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Nov. 5, 2019, 8:00 a.m. EST

10-Q: VISTRA ENERGY CORP.

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(EDGAR Online via COMTEX) -- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2019 and 2018 should be read in conjunction with our condensed consolidated financial statements and the notes to those statements.

All dollar amounts in the tables in the following discussion and analysis are stated in millions of U.S. dollars unless otherwise indicated.

Business

Vistra Energy is a holding company operating an integrated power business in markets throughout the U.S. Through our subsidiaries, we are engaged in competitive energy market activities including power generation, wholesale energy sales and purchases, commodity risk management and retail sales of electricity and natural gas to end users.

Operating Segments

Vistra Energy has six reportable segments: (i) Retail, (ii) ERCOT, (iii) PJM,

Significant Activities and Events and Items Influencing Future Performance

Ambit Transaction

On November 1, 2019 (Ambit Acquisition Date), Volt Asset Company, Inc., an indirect, wholly owned subsidiary of Vistra Energy, completed the acquisition of Ambit (Ambit Transaction). Vistra Energy funded the purchase price of $475 million plus Ambit's outstanding net working capital using cash on hand. See Note 2 to the Financial Statements for further information concerning the Ambit Transaction.

Crius Transaction

On July 15, 2019, Vienna Acquisition B.C. Ltd., an indirect, wholly owned subsidiary of Vistra Energy, completed the acquisition of the equity interests of two wholly owned subsidiaries of Crius that indirectly own the operating business of Crius (Crius Transaction). Vistra Energy funded the purchase price of approximately $400 million (including $382 million for outstanding trust units) using cash on hand. See Note 2 to the Financial Statements for a summary of the Crius Transaction and business combination accounting.

Dynegy Merger Transaction

On the Merger Date, Vistra Energy and Dynegy completed the transactions contemplated by the Merger Agreement. Pursuant to the Merger Agreement, Dynegy merged with and into Vistra Energy, with Vistra Energy continuing as the surviving corporation.

See Note 2 to the Financial Statements for a summary of the Merger transaction and business combination accounting.

Acquisition, Development and Disposition of Generation Facilities

See Note 3 to the Financial Statements for a summary of our solar generation and battery energy storage projects. See Note 4 to the Financial Statements for a summary of our generation plant retirements in 2018 and 2019.

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Dividend Program

In November 2018, Vistra Energy announced that the Board had adopted a dividend program pursuant to which Vistra Energy would initiate an annual dividend of approximately $0.50 per share, beginning in the first quarter of 2019. In February 2019, May 2019 and July 2019, the Board declared quarterly dividends of $0.125 per share that were paid in March 2019, June 2019 and September 2019, respectively.

Share Repurchase Program

In June 2018, we announced that the Board had authorized a share repurchase program under which up to $500 million of our outstanding common stock may be repurchased. In November 2018, we announced that the Board had authorized an incremental share repurchase program under which up to $1.25 billion of our outstanding stock may be purchased. Shares of the Company's common stock may be repurchased in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with the Exchange Act, or by other means in accordance with federal securities laws. The actual timing, number and value of shares repurchased under the share repurchase program or otherwise will be determined at our discretion and will depend on a number of factors, including the market price of our stock, general market and economic conditions, applicable legal requirements and compliance with the terms of our debt agreements and the Tax Matters Agreement. See Note 14 to the Financial Statements for more information concerning the share repurchase program, including shares repurchased and remaining amounts available under the program.

Debt Activity

We have stated our objective is to reduce our consolidated net leverage from current levels to approximately 2.5x net debt/EBITDA. We also intend to continue to simplify and optimize our capital structure, maintain adequate liquidity and pursue opportunities to refinance our long-term debt to extend maturities and/or reduce ongoing interest expense. In the second quarter of 2019, we completed several transactions that we believe, in the aggregate, advanced all of these goals. While the premiums, fees and expenses that we paid in connection with these transactions resulted in an increase in our total debt as of September 30, 2019 relative to March 31, 2019, we expect the ongoing free cash flow savings will offset this increase over the next few years. See Note 11 to the Financial Statements for details of our long-term debt activity and Note 10 to the Financial Statements for details of the accounts receivable securitization program.







        Power Price and Natural Gas Price Exposure
        Estimated hedging levels for generation volumes in ERCOT, PJM, NYISO, ISO-NE,
        MISO and CAISO at September 30, 2019 were as follows:
                                           2019    2020
        Coal/Nuclear/Renewable Generation:
        ERCOT                              100 %   100 %
        PJM                                100 %    92 %
        MISO                                95 %    98 %
        Gas Generation:
        ERCOT                               94 %    59 %
        PJM                                 95 %    65 %
        NYISO/ISO-NE                       100 %    78 %
        CAISO                               98 %    83 %
        


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The following sensitivity table provides approximate estimates of the potential impact of movements in power prices and spark spreads (the difference between the power revenue and fuel expense of natural gas-fired generation as calculated using an assumed heat rate of 7.2 MWh/MMBtu) on realized pretax earnings (in millions) taking into account the hedge positions noted above for the periods presented. The residual gas position is calculated based on two steps: first, calculating the difference between actual heat rates of our natural gas generation units and the assumed 7.2 heat rate used to calculate the sensitivity to spark spreads; and second, calculating the residual natural gas exposure that is not already included in the gas generation spark spread sensitivity shown in the table below. The estimates related to price sensitivity are based on our expected generation, related hedges and forward prices as of September 30, 2019.







        ERCOT:
        Coal/Nuclear/Renewable Generation: $2.50/MWh increase in
        power price                                                $           1        $        3
        Coal/Nuclear/Renewable Generation: $2.50/MWh decrease in
        power price                                                $           -        $        -
        Gas Generation: $1.00/MWh increase in spark spread         $           1        $       17
        Gas Generation: $1.00/MWh decrease in spark spread         $           -        $      (14 )
        Residual Natural Gas Position: $0.25/MMBtu increase in
        natural gas price                                          $           1        $       (3 )
        Residual Natural Gas Position: $0.25/MMBtu decrease in
        natural gas price                                          $          (1 )      $        3
        PJM:
        Coal Generation: $2.50/MWh increase in power price         $           1        $        5
        Coal Generation: $2.50/MWh decrease in power price         $           -        $       (2 )
        Gas Generation: $1.00/MWh increase in spark spread         $           1        $       13
        Gas Generation: $1.00/MWh decrease in spark spread         $           -        $      (12 )
        Residual Natural Gas Position: $0.25/MMBtu increase in
        natural gas price                                          $          (1 )      $       (2 )
        Residual Natural Gas Position: $0.25/MMBtu decrease in
        natural gas price                                          $           1        $        2
        NYISO/ISO-NE:
        Gas Generation: $1.00/MWh increase in spark spread         $           -        $        4
        Gas Generation: $1.00/MWh decrease in spark spread         $           -        $       (3 )
        Residual Natural Gas Position: $0.25/MMBtu increase in
        natural gas price                                          $           -        $       (1 )
        Residual Natural Gas Position: $0.25/MMBtu decrease in
        natural gas price                                          $           -        $        1
        MISO/CAISO:
        Coal Generation: $2.50/MWh increase in power price         $           2        $        2
        Coal Generation: $2.50/MWh decrease in power price         $           -        $        -
        Gas Generation: $1.00/MWh increase in spark spread         $           -        $        1
        Gas Generation: $1.00/MWh decrease in spark spread         $           -        $       (1 )
        Residual Natural Gas Position: $0.25/MMBtu increase in
        natural gas price                                          $           -        $       (1 )
        Residual Natural Gas Position: $0.25/MMBtu decrease in
        natural gas price                                          $           -        $        1
        ___________
        


Environmental Matters - See Note 13 to Financial Statements for a discussion of greenhouse gas emissions, regional haze, state implementation plan and other recent EPA actions as well as related litigation.

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        RESULTS OF OPERATIONS
        Consolidated Financial Results - Three and Nine Months Ended September 30, 2019
        Compared to Three and Nine Months Ended September 30, 2018
                                                                                Favorable            Nine Months Ended             Favorable
                                   Three Months Ended September 30,           (Unfavorable)            September 30,             (Unfavorable)
                                      2019                   2018               $ Change             2019          2018             $ Change
        Operating revenues     $         3,194         $         3,243     $          (49 )      $    8,949     $   6,581     $         2,368
        Fuel, purchased power
        costs and delivery
        fees                            (1,687 )                (1,627 )              (60 )          (4,287 )      (3,492 )              (795 )
        Operating costs                   (397 )                  (346 )              (51 )          (1,153 )        (926 )              (227 )
        Depreciation and
        amortization                      (424 )                  (426 )                2            (1,213 )        (967 )              (246 )
        Selling, general and
        administrative
        expenses                          (246 )                  (194 )              (52 )            (637 )        (711 )                74
        Operating income                   440                     650               (210 )           1,659           485               1,174
        Other income                         6                       6                  -                45            25                  20
        Other deductions                    (4 )                    (1 )               (3 )              (9 )          (4 )                (5 )
        Interest expense and
        related charges                   (224 )                  (154 )              (70 )            (720 )        (291 )              (429 )
        Impacts of Tax
        Receivable Agreement               (62 )                    17                (79 )             (26 )         (65 )                39
        Equity in earnings of
        unconsolidated
        investment                           3                       7                 (4 )              13            11                   2
        Income before income
        taxes                              159                     525               (366 )             962           161                 801
        Income tax expense                 (45 )                  (194 )              149              (270 )         (31 )              (239 )
        Net income             $           114         $           331     $         (217 )      $      692     $     130     $           562
                                                                 Three Months Ended September 30, 2019
                                                                                      Asset          Eliminations /               Vistra
                         Retail       ERCOT        PJM        NY/NE       MISO       Closure      Corporate and Other      Energy Consolidated
        Operating
        revenues        $ 2,207     $   731     $   443     $   214     $   197     $      -     $          (598 )        $            3,194
        Fuel, purchased
        power costs and
        delivery fees    (1,358 )      (429 )      (281 )      (108 )      (164 )          -                 653                      (1,687 )
        Operating costs     (22 )      (166 )       (74 )       (24 )      (101 )         (4 )                (6 )                      (397 )
        Depreciation
        and
        amortization        (86 )      (126 )      (135 )       (51 )        (5 )          -                 (21 )                      (424 )
        Selling,
        general and
        administrative
        expenses           (160 )       (21 )       (14 )       (11 )       (12 )         (5 )               (23 )                      (246 )
        Operating
        income (loss)       581         (11 )       (61 )        20         (85 )         (9 )                 5                         440
        Other income          -           1           -           -           1            1                   3                           6
        Other
        deductions            -          (2 )         -           -          (2 )          -                   -                          (4 )
        Interest
        expense and
        related charges      (8 )         2          (2 )        (1 )        (2 )          -                (213 )                      (224 )
        Impacts of Tax
        Receivable
        Agreement             -           -           -           -           -            -                 (62 )                       (62 )
        Equity in
        earnings of
        unconsolidated
        investment            -           -           1           2           -            -                   -                           3
        Income (loss)
        before income
        taxes               573         (10 )       (62 )        21         (88 )         (8 )              (267 )                       159
        Income tax
        expense               -           -           -           -           -            -                 (45 )                       (45 )
        Net income
        (loss)          $   573     $   (10 )   $   (62 )   $    21     $   (88 )   $     (8 )   $          (312 )        $              114
        


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                                                                 Three Months Ended September 30, 2018
                                                                                      Asset         Eliminations /               Vistra
                         Retail       ERCOT        PJM        NY/NE       MISO       Closure      Corporate and Other     Energy Consolidated
        Operating
        revenues        $ 1,813     $ 1,396     $   620     $   301     $   230     $     (1 )   $        (1,116 )       $            3,243
        Fuel, purchased
        power costs and
        delivery fees    (1,689 )      (458 )      (321 )      (167 )      (150 )          -               1,158                     (1,627 )
        Operating costs     (16 )      (155 )       (83 )       (23 )       (61 )         (3 )                (5 )                     (346 )
        Depreciation
        and
        amortization        (80 )      (122 )      (141 )       (55 )        (3 )          -                 (25 )                     (426 )
        Selling,
        general and
        administrative
        expenses           (111 )       (18 )       (14 )       (11 )       (18 )          -                 (22 )                     (194 )
        Operating
        income (loss)       (83 )       643          61          45          (2 )         (4 )               (10 )                      650
        Other income          -           -           1           -           -            -                   5                          6
        Other
        deductions            -          (2 )         -           -           -            -                   1                         (1 )
        Interest
        expense and
        related charges      (3 )         2          (3 )        (1 )        (1 )          -                (148 )                     (154 )
        Impacts of Tax
        Receivable
        Agreement             -           -           -           -           -            -                  17                         17
        Equity in
        earnings of
        unconsolidated
        investment            -           -           3           3           -            -                   1                          7
        Income (loss)
        before income
        taxes               (86 )       643          62          47          (3 )         (4 )              (134 )                      525
        Income tax
        expense               -           -           -           -           -            -                (194 )                     (194 )
        Net income
        (loss)          $   (86 )   $   643     $    62     $    47     $    (3 )   $     (4 )   $          (328 )       $              331
        


In the third quarter of 2019, we continued with our balanced capital allocation program, refinancing approximately $400 million of debt, which lowered interest rates and extended maturities, and returning approximately $171 million to stockholders through share repurchases. We produced results during the quarter in line with expectations, reflecting the stability of our integrated model with the generation fleet operating safely and reliably over the volatile ERCOT summer while our Retail segment delivered stable pricing and growth in ERCOT residential customer counts. Consolidated results decreased $217 million to net income of $114 million in the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The change in results reflects higher power costs in our Retail segment, lower revenue net of fuel in our PJM, NY/NE and MISO segments, an increase in unrealized losses on hedging transactions and interest rate swaps, and one-time costs associated with the MISO segment plant closures and the Crius Transaction; partially offset by higher revenue net of fuel in our ERCOT segment and a decrease in income tax expense.

Interest expense and related charges increased $70 million to $224 million in the three months ended September 30, 2019 compared to the three months ended September 30, 2018 and reflected a $114 million increase in unrealized mark-to-market losses on interest rate swaps, partially offset by a $24 million decrease in interest paid/accrued reflecting repayments and repurchases of long-term debt. Debt extinguishment gains totaled $2 million in 2019 compared to debt extinguishment losses of $27 million in 2018. See Note 19 to the Financial Statements.

For the three months ended September 30, 2019 and 2018, the Impacts of the Tax Receivable Agreement totaled expense of $62 million and income of $17 million, respectively. See Note 8 to the Financial Statements for discussion of the impacts of the Tax Receivable Agreement Obligation.

For the three months ended September 30, 2019, income tax expense totaled $45 million and the effective tax rate was 28.3%. For the three months ended September 30, 2018, income tax expense totaled $194 million and the effective tax rate was 37.0%. See Note 7 to the Financial Statements for reconciliation of the effective rates to the U.S. federal statutory rate.

Consolidated cash flow from operations produced $941 million in the three months ended September 30, 2019 compared to $892 million produced in the three months ended September 30, 2018.

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                                                                 Nine Months Ended September 30, 2019
                                                                                      Asset         Eliminations /               Vistra
                         Retail       ERCOT        PJM        NY/NE       MISO       Closure      Corporate and Other     Energy Consolidated
        Operating
        revenues        $ 5,014     $ 3,356     $ 1,833     $   813     $   697     $      -     $        (2,764 )       $            8,949
        Fuel, purchased
        power costs and
        delivery fees    (4,383 )    (1,062 )      (862 )      (436 )      (436 )          -               2,892                     (4,287 )
        Operating costs     (44 )      (525 )      (244 )       (74 )      (219 )        (25 )               (22 )                   (1,153 )
        Depreciation
        and
        amortization       (204 )      (385 )      (399 )      (155 )       (11 )          -                 (59 )                   (1,213 )
        Selling,
        general and
        administrative
        expenses           (364 )       (60 )       (41 )       (33 )       (71 )        (14 )               (54 )                     (637 )
        Operating
        income (loss)        19       1,324         287         115         (40 )        (39 )                (7 )                    1,659
        Other income          -          21           -           -           5            2                  17                         45
        Other
        deductions            -          (6 )         -           -          (2 )          -                  (1 )                       (9 )
        Interest
        expense and
        related charges     (16 )         7          (8 )        (2 )        (5 )          -                (696 )                     (720 )
        Impacts of Tax
        Receivable
        Agreement             -           -           -           -           -            -                 (26 )                      (26 )
        Equity in
        earnings of
        unconsolidated
        investment            -           -           4           9           -            -                   -                         13
        Income (loss)
        before income
        taxes                 3       1,346         283         122         (42 )        (37 )              (713 )                      962
        Income tax
        expense               -           -           -           -           -            -                (270 )                     (270 )
        Net income
        (loss)          $     3     $ 1,346     $   283     $   122     $   (42 )   $    (37 )   $          (983 )       $              692
                                                                 Nine Months Ended September 30, 2018
                                                                                      Asset         Eliminations /               Vistra
                         Retail       ERCOT        PJM        NY/NE       MISO       Closure      Corporate and Other     Energy Consolidated
        Operating
        revenues        $ 4,239     $ 2,190     $ 1,104     $   487     $   488     $     48     $        (1,975 )       $            6,581
        Fuel, purchased
        power costs and
        delivery fees    (3,290 )    (1,085 )      (560 )      (276 )      (283 )        (37 )             2,039                     (3,492 )
        Operating costs     (29 )      (503 )      (165 )       (48 )      (136 )        (33 )               (12 )                     (926 )
        Depreciation
        and
        amortization       (237 )      (295 )      (266 )      (104 )        (6 )          -                 (59 )                     (967 )
        Selling,
        general and
        administrative
        expenses           (312 )       (73 )       (28 )       (23 )       (33 )         (4 )              (238 )                     (711 )
        Operating
        income (loss)       371         234          85          36          30          (26 )              (245 )                      485
        Other income         29          20           1           -           -            2                 (27 )                       25
        Other
        deductions            -          (5 )         -           -           -            -                   1                         (4 )
        Interest
        expense and
        related charges      (3 )       (13 )        (5 )        (1 )        (1 )          -                (268 )                     (291 )
        Impacts of Tax
        Receivable
        Agreement             -           -           -           -           -            -                 (65 )                      (65 )
        Equity in
        earnings of
        unconsolidated
        investment            -           -           5           6           -            -                                             11
        Income (loss)
        before income
        taxes               397         236          86          41          29          (24 )              (604 )                      161
        Income tax
        benefit               -           -           -           -           -            -                 (31 )                      (31 )
        Net income
        (loss)          $   397     $   236     $    86     $    41     $    29     $    (24 )   $          (635 )       $              130
        


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In the nine months ended September 30, 2019, we refinanced approximately $4.5 billion of debt and returned approximately $619 million to stockholders through share repurchases. Our operating segments delivered strong operating performance with a disciplined focus on cost management, while generating and selling electricity in a safe and reliable manner. Consolidated results increased $562 million to net income of $692 million in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The change in results reflects an increase in unrealized gains on hedging transactions and a full year of operations acquired in the Merger, partially offset by an increase in interest and income tax expenses.

Interest expense and related charges increased $429 million to $720 million in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 and driven by a $398 million increase in unrealized mark-to-market losses on interest rate swaps and a $65 million increase in interest paid/accrued reflecting long-term debt assumed in the Merger. Debt extinguishment gains totaled $12 million in 2019 compared to debt extinguishment losses of $27 million in 2018. See Note 19 to the Financial Statements.

For the nine months ended September 30, 2019 and 2018, the Impacts of the Tax Receivable Agreement totaled expense of $26 million and $65 million, respectively. See Note 8 to the Financial Statements for discussion of the impacts of the Tax Receivable Agreement Obligation.

For the nine months ended September 30, 2019, income tax expense totaled $270 million and the effective tax rate was 28.1%. For the nine months ended September 30, 2018, income tax expense totaled $31 million and the effective tax rate was 19.3%. See Note 7 to the Financial Statements for reconciliation of the effective rates to the U.S. federal statutory rate.

Discussion of Adjusted EBITDA

Non-GAAP Measures - In analyzing and planning for our business, we supplement our use of GAAP financial measures with non-GAAP financial measures, including EBITDA and Adjusted EBITDA as performance measures. These non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results and the accompanying reconciliations to . . .

Nov 05, 2019

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