Vistra Corp (VST) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Vistra Fourth Quarter 2020 Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your first speaker today, Molly Sorg, Head of Investor Relations at Vistra. Please go ahead, Ms. Sorg.

Thank you, Carol, and good morning, everyone. Welcome to Vistra's investor webcast discussing fourth quarter and full year 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-K and the related earnings 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, for 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 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. Good morning, everybody. We appreciate your interest in this call today.

And this morning, I would like to start out with the elephant in the room. We had a rough week last week, to say the least. And for our investors who are listening to this call, I want to say on behalf of everybody at Vistra that we are disappointed in our inability to deal with this unprecedented event in a way that was favorable for the company. But I can assure you that we did everything we could to try to come out on top.

And I'd like to take you through a little bit, and Jim Burke will too, the events that ensued and what we tried to do to deal with those events, what happened, and also just to tell you on the front end that it has taken us until middle of this week to really sort out what really ultimately ended up happening. And so, therefore, we felt it was imperative that we have this discussion, even though we have not sorted out everything, that we have this discussion today and started the process of a conversation about what actually happened. And then we will get to the final numbers.

I can assure you that there isn't anybody more disappointed than us, and it's disappointing to me that we let you down because we pride ourselves in execution, and I think we've done a darn good job of it over the 5 years I've been here. And within literally an hour or two, our world kind of turned upside down.

First of all, it was for Texas -- maybe for those of us who lived in the northeast or the north, know that it may not have looked as big a deal. But in Texas, it was an unprecedented event. The infrastructure, and I don't mean just the electric infrastructure but I'm talking about housing and other things are built really for the heat.

You don't see this kind of event, and I think history tells us that this was one of these so-called 1 in 100 years. Now it did happen. And the reality is even if it's 1 in 100, it can happen. So it's no excuse, but it tells you the depth of what happened. It's, as I understand it, the coldest 3-day stretch that they can -- that they have on record in Texas, the 14th through the 16th.

So what did that mean? Well, that meant that we had unprecedented demand.

So to take you back, and I think it's important to lay this out. I think it was the 9th of February. Steve Muscato, who is on this call, came to me and said our meteorologists that we have on staff came to him and said we've got an unprecedented event coming. We ran the numbers, and we were seeing load in 72,000 to 74,000 megawatts.

Now let's put that in perspective. The worst-case scenario or the -- one of the -- yes, I guess you call it that -- that ERCOT had performed was about 67,000 megawatts or so, maybe 67,000, 68,000. And Steve was concerned not just because of the load but we also were looking at wind forecasts, and we are concerned about solar. And the fact of the matter was that we didn't have enough steel on the ground to cover that load.

So -- and I've been testifying to this in Texas. I'm still here in Austin last couple of days, and I'll be talking more again today. But we did go to ERCOT because they had, I think it was about 65,000 megawatts for Monday. And this is, by the way, for Monday, Tuesday, 15th and 16th, just to give you a time line.

So we were out in front of it. I've testified to this. I believe and now that I've been listening to the other testimony, that I believe ERCOT thought that they had it under control. And I'll tell you in a minute what happened. And I think they weren't even prepared for what did end up happening.

But the bottom line is the company positioned itself relative to that, to be long or flat. And in some instances, we were short going into that. But then we went out and bought power at very high prices because we believed that power was going to go to the cap, that it was not if, it was when. And so we were prepared.

We also spent, and we've been open about this, about $10 million in preparation. We brought on about 200 additional contractors on site. We essentially did our whole winter readiness in Texas all over again, which we normally do in the fall. And we felt very well prepared going into that.

And then Monday came and I was on the phone with Steve and it was 1 a.m. Steve, like he always does, we talk about, "Okay, here it comes." We think load shed is going to begin. And of course, it was supposed to be rolling blackouts. And then it started. I mean we all saw it because we were 30 minutes on, 15 off. And that went on for a relatively short period of time.

And then Steve told me that we almost lost the entire grid. Frequencies were erratic. It tripped a couple of our units. And then shortly after that, everything locked down. And for what we find out on testimony now, the transmission distribution entities, not ERCOT, essentially locked down each of their systems at wherever they were because they were afraid they were going to lose the system.

Now we had a book, and then all of a sudden, that book of business changed. Loads were down to about 40,000-some. And the reason they locked it down is because we were losing generation on the grid left and right. And the reason we were losing generation on the grid was predominantly because gas pressures, but also there were outages.

Unfortunately for NRG, and this is public, South Texas project tripped. And I think this was a confluence of events for ERCOT and for the PUs that all of a sudden, they were managing a very different risk profile with about 30,000 megawatts less of generation. And they could not run a system on rolling blackouts with that level of generation. And so they just had to preserve the system.

Now that was the first event that changed our books. How did it change it? It locked whatever load you had in your area based on what was on at that time. So if you were rolling blackouts and you were on, North Texas was on, which we were, that froze that at a particular level.

And then we started getting our gas cut because of pressures. So all of a sudden, our book went from a flat to long book into a book that was long, short, mixed. And we were scrambling at that point. And then right on that, we had gas contracts, people declared force majeure. So we had gas, and then we didn't have gas. All that happened within a very short period of time. And we were managing a different reality at that point in time.

And so frankly, we had millions of people without power in the state of Texas. We were scrambling to get gas. Gas prices shot through the roof. And we said this is survival mode. We turned our attention to preserving the Texas market and the grid and putting every megawatt we could.

We said to ourselves, we have to put everything on it and we will count this up at the end. But the one thing we know we need to do is serve customers, stabilize the grid, and then we will sort it out later. And that's what we did.

And I look back on that every day and over the nights when I can't sleep. And I say to myself, "What could we have done different, Curt?" What -- "How could we have played this differently?" And I think those decisions, as I play them over and over again, were right.

Now we had some things. And by the way, I know it doesn't matter. In life -- you know what, it doesn't matter if you lose the Super Bowl. No one goes and says, "Oh, that's just because you know you had a mistake or the ref had a call, you lost." And so I get that. I'm just trying to explain to you what we were trying to do to manage this situation that was unprecedented to us, and we were trying to do the best that we could.

And it took us frankly until the middle of this week. In fact, all the way up to last night, we were having a Board meeting to really get a sense of what that range would be. And so it's -- we still don't know exactly what all these numbers are because we're still getting in -- because ERCOT shut down for a while, wasn't providing invoices. We didn't know what the load looked like, and we're beginning to get that picture.

So if you think about what happened, there was a confluence of events. But the biggest of which -- that we have not seen is all the way from the wellhead, we were having freeze-ups. So there wasn't enough gas to inject into the pipelines. We had gas processing facilities that were having winter issues.

And one of the biggest things that happened is that the TDUs didn't have an updated list of critical infrastructure. And so all of a sudden, they couldn't help it. They just shut down what they didn't think was critical. And all of a sudden, we had gas compressors that are run on electricity, that packed the pipes, they were shut off. They weren't listed as critical infrastructure. We had gas processing facilities that were shut off because they weren't listed as critical infrastructure. And we had wells -- producing wells that were shut off for the same reason.

So then we had to triage. We had to go upstream, looking for people and saying -- and finding out what was wrong, why we weren't getting gas. And we were helping people with the TDUs turn back on critical infrastructure. And that took -- in order to get that to happen, it took a couple of days, then for those to get on, and then you have to -- in order to repressurize the pipe, it takes a good day to do that. So it took the balance of the week to get gas restored. So we had a significant amount of curtailments, and we are buying gas at a very high price.

Now one on us is we had some problems with our coal fleet. We had some -- just some toll issues at Martin Lake, which were derates. We didn't come off-line. We just didn't produce at the maximum.

And then we had, you guys may know this, but Oak Grove, we ship coal. We mine lignite and we ship it, we have freeze -- the rails froze up, and then we had plugging, and that took us down for about 1.5 days.

Now why does that matter? Well, it matters a lot because Oak Grove has about $5 a megawatt hour cost structure as opposed to having to essentially replace it with gas at hundreds of dollars in MMBtu. So the margin that we were getting for that 1.5 days was left.

Now we got it back. That was a good thing, but we lost for about 1.5 days. That was a lot of money that we lost, and Jim is going to go through these numbers.

The other thing I heard is that there was a pricing glitch on Monday. So we're in what we call an EEA3, which is the highest alert at ERCOT. That means you have really no reserves. In fact, we had 30,000 megawatts of negative reserves.

Where was the price? Price was trading at LMPs, in some instances $1,000 below our cost. And so we're calling ERCOT. What is going on? Well, we determined there was a pricing, let's call it, anomaly. We went to the PUC the next day. And they came out with an order and said, "We're going to reprice that at the cap, and then we're going to have it stay at the cap until we come out of EEA3." Frankly, the right decision, and that was a big deal for us.

Inexplicably, 18 hours later, they reversed the decision and they decided to do it prospectively but not retroactively. And they claimed that during the wee hours of the morning on Monday, that people relied on that price. Ridiculous.

And so Monday was a big day for us because we were long that day. Because the gas infrastructure was just beginning to come off, and so we lost that value. Now that's something that we could still take a hard look at, but that was tough.

Again, "Curt, what does it matter? It still happened to you." Yes, it did, but we didn't expect it. Nobody expected when we in EEA3 that the price would be anything but at the cap. How could it be when you have negative reserves? It absolutely is preposterous, and yet that's what happened.

So all of those things happened. We didn't know what the book was. We went through that week. We performed actually relatively well. We put on 25% to 30% of all megawatts on the grid relative to our 18% market share. Good -- again, no good deed goes unpunished.

The problem was we had a mismatch when they locked the system down between megawatts and load. And the other thing is we were producing from higher cost assets than we expected. So our cost of goods sold mix was not helpful.

So I've taken you really through the 2 first slides. I will say a little bit about the market because I think the other very fair question is, "Okay, well, what's this mean for the Texas market?" And frankly, I thought it was the best market in the country. And this event has made me think. Not just me, but a lot of people think about it. But I still believe the basic tenets of a very good market are here.

But I think the one thing that we're going to have to work on with the policy makers, the regulators, and I think we have good momentum on this, is that the grid in Texas today, when we put in the all energy market and the price caps, is a grid that is different than the one that exist -- existed when we went competitive. So when we were competitive, it was a very different grid. How? Well, we have a lot less dispatchable resources. In fact, we have less dispatchable resources than our peak loads.

So we rely much more heavily on renewables. Renewables are good, nothing wrong with that. But it changes the risk profile. Renewables during this event were at capacity factors from 5% to sort of 15%. They didn't really contribute a lot during this event. That's why we didn't -- and that's why I said when we were at 74,000 peak load, we didn't have enough of megawatts in the system. It wasn't -- again, it wasn't a matter of if, it was a matter of when. And we were telling people that.

So on the market design, reserves have to be, in my mind, the #1 emphasis. And so there's a number of ways to get more reserves on the system. But I also think that we have to take a hard look at the balance between market and the competitive markets and reliability. And I think that puts a lot of things on the table. That puts could be potentially greater reserves that ERCOT has to acquire in order to maintain the system. It could be a capacity market. I know that, that may be blasphemy to some in Texas, but I think it has to be on the table.

But what I think comes out of this is still a very good competitive market that still has opportunities for people to do well, but moves on the spectrum of competitiveness to reliability, moves that are a little more toward the middle. And -- but we're going to sort through that and more will come out of that, but I'm confident that Texas will rise to the occasion.

This economy mandates it, and the policymakers and the governor and others know that this economic engine is powered by electricity. And with electrification coming, we've got to get it right. And we're a big player. We have a big seat at the table. We have a lot of good ideas, and I think the market actually advances to a good point.

Now the weather event -- I mean, yes, we're believers in climate change. We don't know this type of event becomes more frequent. But I think if you just let history tell you something, that this is not a frequent event but it could happen. And so we have to adapt. We have to. And it's not huge numbers, but we're going to have to batten down the hatches, so to speak, and to harden our assets.

And we -- the one thing I'm going to be on a crusade about is making sure that the gas and electric systems work seamlessly; that the TDUs upgrade their critical infrastructure; and that the gas system puts the money in, just like we do, to harden the system. It cannot be acceptable to not deliver gas at the maximum pressures in the middle of a natural disaster. And you can't say, "Well, my hands are clean on this. I don't regulate that." Well, let's change the regulations then. So we have work to do, but I still have confidence, very much so, in the market.

Now, this has been difficult. We hope that -- we hope to maintain your trust in us. But at the very least, we hope to earn it back.

I'm disappointed. And it hurts, but it is what it is. And it's easy to lead when things are going well, and I think it's time to lead going forward. And I believe that the franchise is in place, the financial strength that we worked so hard to build, thank goodness, has helped us through this. And our better days are still ahead of us.

And the integrated model still works, and we just have to do some things, some tweaks. We have to work on the market design, but I still have faith in this business and in these markets because they're too important. Electricity is the lifeblood of the economy.

We have to get this right. We can't -- there is no choice when you say, "Well, how do I trust that?" Texas can never go through this again, and they know that. So that's what I trust. And we are a big player here. And so what comes out the back end of this, I believe, is going to be good for Texas, good for the market and good for Vistra.

So with that, I'm going to move into, and I just hate this, but I'll move into 2020. Not that I hate 2020, but -- or maybe I do. But I'm moving into 2020 because we had such a great year and this event has overshadowed it. And the men and women have worked so hard at Vistra in 2020 in the face of COVID, in the face of social issues and everything that's been thrown at us, performed as -- about as good as anybody could have expected.

It enabled us to pay down a significant amount of debt. Our retail business was exceptional, getting close to almost $1 billion of EBITDA. We continue on the cost savings front.

And by the way, I'm not going to throw a number out there today and say that we're going to save a bunch of hundreds of millions of dollars. We have a lean business, and I'm not going to starve this business. You cannot starve power plants for maintenance costs. It will bite you in 2022 and 2023.

But we will, as we always do, and we will double down. We will look for opportunities to optimize earnings going forward once we determine what the full effect of this is. And I'm convinced, like we do every year, we will find opportunities, and we will let you know what those are. But I'm not going to throw a big number out there that I don't think is good for the company in the long run, and we're playing this for the long run. 2021 and this event are a onetime event, and we're going to move this company forward in a way where it can compete and be even better into the future.

In 2020, I'm now on delivering the financial results slide. Just a phenomenal year, $3.77 billion of EBITDA and almost $2.6 billion in free cash flow before growth, almost a 70% conversion ratio. I remember when I was talking to you guys in the Dynegy acquisition, and we put out the -- I think it's S-4, and we had a set of projection numbers. And just looking at what we were able to do in 2020 relative to what we had in that is, in my opinion, truly remarkable. And I think we did that with very disciplined investment into the business. And I'm proud of what we were able to do and what the numbers we were able to put up. I think since we -- since I took over, we've got, I think, almost $600 million above midpoint of guidance over those years.

What just kills me is we gave it all back and more, but we've been through that story already this morning. I won't take you through it again, but that's tough. You don't want to give back what you've created, and that's a difficult thing for us.

The OPI initiative continues, and it will continue. We baked that now. That is just a part of who we are. And we like to give this to you just because we want you to know when we tell you we're doing something, that we do it. But it's really embedded in our EBITDA.

And then we're on track on our synergies for the -- and namely the Crius and Ambit because Dynegy is pretty much done now. Even on the system side, the technology side, that's pretty much done at this point in time.

And the last thing I'll say and I'll hand it over to Jim. Through all this, we still have -- and I'm on the last slide here, prioritizing all stakeholders. Just briefly to touch base, this has been who we are since I've been here. We've been about all stakeholders. We continue to do it. We've made huge advancements on the environmental side with our employees and contractors and customers and suppliers in our communities. We're proud of that, and we expect to continue to do that.

And I know we did announce that we were ahead $5 million to help customers. And some people may say, "Well, there's a cost savings right there, Curt. Why did you do that?" And it's because of what I said earlier, 2 things. One is we're about helping people as a company, not just about making money. We do care about that, but we have a bunch of people down here that are in need. This became a survival game. This became a human's needs effort, and we took that seriously.

Just like we take seriously being the guardians of your investments, we do care also about people. And it's very important to the franchise of our retail businesses that we are out there and we are helping others. And we have not lost those franchises. This weather couldn't take those franchises away from us, and they have extreme value. And we have to keep investing in those franchises. But helping people is also a very important thing. And so we made that hard call in the face of adversity and uncertainty because that's who we are. That's what we're about.

So with that, I'm going to give it to Jim. Jim is going to quickly go through financial results. And then I know you guys have Q&A, and we'll try to answer everything we can as completely as possible. And so I'll turn it over to Jim. Thank you.

Thanks, Curt. I'm going to quickly cover Slide 16. As Curt said, I know we want to get to Q&A. I want to just hit 2 slides.

Our full year 2020 retail results were $176 billion (sic) [million] higher than our full year 2019 results, driven by the acquisitions of Crius and Ambit, plus strong ERCOT margin performance, partially offset by milder weather. The $197 million favorability in our collective generation segments was driven by higher margins in our Texas East and Sunset segments, including the higher period-over-period benefits from our OPI initiatives, partially offset by lower capacity revenues.

As it relates to the impacts of COVID-19, Vistra was able to navigate through the challenges brought on by the pandemic with minimal impacts to our financial performance. On the retail side, we only saw a small uptick in bad debt during the year, while our lower business volumes were offset by higher residential volumes. And as we discussed on our first quarter earnings call in May of 2020, our commercial team executed some opportunistic transactions in anticipation of the market volatility caused by COVID-19, resulting in a positive benefit to Vistra for the year.

In addition to these strong financial results, our retail business grew its residential customer count in Texas year-over-year, reflecting strong performance by our legacy brands, while our generation business once again executed with commercial availability of over 95%.

On the liquidity side, as of year-end 2020, Vistra had total available liquidity of approximately $2.4 billion, which was primarily comprised of cash and availability under its revolving credit facility. This strong liquidity position enabled Vistra to effectively manage the collateral requirements related to the Winter Storm Uri. As of February 25, Vistra had more than $1.5 billion of cash and availability under its revolving credit facility to meet any liquidity needs.

We can close with Slide 17. Vistra repaid more than $1.5 billion of debt in 2020 to end the year at our long-term leverage target of 2.5x net debt to adjusted EBITDA.

As of February 23, we've repurchased approximately 5.9 million shares at an average price of $21.15. $1.375 billion remains available under this authorization.

We're continuing to execute on our strategic renewable and energy storage investments, including our Texas Phase I and California battery projects. As we have communicated to you, we will be disciplined as it relates to deploying capital, regularly evaluating all growth projects for financial viability.

We will only invest in growth projects if we are confident in the expected returns. As a result of this continuous review, we're currently pausing one growth project in West Texas due to updated economics driven by higher-than-anticipated congestion costs.

I know many of you are wondering how our existing capital allocation plan will change as a result of the impacts of this winter storm. We expect to provide an updated capital allocation plan for 2021 on our first quarter earnings call. We remain committed to our dividend trajectory and to maintaining a strong balance sheet.

The challenges brought on by the global pandemic in 2020 and this historic winter storm in Texas last week have tested our business model. We truly believe it was a onetime historic event. The winter event was a significant financial hit.

Our people worked in very tough conditions to generate as much power for the grid as possible. Importantly, our business still has the strong assets that it had just 2 weeks ago. Both our customer base and our generation footprint remain intact, and we believe are solid growth prospects. We are a resilient team. We will stay focused on creating value for our stakeholders over the long term.

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

(Operator Instructions) Your first question this morning comes from Stephen Byrd from Morgan Stanley.

I really do appreciate the very frank and kind of thorough review that you all provided. Just first, maybe on the natural gas supply situation. In terms of just the supplier obligations to you, is there a potential to litigate to the extent that firm supply was not provided? Or is that not likely?

No, there is a potential for that.

Okay. In the sense that sort of folks who had firm supply obligations to you did not provide the gas. And the situations in Texas wouldn't necessarily excuse their delivery obligations?

Yes. I mean look, it -- so it's going to come down to -- and I don't want to actually litigate it, but there are provisions in contracts. Every one of them is a little bit different, and it will come down to whether those provisions applied in this instance or not. And it'd be a very simple analysis, what I'll say is there's potential. We're still doing the analysis as to whether it will make sense or not, and we can update you guys on that.

But obviously it's something we need to take a look at, because we thought we had gas at a particular price and, obviously, we didn't. And that was a big hit for us. So we'll see where this takes us, but there could be some disputes.

Yes. Understood. And then the ERCOT pricing glitch on Monday, that's obviously -- I share your frustration. That just seems like a tremendous just mistake by the -- in terms of how the price was set. Is that also possible to -- I know there was language about sort of adjusting that. But could that be adjusted? And obviously that would have a very substantial impact to your loss position. So I was just curious how you think about that.

So I think the interesting thing on that one, Steve, is first of all, yes, it can be disputed. Secondly, it's going to be disputed on both ends. So the prospective increase to the cap and actually keeping it at the cap on Thursday into Friday is going to be something, I think, that is going -- not only will be maybe challenged with Public Utility Commission, but it may be challenged at the legislature.

Absolutely -- we absolutely believe that when you're in EEA3 and you don't have reserves, you have negative reserves, that you can't be anywhere but the cap. But there was a -- there is a particular mechanism in pricing scheme that actually kicked in that had the prices being set at LMPs that were below the cap at times. And I think the commission rightly so determined that the price should be at the cap.

Ultimately, I think they have the authority to make that order. I think we will likely challenge the notion that you can't retroactively price. And so -- but I think there may be others like retailers who may challenge whether it should have been set at the cap.

So it's an unfortunate thing because billions of dollars changed hands in a week. People are going to go out of business over it. And I think people are going to try to see what they can do to change the playing field. So we won't really know until we get through all of that mess, which I think will go on for some time. But we're probably going to contribute a little bit to the mess because there are some things that we think are legitimate to be -- to dispute, and we may do that.

And Curt, just on that, this point about the position gas power plants were in, it strikes me as such a problem from a market design point of view, in the sense that the gas plant owners were in this on Monday, this really tough position. Do you buy gas at very high prices? First not knowing necessarily whether you're going to dispatch. But secondly, into a price -- a power where you're going to lose a lot of money. And yet at the same time, you want to provide as many electrons as you can for the people of Texas. Is that -- am I getting that right? Or am I -- I may have misunderstood it?

No, you've got it exactly right, Stephen. And this was the dilemma that we were faced with: with an unknown load, an unknown financial obligation, but an absolute obligation to human needs. And this is the problem -- and I said this last night to -- yesterday to the House and the Senate in Texas that I don't believe Texas can stop this type of an event, and I don't think any state really can. I don't think they like the price cap. They don't like the gritty products. They don't like consumers having it passed on. We don't like consumers having blips like this passed on because they'll shop for another supplier or retailer. And so we all agree that the volatility in this market is probably not what it should be.

On the other end of the spectrum, I'm not sure that everybody is ready to go to some full capacity market. But I do believe there's something that can be done in between where the price cap comes down and you increase the amount of reserves, which increases the revenues into the market and it increases the steel in the ground. So it brings this thing a little more stable with less fly-ups and less risk to consumers.

Because what's a problem with the model now for us is as a retailer, we don't want to increase price to consumers in the middle of this type of an event. Yet our suppliers are increasing prices at will, and we get squeezed in the middle. That is an untenable situation. That is not something that can last. And I believe I made some good points and people are beginning to realize that in this market.

So I am convinced that market design will help with that. But the other thing is we cannot let the gas system fail again, and it did. And I don't care what anybody says. All the way from the wellhead, I mean we're producing right now oil and gas in North Dakota. Don't tell me it can't be produced in that kind of weather.

And so we can't have that happen again. I don't care if we produce more gas than we ever have in Texas because of demand. The reality is the pressures on the lines were not sufficient enough to get gas generators what they needed in order to be at the top. And we're in a virtuous cycle. We need to provide electricity for compressors and for gas processing and for production sites. We need gas bill to produce electricity.

So they all have to work together. And sometimes, that's what regulatory -- that's what regulation does and that's what policymakers do. And we need to make sure that happens.

Very good. I could ask 50 more questions, but I'll hand it over to others.

Well, are we going to get -- I think we're going to get a chance, I hope Tuesday.

Yes, sir, I think next week.

(Operator Instructions) Our next question comes from Steve Fleishman from Wolfe Research.

I will try to limit to the one question and follow-up.

You can do more than one.

Okay. Thanks, Curt. Just -- I think just a couple of days ago, you raised the dividend, and I think more -- frankly, more than you were initially planning to for this year. Could you just talk about your thinking in doing that in the context of everything?

Yes, that's an excellent question. So you know we moved it in September. And then we decided to just move it a couple of pennies and to $0.60. And it was $10 million, Steve. And we had made the call, and we just didn't go back on it. $10 million's still $10 million. So we decided to go forward with it and thought it was still the right thing.

This is one of these things where if you do it, some people say, "What the heck are you doing, raising your dividend?" regardless of how much it is in the middle of something like this. Honestly, I think the way we're thinking about this is that this is a onetime event. It's unfortunate, but we're still on the trajectory. When 2022 rolls around, we're still back to where we were on our capital allocation plan in 2023 and forward.

And so we made the call to continue with that. Relatively small, but still obviously -- it's an obvious change in the middle of this type of situation. It certainly can be second-guessed, but we thought it was the right thing to do to move forward with it. We still are very interested in our dividend. We think it's important to our investors. And so we decided to stick with it.

Because we made that decision, Steve, by the way, before this hit. As a Board, we decided to do this, and we did not revisit it. We said we're going to go ahead and move forward with it.

Okay. But I assume you did that with the context knowing that you could get -- even though this was a big hit, it's manageable in the scheme of the whole company?

Oh, yes, absolute -- yes. So from a liquidity standpoint, we feel good. And not only do we feel good with what we have, we feel good with the partnerships we have with a number of different financial institutions that have frankly been very supportive. And they didn't know anything, by the way. They didn't know if we made money or we didn't make money. But they also knew people were winners and losers. And they've come to us and said, "Look, we believe in your long term. If you need it, any kind of liquidity, we would be happy to make our balance sheet available to you to help you through this, if you needed it."

I am convinced that this is not a liquidity crisis for this company. This is a short-run material hit. We took a body blow, but I also believe that we will come back around out of this and move forward with strength.

And the fact that people are willing to help us out in this, and they understand -- they believe in us, that's huge to us. But Steve, I don't see this as a situation where we're in dire straits. I'd tell you, if we hadn't got our debt down and if we're still the old IPP model, we would be in a different place.

Yes, good. And then just my follow-up is just thinking -- trying to ignore '21 and what just happened and looking to '22, let's say, and beyond. Can you just think a little -- talk a little bit about how you're thinking about both generation, which I think forwards have moved up some, but is there any different strategy there for you? And then retail, how are you thinking about the implications of this for retail at '22 and onward?

Yes. So -- and I'm going to let Jim talk a little bit about retail. But I'll just say -- I'm sorry, what was the first part of that? I got fixated on...

Generation and hedging.

Yes, yes, yes, sorry.

Ignoring '21, focusing for the future towards '22.

Yes. So I think this gets in a little bit to the capital allocation discussion too. I mean first of all, we still believe, probably more so than we ever have, in Texas. Until there's a market design change, the generation is pretty darn important. And now we know, obviously, supply chain around our generation with gas is even more important than we ever thought. But we still believe that the generation that we have is important.

I still think that we're going to see coal retirements. And we believe, probably even more now than ever, because my guess is this is also going to impact development in the ERCOT market. But we think there's value in these -- in the projects that we're doing. So we continue to want to do those.

I will say, though, Steve, that how we finance those and how we realize the value from them. I think we're -- we always have been open-minded, and we'll continue to be open-minded about -- I'm talking now about the renewable and battery stuff that we're doing.

And so there could be some things that we do. I think we would like to buy our shares back, and we're going to probably need to do that even more. So the real challenge in '21 is there's not going to be a lot of money to do that unless we were to do some project-level financing, something like that, which we will consider.

In '22 and beyond -- by the way, retail actually held up through this. And Steve -- or I mean Jim can get into the details and tell you his thoughts on retail real quick. But we are looking not only to maintain our retail, but we may end up getting -- we're a provider of last resort in ERCOT. And we may get some of the customers if, in fact, customers drop their customers to the provider of last resort, which is a mechanism in ERCOT. We may get a significant amount of new customers.

And we're also open to continuing M&A around retail. So we've been saying we'd like to get a little more retail in our business. I think we're continuing that. We like that business. We're good at it. And so I think that hasn't changed.

On the generation front, we were sort of reducing our generation exposure a little bit anyway, and we're becoming more and more matched. I know this event, obviously, shakes people because we ended up being short. It was because of things that we did not -- could not have planned for.

So I still think that we are going to head down a path where our generation is going to be reduced in terms of megawatts as we retire coal. And we'll add some renewables and batteries, and we'll still have generation. But I think we'll be a much more balanced company as we go forward. Even with this event, we still think that's the right move.

I hope that answers your question, Steve. Jim, do you want to say anything about retail quick?

Yes, sure, I would. Thanks, Curt.

Steve, I think this -- over the evolution of the markets here in ERCOT, we've seen these events come every 3 to 5 years. And it disciplines retailers to think differently about some of the collateral requirements and the hedging that's necessary to survive.

This event had the chance to really create a runaway scenario for swing for the retail segment, for any retail business in ERCOT. And then the load shed capped out that exposure for some. And it actually -- it did for our business as well. And so the retail business held up well. However, there still are some retail businesses that experienced swing, and they're reporting some results that are unfavorable.

I think this business takes more capital than most people think. And it takes more discipline around hedging than most people think. And we found ourselves even in a business that we're very familiar with, having assets ready to run, being in a position to run and having trouble with the fuel supply, which we did not see coming to the extent, obviously, that had occurred.

So I think there's going to be some retail consolidation. I think whether it's through the polar process or whether that's through a chance to take a look at some books. I think we're going to come out of this in a relative position in a very strong place. And we look at '22 and beyond as we're back to normal.

And to your point about the curves, the curves being up in the next several years is a $200 million to $300 million difference than where we were just a few weeks ago. And so we'll see how that plays out, but this is a tough one, tough one to get through. But I think coming out on the other side, we're going to be relatively positioned in a good place.

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

Thank you for all the color commentary. I wish you guys the best.

Can we talk about capital allocation? I know you mentioned an update coming, but there's some -- you just alluded to it, so I want to bring it up more directly here. It seems like there's some latitude in the budget, especially if you think about having a probably disproportionate preference to review buybacks here.

How do you think about investments in renewables and the ability not to pursue them, but to monetize those selectively as you complete them? Certainly, it seems like an added source, but also can we address the credit rating and your thought process, perhaps initially with the rating agencies?

Yes, great questions, Julien. So on the renewables, I think you sort of stated accurately. And I tried to portray this, maybe I didn't do a very good job on it. But I think there's some opportunity to potentially raise capital in a different way, let's put it that way, that could add capital to buy back shares. And I think we'd like to buy our shares back. So I think we're going to be very open-minded. These projects have value to them.

And now that can be somewhat contingent on also having contracted projects. And of course, we have a retail business that we can look at to contract with, but we also can do that externally with third parties. So I think there's some work in 2021 we'll do to make sure that. But we're not in a position where we have gun to the head and that we absolutely have to do it, but I think it's worth doing. And we were considering it even before this event, but I think it's an even higher priority.

Jim, do you have anything you want to add to that? But that's kind of how I see that. And then I can answer the next piece of it too.

No. Our view is very similar there, Curt, and I think there may also be opportunities to look at current operating assets in the market or those underway, as current owners or projects might have seen the performance gap and how they hedged some of those assets in this market as well. And so I think there could be other opportunities that weren't on the horizon just a few weeks ago.

It sounds interesting.

We look at that, Julien. And the problem is, again, if you want to sell it with gun to the head, I suppose you could do that. But the values just aren't there. There's so much generation that is either explicitly or implicitly for sale in the market that -- and I don't feel like we have to do that. But if we found an opportunity to do that, that made some financial sense, we don't need to own all the megawatts that we have, and so we would consider that. But I'm not -- we're not going to rush to that because we're not in a financial distress.

And I think we're going to be a little more disciplined. I think I'd rather look for ways to save money and to do things like that rather than to force a sale in the middle of a market that is not a particularly good market to sell assets in.

Understood.

You asked about the ratings. Yes, so rating agencies, I'll just say this, we've had some early discussions with them. And this is, like it is to you guys, it's an initial shock. They know that we're still disciplined, and we'll continue to pay down debt and that we've been that way. And so look, I think we've had constructive discussions. I have nothing to announce at this point in time about that, and they don't either. But I'd say the discussions have been constructive.

And I'm going to spend some time -- actually, I was in these hearings all day yesterday. I'm going to spend some time with a couple of the agencies myself because I couldn't make the meetings and talk to them. But I found the discussions to be very open and honest and constructive, and I'm hopeful that we'll be okay there.

Your next question comes from Shar Pourreza from Guggenheim Partners.

It's actually James for Shar. Curt, to build off your policy points about a middle ground between high-priced assets and a capacity market, I mean we watched the hearings yesterday. It sounds like there's sort of a momentum. Kind of from where we stand today, could you give us any probability on policy change actually coming out of the spring session in the legislature?

Yes. So look, we were asked to bring back ideas in a week. This event has really shaken the state of Texas from the very top. I was able to speak with some of the -- obviously, the leadership in the state of Texas, they don't want this to happen again. I think they're beginning to realize that the mix of assets in the market combined with the structure itself is not sustainable, pretty obvious to them. And they also know this was a big weather event. And we can't lose sight of that, that this was an extreme weather event.

But at the same time, they have to ask themselves, even so, do we really want to even have to take the risk of this type of event. And I think they're asking themselves, and they know the answer. None of them can stomach really the idea that a bunch of this high-pricing power is going to get passed on to customers. And so they realize that that's an untenable position to be in for us, and they're worried about having enough generation. And they realize if you don't have a market structure that works, people aren't going to invest.

So that tells me that there's a very good probability that we could get something done here, and I would say north of 50%. And I wouldn't normally say that about any process like that, but I see momentum. And I know our company is going to be at the seat -- have a seat at the table. And we're going to be working on this extensively in the next few days because I do not want to lose the momentum.

I think we do need a change. And we were already considering these things, and so we were prepared. And I think it's time to get everybody together and find a way to move this market. Still using competitive market principles, but I think stabilizing it somewhat.

Our next question comes from Ameet Thakkar from BMO.

I am in Houston. So I hope you will indulge me since I just got the power back. So I figure I've earned it too.

I think Curt,, you kind of talked a little bit about the Oak Grove coal supply issues with some of the rail transportation not kind of getting through. I'm just curious, but don't you typically have like a coal parlor that would represent a couple of weeks of burn? I guess you aren't shipping it -- coal every day to kind of burn that coal. Can you kind of fill us in a little bit on kind of the issues there?

Yes, I will, and then Jim can jump in. But it was kind of 2 things. It was coal -- getting coal to the coal silos, but it also was wet coal that we actually had. And so what we were trying -- and that was creating issues with the front end process to eventually burn coal. And so it was those 2 things.

So we were trying to get fresh coal in. And then we were having problems with the rail because the coal we had on the ground was frozen, and it was also wet and gumming up and causing problems that we end up having to take the units down. But that's what as I understand it. But Jim has been working on this night and day. So why don't we let him also explain his knowledge of what happened?

Sure. Thanks, Ameet, for the question. That is one of the benefits of having a mine operation right there is that we can self-supply. We have several days worked at the plant. And then of course we have -- at the mine, we have much more, under coal barn, a covered area. So the thought was when the coal pile, which is right by the plant, is exposed, it froze over, becomes basically chunks of ice that you can't put through the equipment without tearing it up.

So the goal is to try to get the dry -- the dryer coal over from the mine to the plant. And that transportation system was really tough, not just the tracks, but the railcars, the doors that you used to dump the coal, they're freezing. So they were freezing shut and then we couldn't actually -- once we got them open, we couldn't get them back to close. And so we had a supply chain, even within our own system, where it was effectively difficult to work in the freezing conditions that got worse through the middle of the week before we were able to find ways to work through that.

So that wasn't about a rail coming in from elsewhere. It was really between the mine and the plant and trying to get the best fuel we could. At Martin Lake, we obviously do have also a supply on hand. It was a derated plant because of the freezing temperatures and also dealing with the pile, effectively turning into ice. And so we ended up -- our conveyor systems where we're transporting this coal up through to the plants, they're exposed as well in many parts of the country. Those were completely enclosed. So these systems, as Curt mentioned earlier, they were designed for the heat and the warm weather, not the freezing temperatures we were in.

So we took derates on, on that plant as well. We ended up at a 70% capacity factor for coal during the week. So the capacity factor is certainly lower than we expected and wanted to have. But that 30% that we were not able to keep going, and that includes the derates and being off-line, that just became a very expensive prospect for us. Because as Curt said, we were replacing $5 to $20 a megawatt hour fuel with $2,000 fuel in the form of gas that we were burning in some of our old gas steam units.

And so a little bit of miss on the volume there multiplied by the delta on fuel cost was substantial. So we're going to have to look at the coal handling and look at what resiliency we need to build in for this type of a cold weather stretch at our coal plants.

And I guess that kind of leads into my follow-up question. Just going back to kind of the press release you guys put out on Wednesday, I guess, kind of in the midst of all of this. And I've heard, I think, you testified to this yesterday in front of the legislature as well.

If I kind of look at the percentage of load or cut you kind of reserving, and I kind of used Monday as an example since that was kind of the height of this. Is it fair to say if we set aside STP, assume that ran -- that your fossil fleet kind of ran at a kind of a blended kind of capacity factor of like 70%, 75%?

Yes.

And so like with prices kind of on Tuesday and Wednesday kind of clearing at the cap, and it looked like you guys had some length -- or heat rate length open going into this. I guess, I'm still trying to wrap my head around on kind of -- on why the losses were where they were to such an extent. Are you guys kind of saying that because you did such a good job and the lights stayed on in north zone versus say Houston zone that you just -- and the demand was so high there relatively, that you guys kind of found yourself short, whereas other kind of generation units that were pointed at Houston zone basically had the benefit of their load just basically being cut, so they basically weren't short anymore?

Yes. So Ameet -- go ahead.

Ameet, yes. In essence, this was a very interesting pattern because heading into the weather event when you see what the temperatures were going to be, this looked like where generators, especially generators with length, would have an opportunity to make potentially a good return on their efforts. And retailers, no matter how much they were ahead, whether it was through a P95 or P99 scenario, they were going to swing and likely pay much higher prices to cover their obligation to their customers. So it was originally going to look like a good generator segment opportunity and probably a tough one for retailers.

Once the load shed happened and the load shed happened not just curtailing load for retail but it actually curtailed and contributed to the gas supply issues, the retailers kind of got stopped out on their exposure to the swing. And in some cases, depending on how much load was shed, could have become lost on their supply position.

And the generators and -- the ones -- those that were online including ourselves, we could not get the fuel to meet the obligation of what we had sold forward to both third parties as well as our own supply book. So it shifted, this load curtailment shifted the entire risk from what should have been on a retail segment back to a generation segment, because of its linkage to the fuel supply challenge on particularly natural gas.

And that's we were long. We had ability to capture this, but you're long if you get the fuel. If you don't get the fuel, you're short. And that's why when we put the press release out, we put a lot of emphasis on the fact that we were having fueling challenges. And we also wanted to address that our units were winterized, they were there running. And we have an opportunity here if we can solve the fuel challenges.

And despite all that, we were still a disproportionate amount of the generation on the grid. So it played out very differently than we would have thought a week or 2 ago, but those were the major drivers.

And Jim, I'll just add that, Ameet, that what happened is too is Monday, as I said, pricing was not at the cap. For this very strange reason, we were long Monday. Then we started having gas delivery issues, pricing issues as well as pressure issues. And then we lost Oak Grove for about 1.5 days, which is our low-cost fuel.

And so it is like one of these sayings where if it could go bad, it did. And all those things contributed, but a big chunk of it really was around gas, the cost of gas as well as the amount of gas we were getting delivered. And then there was another -- that's a big bucket. That's like, I think Jim has said, about 2/3. And about 1/3 of it was around our coal of that total.

And I know -- because -- I mean you can only imagine what I was doing, Ameet. I was like pulling my hair out. Like I thought we were long. I thought we were in a good position. We're one of the biggest generators in terms of percentage on the grid. You're thinking $9,000 cap, you're thinking everything is going well. But when you start tracing through it, it begins to make sense and unravel as to how our position changed and how we were -- had the inability to really do much about it.

But we did the right thing, but it was financially not good. And that's a tough thing when you do things and you know that you were doing the right thing and the outcome doesn't swing your way. It's very difficult.

I appreciate all the time, Curt. I know you had a hell of a day yesterday.

Yes. Take care.

This concludes the Q&A portion of our call, and I would like to turn it back to Curt Morgan for final comments.

Well, I appreciate people that are still hanging in there. But thank you very much for your interest in our company. Tough week last week, but this company is strong, resilient. It's a good company, and we are going to come out of this stronger than ever.

I hope you all have a great weekend, and look forward to talking to you soon.

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