Ladies and gentlemen, thank you for standing by, and welcome to the Vistra Energy First Quarter 2020 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Molly Sorg, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, and good morning, everyone. Welcome to Vistra's investor webcast covering first quarter 2020 results, which is being broadcast live from the Investor Relations section of our website at www.vistraenergy.com. Also available on our website are a copy of today's investor presentation, our Form 10-Q and the related earnings release. Joining me for today's call are Curt Morgan, President and Chief Executive Officer; and David Campbell, Executive Vice President and Chief Financial Officer. We have a few additional senior executives available to address questions in 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 our investor presentation. I will now turn the call over to Curt Morgan to kick off our discussion.

Thank you, Molly, and good morning to everyone on the call. As always, we appreciate your interest in Vistra, especially during these extraordinary times. First and foremost, the Vistra family sends our heartfelt thoughts and prayers to those adversely impacted by the COVID-19 virus. We know the Northeast U.S. has been hardest hit and many of you on the call may have been affected. As tough as it is, there is hope, as I am convinced that we will get through this and we will be better than ever. I never thought I'd be hosting an earnings call from my home with our management team dispersed across the North Texas metroplex. And yet, that is where we find ourselves today. These are challenging times as we face the highly disruptive COVID-19 disease, which has already created unprecedented harm to society, threatening the health of not only the population, but of our economy and businesses as well. Now more than ever, I am proud to lead a company that is providing such an essential service to society, the electricity that powers our lives. Roughly 3,000 power plant team members at Vistra have no choice but to go to work every day to fulfill our obligation to society, and they have done it with pride and without question. We would not be able to work from home, power medical equipment and devices, and keep critical infrastructure running without electricity. Since the onset of COVID-19 in the U.S., Vistra has been focused on keeping our people healthy and safe while maintaining our essential business operations. Vistra took actions early on to prepare the company for a COVID-19 environment, putting us in a position of relative strength as we sit here today. In fact, we sowed the seeds of financial strength long before COVID-19…

Thank you, Curt. Turning now to Slide 15. Vistra delivered first-quarter 2020 adjusted EBITDA from ongoing operations of $850 million, results that exceeded management expectations for the quarter. The favorability was driven by our ERCOT segment, reflecting the opportunistic hedging and generation dispatch activities that Curt mentioned previously. Our first-quarter 2020 results were $26 million higher than the same period in 2019, with our retail segment up $54 million and our generation segments down a collective $28 million. The positive year-over-year variance for our ongoing operations was driven by the acquisitions of Crius and Ambit, partially offset by lower results in our MISO and New York, New England generation segments, driven primarily by lower capacity revenue. As a reminder, due to retirement of four coal plants in our MISO segment in the fourth quarter, our first-quarter 2019 results have been recast, increasing by $9 million to account for the movement of the financial results of those plants out of the MISO segment and into the asset closure segment. Next, on the topic of liquidity. Vistra had total available liquidity of approximately $1.834 billion as of March 31, which includes cash and cash equivalents of $717 million and $1.117 billion of availability under our revolving credit facility. In April, we repaid $550 million of borrowings under our revolving credit facility. Additionally, on May 1, we notified the holders of our 5.875% senior unsecured notes due 2023 that we will redeem the entire $500 million principal amount outstanding on June 1. Our teams have modeled various scenarios to stress test our liquidity, and given the company's strong cash generation profile, we are confident we will have ample liquidity to operate our business even in a recessionary environment. Before we conclude today's call, I would like to offer a brief reminder of our…

[Operator Instructions] Your first question is from Shahriar Pourreza with Guggenheim Partners.

Glad you're safe. Can we just -- a couple of questions here. Can we talk about sort of the landscape of potential retail growth opportunities as we look at the second half of the year into '21? Does the PUCT's rate relief program and kind of your lower estimates around peak demand maybe take some of the pressure off the smaller ERCOT books to sell and potentially shift your focus back to buybacks, i.e., that 25% of capital that's allocated to growth, like David just mentioned? Could that present further opportunities as it shifted towards buybacks with sort of credit metrics on pace to hit IG by '21? So how do we sort of think about that growth portion and given some reprieve that's been given to the retail providers?

So it does help. I mean, if they did not put the program in place, I think our view is, Shahriar, that it would have been carnage. No doubt about it. But to be clear about it, what's happening is there's -- what is being recovered by retailers is the energy component or the generation component and the T&D component, the margin that retailers typically get is not embedded in that. So while it's helpful for some of them, some of the retailers that are smaller, not as well capitalized, maybe not as sophisticated from a risk management standpoint, there's still risk and there continues to be, in our view, significant risk going into the summer months. And given the situation, it may be harder also for them to hedge and post collateral. So I do believe that there is still some risk to retailers in this market, and we've seen a little bit of that. Whether that turns into some kind of an opportunity, we'll see. But there is certainly some movement of foot by some retailers given that this isn't exactly everything that a retailer would have wanted in this situation. The other part of this is, is that the margin that is being forgone, you can collect on afterwards. But this is a customer class that is very difficult and will be difficult to collect on. So the ability for the retailer to actually try to claw back, if you will, that lost margin is going to be extremely difficult. So we'll see whether something comes out of this or not, that's certainly something that we are keeping an eye out for. But it's hard to predict at this point in time. I think we're still comfortable, Shahriar, really, with the roughly a quarter of our free…

And so just a follow-up. So I have to imagine that the sustainability of the model that you're displaying today should provide some level of comfort with the agencies, right? Is there any updates with your conversations regarding a ratings upgrade to IG? Also any potential for the time line to slip due to COVID? Are you still kind of shooting for that Q4 '21 for IG? So how is sort of the dialogue going with the rating agencies? Because I have to imagine this quarter should provide a little bit of a reprieve on whatever concerns they have from a business risk standpoint.

Yes. Well, what I understand is that -- and I think S&P made some comments to this effect. But I think it slipped a little bit, Shahriar, because what I heard is that S&P is probably going to wait to see how the year turns out to move us another notch. And then I expect them to it -- to be at least a year and probably a little bit more. So I think we've slipped a little bit on the IG. But my own view is exactly yours, which is, I think when the dust settles, I actually don't think this is going to end up being a negative period of time, but actually a highly positive period of time. And the agencies are going to look at this and say, in what is I don't think anybody can argue that this is not a tail event. This is a truly a tail event, probably as bad or as close to as bad as the great depression in terms of what it's doing to unemployment. And they're going to have to step back and look at that. It's not like just a normal run-of-the-mill recession here. And just the resilience of our business model what I believe, and I think this is incredibly important for our company, is that the business risk that has been ascribed to this sector for so long because of the poor execution, the bad strategies, I think when they look at this model and the execution that we put forward, that it's actually going to end up being a positive in the long run. So I still have some hope that by the end of year '21, we could get to investment grade. But I actually believe based on comments that I have heard, we may have slipped a little bit.

Got it. Thank you, guys. Congrats on the results. I will jump back in the queue. Appreciate it.

All right. Thanks, Shar.

Your next question is from Stephen Byrd with Morgan Stanley.

Hey, I hope you all are well.

You, too, Stephen. Hi.

Congrats on the good results in a challenging time. You gave some really good color on the state of the renewables market. And I just wondered, does that make you want to potentially be more aggressive in terms of growth just because of the opportunities? I just want to make sure I kind of understood how you're thinking about the implications of what's happening there.

Well, I think there was a number of implications that we were trying to get across. I think one of them was that we just think the growth in renewables, in particular in ERCOT, may have slowed down a bit. But I will tell you that when we stressed to get to that within 10% in 2021, we really didn't cut back the amount of renewables that we had previously thought we're going to come in back when we gave guidance, back in November time frame. So in my view, it's a bit punitive, but we wanted to stress the system a little bit. So I think that's one point. In terms of the point that you're making, I think we have some ideas about what we would like to do around renewables. And I don't know that this has really changed it much. We still have a strong cash flow that if we want to do some projects, we're going to follow through. I think you saw that we increased the battery opportunity out at our Oakland site. I think there may be some other opportunities at our Moss Landing site. And then, certainly some potential opportunities in ERCOT. And so I don't know, really, Stephen, I don't think it's changed our view. I think the difference is, is that we have the ability to do the things we want to do, whereas some people, I think, it's going to be more difficult just because it's difficult to attract the capital to support their plans. The developers are having more difficulty. And we know that because they're approaching us, for us to take over their projects and then pay them a small nominal fee to take them over. So I think there is an opportunity there and that we're working on that opportunity, whereas maybe there's some good projects that may come to market at a relatively cheap price, and we'll take a look at that and add that to our backlog. We don't talk much about just the amount of projects we have around renewables, in particular in Texas, but we also have them in other states. Of course, we have the coal to solar, thing going on in Illinois. But this company has a fairly deep backlog of opportunities to invest in renewables. But we're going to be deliberate about it, and we're looking for those kind of opportunities that offer the kind of returns that we expect, that sort of 500 to 600 basis points above cost of equity. And we have some of those, and we'll talk more about that in September.

That's helpful. It sounds like it's a pretty rich opportunity set so we'll stay tuned on that. And just on the demand outlook, you gave a lot of good color in a number of ways. I wonder just on residential demand, and I apologize if you did lay it out. Could you quantify just sort of the percentage increase in residential demand you've seen or that you expect, especially down in Texas this year? What's your general kind of view on how meaningful that may be?

Yes. Since I'm not in the same room with everybody, I'll ask David if he has that. But between David Campbell and Jim Burke, we probably have two folks that can put a little more detail to that. So David, do you want to start? And then, Jim, if you have anything to say, please jump in.

Sure. So this is David. Thanks, Stephen. With respect to residential, what we've seen is impacts actually in the second quarter. So for the past month or so, it's been in the 5% to 6% range. We've modeled it relatively conservatively, around 2% for the back 9 months of the year, but we've actually seen increases, reflecting people working from home in the 5% to 6% range. And that's what we're expecting in the second quarter and moderating in the back half of the year. We've kept pretty conservative assumptions around load declines in other segments, but we -- to be conservative, we had that moderating. So the overall increase for the back 9 months is about 2%.

Understood. And I guess just as a follow-up on that. I mean, that's -- that sounds -- that makes sense. That sounds reasonably conservative. So if demand is actually -- if demand for residential is stronger, presumably, that's relatively meaningful given your business mix?

That's exactly right, Stephen. It's our -- especially in ERCOT, where residential demand is weather sensitive and it's our highest margin segment. We think that there's potential upside there, particularly it's folks -- scenarios where as businesses reopen, you still have a large segment of the workforce working from home. So you'll see some uptick or moderation of the demand declines on the business side, while at the same time seeing the uptick in the residential side being sustained. So I do think that it provides -- it's a meaningful impact for us given the profitability of our ERCOT residential segment.

And Stephen, one other thing I'll mention at this point, I think we've tried to be pretty conservative. We're only at the beginning of May here. And we typically aren't going to change guidance this early in the year, especially given just how important the ERCOT summer is and how volatile it can be. But there were words in my script and there were words in David's and then also on these slides about tracking strong and that we're well within the range. And what that really means is, I think we've been conservative on our estimates for 2020, and we feel very good, very good about the midpoint and we think there's some potential for upside. But we want to be cautious about that. I think what will be a better indicator is when we get into the second and certainly, the third quarter earnings calls, when we have a better insight as to what the summer and ERCOT is going to look like. But from where we stand today, even with COVID-19, 2020, it looks to be a pretty strong year if we can execute the way we believe we can.

Your next question is from Steve Fleishman with Wolf Research LLC.

So just one question in thinking about capital allocation. So if the rating agencies are going to take longer to determine investment grade, I just wanted to kind of get a sense when you make your next decision on capital allocation, are you going to focus mainly on just hitting your debt-to-EBITDA metrics? Or are you going to be trying to kind of do things to keep getting to just the investment grade, i.e., what -- is it the metrics or the investment grade that are the priority in making that decision?

Yes, that's a very good question, Steve. Look, I think the simple way to think about this, and of course I've got a -- we've got a whole session coming up in July with our Board, so I really don't like to get out in front of them but I'll explain it this way. We've dedicated 2020 to pay down debt, and we're going to do that. And that's a bit of a sacrifice to also returning some money to our shareholders, which we would like to do, especially in this environment, but we also had to balance those priorities. And I think what you can expect from us in September is a capital allocation plan that is focused on returning capital to shareholders and reinvesting in our business. And given that it appears that things may be pushed out a little bit and the fact that we've never started this venture to get to investment grade, that was an outcome that kind of came up, that we're not going to chase things around. We are going to get to where we think the capital structure of this company leaves us in a position to be as strong as possible. And we just so happen believe -- to believe that with our business risk, which we are demonstrating is quite solid through all this and just the metrics themselves, they speak for themselves. And we still have to make a jump to BB+ with S&P, and so we want to get to that next. And then we'll get into dialogue with them about what it's going to take to get to investment grade. But I think the focus for us in September is going to be squarely around the two big buckets that I just talked about, reinvestment in the company and some opportunities that we have -- that we think are quite good. But more importantly, the big 3 quarters of our free cash flow talking to our investors about returning that in some form or fashion. And it's not rocket science, it will be a mix of what do we do with our dividend and what do we do with potential -- probably potential share repurchases. So that's -- and we'll see where we're trading, obviously, and all that will go into it. But I suspect that will be the two big buckets. And I think there's also some other details we're going to get into on that call as well that I think are important for people, about what's the long-term focus of our company and how we think about managing our portfolio of assets for the future. So a lot going to be packed into that. I think we want to get through the summer, see how things go and then we're ready to go in September. But that's how we're thinking about it.

That's great. That makes sense. And I don't think you want to be chasing the rating agencies all the time. Okay. And then, just on the unfortunately, I have to ask since the CDR has become a bit of an event in recent times. I think it's coming out maybe next week for the summer. Just any sense on what we should expect for that? And do you think we'll actually see this reduction in some of the renewables or delays, or is it likely not to show up in that? Just any color on the CDR.

Boy, I'd tell you, I have a hard time predicting what is going to come out of that CDR because it's not all that difficult for people to get projects to the point where it shows up in the CDR. And as you know, there's no economic overlay. And I think even ERCOT has tried to distance themselves from this being something to use for forecasting purposes. So it's hard to say. I do think there may be some pullback, Steve, but I also believe what's likely going to happen is it may be deferral more than it is anything actually leaving. And so you may see more kind of like it did last year when everything got pushed from '20 into '21, and there was a big bucket of projects that showed up there. And then, I think that you may see some get deferred even again. But I wouldn't be surprised, honestly, that people were still working -- developers are working on projects and getting them in the queue, interconnection queue and that more may show up. For me, it's less about that. We have a development team on the ground, we know this market very well. And it's more about what we're seeing in terms of real activity on the ground and getting equipment, signing contracts, getting financing. And that's where we're seeing things really pull back. And I think the other area where we've seen pretty big pullback is just the support on the PPA side. And that we have yet to see -- for example, on solar, we have yet to see a merchant solar plant get financing in the ERCOT market. It's just really difficult with an all-energy market to do that. And so without a PPA behind these, it just makes it more and more difficult. And we've seen that PPA market slowed down quite a bit. So even though the CDR could be a wildcard in all this, and I know that we're going to have to deal with whatever comes out of that, for us, it's more about what's really going on, on the ground. And for me, that's why our team is constantly not just looking to develop things, but also to try to get intelligence about what else is going on.

Okay. Thanks so much.

Thank you, Steve.

Your next question is from Julien Dumoulin-Smith with Bank of America.

Hey, good morning, team. Thanks for the time. Hope you all are well. Wanted to follow up on some of the various ways it's been asked on prior questions, but when you talk about the '21 outlook and you put a few comments in your slides, I won't repeat them. But what are you reflecting with respect to, first, the latest uptick in power prices even in recent days when you think about '21 EBITDA relative to '20? As well as you just talked about an improvement in residential sales, for instance, how does that also figure into the meaningful chance that '21 guidance could be flat to '20 at this point? What are you assuming?

Yeah. Yeah. And Julien, I'm going to take that as being largely focused on ERCOT, is that correct?

Yes. You tell me what the meaningful factors are, for example.

Yes. Well, look, I mean -- so 2020 -- actually, what we've seen is that from where our fundamental view is, 20 -- 2021 summer pricing in ERCOT, which is really always the big ticket for us, that will really end up being the swing that will either get us to flat or something less than that. Those prices have come off pretty hard over the last few weeks, and that's liquidity. It's a whole bunch of different reasons why that has come off. We don't believe it's fundamentally driven. And so it will really depend on kind of how quickly we come out of this -- the COVID-19 event and how quick the recovery is. And so that's why we're being a bit cautious in trying to draw distribution around the outcomes. But if we were -- if we saw pricing up near where our fundamental view is, we would be very much closer to a flat year-over-year. If prices stay where they are now, they'd be more like in the -- what we had talked about in the presentation, that $3.1 billion to $3.2 billion. So it just really depends on where ERCOT pricing comes out. And I think on the retail side, the numbers that year-over-year, from '20 to '21 are not that big in terms of our retail outlook that, that's really the swing factor. It's really going to end up being summer ERCOT pricing that will end up being the big ticket item. In the other markets, it's really not -- they're not that big of a player in this either. So I think if you really draw a circle around it, it's really going to end up being where does the summer '21 in ERCOT come out. And we see a distribution around that and still a fairly good chance that you could see a pretty strong year, especially if the development that we talked about doesn't come to fruition and the economy in Texas recovers quickly, which could happen. You could really see another tight situation in ERCOT. And then we're talking about a very different set of numbers, probably something more closer to flat year-over-year relative to our guidance in 2020. But if we see a more prolonged effect from the COVID-19 virus and prices stay a little more depressed going into the summer, weather doesn't show up, then you could be on the lower end, that kind of $3.1 billion to $3.2 billion range. And David, I don't know if you want to add anything on that or not.

I think you covered it, Curt.

Okay.

All right. Excellent. If I can just quickly follow up. On the C&I exposure, to the extent to which obviously 90% of the business is resi and mass biz. I just wanted to understand how you all are thinking about that exposure more in terms of the margin impacts, even on that small piece that would seemingly be the partial offset to what are otherwise very positive trends on the resi side.

Yes. David, do you want to take that one?

Sure. So Julien, you saw that we noted that there's some downticks from LC&I that we cited on Slide 11. And it's a combination of factors, the margin from that segment is pretty low. So part of it is lost margin, part of it is the loss of the hedge position. So we valued reselling back that power into the market at lower prices. And part of it is some of the impacts of certain fixed costs like capacity and transmission, particularly in Midwest and Northeast. So that's what gets you up to that sum total of the $30 million for the year, partially offset by some higher residential volumes. So that's some total of the various impacts, the margin is a relatively small piece of that. And again, that's our projection for the full year. It's with a view that we could have sustained impacts in the downturn. So we've tried to be pretty conservative in our assumptions. But it's the sum total of those various impacts of that segment.

Got it. Understood. Hey, Curt, just a real quick clarification for the sake of the call. When you're talking about growth here real quickly, and you made some comments earlier about growth expectations, renewables, et cetera, and just reconciling against, obviously, where the stock is, et cetera, how committed are you to seeing through growth relative to allocating capital back to buybacks, dividends, et cetera? Just want to be -- just exceptionally clear about growth capital right now.

Yes. So look, I mean we look at -- we balance that. So the priority for us is obviously, to use capital efficiently. But at the same time, you've got to balance that a little bit in terms of growing the company over time. And -- because we are a going concern and buying back our shares. But we do an economic analysis, it's very simple. The real key, Julien, you know this, is what share price do you assume when you do the economics of buying back your own shares? And that is a really -- that's an art more than a science. So we look at a variety of share prices when you look at the return that you get for buying back your own shares, and we don't just look at one price, and we try to be realistic about it. And we have to look at that over a period of time. And so depending on how long the period of time is, that dilutes the return on buying back shares. But we try to balance that, and we try to -- if we're going to invest in our company, we want to -- back into our company, we want to make sure that those returns also stand up to buy -- the alternative of buying back our shares. And I'm pretty happy to say that when we have done that, the returns have been definitely in the range of what we thought the value of buying back our shares has been and we're going to continue to do that kind of analysis, knowing that we also have to balance that we have to -- we're going to have to invest in our company. Our company is going to -- we're going to see coal plants retire. We've already been very straightforward on that front. We'd like to replace economically, obviously, the EBITDA from that, and we'd like to grow our EBITDA. At the same time, we know our stock is cheap. And so it's a balancing effect. There's no simple formula to it. But we do, do the math that you would expect us to do to try to see the relative returns of investing back in the business and investing in buying back our shares.

I would now like to turn the call back over to Curt Morgan for closing remarks.

Well, once again, I want to thank everybody for being on the call. I hope everybody stays safe and healthy in this difficult time. I can't tell you enough how we appreciate your interest in our company, given the extraordinary COVID-19 virus. We're excited about our company, and we're excited about the months coming ahead. And until next time, please be safe and be healthy.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.