Vistra Energy Corp. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Financial amounts are in U.S. dollars; figures are unaudited. Vistra operates an integrated retail electricity and natural-gas business and power-generation fleet across U.S. markets.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $3.194B | $3.243B | $8.949B | $6.581B |
| Operating income | $440M | $650M | $1.659B | $485M |
| Net income | $114M | $331M | $692M | $130M |
| Net income attributable to Vistra | $113M | $330M | $694M | $132M |
| Diluted earnings per share | $0.23 | $0.61 | $1.42 | $0.26 |
| Adjusted EBITDA | $1.060B | $1.141B | $2.554B | $2.040B |
| Cash provided by operating activities | $941M | $892M | $1.823B | $863M |
Operating margin was approximately 13.8% in Q3 2019 versus 20.0% a year earlier, and 18.5% for the first nine months versus 7.4% in 2018. The nine-month comparisons are affected by the Dynegy merger, which closed in April 2018, and the Crius acquisition, which closed in July 2019.
Financial position and capital allocation
- At September 30, cash and cash equivalents were $707M, restricted cash $46M, and total available liquidity $2.562B, including $1.844B of revolving-credit availability.
- Long-term debt, including current maturities, was $10.948B; the accounts-receivable securitization had $600M outstanding. The filing reported $18.651B of total liabilities and $26.443B of assets.
- Operating cash flow of $1.823B was offset by $979M of investing outflows and $784M of financing outflows; cash, cash equivalents and restricted cash ended at $753M.
- Year-to-date capital expenditures, nuclear fuel purchases, and development and growth spending totaled $474M. Vistra spent $619M on share repurchases and paid $181M of dividends.
- Vistra issued $4.6B of notes in 2019 and used proceeds and cash to refinance or repay debt. Management’s stated objective is to reduce net leverage to approximately 2.5x net debt/EBITDA.
Changes and management commentary
- Q3 revenue fell 1.5% and net income fell $217M year over year. Management attributed the decline primarily to higher retail power costs, weaker revenue net of fuel in PJM, NY/NE and MISO, increased unrealized losses on hedges and interest-rate swaps, and costs related to plant closures and Crius. Stronger ERCOT generation results and lower income-tax expense partly offset these factors.
- Nine-month revenue rose 36% and net income increased $562M. Management cited the full-period contribution from businesses acquired in the Dynegy merger and favorable year-to-date commodity hedge mark-to-market results; increased interest and income-tax expense partly offset the improvement.
- Q3 Adjusted EBITDA declined to $1.060B from $1.141B. Nine-month Adjusted EBITDA increased to $2.554B from $2.040B. These are non-GAAP measures; the filing cautions they should be considered with, not instead of, GAAP results.
- Management said Q3 performance was in line with expectations, citing reliable generation during a volatile ERCOT summer and growth in ERCOT residential customer counts. It stated that forecast cash flows were expected to be sufficient for anticipated needs, including capital allocation, for at least the next 12 months; cash flows are seasonal and weighted toward the second half of the year.
Outlook, transactions, and key risks
- No specific full-year earnings guidance is provided in the supplied filing text. Management’s stated goals include lowering leverage, maintaining liquidity, and refinancing debt to extend maturities and/or reduce interest expense.
- Crius was acquired July 15 for approximately $400M in cash; its post-acquisition results included $239M of revenue and a $16M net loss through September 30. The purchase-price allocation remained preliminary.
- After quarter-end, Vistra completed the Ambit acquisition on November 1 for $475M plus net working capital, funded with cash. Ambit’s results are not included in this quarter’s financial statements. Ambit debt was repaid at closing.
- Vistra announced retirements of four Illinois plants totaling 2,068 MW by the end of 2019 in response to revised state emissions requirements. Together with Edwards, scheduled for retirement by the end of 2022 under a proposed settlement, announced Illinois retirements total 2,653 MW. Q3 included $47M of accrued expected plant-retirement costs.
- Environmental compliance, coal-ash remediation, and related litigation or rulemaking may require additional spending or affect operations; the company said potential costs for several matters could not be reasonably estimated. PG&E’s bankruptcy creates risk to the Moss Landing battery-storage contract and certain gas-transportation agreements; contract rejection or nonperformance could result in impairment or higher fuel-transportation costs.
- Commodity prices, hedge valuation, counterparty performance and collateral requirements remain material risks. Q3 included $86M of unrealized commodity mark-to-market losses; nine-month results included $611M of unrealized gains. A 100-basis-point increase in floating rates was estimated to reduce annual pretax earnings by approximately $7M after interest-rate swaps.
- Other exposures include unresolved gas-index pricing claims and a rail transportation arbitration that management says could materially affect results, liquidity or financial condition. The filing reports no material changes to the risk factors in the 2018 Form 10-K.
Important facts for investors to verify
- How much of reported earnings and Adjusted EBITDA reflects realized operating performance versus unrealized commodity and interest-rate derivative changes?
- What are the final purchase accounting, integration costs, and realized benefits of Crius and Ambit, including Ambit’s cash and working-capital funding needs?
- How will the Illinois retirements, Edwards settlement, environmental requirements, and closure obligations affect future generation, costs, and capital spending?
- Can Vistra sustain its liquidity and capital returns while pursuing its approximately 2.5x net leverage objective and meeting debt maturities and collateral needs?
- Will PG&E assume and honor the Moss Landing contract, and what are the outcomes of the disclosed litigation and environmental proceedings?