Vistra Corp. (NYSE:VST) Q1 2024 Earnings Call Transcript May 8, 2024
Vistra Corp. misses on earnings expectations. Reported EPS is $0.268 EPS, expectations were $0.619. Vistra Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and welcome to the Vistra First Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Eric Micek, VP Investor Relations. Please go ahead.
Eric Micek: Good morning and thank you all for joining Vistra’s Investor Webcast discussing our first quarter 2024 results. Our discussion today is being broadcast live from the Investor Relations section of our website at www.vistracorp.com. There you can also find copies of today’s investor presentation and earnings release. Leading the call today are Jim Burke, Vistra’s President and Chief Executive Officer and Kris Moldovan, Vistra’s Executive Vice President and Chief Financial Officer. They are joined by other Vistra senior executives to address questions during the second part of today’s call as necessary. Our earnings release presentation and other matters discussed on the call today include references to certain non-GAAP financial measures.
Reconciliations to the most directly comparable GAAP measures are provided in the earnings release and in the appendix to the investor presentation available in the Investor Relations section of Vistra’s website. Also, today’s discussion contains 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 forward-looking statements. I encourage all listeners to review the Safe Harbor statements included on slide two of 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.
I’ll now turn the call over to our president and CEO Jim Burke.
Jim Burke: Thank you, Eric. I appreciate all of you taking the time to join our first quarter 2024 results call. This call is taking place in conjunction with a major milestone for Vistra, namely the first day of inclusion of our stock in the S&P 500. I want to recognize the hard work of our Vistra team and the support and patience exhibited by our shareholders as this is a result of both strong execution over time bolstered by improving market dynamics in the power sector. We are pleased to be included in the index and excited about the future prospects for Vistra and its stakeholders. Turning to slide five, before we cover the positive results for the quarter, it’s worth noting that we see a significant increase in Vistra’s long-term outlook.
Our team has been hard at work to ensure Vistra’s best position for the increasing power demand fundamentals, while providing reliable, affordable, and sustainable power to our customers. Continuing the theme of execution, our integration teams were hard at work during this quarter. With the closing of our acquisition of Energy Harbor on March 1st, we were ready on day one to unify under the Vistra name and welcome our new colleagues. The core theme throughout the integration process has been one team, and we believe that is crucial to a sustainable, high performance organization. The sites are working closely with each other to share best practices and create a culture of continuous improvement. As a result, the teams identified the potential for several operational and performance improvements throughout the nuclear fleet.
As Kris will cover later, including the expected financial benefits of these improvements and the additional synergies we’ve identified, we now expect the run rate adjusted EBITDA contribution from Energy Harbor to exceed $1.1 billion beginning in 2026. Turning to the other key priorities, we continue to execute on our capital return plan put in place during the fourth quarter of 2021. Since that time, we’ve returned to our investors approximately $4.6 billion, including $3.9 billion of share repurchases through May 3rd of this year. We continue to view our shares as an attractive investment and expect to execute at least $2.25 billion of share repurchases throughout ’24 and ’25. Crucially, our balance sheet remains strong, enabling the ongoing capital return plan.
Our net leverage finished the quarter at approximately three times, exceeding our expectations indicated on the previous quarter results call. We expect net leverage to be below three times by year end 2024. Our discipline capital approach also enables us to invest in solar and energy storage growth that capitalizes on sites interconnects in the Vistra portfolio. Our Baldwin and Coffeen sites, where construction began earlier this year on paired solar and energy storage facilities are good examples of this strategy, and we expect these to be online by the end of the year. Finally, we’ve completed our first non-recourse financing at Vistra Zero, providing attractive capital for a growing portfolio of operating renewable assets. Moving to slide six, we achieved ongoing operations adjusted to about $813 million, a 47% increase compared to the first quarter of 2023.
As you can see, many of the themes contributing to results last year continued into the first quarter of this year. The first quarter of 2024 again reflected the benefits of our comprehensive hedging program as the warmest winter on record in the U.S. led to lower than expected cleared power prices across the country. Specifically, while power prices in the markets we serve cleared below $30 per megawatt hour on average for the first quarter, our first quarter results reflect an average realized power price of over $50 per megawatt hour. In these volatile weather environments, which included a winter event in mid-January and then mild weather in February and March, our generation team once again delivered with another strong quarter of commercial availability at approximately 98%.
Being flexible with not only daily operations, including ramping down when economics signal us to do so, but rescheduling planned outages to optimize opportunities enabled the business to deliver strong results. Finally, the retail team delivered another positive quarter of customer count growth across our Texas and Midwest and Northeast geographies. With the acquisition of Energy Harbor now complete, we’re initiating a guidance on a combined basis for ongoing operations adjusted EBITDA of $4.550,000,000 to $5,050,000,000 and ongoing operations adjusted free cash flow before growth of $2,200,000,000 to $2,700,000,000. It’s important to note that this guidance excludes any potential benefit from the Nuclear Production Tax Credit or PTC. Given the uncertainty around how it will be implemented when the regulations are issued later this year.
However, based on where prices settled in the first quarter and the forward curve for the balance of the year, we believe the PTC could add a significant amount to our 2024 ongoing operations adjusted EBITDA guidance range. Finally, you will note that the implied conversion rate from ongoing operations adjusted EBITDA to ongoing operations adjusted free cash flow before growth for 2024 is below our stated target of 55% to 60%. Primarily due to a couple of timing impacts, we expect to return to our target 55% to 60% range in 2025 and beyond. While we are not providing guidance to reflect specific ranges for Vistra vision and Vistra tradition, our view is that each is expected to contribute roughly half of our adjusted EBITDA over time. However, given the business mix and current capital structure, you can expect Vistra vision will convert adjusted EBITDA to free cash flow before growth at a higher rate over time, roughly 60% to 65%, compared to Vistra tradition, which we expect to convert at a rate of approximately 50% to 55%.
Turning to slide seven, there has been much discussion in recent months about the substantial power demand growth forecasts, including from the potential build out of data centers and other sources of electricity demand. Third party research indicates data center related activity could approach 35 gigawatt of additional demand by 2030. However, our teams also see multiple additional potential drivers of demand in the geographies we serve. These drivers include continued reshoring of industrial activity, as evidenced by multiple large chip manufacturing site build outs, partially due to the CHIPS Act, increased electrification of commercial industrial and residential load across the country, as evidenced by the expectation of approximately 20 gigawatts of additional power demand in West Texas by 2030, and strong population growth, particularly in the state of Texas, which has been steady at 1.5% to 2% per year.
With these drivers, we see the potential demand outcome skewing higher, albeit with a wider range. In their most recent report, PJM’s load growth expectations through 2030 doubled from their 2023 estimate. In Texas, recent reports from ERCOT suggest load growth through 2030 in a wide range, from as low as 1.6% per year to as high as 6% growth per year, or even higher, if more than half of the large loads recently discussed at ERCOT actually materialize. The trailing 10 years has been approximately 2.5%, and that was before some of these more recent drivers of the Permian electrification, the CHIPS Act, and the data center demand. This increase in demand across the country will need to be served by an electric grid that will continue to see coal plant retirements in all markets.
The Inflation Reduction Act will continue to incentivize wind, solar, and battery resources, and we will also need gas fire generation to back up those intermittent sources. The new greenhouse gas rules issued from the EPA on April 25th are expected to make it more challenging to economically build baseload combined cycle gas turbine facilities. But we expect those rules to be litigated, and it’s unclear what the final outcome will be. Natural gas peakers could be a solution that threads the needle of environmental rules and demand needs. In addition, it is likely that existing assets will need to run at higher capacity factors to meet overall annual energy needs as more coal retires. We see Vistra’s well positioned for these trends given our diversified portfolio of reliable and sustainable assets in growing markets.
As you can see on slide eight, the forward curves have moved up considerably in both the Texas and PJM markets on the improved demand outlook, particularly on the longer end of the curve. As an example, ERCOT North around the clock fixed price forwards for calendar 2026 increased over $7 per megawatt hour or approximately 13% since we last provided guidance in November 2023. For 2027 and 2028, the increases were even more significant. In the past, we’ve commented that the backwardation and forward curves did not reflect the tighter grid conditions that we expected to result from continued load growth and planned thermal asset retirements. With the recent improvement of both forward power prices and some additional market interest in transacting farther out on the curve, we believe the market is beginning to recognize these dynamics.
As I stated at the beginning of the call, our integrated business model which combines increasingly critical dispatchable generation assets with a premier retail business positions us well to create long-term value in this dynamic and growing market. As a result, based on recent market curves, we are currently estimating a combined ongoing operations adjusted EBITDA midpoint opportunity for 2025 of $5 billion to $5.5 billion. In addition, while significant uncertainty to both the upside and downside remains for 2026, given our 2026 hedge percentage, which is approximately 50%, we have line of sight to an ongoing operations adjusted EBITDA midpoint opportunity of more than $6 billion. Like the 2024 guidance, our long-term outlook excludes any potential benefit from the Nuclear PTC and we will continue to evaluate the appropriate timing for including any of that potential benefit.
Even without the inclusion of any PTC benefit, the improvement in near-term and long-term outlook for Vistra is expected to result in a meaningful amount of unallocated capital through 2026. And with that, I will turn it over to Kris to provide a detailed review of our first quarter results. Kris?
Kristopher Moldovan: Thank you, Jim. Turning to slide 10, Vistra delivered strong first quarter results in 2024 with ongoing operations adjusted EBITDA of approximately $813 million, including $841 million from generation offset by negative $28 million from retail. This represents a $259 million improvement, nearly 50% year-over-year. For generation, despite another winter on record, our comprehensive hedging program combined with the team’s ability to optimize our flexible assets enabled another quarter of strong results. Turning to retail, as was the case in 2023, the first quarter result was within the range of what we expected. We continue to see higher hedge power costs in the winter and summer months due to entry year shaping and therefore anticipate substantially all of ongoing operations adjusted EBITDA for retail to be achieved in the second and fourth quarters.
We believe continued strong counts and margins in the first quarter position retail well for the balance of the year. Finally, our first quarter results benefited from the inclusion of one month of Energy Harbor, which totaled a month of Energy Harbor, which totaled approximately $60 million for generation and retail combined. On Energy Harbor, we provide an update on the integration process on slide 11. As Jim mentioned earlier, the team’s made significant progress integrating the businesses despite a later than expected closing. In the short time since completing the acquisition, the team has identified approximately $150 million of timing and gross margin benefits that are expected to be realized in 2024. These benefits are expected to bring the in-year 2024 contribution from Energy Harbor to approximately $700 million, which compares favorably to our 10-month contribution estimate.
Turning to integration benefits, we previously communicated expected run rates synergies of $79 million by year-in 2024 and a run rate of $125 million by year-in 2025. Based on the efforts of the teams completed to-date, we are increasing the amount of expected run rate synergies by $25 million to a total of $150 million. Further, when we first announced the acquisition of Energy Harbor, we highlighted our core competency of integrating generation assets, citing the achievements of our Operational Performance Improvement, or OPI, program following the Dynegy acquisition. I am pleased to report that this program continues to deliver, with the teams having identified opportunities for more efficient operations across our nuclear fleet that we expect to lead to $50 million of run rate adjusted EBITDA improvements by year-in 2026.
Importantly, we expect these additional opportunities to be achieved with little incremental capital spend. Finally, we provide an update on the execution of our capital allocation plan on slide 12. As of May 3rd, we executed approximately $3.9 billion of share repurchases, leading to an approximately 28% reduction compared to the number of shares that were outstanding in November 2021. In line with our statements on the fourth quarter 2023 call, we expect to execute at least $2.25 billion of share repurchases over the course of 2024 and 2025. With the long-term update provided today, we still see our shares trading at an elevated free cash flow yield, and thus continue to believe share repurchases to be a sound use of our capital. Moving to our dividend program, we announced last week at first quarter of 2024 common stock dividend of $0.2175 per share, which represents an increase of approximately 7% over the dividend paid in Q2 2023, and an impressive 45% increase over the dividend paid in the fourth quarter of 2021 when our capital allocation plan was first established.
Turning to the balance sheet, this was not leverage ratio currently sits at three times. As Jim stated earlier, we expect to return to below three times by the end of 2024 and continue to target a long-term net leverage ratio below three times. As you may have seen, we successfully issued $1.5 billion of seniors secured and unsecured notes at the beginning of April. These notes were issued primarily to fund our 2024 maturities and are not expected to increase our overall leverage levels. We were very pleased with the transaction and view the tight issuance spreads as recognized by bondholders of Vistra’s well-positioned business model and favorable outlook. Finally, the first quarter of the year was an active period for Vistra Zero. Our team began construction activities at two of our larger Illinois solar and energy storage developments at our former coal plant sites this spring.
Notably, despite the current inflationary environment, we continue to expect these projects to comfortably exceed our targeted return thresholds. Importantly, we took the initial step in developing the long-term capital structure of the Vistra Zero Renewables business, closing on a non-recourse financing at Vistra Zero. The $700 million term loan, which was also well received, is the first step towards our goal to fund our solar and energy storage growth with a combination of free cash flow from operating renewable projects and non-recourse financings. Finally, in connection with the closing of the Energy Harbor acquisition, we have begun paying dividends to the minority investors in Vistra Vision. Our current expectation is that we will pay approximately $100 million in 2024.
We view these dividends as part of our capital allocation program as we continue to analyze Vistra’s earnings power on a consolidated basis. We are very proud of the Vistra team’s performance to begin the year, and we remain committed to executing against our four strategic priorities. We look forward to updating you on our progress on our second quarter call. With that operator, we’re ready to open the line for questions.
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