Vistra Energy Corp. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Vistra completed its merger with Dynegy on April 9, 2018; therefore, 2018 results include Dynegy only from the merger date, while 2017 comparative results exclude Dynegy. Reported year-over-year growth is not directly comparable.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $3.243bn | $1.833bn | $6.581bn | $4.487bn |
| Operating income | $650m | $452m | $485m | $658m |
| Net income | $331m | $273m | $130m | $325m |
| Net income attributable to Vistra | $330m | $273m | $132m | $325m |
| Diluted EPS | $0.61 | $0.64 | $0.26 | $0.76 |
| Adjusted EBITDA (non-GAAP) | $1.141bn | $522m | $2.040bn | $1.143bn |
Q3 operating margin was approximately 20.0% versus 24.7% in the prior-year quarter; net margin was approximately 10.2% versus 14.9%. These comparisons reflect a changed business perimeter after the merger. Q3 net income increased $58m, but diluted EPS declined as the weighted-average share count rose. For the nine-month period, net income fell $195m despite higher revenue and Adjusted EBITDA. Management attributed the decline principally to commodity mark-to-market losses versus gains in 2017, merger-related costs, and plant retirements.
Cash provided by operating activities was $863m for the nine months, versus $845m. Investing activities provided $133m, including $445m cash acquired in the merger; capital expenditures and nuclear fuel purchases totaled $275m. Financing activities used $2.172bn, including debt repayments/tender offers and $414m of share repurchases. Cash, cash equivalents and restricted cash ended at $870m, including $811m of cash and $59m restricted cash.
Balance sheet, debt and liquidity
- Total assets were $25.888bn and total equity was $8.405bn at September 30, 2018.
- Long-term debt, including current maturities, was $11.241bn; the $350m accounts-receivable facility was fully drawn and reported separately. Long-term debt was $4.423bn at December 31, 2017, with the increase reflecting the merger and related financing.
- Available liquidity was $2.101bn: $811m cash and $1.290bn available under the revolving facility. The company said it expected sufficient liquidity for anticipated cash requirements for at least the next 12 months.
- Revolving-facility covenant compliance was reported; the applicable first-lien net leverage ceiling is 4.25x during specified compliance periods. Management’s stated target is approximately 2.5x net debt/EBITDA.
- The Tax Receivable Agreement obligation was $422m carrying value; estimated undiscounted payments were approximately $1.4bn. Asset retirement obligations totaled $2.322bn.
Material changes, outlook and risks
- The Dynegy merger expanded the business into PJM, NY/NE and MISO and materially increased assets, debt, revenue and share count. The purchase-price allocation remained preliminary; completion was expected by no later than Q2 2019.
- Q3 Adjusted EBITDA rose $619m year over year, primarily reflecting acquired businesses and stronger ERCOT results. Nine-month Adjusted EBITDA rose $897m; management cited acquired segments, higher realized prices and production, partly offset by asset-closure results.
- Commodity mark-to-market results were volatile: the filing reports $239m of unrealized commodity losses in operating revenue for the nine months, versus $215m of unrealized gains in 2017. Management reported ERCOT hedges covering 98% of natural-gas-price exposure and 92% of heat-rate exposure for 2018, and 93% and 78%, respectively, for 2019.
- Management estimated 2018 capital expenditures and nuclear fuel purchases of approximately $445m. No full-year earnings guidance is provided in the supplied filing text.
- Plants totaling 4,167 MW were retired in January and February 2018; two acquired, jointly owned plants representing 883 MW of Vistra’s proportional capacity retired in May. A 51 MW Pennsylvania facility was expected to close in late 2018, subject to approvals. Retirements reflected uneconomic operations and/or environmental costs.
- After quarter-end, the company announced an approximately $0.50-per-share annual dividend expected to begin in Q1 2019, subject to board declaration, and an additional share-repurchase authorization of up to $1.25bn over 12–18 months. The initial $500m repurchase program was completed October 19, 2018.
- Material uncertainties include environmental and regulatory proceedings, coal-ash and groundwater remediation, and litigation including gas-index pricing, Advatech and rail disputes. Management said outcomes and potential costs could not be estimated in certain matters and could materially affect results, liquidity or financial condition.
Investor facts to verify
- Assess underlying performance separately from merger-driven growth and volatile mark-to-market results; review the company’s non-GAAP Adjusted EBITDA reconciliations.
- Track debt reduction against the approximately 2.5x net debt/EBITDA target, refinancing costs, available revolver capacity and seasonal collateral requirements.
- Monitor final merger purchase accounting, including acquired asset values, deferred taxes and retirement obligations.
- Confirm progress and costs for plant retirements, environmental compliance and reclamation, and developments in material litigation.
- Evaluate execution and funding of the announced dividend and expanded repurchase plan alongside liquidity and capital needs.