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Vistra Execs Address Sticky, Industry-Leading Retail Margins, Customer Segmentation

Vistra Reiterates View On M&A, Not "Compelled" To Seek Assets Outside Of ERCOT


August 7, 2017

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Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

During an earnings call on Friday, executives at Vistra Energy, the parent of TXU and Luminant, discussed retail margins and customer segmentation

An analyst noted other IPPs stating intentions to "beef up" their retail books, but noted that despite new competitors, Vistra has been able to sustain healthy retail margins, and asked about such margin stickyness.

In response, Curt Morgan, Vistra CEO, stated:

"I think it’s complicated, but I think in some ways it’s really not at the end of the day. First of all, customer segmentation, in broad strokes, because it’s far more segmented than what I am about to really tell you. But I think you can take this a bit to the bank, is there’s kind of a segmentation around those who like named, stable product offerings, people they’re comfortable with. This is, as Jim [Burke, COO] describes it, sort of a low-involvement category product. And so people really don’t want to get into the sausage-making. And I’ll just go to the Power To Choose, and it will spin your head how you make that decision. But people really, they’re happy with the brand.

"But I'll tell you, you can't just do that because [of] your name. You have to do it because you have a product offering that people are comfortable with. And we've gone to great lengths to provide people with stable pricing and a stable product offering, and then we’ve also given them products that meet their needs, and we proactively go to them, if we see that they're on product that they shouldn't be on, and maybe they use a lot of power overnight or something, we'll proactively try to get them on free nights or something.

"So I think there's a lot to it, and it's not just advertising. This is pure data mining. This is a very analytical business, understanding your customers, understanding their needs, and proactively coming up with products they need. There's no smoke and mirrors in this, this is a real retail marketing business. We've just been very good at that and we've been out in front on it. And so that's really been good for us.

"Now we have entered into, what I'll call the other segment which -- there's variation in this segment too by the way -- are more inclined to switch and more inclined to look, and we've got a brand out there we've had for a while and have had great success with it, called 4Change. We've got another brand out there called Energy Express. And those go after folks that are inclined to switch, but also they might want -- they don't want to be involved with anybody, right? They just want to do something online and make it easy. And so they're more price-conscious, and that's about 35% of the market, and about 65% of the market is more of the brand-name customers that we have."

Jim Burke, EVP and COO added, "I would first start out by saying that it is actually very easy to enter the retail space. But it's very hard to be successful at it. So there’s very low barriers to get started. And we sometimes talk about, all you need is a laptop computer and a couple people and you can launch a retailer. But to actually operate, as we talked about on the last call, scale does matter in this business, it matters because you do need to make significant investments in your service platform, your billing systems, your risk management systems and in your product innovation and your service offering."

Burke cited how Vistra was able to leverage a solar development to launch TXU's solar days and free nights plan. "This solar days and free nights is not something that you can just put a billboard up. You got to be able to operationalize that product, market it effectively, and innovate. And that is a better-than-average margin product," Burke said

"And so, I think the key to this business at the end of the day is very similar to every other competitive market where there is a willing buyer and a willing seller, where a supplier has to get through the clutter and compel a customer to choose them. So there's a lot of people that are entering, and the space is getting more and more crowded, which means that having a differentiated proposition in our brand is even more important. So the fact that more are entering does not necessarily mean higher success rates. In fact, I would say it challenges it, because the field at the end of the day has ample, ample choice and the next guy coming into the fold has to really do something special to stand out," Burke said

Another analyst cited NRG Energy's recently announced (see story here) $200 million retail margin enhancement plan and asked if Vistra saw any similar opportunities to grow margin.

Morgan replied:

"Obviously, we can speak to the Texas market. I'm not - they've got a broader retail business, so I don't know how much of what they've talked about is outside of ERCOT. What I will tell you inside of ERCOT is, first and foremost, this is a competitive market. So just saying you're going to increase prices will have a competitive effect to it, and if it's not coupled with some value-enhancing product and service offering that customers value, it's purely announcing that you're going to increase prices to customers. We wouldn't do that. We're not going to do it, and we don't follow our competitors just cause they do that.

"Now, I'm not saying anything about what they're doing, because I don't know, there's not a lot of detail, not a lot of meat on the bone on this as to what they're going to do. What I will tell you is, is that we have had a leadership role at TXU Energy in constantly being out front in offering new products and services, and that has enabled us to basically have an industry-leading margin position in the market.

"We are in the middle of several initiatives that we work on, and we just announced one recently with the solar days and free nights. That was another step forward. I'll tell you this, too, that this is hard work. it takes time. And we would never come out and announce the stuff ahead of time because you have to come up with product development based on what you think customer needs are. You have to test it. And before I would ever come out and tell you anything about it, I would need to see it. We would need to see it. We would put it in place and make sure that it's working before we would talk about it.

"That's a long way, I guess, of saying to you, that you're not going to hear anything about $200 million margin enhancement from us. What we can tell you is, we constantly work to improve our product offering, and we actually saw, in 2016 you saw this, we actually had improved margins. We continually look to improve our margins. And so we’ll be interested to see, though, they're smart people over there at NRG, we're constantly mining information from others. We don't mind being a fast follower if there’s an idea we're missing. So we're anxious to see that, and we want them to be successful, but that's just not what we would do, so if anybody's waiting for some kind of announcement around that, it's not going to happen."

Morgan also reiterated Vistra's view on M&A, and that the company does not feel compelled to diversify outside of ERCOT, particularly since the Texas retail business adds diversity.

"Going forward, we remain opportunistic on both the potential to acquire additional gas-fired generation assets in ERCOT, to do further renewable projects, and on any potential ex-ERCOT growth. As we have stated previously, we do not feel compelled to diversify outside of ERCOT to mitigate weather or market risk given the strength of our integrated portfolio," Morgan said

"We have commented on a number of occasions that any large-scale M&A transaction diversifying Vistra outside of ERCOT would have to stand up to a number of company self-imposed criteria, such as customary control premiums, relative ownership, sharing of synergies and economic resilience under numerous market scenarios. I will say though, that there are economies of scale in this sector, and they are important, and things that we look at in trying to drive down cost in our business," Morgan said

Morgan did state that, "I do believe that size, in this instance, matters," not just in terms of liquidity, but also from an economies of scale standpoint. Still, Morgan emphasized, "I also would say that we have been pretty clear about the fact that we don’t feel compelled to diversify outside of ERCOT, due to the retail position. But I will tell you that there are benefits to diversification even for a company like ours."

"We remain disciplined with our capital allocation approach, and this discipline applies to maintaining the health of our balance sheet, which we believe is a key attribute for sustainable success in this business," Morgan said

"We intend to remain vigilant with respect to capital allocation, seeking meaningful returns for our shareholders as we make future investment decisions, and to maintain a leadership role in the industry. To the extent we do not find investment opportunities in the market that we believe will create value for our shareholders, we could return capital to our shareholders in the form of potential share buybacks or potential dividends," Morgan said

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