Vistra Corp. (VST) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for tuning into this discussion covering power M&A trends. My name is Michael Shenberg, and I'm a partner in the M&A group at White & Case located in New York. And I've been concentrating in transactional work in the energy sector and, more specifically, power for quite some time. I'm very pleased to be moderating this breakout panel today, which, as you can see from the agenda, consists of an impressive and diverse group of senior industry participants. I'm going to ask each of the panelists to quickly introduce themselves, and then we'll go right into the discussion. We plan on saving about 5 to 10 minutes at the end to answer any of your questions, so please use the Q&A feature of the site and click Submit. We will keep this relatively informal, so we will also be able to take questions at any time as well. To make the intro simple, maybe we should just go in alphabetical order, which I think would be Chris first. Chris -- excuse me, Adi, Chris, Dave and Christina.

Thank you. Great to be here. Hoping to be back in Vegas next year in person. It's strange not being there this year, but great to be on this panel. My name is Adi Blum in BlackRock's Real Assets group, focusing on infrastructure. We're currently investing out of a $5 billion global infrastructure fund. And our business model is to partner up with strategic developers to bring -- to invest in quality projects or companies around the world. Over to you, Chris.

Yes. Thanks, Adi. Hi, everybody. It's Chris Buddin. I've been a tech banker for over 20 years. I now run our -- the Global Auto Tech and Clean Technologies and Renewables business at Goldman Sachs. I've been doing work in and around the energy technology space for over a decade, so I've seen a lot of transitions. I do approach this market from a technology standpoint, which I find extremely interesting, and I think it will become an increasing part of the energy and power infrastructure going forward. So looking forward to the conversation.

Okay. Dave?

Great. Hey, Michael. Hey, everybody. I'm David Nanus. I'm co-head of the Private Equity business at LS Power. LS Power has been in the electric power and energy infrastructure space for over 30 years now. We've been a developer, an owner, an investor and operator really across the space. We've been early movers in a number of areas including nonregulated generation, renewables, electric transmission, energy storage and, more recently, demand response and EV infrastructure, among others. And our approach, typically, really, over time, has been to look to invest in assets and businesses that can help make the grid become more efficient. And we are currently focusing on those assets and businesses that we think will provide the most value and, therefore, have the most value throughout the ongoing energy transition.

Okay. And Christina?

Good morning or good afternoon. I'm Christina Scalzo. I'm a Vice President in Corporate Development at Vistra Corp. My primary responsibilities include overseeing our M&A and innovation efforts. Vistra Corp. is a large IPP. We are active in 6 competitive markets across the United States. We have approximately 39 gigawatts of generation assets, various technologies including solar, battery storage, nuclear, gas and coal assets. And we also have a significant pipeline of renewable and battery storage, assets at various stages of development and construction. Interestingly enough, we also have nearly 5 million retail customers, both residential and commercial and industrial customers. And given this asset base, we have a significant set of opportunities that are present for us on the growth front, whether through M&A or through development. Thank you.

Okay. Thank you, everybody. So Chris, maybe it might make sense to start with you for the first kind of question as we go forward as the banker on the panel. It's been such a crazy 12 to 14 months, right, with COVID and the quarantine, the presidential election, the change in the Senate in January, the weather events that were experienced in Texas, the Southwest in February. What's your take on where the power sector is these days and your thoughts on what clients are looking at and maybe what they're avoiding?

Yes. Thanks, Michael. Listen, I'm -- I always warn people, I'm a little bit of a technologist, so I'm going to have an angle or event here. But I think Dave said it right. Forever, the objective around energy technology, clean technology and renewables has been around making the grid or making energy more efficient. And it's a long game. It's a very long game. And what's happened over the past decade, which is -- which I find most interesting, is the costs have continued to improve and align and, along with that, has grown the scale of the technology assets that are going into the power landscape, whether it's on the converter side or whether it's on the EV infrastructure side and all of that. And that ability for those businesses at scale to generate meaningful EBITDA has really, I think, finally opened up to a broader set of investors that this is a real, long-term trend that is starting to take off. It's always been an easy starting point in saying this makes sense. It's just when does it make sense. So we finally got to a point where it makes clear sense, at least from my standpoint. And the terminal value of this market is pretty much hard to determine because it's a decade -- multi-decade long transition. So where we have -- I have seen, Goldman has seen a lot of attention is around these new areas, whether it's equipment or technologies that are enabling solar, financing solutions that are enabling solar and/or wind and/or stationary storage and then a major, major trend going on in the background of electrification of vehicles, which has gone from effectively 0%, 1% to 3% of sales and trending toward 20% to 40% over the next 2 decades. That's going to have a tremendous amount of pull-through across the landscape of everything consuming power and electricity. So that's where we're seeing focus, right? And we'll talk about SPACs later, but you've seen a pretty good encapsulation of all these trends and what's happening in that market across the board.

And how much of that, Chris, is attributable to changes on the political scene, which we've seen dramatically with the election in November and then in February and then 4 years ago versus just, naturally, this is where things are going because of international focus, state focus and so forth?

Yes. So last October, there was definitely some pause where investors wanted to see who won and which direction we're going. I don't think technology waits for anyone or any policy, which is a nice thing about it. But it is absolutely helpful, getting back into Paris climate, very additive. It removes risk and uncertainty. So when you remove risk and uncertainty, it makes it a lot easier to deploy capital. And so there was a pause in October. It accelerated through. I don't think the states paused, right? There are states who have very strong initiatives, and they're going to keep going forward. So while there may be hiccups or slowdowns depending on an administration or a policy, I think it only maybe slows or accelerates the trend. It doesn't stop it.

Okay. Great. Dave, maybe I'll go to you next. We were talking just before we went live about the diverse set of investments that LS has made in the last 12 to 14 months, covering transmission, fast charging for electric vehicles, purchasing one power plant, solar and wind, battery storage and so forth. Maybe you could talk a little bit about what LS' philosophy is in terms of transactional work that you see going forward. And also, I suspect it would -- the last 12 months would have looked very different had I sort of looked at the 12 months ending maybe December 31, 2015 or 2016 in terms of your investments.

Well, look, it's been an evolution, but what we're really focusing on -- 2 of the bigger themes are really, no surprise, decarbonization but also reliability, right? And so you mentioned some of the work that we've been doing in transmission and storage where we've got, I think, among the largest independent businesses in those spaces, but also in EV charging, in renewables, in renewable natural gas. And I think all of those really show this common theme. So we're going to have decarbonization. We're accelerating toward that. How can we invest in a way that will facilitate that but without compromising reliability? Because you really need both of those to happen. And so our philosophy, sort of to your question, is how can we invest into those themes by -- and at the same time, leverage sort of our platform and our expertise in what we've been doing for 30 years to try to maybe get unique access to certain opportunities or to help derisk or improve the returns in some of those opportunities. So all of these investments, while they seem sort of varied, the Venn diagram has a giant amount of overlap in them insofar as we're able to think of these through sort of the electric power and energy infrastructure lens. And all of those types of businesses are going to coalesce to reduce reliance on fossil fuels but, at the same time, making sure that when you turn on the light switch, the power goes on.

And maybe one follow-up on that, which we were just chatting about, too, before we went live, the EVgo investment in which you bought the company and then went public through the SPAC. Maybe you can just talk about how that worked. And we've seen so much of the news lately. There's so many SPAC transactions going on. And was it seamless? Was that the normal hiccups? Is it something you guys would do again?

Well, so we acquired EVgo in early 2020. We are -- we've signed an agreement to combine EVgo with a SPAC, but that hasn't closed yet. But again, it's sort of part and parcel of what we were doing. We think of it not as, hey, is this an opportunity to go find a SPAC, but this is one of these areas in need of innovation on the grid and in the energy system that we're able to find. We thought to ourselves, hey, if we're going to invest into this space, what do we need? We need to find a great team and platform with proprietary technology, to Chris' point, a deep pipeline of infrastructure for us to invest into, which I think is important because one of the things that I think we've observed, to a larger extent, in the last year than previously, is that when funds like ours, we like to deploy significant amounts of capital at one time, the -- I would say the opportunity set has expanded to include those, but also those were -- you can invest some capital upfront, but now you've got access to a pipeline of additional opportunities that is visible, that you can commit capital toward. And so EVgo was really one of those for us because it had this pipeline of opportunities to build more EV infrastructure. But then the other thing for us is it just felt like it had the right business model for us in this space, which is to build on and operate the infrastructure. EVgo can charge on any charging standard, including Tesla. So we get to root for all of the OEMs, not just any one of them in particular, which is nice. So we hope for everybody's success. And that just means that the more EVs that there are on the road, the more utilization of the charging infrastructure, and that just falls right to the bottom line even before we buy another charger. So we did the work. We acquired the company, became a crown jewel in our portfolio. And then as 2020 went on, we saw that the SPAC vehicle, that kind of transaction was potentially viable, not just in the beginning of 2020 when we started seeing some of that, but it went on and further and further. And EVgo is a company that's got a lot of growth ahead of it and was public company ready. So we were able to find the right partner and execute the transaction. And in so doing, they're raising -- and this is an important part. We're raising an amount of capital that's going to fully fund EVgo's business plan.

And just circling back to Chris again at Goldman. Is your sense that the SPAC trend is slowing a little bit? Or is it still gangbusters?

It's a tough question. SPACs in this current instantiation has really only been around for less than a year [ versus ] pre-2020 was an entirely different [ game ]. So it has ebbed and flowed. Like I said, there was a slowdown in October. Part of that for these types of companies was around policy and politics. There has been another slowdown fairly recently. There's -- part of that is capital recycling, so making sure that those who invest in the private side or in pipes get capital recycled out so they can find more opportunities to reinvest. It's not a massively deep market yet. I think everybody moved extremely fast over the past 9 months to take advantage of what's a very interesting structure. We're seeing the SEC trying to catch up to that as well and make sure that people aren't going too fast for what all the rules and regulations are around SPAC. So there is definitely a slowdown. I believe it's a trend to stay, not goes away. I just think there's going to be a lot more appropriate structure placed around these transactions, but they're still super valuable for -- especially for capital-intensive businesses, which everything -- for the most part, energy has a level of capital intensity. I think SPAC products are like extremely well positioned for that.

Okay. Maybe moving next to Adi. Again, we were talking briefly before about what would be more recent investments. So maybe you can talk a little bit about what your strategy and focus has been and where you see it going forward with respect to your recent decarbonization partners investment and other investments that you've made recently or that you're looking at.

Sure. There's a lot to potentially cover there. I guess in terms of the investment themes that we're...

Well, we only have 30 minutes.

I'll confine it. There remains a tremendous need for investment in infrastructure. So that's driven by aging infrastructure, growing populations, increased electrification. And that's with cars, appliances, buildings. Everything is becoming increasingly electrified, which all requires billions of dollars of base infrastructure investment. Yes, energy transition is something we were following well before the pandemic, but the acceleration over the past year has really been tremendous. So you have specific things we're tracking there including batteries, EV, infrastructure, hydrogen, renewable fuels and, of course, regular way renewables. You referenced the decarbonization initiative that we announced the other day with Temasek. So that's starting with the premise that we need to do big things to address climate change, and the world needs to reduce carbon emissions by almost 2 billion tons each year to get to net 0 by 2050. So it's a massive undertaking or a massive investment. So this really requires developing new technologies. Or in many cases, we have the technology, but it's too expensive to do it in a green manner. So this vehicle, the focus is on late-stage venture capital, growth equity, to really help support these new technologies and doing more than just the base solar and wind, so focusing on next-generation renewable and mobility technology including emerging fuel sources, grid solutions, battery, storage, electric vehicle technologies as well as other things like improving the way we produce cement, which is a huge sink of resource. Well, that's on the energy transition side. We're still going to need baseload generation for a long time, and we continue to invest in natural gas, for instance. You might have seen our investment about investing into GasLog, the LNG transport company. With -- we really see gas serving as a bridge throughout the energy transition. And then one other thing I'll mention quickly is industrial infrastructure is an area that we've been focusing on a lot recently. During the pandemic heat of it last year, in September, we signed an investment to create a company with Vopak, which is a terminal operator, to manage industrial terminals around the world. And our first investment was to purchase Dow Chemical's terminals inside the fence at 3 of their production facilities on the Gulf Coast. So yes, that's something we can talk about later as well.

Okay. And finally, we haven't heard from Christina. It's -- I'd be curious as to your company's thoughts, obviously, the largest, I think, as you mentioned, with 39,000 megawatts of generation, most of which is nonrenewable at this point, and how your company positions itself and strategizes toward ultimately what people are focusing on to be kind of 0 carbon going at some future point.

Absolutely. So I agree with most of what my fellow panelists have said so far. I mentioned at the start of the call that we do have 39 gigawatts of generation assets. And Adi just mentioned the role of gas. I would agree. We need reliable, dispatchable, affordable power for our consumers and for the country. But I don't think about gas plants today as just gas plants. I look at them as opportunities for new uses. And so for example, we at Vistra have developed a massive lithium-ion battery storage facility at our Moss Landing facility. That was CCGT. 300 megawatts came online earlier this year. That's capable of about 1,200 megawatt hours. That's critical infrastructure for California, which has been dealing with issues related to the duck curve and just renewables coming on and off-line very quickly. And so one of the ways that we were able to capitalize on our gas plant or gas infrastructure was to use an existing site, use an existing team, existing interconnect. And that allowed us to deploy new technology that we are very excited about and see as a transition asset that will prolong the life of that gas asset. We're doing the same thing, albeit with a slightly different set of parameters and objectives, in Texas at our DeCordova gas plant. So I think there's a great number of opportunities for gas assets, particularly in more efficient CCGTs, to continue to have useful life in and of themselves, but also to transition, whether it's with battery storage or perhaps even if the land is there, solar assets or otherwise. In Illinois, we've been pushing for legislation that would support transition for our coal assets, orderly transition to solar and battery storage sites. And beyond providing continued reliable power to the grid, affordable power, it will also help with the job space, the communities, as we make this transition from a predominantly fossil supply grid into the future where we'll have much more renewables. Now I've just talked primarily about generation. We also have nearly 5 million retail customers. So there's a tremendous amount of opportunity right now for us to help those customers also evolve and have access to energy transition technologies, whether it's rooftop solar, in-house or in-building storage, demand response programs, energy efficiency programs. And we're doing that through partnerships with other strong companies, and we're also looking at investing in solutions ourselves. So the opportunity set is wide open. And without causing a whiplash, back on the generation side, I also was negligent in that I didn't mention the potential of hydrogen as a fuel source at existing gas assets as well as carbon-capture technologies, which those 2 areas in and of themselves could occupy multiple panels. So it's an exciting time to be in our industry. And I think there's a lot of opportunity for us to work together to make sound investments but also to continue to provide reliable, affordable power and transition to a net 0 economy.

Thank you, Christina. Yes. One of the things that I found, and Chris, you'll appreciate this, from confidential information memos that I've seen over the years prepared by your firm and with sponsors and others, is that they used to always talk about extra space on the site to do another -- to build another power plant there, unit 2. Now pretty much they all talk about additional space for solar or for battery storage. So it's an interesting shift in terms of what you might have seen 2 or 3 years ago in terms of people trying to sell fossil fuel plants and what they can use the extra land for versus what now they're marketing it as. I'm wondering if maybe we can touch on 1 or 2 different related topics. Dave, you've obviously, as I think everyone on the panel has, been very active over the past year. Has the COVID quarantine had any real significant impact on transactional work? Or after kind of -- at least my experience was after sort of everybody trying to figure out what was going on for the first couple of months, things, at least from a virtual perspective, seemed to get back to normal in terms of transactional flow in our space.

Yes. So I think we were -- we didn't know what to anticipate and maybe anticipating the worst around a year ago. And then everybody sort of found what is hopefully a temporary kind of re-equilibrium. But there were concerns about how do you pursue a -- how do you develop new business, how do you pursue a transaction with people you haven't met before, and those were bridges that we built and many others were able to build. So it was -- I think everybody had to be a little bit entrepreneurial and a little bit more innovative this last year, but we were able to do that. We were able to do deals with people that we met on Zoom and, candidly, that we still haven't met yet. We talked about the giant closing dinner we're going to do when we're all relieved to do that. And we've had to figure out other ways. The thing that I think I kind of missed the most or that is the hardest to recreate over Zoom is that idea development, that process of making ideas better. That just happens kind of extemporaneously. You're in the office. You're getting a cup of coffee in the pantry, and you run into someone and said, "Hey, you know what, I just heard on this phone call," and then you start riffing, and you're able to build ideas, not to mention just the delight in being around other people that you're not with in your house all the time. So I think that's what's missing. That's the most important thing for us to try to get back. But by and large, we've -- everybody has, with sort of extra effort, figured out a way to muscle through this and continue business as usual.

Yes. I mean from a point of view of a law firm, I mean we've hired -- I don't know if the word is dozens, but lots and lots of lateral lawyers, partners and associates that no one has ever met personally, in addition to accomplishing transactions, working with our clients in the space. Chris, did you want to add something on that point?

Yes. No, I was just going to add to Dave's view. It was like we've done a tremendous amount of deals over the past year without having to be in person. We had to create ways of doing Zoom diligences or walk-throughs, live streams, making it feel as real and as tangible as possible. It's a funny anecdote. Like 2007, 2008, we tried to do this for road shows, is how do you create a net 0 or decarbonized road show where instead of flying every single city, you're doing something minimal. The nice benefit is we've had almost 0 travel, 0 carbon processes last year. I don't think we stay there. I think there's a lot of benefit to being in person as well. But I will say that the one by-product of doing this is Dave's point about like having the -- just random one-off idea generation conversations is -- the downside is I'm constantly on the phone. Like those are -- like the uptick in communication is tremendous. It's like there is no gap. So I'm almost like excited to get back in the office so I can have those conversations and then step away and close the door and get a little quiet time. But we figured out how to make it work. I hope it doesn't go back to the way it was prior because I do think there's a tremendous amount of efficiency utilizing technology to make this work, make it work well.

And I would ask maybe Adi and Dave and Christina. In terms of the need going forward for on-site due diligence, visiting the actual assets, given the ability to actually accomplish transactions, do you think that might be the new normal? I mean putting aside working in the office, which I think a lot of us do want to do because of what we just discussed, but in terms of the need to actually travel and visit, do you think there might be a little bit less of that given that it -- people are able to get it done in the last year without having to physically travel?

Yes. There's certainly been a lot of innovation on that front. And it just amazes me how quickly that innovation occurred. So for a site visit, for instance, we use drone technology. We had one other site visit where there was an individual who was able to go, and he live streamed the site visit and questions to everyone else at home. So I think we'll see a hybrid approach for these types of things going forward, where it is important not only to kick the tires of the actual assets that you're buying but also, just as importantly, to meet the -- meet the technicians and operators and management of complexes. And something that is tough to replicate is the interaction with management teams, and we're still working on the optimal way to do that. But it's interesting, something you don't necessarily get the full benefit of is -- what I like on these site visits is to ask -- just get an opinion of somebody who's on-site as an operator. And those types of anecdotes don't always filter up, yes, certainly not over a drone visit. So yes, we'll have to find a way to get the best out of both.

Okay. Yes. We actually -- I think we have about less than 10 minutes left. If there's any Q&A, please feel free to post them in our inbox. Otherwise, we'll continue to have the panel discussions with some various different topics. Christina, we've seen so much over the last few years with ESG factors becoming so important in public companies in particular. And I take it probably, Dave and Adi, with your investments, with your investors, the same thing. But Christina, how large is that focus in terms of internally and the investments that you're seeking to pursue and sort of total philosophy going forward?

Great question. So I think we could probably all agree that ESG factors have always worked their way into our investment decisions but that the spotlight is brighter today. From emissions profiles to diversity and equity of the management teams and workforce, good companies try to solve problems. And diversity, for example, makes for better problem solving. I'm actually pretty happy to see the focus on ESG. We at Vistra have done a lot to increase our reporting on our ESG footprint and our initiatives. And then we're also, frankly, looking for new ways to improve our investment decisions and our business operations and processes. So we recently entered into a new relationship with a venture capital firm out of the Silicon Valley. And their very first commitment in their new fund is to a company that provides material traceability for corporate supply chains from provenance through manufacturing. This company already has customers, international car manufacturers, industrials and other technology firms. And we're going to explore whether or not it makes sense for us to engage with them directly, not because we're an investor, albeit through the venture capital firm, but because we want to do better. We want to make sure that we are conducting business the right way. And so I've seen -- quite honestly, where I sit responsible for innovation, I interact with a lot of venture capital firms and incubators and accelerators. And there's a tremendous amount of focus from high school students to graduate students to actual companies on investing in the space to make it much more transparent and -- a transparent process that folks can be held accountable to. And so I would expect that the focus would remain. The spotlight will remain and perhaps even get brighter.

Okay. We have a couple of questions, so let me start with the first one that we got. Has anyone noticed an uptick in the use of rep and warranty insurance lately? So we're getting actually a specific question about how transactions are executed. I guess I'd ask Dave or Adi. What are your thoughts on that?

We have, for sure, seen more of it more recently. I don't know if it's about the last 12 months as much as it's about sort of gaining traction in the market. I guess what's interesting is what I've seen that's newer for us anyway is that it's not just sponsors that are trying to employ that, but we're seeing strategics who actually have balance sheets and credit that are looking to offload some of those obligations. I think like with any product, you really need to look at the Ts and Cs and make sure you know what's insured and what's excluded, but we're seeing a fair amount of that.

Okay. Anyone else who wants to respond on that?

I'd echo that. Not necessarily tied to the pandemic, but we're definitely seeing increased frequency and also geographically as well. So Chile, Mexico, Colombia, that product wasn't very often used. And over the past year or 2, we're seeing it becoming a lot more commonplace, even in Brazil. So yes, I think it's going to be increasingly pervasive. But it is very important because -- to consider what's excluded. Environmental is often excluded. Tax is often excluded. So what are you getting protection for?

Yes. I would agree with that, too. We've seen the product, which hadn't been used as much in Latin America, is now often part of the kind of -- at least the initial position by the sellers is to get the buyer to rely solely on rep and warranty insurance. All right. Here's the second question we got. Could you talk about the Texas power failure? And does this create opportunities in the SPAC market for emerging off-grid power technologies such as micro grids, stand-alone energy storage to go public? Or is the jury still out? I'd ask maybe, Chris, what do you think about that?

Yes. Well, before -- I mean before that happened, certainly, Tesla has been making a lot of progress on their stationary storage. Star Peak is in the process of doing a SPAC with a company called STEM. So there's definitely interest and appetite around whether it's micro grids or stationary storage as a balance for situations like that. It just adds to the storyline of what are the risks you're trying to solve. And I can't remember if it was Christina or Adi or Dave, but it's all about resiliency. And so to me, that just identified a point of less resiliency, where stationary storage can improve that. Now we need cost to align, right? And I think a nice by-product of global scale-up of battery manufacturing for automotive is going to drive the cost down for stationery. So there is an ecosystem here that's going to accrue to all fronts as that manufacturing scales up and the costs come down for batteries.

Okay. Anyone else want to add on to that?

I might just say, Michael, that, yes, I think the question was asked in the context of SPACs. But I think just that those weather events just really highlighted that we need to focus on reliability and resiliency. And micro grids and on-site storage are very much a part of that, but transmission can be a part of that. Sort of the last mile of reliability is probably going to be gas for quite a while until the storage solutions are there, too, or hydrogen and that sort of thing. So I think it's just -- reliability just can't be lost throughout the discussion on the energy transition.

All right. Well, I think that about wraps up our time for today. Thank you to all the panelists. It really was a pleasure to work with you all on this. And I think for those of you continuing on, the next step is to click on the link to access the closing session, The Future of Work: AI and Robotics, moderated by Nat Kreamer. So I think that concludes now our M&A panel. Thanks again to all the panelists, and thank you to everybody who listened in and asked some questions. And I hope to see you, as I think Dave said earlier, live next year in Vegas.

Thanks, Michael.

Thanks, Michael.

Thank you.