Vistra Corp. (NYSE:VST) Q4 2022 Earnings Call Transcript

Vistra Corp. (NYSE:VST) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Good morning, and welcome to the Vistra’s Fourth Quarter and Full Year Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Meagan Horn, Vice President of Investor Relations. Please go ahead.

Meagan Horn: Thank you. Good morning, everyone, and welcome to Vistra’s investor webcast, discussing fourth quarter and full year 2022 results, which is being broadcast live on the Investor Relations section of our website at www.vistracorp.com. Also available on our website are a copy of today’s investor presentation, the related press release and recent annual and quarterly reports on Forms 10-K and 10-Q. Joining me for today’s call are Jim Burke, our President and Chief Executive Officer; and Kris Moldovan, 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 all 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 in 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 encourage all listeners to review the safe harbor statement included on Slide 2 of the investor presentation on our website that explain the risks and forward-looking statements, the limitations of certain industry and market data included in the presentation and the use of non-GAAP financial measures.

Thank you, and I’ll now turn the call over to our President and CEO, Jim Burke.

Jim Burke: Thank you, Meagan. Good morning. I’m pleased to be here with you all to discuss our fourth quarter and full year 2022 results, which we believe is a positive and straightforward message. Beginning on Slide 5, as we’ve reiterated over these past quarters, we remain vigilant and focused on our strategic priorities throughout the year, and the 2022 results demonstrate that focus and set us up well for the future. We believe that operating an integrated business model provides the stability and consistency that our customers and our shareholders expect and our operations throughout extreme weather events this past year, we believe, have proved this thesis. You’ll recall that we initiated guidance for 2022 for adjusted EBITDA from ongoing operations with a midpoint of $3.06 billion.

Despite extreme volatility in commodities and numerous weather events, including winter storm Elliott at the end of December, we ended the year exceeding this midpoint by $55 million. Importantly, we delivered strong adjusted free cash flows along with these higher earnings, delivering a final adjusted free cash flow before growth of $129 million above the midpoint of the narrow guidance range we introduced in the third quarter of 2022. Our integrated portfolio also supported our comprehensive hedging strategy we executed throughout 2022, with the goal of locking an out-year earnings potential in years 2023 to 2025. Kris will speak to this in more detail later, but we concluded the year at approximately 73% hedged across ’23 to ’25 across all markets.

This hedging percentage and the current forward curves continue to support the estimated $3.5 billion to $3.7 billion midpoint of adjusted EBITDA earnings potentials in those years. And with our 2023 adjusted EBITDA guidance midpoint set at $3.7 billion, we look forward to executing squarely on these opportunities. We continue to see Vistra generate significant cash flows and our strategic priorities remain focused on returning meaningful value to our shareholders. Kris will provide a detailed update on our capital allocation plan, but I will note that we returned approximately $2.25 billion to shareholders via our share repurchase program from November 2021 through December 2022, approximately $250 million more than we had originally planned.

Additionally, we paid out $300 million in common stock dividends in 2022, as planned, with each quarter’s dividend per share growing as the share count was reduced. The fourth quarter dividend paid in December 2022 represented a 29% increase over the fourth quarter dividend paid in December of ’21. We expect shareholders to continue to experience increases in dividend returns into 2023 as we expect to continue to pay out an aggregate $300 million in annual dividends due to decreasing number of shares of Vistra common stock. We remain vigilant this year in maintaining a strong balance sheet. While our debt balance did grow to provide the liquidity we needed to support our comprehensive hedging strategy, we achieved our goal of a sub-3x leverage after margin deposits are considered at year-end.

We held our debt capacity steady at year-end as we saw less return of margin than originally expected. We have seen the margin deposits start to return to us in the first quarter of 2023, and we continue to actively manage our liquidity and focus on opportunistic timing and structures to further optimize our balance sheet. With the goal to achieve our long-term sub-3x debt leverage ratio target on a pre-margin deposit basis over time. Finally, we are proud of the results we saw in our Vistra Zero business this past year. We added over 400 megawatts of renewable and storage capacity in 2022, and we expect to add another 350 megawatts of storage capacity in California at our Moss Landing Phase 3 facility in mid-2023. We also retired approximately 2,900 megawatts of Ohio and Illinois coal facilities at our Zimmer, Joppa and Edwards plants.

We appreciate the dedication of our teams who work at these sites for decades, powering our communities and always with a sharp focus on safety. We are pleased to be able to redevelop these sites in the future Vistra Zero energy facilities. Notably, the Joppa and Edwards sites are part of our Illinois Coal to Solar program where we are transitioning numerous sites into solar and/or storage facilities. Turning to Slide 6. We had a strong 2022, ending the year with $3.115 billion of ongoing operations adjusted EBITDA. This is $55 million above the $3.06 billion midpoint we said in the third quarter of 2021. We achieved nearly $2.4 billion of adjusted free cash flow before growth, $129 million higher than the narrowed guidance midpoint we set in the third quarter of ’22.

Our financial achievements were underscored by the strong performance of our retail and generation teams. Our flagship retail brand TXU Energy continues to execute well, growing Texas residential customers nearly 2% year-over-year, while maintaining its PUCT 5-star rating. Our Generation team has proven its ability to perform in extreme weather conditions in both the summer and winter months, optimizing the maintenance of our fleet to stand ready to perform when needed. The team’s commitment is illustrated by the 95.4% commercial availability achieved fleet-wide this past year. Safety remains our top priority and the culture of continuous improvement is exemplified in our Vistra best defense safety program. I’m pleased with our performance in 2022, but through continuous improvement, we see opportunities to perform operationally at an even higher level in 2023.

We now look forward to delivering on the financial guidance we set forth last quarter for 2023. We are reaffirming our $3.4 billion to $4 billion adjusted EBITDA from ongoing operations range for 2023 as well as reaffirming our $1.75 billion to $2.35 billion adjusted free cash flow before growth guidance range. It is early in the year, but notably, despite the volatility in commodity prices we’ve experienced lately, we continue to have the line of sight to achieve the expectations we’ve set for ourselves given the potential value our comprehensive hedging program has locked in for 2023. I will now hand the call over to Kris to discuss the 2022 fourth quarter and annual performance in more detail.

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Kris Moldovan: Thank you, Jim. Starting on Slide 8, Vistra delivered solid fourth quarter results in 2022 with ongoing operations adjusted EBITDA of approximately $771 million, including $359 million from Retail and $412 million from Generation. For the year, Vistra delivered $3.115 billion of adjusted EBITDA from ongoing operations, including $923 million for retail and $2.192 billion from Generation. Retail’s results exceeded the midpoint of its component of our 2022 adjusted EBITDA from ongoing operations guidance of $700 million by $223 million. Our favorable results were primarily driven by strong residential margins, claim management and customer counts in ERCOT, offset partially by PJM and New York, New England counts and margins.

Moving now to Generation. Its adjusted EBITDA from ongoing operations results came in under the midpoint of the Generation component of guidance by $168 million, primarily driven by low first quarter prices in ERCOT, coal constraints and higher default service costs, partially offset by higher realized prices and strong commercial availability. Turning now to Slide 9. We are providing an update on the progress we’ve made on our capital allocation plan. As of February 23, we had executed approximately $2.45 billion of share repurchases since beginning the program in the fourth quarter of 2021. This includes an incremental $200 million since the end of 2022. We expect to utilize the remaining approximately $800 million of authorization by year-end 2023.

Notably, as of February 23, our outstanding share count had fallen to approximately 381 million shares outstanding, which represents an approximately 21% reduction from the aggregate number of shares that were outstanding just under 16 months ago. Additionally, in 2022, we delivered on our goal to pay $300 million in dividends to our common stockholders each year, and we continue to execute against that goal as we head into 2023. To that end, we recently declared the quarterly dividend to be paid on Vistra’s common stock in the amount of $0.1975 per share or approximately $75 million in the aggregate, payable on March 31, 2023. This is an approximately 16% growth in dividend per share as compared to the dividend paid in the first quarter of 2022.

While returning cash directly to our shareholders remains a priority, we also continue to focus on maintaining a strong balance sheet. Importantly, we continue to target a long-term net leverage ratio, excluding any nonrecourse debt at Vistra Zero of less than 3x. While we did in the year with a higher debt balance than we planned, that higher balance corresponds to the higher levels of adjusted EBITDA opportunities we now have in years 2023 through 2025 as a result of our comprehensive hedging strategy, the execution of which required additional liquidity. Even with the higher debt balance, we achieved a sub-3x leverage on an after margin deposit basis at year-end. As we have reported in prior quarters, we continue to pursue Vistra Zero growth, and once again, we emphasize that we anticipate financing that growth by using primarily third-party capital along with the remaining proceeds from the issuance of the $1 billion of green preferred stock and ongoing Vistra Zero free cash flow.

Turning to Slide 10. As Jim mentioned earlier, we are reaffirming our guidance for ongoing operations adjusted EBITDA with a $3.7 billion midpoint for 2023. As you can see on Slide 10, we are providing an update on the forward power and gas price curves as of February 23. While there has been noticeable volatility over the past year, prices are still holding in the range of the April 29, 2022 curves, which were the basis for the estimate of $3.5 billion to $3.7 billion of potential ongoing operations adjusted EBITDA midpoint range for each of years ’24 and ’25. Importantly, as of the end of 2022, we were approximately 73% hedged on average across all markets for 2023 through 2025, with 2023 approximately 90% hedged and 2024, approximately 76% hedged.

As Jim stated, we are pleased with our 2022 accomplishments, but we are focused on continuous improvement as we deliver on our 2023 priorities. With that, operator, we’re ready to open the line for questions.

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Q&A Session

Operator: Our first question will come from Shar Pourreza with Guggenheim Partners.

Shar Pourreza: Realize it still kind of ways off, but I guess given the volatility we’ve seen in the backdrop, I think it’d be kind of helpful for The Street, how should we sort of think about the EBITDA in ’26 and beyond? The curves would imply a bit of a step down, obviously, not as liquid that far out from a hedging perspective. And I guess, any general sense you can give there like you’ve been doing for ’25?

Jim Burke: Shar, this is Jim. We knew when we put out 3-year kind of views, we get asked about before and it’s not surprising. What’s interesting about the curves is that ’26 is actually hanging in there relative to ’25. You see gas, obviously, still has a little bit of contango in it. We’re seeing the heat rates hold up. We’re certainly way more open in ’26, and the liquidity there is not obviously the same as the near term. But right now, it’s just that we’re really open in ’26, Shar, but actually, the ’26 on just sort of a view as to where the curves are today. If we could actually lock that in, we feel pretty good about where we would guide for ’26. It’s just that’s a long ways off, and it’s not as liquid as we’d like it to be to be able to act on it.

I’m not even sure from a point of view that we would act on it fully, if we could. I think we think that some things might be a little bit overdone on at least as we see the view now with the mild winter and that putting that kind of downward pressure we’ve seen on the complex overall. But it’s a good question. It’s one we talk about every day, as we look at how we commercially optimize the business, but ’26 is hanging in there.

Shar Pourreza: Perfect. And then, Jim, a lot of different data points flying around this winter on the PCM and ERCOT. I realize it’s not yet a completely done deal, but I guess how should we sort of think about potential uplift to your assets, if it’s passed? You guys should have done the math, and obviously, is there still a door open to do something else down there?

Jim Burke: The PCM, as you know, is the leading concept at the moment as a proposal passed by the Public Utility Commission 50 in January. A lot of alternatives still being discussed there. The one thing to note about the PCM is, it was passed, I would say, more with the conceptual framework. The details are still to be worked out, things like what is the reliability standard that the state is actually going to procure resources to ensure reliability. What is the net CONE, what’s the slope of the demand curve. There’s just a lot of things to work out. And so this idea of trying to calculate its value, I think there’s really a couple of concepts we would want to make sure when we get through the stakeholder process. One is, is it material enough to attract investment?

And that’s one of the ideas that is the concept behind doing anything with market reform. And is it enough to retain the Generation that’s currently there? So to the extent that we end up with a PCM that just does not have a lot of value in it, it could be a concept and it could be implemented, but it may not do much attracting of investment or retaining of assets. And I think you’ll hear the debate down there that’s happening in Austin, there are many stakeholders that do not believe that we have to do significant market reform. We’re concerned about market reform from the standpoint that the state of Texas from a reliability standpoint will need to actually incentivize new generation while retaining the existing because we are such a strong economy, and we’re seeing the load growth here in markets unlike anywhere else in the country.

So I think, Shar, it’s too early to say what the PCM is going to provide. Obviously, we believe in a dispatchable resource emphasis around PCM. We think that’s core to grid reliability, but there’s too many things to still work out in the stakeholder process, if this is the leading concept coming out of the legislative session.

Shar Pourreza: Perfect. And then, Jim, one last one for me, I promise. Just on the inorganic side, I mean we’ve seen nuclear assets in the East come to market in recent months. One of your peers obviously has been very vocal that they couldn’t bridge the bid ask there. Is this something you’ve considered or would you consider in the future? Any thoughts there would be appreciated.

Jim Burke: Yes, sure, sure. We’re obviously not going to comment on any specific aspect of M&A, but you’ve seen this in the past. If they can leverage our core capabilities, it’d be a consideration. We’ve done it with Dynegy, Crius, Ambit. I view it as — I think we’re good at 3 things. I think we’re very good at operating plants, serving customers and commercially integrating these 2 activities, which as you know, operate in a followable commodity market. So I think we would look at things, and we have been around processes and that’s part of just our core strategy of looking how — looking at ways that we can maximize value for shareholders, but I wouldn’t put a caveat. Our investors have been very clear that they do like our return of capital strategy.

We try to be very consistent with that approach, as Kris laid out, and I think that still remains our priority. So anything that we’re going to consider in that front, I believe, needs to fit within that framework that may or may not be possible, but we have a priority around returning capital to shareholders. And if we can do that and leverage our core capabilities, we’d be interested