Vistra Earnings: Hedges Help Protect Against Near-Term Downside, Offer Long-Term Upside

We are reaffirming our $24 fair value estimate for Vistra VST after the company reported $554 million in adjusted EBITDA in the first quarter, mostly flat with the first quarter of 2022. Results are on track to meet our full-year outlook. We are reaffirming our no-moat and negative moat trend ratings.

The aggressive hedging strategy that Vistra initiated last year paid off during the first quarter, protecting generation margins as energy prices fell. The hedges and lower winter energy demand resulted in a $192 million drop in Vistra’s retail EBITDA from last year but a $205 million increase in EBITDA at the generation business.

We expect similar offsetting trends to keep earnings mostly flat for the next two years, since Vistra has hedged 99% of its expected generation for the rest of 2023 and 96% for 2024. Our adjusted EBITDA estimates through 2025 remain near the midpoint of management’s $3.4 billion-$4.0 billion guidance for 2023 and $3.5 billion-$3.7 billion guidance for 2024 and 2025.

The $5.7 billion Energy Harbor acquisition appears to be on track to close late this year. Our Vistra fair value estimate includes $1 per share of incremental value from the deal primarily because of the debt-heavy financing structure and potential synergies. Management suggested that its $900 million incremental EBITDA estimate could go slightly higher based on current energy market prices. Short-term energy price moves don’t have a material impact on our deal value estimate.

Vistra raised its dividend for the sixth consecutive quarter, up 3.3%. Share repurchases should allow the company to continue raising the dividend without committing additional capital. We expect Vistra to complete the remaining $1.55 billion of share repurchases under the current $4.25 billion authorization by the end of 2024. With the stock trading near our fair value estimate, share repurchases don’t have a material valuation impact.