Vistra Energy Corp. (NYSE: VST) Q4 2020 earnings call dated Feb. 26, 2021
Ladies and gentlemen, thank you for standing by, and welcome to the Vistra Fourth Quarter 2020 Results Conference Call. [Operator Instructions]
I would now like to hand the conference over to your first speaker today, Molly Sorg, Head of Investor Relations at Vistra. Please go ahead, Ms. Sorg.
Molly Sorg — Investor Relations
Thank you, Carol, and good morning, everyone. Welcome to Vistra’s investor webcast discussing fourth quarter and full year 2020 results, which is being broadcast live from the Investor Relations section of our website at www.vistracorp.com. Also available on our website are a copy of today’s investor presentation, our Form 10-K and the related earnings release. Joining me for today’s call are Curt Morgan, Chief Executive Officer; and Jim Burke, President and Chief Financial Officer. We have a few additional senior executives present to address 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 2 and 3 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, our earnings release, slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures are provided in the earnings release and in the appendix to the investor presentation.
I will now turn the call over to Curt Morgan to kick off our discussion.
Curtis A. Morgan — Chief Executive Officer
Thank you, Molly. Good morning, everybody. We appreciate your interest in this call today. And this morning I would like to start out with the elephant in the room. We had a rough week last week to say at least. And for our investors who are listening to this call, I want to say on behalf of everybody at Vistra that we are disappointed in our inability to deal with this unprecedented event in a way that was favorable for the company. But I can assure you that we did everything we could to try to come out on top. And I’d like to take you through a little bit, and Jim Burke will too, the events that ensued and what we tried to do to deal with those events, what happened and also just to tell you on the front end that it has taken us until middle of this week to really sort out what really ultimately ended up happening.
And so therefore, we felt it was imperative that we have this discussion, even though we have not sorted out everything that we have this discussion today and started the process of a conversation about what actually happened and then we will get to the final numbers. I can assure you that there isn’t anybody more disappointed than us. And it’s disappointing to me that we let you down because we pride ourselves in execution, and I think we’ve done a darn good job of it over the five years I’ve been here. And within literally an hour or two, our world kind of turned upside down.
First of all, it was for Texas, maybe for those of us who lived in the Northeast or the North know that may not have looked as a big a deal. But in Texas, it was an unprecedented event. The infrastructure, and I don’t mean just the electric infrastructure, but I’m talking about housing and other things are built really for the heat. You don’t see this kind of event. And I think history tells us that this was one of these so-called one in a 100 years. Now it did happen. And the reality is, even if it’s one in a 100, it can happen. So it’s no excuse, but it tells you the depth of what happened. It’s, as I understand it, the coldest three day stretch that they can — that they have on record in Texas, the 14th through the 16th.
So what does that mean? Well, that meant that we had unprecedented demand. So to take you back, and I think it’s important to lay this out, I think it was the 9th of February, Steve Muscato who’s on this call, came to me and said, our meteorologists that we have on staff came to him and said, we’ve got an unprecedented event coming. We ran the numbers and we were seeing load in 72,000 to 74,000 megawatts. Now let’s put that in perspective, the worst case scenario or the — one of the — I guess you called out that ERCOT had performed was about 67,000 megawatts or so, maybe 67,000 to 68,000. And Steve was concerned not just because of the load, but we also were looking at wind forecast and we are concerned about solar. And the fact of the matter was that we didn’t have enough steel on the ground to cover that load. So they have been testifying to this in Texas, I’m still here in Austin last couple of days and I’ll be talking more again today. But we did go to ERCOT because they had — I think it was about 65,000 megawatt for Monday — and this is by the way for Monday, Tuesday, 15th and 16th, just to give you a timeline.
So we are out in front of it. I’ve justified to this. I believe and now that I’ve been listening to the other testimony that I believe ERCOT thought that they had it under control. And I’ll tell you in a minute what happened. And I think they weren’t even prepared for what did end up happening. So the bottom line is, the company positioned itself relative to that to be long or flat. And in some instances, we were short going into that, but then we went out and bought power at very high prices because we believe that power was going to go through the cap. That it was not if, it was when.
And so we were prepared. We also spent, and we’ve been open about this, about $10 million in preparation. We brought on about 200 additional contractors on site. We essentially did our whole winter readiness in Texas all over again, which we normally do in the fall. And we felt very well prepared going into that. And then Monday came and I was on the phone with Steve and it was 1 AM and Steve, like he always does, we talk about, okay, here it comes. We think load-shed is going to begin. And of course, it was supposed to be rolling blackouts. And then it started. I mean, we all thought because we were 30 minutes on, 15 off, and that went on for a relatively short period of time. And then Steve told me that we almost lost the entire grid. Frequencies were erratic. It tripped a couple of our units. And then shortly after that, everything locked down.
And from what we find out on testimony now, the transmission distribution entities, not ERCOT, essentially locked down each of their systems at wherever they were because they were afraid they were going to lose the system. Now we had a book and then all of a sudden that book of business changed. Loans were down about 40,000. And the reason they locked it down is because we were losing generation on the grid left and right. And the reason we were losing generation on the grid was predominantly because gas pressures, but also there were outages. Unfortunately, for NRG, and this is public, South Texas project tripped. And I think this was a confluence of events for ERCOT and for the TEUs that all of a sudden, they were managing a very different risk profile with about 30,000 megawatts less of generation and they could not run a system on rolling blackouts with that level of generation. And so they just had to preserve the system.
Now that was the first event that changed our book. How did it change it? It locked whatever load you had in your area based on what was on at that time. So if you were rolling blackouts and you were on, North Texas was on, which we were, that froze that at a particular level. And then we started getting our gas cut because of pressures. So all the sudden, our book went from a flat to loan book into a book that was long, short, mixed. And we were scrambling at that point. And then right on that, we had gas contracts, people declared force majeure. So we had gas and then we didn’t have gas. All that happened within a very short period of time. And we were managing a different reality at that point in time.
And so frankly, we had millions of people without power in the State of Texas. We were scrambling to get gas. Gas prices shot through the roof. And we said, this is survival mode. We turned our attention to preserving the Texas market and the grid and putting every megawatt we could. We said ourselves, we have to put everything on it and we will count this up at the end. But the one thing we know we need to do is serve customers, stabilize the grid and then we will sort it out later. And that’s what we did. And I look back on that every day and over the night when I can’t sleep, and I say to myself, what could we have done different, Curt? What — how could we have played this differently? And I think those decisions, as I play them over and over again, were right.
Now we had some things. And by the way, I know it doesn’t matter, in light, what doesn’t matter. If you lose the Super Bowl, no one goes and says, [Indecipherable] the ref had a call, you lost. And so I get that. I’m just trying to explain to you what we were trying to do to manage this situation that was unprecedented to us and we were trying to do the best that we could. And it took us, frankly, until the middle of this week. In fact, all the way up to last night we were having the board meeting to really get a sense of what that range would be. And so we still don’t know exactly what all these numbers are because we’re still getting in because ERCOT shutdown for a while, wasn’t provided invoices. We didn’t know what the load looked like and we’re beginning to get that picture.
So if you think about what happened, there was a confluence of events. But the biggest which that we have not seen is all the way from the wellhead, we were having freeze ups. So there wasn’t enough gas to inject into the pipelines. We had gas processing facilities that were having winter issues. And one of the biggest things that happened is that the TDUs didn’t have an updated list of critical infrastructure. And so all of a sudden, they couldn’t help it. They just shut down what they didn’t think was critical. And all of a sudden, we had gas compressors that are running on electricity, that packed the pipes, they were shut off. They weren’t listed as critical infrastructure. We have gas processing facilities that were shut off because they weren’t listed as critical infrastructure. And we had wells, producing wells that were shut off for the same reason.
So then we have to triage. We had to go upstream looking for people saying — and finding out what was wrong, why we weren’t getting gas and we were helping people with the TDUs turn back on critical infrastructure. And that took — in order to get that to happen, it took a couple of days then for those to get on and then you have to — in order to repressurize the pipe, it takes a good day to do that. So it took us the balance of the week to get gas restored. So we had significant amount of curtailments and we were buying gas at a very high price.
Now one on us is we had some problems with our coal fleet. We had some — just some coal issues at Martin Lake, which would be rates. We didn’t come offline. We just didn’t produce at the maximum. And then we had, you guys may know this, but Oak Grove, we shipped coal, we mined lignite and we shipped it. We have three — the rails froze up and then we had plugging and that took us down for about a day and a half. Now why is that matter? Well, it matters a lot because of Oak Grove has about $5 a megawatt hour cost structure as opposed to having to essentially replace it with gas at hundreds of dollars in MMBtu. So the margin that we were getting for that day and a half was less. Now we got it back. That was a good thing, but we lost for that day and a half. That was lot of money that we lost, and Jim is going to go through these numbers.
The other thing that hurt us is that there was a pricing glitch on Monday. So we’re in what we call an EEA3, which is the highest alert at ERCOT. That means, you have really no reserves. In fact, we had 30,000 megawatts in negative reserves. Where was the price? Price was trading at LMPs, in some instances, $1,000 below our cost. And so we were calling ERCOT, what is going on? Well, we determined there was a pricing, let’s call it anomaly. We went to the PUC the next day. And they came out with an order and said we’re going to reprice that at the cap and then we’re going to have it stay at the cap until we come out of EEA3. Frankly, the right decision, and that was a big deal for us. Inexplicably, 18 hours later, they reversed the decision and they decided to do it prospectively, but not retroactively. And they claim that during wee hours of the morning on Monday that people relied on that price, ridiculous.
And so Monday was a big day for us because we were long that day because the gas infrastructure was just beginning to come off. And so we lost that value. Now that’s something that we are still taking a hard look at, but that was tough. Again, Curt, what’s the matter? Still happened to you? Yes, it did. But we didn’t expect it. Nobody expected when we’re in a EEA3 that the price will be anything, but at the cap. How could it be when you have negative reserves. It absolutely is preposterous, and yet that’s what happened.
So all of those things happened. The book — we didn’t know what the book was. We went through that. We performed actually relatively well. We put on 25% to 30% of all megawatts on the grid relative to our 18% market share. A good — again, no good deed goes unpunished. The problem was we had a mismatch when they locked the system down between megawatts and load. And the other thing is, we were producing from higher cost assets than we expected. So our cost of goods sold mix was not helpful.
So I’ve taken you really through the two first slides. I will say a little bit about the market because I think the other very fair question is okay, well, what does this mean for the Texas market? And frankly, I thought it was the best market in the country. And this event has made me think. Not just me, but a lot of people think about it. But I still believe the basic tenants of a very good market are here. But I think the one thing that we’re going to have to work on with the policymakers, the regulators, and I think we have good momentum on this, is that the grid in Texas today when we put in the all energy market and the price gaps is a grid that is different than the one that exist or existed when we went competitive.
So when we are competitive, it was very different. How? Well, we have a lot less dispatchable resources. In fact, we have less dispatchable resources than our peak loads. So we rely much more heavily on renewables. Renewables are good, nothing wrong with that. But it changes the risk profile. Renewables during this event were at capacity factors from 5% to sort of 15%. It didn’t really contribute a lot during this event. That’s why we didn’t — and that’s why I said, when we were at 74,000 peak load, we didn’t have enough at megawatts in the system. It was — again, it wasn’t a matter of if, it was a matter of when and we were telling people that.
So on the market design, reserves has to be, in my mind, the number one emphasis. And so there is a number of ways to get more reserves on the system. But I also think that we have to take a hard look at the balance between market and the competitive markets and reliability. And I think that puts a lot of things on the table. That puts could be potentially greater reserves that ERCOT has to acquire in order to maintain the system. It could be a capacity market. I know that that may be blasphemy need to some in Texas, but I think it has to be on the table. But what I think comes out of this is still a very good competitive market that still has opportunities for people to do well. But move on the spectrum of competitiveness to reliability, move that a little more towards the middle. And — but we’re going to sort through that and more will come out of that, but I’m confident that Texas will rise to the occasion. This economy mandates it. And the policymakers and the governor and others know that this economic engine is powered by electricity. And with electrification coming, we’ve got to get it right. And we’re a big player. We have a big seat at the table. We have a lot of good ideas. And I think the market actually advances to a good point.
Now the weather event, I mean, we’re believers in climate change. We don’t know if this type of event becomes more frequent. But I think if you just let history tell you something that this is not a frequent event, but it could happen. And so we have to adapt. We have to — and it’s not huge numbers, but we’re going to have to batten down the hatches, so to speak, and to harden our assets. And the one thing I’m going to be on a crusade about is making sure that the gas and electric systems work seamlessly, that the TDUs upgrade their critical infrastructure and that the gas system puts the money in just like we do to harden their system. It cannot be acceptable to not deliver gas at the maximum pressures in the middle of a natural disaster. Now you can’t say, well, my hands are clean on this, I don’t regulate that, let’s change the regulations then. So we have work to do, but I still have confidence very much so in the market.
Now this has been difficult. We hope that — we hope to maintain your trust in us, but at the very least, we hope to earn it back. I’m disappointed and it hurts, but it is what it is. And it’s easy to lead when things are going well. And I think it’s time to lead going forward. And I believe that the franchise is in place, the financial strength that we worked so hard to build, thank goodness has helped us through this. And our better days are still ahead of us. And the integrated model still works. And we just have to do some things, some tweaks. We have to work on the market design. But I still have faith in this business and in these markets because there are too important. Electricity is the lifeblood of the economy. We have to get this right. There is no choice when you say, well, how do I trust that? Sectors can never go through this again, and they know that. So that’s what I trust. And we are a big player here. And so what comes out the back end of this, I believe, is going to be good for Texas, good for the market and good for Vistra.
So with that, I’m going to move into, and I just hate this, but I’ll move into 2020. Not that I hate 2020, but — or maybe I do, but moving into 2020 because we have such a great year and this event has overshadowed it and the men and women have worked so hard at Vistra in 2020 in the face of COVID, in the face of social issues and everything that’s been thrown at us, performed as good as anybody could have expected. It enabled us to pay down a significant amount of debt. Our retail business was exceptional getting close to almost $1 billion of EBITDA. We continue on the cost savings front. And by the way, I’m not going to throw a number out there today and say that we’re going to save bunch of hundreds of millions of dollars.
We have a lean business. And I’m not going to starve this business. You cannot starve power plants for maintenance costs. It will bite you in 2022 and 2023. But we will, as we always do and we will double down. We will look for opportunities to optimize earnings going forward once we determine what the full effect of this is. And I’m convinced, like we do every year, we will find opportunities and we will let you know what those are. But I’m not going to throw a big number out there that I don’t think is good for the company in the long run. And we are playing this for the long run. 2021 and this event are one-time event. And we’re going to move this company forward in a way where it can compete and be even better into the future.
In 2020, I’m now on delivering financial results slide. This is a phenomenal year. $3.77 billion of EBITDA and almost $2.6 billion in free cash flow before growth, almost a 70% conversion ratio. I remember when I was talking to you guys and the Dynegy acquisition and we put out the, I think it’s [Indecipherable] and we had a set of projection numbers. And just looking at what we were able to do in 2020 relative to what we had in that is, in my opinion, truly remarkable. And I think we did that with very disciplined investment into the business. And I’m proud of what we were able to do and what the numbers we were able to put up.
I think since we — since I took over, we’ve got I think almost $600 million above midpoint of guidance over those years. What just kills me is we gave it all back and more. But we’ve been through that story already this morning, I won’t take you through it again, but that’s tough. You don’t want to get back what you’ve created, and that’s a difficult thing for us. The OP initiative continues and it will continue. We think that now that is just a part of who we are. And we like to give this to you just because we want you to know when we tell you we’re doing something that we do it, but it’s really embedded in our EBITDA. And then we are on track on our synergies for the — and namely, the Crius and Ambit because Dynegy is pretty much done now. Even on the system side, the technology side, that’s pretty much done at this point in time.
And the last thing I’ll say then I’ll hand it over to Jim. Through all this, we still have, and I’m on the last slide here, prioritizing all stakeholders. Just briefly to touch base, this has been who we are since I’ve been here. We’ve been about all stakeholders. We continue to do it. We’ve made huge advancements on the environmental side with our employees and contractors and customers and suppliers and our communities, we’re proud of that. And we expect to continue to do that. And I know we did announce that we were — had $5 million to help customers. And some people may say, well, there is a cost savings right there, Curt. Why did you do that? And it’s because of what I said earlier, two things. One is, we’re about helping people as a company, not just about making money. We do care about that, but we have a bunch people down here that are in need. This became a survival game. This became a humans’ needs effort, and we took that seriously. Just like we take seriously being the guardians of your investments, we do care also about people. And it’s very important to the franchise of our retail businesses that we are out there and we are helping others. And we have not lost those franchises. This weather couldn’t take those franchises away from us. And they have extreme value and we have to keep investing in those franchises. But helping people is also a very important thing. And so we made that hard call in the face of adversity and uncertainty because that’s who we are. That’s what we’re about.
So with that, I’m going to give it to Jim. Jim is going to quickly go through financial results. And then I know you guys have Q&A and we’ll try to answer everything we can as completely as possible. And so, I will turn it over to Jim. Thank you.
Jim Burke — President and Chief Financial Officer
Thanks, Curt. I’m going to quickly cover Slide 16. As Curt said, I know we want to get to Q&A. I would just hit two slides.
Our full year 2020 retail results were $176 billion higher than our full year 2019 results, driven by the acquisitions of Crius and Ambit, plus stronger comp margin performance, partially offset by milder weather. The $197 million favorability in our collective generation segments was driven by higher margins in our Texas East and Sunset segments, including the higher period-over-period benefits from our OPI initiatives, partially offset by lower capacity revenues.
As it relates to the impacts of COVID-19, Vistra was able to navigate through the challenges brought on by the pandemic with minimal impacts to our financial performance. On the retail side, we only saw a small uptick in bad debt during the year, while our lower business volumes were offset by higher residential volumes. And as we discussed on our first quarter earnings call in May of 2020, our commercial team executed some opportunistic transactions in anticipation of the market volatility caused by COVID-19, resulting in a positive benefit to Vistra for the year.
In addition to these strong financial results, our retail business grew its residential customer count in Texas year-over-year, reflecting strong performance by our legacy brands, while our generation business once again executed with commercial availability of over 95%. On the liquidity side, as of year end 2020, Vistra had total available liquidity of approximately $2.4 billion, which was primarily comprised of cash and availability under its revolving credit facility. This strong liquidity position enabled Vistra to effectively manage the collateral requirements related to the winter storm, Yuri. As of February 25, Vistra had more than $1.5 billion of cash and availability under its revolving credit facility to meet any liquidity needs.
We can close with Slide 17. Vistra repaid more than $1.5 billion of debt in 2020 to end the year at our long-term leverage target of 2.5 times net debt to adjusted EBITDA. As of February 23, we’ve repurchased approximately 5.9 million shares at an average price of $21.15. $1.375 billion remains available under this authorization. We’re continuing to execute on our strategic renewable and energy storage investments, including our Texas Phase 1 in California battery projects.
As we have communicated to you, we will be disciplined as it relates to deploying capital, regularly evaluating all growth projects for financial viability. We will only invest in growth projects if we are confident in the expected returns. As a result of this continuous review, we’re currently pausing one growth projects in West Texas due to updated economics, driven by higher than anticipated congestion cost.
I know many of you are wondering how our existing capital allocation plan will change as a result of the impacts of this winter storm. We expect to provide an updated capital allocation plan for 2021 on our first quarter earnings call. We remain committed to our dividend trajectory and to maintaining a strong balance sheet.
The challenges brought on by the global pandemic in 2020 and this historic winter storm in Texas last week have tested our business model. We truly believe it was a one-time historic event. The winter event was a significant financial hit. Our people worked in very tough conditions to generate as much power for the greatest possible. Importantly, our business still has the strong assets that are hedged just two weeks ago. Both our customer base and our generation footprint remained intact and we believe were solid growth prospects. We are a resilient team. We will stay focused on creating value for our stakeholders over the long-term.
With that operator, we are now ready to open the lines for questions.
We are still processing the Q&A portion of the conference call. We will be updating it as soon as we analyze and process the con call. Stay tuned here for more updates.
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