Vistra Corp. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Vistra operates an integrated U.S. electricity generation, wholesale, risk-management and retail business. Unless noted, dollar amounts are in millions. The Dynegy merger closed April 9, 2018, so prior-period comparisons do not include Dynegy for the full comparable periods.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $2,832 | $2,574 | $5,755 | $3,338 |
| Operating income (loss) | $729 | $231 | $1,218 | $(164) |
| Net income (loss) | $354 | $105 | $578 | $(201) |
| Net income (loss) attributable to Vistra | $356 | $108 | $581 | $(198) |
| Diluted EPS | $0.70 | $0.20 | $1.15 | $(0.41) |
| Adjusted EBITDA (non-GAAP) | $692 | $658 | $1,494 | $899 |
Q2 operating margin was approximately 25.7% versus 9.0%; net margin was approximately 12.5% versus 4.1%. These GAAP results include substantial commodity derivative mark-to-market effects: consolidated unrealized gains included in operating revenue were $538 million for Q2 and $697 million for the first half. Adjusted EBITDA excludes these unrealized effects and is a non-GAAP measure.
- Revenue and earnings: Q2 revenue rose about 10%, and net income increased $249 million. For the first half, revenue increased $2,417 million and net income improved by $779 million; comparisons are significantly affected by Dynegy’s inclusion in 2019 but not the full 2018 periods.
- Cash flow: First-half operating cash flow was $882 million, compared with cash used of $29 million in 2018. Investing activities used $399 million; financing activities used $170 million. The filing attributes much of the operating cash flow improvement to acquired operations and increased cash from margin deposits.
- Debt and liquidity: At June 30, total long-term debt, including current maturities, was $11.354 billion; the receivables securitization balance was $430 million. Cash and cash equivalents were $964 million. Reported available liquidity was $3.137 billion, including $2.173 billion of available revolver capacity.
- Capital returns: First-half share repurchases were $448 million and dividends paid were $120 million. The quarterly dividend was $0.125 per share; $524 million remained under the share-repurchase authorization at June 30.
Material changes and management commentary
- Management said Q2 results were as expected, citing strong retail margins and safe, reliable operation of a largely hedged generation fleet. Q2 Adjusted EBITDA rose $34 million; first-half Adjusted EBITDA rose $595 million, with the latter comparison also affected by the merger and added segments.
- Management refinanced approximately $2.9 billion of debt in Q2 and approximately $4.2 billion during the first half, aiming to lower interest costs and extend maturities. First-half interest expense and related charges rose to $495 million from $137 million, including increased noncash mark-to-market losses on interest-rate swaps and debt assumed in the merger.
- Management’s stated objective is to reduce consolidated net leverage to approximately 2.5x net debt/EBITDA. It said current forecasts indicated sufficient liquidity for anticipated cash needs for at least 12 months, while noting that operating cash flows are seasonal and weighted toward the second half. This is not formal earnings guidance.
- At June 30, ERCOT exposure was reported as 98% hedged for natural-gas price risk and 95% for heat-rate risk for 2019; corresponding 2020 levels were 100% and 70%. Hedge coverage varied by other market and year.
Outlook, transactions, risks and unusual items
- Crius acquisition: Closed July 15, 2019, after the reporting period; its results are not included in this quarter. Vistra paid approximately $400 million, including $380 million for trust units, using cash on hand and assumed approximately $111 million of net debt. Purchase accounting was incomplete at filing. Management cited approximately 11.6 TWh of annual Crius load and expected improved generation-load matching and retail growth opportunities.
- Commodity and counterparty exposure: Earnings are sensitive to power and fuel prices, heat rates, weather, hedging outcomes and collateral requirements. Q2 earnings included large unrealized commodity gains; derivative fair values and cash collateral can fluctuate. Management reported VaR average of $368 million and high of $520 million for the first half, versus $182 million and $267 million, respectively, for 2018, primarily reflecting higher ERCOT volatility.
- Environmental and legal matters: The filing describes potentially material uncertainty around emissions, coal-ash/groundwater and other regulatory matters, including possible compliance costs, capital expenditures or plant retirements. Gas-index pricing litigation and the Wood River rail arbitration could materially affect results or liquidity, though outcomes and cost ranges could not be estimated. FERC’s July 2019 order resolved the MISO auction investigation in Dynegy’s favor, subject to possible rehearing or appeal.
- PG&E: PG&E filed for Chapter 11 in January 2019. Vistra warned that rejection or nonperformance of relevant contracts, including the approved Moss Landing battery resource-adequacy contract, could cause impairment or higher fuel-transport costs. Vistra had accumulated approximately $15 million in Moss Landing construction work-in-process and expected commercial operation by Q4 2020.
- Tax Receivable Agreement: The recorded obligation was $384 million at June 30, while estimated undiscounted payments were approximately $1.3 billion over the agreement’s life. The carrying amount depends on taxable-income and other assumptions.
- Other unusual items: First-half income benefited from $36 million of net Tax Receivable Agreement impacts. Q2 included a $7 million debt-extinguishment gain; the first half included a $10 million debt-extinguishment gain. The company reported no material change to its previously disclosed risk factors.
Important facts for investors to verify
- How much reported profit and revenue growth reflects realized operating performance versus unrealized commodity and interest-rate derivative valuations.
- Whether operating cash flow is sustainable after considering seasonality, margin deposits and working-capital movements.
- Debt and liquidity after Q2 refinancing, July debt redemptions, the Crius acquisition and ongoing capital returns; also monitor covenant and collateral requirements.
- The final Crius purchase-price allocation, integration results and realization of expected benefits.
- Developments and potential costs in environmental matters, litigation and PG&E-related contracts, for which some outcomes and exposure ranges are not estimable.