Vistra Corp (VST) 2018 Q1 法說會逐字稿

Welcome to the Vistra Energy First Quarter 2018 Results Conference Call.

(Operator Instructions) I would now like to turn the call over to Molly Sorg, Vice President, Investor Relations.

Please go ahead.

Thank you, Michelle, and good morning, everyone.

Welcome to Vistra Energy's investor conference call discussing first quarter 2018 results, which is being broadcast live via webcast from the Investor Relations section of our website at www.vistraenergy.com.

Also available on our website are a copy of today's investor call presentation, our 10-Q and the related earnings release.

Joining me for today's call are: Curt Morgan, President and Chief Executive Officer; Bill Holden, Executive Vice President and Chief Financial Officer; Jim Burke, Executive Vice President and Chief Operating Officer; and Sara Graziano, Senior Vice President of Corporate Development.

We also have a few additional senior executives in the room to address questions in the second part of today's call as necessary.

Before we begin our presentation, I encourage all listeners to review the safe harbor statements included on Slides 1 and 2 in the investor presentation on our website, which explain the risks of forward-looking statements and the use of non-GAAP financial measures.

Today's discussion will contain forward-looking statements, which are based on assumptions we believe to be reasonable only as of today's date.

Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected or implied.

Further, our earnings release, slide presentation and discussions on this call will include certain non-GAAP financial measures.

For such measures, reconciliations to the most directly comparable GAAP measures are in the earnings release and in the appendix to the investor presentation.

I will now turn the call over to Curt Morgan to kick off our discussion.

Thank you, Molly, and good morning to everyone on the call.

As always, we appreciate your interest in our company.

I want to apologize upfront for a relatively lengthy call, but we have a lot to talk about today.

You may want to grab a SNICKERS bar.

Turning now -- I'm going to turn now to Slide 6. We have lot of exciting news to cover today as our merger with Dynegy closed just under a month ago on April 9. Following the merger, we are now more than a $20 billion enterprise value integrated power company competing in the key U.S. markets with an expected annual adjusted EBITDA of $3 billion or more on an annual basis and projected conversion rate of adjusted EBITDA to free cash flow of more than 60%.

Importantly, we have also made meaningful progress on our merger transition and integration.

And we are excited to announce today a nearly 60% increase in our merger value lever target, which I will discuss in detail momentarily.

As you may recall, our reference of value lever targets include synergies, our operation performance initiative or what we call OPI, free cash flow and tax value enhancements.

This increase in our merger value lever target, combined with power price improvement, particularly in the ERCOT market, have resulted in significantly higher EBITDA and free cash flow estimates for the combined company as compared to our October 2017 forecast.

And we'll get into that in detail on this call.

Speaking of ERCOT market.

As many of you know, we were able to close the merger without a requirement to divest of any assets in ERCOT, which positions us well for the anticipated peak summer demand with tight reserve margins at least for the next few years.

We have retained length even under the most severe, and it's important to note this, even under the most severe weather conditions, like the 2011 event, as a precaution to make sure we meet our customers' demands under any scenario.

So being very pointed about this, we're carrying very good length into the summer.

And then that's important to note.

Interestingly, forward curves in ERCOT are steeply backward dated beyond 2019, likely due to uncertainty regarding the potential development of longer-term generation resources.

Ironically, in our view, the current forward curves do not support new investments, especially in the energy-only ERCOT market.

Remember, these are 30- to 40-year assets.

And the market is not supportive for even 1 year to forward hedge, either by the liquidity or the pricing to support new development.

We like our net long position in ERCOT and believe Vistra will be able to generate approximately $3 billion or more of adjusted EBITDA on an annual basis in nearly any wholesale market environment.

The factors that could contribute to this stability are that we -- approximately 45% of our gross margin is derived from relatively stable capacity payments in retail operations.

We own a young, predominantly gas-fueled, low heat-grade generation fleet that as result is regularly in the money generating meaningful energy revenues.

And our commercial operations team has proven experience in the industry and has constantly been able to construct a realized price curve for our fleet that is significantly higher than settled around-the-clock prices.

With this business mix and operational expertise, supported by our strong balance sheet that is poised to achieve our 2.5x net debt-to-adjusted EBITDA target by year-end 2019, we are confident in our ability to deliver relatively stable earnings with the opportunity to capitalize on upside while converting approximately 60% of our adjusted EBITDA from ongoing operations to free cash flow.

This free cash flow conversion ratio is significantly higher than that of other commodity-exposed, capital-intensive energy industries.

And as result, we believe over time this will lead to a full valuation for Vistra.

However, I must note we are not there yet.

We understand this is about execution and delivering on our commitments in putting the historical performance of this sector in the rearview mirror with a very different strategy, one that centers on low leverage, integrated and low-cost operations, disciplined growth and return of capital to shareholders.

We believe we have been true to our word thus far, including a substantial restructuring of our support organization, fully completed 3 weeks after emerging from bankruptcy; completion of an operations performance initiative; and returning $1 billion to our investors at the end of 2016.

We have several updates related to the combined company to share this morning, including increasing our merger value lever targets, providing a glimpse in the earnings power of Vistra and initiate 2018 and 2019 guidance.

As these updates will be the focus of today's call, we are going to start the discussion with Bill Holden, who will cover Vistra's stand-alone first quarter 2018 results.

We finished the quarter delivering $263 million in adjusted EBITDA from our ongoing operations, exceeding our expectations for the quarter and even stronger results when you take into account the $21 million reduction in adjusted EBITDA for accounting purposes resulting from our partial buyback of the Odessa power plant earn-out in February.

Though the impact of the partial buyback was negative in the first quarter, we expect the full year 2018 impact of that transaction, net of the premium paid to be a positive $3 million with a projected 3-year net benefit of $23 million in the aggregate, nearly all of which we have already locked in.

Excluding this first quarter negative impact, Vistra's adjusted EBITDA from its ongoing operations would have been $284 million, in line with first quarter 2017 results and ahead of our expectations embedded in our stand-alone full year guidance.

Bill is now going to walk us through the first quarter results in more detail.

And then I will cover our synergy and operational performance initiative, or OPI, updates as well as earnings expectations for the combined entity.

We will conclude today's call with a brief preview of our June 12 Analyst Day.

Bill?

Thanks, Curt.

As we depict on Slide 8 and as Curt just mentioned, Vistra's stand-alone first quarter adjusted EBITDA from ongoing operations was $263 million.

Excluding the negative $21 million impact from our partial buyback of the Odessa earn-out in February, first quarter 2018 adjusted EBITDA would have been $284 million, in line with first quarter 2017 results and, as Curt mentioned, above our expectations relative to our stand-alone full year earnings guidance.

For the quarter, the retail segment's adjusted EBITDA was $194 million, which was $17 million higher than first quarter 2017, primarily due to favorable weather and lower SG&A expenses quarter-over-quarter.

Retail also grew residential customer counts by approximately 4,000 in the first quarter of 2018.

Adjusted EBITDA for the wholesale segment was $70 million for the first quarter, which was $35 million lower as compared to the first quarter of 2017.

$21 million of the decrease was related to the negative impact of our partial buyback of the Odessa earn-out in February.

Though as Curt just mentioned, we expect a full year benefit net of the premium paid from this transaction of $3 million and in the aggregate, a 3-year net benefit of $23 million.

O&M expenses also increased quarter-over-quarter.

In total, first quarter results exceeded our expectations on a stand-alone basis, setting up the combined company well to execute on its new 2018 guidance, which I will describe later on the call.

First though, let's get to the merger updates.

Curt?

Great, thanks, Bill.

I'm moving us to Slide 10 now.

As you can see today, we are announcing an improved outlook for our merger value lever targets compared to what we initially announced upon merger signing in October of last year.

After 6 months of diligence and detailed transition and integration planning, we are increasing our adjusted EBITDA value lever target to $500 million versus the $350 million announced in October, a robust 40% increase.

Sara Graziano and Jim Burke will go into more detail about these merger synergy and operational improvement opportunities later on the call.

On the synergy front, we expect to capture the bulk of the value by year-end 2018.

And we believe we have a clear line of sight to achieving this result.

As you have heard me say before, this is my fifth time leading an OPI effort with McKinsey.

With an assist from Bob Flexon and the Dynegy team prior to the merger closing, we are progressing ahead of schedule with the Dynegy fleet and we are nearing completion of the OPI effort on Luminant fleet, which we began shortly after emergence from bankruptcy in the fall of 2016.

As Jim will further discuss, we expect to realize a material amount from OPI in 2018, reach a significant run rate on OPI by the year-end 2018 and capture 100% of this announced wave of OPI by year-end 2019.

We believe there could be more OPI value to come.

However, it will take the balance of 2018 to prove this out.

We are also increasing our recurring after-tax adjusted free cash flow target by $170 million to $235 million, of which nearly 70% is expected to be achieved by year-end 2018 and 100% is expected to be achieved by year-end 2019.

The increased target reflects interest and savings from debt repricings and other transactions already completed between October 2017 and today as well as incremental interest savings projected once we achieve our long-term leverage target of 2.5x net debt-to-adjusted EBITDA.

So we are very confident these cash flow savings will be achieved.

We believe that there are even further recurring cash flow enhancements through continued optimization of our balance sheet.

And we expect we'll be in a position to discuss those later this year.

Last, we are pleased to announce today that tax reform has materially improved our projected cash tax and TRA payment outlook.

As we now expect, we will not have to pay any federal cash taxes or TRA payments in 2019 through 2022.

This improved forecast is primarily a result of the reduced federal income tax rate from 35% to 21%, together with our ability to utilize a higher portion of Dynegy's net operating losses in the first 5 years following the merger.

In addition, we project we will receive $223 million in alternative minimum tax credit refunds over the next 5 years, which further increases our projected adjusted free cash flow.

In fact, we estimate that these factors combined will improve our 5-year federal cash tax and TRA payment outlook by more than $1.7 billion versus our October 2017 estimates.

We believe it is most important to value Vistra off of a free cash flow yield metric of approximately 10% or less when you consider our stable earnings power and substantial conversion of EBITDA to free cash flow when compared to other commodity-exposed, capital-intensive industries.

When we apply this 10% free cash flow yield or discount rate, where applicable, to the increased merger value lever targets and the impacts of tax reform, we calculate a projected equity value creation of approximately $7.5 billion or approximately $14 per share, significantly higher than the $4 billion of equity value creation we projected at the time of the merger announcement.

This improved earnings and cash flow outlook, combined with the recent improvement in forward curves in most markets but particularly in ERCOT, results in what we project will be significant earnings power for the combined company.

As demonstrated in the pro forma 2018 illustrative guidance on Slide 10, assuming the merger would have closed on January 1 of this year rather than April 9, we forecast the combined company's adjusted EBITDA from ongoing operations would have been $3.15 billion to $3.35 billion versus the approximately $2.875 billion to $3.125 billion consolidated forecast at the time of the merger announcement.

In addition, assuming a January 1 merger close, we estimate adjusted free cash flow from ongoing operations would have been approximately $1.675 billion to $1.875 billion in 2018, again a marked improvement from the approximately $1.415 billion to $1.665 billion in consolidated adjusted free cash flow projected last October.

Similarly, as demonstrated in the 2019 illustrative guidance on Slide 10, assuming the full run rate of synergies and operational improvement benefits are realized in 2019, we estimate Vistra's 2019 adjusted EBITDA from ongoing operations would be $3.275 billion to $3.575 billion and our adjusted free cash flow from ongoing operations would be $2.15 billion to $2.45 billion, which would represent an estimated conversion of adjusted EBITDA to free cash flow of more than 60% from ongoing operations.

Over the long term, we expect Vistra will be able to deliver $3 billion or more of adjusted EBITDA from ongoing operations annually, even in the challenging wholesale market environments with an approximately 60% conversion of adjusted EBITDA to free cash flow from ongoing operations, including during the periods where capacity prices decline, such as the decline in PJM capacity prices from 2019 to 2020.

We believe we'll be able to bridge those declines through the merger value enhancements, commercial optimization of our assets, cost management and balance sheet optimization.

At the end of the day, this means that we expect we will have significant capital available for allocation.

I know that's of interest to many of you.

As we describe on the right-hand side of Slide 10, our primary capital allocation priorities will be to, first, maximize our adjusted free cash flow by ensuring we achieve or exceed our value lever targets as quickly as possible while also reducing our debt balances to achieve our long-term target of 2.5x net debt-to-adjusted EBITDA by year-end 2019.

Given our improved adjusted EBITDA and adjusted free cash flow expectation for 2018 and 2019, which Bill will discuss momentarily, we estimate we will have approximately $1 billion in aggregate of capital available for allocation in 2018 and 2019 while still achieving our leverage target.

We have been working with our board in anticipation of the merger close to evaluate various capital allocation alternatives.

Our projected significant cash flow above debt reduction requirement should afford us the opportunity to potentially accelerate certain capital allocation alternatives.

As we have mentioned in prior earnings calls, our capital allocation priorities, in addition to retiring debt, are to repurchase our stock if we believe it is trading at a significant discount to our view of value; evaluate a recurring dividend with a meaningful yield and with the ability to grow it; and pursue growth of our business with a focus on retail, renewables and batteries.

To be very clear, as we have previously mentioned, we will be disciplined in the pursuit of growth, seeking opportunities that we project will earn at least 500 to 600 basis points more than our cost of capital.

As I'll mention again later, capital allocation will be an important agenda item for our June 12 Analyst Day.

We continue to believe that any incremental investments in traditional generation are unlikely at this stage, absent compelling value creation.

In fact, rationalization of our generation portfolio is more probable, which could provide incremental capital for allocation.

We have been open about the components of our portfolio where we will explore rationalization.

They include New York, California and the MISO market.

We expect to complete our OPI initiative on assets in these areas and explore potential opportunities to enhance value prior to making any final decisions on rationalization.

We believe these efforts could take the balance of 2018 to conclude.

Now I'm going to turn to Slide 11.

Following the merger with Dynegy, Vistra now expects it will generate approximately 45% of its gross margin from stable revenue sources of retail and capacity payments.

In addition, we are projecting that approximately 60% of our adjusted EBITDA will come from the attractive ERCOT market while more than half of our generation is projected to come from natural gas assets, which reduces our overall exposure to natural gas prices.

It is also important to note that we expect a significant contribution to adjusted EBITDA and free cash flow from energy margin in nearly any market environment, given our relatively new and efficient generation fleet that is often in the money, especially in the summer and winter peak seasons.

This improved diversification of our operations and earnings, together with the significant value levers we expect to realize as a result of the merger, support our belief that Vistra will be able to generate approximately $3 billion or more of adjusted EBITDA with an approximately 60% conversion of adjusted EBITDA to free cash flow from operations in any market environment.

Now I'm going to turn to Slide 12.

As I mentioned at the beginning of the presentation, Vistra is increasing its merger-related adjusted EBITDA value lever target from $350 million to $500 million.

$50 million of this increase relates to merger synergies we have identified through our premerger integration work, which Sara will discuss here in a second.

The remaining $100 million of the increase relates to our operation performance improvement initiative that is underway at both Vistra and Dynegy fleets.

We now believe we will be able to deliver $225 million of the recurring adjusted EBITDA benefits from this program with the opportunity for potential upside to that estimate in the future.

Jim is going to provide more detail regarding the OPI process later on during the call.

It is important for you to note that true to how we have handled communication of OPI value opportunities previously, we have a very high confidence level in our ability to achieve the $225 million in EBITDA value levers we are announcing today.

When we prove up incremental value in the future, we will communicate it at that time.

In sum, we expect we will realize approximately $165 million of adjusted EBITDA value levers in 2018.

With 72% of the value levers achieved by year-end, we expect we will have achieved the full run rate of adjusted EBITDA value levers by year-end 2019 with $420 million of benefit realized during the year.

Our entire management team is incentivized to ensure that we do in fact achieve all the targeted merger value levers by year-end 2019, as the board recently approved a significant grant of long-term options that have a 4- and 5-year cliff vest.

The options are 100% contingent on our collective achievement of hitting the targeted value levers and retention of key people necessary to achieve those targets.

I'm also pleased to announce on this call today that the Vistra board and I have reached an agreement on a 4-year extension of my employment contract from May 2018 until May 2023, I think, is it, '22 and '23.

Sorry.

In my 35 -- I don't even know my own contract.

In my 35-year career, I have never been more excited about an opportunity than the one before me here at Vistra.

And I am completely committed to getting the value from the Dynegy merger and achieving the full valuation of Vistra.

I'm now going to turn to Slide 13.

In addition to the adjusted EBITDA value lever targets, we also have an improved outlook for incremental adjusted free cash flow synergies and tax synergies related to the merger.

As you can see, we now expect we'll be able to achieve $235 million of run rate additional after-tax free cash flow benefits by year-end 2019, $100 million of which have already been identified or achieved.

$20 million of the projected benefits relate to expected capital expenditure synergies we have identified and $8 million reflect interest savings we have already achieved from the repayment of the legacy Dynegy notes due in 2019 as well as repricing and other transactions that have occurred between the announcement of the merger and today's date, thereby reducing our interest expense.

The incremental $135 million of projected after-tax free cash flow benefits reflect interest savings we expect we will achieve once we reach our net leverage of 2.5x net debt-to-adjusted EBITDA.

We believe there remains further opportunity for upside, which is not reflected in this presentation if we're also able to take advantage of favorable market conditions to further reduce our borrowing costs.

In total, we expect we will have achieved at least $235 million of additional after-tax free cash flow benefits by year-end 2019.

We have also materially improved our federal cash tax and TRA payment forecast for the combined company as a result of tax reform.

The combination of the lower federal tax rate from 35% to 21%, coupled with our expected ability to utilize more of Dynegy's net operating losses in the first 5 years following the merger have resulted in an expectation that we will only pay approximately $24 million in federal taxes or TRA payments through 2022.

And it's important to note that the $24 million that we forecast to pay -- to be paid to TRA right holders in 2018 that stems from 2017 tax year.

We calculate the NPV of the use of Dynegy's net operating losses as well as the anticipated receipt of alternative minimum tax refunds to be $750 million to $850 million versus our original estimate of $500 million to $600 million.

While it might be counterintuitive that the net present value of the NOLs has gone up even though the federal tax rate has gone down, our expectation for the ability to utilize significantly more of the Dynegy NOLs in the first 5 years following the merger closing more than offsets the impact from the lower tax rate.

As I have said before and as I hope today's update demonstrates, I continue to believe this merger will bring significant value to Vistra shareholders.

We understand our credibility is at stake regarding hitting our value creation targets described above -- or described earlier.

We have line item detail for every action required to achieve our targets, sophisticated tracking systems in place and a steering committee-based governance process, which I am a part of, that meets frequently to review progress.

This is why we are confident of the value capture and why we are excited for the future of our company.

We look forward to executing on the value lever targets I just described.

I would like to now turn the call over to Sara Graziano to describe the merger synergies we have identified in a little more detail.

Sara?

Thank you, Curt.

Turning now to Slide 15.

As Curt mentioned, during the period between merger announcement and closing, the management teams of both Vistra and Dynegy undertook a robust integration process.

Through that process, we have identified $275 million of projected adjusted EBITDA synergies related to the merger.

$150 million of these synergies were achieved on day 1 following the merger close and primarily reflect headcount and executive team reductions as well as certain other insurance, shareholder and employee expense reductions.

The bulk of the remaining synergies are projected to come from procurement and information technology cost reductions, reflecting the improved purchasing power afforded by Vistra's larger scale as well as the ability to streamline and simplify applications and infrastructure for the combined company.

We also expect to achieve synergies from facilities consolidation and reductions in corporate support, retail, commercial and plant operations overhead.

We are forecasting $150 million of these synergies will be realized in 2018 with 89% of them estimated to be achieved by year-end.

We project $260 million of the synergies will be realized in 2019 with the full run rate achieved heading into 2020.

We have specifically identified each line item that comprises our $275 million merger synergy target.

And as Curt mentioned, we have a sophisticated tracking system in place and a robust governance process that includes periodic reporting.

As a result, we have full confidence in our ability to deliver on these targets.

I would now like to turn the call over to Jim to discuss our operations performance improvement process in more detail.

Thanks, Sara.

As you know, our OPI process is well underway at both the legacy Dynegy and Luminant fleets.

At this stage in the process, we are confident we can achieve $225 million of projected EBITDA enhancements.

I would summarize these into 3 main areas: the Texas-based Luminant assets, procurement and the legacy Dynegy fleet.

The Luminant opportunities are in addition to the $50 million value for 2018 that we reported on last fall from our OPI efforts.

This value is already reflected in our stand-alone guidance.

First, for Luminant, Martin Lake continues to find cost and revenue opportunities as an early participant in the OPI process.

Our nuclear site, Comanche Peak, embarked on its effort late in 2017.

They have identified and are implementing actions worth nearly $30 million on a run rate basis.

The levers are across the board, including working with major alliance partners to rationalize scope, prioritizing O&M projects and reducing site labor and support functions.

Comanche Peak is already one of the lowest nuclear sites in the country.

But the team continues to look for ways to compete in a challenging wholesale market, reducing its costs while maintaining a focus on reliability and nuclear safety.

Our combined-cycle sites, Forney, Lamar and Odessa, have been working through their OPI efforts and are implementing ideas worth approximately $10 million.

These ideas include improving heat rate through reducing compressor air inlet temperatures, improving cooling tower efficiency and better monitoring and repair of cycle isolation valves throughout the steam cycle.

Another example, planned outage time lines, have been optimized through Kaizen exercises to shave over 20% of the total time, resulting in lower cost and more gross margin.

Importantly, these 3 teams did their OPI efforts together, which materially enhanced the value they are achieving.

Moving on to procurement, another big lever for our combined fleet.

Sara mentioned procurement synergies have been identified as part of the $275 million.

We have identified additional procurement opportunities as part of the OPI process in the $225 million target.

Combined, these procurement opportunities represent a 6% to 8% reduction of the fossil O&M spend base of approximately $1.7 billion, excluding fuel costs, such as coal and natural gas.

We expect to realize these savings through the ongoing evaluation of procurement specifications, strategic sourcing and demand management.

For example, the team has identified opportunities in ammonia and bulk chemicals of $10 million to $12 million averaging 20% reductions, maintenance, repair and operating supplies with our larger scales yielding more than 15% through our initial waves.

Now turning to the Dynegy combined-cycle fleet.

We are leveraging our learnings from our combined-cycle fleets here in Texas to see the OPI effort across the additional 19 sites.

Kendall was the first Dynegy combined-cycle to pursue their OPI effort.

And they are executing on more than $5 million of value.

Given our collective efforts to date, we're going to organize the OPI rollout across the rest of the gas fleet in a coordinated manner, focusing by major value drivers, such as heat rate, outage reduction, min-max load, offload and deep dives into O&M.

We anticipate that the legacy Dynegy combined-cycle fleet will realize a run rate value of at least $55 million through these efforts.

Finally, the legacy Dynegy coal fleet has 13 sites with about half of these underway with their OPI efforts.

We have a head-start on some of these sites as Dynegy kicked off these efforts prior to the closing of the transaction.

Many of the levers are similar to actions implemented on the Luminant Texas coal fleet we reported on earlier.

Reductions in min load, improvements in max load as well as faster ramps up and down all create more flexibility and value.

For example, Zimmer is executing on reducing its min load from 650 megawatts to 450 megawatts, yielding nearly $1 million a year in recurring value.

Ramp rates for the majority of the MISO and PJM coal fleet are currently in the 3 to 5 megawatts a minute range.

And for sites that has completed OPI, we're executing on ramp rates that are nearly 3x faster.

With respect to improved generation, reduction in auxiliary loads can drive value across the spectrum from full load down to minimum loads.

At minimum loads, value is created by identifying equipment that isn't needed to support a lower level of generation, including cooling water pumps, circulating pumps, air compressors and other house loads to improve the bottom line.

Outage reduction, both in terms of more effective planned outages as well as more timely response to unplanned outages, is a source of opportunity.

Boiler tube leaks are particularly a challenge for coal plants and effective preventive maintenance and standard playbooks to recover from them is critical.

Many of the MISO and PJM sites experience unplanned or forced outages in excess of 13%.

And being able to reduce this by at least 50% is consistent with our experience as well as reducing the turnaround time from 72 hours to 48 hours or less in times of an unplanned outage.

Heat rate focus through implementation of on-site data and analytics, coupled with real-time advanced monitoring and diagnostics from our POC, or Power Optimization Center, is a significant source of value.

Operators can use this information to adjust operating parameters to resolve issues related to combustion and cycle efficiency losses.

Baldwin and Zimmer have identified over $4 million of annual heat rate improvement through their OPI efforts.

Overall, we're currently projecting we'll realize $50 million of the OPI benefits in 2018 and $160 million in 2019.

On a run rate basis, we will have achieved roughly $115 million of our $225 million OPI target by the end of '18 and 100% by the end of '19.

It's important to emphasize there are literally thousands of action items required to capture the OPI value across the fleet.

This requires attention to detail and strong accountability and governance, assisted by online tracking and reporting tools that reinforce the ongoing performance mindset.

The value capture is important, but sustaining the OPI process is critical to long-term success and key to identifying even more opportunities down the road.

As a result, while we believe there could be opportunities for further upside to this $225 million target, we will not know with confidence until we get further down the road.

With that, I would like to turn the call over to Bill Holden to discuss a few financial highlights of the combined company.

Great, thanks, Jim.

So turning now to Slide 18, where we have provided 4 sets of financial projections, 2 sets of which represent our actual guidance for 2018 and 2019 and 2 sets of which represent illustrative guidance for the same periods and are being presented for illustrative purposes to indicate the earnings power of our company.

I would like to note that we provided the 2019 guidance along with 2018 because the 2019 guidance reflects the partial year of combined results, given the timing of the close of the merger.

As Curt mentioned and I will discuss, the illustrative 2018 case shows that on a combined company basis, including Dynegy's actual first quarter results, adjusted EBITDA and adjusted free cash flow for full year 2018 are projected to be higher than we anticipated when we announced the transaction.

We thought it would also be beneficial to provide you an early look at 2019 on a combined company basis.

On the right side of the page, you will see the illustrative cases.

The 2018 illustrative case provides a projection of the earnings and cash flow generating power of the combined company as the merger closed on January 1, including actual first quarter results for both companies.

Assuming the merger had closed at the beginning of the year, we forecast the combined enterprise could earn between $3.15 billion and $3.35 billion in adjusted EBITDA from ongoing operations and between $1.65 billion and $1.875 billion in adjusted free cash flow from ongoing operations.

With the exception of the introduction of the Asset Closure segment, this illustrative presentation is on a comparable basis to the pro forma 2018 adjusted EBITDA and adjusted free cash flow projections we provided when the merger was announced.

As Curt mentioned, assuming a January 1 merger closing, we had previously estimated the combined company could earn between $2.875 billion and $3.125 billion of adjusted EBITDA on a consolidated basis.

The improvement of approximately $250 million when comparing midpoints versus our 2018 illustrative case reflects 4 primary drivers: first, an increase of approximately $85 million related to the increase in merger value lever targets we now expect to realize within the first 12 months following the merger close; second, an adjustment of approximately $85 million to reflect the exclusion of the Asset Closure segment from the 2018 illustrative case we are presenting today; and an increase of approximately $155 million reflecting improved power prices, primarily in ERCOT.

These positive variances were partially offset by Dynegy's first quarter 2018 results, which were approximately $75 million lower than Dynegy management expectations at the time the merger was announced.

I would also note that had we compared our current 2018 forecast for April 9 through December 31 only with the same time period from our October 2017 forecast, our positive variance would have been even higher as the result for those periods would not include Dynegy's first quarter underperformance.

Because the merger actually closed on April 9, Vistra's 2018 financial results will only include Vistra's results on a stand-alone basis for the period prior to April 9, 2018, and results of the combined company for the period from April 9 through December 31, 2018.

As a result, our 2018 guidance, which can be found in the first column in the table on Slide 18, reflects earnings and cash flow expectations for 2018 on this basis.

Vistra is projecting 2018 adjusted EBITDA from ongoing operations will be $2.7 billion to $2.9 billion with adjusted free cash flow from ongoing operations of $1.4 billion to $1.6 billion.

Guidance reflects power price curves as of March 30, 2018, in all markets.

Because our 2018 guidance does not reflect earnings and cash flow expectations for the combined company for a full year, we are also providing 2019 guidance today.

In 2019, we expect adjusted EBITDA from ongoing operations of $3.2 billion to $3.5 billion and adjusted free cash flow from ongoing operations of $2.05 billion to $2.35 billion, which represents a projected adjusted EBITDA to free cash flow conversion ratio of approximately 64% from our ongoing operations, highlighting the significant cash flow generation we expect from our diversified and integrated operations.

The last case we present on Slide 18 is in the far right-hand column.

And it reflects, as Curt mentioned earlier this morning, the earnings potential of the combined enterprise once we realize the full run rate of projected EBITDA value lever targets.

In that instance, we would expect Vistra could earn approximately $3.275 billion to $3.575 billion in adjusted EBITDA from ongoing operations and approximately $2.15 billion to $2.45 billion in adjusted free cash flow from ongoing operations.

Turning to Slide 19.

We provide a walk-forward from our 2018 and 2019 guidance for the illustrative cases we show on Slides 10 and 18.

The 2018 illustrative case reflects 2018 guidance and an increase for actual and forecasted Dynegy results from January 1 to April 8, the period prior to the merger close, and an incremental quarter of realized EBITDA value levers.

The 2019 illustrative case reflects 2019 guidance and an increase by $80 million to reflect the full run rate of adjusted EBITDA value levers versus the $420 million we expect to realize in 2019.

In any case, we believe the projected earnings power of the combined enterprise is impressive and supports our view that Vistra should be able to earn upwards of $3 billion of adjusted EBITDA on an annual basis while converting approximately 60% of its adjusted EBITDA from ongoing operations to free cash flow.

Turning now to Slide 20.

We have updated our capital structure slide pro forma for the merger close.

As you can see, pro forma for the merger closing and for the retirement of the $850 million of Dynegy's 6.75% senior notes due in 2019, which occurred on May 1, we had net debt as a combined company of approximately $10.5 billion as of March 31, 2018.

We project our net debt-to-adjusted EBITDA will be 2.9x as of year-end 2018 and approximately 2.2x at year-end 2019.

As a result, we project we will have approximately $1 billion of capital available for allocation over the next 18 months while still achieving our 2.5x net debt-to-adjusted EBITDA target by year-end 2019.

We plan to provide more specificity regarding our initial capital allocation plans at our upcoming Analyst Day on June 12.

We also plan to discuss our thoughts on optimizing our capital structure at the Analyst Day.

We have approximately $3.7 billion of senior notes that are callable later in 2018 and in 2019.

Streamlining our capital structure and minimizing our borrowing costs will be an important focus for us in the coming months.

To the extent the capital markets remain favorable, we would pursue repricing or refinancing opportunities in the future as has been Vistra's historical practice.

Our balance sheet remains strong, and we are committed to achieving our long-term leverage target of 2.5x net debt-to-adjusted EBITDA by year-end 2019 as we continue to believe maintaining a strong balance sheet is critical to success in this industry.

I'll now turn the call back over to Curt for a brief wrap-up before we get to Q&A.

Thanks, Bill.

I know we've covered a lot here today.

But I thought at the end here, it might be useful to quickly highlight again why we're optimistic about the future of our company and the ability to create superior shareholder value for investors.

As I said before, we believe our overall strategy of low leverage, low-cost integrated business operations and disciplined capital allocation is the winning formula for companies like ours and will lead to long-term shareholder value.

We continue to believe that the Dynegy merger is consistent with these strategic imperatives and represents the single-largest opportunity to enhance shareholder value relative to a host of other strategic alternatives we evaluated.

We now must execute.

If you just take a look at Slide 22 briefly.

The closing of the Dynegy merger provides what we believe will be significant value creation for our shareholders as well as diversification, scale and a platform to expand our integrated operations.

On the value creation side, as I highlighted earlier, we now project the merger, together with the impact of tax reform, will create approximately $500 million in adjusted EBITDA value levers, $235 million in additional after-tax free cash flow benefits and more than $1 billion -- $1.7 billion in federal cash tax and TRA savings plus anticipated alternative minimum tax credit refunds.

The combination of these benefits we believe should create approximately $7.5 billion in equity value.

As a combined company, we expect we will be able to drop approximately 60% of our EBITDA from ongoing operations down to adjusted free cash flow, a free cash flow conversion ratio that is significantly higher than that of other commodity-based, capital-intensive industries.

As an organization, we project to earn approximately $3 billion or more per year in adjusted EBITDA that should translate to approximately $9 billion or more in adjusted free cash flow from ongoing operations from 2018 through 2022.

We are absolutely committed to achieving our long-term leverage target of 2.5x net debt-to-adjusted EBITDA by year-end 2019 and expect we will have significant capital to pursue a diverse set of capital allocation alternatives, including returning capital to our shareholders.

In fact, we estimate we will have approximately $1 billion, as we've discussed previously, $1 billion in capital allocation in 2018 and 2019 while still achieving our leverage target.

The ability to achieve these financial metrics is a direct reflection of our earnings, geographic and field diversification as well as the quality of our assets and operations following the closing of the merger.

We have a leading retail platform.

We are a market leader in Texas.

And the addition of Dynegy's generation fleet provides a platform for us to leverage Dynegy's existing retail presence while applying best practices from our TXU Energy brand to expand further in these regions.

Further, even before any retail growth, we had projected approximately 50% of our adjusted EBITDA over time will come from a combination of retail and capacity payments as well as from the attractive ERCOT market.

Our operations are estimated to be the lowest cost among competitive generators as we project all-in wholesale cost of approximately $9 per megawatt hour and retail cost of approximately $45 per residential customer equivalent, which gives you the sense of the type of scale benefits that we receive.

With the addition of the Dynegy legacy CCGT assets, we believe we now have the youngest, most efficient fleet in the key U.S. markets, more than 60% of which is gas-fueled.

We own very attractive low-cost assets that are in the money most of the time and contribute to our ability to produce consistent earnings and free cash flow in a variety of market environments while lowering our organizational risk and reducing our exposure to natural gas.

We look forward to going into more detail regarding our new operating profile at our Analyst Day on June 12.

So as we conclude today, Slide 23 provides a highlight -- or high-level preview of our Analyst Day, which will be held at our corporate offices here in Irving on June 12, beginning at 8:30 a.m.

Central Time and concluding approximately 1:30 p.m.

Central.

The topics we expect to cover include: capital allocation, which I know is probably high on everybody's list and the priorities thereof; our 5-year free cash flow outlook; capital structure optimization -- opportunities; operational updates, including retail, commercial operations and generation with an OPI update.

We also plan to provide our view, and it's a preliminary one as you might guess, on the impact and the opportunities for batteries.

I know that's something of interest and there's a lot of chatter about what's the long-term impact from batteries.

We obviously are very interested in that.

And we're beginning to invest in it.

We hope many of you will be able to join us in Texas.

And we look forward to that day.

And for those of you unable to join us in person, the event will be broadcast -- there will be a webcast on our website.

With that, operator, we are now are ready to open the line for questions.

Thank you.

(Operator Instructions) Your first question comes from Shar Pourreza from Guggenheim Partners.

So on the synergies, nice surprise on the incremental $50 million for the corporate combo.

As we're thinking about additional opportunities, have you tapped this out?

And more importantly, as we're thinking about the operational synergies, obviously, past comments even through Dynegy's own internal studies seem to point to multiples higher on the operational side.

So again, can you review sort of what you need to play out to up this number to more emulate what the past comments have been?

And when do you think you can update us since you already have a pretty good start?

Well, look, I think true to what we've done, and look, I have to say, talking about it's one thing; doing it's another.

So I really don't -- I know there were some numbers thrown around out there, but Shar, here's how it works.

Because these are plant by plant, you got to get in, and you got to do the assessment.

And it takes -- to go into each plant, and I'll just -- should emphasize to you guys, there are literally thousands of line items that comprise getting to that $225 million, and there'll be another 1,000 or so to get another increment on that.

And so what we have done with our OPI effort is try to bring those out and communicate those to you guys.

When -- once we get into the plants and do that early-on assessment, what we do is we do an early-on assessment, it's very detailed and then we put target out there for the plants to go after and then we prove it up.

And so that's why I say, any increment to the $225 million is likely to come more at the end of this year so that we can get through the plant assessments.

And then -- so that we could feel comfortable.

The one thing that we're very focused on is putting numbers out there that we know we can achieve, that you can take to the bank and that don't erode our credibility because we get out in front of ourselves.

So I think that's what we're trying to do here.

And I do think there's probably -- I think, Jim and I think there's another increment here.

And it's just we want to prove it up and then communicate it.

I think you probably shouldn't expect anything on that until the end of this year and then we'll communicate what that increment looks like.

As far as synergies go, I think we've hit the top end of that.

I mean, that was our top end of our range, and we've hit it, and I don't -- would not expect a lot more.

We're always looking for cost savings, but I wouldn't consider it anything more material.

It's the OPI area where I see incremental.

And there is a good chance that we'll have some reasonable amount there.

But we've got to prove it up before we communicate it.

That's helpful.

That's well understood too.

And then just not to jump ahead of the Analyst Day, but $1 billion of cash available after delevering in the near term, which will, obviously, likely be materially higher post your delevering targets, you're looking at shutting down some additional assets with Dynegy, you've got a mark in Texas into the summer, and then you've got stable cash flows, right, from retail.

So how and when should we begin to think about a dividend, is 3% to 4% yield "meaningful?" And then as you sort of think about a board approval of the dividend policy, when you think about growth, are you sort of thinking about looking to emulate regulated peers?

Yes.

So I don't think -- well, let me just step back.

On the dividend, I think what we are thinking about there, and we're inching toward this, but we just bought the company, we're integrating it, we feel pretty confident about it, we got a summer ahead of us, and I don't think that you're going to hear from us that we have a definitive date to begin a dividend at June 12.

I mean, I -- we're still working with our board, but I doubt that.

But I do think, Shar, that when we get through the summer, and we work with our board, we have a board meeting over the summer, we're going to take a hard look at that.

And we've been pretty open that, that is something that's squarely on -- in our sights.

But we're also just trying to be mindful that we've got a lot of wood to chop elsewhere, and we want to make sure how we're doing through this summer before we make a final decision on it.

We do still think this 3% to 4% yield range is important, but we also think it's incredibly important to be able to grow that dividend.

I think you -- it's hard to -- it's hard for us not to admit that when you look at the cash generation of this business, and it's because we have low leverage, so we have low interest expense, and it's because our CapEx to maintain our business is substantially lower than the CapEx that other energy commodity-based capital-intensive business have to plow back in their business just to generate the same level of EBITDA, like E&P and MLPs, that we are going to have a multitude of opportunities around capital allocation, and we've been very open about the fact that dividend is one that's squarely on the table.

We're just -- we're not ready to pull the trigger on that, but I think we'll make some final decisions as the year progresses.

I think you should expect to hear from us in a much more definitive sense on this in 2018.

I believe that we will have that discussion.

But we are going to talk about some other things around capital allocation and in particular, we'll talk a little bit about our stock, where it's trading and share repurchases also at the June 12 meeting.

I think there'll be more meat on the bone on that one.

Terrific.

And then just one last one, if I may.

As you think about retail deals in sort of the Northeast, what sort of the read through to your plan is presented today?

I.e., any potential delays you see as far as you're delevering targets with a retail deal or the deal that you're sort of looking at shouldn't sway your balance sheet targets more than a couple of months?

Yes.

No, I think it's limited, if any.

So I think we can do retail-type transactions if we decide to do that.

And I should emphasize that our retail strategy is going to be -- it's going to be a dual strategy, and it'll be looking at M&A.

But I will tell you that we have to feel very confident of what we're getting, and we have to feel confident that we are getting a good value proposition.

And that's not easy to do looking at the retail companies that are out there.

We have a way to do business, and we have certain standards.

And we're going to make sure that what we're getting is real at the end of the day.

I think what you probably are going to see -- what you will see is a pretty aggressive out of ERCOT organic growth strategy that will put the lever down, and we think that's probably the more cost-effective approach to growing our business.

I mean, I look at it this way, Shar, we got people out there that have grown businesses to $100 million of EBITDA and 1 million customers over sort of a 3- to 7-year period.

And I look at that, and I look at the prowess that we have in our company, why can't we do that?

And why can't we build the kind of business we like rather than acquiring something, paying a premium and getting something that we're not even certain is a real solid business model.

So we're going to take a hard look at that.

Jim and Scott Hudson is here with us too, who runs our retail business.

They're working on with Sara Graziano working on a retail strategy.

We're taking that to our board in our July board meeting, and I think you guys will hear more about that strategy as well.

And we're going to talk about that too at our June 12 meeting.

Got it.

And Curt, congrats on the contract extension.

Now you're stuck with us for 4 more years.

Well, now that you put it that way.

I'll make sure -- I'm looking forward to it.

Thank you, Shar.

Your next question comes from Julien Dumoulin-Smith from Bank of America.

I suppose to start it off here with the Asset Closure.

Can we talk about that in terms of the composition of EBITDA attribution and/or just time line to actually getting these things closed out?

I'm thinking specifically MISO in California.

Yes, so a couple of things on that, then Bill, you might want to give some more details.

But the one area, I'd say, we're still working on is the Dynegy sort of ARO-related expenditures over the next few years.

And so I think we're talking about by the 12, Julien, we want to provide kind of a 10-year look at our cash expenditures.

And the reason we're not doing that right now is that we're still working on it and -- but we know we need -- if we're going to separate this thing out, we know we need to provide detailed information.

And we'll also give you an EBITDA outlook as well.

So the EBITDA and -- yes, I know -- and so I just want you guys to know on the Asset Closure segment that I'm going to -- on that particular thing, we're going to give you guys more detail.

On asset rationalization, in terms of what we're going to do with our assets, I think we've been clear on this.

We've got to figure out what kind of a business we have in MISO.

And I know that everybody would like to see a capacity market get passed from the Illinois legislature.

This is probably not a commonly known fact, but I grew up in Illinois, and I know a little bit about Illinois politics and that state's run out of Chicago.

And we have downstate Illinois coal plants and they're a lot of people in Illinois that don't like coal plants.

I think it is a really low probability that we get that passed.

I'd love it.

We'll work on it.

But we can't build a business around a hope.

We've got to build a business around reality.

And if reality is that we have the same capacity clears that we just saw in MISO, we got to do some things with our business.

I think the most important thing for our company is to work with the Illinois EPA and legislature to get the Multi-Pollutant Standard changed, and that's good for everybody.

Because it basically allows the assets to sort of fend for themselves, and we have a higher probability of keeping more assets in that market with that adjusted than if we keep them in a bubbled state that they're in now.

So our highest priority is then to work through the MPS process and try to get that through.

We'll continue to work on the capacity market, but I just don't have a lot of hope for that.

What's that mean at the end of the day, that we're -- and we're going through the OP process too, that's the other prong.

But once we get through all that, just like we did in Texas, we're going to make decisions.

And if we're losing money on assets, we're not going to run.

And so I would expect balance of this year, you guys are going to hear a lot more from us about what we're going to do with our MISO generation.

I do think though at the end, when we get all that done, the retail business and what's left of the assets, we could have a little -- nice little business in MISO that we can make money on.

And that's the real goal on this.

And so that's what -- I think you'll see us probably a smaller, more-focused business in MISO at the end of the day.

In California, we have some opportunities there that I don't know that I can really -- can I -- yes, I can't really talk about right now, Julien, but I'd like to.

We have some opportunities around our asset sites there that are pretty intriguing, and could be very valuable.

And so our view on that is we got to play that out, and then we'll decide what we do with it.

Right now, our position in California is not a strategic position, and we're not looking to grow traditional generation at all in California.

So if that's what we're left with, you can expect we're going to try to do something with that position.

So I think that's about as straight as I can be on those assets right now.

And unfortunately, we don't have anything to announce on it, but we're working through it.

And what we're trying to do is simplify our business and focus on those areas where we make money.

And I think it's ERCOT, PJM, ISO New England is really the core.

And around that, we got a tremendous retail business, and we're continuing actually to grow our other retail brands in Texas.

We can do an acquisition of something in Texas and expand a little bit further on the retail side.

And then with our asset base, we're looking for retail channels to basically sell our long-asset position, generation position in PJM.

And we're focused on Illinois, Ohio, where we already have position there.

We're looking at Pennsylvania.

We think Pennsylvania is a very good stake for retail.

You could expect us to be pretty aggressive there.

We'll look at Massachusetts, Connecticut, those types of markets on the retail side.

So that -- if you're thinking about what are we going to do, we're going to look at the retail side of the things to grow that out in addition to the asset rationalization and then, of course, I've talked about this, renewables as it relates to our retail business, are important to us.

And then we have begun to what I'd call, toe-dip into the battery world.

We think batteries are real.

We think there's some opportunities in ERCOT around batteries, and so we're -- and we have -- other opportunities may present themselves, and so you'll see us actually probably put a little bit -- I won't scare anybody, we're not talking about hundreds of millions of dollars here, but we have some small opportunities that allow us to get into that business and to understand batteries and understand their application in markets like ours.

Excellent.

Quick follow-ups if I can.

What's the curve date for the adjusted EBITDA that you disclosed today?

Just to understand where the mark to market is?

Yes, it's March 30.

Okay.

It's very recent.

And then separately, what's the retail allocation of synergies just when you look at the numbers that you put out there, just if you were to kind of slice up that $500 million?

It's the -- it's like $10 million.

Okay.

Isn't that significant...

So I should tell you, Julien.

I think they spent like $17 million in total, and so we got over half of that as synergies.

But there wasn't a lot of meat on that bone.

And our -- as you know, even prior to this deal, our costs -- we were at the -- we were one of the lowest cost on a residential customer equivalent basis as it was just [Tier 2] energy, and so when you combine what they have, almost 1 million customers with $17 million of spend, that's why we saw such a precipitous reduction in that particular metric on the $45.

We were -- I think we were around $90 previous, and we dropped it in half because we picked up all these assets.

Because the way that they go to market, right, they do mainly muni, ag type stuff and broker related, and so their overhead structure was less because they're not doing like we do, a lot of door-to-door and direct marketing-type stuff.

Your next question comes from Greg Gordon from Evercore.

A lot of my questions have been answered.

When you talk about your confidence that you can be a $3 billion run rate EBITDA company even under stressed market conditions, I mean, I guess, I'm looking at this Page 19 and the $3.275 billion to $3.375 billion illustrative EBITDA forecast, you've indicated that you think you can nudge that a little bit higher perhaps with further OPI -- OP initiatives.

But when you run your simulations and get comfortable that you're sustainably sort of even in that down cycle, a $3 billion EBITDA run rate business, can you just give us a sense of how you stress-tested that?

Are you counting on counter-cyclicality of the retail versus the wholesale business?

Or what factors drive you to the conclusion that you think you can convince investors that this is fundamentally a pretty stable through the cycle cash flow business?

Yes, so, look, I will say that we do have -- the combined company, Greg, we ran models on this is -- has reduced its exposure to gas fairly significantly.

One with the retail channels, but also because of -- in PJM, the [significant] combined cycle fleet and the smile effect there that was additive to us.

And so we have reduced it.

But I want to be clear, we still have exposure to both gas, and we have exposure to heat rate, and that's how we look at our combined power position.

It's broken between gas and heat rate.

The reason I feel comfortable, and we feel comfortable, because there is exposure outside the bands of what we provide.

But it's our ability to access liquid commodity markets and to be able to hedge and to take that tail risk out.

And some -- we're doing something now in ERCOT to attempt, and I think we're doing a good job of it, in terms of how we hedge the summer to try to reduce the risk of that -- something could happen in ERCOT that where we would go below the bottom end of the range.

I don't want to mislead anybody.

I mean, this is a presentation where we're talking about our company and what we think we can do, but through execution.

But we still have risk in our business.

But the way we manage our business and we think about, we don't wait and swing for the fences, we find opportunities relative to our fundamental view in each of the markets where the forward curves are above that, and we take that risk exposure off the table.

And by doing that, in fact, we really like the PJM market because it actually has more liquidity further out into the markets that we can manage that risk to an EBITDA outcome.

And we talk about that with Steve Muscato, who runs our commercial group.

We'll say, "Okay, Steve, this is where we want to be.

This is the EBITDA we want to hit." And then Steve comes up with strategies on how we can hedge and how we can basically hit those numbers.

So Greg, it is my confidence in our ability to commercialize our assets and use liquid forward curves to be able to manage the risk that we have inherent in our business.

But I also would say, it's also because we have -- on the energy side, we have very low heat rate in the money assets, so that's helpful too.

We have capacity payments as well as retail business.

And when I combine all those and we stress our outcomes, we feel comfortable that we can hit the $3 billion plus, and we can convert roughly 60% of that into cash.

That's great.

When you talk about batteries, not to try to gun-jump beyond the Analyst Day, but that's my job, the -- you talked about ERCOT, but you've also mentioned California, and I know back in March -- I think it was back in March, they had a ramp in the duck curve 1 or 2 days that was basically so substantial, it was like 3 or 4 years.

They hadn't projected a ramp in the duck curve as steep as they saw for another 3, 4 years out from when it happened.

And so they seem like they're kind of in a bind there to figure out how they're going to deal with the -- how much renewables they have there.

So is a battery storage opportunity what you're implying or inferring you could be looking at those sites in California as well as perhaps dabbling in retail-focused batteries in ERCOT?

Yes, so this is what I can say that we have 2 of the best sites in TG&E's territory for batteries.

And so we are certainly considering that.

And if you thought, Greg, you hit it around ahead.

If we thought we're going to have a business in California, it wouldn't be a traditional generation business.

That's not (inaudible) we had an opportunity to get into alternative energy sources, like a battery, and we can do it through potentially contractual arrangements and work with the utilities there.

That's a business that we can get our head around, and that might even lead potentially to even considering, god forbid, our retail business.

But bottom line is the business we have there now is not a sustainable business, but what we could do at those sites could actually create a business in California.

So that's it.

And I would also tell you, Greg, that we should have called our battery section -- session on the 12th, the Greg Gordon battery session because you're the one that has pushed us on that issue about what does the long term -- and I'm being serious, what does the long-term outlook of these markets look like with a realistic penetration of batteries and renewables.

And it's a serious issue for us, and we're studying it, and we're going to share with you guys what we know.

We won't -- we know we have to answer, but at least we can share with you guys our thoughts around it.

The next question comes from Praful Mehta from Citigroup.

Couple of quick questions.

I know you've gone through a long session already.

But quickly on Texas.

Firstly, 2019, how long a position do you have right now?

And how do you see that market involve in '19?

You talked about backwardation as well.

So a little bit on Texas and how you are positioned to any sensitivities to movements up or down on the curve, how would you see that play out?

So I'm going to -- you can -- go ahead, hit the number.

I want to talk about...

Yes, Praful, I'll quickly give you a summary of our positions and the sensitivity.

We've got those in the appendix, by the way, but you can refer them later.

But you'll see on natural gas, this is at March 30, we were about 23% hedged and then on -- for 2019, and then on heat rate for 2019 at March 30, we were about 42% hedged.

But I guess, the sensitivities that the changes that are also greater, so for natural gas sensitivity at March 30, it was sort of for a $0.50 change in gas, at $235 million if the gas price changes up, $225 million down if the gas price is down.

And again, that sensitivity if the heat rates are held constant and then the market heat rate sensitivity for 1 turn in heat rate is about $160 million up and $150 million down.

Yes, that's good.

So to talk may be slightly more qualitative than that, but just directionally.

And '18, '19, when we look at the -- just the fundamentals of the market and since we live here, we see this.

The tremendous amount of growth that's going on in Texas, low growth seems extremely strong.

And when you look at what the new resources are likely to come on between '18 and '19, there's some, but it's limited.

We actually felt that '18 -- or that '19 would trade over '18.

Now what I'd say is, there's a psychology to all these markets, and I think people got caught in '18 in a little bit and so that played out in kind of behavior and psychology.

And '19 hasn't quite gotten to that fervor yet, but we certainly have seen '19 come up as we've gotten further into '18, and I believe it'll come up even further as we see the psychology of the market turn from '18 to '19, and realize that there really isn't a lot of resources coming on and there's still low growth coming.

So we've always felt like '19 was going to be a little tighter.

We'll see.

But it certainly seems that way to us.

The question for me, and we've talked about this a lot is what happens beyond that.

But even '20, it's hard to see how there's enough resources that are on.

There's no big chunky gas combined cycle plays.

Plus, as I've said earlier, when you look at the forward curves, they don't justify a plant like that.

So we do believe that there's going to be renewables that come in, wind and solar, but it's just not enough over that period of time.

So we still think that '20 is going to look pretty attractive over time, and that should pop up as well and that some of that backwardation should come out in the market.

Now backwardation, I think, is a function of uncertainty and it's a function of illiquidity.

And as you move closer to those markets, we would expect those curves to move up.

So it's going to be interesting to see.

There's no -- I don't think there's any more, there's any deep-pocketed strategic who are going to make a poor decision to build 2,000 megawatts when it's not needed in this market.

I don't see that happening.

This is going to have to be merchant players in an energy-only market with backward dated curves, which is already difficult to get -- to raise debt against and then the illiquidity in the market because of the uncertainty that trading -- traders have in it.

It'd be very difficult to go out and do a long-term hedge to support a new build.

So that bodes well in my view -- that bodes well for some sustainable, relatively strong ERCOT market over the next few years.

Got you.

Super helpful.

And then just quickly on taxes.

Sounds like a meaningful improvement on the NOL utilization and the fact that you are really not paying any cash taxes for a number of years.

Just wanted to confirm, is there any uncertainty or do you require any tax approval or private letter ruling or anything else for this change?

Or is this already okay in terms of the NOL utilization of Dynegy?

Yes, our assumptions are based on existing law at the date of the merger.

So we're pretty confident in the outcome.

Your next caller comes from Angie Storozynski from Macquarie.

So I wanted to actually go back to this sensitivity that you guys are showing to changes in natural gas prices in Texas, especially, because power prices in Texas have seemingly decoupled from natural gas, which could be a good thing given what's happening with the Permian gas.

And so how do you see it evolving?

Yes, we have, obviously, scarcity being priced in Texas and that might continue for the next year or 2. But you're also seeing this incredible growth in gas or associated gas in Permian with some estimates suggesting that come next summer, Permian gas is going to be basically trading at 0. And so how should I think about that and your exposure of your earnings to that gas -- regional gas phenomenon?

Yes.

So good question.

Let me start to attack it in a couple of ways.

First of all, we sort of recognize the gas exposure.

And I think I mentioned this previously that we break our power position to a gas equipment position and a heat rate position.

And without -- I don't want to give up our positioning.

But what I would tell you is that we are mindful of where gas is, and we are protecting ourselves on gas in both '18 and '19 to the downside.

And we have effectively done that.

And I think that was important for us.

And we've left ourselves some position for the upside.

So I can't really -- and yes, just don't think it's right for me to say in much more detail than that because Steve Muscato is staring at me, and I don't want to give away our position.

But we recognize exactly what you said.

Now we actually, though -- we actually have a net benefit in our fleet, in particular the Luminant fleet.

But gas is doing quite well, I mean, with the kind of gas prices.

And one thing we are going to have Steve go through at the Analyst Day is pricing in ERCOT.

So I think there may be some misconception about it.

But in general, gas generators that use Houston Ship Channel gas, which trades at a premium to Mid-Continent gas, Texo Gas and Waha.

They set the price unless there's congestion from West Texas.

What that means is because Houston Ship Channel gas is higher, then our plants that source off of Mid-Con and off of Texo and off of Permian actually have an advantage relative to those that price off of Houston Ship Channel or Henry Hub.

So we have a pretty good position.

Now we're working on the Dynegy plants to get them better positioned on the gas over time, but even there, are better positioned in some.

But the bottom line is our assets, Forney and Lamar and Odessa are in really good gas position.

So for us, we're in a pretty good position.

The thing we are worried about, and it's a fair question, is the downside on the gas.

And we have positioned ourselves to guard against the downside because we think that -- in the next year or 2, we think it's downside risk.

What I would also tell you though is that the markets are telling us that they believe -- because you can build pipelines in Texas, so I want to be clear.

This is not the same kind of situation that you have in the Marcellus, and you have in the Utica and other parts of the country where there's an envy about -- or just anti-pipeline.

You can build pipelines in Texas.

So anybody who thinks they can come in and try to build on the back to low gas, try to build a combined cycle plant, that's going to vanish in about 2 years because there's going to be pipeline to get that gas out and try to get it to LNG facilities and get it to the rest of the country and also try to get it to Mexico.

So that differential is going to dissipate over time.

This will bring us to the end of the Q&A portion as we have ran out of our time limit.

I turn the call back over to the speakers for closing remarks.

Okay.

Thank you very much.

And thank you all for taking the time to join us.

As I stated at the beginning of the call, we do appreciate your interest in Vistra, and we look forward to continuing our conversations.

Thank you.

Operator?

Thank you, everyone.

This will conclude today's conference.

You may now disconnect.