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Essential Energy Insights, April 2021


Wall Street response muted as Vistra blames gas system for $1.6B impact

Vistra Corp.'s stock fell slightly on April 26 as management blamed financial losses on a natural gas infrastructure system that buckled unexpectedly during February's deadly winter storm in Texas.

Vistra on April 26 said it expects an approximately $1.6 billion net financial impact to its 2021 ongoing operations adjusted EBITDA and ongoing operations free cash flow from the near grid collapse in the Electric Reliability Council Of Texas Inc.

"As we have highlighted from the beginning, we saw this storm coming. It was not a surprise," Vistra CEO Curtis Morgan told analysts and investors on a business update call. "What we certainly didn't forecast and couldn't have foreseen was the unprecedented failure of the gas supply system, which was the most significant driver of our financial impact."

The management team believes Vistra, which also owns a large retail portfolio in Texas, was "as well-positioned as anyone heading into this storm."

Vistra's stock was down less than 2% as management attributed more than $2.5 billion of the company's total loss from the Texas energy crisis to "the lack of available gas supply."

"In a nutshell, the issues stemming from the natural gas system cost us dearly and there wasn't anything we could do about it while we were in the middle of the event," Morgan said. "We never would have imagined that the gas infrastructure system in Texas would face power outages, freeze offs and operational issues. And that gas fuel supply, not operational challenges, would have been the significant driver of our financial loss."

CreditSights analyst Andrew DeVries in an April 26 research report said Vistra's shares barely moved as "investors have already accepted the winter freeze impact."

Two months earlier, the company's shares plummeted more than 20% on Feb. 26 when executives disclosed a financial hit as large as $1.3 billion from the event.

In mid-April, Vistra received resettlement statements from ERCOT, which drove an estimated negative variance of more than $200 million.

"We now have a new appreciation for this risk and we are taking proactive steps to mitigate it in the future," Morgan said.

The company's self-help initiatives are expected to total about $500 million in 2021. This includes the "monetization of certain commercial positions," generation savings, retail savings and forecast performance, among other financial offsets.

Vistra reissued 2021 ongoing operations adjusted EBITDA in the range of $1.48 billion to $1.88 billion and ongoing operations adjusted free cash flow guidance in the range of $200 million to $600 million.

Morgan said the Texas fallout "set us back about a year" on achieving investment-grade credit ratings.

CreditSights on March 23 downgraded Vistra's bonds on "very high" leveraged buyout risk as the company looks to climb back from its financial losses.

"CreditSights still sees well above average risk of Vistra going private given the cheap stock price on unchanged 2022 EBITDA estimates despite rising forward power prices in [Texas] that in theory should lead to higher EBITDA estimates," DeVries wrote on April 26.

Fueling the fire

The largest generator in Texas on Feb. 17 disclosed that only about 1,000 MW of its more than 19,000 MW portfolio was offline during the energy emergency. However, the lack of physical gas and insufficient pressures on the pipelines impacted the company's ability to generate power at full capacity.

"Absent these issues with gas deliverability and increased gas costs, Vistra estimates that the 2021 Adjusted EBITDA impact of Uri would have been a slight positive," the company said in an April 26 news release.

The company's firm gas contracts that were not honored by third parties led to the company procuring replacement gas at "incredibly high" costs, Vistra said.

"It is our view that the Public Utility Commission of Texas' decision to administratively set ERCOT pricing at $9,000 per MWh during the week did not follow the appropriate regulatory process, resulting in further negative impacts to our financial results," Morgan said, adding the company is challenging ERCOT's pricing orders in the Texas Court of Appeals.

Vistra also is seeking damages for improper force majeure claims and curtailment notices from gas suppliers.

"In one week alone, Vistra spent more than twice the amount on natural gas than what we usually spend in one full year to power our Texas generation fleet," Morgan said.

Mitigation strategies

Vistra is advocating for legislation that would require gas infrastructure to be listed as critical resources by transmission and distribution utilities while mandating better weatherization of gas and power assets.

Other market reforms appear to face steeper hurdles.

"It's pretty clear that Texas is still not interested in a capacity market," Morgan said. "I do believe though that there is some openness to taking the current model and making some changes to it. For example, reducing the cap but extending the amount of reserves."

"My sense of this is that market design changes may not get done in this session," Morgan added. "I do think there is interest in trying to reduce the volatility in the market [and] to get more revenues in the system for non-intermittent dispatchable resources."

Building out-of-market backup generation

Morgan blasted proposals by investment firm Starwood Energy Group Global LLC and Warren Buffett's Berkshire Hathaway Energy to improve grid reliability by adding billions in new out-of-market generation.

In an April 23 letter to the PUCT and ERCOT's board of directors, the CEO of Starwood Energy Group pitched a plan to invest more than $8 billion to build 11 new gas-fired power plants totaling 11 GW of dispatchable, nonintermittent capacity.

The Starwood Capital Group subsidiary said it would create a regulated entity to hold the assets and would seek a regulated rate of return not to exceed 9.0%. That is slightly less than the 9.3% return on equity that Berkshire Hathaway Energy has proposed as part of its $8.3 billion plan to build 10 GW of gas-fired capacity, which the company calls "blackout insurance for all Texas consumers."

"We believe these types of solutions are self-serving and expensive proposals that do not address the primary issues that caused the blackout," Morgan said. "In addition, these proposals would depress forward prices and drive out the very generation types that ERCOT market requires. Not to mention that the technical details of the proposals are lacking or inefficient and the terms are egregious."