Vistra Corp (VST) 2021 Q3 法說會逐字稿

Good morning, and welcome to the Vistra Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Molly Sorg, Head of Investor Relations. Please go ahead, ma'am.

Thank you, and good morning, everyone. Welcome to Vistra's Third Quarter 2021 Results Conference Call, 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 press release.

Joining me for today's call are Curt Morgan, Chief Executive Officer; and Jim Burke, President and Chief Financial Officer. We have a few additional senior executives present to address questions during 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, today's press 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 press 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. While we have a lot to cover today, we will do our best to be as jiffy as possible to leave sufficient time for Q&A.

Not only will we be discussing our third quarter and year-to-date financial results, but we are also initiating our 2022 guidance as is customary on our third quarter results call. And most importantly, we are laying out additional details of our long-term capital allocation plan, which I'm excited to share with you.

So let's get started. It's hard to believe we are still in the same year where we experienced the significant effect from winter storm Uri. I'm proud of how our company has recovered from a business standpoint, and we are beginning to execute on our strategic priorities, which are a product of a thorough review with the Board that have begun prior to Uri but accelerated greatly immediately on the heels of the storm. We will discuss these priorities in more detail later.

Consistent with the bounce back of our business, Slide 6 reports our strong third quarter financial results despite a weak Texas summer where Vistra delivered adjusted EBITDA from ongoing operations of $1.177 billion or $1.167 billion, excluding the impacts from Winter Storm Uri realized in the third quarter, which included a small positive impact from ERCOT's 180-day resettlement statements.

As of September 30, Vistra has already achieved approximately 85% of the $500 million self-help target we announced following Uri, and all of that done without really impacting any future periods. And we have a clear line of sight to achieving the balance in the fourth quarter. The combination of our solid execution on these self-help initiatives together with the inclusion of the approximately $500 million in proceeds we expect to realize from ERCOT's securitization of certain charges allocated to load serving entities during Uri, we are in a position today to both narrow and raise our 2021 ongoing operations adjusted EBITDA guidance range as shown on the slide.

The securitization and self-help materially offset the more than $2 billion loss from Uri, such as the retail bill credits we will discuss later. As you likely recall, internal and third-party analysis has shown that Vistra's Uri loss was driven predominantly by the uncontrollable failure of the Texas Intrastate gas system.

We are also narrowing and revising our ongoing operations adjusted free cash flow before growth guidance which is similarly reflected on Slide 6. The cash flow associated with securitization is expected to be received in the first half of 2022. Consequently, the cash impact of securitization is reflected in our 2022 guidance on the next slide.

So turning to Slide 7, Vistra is initiating its 2022 guidance today, forecasting ongoing operations adjusted EBITDA in the range of $2.81 billion to $3.31 billion, with ongoing operations adjusted free cash flow before growth in the range of $2.07 billion to $2.57 billion. This represents a free cash flow conversion ratio of approximately 76%, which is higher than our historical conversion ratio due to the anticipated receipt of the securitization proceeds in the first half of 2022.

On Slide 7, we also offer an illustrative view of Vistra's 2022 guidance ranges, which exclude winter storm Uri related bill credits of approximately $185 million and also the negative in-year impact from the execution of NPV-positive long-dated contracts with retail customers of approximately $55 million and the $500 million of securitization proceeds in free cash flow before growth only.

We believe this illustrative view is the best way to think about Vistra's future financial performance potential as it demonstrates the long-term earnings power and cash generation of the business. Notably, the adverse impact from the bill credits in 2022 guidance are more than offset by the securitization included in the 2021 updated guidance. In fact, securitization will likely more than offset the retail bill credits across all years.

Looking beyond 2022, Vistra's long-term view of our earnings power remains robust. The company is less hedged in 2023 and beyond, which affords an even greater opportunity to capture momentum from the rising curves we have observed in recent months. In fact, we have seen a move up in both gas and heat rate in ERCOT as the gap between market and our fundamental view converge, which we have similarly seen in the last several years. In fact, this conversion has resulted in projected results using market curves for the next several years, in line with our stated view that we can generate consistent EBITDA of $3 billion or greater.

Previously, the out years using steeply backwardated market curves were below $3 billion. This leaves us in a stronger position to optimize our EBITDA within the $3 billion or greater EBITDA range, especially as we add our growth investments. We continue to remain confident in the ability of this business to earn significant cash flow on an annual basis, and we intend to return a majority of that cash flow to our financial stakeholders in the years ahead, as I will outline on the next few slides.

Slide 8 sets forth the 4 key priorities that our recent strategic review identified. We believe the best way to unlock the value inherent in this business and maximize value for our financial stakeholders is to drive long-term sustainable value through our integrated business model, which has been strengthened following Uri through various investments in our fleet and fuel supply as well as our enhanced risk management practices; return a significant amount of capital to shareholders via share repurchases and a meaningful dividend program, especially for as long as our stock remains at what we believe is such a meaningful discount to its fundamental value. And if our stock responds, we will continue to return that capital in the most optimal way to our shareholders.

The key is that we generate substantial capital year-over-year, and we intend to return a significant amount to our shareholders. Also, we intend to maintain a strong balance sheet.

And last but not least, accelerate our Vistra Zero growth pipeline with cost-effective capital. As we set forth on the next slide, our long-term capital allocation plan reflects these strategic priorities. Vistra's long-term capital allocation plan reflects an anticipated return of capital of at least $7.5 billion to its common stockholders through year-end 2026 while simultaneously reducing our corporate level leverage and accelerating our Vistra Zero growth pipeline. Specifically, as we announced in October, our Board recently approved a $2 billion share repurchase program which we expect to fully execute by year-end 2022.

The share repurchase program is partially funded by the $1 billion of 8% preferred equity we issued last month. We then expect we will allocate approximately $1 billion per year towards share repurchases from 2023 through 2026 for a total of $6 billion in 5 years. And again, if our stock responds, we will reallocate those funds back to our shareholders and some other cost-effective manner.

This $6 billion of return of capital represents more than 60% of our current market cap. This significant amount of capital allocated to share repurchases is evidence of both management and the Board's conviction of the long-term earnings power of the business, juxtaposed with what we believe is a significant undervaluation of our stock. We will expect we will continue to prioritize share repurchases so long as we believe our stock is undervalued.

And let me tell you, in my view, we have a long way to go. We are also reinforcing our commitment to paying a meaningful and growing dividend rather than identifying a target annual growth rate for our dividend. Management expects that it will, subject to Board approval at the appropriate time, allocate $300 million per year toward its common dividend.

As we retire more and more of our shares over time, this $300 million dividend pool will be spread over fewer shares and will offer potentially outsized growth on the remaining shares. For example, if we were to execute all $6 billion worth of the share repurchases at our recent stock price, our annualized dividend per share would grow by more than 175% by year-end 2026. At our current share price, these share repurchases and dividend programs are projected to result in an annual average cash yield on the stock of an attractive 15%.

As always, we are also committed to a strong balance sheet. We expect we will retire another approximately $1.5 billion of corporate level debt by the end of next year and up to $3 billion by 2026 with projections of debt-to-EBITDA in the mid to high 2s during this time frame for the Vistra base business.

For our previous comments, we expect to combine project financing with renewable-related preferred equity and cash flows from existing renewable projects to cost effectively develop our current nearly 5 gigawatt renewable and battery pipeline over the next 5 years using only $500 million of our own capital. And that is $500 million on a cumulative basis over the 5-year period, a significantly lower estimate than our previous expectation of spending approximately $500 million per year on growth capital.

These funds can now be used to support other capital allocation priorities, especially share repurchases. It is important to note that Vistra Zero will be a highly contracted business with third-party and internal PPAs. So the leverage ratios will be commensurate with similarly situated businesses.

Slide 10 outlines the sources and uses for the long-term capital allocation plan that I just laid out. Importantly, we expect we will be able to execute on this capital allocation plan by growing our Vistra Zero renewable and battery storage portfolio to a more than 5 gigawatt business, generating approximately $450 million to $500 million of adjusted EBITDA annually by year-end 2026.

We are excited about this long-term capital allocation plan and believe strongly that it is the best way to maximize the value of our business as we expect we will return the majority of our free cash flow from our base business to our financial stakeholders while being mindful of our overall leverage levels and cost effectively accelerating our renewables and battery storage growth pipeline, which should ultimately be valued at a higher multiple over time.

Using the midpoint of the Vistra Zero EBITDA of $475 million by 2026 and a 14x multiple would result in a total value of $6.65 billion for these projects. As I mentioned earlier, the strategic review we undertook was thorough, evaluating multiple scenarios and potential paths to unlock shareholder value. Ultimately, we believe the path we have outlined here today will be the path that will result in the greatest financial reward over time, taking into account risk of execution, cost effectiveness and economies of scale.

With that, I will now turn the call over to Jim Burke to discuss our financial results in more detail. Jim?

Thank you, Curt. As shown on Slide 12, Vistra delivered strong financial results during the quarter, with adjusted EBITDA from ongoing operations of $1.177 billion, results that are comparable to our third quarter 2020 financial results. Period-over-period, our retail segment results were $205 million higher than third quarter 2020 driven by the realization of our self-help initiatives and the lower cost of goods sold in 2021. The collective generation segment ended the quarter $211 million lower than third quarter 2020, driven primarily by the lower realized energy margin in Texas east and sunset after a very strong 2020.

Turning now to Slide 13. We wanted to briefly touch on the momentum we have seen in spark spreads across the markets where we operate. Since September, we've seen a dramatic rise in commodity pricing across the board as gas prices, power prices and spark spreads are all climbing higher for 2022 and beyond.

This is true in all the markets where we operate, though we highlight our 2 largest markets, ERCOT and PJM on the slide. As a general rule, Vistra is a company that benefits from higher natural gas price environments as gas units are typically the marginal unit setting the price of power, leading to higher overall power prices. We expect this will benefit us in the outer years where we are less hedged.

As of October 31, Vistra is now 27% and 50% hedged in ERCOT and PJM, respectively, for 2023. We are hedged at relatively similar levels in New York, New England, CISO and MISO as we have taken advantage of the increase in outright power prices and spark spreads over the last couple of months which are rising more in line with our fundamental point of view. We expect our commercial team will continue to take advantage of commodity pricing volatility, working to position our integrated operations to earn a relatively stable earnings profile over time.

I'm turning now to Slide 14, which provides a more detailed breakdown of our 2022 financial guidance. We believe the illustrative guidance in the range of $3.05 billion to $3.55 billion, adding back the impact of the Uri-related bill credits and the year 1 impact of various NPV positive long-dated retail contracts is the best way to think about the long-term earnings power of this business.

We continue to believe that Vistra will be able to convert a majority of its adjusted EBITDA to adjusted free cash flow before growth. Similarly, our guidance for ongoing operations adjusted free cash flow before growth includes the anticipated receipt of securitization proceeds in addition to the other Uri impacts such as bill credits. So our illustrative guidance removes these for a more normalized view of adjusted EBITDA and adjusted free cash flow before growth.

A strong conversion percentage, as shown on the slide, enables the significant return of capital that Curt discussed while also supporting a strong balance sheet and the transformation of our fleet with our Vistra Zero pipeline. Before we close this morning, I wanted to briefly address our long-term leverage target in pursuit of investment-grade credit ratings which I know has been a strategic question for many of you following Uri. Foundationally, a strong balance sheet is core to Vistra's strategy. Our low leverage level proved critical during Uri as our financial strength supported our ability to quickly add more than $2 billion of debt in response to the storm.

As outlined on Slide 15, we believe our current leverage in the range of approximately 3 to 3.5x net debt to adjusted EBITDA is a leverage level that will afford us the same level of financial strength. We believe we will be able to maintain our leverage in this range in the near term and reach the mid to high 2s over the next 5 years. We also believe that we would still be a candidate for investment-grade credit ratings in the future as our corporate leverage drops below 3x and any project financing will relate to a lower risk contracted part of the business, though, as we said recently, we believe this opportunity is at least a few years in the future.

In closing, as I hope you can see from the long-term capital allocation plan we laid out today, we believe in the value of this business and our ability to generate significant free cash flow for allocation in the years ahead. By prioritizing returning the majority of our capital to our financial stakeholders while maintaining a strong balance sheet and pursuing accelerated growth of our Vistra Zero portfolio, we believe that we will unlock the value of our business over time.

With that, operator, we are now ready to open the lines for questions.

(Operator Instructions) Today's first question comes from Stephen Byrd at Morgan Stanley.

Congratulations on laying out a very thoughtful capital allocation approach. So I wanted to focus on Vistra Zero and the updated guidance here. And you mentioned in your prepared remarks, it's fairly capital light from your perspective, as you mentioned, $5 billion in total capital needed, but only $500 million in net capital from Vistra net of project debt, other financing, cash flow, et cetera. Can you just elaborate a little bit more on that? I guess I was thinking that's a fairly high level of project leverage. And we can get that typically when we have contract durations of 20, 25 years. I thought it might be more challenging to achieve that level of leverage here? And what gives you the confidence in sort of such a capital-light approach?

Yes. So I'll take a first shot at that and then Jim feel free to jump in. But -- so I think we're also looking at sort of what I'll call a kick-start upfront tranche of capital. We haven't determined exactly what that tranche will look like, but it will be equity like, let's put it that way. And then when you combine that with leverage, Stephen, that's more around about 60% type leverage, project leverage with the contracted cash flows. So it's not like we're putting 80% leverage. But I think the other thing that's missing maybe in this is the effort that we're pursuing to bring in another tranche of capital in here of some consequence.

And then when we look at the cash flows off of the business and the maintenance expense and things because it's fairly low for these types of assets, we generate enough cash, along with project financing and this project capital along with our $500 million to basically self-fund the build-out of the roughly 5 gigs through 2026. So we have looked at this. We feel comfortable with how we're setting it up.

Clearly, we would like to grow it even further than that, and I expect us to add to the pipeline, whether that's through acquiring projects or potentially even a platform. But just what is line of sight that we have already in the queue, we feel like we can raise sufficient capital and through the cash flows, that would be more than adequate to be able to run that business. Jim, anything you want to add?

Curt, you covered it well. The only thing that I would amplify is that we intend to structure the PPAs from these assets back to Vistra to create the contracted cash flows. That gives us the chance then to put 60% to 70% project debt. The balance comes from the 3 sources Curt mentioned, the parent contribution of less than $500 million, some form of structured financing or equity and then the cash flows from the projects themselves.

And so when we think of this as a self-sustaining entity and an entity that can grow even faster than we anticipated when we announced this pipeline last summer. And so I think it gives us a way to use more cost-effective capital and still take advantage of the opportunities given the pipeline of great sites that we have.

That's really helpful and makes a lot of sense. And then just on the 5 gigawatt target by year-end 2026, could you just give us your latest thoughts on sort of visibility of growth, degree of competition, sort of how you see that sort of playing out?

Yes. So go ahead, Jim.

Sure. Sure. Thanks, Curt. What we tried to do here, Stephen, is focus on where we've got a strong place to start, which is sites that we have control over. Its focus right now is primarily Texas, California and now with coal to solar, the Illinois fleet. We have a few opportunities at a couple of other coal plants that we intend to convert. But this does not include, as Curt mentioned, this does not include an expectation of prospecting for a bunch of sites we don't have control over or an M&A type platform.

So I think we've got a really good pipeline that we can set up based on our partnerships. We've got very good partnerships on the solar side and the EPC side and our batteries. And so it's really just a matter of taking advantage of this methodically over the next 5 years. And then in addition to that, I think there's other opportunities that Curt mentioned. But this is our focus, not a heavy focus on PJM, and I also know England at this point, those are possibilities. But what we've got in front of us is quite a bit.

Stephen, you know we have mass land inside that can take probably up to another 1,000 megawatts. We have a site called Morro Bay, which can be up to 700 megawatts. Those are both in California. We have a number of sites. We're one of the largest landholders especially at our sites that have some of the old coal plants in Texas. We obviously know that market quite well. And we're partnering in California with the utilities there.

And then of course, we are in the Omnibus Energy Legislation in Illinois. We pursued that for 3 years out of thin air and raised this coal to solar and battery storage legislation that then was woven into the ultimate omnibus bill. So I think we came up with an idea to utilize sites that already have transmission access in many of the areas where the assets were being shutdown or were already retired. And that's proven to work very well. And I think we have other opportunities down the road.

It's a great point. I mean the site value from any of those sites in places like California, Illinois, clearly quite high.

Yes.

And our next question today comes from Shahriar Pourreza with Guggenheim.

Just a 2-part question on '23. Curt, you indicated you're pretty open still. Is your fundamental view for more expansion in sparks as we draw closer? And directionally, can you just also indicate where EBITDA would shake out under the current dynamic?

Yes. For '23 now, you're talking about?

Yes, please. Yes, perfect.

Yes, yes. So look, we had a period of time where sparks were compressed. They've actually come back to what I'd call a more normalized level, but there's still a fair amount of backwardation in the curve going from '22 to '23. I think our fundamental view would suggest there's still room to move with the curves relative to the fundamental view in 2023.

But the one good thing is that, that -- those 2 curves, market and our fundamental view -- our point of view have converged significantly, and I think I made it in my remarks. But we're now seeing over the next 5 years, EBITDA levels that are $3 billion plus even at the curves. And prior to that, Shahriar, we were seeing -- when you marked it to the curve, below $3 billion. So that has converged significantly.

In terms of the spark spreads, there's probably some further what I'll call normalization that can occur in '23 on sparks. And so yes, there could be some of that movement. But we've seen a pretty strong move in sparks. But if you take a look at '22 sparks versus '23 sparks, they're still about, I'm going to say, maybe about $4 difference. And we would expect that to -- that gap to close. And so there is some upward mobility and our fundamental view shows that.

In terms of directionally, '22 to '23, we always say this, but I want to be clear this time that we're within the range of being in a very similar EBITDA level on using that illustrative EBITDA number. And when I say that, that's plus or minus a couple of hundred million dollars, because an open position can go either way depending on weather.

And so -- but we're well within the bounds of where we are in '22 for '23. And I would say directionally, when we look at the distribution of outcomes, probably with a greater probability of upside versus downside, just knowing where the curves are, where our fundamental view is, and knowing that our commercial team is able to take advantage of when the curves are in -- are at the point of view or better. So I feel good about 2023. I think directionally, it's in that range, and now we have to go out and execute and capture that value.

Right. At least at a minimum, the reality versus your view is starting to align, which is what you've been pitching for a while, so it's good to see that. And then the $4 billion in additional buybacks is predicated, obviously, on your view of the stock value, right? Any guidance here on what you see, Curt, as something of a more sustainable free cash flow yield?

Well, yes, that's -- man, that's -- I wish I had a crystal ball. And -- but look, I think what I would hope to see, especially with this capital allocation plan and with our execution is something that is much more in the mid-teens and going down into the low double digits. I think that we certainly warrant that when -- I understand that there was a major event in February, and you know this as well as I do that any kind of return is -- part of that is the anticipated risk of the business, and I think that exposed some risk. But I think once we show how we have invested in our business, we've reduced the risk significantly, and we're able to execute, I would expect that risk premium to come down.

And then I also believe that people are beginning to realize that a combination of renewables, batteries and low heat rate, very efficient fossil fuel, mainly gas plants, is really going to be the right mix of assets going into the next 15 to 20 years, because you're going to need dispatchable resources for reliability purposes. The market is going to have to pay for those.

Clearly, we're going to need to have clean and green resources going forward, and battery storage is going to be a big piece of that. I think that's what our company is lining up with. And then we've got this large retail business that I think people don't think about that we can contract much of our renewable and battery business with. That also has a very consistent and significant margins, and we expect that to continue as well.

So we feel like we're lined up. If we can execute, then we would expect that the risk premium, that is a function of both a perceived risk in the business model, which I think we are closing, but also the terminal value question, we believe that we have a company that's here for a long period of time. We should see that risk premium come down. And commensurately, we ought to see a much lower free cash flow yield, which in turn, as you know, means a higher and stronger stock price.

Right. Got it. And then just lastly for me, are you having any coal or sort of material supply challenges with the Sunset fleet?

Yes, we are, we are. If you take 2021 outcome and you take $500 million securitization, you back it off, you'll notice that we were a little bit under and a big chunk of that, more than half of it, is the challenges we've had at the sunset segment, not just coal constraints, but also we've had some outages that were this year that came about. What I would call, though, our coal constraints mainly is an opportunity loss more than anything else. And I'll tell you why.

We have been prioritizing building coal inventory for the winter, because the price curves are saying that it's much more economic to run in Q1 of '22 than it is in Q4 of '21. And if you think of it, we have a finite amount of coal because of the supply constraints. We were going to have to optimize between Q4 '21 and Q1 of '22. We have opted to run a little bit less in Q4 of '21 to conserve and preserve the amount of coal we have so that we are going to be there for Q1 of '22 because the price curves are telling us that's where it's most economic, and that's what we intend to do.

The other thing I'll tell you is that I'm still a little bit concerned about making sure that the entire grid in Texas is weatherized, including the gas system for this particular winter. And so we want to be very cautious. We're going to go into that carrying more length because of that, and we want to make sure that we don't have any hiccups. And then just the broader energy commodity complex, as you know, is quite volatile. And so because of that, we're taking a very, very conservative approach going into Q1 and that means trying to conserve some of our coal to make sure that we can run in Q1 of '22.

And our next question today comes from Julien Dumoulin-Smith at Bank of America.

Well done, truly. Listen, I wanted to follow up a couple of easy questions, if I can just start. First off, in terms of the buyback itself here, any thoughts about a tender versus other mechanisms to execute here? Obviously, a lot to buy at hand. And then separately, related to your on the '23 EBITDA, just I'll throw it out there quickly. Some inbound questions here. I mean how are you thinking about that relative to '22 levels? I know you said it's better than 3, but what about better than '22, if I can ask you in that way.

Jim, do you want to take the first one around buyback, what we're looking at around buybacks and then we can -- and then if you want to take a stab at the second one that's fine, and I can add to it. Go ahead.

Sure. Julien, thanks for the questions. So on the buyback, we have -- we are looking at a number of alternatives. We have not settled on the method that we're going to use, hopefully coming out of this earnings call. We'll be very aggressive with the buyback program in order to be able to implement the $2 billion by the end of '22.

We don't intend to telegraph how we're going to buy, when we're going to buy, but we'll report each quarter how we've effectuated the number of shares that we've purchased. But it is a meaningful percentage, as you know, of what's outstanding not only for the program through '22, but through '26.

The other question, as we think about '23, I think as Curt, you mentioned, we have a large open position in '23 relative to '22. And that can work, obviously, to create an overperformance opportunity or come in slightly under, and we've seen the curves continue to rise. And I think the commercial team has done a very nice job looking at our point of view and trying to figure out when to put the positions on to be able to manage the expectation.

I think, as Curt said, '23 was much lower. You saw that with forward curves in the past, particularly this time last year. That gap has closed considerably. It hasn't fully closed. And then you see that even in our charts in the slides that we presented for the spark spreads.

So we think '23 has a very good chance of being in line with '22, but there's still room. There's still room for the curves to move, and we still have a large open position. So we've talked about a $3-plus billion business on a run rate basis. And I think the fact is, is that there's going to be a range around these outcomes. We are in a competitive segment.

We're benefited by having a large retail position that can work almost in a countercyclical manner to the wholesale position at times. But we still have some variation around it as these -- as the markets have shown some volatility. We view that as something we can capture. So I think looking at it more in line is where we would expect to be, but we still have a ways to go for the '23 given that there's still some backwardation relative to '22.

Okay. Got it. So ways to go? Is it uncertainty or is it still a little bit below reversal?

Well, I think, Julien, the way I would describe it, it has -- go ahead, Curt.

No, no. Go ahead, Jim, sorry.

No. I would say you have -- if you're simply -- and this is the struggle that we talk about because we have a point of view on the business that has consistently shown that the market curves begin to approach as we get towards a prompt year. So if all you do is look at where it curves today, and you just look at it and say, lock all that in, it's going to be lower than '22. I mean that's just math. That's not how we run our business.

We run our business based on where we think it makes sense to put positions on and where we think curves would likely end up given supply-demand characteristics in the Q that comes in for new build, et cetera. And so when we look at it over that basis, we feel that '23 has a very good chance to be right in line with '22, but that's just not where the curves are at the moment. And we don't -- that does not concern us. We've been in the spot before. And we -- and it's happened for '22. It's happened in previous years. And so we anticipate it would likely happen again in '23.

Yes. So Julien, I think that's why we say -- and we're not trying to be evasive here at all. It's just that when you're this far out and the curves are still backwardated and we've seen every year that when you get into the summer and come out of the summer, that the next summer and the winters tend to begin to move up, and we expect that from our fundamental view.

Marking something just to a current curve will give you 1 result. Marketing something to our fundamental view will give you a different result. We think those -- the good news is this time around is that those 2 things are still within the range of '22 for '23. In the past, the curves -- and you brought this up before. In the past, the curves were well below the $3 billion mark. And now those -- the curves in the fundamental view are -- have converged, but there's still some room to move.

So I like to think about there's a distribution around '23. But clearly, the '22 EBITDA midpoint on a illustrative basis is within that distribution. And so we think there's a good chance that we can come in around where '22 levels are for '23. That's going to come down to execution and being ready when the curves are ripe and our team, that's what we do. That's what we get paid to do.

So we feel pretty good about going into '22. We clearly feel good about it being $3 billion plus and being plus $3 billion. Where it will land in terms of '22 or '23, we're going to be within spitting distance of '23. And I think we have a good chance of hitting it, and we could actually even exceed it. So that distribution, I think, is favorable. It's now about execution and getting opportunities.

Wow. Thank you, so much for an easy question here and certainly not evasive at all. Now let me ask you a slightly more detailed question then. On this Vistra Zero side of the equation, you talked about $450 million to $500 million of adjusted EBITDA. How much CapEx are you thinking needs to get invested to get that outcome here? And just to be clear, it sounds like none of that would be paid at least prospectively by the corporate capital. It would all be funded with various other project and segment-specific sources as well. I know that this is an update that's coming. But it's -- I just want to make sure if I'm capturing this holistically correctly.

Yes. I think it's in the $5 billion to $5.5 billion range of total capital that would have to be invested. And you are right, the amount of equity capital that we would be putting in is relatively low, although we're putting in some -- obviously putting in some projects into that as well that have value on the market. But yes, I think it's $5 billion to $5.5 billion, if I remember right, that we would have to invest. And we obviously have plans for how we would do that.

In the contribution, principally, is just your existing storage assets, right, without being too specific?

Well, yes, I think I mentioned it's watch landing. It's Morro Bay. It's our Oakland site in California. It's what is it, 9 sites in Illinois that would have batteries or something like that. It's batteries in Texas. We have 1 that's 265-megawatt, 1 hour battery coming on in Texas. We have a 10-megawatt already on. But that's what the battery storage picture looks like.

And of course, we're predominantly a solar. On the renewable side, we have found wind to be economic. We're not an offshore wind person yet, so -- and I don't expect us to be that. But we're not afraid of wind, it's just that we haven't found the opportunity for that. But that's -- those are the primary projects. Of course, there's a lot of solar, both in Texas and in Illinois.

And our next question today comes from Steve Fleishman at Wolfe Research.

Curt, so just want to just -- the NRG issues yesterday call, it sounds like you discussed some. But I guess also the Texas ancillary costs and coal treatment, et cetera. How do you feel like those are embedded in your outlook? And obviously, your asset position is different, but just want to kind of clarify that you're okay on those issues.

Yes. So -- and Jim, you can jump in after this. But -- so over half of -- well, let's just put it this way, about $40 million in '21 is the effect of coal constraints. And so just -- so we've captured that, Steve. That's in our updated guidance, and we've captured that. I think I mentioned, we've decided to build inventory for Q1 because the economics are more compelling to be ready for Q1. And so we have created this constraint in Q4 of '21 in favor of Q1 of '22. Everything -- any constraint that we have going into '22 is already built into our guidance. So there's nothing more to talk about there.

We expect, given what we're doing in Q4 of '21 in favor of Q1 of '22 will actually allow us to run where we want to in Q1 of '22. I think you know this, too, that some of our plants, 2 of them in PJM and Ohio are not on PRB. A lot of these constraints are coming out of the PRB and on the rails from the PRB. And then, of course, Oak Grove mines its own coal. So we don't have those limitations there.

And then many of our other -- we just don't have a lot of EBITDA coming from like the Illinois plants. And so the constraints just aren't as big for us. And I think the other thing is our team got way out in front. I mean this came to me more than a couple of months ago that we were concerned about this. And so we've been managing toward that, and we've been working with the Burlington Northern folks. I've talked to their leadership team about getting more trains so that we can get them in and they're doing the best they can. They know it's important for this winter in Texas. So all in all, I think we really kind of took a, what I'd call, a $40 million opportunity loss in Q4, but we're also going to have more inventory for Q1 of '22. And all of that's baked in both of our guidance ranges.

Go ahead on the ancillaries.

Did you ask about ancillaries, Steve? Can you hear us?

Yes. That was a big part of the issue they had to, yes.

Yes. We have that. That's also -- ours is just much lower. And Jim, you might want to add to this. But our effect -- we have ancillary -- the effects of ancillaries baked into our numbers. Jim, do you want to add to that? Any specifics?

Sure. Yes, we do. It's baked into our plan. We view the ancillary costs similar to the other costs that any retailer would face. You've got to work it into your price, and you've got to ultimately reflect it with the customers. We have that built into our plan for '22 and beyond. And of course, we do have, as you mentioned, Steve, a different position, having some generation assets as well. So -- but the integrated effect and the effect on retail is slowly reflected in our plan.

Great. And then just on the renewables plan. How are you going to deal with the Texas sites in terms of -- historically, you were looking at developing those as merchants. But obviously, you can't project finance that. So are you going to do PPAs with Vistra retail or with third parties? What's your strategy on the Texas renewals?

Yes, it could be both, Steve. But I think most of it, we're looking at right now, this can be different in the future is back with our retail. And that's actually -- we have an entity that lives between our wholesale and retail group that manages the supply. We call it the supply book, but the management of supply for our retail business.

And they buy and they sell to third-party retailers as well as to our own retail business. They're the one that will ultimately end up contracting and then they will then supply our retail book as well as other retailers, but that's where -- it's really sort of back-to-back with our retail arm. And so that's where those contracts will be set up.

And our next question today comes from Durgesh Chopra with Evercore ISI.

I have a clarification and a follow up. Just the $500 million prospective EBITDA from the Vistra Zero platform. Just to be clear, as you're thinking about the structured financing or equity for those projects, that ends up diluting that $500 million, right? That $500 million is the gross number than what's Vistra's share is going to be lower depending on what financing you choose. Am I thinking about the right way or no?

You are, but let me just put it this way. We will own 100% of the common equity of this entity. So just to be very clear about it. That capital tranche that we're looking at, we haven't decided exactly what it will look like, but we will own 100% of the common equity of that business. And so you can sort of figure out what kind of tranches that could be. But we're not looking to sell and partner with the equity ownership of that. I think there are other ways to do what we want to do and maintain our control. Jim, anything you want to add?

Yes, Durgesh, I think the way you're thinking about it is correct. What Curt mentioned is an EBITDA number. And so we would expect that we would have some interest expense because we're going to be doing the project financing and any other sort of third-party capital charges that we would have. So we have some ongoing cost of that capital, which we believe to be more cost-effective than our own.

And then over time, we'd have some amortization of the project debt, the project level debt that we would take on. So that's not meant to be a free cash flow number if that's, I think, was getting to the nature of your question. It is an EBITDA number. And as Curt mentioned, our goal is to maintain 100% equity control so that from a terminal value standpoint, we're building a business of $500 million on a 5-year basis. We can get to $500 million and have long-dated, long-lived assets, very ESG-friendly asset portfolio that's grown rapidly and use third-party capital more cost-effective capital to do it. So there will be some distributions out of that EBITDA to pay for that, but we think that's more cost effective than doing it all on balance sheet.

Got it. That's super helpful. Yes, I was really interested in whether it's going to be 100% owned by you and sounds like it will be. Okay. Second question, in terms of that $3-plus billion EBITDA number. You mentioned coal retirements, amongst other things that kind of give you opportunity to get to that 5 gigawatt 0 platform number. Is there a degradation to that base $3 billion EBITDA as you ramp up on the Vistra Zero platform?

Well, yes, if you break these things -- and Jim, you can go. But if you break them out, right, and you say, okay, let's isolate what impact do we have from our closing or retiring of our coal fleet, yes, there is some slight degradation in EBITDA from that. I will say that there's very little coming from these assets and the value of these assets have been written down to 0 on the books.

So they're just not economically not contributing a lot and certainly not on an EBITDA basis. What we are seeing though is that, that effect is more than offset by over time as we invest in the Vistra Zero platform. So we're able to actually ultimately grow EBITDA over time as we invest. And so we do see an increasing EBITDA profile when we project that out. So while they do, if you isolate it, they do have a negative effect on EBITDA, meaning retired coal plants, the other projects that are coming on more than offset that.

Jim, go ahead. I'm sorry, I didn't mean to interrupt.

No. Curt, you covered it well. There's -- nearly 8,000 megawatts of slated retirements. Well, we obviously have 2 large facilities in Texas that do not have anticipated retirement dates, but the EBITDA contribution of that nearly 8,000 has come down through time and is not material on the go-forward horizon, but it's something that we are built -- we built into our plan, and that's the whole point of transitioning this fleet is to be able to put new long-lived high-margin assets with Vistra Zero to more than overcome that so that we have a growing EBITDA profile through time.

Got it. Net-net, it sounds like you're biased higher on that $3-plus billion EBITDA prospectively, right? Like counting in the retirement...

Yes.

Ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to Curt Morgan for any closing remarks.

Thanks again for everybody for your interest in our company. I'm proud of what we've done after this February event. I think we're back on track. I feel like we're as strong as ever and really appreciate the interest in Vistra, and we look forward to speaking to you in the near future. Thank you.

And ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.