Ladies and gentlemen, thank you for standing by, and welcome to the Vistra Second Quarter 2020 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Molly Sorg. Thank you. Please go ahead, Molly.

Thank you, and good morning, everyone. Welcome to Vistra's investor webcast covering second quarter 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-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 on the call to address questions in the second part of today's webcast as necessary. Before we begin our presentation, I encourage all listeners to review the safe harbor statements included on slides two and three 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.

Thank you, Molly, and good morning to everyone on the call. As always, we appreciate your interest in Vistra especially during these uncertain times. Cases of COVID-19 have been rising throughout the country, including in many of the states where we operate. Cities are facing social unrest as citizens are fighting for equality and demanding change, while the political climate is polarizing and masked by uncertainty heading into this presidential election season. While it all seems overwhelming, I remain convinced that we will get through this and we will be better than ever. I have seen proof of the resiliency of the American people through the lens of our own team members and their dedication and commitment to keeping the lights on in the face of these macro challenges. And instead of the strife in our country dividing us, we have rallied together as a team and as a family, seeking a better understanding of one another and recognizing that the only way we advance as a company and as a country is to listen and take action to ensuring quality for all. We say at Vistra, we want to be a company that works for everyone. Our people are our number one asset, and they have continued to show up day after day to maintain the level of operational excellence our stakeholders expect from us and our customers deserve. The second quarter results we are announcing today are evidence of this dedication. On slide six, we show our strong second quarter and year-to-date results. In the second quarter, Vistra delivered adjusted EBITDA from ongoing operations of $929 million, which is 30% above second quarter 2019 results. The quarter-over-quarter favorability was driven by the acquisitions of Crius and Ambit in the second half of 2019 as well as strong execution…

Thank you, Curt. As shown on slide 12, Vistra delivered another strong quarter, with adjusted EBITDA from ongoing operations of $929 million, which was $212 million higher than the same period in 2019. Our retail segment increased by $108 million period-over-period and our generation segments were up a collective $104 million. The positive year-over-year variance for our ongoing operations was driven by the acquisitions of Crius and Ambit and favorability in our ERCOT and PJM segments, reflecting our operations performance improvement initiatives and commercial optimization contributing to higher energy margin. As a reminder, due to the retirement of four coal plants in our MISO segment in the fourth quarter of 2019 and the associated movement of the financial results of those plants into the Asset Closure segment, our 2019 results have been recast, increasing ongoing operations adjusted EBITDA by $9 million in the first quarter of 2019 and $10 million in the second quarter of 2019. Year-to-date, Vistra's ongoing operations adjusted EBITDA is $1.779 billion or $238 million higher than our comparable 2019 results. The favorability is driven by the acquisitions of Crius and Ambit as well as higher energy margins in our ERCOT and PJM segments. In both the second quarter and the first half of the year, Vistra's financial results are coming in ahead of management expectations. As a result, Vistra is currently tracking toward the upper half of its guidance range. Turning now to slide 13. Vistra remains committed to reducing our leverage in 2020 as we approach our long-term leverage target of 2.5 times net debt to EBITDA. As of July 31, we have paid down nearly $750 million of debt in 2020, including the redemption of the entire $500 million principal amount of our 5.875% senior unsecured notes due 2023 as well as redemption of…

[Operator Instructions] And your first question comes from the line of Shar Pourreza with Guggenheim Partners.

It's actually James for Shar. Congrats on a great quarter and looking forward to September. I just have two quick questions for you. Building off of some of your COVID data points, are you seeing or expecting any inorganic retail opportunities to arise in Texas or the East due to the virus? Any stress on smaller books?

Well, yes, we I mean, we have seen pockets of books and companies that have seen some signs of stress. The summer hasn't shown up here yet in ERCOT, and so that has provided some relief for some of those companies. But we could see that and we're active, as you might guess. And most people are going to come to us before they transact with somebody else. So we're in the flow on that, and we are seeing some of it. And I would expect if we see what we think we're going to see in terms of scarcity value, particularly in ERCOT, we may see some more of those books come available. I will say that when we evaluate those, we're obviously looking for quality books, it can extend beyond a year. And some of these companies have the value of their company is atrophied because they may be door-to-door, more face-to-face-type contact. And what's happening with the virus, those types of channels have been a little more difficult. And so you've got to really dig under and just make sure you're getting something of value. And we're not going to do a deal just to do one. We want to make sure we get value. I don't know, Jim Burke's on the line. And Jim oversees over our retail business. Do you want to add anything to that?

Curt, I think you covered it well. The only thing I would add is that, with some of the COVID impacts having a little bit more focus on the business impacts to demand, some of the lower-margin business-focused books are seeing a little bit more pressure than some of the residential books. But in general, the theme that Curt mentioned that the summer hasn't shown up yet in ERCOT, is probably the prevailing consideration, and we are constantly monitoring the market for these opportunities.

Got you. And then this one might be more for David, but could you give us an update maybe on the conversations with the rating agencies? Are you still targeting investment grade maybe by the end of next year? Or has that kind of slipped to 2022?

Yes, David. You there?

Yes. So the conversations with the agencies continue to go well. The with S&P, they've indicated and right now they've got us some positive outlook for getting the BB+. And they've indicated that, that review will happen as early as the third quarter. That's possible they'll wait for the third quarter results. We expect that, that review will happen as early as the third quarter of this year. And they haven't put a fixed time line out for consideration to investment grade, but that often can take a year or so afterwards. Moody's is on a faster trajectory. They and their when they upgraded us to the equivalent of BB+, indicated that they would consider an upgrade as early as the middle part of 2021. So obviously, we don't control the time line. We expect it's going to be next year, middle or latter part of next year. But the key thing is that I think the agencies have both recognized and affirmed that the strength of our company through the pandemic and through the financial crisis is something related, crisis related to the pandemic is something that they're watching and evaluating and can help to reinforce the resiliency of our business and our business model. And we think this quarter's results and our expectation is that you're willing to reinforce that. So we think we're on a positive trajectory with both the agencies.

Great, guys. That's it for me. Thanks for everything. Congrats on a great quarter and looking forward to September.

Thanks.

Thank you.

And your next question comes from the line of Julien Dumoulin-Smith with Bank of America.

Good morning. Team. Thank you very much for the time. So if I can ask a couple of questions. Let me just start first with a high-level question. As you think about this larger update in the next couple of months, how do you think about growth investments and where you want to be positioned on that front? And I'm thinking specifically on storage, but also just in terms of generation, you've seen your peers enter more into PPA structures to further align their generation business with retail. How do you see the growth side of the equation initially coming in? And I know this is, to a certain extent, pre-empting some of your updates coming ahead here, but just think more strategically here on growth as part of the capital allocation. Where are you going with that?

Yes. Julien, thanks for the question. And I tried to allude a little bit in the comments to this, and I will say, obviously, some for September, some of the details, but I think more at a 10,000-foot level strategically, and I made a very specific comment for a good reason. I think we may think a little bit differently than or maybe other competitors do. But we kind of balance between having investment in physical assets, in generation and in new technologies, renewables and batteries and PPAs. Like I said, we've got over 1,000 megawatts of PPAs as well as we've invested in batteries in California, we put up in two which is a battery. And I think you should expect us to do the same. I mean there are times where we have opportunities to sign up a PPA that is good value and we may back-to-back that with a retail deal. And then we also have times where we have because of a location we might have or because of our retail business and also because of our commercial capabilities and our ability to manage projects, those types of things, we have the capability to also invest in solar, predominantly solar and batteries. Of course, we've got a really good location in Moss Landing and then also Oakland in California. You can only imagine, given the size of our company in Texas, we've got a number of really good sites. And when it comes to renewables and batteries, it's kind of like real estate. It's location, location, location. And I think there's an opportunity for us to use our skills and capabilities as well as our locations and to invest in assets as well. And we like that balance. We like a balance of both new technology…

And looks like we might have lost Julien. Julien, are you on mute?

Maybe we can get him back on here in a minute.

Okay. And we'll move on to the next question. And your next question comes from Michael Weinstein with Credit Suisse.

Is there any reason why you're tracking in the upper half of the guidance range? Is there any reason why the second half of the year might bring that back down to the midpoint of the range at this point? I mean is there are there any specific things you're looking at? Or is it just COVID-19 uncertainty that we should be worried about?

Well, look, I think certainly, COVID-19, and we still continue to believe that we may do better on the bad debt expense side. But you just don't know. And like we said in our remarks, I'm a little worried about the additional unemployment and insurance payments coming off at the end of July. We think that's been helpful, people paying their bills. And we want to tread a little bit lightly, you guys know the cases in Texas have exploded. And this is really uncharted waters. So and then that's one of the things that I think could be a place where we might give something back. We haven't played out the whole summer out yet, and we still carry a little bit of length in the summer. And so we'd like to see how that plays out. But I think we were also trying to say in our remarks that we feel pretty good about where we are at this point in time. And so we didn't want to change the ranges. We typically don't do it this early. I think we'll probably talk about that in September. That's even earlier than we normally do. But I think we're going to be in a position to talk about 2020 in the range then in September. I think for us, and you know us well, I think you do, for us to even talk about the fact that we're tracking above the midpoint, I think, tells you that we're feeling good about 2020. But I do want to emphasize, there is still there are still some things out there that we want to keep an eye on for the remainder of the year, but we're feeling good about it. And I don't know, David, if there's anything you want to specifically mention, please jump in.

Curt, I'd just emphasize where you closed, is that we feel good about how we're tracking, even our commentary. I think you can see, Michael, in the script, reflects our view that we're tracking well. So Q3 is always a big quarter for us, so that's why we typically don't update the range at this time of year, but we're feeling good about how we're tracking. The business has performed well. And it's an unusual year. So that, plus the normal dynamics of Q3 being our biggest quarter, are why we haven't changed the range, but still signaling the strength. Go ahead.

Sorry about that, David. I will mention this, Michael, that I think people I think they now know this about us, but we kind of have a balanced year that we have. So the retail does pretty good and can do pretty well in the shoulder months where the supply cost, because we have a levelized retail price where the supply costs are lower. And then in the summer, we don't make as much money in retail, although we're doing pretty well, obviously, right now. And then in the winter months, in the fall and the winter, we get that lower supply cost again. And so it's important that volumes stay strong for us in the remainder of the year on the retail side. So October can be a big month for us. November and December can be big months on the retail side. And if you get if you had a situation where in Texas, you had an issue with demand because of COVID, that might be a little bit of a drag. We're not seeing that, though. We haven't seen it through up to now, and we've seen, obviously, a lot of cases. And so we're pretty optimistic that we're not going to see it. But also the relief program in ERCOT is coming off at the end of August. And so all those things are going to factor into what's going to happen with our retail business for the remainder of the year. We're optimistic, but we want to keep an eye on it, and we've provisioned for it, too. And when we're telling you where we think we're going to be, we also take into account that we do think that there could be higher bad debt expense than we normally have.

Right. And one place you mentioned about that renewable investments would only be done if it meets your return criteria. How does that look now? Are renewable investments presenting some attractive return possibilities for you? And I'm not just talking about just in Texas, but maybe in other states, where gas and electric prices might be a little higher.

Yes. So there are opportunities out there for people like us that have the locations, the capabilities, have the integrated nature of the business. You can see what I'd call attractive returns. And we're going to get more into that. And we'll actually in September, when we go through this, we'll actually show you how that builds up. Because I know what people have in their mind, they have a PPA, sort of what the returns are for some of the developers that are putting these projects out there. And they're wondering, how are you making something that looks attractive? Somebody's getting that value. That value exists given where market prices are clearing in ERCOT. It's who's getting it. And so the developer wants to get paid the development fee, and they need to get financing to get the project to go. So they need a PPA with an investment-grade firm in order to do that. And then somebody, the investment-grade firm, is getting the value. How they choose to monetize that value is up to them. They can sell the PPA to us and we can back-to-back it with a retail deal. They can take it to the market. Many of these guys don't want to take it to the market because there's risk taking it to the market. And if you don't have the capability to do that, then you don't want that risk. And so you're going to offlay that risk. But the value is in the market. And as we move more and more, Michael, to merchant investment, because not everything in Texas or across this country can be built through a PPA structure, when we get to the point where somebody has to put down real dollars per merchant, then the kind of returns that we're looking for and that we see, they're justified. They need to be there in order to justify the risk. And then you have to have the capability. You have to deal with basis risk and market risk and weather risk and all of those things that go into it. We have that ability to do that. We've got a whole infrastructure that knows how to do that. Not everybody knows how to do that. And so but we are seeing the opportunity, and we're one of the in my view, one of the view players that really have the integrated nature and the capabilities to actually monetize and to extract those kind of returns.

And your next question comes from the line of Jonathan Arnold with Vertical Research Partners.

Good morning, guys. Just one quick question on the retail side. I saw the customer count versus March came down maybe about 1%. And your but your slide says you grew counts in ERCOT across all classes. So I'm presuming other regions saw customer accounts come in and maybe that was partly sort of intentional. But could you just give us some perspective on what's going on there?

Yes. David, do you want so Jonathan, to be clear, do you want us to talk about what's going on like in the PJM area, ISO New England, just what's going on with customer counts there as well as ERCOT? I just want to make sure that I got the question right.

If you could touch both, and just to make correct that the counts did come down in PJM or elsewhere.

All right.

This is Jim. I'm happy to take it.

Yes. Go ahead, Jim. Yes. Go ahead, Jim.

Yes. Jonathan, so we had talked on the last call that a couple of our partners, the brands that we acquired, Crius and Ambit, are more dependent on face-to-face selling and the Midwest, Northeast markets have had some of the biggest restrictions on face-to-face selling. So Crius and Ambit, for instance, did well in Texas. Texas reopened in mid-June to allow some face-to-face selling. Many of the other markets, particularly Illinois and Ohio, where we've got sizable presence, have not reopened yet. So the quarter one to quarter two drop is largely a function of the markets not enabling that kind of channel performance. We have moved to other channels. There's more online activity that you would expect. There's definitely more. We're doing through the phones, but not through face-to-face selling. So that's the main driver. And fortunately, the strong ERCOT performance of TXU as well as the other brands in ERCOT more than overcame that in the quarter. And that and we see sort of the full year playing out in a similar fashion.

Perfect. And then just kind of one question on last quarter, you had talked about your point of view, and you'd also had a specific comment on what you where you thought 2021 would track relative to 2020 based on the March forward curves. I mean they don't seem to have moved very much. So I'm curious if that prior comment still stands or if hedging and other things might have moved the needle there.

Yes. So I think we're pretty much where we were. We see we were trying to convey a message that we're kind of flattish to midpoint guidance from 2020, which was, I think it's like three four, three five, we're kind of flattish to lower. We also, I think, if you remember, Jonathan, we said that we had stressed down further than that, and we were within 10% of EBITDA. But that was to give you guys a sense, because we were getting feedback from people that especially we were really in the throes of COVID and it was really new at the time, they wanted to see what a stress case would look like. But I think where we are right now is we're sort of flattish to slightly lower. And that was similar to where we had come out last time. We haven't seen anything yet that would change that view, and we'll probably know more because we'll be through most of the summer and into September. We'll also be able to see where the 2021 curves go as we roll out of the summer and into that fall period that we showed on that graphic where you start to see people turning their attention to the next summer. And that's where you get liquidity, and that's where pricing starts to firm up. Some of that pricing is supported by what happens in the summer, people the prompt summer. People like to look and see, well, was there scarcity or when conditions for scarcity showed up, didn't show up. That kind of thing does affect the market. And so we'll see where the rest of the summer goes. But if we get some high temperatures and low wind, people will be looking to see how the market reacts…

Great. And just one final thing. Your most obvious listed peer reorganized their segments this year to be to show more kind of an integrated look of the businesses. Is that something you would potentially consider? Or do you expect you'll continue reporting the way you are?

That's a good question. I don't think we're going to do what they did. But I think in September, you'll see that we have a slightly different way that we are going to take a look at our business, that we hope will actually increase transparency and provide more information to you guys. And that will be the goal of what we do. And we'll give you a better sense of the business from a longevity standpoint and our strategic focus. So we do have an idea that we've been working on for some time now, and we would like to roll that out commensurate with the remainder of our longer-term capital allocation plan.

And there are no further questions at this time. I'll now hand the call back over to Curt Morgan for closing remarks.

Thank you for taking the time to join us this morning. And as I stated at the beginning of the call, we do appreciate your interest in Vistra, and we look forward to continuing the conversation. I hope everybody stays healthy and safe through these trying times. Thank you.

And this concludes today’s conference call. Thank you for your participation. You may now disconnect.