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Vistra Energy CEO: Retail Opportunities Are The "Biggest" Investment Opportunity In Near Term

Expects Any Retail Energy Deals To Be Smaller, Will "Likely Pursue"

Vistra (TXU Parent) Grows ERCOT Customer Count Organically

Retail Segment Reports Negative Adjusted EBITDA On ERCOT Wholesale Pricing, Offset By Gains In Generation Segment

Reports Negative Impact From Retail Term Contract Backwardation

Closes On Acquisition Of Ambit Energy

Vistra CEO: "I Just Don't See ERCOT Going To A Capacity Market"

November 4, 2019

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Copyright 2010-19
Reporting by Paul Ring •

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During an earnings call this morning, Curt Morgan, president and chief executive officer of Vistra Energy, said that, regarding future investment for Vistra, "retail opportunities are the biggest opportunity," in the near-term.

"I think they're going to be smaller in nature," compared to Crius and Ambit, but there's still retail deals out there that Vistra will, "likely pursue," Morgan said

Morgan noted that more volatility in ERCOT is expected

As a result, "The types of volatility products that have historically been available for retailers are becoming more expensive and difficult to find," contrasting such experience with Vistra's integrated generation-retail model.

Morgan emphasized that the company is not going to a retail-only model or "short" model

Morgan said that investing in renewables is something that the company may pursue more longer-term, at the, "right point in time."

However, in the nearer-term, Vistra could invest in "tuck-in" and "selective" solar opportunities in ERCOT, that support its growing ERCOT retail business.

Asked by an analyst about higher growth rates for rooftop solar companies and whether Vistra would consider "centralized" renewable energy or a distributed power retailer to compete against rooftop solar, Morgan said the company would "consider" such opportunities.

Vistra reported that it grew its ERCOT customer count organically in the third quarter of 2019 (three months ending September 30, 2019), "as the integrated model supported disciplined margin strategy in a highly active customer market." This reflects growth in the company's "core" retail brands prior to the Crius and Ambit acquisitions

As of Q3 2019, Vistra's residential customer count was 2.029 million, reflecting direct-to-consumer residential counts and, "excluding municipal-aggregation and international customers."

On a pro forma basis, reflecting Ambit customers (the Ambit acquisition closed after the end of the quarter), the Q3 2019 Vistra residential customer count was about 2.8 million, reflecting the addition of about 775,000 residential customers from Ambit

For comparison, Vistra's Q2 2019 residential customer count had been 1.528 million, with a pro forma Q2 2019 residential customer count (reflecting the addition of Crius customers which were added after the close of Q2 2019) of 2.028 million. The year-ago Q3 2018 residential customer count had been 1.540 million

Vistra reported retail volumes as follows, including a pro forma Q3 2019 total reflecting Ambit volumes

Vistra Retail Volumes (TWh)
                               Pro Forma
            Q3 2018   Q3 2019   Q3 2019
Residential   7.1       7.4       7.4
Business     10.9      11.8      11.8 
Muni Agg.     3.3       3.1       3.1 
Crius                   2.2       2.6 
Ambit                             3.4 

Total        21.3      24.4       28.2

Vistra Retail segment volumes for Q3 2019 included 15.2 TWh in ERCOT and 9.1 TWh in the Northeast/Midwest

Vistra Retail segment operating revenues were $2.2 billion for the third quarter of 2019, versus $1.8 billion a year ago. The Retail segment revenues for the third quarter of 2019 included $1.6 billion in ERCOT, and $576 million in the Northeast/Midwest

Vistra's Retail segment reported third quarter retail Adjusted EBITDA of $(87) million, $228 million lower than the third quarter of 2018 Adjusted EBITDA of $141 million, "which were expected as a result of higher cost of goods sold in the period," the company said

More specifically, Vistra said that the decrease in Retail segment Adjusted EBITDA, versus the year-ago, was driven by the following factors:

Retail Adjusted EBITDA Change Versus Q3 2018
  $ in millions

Unfavorable margins in ERCOT        
    driven by increased power costs 
    and timing of multi-year retail 
    contracts due to backwardation 
    of power curves                  $ (243)

Impact of Crius acquired 
    in July 2019                     $   18

    weather in ERCOT                 $    7

Other                                $  (10)

Total change                         $ (228)

On a GAAP basis, the Retail segment reported net income of $573 million for the third quarter of 2019, versus a net loss of $86 million a year ago. The GAAP earnings reflect the impact of unrealized mark-to-market gains in the current quarter.

"[O]ur Retail segment delivered stable pricing and growth in ERCOT residential customer counts," Vistra said

"Retail is expected to be a stable and growing contributor to Vistra’s performance," the company said

Vistra closed on the previously reported (details here) acquisition of Ambit Energy on November 1, after the close of the third quarter.

Vistra said that Ambit is expected to contribute approximately $15-20 million to Adjusted EBITDA in 2019, "while adding ~$125M annual adjusted EBITDA (on a full run-rate synergy basis)."

Vistra also reported the negative impact of retail term contract backwardation -- the near-term impact of long-dated contracts executed with retail customers supplied by Vistra's native generation. For example, if Vistra executes a new three-year contract with a retail customer, often the pricing under that contract is flat for the entire three-year term. Given the backwardation that exists in current ERCOT market curves, that usually means that the retail contract is out-of-the-money compared to the market in the early period of the contract, but is meaningfully in-the-money thereafter, such that the net present value of executing the transaction is favorable. "While we have historically realized some level of retail backwardation in our results, the total impact has typically been minor. However, for 2019 and 2020, we are projecting a much larger impact as a result of the greater curve backwardation [in] both years coupled with increased interest by market participants to enter into long-dated contracts in ERCOT," Morgan said

The impact of such backwardation is included in updated guidance from Vistra

For the Retail segment, Vistra narrowed and updated its 2019 Ongoing Operations guidance ranges, forecasting Ongoing Operations Adjusted EBITDA of $800 million to $840 million for the Retail segment. "Vistra's 2019 guidance range includes an expected ($40) million in-year impact from the execution of NPV-positive, long-dated contracts with retail customers that will contribute positive EBITDA in future years," the company said.

"This negative impact was not anticipated at the time original 2019 guidance was developed," the company said. Prior guidance from November 2018 had forecast Retail Ongoing Operations Adjusted EBITDA as $740 million to $810 million. Excluding the impact from the retail term contract backwardation noted above, 2019 illustrative Retail segment guidance would have been $840 million to $880 million

Vistra also initiated its 2020 Ongoing Operations guidance ranges, and, for the Retail segment, Vistra is forecasting Ongoing Operations Adjusted EBITDA of $850 million to $950 million, which includes an expected ($70) million in-year impact from the execution of NPV-positive, long-dated contracts with retail customers that Vistra said, "will contribute positive EBITDA in future years." When excluding this impact from the retail term contract backwardation, illustrative 2020 Retail segment Ongoing Operations Adjusted EBITDA guidance would have been $920 million to $1,020 million

Vistra said that lower third quarter 2019 results in the Retail segment were offset by higher results in Vistra's ERCOT Generation segment, as the ERCOT Generation segment reported higher Adjusted EBITDA of $823 million for the third quarter, up from $597 a year ago.

Discussing the outlook for the ERCOT market and the impact as more zero-marginal-cost assets come online, Morgan questioned whether PPAs, which have historically been used to build renewables in ERCOT, can support the levels of new renewable capacity needed to meet demand and replace retirements, or whether merchant renewable build will be required to achieve such a level of installed capacity. In the latter case, Morgan said that if such merchant build does not materialize, market changes may be forthcoming, whether that be a change to the ORDC or ancillary service changes, to get more revenues in the market.

However, "I just don't see ERCOT going to a capacity market," Morgan said

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