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Vistra Energy Corp. (VST) CEO Curt Morgan on Q1 2020 Results - Earnings Call Transcript

May 05, 2020 11:16 PM ETVistra Corp. (VST)5 Comments
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Vistra Energy Corp. (NYSE:VST) Q1 2020 Results Conference Call May 5, 2020 8:00 AM ET

Company Participants

Molly Sorg - VP, IR

Curt Morgan - President and CEO

David Campbell - EVP and CFO

Conference Call Participants

Shahriar Pourreza - Guggenheim Partners

Stephen Byrd - Morgan Stanley

Steve Fleishman - Wolf Research LLC

Julien Dumoulin-Smith - Bank of America


Ladies and gentlemen, thank you for standing by, and welcome to the Vistra Energy First Quarter 2020 Earnings Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Molly Sorg, Vice President of Investor Relations. Thank you. Please go ahead.

Molly Sorg

Thank you, and good morning, everyone. Welcome to Vistra's investor webcast covering first quarter 2020 results, which is being broadcast live from the Investor Relations section of our website at www.vistraenergy.com. Also available on our website are a copy of today's investor presentation, our Form 10-Q and the related earnings release.

Joining me for today's call are Curt Morgan, President and Chief Executive Officer; and David Campbell, Executive Vice President and Chief Financial Officer. We have a few additional senior executives available to address questions in the second part of today's call as necessary.

Before we begin our presentation, I encourage all listeners to review the safe harbor statements included on Slides 2 and 3 in the investor presentation on our website that explain the risks of forward-looking statements, the limitations of certain industry and market data included in the presentation and the use of non-GAAP financial measures. Today's discussion will contain forward-looking statements, which are based on assumptions we believe to be reasonable only as of today's date. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected or implied. We assume no obligation to update

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Comments (5)

In the Ruff Research profile picture
Excellent Call,

Vistra trades with a 24% FCF yield (higher than the industry peer group average and higher than the S&P 500 average)....and the CEO (and I) are completely perplexed as to why it trades at such a heavy discount to its peers (even any discount seems unwarranted).

Soon after the earnings release, the shares jumped just under 10%. Thereafter, mid-day the shares trade steadily down to just under breakeven (relative to the prior day's close).

Here are my summary thoughts on the Highlight points from the call:

1. The Company Dividends are intact and grew by 8% with a 2.85% dividend yield.

2. The Company Revenues were basically inline with Analyst estimates (Adjusted Continuing operations beating on both Revenues and Earnings)

3. The Company Provided/Reaffirmed prior Guidance for 2020 with some guidance on being "flat" for 2021 as well (in line with 2020 midpoint guidance).

4. The Company remains on track to achieve target Adjusted Net Debt / Adjusted EBITDA goals of 2.5x which is very feasible.

5. The Company is hedged/protected on multiple fronts from:

- Commodity price fluctuations (various hedging instruments) for 99% of 2020 and 50-70% of 201

- Work-from issues with COVID (Company actually benefits from such situations in their dominant retail market which is 70% of their business and has higher margins on the residential side)

- From account delinquency in Texas (where the PUCT covers a good portion of the losses in both transimission and power costs) and outside of Texas (where the VST's customers are the retailers who take on the customer default risk).

Here is a back of the envelope calculation of how to get to a 2.5x Multiple Adjusted Net Debt to Adjusted EBITDA ratio using March 31st's, 2020 end of period Net Debt of $10.52Bn. This can be examined under the following two scenarios:

Based on a Low Adjusted EBITDA 2020E forecast of $3.285Bn, this implies a $8.21BN Net Debt target and a required Debt Reduction amount of $2.38BN funded from consolidated adjusted FCF. In this scenario, the company would have only $1.71Bn available for reduction (Which is the company estimated $1.97Bn in Consolidated Adjusted FCF less the Dividend Payouts for the year of $0.26Bn)). This would leave an Adjusted Net Debt ratio of 2.7x. The company would need to cover the shortfall from existing cash (if necessary).

Based on a High Adjusted EBITDA 2020E forecast of $3.585Bn, this implies a $8.96BN Net Debt target and a required Debt Reduction amount of $1.63BN funded from consolidated adjusted FCF. In this scenario, the company would have $2.02Bn available for reduction (Which is the company estimated $2.29Bn in Consolidated Adjusted FCF less the Dividend Payouts for the year of $0.26Bn)). This would leave an Adjusted Net Debt ratio of 2.39x.

Alternatively, any remaining funds (once VST has achieved a ratio of 2.5x) can be used to fund up to $0.392Bn in Share Repurchases (per the Q1 2020 filing, that is all that is left in the Share Repurchase Authorization as of March 31st, 2020) or for Capex Growth initiatives.

I am still unsure why VST trades well below its peer group (which averages a 10x+ EV/FCF yield). VST seems to be trading at a 30% discount to the peer group, even though it is more stable, well-hedged. Most of the holdings are institutionally held (99.14% based on prior year records).

Here are some possible thoughts as to why they might have traded down today on such upbeat results (and why that may change shortly):

1. The dividend payouts/yields may be too low (VST is looking at addressing this in their July Board meeting and will announce plans in September).

2. The company is not Investment Grade (IG) yet (VST is working on this and expects to have this finalized at the end of 2021 or 2022 as it achieves core metric goals such as the Adjusted Net Debt to Adjusted EBITDA ratios at or below 2.5x).

3. The company bears the burden of a legacy bankruptcy from 4-5 years ago (this will fade with time).

4. The company's resiliency was in question for cyclical markets (this quarter showed that they can handle recessionary environments regardless)

5. There are fears on Customer Delinquencies (VST has already budgeted a conservative estimate on bad debt even though those issues are mitigated by the PUCT and residential margins going up).

6. The company needs to re-engage in Share Repurchases (given the low retail ownership in holdings, share repurchasing should encounter a fairly price-inelastic security which should benefit from the share repurchases relatively quickly with its aforementioned holding structure).

7. The company has several coal assets which will stop generation by 2022 and must find ways to replace the lost EBITDA contributions (which the Company will be well positioned to take on given its current and near-term future liquidity).

8. The company may suffer from legacy stigmas (such as coal and the bankruptcy history) which could be dragging the price down (as I said before, the Coal assets are being disposed of and he bankruptcy is an old legacy issue which will fade with time).

9. There may be institutional holders who unloaded significant shares based on price triggers or counter-"flight to safety" arguments as the markets seemed to have a generally positive day.

Overall, my target valuation on the firm is $28 per share (based on Trading Multiples Ranges for Adjusted Free Cash Flows before Growth, also Adjusted EBITDA for SOTP analyses).

I Hope that helps someone out there 8-)
jambo297 profile picture
This is good and detailed look. Thanks. I have been a supplier to coal generation biz for most of my career. #1 to me, utilities investors are safety conscious. Regulated generation (PEG, D) are given premiums. Who are you calling peers? That’s a key. I own VST and think it’s a new & different model...untried (disruptive?). Evolution to gas and renewables is good. Ambit-type retail and dereg generation combo is intriguing and cash flow and
Manageable debt good...but to me peers are NRG NGG and others who generate in deregulated states. And yes the typical utility (VST not typical) yields more dividend.

Legacy of these unregulated merchant power businesses and their peers (NRG, Dynegy, Mirant, Enron, et al - NONE real winners) is a hurdle. Difference with VST is still evolving. I’m willing to wait. Haven’t read this report yet.
I have been invested ever since they came back to the market in low teens. I think you mentioned part of the reason is the legacy private equity holders from time to time sell large blocks of 1-2 million in shares and without a buyback, it takes time to sell out and puts pressure on stock.

I agree that by year end this is a $26 stock with little risk.

In 2 years. $35
In the Ruff Research profile picture
Thanks Jambo for the insights. I guess the investment community needs more time to get used to a nontraditional utility like VST (eventually the continued resiliency of the company in terms of stability of revenues and cash flows through this pandemic will demonstrate its stability). I had bought into the security in the low teens and have watched it climb since, but was surprised at the market reaction given the positive results in the earnings announcement yesterday.

I have thought about owning NRG but their model is a little more C&I oriented than VST and seems to bear more risk from deregulation from my prior analysis....I may revisit thought. I'll rethink my peer group comparison (I did have NRG in there but had not included NGG).

As an FYI, UBS just came out with a reaffirmed Buy with a Price Target of $31 per share.

Morgan Stanley was on the call and echoed the positive results so I expect to see a report reaffirming their buy (although he may or may not adjust his price target somewhat).
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