legislative session to try to keep existing thermal generation and try to incentivize new. Not all stakeholders agreed on what the right solution is to do that, but at least there's recognition that those thermal resources, existing and new, are important. That, and that, that was a good outcome. There's still a lot of work to do with the PUC and ERCOT and various stakeholder groups to get this over the finish line.

Stephen Michael Sullivan (Director of Equity Research)

Thanks so much. Appreciate it.

Jim Burke (President and CEO)

Thank you, Michael.

Operator (participant)

The next question comes from the line of Julien Dumoulin-Smith with Bank of America. Please go ahead.

Julien Dumoulin-Smith (Senior Research Analyst)

Hey, good morning, team. Thank you very much for the time. Appreciate it. Just wanted to follow up a little bit on the conversation on the 2024, 2025, the 4.5 there. Can you elaborate a little bit on what the retail assumptions are there? I know Shar tried to get at this a little bit, but it seems like you're just collapsing the transaction in there, ultimately come up with that new number in the mid-40s.

How do you think about these other retail pieces there? Ultimately, just also, what were you alluding to on 2026? I know you said it was quite open. Just what does that transpose into 2026, if, if you can start to go there just quickly in terms of the puts and takes?

Jim Burke (President and CEO)

Sure. Well, if you look at our revised guidance for 2023, you look at that sort of midpoint, if you take that and add the Energy Harbor numbers to it that I'd shared with you for 2024, 2025, you're getting to that $4.5 billion number. What we've seen in our business model, Julien, is because of where we've hedged and how we've been able to hedge, the realized kind of margin expectations are pretty flat from this kind of 2023, 2024, 2025 time frame. The split between retail and gen might vary a little bit, but not materially.

I think that's one of the durable parts about our model is, and we saw it last year, and we're going to see it a little bit this year, is that you may see a little bit of movement between retail and gen based on market conditions, but retail is, retail is very solid in this kind of billion-dollar range over that horizon. I would expect, you know, the difference being the wholesale to get to that $3.8 billion. That's actually, I think, one of the things that we've been excited to share, is that the business is stable. Doesn't mean we're not working hard every day to hold on to it.

I don't want to make it sound like just because we've hedged it, it's going to be realized. We have to deliver every single day on the, on the business. The outlook is, is actually above where we were in May of last year when we announced it, and stable, and we'll be adding Energy Harbor to it. So that line of sight with those hedge percentages, you know, we feel really good about where we are in that 2024, 2025 time frame. Certainly, 2026 is more open. As I mentioned earlier, ERCOT's looking favorable relative to last time we talked, but PJM is down on fixed-price power at this point in 2026.

Then we also have some PTCs, PTC support for that, for the Energy Harbor length. It doesn't look like ERCOT would be in that PTC range right now because of where the curves have moved up to. We've got kind of geographic flexibility, segment, you know, flexibility, or I should say, diversification in how I think, you know, 2026 will play out.

Julien Dumoulin-Smith (Senior Research Analyst)

Got it. If I can ask you to clarify your forward ERCOT expectations. I mean, we've got a few different programs yet to be implemented. I suppose there's a procurement program, with, with, you know, a certain level of subsidy baked in there, coming, I suppose, at some point. Curious on your sense of timing on that, for any real impacts. Then related, we have other reserve programs yet to be fully implemented. I'd be curious on your initial assessment of some of these programs, like the dispatchable reserves, for instance.

Jim Burke (President and CEO)

Sure. I'll start. I think by subsidy, I think you're referring maybe to the loan program and the grants that could be coming, Julien?

Julien Dumoulin-Smith (Senior Research Analyst)

Yeah.

Jim Burke (President and CEO)

Yeah. Yes, that, obviously, the referendum's in November. The initial amount that was shared as part of the bill was $10 billion. The amount that has been provided for in the budget is $5 billion, then the amount of the $5 billion that's going to be allocated to building new gas plants is unknown at this point. Let's say it's something in the $3 billion-$3.5 billion range, potentially. When we've looked at the math, the 3% interest on a 60% loan-to-value, it can move your returns a couple of points. It is helpful, but it does not make up for potentially missing revenue in a backwardated market.

That gets to your other point, which is: do these other programs, whether it's an ORDC bridge, PCM being implemented, ECRS was just implemented, DRRS will be implemented by the end of 2024, do those cumulatively add a recognition of reliability for the assets that can provide it? If so, can we get enough line of sight to build into that? I think we don't know yet, for us. I mean, we're still evaluating it. Steve, in terms of how the new ancillaries like ECRS and DRRS, how you see that playing in ORDC bridge, be interested in sharing your thoughts on how you see the market adapting to these.

Steve Muscato (President of Wholesale Operations and Development)

Sure. I, I think let's, let's start with ECRS because it's the latest, and we've actually seen how it's been implemented. And they're, they're putting it in. When I say they, ERCOT is dispatching it, you know, only when critically needed. I think it's serving well from a reliability perspective in terms of keeping ERCOT, you know, out of an EEA situation. One of the other things I've seen is it, it hasn't necessarily impacted price formation too much. I really think it gets into how ERCOT handles these reserve products.

If they handle them in the way that they're designed, which is really when the grid is approaching tight conditions, and it's not necessarily used to, for, for price formation, which is what we're seeing so far. When I, when I see ECRS dispatched, it's been on the very hot days, at the peak hours when needed, and it hasn't been very price suppressive.

We think it's, it's working the way it's intended, and, you know, we'll have to see on these new reserves that they're putting in. To the extent they use them in the same way as ECRS, I think we're in the best of both worlds, where we're avoiding, you know, what I'll call emergency conditions on the grid, but we're still seeing very solid price formation when it does get tight.

Jim Burke (President and CEO)

I think it's too early to call DRS at this point. I mean, it's, it's still early stage to think about that one, Julien. That was one of the ones that some certain stakeholders were pushing as kind of the market solution. I believe the PUC and ERCOT have enough tools that they can work with to try to build some incentives for existing and new assets to be re-recognized and rewarded for their reliability, including a firming requirement for assets that come onto the grid after January 1, 2027, that they have to effectively be able to backstop the expected generation that they are committing to. Those are all the right, I think, concepts. It's just early stage for us to know at this point how that's going to affect prices.

Julien Dumoulin-Smith (Senior Research Analyst)

Right. Net-net, though, there does seem to be some kind of timing discrepancy between when these reserve programs come in and any ultimate effect of any kind of, procurement program here.

Jim Burke (President and CEO)

I think so. The, the procurement program, or the loan program, and grant program alone, like I said, is marginally, it's beneficial, but it does not solve the broader problem that we entered the session trying to solve, and I think that's why we ended up with a menu of things. Frankly, it's a ton of work for the Public Utility Commission and ERCOT to work through this, and they're going to have their plate more than full.

I mean, there's Real-Time Co-Optimization that has to fit in there before even PCM. There is a lot still to, I think, figure out, and we'll obviously be active and work with the stakeholders involved to try to bring clarity to it. Yes, on a calendar basis, it's multi-year at this point.

Julien Dumoulin-Smith (Senior Research Analyst)

Excellent, guys. Good luck. Thank you so much. Talk to you soon.

Operator (participant)

The next question comes from the line of Durgesh Chopra with Evercore ISI. Please go ahead.

Durgesh Chopra (Managing Director)

Hey, good morning, team. Thanks for taking my questions. Hey, just.

Jim Burke (President and CEO)

Good morning, Durgesh.

Durgesh Chopra (Managing Director)

Hey, good morning, Jim. Just on the hedges, I think you answered a part of my question in your prepared remarks, but the 2023-2025 hedges stayed at 86% and no change since the Q1 update call. Is that just you willing to stay more open, given the market conditions? You mentioned the ERCOT curves. Is it just more normal course of business and you're going to opportunistically hedge more? Just any thoughts there?

Jim Burke (President and CEO)

Yes, it's, very good question, Durgesh. I would say there's a combination of factors. One is, we've actually added some length, given that the curves have moved up, so that's a good thing. There's more hours in the money for the fleet, so that means there's actually more to hedge. That's, that's ultimately a good thing. When you look at the percentage, it's not a static amount of generation. That's one element. The second element is, that's as of 6:30, that we were giving you these percentages. We've continued to hedge since 6:30, particularly in the 2025 timeframe.

I don't feel that where we sit, working with our team, that we feel 2026 is at a place where you have to go lock it all in because of the dynamics we talked about earlier. We think there's still upside in some of these markets, and we feel good about the visibility we've given for 2024, 2025, and we've got time to work on 2026. The curves, as I mentioned, in 2026 for PJM, had come down. ERCOT's gone up, but not anything that we need to go rush out and move materially on 2026 at this stage.

Durgesh Chopra (Managing Director)

How about just within that 2023-2025 period? I guess what the message here is that 86% should move higher, as we get along here.

Jim Burke (President and CEO)

It's already, it's already higher since 6:30, Durgesh.

Durgesh Chopra (Managing Director)

Okay.

Jim Burke (President and CEO)

The 2026 hasn't moved much, but we have moved up on 2025, and we're, you know, we're nearly fully hedged, obviously, for 2024. These percentages do move because, again, being in the money means you have more hours to hedge because there's gross margin. The hedge percentage could drop, but your earnings forecast could go up as a function of just simply looking at the opportunity set. Some of it's just the timing and the fact that these curves do move around.

Durgesh Chopra (Managing Director)

Understood. Thanks. Then, Jim, one of the questions we consistently get from investors, obviously, as you look at the stock, right? I mean, since I believe you initiated this buyback program, it was Q3, Q4 2021, the stock was in mid-teens. You know, you, you broke 30 today. Just your updated thoughts on capital allocation, share buyback versus growth opportunities. How, how are you thinking about all of that, here as the, as the stock hit, hit $30?

Jim Burke (President and CEO)

Sure. Well, Durgesh, it is good to see that the stock has moved up. We view this as a long-term strategy when we initiated it, we still feel that way. If you look at the stock price move, this is a very imprecise science, a good portion of the move you could explain by virtue of the reduction in the share count, not necessarily seeing the enterprise value move that materially. Now, that's still a good thing for the existing shareholders, it's an opportunity for existing shareholders that are effectively increasing their percentage of ownership in Vistra.

I also believe that since the May time frame of last year and where we are today, we have materially improved the earnings outlook of the company, which in, in theory, would result potentially in a multiple expansion.

We really haven't seen that much of a multiple expansion. I'm not here to argue what the right multiple actually is, but I still feel there's recognition that I believe the market will continue to see as we put, you know, I call it points on the board, you know, delivering on our, on our scorecard and our results. At some point in time, when folks are comfortable that the earnings power is sustainable for the in the duration of a horizon beyond even the, the two to three years we talk about, you might actually see some multiple expansion.

We're not really there yet, and so our capital allocation plan for the foreseeable future, and I would put that in partly the high-class problem if we have to revisit it. We feel very good about the capital allocation plan, and we might lean in a little more aggressively on the pace of the buybacks if we continue to overperform and see where we are with our, obviously, cash needs to do that. Fund Energy Harbor, which is, which is our focus, is to get this transaction closed in the fourth quarter. We're being disciplined on the Vistra Zero projects, and when we're reflecting that.

We want our shareholders to be confident that we do things, and we do look at the buyback as an alternate use of capital relative to the growth options. The growth options need to be attractive. We'll pace the Vistra Zero projects to make sure that we're hitting the best ones and not chasing just the renewable projects.

I like our portfolio there, and we mentioned Moss 350 was an excellent project to bring online and an excellent job by the team. Capital allocation plan is intact, you know, we're excited to, you know, I'd say, hit the gas pedal on the capital allocation plan because we think it's, it's the right mix for our shareholders as well as, you know, our, our debt holders.

Durgesh Chopra (Managing Director)

Got it. I appreciate it.

Kris Moldovan (EVP and CFO)

Yeah, I would just add, obviously, you're talking about, as, as you mentioned, $30. We do, as you would expect, internally have our own valuation of what management and, and the team feels like the stock is worth. I think, as Jim said, we're, we're still comfortable buying and, and potentially leaning in at, at these prices. So it gives you a feel for, you know, where we think fair value is, and we're, we're not there yet.

Durgesh Chopra (Managing Director)

Got it. Thank you both, and congrats on solid execution here on, on several quarters. Thanks.

Jim Burke (President and CEO)

Thank you, Durgesh.

Operator (participant)

The next question comes from the line of David Arcaro with Morgan Stanley. Please go ahead.

David Arcaro (Executive Director and Senior Equity Research Analyst)

Oh, thanks so much. Good morning.

Jim Burke (President and CEO)

Good morning, David.

David Arcaro (Executive Director and Senior Equity Research Analyst)

Let's see. I was wondering, I noticed a decline in the CapEx for 2023 for solar and storage development. Wondering what's driving that? Then similarly, just looking out to the development plan, some of the in-service dates moved out for, for several of the solar and storage development projects. Wondering if you could give some color around that dynamic.

Jim Burke (President and CEO)

Yes, absolutely. Those two are related, David. We have the Illinois Coal to Solar, we had the majority of that reduction that you see was some movement out of 2023 and into 2024, 2025. We're still working the procurement cycle with working with vendors on EPC and obviously the equipment, and we're still working that process in Illinois. It's more just a deferral at this point for the Coal-to-solar projects.

That was a, you know, that was, that was about 2/3 of what was moving out. The other is, as I mentioned on a couple of previous calls, on the ERCOT solar, we're starting to see the solar hours, you know, kind of cannibalize the solar hours.

We'll move forward on solar projects with a PPA, but we're not going to move those into in a merchant-type model. That really was the other part of what lowered the CapEx. Now, as I've mentioned as well, we own these projects. The pacing of these, a project may not be ripe now, could be ripe three years from now, depending on market conditions and depending on how some of these rules played out that we talked about on one of the earlier questions. That is really a, a, a reduction at this point this year that's a deferral on the Coal-to-solar.

I would say next year, we're probably still in this kind of $600 million number, so we're not pushing the number down this year to then take the next year number up fully. We're showing the discipline because the Texas piece, in particular, is something that we want to keep a close eye on. I think even for next year, you're going to see a development number for CapEx that's pretty close to this year.

David Arcaro (Executive Director and Senior Equity Research Analyst)

Got it. Got it. That's, that's helpful. I guess, just maybe following on to that, how do you think you know, if there's, or, or no, maybe this is a little bit separately. I, I, I imagine if that growth CapEx number goes down, that was going to be largely financed with non-recourse project financing anyway.

Jim Burke (President and CEO)

That's correct.

David Arcaro (Executive Director and Senior Equity Research Analyst)

Open up additional cash available for allocation at the overall Vistra entity.

Kris Moldovan (EVP and CFO)

No, you, you have that right. As we, as we look at this, the amount.