Vistra Energy’s CEO rejoins The Stock Podcast to provide an update on the VST stock thesis. It’s always a pleasure to have Curt on the program to talk about his company and provide updates on the investment story. VST is one of my personal favorite investment ideas and Curt does a fantastic job of highlighting the key elements of the investment thesis. If you’d like to tune in to the first interview with Curt, click here!
Relevant Links:
Take a look at the research report from Steve Fleishman with Wolfe Research.
Interview Transcript
Participants
Curt Morgan, President and CEO of Vistra Energy (VST)
Nate Abercrombie, The Stock Podcast
Interview Transcript
Nate: Curt, thank you so much for joining the podcast. It’s a real honor to have you back on again and I really appreciate you taking the time.
Curt: Well, thank you for having me. I’m looking forward to the discussion. There’s lots to talk about so we can dig right into the details.
Nate: Yeah. And there is a lot to talk about and your 3Q call, you had a lot of updates and believe me, I think I could spend probably two or three hours just picking your brain as to what’s going on in the space and what’s going on with Vistra specifically. But before we get to some of the more detailed questions, I was hoping that maybe you’d be able to just give a very brief business overview since there could be listeners that haven’t listened to your previous interviews, so would just love to hear about the business and just really briefly on who you are and what your company does.
Curt: Yeah. Great. So thanks a lot Nate. We are an integrated energy company. I know that some people call … used to call this IPPs, but we think of ourselves as an integrated energy company. We’re in power and natural gas predominantly, but also coal and uranium because we have a nuclear plant. So we look … we dabble in a lot of different energy commodities and we’re now, I think since we talked last, we’re now in 20 States and the District of Colombia, we’re also in retail markets in Canada and in Japan. Which is a country that’s recently restructuring their power markets. We are the largest competitive residential electric provider in the country. We serve, just nearly 5 million residential, commercial and industrial retail customers with electricity and gas. So, since Nate, the last time we talked, I think we’ve added, over 2 million customers to our portfolio. We also won the largest competitive power generators. So that’s the integrated nature of the competitive power generation combined with the competitive retail business. And that’s a, obviously the generation is all in the U.S. We have about 38,000 megawatts and we have a very diverse portfolio. We’re natural gas predominantly now just about two thirds of our generation is natural gas and that’s from a company that when I took over was probably closer to 70% coal.
Curt: So we made … we’ve made a big pivot off of coal and into natural gas, which we can get into a little bit later. We also have the lowest cost nuclear plant here in ERCOT in Texas in Comanche peak. We also have, by the way, the lowest cost coal facility of grow also in Texas. And so those are two big base load facilities that we have. We’re now in solar, we also have a portfolio of wind, but it’s a through a purchase power agreements. And we … I think we have become one of the leading players in battery energy storage because we have sites in California that are ideal for battery storage and given that California has a lot of solar and they need a dispatchable resources, quick-start resources to come on when the sun goes down. They’ve been supporting battery energy storage facilities and they’re most landing site, we’re doing a 300 megawatt but more importantly, 1,200 megawatt hour battery facility, it’s just South of San Francisco.
Curt: So here we have very low cost and low heat rate gas plants as I mentioned, which means that they’re in the money. And that’s important for us because we are interested in trying to achieve a stable, consistent and somewhat predictable earnings stream. And that the … in the money nature of our fleet allows us to forward hedge and to take some of the volatility out of the business. I think we’re focused on being very disciplined. I think the IPPs of the past, bought at the wrong times of the cycles and they have very high leverage, which then when the market prices dropped, it put them in a really difficult position. And I think in this particular business, and because of all the uncertainty and the change in the markets, you have to play from a very low leverage. And so since we’ve come out of bankruptcy, that’s been our number one focus is to make sure that we have a strong balance sheet and then of course to have the integrated business with the retail and wholesale merged together. And that integration really spells value for us because one is collateral efficient, but two, if you’re selling to yourself, you’re not getting the bad end of the bid ask spread.
Curt: And so there’s not that bid-ask leakage that you’ll see if you’re just a long generator or a short retailer. It also allows you to manage the enormous risks that can sometimes flare up, especially in Texas if you’re a short retailer that you have to manage that risk. And to having those assets combined with our commercial capability allows us to manage the risk in this sector, which is very important. And here we’re driving to the two and a half times net debt to EBITDA, which has been the target that we put out there some time ago and we should buy the balance of 2020 be where we want to be on that. But I think more important than that, it puts us in a position that we’ll be under consideration for investment grade ratings, which I think is also a visible sign that this company, the risk of this company is much lower than it used to be.
Curt: We convert about 65 cents of every dollar of adjusted EBITDA to adjusted free cash flow before growth. So that means after we service our debt and after we pay for maintenance capital, we’re dropping down, about two thirds of our EBITDA to free cashflow. Which that allows us to either put it back into the company or to give it to investors … give it back to investors, which we plan to do a large part of. I think that when you look at our EBITDA, which is over $3 billion a year, we’re going to be converting roughly $2 billion a year in free cashflow. That’s a heck of a lot of cash to generate. And we think that we can put about a quarter of that 2 billion back into the business. On an annual basis on average, which means, we have a billion … roughly a billion and a half to do something with and we’re going to have a strong dividend. We already do and we’ll probably continue to keep that strong dividend. And then we’ll look for other ways, whether it’s through share repurchases or special dividends, we’ll just have to see how that that plays out. But that’s really kind of who we are and what we’re about. We try to pair a strong commercial capability with risk management along with, very attractive asset base and combined with a very strong residential focused retail business. We think that’s really the core to our business. And if you combine that with a strong balance sheet, that’s really who Vistra is.
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