Q3 2022 Vistra Corp Earnings Call
Good day and welcome to the Vista third quarter earnings call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your Touchtone phone and to have all your question.
Please press Star then two please note. This event is being recorded I would now like to turn the conference over to MS. Megan Horn. Please go ahead.
Thank you good morning, everyone welcome to <unk> Investor webcast discussing third quarter, 2022 result, which is being broadcast live from the Investor Relations section of our website at Www Dot Fisher Corp Dotcom.
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 Jim Burke, our President and Chief Executive Officer, and Christian I'll bet, Our executive Vice President and Chief Financial Officer, We have 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 would like to note that today's press release slide presentation and discussions on this call include certain non-GAAP financial measures reconciliations to the most directly comparable GAAP measures are provided in the press release and in the appendix to the Investor presentation available on the Investor Relations section of the company's website.
Also 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 I.
I encourage all listeners to review the Safe Harbor statements included on slides two and the Investor presentation on our website that explain the risks of these forward looking statements the limitations of certain industry and market data included in the presentation and I guess, if these non-GAAP financial measures.
You and I will now turn the call over to our President and CEO Jim Burke.
Thank you Meghan good morning, everyone. We plan to keep this call relatively short we believe we have a straightforward message to deliver today.
I recall, we've shared with you our priorities for the year and today, we're here to share how we are successfully executing against those priorities and.
Provide a review regarding 2023.
Starting on slide five we had another strong quarter financially, earning $1.038 billion in ongoing operations adjusted EBITDA or.
Our generation team performed extremely well throughout the summer, but their performance was most on display during the high heat weather events experienced in July in the ERCOT region. For example on one particular day in July when ERCOT experienced periods of low wind and solar output.
We saw our Texas generation fleet operate at its Max capacity.
On this day, we saw prices hit the $5000 price cap on three different hours.
Well maintained fleet is key to delivering reliable power for our customers and our communities and ensuring value is captured during these weather events in our generation team delivered.
Our retail business, similarly performed well showing its resiliency by demonstrating the ability to serve customers at attractive margins, even in light of the higher commodity cost environment. Our retail team responded to our customers' needs and our performance reflects our deep commitment to our customers in fact its commitment.
He was recently acknowledged by the PUC T. When T X you Entergy was recognized as a five star rated retailer.
With three quarters of performance now reported we are able to narrow our previously announced guidance for ongoing operations adjusted EBITDA and ongoing operations adjusted free cash flow before growth.
We know the ongoing operations adjusted EBITDA in a range of two point $96 billion to $3.16 billion in ongoing operations adjusted free cash flow before growth in a range of $2.17 billion to $2.37 billion for 2022.
We're reaffirming our original midpoint of three point or $6 billion of ongoing operations adjusted EBITDA for 2022.
This has been a year with significant volatility in fuel prices and weather in an environment of rising inflation and yet our team is performing well and tracking at the original guidance provided last November .
Due to our comprehensive hedging program to capture higher earnings in future periods, we had incurred some higher interest charges, which is reflected in our modestly lower midpoint for ongoing operations adjusted free cash flow before growth.
This midpoint is now 2.2 dollars $7 billion as we have discussed in the past we took on additional short term debt to fund the liquidity needed for our comprehensive hedging program.
The hedges are locking in significant out year earnings potential.
That higher earnings power as reflected on slide six today, we are initiating guidance for ongoing operations adjusted EBITDA in a range of three point for the $4 billion and ongoing operations adjusted free cash flow before growth in a range of $1 75 to two.
Three $5 billion for 2023.
Our 'twenty to 'twenty three guidance midpoint of ongoing operations. Adjusted EBITDA is three $7 billion. This is the top end of the mid point opportunity range. We estimated for 2023 during our first quarter call as we saw the dramatic increase in gas and power forward curves.
The higher EBITDA figures and the volatility we have seen in the market. Our range is larger on an absolute basis, but as a similar percentage of the midpoint as we've had in recent years.
We are confident in our ability to deliver on this value proposition for 2023, and as you know our comprehensive hedging program extends into future years.
With that I wanted to take a moment to reiterate Mr strategic priorities as we summarized on slide seven.
We believe these priorities are delivering and are expected to continue to deliver significant value for investors.
We previously stated that we saw annual ongoing operations adjusted EBITDA potential up around three plus billion dollars going forward.
As forward power curves increased we announced Q1.
22 that we saw ongoing operations adjusted EBITDA midpoint potential in the three five to $3 7 billion dollar range for years 2023 through 2025.
We're now approximately 70% hedged on average across 2023 through 2025 occur.
Accordingly, we continue to believe in that range of earnings potential.
And in turn we are using the significant cash flows to return value to the shareholders.
Mr continues to execute on our previously announced capital allocation plan and Chris will speak to those details momentarily.
But notably.
Our capital allocation plan offers a robust returns per share looking forward to the target share repurchases and dividends under the capital allocation plan between now and year end 2023.
We have $1 $2 billion of remaining authorization for share repurchases that we expect to utilize by year end 2023.
Plus $375 million in dividends targeted for payment Q4, 2022 through Q4 2023.
That capital distributed across our current shareholder base delivers an equivalent of approximately $4 per share of capital being returned.
I recognize this is a simple illustration I only point this out to underscore the incredible value proposition. We believe district currently offers.
As a reminder, these expected cash returns are achieved even after we make the planned maintenance capital investments to ensure our fleet is well positioned for the winter and the summer.
This is also after we execute on our expected debt reduction to ensure a strong balance sheet.
Lastly, we expect this to zero to be financed primarily with third party capital, enabling us to continue the transition aspects of our fleet, primarily some of our older coal assets in a capital efficient manner.
Mr. Xie role will also benefit from the inflation reduction Act.
Including setting a price floor for our nuclear asset Comanche peak you.
You may have seen we recently submitted the re licensing application, which would extend our licenses by 20 additional years for each of the two units to 2050 in 2053.
We continue to see how important a role our diverse set of assets are playing throughout the U S and ensuring reliable affordable and sustainable power.
Our integrated model is delivering a service that our customers and communities depend upon and we are excited to be able to share our expectations with you our owners that the future is bright for our company.
I will now hand, the call over to Chris to discuss this quarter's financial performance in more detail.
Thank you Jim starting on slide nine as Jim mentioned, Mr delivered strong financial results during the third quarter with ongoing operations adjusted EBITDA of approximately one point O three $8 billion, including negative $2 million for retail and one point O $4 billion for generation.
It is important to note that mistras full year 2022 guidance contemplated that retail would deliver negative ongoing operations adjusted EBITDA this quarter.
Despite rapidly rising power prices. This year Retail's results this quarter and year to date are bolstered by continued strong margins and customer counts in ERCOT, along with robust large business market sales performance, partially offset by higher bad debt expense and ex ERCOT headwinds.
Moving now to generation the results of the generation segments this quarter and year to date benefited from higher prices in the summer months, coupled with outstanding performance of the fleet to be available to capture those higher prices.
Offset by lower prices in Q1 2022.
Lower generation volumes from coal plants due to industry wide fuel delivery challenges and higher than expected migration of customers to default service providers.
With our financial results tracking consistently with our expectations, we continue to execute on our capital allocation plan as described on slide 10.
As of November 1st we had completed approximately $2.05 billion of share repurchases.
We expect to utilize the remaining approximately $1 $2 billion of authorization under the Upsized $3.25 billion program by year end 2023.
Notably as of November 1st our outstanding share Count had fallen to approximately 398 million shares outstanding which represents an approximately 18% reduction from the aggregate number of shares that were outstanding as of a year ago.
We also remain committed to paying $300 million in dividends to our common stockholders each year.
And our board recently approved a quarterly dividend to be paid on Vista as common stock in the amount of 19.3 cents per share or approximately $75 million in the aggregate payable on December 29 2022.
This is an approximately 29% growth in dividend per share as compared to the dividend paid in the fourth quarter of 2021.
While returning cash directly to our shareholders remains a priority we will continue to focus on maintaining a strong balance sheet.
Importantly, we have not deviated from our long term net leverage target.
Excluding any nonrecourse debt administer zero of less than three times.
On our second quarter call. We noted that we expected to repay at least $2 $5 billion in the second half of the year and we made significant progress this quarter repaying approximately $1 $4 billion of debt.
We expect to repay an additional $1 $1 billion of debt by year end.
Finally, as we look to grow go through zero. It is important to emphasize that we anticipate financing that growth by using primarily third party capital.
As Jim mentioned earlier, we have initiated guidance for ongoing operations adjusted EBITDA with a $3 7 billion dollar midpoint for 2023.
On slide 11, we're presenting the forward power price and gas curves as of October 31, 2022 as.
As you can see while there has been noticeable volatility prices are still up materially as compared to the prior year not.
Not only do these curves support our 'twenty 'twenty three guidance range, but they also continue to give us confidence in the 3.5 to $3 $7 billion of potential ongoing operations adjusted EBITDA midpoint for each of years 'twenty 'twenty four and 2025.
As you would expect the commercial team has continued its execution of the comprehensive hedging program that we discussed initially on the first quarter earnings call significantly derisking and locking in our future earnings potential for these out years as well.
At the end of the quarter, we were approximately 70% hedged on average across all markets for 2023 through 2025.
With 2023 being approximately 90% hedged.
On slide 12, we are providing a bit more detail around our 2023 guidance.
Our retail and generation segments.
Recall that last year, we also separately broke out or Sunset generation segment.
Several plants closing in 2022 in the very beginning of 2023.
Moving from our sensor segment to our asset closure segment.
Together with the growth of Mr. Zero, we are currently reevaluating the appropriate segments for our businesses.
In light of that ongoing process, we have combined the sunset segment with their other generation segments for 2023 guidance purposes only.
We currently expect to finalize any segment changes by the time, we share our first quarter 2023 results.
It is worth reiterating execution has been and will continue to be our focus in 2022 and into 'twenty 'twenty three our first nine months have delivered strong results and we see our full year 2022 on track, we look forward to discussing our full year results on the next call.
With that operator, we're ready to open the line for questions. Thank you. We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble.
Foster.
And the first question will come from Michael Sullivan with Wolfe Research. Please go ahead.
Hey, everyone. Good morning.
Good morning.
Hey, Jim Hey, Chris I was just hoping maybe you could start with that.
Just some color on some of the moving pieces relative to the last call. It seemed like a 22, you were tracking a little better than the midpoint now at the midpoint.
23, youre kind of at the higher end of that range. So maybe just a little more color on what kind of move between the two years from the last call. It just commodity prices or anything else going on.
Yeah sure Michael So for 'twenty, two we were tracking a little bit above mid point, when we talked last time, we see ourselves closer.
The midpoint at the moment I think we've seen some headwinds with coal constraints that we have some earlier in the year and even through the summer.
We were getting some indications that coal deliveries would pick up.
That has been a slower process not just for us and I think from everything we can tell you know industry wide. So that that's one of the headwind the other headwind that we mentioned as we picked up some default service mode.
We did on that load last year and even as late as early this year before the price ran up.
As that as the market moved up in the spring and summer customers have the opportunity to move to default service that their choice. In addition to that there was one new the aggregation no pack.
That actually in Nast moved all of their customers alternatives, we're not sure that that actually was provided for in the structure of the whole service, but it was a it was approved by the commission in Ohio.
Those were headwinds that have developed further since our last call. So when we look at the year, we've been able to offset those so we have had very good performance on the retail business. We had good performance with the summer as we mentioned in the script and so we had length, we were able to cover that those headwinds and I think the.
We did model show the diversification eight off but I think that's really the driver as to why we saw ourselves tracking slightly above mid point before and now we see it on this point, but the operational excellence of the fleet in the retail business has been has been quite strong I mean as it relates to 23.
Some of the default service carries over into that May come through the may timeframe and.
And we also had to recognize that the cold constraints as many rolling issue. So we have just modest improvement now assumed in 2023 for coal deliveries were still not running everything that we could run.
The coal fleet, even in the 2023 class.
There's a little bit of conservatism and it's just something we learned throughout this year that it's a tough it's a tough market is a tough challenge.
So basically free up.
The supply chain and have the train sets running at the quantity and the cycle times that we would like so we reflected that here and I think the upper end three five to three seven we mentioned that on our first week.
Our call in May and we're at the upper end of that mid point.
So we feel good about being able to weather this volatility, but those are the headwinds and some of the tailwind that we've reflected now in this guidance.
Okay, that's super helpful.
And then my my next question was just.
As we look out to 'twenty four 'twenty five it seem like previously given a bigger unhedged position.
Maybe even better out there and just latest thoughts on how you're feeling since our since the Q2 call you on slide 11, you see the direction of the curve and we've tried to we knew when we put this out FERC made it we'd be asked for continuous updates on necessarily we added potentially our disc.
Closure on a more consistent basis now or the third call you see the run up late spring and summer and then you see it coming back off pretty hard we have been hedging through that period and I think the value of the comprehensive hedging program. So we were a little bit more bullish about where we saw things obviously when you're in.
The middle of the summer and the curves were peaking and you had your hedge position, we were able to hedge through some of that but the curves have come off and we are actually still through this chart showing that through October 31st curves, which as you know.
Certainly much lower than where they were at the peak of the summer because we've increased our hedge percentage now to 70% across the years, we still feel good about the three five to $3 seven so again, it's a predictable.
Set of cash flows as far as we can see we obviously arent fully hedged.
I think we haven't been trying to time the high and the low we've been working through this and I think showing that three five to three seven is still there and our expectation for 'twenty four 'twenty five.
You know it is a sign of that integrated model works.
Okay, that's great.
Real quick the last one again kind of back to the bridge to 'twenty three.
What are the what are the positives on on the retail side. If I just look at kind of where you are year to date, something like 564 million and then the range for next year.
Kind of close to 1 billion.
Yeah, what what what are the tailwind there that that could be up for next year. Yeah. We continue you know one of the things we've been able to do this year, which has been a benefit for customers as we forward buy obviously as you would expect in our retail business because our customers expect predictable pricing and so we've seen our rates move up on existing customers on.
Average about 10% this year so in the aggregate.
The inflationary effects and even the price spikes of commodities.
We've done a nice job smoothing that out for our customer base.
As you look at you know what's going on when you move forward, we do have continued movement.
Our expectations on average of how we smooth out the prices for customers. So we have even greater margin realizations as we go forward, which is a which is a tailwind. We also are seeing and we've had great margin management. This year, we see that continuing the count story has been very good in ERCOT.
It continues and even our Midwest northeast business, which has been more challenged because of the default service.
Prices lagging the same topic I just mentioned about default service migration. It makes it difficult for retail businesses to compete against that we see that improving the Midwest northeast improving next year as well so retail business has had a very good position.
That's having a very good year this year and we expect that to continue to improve we also have a little bit less retail bill credits that we have is a Polish erie effect, where we have no credits for settling large customers. We have less of that in 'twenty three versus 22. So those are the key drivers are.
The improvement in that business.
Thanks, Dan I appreciate all the color.
The next question will come from Paul Zimbardo with Bank of America. Please go ahead.
Hey, Paul I, Hi, good morning.
For the updates.
A lot to dig through just to start out with could you discuss the drivers on the 20th twenty-three free cash flow conversion I know you had a 65% target at the analyst day in the past, but just curious it is kind of 2023, a blip until we get back there in the future.
Yeah, all the the free cash flow conversion from a from a historical standpoint, we've obviously revenues go up because we have inflation that's affected some of the raw commodities. Some of that also affects our cost of doing business, including our capex assumption. So we have more outages next year.
It's actually just a function of the starts of the units and the run hours. So we have more outages planned for 'twenty for actually 'twenty, three and 'twenty four and that that's predictable we can see that peak in 'twenty, three and 'twenty four and then it comes off in the next three to four years. So we have higher capex and some of the Capex is more.
Pension because of the inflation drivers. We also have more interest expense that's a function of our comprehensive hedging program you can see some of those drivers obviously in the back of the release.
In terms of some of the reconciliations between our EBITDA and our free cash flow.
Obviously, the inflation does affect revenue line, but it does affect some of the cost drivers as I've as I just mentioned interest rates, we have more borrowings at this point and we have slightly higher interest that's unhedged that we have but we do have some interest rate swaps in place as well, but those are the key drivers and Chris if theres something you'd like to add there. Please.
Jim I think you covered it.
The driver as well.
Thanks.
Okay, Great and then separately I know you're running a lot of promotions in Texas over the summer could you just discuss what you've seen on kind of retail customer attrition and stopped packing a little bit it looks like customer count was down.
Quarter over quarter, and you talked about like value accretive exits if you could just elaborate a little bit there. Yes. Thank you. Thank you Paul the retail market.
Texas.
It is a robust market, we have done extremely well this year.
Part of it is the innovation that you mentioned, we've been able in fact, we rolled out an easy miles program just this week.
We have a lot of those flexibilities in Texas, because the retailer gets to do the billing we get to design the products that customers are looking for and that gives us a chance to differentiate and our accounts have actually been very strong in ERCOT and we've seen ourselves.
I think this this position of a trusted brand and that is one of the positives from 'twenty two going into 'twenty. Three these exits that have occurred in other markets are a function of the fact that some of these other market designs. They still don't let the retailer do the billing you're still competing against default rates and.
If those default rates lag like we've seen a lag this year in particular it becomes unprofitable to stay in some of these markets and so you end up in these boom bust cycles. In fact, I think the default market could end up seeing peak pricing and then you'll see the retailers rushed back in and pull these customers often default. So there were.
Two things happened on New York, We actually left the New York market because the regulatory scheme said you had to offer a discount to the default rate. So.
That became untenable once the default rates not moving and you have to offer a discount to that it becomes unprofitable is unfortunate because it was a very good customer base, but we have to look at this and be realistic that if the market design is not there to be able to recover your cost you need to exit, Connecticut was a different story.
Prior to our acquisition of Korea. There was there was concern from the regulatory body about some of the bill disclosures and when contract terms with and for customers.
Wanted to settle that matter and one of the terms of settlement was they asked us to give up our licenses in Connecticut, just happened before we ever got the business. It seemed shortsighted from the standpoint that the customer impact wasn't even determined to necessarily be negative. It was a question about how clear was a disk.
Closure around the termination of a contract plan, but as I mentioned earlier, if you're competing against default rates and you do not have the ability to differentiate your product with the customer you're essentially a line item on a bill and you're competing on price and that's a difficult proposition. So we have to work to.
And the mindset of some of these market places to be able to open them up to differentiation I do think other brands entering the space like Tesla shell BP can help bring other voices to the table I think a lot of this is the follow on to the polar vortex in 2014, where there was a lot of concern about how REIT.
Taylor's needed to try to recover their cost and prices were moving very very quickly.
We've got to restore confidence in some of these other markets outside of Texas to be able to differentiate like we do here.
Great. Thank you very much.
Thank you Paul.
Yes.
And the final question for today will come from Andy Soros and see what the Seaport. Please go ahead.
Hi, Thanks for taking my questions. So just first just one follow up on the free cash flow projection that people felt 2022 and 'twenty 'twenty, we I think I'm a little bit confused about what do you have no changes.
And any collateral postings I'm, assuming that's collateral is coming back so I was actually hoping for some boost to.
Cash flow in 'twenty three.
So again, maybe if you could talk both about collateral postings and the free cash flow projection.
Yes.
Quite a bit and so.
We do expect the collateral could be posted as you can as you saw we just said we have just over $3 billion of cash still posted as of 930, we expect a significant amount of that.
To come back over the balance of the year and into 2023, what you would note, though is the margin deposits and working capital we don't that doesn't get reflected in our.
Adjusted free cash flow.
Number so it's below that line, but we do expect over the next 14 months.
To receive it.
A substantial portion of the cash the $3 billion that we have to return to us and that's factored into our capital allocation discussions as far as the amount of share repurchases that we plan those dividends and debt repayments.
So what's the reason why there isn't a big positive from working capital perspective, this year and that basically offsetting negative next year.
Yeah.
I think AG what were.
What we're seeing in the disclosures from the EBITDA to free cash flow is that we are seeing.
Obviously from EBITDA to free cash flow, we see some drivers through capex and interest expense.
We are expecting the return of working capital.
And margin deposits net through 2023, and we will see that as part of our capital allocation is as Chris mentioned with our share buybacks or dividends and obviously our debt pay down.
Okay, Okay, and then secondly on the on the guidance Mike.
'twenty three so you're 90% hedged and I appreciate all of the volatility that you're seeing and and energy markets, but that's quite a wide range. So can you give me a sense. For example, what is it that you're trying to hedge against is that you know as you mentioned some issues with the call supply.
Is it performance issues I'll see a power plans again, just you know what can take me to the high end sensors to sell O N E.
Sure well, there's a number of things even the 90% still has quite a bit at elevated prices that unhedged part there's still a meaningful.
Part of the various drivers and we also assume that there is volatility in the marketplace and that volatility is something we can capture and that's what we did over the month of July when we had higher prices tighter supply demand you saw that some in PJM, we actually saw it a little bit and queso. So.
We assume that there is an element of volatility in the marketplace and that we can capture some of that either because prices move up and we're able to two.
To capture that incremental output at a higher margin or if prices actually moved down we can actually not run the asset and buy back in the marketplace and that sort of what we call extrinsic value as part of the value that we anticipate when we set guidance. So that's part of the.
Patients that we said when we put $3 7 billion out in the market. We also have some assumption I said, it's modest.
Coal being able to be delivered slight improvement over 2022 actual.
It could still.
Moves down from here I mean, you do not know how all of this is going to get resolved or still in negotiation, they're trying to get the rail agreement.
That would work for all of the unions involved but we don't have we don't have perfect foresight into how that will play out that also could be a path that we can actually get past that and get the best that we already have security to get cycle times, where they need to be that would be upside.
Potential into our guidance.
And then lastly, you know we still have weather areas even in retail.
We do hedge retail.
Derivatives and that's paid off for our customer base. This year has paid off for our retail performance, but if he had mild weather.
I actually find yourself long power and the retail business and having to do.
Sell that back in the market prices, so when prices get elevated and.
And then the variances around and volumetric we become bigger on a dollar basis. That's why we kept about an 8% band around the midpoint similar to prior years, just larger on an absolute basis.
Okay, and then lastly, again, I might've missed it and yacht and yacht back.
In your slides I was hoping for more disclosures on cash available for distributions and drivers year over year and I. Appreciate some of the comments you guys made in your prepared remarks, but should we expect something like that my cash available for distribution. So we have a better sense of you know how.
How much can be deployed into either additional buybacks or.
And our dividends.
Yeah. So thank.
Thank you again.
Sure.
We continue to talk about being able in a position to spend $300 million a year on the dividend 1 billion at least $1 billion, you're on share repurchases and paying down debt to.
The three times, which are primarily we can get there as you can see as working capital comes back.
The margin cause its come back we could use that money to pay down debt. We also.
Still have some proceeds from the green preferred to allocate but where we're tracking well right at.
We're where we thought we would track when we came out with our cash available for allocation last year in November .
We've got you know, we did upsize the share repurchases by $250 million to reflect some confidence in additional free cash flow will continue to evaluate as we move through the time period and if.
If we as we have additional cash okay.
What's the best use of that cash, but we're still committed to at least $1 billion a year of share repurchases and the $300 million dividend and getting our leverage to three times just under three times.
Okay. Thank you thanks for taking my questions.
This concludes our question and answer session I would like to turn the conference back over to Mr. Jim Burke for any closing remarks. Please go ahead Sir.
I wanted to thank you again for joining us. This morning, we're excited about district continued value proposition and we appreciate your continued interest in history and we look forward to speaking to you again in a few months and we'll discuss our fourth quarter and our full year performance as an important thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yeah.
Uh huh.
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