
Transmission lines near Sweetwater, Texas. Vistra's recent deal to acquire Dallas-based Ambit Energy Holdings represents the latest move in a strategy by independent power producers to scoop up retail providers. Source: Associated Press |
Equity analysts view Vistra Energy Corp.'s recent agreement to purchase Ambit Energy Holdings LLC for $475 million as another sign of an increasingly consolidated retail energy market dominated by a duo of independent power producers.
Vistra and NRG Energy Inc. have spent the better part of a year snapping up retailers, with the former closing its acquisition of Crius Energy in a $378 million transaction in mid-July. Princeton, N.J.-headquartered NRG followed with its purchase of Dallas-based Stream Energy in August. The acquisitions represent the latest moves in an ongoing strategy by Vistra and NRG to bolt on retail customers to more closely match demand with with their generation fleets, as a kind of hedge against wholesale market price volatility.
"We expect Vistra and peer NRG Energy will continue to consolidate the retail energy market," Travis Miller, director of utilities research and equity strategist at Morningstar Inc., wrote in an Aug. 22 note following Vistra's announcement of the Ambit acquisition. As a result, retail margins are expected to shrink in the long-term "as the largest retailers increasingly compete on price," Miller added.
"We see the deal as an expected continuation of management's retail strategy," Guggenheim Securities LLC analyst Shahriar Pourreza wrote of the Vistra-Ambit deal, describing the acquisition as "generally in line with other transactions" in the retail space.
Guggenheim and Morningstar both expect the Ambit deal will strengthen Vistra's position in the Texas retail market, of which it will control one-third once the acquisition is finalized.
Residential consumers account for 90% of Dallas-based Ambit's business and two-thirds of the company's customers located within the Electric Reliability Council Of Texas market.
Vistra's generation-to-load match in ERCOT will rise to 63% after the deal closes, within the company's stated 60% to 70% target, wrote Guggenheim's Pourreza. Vistra's acquisition of Crius had brought the same figure to 45% from 37%.
"In our view, additional smaller retail acquisitions are not out of the question given power market volatility in ERCOT," wrote Pourreza, adding that smaller retail companies may move toward a sale after the summer but larger retailers are not expected to come to market in the near-term.
"Vistra still has plenty of capital flexibility to continue rolling up small retailers," wrote Miller.
Morningstar reaffirmed its negative trend rating for Vistra, but raised its fair value estimate to $21.50 from $20.50 on Aug. 22 as a result of both the Ambit deal and Vistra's decision to shutter four coal-fired generation facilities in Illinois.
The 915-MW Coffeen plant in Montgomery County, the 434-MW Havana 6 plant in Mason County, the 425-MW Duck Creek plant in Fulton County and the 294-MW Hennepin Power Station in Putnam County are each between 41 and 66 years old.
"Vistra's move to grow its retail business and shrink its coal fleet is consistent with our view that while average wholesale power prices fall, volatility will pick up," wrote Miller. "This should boost profitability for the largest retail energy providers like Vistra while reducing the value of older, inefficient generators."
Morningstar expects the closures to be "cash flow and value neutral," according to Miller, who wrote that the outlook for wholesale power prices in Illinois remains bearish as renewable energy spreads throughout the Midwest. "More closures could be coming."
