Business context and reporting period
Vistra Energy Corp. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. It operates an integrated U.S. electricity retail and generation business. The April 9, 2018 merger with Dynegy materially expanded the company: results include Dynegy only from the merger date, so comparisons with 2017 are not like-for-like.
Key financial metrics
Amounts in millions of dollars, except per-share data and percentages.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $2,574 | $1,296 | $3,338 | $2,653 |
| Operating income (loss) | $231 | $53 | $(164) | $207 |
| Net income (loss) attributable to Vistra | $108 | $(26) | $(198) | $52 |
| Diluted EPS | $0.20 | $(0.06) | $(0.41) | $0.12 |
| Adjusted EBITDA (non-GAAP) | $658 | $345 | $899 | $621 |
Operating margin was approximately 9.0% in Q2 2018 versus 4.1% in Q2 2017; for the six-month periods it was approximately (4.9%) versus 7.8%. These calculated margins and the earnings comparisons reflect the merger, market-related mark-to-market changes and other unusual items, and should not be read as directly comparable underlying performance.
- Cash flow: Six-month operating cash flow was $(29) million, compared with $333 million provided in 2017. Financing used $1,443 million; investing provided $242 million, including $445 million of cash acquired in the merger. Capital expenditures and nuclear fuel purchases totaled $181 million.
- Debt and liquidity: Long-term debt, including current maturities, was $11,963 million at June 30. Cash and cash equivalents were $757 million, with $59 million of restricted cash. Reported available liquidity was $1,822 million, including $1,065 million of revolving-credit capacity. Management reported approximately $11.0 billion of debt net of cash.
- Balance sheet: Total assets were $26,470 million and total equity was $8,420 million. Debt was 58% of capitalization, compared with 41% at year-end 2017.
Material changes versus the prior comparable periods
- Q2 revenue more than doubled, principally reflecting acquired Dynegy operations. The merger contributed $1,248 million of revenue and $97 million of net income from April 9 through June 30.
- Q2 net income improved by $131 million year over year, with acquired operations, commodity mark-to-market gains and favorable ERCOT retail weather among the drivers. Six-month net income declined by $253 million, principally due to commodity mark-to-market losses, merger expenses and plant retirements.
- Six-month commodity derivative results included a $286 million net loss, versus a $141 million net gain in 2017; reported results are subject to mark-to-market volatility.
- Debt rose substantially following the merger. The company amended its credit facilities, established a $2.050 billion term loan due 2025, redeemed $850 million of 6.75% notes due 2019, and extended the revolving facility maturity to 2023.
- Plants with 4,167 MW of nameplate capacity were retired in January and February; two additional jointly owned plants representing 883 MW of Vistra’s proportional capacity were retired in May.
Outlook, management commentary, risks and unusual items
- Management targets net debt/EBITDA of approximately 2.5x by the end of 2019. It expects 2018 capital expenditures and nuclear fuel purchases of approximately $500 million and believes liquidity will cover anticipated requirements for at least 12 months. Cash flows are seasonal and weighted toward the second half of the year.
- Management estimated ERCOT natural-gas price exposure hedged at 94% for 2018 and 91% for 2019, and heat-rate exposure hedged at 89% and 58%, respectively, as of June 29. Hedging reduces but does not eliminate commodity exposure.
- The company announced a proposed 300 MW battery storage project at Moss Landing, subject to California Public Utilities Commission approval, with commercial operation anticipated by Q4 2020. The approximately 180 MW Upton solar facility began commercial operation in June 2018.
- Q2 results included $156 million of transition and merger expenses in the company’s Adjusted EBITDA reconciliation; six-month expenses were $184 million. The preliminary merger purchase-price allocation remains subject to revision, with completion expected by Q2 2019. The company recorded a $74 million Q2 income tax benefit, including a one-time deferred-tax remeasurement related to its expanded state footprint.
- The Tax Receivable Agreement obligation was $439 million at June 30; estimated undiscounted payments were approximately $1.4 billion, subject to assumptions and actual tax savings. The company repurchased shares for $75 million, including fees, through June 30, under a program authorizing up to $500 million through 2019.
- Key risks include commodity prices and hedging liquidity, substantial debt and collateral needs, merger integration and realization of expected benefits, environmental compliance and reclamation costs, and legal or regulatory proceedings. Management stated that certain litigation and environmental matters could materially affect results or liquidity, but could not estimate potential costs for several proceedings.
Important facts for investors to verify
- Separate merger-related growth and one-time costs from recurring operating performance; assess Adjusted EBITDA alongside GAAP results and its reconciliation.
- Track debt reduction against the approximately 2.5x net debt/EBITDA target, and monitor cash generation, collateral requirements and revolving-credit availability.
- Review the final Dynegy purchase-price allocation, integration costs and evidence of realized synergies.
- Monitor commodity hedge positions, mark-to-market movements and their potential cash-collateral effects.
- Follow regulatory approvals for the Moss Landing project and developments in environmental matters, litigation and asset-retirement obligations.