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Operator
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 a 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 withdraw 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.
Megan Horn
Thank you. Good morning, everyone. Welcome to Vistra's investor webcast discussing third quarter 2022 results, which is being broadcast live from the investor relations section of our website at www.vistracorp.com. Also available on our website are copies of today's investor presentation, our form 10-Q, and a related press release. Joining me for today's call are Jim Burke, our president and chief executive officer, and Chris 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, the 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 statements included on slide two in 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 the use of these 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, Megan. Good morning, everyone. We plan to keep this call relatively short. We believe we have a straightforward message to deliver today. In prior calls, 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 our view regarding 2023. Starting on slide five, we had another strong quarter financially earning $1.038 billion in ongoing operations adjusted EBITDA. 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 $5,000 price cap on three different hours. A well-maintained fleet is key to delivering reliable power for our customers and our communities and ensuring value is captured during these weather events. And our generation team delivered. Our retail business similarly performed well. shown 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, this commitment was recently acknowledged by the P-U-C-T when TXU Energy 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 now see ongoing operations adjusted EBITDA in a range of 2.96 to 3.16 billion dollars and ongoing operations adjusted free cash flow before growth in a range of 2.17 to 2.37 billion dollars for 2022. We're reaffirming our original midpoint of $3.06 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 have 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 $2.27 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 is reflected on slide six. Today we are initiating guidance for ongoing operations adjusted EBITDA in a range of $3.4 to $4 billion and ongoing operations adjusted free cash flow before growth in a range of $1.75 to $2.35 billion for 2023. Our 2023 guidance midpoint of ongoing operations adjusted EBITDA is $3.7 billion. This is the top end of the midpoint opportunity range we estimated for 2023 during our first quarter call as we saw the dramatic increase in gas and power forward curves. Given the higher EBITDA figures and the volatility we have seen in the market, our range is larger on an absolute basis but is a similar percentage of the midpoint as we have 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 VISTA's 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 of around $3-plus billion going forward. As forward power curves increased, we announced Q1 2022 that we saw ongoing operations adjusted EBITDA midpoint potential in the $3.5 to $3.7 billion range for years 2023 through 2025. We're now approximately 70% hedged on average across 2023 through 2025. 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. VISTA 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 Vistra 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 our expected debt reduction to ensure a strong balance sheet. Lastly, we expect Vistra Zero to be financed primarily with third-party capital, enabling us to continue to transition aspects of our fleet, primarily some of our older coal assets, in a capital-efficient manner. Vistra Zero will also benefit from the Inflation Reduction Act, including setting a price floor for a nuclear asset Comanche Peak. You may have seen we recently submitted the relicensing application which would extend our licenses by 20 additional years for each of the two units to 2050 and 2053. We continue to see how important a role our diverse set of assets are playing throughout the U.S. in ensuring reliable, affordable, and sustainable power. Our integrated model is delivering the 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.
Megan
Thank you, Jim. Starting on slide nine, as Jim mentioned, Vistra delivered strong financial results during the third quarter with ongoing operations adjusted EBITDA of approximately $1.038 billion. including negative $2 million for retail and $1.04 billion for generation. It is important to note that Vistra's 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 bed debt expense and ex-ERCOT headwinds. Moving now to generation, the results of the generation segments this quarter and year to date have 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. To that end, our board recently approved a quarterly dividend to be paid on Vistra's 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 non-recourse debt at Vistra 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 Vistra 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 midpoint for 2023. On slide 11, we're presenting the forward power price and gas curves as of October 31st, 2022, As you can see, while there has been noticeable volatility, prices are still up materially as compared to the prior year. Not only do these curves support our 2023 guidance range, but they also continue to give us confidence in the $3.5 to $3.7 billion of potential ongoing operations adjusted even at midpoint for each of years 2024 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 de-risking and locking in our future earnings potential for these out years. As of 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 among our retail and generation segments. You may recall that last year we also separately broke out our sunset generation segment. With several plans closing in 2022 and the very beginning of 2023, and moving from our sunset segment to our asset closure segment, together with the growth of Vistra Zero, we are currently reevaluating the appropriate segments for our businesses. In light of that ongoing process, we have combined the sunset segment with our 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. I think it is worth reiterating, execution has been and will continue to be our focus in 2022 and into 2023. 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.
Operator
Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 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 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Michael Sullivan with Wolf Research. Please go ahead.
Michael Sullivan
Hey, everyone. Good morning. Good morning. Hey, Jim. Hey, Chris. I was just hoping maybe you could start with some color on some of the moving pieces relative to the last call. It seemed like 22, you were tracking a little better than the midpoint. Now at the midpoint, 23, you're 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. Is it just commodity prices or anything else going on?
Jim Burke
Yeah, sure, Michael. So for 22, you know we were tracking a little bit above midpoint when we talked last time. We we see ourselves closer to midpoint at the moment. I think we've seen some headwinds with coal constraints that we assumed earlier in the year and even through the summer. We were getting some indications that coal deliveries will pick up. That has been a slower process, not just for us, but I think from everything we can tell, you know, industry-wide. So that's one of the headwinds. The other headwind that we mentioned is we picked up some default service mode. We had bid on that load last year and even as late as early this year before the price ran up. As the market moved up in the spring and the summer, customers have the opportunity to move to default service. That's their choice. In addition to that, there was one media aggregation, NOPAC, that actually in mass moved all their customers to default service. We're not sure that that actually was provided for in the structure of default service, but it was approved by the commission in Ohio. Those were headwinds that have developed even 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've had good performance with the summer, as we mentioned in the script. And so we had length. We were able to cover those headwinds. And I think the integrated model showed that diversification paid off. But I think that's really the driver as to why we saw ourselves tracking slightly above midpoint before, and now we see it on midpoint. But the operational excellence of the fleet and the retail business has been quite strong. As it relates to 23, some of the default service carries over through the May timeframe. And we also had to recognize that the coal constraints has been a rolling issue, so we have just modest improvement now assumed in 2023 for coal deliveries. We're still not running everything that we could run from the coal fleet even in the 2023 plan. So I think there's a little bit of conservatism, and it's just something we've learned throughout this year that it's a tough market, it's a tough challenge to basically free up the supply chain and have the train sets running and the quantity and the cycle times that we would like. So we reflected that here and I think you know the upper end 3.5 to 3.7 we mentioned that on our first week call in May and we're at the upper end of that midpoint and so we feel good about being able to weather this volatility. But those are the headwinds and some of the tailwinds that we've reflected now in this guidance.
Michael Sullivan
Okay, that's super helpful. And then my next question was just as we look out to 24, 25, it seemed like previously given a bigger unhedged position, you felt maybe even better out there and just latest thoughts on how you're feeling since the Q2 call.
Jim Burke
On slide 11, you see the direction of the curves, and we tried to, we knew when we put this out the first week of May that we'd be asked for continuous updates on this. So we added to potentially our disclosure on a more consistent basis now for the third call. But you see the run-up late spring and summer, and then you see it coming back off pretty hard. We had been hedging through that period, and I think that's 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 the unhedged position, we were able to hedge through some of that, but the curves have come off. And we were actually still, through this chart, showing that through October 31st curves, which is 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 3.5 to 3.7. So, again, it's a predictable, you know, set of cash flows as far as we can see. We obviously aren't fully hedged. But 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 3.5 to 3.7 is still there in our expectations for 24 and 25, you know, is a sign of that integrated model working.
Michael Sullivan
Okay, that's great. And just real quick, the last one, again, kind of back to the bridge to 23. What are the positives 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 gets kind of close to a billion. Yeah, what are the tailwinds there that get you up for next year's?
Jim Burke
Yeah, we continue. One of the things we've been able to do this year, which has been a benefit for customers, is we forward buy, obviously, as you'd 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 of the inflationary effects and even the price spikes of commodities, I think we've done a nice job. smoothing that out for our customer base. As you look at what's going on when you move forward, we do have continued movement in our expectations on average of how we smooth out the prices for customers so we have even greater margin realization as we go forward, 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. and that continues. And even our Midwest Northeast business, which has been more challenged because of the default service, price is 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, and Midwest Northeast improving next year as well. So retail business is in a very good position. It'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 as a post-URI effect where we have bill credits for settling large customers. We have less of that in 23 versus 22. So those are the key drivers of the improvement in that business.
Michael Sullivan
Thanks, Jim. Appreciate all the color.
Operator
The next question will come from Paul Zimbardo with Bank of America. Please go ahead.
Paul Zimbardo
Hi, Paul. Hi. Good morning. Thanks for the update. A lot to dig through. Just to start out with, could you discuss the drivers on the 2023 free cash flow conversion? I knew you had a 65% target at the analyst day in the past. So just curious, is kind of 2023 a blip? And do we get back there in the future?
Jim Burke
Yeah, Paul, the free cash flow conversion, you know, from a historical standpoint, we've obviously seen 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 assumptions. 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 actually 23 and 24, and that's predictable. We can see that peak in 23 and 24, and then it comes off for the next three to four years. So we have higher CapEx, and some of the CapEx is more expensive 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 the revenue line, but it does affect some of the cost drivers, 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 there's something you'd like to add there, please. No, Jim, I think you've covered the drivers well.
Paul Zimbardo
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 retail customer attrition? And just unpacking a little bit, it looks like customer count was down quarter over quarter, and you talked about value accretive exits. If you could just elaborate a little bit there.
Jim Burke
Yeah, thank you, Paul. The retail market in Texas is a robust market. We have done extremely well this year. Part of it is the innovations that you mentioned. We've been able – in fact, we rolled out an EV 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 hold, I think, this position of a trusted brand, and that is one of the positives from 22 going into 23 – 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 them 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 these default markets could end up seeing peak pricing, and then you'll see the retailers rush back in and pull these customers off 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 rate's not moving and you have to offer a discount to that. It becomes unprofitable. It's 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 CREUS, there was concern from the regulatory body about some of the bill disclosures and when contract terms would end for customers. They wanted to see us settle that matter, and one of the terms of settlement was they asked us to give up our licenses in Connecticut. This happened before we ever got the business. It seemed short-sighted from the standpoint that the customer impact wasn't even determined to necessarily be negative. It was a question about how clear was the disclosure 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 change the mindset of some of these marketplaces 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 retailers needed to try to recover their cost and prices were moving very, very quickly. And we've got to restore confidence in some of these other markets outside of Texas to be able to differentiate like we do here.
Paul Zimbardo
Great. Now, thank you very much. Thank you, Paul.
Operator
And the final question for today will come from Angie Sorosinski with Seaport. Please go ahead.
Angie Sorosinski
Hi. Thanks for taking my question. So just first, just one follow-up on the free cash flow projections, actually for both 2022 and 2023. I think I'm a little bit confused about worth to capital changes and your collateral postings. I'm assuming that collateral is coming back, so I was actually hoping for some boosts to – to free cash flow in 23. So again, maybe if you could talk both about collateral postings and the free cash flow projection.
spk03
Yeah, Andy, thanks for the question. So we do expect the collateral to be posted. As you saw, we have just over $3 billion of cash that's still posted as of 9-30. 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, 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 a substantial portion of the cash, that $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, the dividends, and the debt repayments.
Angie Sorosinski
Okay. So what's the reason why there is this big positive from a working capital perspective this year and basically an offsetting negative next year?
Jim Burke
I think, Angie, what we're – 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 deposit net through 2023, and we'll see that as part of our capital allocation, as Chris mentioned, with our share buybacks or dividends and obviously our debt pay down.
Angie Sorosinski
Okay. Okay. And then secondly on the guidance for 23, so you're 90% hedged and I appreciate all of the volatility that you're seeing in 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 it you know, as you mentioned, some issues with call supplies, is it performance issues of your power plants? Again, just, you know, what can take me to the high end versus the low end?
Jim Burke
Sure. Well, there's a number of things. Even the 90% still has quite a bit of elevated prices. That unhedged part is still a meaningful part of the various drivers. We also assume that that there's 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. We saw that some in PJM. We actually saw it a little bit in KISO. So we assume that there's 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 capture that incremental output at a higher margin, or if prices actually move down, we can actually not run the asset and buy back in the marketplace. And that's sort of what we call extrinsic value is part of the value that we anticipate, you know, when we set guidance. So that's part of the expectations that we set when we put the $3.7 billion out in the market. We also have some assumption, I said it's modest, of coal being able to be delivered slight improvement over 2022 actuals, it could still move south from here. I mean, we do not know how all of this is going to get resolved. They're still in negotiation. They're trying to get a rail agreement that would work for all of the unions involved, but we don't have perfect foresight into how that will play out. That also could be a possibility. We can actually get past that and get to the set that we already have secured and get the cycle times where they need to be. That would be upside, you know, potentially to our guidance. And then lastly, you know, we still have weather variants even in retail. We do hedge retail conservatively, and that's paid off for our customer base this year. It's paid off for our retail performance. But if you had mild weather, you could actually find yourself long power in the retail business and having to – sell that back in the market at reduced prices. So when prices get elevated, then the variances around them volumetrically 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.
Angie Sorosinski
Okay. And then lastly, again, I might have missed it in your slides. I was hoping for more disclosures on cash available for distributions and drivers year over year. I appreciate some of the comments you guys made in your prepared remarks, but should we expect something like that, like cash available for distribution, so we have a better sense of how much can be deployed into either additional buybacks and or dividends?
spk03
Yeah, Angie, so thank you again. We continue to talk about being able and in position to spend $300 million a year on the dividend, at least $1 billion a year on share repurchases, and paying down debt to get to three times, which primarily we can get there, as you can see, as working capital comes back, as margin deposits come back, we could use that money to pay down debt. We also still have some proceeds from the green preferred to allocate, but we're tracking well right at where we thought we would track when we came out with that cash available for allocation last year in November. We did upsize the share repurchases by $250 million to reflect some confidence in additional free cash flow. We'll continue to evaluate as we move through the time period and as we have additional cash to allocate, 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.
Angie Sorosinski
Okay. Thank you. Thanks for taking my questions.
Operator
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.
Jim Burke
I want to thank you again for joining us this morning. We're excited about VISTA's continued value proposition, and we appreciate your continued interest in VISTA. We look forward to speaking to you again in a few months when we'll discuss our fourth quarter and our full year performance. Have a good morning. Thank you.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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