Vistra Corp

NYSE:VST

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to this Vistra Third Quarter 2020 Results Conference Call. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

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

[Molly Sorg, IR]

Thank you, and good morning, everyone. Welcome to Vistra's investor webcast covering third quarter 2020 results, which is being broadcast live from the Investor Relations section of our website at www.vistracorp.com. Also available on our website are a copy of today's investor presentation, our Form 10-Q and the related earnings release.

Joining me for today's call are Curt Morgan, President and Chief Executive Officer; Scott Hudson, Executive Vice President and President of Retail; and David Campbell, Executive Vice President and Chief Financial Officer. We have a few additional senior executives on the call to address questions in the second part of today's webcast as necessary.

Before we begin our presentation, I encourage all listeners to review the Safe Harbor statements included on slides 2 and 3 in the investor presentation on our website that explain the risks of forward-looking statements, the limitations of certain industry and market data included in the presentation and the use of non-GAAP financial measures. Today's discussion will contain forward-looking statements, which are based on assumptions we believe to be reasonable only as of today's date.

Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected or implied. We assume no obligation to update our forward-looking statements. Further, our earnings release, slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures are provided in the earnings release and in the appendix to the investor presentation.

I will now turn the call over to Curt Morgan to kick off our discussion.

[Curt Morgan, CEO]

Thanks, Molly, and good morning to everyone on the call. We appreciate your time and interest in Vistra during this busy third quarter earnings season. It was just five weeks ago when we last connected with you at our virtual investor event, where we laid out our capital allocation plan for the next few years and provided additional details regarding our planned portfolio transformation.

As we announced on the call, we expect to transform our generation fleet, including growing our renewable and energy storage presence, while retiring the majority of our existing coal plants, significantly decreasing the greenhouse gas emissions produced by our operations. We believe, we are our natural owner of renewable and energy storage assets given our capabilities and competitive position, and have a high degree of competence that we can generate healthy return from these assets through the same skills and methodology by which we extract significant value from our existing fleet.

We are not going to give away the value to others by entering into below market power purchase agreements, and we have the capabilities to manage the market risk.

We also own a portfolio of highly-efficient low-emitting natural gas assets that can provide reliable dispatchable power and complement the intermittent nature of renewable resources. The diversity of our portfolio enables our team to structure renewable products that can ensure reliability at an affordable price.

As we have recounted in the past, every reputable and objective study on the changing power generation landscape has natural gas playing a significant role for several years to come, especially as we electrify the economy. The most recent study by E3, a well-respected energy consulting firm, is another good example. And let's not forget, we already serve nearly 5 million retail customers, many of which are increasingly seeking to procure their electricity needs from renewable sources.

I know we did not spend as much time on our retail business during our virtual investor event in September, but it is one of the cornerstones of our business model, and we expect to prudently invest in it, as evidenced by the announcement of a highly attractive tuck-in retail business we announced today that Scott Hudson, the President of our Retail Business will discuss. Through growing retail and reducing our exposure to coal generation, we will continue to optimize our retail to wholesale match.

It is important to keep in perspective that it's going to take trillions of dollars of investment over several years for the U.S. electricity grids to meaningfully transition away from thermal resources. The current generating fleet in the U.S. was invested in over many decades. In this respects, we will play an important role in that transition, as well as provide critical reliability via our flexible gas assets.

As we have just recently spent considerable time on these topics, we plan to focus today on the very strong third quarter and year-to-date results of our integrated business. We will also provide a business update on our retail operations.

Before I turn to our third quarter results, I would be remised not to acknowledge that the country is experiencing another wave of COVID-19 cases as we enter the flu season, albeit with a lower mortality rate.

As we have said before, the health and safety of our employees is our highest priority. We have had only five cases we can trace to being contracted at work, successfully containing further spread. Vistra is dedicated to staying vigilant and focused as we continue to operate safely to keep the lights on in this unprecedented environment. We will also continue to focus on helping our communities and customers through this difficult period by making corporate donations, procuring computers for children in need, and offering payment plans and deferral programs for our customers. Just a few examples of our commitment to helping others in need. We hope all of you are also staying safe and healthy.

I'm going to start on Slide 6, where we set forth our strong third quarter and year-to-date results. In the third quarter Vistra delivered adjusted EBITDA from ongoing operations of $1,185 million which is 10% above third quarter of 2019 results despite operating through a pandemic in 2020. These higher results might appear counterintuitive, as it was in the third quarter of 2019, when the Texas market saw meaningful scarcity pricing intervals. We did not see similar scarcity pricing this summer as the hottest days fell on the weekends, and fleet performance across Texas was exceptional, exceeding what was already strong performance in the summer of 2019.

As we often reiterate, scarcity events typically have an overall limited impact on current period results, as we are usually largely hedged heading into any given summer. Rather, where scarcity pricing events can be the most beneficial for Vistra’s financial results, relates to the impact they have on forward pricing. We saw this phenomenon play out in the summer of 2019, as it was in August 2019, when the summer 2020 forwards in Texas rose meaningfully. The ERCOT forward stayed at elevated levels through the end of the year, giving Vistra several months of opportunity to hedge our summer 2020 output at attractive prices that were on average higher than the average prices realized for 2019. We're also continuing to see the benefits of our Operations Performance improvement or OP Initiative materialize.

As a reminder, our OP program is on track to deliver an incremental $100 million of adjusted EBITDA in 2020 as compared to 2019. With the benefits of our OP program combined with the Dynegy, Crius and Ambit synergies projected to reach an annual run rate of nearly $700 million by year end.

Our retail business had lower adjusted EBITDA period-over-period driven by the additional volume from Crius and Ambit acquisitions. You will recall that our retail business can generate negative EBITDA in the third quarter in periods of higher wholesale pricing due to the seasonality and power costs in Texas, which is why this incremental value drove EBITDA lower in the period. While approaches vary across companies, we do not levelize our cost of power throughout the year. Rather we flow through our actual costs while our retail pricing and revenues are relatively flat.

However, it is important to note that our retail business results exceeded management expectations for the quarter, which are embedded in our guidance as a result of stronger margins and lower sales costs contributing to our 2020 guidance raise for the segment during our September investor event. In addition, our three legacy retail brands once again organically grew residential customer counts in Texas during the course. Vistra delivered year-to-date adjusted EBITDA from ongoing operations of $2,964 million, results that are tracking ahead of management expectations for the period and solidly above 2019 results by nearly 15%, further evidence of the resiliency of the integrated model.

It was a strong performance through the first part of the year that led Vistra to raise its 2020 ongoing operations adjusted EBITDA and adjusted free cash flow before growth guidance midpoint by $150 million and $165 million respectively in September. Year-to-date, this Vistra is tracking solidly above this recently raised adjusted EBITDA guidance midpoint. And as we've mentioned before, it will be the fifth year in a row that we have exceeded the midpoint of our guidance, not exactly the kind of performance associated with the stock or the free cash flow yield in the 20s.

Today, we are reaffirming our recently raised 2020 guidance ranges as set forth on Slide 6. Though, assuming we once again successfully execute in the fourth quarter, we are expecting another adjusted EBITDA guidance midpoint be. Importantly, our financial guidance implies an adjusted EBITDA through adjusted free cash flow before growth conversion ratio of approximately 69% for the year, which supports our recently announced capital allocation plan and the anticipated significant return of capital to our financial stakeholders. We have been able to significantly exceed our original free cash flow before growth guidance midpoint and achieve this high conversion ratio even with the early receipt in 2019 of nearly $95 million of alternative minimum tax refunds that were projected in our 2020 guidance and while accelerating some planned outages in 2020, and opportunistically taking advantage of business opportunities that required a higher use of current year cash flows.

Turning now to Slide 7. Today, we are also reaffirming our 2021 guidance ranges for both ongoing operations adjusted EBITDA, and ongoing operations adjusted free cash flow before growth, which we initiated during our virtual investor event in September. We have continued to execute since that time, increasing our confidence in our 2021 guidance ranges, and further supporting our view that the upper end of the guidance ranges are achievable.

Importantly, Vistra’s fundamental analysis continues to suggest that the current 2021 forward prices in ERCOT are meaningfully discounting the probability of summer scarcity events. When evaluating all the supply and demand variables at play, we are bullish as ever regarding our opportunity to capture value in 2021.

In fact, last Monday, a random Monday in late October, the ERCOT market found itself in a period of scarcity, where prices surged to over $1,000 per megawatt hour around 7 p.m. and stayed well above $100 per megawatt hour for most of the day. These price outcomes were driven by several factors including load coming in 1,500 to 3,000 megawatts higher than predicted in the day-ahead market. Lower available thermal generation due to the post-summer outage season for most units significantly lowered renewables contribution than expected, including wind coming in approximately 13,000 megawatts lower than anticipated during the peak 7 p.m. hour partly driven by icing issues on the turbine blades and the limited contribution from solar throughout the day given the cloud cover.

Importantly, the observed strong demand levels extending into the evening hours was also a key contributor to the strong pricing we saw on Monday. As we know and have observed in other markets, the presence of strong evening hour demand does not line up well with the solar contribution profile. This mismatch between demand and the solar generation profile is an emerging trend in Texas, and it will likely be an increasing source of volatility as the supply stack evolves, volatility that Vistra's commercial team and generating assets are positioned to capture, as we have demonstrated time and time again. This is just another reminder of how quickly prices in Texas can change when intermittent renewable resources are not available.

While the value of the forward curve at any single point in time leading into the delivery year is important, what is most important to Vistra is that we are able to strategically capture value as market opportunities arise, just like we did last Monday in Texas.

Our assets and business positions offer significant levers to capture value that can be represented and captured in the forward, or it can be locked into through bilateral transactions.

We have been able to construct a realized wholesale price curve that has supported our consistent overperformance for the last 5 years. We are continuing to make progress in this regard and executing for 2021.

Looking ahead to 2022, our current expectations for the earnings power of our business are consistent with our average 2020 to 2021 view in the range of $3.4 billion in adjusted EBITDA and a conversion rate to free cash flow before growth of 65% or more. We believe we can manage our year-to-year earnings volatility within a very tight range, and we continue to have confidence in the long-term earnings profile of our business.

The market clearly does not share this view. As action on climate change accelerates in private institutions, and state and federal policymakers advance policies supporting the development of incremental renewable resources, investors are clearly questioning what this evolving landscape might mean for Vistra. In our view, it is this question that has directly been impacting Vistra's valuation. There is no justification for Vistra to trade at a 20% free cash flow yield based on the performance and financial position of the company. Free cash flow yield at these levels are generally reserved for companies in financial distress, with poor performance track records and weak balance sheets. None of this applies to Vistra.

The only explanation that seems to make some sense is that the market must expect Vistra will experience future economic distress based on the changing power generation landscape. In our view, Vistra's near-term financial performance supports a free cash flow yield at least in the low double-digits, especially when taking into account where the company's debt trades and the prospect for investment-grade credit ratings in the next year. The debt-to-equity risk premium is confounding.

Rather, if you believe in appropriate free cash flow yield for a business with a strong balance sheet and a proven track record on execution should be in the range of 10% to 12%, the recent prices where Vistra's stock has been trading would suggest that the market is assigning virtually zero equity value to Vistra's generation segments. In our view, this is a completely flawed assumption that is likely driven by the emotions of the current ESP environment as opposed to a practical and informed fundamental analysis.

The bulk of Vistra's adjusted EBITDA from its generation segments is derived from its relatively young, low-cost, highly flexible gas field generation fleet, with 2 of the lowest cost nuclear and coal plants in the country in Comanche Peak and Oak Grove, both in Texas. We believe these assets will continue to be critical resources in the markets where we operate and will continue to generate substantial free cash flow, most of which will be returned to investors. There is absolutely no way that these assets have zero equity value, and in fact, they have significant positive value.

In addition, the assumption of no value from our generation fleet extends to our investments in solar and batteries, yet standalone renewable companies are garnering lofty valuations in the markets today.

An appropriate free cash flow yield applied to the true long-term free cash flow of Vistra would produce a stock price substantially above our current trading price and at least in line with most sell-side analysts’ price targets. As long as this valuation disconnect persists, we will continue to buy back our shares.

If you turn to the next slide, Slide 8, we have set forth how we think Vistra will be able to not only compete but to lead over the next couple of decades.

Since 2016, when Vistra was first spun off from its parent as a publicly traded company, we have taken actions to build a business that prioritizes a strong balance sheet and low-cost and market-leading integrated operations with high-quality assets.

We also took a company that was 70% coal and transformed it by retiring 16,000 megawatts of coal, adding natural gas renewables and battery generation and growing our retail business by over 3 million customers, all while significantly reducing costs, improving generation performance and expanding our EBITDA at highly attractive returns, which we highlighted at our investor event.

We derive approximately 95% of our ongoing operations adjusted EBITDA from our 4 core operating segments, Retail, Texas, East and West, where we believe we have meaningful and attractive transformational growth opportunities into the future. Of that 95%, only 15% now comes from coal And we convert approximately 65% of our adjusted EBITDA to adjusted free cash flow before growth, which has enabled the return of more than $6 billion of capital to our financial stakeholders over the last 4 years.

With our expectation that we will return an average of $1.5 billion to our financial stakeholders annually, we estimate that we will return another approximately $7.5 billion by 2025 and a cumulative approximately $15 billion by 2030, with total annual returns of 15% or more projected.

As we approach our long-term leverage target of 2.5 times net debt-to-EBITDA, we also believe we are on track to achieve investment-grade credit ratings next year. The steps we have taken over the last 4 years have created a strong foundation from which we can launch our future initiatives. True to our name, we have a vision for success and a tradition of excellence. And now we have introduced our Vistra Zero brand, which will build on this vision and tradition as our zero carbon growth engine for our generation transformation.

As we look ahead to 2030, we expect we will continue on this path, evolving into a market-leading integrated business that plays a key role in powering America through its renewable transition by making prudent incremental investments in renewables and energy storage, growing our retail business and offering innovative green products and value-added services to our customers and supporting the reliability of the electric grid at affordable prices with our flexible natural gas fleet.

In fact, by 2030, we project that more than half of our adjusted EBITDA will be derived from our carbon-free operations, with 90% of our adjusted EBITDA coming from our retail business and low to zero-carbon generating assets. We believe we can grow our EBITDA over the next decade, even while retiring the majority of our existing coal portfolio, by investing only a modest fraction of our free cash flow back into the business.

We expect the majority of our free cash flow will be returned to our financial stakeholders, primarily through dividends and share repurchases. And if we allocate only $1 billion per year to share repurchases at the recent prices where our stock has been trading, we can buy back the entire market cap of our company in less than 9 years. This is all while maintaining balance sheet strength and expected investment-grade credit ratings, a pretty impressive value and growth story, if you ask me.

As difficult as it is to project 20 years into the future, as the decarbonization of the economy continues, we expect our disciplined transformation to accelerate into 2040. By 2040, we estimate at least 70% to 80% of our adjusted EBITDA will come from our carbon-free operations, including retail, nuclear, renewable and energy storage. We continue to believe that gas plants will remain a key component of the supply stack up until 2040 and beyond, initially as a base load and reliability resource and, over time, as a transition resource complementing renewables.

The playing field is changing. ESG, in particular, environmental stewardship, especially as it relates to climate change, is an increasingly important component for portfolio managers’ investment decisions, and Vistra is committed to prudently be out in front in the transformation leading a sustainable company reaching its fair and full value.

Before I turn the call over to Scott, I did want to highlight 3 new slides we included in the appendix to our investor presentation this quarter related to our broad focus on our stakeholders as part of our ESG efforts. We believe a company that prioritizes employees, customers, communities, suppliers and investors is one that will attract the best talent and retain customers and investors. Slides 15 through 17 in our appendix highlight some of our recent ESG initiatives in these areas. We will update these slides on a quarterly basis, and we hope you find them informative and helpful.

I will now turn the call over to Scott Hudson to discuss our retail business in a bit more detail.

[Scott Hudson, EVP and President-Retail]

Thank you, Curt. Turning to Slide 10, we wanted to spend some time on today's earnings call highlighting the stability of our retail business, its resiliency through the COVID-19 pandemic and our opportunities for continued growth. As many of you who have been following Vistra for some time might recall, Vistra's retail business has been a stable contributor of EBITDA since the retail market in Texas opened fully to competition in 2008.

Prior to the Dynegy transaction, which closed in April of 2018, Vistra's retail business grew solely through organic activity. And over the period from 2008 to 2017, we generated an average of approximately $800 million of EBITDA annually, even in the face of a number of volatile power price cycles, including the extremely hot summer of 2011 and the polar vortex of 2014. The Dynegy transaction that closed in 2018 expanded Vistra’s reach from a Texas-only retailer to one with operations in 5 of the top 10 competitive markets in the U.S.

Then last year, we added both Crius Energy and Ambit Energy to our portfolio of businesses, expanding the Vistra Retail footprint to 19 states in the District of Columbia, adding several new brands, high-margin residential natural gas to the portfolio and a powerful network marketing channel. Vistra's customer counts grew to nearly 5 million, and our total delivered load grew to approximately 95 terawatt hours.

In 2018 and 2019, our retail EBITDA averaged approximately $825 million. And we are currently on track to exceed our recently raised 2020 guidance midpoint of $955 million, with our 2021 adjusted EBITDA projected at nearly $1 billion. This expected performance in 2020 is particularly impressive in light of the challenges brought on by the COVID-19 pandemic during the year.

In May, we estimated that COVID-19 could potentially be a negative driver of our 2020 adjusted EBITDA of approximately $70 million due to anticipated higher bad debt expense and the anticipated impact of lower volumes on our financial results.

We now expect the impact from COVID-19 to reflect only $10 million to $15 million of higher bad debt expense in 2020, as lower business volumes during the year have been largely offset by higher residential volumes due to increased usage from the work-from-home population.

Our strong performance in 2020 in the face of the pandemic is a direct result of the numerous initiatives we implemented to help our customers through these unprecedented times. For example, we utilized our data and analytics capabilities to proactively contact customers whose usage patterns had changed due to working-from-home requirements in order to make sure that they were on the right electricity plan. These efforts resulted in higher retention rates and enhanced customer satisfaction.

We also offered payment flexibility to customers unsure of their financial future. Our experience has shown that if you help a customer through hard times, he will be a customer for life.

Importantly, TXU Energy, our flagship retail brand, continued to maintain its 5-star rating in the ERCOT market and was the top-performing major retail electric brand in each month of the third quarter.

In addition, TXU Energy has been a leader in innovation year-in and year-out, as evidenced by products like Free Nights, Free Nights and Solar Days, Free Pass and many others, all of which have been copied by our competition.

In short, our strong 2020 is proving out. Vistra Retail continues to provide stability and robust financial results for the integrated model. As we look to the future, we expect to continue to grow our portfolio, both organically and through opportunistic acquisitions.

In addition to the organic growth on the residential customer side, Vistra has demonstrated its ability to organically grow its business markets portfolio each year in ERCOT, and we have line of sight to consistent business markets growth in targeted regions outside of Texas.

We also plan to continue to strengthen our customer relationships through various value-added offerings. On that point, Vistra has been active in the cross-selling of non-commodity products and services for over 8 years. We have invested in our platform, and we have seen significant growth, with customer interest growing threefold since 2013. We currently offer services like home warranties and insurance, smart thermostat, HVAC services and a variety of solar, energy storage and green products. We offer most of these products through an asset-light partnership model, which allows Vistra to nimbly test which services resonate with our consumers without making large capital investments.

Beyond the opportunity to earn incremental EBITDA through these bolt-on product offerings, we have found that the expanded relationship results in a stickier portfolio, ultimately extending the life of our customers. As a result, we are continuing to expand the universe of value-added products we offer.

On the natural gas side, our portfolio is focused on the high-margin residential and small business segments, where approximately 1 in 4 of our Crius and Ambit customers carry a natural gas product into the fuel markets. We are exploring expanding this offering into new markets in the future.

We are similarly continuing to be opportunistic when evaluating potential M&A transactions. On that note, I'm excited to announce today that we have just executed an agreement to acquire the Texas electric retail customers of Infinite Energy and Veteran Energy. The transaction will expand Vistra's retail footprint in the attractive Texas market, where we currently derive 95% of our retail profitability. The transaction, which was executed at an estimated acquisition multiple of approximately 3.7 times is expected to close later this month. This acquisition is just another example of Vistra's ability to take advantage of our scale and market position to grow our business through attractive tuck-in opportunities.

Vistra Retail has the lowest cost structure of any major retailer in the country, and our operations are incredibly cash-efficient, dropping over 90% of our EBITDA to free cash flow.

Retail continues to be the most attractive channel for Vistra to sell its generation [light]. And after accounting for the recently announced retirements in our generation fleet, we expect we will be more than 80% matched generation to load.

We have an exceptionally strong retail business that is focused on the customer and a leader in innovation, and we will continue to leverage these capabilities as we grow.

I will now turn the call over to David Campbell.

[David Campbell, CFO]

Thank you, Scott. As shown on Slide 12, in the third quarter, Vistra once again outperformed management expectations embedded in our guidance. Ongoing operations delivered adjusted EBITDA of $1.185 billion, which was $108 million higher than the same period in 2019, with our Retail segment down $53 million, and our generation segments up a collective $161 million.

As Curt described, the positive year-over-year variance in generation was driven by higher margins in our Texas segment. The negative variance in our Retail segment was a product with higher volumes from our Crius and Ambit acquisitions during negative margin months.

You may recall from our discussions during third quarter performance last year, our plan projected negative adjusted EBITDA in our Retail segment during the third quarter. This phenomenon is a result of the seasonality of power cost in Texas where power prices are at their highest in August, driving up our third quarter cost of goods sold, whereas retail customer prices are generally at more consistent levels through the year. This negative third quarter margin is offset by higher gross margin in the first, second and fourth quarters.

Year-to-date, Vistra's ongoing operations adjusted EBITDA is $2,964 million or $346 million higher than our comparable 2019 results. The favorability is driven by the acquisitions of Crius and Ambit, our operations performance improvement initiatives and higher energy margin, primarily in our Texas segment.

With 3 quarters of outperformance relative to management expectations for the year, Vistra is tracking solidly above its recently raised adjusted EBITDA guidance midpoint for 2020.

This quarter, we are also reporting our financial results in accordance with our new segments. Of note, the new Sunset segment includes plants that have announced future retirement dates, providing transparency into the contributions and potential liabilities from those facilities, and more importantly, separating their financial results from our longer-term assets and businesses. Once the Sunset assets retire, it will be moved into the Asset Closure segment.

When evaluating the best path forward for these plants, Vistra explored a potential sale. However, the bid-ask spread on the closure cost was [too great], as buyers were generally too conservative due to relative lack of experience and the transactional requirements were too complex. In the end, we determined that Vistra is better equipped to handle the wind-down of these assets as we have significantly more experience in the process than most others. We can manage the retirement of the assets without taking a significant hit to value, while benefiting from the cash generated from the leased facilities prior to their retirement.

Once the assets are retired, Vistra has had very good success in divesting some of these facilities in associated closure liabilities to third parties. In addition, retiring the assets, as opposed to selling them, has a greater impact on Vistra's greenhouse gas emission reductions, as selling the assets would similarly reduce our baseline. It is better for the company and for the environment for Vistra to take the action to retire the plants.

Turning now to Slide 13. Vistra remains committed to reducing our leverage in 2020, as we approach our long-term leverage target of 2.5 times net debt-to-EBITDA. As of September 30, we have paid down approximately $1,150 million of debt this year, including the repayment of all outstanding borrowings under our revolving credit facility, which totaled $550 million as of the end of the second quarter, as well as the redemption of all of the remaining senior unsecured notes issued by Vistra Corp.

Last week, we also announced that our Board of Directors approved a fourth quarter dividend of $0.135 or $0.54 per share on an annual basis, which represents an 8% increase from the annual dividend we paid in 2019.

With respect to credit ratings, shortly following our September virtual investor event, we received an upgrade to BB+ by S&P ratings, which also maintained its positive outlook. This upgrade positions Vistra to one notch below investment grade. And of note, all 3 credit rating agencies, Moody's, Fitch and S&P have Vistra on positive outlook. As a result, we expect that a potential upgrade to investment-grade is achievable before the end of 2021.

In furtherance of our commitment to maintain a strong balance sheet, our capital allocation plan for 2021 and '22 calls for incremental debt reduction of approximately $550 million over the 2-year period, while the bulk of our free cash flow of more than $2 billion is expected to be returned to our shareholders through dividends and share repurchases.

As it relates to the dividend, it is our intention to increase our dividend by approximately 8% in 2021, at the high end of our expected 6% to 8% annual growth rate. In 2022, we anticipate a step change increase in the annual dividend to $0.76 per share. Both of these increases will be subject to Board approval at the appropriate time.

Our recently announced $1.5 billion share repurchase program begins on January 1st of next year and replaces any repurchase authority that remains outstanding under our existing programs as of the end of this year.

The last component of our 2021 and 2022 capital allocation plan is to grow our business through investments that have attractive return profiles and support our continued retail growth or expansion into zero-carbon resources.

We expect we will allocate approximately $1.15 billion of capital to transformational growth investments over the next 2 years, which includes capital for our previously announced Moss Landing and Oakland battery storage projects as well as our recently announced Texas Phase 1 renewable and storage development projects. These investments exceed our threshold of 500 basis points to 600 basis points above our cost of equity and are consistent with our strategic transformation plans.

Vistra's track record of delivering on our financial commitments, combined with impressive conversion of adjusted EBITDA to adjusted free cash flow before growth, supports our ability to maintain a strong balance sheet on both investing in our business and returning a significant amount of capital to our shareholders.

Our strong performance year-to-date in 2020, in the midst of a global pandemic, is further evidence of the resilience of our integrated business model. We remain optimistic that with the ongoing successful execution of our business plan, our stock price will ultimately reflect its fundamental value.

I would now like to turn the call back over to Curt to make a few remarks on the election.

[Curt Morgan, CEO]

Thanks, David. And Scott, thank you as well. So not much to say at this point. I think most of you have been following the election and things look pretty tight, too tight to call. Of course, it's going to be interesting to see whether we'll have divided government or whether we will have a single-party control. That, of course, would end up being the Democrats, because it looks like the house will go to the Democrats.

The point that I'd like to make about the election is that -- and we've said this before, that we feel like we can be successful under any administration. We're an apolitical entity. We have friends on both sides of the aisle. We've worked very well with both Republicans and Democrats. And we, of course, studied, like most of you have, where the policies might go and feel like we can benefit under either administration. So we look forward to working with whoever the administration is and with whatever the Congressional makeup ends up being. And we feel like we can make progress under either administration, and however Congress gets set up.

So it's a little too early to tell on this, as you guys know. This could drag out for a while as well, given what we're seeing. But we believe that Vistra is well-positioned under either control administration by Democrats or Republicans.

So with that, operator, we'd like to open it up for Q&A.

[Operator]

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

[Shahriar Pourreza, Guggenheim]

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

[Curt Morgan, CEO]

Good question, Shahriar. So, we are seeing these types of opportunities come up. What can happen is, and what we typically do through our M&A team, as we will reach out to entities like this, and in some cases we'll reach out and say, are you interested in exiting the business? And in other cases, they may be looking to exit. We happen to know a couple of the principals. And we actually do the supply -- we actually do their supply right now for Infinite. So, we have a relationship, an existing relationship. And I think when they decided that it was time for them to do something different, they of course looked at us as one of the top candidates for buying their business. So, this one, I think, came to us a little bit different. But we have an active process where we are reaching out to some entities. And then again, some will reach out to us.

And there are, I'd say, a few of these, it seems like all the time. And some of which we are able to sign a deal with and some that we are not. So, I would expect that this can continue. And they're just -- they're smallish in nature, but they add up over time.

[Shahriar Pourreza, Guggenheim]

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

[Curt Morgan, CEO]

Yes. So, October has turned out to be a pretty decent month for us on the retail side of the business, although we're still closing out things. But there's a potential that we -- the weather was decent, and we still have to take a look at what the final tally looks like, but it could be in a favorable position.

And we've also -- as you know, we were pretty well hedged on the wholesale side throughout the year at some reasonably good pricing. So, I think that we also go into things a little bit, as you might expect, because we don't know exactly what's going to happen with weather. And our retail business actually does well in these shoulder months, that we tend to go a little conservative even when we revise our guidance. And I think what's showing is that we're more on target with where we thought we would end up being. Plus I think we may see a little better October.

All of that is beginning to give us more confidence. This is just a situation where our confidence is growing around getting somewhere above the midpoint and heading towards the upper end of that range. And that's simply what it is. But I think October also may end up being a favorable month. Again, we don't want to get too far ahead of ourselves because we haven't closed out the books yet.

[Shahriar Pourreza, Guggenheim]

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

[Curt Morgan, CEO]

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

[Shahriar Pourreza, Guggenheim]

Yes, exactly. No, it's okay.

[Curt Morgan, CEO]

In '21, so that's a little bit different. I apologize for that. In '21, I mean, I alluded to this in my comments that there's -- our business position and assets do offer us option value. And the market, depending on whether you're short or long, or where your book is positioned, people look at our business position and they see value for them and we see value in our business. And we're able to either transact in the forward. Sometimes, the forwards recognize scarcity. And sometimes, they recognize the value that's embedded in our assets and you can use that to hedge. Sometimes, like right now, it's not fully reflected in the forward curves, but that value is still there and you can capture it on a bilateral basis.

And so I think what we're seeing, though, is in the market, that the value in our portfolio is there. It's just a matter of how do you want to transact and capture it. And we're seeing that value and we're realizing some of it. And we feel like that gives us a lot of confidence that ultimately '21 will turn out to be a year where we can get to the midpoint or even better than that.

So, it's just really what you see in the marketplace. And it's not always -- I try to tell this to people, the forward curves are not the end of the all, especially as you get out beyond a year where they are thinly traded and they're not very representative. Have we gone back and marked our book to the forward curves 5 years ago, we would be coming in with EBITDA over that 5-year period at less than $3 billion. But that's not how it ended up. And so you got to be very careful about just choosing the forward curves. I know it's an easy thing. And I know it feels right for people to do it. But that's why we invest a bunch of money to try to analyze and model and understand the fundamentals of our business. And I know people get worried about models and all that. But for us, we have to do that along with the forwards and understand -- to understand really the value of our business. And for '21, we think there's a lot of value that's not reflected in the forward curves and there are multiple ways to realize that value.

[Operator]

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

[Julien Dumoulin-Smith]

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

[Curt Morgan, CEO]

Yes. So I'll take a shot at that. And David or Jim -- Jim Burke is on here with us, if you guys want to add to it. But in terms of the Phase 2, I'm thinking that, that is probably more a '21 -- later '21 type event where we would talk about that. We still have to -- we still have a significant pipeline of things that we announced in Phase 1. We haven't decided exactly when we would come out with our Phase 2 details, but I would guess it's more of a '21 event.

In terms of tax appetite, of course, tax appetite is going to be somewhat driven by the election and where tax rates go. But we -- what we do is we look at the present value of the tax benefit relative to what the cost is of bringing in tax equity. And what we have found so far, Julien, is that we still have a tax -- we still have an appetite. Depending on where prices go, so we look at it both using our point of view, our fundamental modeling, as well as market, and when we become taxable, does affect the NPV of those tax attributes. But in all cases, we have an appetite for tax attributes because we will ultimately become a taxpayer after we run through the NOLs. And of course, you know that we have this unique TRA payment that actually will kick in before federal taxes will. And so we also look at that because that helps us defer the TRA payment as well. And that also affects our appetite for the tax attributes of renewables.

So it's going to be a little bit fluid just because we don't know exactly what tax rates are going to end up being. But under -- whether it's today's tax environment or something different, we still continue to have tax attribute -- or excuse me, appetite. And we believe we will continue to have that even into our Phase 2 build-out.

Does anybody, David or Jim want to add anything to what I just said?

[David Campbell, CFO]

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

[James Burke, COO]

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

[Julien Dumoulin-Smith]

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

[Curt Morgan, CEO]

Yes, we are. We are. I think, Julien, we see what everybody sees in terms of where the world is going. And I don't think that the ESG world is going to change in the next couple of years. And we want to be a part of that transition. And we also believe that we have the projects, the capabilities and understanding the markets to be able to invest and to generate very good returns.

Of course, we always will look, at any given time, if something were to change, then we would obviously let you guys know that. And I'm not saying that we can't change. We're not stubborn about it. But we still see opportunity, and we haven't seen anything to change our view on the long-term fundamental view of markets that we have today and then our ability to create value from investment.

We think a quarter of our free cash flow makes a lot of sense to reinvest in the business. But as we have said before, if we begin to see a market environment where we don't believe that we can generate the kind of returns that we think we can, then we will return that money to our shareholders. But at this point in time, we feel like we can continue to do that.

And I think one of the things that really is underappreciated, in my mind, is that there is going to be a supply response to newbuild. There was a supply response when combined cycle plants came into the market, and there were a number of retirements in coal plants and higher heat rate gas and oil units. And that's going to continue to happen in these markets as you bring on new technologies. And I think that's largely being ignored. And we certainly are a company that has had to make the hard decisions, and I expect we will continue to do that. But I do believe that this country's generation landscape is going to change significantly. And there's absolutely no reason why Vistra cannot be a part of that.

I also believe that you have to have a return on that investment in order to get people to do it. You can't just invest in renewables and say, okay, well, it's zero marginal cost. So now we're going to have free power forever. There has to be a mechanism, a pricing mechanism that incentivizes people to invest. And if we're going to spend trillions of dollars in this country to invest, there has to be a price clearing point that allows that to happen. You can't just invest and then go to zero marginal cost. Zero marginal cost doesn't work in the long run to support an industry. And so if you believe in economic theory, like I do, ultimately, pricing is going to settle at a point where people can get a return of and on investment. And that's why we're encouraged by it. And we'll watch that.

There are periods of time in all competitive markets where markets can get oversupplied. And then there's times when they get tight and they're undersupplied. I am certain that is going to happen. But there will also be a supply response when there is an oversupply, and that will bring markets back to equilibrium.

[Operator]

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

[Steve Fleishman, Wolfe Research]

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

[Curt Morgan, CEO]

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

[Steve Fleishman, Wolfe Research]

$13 million is the price paid or the EBITDA?

[Curt Morgan, CEO]

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

[Steve Fleishman, Wolfe Research]

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

[Curt Morgan, CEO]

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

[Steve Fleishman, Wolfe Research]

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

[Curt Morgan, CEO]

Yes. Look, that's why I get paid the big buck, that's the tough decision, right? I mean, I don't know where the stock is going to go. I do -- there's obviously the famous CAPM, which would tell you that our cost of capital is much lower than where the free cash flow yield is, right? But we don't invest in anything anywhere close to what a CAPM model would tell you where we should be. And I won't say, though, that every investment -- although there are some that we have done, that every investment has a 20%-plus return either. And I do believe that we believe -- you know this, since you've covered us, we've been at 15% free cash flow yield. It just so happens that we're up in the 20s right now. But we typically would be in excess of that 15%. But it is something that we have to look at. This is why I believe that we are trying to take a balanced approach and actually one that errs on the side of returning more capital and buying back our shares, more so than reinvesting in the business, and it's something that we're going to have to follow.

But then you know this because you've asked me this question, a sustainable 20% plus free cash flow yield has far-reaching implications well beyond whether we invest in solar projects or not. It has a lot to do with, can this company get a reasonable free cash flow yield for the kind of company that it is in the public market setting? And the management team and the Board, over the next couple of years, is going to have to wrestle with that. But there is no easy way out either. It's not easy just to go private either. I know how money is made there, too. And that's no panacea. But at the end of the day, we are going to search, as much as we possibly can, to find a way to get the full and fair value of this company. And I think part of that is investing in the changing technology on the generation side. But we absolutely have to do that in a prudent fashion. And your point is a fair one, and one that we have to wrestle with. And I think we try to balance that. But we've been investing in what we believe are compensatory type returns given where we are.

[Operator]

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

[Curt Morgan, CEO]

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

[Operator]

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