Fitch Ratings has assigned a 'BBB-'/'RR1' rating to Vistra Operations Company LLC's proposed issuance of senior secured notes due in 2034 and a 'BB'/'RR4' rating to the proposed issuance of senior unsecured notes due in 2032.
The 'RR1' Recovery Rating denotes outstanding recovery and the 'RR4' Recovery Rating denotes average recovery in the event of default.
The Fitch-rated Long-Term Issuer Default Rating (IDR) for Vistra Operations and its parent company, Vistra Corp. (Vistra) is 'BB'. The Rating Outlook is Stable. The net proceeds from the issuance will be used to refinance upcoming $1.5 billion of 2024 senior secured maturities.
The new senior secured notes will be pari passu with Vistra Operations' existing first lien debt. 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.
Key Rating Drivers
Strong 2023 Results: Per Fitch's calculations, Vistra's 2023 EBITDA leverage was at 3.8x vs. 4.5x in 2022. The improvement in leverage was driven by strong operating results across both the retail and wholesale segment driven by demand growth and a decrease in liquidity requirements due to a reduction in the average collateral requirements vs. 2022. Natural gas and power prices have fallen from their highs in 2022, resulting in a material release of collateral requirements in 2023. As of the end of the 4Q23, Vistra had close to $1.2 million of cash collateral postings, which is close to historical averages.
Deleveraging Capacity: Fitch projects total consolidated leverage post acquisition to trend toward 3.5x by 2026. Fitch's leverage calculations reflect 50% debt allocated to approximately $2.5 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 an improvement in 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. Management is committed to net debt/EBITDA leverage below 3.0x, and calculates 2023 net debt/EBITDA of 2.7x excluding preferred equity, which adds about 20 bps to the leverage calculation.
Fitch expects planned investments into renewable and battery storage opportunities will be mostly financed by third-party non-recourse debt, of which $700 million was issued in March 2024. Fitch consolidates all the debt in the calculation of the leverage.
Acquisition Provides Diversification: Fitch views the acquisition of Energy Harbor (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. 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 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 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), providing increased confidence in 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.
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;
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 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;
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.
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 EH acquisition. Proceeds from the December 2023 issuance were used to settle the Senior Secured Notes Tender Offers in January 2024.
The company's proposed issuances are being used to refinance the $1.5 billion of debt maturities in 2024. After that, the refinancing declines to $750 million in 2025 and $1.0 billion in 2026.
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 100 TWHs of load and approximately four million customers.
Criteria Variation
Variation from Criteria: Fitch looks to its Corporate Rating Criteria dated Oct. 28, 2022, which outlines and defines a variety of quantitative measures used to assess credit risk. As 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 proposed P-Caps as debt, which is a variation from the Corporate Rating Criteria's 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 Operations 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.
Date of Relevant Committee
10 May 2023
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.
Public Ratings with Credit Linkage to other ratings
Vistra 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.
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. 
