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With market awash in generation assets, IPP chiefs assess M&A

Dynegy Inc. and Vistra Energy Corp. management teams on Aug. 4 separately flagged an excess of generation assets available for sale, a trend seen as shifting bargaining power to the buy-side.

Both generators reaffirmed 2017 earnings guidance, and emphasized the implementation of separate cost-cutting initiatives during the back half of 2017. But while Vistra has emerged from bankruptcy with relatively little debt on its balance sheet, Dynegy is still endeavoring to cut net debt to achieve its target leverage level of 4.5x debt-to-EBITDA by year-end 2018.

To do so, Dynegy has suggested that it would be an opportunistic seller of higher quality Northeastern combined-cycle gas assets in its portfolio, while more broadly considering the value that could be extracted from synergies in a larger corporate-level merger.

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Awash in assets

While neither management team addressed a potential merger, perspectives offered by Dynegy CEO and President Bob Flexon off the recent sale of three assets to private equity buyers, and that of Vistra CEO and President Curt Morgan following the completed acquisition of a large ERCOT combined-cycle gas asset, shed light on the dynamics playing out in the market for competitive power portfolios.

"There is a plethora of people wanting to sell assets right now in the marketplace," Vistra's Morgan observed, noting that such selection represents a signal to look to buy. "I think if you're going to be an acquisitive company, you're going to try to grow you need to grow at the bottom of the cycle ... and so we believe this would be the best time to rotate our supply base into more flexible gas assets for a variety of reasons."

From the other vantage, however, selling assets at the perceived bottom of the cycle suggests less return, leaving Dynegy in no rush to sell off "crown jewel" power plants if bids come back below expectations.

"What we have found through the sales process right now is that the market for assets is weakening a bit in terms of the players that are coming in and bidding for the assets," Flexon observed. "We're going to see who shows up for the auction, for the sales process, and if it's not a strong group of buyers, we're not going to spend a lot of time on it."

If Dynegy's recent New England sale is any indication of what to expect, then larger private equity and strategic buyers may simply be occupied with larger transactions, whether in the fold for rival Calpine Corp. or elsewhere upstream, leaving the bulk of the buy-side to more opportunistic middle market private equity specialists.

"As we went further into the process, you're kind of left with some of the smaller private equity firms that specialize more in smaller single-asset-type acquisitions, and seems like the larger private equity and the strategics became tied up in more complex and higher transactions that require far more capital," Flexon observed of the buyers drawn to the market mitigation sale.

Synergies

The thread behind a potential Vistra takeover of Dynegy was not entirely absent, however, with both teams noting programs to evaluate cost cuts and operational synergies. Vistra has undertaken an operations performance, or OP, initiative to identify cost savings in its field operations, namely heat rate and logistical improvements among its generation fleet.

Likewise, for Dynegy, by hiring a third-party consultant to evaluate its operational cost structure of nearly $2 billion, the company may be looking to drill down on precisely the scope of potential cost synergies within its generation fleet before jumping into a transaction.

"The opportunities that we're seeing I think would be additive to any synergies, if we ever got into a situation where we're talking about some type of strategic combination," Flexon noted of the company's latest cost cutting effort, centered on heat rate, ramp rate and other logistical improvements.

Moreover, Dynegy's Northeastern operations are seen as an attractive complement to Vistra's business, and one that offers attractive revenues from capacity payments, which offers revenue diversification against the Texas market. Even in light of nuclear subsidies in eastern markets, Vistra is not entirely deterred, with management noting that to the degree markets declined due to the subsidies, cost synergies extracted through a merger could offset lower fundamentals overall.

"There are benefits to diversification even for a company like ours ... and when you're a single-state company, we got to roll with Texas weather," Morgan said, noting that the "downside protection that capacity markets offer is pretty formidable."