Q3 2021 Vistra Corp Earnings Call
Good morning, and welcome to the this drove third quarter 2021 earnings conference call.
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I would now like to turn the conference over to Molly Sorg head of Investor Relations. Please go ahead ma'am.
And good morning, everyone welcome to <unk> third quarter 2021 results conference call, which is being broadcast live from the Investor Relations section of our website at Www Dot district popped outcome also available on our website a copy of today's investor presentation, our Form 10-Q and related press release.
Joining me for today's call are Curt Morgan, Chief Executive Officer, and Jim Burke, President and Chief Financial Officer.
A few additional senior executives present to address 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. Further today's press release slide presentation and discussions on this call will include certain non-GAAP financial measures for such measures reconciliation.
And to the most directly comparable GAAP measures are provided in the press 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 and good morning to everyone on the call as always we appreciate your interest in Vista.
While we have a lot to cover today, we will do our best to be as quickly as possible to leave sufficient time.
For Q&A.
Not only will we be discussing our third quarter and year to date financial results, but we are also initiating our 2022 guidance as is customary on our third quarter results call and most importantly, we are laying out additional details of our long term capital allocation plan.
Which I am excited to share with you so let's get started.
It's hard to believe we are still in the same year, where we experienced the significant effects from winter storm Yuri.
I'm proud of how our company has recovered from a business standpoint, and we are beginning to execute on our strategic priorities, which are a product of a thorough review with the board.
They have begun prior to Yuri but accelerated greatly immediately on the heels of the storm.
We will discuss these priorities in more detail later.
Consistent with the bounce back of our business Slide six reports, our strong third quarter financial results. Despite a weak, Texas summer, where Vista delivered adjusted EBITDA from ongoing operations of $1 $177 billion.
Or 1.1 dollars $67 billion.
<unk> the impacts from winter storm Yuri realized in the third quarter, which included a small positive impact from ERCOT 180 day resettlement statements.
As of September 30th District has already achieved approximately 85% of the 500 million dollar self help target, we announced following Uri and all of that done without really impacting any future periods and we have a clear line of sight to achieving the balance.
In the fourth quarter.
The combination of our solid execution on these self help initiatives together with the inclusion of the approximately $500 million of proceeds we expect to realize from ERCOT securitization of certain charges allocated to load serving entities during Yuri.
We are in a position today to both narrow and raise our 2021 ongoing operations adjusted EBITDA guidance range as shown on the slide.
The securitization and self help materially offset the more than $2 billion loss from Yuriy such as the retail Bill credits, we will discuss later.
As you likely recall internal and third party analysis has shown that disturbs Yuri loss was driven predominantly by the uncontrollable failure of the Texas intrastate gas system.
We are also narrowing and revising our ongoing operations adjusted free cash flow before growth guidance, which is similarly reflected on slide six.
The cash flow associated with securitization is expected to be received in the first half of 2022. Consequently, the cash impact of securitization as reflected in our 2022 guidance on the next slide.
So turning to slide seven district is initiating its 2022 guidance today forecasting ongoing operations adjusted EBITDA in the range of $2 81 to three <unk> three $1 billion with ongoing operations adjusted free cash flow before growth in the range.
A 2.07 to $2 $5 7 billion. This represents a free cash flow conversion ratio of approximately 76%, which is higher than our historical conversion ratio due to the anticipated receipt of the securitization proceeds in the first.
Half of 2022.
On slide seven we also offer an illustrative view of distress 2022 guidance ranges, which exclude winter storm Yuri related bill credits of approximately $185 million.
And also the negative in year impact from the execution of NPV positive long dated contracts with retail customers.
Approximately $55 million and the $500 million of securitization proceeds and free cash flow before growth only.
We believe this illustrative view is the best way to think about distress future financial performance potential as it demonstrates the long term earnings power and cash generation of the business.
Notably the adverse impact from the Bill credits in 2022 guidance are more than offset by the securitization included in the 2021 updated guidance in fact securitization will likely more than offset the retail bill credits across all years.
Looking beyond 2022 visitors long term view of our earnings power remains robust.
Company is less hedged in 2023, and beyond which affords an even greater opportunity to capture momentum from the rising curves. We have observed in recent months. In fact, we have seen a move up in both gas and heat rate in ERCOT as the gap between market and our fundamental view converge.
Which we have similarly seen in the last several years in fact this conversions has resulted in projected results using market curves for the next several years in line with our stated view that we can generate consistent EBITDA of $3 billion or greater.
Previously the out years using steeply backward dated market curves were below $3 billion.
This leaves us in a stronger position to optimize our EBITDA within the $3 billion or greater and greater EBITDA range, especially as we add our growth investments.
We continue to remain confident in the ability of this business to earn significant cash flow on an annual basis, and we intend to return a majority of that cash flow to our financial stakeholders in the years ahead as I will outline on the next few slides.
Slide eight sets forth the four key priorities that our recent strategic review identified we believe the best way to unlock the value inherent in this business and maximize value for our financial stakeholders is two <unk>.
Drive long term sustainable value through our integrated business model, which has been strengthened following uri through various investments in our fleet and fuel supply as well as our enhanced risk management practices.
Return, a significant amount of capital to shareholders via share repurchases and a meaningful dividend program, especially for as long as our stock remains at what we believe is such a meaningful discount to its fundamental value and if our stock responds.
We will continue.
To return that capital in the most optimal optimal way to our shareholders. The key is that we generate substantial capital year over year, and we intend to return a significant amount to our shareholders.
Also we intend to maintain a strong balance sheet.
And last but not least accelerate our bistro zero growth pipeline with cost effective capital.
As we set forth on the next slide our long term capital allocation plan reflects these strategic priorities.
This for US long term capital allocation plan reflects an anticipated return of capital of at least seven 5 billion to its common stockholders through year end 2026, while simultaneously, reducing our corporate level leverage and accelerating our <unk> zero growth pipeline, specifically as we announced in October.
Our board recently approved a $2 billion share repurchase program, which we expect to fully execute by year end 2022.
The share repurchase program is partially funded by the $1 billion of 8% preferred equity we issued last month. We then expect we will allocate approximately $1 billion per year towards share repurchases from 2023.
Through 2026 for a total of $6 billion in five years and again, if our stock responds.
We will reallocate those funds back to our shareholders and some other cost effective manner.
The $6 billion of return of capital represents more than 60% of our current market cap.
This significant amount of capital allocated to share repurchases as evidence of both management and the board's conviction of the long term earnings power of the business jet.
<unk> proposed with what we believe is a significant undervaluation of our stock. We will expect we will continue to prioritize share repurchases. So long as we believe our stock is undervalued and let me tell you in my view, we have a long way to go.
We're also reinforcing our commitment to paying a meaningful and growing dividend rather than identifying a target annual growth rate for our dividend.
Management expects that it will subject to board approval at the appropriate time allocate $300 million per year.
It's common dividend.
As we retire more and more of our shares over time, this $300 million dividend pool will be spread over fewer shares and will offer potentially outsized growth on the remaining shares for example, if we were to execute acute all $6 billion worth of share repurchases at our recent stock price.
Our annualized dividend per share would grow by more than 175% by year end 2026 at.
At our current share price.
These share repurchases.
And dividend programs are projected to result in an annual average cash yield on the stock of an attractive 15%.
As always we are also committed to a strong balance sheet. We expect we will retire another approximately $1 5 billion of corporate level debt by the end of next year and up to $3 billion by 2026 with projections of debt to EBITDA in the mid to high twos during this timeframe.
The Vista base business.
For our previous comments, we expect to combine project financing with renewable related preferred equity in cash flows from existing renewable projects to cost effectively develop our current nearly five gigawatt renewable and battery pipeline over the next five years using only $500 million.
Of our own capital.
And that is $500 million on accumulative basis over the five year period of significantly lower estimate than our previous expectation of spending approximately $500 million per year on growth capital.
These funds can now be used to support other capital allocation priorities, especially share repurchases.
It is important to note that <unk> zero will be a highly contracted business with third party and internal ppas. So the leverage ratios will be commensurate with similarly situated businesses.
Slide 10 outlines the sources and uses for the long term capital allocation plan that I just laid out importantly, we expect we will be able to execute on this capital allocation plan, while growing our Vista zero renewables and battery storage portfolio.
Two of more than five gigawatt business generating approximately $450 million to $500 million of adjusted EBITDA annually by year end 2026.
We are excited about this long term capital allocation plan and believe strongly that it is the best way to maximize the value of our business as we expect we will return the majority of our free cash flow from our base business to our financial stakeholders, while being mindful of our overall leverage levels and cost effectively accelerate.
Our renewables and battery storage growth pipeline, which should ultimately be valued at a higher multiple overtime user.
Using the midpoint of the Vista zero EBITDA of $475 million by 2026, and a 14 times multiple would result in a total value of $6 $65 billion for these projects.
As I mentioned earlier, the strategic review, we undertook was thorough evaluating multiple scenarios and potential paths to unlock shareholder value. Ultimately we believe the path. We have outlined here today will be the path that will result in the greatest financial reward.
Over time, taking into account risk of execution.
Cost effectiveness and economies of scale.
With that I will now turn the call over to Jim Burke to discuss our financial results in more detail Jim.
Thank you Kurt as shown on slide 12. This tree delivered strong financial results during the quarter with adjusted EBITDA from ongoing operations of one to $1 $77 billion.
<unk> that are comparable to our third quarter 2020 financial results.
Period over period, our retail segment results for $205 million higher than third quarter 2020, driven by the realization of our self help initiatives and the lower cost of goods sold in 2021.
The collective generation segments ended the quarter $211 million lower than third quarter 2020, driven primarily by the lower realized energy margin in Texas East and Sunset After a very strong 2020.
Turning now to slide 13, we wanted to briefly touch on the momentum we have seen in spark spreads across the markets, where we operate.
In September we have seen a dramatic rise in commodity pricing across the board.
Gas prices power prices and spark spreads are all climbing higher for 2022 and beyond.
This is true in all the markets, where we operate we highlight our two largest markets ERCOT and PJM on the slide as a general rule <unk> is a company that benefits from higher natural gas price environment as gas units are typically the marginal unit setting the price of power, leading the higher overall power prices we.
Expect this will benefit us in the outer years, where we are less hedged as.
As of October 31 district, now, 27% and 50% hedged in ERCOT and PJM, respectively for 2023.
We are hedged at relatively similar levels, and New York, New England Queso and MISO is we have taken advantage of the increase in outright power prices and spark spreads over the last couple of months, which horizon more in line with our fundamental point of view, we expect our commercial team will continue to take advantage of commodity.
Pricing volatility working to position our integrated operations to earn a relatively stable earnings profile over time.
I'm, turning now to slide 14, which provides a more detailed breakdown of our 2020 to financial guidance. We believe the illustrative guidance in the range of three $5 billion to $355 billion, adding back the impact of the euro related bill credits in the year, one impact to various NPV positive.
Long dated retail contracts is the best way to think about the long term earnings power of this business.
We continue to believe that this rule will be able to convert a majority of its adjusted EBITDA to adjusted free cash flow before growth.
Similarly, our guidance for ongoing operations adjusted free cash flow before growth.
Includes the anticipated receipt of securitization proceeds in addition to the other euro impacts such as Bill credits.
So our illustrative guidance removes these for a more normalized view of adjusted EBITDA and adjusted free cash flow before growth.
Strong conversion percentage as shown on the slide enables a significant return of capital that Kirk discussed while also supporting our strong balance sheet and the transformation of our fleet with our Vista zero pipeline.
Before we close this morning I wanted to briefly address our long term leverage target in pursuit of investment grade credit ratings, which I know has been a strategic question for many of you. Following Uri foundational a strong balance sheet is core to district strategy, our low leverage level proved critical during Yuri is our financial strength supported our ability to quickly add more.
$2 billion of debt in response to the storm.
As outlined on slide 15, we believe our current leverage in the range of approximately three to three five times net debt to adjusted EBITDA as a leveraged level that will afford us the same level of financial strength. We believe we will be able to maintain our leverage in this range in the near term and reach the mid to high twos over the next five years, we all.
Also believe that we would still be a candidate for investment grade credit ratings in the future as our corporate leverage drops below three times and any project financing will relate to a lower risk contracted part of the business. So as we've said recently, we believe this opportunities at least a few years in the future.
In closing as I hope you can see from the long term capital allocation plan, we laid out today, we believe in the value of this business and our ability to generate significant free cash flow for allocation in the years ahead.
By prioritizing returning the majority of our capital to our financial stakeholders, while maintaining a strong balance sheet and pursuing accelerated growth of our <unk> zero portfolio. We believe that we will unlock the value of our business overtime.
With that operator, we're now ready to open the lines for questions.
Thank you we will now begin the question and answer session.
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Today's first question comes from Stephen Byrd of Morgan Stanley. Please go ahead.
Hey, good morning, and congratulations on laying out a very thoughtful capital allocation approach.
Hey, Stephen Good morning, good to hear from you.
So I wanted to focus on <unk> zero and the updated guidance here and you mentioned in your prepared remarks, it's fairly capital light from your perspective, as you mentioned $5 billion in total capital needed, but only $500 million and net capital from distress net of prop.
That other financing cash flow et cetera could you just elaborate a little bit more on on that I guess I was thinking that's a fairly high level of project leverage and we can get that typically when we have contract durations of 2025 years I thought it might be more challenging to achieve that level of leverage here and what gives you the confidence.
And sort of such a capital light approach.
Yes so.
I'll take first shot at that Jim feel free to jump in but so I think we're also looking at a.
Sort of what I'll call a kickstart upfront.
Tranche of capital, we haven't determined exactly what that tranche will look like but it will be equity like let's put it that way.
And then when you combine that with leverage Stephen this more around about 60% type leverage project leverage with the contracted cash flows. So it's not like we're putting 80% leverage but I think the other thing that's missing maybe in this is that the.
The effort that we're pursuing to to bring in.
Ah another tranche of capital in here of some consequence, and then when we look at the cash flows off of the business and the maintenance expense and things because its fairly low for these types of assets we.
Generate enough cash along with project financing and this tranche of capital along with our <unk>.
Over $1 million to basically self fund the build out of the roughly five gigs through 2026.
We.
Have looked at this we feel comfortable with how we're setting it up.
Clearly, we would like to grow it even further than that and I expect us to add to the pipeline whether that's through.
Acquiring.
Projects or potentially even a platform, but but just what is line of sight that we have already in the queue.
We feel like we can raise sufficient capital and through the cash flows.
That would be more than adequate to be able to run that business, Jim anything you want to add.
Kurt you covered it well the only thing that I would amplify is that we intend to structure that ppas from these assets back to <unk>.
<unk> to create the contracted cash flows that gives us the chance then to put 60% to 70%.
Reject that balance comes from the three sources Curt mentioned, the parent contribution of less than $500 million some form of structured financing or equity and then the cash flows from the projects themselves and so when we think of this as a as a self sustaining entity in an entity that can grow even faster.
We anticipated when we announced this pipeline last summer and so I think it gives us.
Way to use more cost effective capital and still take advantage of the opportunities given the pipeline of great sites that we have.
Yeah, that's really helpful and makes a lot of sense and then just on the the five gigawatt target by year end 2026 could you just give us your latest thoughts on sort of visibility of groove degree of competition sort of how you see that sort of playing out.
Yes.
Yeah go ahead go ahead Jim.
Sure sure. Thanks, Kurt.
What we've tried to do here Stephen is focus on where we've got a strong place to start which is sites that we have control over.
Its focus right now is primarily Texas.
California, and now with coal to solar.
Illinois fleet.
We have a few opportunities at a couple of other coal plants that we intend to convert but this does not include as Kurt mentioned. This does not include an expectation of.
Prospecting for a bunch of sites, we don't have control over or an M&A type platform. So I think we've got.
Really good.
Pipeline that we can.
Set up based on our partnerships, we've got very good partnerships on the solar side and the EPC side and our batteries and so it's really just a matter of taking advantage of this methodically over the next five years and then in addition to that I think there's other opportunities that Curt mentioned, but this is our focus not a <unk>.
Heavy focus on PJM and ISO new England at this point those are possibilities, but what we've got in front of us is quite a bit.
Yes.
Yes, Sir saving you know we have Moss landing site.
Can take probably up to another 1000 megawatts, we have a site called Morro Bay, which can be up to 700 megawatts. Those are both in California, we have a number of sites, where one of the largest landholders.
Especially at our sites.
Some of the old coal plants in Texas.
We obviously know that market quite well.
And we're partnering in California, with the utilities, there and of course, we were in the omnibus energy legislation in Illinois, we pursued that for three years out of thin air.
<unk> raised this coal to solar and battery storage legislation that then was woven into the ultimate omnibus Bill.
So I think we we came up with an idea to utilize sites that already have transmission access.
In many of the areas, where the assets were being shut down or we're already retired.
And thats proven to work very well and I think we have other opportunities down the road.
It's a great point I mean, the site value for many of the sites in places like California, Illinois, clearly clearly quite high. So thanks, so much for the color I appreciate it.
Yep. Thank you.
And our next question today comes from Shar <unk> with Guggenheim. Please go ahead.
Good morning, guys.
Yes sure.
Just two part question on 23.
Indicated.
Pretty open still is your fundamental view for more expansion in Sparks as we draw closer and Directionally can you just also indicate where EBITDA would shake out.
Under the current dynamic.
Yes for 'twenty three now you're talking about yes, yep Yep perfect. Yeah. Yeah. So look we had a period of time, where sparks were compressed they've actually.
Come back to what I would call a more normalized level, but there's still a fair amount of backwardation in the curve going from 'twenty two 'twenty three.
I think our fundamental view, which suggests there is still room to move with the curve relative to the fundamental view in 2023, but the one good thing is that that those two curves market in <unk> and <unk>.
Our fundamental view point of view have converged significantly and I think I made it in my remarks, but.
We're now seeing over the next five years EBITDA levels that our $3 billion plus even at the curves and prior to that sure. We were seeing we were seeing when you market to the curve below $3 billion. So that has converged significantly in terms of spark spreads.
Theres, probably some further or what I'll call normalization that can occur in 'twenty, three on Sparks and and so there could be.
Some of that movement, but we've seen a pretty strong move.
And Sparks, but if you take a look at 'twenty two sparks.
Versus 2023, Sparks Theres still about I'm going to say, maybe about $4 difference.
And we would expect that to that gap to close and so there is some some some upward mobility.
And our fundamental view shows that in terms of Directionally 'twenty two to 'twenty three.
We always say this but I want to be clear this time.
Within the range of being in a very similar.
EBITDA level on using that illustrative EBITDA number.
And when I say that that's plus or minus.
A couple of hundred million dollars, because an open position.
Can go either way, depending on weather and so, but we're with it well within the bounds of Av.
Where we are in 'twenty, two 'twenty, three and I would say directionally. When we look at the distribution of outcomes, probably with a greater probability of upside versus downside, just knowing where the curves are where our fundamental view is.
And knowing that our commercial team is able to take advantage of when the curves are in there.
Are at the point of view or better so.
Feel good about 2023, I think directionally, it's in that range and.
Now we have to go out and execute and capture that value.
Well at least at a minimum the reality and versus your views are starting to align which is what <unk> been pitching for a while so it's good to see that.
And then.
The $4 billion in additional buybacks is predicated obviously on your view of the stock value right.
Any guidance here on what you see Kurt.
As something of a more sustainable free cash flow yield.
Well, yes, that's a man.
I wish I had the crystal ball.
But look I think what I would hope to see especially with this capital allocation plan and with our execution.
Is something that is much more in the mid teens and going down into the low double digits I think that we certainly warrant that when I understand that there was a major event in February and you know this as well as I do that.
Any kind of return.
Part of that is the anticipated risk of the business and I think that exposed some risk, but I think once we show how we <unk>.
Invested in our business.
<unk> reduced the risk significantly and we're able to execute I would expect that risk premium to come down and then I also believe that people are beginning to realize that a combination of renewables batteries and.
Low heat rate very efficient fossil.
Fossil fuel mainly gas plants is really going to be.
The right mix of assets going into the next 15 to 20 years, because youre going to need dispatch more resources for reliability purposes. The market is going to have to pay for those clearly were going to need to have clean and green resources going forward in battery storage is going to be a big piece of that I think thats, what our property is lining up with and then.
We've got this large retail business that I think people don't think about that we can contract much of our.
Renewable and battery business with.
That also has a.
Very consistent and significant margins and we expect that to continue as well. So we feel like we're lined up if we can execute then we would expect that the risk premium that is a function of both a perceived risk in the business model, which I think we are closing, but also the terminal value.
And we believe that we have a company that's here for a long period of time, we should see that risk premium come down commensurately, we ought to see.
A much lower free cash flow yield, which in turn as you know means.
Higher and stronger stock price.
Got it and then just lastly for me are you, having any coal or sort of material supply challenges with the sunset fleet.
Yes, we are we are.
If you take if you take 2021 outcome and you take the $500 million securitization you back it off you'll notice that we were a little bit.
Little bit under and a big chunk of that more than half of it is the challenges we've had at defense. It segment not just coal constraints, but also we had some outages.
This year that came about.
What I would call, though our KOL constraints, mainly as an opportunity loss more than than than anything else. So I'll tell you why we have been prioritizing building coal inventory for the winter because the price the price curves are saying that it's much more economic to run in Q1 of 'twenty two than it is.
As in Q4 of 'twenty, one and if you think of it we have a finite amount of coal because of the supply constraints, we're going to have to optimize between Q4 'twenty. One in Q1 of 'twenty. Two we have opted to run a little bit less in Q4 of 'twenty one to concern.
<unk> and preserve the.
The amount of coal we have so that we are going to be there for Q1.
22, because the price curves are telling us that's where it's most economic and that's what we intend to do the other thing I would tell you is that.
Still a little bit concerned about making sure that the entire grid in Texas as weatherized, including the gas system.
For this particular winter and so we want to be very cautious we're going to go into that carrying more linked because of that and we want to make sure that we don't.
Have any hiccups and then just the broader energy commodity complex as you know is quite volatile and so because of that we're taking a very very.
Our conservative approach going into Q1 and that means trying to conserve some of our coal to make sure that we can run in Q1 of 'twenty two.
Got it I appreciate it guys I'll jump back in the queue refreshing seeing these are thank you. Thanks guys.
Thank you.
And our next question today comes from Julien Dumoulin Smith with Bank of America. Please go ahead.
Yes.
Hey, good morning team well done truly.
Listen I wanted to follow up a couple of easy questions. If I can start first off in terms of the buyback itself here any thoughts about a tender versus.
Other mechanisms to execute here, obviously, a lot a lot a lot to buy at hand, and then separately and related Edgar on the on the 23 EBITDA.
I'll throw it out there quickly some inbound questions here I mean, how are you thinking about that relative to 'twenty two levels. I know you said, it's better than three but what about better than 'twenty. Two if I can ask you.
In that way.
Jim do you want to take the first the first one around buyback.
Buyback, what we're looking at around buybacks and then we can and then if you want take a stab at the second one that's fine and I can add to it go ahead.
Sure.
Good morning, Julien Thanks for the questions.
So on the buyback we have we are looking at a number of alternatives we have not.
Settled on the method that we're going to use.
You know hopefully coming out of out of this.
This earnings call will be very aggressive.
With the buyback program in order to be able to implement the $2 billion by the end of 'twenty two we don't intend to telegraph.
How we're how we're going to buy when we're going to buy but we will report each quarter. How we have how we can fluctuate the number of shares that we've that we've purchased.
But it is a meaningful percentage as you note of what's outstanding.
Not only for the program through 'twenty, two but but through 'twenty six.
The other question you know as we think about.
23.
As Curt mentioned, we have a large open position.
In 'twenty three relative to 'twenty, two and that can work, obviously to create an over performance opportunity or come in slightly under.
And we've seen the curves continue to rise and I think the commercial team has done a very nice job looking at our point of view and trying to figure out when to put the positions on to be able to manage the expectation I think as Curt said 23 was much lower and you saw that with forward curves in the past, particularly.
This time last year.
That gap has closed considerably it hasnt fully closed.
And then you see that even in our charts in.
In the slides that we presented for the spark spreads. So we think 'twenty three has a very good chance of being in line with 22, but theres still room, there's still room for the curves to move and we still have a large open position. So we've talked about a three plus billion.
Business on a on a run rate basis, and I think the fact is is that there's going to be a range around these outcomes. We are in a competitive segment.
Benefited by having a large retail position that can that can work almost in a counter cyclical manner to the wholesale position at times, but.
We still have some variation around it as these as the markets have shown some volatility, but we view that as something we can capture so I think looking at it more in line is where we would expect to be but we still have a ways to go.
The 23, given that Theres still some backwardation relative to 'twenty two.
Okay got it so just ways to go as an uncertainty or still a little bit below.
<unk>.
No.
Well.
Julian the way I would just I think it has.
Go ahead Kurt.
No no no go ahead I'm sorry.
No I would say you have it.
If you simply in this is that this is the struggle that we talk about because we have a point of view on the business that has consistently.
Shown that the market curves begin to approach as we get towards a prompt year. So if all you do is look at where our curves two day.
And you just look at it and say lock all that in it's going to be lower than 2002.
That's just math, that's not how we run our business we run our business based on where we think it makes sense to put positions on and where we think curves.
We'll likely end up given supply demand characteristics in the queue that comes in for Newbuild et cetera, and so when we look at it over that basis. We feel that 23 has a very good chance to be right in line with 22, but that's just not where the curves are at the moment and we don't that does not concern us we've been in the spot before.
And we and it's happened for 'twenty two that's happened in previous years and so we anticipate.
Dissipated would likely happen again in 'twenty three.
Yeah.
So Julien I think you know I think Thats why we say, we're not trying to be evasive here at all it's just that when you're this far out in the curves are still backward dated and we've seen every year.
When you get into the summer and come out of the summer that the next summer and the winners tend to begin to move up and we expect that from our fundamental view.
Marketing something just to a current curve will give you one result, marketing something to our fundamental view will give you a different result, we think those.
The good news is this time around is that those two things are still within the range of 22 for 'twenty three.
In the past the curves and how you you've brought this up before in the past the curves were well below the $3 billion, Mark and now those the curves and the fundamental view.
You don't have converged, but theres still some room to move so I like to think about it there's a distribution around 'twenty three but clearly the 'twenty to 'twenty two EBITDA midpoint on a lesser basis is within that distribution and so we think there's a good chance that we can.
We can come in around where 22 levels are for 'twenty, three that's going to come down to execution.
And being ready when the curves are ripe and our team that's what we do that's what we get paid to do so we feel pretty good about.
Going into 'twenty, two we clearly feel good about it being 3 billion plus and big plus 3 billion.
Where it will land.
In terms of 'twenty in terms of 'twenty two 'twenty three.
We're going to be what we're gonna be within spitting distance of 'twenty. Three I think we have a good chance of hitting it and we could actually even exceed it so that distribution I think is favorable it's now about execution and getting opportunities.
Wow, Thank you team up.
For an easy question here.
And certainly not a evasive at all now let me let me ask you a slightly more detailed question.
On this.
Mr Zero.
Side of the equation you talked about $4 50 to 500 million of adjusted EBITDA. How much Capex are you thinking needs to get invested to get that outcome here and just to be clear.
It sounds like none of that would be paid at least prospectively.
Corporate capital it would all be funded with various other.
And segment specific sources as well I know that this is an update that's coming but it. So I just want to make sure I'm capturing this holistically correctly.
Yes, I think it's in the five to $5 $5 million range of total capital that would have to be invested in and you are right. The amount of equity capital that we would be putting in as relatively low although we're putting in some.
Obviously, putting in some projects into that as well that have value on the market, but yes, I think it's five to five and half million. If I remember right that we would have to invest.
And we obviously have plans for how we would do that.
And the contribution principally it just your existing storage at great.
Without being too specific.
Well, yes, I think I mentioned it.
It's moss landing it's.
Morro Bay, it's our Oakland site in California.
What is at nine sites in Illinois that would have batteries or something like that.
Its batteries in Texas, we have one that's 265 megawatt.
One hour battery coming on in Texas, We have a 10 megawatt already on.
But that's what the battery storage picture looks like and of course, we're predominantly a solar.
On the renewable side, we have found when to be economic.
We're not in offshore wind person, yet, so and I don't expect us to be that.
But we're not afraid of wind is just that we haven't found the opportunity for that but that's those are the primary projects of course Theres a lot of solar both in Texas and in Illinois.
Thanks, guys really appreciate the detail there.
Okay.
And our next question today comes from Steve Fleishman at Wolfe Research. Please go ahead.
Yes.
Hey, good morning.
Okay.
Hey, Curt so just.
Wanted to just.
NRG issues yesterday.
Call It sounds like you discussed some.
But I guess also the Texas ancillary costs.
And.
Called treatment Etsy.
Et cetera, how do you feel like those are Mb.
Embedded in your outlook and.
Obviously you are.
Asset position is different but just.
Want to kind of clarify that.
You are okay on those issues.
Yeah. So Jim you can jump in after this but so.
Over half of <unk>.
Let's just put it this way, but about $40 million in 'twenty one.
What is the effect of coal constraints.
So.
Just so we've captured that see that's in our our updated guidance and we capture that.
I think I've mentioned, we've decided to build inventory for Q1, because the economics are more compelling to to be ready for Q1, and so we've we have created.
This constraint in Q4 of 'twenty one.
In favor of Q1 of 'twenty to.
Everything is any constraints that we have going into 'twenty two is already built into our guidance. So there's nothing.
No nothing more.
About there we expect given what we're doing in Q4 of 'twenty one.
Favre of Q1 of 'twenty, two will actually allow us to run where we want to in Q1 of 'twenty. Two I think you know this to that.
Some of our some of our plants two of them in PJM in Ohio are not on pier B a lot of these constraints are coming out of the P. R B and on the rails from the P. R. B.
And then of course, the Oak Grove minds its own coal. So we don't have those limitations. There and then you know many of our other we just don't have a lot of EBITDA coming from like the Illinois plants and so the constraints just arent as big for us.
And I think the other thing is our team got a way out in front I mean, I just came to me.
More than a couple of months ago that we were concerned about this and so we've been managing toward that and we've been working with the Burlington Northern folks you know I've talked to their.
Our leadership team about getting more.
Getting more trains so that we can get them in and they're doing the best they can they know it's important for this winter in Texas. So all in all I think we're really kind of took a what I'd call a $40 million opportunity loss in Q4, but we're also going to have more inventory for Q1 of 'twenty two and all of that's baked in both of our guidance ranges.
Yeah.
Okay I'm sorry.
Yes.
Go ahead on the ancillary.
Did you ask about ancillary Steve can you hear US, yes that that was a big part of the issue. They had to yeah. We have that that's also ours is just much lower.
And Jim you might want to add to this but <unk>.
<unk>, we have we have ancillary effects of ancillary is baked into our numbers.
Jim do you want to add to that any specifics sure.
Yes.
We do that's baked into our plan.
We view the ancillary costs similar to the other cost at any retailer would face you've got to work it into your price and you've got it ultimately reflected with the customers we have that built into.
Our plan for 'twenty two.
Beyond and of course, we do have as you mentioned, Steve a different position, having some generation assets as well, so but the integrated effect and the effect on retail is fully reflected in our plan.
Great and then just on the.
Renewables.
The.
Plan.
How are you going to deal with the.
The Texas sites in terms of.
Historically, you were looking at developing those as merchant.
But obviously you can't project finance that so.
Are you.
Are you going to do Ppas with dish grow retail or with third parties Whats your strategy on the Texas with Windows.
Yes, it can be both Steve, but I think.
I think most of it were looking at right now is can be different in the future is back with our retail and Thats actually.
We have a we have.
Entity that lives between our wholesale and retail group that manages to supply.
We called the supply boat, but advantages of supply for our retail business.
They buy and they sell to third party retailers as well as to our own retail business. There. The one that will ultimately ended up contracting and then they will then supply our retail book as well as other retailers.
But that's where it's really sort of back to back with our retail arm and so that's where those contracts will be set up.
Okay.
Great. Thank you very much.
Thank you.
And our next question today comes from <unk> Chopra with Evercore ISI. Please go ahead.
Hey, good morning team. Thank you for taking my question I have a clarification and a follow up.
$500 million.
Prospective EBITDA from the Vista zero platform just to be clear as you are thinking about the structured financing or equity for those projects.
Yes.
That ends up diluting that $500 million rate that $500 million.
Is the gross number then what's Vista share is going to be lower depending on what financing choose my thinking about the right way or no.
Yeah, you are but let me just put this way we will we will own 100% of the common equity of this entity. So just to be very clear about it.
That capital tranche that we're looking at.
We haven't decided exactly what it will look like but.
We will we will own 100% of the common.
Equity of that business.
And so you can sort of figure out what kind of what kind of.
Tranches that could be.
But we're not looking to sell and partner with the equity ownership of that I think there are other ways to do what we want to do and maintain our control Jim anything you want to add.
Yes.
The way Youre thinking about it is correct.
Curt mentioned is an EBITDA number.
So we would expect that we would have some interest expense because we're going to be doing the.
Financing and any other sort of third party capital charges that we would have so we have some ongoing cost of that capital, which we believe to be more cost effective than our own.
And then over time, we would have some amortization of the project at the project level debt.
That we would take on so that's not meant to be a free cash flow number. If that's I think was getting to the nature of your question.
As an EBITDA number and as Curt mentioned, our goal is to maintain a 100% equity control so that from a terminal value standpoint.
Building a business of 500 million on a on a five year basis, we can get to $500 million and have long dated.
Long lived assets.
Very ESG friendly asset portfolio Thats grown rapidly and use third party capital more cost effective capital to do it. So there will be some some distributions out of that EBITDA to pay for that but we think that's more cost effective than doing it all on balance sheet.
Got it that's super helpful. Yeah, I was I was really interested in whether it's going to be 100% owned by you and it sounds like it will be.
Okay.
Second question in terms of that three plus billion.
EBITDA number you mentioned coal retirements amongst other thing that kind of gives you opportunity to get to that five gigawatt zero platform number.
Is there any degradation to that base 3 billion EBITDA as you ramp up.
Does your platform.
Well, yes.
We break if you break yes, if you break these things and Jim you can go but if you break them out right and you say, okay, let's isolate what impact do we have.
From our closing.
From our closing.
Our retiring of our coal fleet, yes, there is some slight degradation in EBITDA from that I will say that theres very little coming from these assets and the value of these assets have been written down to zero on the books. So they're just not.
Economically not contributing a lot and certainly not on an EBITDA basis.
What we are seeing though is that that effect is more than offset by over time as we invest in the Vista zero platform.
So we're able to actually ultimately grow.
Overtime.
As we invest and so we do see an increasing EBITDA profile when we project that out.
So while they do if you isolate if they do have a negative effect on EBITDA, meaning retired coal plants.
The other projects that are coming on more than offset that Jim go ahead, I'm, sorry, I didn't mean to.
No Kurt.
You covered it well there is eight that nearly 8000 megawatts slated retirements.
But we obviously have two large facilities in Texas that do not have anticipated retirement dates, but the EBIT contribution of that nearly 8000 has come down through time and is not material.
On the go forward horizon, but its something that we are are.
We built in.