Vistra Corp. — 2024 Q1

Sure. Thank you, Shar. Yes, as you've noted, the sparks have obviously increased. Fixed-price power has also increased. This discussion about the value of tradition, which I think has come into focus a lot in the last 2 months, has been really positive for Vistra overall. As you note, the Vistra Tradition business is a key part of how we integrate our model overall. So we have a very large retail business that we have in Vistra Vision, and a lot of that business is residential. Residential has a level of usage that can vary with weather. And that's something that the asset side in Vistra Tradition supports extremely well.

Great question, Shar. I think -- so first of all, I think the queue of gas is starting to build a little bit. The application process will officially open for the Texas loan program in June. I think it's different than the early 2000s in a couple of ways. Number one, while sparks have improved over the -- even the last 2 months, in ERCOT, we no longer have the severe backwardation that we are accustomed to seeing. So that's a bullish sign. The loan program would be a bullish sign.

Yes. On the sensitivity, what I'll say is we feel good about the $6 billion number. We have a high confidence in that number, given where the curves are and where our hedge percentage is. As we look to sensitivities, we haven't given that. But as we think about it versus what you'll see in our deck on 2025, it's roughly twice, I would say, as sensitive to moves in power and sparks is what we're showing for 2025. But we do feel confident in that $6 billion number.

Thank you, Shar.

Yes, that's a good question. As you would expect, we put a lot of emphasis internally on the free cash flow conversion rate. And as Jim said in our prepared remarks, we target 55% to 60%, and we're a little bit lower than that based on 2 timing issues, I would say, this year. One of those is that of the -- on Slide 11, you'll see that Energy Harbor increased $150 million. One of that is -- $100 million of that $150 million is really due to a change in accounting methodology for outage expense recognition. So that's a noncash item that is increasing EBITDA but not turning into cash. So that is hurting free cash flow conversion.

Durgesh, what I would add to Kris's comment is, as you see the curves rise, some of that does not necessarily require additional capital and expense to achieve the higher earnings and free cash flow. So as you see the projections improve, you would expect to see some of the free cash flow conversion improve by the nature of the gross margin expansion and more of that dropping to the bottom line. So that is part of the trend that we're describing when we gave you the outlook for the free cash flow conversion.

Sure. Durgesh, I'll start and argue, as a more of a free cash flow yield comparison and how does that compare to the next best use of capital. When we started this process, of course, years ago, we were talking about free cash flow yields north of 20% for the business. It was a very obvious choice, I think, as to how we would deploy capital, recognizing where our relative value was in the marketplace.

Yes. I would just, again, reiterate that we do maintain an internal model and evaluation. And then we get feedback from our partners, our consultants as well, and we've done that recently. And we continue to look at different ways to value our stock. And right now, where it sits is any way we look at it, given the update that we've provided today, we still feel like our stock is a good buy. To the extent it gets to the point where it exceeds our internal valuation, which we don't see as being a near-term issue, but we would have to then discuss -- we will be disciplined in how we spend our capital.

David, this is Jim. I think I heard you mention data centers and curious about locations. Was that the question? It broke up a little bit on us, I'm sorry.

Sure. Yes, thank you, David. I think the conversation certainly has picked up this year. We started our process actually last year looking at our -- at the time, it was a prospective close of Energy Harbor, which, of course, is now in the rearview mirror, which is great. And of course, the Talen AWS deal came out early March. So that was certainly a benchmark and a watershed event for the industry.

Yes, David. It actually ties into the earlier question, which is you have existing assets that we have in our portfolio, large-scale combined cycle assets. The goal, obviously, for any of these potential partners with the data centers is speed and then reliability that they can count on for supply. It's going to be really hard to build an asset like a combined cycle to support a new data center without it having the carbon capture equipment that we were talking about. That's a huge lift.

Thanks, Angie. I appreciate that. As you know, we just said today, we're right at 3x. I think there's a -- we're 2 notches away from investment-grade with 2 of the agencies and 1 notch away from the other one. So we have some work to do even to get closer to investment grade. I think we're continuing to look at -- as we look at the outlook, I mean, our leverage metrics go down just with the increase in EBITDA that you're seeing over time.

So Angie, I think on the coal plants themselves, the main driver that we're looking at on a go-forward basis is really the EPA rules that we need to comply with, which means that all but 2 of our coal plants, the 2 being Martin Lake and Oak Grove, will be retiring in that 2027 time frame unless there's some other change in rule or law that we don't anticipate.

Yes, Angie, we do see some bilateral trades that are indicating improvement in PJM capacity clears. I think we've still been pretty conservative with our forecast and how we've built assumptions for the auctions that are forthcoming, the first one coming in July. I think where we've seen some of these clears, we've seen them in the $90, $100 kind of megawatt day range. Whether we're going to see that in this upcoming clear or it's going to be one later in December, we like the steps that PJM has been attempting to bring forward.

No. I think, Jim, you hit it. It's basically, if you look historically, PJM cleared on average $100 a megawatt day historically. We see that happening at the very least. And obviously, as grids continue to get tighter with demand growth in PJM and the retirements of coal that Jim mentioned, which are really more environmentally driven than they are price-driven, that market should continue to tighten.

Sure, Steve, the hedging, obviously, from our standpoint, we look at it as more opportunistic. So we look at where the price obviously is, where our fundamental view is and then is there actual liquidity in the market to transact. So just to give a perspective, at the end of last year, so December time frame, we were in a hedge percentage that was going to be closer to 10% to 15% hedged for 2026. So the team, as they've seen this move particularly more recently, have been moving more volume, Steve. There's also been more liquidity in the marketplace.

Sure, Jim. As you pointed out, we've been waiting for the curve in ERCOT to no longer be in backwardation and move up into a contango formation, which it is. And the second thing we look for is basically liquidity events, meaning there's going to be people that are willing to buy it with enough scale for us to get our hedges off. And we're starting to see that liquidity come in.

Yes, Steve, we weren't planning to comment on specifically by region on that front. But obviously, those are our 2 biggest portfolios so I would just leave it at that. I think it depends on the depth in the market and where we feel we can comfortably move some of the volume. And Steve, I do want to correct 1 thing I shared a minute ago. I was 1 file off as I was trying to respond to your question. We were closer around a 25% hedge at the end of the year in 2023, and that's moved up closer to the 50%. So I was trying to be a little bit too nimble in pulling out my information.

Sure. Yes, we have -- Steve, we have secured the supply physically for the outages all the way through 2027 and substantially financially. There's a few of our products that have some index pricing to it. And we are significantly hedged into 2028 as well. So we feel really good about fueling the 6 units over this planning horizon. With the Russian ban, with an uncertain or to be determined waiver process, I should say, we're very active in the discussions just to make sure that there's ample liquidity in the market as folks will look at these disruptions potentially, and it can cause the spot prices to move up considerably.

Sure. Yes, Bill. So the business contracts that we sell can be a duration of 1 to 2 years all the way up to 10 years. Now our portfolio is more skewed to the residential business, which I would say those tend to be 1- to 2-year contracts. Residential customers don't tend to have as much appetite for the longer-dated contracts. And so if you see a sustained higher price environment, you would expect the competitive market from a retail perspective to reflect the new cost of goods sold over time. And that would mean higher prices in a sustained high power market.

Sure, Bill. I'm going to ask Scott Hudson, our President of the Retail business is here, and I'll ask Scott to cover.

Sure. Well, first of all, let me just touch on current retail performance. We really had strong performance in the quarter and year-over-year. We grew residential direct-to-consumer customer counts by 13%. That came not only from the Energy Harbor acquisition, and we had some really nice success in the market that just opened, but we're also growing these books across all markets sort of organically. So really nice growth rates in Texas around the population. As Jim mentioned earlier, roughly 1.5% to 2%. And it's our goal at retail to grow with the market or exceed that market and grow kind of market share.

Yes. Thank you, everyone, for joining us, and I again want to thank the Vistra team, which includes our new members in Ohio and Pennsylvania. And we are very excited about our platform and our unique growth opportunities. The S&P 500 inclusion is a great milestone and our future looks bright. We appreciate your interest and investment in Vistra, and we look forward to visiting soon. Have a great day. Thank you.