VST - VIA Renewables: When Will The Big Dividends Return?

2023-12-01 12:29:03 ET

Summary

• The Via Renewables, Inc. dividend has been suspended, but should be restored in about a year.
• Via Renewables preferred shares offer an attractive 15.8% yield, but the common stock is even more compelling at current prices.
• Moderate natural gas prices are favorable for Via Renewables.
• Via Renewables common is is trading at $9.10 and would yield 33% if a 75 cent quarterly dividend was restored.

2023 has been a rough year for Via Renewables, Inc. ( VIA ). The company announced a 1:5 reverse stock split on 3/20/2023. Then the dividend was "temporarily suspended " on 4/19/2023. At a recent price of $9.10, VIA common stock has lost 75% of its value over the last year.

However, VIA now appears to be on the road to recovery. The Q3 earnings report was surprisingly good, as VIA earned $1.47 per share despite spiking wholesale electricity prices due to a prolonged Texas heatwave. Q4 earnings should be even better due to moderate natural gas prices. Customer retention has improved, and this should facilitate company growth. With the dividend suspended, more cash is being retained every quarter to strengthen the balance sheet .

This article makes the bullish case that VIA will be ready to restore a common stock dividend in about a year. VIA may also be a potential acquisition target. The article also takes another look at Via Renewables 8.75% PREF SER A ( VIASP ). Some of the major risks for VIA and VIASP are also highlighted.

Majority insider ownership

Chief Executive Officer and founder Keith Maxwell owns 65.8% of the shares as per this 5/18/2023 SEC filing . This assumes that his class B shares are converted into the class A publicly traded shares.

The customer count is stable

VIA ended Q3 2023 with 337,000 RCE (retail customer equivalents). This was a slight decline from the 346,000 RCE reported on 6/30/2023 and 339,000 reported on 3/31/2023. However there are some positive trends as CEO Keith Maxwell noted in the Q3 earnings report:

"We added approximately 24,000 RCEs in the third quarter through our organic sales channels compared to 10,000 in the third quarter of 2022. Our average quarterly attrition is down to 3.1% compared to 4.0% for the same period last year,"

VIA handled the Texas heatwave remarkably well

Texas recorded its second hottest summer on record in 2023. At times electricity prices spiked briefly as high as $5,000 per megawatt-hour . That's more than 100X the typical price level. VIA's hedging strategy and broad customer base enabled them to report a profitable Q3 despite the extreme challenges they faced in Texas. As Chief Executive Officer Keith Maxwell commented on the Q3 conference call:

"In the third quarter, we experienced relatively mild weather in the Northeast as well as 1 of the hottest summers on record in the ERCOT service area. However, we were able to successfully navigate the quarter due to our proven risk policies and portfolio diversification."

VIA adjusted EBIDTA should be $50 to $60 million in 2024

2020 was a great year for VIA which earned $68.2 million . VIA lost $5.4 million in 2021 as they took a $68 million hit from winter storm Uri. VIA earned only $11.2 million in 2022 as extreme price volatility for natural gas reduced margins. Note that natural gas prices also tend to drive whole sale electricity prices. VIA lost $6.8 million in Q1 2023 as plummeting natural gas prices caused hedging losses.

Fortunately for VIA, natural gas appears to have entered a period of fairly stable and moderate pricing. VIA earnings rebounded to $19.1 million in Q2 2023 and $14.7 million in Q3 2023 despite the Texas heat wave. Adjusted EBIDTA was $12.8 million in Q3 2023 and $12.0 million in Q2 2023. Both Q2 2023 and and Q3 2023 were good quarters despite some negative impact from the record setting Texas heatwave. Henry Hub December 2023 natural gas is now trading for only $2.80 per mmBTU. December 2024 natural gas is priced at $3.94 per mmBTU. These are ideal operating conditions for VIA. Given the lack of extreme weather and very moderate natural gas prices, Q4 2023 should be a stronger quarter than Q3 2023 was.

Based on the $24.8 million adjusted EBIDTA for the 6 months ended on 9/30/2023 (which I estimate included a $5 million hit from the Texas heat wave), I believe that VIA is on track to generate $50 million to $60 million of adjusted EBIDTA in 2024. This assumes a continuation of moderate natural gas prices and a stable or slightly increasing RCE count.

Liquidity is critical and improving

Strong liquidity and good credit is critical for VIA as they purchase and hedge their customer's expected electricity and natural gas usage requirements. VIA can face unpredictable price moves due to extreme weather or commodity price fluctuations. CEO Keith Maxwell emphasized this point on the Q3 earnings conference call :

"Financial flexibility provides us with the ability to pursue strategic growth opportunities and mitigate the impacts of unforeseeable future weather events."

VIA liquidity was only $76.9 million on 12/31/2022. This resulted in the temporary dividend suspension. As of Q2 2023, liquidity had improved to $86.3 million and $98.8 million as of Q3 2023. Things are heading in the right direction, but more liquidity is still needed.

When will VIA be ready to resume a dividend?

VIA really needs about $150 million in liquidity to operate comfortably given the potential uncertainties created by potential extreme weather events such as winter storm Uri and commodity price volatility. VIA had liquidity of $122 million on 12/31/2021, $168 million on 12/31/2020 and $139 million on 12/21/2019. Based on my projected adjusted EBIDTA of $50 million to $60 million for 2024, VIA should hit the $150 million comfortable liquidity level by Q4 2024. Therefore, a dividend resumption by Q4 2024 or Q1 2025 seems reasonable.

How much of a dividend can VIA afford to pay?

Let's assume normalized annual VIA adjusted EBIDTA going forward of $55 million. VIA has $17 million of tax loss carry forward assets as of Q3 2023. This should offset most cash tax payments for the next year. Interest costs and the preferred stock dividend expenses should total about $19.6 million per year. Interest costs should drop after 1 year due to higher cash levels. VIA has 7.23 million diluted shares. A 75 cent quarterly dividend would cost $21.7 million per year and would be more than fully covered.

Note that VIA paid a reverse split adjusted quarterly dividend of 91 cents per share prior to the dividend suspension. The CEO owns 65.8% of the company and VIA has a long history of paying dividends. Prior to the recent suspension, quarterly dividends were paid without interruption from 12/15/2014 through 3/15/2023.

Is VIA a takeover target?

VIA has 337,000 retail customers and markets green energy solutions through several marketing brands located around the country. This would make VIA an attractive acquisition target for green energy producers such as Vistra Corp ( VST ) and NextEra Energy Inc. ( NEE ). CEO Keith Maxwell owns a majority of the company and has been running it since the IPO in 2014. The depressed current stock price could facilitate an offer to take the company private.

Another look at VIASP

VIASP has recovered from $11.16 when my first article covering it was published on 5/12/2023 to a recent price of $19.69. The rally in VIASP was well deserved. VIA's balance sheet liquidity improved substantially as solid profits were reported in Q2 and Q3. Surprisingly, VIA declined from $12.40 to a recent price of $9.10. VIASP continues to be a good value at $19.69 since credit risk has declined. However, I believe that VIA is a more compelling value at current prices.

What are the major risks?

See pages 21 - 39 of the annual report for a more detailed description of risks. Even with their sophisticated hedging strategy, VIA could be impacted by more extreme weather events or commodity price volatility. VIA bad debt expense was $2.7 million in Q3 2023. More utility customers could default if economic conditions worsen. CEO Keith Maxwell owns 65.8% of the common stock (including his class B shares) and controls the company. This could create conflicts of interest with other stakeholders. There is some risk that VIASP could be delisted if the company goes private. Note that VIASP holders would be entitled to elect 2 Directors if the public listing is not maintained.

Conclusions

My calculations indicate that a 75 cent quarterly VIA dividend would be reasonable and could be resumed in about 1 year. Purchasing VIA today at $9.10 could generate a future yield on cost of about 33%. The current depressed price of VIA and majority insider ownership could also make the company a good candidate to be taken private. Credit risk is decreasing for VIASP which now yields 15.9% at a recent price of $19.69. VIASP still offers an attractive yield, but VIA is a more compelling value for those investors willing to wait about a year for the dividend to be restored.

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