Fitch Ratings has affirmed the 'BB' Long-Term Issuer Default Ratings (IDRs) of Vistra Corp. and Vistra Operations Company, LLC.
The Rating Outlook is Stable. Fitch has also affirmed Vistra Ops.'s senior secured debt at 'BBB-'/'RR1' and senior unsecured debt at 'BB'/'RR4', and Vistra's preferred stock at 'B+'/'RR6'. In addition, Fitch has affirmed the rating for the Pre-Capitalized Trust Securities (P-Caps) issued by Palomino Funding Trust I at 'BBB-/RR1'.
The ratings and Outlook reflect Fitch's expectation that EBITDA leverage will remain in the 4.0x to 3.5x range following the acquisition and integration of Energy Harbor (EH) nuclear and retail assets. Although the addition of EH's assets provides diversification away from Vistra's retail and generation concentration in ERCOT, and adds 4GW of carbon free generation to Vistra's fleet, Vistra's credit profile is expected to remain in line with a 'BB' rating over Fitch's forecast period.
Key Rating Drivers
Strong Demand Supports 2023 Results: Per Fitch's calculations, Vistra's 2023 EBITDA leverage was at 3.8x vs. 4.5x in 2022. The improved leverage was driven by strong operating results across both the retail and wholesale segment. Increased demand (partially due to extremely warm summer weather), coupled with above market hedges, and a decrease in liquidity requirements due to a reduction in the average collateral requirements vs. 2022, supported leverage improvement.
Natural gas and power prices have fallen from their highs in 2022, resulting in a release of collateral requirements in 2023. As of the end of the 4Q23, Vistra had around $1.2 billion of cash collateral postings, which is close to historical averages. Strong generation demand, well above historical averages in the past decade, is spurred by data centers and overall economic growth driven by industrial and population growth in Texas, Vistra's primary market.
Acquisition Provides Diversification: Fitch views the acquisition of EH as positive for Vistra's credit profile. The acquisition of four nuclear units across three sites located in PJM provides geographical diversification, while adding strong baseload assets to Vistra's generation portfolio, including relatively low fuel cost dynamics and assets that run at capacity factors over 90%.
The Inflation Reduction Act (IRA) establishes a nuclear Production Tax Credit (PTC) mechanism, thereby providing a revenue floor for nuclear plants. Fitch believes the nuclear PTCs provide a key credit strength. EH's assets, including synergies from integration, should contribute close to 20% of Vistra's consolidated EBITDA by 2025.
Despite the positive aspects of nuclear assets, Fitch believes nuclear generation has higher operating risk. EH's nuclear fleet is mature with an average age of over 40 years. However, plants are permitted for the next 20+ years, excluding the Perry facility, which is currently in the process of license renewal. No nuclear asset in the U.S. has failed to be permitted in the last 30 years. Fitch believes the company's strong operating performance record largely mitigates re-licensing risk. Over the last five years, EH's average outage rates have been lower than 5%. Fitch believes the company can reliably generate about 32TWh of power annually.
Hedges Provide Earnings Visibility: Vistra (standalone) is well hedged for 2023 to 2025 (~99% hedged for 2024 and 87% hedged for 2025), bolstering Vistra's ongoing operations adjusted EBITDA expectations. The addition of EH's nuclear assets provides additional revenue security supported by Nuclear PTCs starting in 2024, providing a high degree of revenue visibility for those assets.
In addition, Vistra's retail business provides revenue stability with relatively high renewal rates and stable margins, in particular, given its strong presence in Texas. Retail margins in the commercial and industrial segments generally remain range-bound during commodity cycles, and residential retail margins are usually countercyclical, given the length and stickiness of the customer contracts. TXU Energy Company LLC, Vistra's largest retail electricity operation in Texas, has demonstrated strong brand recognition, tailored customer offerings and effective customer service, which are driving high customer retention and growth.
Measures to Mitigate Extreme Weather Risks: Management has taken favorable steps to address gas deliverability and fuel handling issues, which were key drivers of Vistra's financial loss in February 2021 due to winter storm Uri. Steps taken include additional weatherization of the generation fleet, including coal fuel handling, installing dual fuel capabilities at gas steam units, expanding fuel oil inventory at existing dual fuel combustion turbine sites, contracting for additional natural gas storage and maintaining greater generation length during peak periods.
According to the company, it has spent more than required by Texas regulations following implementation of provisions of Senate Bill 3. The bill was enacted to make the Texas electric system more resilient to extreme weather events following winter storm Uri. Vistra's fleet has not experienced any significant failure during extreme weather events, including December 2022 winter storm Elliot in PJM and the most recent Texas winter storm Heather in January 2024.
Texas Market Reforms: Several market reliability and pricing options are under consideration by the Texas legislature, including a Performance Credit Mechanism (PCM) to financially compensate resources for their availability during ERCOT's tightest system condition. PCMs would require load-serving entities to purchase, at a centrally determined clearing price, credits from generators that supply power during high risk hours.
House Bill 1500 caps the net cost of PCM to consumers at $1 billion, creates minimum performance requirements for generators and requires ERCOT to create a new service for dispatchable resources to provide flexibility to address intra-hour operational challenges. In November 2023, the constitutional amendment was passed approving creation of Texas Energy fund that provides up to $5 billion of low interest rate loans and completion bonuses to new dispatchable generation in Texas Senate Bill 2627. Vistra is currently evaluating whether they should participate in the program. Capex investments related to Vistra's potential participation in the program are not reflected in Fitch projections.
Fitch views any market reforms that incentivize dispatchable generation as potentially positive for Vistra. Fitch does not project any benefit from PCM or any other mechanism to improve capacity reserves to manage load and intermittent resource output uncertainty to Vistra. The ultimate structure is not clear and potential implementation could take a couple of years.
Variation from Criteria: Fitch's 'Corporate Rating Criteria,' dated Oct. 28, 2022, outlines and defines a variety of quantitative measures used to assess credit risk. Per criteria, Fitch's definition of total debt is all encompassing. However, Fitch's criteria is designed to be used in conjunction with experienced analytical judgment, and as such, adjustments may be made to the application of the criteria that more accurately reflects the risks of a specific transaction or entity.
Fitch does not consider the P-Caps as debt, which is a variation from its 'Corporate Rating Criteria' definition of total debt. Absent the exercise of the issuance right, P-Caps are treated as off-balance sheet for analytical purposes and excluded from Fitch's leverage and interest coverage metrics. If Vistra Ops were to exercise issuance rights, the amount of debt issued to the trust would be included in Vistra's total debt calculation and therefore its credit metrics.
Derivation Summary
Vistra is well-positioned relative to Calpine Corporation (B+/Stable) and NRG Energy (BB+/Stable) in terms of size, scale and geographic and fuel diversity. Vistra is the largest independent power producer in the country, with approximately 40GW of generation capacity compared with Calpine's 26GW. Vistra's generation capacity is well-diversified by fuel, compared with Calpine's natural gas-heavy portfolio. Vistra's portfolio is less diversified geographically, with more than 70% off its consolidated EBITDA coming from operations in Texas, while Calpine's fleet is more geographically diversified across PJM, Texas and California.
The addition of EH will provide diversification from Texas and a larger presence in PJM, a credit positive. In addition, EH's nuclear fleet supported by federal nuclear PTC program provides a high degree of revenue visibility for the next decade. NRG's acquisition of Vivint will continue the company's transformation from its origins as a power generator and provide additional revenue channels, further diversifying NRG's revenue stream compared to Vistra.
Vistra, like NRG benefits from its ownership of large and well entrenched retail electricity businesses in Texas, compared to Calpine, which has a smaller retail business. Calpine's younger and predominant natural gas fired fleet bears less operational and environmental risk compared to Vistra's portfolio that also has nuclear and coal generation assets. In addition, Calpine's EBITDA is more resilient to changes in natural gas prices and heat rates as compared to its peers. NRG is short generation compared to Vistra and Calpine, and serves load from sources other than its own generation.
Fitch projects Vistra's leverage to remain in the range of 3.5x-4.0x in 2024-2026, which compares favorably to Calpine's leverage, which is forecasted to remain around 5.0x. Fitch expects NRG to allocate FCF to maintain leverage within rating thresholds of 3.0x-3.5x beyond 2023.
Key Assumptions
Acquisition of EH for $3 billion cash and a 15% equity interest in Vistra Vision in March 2024;
Hedged generation in 2024 -2026 per management's guidance;
Power prices in key markets such as PJM and ERCOT at a discount to current forward prices;
Annual retail load of approximately 135 TWh;
Capacity revenues per past auction results; future PJM capacity auctions in-line with the last auction results;
Total capex including nuclear fuel of about $5.3 billion over 2024-2026;
Nuclear fuel hedged in-line with company's guidance;
Share repurchases of approximately $3.3 billion over 2024-2026;
Common dividends of about $300 million annually;
Run rate synergies of about $130 million by 2026;
Dividends to Energy Harbor shareholders about $180 million annually, with 2024 pro-rated; 15% of total free cash flow from Vistra Vision;
Implied coupon for new debt issued between 6%-6.5%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
While Fitch does not anticipate positive rating actions in the near to medium term, demonstrated EBITDA leverage lower than 3.5x on a sustainable basis coupled with track record of stable EBITDA generation and continued emphasis on an integrated wholesale-retail platform could lead to a positive rating action.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Gross debt/EBITDA above 4.0x on a sustained basis;
Weaker power demand and/or higher than expected supply depressing wholesale power prices and capacity auction outcomes in its core regions;
Unfavorable changes in regulatory constructs and markets;
Lack of access to adequate liquidity to meet collateral requirements;
An aggressive growth strategy that diverts a significant proportion of FCF toward merchant generation assets and/or overpriced retail acquisitions.
Liquidity and Debt Structure
Adequate Liquidity: As of Dec. 31, 2023, the company had approximately $5.8 billion of liquidity available consisting of $3.5 billion of cash in hand and around $2.3 billion was available under various revolving facilities. There were no short-term borrowings outstanding under the Commodity-Linked Facility and the Revolving Credit Facility as of Dec. 31, 2023. Vistra's revolving credit facility agreement, has a $3.175 billion commitment expiring in April 2027.
The Commodity-Linked Facility matures in October 2024 and has aggregate available commitments of $1.575 billion. As of Dec. 31, 2023, the borrowing base under the facility was $1.1 billion, which is lower than the facility limit of $1.575 billion. The reduction in the borrowing base is due to a decrease in commodity prices and would increase in size in a rising commodity price environment in accordance with the terms of the facility.
The increase in cash as of Dec. 31, 2023 includes proceeds from the issuance of $1.75 billion and $750 million principal amount of Vistra Operations senior secured and senior unsecured notes in September 2023 and December 2023, respectively. Proceeds from the September 2023 issuance were used, together with cash on hand, to fund the acquisition. Proceeds from the December 2023 issuance were used to settle the Senior Secured Notes Tender Offers in January 2024.
The company issued $1.5 billion of debt in mid-April. The proceeds will be used to pay off 2024 maturities as they mature later this year. The refinancing declines to $750 million in 2025 and $1.0 billion in 2026.
Vistra Operations' first-lien secured debt receives an upstream guarantee from the asset subsidiaries under Vistra Operations, which consists of a substantial portion of property, assets and rights owned by Vistra Operations.
The secured notes have a security fall away provision wherein the collateral securing the notes will be released if Vistra's senior unsecured notes obtain an investment-grade rating from two out of the three rating agencies. The fall away provision will be reversed if the investment grade ratings for the senior unsecured notes are withdrawn or downgraded below investment grade.
Fitch considers all the secured debt issued at Vistra Operations to be a category 1 first-lien debt, thus assigning it a 'BBB-'/'RR1' rating. Following acquisition of Energy Harbor, Vistra Operations' secured debt is secured by the remaining fossil assets at Vistra Operations and equity interest in Vistra Vision and by a secured claim on Vistra Vision's intercompany note.
The preferred stocks series A, B and C receive 50% equity credit based on Fitch's 'Corporate Hybrids Treatment and Notching Criteria'. The features supporting 50% equity credit include an ability to defer dividend payments on the preferred stock for at least five years and cumulative feature of deferred dividends. There is no ability for the preferred stock holder to cause acceleration or mandatory prepayment in the event of change of control trigger event, which is defined as both change in control and a ratings decline.
Issuer Profile
Vistra is the largest independent power generator in the U.S. with approximately 40 GW of capacity. Vistra Retail is one of the largest retail providers in the country with roughly 135 TWHs of load and approximately five million customers.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
VISTRA CORP. 
