Q3 2020 Vistra Corp Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome today.
That's true third quarter 2020 results conference call.
After the speaker's presentation, there will be a question and answer session.
Question during the session you'll need to construct one on your telephone keypad. If you require any further assistance at any time. Please press star zero I would I like to cat and the conference over to your speaker today, while we sort <unk> head of Investor Relations. Please go ahead.
Thank you and good morning, everyone welcome to <unk> Investor webcast covering third quarter, 2020 result, which is being broadcast live from the Investor Relations section of our website at Www Dot Mr. Corp. Dotcom also available on our web site or a copy of today's investor presentation, our form 10-Q, and the related earnings release.
Joining me for today's call are hurt Morgan, President and Chief Executive Officer.
Nothing executive Vice President and President of retail and David Campbell, Executive Vice President and Chief Financial Officer.
A few additional senior executives on the call to address questions and the second part of today's webcast as necessary.
Before we begin our presentation I encourage all listeners to review the Safe Harbor statement included on slides two and three in the Investor presentation on our website that explains the risks of forward looking statements the limitations in certain industry and market data included in the presentation and the use of non-GAAP financial measures. Today's discussion will contain forward looking statements, which are based on assumptions and.
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.
There are earnings release slide presentation and discussions on this call will include certain non-GAAP financial measures for such measures reconciliations to the most directly comparable GAAP measures are provided in the earnings release and in the appendix the Investor presentation I will now turn the call over to Kurt Morgan to pick up our discussion.
Thanks, Molly and good morning, everyone on the call.
We appreciate your time and interest in Investor during this busy third quarter earnings season.
It was just five weeks ago, when we left and I agree with you at our virtual investor event.
Where we laid out our capital allocation plan for the next two years and provided additional details regarding our planned portfolio transformation.
As we announced on the call we expect to transform our generation fleet, including growing our renewable and energy storage presence, while retiring the majority of our existing coal plants. So.
I never get really decreasing the greenhouse gas emissions produced by our operations.
We believe we are a natural owner of renewable energy storage assets, given our capabilities and competitive position and have a high degree of confidence that we can generate healthy returns from these assets through the same skills and methodology by which we extract significant value from our existing fleet.
We're not going to give away the VA.
How you others by entering into below market power purchase agreements and we have the capabilities to manage the market risk.
We also own a portfolio of highly efficient low admitting natural gas assets that can provide reliable dispatchable power and complement the intermittent nature of renewable resources.
The diversity of our portfolio enables our team to structural renewable products that can ensure reliability at an affordable price.
As we have recounted in the past every reputable and objective study on the changing power generation landscape as natural gas playing a significant role for several years to come.
Especially as we electrify the economy.
The most recent study by Eathree, a well respected energy consulting firm is another good example.
And let's not forget we already serve nearly 5 million retail customers many of which are increasingly seeking to procure their electricity needs from renewable sources.
I know, we did not spend as much time on our retail business during our virtual investor event in September but it is one of the cornerstones of our business model and we expect to prudently invest in it as evidenced by the announcement of a highly attractive tuck in retail business, we announced today, that's got us in the president of our retail.
Business will discuss.
[music] growing retail and reducing our exposure to coal generation, we will continue to optimize our retail to wholesale match.
It is important to keep in perspective that it's going to take trillions of dollars of investment over several years for the U.S. electricity grid to meaningfully transition away from thermal resources.
The current generating fleet in the U.S. was invested in over many decades.
Mr expects, we will play an important role in that transition.
As well as provide critical reliability via our flexible gas.
Asked assets.
As we have just recently spent considerable time on these topics we plan to focus today on the very strong third quarter and year to date results of our integrated business. We will also provide a business update on our retail operations.
Before I turn to our third quarter results I would be remiss not to acknowledge that the country has experienced another wave of COVID-19 cases, as we enter the flu season, although.
Albeit with a lower mortality rate.
As we have said before the health and safety of our employees is our highest priority.
We have had only five cases, we can trace to being contracted at work successfully containing further spread.
Mr is dedicated to staying vigilant and focused as we continue to operate safely to keep the lights on and this unprecedented environment. We will also continue to focus on helping our communities and customers through this difficult period by making corporate donations procuring computers for children in need and offering payment plans and deferral program.
For our customers just a few examples of our commitment to helping others in need.
We hope all of you are also staying safe and healthy.
Im going to start on slide six.
Where we set forth our strong third quarter and year to date results in the third quarter. Mr delivered adjusted EBITDA from ongoing operations of $1.185 billion, which is 10% above third quarter 2019 results. Despite operating through a pandemic in 2020.
These higher results might appear counter intuitive.
As it was in the third quarter of 2019, when the Texas market saw meaningful scarcity pricing intervals.
We did not see similar scarcity pricing this summer as the hottest days fell on the weekends and fleet performance across Texas was exceptional exceeding what was already strong performance in the summer of 2019.
As we often reiterate scarcity events typically have an overall limited impact on current period results. As we are usually largely hedged heading into any given summer rather where scarcity pricing events can be the most beneficial for vistas financial results relates to the impact they have on forward pricing.
We saw this phenomenon play out in the summer of 2019.
As it was in August 2019, when the summer 2020 forwards in Texas Rose meaningfully.
The aircraft forward stayed at elevated levels through the end of the year, giving this for several months of opportunity to hedge our summer 2020 output at attractive prices that were on average higher than the average prices realized for 2019.
We're also continuing to see the benefits of our operations performance improvement or Opie initiatives materialize. As a reminder, our Ob program is on track to deliver an incremental $100 million of adjusted EBITDA in 2020 as compared to 2019 with the benefits of our Ob program combined with the dynasty.
Prius and ambit synergies projected to reach an annual run rate of nearly $700 million by year end.
Our retail business.
That lower adjusted EBITDA period over period, driven by the additional volume from Cree has been ambit acquisitions, you will recall that our retail business can generate negative EBITDA in the third quarter in periods of higher wholesale pricing due to the seasonality of power costs in Texas, which is why this incremental volume drove EBITDA lower in the period.
While approaches vary across companies, we do not levelize, our cost of power throughout the year, rather we flow through our actual costs, while our retail pricing in revenues are relatively flat.
However, it is important to note that our retail business results exceeded management expectations for the quarter, which are embedded in our guidance as a result of stronger margins and lower sales costs contributing to our 2020 guidance raise for the segment during our September investor event.
In addition.
Our three legacy retail brands once again organically grew residential customer accounts in Texas during the quarter.
Mr delivered year to date adjusted EBITDA from ongoing operations of $2 billion $964 million results that are tracking ahead of management expectations for the period and solidly above 2019 results by nearly 15% further evidence of the resiliency of the integrated model.
It was a strong performance through the first part of the year that let mr. to raise its 2020 ongoing operations adjusted EBITDA and adjusted free cash flow before growth guidance midpoint by $150 million and $165 million respectively in September.
Year to date visitor is cracking solidly above its recently raised adjusted EBITDA guidance mid point and as we have mentioned before it will be the fifth year in a row that we have exceeded the midpoint of our guidance not.
Not exactly the kind of performance associated with a stock with a free cash flow yield in the twentys.
Today, we are reaffirming our recently raised 2020 guidance ranges as set forth on slide six though assuming we once again successfully executed in the fourth quarter. We are expecting another adjusted EBITDA guidance mid point B.
Importantly, our financial guidance implies an adjusted EBITDA to adjusted free cash flow before growth conversion ratio of approximately 69% for the year, which supports our recently announced capital allocation plan and the anticipated significant return of capital to our financial stakeholders.
We have been able to significantly exceed our original free cash flow before growth guidance midpoint and achieved this high conversion ratio even with the early receipt in 2019 of nearly $95 million of alternative minimum tax refunds that were projected in our 2020 guidance and while accelerating some planned outages in.
2020, and Opportunistically, taking advantage of business opportunities that required a higher use of current year cash flows.
Turning now to slide seven today, we are also reaffirming our 2021 guidance ranges for both ongoing operations adjusted EBITDA and ongoing operations adjusted free cash flow before growth.
Which we initiated during our virtual investor event in September.
We have continued to execute since that time and increasing our confidence in our 2021 guidance ranges and further supporting our view that the upper end of the guidance ranges are achievable.
Importantly, vespers fundamental analysis continues to suggest that the current 2021 forward prices in ERCOT are meaningfully discounting the probability of summer scarcity events.
When evaluating all the supply and demand variables at play we are bullish as ever regarding our opportunity to capture value in 2021.
In fact last Monday, a random Monday in late October the ERCOT market found itself in a period of scarcity, where prices surged to over $1000 per megawatt hour around seven P.M. and stayed well above $100 per megawatt hour for most of the day.
These price outcomes were driven by several factors, including load coming in 1500 to 3000 megawatts higher than predicted in the day head market lower.
Lower available thermal generation due to the post summer outage season for most units significantly lower renewables contribute contribution than expected, including wind coming in approximately 13000 megawatts lower than anticipated during the peak seven PM hour, partly driven by icing issues on the turbine blades.
And the limited contribution from solar throughout the day, given the cloud cover.
Importantly, the observed strong demand levels extending into the evening hours was also a key contributor to the strong pricing we saw on Monday.
As we know and have observed in other markets. The presence of strong evening, our demand does not line up well with the solar contribution profile. This mismatch between demand and the solar generation profile is an emerging trend in Texas and it will likely be an increasing source of volatility as the supply stack evolves.
Volatility that visitors commercial team and generating assets are positioned to capture as we have demonstrated time and time again.
This is just another reminder of how quickly prices in Texas can change when intermittent renewable resources are not available.
While the value of the forward curves at any single point in time, leading into the delivery year is important.
What is most important to Vista is that we are able to strategically capture value as market opportunities arise just like we did last Monday in Texas.
Our assets and business positions offer significant levers to capture value that can be represented and captured in the forwards or it can be locked into through the bilateral transactions.
We have been able to construct a realized wholesale price curve that has supported our consistent over performance for the last five years.
We are continuing to make progress in this regard and executing for 2021.
Looking ahead to 2022, our current expectations for the earnings power of our business are consistent with our average 2020 to 2021 view in the range of $3.4 billion in adjusted EBITDA, and our conversion rate to free cash flow before growth of 65% or more.
We believe we can manage our year to year earnings volatility within a very tight range and we continue to have confidence in the long term earnings profile of our business.
The market clearly just not share this view.
As action on climate change accelerates in private institutions in state and federal policymakers advanced policies supporting the development of incremental renewable resources investors are clearly questioning what this evolving landscape might mean for Vista.
In our view. It is this question that has directly been impacting this revaluation.
There is no justification for Vista to trade at a 20% free cash flow yield based on the performance and financial position of the company.
Free cash flow yield at these levels are generally reserved for companies in financial distress were poor performance track records and weak balance sheets none.
None of this applies to visteon.
The only explanation that seems to make some sense is that the market must expect Vista will experience future economic distress based on the changing power generation landscape.
In our view this is near term financial performance supports a free cash flow yield at least in the low double digits, especially when taking into account where the company's debt trades and the prospects for investment grade credit ratings in the next year.
The debt to equity risk premium is confounding.
Rather if you believe in appropriate free cash flow yield for a business with a strong balance sheet and a proven track record on execution should be in the range of 10% to 12%. The recent prices where visitors stock has been trading would suggest that the market is assigning virtually zero equity value to visitors generation segments.
In our view this is a completely flawed assumption that is likely driven by the emotions of the current DSD environment.
As opposed to a practical and inform fundamental analysis.
The bulk of visitors adjusted EBITDA from a generation segments is derived from its relatively young low cost highly flexible gas deal generation fleet.
With two of the lowest cost nuclear and coal plants in the country in Comanche peak in Oak Grove both.
Both in Texas.
We believe these assets will continue to be critical resources in the markets, where we operate and will continue to generate substantial free cash flow most of which will be returned to investors there.
There is absolutely no way that these assets have zero equity value and in fact, they have significant positive value.
In addition, the assumption of no value from our generation fleet extends to our investments in solar and battery yes.
Get standalone renewable companies are garnering lofty valuations in the market today.
And appropriate free cash flow yield applied to the true long term free cash flow of distro would produce a stock price substantially above our current trading price.
At least in line with most sell side analyst price targets as long as this valuation disconnect persists, we will continue to buy back our shares.
If you turn to slide the next slide slide eight we have set forth now we think this year, we'll be able to not only compete but the lead over the next couple of decades.
Since 2016 when Mr was first spun off from its parent as a publicly traded company.
We have taken actions to build a business that prioritizes, a strong balance sheet and low cost and market, leading integrated operations with high quality assets.
We also took a company that was 70% coal and transformed it by retiring 16000 megawatts of coal, adding natural gas renewables and battery generation and growing our retail business by over 3 million customers, all while significantly reducing costs improving generation performance and expanding.
Our EBITDA at highly attractive returns, which we highlighted at our investor event.
We derive approximately 95% of our ongoing operations adjusted EBITDA from our four core operating segments retail, Texas Eastern West, where we believe we have meaningful.
An attractive transformational growth opportunities into the future.
Of that 95% only.
Only 15% now comes from coal.
And we converted approximately 65% of our adjusted EBITDA to adjusted free cash flow before growth, which has enabled the return of more than $6 billion of capital to our financial stakeholders over the last four years.
With our expectation that we will return an average of one and a half billion dollars to our financial stakeholders annually. We estimate that we will return another approximately $7.5 billion by 2025, and a cumulative approximately $15 billion by 2030 with.
With total annual returns of 15% or more projected.
As we approach our long term leverage target of two and a half times net debt to EBITDA we.
We also believe we are on track to achieve investment grade credit ratings next year.
The steps we have taken over the last four years have created a strong foundation from which we can launch our future initiatives through to our name we have a vision for success in a tradition of excellence.
And now we have introduced our vis vis the zero brand.
Which will build on this vision and tradition as our zero carbon growth engine for our generation transformation, but.
As we look ahead to 2030.
We expect we will continue on this path evolving into a market leading integrated business that plays a key role in power in America through its renewable transition by making prudent incremental investments in renewables and energy storage growing our retail business and offering innovative green products and value added services to our customers.
And supporting the reliability of the electric grid at affordable.
Prices with our flexible natural gas fleet.
In fact by 2030, we project that more than half of our adjusted EBITDA will be derived from our carbon free operations with 90% of our adjusted EBITDA coming from our retail business and low to zero carbon generating assets. We believe we can grow our EBITDA over the next decade, even while retiring the majority of our existing coal portfolio.
By investing only a modest fraction of our free cash flow back into the business we.
We expect the majority of our free cash flow will be returned to our financial stakeholders, primarily through dividends and share repurchases.
And if we allocate only a billion dollars per year to share repurchases at the recent prices, where our stock has been trading we could buy back the entire market cap of our company in less than nine years. This.
This is all while maintaining.
Balance sheet strength and expected investment grade credit ratings, a pretty impressive value and growth story, if you ask me.
As difficult as it is to project 20 years into the future as a de carbonization of the economy continues we expect our disciplined transformation to accelerate into 2014 by 2040, we estimate at least 70% 80% of our adjusted EBITDA will come from our carbon free operations, including resale nuclear renewable and energy.
The story, we continue to believe the gas plants will remain a key component supply stack up until 2040 and beyond initially as a base load and reliability resource and overtime as a transition resource complementing renewables.
The playing field is changing DSP in particular, environmental stewardship, especially as it relates to climate change is an increasingly important component for portfolio managers investment decisions and district is committed to prudently be out in front in the transformation, leading a sustainable company, reaching its fair enough.
Full value.
Before I turn the call over to Scott I did want to highlight three new slide we included in the appendix to our Investor presentation. This quarter related to our broad focus on our stakeholders.
As part of our ESG efforts.
We believe accompany that prioritizes employees customers community suppliers and investors is one that will attract the best talent and retain customers and investors.
Slides 15 through 17 in our appendix highlight some of our recent DSP initiatives in these areas.
We will update the slides on a quarterly basis, and we hope you find them informative and helpful.
I will now turn the call over to Scott Huston to discuss our refill business in a bit more detail.
Thank you Kurt.
Turning to slide 10, we wanted to spend some time on today's earnings call highlighting the stability of our retail business its resiliency through the COVID-19 pandemic.
Opportunities for continued growth.
As many of you who've been following investor for some time might recall. This was retail business has been a stable contributor of EBITDA since the retail market in Texas opened fully competition in 2008.
Prior to the Donaghy transaction, which closed in April of 2018 distressed retail business grew solely through organic activity.
And over the period from 2008 to 2017, we generated an average of approximately $800 million of EBITDA annually.
Even in the face of a number of volatile power price cycles.
Including the extremely hot summer of 2011, and the polar vortex of 2014.
The dynasty transaction that closed in 2018 expanded this risk reach from a Texas only retailer to one with operations in five of the top 10 competitive markets in the U.S.
Then last year, we added both cleanest on your end to end the energy to our portfolio of businesses expanding the industrial retail footprint to 19 states and the district of Columbia.
Adding several new brands.
Margin residential natural gas to the portfolio and a powerful network marketing channel.
This first customer accounts grew to nearly 5 million and our total delivered low grew to approximately 95 kilowatt hours.
In 2018, and 2019, our retail EBITDA averaged approximately $825 million.
We're currently on track to exceed our recently raised 2020 guidance midpoint of $955 million.
With our 2021 adjusted EBITDA projected at nearly $1 billion.
This expected performance in 2020 is particularly impressive in light of the challenges brought on by the COVID-19 pandemic during the year.
In May we estimated that opened 19 could potentially be a negative driver of our 2020 adjusted EBITDA of approximately $70 million due to anticipated higher bad debt expense and the anticipated impact of lower volumes on our financial results.
We now expect the impacts from COVID-19 to reflect only $10 million to $15 million of higher bad debt expense in 2020.
Lower business volumes during the year.
Have been largely offset by higher residential volumes due to increased usage from the work from home population.
Our strong performance in 2020 in the face of the pandemic is a direct result of the numerous initiatives we implemented to help our customers through these unprecedented times.
For example, we utilized our data and analytics capabilities to proactively contact customers, whose usage patterns have changed due to working from home requirements in order to make sure that they were on the right electricity.
These efforts resulted in higher retention rates and enhanced customer satisfaction.
We also offered payment flexibility to customers unsure of their financial future.
Our experience has shown that if you help a customer through hard times, it will be a customer for life and.
Importantly, TX you energy our flagship retail brand continued to maintain its five star rating in New York Hot market and was the top performing major retail electric brand in each month of the third quarter.
In addition, Q energy has been a leader in innovation year in and year out as evidenced by products like free nights three nights in solar days free pass and many others.
All of which have been copied by our competition.
In short our strong 2020 is proving out this retail continues to provide stability and robust financial results for the integrated model as we look to the future. We expect to continue to grow our portfolio, both organically and through opportunistic acquisitions.
In addition to the organic growth on the residential customer side. Mr has demonstrated its ability to organically grow its business markets portfolio, each year end or cod and.
And we have line of sight to consistent business markets growth in targeted regions outside of Texas.
We also plan to continue to strengthen our customer relationships through various value added offerings.
On that point this year has been active in the cross selling if non commodity products and services for over eight years.
We have invested in our platform and we have seen significant growth with customer interest growing threefold since 2013.
We currently offer services like home warranties, and insurance Smart Thermostats, Hvdc services, and a variety of solar energy storage in green products.
We offer most of these products to an asset light partnership model, which allows districts nimbly test, which services resonate with our consumers without making large capital investments.
Beyond the opportunity to earn incremental EBITDA through these bolt on product offerings. We have found that the expanded relationship results in a stickier portfolio ultimately extending the life of our customers.
As a result, we are continuing to expand the universe of value added products we offer.
On the natural gas side, our portfolio is focused on the high margin residential and small business segments were approximately one in four of our clients and customers carry a natural gas product into fuel markets. We.
We are exploring expanding this offering into new markets in the future.
We are similarly, continuing to be opportunistic when evaluating potential M&A transactions.
On that note I'm excited to announce today that we have just executed an agreement to acquire the Texas electric retail customers have infinite energy and veteran energy.
The transaction will expand this freeze retail footprint in the attractive Texas market.
Where we currently derive 95% of our retail profitability.
The transaction, which was executed at an estimated acquisition multiple of approximately 3.7 times is expected to close later this month.
This acquisition is just another example of this through his ability to take advantage of our scale and market position to grow our business through attractive tuck in opportunities.
Distort retail has the lowest cost structure of any major retailer in the country.
And our operations are incredibly cash efficient dropping over 90% of our EBITDA to free cash flow.
Retail continues to be the most attractive channel for Vista Deselect generation lighting.
And after accounting for the recently announced retirement and our generation fleet, we expect we will be more than 80% matched generation to load.
We have an exceptionally strong retail business that is focused on the customer and a leader in innovation.
And we will continue to leverage these capabilities as we grow.
I will now turn the call over to David Campbell.
Thank you Scott.
As shown on slide 12.
Third quarter of this were once again outperformed management expectations embedded in our guidance.
Ongoing operations delivered adjusted EBITDA of $1.185 billion.
Which was $108 million higher than the same period in 2019.
With our retail segment down $53 million and our generation segments up our collective under $61 million.
As Kurt described the positive year over year variance in generation was driven by higher margins in our Texas segment.
The negative variance in our retail segment was a product of the higher volumes from our Korean Emmett acquisitions during negative margin Mark.
You may recall from our discussions during third quarter performance last year that our plan production negative adjusted EBITDA in our retail segment during the third quarter.
This phenomenon as a result of the seasonality of power cost and Texas, where power prices are at their highest in August driving up our third quarter cost of goods sold.
Whereas retail customer prices are generally it more consistent levels through the year.
This negative third quarter margin was offset by higher gross margin in the first second and fourth quarters.
Year to date. This is ongoing operations adjusted EBITDA was $2.964 billion or $346 million higher than our comparable 2013 results.
Favorability is driven by the acquisitions of Chris and ended our operations performance improvement initiatives and higher energy margins, primarily in our Texas segment.
With three quarters of outperformance relative to management expectations for the year. This is tracking solidly above its recently raised adjusted EBITDA guidance midpoint for 2020.
This quarter, we are also reporting our financial results in accordance with our new segments.
Of note the new Sunset segment includes plans that have announced future retirement dates providing transparency into the contributions and potential liabilities from those facilities more importantly, separating the financial results from our longer term assets and businesses.
Once the sunset assets retire there will be moved into the asset flows or segment.
When evaluating the best path towards these plants misra explored a potential sale.
However, the bid ask spread on the closure costs was two great as buyers were generally too conservative due to low relative lack of experience and the transactional requirements for too complex.
In the end, we determined that Mr. is better equipped to handle the wind down of these assets.
And we as we have significantly more experience in the process than most others.
We can manage the retirement of the assets without taking a significant hit to value while benefiting from the cash generated from leased facilities prior to their retirement.
Once the assets are retired Mr has had very good success and divesting some of the facilities and associated closure liabilities to third parties.
In addition, retiring the assets as opposed to selling them has a greater impact on this year's greenhouse gas emission reductions as selling the assets with similarly reduce our baseline.
EBITDA for the company and for the environment for this sort of take the action to retire the plants.
Turning now to slide 13, this remains committed to reducing our leverage in 2020 as we approach our long term leverage target of 2.5 times net debt to EBITDA.
As of September Thirtyth, we had paid down approximately $1.150 billion in debt this year, including the repayment of all outstanding borrowings under our revolving credit facility, which totaled $550 million as of the end of the second quarter as well as the redemption of all of the remaining senior unsecured notes issued by District Court.
Last week, we also announced that our board of directors approved our fourth quarter dividend of 13.5 cents or 54 cents per share on an annual basis, which represents an 8% increase from annual dividend we paid in 2019.
With respect to credit ratings shortly following our September virtual Investor event, we received an upgrade to double b plus by S&P ratings, which also maintained its positive outlook.
This upgrade positions. This stricter one notch below investment grade and of note all three credit rating agencies Moody's sufficient S&P.
This strong positive outlook.
As a result, we expect that a potential upgrade to investment grade is achievable for the end of 2021.
In further in some of our commitment to maintaining a strong balance sheet, our capital allocation plan for 2021 and 22.
Sales for incremental debt reduction of approximately $550 million over the two year period.
While the bulk of our free cash flow of more than $2 billion is expected to be returned to our shareholders through dividends and share repurchases.
As it relates to the dividend it is our intention to increase our dividend by approximately 8% and 2021 at the high end of our expected fixed 8% annual growth rate in.
In 2022, we anticipate the step change increase in the annual dividend to 76 cents per share.
Most of these increases will be subject to board approval at the appropriate time.
Our recently announced $1.5 billion share repurchase program begins on January Onest of next year.
And replaces any repurchases Gordy the remains outstanding under our existing programs as of the end of this year.
The last component of our 2021 and 2022 capital allocation plan is to grow our business through investments that have attractive return profiles and support our continued retail growth or expansion into zero carbon resources.
We expect we will allocate approximately $1.15 billion of capital to transformational growth investments for the next two years, which includes capital for our previously announced Moss landing and Oakland battery storage projects as well as our recently announced Texas phase one renewable and storage development projects. These.
These investments exceed our threshold of 500 600 basis points above our cost of equity and are consistent with our strategic transformation plans.
This track record of delivering on our financial commitments combined with impressive conversion of adjusted EBITDA to adjusted free cash flow before growth supports our ability to maintain a strong balance sheet on both investing in our business and returning a significant amount of capital to our shareholders.
Our strong performance year to date in 2020.
In the midst of a global pandemic.
As further evidence of the resilience of our integrated business model.
We remain optimistic that with the ongoing successful execution of our business plan, our stock price will ultimately reflect its fundamental value.
I would now like to turn the call back over to Curt to make a few remarks somebody election.
[music].
Thanks, David and Scott, Thank you as well.
So not much to say at this point I think most of you have been following.
The election.
And things look pretty pretty tied to type two tied to call.
Of course is going to be interesting to see whether we'll have divided government or.
Whether we will have a single party control are that of course would end up being the Democrats because it looks like the house will go.
To the Democrats.
The point that I'd like to make about the election is that we and we've said this before that we feel like we can.
Be successful under any administration Werent apolitical entity, we have friends on both sides. The Isle we worked very well.
You know with both Republicans and Democrats and you know we of course studied.
Like most of you have where the policies might go.
And feel like we can benefit under either administration.
So we we look forward to working with whoever the administration is and with whatever they.
Congressional makeup ends up being and we feel like we we can make progress under.
Under either administration, and however, Congress could set up so it's a little too early to tell on this as you guys know this could drag out for a while as well given what we're seeing.
But we believe that Vista is well positioned under either.
Control of administration by Democrats or Republicans.
So with that operator, I'd like to open it up for QNX.
Okay. At this time, if anybody would like to ask a question. Please press star one on your telephone keypad.
Matt Let me start buying on your telephone keypad, we ask that anybody who is asking a question Keith your question to Brian and one follow ups and the essence of time. Your first question comes from Shire per each staff from Guggenheim. Your line is open.
Hey, good morning, guys.
Good morning show or how are you.
Let's move now to Bryan Graham and everyone knows how funny sounds good.
You too just.
Just a couple of questions here, obviously, you did the small retail acquisition in Texas in the quarter. It looks like a pretty healthy multiple hi, Hi, you know very high cash flow conversion on that can you just maybe shed any more details on the process. There is this something that we should kind of expect.
Expect intermittently or was it more of a sort of one off and are you seeing any additional opportunities.
Good question Ashar. So you know we are seeing.
These types of opportunities come up.
These.
What can happen is in what we typically do through our M&A team as we will reach out to entities like this and and in some cases, we'll reach out and say are you interested in exiting the business and in other cases they may be.
Looking to exit we happen to know a couple of the principles and we actually do the supply we actually do their supply right now.
Infinite so we we have a relationship an existing relationship and I think when they decided that it was time for them to do something different.
They of course looked at us as one of the top candidates for.
Buying a business. So this one I think.
Came to us a little bit different but we have an active process, where we are reaching out to some entities and then again some will reach out to us and there you know there are I'd say show a few of these sales.
It seems like all the time.
And Joe some of which.
We are able to find a deal with them. Some the week that we are not so I would expect that that this can continue.
Neil they're just they're smaller should nature, but they add up over time.
Got it perfect and then you noted that in the upper end you gain the upper end of your 21 guidance Thats fairly achievable can you just maybe refresh us on what the drivers are of that may be giving you a little bit more incremental confidence I mean, most directionally like you're pointing to the economy and supply demand I guess.
How has that improved since late September so maybe just a little bit of drivers there.
Yes, so you know.
October has turned out to be.
Pretty decent month for us on the retail side of the business. Although we were still closing out things. So but there is a potential that we know that the weather was decent and we still have to take a look at what the final.
Tally looks like but it could be in a favorable position.
And we've also we as you know we were pretty well hedged on the wholesale side throughout the year at some reasonably good pricing so.
I think the we also go into things a little bit as you might expect.
Because we don't know exactly what's going to happen with weather in our retail business actually does well in the shoulder months that we we tend to go a little conservative even when we revise our guidance and I think was showing is that we were we're more in target on target with where we thought we would end up being cautious I think we made.
A little better October all of that is beginning to give us more confidence. This is just a.
A situation, where our confidence is growing.
Around getting somewhere above the midpoint and heading towards the upper end of that of that range and that's simply what it is but I think October also may end up being.
Trouble month again, I don't want to get too far ahead of ourselves because we have closed out the books yet.
Got it and then I was referring to I'm, assuming you're referring to is it 21 correct.
Oh I'm, sorry, I thought you said, Okay. You were talking about 21, I apologize, yes correct.
Slide 21, and 21, so thats a little bit different apologize for that.
Slide 21, and 21, I mean I alluded to this in my comments that you know there is a.
Our our business position in assets do offer us a meal option value and.
The market, depending on whether you're short or long or or or where your your book is positioned.
People look at you know our business position and they see value for them and we see value in our in our business and we're able to either transact in the forward, sometimes the forwards recognized scarcity in sometimes they recognize the value that's embedded in our assets.
And and you can use that to hedge sometimes like right now it's not fully reflected in the forward curves, but that value is still there and you can capture it on a bilateral basis and so I think what we're seeing though is in the market.
That the value in our portfolio is there. It's just a matter of how do you want to transacting capture it and we're seeing that value.
And we are realizing some of it and we feel like that gives us a lot of confidence that ultimately 21 will turn out to be.
A year, where we can get to the midpoint or even better than that so it's just really on what you see in the marketplace and its not always I try to tell this people. The forward curves are not begin to all be all especially as you get out beyond a year, where they are thinly traded and they are not very representative.
We've gone back in and and marked our book to the forward curves five years ago, we would be coming in with EBITDA over that five year period at less than $3 billion, but that's not how it ended up and so you got to be very careful about just choosing the forward curves I know, it's an easy thing.
And I know it feels right for people to do it but thats why we invest a bunch of money to try to analyze and model.
And understand the fundamentals of our business.
And I know people get worried about models and all of that but for US we have to do that along with the forwards and understand the to understand really the value of our business and for 21. We think there is a lot of value that is not reflected in the forward curves and there are multiple ways to realize that value.
Got it I'll hop back in the queue, let others ask thanks, so much guys.
All right. Thanks.
And your next question will come from Julien Dumoulin from Bank of America. Your line is open.
Hey, good morning, Tim Thanks for the time I'll I'll make this quick.
So you all talked about the true so call it a growth initiatives.
Few weeks ago here, so at the time, I think you'd alluded to having a.
Shortly upcoming phase two update on Texas, specifically or just to stand on expanding on your initial present for its first and then secondly related.
Restructuring how should we think about your tax appetite or forward.
Relative to the pace of renewable endorsed storage investments verticals.
As I think about it I would I would I would think that key youre. The pace in essence offered your ability to absorb those tax attributes directly or weakness stake in making that assumption and thinking that perhaps.
The retail direct to retail sales what would drive some of those.
Growth ambitions so.
So a lot of that but I'll I'll, let you have at it.
Yeah, So I'll take a shot at that.
And.
David or.
Jim Jim Burkes on here with US if you guys want to add to it but.
In terms of the the phase two.
I'm thinking that that is probably more a 21 year later 21 type of that where we would talk about that we still have to we still have a significant pipeline of things that we announced in phase one.
We haven't decided exactly when we would come out with our phase two.
Details, but I would guess, it's more of a 21 event.
In terms of tax appetite of course tax appetite is going to be somewhat driven by the election and where tax rates go.
But we what we do is we look at the present value of the tax benefit relative to what you know what the cost is of bringing in tax equity.
And what we have found so far Julian is that.
We still have a tax out we still have a an appetite depending on where prices go. So we look at both were using our point of view, our fundamental modeling as well as market and when we become taxable does affect the NPV of those tax attributes but.
But in all cases, we have an appetite for tax attributes because we will ultimately become a taxpayer after we run through.
The annul well of course, you know.
You know that we have this unique Trs way.
A payment that actually will kick in before federal taxes will and so we also look at that because that helps us to further tiara payment as well and that that also affects our appetite for.
For the tax attributes.
Renewables so.
So.
It's going to be a little bit fluid just because we don't know exactly what tax tax rates are going to end up being but under whether its todays tax environment or something different.
We still continue to have a tax attributes are skewing appetite and we believe we will continue to have that even into our phase to build out.
Does anybody David or Jim want to add anything to what I just said.
It could be heard any julianna.
Go ahead Gerry.
Well I was going to say that its going to doing it.
Thank you Jamie.
We look at this from an overall return perspective of course, so tax attributes are a factor in our overall analysis and are kind of phase. One we are the products that were exceeded our return thresholds with utilizing the tax benefits on the schedule that we can utilize it meets our remodel momentum as Curt describe to us.
Higher benefits using internally minute third party marketplace. So as we look at work on phase two and beyond we will do that same assessment of where to maximum opportunity due to extract further tax benefits and we'll pull that into our overall system returns and to make sure that the project returns Jim over to you.
Yes, Thank you David sorry about that.
Kurt as you described it most of our phase one spend it peaks in 2021 it starts to taper off in 22. So we would expect to announce the phase two and 2021, so it'll still in sum up 2020 to amend the bulk would be in 2023 to try to levelize.
Around this 500 million or so and growth capital So I asked.
That's how I see it sort of feather in Yemen at this point.
Got a quick quick follow up you're correct given the feedback after the analyst day are you committed going forward to continue to see that that level of capex, even after phase two.
Yes, we are we are I think Julie.
Drilling we see we see what everybody sees in terms of where.
So the world is going in and I don't think that the.
The S.G. World is going to change the next couple of years and we want to be a part of that transition and we also believe that we have the projects the capabilities.
I understand the markets to be able to invest in and to generate.
Generate very good returns we of course, we always will look.
At any given time, if something were to change.
Then we would obviously, let you guys know that.
And I'm not saying it we can't change we're not.
We're not stubborn about it but we still see opportunity and we haven't seen anything to change our view on the long term fundamental view of markets that we have today and then our ability to.
You know to create value from investment.
We think a quarter of our free cash flow.
Makes a lot of sense to reinvest in the business.
But as we have said before if we if we begin to see so at a market environment, where we don't believe that we can generate the kind of returns that we think we can then we will return that money to our shareholders, but at this point in time, we feel like we can continue to do that and I think one of the things that really.
Is under appreciated in my mind.
Is that there is going to be a supply response to new build the there was a supply response when combined cycle plants came into the market and there were a number of retirements of coal plants and higher heat rate gas and oil units and thats going to continue to happen in these markets as you bring on new.
Technologies.
And I think thats largely being ignored.
And we certainly are a company that has had to make the hard decisions and I expect we will continue to do that but I do believe that this country's.
Generation landscape is going to change significantly and there is absolutely no reason.
Why.
Mr cannot be a part of that I also believe that you have to have a return on that investment in order to get people to do it you can't just invest in renewables and say, okay, well zero marginal cost. So now we're going to have free power forever. There has to be a mechanism a pricing mechanism that incentivizes people.
To invest and if we're going to spend trillions of dollars in this country to invest there has to be a price clearing point that allows that to happen. If you can't just invest and then go to zero marginal cost zero marginal cost doesn't work in the long run to support an industry and so if you. If you believe in economic theory like I.
Do ultimately pricing is going to settle at a point where people can get a return of and on investment and that's why we're encouraged by it and what we'll watch that there are periods of time in all competitive markets, where markets can get oversupplied and then there is times when they get tight and they are undersupplied eyes, I am certain that is going to happen.
But there will also be a supply response when there is an oversupply.
And that will bring markets back to equilibrium.
Thank you for the time.
Thank you.
Thanks. Your next question will come from Steve Fleishman from Wolfe Research. Your line is open.
Hi, good morning, just.
First is there a price for EBITDA and you've disclosed for the new acquisition.
We havent, but we can't Steve So good morning to you by the way.
So it's it's $13 million.
In that range and then I think we said that it was about three 3.7 times.
When you when you look at the multiple that include synergy synergies come from back office.
And other functional units largely we were already to supplier to these guys.
So 13 million as the price paid.
Or the EBITDA.
No that's all I'm, sorry, that's the price paid.
EBITDA I.
I don't know that we have disclosed no thats fine I can I can figure that out okay. Yes.
And.
Just.
Just to be clear on when you're making the decision making on growth.
And your cost of capital.
I mean, if the stock stays in this range around where it is.
Are you using that as your cost of capital are using something higher.
And that.
When you think about your talking about love the yield the yield on our stock.
Are you.
There's no the general cost of capital the embedded.
Yes, the free cash flow yield or whatever in terms of the decision to invest in the growth are you assuming.
Something better and so then what happens is.
We're here nine months from now and you're you're making the growth decision investment and the stock still at 18 Bucks.
Yeah.
Yup.
Yes, that's why I get paid to big Odessa Thats, the tough decision right I mean.
I don't know, where I don't know where the stock is going to go I do Theres Theres, obviously, the the famous Capex, which would tell you that our cost of capital is much lower than where the free cash flow yield is right.
But we don't we don't invest in anything anywhere close to what our Capex model would tell you where we should be.
And and I won't say, though that every investment although there are some that we have that that every investment.
Has a 20% plus return either.
And I do believe that we believe can we you know this.
This since we've you've covered us we've been at 15% free.
Free cash flow yield it just so happens that were up in the Twentys right now.
But we typically would be in excess of that that 15%, but it is something that we have to look at this is why I believe that we are trying to take a balanced approach and actually one that.
Airs on the side of returning more capital and buying back our shares.
More so than reinvesting.
In the business and it's something that we're going to have to follow but then you know this because you've asked me. This question.
A sustainable 20% plus free cash flow yield has far more far reaching implications well beyond.
Whether we invest in.
Solar projects or not.
It has a lot to do with Ken This company.
Get a a reasonable free cash flow yield for the kind of company that it is in the public market setting and the management team of the board.
Over the next couple of years is going to have to wrestle with that.
But there is no easy way out either it's not that easy it's not easy just to go private either I know how that money is made there too.
That is no panacea, but at the end of the day, we are going to search as much as we possibly can to find a way to get the full and fair value of this company.
And I think part of that is.
Investing in the changing technology on the generation side, but we absolutely have to.
We'll do that in a prudent fashion and your point is a fair one and one that we have to wrestle with and.
I think we tried to balance that but we've been investing in what we believe are compare.
Compensatory type returns given where we are.
Okay. Thank you.
Thanks.
Okay.
This brings us to say that at the end of today's checking Renee.
I would now like to turn the call over to current Hogan for closing remarks.
Current market Im sorry go.
No. That's okay. Thank you everybody again appreciate your interest in Vestra had a great quarter, we hope to close the year out strong.
Tracking in that direction and thanks again for your time.
Thank you everyone. This will conclude today's conference call you may now disconnect.
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