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Updated: Vistra-Dynegy Merger Will Require "Modest" Mitigation In ERCOT

Touts Lower Costs To Serve Retail Customers Than Competitors

Earlier: Parent Of TXU Announces Deal To Combine With Dynegy

Combined Generation Portfolio Will Serve To Accelerate Growth of Retail Business

October 30, 2017

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Copyright 2010-17
Reporting by Paul Ring •


During an analyst call on the announcement, in response to a question regarding any market power issues resulting from the merger, Vistra Energy President and Chief Executive Officer Curt Morgan said, "We will need to do some modest mitigation, roughly around 900 MW in ERCOT."

"We've got two paths that we could go down. We will be kicking off a divestiture process that we've already started, and we'll be going out in the market. But there's also another avenue that I won't get in too much detail on here, but there's another avenue where we wouldn't have to do any divestitures at all," Morgan said

In a presentation accompanying the analyst call, the companies projected their pro forma Retail Business Costs as $45/RCE, and the companies said that this compared favorably to various unnamed competitors, whose costs they pegged at $84/RCE to $177/RCE


Vistra Energy, the parent company for TXU Energy and Luminant, and Dynegy Inc., today announced that their Boards of Directors have approved, and the companies have executed, a definitive merger agreement pursuant to which Dynegy will merge with and into Vistra Energy in a tax-free, all-stock transaction.

Together with Dynegy, Vistra Energy will serve approximately 240,000 commercial and industrial (C&I) customers and 2.7 million residential customers in five retail choice states (Texas, Illinois, Ohio, Pennsylvania, and Massachusetts), with estimated retail sales of 75 terawatt-hours (TWh) in 2018. The combined company will also own approximately 40 GW of installed generation capacity. Of that capacity, more than 60 percent is natural gas-fueled, and 84 percent is in the ERCOT, PJM, and ISO-NE competitive power markets.

The companies projected pro forma Retail Business Costs as $45/RCE, and the companies said that this compared favorably to various unnamed competitors, whose costs they pegged at $84/RCE to $177/RCE

The combined company's wholesale generation portfolio will serve as a platform for accelerated growth of this retail business, the companies said. Approximately half of the combined company's gross margin is projected to be derived from capacity revenues and retail margin.

The resulting company is projected to have a combined market capitalization in excess of $10 billion and a combined enterprise value greater than $20 billion.

Under the terms of the agreement, Dynegy shareholders will receive 0.652 shares of Vistra Energy common stock for each share of Dynegy common stock they own, resulting in Vistra Energy and Dynegy shareholders owning approximately 79 percent and 21 percent, respectively, of the combined company. Based on Vistra Energy's closing share price of $20.30 on October 27, 2017 and the aforementioned exchange ratio, Dynegy shareholders would receive $13.24 per Dynegy share.

The companies said that, "both Vistra Energy and Dynegy shareholders are expected to benefit from an estimated $350 million in projected annual run-rate EBITDA value levers, additional annual free cash flow value levers of approximately $65 million (after tax), and approximately $500-600 million in projected net present value benefit from tax synergies."

"The combination of Dynegy's generation capacity and existing retail footprint with Vistra Energy's integrated ERCOT model is expected to create the lowest-cost integrated power company in the industry and to position the combined company as the leading integrated retail and generation platform throughout key competitive power markets in the U.S.," the companies said

Vistra Energy President and Chief Executive Officer Curt Morgan said, "This combination represents a transformative opportunity to create the leading integrated power company in the United States. Combining Vistra Energy's leading retail and commercial operations with Dynegy's leading CCGT fleet and geographically diverse portfolio is expected to create a company with significant earnings diversification and scale. The resulting combined enterprise is projected to have the lowest-cost structure in the industry and will benefit from weather and market diversification that, when combined with Vistra Energy's balance sheet strength, will provide a platform for future growth. The result will be a leading integrated power company with significant scale in the key U.S. competitive markets."

"The combined company is projected to achieve approximately $350 million in annual run-rate EBITDA value levers by streamlining general and administrative costs, implementing fleet-wide best-in-class operating practices, driving procurement efficiencies, and eliminating other duplicative costs. Vistra Energy estimates the full run-rate of EBITDA value levers will be achieved in approximately 12 months of closing. In addition, the combined company is expected to benefit from approximately $65 million (after tax) of incremental annual run-rate free cash flow benefits from balance sheet and capital expenditure efficiencies. Finally, the combined company is expected to benefit from the utilization of approximately $2.0-2.5 billion of legacy Dynegy Net Operating Losses (NOLs) with an estimated net present value of approximately $500-600 million," the companies said

The combined company is expected to have projected proforma liquidity of approximately $3.9 billion as of April 30, 2018 and gross debt to EBITDA declining to the company's targeted 3 times by year-end 2019 (with net debt to EBITDA of 2.6 times by year-end 2019). With approximately $14 billion of adjusted EBITDA expected to be generated between 2018 and 2022, the combined company is projected to have approximately $5.5 billion in excess capital available for allocation toward balance sheet improvements (including any debt repayments required to achieve the company's 3 times gross debt to EBITDA target), growth investments, and other value accretive opportunities, the companies said

Following the close of the transaction, the combined company will be led by Curt Morgan as President and Chief Executive Officer. Bill Holden will serve as the Chief Financial Officer with Jim Burke as the Chief Operating Officer.

The Board of Directors is expected to have a total of 11 directors consisting of the current eight members of the Vistra Energy Board and three members from Dynegy's Board.

The Dynegy Board of Directors and Dynegy President and Chief Executive Officer Bob Flexon have mutually agreed to extend his employment as permitted under the terms of his existing employment agreement for one year. Flexon will continue to serve as President and Chief Executive Officer of Dynegy through April 30, 2019 or the date the transaction closes, whichever comes first.

The combined company's headquarters will be in Irving, Texas. In addition, the combined entity will have retail offices in Houston, Texas, Cincinnati, Ohio, and Collinsville, Illinois.

The companies anticipate closing the transaction in the second quarter of 2018.

The transaction is subject to certain regulatory approvals, including expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, and approval by the Federal Energy Regulatory Commission, the Federal Communications Commission, the Public Utility Commission of Texas, the New York Public Service Commission, and other customary closing conditions. The transaction is subject to approval by the shareholders of Vistra Energy and Dynegy. In addition, the transaction will not require any refinancing of Vistra Energy's or Dynegy's debt, but preserves flexibility for opportunistic refinancing at, or after, closing.

Dynegy operates 27,000 megawatts (MW) of power generating facilities throughout the Northeast, Mid-Atlantic, Midwest, and Texas, including 17,000 MW fueled by natural gas and more than 9,000 MW fueled by coal. Dynegy serves 1.2 million electricity customers

Vistra's TXU Energy serves approximately 1.7 million residential and business customers in Texas. Vistra's Luminant operates approximately 18,000 MW of generation in Texas, including 2,300 MW fueled by nuclear power, 8,000 MW fueled by coal, and 7,500 MW fueled by natural gas

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