| The U.S. and Texas flags fly in front of high voltage transmission towers on Feb. 21 in Houston, Texas. Millions of Texans lost power when winter storm Uri hit the state and knocked out coal, natural gas and nuclear plants that were unprepared for the freezing temperatures brought on by the storm. Source: Justin Sullivan/Getty Images |
Shares of the largest power generator in Texas plunged Feb. 26 as markets seemed taken by surprise by Vistra Corp.'s disclosure of a financial hit as large as $1.3 billion from the recent Arctic freeze.
In a Feb. 26 premarket earnings release, Vistra management disclosed a preliminary estimate of a one-time adverse financial impact in the range of $900 million to $1.30 billion.
The company's stock opened down more than 17% on Feb. 26 and was trading down roughly 22% in heavy volume in afternoon trading, hovering around $17.70.
"I can assure you that there isn't anybody more disappointed than us, and it's disappointing to me, that we let you down," Vistra CEO Curtis Morgan told analysts and investors on a conference call.
"I am convinced that this is not a liquidity crisis for this company," the CEO added. "This is a short run-material hit. We took a body blow, but I also believe that we will come back out out of this and move forward with strength."
Vistra said it expects the Arctic blast that swept through Texas the week of Feb. 15 "will have a material adverse impact on its financial results driven by generation output being constrained due to challenges with receiving a steady supply of fuel for some plants as well as challenges with handling fuel already on site given the freezing conditions."
The week prior, Irving, Texas-headquartered Vistra on Feb. 17 disclosed that only about 1,000 MW of its more than 19,000 MW of generation was offline during the energy emergency. But despite its fleet's strong performance, the company was unable to avoid skyrocketing prices for power and fuel.
"The biggest challenges to our plants throughout the storm were securing adequate natural gas supplies for our gas plants and the handling of frozen fuel at our coal plants," Vistra wrote in a Form 10-K. "Despite these challenges, we estimate that our fleet generated approximately 25[%] to 30% of the power on the grid during the height of the outages, as compared to our approximately 18% market share."
"The problem was we had a mismatch when they locked the system down between megawatts and load," Morgan told analysts and investors. "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."
Vistra said it had to procure power in the Electric Reliability Council Of Texas Inc. market "at prices at or near the price cap [of $9,000/MWh] to meet its supply obligations."
Vistra's earnings call focused primarily on the Texas energy emergency, during which Morgan explained that the company was "scrambling to get gas" as prices "shot through the roof."
"But the one thing we know we need to do is serve customers, stabilize the grid, and then we will sort it out later," Morgan said. "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? How could we have played this differently?' And I think those decisions, as I play them over and over again, were right."
The CEO added that the company, which also owns a large retail portfolio in Texas, could not have prepared for the historic weather event.
"I know this event obviously shakes people because we ended up being short," Morgan said. "It was because of things that we did not, could not have planned for."
What went wrong?
One day earlier, Morgan and NRG Energy Inc. President and CEO Mauricio Gutierrez appeared before Texas lawmakers to discuss system failures during the deadly winter storm.
The Vistra CEO told lawmakers on Feb. 25 that the story was "the failure of the gas system to perform" through the entire supply chain as wellheads and pipes froze up.
"[T]here wasn't enough gas to inject into the pipelines," Morgan said on the Feb. 26 call. "[O]ne of the biggest things that happened is that the [transmission and distribution utilities] 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.
"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."
Morgan added that it "took the balance of the week to get gas restored."
"[W]e cannot let the gas system fail again, and it did," Morgan said. "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."
Vistra also disclosed that it lost its 1,710-MW Oak Grove Project in Robertson County for about a day and a half as coal piles turned into "chunks of ice" and rails "froze up."
"Now why does that matter? Well, it matters a lot because Oak Grove has about $5 [per MWh] cost structure as opposed to having to essentially replace it with gas at hundreds of dollars in MMBTU," Morgan said. "Now, we got it back. That was a good thing, but we lost for about a day and a half. That was a lot of money that we lost."
Vistra and NRG are believed to have had the most exposure to generation outages during the week of Feb. 15 in ERCOT, given their large generation fleets in the state. Between Feb. 12 and Feb. 24, Vistra shares were up 12%, compared to declines for other power and gas providers with Texas exposure, in an apparent sign of market confidence in Vistra.
As fully integrated power providers, NRG and Vistra also own large retail electricity companies in Texas. Vistra has a "long" position, with more generation in Texas than retail load, while NRG has more retail load than generation.
"[T]his 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," Vistra President and CFO James Burke said Feb. 26. "And that's where we were long. We had an ability to capture this, but you're long if you get the fuel. If you don't get the fuel, you're short."
Market reforms
Morgan's comments joined other executives of power providers and investor-owned utilities who have been calling for market reforms in Texas since the crisis.
"I still believe the basic tenets of a very good market are here," Morgan said, adding that reserves have to be "in my mind, the number one emphasis."
"But I also think that we have to take a hard look at the balance between ... the competitive markets and reliability," the CEO said. "And I think that puts a lot of things on the table. [It] 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."
Exelon Corp. President and CEO Christopher Crane said the future of the company's fleet and retail business in Texas could depend on potential electricity market changes.
"[Y]ou don't get compensated to do what we've done in other jurisdictions hardening the plants that have not only penalties but capacity payments that allow you to make those investments," Crane said on a Feb. 24 earnings call. "We want to participate in a market that's designed to not only protect the consumers ... but allow[s] us to make the investments and operate our plants safely and reliably."
Sector impacts
NRG has yet to disclose its financial impact from the February blackouts and price spikes. The company pushed the planned release of earnings results to March 1.
"The bigger picture ramifications cannot be ignored that the agencies and investors are likely to give up on viewing this as an [investment-grade] sector," CreditSights analyst Andrew DeVries wrote in a Feb. 26 research report.
The analyst noted that "commodity price risk is one thing" and can be addressed at Vistra with low leverage.
"Adding in completely unknown volume risk with plant availability risk that combined can flip one from a seller of the commodity to a buyer of the commodity is an entirely different and larger risk," DeVries wrote.
CreditSights on Feb. 23 downgraded NRG bonds to "underperform" from "market perform" based on concerns about the company's recent performance and lack of transparency.
NRG, headquartered in New Jersey, operates more than 10,000 MW of coal, gas and nuclear generation in Texas, according to S&P Global Market Intelligence data.
Unit 1 at the company's 2,560-MW South Texas Project, a nuclear plant, was believed to have been offline for two days during the historic weather event.
Meanwhile, Vistra was seen as a "clear beneficiary" from the market movement, with the company reported to be offering to take on customers from other retailers in Texas and signaling that its retail customers were largely unscathed by price spikes.
"It's an unfortunate thing because billions of dollars changed hands in a week," Morgan said. "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."