Virus May Show How Wall Street Misjudged Two Power Companies

(Bloomberg) -- The last two independent power providers trading on Wall Street, Vistra Energy Corp. and NRG Energy Inc., are getting a unique chance to prove their mettle to investors, thanks to Covid-19.

Over the past few years, both NRG and Vistra have each reduced their debt, boosted cash flows and pitched for investment-grade ratings. They've also expanded sales through their retail business and reduced their exposure to the impacts of wholesale energy price swings. Still, their shares have consistently underperformed regulated utilities, typically seen as a safer bet.

Now, with the pandemic closing businesses nationwide, lowering demand for electricity, they face a new challenge. And investors are watching closely to see how well they stand up versus their regulated rivals.

“If they show their ability to weather Covid-19 with minimum or no impact, that will be a pretty dramatic statement in their favor,” Stephen Byrd, an analyst at Morgan Stanley, said. “This is a big year to prove out how defensive they really are.”

Vistra and NRG are down by more than 15% in the past year, significantly below the 4% decline for companies in the S&P 500 utility index. While regulated utilities including NextEra Energy Inc. and Duke Energy Corp. are expected to be largely insulated from the crisis, merchant power producers like Vistra and NRG have over the years proved to be way more vulnerable to such shocks.

On April 14, West Virginia-based Longview Power LLC filed for Chapter 11, citing the impact of pandemic on already depressed power prices. That's the latest of a series of merchant power producers that have already faced bankruptcy or restructuring, which includes Vistra and NRG. There were once about a dozen publicly-traded merchant power providers. Now there are two.

Vistra emerged from the bankruptcy of Energy Future Holdings Corp. in 2016. NRG, which in 2003 filed for Chapter 11 protection, agreed three years ago to hand over struggling power producer GenOn Energy Inc. to bondholders. The company also was pressured by investors to unload assets as part of a broader restructuring.

Now Vistra expects the pandemic to cause “minimal impacts” to its results this year, according to Chief Executive Officer Curtis Morgan.

Since 2016, Vistra has almost tripled the number of retail customers, who now consume about 60% of the electricity it generates. The move has boosted margins, stabilized earnings and put the company “in a position to not only survive, but to grow,” Morgan said.

Retail customers help mitigate price risks because those sales are typically held under longer-term contracts. Morgan said in a statement that sales to residential customers may rise as more people work from home, offsetting a decline in other segments.

At NRG, the match between generation volumes and retail sales is “almost perfectly” balanced in Texas, where most of the company's operations are based, according to CEO Mauricio Gutierrez. “Our model is a lot more resilient, a lot more stable than it was in the past,” Gutierrez said in a March interview, adding the company was “redefining competitive power”.

Debt investors seem to be comfortable with that strategy. Vistra and NRG most-traded bonds have lost less than 1% this year, which compares to a 9% drop in U.S. high yield bonds, and are mostly traded above par. The companies' strong cash flows, limited capital spending and no near-term maturities have helped support the bonds, according to Maergrethe Amoussou, an analyst at Segall Bryant & Hamill.

“These companies have taken a lot of steps to strengthen both their business profile and well as their financial profile,” Shalini Mahajan, a managing director at Fitch Ratings, said in an interview. “Going into this down cycle, they're in a much better position.”

Other merchant power producers include Calpine Corp., which went private after executives felt its shares were undervalued, and Energy Harbor Corp., a former FirstEnergy Corp. subsidiary that emerged from bankruptcy earlier this year.

While Vistra and NRG are in a better shape now, long-term challenges remain, according to Paul Patterson, an analyst for Glenrock Associates LLC. Merchant power producers are still poised to struggle, he said, as rising supplies of low-cost renewable power and competition from regulated utilities are seen pressuring their profit margins down over time.

Vistra was down 3.1% at 2:48 p.m. in New York, while NRG slid 1%.