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Vistra touts cash-rich outlook to help draw long-term investors

Vistra Energy Corp. executives on June 12 highlighted their expectations for abundant cash flow to entice new shareholders, underscored by the launch of a $500 million share buyback effort.

During an analyst day at the company's Irving, Texas, headquarters, Vistra senior executives pointed to improving fundamentals in wholesale power markets and higher margins from its TXU Energy retail business to emphasize commercial operations that could deliver some $9.8 billion in adjusted free cash flow through the end of 2022, of which it expects approximately $6 billion will be converted into excess capital available for allocation over that period.

The financial flexibility afforded Vistra by its cash flow position has compelled senior management to prioritize the benefits of returning that cash to shareholders to drive liquidity and new ownership of its stock, all while steadily deleveraging with the aim of securing an investment-grade credit profile. The strategy includes a $500 million share repurchasing program approved by Vistra's board of directors and announced by CEO and President Curt Morgan during the company's presentation. That program will extend through 2019, and may be buttressed by an additional $500 million in expected excess capital, which Vistra could also deploy toward dividends or acquisitive growth opportunities.

"If run properly, with that low-cost set of generation assets and significant cash generation from the retail business, this thing is a cash machine, and the question is going to be what are we gonna do with that excess cash," Morgan said. "Certainly, returning some of that to [investors] is important to us."

Luring long-term investors

Since emerging from bankruptcy, Vistra has looked to stoke investor interest. The successful acquisition of Dynegy Inc. in April was in line with this strategy, partly intended to help garner attention from the broader investment community and give large hedge fund shareholders a deeper market to wind down equity positions inherited through bankruptcy. Two of Vistra's largest hedge fund shareholders, Oaktree Capital Management LP and Apollo Global Management LLC, own just shy of 20% of Vistra's outstanding shares, according to S&P Global Market Intelligence data. Vistra executives described a wish to to transition into more passive ownership with larger, long-term investors.

"I think our business model sets itself up, especially with the cash flow and return of capital to shareholders, for long-only interest, and we're pitching that," Morgan said. "It's imperative for us to get to a more stable place with our shareholder base, and I think there's still selling pressure with people who desire to sell their positions down some. We're not going to have enough money to buy those folks out, but we have to create the demand, and I think we have the business model to do that as long as we execute."

This makes it critical to attain investment grade credit ratings through debt reduction. The company is targeting 2.5x net debt to adjusted EBITDA in 2019, a ratio the company believes could bolster its case with ratings agencies, further crack open the investor universe and lift its stock. An investment-grade rating would also help the company minimize collateral costs within its commercial trading operations, executives said.

"We've heard this from long-only equity investors, but we think there is a good probability investment-grade ratings would bring in a wider base of investors, and could result in higher valuations for the stock," Vistra CFO Bill Holden added.

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Asset outlook

With returning capital to shareholders a top priority, Vistra appears less likely to pursue acquisitions in the name of growing its earnings base. Instead, its wholesale generation footprint could experience some slimming, while its retail business expands organically.

"I would expect us to shrink our conventional generation before we grow it," Morgan said during his opening remarks, pointing to the possibility of shedding assets in Illinois and the 1,212-MW combined-cycle Independence Station in New York.

"We've seen some [retail] deals where you could probably make the math work, but the underlying business was not something we felt comfortable with, and it's not just price, but what is the underlying business and do we feel good about it," Morgan observed on the retail front.

Beyond pure wholesale and retail, Vistra is focusing more closely on investments in energy storage, primarily by pairing it with existing assets in Texas and Northern California, including its Moss Landing and Oakland facilities. Vistra announced plans to pair its Upton Solar Project with a 10-MW or 42-MWh lithium ion battery installation, which it expects will begin commercial operations later this year.