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Vistra eyes retail M&A as counterweight to Dynegy deal

With its acquisition of Dynegy Inc. nearing final approval, Vistra Energy Corp. is shifting its strategy toward retail growth beyond Texas as a hedge for its imminent wholesale expansion in northern markets.

Vistra, which on Feb. 26 posted $1.46 billion in adjusted EBITDA in full-year 2017, is set to become the largest publicly traded power generator with some 40 GW of combined capacity across the U.S., should its deal with Dynegy reach an expected close this spring.

"We remain confident we will be able to close the merger with Dynegy in the second quarter of 2018," Vistra CEO and President Curt Morgan told analysts on a Feb. 26 earnings call. "My view is it's most likely in the mid-April to mid-May time frame."

The company is awaiting final regulatory approval from the Public Utility Commission of Texas and the Federal Energy Regulatory Commission. The company has requested FERC approve its deal by March 15, shortly after Vistra and Dynegy shareholders will vote on the merger proposal March 2. Vistra already gained approval from the Federal Trade Commission, as well as the New York Public Service Commission via the body's consent agenda. The company is also engaged in the "robust sales process" of a trio of assets in the Electric Reliability Council of Texas market to meet PUCT market power requirements.

Retail opportunities

Heading into its shareholder vote, Vistra offered a glimpse into its medium-term strategy as a combined organization with Dynegy, which could entail targeted acquisitions of retail books to supplement its integrated power generation and distribution platform. While the company is keen to maintain a leverage target of 2.5 times net-debt to EBITDA ratio in the 12-to-24 months after deal closure, Vistra may still pursue acquisitions on the retail front.

"We'll evaluate growth opportunities during this period, predominantly on the retail side, and we'll be flexible on allocating capital to these tuck-in opportunities," Morgan said. "We do not control when accretive transactions might present themselves."

In particular, Vistra may look to pursue such deals within markets where Dynegy operates wholesale assets, namely PJM Interconnection and ISO New England, with such capital allocation coming in lieu of investments in additional generation assets.

"I think our bigger focus is going to be more around our retail business ... we are significantly long in PJM and ISO New England markets, and we like to be shorter than that," Morgan said. "We are embarking on developing a strategy this year in 2018. We're already in the middle of it on our retail business that's outside of Texas ... and it's not rocket science we're going to try to grow organically, and then look for opportunities for acquisitions that we think have a compelling value proposition."

Market strategies

Vistra appears most constructive on ERCOT, PJM and ISO New England, which it considers "core markets." The company notably believes new-build thermal capacity in ERCOT appears overstated compared to existing reserve margin projects, based on deteriorating project returns. Meanwhile, additional renewable penetration could be offset by geographic and transmission constraints, along with limited tax equity capacity to finance new projects.

But Vistra's expanded footprint in New York, California and Midcontinent ISO through Dynegy may be less than core, Morgan observed. In California, the company is considering its long-term strategy at Dynegy's sites, including prospects for battery storage development, Morgan said. In New York, however, the market appears less promising.

"I'm not sure that one asset in New York is strategy, and so we'll have to make a decision," Morgan said, referring to the 1,211.8-MW Independence Station CC gas plant. "It's a good asset and not saying anything against the asset ... not sure about the long-term market in New York."

In MISO, Vistra is evaluating its portfolio, similar to efforts it undertook in Texas for legacy coal-fired units, which could lead to a potential exit or retirement.

"We've got a good retail business there, but we have some challenges around that asset base there, both in terms of performance, but also just economics," Morgan said. "We've got a portfolio optimization exercise to do no different than what we did in Texas, and I think that may result in maybe a shrinking our size of our generation. Whether that means we try to sell assets or what, I don't know yet."