German Jamison: Texas Gas Players Consolidate as Vistra Agrees to Buy Dynegy

Vistra Energy wants to buy fellow Texas-based power producer Dynegy for $1.74 billion in stock.

If approved by regulators, the combined company would have a market capitalization greater than $10 billion and an enterprise value greater than $20 billion. It would serve 240,000 commercial and industrial (C&I) customers and 2.7 million residential customers in five top retail states, and control 40 gigawatts of installed generation capacity, the companies said.

The capacity is concentrated in ERCOT, PJM and ISO-NE territory, and more than 60 percent of it comes from natural gas.

The move comes as competitive generators scramble to cut costs as cheap fracked gas squeezes their margins. Merging Vistra's retail and commercial units with Dynegy's gas fleet and geographical diversity will serve this goal, the companies hope.

"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," Vistra Energy President and CEO Curt Morgan said in a statement.

The companies aim to save $350 million annually through streamlining their combined operations, plus other savings.

The deal does come with some risk, as it increases the share of income Vistra will get from generation, which is more volatile than the retail sales that form the core of Vistra's current business model. Capacity payments mitigate some of that volatility, writes Liam Denning at Bloomberg Gadfly. In exchange for that risk, Vistra will gain access to new geographical markets.

The proposed merger joins a growing list of consolidations in the Texas power markets.

San Diego-based Sempra Energy is seeking regulator approval for a $9.45 billion purchase of Oncor Electric Delivery, which serves 10 million customers in Texas. Houston-based Calpine, another gas specialist, is selling itself to Energy Capital Partners and other investors for $5.6 billion, as it struggles with billions of dollars of debt.

Vistra recently announced it will close three Texas coal plants, totaling about 4,100 megawatts, citing "sustained low wholesale power prices" and competition from renewables and cheap natural gas.

Vistra already ranks as the largest Texas power producer, so the Dynegy merger has implications for consumers and market competitiveness.

The Public Utility Commission forbids one company from controlling more than 20 percent of Texas generation, Dallas News reported. Vistra told the newspaper it is considering a sale of three gas plants to stay under that cap; those three happen to be its oldest plants, dating from the 1950s and '60s.

Two bids for the purchase of Oncor failed to garner PUC approval, so regulatory acceptance is not a given.