Vistra CEO: New Build In ERCOT "Inexplicable", Won’t Wait On Others To Be First Movers On Retirement
March 31,2017
During an earnings call yesterday, Vistra CEO Curt Morgan called the decision for investors to continue new build in ERCOT, "irrational," and said Vistra would not wait for others to be the first movers on retirement if Vistra cannot justify continued operation of its legacy coal plants in the current environment
Vistra Energy is the parent of TXU and Luminant
Morgan noted that ERCOT continues to see announcements for the development of new natural gas-fueled generation projects in 2017 and beyond.
"Any decision to build a new thermal generation asset in ERCOT is inexplicable in our view, as any such asset would be uneconomically developed in the current market price environment," Morgan said. "The equity of recent new builds in ERCOT is completely out of the money, and for certain assets, even the debt investments are challenged."
However, "so long as financial market players are not willing to bring discipline to their investment decisions, ERCOT could remain in an overbuild situation," Morgan said
"Since restructuring of power markets began in the late 1990s, and I went back and tried to find one of these, we are hard-pressed to find a single merchant plant investment where the original equity investment owner received an adequate return, and many suffered catastrophic financial distress. And in particular, if you think about an energy-only market like ERCOT, just the difficulty in being able to get an initial return on that equity investment is quite difficult," Morgan said
"It seems to us that the primary beneficiaries of the new power plant investment that's occurred over that time period has been the equipment manufactures and developers, with a flawed model of paying developers on the front end, and not forcing them to earn their value over time just like equity investors. We think there needs to be a change in that model in our sector, to make sure that we have a disciplined sector over time," Morgan said
"Assuming that the irrational behavior that we just discussed in new investment doesn't continue, we should start to see tightening of the ERCOT market, particularly as older more challenged assets begin to retire in the coming years. We believe there is up to at least 9 gigawatts of coal-fueled generation that might not be able to survive in this market environment, potentially including Luminant's legacy coal plants: Big Brown, Martin Lake, and Monticello," Morgan said
Morgan said Vistra will potentially need to make "difficult decisions" around the future operations of its three legacy coal plants.
"I can't sit here and talk about the irrational behavior of investors and not also address the fact that we need to be rational as owners of power plants. We will not continue to operate assets that we believe are out of the money, merely in the hopes that we might see a market recovery. And we're not going to wait for somebody else to be the first mover," Morgan said
"If we cannot find a way to keep plants running in an economic fashion, we will make the right decisions," Morgan said
"I want to stress that any analysis we do is on a plant-by-plant basis and it is solely focused on the profitability on an individual plant basis. And what we look at is obviously EBITDA contribution, and we also look at basically cash flow from the facility. ERCOT being an energy only market with $9,000 per megawatt-hour price caps, you can be lured into the idea that: 'we'll just wait around and within one summer we'll make a bunch of money on a lot of capacity by having some plants around,'" Morgan said
"And so, our analysis really is around what do we think the frequency of that might be, but more important is, we look at our excess length in ERCOT that is only in the money, or largely [in the money], in the summer months, we look at those as options. And then what we look at is: can we get the strike price of those options, effectively the fixed costs of those plants, down to a level where we feel comfortable keeping them in the portfolio during the trough and that we can then get disproportionate returns in an energy-only market during the tightening in the marketplace," Morgan said
"And so, when we take that into account, just what are the current here-and-now cash flows and EBITDA contribution combined with how low can we get the cost structure down to get the strike price, if you will, of the ongoing fixed cost nature of that to the lowest it can be: does it have a reasonable chance given what we think the probability that we will see tightening in the market, does it have a reasonable chance of making money," Morgan said
"I will just tell you that I think in this market, right now, that’s a very difficult proposition for some of our coal plants, but we are in the middle of trying to get that strike price down as low as we can before we make that final decision, and we will probably be wrapped up on that in the middle, probably more toward the end of the summer, and you should expect that we will have some decisions around our legacy coal plants that we will communicate with the market in 2017," Morgan said