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TXU Parent: Any Retail M&A Would Need To Build Integrated Model (Not Interested in Retail-Only Northeast Buys); ERCOT Retail M&A Possible, But Not Sure If "Right Time"

March 31, 2017

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Reporting by Paul Ring • ring@energychoicematters.com

During an earnings call yesterday, Vistra Energy executives discussed its capital allocation strategy and potential for M&A, including potential M&A for its retail segment

Vistra Energy is the parent of TXU and Luminant

For any type of "transformational" retail deal, "we would want it to be in an integrated fashion," Vistra CEO Curt Morgan said

"We want two things. One, existing retail, and two, we want to know that we could use it as a platform to expand our integrated model," Morgan said

"It is highly unlikely that we're going to go buy a couple of generation assets just standalone, and then look to build organically a retail business outside of ERCOT or buy a retail business. It’s also equally unlikely that we're going to go out and buy, and lead, with a retail business and fill it in with generation. Those are just unlikely things when you think about how we see the world," Morgan said

"We still think that we could actually add to our business here [in ERCOT], and we know it well. We’ve got scale economies in our retail business and certainly a very good approach to the market. We just don’t know that this is the right time to do that," Morgan said

"But we're constantly in this market. I will tell you that the deal flow that goes on in ERCOT, we are front and center on this. Everybody knows what our balance sheet looks like. Everybody knows kind of what we're interested in, so there is very little going on in ERCOT that we don’t get a look at, and so I'd say, if we're going to do retail right now on a standalone only basis, you could pretty much bet on [that] it would be an ERCOT deal," Morgan said

More broadly, regarding capital allocation, Morgan said, "there are several potential uses of cash we can evaluate, including the return of capital to our stockholders in the form of share repurchases and/or dividends, investments in our business in ERCOT and potential investments in the U.S. markets including transformational transactions."

"We do not believe at this point in time a recurring dividend policy is appropriate for the company," Morgan said. "Our evaluation suggests that a recurring dividend must be meaningful in a 3% to 4% yield level, and we must be able to grow it to get recognition in the company's valuation. We are not ready to commit to that and a recurring dividend policy program right now, especially given where the current power wholesale and retail markets are in the U.S., and the potential opportunities available to invest at attractive valuations and enhance the value of the company."

"However, I would like to make it very, very clear, that we are looking for compelling value opportunities and we are quite comfortable returning value to our shareholders rather than squandering our balance sheet and destroying value if compelling value opportunities do not materialize," Morgan said

Morgan emphasized that Vistra would be disciplined on any significant growth transaction, and said that, among other considerations, any such transaction would need to drive further efficiency through synergies, and such synergies would need to be meaningful.

"And management would need to have a clear line of sight to return our gross debt to EBITDA to [a] three to four times level within 12 to 18 months of any such transaction," Morgan said

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