2023-05-12 06:53:11 ET
Summary
- Via Renewables took a $60 million hit in 2021 as Winter Storm Uri caused Texas natural gas prices to briefly spike to astronomical levels.
- Record U.S. natural gas price volatility and high prices also hurt VIA in 2022.
- Extreme "unlucky" events in 2021 and 2022 limited the effectiveness of VIA's hedging strategy. 2023 is looking like a much better year.
- VIASP yields 26.5% and trades at a 55% discount to par value.
One of our members at the Panick High Yield Report Investing Group (shout out to petergo007) frequently comments on the important role that luck plays in investing. Unfortunately, Via Renewables Inc. ( VIA ) had exceptionally poor luck in both 2021 and 2022. VIA is a retail energy provider. They buy electricity and natural gas wholesale and resell it to retail customers. VIA uses a complex hedging strategy to protect themselves against fluctuations in the price and demand for natural gas and electricity. Unfortunately, no hedging strategy is completely effective against the very rare and extreme weather and commodity price volatility events of 2021 and 2022.
Very bad luck in 2021
VIA took a $60 million hit in 2021 as Winter Storm Uri caused Texas natural gas prices to spike to over $100 per MMBtu . That was about a 40X price spike as compared to "normal" natural gas prices prior to the storm. The extreme cold temperatures brought by Uri prevented many natural gas wells from producing even as demand surged to record levels.
More bad luck in 2022
2022 was the most volatile year ever for U.S natural gas prices. The Ukraine war contributed to the volatility as increased LNG exports to Europe caused natural gas prices to spike higher. Henry Hub spot natural gas prices ranged from $3.46 per MMBtu to $9.85 per MMBtu in 2022. Bear in mind that 39% of all U.S. electricity is generated from natural gas. High spot natural gas prices result in high spot prices for electricity. VIA hedging was not completely effective against these volatile and generally high prices for natural gas and electricity.
Even more bad luck in Q1 2023
Even a very sudden and extreme move lower in spot natural gas and electricity rates can hurt VIA somewhat. We saw this in Q1 2023 as natural gas prices plummeted by 41% in January to $3.25 per MMBtu. Henry Hub spot natural gas prices have continued to decline and are currently trading at only $2.19 per MMBtu as of 5/11/2023. VIA lost $6.6 million in Q1 2023 even though adjusted EBIDTA increased to $18.8 million in Q1 2023 from only $10.8 million in Q1 2022. VIA was over hedged on natural gas as prices plummeted in Q1 while a mild winter caused actual retail demand to decline.
2023 looks like a good year
Fortunately, it looks like the rest of 2023 will be much better and more normal year for VIA despite the slow start in Q1. While there is always some risk to VIA from extreme weather events, what happened in 2021 with Winter Storm Uri was unusual. The recent extreme volatility in natural gas prices due to Russian sanctions was also unusual.
Margins are currently very high for reselling electricity and natural gas. As noted in the Q1 earnings report :
For the quarter ended March 31, 2023, Via Renewables reported Retail Gross Margin of $40.3 million compared to Retail Gross Margin of $28.8 million for the quarter ended March 31, 2022.
That $40.3 million gross margin was an impressive 30% of revenues. VIA took a large hit in Q1 as they had an $18.5 million loss on their electricity hedging and a $4.2 million loss on their natural gas hedging. Fortunately, these unusual hedging losses are likely to normalize as the year progresses. Henry Hub June 2023 natural gas is now trading at $2.18 per MMBtu as compared to $3.14 per MMBtu for June 2024. Electrical prices tend to track natural gas prices. The market is expecting more stable and moderate prices over the next year. That would be the best case scenario for VIA.
In addition to high margins and more stable commodity prices, VIA should also benefit from customer growth as the year progresses. As noted in the Q1 report:
Total RCE count of 339,000 as of March 31, 2023, up from 331,000 as of December 31, 2022.
CEO Keith Maxwell commented in the Q1 earnings report on the favorable customer growth and commodity price trends that are expected to continue in 2023:
We are pleased with the strong first quarter results despite some milder than normal weather as commodity prices continued their path downward from the fourth quarter. We were able to grow our customer base organically and have expanded to an additional deregulated state that we currently operate in, bringing the total to 20.
What is VIASP?
Via Renewables 8.75% PREF SER A ( VIASP ) is a floating rate par $25 cumulative preferred issue with a coupon based on 3 month LIBOR plus 6.578%. The next quarterly dividend of $0.73989 per share will be paid on 7/17/2023 to holders of record on 7/1/2023. VIACP now yields 26.5% at a recent price of $11.16.
What happens to VIASP now that LIBOR will be phased out by June 2023 ? Many LIBOR based floating rate issues will switch to SOFR. However, the VIASP prospectus (see page S-20) does not seem to provide for a transition to SOFR. The prospectus specifies that if LIBOR is unavailable the rate "will be the same as for the immediately preceding Dividend Period". This could favor VIASP holders by locking in the high 0.73989 quarterly coupon even after interest rates have declined.
VIASP is a perpetual issue, which means that the company is not required to call it. The company has the option to call VIASP anytime at par, but it is unlikely to be called until VIA's balance sheet improves significantly. See prospectus for additional details. Average daily trading volume is typically around 40K shares. VIASP dividends are qualified for tax purposes. VIASP holders will NOT receive a k-1. Use limit orders and patience when trading. A total of 3.6 million shares ($90 million par value) of VIASP are now outstanding. CEO Keith Maxwell owns 7,000 shares of VIASP (see page 37 of the annual proxy statement ). Preferred stock holders will have the right to elect 2 Directors if VIASP is delisted or defers 6 cumulative dividends.
Liquidity
Liquidity is always an important consideration for high yield preferred stock. Liquidity is especially important in the Retail Energy Provider sector where results can be volatile due to extreme weather events and commodity price fluctuations. As of Q1 2023 VIA had total liquidity of $75.4 million including cash of $45.2 million. VIA is focused on rebuilding their balance sheet. As per their 4/19/2023 press release the common dividend has been suspended. VIASP holders will benefit as the company retains more cash.
VIASP 3.3X dividend coverage
VIA had adjusted EBIDTA of $51.8 million in 2022 . However, it looks like 2023 will be a much better year. Q1 2023 adjusted EBIDTA was $18.8 as compared to $10.8 million for Q1 2022. These higher margins should persist in 2023. Based on Q1 results I would estimate that VIA is on target for adjusted EBIDTA of about $70 million in 2023. Q1 2023 interest expense was $2.7 million and quarterly preferred stock dividends were $2.6 million. Therefore, 2023 coverage of interest and preferred stock dividends should be about:
70 / 4(2.7 + 2.6) = 3.3X
2.4X balance sheet leverage including preferred stock
Due to the regional banking crisis some companies are having difficulty refinancing debt. Fortunately, VIA's bank credit line does not expire until 6/30/2025. As of Q1 2023 VIA had total debt of $126 million including $111 million on the senior secured bank credit line and $15 million on a subordinated credit line provided by CEO and founder Keith Maxwell. VIA is in compliance with all debt covenants (see page 22 of the 10Q for details). Q1 debt net of cash was $80.8 million. Based on my estimated 2023 adjusted EBIDTA of $70 million the balance sheet leverage is 80.8 / 70 = 1.2X. If we treat the VIASP preferred stock as debt then balance sheet leverage is (80.8 + 90 ) / 70 = 2.4X.
Enterprise value is about 3.5X adjusted EBIDTA
This article is focused on VIASP, but is the VIA common stock a reasonable speculation. At a recent price of $12.40, VIA has a market cap of $82 million. Therefore VIA is trading at an enterprise value of about (80.8 + 90 +82 ) / 70 = 3.6X adjusted EBIDTA.
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 customers defaults were only 5.1% of adjusted EBIDTA in Q1 2023, but 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
VIA was formerly known as Spark Energy and has been in business as a retail energy provider for more than 20 years. Even the sophisticated hedging strategies developed over that extended time period could not fully protect them from the extreme events that hit the REP market over the last couple of years. However, gross margins were a healthy 30% in Q1 2023. There is no guarantee that VIA will have a good year in 2023, but the odds are certainly in their favor. At a recent price of $11.16 VIASP yields 26.5% and is trading for less than half its par value. At current prices the risk / reward looks favorable for both VIA and VIASP.
For further details see:
Via Renewables Preferred: Better Luck Expected In 2023 For This 26.5% Yielder