Vistra Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2024

There are 10 speakers on the call.

Operator

Good day, and welcome to the Vistra's 4th Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. And now, I would like to take the conference to Eric Misek. Please go ahead.

Speaker 1

Good morning, and thank you all for joining Vistra's investor webcast discussing our Q4 and full year 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, Vista's President and Chief Executive Officer and Chris Moldovan, Vista's Executive Vice President and Chief Financial Officer. They are joined by other Vistra's senior executives to address questions during the 2nd part of today's call as necessary.

Speaker 1

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 earnings 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.

Speaker 1

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 limitations of certain industry and market data included in the presentation and the use of non GAAP financial measures. I will now turn the call over to our President and CEO, Jim Burke.

Speaker 2

Thank you, Eric. I appreciate all of you taking the time to join our Q4 2023 earnings call. First, I am proud to share the very strong results that the hardworking Vistra team delivered in 2023. And second, I am excited to announce that we expect to close the Energy Harbor acquisition on Friday, March 1. The Energy Harbor acquisition fits squarely with our continued focus on our 4 strategic priorities as laid out on Slide 5, which starts with operating an integrated business model that combines retail and wholesale operations, leading to more resilient and sustainable earnings in a variety of weather and pricing environments.

Speaker 2

This was not only true in delivering results 440,000,000 above our original guidance level in 2023, but was recently apparent during winter storm Heather in January of this year, where our core competency of operating generation assets was evidenced by our 98% commercial availability, which is particularly impressive in an environment where the ERCOT overall market outage rate for the 5 days impacted by the storm was 2.5 times Vistra's outage rate. Turning to the other key priorities, we continue to execute on our capital return plan put in place during the Q4 of 2021. Since that time, we have returned to our investors approximately $4,300,000,000 through share repurchases and dividends. Further, we are excited to announce the Board approval of an additional $1,500,000,000 of share repurchases, which we expect to fully utilize by year end 2025. Importantly, we have strengthened and simplified our balance sheet while maintaining our capital return plan.

Speaker 2

Net leverage remains low at 2.4 times and although we expect to be slightly above our 3 times net leverage target when Energy Harbor closes, we project to return to below 3 times by year end 2024. The successful repurchase of approximately 98% of our outstanding tax receivable agreement rights marks further progress in our efforts to simplify Vistra's capital structure while improving our free cash flow conversion over the foreseeable planning horizon. Our disciplined capital approach also enables us to invest in renewables energy storage growth that capitalizes on sites and interconnects in the Vistra portfolio. We delivered the Moss Landing 350 Megawatt Energy Storage Expansion in June of last year and we begin construction on 3 of our larger Illinois solar and energy storage developments located at our former coal plant sites in the spring of 2024. With grids in most of our markets tightening in the coming years as older fossil generation retires, load continues to grow and with interconnection and transmission challenges, Vistra is well positioned to continue to find ways to serve our customers reliably, affordably and sustainably while remaining disciplined about our capital allocation.

Speaker 2

Turning to Slide 6, we received FERC's approval for both the acquisition of Energy Harbor and the corresponding sale of our Richland and Stryker generation facilities. Energy Harbor is a transformative acquisition and represents another significant step forward for our company. We are diligently working towards closing this transaction, which as I already mentioned, we expect to close on March 1. Despite closing later than we had hoped, we remain comfortable with our ability to successfully integrate our teams and deliver the initial guidance of pre tax run rate synergies of $125,000,000 by year end 2025. We are also reiterating a 12 month 2024 2025 ongoing operations adjusted EBITDA midpoint opportunities from Energy Harbor of $700,000,000 $800,000,000 respectively, as well as the expected run rate ongoing operations adjusted EBITDA midpoint opportunity on an unhedged and open basis of $900,000,000 However, given the anticipated closing date, you can expect our updated 2024 ongoing operations adjusted EBITDA guidance range, which we expect to provide on the Q1 2024 results call, will reflect only 10 months of contribution from Energy Harbor this year.

Speaker 2

Moving now to Slide 7. As a reminder, we began the year with initial guidance for 2023 ongoing operations adjusted EBITDA with a midpoint of $3,700,000,000 This guidance was subsequently revised on both our second and third quarter calls, ultimately raised to a midpoint of $4,025,000,000 As I stated earlier, despite another year of volatile weather, characterized by mostly mild weather excluding the unprecedented summer heat in ERCOT during the Q3, we were able to exceed the midpoint of our original guidance range by $440,000,000 Importantly, this translated to higher than expected ongoing operations adjusted free cash flow before growth of approximately $2,491,000,000 exceeding the midpoint of our original guidance range by $441,000,000 These results were achieved through strong customer count and margin performance at our retail segment and a nearly 96% commercial availability rate for our generation segment. Now I'd like to quickly turn to the 2024 guidance. Given the recent regulatory approval and the upcoming transaction closing, we anticipate providing combined Vistra and Energy Harbor guidance, including an update on synergies as part of our Q1 2024 results call. However, we can reaffirm the Vistra standalone 20 24 guidance for ongoing operations adjusted EBITDA in the range of $3,700,000,000 to $4,100,000,000 and ongoing operations adjusted free cash flow before growth in the range of $1,900,000,000 to $2,300,000,000 We are eager and excited to join with the men and women of Energy Harbor and execute on behalf of our customers and communities as one team.

Speaker 2

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

Speaker 3

Thank you, Tim. Turning to Slide 9, Vistra delivered strong 4th quarter results in 2023 with ongoing operations adjusted EBITDA approximately $965,000,000 including $463,000,000 from retail and $502,000,000 from generation. For the year, Vistra delivered $4,140,000,000 of ongoing operations adjusted EBITDA, including $1,105,000,000 from retail and $3,035,000,000 from generation. Despite mild weather conditions for much of the year, the performance of our generation units combined with our comprehensive hedging program and our ability to optimize our flexible assets drove the significant year over year improvement in our generation results in every region in the country. Moving to the Retail segment, the strong margin performance seen in the 1st 9 months of the year continued in the 4th quarter.

Speaker 3

Positive residential customer count growth was driven by our multi brand strategy with organic growth by our flagship brand TXU Energy for the 3rd consecutive year. Turning to Slide 10, we provide an update on the execution of our capital allocation plan. As of February 23, we executed approximately $3,700,000,000 of share repurchases, leading to an approximately 28% reduction compared to the number of shares that were outstanding in November of 2021. We expect to utilize $2,250,000,000 consisting of the $750,000,000 remaining under the previous authorization as of the end of 2023 and the additional $1,500,000,000 of authorization announced today over the course of 2024 2025. We will review our capital available for allocation after we close the Energy Harbor acquisition and expect to share any updates later this year.

Speaker 3

Moving to our dividend program, we announced last week a 4th quarter 2023 common stock dividend of $0.215 per share, which represents an increase of approximately 9% the dividend paid in Q1 2023 and an impressive 43% increase over the dividend paid in the Q4 of 2021 when our capital allocation plan was first established. Turning to the balance sheet. Vistra's net leverage ratio currently sits significantly below 3 times. As Jim stated earlier, although net debt will increase upon closing of the Energy Harbor acquisition, it will remain close to 3x and we expect it to return to below 3x by the end of 2024. In addition to maintaining low leverage, we took an important step to further simplify the balance sheet at the end of 2023 and the beginning of 2024.

Speaker 3

As of February 23, 2024, we have repurchased approximately 98% of the outstanding rights to receive payments under our tax receivable agreement. To pay for these rights, which were entitled to receive approximately $1,400,000,000 over time on an undiscounted basis, we paid approximately $625,000,000 consisting of approximately $475,000,000 in aggregate face value of Series C perpetual preferred stock and approximately $150,000,000 of cash. Based on our forecast of payments that would have been due under the tax receivable agreement over the foreseeable planning horizon, we believe this transaction results in accretion of free cash flow over that time period and provides robust net present value to the company. Finally, the team is preparing to begin construction activities at 3 of our larger Illinois solar and energy stores developments at our former coal plant sites this spring. We believe these projects will continue to exceed our targeted return thresholds despite some headwinds in this higher cost and interest rate environment.

Speaker 3

The 3 key tenants of our responsible energy transition, reliability, affordability and sustainability, will continue to guide our renewables development program. We remain disciplined in our approach and continue to benchmark all projects against other uses of capital, including our share repurchase program. Touching quickly on Slide 11, as we have done in prior quarters, we have provided an update on the out year forward price curves as of February 23. While the ERCOT forward price curves continue to reflect some backwardation, the prices remain higher than the April 29, 2022 curves when we first spoke to you about increased EBITDA earnings potential in the out years. These curves together with the continued execution of our comprehensive hedging program give us confidence in the ongoing operations adjusted EBITDA midpoint opportunity for 2025 in the range of $3,800,000,000 to $4,000,000,000 for Vistra standalone discussed last quarter.

Speaker 3

Again, we expect to update the 2025 opportunity, including the expected contribution from Energy Harbor on the Q1 results call. We are extremely proud of the performance of our generation retail and commercial teams during 2023 and the start of 2024. We believe our commercial optimization activities and flexible generation assets combined with an industry leading retail business provides significant opportunities going forward. We will continue to focus on being a reliable, cost efficient operator of assets, while producing adjusted free cash flow yields that translate directly into significant returns for our stockholders. With that operator, we're ready to open the line for questions.

Operator

Thank you very much. We will now begin the question and answer At this time, let's start with a question from Shar Pourreza from Guggenheim Partners. Shar, please go ahead.

Speaker 1

Can you hear me?

Speaker 2

Yes. Hey, Shar. Good morning.

Speaker 4

Hey, Jim. Sorry about that, I did a little tech issues. I guess, Jim, you're getting closer to closing the Energy Harbor. You repurchased the TRAs to clean up the cap structure. Can we just get a little more color on how you're thinking about the longer term profile of the business?

Speaker 4

I mean, do you see a pathway for tradition and vision to go their separate ways in the years ahead? Or is this kind of a longer date process in your mind?

Speaker 2

Yes. Thank you, Shahar. I'll let Chris address the TRA, but I'll start with the direction we're headed. I think the Energy Harbor acquisition, as we said, is transformative for the company. It obviously brings a dispatchable 20 fourseven carbon free element to the portfolio enhances our starting point that we had with Comanche Peak and Vistra 0.

Speaker 2

The other part of the portfolio that I think is incredibly critical is the dispatchable assets that we have with our fossil fleet. Flexibility is an increasingly valuable attribute on these grids, particularly with the renewables penetration that we're seeing across the country, particularly ERCOT in California. So from our standpoint with such a large retail position and a growing retail position, The integration of how we can match the customer needs with assets that can provide the baseload and the ramp products is an important part of risk management and value creation for our company. So we see this still as one team. We see it as Vistra delivering on an integrated basis across our business for the long term.

Speaker 2

And I think this excitement we have around closing Energy Harbor is it's a path we've been on for quite some time with the other acquisitions we've done. This is yet another one that fits neatly into what customers are looking for. And that's why we're ready to get on to this next chapter. I'll let Chris quickly address the TRA.

Speaker 3

Yes, Shar, again, we noted in the comments, I think, the primary purpose of the TRA, it does have some benefits that aren't economic related, but the primary purpose was economic. When you take an instrument out that is entitled to $1,400,000,000 and then we did it with a little bit more than $600,000,000 and more than 3 quarters of that isn't is perpetual stock. It just it became a transaction that was very economically beneficial for the company. And so we really focused on the economics of it. As far as cleaning it up, does simplify the capital structure.

Speaker 3

It's a topic that we're pleased to not talk much about going forward. But it still is just one of the impediments to a split. There are still other debt securities at the Vistra operations level and we still have preferred stock in place. So there would be other things to address. So that wasn't the primary purpose for this transaction.

Speaker 3

It was really we thought it was a great economic company, including a significant amount of NPV for us.

Speaker 4

Okay, perfect. That's helpful. And then Jim, just on ERCOT, we've seen a few new build announcements recently. It sounds like one of your peers is waiting for the loan program details before potentially pulling the trigger on a combined cycle. There has also been a substantial amount of noise regarding the ECRS.

Speaker 4

I guess, what's your house view on supply demand backdrop and sort of ongoing market reforms? Thanks.

Speaker 2

Yes. Great question. Well, the demand growth surprised, I think many of us both what we saw last summer and even with heather. So robust low growth in Texas coupled with extreme weather, you start to see the grid getting pushed obviously to a level of tightness we haven't seen in quite some time. The loan program clearly was a signal from the legislature and policymakers that they would like to see the dispatchable resources grow in Texas at a minimum to backstop the level of growth that we see with intermittent resources in Texas and we see like in winter storm Heather on the tightest days of winter storm Heather about 5% during the hours that were the tightest about 5% of the power coming were coming from intermittent sources about 95% from dispatchable.

Speaker 2

So I think the desire is there. The loan program is clearly a boost because the interest rate at 3% that's better than where market is. But you raised another point that I think is critical, which is there's a series of market reforms that are contemplated at the moment that sit between ERCOT and the Public Utility Commission. They generally are around the ancillary. So ECRS is 1, DRRS is another.

Speaker 2

And there's details of these that are yet to be defined. We hope to hear more about ECRS here in a few months. It's likely that ECRS could dispatch a little earlier, could actually end up being brought into the market earlier than it was last summer, which could have a little bit of a dampening effect on prices. The DRRS is pushed out in time and it's unclear what kind of effect on price signals that might have. And then lastly, PCM is Performance Credit Mechanism, which is in the law, the House Bill 1500, that is also probably on a 2027 timeframe.

Speaker 2

And I think the balance, Shar, that all policymakers are trying to strike is what's the sufficient revenue stream to incentivize someone to write an equity check and at the same time deliver affordable electricity in Texas that's obviously reliable. And there is a tension there and that tension shows up in some of the rule makings and the procedures that are going to follow. We're going to learn more as they follow through on these in the next 3 to 6 months. So the loan program is certainly helpful. We don't view that as sufficient as a revenue signal.

Speaker 2

You still see in our PowerPoint deck, there's backwardation in the spark spreads for ERCOT. So why they are higher than they were when we first started to talk to you about long dated curves in 2022. They're still backwardated. We need to see some support for the price signals to be able to be confident that a 20 to 30 year life asset has a reasonable prospect for a return. And I think people are working hard to try to make that happen, but that's still TBD.

Speaker 4

Perfect. Thank you very much, Jim. Congrats on the execution. I'll see you soon. Appreciate it.

Speaker 2

Thank you, sir.

Operator

And now we have a question from David Arcaro from Morgan Stanley. David, please go ahead.

Speaker 5

Thank you. Good morning.

Speaker 2

Hey, David.

Speaker 5

Maybe a bit

Speaker 2

of a follow on

Speaker 5

to that question, specifically on data center growth. And as we see that accelerate, wondering if you could speak to how you're thinking about the potential market impact and opportunities for your fleet potentially from new data centers coming on?

Speaker 2

Sure. Yes, thanks David for the question. I'll step back just a second to say that as the grids have become a little bit tighter across the country, We're seeing the fossil assets retire, particularly coal. And then we're seeing more electrification. We're seeing customers approach us at a rate that we haven't seen in my history with this industry.

Speaker 2

And data center specifically, they're looking for speed to market. So they're trying to get online as fast as they can. They're obviously looking for where they've got good fiber, particularly potentially access to water for cooling needs. But reliability is now entering that discussion. So many of them are talking about while they can do it out on the grid, they're interested in also being behind the meter.

Speaker 2

And depending on who the customer is, it doesn't need to be a nuclear plant. They're actually entertaining gas plants for behind the meter opportunities and we've done that with some of the crypto load already in Texas. We've done some behind the meter. So we're familiar with it. Whether that load goes behind the meter or out on the grid, it's new demand.

Speaker 2

And that's part of this supply demand equation that might also send the price signals. That could also then incentivize new supply. But it's meaningful, David. It's hard to get locked in on any one forecast, but most forecasts have a doubling of this data center load by 2,030. Texas is a pretty easy place to do business.

Speaker 2

So Texas, which is already the 2nd largest data center market in the country, may end up getting a disproportionate amount of it. But we do see this as a real opportunity for our company. I will tell you in terms of customers approaching us, way more customers approaching us around data centers than we've had so far on hydrogen. And part of that is just the rules uncertainty around hydrogen, but also I think we're serving a customer demand. There's actually a demand for where this is going, whereas the hydrogen has been a little bit more supply driven and trying to create a product that's inexpensive.

Speaker 2

This is more pull from the customer and we're having a lot of conversations. We're pretty excited about it.

Speaker 5

Yes, got it. Thanks. Appreciate that perspective. How early is it? When do you think that you could see potential market impacts if it's upside in the curve or potential contracts like you say with maybe behind the meter or contracted power with these customers?

Speaker 2

Yes. The behind the meter activity, it still takes some planning studies that we work on with ERCOT and the wires company. You may also need to be doing the substation construction, get some of the high voltage switch gear. So you could still be looking at a couple of years for something to go from concept to reality. So I wouldn't say that it's immediately around the corner for something that's a new conversation.

Speaker 2

There are clearly some current data centers that could actually even be repowered. Those can actually go from existing chips that are used more for cloud services to the more energy intensive AI purpose chips. That could be happening over the course of the next 2 years. But I would say it's a couple of year process, David, from my perspective.

Speaker 5

Okay, got it. Very helpful. Thanks so much.

Speaker 6

Yes. Thanks, David.

Operator

And we'll follow with a question from Julien Dumoulin Smith from Bank of

Speaker 3

In fact, I wanted to follow-up on

Speaker 7

the last question and the expectations for 1Q update here. Can you give us an initial glimpse on how you think about capital allocation? I presume to a certain extent there could be capital commitments on your part to enable some of these data oriented strategies, right, to perhaps provide some of the warehousing, etcetera. So how do you think about that impacting capital allocation, as you say, maybe a couple of years out, 2025, 2026? And then maybe to marry that up, how do you think about sustaining this level of buyback?

Speaker 7

Or do you have any kind of broad heuristics that you might be willing to share as you think about buybacks beyond 25 and beyond here as you think about this updated plan with 1Q?

Speaker 2

Yes. Julien, thank you very much for the questions. I'll start with the data center opportunities as I mentioned whether behind the meter or whether out on the grid. They have a natural sort of demand increase that could send some price signals for wholesale power prices in the out years. Some of that could be factored into these curves already.

Speaker 2

I mean, people have been reading about this. The curves have stronger today than they were in the spring of 2022 when we first put out our multiyear guidance range. So I think Vistra being net long and ERCOT has an opportunity whether we are directly involved with the data center or not. So then you begs question, when would we get directly involved? It's if we found that there's a return on that capital to do something that would make sense relative to our other capital allocation alternatives, I would say that I'm not in the detail at a level of comfort yet that I would tell you that's actionable.

Speaker 2

So we know that from a free cash flow yield perspective, it's still pretty attractive for us to be returning capital through the buyback. So we would need to see a level of what I'd call transactable economics that have the long term agreement to bring that to bear as an alternative to our capital allocation strategy, in which case I think our shareholders would be pleased to see it. But I view this as an opportunity for us with our native position that I think it's specifically an enhanced opportunity for our own assets if we choose to do something behind the meter. In addition, I didn't even mention, but in addition to the data center, of course, we have population growth in Texas, which is still strong. And we have a Permian Basin growth rate for load that ERCOT has put out some studies that suggest that you could see 13 gigawatts of growth out west from 2023 to 2,030.

Speaker 2

That's oil and gas driven, it's population driven, it's also got some data center low growth there. So this is a general theme and then how that I think will benefit an asset position like Vistra and then specifically how we might target our own assets. I view that as incremental upside, none of which is factored in to our long range plan at this point. And in terms of when we'll update from a capital allocation and how we think about longer term buybacks, I'm going to have Chris jump in.

Speaker 3

Yes, Julien, I would say you hit it with the Energy Harbor transaction. So as that closes, as we look forward, we talked about expecting to spend $2,250,000,000 on share repurchases over 2024 2025. We also have a little bit of debt to repay and we have some growth that you see in for our renewables and energy storage business. But on top of that, we do expect to have additional cash available for allocation that's unallocated. We think it's preliminary right now to get into the levels that that is because we just want to make sure to get this Energy Harbor deal closed and put the 2 businesses and start integrating the businesses.

Speaker 3

But I do think we will come back to you and talk about an additional amount that over the next 2 years that we have to allocate on top of the share repurchase estimate that we're making. And so I don't believe that any of those opportunities would disrupt our pacing on share repurchases.

Speaker 7

Right. Even as a percent of total cash flow beyond 25.

Speaker 3

I think as well, beyond 25, I think what we'll we're going to continue to come back. I still think that the we haven't ever announced it as a percentage, but I think as a gross amount in this $1,000,000,000 plus range on a per year basis, we don't see anything that would move us off that now, but we will continue to evaluate that with our Board.

Speaker 7

Wonderful. I know it's in flight. Good luck guys. We'll speak to you then.

Speaker 6

Thank you, Julien.

Operator

Our next question comes from Durgesh Chopra from Evercore ISI, pardon me. Durgesh, you may proceed.

Speaker 6

Yes. Thanks so much. Appreciate the time team. Good morning to you. Hey, good morning, Jim.

Speaker 6

Hey, Chris, just maybe this is a stupid question, but I'll ask it anyways. The TRA transaction that you did, does that have any implication on like your forward looking free cash flow guidance? You kind of talk to it as being somewhat cash flow accretive. So are there any implications as we think about sort of 20 25 guidance and beyond?

Speaker 3

It does. We do see some benefits on just a straight free cash flow basis. It is positive from free cash flow. So if you look, as we talked about, we spent about $150,000,000 of cash and then we issued the preferred. And so over the course of 5 years, our cash costs for that repurchase is in the neighborhood of $350,000,000 Our estimates that we previously had would have shown that the TRA payments would have been roughly twice that.

Speaker 3

So there is some free cash flow pickup and that will factor into our conversion percentage. We still see obviously, we're in a higher cost and higher interest rate environment. So there are puts and takes. And so I think we still feel really good about saying that our expectation is that we would be 55% on average over the planning horizon. Some years we expect to be more like this year.

Speaker 3

You see in our materials that we end up just over 60% conversion. And some years depending on the timing of maintenance capital, could be a little bit lower. But I think on average, 55%, the mid-50s is the right place for our conversion ratio.

Speaker 6

Okay. That's super helpful. But it is accretive to your cash flow guidance, but there are obviously other drags and you're comfortable with the 55% range is the key takeaway there. Okay. Thank you.

Speaker 6

And then maybe just can I

Speaker 2

ask, I don't want to

Speaker 6

jump the gun, but what to expect in terms of disclosures on the Q1 call? Whether EBITDA is still the metric? And then in terms of forward looking years, what to expect, if you could share any color?

Speaker 3

Yes. So we're going to focus here on Energy Harbor and getting it closed. I do think that whether it's on that call or a future call, we are going to continue to assess what is the best way for us to communicate the ongoing value of this company. And so, I do think we will at the very we do expect to plan we do expect to give updated guidance for this year. But as we go forward, what metrics we use and how we communicate what we see as the value of the business.

Speaker 3

We're going to continue to work through that and we will come back to you whether that it could come on the May call, but it could come also later this year. We're going to think through that and make sure that we've thought through all the issues.

Speaker 2

Yes. Durgesh, what I would add is once we close Energy Harbor, we will go through a process to confirm the synergy numbers. So we'll talk about that on the May call. That will then lead to the 2024 expectation, as Chris said, of the combined companies. We will also, as he noted in his script, we'll talk about where we see the 2025 headed as well.

Speaker 2

And obviously, the synergies are part of that. Capital allocation, there will be an amount that's still unallocated that we see that we will be talking to our Board with respect to how we think about the best use of that capital. But what you could expect to hear about May at least to 2024 with a nod to 2025 with our guidance and then these updated synergy expectations. As far as the best metrics, clearly with Constellation's call yesterday, very successful in their description of how to think about the value drivers. For our business where we have looked at it and since the buyback program was enhanced in 2021, So far, we've really focused on the return of cash and capital to the shareholders.

Speaker 2

And on a per share basis between the buyback programs and the dividends, you're seeing that in the sort of $4 $0.45 on the high end and that's an opportunity to us per share. And so that's just from a return of capital standpoint. In terms of the adjusted free cash flow before growth on a per share basis, it's much higher on a standalone basis that's closer to $6 a share. As far as working through GAAP and working through the mark to market, working through depreciation and amortization, we will be taking a look at that. What we've tried to focus on to date has been much more about the proof points around the capital we're returning and the sustainability of that and frankly the upsizing of that.

Speaker 2

But clearly the investor response yesterday was super positive. And if there's opportunities for us to be more clear about the value drivers and the comfort that investors were looking for the long term, we owe it to them. We'll be certainly taking a look at that.

Speaker 6

I appreciate that very much. Thank you both.

Operator

We're now taking a question from Michael Sullivan from Wolfe Research. Michael, please go ahead.

Speaker 8

Hey, everyone. Good morning.

Speaker 9

Hey, Michael.

Speaker 8

Hey, Jim. You kind of answered this, but just wanted to confirm. So it sounds like the synergies from the original target you're going to kind of revisit and refresh. But the Energy Harbor guidance itself, what you're putting out there today, is that just kind of what you saw originally or is that actually refreshed and just consistent as of today? Yes.

Speaker 2

Michael, I would say it is then we have been updating it ourselves as we're tracking through the process of working to close. We feel good about it. So when we looked at $700,000,000 on a 12 month basis, I do think we'll be in the ballpark of prorating, ten-twelve of that number. If you do that and you add it to our VISTA standalone as we sit today, then you're in the $4,500,000,000 sort of range for calendar year 2024. That's above where we were when we announced the acquisition in March of 2023.

Speaker 2

The synergy numbers, I think there'll be some upside to the synergy numbers, but not likely in calendar year 2024 because we thought we could close this deal later last year. So we're getting a later start. But I think by the end of this year, we'll be about where we expected from a run rate perspective. I think there's upside to the out years on how we're thinking about it. So we'd expect to talk about that on the May call.

Speaker 2

But the way you're thinking about it is correct, Michael. I think it's always helpful to close a deal, work with the teams day in and day out, make sure we understand all the assumptions and then affirm and potentially we see a chance to upsize some things on the May call, we'll do it at that time.

Speaker 8

Okay, super clear. Thanks. And then we continue to get questions on this. Just can you give us the latest on where you are in terms of having nuclear fuel secured both for Comanche and to the extent you know Energy Harbor's position?

Speaker 2

Sure. Yes. Yes, we believe we're in really good shape, Michael. We have as I've indicated on previous calls, we have as Vistra done some additional procurements through time since we announced the transaction. Obviously, we had a high percentage likelihood in our view of being able to close the transaction.

Speaker 2

Either way, the markets continue to go up in price. And that's been speculation on the part of a number of folks based on whether Russia bans or limitations would ultimately be put in place. So we have a physical procurement strategy that we are secure for both Energy Harbor sites and our site Comanche Peak through 2027 refuelings. And we feel good about that. We're also substantially hedged into 2028 as well.

Speaker 2

So we feel good about the risk management around that. And of course, long term, depending on where this goes with the domestic fuel supply capabilities and whether the federal government will incentivize more domestic capabilities for enrichment remains to be seen. But I think we have a very good line of sight and very consistent with everything that we've shared publicly so far and our expectations of this deal.

Speaker 8

Thanks for all the detail. Appreciate

Speaker 2

it. Thank you, Michael.

Operator

And now we follow with a question from Angie Storozynski from Seaport. Angie, please go ahead.

Speaker 9

Thank you. Good morning. Good morning. Good morning. Maybe first with the fundamentals of our markets are tightening, but we don't see it in forward power curves and probably very low natural gas prices do not help.

Speaker 9

But I'm just wondering if you think that there will be a step change in those power curves on the back of any big announcements about data centers, you name it. We've seen some positive surprise in capacity prices in New England. I'm wondering if you'd hope to see a similar message being sent from the next PJM capacity auction. And again, how do you think we will see more of a forward looking signal that the profitability of your assets is improving?

Speaker 2

Yes. Angie, thank you for that. New England was a better clear than we've seen in a while. In fact, about 50% higher in the 2027, 2027, 2028 auction than what we saw just prior in the previous auction. Good for our gas fleet, obviously, up in New England.

Speaker 2

PJM has delayed some of their auctions, so we have to play catch up with PJM. So we'll see what comes forward. There's going to be a number of auctions that happen in the next 12 months to get caught up in PJM. There have been market reforms proposed for PJM. Some of those are going to be implemented.

Speaker 2

Some of them were not supported by FERC. So again, it's still a little bit of a struggle as to what is going to be the effect on the capacity. Things like market seller offer cap have been very difficult to move the needle on, which has had a dampening on capacity prices. But this effective load carrying capability or ELCC, where potentially the dispatchable assets get proportionally more credit than the intermittent, that's an opportunity for the PJM capacity clear. So I think they are coming to the same conclusion that other grid operators, which is we PJM used to be really flushed with excess capacity, but a lot of it is retiring.

Speaker 2

And the gas plants are critical because the intermittent sources for wind and solar are not nearly as naturally supported in PJM as they are in places like ERCOT in California. As far as Texas is concerned, as I mentioned, the spark and you see it in the graph that Chris covered, the spark spread has definitely moved up. So gas prices went up and the Russia, Ukraine conflict have come back down. Sparks have stayed elevated relative to that timeframe, but they're still strongly backwardated. And I think that still comes from the concern of how much renewables will continue to come in?

Speaker 2

And then also will the market reforms support price formation in ERCOT? And ECRS was an example where price formation occurred last summer. There was a lot of concern from a lot of customers and others that maybe there was too much price formation. And so they start having to revisit the rules. And now I would say it's just uncertain how some of these things like ECRS will play out.

Speaker 2

So certainty around some of these ancillaries will help, certainty around PCM will help that coupled with the demand growth that is actualized on the ground, I think could help address some of the backwardation in ERCOT, which could then help address the investment signal. But we've said that for a while, ERCOT has been backwardated for about forever. If you go long enough out back in history, so the prompt will always be pretty strong because that's where reality meets the supply demand. But out in the forwards, you still see concern around whether the price signals will be there. And that's part of the Texas market reform and ultimately the gas plant investment that folks are considering.

Speaker 2

But I think that's still yet to play out.

Speaker 9

Okay. And then changing topics. So I understand that the Energy Harbor transaction hasn't closed, but I'm sure that as this was taking months to close, you were probably looking at the assets you're acquiring and potential revenue and cost synergies. So we're waiting for probably the first co location of a data center with a nuclear plant. And I'm just wondering, one, if you think that this will have an impact on other nuclear power owners?

Speaker 9

And also, how do you see the portfolio and large portfolio of nuclear plants vis a vis that opportunity? I'm mostly asking, most of your sites are single unit nuclear plants. So there's this no backup from additional units that a data center would get? And would you think that it's somewhat of an impediment to the pursuit of such a colocation strategy on your sites?

Speaker 2

Yes, Angie, it's a fair question. I would say the data center growth behind the meter at a nuclear plant is still early stages for anybody in the market. It's certainly been discussed and being considered, but it still takes time for some of these to play out. I do think the 2 units having an opportunity to have redundancy will be attractive for customers. So, Beaver Valley has been the one that has been working towards this path and then Comanche Peak as well.

Speaker 2

However, I'll go back to a comment I made on an earlier question. Between the co location companies and the hyper scalers, speed is very important to them. So while the redundancy may not be there on a single unit site, pulling from the grid would still be an option. And that's how we manage the behind the meter that we work with our gas plant. So while there's a preference list from a customer standpoint of things that check every box, I think there's going to be a balance of factors that the potential data center companies will be considering when they do a site selection.

Speaker 2

And speed is one of them, economics is one of them, access to water is another one. So there's a number of variables there beyond just the 2 units versus 1 unit. But all things being equal that would probably be a preferred site Angie. But the fact that we're being approached about gas plants tells you that it isn't just about the carbon attributes, it's about some of these others as well.

Speaker 9

Okay. And then lastly, I'm sorry that I'm asking so many questions, if you were to be approached by some of these tech companies and offered long term contracts, and again, against a very depressed forward power curves, would you be willing to actually lock in some of these assets? Or are you basically thinking that we're about to see a step change in how the market assesses the value of your assets and so there's no need to actually lock the value at the bottom of the potential bottom of the cycle?

Speaker 2

That is an excellent question, Angie. I don't know if it's an all or nothing approach because we have a lot of assets with a lot of length. But I with if you're speaking nuclear first with a production tax credit that escalates with inflation and our curves are basically sitting at those levels, you would need to see something attractive from a customer to lock it in and it would have to be at a reasonable premium to what your view is of the alternative, which is to stay long to have the PTC as some support on the bottom, but still retain some of the upside for that asset. For other assets like the gas plants, I think you could potentially have more flexibility because you're not necessarily going to see that you're not going to see the PTC support for some of those. But from a nuclear standpoint, I don't think there's a rush here for the reasons that you mentioned.

Speaker 2

And it also takes time because of the complexities to put these in place. So I think we agree with how you're framing the question, Angie, and we're going to be patient about how we think about these opportunities.

Speaker 9

Thank you.

Speaker 6

Thank you, Angie.

Operator

And with that, we conclude the question and answer session. I would like to turn the conference back over to Jim Burke, the CEO of Vistra for some closing remarks.

Speaker 2

Perfect. Thank you. First, I want to start with just thanking the Vistra team. 2023 was a heck of a year and we look forward to what is in store with Energy Harbor. So I also want to thank, they have done an excellent job running a business during a year of uncertainty whenever an announcement is made.

Speaker 2

The units are running very well. The team has been incredibly cooperative on our integration efforts and we're excited about this Friday and becoming one team. We're going to continue to execute our plan, which includes returning capital in an environment of very strong long term fundamentals. I think that came out in a number of the questions that we were asked. And I also hope that we get to see many of you in New York next week.

Speaker 2

We'll be out there for a couple of days and it's always good to see folks face to face. So thank you for your time this morning and we'll hopefully see you soon.

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Earnings Conference Call
Vistra Q4 2023
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