Q4 2020 Vistra Corp Earnings Call
Thompson of 'twenty Reserve results conference call.
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I would now like to hand, the conference over to your first speaker today, Molly Sorg head of Investor Relations Investor.
Please go ahead Mr. Burke.
Thank you Carol and good morning, everyone welcome to this or the Investor webcast discussing fourth quarter and full year 2020 results, which is being broadcast live from the Investor Relations section of our website at Www Dot Mr Corp. Dot Com also available on our website are a copy of today's investor presentation, our form 10-K, and the related earnings release John.
The need for today's call are Curt Morgan, Chief Executive Officer, and Jim Burke, President and Chief Financial Officer, We have a few additional senior executives present to address the questions. During the second part of today's call as necessary before we begin our presentation I encourage all listeners to review the Safe Harbor statements included on slides two and three in 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. Today's discussion will contain 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.
Our earnings release of 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 to the Investor presentation, I will now turn the call over to Curt Morgan to kick off our discussion.
Yeah.
Thank you Molly good morning, everybody. We appreciate the.
Your interest in this call today this morning.
I'd like to start out with the yellow book in the room.
We had a rough week last week, the say the least.
And.
For our investors who are listening to this call.
I wanted to say on behalf of everybody at the strip.
That's we are disappointed.
And.
Our inability to deal with this unprecedented event in a way that was favorable for the company.
But I can assure you that we did everything we could.
To try to kind of come out on top of and I'd like to take you through a little bit of Jim Burke will too.
The events that ensued.
And.
What we tried to do to deal with those events.
What happens.
And also just to tell you on the front end.
That it has taken us until middle of this week to really sort out.
What really ultimately ended up happening.
And and.
So therefore, we felt it was imperative.
That we have this discussion even though we have not sorted out everything that we have this discussion today.
And started.
The process of of conversation about what actually happened and then we will get to the final numbers.
Can assure you that there isn't anybody more disappointed.
Than us.
And.
It's disappointing to me.
That will let you down because.
We pride ourselves in execution and I think we've done a darn good job of it over the five years I've been here.
And within literally an hour or two.
Our ward world kind of turned upside down.
First of all of you know it was for Texas, maybe for those of US who lived in the northeast for the North no that may not have looked at the big a deal but in Texas. It was an unprecedented event the.
The infrastructure and I don't mean, just the electric infrastructure, but I'm talking about housing and other things are built really for the heat.
You don't see this kind of of them and.
I think history tells us that.
This was one of these.
So called one of 100 years now it did happen and the reality is even if it's one of the 100 it can happen.
So there's no excuse.
But it tells you the depth.
Of what happened.
As I understand it the coldest three day stretch.
Debt they can that they have on record in Texas, the 14th through the 16th.
So what does that mean.
Well that meant that we.
We had unprecedented demand.
So the take you back and I think it's important to lay this out.
I think it was the ninth of February.
Steve Muscato Who's on this call came to me and said our meteorologists that we have on staff.
Came to him and said we've got an unprecedented event coming we ran the numbers and we were seeing.
Low then 72 to 74000 megawatts.
Now, let's put that in perspective.
The worst case scenario of the or the the one of the the yeah. There I guess you'd call that of that debt ERCOT had performed was about 67000 megawatts or so maybe 67 68.
And Steve was concern not just because of the load.
But we also were looking at wind forecasts.
And we were concerned about solar.
And the fact of the matter was the we didn't have enough steel on the ground.
Cover that load.
So and I've been testifying to this.
In Texas I'm still here in Austin.
The last couple of days and I'll be talking more getting the day.
But we did go to ERCOT.
Because they had I think it was about 65000 megawatts.
For Monday, and this is by the way from Monday, Tuesday, 15th and 16th just to give you a time line.
So we were out in front of it.
I've testified the desk I I.
I believe and now that the lifting of the other testimony that I believe are kind of thought that they had it under control and I'll tell you in a minute what happened and I think they werent even prepared for what the end up happening.
But the bottom line is the company positioned itself so.
Relative to that to be long.
We're flat and in some instances we were short going into that but then we went out and bought power at very high prices.
Because we believe the power was going to go to the cap that it was not if it was win.
And so we were prepared we also stepped in.
We've been open about this about $10 million in preparation we brought on about 200 additional contractors on site.
We essentially did our whole winter readiness in Texas, all over again, which we normally do in the fall.
And we felt very well prepared going into that.
And then Monday came and I was on the phone with Steve.
And it was one of EM and you know Steve He always does we talk about okay here it comes in.
The load shed is going to begin and of course, it was supposed to be rolling blackouts.
And then the started I mean, we all saw it because you know we were 30 minutes on 15 off and that went on for a relatively short period of time.
And then Steve told me that we almost lost the entire grid frequencies.
Were erratic it tripped a couple of our units.
And then shortly after that everything locked down.
And from what we find out on testimony now the.
Transmission distribution.
Entities, not ERCOT essentially locked down each of their systems at wherever they were.
Because they were afraid.
They were going to lose.
The system.
Now.
We had a book.
And then all of the sudden.
Debt book of business changed.
Loans were down to about 47000, and the reason they locked it down is because we were losing generation on the grid left and right and the reason we were losing generation on the grid.
It was predominantly because gas pressures.
But also there were outages and.
Unfortunately for NRG and this is public.
The South Texas project tripped.
And I think this was of confluences of of events for ERCOT and for the two years.
That all of the sudden they were managing a very different risk profile with.
About 30000 megawatts less of generation and they could not run the system on rolling blackouts with that level of generation and so they just had the preserve the system.
So that was the first of that that changed our book how did it change it it locked whatever loads you had in your area based on what was on at that time. So if you were rolling blackouts and you were on North Texas was on which we were net froze debt at a particular level.
And then we started getting our gas cut because of pressures.
So all of the sudden our book went from a flat to the loan book into a day.
The book that was.
Long shore.
Mixed.
And we were scrambling at that point and then a part of our right on that we had gas contracts people declared force majeure.
So we have gas and then we didn't have gas.
All of that happened within a very short period of time.
And we were managing of different reality at that point in time.
And so frankly.
We had.
Millions of people without power in the state of Texas.
We were scrambling to get gas gas prices shot through the roof.
And we said this is survival mode.
We turned our attention.
The preserving.
The Texas market in the grid and putting every megawatt we could we set ourselves we have to put everything on it and we will count this up at the end, but the one thing we know we need to do is serve customers stabilize the grid and.
And then we will sort it out.
Later.
And that's what we did.
And I look back on that every day and over the night when I can't sleep and I say to myself, what could we have done different Kurt what how could we have played this differently.
And I think those decisions.
As I play them over and over again were right.
Now, we have some things and by the.
I know it doesn't matter.
Right.
You know what doesn't matter.
If you lose the Super Bowl no one of those who says all of the after that just because you know you had a mistake of the Rep had a call the lost and.
So I get that I'm, just trying to explain to you what we were trying to do to manage the situation.
That was unprecedented to us and.
And we were trying to do the best that we could.
And it took us.
Frankly until the middle of this week in fact, all the way up to last night, we were having a board meeting.
To really get a sense of what that range would be.
And so it's we still don't know exactly what all of these numbers are because we're still getting in the because ERCOT shut down for a while it wasn't provided the voices we didn't know.
What the load looked like and we're beginning to get that picture.
So if you think about what happened.
There was a confluence of events, but the biggest one of which that we have not seen it all the way from the wellhead, we were having freeze ups.
There wasn't enough gas to inject into the pipelines, we have gas processing facilities that we're having winter issues.
And the one of the biggest things that happen is.
Is that the TD used didn't have an updated list of critical infrastructure.
And so all of the sudden they couldnt help it they just shut down.
What they didn't think was critical and all of the sudden we had gas compressors that are run on electricity debt.
The tax the pipes they were shut off they werent. They werent listed as critical infrastructure, we of gas processing facilities there.
Were shut off because they werent listed as critical infrastructure and.
And we had wells.
Producing wells that were shut off.
For the same reason. So then we had to triage we had to go upstream low.
Looking for people and saying and finding out what was wrong why we weren't getting gas and we were helping people with the T to use turned back on critical infrastructure and.
And that took in order to get that to happen. It took a couple of days then for those to get on and then you have to in order in order to re pressurize. The pipe. It takes a good day to do that so it took care of the balance of the week.
To get gas restored.
So we have a significant amount of curtailments and we were buying gas at a very high price.
Now one of on us.
As we had some problems with our coal fleet.
We are we had some.
Just some pull issues at Martin Lake, which where day rates, we didn't come offline. We just didn't produce at the maximum.
And then we had.
You guys May know this but oak Grove, we ship coal, we mine lignite and we ship it when we have free the the rails froze up and then we had plugging.
And that took us down for about a day and a half.
Now why is that matter.
Flow matters, a lot because of growth is about $5 a megawatt hour cost structure as.
As opposed to having to essentially replace it.
With gas.
At hundreds of dollars of M N V to you.
So the margin that we were getting for the for that day and a half with less now we got it back.
That was that that was a good thing, but we lost per day in the half that was a lot of money net.
Net loss of Jim's going to go through these numbers.
The other thing that hurt us is that there was a price of glitch on Monday.
So we're in we're in what we call. It E <unk>, three which is the highest alert at ERCOT.
That means you have really no reserves in fact, we had 30000 megawatts of negative reserves.
Where was the price.
Price was trading of Dell and piece of it.
In some instances thousands of dollars below our cost.
And so we're calling ERCOT what is going on.
Well, we determined there was a pricing.
Let's call it the anomaly.
We went to the PUC the next day.
And they came out with an order and said we're going to reprice that.
At the cap and then we're going to have it stay at the cap until we come out of the E. Three.
Frankly, the right decision.
And that was the big deal for us.
Inexplicably.
18 hours later, they reversed the decision and they decided to do it prospectively, but not retroactively.
They claim that during the hours of the morning.
On Monday, the people relied on that price.
Ridiculous.
And so Monday was the big day for Us because we were long that day because of the gas infrastructure was just beginning to come off.
And so we lost that value.
Now that's something.
That we are still taking a hard look at.
But that was tough again current what's matter still happened to you, yes. It did but we didn't expect that nobody expected when we're in the <unk> three that the price would be anything but at the cap how could it be when you have negative reserves.
It absolutely is preposterous.
And yet that's what happened.
So all of those things happen. The book, we didn't know what the book was we went through that week.
We performed actually relatively well, we put on 25% to 30% of all megawatts on the grid realm.
Relative to our 18% market share.
Oh, good again, no good deed goes unpunished.
The problem was we had a mismatch when they lock the system down between megawatts in load and the other thing is we were producing.
From higher cost assets.
Then we expect it so our cost of goods sold.
Mix.
Was that helpful.
So.
I've taken you for really two through the two first slides.
We'll say a little bit about the market.
Because I think the other very fair question.
Okay, well what does this mean for the Texas market and.
You know frankly I thought it was the best market in the country.
And this event has made me think.
Not just me, but a lot of people think about it.
But I still believe the basic tenants of of very good market are here, but.
But I think the one thing that we're going to have to work on with the policymakers the regulators.
And I think we have good momentum on this.
Is that the the grid in Texas today.
When we put in the all energy market.
And the price caps.
Is a grid that is different than the ones that exist.
For existed when we weren't competitive so when we were competitive it was a very different great. How well we have a lot less just basketball resources. In fact, we have we have less this basketball resources than our peak loads.
So we rely much more heavily on renewables renewables are good nothing wrong with that.
But it changes the risk profile.
<unk> during this event.
We're at capacity factors from five the sort of 15%.
They didn't really contribute a lot.
During this event.
That's why we didn't and that's why I said when we were at 74000 peak low we didn't have enough of megawatts in the system. It wasn't again it wasn't a matter of if it was a matter of when and we were telling people that.
So on the market design.
The reserves has to be in my mind the number one.
The number one.
Emphasis and so theres a number of ways to get more reserves on the system.
But I also think debt.
We have to take a hard look at the balance between market and the competitive markets.
And reliability.
And I think that puts a lot of things on the table that puts could be potentially.
The greater reserves that ERCOT has to acquire.
In order to maintain the system.
It could be a capacity market.
No the debt, maybe blacks will need the sun in Texas, but I think it has to be on the table.
But what I think comes out of this.
It's still a very good.
Competitive market that still has opportunities for people to do well, but moves on.
On the spectrum of.
Competitiveness to reliability moves out a little more towards the middle.
And but we're going to sort through that and more will come out of that but I am confident the Texas will rise to the occasion this economy mandates it and the policymakers.
And the governor and others.
No that the in this economic engine.
Is powered by electricity.
And with electrification coming week.
Got to get it right.
And we're a big player we have a big seat at the table, we have a lot of good ideas.
And I think the market actually advances to a good point.
Now the weather event.
I mean, we're believers in climate change, we don't know this type of event becomes more frequent but I think if you just let history tell you.
Something that this is not a frequent event.
But it could happen and so we have to adapt.
We have to.
And it's not huge numbers, but we're going to have the batten down the hatches so to speak.
And to Harden, our assets and we the one thing I am going to be on the pursuit Crusade about is making sure that the gas and electric systems work seamlessly.
That the TD <unk> TD use upgrade their critical infrastructure.
And that the gas system puts the money and just like we do the harden the system it cannot be acceptable to non.
Not deliver gas at the maximum pressures in the middle of the of the natural disaster.
Now you can say well you know my hands my hands of clean on that but I don't I don't regulate that one of the the change the regulations debt. So we have work to do.
But I still have confidence very much so.
In the market.
Now this has been difficult.
We hope that we hope to maintain.
You expressed in us, but at the very least.
We hope to earn it back.
I'm disappointed.
And it hurts.
But it is what it is.
And.
It's easy to lead.
When things are going well.
And I think it's time.
To lead going forward.
And I believe that.
The franchise is in place the financial strength that we worked so hard to build thank goodness.
Has helped us through this.
And.
All of better days are still ahead of us in the <unk>.
Integrated model still works.
And we just have to do some things some tweaks we have to work on the market design, but I still have faith.
In this business and in these markets because they are too is.
There are two important <unk>.
Electricity.
Is the lifeblood of the economy.
We have to get this right we can't you know.
There is no choice when you say well how do I trust that.
Texas can never go through this again and they know debt. So that's what I Trust.
And we are a big player here.
And so what comes out the backend of the.
I believe there's going to be good protect is good for the market.
And good for Vista.
So with that I'm going to.
Move into in it and I just hate this but I'll move into 2020.
That's what I hate 2020, but or maybe I'll do but are moving into 2020.
Because we.
We have such a great year and this event.
Has overshadowed at.
And the men and women, who work so hard investor of.
In 2020 in the face of Covid.
In the face of social issues.
And everything that's been thrown at us.
Performed is that as good as anybody.
The anybody could have expected.
It enabled us.
To pay down the significant amount of debt.
Our retail business was exceptional getting close to almost $1 billion of EBITDA.
We continue on the cost savings front.
And by the way.
I'm not going to throw a number out there today.
And say that we're gonna say the whole bunch of hundreds of millions of dollars, we had the lean business.
And I'm not going to starve this business.
You cannot star of power plants for maintenance costs, it'll bite you.
In 2022 and 2023.
But we will as we always do and we will double down.
We will look for opportunities.
The optimized earnings going forward once we determine what the full effect of this is.
And.
Convinced like we do every year, we will find opportunities and we will let you know.
What those are.
But I'm not going throw of a big number out there.
That I don't think is good for the company in the long run.
And we're playing this for the long run.
2021 in this event.
The one time event.
And.
We're going to move this company forward in a way where it can compete and be even better into the future.
In 2020 of them.
Now on delivering the financial results slide.
It's just a phenomenal year.
The $3 77.
Billions of dollars of EBITDA, and almost $2 6 billion in free cash flow before growth.
Almost of 70% conversion ratio.
I remember when I was talking to you guys in the Dynegy acquisition and we.
We put out the S. Four.
And you know we had a set of projection numbers and.
Just looking at what we were able to do in 2020 relative to what we had in that as you know in my opinion truly remarkable.
And I think we did that with very.
Our disciplined investment into the business.
And I am proud of what we were able to do and what the numbers were able to put up.
I think since we.
Since the since I took over we've got on the I think almost $600 million above midpoint.
The guidance over those years.
What just kills me is we gave it all back.
And more.
But you know we've been through that story already this morning, I won't take you through it again, but that's tough.
Don't want to get back what you've created.
And that's that's a difficult thing for us.
The O P initiative continues and it will continue we think that now that is just the part of who we are and we like to give this to you just because we want you to know when we tell you were doing something that we do it but its really embedded in our EBITDA.
And then we are on track on our synergies from.
The the the.
And namely the Korea and ambit because dynegy is is pretty much done now even the on the system side of the technology side, that's pretty much done at this point in time.
And the last thing I'll say in the hand, it over to Jim.
Through all of this we still have the and I'm on the last slide here prioritizing all stakeholders.
Just briefly to.
The touch base you know this is Ben who we are since I've been here.
We've been about all stakeholders, we continue to do it we've made huge advancements on the environmental side.
With our employees and contractors.
And customers and suppliers and our communities we're proud of that.
And we expect to continue to do that and I know.
We did the announced that we were had $5 million to help customers and some people may say well, there's a cost savings right. There Kurt why did you do that.
And it's because of the what I said earlier.
Two things one is <unk>.
We're about helping people.
As a company not just about making money.
We do care about that.
But we are of a bunch of people down here that are in need just became a survival game.
This became of humans needs effort.
And we took that seriously.
Just like we take seriously.
You know being the Guardians of your of your investments we do care also about people and it's very important to the franchise of our retail businesses that were out there and we are helping others and we have not loss of those franchises. This weather couldn't take those franchises away from us and they have extreme value.
And we have to keep.
Investing in those franchises.
The helping people is also a very important thing and so we made that hard coal.
In the face of adversity.
The uncertainty.
Because that's who we are.
That's what we're about.
So with that I'm gonna give it the Jim James going to quickly go through financial results and then I know you guys have Q&A and we'll try to answer everything we can as completely as possible.
And so I'll turn it over to Jim Thank you.
Thanks, Kurt I'm going to quickly cover slide 16, as Curt said I know, we want to get the Q&A I would of just hit two slides.
Our full of our full year 2020 of retail results were 176 billion higher than our full year of 2019 results driven by the acquisitions of curious and ambit plus strong ERCOT margin performance, partially offset by milder weather the.
197 million favorability in our collective generation segments was driven by higher margins in our Texas Eastern Sunset segments.
<unk> the higher of period over period benefits from our <unk> initiatives, partially offset by lower capacity revenues.
As it relates to the impacts of COVID-19. This one was able to navigate through the challenges brought on by the pandemic with minimal impacts to our financial performance on the retail side, we only saw a small uptick in bad debt during the year, while our lower business volumes were offset by higher residential volumes.
And as we discussed on our first quarter earnings call in May of 2020 of our commercial team executed some opportunistic transactions in anticipation of the market volatility caused by COVID-19, resulting in a positive benefit to district for the year.
In addition of the strong financial results, our retail business grew its residential customer count and Texas year over year, reflecting strong performance by our legacy brands, while our generation business once again executed with commercial availability of over 95%.
On the liquidity side as of year end 2020 of the extra had total available liquidity of approximately $2 $4 billion, which was primarily comprised of cash and availability under its revolving credit facility.
The strong liquidity position enabled this growth to effectively manage the collateral requirements related to the winter storm Yuri.
As of February 25th District had more than $1 $5 billion of cash and availability under its revolving credit facility to meet any liquidity needs.
We can close with slide 17.
Vista of repaid more than $1 $5 billion of debt in 2020 to end the year at our long term leverage target of two five times net debt to adjusted EBITDA.
As of February 23rd we've repurchased approximately five 9 million shares at an average price of $21 15.
One of $3 $75 billion remains available under this authorization.
We're continuing to execute on our strategic renewable and energy storage investments, including our Texas Phase one in California battery projects.
As we have communicated to you we will be disciplined as it relates to deploying capital regularly evaluating all growth towards the projects for financial viability.
We will only invest in growth projects. If we are confident in the expected returns.
As a result of this continuous review we're currently pausing one growth projects in West, Texas due to the updated economics, driven by higher than anticipated congestion costs.
I know many of you are wondering how our existing capital allocation plan will change as the result of the impacts of this winter storms.
We expect to provide an updated capital allocation plan for 2021 on our first quarter earnings call we remain.
Committed of our dividend trajectory and the maintaining of strong balance sheet.
The challenges brought on by the global pandemic in 2020, and the historic Winter Storm in Texas last week have tested our business model.
We truly believe it was a one time historic event.
The winter event was the significant financial hit.
Our people worked in very tough conditions to generate as much power for the greatest possible.
Importantly, our business still has the strong assets that have had just two weeks of.
Both of our customer base and our generation footprint remain intact, and we believe with solid growth prospects.
We are of resilient team will stay focused on creating value for our stakeholders over the long term.
With that operator, we are now ready to open the lines for questions.
Thank you.
Reminder, to ask the question you don't meet the press Star one on your telephone.
To withdraw your question please press the pound.
Keith.
The first question. This morning comes from Stephen Byrd from Morgan Stanley. Please go ahead.
Yeah. Thanks, so much for taking my questions and I really do appreciate the the very Frank and kind of thorough reviews that you all provide us so thank you.
Okay.
I appreciate I appreciate the time.
The first maybe on the natural gas supply situation.
In terms of just the supplier obligations to you.
Is there a potential to litigate the to the extent that firm supply was not provided or is that not likely.
No there isn't there is the potential for them.
Okay.
In the sense of sort of the folks who had the firm's supply obligations to you did not provide the gas.
And the the situations in Texas wouldn't necessarily excuse their delivery obligations.
Yeah, I mean look it's.
So it's going to come down too.
And I don't want of.
Actually litigate it but.
There are provisions in contracts every one of them of a little bit different and.
It will come down to whether those provisions applied in this instance, or not and it would be very simple analysis, what I'll say is there is potential.
We're still doing the analysis.
As to whether it'll make sense.
Or not and we can update you guys on that.
But obviously, it's something we need to take a look at because we thought we had.
We thought we had.
Gas at a particular price and obviously, we didn't and that was a big big hit for us. So we.
We will see where the where this takes us but there could be there could be some disputes.
Yes, understood and then the the ERCOT pricing glitch on Monday, that's obviously I share your frustration.
That just seems like a tremendous just mistake by the <unk>.
In terms of how the price was set is that also possible to I know there was language about sort of adjusting that but.
Could that be adjusted and obviously that would have a very substantial impact to your loss positions. I was just curious how you think about that.
So I think of the interesting thing on that one Stephen is first of all yes. It can be the spirit and secondly, it's gonna be disputed on both ends so the the prospective increase through the cap and actually keeping it at the cap on Thursday and Friday.
It's going to be something I think that is growing not only will be may be challenged with the public utility commission, but it may be challenged at the legislature.
Absolutely, we absolutely believe that when you're in the E. Three and you don't have reserves you have made of reserves that you can't be anywhere, but the cap, but there was a there is a particular mechanism and pricing scheme.
That actually kicked in that had the price is being set at L. L. M. P's debt were below the cap at the times and.
I think the commission rightly so determined that.
The price should be at the cap ultimately I think they have the authority to make that order.
I think we will likely challenge.
The notion that you can't retroactively price and and so but I think there may together like retailers, who may challenge, whether whether it should've been set at the at the cap.
So it's an unfortunate thing because the.
<unk> of dollars changed hands in a week.
People are going to go out of business over it.
And you know I think people were going to try to see what they can do two to change the playing field. So we won't really know.
Until we get through all of that math, which I think will go on for some time.
But we're probably going to contribute a little bit to the mess because there are some things that we think are legitimate to be to dispute and we may do that.
And Curt just on that this point about the position gas power plants were in.
The strikes me as such of a problem from a market design point of view in the sense that the gas plant owners. We're in this.
On Monday, it's really tough position do you buy gas at very high prices first not knowing necessarily whether youre going to dispatch of secondly into a price of power, where youre going to lose a lot of money and yet at the same time you want to provide as many electrons as he can to the people of Texas is that am.
My getting that right or am I I might have made misunderstood it.
No you've got it exactly right Stephen and this was the dilemma that we were faced with.
With an unknown load.
And no financial obligation.
But in absolute net obligation to human needs.
And this is the problem of ours.
I said this last night and day.
And yesterday of the house and the Senate in Texas.
Debt I don't believe Texas could stomach.
This type of an event and I don't think any state really care I.
I don't think they like the price cap they don't like the gritty products, they don't like consumers, having it passed on.
We don't like consumers having blue.
Blips like this past arm because they'll shop for another.
Supplier of retailer.
And so we all agree that the volatility in this market is probably not what it should be.
On the other than the specter of them I'm not sure where everybody is ready to go to some forward capacity market.
But I do believe there is something that can be done in between where the price gap comes down and you increase the amount of reserves, which increases the revenues into the market and it increases the steel on the ground. So it brings this thing a little more stable with less fly ups.
And less risk to consumers.
Because of what's the problem with the model now for US is that the retailer we don't want to increase price.
The consumers.
In the middle of this type of an event.
Yet our suppliers.
Our increasing prices.
At will.
And we get squeezed in the middle of that as an untenable situation that is not something that can last and I believe I made some good points and people are beginning to realize that in the market. So I am convinced of market design will help with that.
But the other thing is we cannot let the gas system sale again, and it did and I don't care, what anybody says all the way from the wellhead.
We are producing right now oil and gas in North Dakota don't tell me of can't be produced in that kind of weather and so we can't have that happen again I don't care, if we produce more gas than we ever have in Texas because of the demand. The reality is the pressures on the lines were not sufficient enough to get gas generators.
What they needed in order to be at the top and we're in a virtuous cycle, we need to provide electricity for compressors and for gas processing and from our production sites we.
We need gas build of produce electricity.
They all have to work together.
And sometimes that's what regulatory that's what regulation does and Thats, what the policymakers soon and we need to make sure that happens.
Very good I guess 50 more questions, but I'll hand, it over the others. Thank you very much are we going to get of I think we're going to get a chance of hope, yes, Sir who's the I think.
Yep. Thank you alright, thank you.
Yeah.
In the interest of time, we would like to ask the England. It yourself to one question and one follow up.
Our next question comes from Steve Fleishman from Wolfe Research. Please go ahead.
Hey, good morning.
I will try to women for the one question and follow up.
Neither do more and more into line.
Okay. Thanks Curt.
I think just a couple of days ago, you raised the dividend and I think more frankly more than you were initially planning to.
For this year could you just talk about your thinking and doing that in the context of everything.
Yeah, that's an excellent question.
So you know we moved it.
In September and.
And then we decided to just move it a couple of pennies per.
And to 60.
It was $10 million Stephen.
We have made the call and we just didn't go back on it.
10 minutes still 10 million or so.
We decided to go forward with it.
And thought it was still the right thing. This was one of these things where if you do it some people will say what the heck of you're doing raising your dividend.
Is that how much it is in the middle of something like this.
Honestly I think the way we're thinking about this is that the.
The one time event and so on.
Fortunate but.
Still on the trajectory when 2022 worlds around we're still back to where we were on our capital allocation plan in 2023 and forward.
And so we made the call to continue with that low.
The relatively small but still you know obviously you know it's an obvious change in the middle of this type of situation.
Can be second guessed in but we thought it was the right thing to do the two to move forward with it we still are very.
Interest in our dividend, we think it's important to our investors and so we.
We decided to stick with it.
Because we made that decision.
And by the way before before this hit.
As a board we.
To do this and we did not revisit it.
We said, we're going to go ahead and move forward with it.
Okay.
But I assume you did that with the context, knowing that you could.
Even though this was the big hit its manageable in the scheme of.
The whole company call Yeah, absolutely, yes, so from a liquidity standpoint.
We feel good and not only do you feel good with what we have we feel good with the partnerships, we have where the number of different financial institutions net.
Have frankly been very supportive and they didn't know anything by the way. They know we've made money and we didn't make money.
But they also knew people were winners and losers and they've come to US and said look we believe in your long term.
If you needed any kind of liquidity, we would we would be happy to.
To make our balance sheet.
Available to you to help you through this if you needed it.
I am convinced that this is not.
Our liquidity crisis for this company. This is a short run.
Material hit.
We took of body blow.
But I also believe that we will come back at round out of this.
And move forward.
The strength and the fact that people are willing to.
To to help us out of this and I understand they believe in us debt, that's huge to us, but Steve I don't see the says.
The situation where were in dire Straits I'll tell you if we hadn't got of debt down.
And in some of them.
We still of the old IPP model, we would be at a very different place.
Yeah.
And then just my follow up is just so thinking.
Trying to ignore 'twenty, one and what just happened in looking into 'twenty, two let's say and beyond Covid.
You just.
Think of it talk a little bit about.
You know how youre thinking about both the generation, which I think you.
Towards the moved up some.
But is there any different strategy there.
For you and then and then the retail.
How are you thinking about the implications of this for retail.
Yeah, you know 22 non work.
Yeah. So.
A number of let Jim talk a little bit of of retail, but I'll just say.
I'm sorry, what was the first part of that of.
Fixated on the generation and hedging Oh, yeah, yeah yeah.
Ignoring 'twenty, one focusing for the future towards the 22.
Yes.
No.
I think this gets in the little bit to the capital allocation discussion too I mean first of all.
We still believe probably more so than we ever have in Texas until Theres a market design change the generation is pretty darn important.
And.
Now, we know obviously supply chain around our generation with gas is even more important than we ever thought but.
We still believe that the generation that we have.
Is the board and I still think that we're going to see coal retirements.
And we believe probably even more now than ever because of my guesses.
This is also going to impact development and the New York market, but we think there's value in these and in the projects that we're doing so we continue to want to do those I will say, though Steve that you know how we finance those.
And how we realize the value from them I think.
We always have been open minded and we'll continue to be open minded about I'm talking now about the renewables battery stuff that we're doing and so I you know there could be some things that we do I think we would like the buy our shares back and we're going to probably need to do that even more so.
The real challenge in 'twenty, one is theres not going to be a lot of money to do that unless we were to do some project level financing something like that which we will consider.
In 'twenty, two and beyond you know the REIT by the way retail actually.
Hold up through this.
And Steve or being.
The Jim can get into the details I can tell you is thoughts on retail real quick but we are.
We are looking not only to to maintain our retail, but we may end up getting we're a provider of last resort resort in ERCOT.
And we may get some of the customers if in fact customers dropped their customers through the provider of last resort.
Which of the mechanism in ERCOT, we may get a significant amount of new customers and we're also opening open to continuing.
M&A around retail.
So.
We've been saying, we'd like to get a little more retail in our business I think we're continuing that we like that business. We're good at it.
And so I think that hasn't changed on the generation front, we were sort of.
Reducing our generation of exposure, a little bit anyway, and we're becoming more and more matched.
Hi.
No this event.
Obviously shakes people because we ended up being short it was because of the things that we did not could not of planned for.
So I still think debt.
We're gonna have dropped out of path, where our generation is going to.
The reduced in terms of net megawatts as we retire coal.
And we will add some renewables and batteries.
And we will still have generation, but I think will be of much more balanced company.
As we go forward even with this event, we still think that's the right move.
I hope that answered it in student debt.
Jim do you want the Jim you were saying about retail quicker.
Yeah sure I would thanks, Kurt the Ste.
We've I think this.
The over the evolution of the markets here in the in ERCOT, we'd seen these events come every three to five years and disciplines retailers.
To think differently about some of the collateral requirements and the hedging that's debt necessary to survive.
This event had the chance to really create a runaway scenario for swing for the retail segment for any any retail business in ERCOT.
And then the load shed tapped out debt exposure for some and it actually it did for our business as well and so the retail business held up well. However, there still are some retail businesses that experienced swing in the reporting some results that are unfavorable.
I think the business takes more capital than most people think and it takes more discipline around hedging. The most people think and we found ourselves even in a business that we're very familiar with having assets ready to run being in a position to run and having trouble with the fuel supply.
Which we did not see coming to the extent, obviously that it occurred so I think theres going to be from retail consolidation I think whether it's through the polar process or whether that's through the chance to take a look at some books I think were going to come out of this and our relative position and a very strong place and we look at 'twenty two and beyond is.
<unk> is more back to normal and to your point about the curves the curves being up in the next several years as of $2 million to $300 million difference than where we were just a few weeks ago and so we will see how that plays out but this is a tough one tough one to get through but I think coming out on the other side, we're going to be relatively pause.
And in a good place.
Great. Thank you.
Thanks, Dave.
Your next question comes from Julien Dumoulin Smith from Bank of America. Please go ahead.
Hey.
Thank you for all of the color and commentary I wish you guys the bet.
Can we talk about capital allocation I know you mentioned.
They're coming but theres. Some you just alluded to it so I want to bring it up more directly here.
Seems like there's some latitude in the budget, especially as you think about having a probably a disproportionate of preference to review buyback or how do you think about investments in renewable and the ability not to pursue them, but the to monetize the selectively.
As you complete them certainly it seems like added source, but also keep readdress the the credit rating and your thought process, perhaps initially with the rating agencies.
Yeah, Great question Julian.
So on the.
Yeah on the Omnipod.
Renewables I think you sort of state of the accurately and I tried to portray this maybe I didn't do very good job on it but.
I think there's some opportunity.
<unk> raised capital.
In a different way, let's put it that way that could.
Could could add capital to the buyback shares.
We'd like to buy our shares back. So I think we're gonna be very open minded these projects have value to them and.
Now that can be somewhat contingent on.
Also having contracted.
The contracted the.
Projects and of course, we have of retail business that we can look at to contract with but we also.
Can do that externally with third parties. So I think theres. Some work in 2021 will do to.
To make sure of that but we're not in a position where we have of gun. It ahead of that we absolutely have to do it but I think it's worth doing and we were considering it even before this event, but I think it's even higher priority.
Jim do you have anything you want to add to that but that's kind of how I see that and then I can answer the the next piece of it too.
No debt our views very some of their Kurt and I think there may also be opportunities to look at current operating assets in the market or those underway as current owners or projects might have seen the performance gap and how they hedge some of those assets in this market as well and so I think there could.
The other opportunities that weren't on the horizon, just a few weeks ago.
The T cell.
Okay.
We've looked at that deal and the problem is and if you want to sell it with them to the head.
I suppose you could do that but the value is just aren't there. There's so much generation that is either explicitly or implicitly for sale in the market.
And I don't feel like we have to do that but if we found an opportunity to do that that made some financial sense.
We don't need the own all of the megawatts that we have and so we would consider that but I'm not we're not going to rush to that because we're not in a.
Financials.
And I think we're going to be a little more disciplined I think I'd, rather look for ways to save money and debt.
At the end to.
The do things like that rather than to force of sale in the middle of the of market that is not a particularly good market sell assets.
Understood there was on the radar.
Most of it.
Yeah, right so rating agencies.
I'll just say this we've had some early discussions with them.
And you.
This is like it is to you guys.
The initial shock.
They know that we're still disciplined and we will continue to pay down debt.
And that we've been that way and so look I think we've had constructive discussions I have nothing to announce at this point in time about that and they don't either but I would say the discussions have been constructive and I'm going to spend some time I could I was in these hearings all day yesterday I'm going to spend some time with a couple of the agencies myself.
Because I couldn't make the meetings.
And talk of them, but I found the discussions to be very open and honest and constructive on.
I'm hopeful that we.
We'll be okay. There.
Okay.
Best of luck.
Thank you.
Your next question comes from Matt Sharpe per inch up from Guggenheim Partners. Please go ahead.
Good morning, guys, it's actually of James for sure.
Hey, How's it going.
Good Kurt to build off your policy point of the middle ground between high price debt stomach capacity market.
We watched the hearings yesterday, it sounds like the sort of momentum.
Kind of from where we stand today could you give us any probability on the policy change actually coming out of the spring session legislature.
Yes so.
Look we were asked to bring back ideas in a week.
This this is the this this event has really.
Shaken the state of Texas from the very top.
I was able to.
Just speak with some of the obviously.
The leadership from the state of Texas.
I don't want this to happen again, I think they're beginning to realize debt.
The mix of assets in the market.
Combined with the structure itself is not sustainable.
Pretty obvious to them and they also know this was the big weather event and we can't lose sight of that debt. This was an extreme weather event, but at the same time they have to ask themselves.
Even so.
Do we really wont even have to take the risk of this type of event and I think they're asking themselves.
I know the answer none of them could stomach really the the.
Idea the a bunch of this high pricing power is going to get passed onto customers.
And so they realize that that's an untenable position the ban for for us and Theyre worried about having enough generation and they realize if you don't have a market structure that works people aren't going to invest.
So.
That tells me that there's a.
Very good probability that we could get something done here.
And I would say north of 50 per cent and I would normally say net about any process like that but I see momentum.
And I know our company is going to be at the C of Hep C table and we're going to be working on this.
Extensively in the next few days, because I do not want to lose the momentum.
I think we do need of change.
We were already considering these things and so we were prepared and I think it's time to.
Get everybody together and find a way to move this market still using competitive market principles.
But I think of stabilizing it somewhat.
Got it thanks, that's all of it.
Thank you.
Our next question comes from Amit the car from BMO. Please go ahead.
Hey, Kurt Thank you for taking my questions.
Volume in Houston, So I Hope you will indulge me since I, just got the power of that so.
I figure I have earned it too.
I think Curt you can kind of talk a little bit about the.
The book growth coal supply issues with some of the rail transportation of that kind of getting through.
I'm just curious, but don't you typically have like of cold Pilar that would represent a couple of weeks of burn.
On your.
You're shipping at Cole every day to kind of burn that coal can you kind of.
So listen a little bit on kind of the issue there.
Yeah, I will jump in but it was it was kind of the two things it was called the getting coal to the the KOL silos, but it also was wet coal that we actually had and so what we were and that was creating.
The issues with the front end process the eventually burn coal.
And so.
It was it was those two things so we were trying to get fresh goal.
And then we were having problems with the rail.
Because the call we had on the ground.
Frozen and it is also of wet and gumming up and causing problems that we ended up having to take the unit standard but.
And that's why as I understand it but the debt.
Jim.
<unk> has been working night and day. So why don't we why don't we let him also explain his knowledge of what happened.
Sure. Thanks, Amit for the question, Yes that is one of the benefits of having of mine operations right. There is that we can self supply.
We have several days' worth of at the plant and then of course, we have at the mine we have much more under coal barn.
<unk> areas of of the thought was when the coal pile, which is right by the plant is exposed it froze over.
It becomes basically chunks of ice that you can't put through the equipment without pairing it up so the goal is to try to get the dry the dryer coal over from the mine to the to the plant and that transportation system was really tough not just the tracks, but the railcars the doors that you used to dump the call the freezing.
So they were breathing shot and then we couldnt actually.
Once we got them open we couldn't get them back to close and so we had a supply chain even within our own system.
It was effectively the difficult to work in the freezing conditions that got worse through the middle of the week before we were able to find ways to work through that so that wasn't about of rail coming in from the elsewhere or is really between the mine and the plant and trying to get the best deal we could at Martin Lake, We obviously do.
Have also of supply on hand, it wasn't the rated plant because of the freezing temperatures and also dealing with.
The pile the effectively turning into ice.
So we ended up our conveyor systems, where we're transporting this call up through to the plants are exposed as well in many parts of the country. Those are completely enclosed some of the systems as Curt mentioned earlier, the redesigned for the heat and the warm weather or not the not the freezing temperatures we were in so we took the rates.
On that plan as well we ended up at 70% capacity factor for coal during the week. So the capacity factor of certainly lower than we expected and wanted to have.
But that 30% debt, we were not able to keep going and that includes the day rates and being offline that just became a very expensive prospect for us because as Kurt said, we were replacing five to $20 a megawatt hour of fuel with $2000 fuel in the form of gas that we were burning in some of our old gas steam units.
And so a little bit of Miss on the volume there multiplied by the Delta on fuel costs with substantial so we're going to have to look at the coal handling.
And look at what resiliency, we need the build in for this type of the cold weather stretch that our coal plants.
Thank you for that and I guess, the kind of leads into my follow up question, just going back to kind of of the press release, you guys put out on Wednesday.
I guess kind of in the midst of of all of this.
And Curt I think testifies of this yesterday in front of the legislature as well.
Kind of look at the percentage of.
The load of growth how do you kind of of serving in that kind of is Monday of an example from astellas.
Is it fair to say, if we set aside Comanche peak net rent per year.
Fossil fleet kind of ran out of town.
Blended kind of capacity factor of ex 70, 75%.
Yes.
And so with prices kind of on Tuesday, and Wednesday kind of clearing of the cap and it looked like you guys had some.
Link all of our heat rate length open going into this I guess I'm still trying to wrap my head around on kind of.
While the losses were where they were to such an extent or are you guys kind of thing that because you did such a good job in the light stayed on in.
In North zone versus say Houston zone that.
You just and the demand was so high they're relatively the UK kind of found yourself short of whereas other kind of generation units the appointed at Houston Zone basically had the benefit of the low just basically mean cuts of.
They basically went short anymore.
Yes, so the.
And the.
Yeah.
No.
I mean, yes in essence this was a very interesting pattern because heading into the weather event. When you see what the temperature is we're gonna be this looked like who are generators, especially generators with link would have an opportunity to.
Make potentially a good return on their efforts and retailers no matter of almost no matter how much they were hedged whether it was two of $3 95 of P. 99 scenario, there, we're going to swing and likely pay.
Much higher prices to cover their obligations to their customers. So it was originally going to look like of good generator segment opportunity and probably of tough tough one for retailers once the load shed happened and the load share happened not just.
The curtailing load for retail, but it actually curtailed and contributed to the gas supply issues. The retailers kind of got stopped out on their exposure to the swing and in some cases, depending on how much load rochette could have become lost on their supply position and the generators and the owner.
Those that were online, including the including ourselves.
We could not get the fuel because of.
To meet the obligation of what we had sold forward to both third parties as well as our own supply book. So it shifted this this this low.
Low curtailment shifted the entire risk from what should of been on a retail segment back to of generation segment because of its linkage to the fuel supply challenge on particularly natural gas and Thats. We were along we've had the ability to capture of this but your long if you get the fuel if you don't get the fuel your share.
And that's why when we put the press release out we put a lot of emphasis on the fact that we were having fueling challenges and we also wanted to address debt. Our units were winterized. They were they are running and we have an opportunity here. If we can solve the field challenges and despite all of that we were still a disproportionate amount of the generation on the grid.
So it played out very differently than we would of thought of week or two ago, but those of the major drivers.
And all of them I'll, just add Amit that.
What happened is two Monday, as I said pricing.
<unk> was not at the cap for the.
It's very strange reason, we were long Monday.
Then we start having gas.
Delivery issues.
Pricing issues as well as pressure issues and then we lost the Oak Grove from about day to have.
Which is our low cost fuel and so.
And of what like one of the St.
It could go bad it did and all of those things contributed but a big chunk of it really was around gas the cost of gas.
And as well as the amount of gas we were getting delivered and then there was another day, that's a big bucket. That's like I think Jim has said about two thirds and about a third of it was around our coal.
Of that total.
And I know because I mean.
You can only imagine what I was doing I mean, I was like all of my hair out like I thought we were long I thought we were in a good position.
We're one of the biggest generators in terms of percentage on the grid.
You think 9000 dollar cap youre thinking everything's going well.
But when you start tracing through it it begins to make sense and unravel as the.
How are physicians changed and how we were had the and an ability to really do much about it.
But we did the right thing, but it was financially not good and that's the.
That's a tough thing when you do things and you know that you were doing the right thing and the outcomes doesn't swing your way.
It's very difficult.
Hey, I appreciate all the time, Kurt I know you got a hell of a day of shack thinking.
Yeah take care of them.
This concludes the Q&A portion of our call and I would like to turn it back to Chris Morgan for final comments.
Well hey.
I appreciate the people that are still hanging in there, but thank you very much for your interest in our company.
Tough tough week last week.
But this company is strong resilient.
The company.
And we are going to to come out of the stronger than ever.
I Hope you all have a great weekend, and we look forward to talking to you soon.
Ladies and gentlemen, this concludes today's conference call. Thank you once again for participating you may now disconnect.
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