Vistra Corp

NYSE:VST

Earnings Call Transcript 2018-Q1

[Operator]

Welcome to the Vistra Energy First Quarter 2018 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]

I would now like to turn the call over to Molly Sorg, Vice President, Investor Relations. Please go ahead.

[Molly Sorg, Vice President, Investor Relations]

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.

[Curtis Morgan, President and Chief Executive Officer]

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 relatively lengthy call, but we have a lot to talk about today. You may want to grab a snickers for.

Turning now to Slide 6, we have a 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 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 in our merger transition and integration, and we’re excited to announce today a nearly 60% increase in our merger value lever targets, which I will discuss in detail momentarily. As you may recall, our reference of value lever targets include synergies, our operations performance initiative or what we call Operator, free cash flow and tax value enhancements.

This increase in our merger value lever targets, combined with power price improvement, particularly in the ERCOT markets 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 the best 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 is 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 the very important thing about this, we’re carrying very good length into the summer and that’s important to know.

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 investment, especially in the energy-only ERCOT market. Remember, these are 30-year to 40-year assets and the market is not supportive for even one 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 this 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 contribute to the 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-filled, low heat rate generation fleet that as a result is regularly in the money generating meaningful energy revenues. And our commercial operations team has proven experience in the industry and has consistently 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 2.5 times 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 a result, we believe, over time, this will lead to a full valuation for Vistra.

However, I must note, we’re not there yet. We understand this is about execution and delivering on our commitments and 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 three 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. Now these updates will be the focus of today’s call. We’re going to start the discussion with Bill Holden, who will cover Vistra’s standalone 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 earnout 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 three-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 standalone 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 of OPI update, as well as earnings expectation for the combined entity. We will conclude today’s call with a brief preview of our June 12 Analyst Day. Bill?

[William Holden]

Thanks, Curt. As we depict on Slide 8 and as Curt just mentioned, Vistra’s standalone first quarter adjusted EBITDA from ongoing operations was $263 million. Excluding the negative $21 million impact from our partial buyback of Vistra earnout 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 standalone full-year earnings guidance.

For the quarter, the retail segments 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 count 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 earnout in February. So as Curt just mentioned, we expect the full-year benefit net of the premium paid in this transaction of $3 million and in the aggregate a three-year net benefit of $23 million. O&M expenses also increased quarter-over-quarter.

In total, first quarter results exceeded our expectations on a standalone basis, setting up the combined company well to execute on this new 2018 guidance, which I’ll describe later on the call.

Curt, so let’s get to the merger update. Curt?

[Curtis Morgan, President and Chief Executive Officer]

Great. Thanks, Bill. I’ll be moving us to Slide 10 now. As you can see today, we’re 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 six months of diligence and detailed transition and integration planning, we’re 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 OP effort with McKinsey.

With assist from Bob Flexon and the Dynegy team prior to the merger closing, we’re progressing ahead of schedule with the Dynegy fleet and we’re nearing completion on the OP effort on the Luminant fleet, which we began shortly after a merger and through bankruptcy in the fall of 2016.

As Jim will further discuss, we expect to realize a material amount from OP in 2018, reaching a significant run rate on OP by the year-end 2018 and capture a 100% of these amounts waived of OP by year-end 2019. We believe there could be more OP value to come. However, we’ll take the balance of 2018 to prove this out.

We’re 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 a 100% is expected to be achieved by year-end 2019.

The increased target reflect 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 2.5 times net debt to adjusted EBITDA.

So we’re very confident, these cash flow savings will be achieved. We believe 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’re pleased to announce today that the 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 five years following the merger.

In addition, we project we’ll receive $223 million in alternative minimum tax credit refunds over the next five years, which further increases our projected adjusted free cash flow. In fact, we estimate that these factors combined will improve our five-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, where discount rate were applicable to the increased merger value lever targets and the impact of tax reform, we calculated 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, result 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 mark improvement from 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 our 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 declined such as the decline in PJM capacity prices from 2019 to 2020.

We believe we’ll be able to bridge those declines to 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’ll have significant capital available for allocation. I know that’s of interest to many of you.

As we described on the right-hand side of the Slide 10, our primary capital allocation priorities will be to first to 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 2.5 times net debt to adjusted EBITDA by year-end 2019.

Given our improved adjusted EBITDA and adjusted free cash flow expectations 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 requirements should report us the opportunity to potentially accelerate certain capital allocation alternatives.

As we have mentioned in prior earnings call – calls, our capital allocation priority is in addition to retire debt or to purchase out stock if we believe it is trading in 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 will mention again later, capital allocation will be an important agenda item for our June 12 Analyst Day. We continue to believe that an 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 OP initiative on assets in these areas an explore potential opportunities to enhance value prior to making final discussions 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 at approximately 60% of our adjusted EBITDA will come from the attractive ERCOT market, while more than half of our generation is projected to be come from natural gas asset, which reduces our overall exposure to natural gas pricing.

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 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 targets from $350 million to $500 million, $50 million of this increase relates to merger synergies we have identified to our pre-merger 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 fleet. We now believe we’ll 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 OP process later on during the call.

It is important for me to note that true to how we have handled communication of OP 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 those 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 us 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 four and five-year clip there. The options are 100% contingent on our collective achievement of hitting the targeted value levers in 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 a recent agreement on a four year extensive of my employment contract from May 2018 until May 2023 I think, isn’t it, 2022 to 2023. In my, sorry, in my 35 – I don’t even know I’m on 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 for getting the value for 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 will be able to achieve $235 million of run rate additional after tax free cash flow benefits by year-end 2019, a $100 million of which have already been identified or achieved, $20 million of the project benefits relate to expected capital expenditure synergy 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 in 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 see once we reach our net leverage of 2.5 times net debt to adjusted EBITDA. We believe there remains further opportunity for upside, which is not reflected in this presentation, if we are 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 lower federal tax rate from 35% to 21%, coupled with our expected ability to utilize more than Dynegy’s net operating losses in the first five 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. That – but – and it’s important to note that the $24 million that we forecast to pay – to be paid to TRA rightholders 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 – or 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 five years following the merger closing more than offset the impact from the lower tax rate.

As I’ve 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 a 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’m a part of that meets frequently to review progress.

This is why we are confident in the value capture and why we are excited for the future of our company. We look forward to executing on the value lever target 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?

[Sara Graziano, Senior Vice President of Corporate Development]

Thank you, Curt. Turning now to Slide 15, as Curt mentioned, during the period, the three merger announcement in closing, the management team 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. $115 million of these synergies were achieved on day one, 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 largest 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 $115 million of these synergies will be realized in 2018, with 89% of that 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 items 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.

[Jim Burke]

Thank you, Sara. As you know, our OP 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 in the three main areas: the Texas-based limited 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 OP efforts. This value has already reflected in our standalone guidance.

First, for Luminant, Martin Lake continues to find cost and revenue opportunities as an early participant in the OP process. Our nuclear site, Comanche Peak, embarked on its efforts 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 OP 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 timelines have been optimized through kaizen exercises to shave over 20% of the total time, resulting in lower cost and more gross margin. Importantly, these three teams did their OP efforts together, which materially enhance 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 OP process in the $225 million target. Combined these procurement opportunities represent a 6% to 8% reduction of the fast loan and spin-based 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 scale is yielding more than 15% through our initial rates.

Now turning to the Dynegy combined cycle fleet, we are leveraging our learnings from our combined cycle fleets here in Texas to see the OP effort across the additional 19 sites. Kendall was the first Dynegy combined cycle to pursue their OP effort and they are executing on more than $5 million of value.

Given our collective efforts to date, we’re going to organize the OP roll out across the rest of the gas fleet in a coordinated manner, focusing by major value drives, 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 OP 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 has completed OP, we’re executing our ramp rates that are nearly three times faster.

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

The average reduction both in terms of more effective planned outages, as well as more timely response to unplanned outages is a source of opportunity. [indiscernible] typically 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 experienced 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 onsite 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 OP efforts.

Overall, we’re currently projecting we’ll realize $50 million of the OP benefits in 2018 and $160 million in 2019. On a run rate basis, we will have achieved roughly $115 million of our $225 million OP target by the end of 2018 and 100% by the end of 2019. It’s important to emphasize, there were literally thousands of action items required to capture the OP value across the fleet.

This requires attention in detail and strong accountability in governance assisted by online tracking and reporting tools that reinforce the ongoing performance mindset. The value capture is important, but sustaining the OP 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 a 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.

[William Holden]

Great. Thanks, Jim. Turning now to Slide 18, where we have provided four sets of financial projections. Two sets of which represent our actual guidance for 2018 and 2019, and two sets of which represent illustrative guidance for the same period and are being presented for illustrative purposes to indicate the earnings power of our company.

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

As Curt mentioned and I will discuss the illustrative 2018 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 projection we provided when the merger was announced.

As Curt mentioned, assuming the 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 four primary drivers. First, an increase of $5.85 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’re 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 we – had we compared our current 2018 forecast for April 9 through December 31 only for the same time period from our October 2017 forecast, our positive variance would have been even higher as the results for those periods does not include Dynegy’s first quarter underperformance. Because the merger actually closed on April 9th Vistra’s 2018 financial results will only include Vistra’s results on a standalone basis for the period prior to April 9th 2018 and results of the combined company for the period from April 9th 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 30th, 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.

Turing to Slide 19, we provide a look forward from our 2018 and 2019 guidance, the illustrative cases we show on Slides 10 and 18. The 2018 illustrative case reflects 2018 guidance and has increased for actual and forecasted Dynegy results for January 1st to April 8th, the period prior to the merger close and an incremental quarter of realized EBITDA value levers.

The 2019 illustrative case reflects 2019 guidance and has increased 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 it 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 we can see, pro forma for the merger closing and for the retirement of the $850 million of Dynegy 6.75% senior notes due in 2019 which occurred on May 1st, we had net debt of the combined company of approximately $10.5 billion as of March 31st, 2018.

We project our net debt to adjusted EBITDA will be 2.9 times as of year-end 2018 and approximately 2.2 times 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 2.5 times net debt to adjusted EBITDA target by year-end 2019. We plan to provide more specificity regarding our initial capital allocation plan at our upcoming Analyst Day on June 12th.

We also plan to discuss our thoughts of 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 cost will be an important focus for us in the coming months. To the extend 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’re committed to achieving our long-term leverage target of 2.5 times 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.

[Curtis Morgan, President and Chief Executive Officer]

Thanks Bill. I know we’ve covered a lot here today, but 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 shareholders, as well as diversification, scale and a platform to expand our integrated operations.

On the value creation side, as I highlighted it 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 a $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’ll be able to drop approximately 60% of our EBITDA from ongoing operations down to adjusted free cash flow. A free cash conversion ratio that is significantly higher than that of other commodity based capital intensive business stream.

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 2.5 times net debt to EBITDA, 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’ll have approximately $1 billion, as we discussed previously, $1 billion in capital allocate in 2018 to 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 are the leading retail platform, we’re a market leader in Texas in addition – 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 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 competitor 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 as we believe we now have the youngest most efficient fleet in the key U.S. markets, more than 60% of which is gas field. We own a very attractive low cost assets that are in the money [ph] 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 a 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 AM central time and concluding approximately 1:30 PM central.

The topics we expect to cover includes capital allocation which I know is probably high on everybody’s list in the priorities thereof. Our five-year free cash flow outlook, capital structure optimization opportunities, operational update included retail, commercial operations and generation with an OP update we also plan to provide our view yet 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 we had a lot of chatter about what’s 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 out via a webcast on our website.

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

[Operator]

[Operator Instructions] Your first question comes from Shahriar Pourreza from Guggenheim Partners. Your line is open.

[Shahriar Pourreza, Guggenheim Partners]

Hey good morning guys.

[Curtis Morgan, President and Chief Executive Officer]

Hey Shah.

[Shahriar Pourreza, 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 to 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 pretty good start?

[Jim Burke]

Well, look I think included [ph] what we have done and look I have to say talking about it to one thing, doing it to another, so I really don’t – I know there were some numbers sitting around out there, but Shah here is how it works, because these are plant by plant you’ve got to get in and you got to do the assessments and it takes to go into each plan, and I’ll just – I should emphasize you guys, there are literally thousands of line item items that comprise getting to that 225, and there will be another thousand or so to get another incremental on that.

And so what we’ve done with our OPI effort is try to bring those out and community those to you guys, when – once we get into the plant 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 is likely to come more at the end of this year so that we can get through the plant assessment. And then so that we could feel comfortable, the one thing that we are 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 is probably I think Jim, I think there is another incremental here, and it’s just we want to prove it out 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 hit the top end of that. I mean, that was our top end of our range and we hit it, and I don’t – I would not expect a lot more rallies looking for cost savings, but I would consider it anything more material. It’s the OP 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.

[Shahriar Pourreza, Guggenheim Partners]

That’s helpful, well understood Jim. And then just not to jump ahead of the Analyst Day, but $1 billion of cash available after delevering in the near-term which you’ll obviously likely be materially higher post your delivering targets, you are looking at shutting down some additional assets with Dynegy, you’ve got a mark in Texas this summer and then you 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?

[Jim Burke]

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 are integrating it, we feel pretty confident about it, we got a summer ahead of us, and I don’t think that you are going to hear from us that we have a definitive day to begin a dividend at the June 12th. I mean we are still working with our Board, but I doubt, but I do think Shah that when we get through this summer and we work with our Board, we have a Board meeting over this summer. We’re going to take a hard look at that and we’ve been pretty open. And that is something that’s squarely on our – in our site. 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 at 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 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. I also – at the June 12th meeting, I think, there’ll be more meat on the bone on that one.

[Shahriar Pourreza, Guggenheim Partners]

Terrific. And then just one last question, if I may. As you think about retail deals sort of the Northeast, what’s sort of the read-through to your plan as 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?

[Curtis Morgan, President and Chief Executive Officer]

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 will 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 giving is real at the end of the day. I think, what you probably are going to see the way 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 – it’s like the more cost-effective approach to growing our business.

When I look at it this way, Shahriar, we’ve got people out there that have grown businesses to $100 million of EBITDA and 1 million customers over sort of a three-year to seven-year period. And I look at that, I look at the problems 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. As Scott Hudson is here with us too, who runs our retail business, they’re working on with Sara Graziano, working on our 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 12th meeting.

[Shahriar Pourreza, Guggenheim Partners]

Got it. And Curt, congrats on the contract extension. Now you stuck with us for four more years. See you guys.

[Curtis Morgan, President and Chief Executive Officer]

Well, now that you put it that way. I’m looking forward to you. Thank you, Shahriar.

[Shahriar Pourreza, Guggenheim Partners]

Thank you, guys.

[Curtis Morgan, President and Chief Executive Officer]

You bet.

[Operator]

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

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

Hey, good morning. Congratulations.

[Curtis Morgan, President and Chief Executive Officer]

Hey, Julien, how are you?

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

Good. Thank you very much. Happy Friday. I suppose to start it off here with the Asset Closure. So we talk about that in terms of the composition of EBITDA attribution and/or just timeline to actually getting these things closed out, I’m thinking specifically MISO in California?

[Curtis Morgan, President and Chief Executive Officer]

Yes. So a couple of things on that, and then Bill, you might want to get in 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, look, 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 we’re – 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 – and so, I guess, what you guys 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 the capacity market get passed from the Illinois legislature. This is probably not a commonly known fact, but I grew up in the Illinois and I know a little bit about Illinois politics and that stage right out of Chicago and we have downstate Illinois coal plants and there are a lot of people in the Illinois that don’t like coal plants.

I think, it is a really low probability that we get that passed, I love it, we’ll work on it, but we can’t do 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 the 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 bubble state that they’re in now.

So our highest priority has been 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 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 like we did in Texas, we’re going to make decisions and 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 – yes, I can’t really talk about right now, Julien, but I like to. But 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 our strategic position, and we’re not looking to grow for additional generation at all in California.

So if that’s what we’re left with, you can expect we’re going to start 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, EISA New England is really the core. And then around that, we’ve 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 state for retail, as you can 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 think 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’ll talk about this renewable as it relates to our retail business, are important to us. And then we have began to, what I call, into the battery world. We think batteries are real.

We think there are some opportunities in ERCOT around batteries, and so we have 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 in that business and to understand batteries and understand their application in markets like ours.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

Excellent. A quick follow-ups, if I can. What’s the curve date for the adjusted EBITDA that you post today just to understand where the mark-to-market is?

[William Holden]

Yes, it’s March 30.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

Okay, it’s very, 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?

[Curtis Morgan, President and Chief Executive Officer]

It’s like $10 million.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

Okay. [Multiple Speakers]

[Curtis Morgan, President and Chief Executive Officer]

So I should tell you, Julien, I think I spent like $17 million in total. And so we got over half of that as synergies, but there weren’t a lot of meat on that bone. And our – as you know, even prior to this deal, our costs, we were at – we were one of the lowest cost on a residential customer equivalent basis as it was, just TXU Energies. And so when you combine what they had, 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.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

Got it. Excellent. Thank you all very much.

[Curtis Morgan, President and Chief Executive Officer]

Thank you.

[Operator]

Your next question comes from Greg Gordon from Evercore. Your line is open.

[Greg Gordon, Evercore ISI]

Hey, good morning. Can you guys hear me?

[Curtis Morgan, President and Chief Executive Officer]

Hey, morning. Good morning, Greg. How are you?

[Greg Gordon, Evercore ISI]

Yes, good morning. So – I’m great. So a lot of my questions have been answered. When you talk about your confidence that you can be $3 billion run rate EBITDA company even under stressed market conditions. I mean, I guess, I’m looking at the page 19, you’re the $3,275 to 3,575 illustrate of EBITDA forecasts, 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 with that, you’re sustainably sort of even in a down cycle of $3 billion EBITDA run rate business.

Can you just give us a sense of how you stress tested that? Are you counting on countercyclicality in 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?

[Curtis Morgan, President and Chief Executive Officer]

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 PJMs a significant combined cycle fleet and the small effect there – that we’ve added into 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 to break it 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 on 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 miss – 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 market that we can manage that risk to an EBITDA outcome and we talk about that with Steve Muscato, who runs our commercial group will say, okay, Steve, this 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 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 to we have capacity payments as well as retail business. And when I combine all those and we stress, 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.

[Greg Gordon, Evercore ISI]

That’s great. When you talk about batteries, not to try to gun jump you on the Analyst Day, but that’s my job. 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 one or two days that was basically so substantial. It was like three to four years. They hadn’t projected a ramp in the duck curve as steep as they saw for another three four years out from when it happened. And so they seem like they are 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 it battery storage opportunity what you’re infer – you are implying or inferring you could be looking at at those sites in California, as well as perhaps dabbling in retail focused batteries in ERCOT?

[Curtis Morgan, President and Chief Executive Officer]

Yes so this is what I could say that we have two of the best sites in PG&E’s territory for batteries and so we are certainly considering that. And if you thought, Greg, you hit it around the head. If we thought we were going to have a business in California, it wouldn’t be a traditional generation business, that’s not gone. We had an opportunity to get into alternative energy sources like a battery and we could do it through potentially contractual arrangements and work with the utilities there that’s a business that we could get our head around. And that might even lead potentially to even considering God forbid our retail business. But the bottom line is, the business we have there now is not a sustainable business, but what we could do with 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 to 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 – well, nobody has the answer, but at least we can share with you guys our thoughts around it.

[Greg Gordon, Evercore ISI]

No, that you are too kind, I appreciate that. Have a great morning.

[Curtis Morgan, President and Chief Executive Officer]

All right, Greg.

[Operator]

The next question comes from Praful Mehta from Citigroup. Your line is open.

[Praful Mehta, Citigroup]

Thanks so much. Hi guys.

[Curtis Morgan, President and Chief Executive Officer]

Hey, Praful. How are you?

[Praful Mehta, Citigroup]

Good, good thanks for the fulsome update. A couple of quick questions, I know you’ve gone through a long session already. But quickly on Texas, firstly, in 2019 how long a position do you have right now and how do you see that market evolving 2019? You’ve 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?

[Curtis Morgan, President and Chief Executive Officer]

So I’m going to – you can go ahead and get the numbers, I want to talk about [Multiple Speakers].

[William Holden]

Yes, I’ll just quickly give you a summary of our positions and the sensitivity. We’ve got those in the appendix by the way, so you can refer to 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 in 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 30th, it was sort of $0.50 change in gas, if $235 million of the gas price changes up to $225 million down as the gas price was down. And again, that sensitivity of heat rates are held constant and then the market heat rate sensitivity for a one turn in heat rate is about $160 million up and $150 million down.

[Curtis Morgan, President and Chief Executive Officer]

Yes, that’s good. So to talk maybe slightly more qualitative than that. But just directionally in 2018 and 2019 when we look at just the fundamentals for the market and since we live here we see this, the tremendous amount of growth that’s going on in Texas, load growth seems extremely strong. And when you look at what the new resources are likely to come on between 2018 and 2019, there are some, but it’s limited. We actually felt that 2018 or that 2019 would trade over 2018.

Now what I’d say is, there’s a physiology to all these markets and I think people got caught in 2018 in a little bit and so that played out in kind of behavior and physiology and 2019 hasn’t quite gotten to that further yet. But we certainly have seen 2019 come up as we’ve gotten further into 2018 and I believe it will come up even further as we see the physiology of the market turn from 2018 to 2019 and realize that there really isn’t a lot of resource coming on and there’s still load growth coming. So we’ve always felt like 2019 was going to be a little tighter, we’ll see, but it’s certainly seems that way to us was.

The question for me and we’ve talked about this a lot is, what happens beyond that, but even 2020 it’s hard to see how there’s enough resources that are on. There’s no big chunky gas combined cycle play, first 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 to come in when and solar, but it’s just not enough over that period of time. So we still think that 2020 is going to look pretty attractive over time and that should pop up as well. And then 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 close 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 is any more – there’s any deep pocketed strategic who are going to make a poor decision to build 2000 megawatts when it’s not needed in this market.

I don’t see that happening, this is going to have to be merchant players and in an energy only market with backwardated curves and 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 will be very difficult to go out and do a long-term hedge to support a newbuild. So that bodes well, on my view that bodes well for some sustainable relatively strong ERCOT market over the next few years.

[Praful Mehta, Citigroup]

Got you, super helpful. And then just quickly on taxes, it sounds like a meaningful improvement on the NOL utilization and the fact that you’re 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?

[Curtis Morgan, President and Chief Executive Officer]

Yes, our assumptions are based on existing law at the date of the merger, so we’re pretty confident in the outcome.

[Praful Mehta, Citigroup]

All right. Well, thanks so much, guys.

[Curtis Morgan, President and Chief Executive Officer]

Thanks.

[Operator]

Your next caller comes from Angie Storozynski from Macquarie. Your line is open.

[Angie Storozynski, Macquarie]

Thank you. 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 for being priced in Texas and that might continue for the next year or two. But you’re also seeing this incredible growth in the gas, associated gas in Permian that with some estimates suggesting that from next summer Permian gas could be basically trading at zero. And so how should I think about that and your exposure of your earnings to that the gas, regional gas phenomenon?

[Curtis Morgan, President and Chief Executive Officer]

Yes, so a good question, let me try to attack it in a couple of ways. First of all, we sort of recognized the gas exposure. And I think I’ve mentioned this previously that we break our power position to a gas equipped position and a heat rate position. And without – I don’t want to give up our positioning, but what I will tell you is that we are mindful of where gas is and we are protecting ourselves on gas in both 2018 and 2019 to the downside. And we have effectively done that and I think that was important for us and we left ourselves some position for the upside.

So I can’t really, Angie, I just don’t think it’s right for me to say much more details than that, because Steve Muscato is staring at me and I don’t want to give away our position. But we recognized exactly what you said. Now, we actually though, we actually have a net benefit in our fleet in particular the Luminant fleet, but our 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 because I think there maybe some misconception about it. But in general, gas generators that Houston Ship Channel gas, which trades at a premium to Mid-Continent gas, Texas gas, and Waha. They set the price investors congestion from West Texas.

What that means is, because Houston Ship Channel gas is higher, there are plans to source off a Midcon and off of Texas and off of Permian actually have a advantage relative to those that price off a Houston Ship Channel or Henry Hub. So we have a pretty good position, now we’re working on the Dynegy plans to get them better positioned on the gas over time, but even they are better positioned than some, but the bottom line is, our assets, Forney, Lamar and Odessa are really good gas positions.

So for us we’re in a pretty good position. The thing we’re worried about and it’s a fair question is the downside on the gas and we have positioned our self to guard against the downside, because we think that in the next year or two, we think it’s downside risks. What I would also tell you though is that, the markets are telling us that they believe, it could even 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 the Utica and other parts of country where there’s Nimby about or just anti-pipelines.

You can build pipelines in Texas, so anybody who thinks they could come in and try to build on the backs of low gas, try to build a combined cycle plant that’s going to vanish in about two years, because there’s going to be gas, there’s going to be pipeline to get that gas out and try to get it to LNG facilities and get it to rest of the country and also to try to get it to Mexico. So that differential is going to dissipate over time.

[Angie Storozynski, Macquarie]

That’s all I have. Thank you.

[Operator]

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 a closing remarks.

[Curtis Morgan, President and Chief Executive Officer]

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 continue our conversations. Thank you. Operator?

[Operator]

Thank you everyone. This will conclude today’s conference. You many now disconnect.