Fitch Ratings has downgraded the Long-Term Issuer Default Rating (IDR) of Vistra Corp. and Vistra Operations Company, LLC to 'BB' from 'BB+'.
The Rating Outlook is Stable. Fitch has affirmed the senior secured debt at 'BBB-'/'RR1' for Vistra Operations, and downgraded the senior unsecured debt to 'BB'/'RR4' from 'BB+'/'RR4' and Vistra Corp.'s preferred stock rating to 'B+'/'RR6' from 'BB-'/'RR6'.
The downgrade of Vistra is driven by yesterday's announcement of the debt financed acquisition of Energy Harbor's (EH) nuclear assets and its retail business and management's willingness to delay the return to its stated leverage targets yet again. Fitch expects Vistra's debt to EBITDA ratio will remain above the negative sensitivity threshold of 3.5x until at least 2025. Although the addition of EH's assets provides diversification away from Vistra's retail and generation concentration in ERCOT, it increases leverage such that Vistra's credit profile is more in-line with a 'BB' rating.
Key Rating Drivers
Transaction Increases Leverage: Vistra's downgrade reflects higher EBITDA leverage for 2023 and beyond compared to prior Fitch's expectations, driven by about $2.6 billion of planned debt issuances to finance the EH acquisition. Acquisition financing is also pushing out Vistra's previous debt paydown plans.
While management still aspires to achieve investment-grade leverage metrics and is targeting net debt/EBITDA leverage below 3.0x, the goal has been pushed back by a few years. Fitch expects an improvement in pro forma EBITDA over time as a result of improved energy margins at EH following the roll off below market hedges and merger synergies from EH integration. However, the trajectory of credit metrics will largely be driven by management's financial policy.
Deleveraging Over Time: Per Fitch's calculations, Vistra's 2022 EBITDA leverage jumped to 4.5x as increased liquidity requirements due to higher than average collateral requirements resulted in higher short-term debt. Over the forecast period total pro forma consolidated leverage is expected to decline as collateral requirements are reversed and assuming some of the free cash flow is allocated for debt paydown. Even though commodity prices have moderated in recent months, these remain higher than Fitch's prior expectations, bolstering Vistra's EBITDA and FCF generation profile over the forecast period.
Fitch projects total consolidated leverage post acquisition to trend toward 3.5x in 2025-2026, which is later than previously expected. Fitch's leverage calculations reflect 50% debt allocated to $2 billion preferred stock. Fitch assigned a 50% equity credit to the preferred stock based on the ability to defer dividend payments for at least up to five years.
Fitch expects planned investments into renewable and battery storage opportunities will be mostly financed by third-party non-recourse debt. Vistra's capital plan includes about $1.4 billion of non-recourse debt over next couple of years; however, there is none currently issued.
Acquisition Provides Diversification: Fitch views the announced acquisition of EH as positive for Vistra's credit profile. The acquisition of four nuclear plants 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 in excess of 90%. The Inflation Reduction Act (IRA) establishes a nuclear Production Tax Credit (PTC) mechanism, thereby providing a revenue floor for nuclear plants. In Fitch's view, the nuclear PTCs provide a key credit strength that somewhat offsets Vistra's increased leverage. EH's assets, including synergies from integration, should contribute about 20% of Vistra's consolidated EBITDA by 2025.
Despite the positive aspects of nuclear assets, Fitch regards nuclear generation as having higher operating risk. EH's nuclear fleet is mature with an average age of over 40 years, but plants are permitted for the next 20+ years, excluding the Perry facility, which is due for license renewal by 2026. 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%.
Equity Ownership in Vistra Vision: Fitch expects EH shareholders could look to monetize their minority equity interest in Vistra Vision in the next several years. This could involve a sale of the minority interest. Long term, Fitch expects, Vistra might explore options to divest Vistra Vision into a standalone business.
Hedges Provide Near-Term Earnings Visibility: Vistra (standalone) is well hedged for 2023 to 2025 (approximately 92% hedged for 2023 and over 70% hedged for 2024, which implies about 50% for 2025), providing increased confidence in the company's EBITDA expectations. The addition of EH's nuclear assets provides additional revenue security supported by Nuclear PTCs.
In addition, Vistra's retail business provides revenue stability with relatively high renewal rates and stable margins in its primary Texas market. 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.
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 pro-forma 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 currently 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 larger presence in PJM, a credit positive. In addition, EH's nuclear fleet supported by federal nuclear PTCs 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 with Calpine, which has a smaller retail business. Calpine's younger and predominant natural gas fired fleet bears less operational and environmental risk compared with 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 with Vistra and Calpine, and serves load from sources other than its own generation.
Fitch projects Vistra's leverage to trend toward 3.5x in 2025-2026, which compares favorably with Calpine's leverage, which is forecast 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;
Acquisition financed with issuance of $2.6 billion of Vistra Operations debt in 2023;
Acquisition of EH to be completed as of Sept. 30, 2023;
Hedged generation in 2023-2026 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 100TWH for Vistra and about 25TWH for EH;
Capacity revenues per past auction results; future PJM capacity auctions in-line with the last auction results;
Total capex of about $5.4 billion over 2023-2026 including Vistra Vision;
Share repurchases of approximately $4.0 billion over 2023-2026;
Common dividends of about $300 million annually;
Run rate synergies of about $125 million by 2025;
Issuance of about $1.4 billion of project finance debt over the forecast period consolidated on the Vistra's balance sheet.
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.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: Vistra's liquidity has been negatively affected by rising natural gas and power prices that drove up collateral postings in 2022 given its hedged profile. Management was able to increase its revolver commitments in 2022 and accessed capital markets to bolster liquidity. As of Dec. 31, 2022, the company had approximately $2.87 billion of liquidity available consisting of $455 million of cash in hand and $2.4 billion available under various revolving facilities.
There was $650 million of short-term borrowings outstanding under the Commodity-Linked Facility and the Revolving Credit Facility as of Dec. 31, 2022.
As of Dec. 31, 2022, Vistra's revolving credit facility agreement had a total commitment of $3.375 billion, of which $3.175 billion expires April 2027, while the balance of $200 million expires June 2023. Vistra can issue LCs under its revolving credit facility up to $3.245 billion.
On Oct. 5, 2022, Vistra initiated an amendment to the Commodity-Linked Facility to extend the maturity date to October 2023 from October 2022 and reduced the aggregate available commitments to $1.25 billion from $2.25 billion. On Oct. 21, 2022, the Commodity Linked Facility was further amended to increase the aggregate available commitments to $1.35 billion.
Issuer Profile
Vistra is the largest independent power generator in the U.S. with approximately 37 GW of capacity. Vistra Retail is one of the largest retail providers in the country with roughly 95 TWHs of load and approximately 4 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
Vistra Corp. has an ESG Relevance Score of '4' for Exposure to Environmental Impacts due to exposure to deficiencies in ERCOT's energy only market construct caused by extreme weather events, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
ESG Relevance Score for Exposure to Environmental Impacts of '4' has been revised from '5'. The score was set at '5' following the effects of February 2021 severe winter weather, which has had a material negative impact on Vistra's credit profile. The storm has exposed deficiencies in ERCOT's market design and ability to keep the grid functioning well in the face of an extreme weather event, which increases the risk of owning power generation and retail electricity businesses in the state. The financial hit to Vistra as a consequence of the weather event resulted in a material jump in near-term leverage and a change in the Outlook to Negative. Subsequently, ERCOT has taken some measures to improve grid reliability in the face of the extreme weather, but has not resolved potential future reliability issues cause by severe weather events stemming from its energy only market construct. Vistra's management has also taken steps to address its fleet fuel related issues, which were the main drivers of the financial loss Vistra experienced due to winter storm Uri.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
VISTRA CORP. 
