Vistra Corp. quarterly report, Q2 FY2020

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Vistra Corp. 2020 Q2 Form 10-Q Summary

Business context and reporting period

Vistra operates an integrated U.S. retail electricity and natural gas business and power-generation fleet across six reporting segments. This unaudited report covers the three and six months ended June 30, 2020, compared with the same 2019 periods. Results include Ambit from its November 2019 acquisition and Crius from its July 2019 acquisition; therefore, comparisons include acquired operations not present in the full prior-year periods. The company changed its name from Vistra Energy Corp. to Vistra Corp. effective July 2, 2020.

Financial results and position

  • Second quarter: Revenue was $2.509 billion, down 11% from $2.832 billion. Operating income was $377 million versus $729 million; net income was $164 million versus $354 million. Net income attributable to Vistra was $166 million versus $356 million, reflecting a noncontrolling-interest loss. Diluted EPS was $0.34 versus $0.70.
  • First six months: Revenue was $5.367 billion, down 7% from $5.755 billion. Operating income was $766 million versus $1.218 billion; net income was $209 million versus $578 million. Diluted EPS was $0.45 versus $1.15.
  • Margins: Operating margin was approximately 15.0% in Q2, versus 25.7% a year earlier; first-half operating margin was approximately 14.3%, versus 21.2%. Net margin was approximately 6.5% and 3.9%, respectively, compared with 12.5% and 10.0% in 2019.
  • Adjusted EBITDA: $916 million in Q2, up from $692 million; $1.749 billion for the first half, up from $1.494 billion. This non-GAAP measure excludes, among other things, derivative mark-to-market changes and specified unusual items; it should be considered alongside GAAP results.
  • Cash flow: First-half operating cash flow was $1.309 billion, versus $882 million. Investing cash use was $653 million, including $588 million of capital expenditures; financing cash use was $698 million. Cash, cash equivalents and restricted cash ended June at $433 million, including $382 million of unrestricted cash.
  • Debt and liquidity: Long-term debt, including current maturities, was $9.598 billion at June 30, down from $10.379 billion at year-end. The company also had $550 million in revolving-credit borrowings and $450 million outstanding under its receivables securitization program. Reported available liquidity was $1.669 billion: $382 million cash plus $1.287 billion of revolving-credit capacity. The company was in compliance with its applicable leverage covenant.
  • Other balance-sheet items: Total assets were $26.307 billion and total equity was $8.044 billion. The Tax Receivable Agreement obligation was $469 million; estimated undiscounted future payments were approximately $1.4 billion.

Changes versus the prior comparable periods

  • GAAP earnings declined substantially, principally because the prior-year periods included much larger unrealized commodity-hedging gains. Management cited a $519 million unfavorable year-over-year change in unrealized hedging results for Q2 and a $580 million unfavorable change for the first half.
  • Retail Adjusted EBITDA rose to $401 million in Q2 from $293 million and to $712 million for the first half from $550 million. Management attributed the gains mainly to the addition of Crius and Ambit, while noting higher related SG&A and bad-debt expense.
  • Lower wholesale power prices and reduced capacity revenue affected generation results in several markets. First-half results also included an $84 million impairment related to the Joppa/EEI coal facility and linked capacity contract, and a $29 million loss on the NELP transaction.
  • Interest expense and related charges fell to $141 million in Q2 from $274 million and to $440 million for the first half from $495 million, reflecting lower interest costs after debt repayments and fewer unrealized swap losses.
  • Operating costs and SG&A increased. Management cited higher long-term service agreement costs, COVID-19 response expenses, acquired-company expenses, and a first-half nonrecurring gross-receipts-tax charge of approximately $10 million.

Outlook, commentary, risks and unusual items

  • Management said it expected sufficient liquidity to meet anticipated cash requirements, including capital allocation initiatives, for at least the next 12 months; cash flows are seasonal and generally weighted toward the second half. No specific full-year financial guidance is provided in the supplied filing text.
  • Management reported no material COVID-19-related operating disruption or material adverse effect on first-half results to date, but warned that prolonged economic effects could pressure demand, customer collections, liquidity and supply chains. Retail disconnection protections and related regulatory measures could also affect collections and costs.
  • Management expected approximately $64 million of accelerated alternative-minimum-tax refunds in 2020 and an approximately $550 million increase in interest-expense deductions across the 2019 and 2020 tax years under the CARES Act. It expected approximately $129 million in AMT refundable credits over the next 12 months, alongside state tax payments and refunds.
  • Capital projects include Moss Landing Phase I, a 300 MW battery project with approximately $315 million of construction work in progress and anticipated commercial operation in Q4 2020; Phase II, an additional 100 MW, remained subject to CPUC approval. A 36.25 MW Oakland battery project was expected to enter service by January 2022.
  • Environmental compliance and coal-ash remediation rules remain uncertain and could require significant expenditures or affect coal-plant economics. The Joppa impairment reflects lower forecast wholesale prices and a reduced expected useful life. Nuclear decommissioning ARO increased by $219 million following a revised cost estimate, driven by higher assumed labor, equipment and service costs and later expected federal spent-fuel acceptance.
  • Material contingencies include environmental and regulatory matters, rail-contract arbitrations, and litigation. The filing states that outcomes and potential costs for certain matters cannot be predicted or reasonably estimated and could materially affect results, liquidity or financial condition. The ME2C patent claims against Vistra were dismissed in July 2020 following settlement. The filing reports no material off-balance-sheet arrangements.

Most important facts for investors to verify

  1. How much of adjusted EBITDA and cash generation reflects durable operating performance versus derivative timing and mark-to-market accounting.
  2. Retail customer payment trends, bad-debt expense and the continuing effects of COVID-19 measures on collections and demand.
  3. Debt reduction, refinancing plans, covenant headroom and liquidity after capital spending, dividends, collateral needs and subsequent debt redemptions.
  4. Joppa and other coal-plant economics, environmental compliance spending, Illinois plant-closure obligations and the updated nuclear decommissioning estimate.
  5. Actual cost, timing, regulatory approvals and contractual economics for Moss Landing and Oakland storage projects.
  6. Final Ambit purchase-price allocation and the eventual financial impact of the Tax Receivable Agreement and unresolved legal or regulatory matters.