EUR 850.00 For Business Accounts Only

Morningstar | Vistra's Retail Expansion a Good Hedge Against Weak Power Markets

Once part of the sprawling Energy Future Holdings complex, Vistra Energy broke off when EFH exited bankruptcy in 2016. Its first three years have been a success, but we think investors should be cautious.As an independent power producer and retail energy provider, Vistra has a much different risk profile than a typical regulated utility. Vistra is subject to the whims of the U.S. electricity and natural gas markets. Turbulent energy markets and excessive leverage led EFH into bankruptcy just seven years after several high-profile investors closed a $45 billion buyout, the largest ever at the time. Even Warren Buffett reportedly lost nearly $900 million in the deal.Vistra's clean post-bankruptcy balance sheet allowed it to acquire Dynegy, another independent power producer that fell into distress. The $2.27 billion deal, which closed in 2018, more than tripled the size of Vistra’s wholesale generation fleet after accounting for Vistra’s three legacy coal plant closures in early 2018. The deal also introduced Vistra to power markets outside of Texas, notably the Midwest and Northeast.We expect Vistra will be able to make the deal value-accretive primarily because it was able to buy at a rock-bottom price while the rest of the industry was trying to shore up their balance sheets. Vistra should also benefit from some cost savings and tax benefits.Now Vistra is on the hunt to offset some of its wholesale energy market exposure by growing its retail energy business. Its first big move was a $328 million bid for Crius Energy in early 2019. Crius expands Vistra's reach to the Midwest and Northeast, where Dynegy's wholesale operations can support retail growth.Vistra remains heavily exposed to wholesale energy markets, but its retail business volume could grow to more than half of its expected wholesale generation with Crius and organic near-term growth. This could result in more stable cash flows, a sustainable dividend, and more share buybacks if management does a good job executing its strategy.