Vistra Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 11 speakers on the call.

Operator

Morning, and welcome to the Vistra Second Quarter 2023 Results Conference 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 Megan Horn, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning, and thank you all for joining Vistra's investor webcast discussing our Q2 2023 results. Today's discussion is being broadcast live from the Investor Relations section of our website at www.vistracorp.com.

Operator

There you can also find copies

Speaker 1

of today's investor presentation and earnings release. Leading the call today are Jim Burke, Vistra's President and Chief Executive Officer and Chris Moldovan, Vistra's Executive Vice President and Chief Financial Officer. They are joined by other Vistra senior executives to address questions during the 2nd 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 GAAP measures are provided in the press release and in the appendix to the investor presentation, all available in the Investor Relations section of Fiskars' website.

Speaker 1

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 risks and uncertainties that could cause actual results to differ materially from those projected on 5. 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 explains the risks 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.

Speaker 1

I'll now turn the call over to our President and CEO, Jim Burke.

Speaker 2

Thank you, Megan. Good morning and thank you all for joining our 2nd quarter 2023 earnings call. The 2nd quarter proved to be another strong one for the business as we delivered $1,800,000,000 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 Q3 earnings call last year.

Speaker 2

Accordingly, we are narrowing that original range, which was $3,400,000,000 to $4,000,000,000 to a new range of $3,600,000,000 to $4,100,000,000 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 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 0 carbon generation portfolio with our 3 50 megawatt addition to

Operator

the Moss Landing Energy Storage Facility

Speaker 2

that came online this quarter. Energy storage facility that came online this quarter. I'll speak to that milestone momentarily, but first I'd like to turn to Slide 5, Where we once again highlight our 4 strategic priorities. I think it's important to continue to reiterate our focus on these priorities each quarter with some notable accomplishments, 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.

Speaker 2

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 derisked consistent earnings give Vistra the confidence to announce aggressive shareholder return programs and then stick with those programs at amounts equal to or higher than those originally announced. I'll let Chris provide the detailed update on our capital allocation plan, but of the aggregate upsized 7,750,000,000 back. $3,350,000,000 through August 4, 2023, which is approximately $250,000,000 ahead Pay dividends that grow each quarter based on a reduced share count.

Speaker 2

Our balance sheet strength remains a top focus as well. You saw this quarter that we structured a $450,000,000 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 Q4 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 6 regarding our Moss Landing facility. The Vistra team did an excellent job in bringing online an additional 350 Megawatts to add to the existing 400 Megawatts at our Moss Landing site in California, which is the largest energy storage facility of its This addition came online ahead of schedule and on budget despite a challenging supply chain environment and extreme rainfall.

Speaker 2

This is now a total of 7 50 megawatts of energy storage backed by contracted revenues through our PG and 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 the 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 a 10 20 megawatts of capacity. This is a tremendous site and a great example of our ability to invest in a disciplined way In Vistra 0, while also providing for the reliable and affordable energy customers need.

Speaker 2

Moving to Slide 7, the $1,800,000,000 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 and they continue to perform extremely well. When we originally announced 2023 guidance in the Q3 of last year, we estimated a range of $3,400,000,000 to 4 $100,000,000 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 $3,600,000,000 to $4,000,000,000 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 All three key agencies continue to work on the necessary approvals to close the Energy Harbor acquisition.

Speaker 2

We are working constructively with each agency and in all involved parties. And as I mentioned before, we continue to anticipate a 4th 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 $2,800,000,000 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 $4,500,000,000 including synergies and out year prospects potentially even higher.

Speaker 2

Chris, I'll now turn the call over to you to discuss our quarterly performance in more detail.

Speaker 3

Thank you, Jim. Starting on Slide 10, Vistra delivered $1,800,000,000 in ongoing operations adjusted EBITDA in the 2nd quarter, including $510,000,000 from Generation and $498,000,000 from Retail. Generation's results Favorable compared to the Q2 of 2022, primarily due to higher energy margin achieved through our comprehensive hedging strategy. And as we did last quarter, our ability to capture value by backing down generation at times when prices are below unit costs. Retail results were also favorable as compared to the Q2 2022.

Speaker 3

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 Q1's earnings Contribution to the overall year was offset as expected in the Q2. Turning to Slide 11. As Jim mentioned, We have been consistently delivering on our capital allocation plan. As of August 4, we have executed approximately $2,900,000,000 of share repurchases Since beginning the program in the Q4 of 2021, we expect to utilize the remaining approximately $1,350,000,000 of the total $4,250,000,000 authorization by year end 2024.

Speaker 3

Notably, our outstanding share count has been reduced to 367,500,000 shares as of August 4, 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 Q3 2023 common stock dividend of $0.226 per share represents an increase of approximately 12% per share as compared to the dividend paid in the Q3 of 2022. Finally, as Jim mentioned, we remain focused on maintaining 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.

Speaker 3

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 4th. 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 $3,700,000,000 to $3,800,000,000 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 the balance of 2023 expected generation hedge at approximately 98% and 2024 expected generation hedge at approximately 95%.

Speaker 3

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 multiyear comprehensive hedging strategy, 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 Q3 call. With that operator, we're ready to open the line for questions.

Operator

We will now begin the question and answer session. Our first question comes from the line of Shar Pourreza with Guggenheim Partners. Please go ahead.

Speaker 4

Hey, guys. Good morning.

Speaker 2

Hey, good morning, Shar.

Speaker 4

Good morning. So Kind of within this strength as we're thinking about optimization versus actual margin expansion and the degree to which I guess you guys This is being durable. Thanks.

Speaker 2

Sure. Shahriar, 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. You realize last year, when we were in a climbing power environment due to the conflict That we saw with Russia, Ukraine and then the commodity curves moving up. So retailers in general were climbing the hill in 2022. We started to see that obviously come off at the beginning of this year.

Speaker 2

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 And 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 When they signed up with you, so even on renewals, we're careful about how we manage this. So from a durability standpoint, The retail business has earned strong margins in volatile years and in stable years. And 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.

Speaker 2

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

Speaker 2

I would just add

Speaker 5

to what Jim said is that we've got multi brands play in the ERCOT market. So each of those brands are designed to attract a different customer segment. But In general, in ERCOT on the residential side, transactions remain at historical levels. So there are a lot of moves and switches and opportunities to win customers in the market. This really reflects the health of the Texas market migrations to consumers to it.

Speaker 5

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 in these markets, so very robust. But I think where we're successful in both the accounts and the margin side The differentiation of our products and services across those brands. So our summer campaign this summer features 3 distinct products, Seasonal discount product, the first to market time of use product and then also an electric vehicle product, which really is doing well on the gains and helping us mitigate Your losses as well.

Speaker 2

Yes. And I would add, Shar, that the annual view for retail, that outlook has improved from when we originally set Our guidance for 2023, as Chris noted, the Q1 to Q2 effect is more about the shaping of the cost of goods sold because retail We'll buy power according to the shape by month for the year. So the winter costs much higher than the spring. The summer costs are much higher than the fall and into December. So we see that retail profitability much higher in our results in 2Q Q and 4Q and we see less from retail in 1Q and 3Q.

Speaker 2

So 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.

Speaker 4

No, it does. And that's helpful. Thank you for that. And then just lastly, and I don't want to push too far, but with such great Color on 2024 and 2025. Can you just speak to how the EBITDA opportunity looks for 2016 or at least the degree to which You've been able to hedge that far.

Speaker 4

And just maybe refresh us on the Energy Harbor EBITDA opportunity that far out. Are you still seeing things north of $900,000,000 Thank you, guys.

Speaker 2

Yes, you bet. So Shar, we have obviously continued Our progress of hedging, as we said we would, we consistently look for opportunities To provide a predictable earnings stream. And so first of all, on 2024, 2025, we feel good about where we are from an outlook standpoint for a VISTA 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. And so we the data we have is more the data we had at the time of the announcement.

Speaker 2

And but our view is because we're In the market, 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 to 3.7. And now we're looking at 3,700,38. So 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.

Speaker 2

And so our view there was that On a combined basis, we were 4.35 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 when we gave you the update for Vistra standalone. If we're at 3.7 Now for Vistra standalone, again, being between 3,700,000,38, that puts the combined enterprise In that $4,450,000,000 to $4,500,000,000 range. So $4,500,000,000 on average in that $24,000,000 to $25,000,000 timeframe. 26, we're pretty open still.

Speaker 2

In fact, I would say, Steve Muscato is here. When we look at the markets, We look for opportunities, but when we last talked to you, we were seeing curves in AD Hub, for instance, in PJM that were pretty attractive. They were in sort of the $50 range. Those have come off now to about 44 back. Dollars in that 2026 timeframe, very close to the acquisition case that we announced.

Speaker 2

So I think we're on track for that 900,000,000 The upside to that for that piece would need some support from the $26 curve because we've seen that move around from $45 back. Up to the low 50s and back to that sort of 44 range. And 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.

Speaker 2

But I think 900 is still a solid number for 2026 for Energy Harbor. And in terms of our business, Vistra standalone, We've seen PJM come off, we've seen ERCOT come up. And ERCOT's come up and it's been attractive. And Steve, I'd be interested Can you share some thoughts about how you have seen these markets unfold even in the last month or 2?

Speaker 6

Sure. We've seen ERCOT because back. The heat that we've been experiencing and the 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 and so fixed price is holding in there. So we're able to hedge some of our solid fuel free. And we're also seeing Sparks, to your point, Jim, expand

Speaker 7

as we move

Speaker 6

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

Speaker 2

And of course with the AD Hub and with Energy Harbor, we'd have some PTC support ultimately Shar. We don't view it as meaningful because it's kind of all the curves are close back. I have 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. So Thank you, Steve for the and Scott for the context on that. Sure.

Speaker 2

Thank you for the questions.

Speaker 4

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

Speaker 2

Thank you.

Operator

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

Speaker 8

Hey, good morning, everyone. Thanks for all the color on those last couple questions. Hey, Jim. Wanted to shift over to from the debt from the EBITDA side more to the debt side. Pro form a, I think, Jim, you were mentioning, you did the PCAP and then you have some margin collateral posting coming back.

Speaker 8

Can you just give a better sense of like how much new debt you will ultimately have to issue? And if that's changed from From when you announced the deal and then what on a pro form a consolidated basis where the debt is going from where you are today?

Speaker 2

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

Speaker 3

the question. I'll put it into 2 buckets. As we When we announced the transaction, we had shown an assumption that we would use $600,000,000 of cash back $2,600,000,000 of debt. And of course, we knew that there was going to be some more cash coming back from margin deposits or we expect it to come back from margin deposits, but We wanted to be conservative and make sure that we maintain sufficient liquidity. As we have settled those hedges Throughout this year, that money has returned as expected, but that number also included a plan to do some non recourse financing At Vistra 0, which we still intend to do.

Speaker 3

So I would say over the balance of the year, there's really 2 different things that we're looking at. There's the acquisition financing. You can that has with the return of the margin deposits and the cash and the PCCAP transaction that has also returned cash. That has brought that $2,600,000,000 down to again, assuming we go to the next stage On the non recourse financing, but that's probably brought that number down to $1,000,000,000 to $1,500,000,000 somewhere in that range. And then we still have non recourse financing in the works that was in our plan that was assumed in those numbers.

Speaker 3

And I think as we said in the remarks that we still expect to see a transaction in the coming months. And so that will fill in the rest. We still have enough commitment that we're still being conservative with our The financing commitment that we have in place, but that's really it. And from a debt perspective, as we said, we're still targeting sub three times. At the closing, I think we continue to believe that we're going to be just above that.

Speaker 3

And As we look forward through a combination of debt repurchases and increasing EBITDA, we think we can get to that sub three Times in the 2020 as early as 2024 potentially leaking into the 1st part of 2025, but we don't see there being a long Wait for us to get to the target levels that we're looking at.

Speaker 8

Okay, thanks. I appreciate all the color there. And then Maybe just on ERCOT looking forward here, obviously, been pretty hot down there. What are you seeing in terms of Just the grid holding up for the rest of the summer and then thoughts on potential newbuild Later this year around the referendum vote.

Speaker 2

Sure. Yes, Michael, it's been a very active Kind of last 3 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 It's been a robust low growth market and the additional resources that have been added over the last 3 to 5 years Largely been wind and solar. The solar move has been consequential, 4000 to 5000 megawatts year over year, Which is helping that evening period and we're getting to the point where solar is filling in that 6 to 8 hour range fairly well And we are all focused on the wind's ability to pick up where solar left off at that sort of 7 to 8 o'clock hour and beyond. A couple of good points is that earlier in June, while wind overall was lower in 3rd in second quarter This year in ERCOT than last year, at peak times during this evening hours, wind actually when the grid was at 80,000 megawatts Wind actually performed relatively well in the early part of the summer.

Speaker 2

We didn't see much price formation. In July, late July 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. And 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. And that's we sometimes lose focus on that because that's the majority of the grid. The units are running hard.

Speaker 2

There's no end in sight for this heap that we're in. And so, the team is doing a terrific job keeping these units So online and I would say overall the ERCOT grid and the operators have done a nice job keeping the grid supplied. But there's an asymmetric risk to the upside 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. And as far as whether gas newbuild It's a 3 year process for the most part from the time you get started.

Speaker 2

And the loan referendum In November, the PCM, which was part of the House Bill 1500, the Sunset Bill, It has a net $1,000,000,000 cap that was inserted as part of that legislation. It could be several years to 3 years before that To be implemented, the PCM. So 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 24, back. 25 and we're working through it.

Speaker 2

ERCOT still has 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. So 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. And that was a good outcome, but there There's still a lot of work to do with the P and C and ERCOT and various stakeholder groups to get this over the finish line.

Speaker 8

Thanks so much. Appreciate it.

Speaker 2

Thank you, Michael.

Operator

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

Speaker 9

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 24, 25, the 4.5 there. Can you elaborate a little bit on what the retail assumptions are there?

Speaker 9

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-4s. How do you think about these other retail pieces there? And ultimately, just also what were you alluding to on 26? I know you said it was quite open. Just what does that transpose into 20 26, if you can start to go there just quickly in terms of the puts and takes?

Speaker 2

Sure. Well, if you look at our revised guidance for 2023 and you look at that sort of midpoint, back. Q3, can 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 $4,500,000,000 number. And what we've seen in our business model, Julian, It's 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 'twenty three, 'twenty four, 'twenty five timeframe and a split between retail and gen might vary a little bit, but not materially.

Speaker 2

And 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 back. You may see a little bit of movement between retail and gen based on market conditions. But retail is very solid In this kind of $1,000,000,000 range over that horizon. And I would expect the difference being the wholesale to get to that 3.8 And 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.

Speaker 2

I don't want to make it sound like it just because we've hedged it, it's going to be realized. We have to deliver every single day On the business, but the outlook 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. And so that line of sight with those hedge percentages, We feel really good about where we are in that 2024, 2025 timeframe. Certainly, 2016 is more open. And as I mentioned earlier, ERCOT is looking favorable relative to last time we talked, but PJM is down on fixed price power at this point In 26, but then we also have some PTC support for that for the Energy Harbor length.

Speaker 2

It doesn't look like ERCOT would be in that PTC range right now because of where the curves have moved up to. But we've got Kind of geographic flexibility segment, flexibility and or I should say diversification and how I think 2026 will play out.

Speaker 9

Got it. And 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 this is a German program with 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. And then Related, we have other reserve programs yet to be fully implemented.

Speaker 9

I'd be curious on your initial assessment of some of these programs like the dispatchable reserves for instance.

Speaker 2

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, Julian. Yes. So yes, that obviously the referendum is in November.

Speaker 2

The initial Amount that was shared as part of the bill was $10,000,000,000 The amount that has been provided for in the budget is $5,000,000,000 And then the amount of the $5,000,000,000 that's going to be allocated to building new gas plants is unknown at this point. So let's say it's something in the $3,000,000,000 to $3,500,000,000 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. So it is helpful, but it does not make up for potentially missing revenue in a backward aided market. And that gets to your other point, which is do these other programs, whether it's ORDC bridge, PCM being implemented, ECRS was just implemented, DRRS will be implemented by the end of 2024.

Speaker 2

Do those cumulatively add a recognition of reliability for the assets that can provide it? And if so, Can we get enough line of sight to build into that? And 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 DRS, how you see that playing in ORDIC Bridge, Be interested in sharing your thoughts on how you see the market adapting to these.

Speaker 2

Sure. I think let's start with ECRS because it's the latest We've actually seen how it's been implemented. And they're putting it in, when

Speaker 6

I say they, ERCOT is dispatching it Only when critically needed. And so I think it's serving well from a reliability perspective in terms of keeping ERCOT You know out of an EEA situation, but one of the other things I've seen is it hasn't necessarily impacted price formation too much. So I I really think it gets into how ERCOT handles these reserve products. If they handle them in a way that they're designed, which is really when the grid is Approaching tight conditions and it's not necessarily used to for price formation, which is what we're seeing so far. When I see ECRS dispatched.

Speaker 7

It's been on

Speaker 6

the very hot days at the peak hours when needed and it hasn't been very price suppressive. So We think it's working the way it's intended, and we'll have to see on these new reserves that they're putting in. But 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, what I'll call emergency conditions on the grid, but we're still seeing very solid price formation when it does get tight.

Speaker 2

I think it's too early to call DRS at this point. I mean, 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. And so 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 recognized and rewarded for their reliability, including affirming requirement for assets that come onto the grid after January 1, 'twenty seven, That they have to effectively be able to backstop the expected generation that they are committing to. Those were 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.

Speaker 9

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.

Speaker 2

I think so. 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 and 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. So 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. But yes, on a calendar basis, it's Multi year at this point.

Speaker 9

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

Operator

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

Speaker 7

Hey, good morning team. Thanks for taking my questions. Good morning, Tim. Just On the hedges, I think you answered a part of my question in your prepared remarks. But the 23% to 25% hedges stayed at 86% And no change since the Q1 update call.

Speaker 7

Is that just you willing to stay more open given the market conditions you mentioned, the ERCOT curves? Or is it just more normal course of business and you're going to opportunistically hedge more? Just any thoughts there?

Speaker 2

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.

Speaker 2

There's more hours in the money for the fleet. So that means there's actually more to hedge. That's ultimately a good thing. And so when you look at the percentage, it's not a static amount of generation. So that's one element.

Speaker 2

The second element is that's as of sixthirty that we were giving you these percentages. We've continued to hedge Since six thirty, particularly in the 2025 timeframe, I don't feel that where we sit Working with our team that we feel 26 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. So the curves, as I mentioned in 2026 for PGM had come down, ERCOT has gone up, But not anything that we need to go rush out and move materially on 26 at this stage.

Speaker 7

How about just within that 23% to 25% period? I guess what the message here is that 86% should move higher As we get along here.

Speaker 2

It's already higher since 6:30, forgive. And so The 26 hasn't moved much, but we have moved up on 25 and we're nearly fully hedged obviously for 2024. So but these percentages do move because again being in the money means you have more hours to hedge because there is gross margin. So the hedge percentage could drop, but your earnings forecast could go up as a function of just simply looking at the opportunity set. So some of it's just the timing and the fact These curves do move around.

Speaker 7

Understood. Thanks. And 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 broke 30 today.

Speaker 7

Just your updated thoughts on capital allocation, Share buyback versus growth opportunities. How are you thinking about all of that here as the stock hit $30?

Speaker 2

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 and we still feel that way. If you look at the stock price move and this is a very imprecise science, but a good portion of the move you could explain by virtue of the reduction in the share count and not necessarily seeing the enterprise value Move that materially. Now that's still a good thing for the existing shareholders and it's an opportunity for existing shareholders that are effectively increasing their percentage of ownership in Vistra.

Speaker 2

I also believe that since the May timeframe of last Here and where we are today, we have materially improved the earnings outlook of the company, which in theory would result potentially in a multiple expansion. And 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, I call it points on the board, Delivering on our scorecard and our results. And at some point in time, when folks are comfortable that the earnings power Is sustainable for the in the duration of our horizon beyond even the 2 to 3 years we talk about, You might actually see some multiple expansion. We're not really there yet.

Speaker 2

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. But 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 over perform and see where we are With our obviously cash needs to do that, fund Energy Harbor, which is our focus is to get this transaction closed in the Q4. And then we're being disciplined on the Vistra 0 projects. And when we're reflecting that and 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. So the growth options need to be attractive.

Speaker 2

And so we'll pace the Vistra 0 projects to make sure that we're hitting the best ones and not chasing just the renewable projects. And I like our portfolio there. And we mentioned Moss 350 was an excellent project to bring online and excellent job by the team. So capital allocation plan is intact and we're excited to I'd say hit the gas pedal on the capital allocation plan because we think it's the right mix for our shareholders As well as our debt holders.

Speaker 3

I appreciate it. I would just add, obviously, you're talking about, as you mentioned, dollars 30 We do, as you would expect internally, Fair value is and we're not there yet.

Speaker 7

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

Speaker 4

Thank you, Vitesh.

Operator

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

Speaker 10

Thanks so much. Good morning.

Speaker 2

Good morning, David.

Speaker 10

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. And then similarly, just looking out to the development plan. Some of the in service dates moved out for several of the solar and storage development projects. Wondering if you could give some color around that dynamic?

Speaker 2

Yes, absolutely. Those 2 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. So it's more just a deferral at this point for the coal to solar projects.

Speaker 2

And that was about 2 thirds 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 kind of cannibalize the solar hours. And so we'll move forward on solar projects with a PPA, but we're not Going to move those in a merchant type model and 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 right now, could be right 3 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.

Speaker 2

But That is really a reduction at this point. This year, that's a deferral on the coal to solar, but I would say In Texas Solar, but I would say next year, we're probably still in this kind of $600,000,000 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 It's something that we want to keep a close eye on. So I think even for next year, you're going to see a development number for CapEx that's pretty close to this year.

Speaker 10

Got it. Got it. That's helpful. And I guess, just maybe following on to that, how do you think back. So if there's or no, maybe this is a little bit separately.

Speaker 10

I imagine if that growth CapEx number goes down, that was going to be largely financed With non recourse project financing anyway. That's right. So we'll open up additional cash available for allocation at

Speaker 3

You have that right. As we look at this, as we the amount

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Earnings Conference Call
Vistra Q2 2023
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