Favorable Energy Markets Lift Vistra’s Near-Term Outlook

Business Strategy & Outlook:

Vistra Energy’s emergence from the Energy Future Holdings bankruptcy in 2016 has been a success for the most part. The company has produced solid returns through volatile commodity markets while shifting its business mix toward retail and clean energy. The only significant bump in the road has been winter storm Uri that hit Texas in February 2021, causing more than $2 billion of gross losses. As an independent power producer and retail energy supplier, Vistra has a much different risk profile than most utilities. Vistra is subject to the whims of the U.S. electricity and natural gas markets. Energy market volatility and excessive leverage led EFH into bankruptcy just seven years after several high-profile investors closed a $45 billion leveraged buyout, the largest ever at the time. Even Warren Buffett reportedly lost nearly $900 million in the deal. Vistra’s clean post-bankruptcy balance sheet allowed it to acquire Dynegy in 2018 for $2.27 billion, more than tripling the size of its generation fleet and introducing Vistra to power markets outside Texas, notably the Midwest and Northeast. The rock-bottom price Vistra paid and cost synergies have made the deal value-accretive.

Vistra produces substantial free cash flow before growth, given minimal core investment needs. Management is expanding the retail energy business to hedge its wholesale generation market exposure and is investing in clean energy projects like utility-scale solar and batteries. We expect this strategy to continue as Vistra tries to dilute its fossil fuel exposure. Retail supply earnings could climb to one third of consolidated earnings on a normalized basis after Vistra’s recent acquisitions and continued customer growth. This could result in more stable cash flows, a durable dividend, and regular share buybacks if management executes its strategy. Vistra’s largest shareholders, notably Brookfield and Apollo, were creditors as Vistra went through bankruptcy. Both started exiting their positions in 2018 and 2019, and we expect that selling to continue.

Financial Strengths:

After the setback from the Texas winter storm losses in February 2021, Vistra’s quest to earn investment-grade credit ratings and reach 2.5 net debt/EBITDA stalled. However, the company remains in a solid financial position with plenty of liquidity. Management has shifted its focus toward returning capital to shareholders through stock buybacks and dividends rather than achieving investment-grade credit ratings immediately. Vistra’s $2 billion preferred issuance in 2021 with an 8% dividend floor all but ensures it will take several more years to earn investment-grade ratings. We think Vistra generates enough cash flow to execute management’s five-year, $6 billion stock-repurchase plan and dedicate $300 million annually for the dividend. However, we consider this a base plan that could change if Vistra sees small acquisition opportunities or needs financial flexibility to handle a downturn. The board authorized a $2 billion share-repurchase plan in late 2021, replacing a largely unused $1.5 billion plan from 2020. We also expect Vistra to invest nearly $2 billion in clean energy projects during the next few years. The combination of stock buybacks and a $300 million annual allocation to the dividend means the dividend could top $1.00 per share by 2025, up from $0.50 when the board initiated the dividend in 2019 and surpassing management’s initial 6%-8% annual growth target. Vistra exited bankruptcy in 2016 with just $4.5 billion of medium-term debt. Consolidated debt grew to $11 billion after the 2018 Dynegy acquisition before Vistra began reducing its leverage.

Bulls Say:

Vistra’s debt reduction in 2019-20 gives it financial flexibility to repurchase stock, raise the dividend, and invest in growth projects in 2022 and beyond.
Despite a recent surge in gas prices, Vistra’s relatively new, efficient gas fleet allows it to earn higher margins than its peers with older, less-efficient power plants.
The retail-wholesale integrated business model reduces risk and market transaction costs, allowing Vistra to be a low-cost provider, especially in its primary Texas market.

Company Description:

Vistra Energy emerged from the Energy Future Holdings bankruptcy as a stand-alone entity in 2016. Vistra is one of the largest power producers and retail energy providers in the U.S. It owns and operates 38 gigawatts of nuclear, coal, and natural gas generation in its wholesale generation segment after acquiring Dynegy in 2018. Its retail electricity segment serves 4.3 million customers in 20 states. Vistra’s retail business serves almost one third of all Texas electricity consumers.

(Source: Morningstar)

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