Ladies and gentlemen, thank you for standing by, and welcome to this Vistra Third Quarter 2020 Results Conference Call. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Molly Sorg, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to Vistra's investor webcast covering third 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; Scott Hudson, Executive Vice President and President of Retail; 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 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 the investor presentation. I will now turn the call over to Curt Morgan to kick off our discussion.

Thanks, Molly, and good morning to everyone on the call. We appreciate your time and interest in Vistra during this busy third quarter earnings season. It was just five weeks ago when we last connected with you at our virtual investor event, where we laid out our capital allocation plan for the next few years and provided additional details regarding our planned portfolio transformation. As we announced on the call, we expect to transform our generation fleet, including growing our renewable and energy storage presence, while retiring the majority of our existing coal plants, significantly decreasing the greenhouse gas emissions produced by our operations. We believe, we are our natural owner of renewable and energy storage assets given our capabilities and competitive position, and have a high degree of competence that we can generate healthy return from these assets through the same skills and methodology by which we extract significant value from our existing fleet. We are not going to give away the value to others by entering into below market power purchase agreements, and we have the capabilities to manage the market risk. We also own a portfolio of highly-efficient low-emitting natural gas assets that can provide reliable dispatchable power and complement the intermittent nature of renewable resources. The diversity of our portfolio enables our team to structure renewable products that can ensure reliability at an affordable price. As we have recounted in the past, every reputable and objective study on the changing power generation landscape has natural gas playing a significant role for several years to come, especially as we electrify the economy. The most recent study by E3, a well-respected energy consulting firm, is another good example. And let's not forget, we already serve nearly 5 million retail customers, many of which are increasingly seeking to procure…

Thank you, Curt. Turning to Slide 10, we wanted to spend some time on today's earnings call highlighting the stability of our retail business, its resiliency through the COVID-19 pandemic and our opportunities for continued growth. As many of you who have been following Vistra for some time might recall, Vistra's retail business has been a stable contributor of EBITDA since the retail market in Texas opened fully to competition in 2008. Prior to the Dynegy transaction, which closed in April of 2018, Vistra's retail business grew solely through organic activity. And over the period from 2008 to 2017, we generated an average of approximately $800 million of EBITDA annually, even in the face of a number of volatile power price cycles, including the extremely hot summer of 2011 and the polar vortex of 2014. The Dynegy transaction that closed in 2018 expanded Vistra’s reach from a Texas-only retailer to one with operations in 5 of the top 10 competitive markets in the U.S. Then last year, we added both Crius Energy and Ambit Energy to our portfolio of businesses, expanding the Vistra Retail footprint to 19 states in the District of Columbia, adding several new brands, high-margin residential natural gas to the portfolio and a powerful network marketing channel. Vistra's customer counts grew to nearly 5 million, and our total delivered load grew to approximately 95 terawatt hours. In 2018 and 2019, our retail EBITDA averaged approximately $825 million. And we are currently on track to exceed our recently raised 2020 guidance midpoint of $955 million, with our 2021 adjusted EBITDA projected at nearly $1 billion. This expected performance in 2020 is particularly impressive in light of the challenges brought on by the COVID-19 pandemic during the year. In May, we estimated that COVID-19 could potentially be a negative…

Thank you, Scott. As shown on Slide 12, in the third quarter, Vistra once again outperformed management expectations embedded in our guidance. Ongoing operations delivered adjusted EBITDA of $1.185 billion, which was $108 million higher than the same period in 2019, with our Retail segment down $53 million, and our generation segments up a collective $161 million. As Curt described, the positive year-over-year variance in generation was driven by higher margins in our Texas segment. The negative variance in our Retail segment was a product with higher volumes from our Crius and Ambit acquisitions during negative margin months. You may recall from our discussions during third quarter performance last year, our plan projected negative adjusted EBITDA in our Retail segment during the third quarter. This phenomenon is a result of the seasonality of power cost in Texas where power prices are at their highest in August, driving up our third quarter cost of goods sold, whereas retail customer prices are generally at more consistent levels through the year. This negative third quarter margin is offset by higher gross margin in the first, second and fourth quarters. Year-to-date, Vistra's ongoing operations adjusted EBITDA is $2,964 million or $346 million higher than our comparable 2019 results. The favorability is driven by the acquisitions of Crius and Ambit, our operations performance improvement initiatives and higher energy margin, primarily in our Texas segment. With 3 quarters of outperformance relative to management expectations for the year, Vistra is tracking solidly above its recently raised adjusted EBITDA guidance midpoint for 2020. This quarter, we are also reporting our financial results in accordance with our new segments. Of note, the new Sunset segment includes plants that have announced future retirement dates, providing transparency into the contributions and potential liabilities from those facilities, and more importantly, separating their…

Thanks, David. And Scott, thank you as well. So not much to say at this point. I think most of you have been following the election and things look pretty tight, too tight to call. Of course, it's going to be interesting to see whether we'll have divided government or whether we will have a single-party control. That, of course, would end up being the Democrats, because it looks like the house will go to the Democrats. The point that I'd like to make about the election is that -- and we've said this before, that we feel like we can be successful under any administration. We're an apolitical entity. We have friends on both sides of the aisle. We've worked very well with both Republicans and Democrats. And we, of course, studied, like most of you have, where the policies might go and feel like we can benefit under either administration. So we look forward to working with whoever the administration is and with whatever the Congressional makeup ends up being. And we feel like we can make progress under either administration, and however Congress gets set up. So it's a little too early to tell on this, as you guys know. This could drag out for a while as well, given what we're seeing. But we believe that Vistra is well-positioned under either control administration by Democrats or Republicans. So with that, operator, we'd like to open it up for Q&A.

[Operator Instructions]. Your first question comes from Shahriar Pourreza from Guggenheim.

Just, Curt, a couple of questions here. I know obviously, you did the small retail acquisition in Texas in the quarter. It looks like a pretty healthy multiple. Very high cash flow conversion on that. Can you just maybe shed any more details on the process there? Is this something that we should kind of expect intermittently? Or was it more of a sort of one-off? And are you seeing any additional opportunities?

Good question, Shahriar. So, we are seeing these types of opportunities come up. What can happen is, and what we typically do through our M&A team, as we will reach out to entities like this, and in some cases we'll reach out and say, are you interested in exiting the business? And in other cases, they may be looking to exit. We happen to know a couple of the principals. And we actually do the supply -- we actually do their supply right now for Infinite. So, we have a relationship, an existing relationship. And I think when they decided that it was time for them to do something different, they of course looked at us as one of the top candidates for buying their business. So, this one, I think, came to us a little bit different. But we have an active process where we are reaching out to some entities. And then again, some will reach out to us. And there are, I'd say, a few of these, it seems like all the time. And some of which we are able to sign a deal with and some that we are not. So, I would expect that this can continue. And they're just -- they're smallish in nature, but they add up over time.

Then you noted that in the upper end -- you've been at the upper end of your '21 guidance, and that's fairly achievable. Can you just maybe refresh us on what the drivers are that may be giving you a little bit more incremental confidence? I mean, it looks directionally like you're pointing to the economy and supply demand. I guess, how has that improved since late September? So maybe just a little bit of drivers there.

Yes. So, October has turned out to be a pretty decent month for us on the retail side of the business, although we're still closing out things. But there's a potential that we -- the weather was decent, and we still have to take a look at what the final tally looks like, but it could be in a favorable position. And we've also -- as you know, we were pretty well hedged on the wholesale side throughout the year at some reasonably good pricing. So, I think that we also go into things a little bit, as you might expect, because we don't know exactly what's going to happen with weather. And our retail business actually does well in these shoulder months, that we tend to go a little conservative even when we revise our guidance. And I think what's showing is that we're more on target with where we thought we would end up being. Plus I think we may see a little better October. All of that is beginning to give us more confidence. This is just a situation where our confidence is growing around getting somewhere above the midpoint and heading towards the upper end of that range. And that's simply what it is. But I think October also may end up being a favorable month. Again, we don't want to get too far ahead of ourselves because we haven't closed out the books yet.

Got it. And I was referring to -- I'm assuming you're referring to '21, correct?

Well, I'm sorry, I thought you said -- okay, you're talking about '21, I apologize.

Yes, exactly. No, it's okay.

In '21, so that's a little bit different. I apologize for that. In '21, I mean, I alluded to this in my comments that there's -- our business position and assets do offer us option value. And the market, depending on whether you're short or long, or where your book is positioned, people look at our business position and they see value for them and we see value in our business. And we're able to either transact in the forward. Sometimes, the forwards recognize scarcity. And sometimes, they recognize the value that's embedded in our assets and you can use that to hedge. Sometimes, like right now, it's not fully reflected in the forward curves, but that value is still there and you can capture it on a bilateral basis. And so I think what we're seeing, though, is in the market, that the value in our portfolio is there. It's just a matter of how do you want to transact and capture it. And we're seeing that value and we're realizing some of it. And we feel like that gives us a lot of confidence that ultimately '21 will turn out to be a year where we can get to the midpoint or even better than that. So, it's just really what you see in the marketplace. And it's not always -- I try to tell this to people, the forward curves are not the end of the all, especially as you get out beyond a year where they are thinly traded and they're not very representative. Have we gone back and marked our book to the forward curves 5 years ago, we would be coming in with EBITDA over that 5-year period at less than $3 billion. But that's not how it ended up. And so you got to be very careful about just choosing the forward curves. I know it's an easy thing. And I know it feels right for people to do it. But that's why we invest a bunch of money to try to analyze and model and understand the fundamentals of our business. And I know people get worried about models and all that. But for us, we have to do that along with the forwards and understand -- to understand really the value of our business. And for '21, we think there's a lot of value that's not reflected in the forward curves and there are multiple ways to realize that value.

Our next question will come from Julien Dumoulin from Bank of America.

I'll make this quick. So you all talked about, shall we call it growth initiative, a few weeks ago here. So at the time, I think you alluded to having a shortly upcoming Phase 2 update on Texas specifically. Where do you stand on expanding on your initial growth efforts, first? And then secondly, related, more structured, how should we think about your tax appetite going forward relative to the pace of renewable and/or storage investments, right? As I think about it, I would think that you would key the pace investments off of your ability to absorb those tax attributes directly? Or are we mistaken in making that assumption and thinking that perhaps the retail -- the direct retail sales would drive some of those growth ambitions? So a lot of in there, but I'll let you have at it.

Yes. So I'll take a shot at that. And David or Jim -- Jim Burke is on here with us, if you guys want to add to it. But in terms of the Phase 2, I'm thinking that, that is probably more a '21 -- later '21 type event where we would talk about that. We still have to -- we still have a significant pipeline of things that we announced in Phase 1. We haven't decided exactly when we would come out with our Phase 2 details, but I would guess it's more of a '21 event. In terms of tax appetite, of course, tax appetite is going to be somewhat driven by the election and where tax rates go. But we -- what we do is we look at the present value of the tax benefit relative to what the cost is of bringing in tax equity. And what we have found so far, Julien, is that we still have a tax -- we still have an appetite. Depending on where prices go, so we look at it both using our point of view, our fundamental modeling, as well as market, and when we become taxable, does affect the NPV of those tax attributes. But in all cases, we have an appetite for tax attributes because we will ultimately become a taxpayer after we run through the NOLs. And of course, you know that we have this unique TRA payment that actually will kick in before federal taxes will. And so we also look at that because that helps us defer the TRA payment as well. And that also affects our appetite for the tax attributes of renewables. So it's going to be a little bit fluid just because we don't know exactly what tax rates are going to end up being. But under -- whether it's today's tax environment or something different, we still continue to have tax attribute -- or excuse me, appetite. And we believe we will continue to have that even into our Phase 2 build-out. Does anybody, David or Jim want to add anything to what I just said?

Well I was going to say, we look at this from an overall return perspective, of course. So tax attributes are a factor in our overall analysis. And ERCOT Phase 1, we -- the products exceeded our return thresholds with utilizing the tax benefits on the schedule that we can utilize it. That's how we model them. And as Curt described, there are higher benefits use internally in a third-party marketplace. So as we look at ERCOT Phase 2 and beyond, we'll do that same assessment of what's the maximum opportunity to extract further tax benefits. And we'll fold that into our overall customer accounts and to make sure that the project exceed our returns. Jim, over to you.

Thank you, David. Sorry about that. Curt, as you described it, most of our Phase 1 spend, it peaks in 2021 and starts to taper off in '22. So we would expect to announce the Phase 2 in 2021. So fill in some of 2022, and then the bulk would be in 2023. You can try to levelize around the $500 million or so in growth capital. So that's how I see it sort of feathering in at this point.

Got it. Quick follow-up here, Curt. Given the feedback after the Analyst Day, are you committed going forward to continue to see that level of CapEx even after Phase 2?

Yes, we are. We are. I think, Julien, we see what everybody sees in terms of where the world is going. And I don't think that the ESG world is going to change in the next couple of years. And we want to be a part of that transition. And we also believe that we have the projects, the capabilities and understanding the markets to be able to invest and to generate very good returns. Of course, we always will look, at any given time, if something were to change, then we would obviously let you guys know that. And I'm not saying that we can't change. We're not stubborn about it. But we still see opportunity, and we haven't seen anything to change our view on the long-term fundamental view of markets that we have today and then our ability to create value from investment. We think a quarter of our free cash flow makes a lot of sense to reinvest in the business. But as we have said before, if we begin to see a market environment where we don't believe that we can generate the kind of returns that we think we can, then we will return that money to our shareholders. But at this point in time, we feel like we can continue to do that. And I think one of the things that really is underappreciated, in my mind, is that there is going to be a supply response to newbuild. There was a supply response when combined cycle plants came into the market, and there were a number of retirements in coal plants and higher heat rate gas and oil units. And that's going to continue to happen in these markets as you bring on new technologies. And I think that's largely being ignored.…

And your next question will come from Steve Fleishman from Wolfe Search.

Just first, is there a price or EBITDA that you've disclosed for the new acquisition?

We haven't, but we can, Steve. It's $13 million, in that range. And then I think we said that it was about 3.7 times when you look at the multiple. That includes synergies. Synergies come from back office and other functional units largely. We were already a supplier to these guys.

$13 million is the price paid or the EBITDA?

No, well, I'm sorry. That's the price paid. EBITDA -- I don't know that we've disclosed that.

No, that's fine. I can figure that out. And just to be clear on -- when you're making the decision-making on growth and your cost of capital, I mean, if the stock stays in this range around where it is, are you using that as your cost of capital? Or are you using something higher than that, when you think about...?

You're talking about the yield on the stock? Are you talking about...?

No, just the general cost of capital, the embedded -- yes, the free cash flow yield, whatever, in terms of making the decision to invest in the growth, are you assuming something better? And so then what happens if we're here 9 months from now and you're making the growth decision investment and the stock is still at $18?

Yes. Look, that's why I get paid the big buck, that's the tough decision, right? I mean, I don't know where the stock is going to go. I do -- there's obviously the famous CAPM, which would tell you that our cost of capital is much lower than where the free cash flow yield is, right? But we don't invest in anything anywhere close to what a CAPM model would tell you where we should be. And I won't say, though, that every investment -- although there are some that we have done, that every investment has a 20%-plus return either. And I do believe that we believe -- you know this, since you've covered us, we've been at 15% free cash flow yield. It just so happens that we're up in the 20s right now. But we typically would be in excess of that 15%. But it is something that we have to look at. This is why I believe that we are trying to take a balanced approach and actually one that errs on the side of returning more capital and buying back our shares, more so than reinvesting in the business, and it's something that we're going to have to follow. But then you know this because you've asked me this question, a sustainable 20% plus free cash flow yield has far-reaching implications well beyond whether we invest in solar projects or not. It has a lot to do with, can this company get a reasonable free cash flow yield for the kind of company that it is in the public market setting? And the management team and the Board, over the next couple of years, is going to have to wrestle with that. But there is no easy way out either. It's not easy just to go private either. I know how money is made there, too. And that's no panacea. But at the end of the day, we are going to search, as much as we possibly can, to find a way to get the full and fair value of this company. And I think part of that is investing in the changing technology on the generation side. But we absolutely have to do that in a prudent fashion. And your point is a fair one, and one that we have to wrestle with. And I think we try to balance that. But we've been investing in what we believe are compensatory type returns given where we are.

This brings us to the end of today's Q&A. I would now like to turn the call over to Curt Morgan for closing remarks.

Thank you, everybody, again. I appreciate your interest in Vistra. Had a great quarter. We hope to close the year out strong. We're tracking in that direction. And thanks again for your time.

Thank you, everyone. This will conclude today's conference call. You may now disconnect.