Morningstar | All Eyes on Texas as Vistra Energy Tries to Square Bullish Fundamentals With Bearish Prices
We are reaffirming our $20.50 per share fair value estimate for Vistra Energy after the company reported $815 million of adjusted EBITDA in the first quarter of 2019, up from $576 million in the first quarter of 2018 and on track to meet our full-year estimate. We are reaffirming our no-moat and stable moat trend ratings.Management reaffirmed its $3.22 billion-$3.42 billion adjusted EBITDA guidance for 2019 and suggested 2020 EBITDA will be at a similar level, in line with our estimates. Vistra appears to be doing everything in its control to drive shareholder value, but backwardated forward power prices will make it challenging. Vistra has hedged only about half of its 2020 generation. We think a normalization in power prices could drive EBITDA above $3.5 billion in 2021-beyond.
Vistra's capacity earnings and retail supply business should keep EBITDA above $3 billion for several years while policy uncertainties in Texas and the mid-Atlantic power markets resolve. Capacity pricing in eastern markets remains a key uncertainty.
We wouldn't be surprised to see Vistra grow its retail business through acquisition, similar to the $486 million Crius deal this year. Growing its retail business outside of Texas should help reduce its sensitivity to weak generation margins. Within Texas, lower volatility in the forward power markets should help retailers. However, if volatility returns, Vistra could have an opportunity to acquire smaller retailers at distress prices.
Management reaffirmed its intention to pay quarterly dividends totaling $0.50 per share for the year and grow the dividend 6%-8%. We think this is achievable in the near term as Vistra has plenty of free cash flow to fund the dividend, stock buybacks, and debt reduction. Continuing that dividend-growth rate beyond the next 2-3 years could be challenging given the lack of fundamental growth drivers.
Vistra Energy operates an integrated retail and generation business in markets throughout the U.S. Through its subsidiaries, the company is engaged in electricity market activities, including electricity generation, wholesale energy sales and purchases, commodity risk management and retail sales of electricity. The company has six segments: Retail, ERCOT, PJM, NY/NE (comprising NYISO and ISO-NE), MISO and Asset Closure. The Retail segment is engaged in retail sales of electricity and related services. The ERCOT, PJM, NY/NE and MISO segments are engaged in electricity generation, among others. The Asset Closure segment is engaged in the decommissioning and reclamation of retired plants and mines.
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