Vistra Energy (VST, Financial), a spin off of Energy Future Holdings, is a power business in Texas. It operates mainly in the growing Electric Reliability Council of Texas electricity market, providing electricity to 24% and 19% of the residential and commercial customers in ERCOT, which manages 85% of the state's total electricity.Ă‚
The ERCOT market is different from other competitive electricity markets in the U.S. While other markets have to maintain a minimum reserve margin and resource adequacy requirement, ECORT’s resource adequacy depends on free market and market price signals. Thus, ECORT is considered the only fully deregulated electricity market in the U.S.
Vistra has two business segments, TXU Energy and Luminant. TXU Energy is the largest electricity retailer in Texas with 1.7 million customers. Luminant, the electricity generation business, operates 17,000 MW of fuel-diverse installed capacity in Texas. In the illiquid time periods, by bypassing bid-ask spread, the retail business is protected by the generation business. In addition, the retail load requirements of TXU Energy help offset the length of Luminant’s generation portfolio, reducing wholesale power price volatility.
Vistra’s adjusted 2016 free cash flow was in the range of $745 million-$925 million, while adjusted EBITDA was from $1.35 billion-$1.5 billion. Compared to its peers including Calpine (CPN, Financial), Dynegy (DYN, Financial) and NRG Energy (NRG, Financial), Vistra Energy has the lowest debt level and cheapest valuation.
| Ă‚ | EV/EBITDA | Debt/EBITDA |
| Vistra Energy | 7.1 | 2.9 |
| Calpine | 8.9 | 6.7 |
| NRG Energy | 9 | 5.9 |
| Dynegy | 8.33 | 8.9 |
Recently, Dynegy’s stock price got a 29% boost because Vistra Energy is in talks to acquire it, which would spread its footprint to other parts of the U.S. such as the Midwest and Northeast. Due to falling wholesale prices, Vistra Energy seems to follow a consolidation strategy. However, the additional $9 billion debt that it has to bear if it acquires Dynegy is concerning.
Previously, Vistra Energy got little coverage, as it was traded in the OTC market. But it just got uplisted to the New York Stock Exchange, meaning more coverage. In addition, if the company pays only 30% of free cash flow in dividends, that equals 6 cents per share, equivalent to 4% yield. Consequently, Vistra Energy is likely to reach $20 per share in 12-18 months.
Disclosure: Long VST
