Vistra Corp. (NYSE:VST) Q3 2023 Earnings Call Transcript

Vistra Corp. (NYSE:VST) Q3 2023 Earnings Call Transcript November 7, 2023

Vistra Corp. misses on earnings expectations. Reported EPS is $1.25 EPS, expectations were $2.02.

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

Meagan Horn: Good morning, and thank you all for joining Vistra’s investor webcast discussing our third quarter 2023 results. Our discussion today is being broadcast live from the Investor Relations section of our website at www.vistracorp.com. There you can also find copies of today’s investor presentation and the earnings release. Leading the call today are Jim Burke, Vistra’s President and Chief Executive Officer; and Kris Moldovan, Vistra’s Executive Vice President and Chief Financial Officer. They are joined by other Vistra senior executives to address questions during the second part of today’s call as necessary. Our earnings release presentation and other matters discussed on the call today include references to certain non-GAAP financial measures.

Reconciliations to the most directly comparable GAAP measures are provided in the press release and in the appendix to the investor presentation available in the Investor Relations section of Vistra’s website. Also today’s discussion contains forward-looking statements, which are based on assumptions we believe to be reasonable only as of today’s date. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected or implied. We assume no obligation to update our forward-looking statements. I encourage all listeners to review the safe harbor statements included on Slide 2 of the investor presentation on our website that explain the risks of forward-looking statements, the limitations of certain industry and market data included in the presentation and the use of non-GAAP financial measures.

Thanks. And I will now turn the call over to our President and CEO, Jim Burke.

Jim Burke: Thank you, Meagan. Good morning, and I appreciate all of you for taking the time to join our third quarter 2023 earnings call. I am proud to deliver our third quarter results this morning, which was a very successful quarter for all facets of the business. We’ll start this morning on Slide 5. I’ll speak to this quarter’s operational and financial performance in more detail in a moment, but notably, this quarter’s adjusted EBITDA from ongoing operations of approximately $1.6 billion underscored Vistra’s capability of achieving consistently strong earnings through its integrated business model, with excellent operational performance by each of our generation retail and commercial teams and a variety of pricing and weather environments.

In the prior two quarters, we experienced average power prices clearing lower than our realized hedge prices, which highlighted the significant downside risk protection to our earnings at our comprehensive hedging strategy provides. This quarter that scenario held in the markets outside of ERCOT were milder weather kept prices lower. In these markets, we were able to capitalize on our dynamic position management of our hedged portfolio to capture significant earnings in our generation segment. We saw this paradigm flip in the ERCOT market and while we were significantly hedged, we did have some open length and the generation fleet’s operating flexibility was optimized by our integrated teams to respond to higher market prices, while keeping the lights and much needed air conditioning on at competitive prices for our customers throughout the markets we serve.

With each of our four strategic priorities, our aim is to challenge ourselves with high performance goals and then consistently deliver. To that end this quarter, you saw us continue to advance our other three strategic priorities as well, as we focus on a strong balance sheet, our capital return program and our energy transition goals. As of November 2, we’ve now returned over $3.785 billion of capital to our shareholders through share buybacks and our dividend program, since the capital allocation was first announced in November of 2021. After we close Energy Harbor acquisition and develop a long-range plan for the combined company, we will work with our Board on a new multi-year capital allocation plan and expect to disclose the specifics of that plan in the first half of 2024.

In the meantime, we continue to opportunistically invest in renewables and energy storage growth, including our expectation that we will begin construction in spring of 2024 on our three largest solar and energy storage developments located at our former Illinois Coal plant sites while maintaining our sub-three times leverage ratio. I want to move now to slide 6 to discuss our third quarter operational performance. This past quarter, we saw unprecedented heat and ERCOT. It was the highest third quarter on record even beating the record-setting heat of 2011. Temperatures in Texas were six degrees above normal in August and early September frequently topping 105 degrees in Dallas and over 100 degrees in Houston and San Antonio. Cooling degree days were 23% above the 30-year normal for the June through September comparable time period and ERCOT set a new peak demand 10 different times this summer.

On August 10, ERCOT experienced its all-time record peak load of over 85,000 megawatts. It was vital for our generation team to keep the plants running in these extreme conditions to ensure that people of Texas could continue to live and work in healthy and comfortable environment. In ERCOT, the solar generation ramp down hours of around 6 to 8 p.m., have proven to be a critical time period for the grid. It is still very hot during those times with strong customer energy demand but it is also the time period where we see solar start to ramp down and at times the wind may not make up the difference especially in August. The ERCOT grid is operationally complex having to predict the availability of not only dispatchable resources but also intermittent resources such as solar and wind, limited duration energy storage and demand response activities.

As the generation mix of intermittent resources increases, ERCOT needs more reserves as a backstop to ensure there is adequate generation to cover demand and avoid emergency conditions. In these scenarios, you see flexible generation fleets like ours ramping to meet as much of this demand as possible. And that is exactly what we did, exceeding 97% commercial availability on average during those critical hours. During these tough weather seasons, our number one priority is ensuring our customers can consistently access competitively priced power to maintain their quality of life and keep the economy strong. That’s where our retail business excelled. This summer’s marketing campaigns featured several differentiated products tailored to our customers’ needs, including a seasonal discount product that helps customers manage the size of their electricity bill through the higher usage summer months.

Our customer-focused multi-brand and marketing channel strategy and responsive service, allowed us to grow our ERCOT residential customer counts over the prior quarter. In addition, our business market segment grew customer volume 16% year-over-year as strong margins. While the retail and generation teams stood ready to meet these demands for our customers and the people we serve, our commercial team optimized our financial position to create significant value for our shareholders. Specifically, in August, the ERCOT market saw average real-time pricing around $196 with 43 hours in August clearing over $1,000. And during those critical hours at 6:00 to 8:00 PM in August, we saw prices clear on average around $843. Leveraging customer usage insights and our generation fleets strong commercial availability, our commercial team optimized and managed our risk position to create significant value on our open positions.

The commercial team further set us up for success in our markets outside of ERCOT where the weather was milder, strategically managing our positions and flexing our generation output to optimize our hedge positions and achieve strong results for the quarter. We see this trend of new peak demand records at ERCOT continuing for the foreseeable planning horizon, demand that we believe our retail products are designed to attract and our diverse and flexible generation fleet is uniquely positioned to serve. Moving now to slide 7. Again I am proud of the team’s exceptional, tightly coordinated performance this quarter that helped Vistra achieve its $1.613 billion of ongoing operations adjusted EBITDA. Not only did the retail team grow residential customer accounts, TXU Energy maintained the PUC of Texas five-star rating, extending its streak to 12 straight months.

Our ERCOT fleet delivered 2.5 terawatt hours more than any other quarter’s output in at least the past 10 years, a 10% increase over the next highest quarterly generation output achieved in the third quarter of 2019. It was a notable feat that when paired with a strong performance by the commercial team to adapt to a variety of weather conditions created significant value across all of our markets. With the important summer months behind us and only two months left in the year, today we are raising and narrowing the guidance range we announced last quarter from $3.6 billion to $4 billion in adjusted EBITDA from ongoing operations to now $3.95 billion to $4.1 billion. We are similarly increasing and narrowing the range of adjusted free cash flow before growth from ongoing operations to a new range of $2.35 billion to $2.5 billion.

Turning now to slide 8. We introduced 2024 guidance ranges for Vistra stand-alone without including any Energy Harbor contributions. We are forecasting adjusted EBITDA from ongoing operations in the range of $3.7 billion to $4.1 billion and adjusted free cash flow before growth from ongoing operations in the range of $1.9 billion to $2.3 billion. Notably our ongoing operations adjusted EBITDA midpoint for 2024 of $3.9 billion is higher than the midpoint opportunities we previewed on our most recent earnings call in the range of $3.7 billion to $3.8 billion. We are confident in our forecast as we expect consistent earnings from our retail business paired with expected strong performances from our reliable, diverse and flexible generation fleet that stands ready to deliver in a variety of economic and weather conditions just as it has this year.

Of course, we will update our guidance ranges to include Energy Harbor performance expectations after we close the acquisition. Speaking of the Energy Harbor acquisition slide 9 provides an update on the status of the transaction. Since we last spoke, we have received approval from the NRC in September and we declared substantial compliance with the DOJ’s second request on August 31st. We have responded to all requests from FERC and that process is progressing. Given our commitment to sell the Richland/Stryker generation plants, which we believe eliminates any potential remaining concerns around market competition, we continue to target a closing before the end of the year. Our team has worked with the Energy Harbor team to prepare for a smooth integration.

And we are prepared to close the transaction promptly after receiving approval from FERC. As noted before, we intend to provide combined Vistra and Energy Harbor forecast and guidance information, after we close the acquisition. But as shown on slide 9, we continue to expect the Energy Harbor business to deliver an average of approximately $750 million of adjusted EBITDA in 2024 and 2025 including the impact of the hedges and synergies with that number growing to approximately $900 million when considered on an open basis. I’ll now turn the call over to Kris, to discuss our quarterly performance in more detail.

Kris Moldovan: Thank you, Jim. Turning to Slide 11, Vistra’s performance in Q3 2023 was a reflection of available opportunities and outstanding execution throughout the country by both our Generation and Retail segments. Generation segment exhibited the benefits of maintaining a diverse, flexible and durable fleet of assets with the team delivering strong results in both ERCOT, where third quarter temperatures were on average the hottest on record and outside of ERCOT where temperatures were milder. Notably, the $1.44 billion in adjusted EBITDA from ongoing operations delivered by the Generation segment, in Q3 2023, was almost $400 million higher than the same quarter last year. Moving to the Retail segment. Despite the challenges of high loads and prices in ERCOT in Q3, the Retail team delivered outstanding results for the quarter by focusing on customer counts and margins and consistently optimizing its supply position throughout the quarter.

Although Retail is not typically expected to contribute much adjusted EBITDA, if any, in the summer months when prices are higher, the team was able to deliver $173 million in Q3 this year. Looking at year-to-date, each of the Generation and Retail segments are outperforming as compared to last year, with Vistra earning over $800 million more in ongoing operations adjusted EBITDA through the third quarter of this year, as compared to the same period in 2022. We are proud of the team’s execution thus far this year. And we are looking forward to finishing the year strong. Turning to Slide 12. We provide an update on the execution of our capital allocation plan. As of November 2nd, we had executed approximately $3.26 billion of share repurchases, leading to an approximately 26% reduction in the number of shares that were outstanding in the fourth quarter of 2021.

We expect to utilize the remaining approximately $1 billion of the total $4.25 billion authorization by year-end 2024. However, as Jim noted, we do expect to review our capital available for allocation, shortly after we close the Energy Harbor acquisition and would expect to announce a new comprehensive capital allocation plan in the first half of 2024. Moving to our dividend program. We announced last week a fourth quarter 2023 common stock dividend of $0.213 per share, which represents a substantial growth of 42% over the dividend paid in the fourth quarter of 2021 when our capital allocation plan was first established. This growth highlights the significant returns available to our shareholders, as we reduce share count while paying a constant quarterly dividend amount.

Turning to the balance sheet. In light of the results achieved in the third quarter, culminating an updated 2023 guidance ranges Vistra’s net leverage ratio currently sits significantly below three times. While net debt will increase upon closing of the Energy Harbor acquisition, we currently expect our net leverage ratio to be below three times on a pro forma basis in 2024. Finally, in addition to the transformation we are achieving with the Energy Harbor acquisition, the team has been busy with development and pre-construction activity this year at our three largest solar and energy storage developments at our former Illinois coal plant sites, for which we now anticipate construction to begin next spring. Despite some headwinds in this higher cost and interest rate environment, these projects continue to comfortably exceed our targeted return thresholds.

As we’ve stated before, we believe in a responsible energy transition that targets disciplined capital outlays for strategic projects and the zero carbon generation growth we will achieve with these three coal to solar sites are reflective of that core principle. Touching quickly on Slide 13, as we have done in prior quarters, we have provided an update on the out-year forward price curves as of November 2. While the ERCOT forward price curve continues to reflect some backwardation, the prices still remain higher than the April 29, 2022 curves, when we first spoke to you about increased EBITDA earnings potential in the out years. The curves and sparks are holding together well and support our initiated 2024 guidance ranges. Those curves together with the continued execution of our comprehensive hedging program provide us confidence in an adjusted EBITDA from ongoing operations midpoint opportunity for 2025 in the range of $3.8 billion to $4 billion.

To wrap up, Slide 14 provides some additional breakdown of our 2024 initiated guidance ranges including midpoint expectations among the current business segments. As we have discussed previously, the acquisition of Energy Harbor will accelerate the transformation of our company and we expect it to alter the way we analyze our business results. Accordingly, after we closed the transaction, we expect to re-segment our businesses. While we will have more say on that after closing, we do expect to provide you with more visibility into our nuclear and renewable businesses. I want to reiterate Jim’s comments. We are extremely proud of the collaborative work and performance of each of our generation retail and commercial teams. We have great line of sight to keep that momentum going for the foreseeable future.

And we will keep striving to meet the expectations of our customers and our communities to keep the lights on in an affordable and reliable manner in markets in which we operate. And at the same time, we will manage the company in a cost-efficient and strategic manner to continue producing adjusted free cash flow yields that we are translating directly into significant returns for our shareholders. I know I speak on behalf of all of our employees and partners, when I say that we are striving to end 2023 on a strong note and to execute against our targets for 2024. With that operator, we’re ready to open the line for questions.

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Q&A Session

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

Michael Sullivan: Hey, everyone. Good morning.

Jim Burke: Hey, good morning, Michael.

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

Jim Burke: Yes, Michael. We’ve noted the progress that we’ve made with this transaction. Originally we thought NRC would be the longer pole in the tent and we were pleased to get that approval a few months ago. Where we sit at the moment is we’ve got feedback from DOJ and we think we’ve addressed DOJ’s concern. We expect to have addressed FERC’s concern by selling the Richland/Stryker facility. We did not think it was a concern at the time we initiated the deal and we still don’t believe that’s a concern. But out of an abundance of caution we are making that move. We have obviously responded to all of their information requests and the interveners have done the same. So our anticipation is that FERC has all the information that they need.

We’ve asked for a feedback by the middle of November. We feel confident that we’ll get to something by the end of this year and that we target to — we’re planning and targeting to close by the end of this year. But I think it’s just been a process Michael and it’s been one that we’ve been obviously very responsive to and I think from a FERC standpoint they’ve got the information and they’ve got to do their due diligence, but there’s been no new issues raised to us at this point and that’s why we think we’re going to get this done by year end.

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

Jim Burke: Yes, Michael, thank you for that. I’ll start by saying that our results for this year which obviously we’ve continued to guide up as we’ve gone through the year. Most of that improvement is EBITDA-driven and we did a nice job operating in the third quarter with extreme opportunities with pricing and weather being coincident particularly in ERCOT. That EBITDA largely drops through to the bottom-line when we built the plan at the beginning of the year you wouldn’t have expected the kind of weather conditions that actually played out. So that free cash flow in this near term obviously will fall through and you’re seeing that improved conversion. We started the year with an expected lower conversion rate because we wouldn’t have had this kind of EBITDA opportunity built into a more normal weather scenario.

We actually talked about free cash flow conversion being a little bit lower in 2023 and 2024 when we set our plans and we talked about the capital required to run the units pulling in some of the long-term service agreement spend for CapEx was one of the main drivers. You’ll see in the capacity factors that are in the back of the deck our units have been running really well but they’ve also been running hard. And so we’ll spend some capital in 2024 and probably have to spend some capital in 2025 to make sure the fleet stays in tip top condition. And so I think the surprise was not where we see 24 playing out from a free cash flow conversion. We actually had some positive free cash flow conversion due to the EBITDA opportunities that came our way in 2023.

As far as Energy Harbor interest and how we’re thinking about that financing and its effect on our results in 2023 — in 2024 I’ll ask Kris to comment.