Vistra Corp

NYSE:VST

Earnings Call Transcript 2019-Q1

[Operator]

Good day. My name is Jack and I will be your conference operator today. At this time, I would like to welcome everyone to the Vistra Energy First Quarter 2019 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].

Thank you. Molly Sorg, Vice President of Investor Relations, you may begin your conference.

[Molly Sorg, VP, IR]

Thank you and good morning, everyone. Welcome to Vistra Energy's investor webcast covering first quarter 2019 results which is being broadcast live from the Investor Relations section of our website at www.vistraenergy.com. Also available on our website are a copy of today's investor presentation, our 10-Q, and the related earnings release.

Joining me for today's call are Curt Morgan, President and Chief Executive Officer; and Bill Holden, Executive Vice President and Chief Financial Officer. We have 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 2 and 3 in the investor presentation on our website, which explain the risks of forward-looking statements, the limitations of certain industry and market data included in the presentation, 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.

[Curt Morgan, President & CEO]

Thank you, Molly, and good morning, to everyone on the call. As always, we appreciate your interest in Vistra Energy.

As you can see on Slide 6, Vistra finished the first quarter of 2019 reporting adjusted EBITDA from its ongoing operations of $815 million. Results are above consensus and in line with management's expectations for the quarter.

Notably when compared to first quarter 2018 pro forma results for the merged Vistra and Dynergy entities, we finished the quarter nearly $240 million ahead of last year, primarily as a result of favorable realized wholesale prices in 2019, higher retail margins, and the realization of merger synergy and OP cost savings consistent with the estimated $565 million of annual EBITDA value levers we have announced.

We also remain on track to capture the $310 million of additional after-tax free cash flow value levers from the merger which are bolstering our free cash flow generation and conversion percentage from EBITDA.

On a smaller scale but equally important in advancing Vistra's operational and earnings diversity, we continue to expect we will be able to close the Crius Energy acquisition in the second quarter. At this point, the Department of Justice Review has expired and the Crius unitholders overwhelmingly voted to approve the acquisition at their special meeting held on March 28. We are still awaiting approval from the Federal Energy Regulatory Commission which we expect we could receive at any time in the coming weeks. We expect we will close the acquisition within five business days of receiving FERC approval. And we look forward to quickly integrating the Crius portfolio into our existing integrated platform. We have been working effectively with the Crius team on transition and integration and continue to be confident in the value of their retail portfolio.

Turning now to Slide 7, we are reaffirming our 2019 ongoing operations guidance ranges of $3.22 billion to $3.42 billion in adjusted EBITDA, and $2.1 billion to $2.3 billion in adjusted free cash flow.

Our strong start to the year resulted in financial performance that was in line with management expectations for the quarter setting up for what we expect will be solid full-year results as we move into the important ERCOT Summer.

While our first quarter results came in meaningfully above consensus, we are not resetting our full-year financial guidance at this time.

There are a few important points to keep in mind as it relates to Vistra's first quarter performance. First, this year we had forecast internally that Vistra's retail margin would be higher in the first, second, and fourth quarters of the year, while lower in the third quarter as compared to historical performance. This expectation is due to the extreme peaky nature of the 2019 forward power curve with August heat rates forecasted to be meaningfully higher than historical averages, thereby altering the comparative dispersion of annual retail cost of goods sold.

Second, as you know, the bulk of our wholesale earnings come in the third quarter of the year, and meaningful retail EBITDA's produced in the non-summer periods. As we have important earnings periods ahead, it is premature to alter guidance even though we remain optimistic especially with regard to strong pricing in ERCOT this summer given the tight reserve margin environment.

And one last reminder, as it relates to our 2019 guidance, we have not yet incorporated the expected contribution from the Crius acquisition into our numbers but we'll do so following the closing of the transaction.

Beyond 2019, we continue to anticipate that our integrated business model will generate relatively stable earnings. We still expect 2020 adjusted EBITDA will be relatively flat to 2019, which as you will recall, is a marked improvement from Dynegy's pre-merger forecasts. Prior to the merger, Dynegy's forecast for 2020 and 2021 reflected anticipated declining EBITDA due principally to lower capacity revenues in PJM. We now expect we'll be able to close that EBITDA gap as a result of improvements in forward-curve, high wholesale market conditions in ERCOT, and enhanced management expectations or merger value lever achievement.

Creating earnings and cash flow profiles in consistent ranges is of critical importance to Vistra, as we continue to attract new long-term investors to the stock. We believe we will be able to achieve these consistent results in the future as a result of our diversified earnings profile especially in our retail business when capacity revenues were roughly half of our EBITDA derived and in the money generation fleet combined with the execution of our hedging strategies by our commercial team.

Our retail operations also lead the charge in our ability to convert a significant amount of our adjusted EBITDA from ongoing operations into adjusted free cash flow.

We expect this conversion ratio will be approximately 66% in 2019 which benefits from the Dynegy free cash flow and tax value levers and is meaningfully higher than the free cash flow conversion observed in other commodity exposed capital intensive businesses that trade at a considerably more favorable free cash flow yields.

Our strong free cash flow conversion profile supports our diverse capital allocation plan which we announced in November of 2018 and is actively being implemented today.

As of April 25, we had executed a total of $1.053 billion of our aggregate $1.75 billion share repurchase program authorization. As a result, we now have approximately 483 million shares outstanding as of April 25, and approximately 8% reduction as compared to the number of shares outstanding at the time of the Dynegy merger close. We still have nearly 700 million available for opportunistic repurchases under the program. So long as our stock is trading at the current high free cash flow yield and what we believe is a meaningful discount to fair value, we expect we will continue to allocate capital towards share repurchases, although our stock price is certainly moving in the right direction.

In addition, we paid our first quarterly dividend on March 29 of this year to shareholders of record as of March 15. The quarterly dividend was $0.125 per share or $0.50 per share on an annualized basis. We expect we will grow the dividend at approximately 6% to 8% per share annually going forward and can support this growth through disciplined investments such as the Crius acquisition, the Upton 2 solar and battery storage project, and the Moss Landing battery storage development opportunity.

And last, but certainly not least, we believe we remain on track to achieve our long-term leverage target in the range of 2.5 times net debt to EBITDA by year-end 2020. As you've heard before, balance sheet strength is a core tenet of Vistra's operating model and we plan to manage our business and cash flows accordingly with the opportunity to continue to improve our credit profile which we believe strengthens our business and ultimately our stock price.

We are seeing our view materialize that our diverse capital allocation plan will attract new long-term investors. In the first four months of 2019, we have continued to withstand selling pressure from our two of our top five largest shareholders Oaktree and Apollo with relatively strong performance in our stock price. We believe this stability in our valuation has only been possible because we have been able to successfully attract new investors into the stock. As 2019 runs its course, we expect our shareholder rotation will be meaningfully complete which has helped to unlock the true value of Vistra's equity as we continue to meet investor expectations and execute on our financial and operational goals.

While we were making progress, it is our view that our free cash flow yield remains inordinately high and hence our stock price is very attractive.

I'm now on Slide 8. The topic I know has been at the forefront of discussion in our sector relates to expectations for the 2019 ERCOT Summer as well as logic behind the backwardated forward curve we're observing in the market. It is our view that the backwardation in the forward curves is dislocated from market fundamentals in particular beginning in 2021. As you can see in the chart on Slide 8 which is based on the ERCOT capacity demand and reserve reports or CDR, adjusted for the announced Gibbons Creek and Oklaunion retirements reserve margins are forecast to remain very low through 2023 reaching levels that are less than half of the targeted reserve margin ERCOT recommends by 2023. These anticipated low reserve margins are a product of projected 2% annual load growth in ERCOT, combined with relatively low new thermal generation coming online over the next several years.

While both Vistra and ERCOT expect sizable new generation to be added to the market in the form of solar and wind assets, the intermittent nature had relatively low capacity factors of these assets is likely insufficient to offset the current shortfall of generation in ERCOT and the anticipated load growth in the state. As a result, we expect that the supply and demand balance will continue to be favorable for the foreseeable future. In addition, it is important to note that there remains 10,000 to 15,000 megawatts plus of thermal generation at risk in ERCOT that will likely act as a long-term supply and demand calibration feature in the market.

And given that the new build will likely be wind and solar coming in much lower megawatt increments, the market reaction and calibration should be quicker and less volatile with a lower likelihood of the market getting overbuilt and resulting in prolonged depressed pricing. Despite these implied tight supply demand dynamics, ERCOT forward curves are materially backwardated with 2023 North Hub around the clock prices currently forecast to be nearly 30% lower than 2019 prices. This level of backwardation is clearly just located from market fundamentals; it is likely a result of uncertainty with market participants driving a lack of liquidity in the out years. In 2021 and beyond for example long-dated power purchase agreements are currently setting the price of power. This relatively small portion of transaction activity is not representative of where the market will ultimately settle as we get closer and closer to the prompt period. Ironically, it is the backwardated nature of the forward curve that should keep new thermal generation on the sidelines in ERCOT and to some extent renewables.

Furthermore as renewables build out in the West, there will be congestion and discounted pricing further adversely impacting new build economics. Notably, district is a net long generator carrying at least 1,200 megawatts of length into the important summer months, some of which is used as a physical insurance against swings in retail load or to protect against an unplanned outage in our generation fleet. The physical link we hold as insurance and keep unhedged in the summer is critical to minimizing our risk profile and reducing our exposure to the $9,000 megawatt hour price caps in ERCOT which is an advantage we have over the many retailers who must manage their volatile ERCOT summer short position without physical assets.

Turning now to Slide 9. I would like to spend a few minutes discussing the latest regulatory and legislative updates in MISO and PJM. As many of you are aware, Vistra's supporting legislation introduced in the Illinois General Assembly by State Senator Michael Hastings and State Representative Luis Arroyo of the Illinois Coal to Solar and Energy Storage Act. Before I get into the details, I would like to emphasize that our support for this legislation is a reaction to the completely ineffective and dysfunctional MISO market construct which has not improved after years of attempts by market participants.

This is very much in contrast to PJM and ISO New England where both markets are functioning relatively well if not for unwarranted out of market activity particularly the nuclear subsidies. If our assets were in PJM and not MISO, we would not be discussing the similar form of legislation.

Moving on to the details, if passed in its current form the legislation would redevelop downstate coal plant sites into utility scale solar and energy storage platforms while also providing a path to responsibly retire existing downstate coal capacity. While it's always difficult to predict the outcome of the legislative process in Illinois, we do believe that at least some or all components of the proposed coal to solar legislation have a reasonable opportunity included in a broader energy reform package.

The legislation is designed to help the state achieve its long-term Greenhouse gas emissions reductions targets, incentivize in local investment and communities, and transition to downstate generation portfolio without negatively impacting grid reliability, all while having a minimal total impact on customers monthly bills. We believe the various components of the bill adequately address the ultimate goals of interested parties and we look forward to supporting the legislation as it advances.

Also in MISO, we remain supportive of the amendment to the multi-pollutant standard that is pending before the Illinois Pollution Control Board and believe it will ultimately be approved by both the Board as well as the Illinois Joint Commission on Administrative Rules. The amendment if approved would allow Vistra to manage the emissions of its downstate coal plants as one fleet with overall lower mass-based tonnage cap. These amendments would provide Vistra the flexibility to operate its fleet in a manner that is the most economic while reducing overall total emissions.

If the amendment is approved as draft, which we suspect could occur in the Summer timeframe, Vistra would be required to file with MISO to retire 2 gigawatts of nameplate capacity in MISO Zone 4 within 30 days. MISO then has 26 weeks to perform their reliability analysis which could put retirements in the late fourth quarter of 2019 to early first quarter of 2020. We believe MISO's reliability analysis could conclude prior to the 26 week deadline and we do not believe any of the plants will be necessary for reliability.

Our preliminary analysis suggests that these retirements could be approximately $50 million to $100 million a year accretive to Vistra's long-term EBITDA profile as some of our existing MISO assets are EBITDA and free cash flow negative in the current market environment. We will keep you posted on the potential fleet rationalization as the MPS amendment progresses through the administrative approval process.

As for PJM, in April, FERC approved the tariff change related to fast-start pricing. The order would allow units that can start within one hour and have a minimum runtime of no greater than one hour to set the locational marginal price. The order would also allow commitment prices to be reflected in wholesale energy prices. Even though the fourth quarter was ultimately more conservative than the tariff modifications requested by FERC, we believe the order is a positive step forward for price formation in PJM.

We estimate the impact of the order could be an improvement in around the clock prices by approximately $0.50 a megawatt hour, so it is difficult to discern how much of this benefit was already embedded in the forward curve.

Vistra's PJM generation fleet is well-positioned to benefit from this pricing reform as Vistra operates a relatively young low heat rate fleet. We expect in general all of our base low coal assets in CCGT should be online when the price data is triggered and we'll realize the higher locational marginal cost. While we do clear most of these assets in the day head market, we would expect the day head in real time market to converge over time. And as forwards reflect the new price formation, we will have the opportunity to hedge into this uplift.

The changes are targeted to be implemented in November of 2019, so we do not expect a meaningful change to current year results. Now the order is an improvement in the market structure which is a positive for Vistra overall.

Similarly reserve pricing reforms are currently in front of FERC as part of a PJM 206 filing which allows FERC to derive their own outcome in any final order. The reserve pricing reforms would effectively allow all generating units providing reserves to be paid for this service and a related change to the operating reserve demand curve would set an administrative price for reserves under certain operating reserve levels. Our very preliminary analysis suggests that these credential market reforms could lift around the clock prices at PJM by more than $0.50 per megawatt hour. As it relates to the status of the pending PJM capacity reforms, we still do not have any indication on when we might receive direction from FERC on this topic.

PJM has notified FERC of its intent to foresee with the next auction in August and we are supportive of this approach as it allows parties to continue to advance the ball for 2022 and 2023 delivery year, although it does not address the price suppressive effects of the out of market activity most notably the nuclear subsidies.

As I mentioned on the fourth quarter call in February, we continue to believe the outcome of the capacity reform process will be at worst neutral to the current state given FERC's view that the existing capacity auction cost structure is unjust and unreasonable due to the anti-competitive impact of out of market subsidies. Action from FERC to neutralize these impacts will be even more important with the proliferation of nuclear subsidies that are becoming all too common place. We continue to be perplexed how state-elected officials can justify awarding subsidies to nuclear units that have shown no indication of economic need. While there are certainly some nuclear assets are economically challenged in the current market environment, it is our view that those assets are the minority. Yet nuclear subsidies are being considered very broadly. It is highly objectionable that the owners of these nuclear plants are holding the state-elected officials, utility commissions, and employees' hostage by threatening retirement of economic units.

We remain cautiously optimistic FERC will find a solution that appropriately neutralizes these subsidies continuing its past practice of promoting balanced market reforms and supporting competitive markets. FERC has historically played a strong and decisive role in protecting markets against actions that are unjust and unreasonable regardless of any perceived notion that the markets they are charged to oversee are perfectly competitive or not after all what market is.

We believe it is highly likely the outcome of FERC's deliberations on this matter will result in a neutral to modestly positive impact on capacity pricing in PJM especially given the more serious proposals in front of FERC.

For example, even the PJM FRR proposal deploys PJM wide reserve margin in matching generation and load which if deployed would likely result into similar auction results to the existing market design only potentially in a just and reasonable manner. Properly designed mover [ph] would likely improve outcomes but only modestly.

We should expect FERC to construct an order that creates a fairly functioning market not an outcome driven result that automatically improves pricing. PJM has healthy reserve margins and the market has contributed a steady margin over the past several years of approximately $9 to $11 per KW month for combined cycle plants, an outcome we believe is reasonable consistent under the circumstances. What we expect FERC to do is to ensure the market does not further erode given the aggressive nature of the out of market activity. In a nutshell, FERC must ensure just and reasonable markets despite state energy policies.

Last, there has been meaningful chatter in the market about Exelon and Illinois exercising an FRR option under current rules to completely carve out its ComEd load serving this load with Exelon's nuclear units. For several reasons, we believe the potential risk of such an action to other generators have been overblown.

First, we do not see Illinois as even eligible for the FRR option under the existing rules as there is a requirement that a load serving entity electing the FRR alternative demonstrate the ability to serve all of the load in its FRR service areas because Illinois has retail choice, ComEd does not serve all of the load in its service territory and is therefore not eligible to use the FRR alternative in our view.

Second, ignoring this complication, if the Illinois Power Authority were to run an option to contract for the necessary resources, we believe it would be challenging for Illinois Power Authority to structure the auction in a way that would ensure the Exelon nuclear units are selected without running a follow first affiliate abuse rules. If you assume however that Illinois is able to bridge these hurdles, we still believe any resulting impact of the residual ComEd zone to PJM will be relatively immaterial as Illinois would not only need to take out the entire ComEd load but it would also have to cover the reserve margin requirement which should result in the balance of the market being relatively unaffected.

Moreover if Illinois is successful in pursuing its intent to rotate away from coal towards renewables we believe the retirement of coal plants in ComEd and throughout Illinois could provide upside for ComEd gas plants on both the capacity and energy fronts as despatchable gas can take advantage of the greater energy price volatility that is typically present when base load assets are replaced with intermittent renewables. Given our approximately $175 million per year of PJM ComEd capacity revenue, any reasonable downside outcome would likely be in the $20 million per year range or less which is relatively immaterial to our overall EBITDA profile.

In summary, we feel very good about the ERCOT market where we drive over 50% of our EBITDA and have a big seat at the table. PJM and ISO New England have seen several changes in market design over the years especially as it relates to capacity but these changes have largely resulted in improved markets. We expect that to continue but it will always be a hard fought battle. We also believe any downside scenarios in PJM and ISO New England are limited and less impactful to District given the size of our EBITDA and the diverse nature of our revenue streams.

In fact, we expect MISO to be an upside after execution in 2019 and California has been a nice surprise to the upside for our portfolio.

We are also on track to add future EBITDA from the Crius acquisition and the Moss Landing battery storage project. We remain optimistic about this visibility to generate relatively robust and stable earnings in the years ahead and we are not taking our eye off the ball.

I will now turn the call over to Bill Holden.

[Bill Holden, EVP & CFO]

Thank you, Curt.

Turning now to Slide 11. Vistra delivered first quarter 2019 adjusted EBITDA from ongoing operations of $815 million with both the retail and wholesale business units delivering results that were in line with management expectations for the quarter.

Retail reported solid adjusted EBITDA for the quarter as a result of strong cost management and operational performance. The generation segments also collectively finished the quarter in line with management expectations as March weather drove favorable results in ERCOT for the quarter offsetting headwinds from a mild winter in PJM and New England.

These results underscore the value of Vistra's diversified business operations which can mitigate earnings volatility from external factors such as weather or regulatory changes supporting Vistra's ability to deliver stable EBITDA across periods.

Both segment results from this quarter can be found on Slide 15 in the Appendix. Also in the Appendix Slides 21 and 22 include our updated hedge positions for all markets in 2019 and 2020 reflecting an increase in hedges over the first quarter. Our commercial team continues to take advantage of the volatility and forward curves that incrementally hedge at prices that we perceive to be attractive. This hedging activity further supports our expected ability to generate relatively stable EBITDA over time.

Before I move off of this slide, I also want to highlight the meaningful increase in Vistra's first quarter 2019 results as compared to the adjusted EBITDA of the pro forma merge Vistra and Dynegy entities in the first quarter of 2018.

2019 results were nearly $240 million higher as a result of favorable realized prices in 2019, higher retail gross margins, and the realization of merger value levers that continue to create value for our shareholders.

Finally, let's turn to Slide 12 for the quarterly capital structure update. Vistra's long-term debt outstanding as of March 31 remained at approximately $11.1 billion. We are still forecasting we'll repay approximately $800 million of senior notes in 2019 as we work toward achieving our long-term leverage target of approximately 2.5 times net debt to EBITDA by year-end 2020. We will also continue to opportunistically optimize our balance sheet through refinancing transactions in the future and we are continuing to allocate capital towards opportunistic share repurchases under our previously announced share repurchase program. We also paid our first quarterly dividend in March and announced a tuck-in retail growth acquisition in February with the planned acquisition of Crius, a transaction we expect we'll be able to close in the second quarter.

Our meaningful free cash flow generation is supporting this diverse capital allocation plan which we believe will continue to attract interest from new long-only investors in our stock. We have been receiving great feedback on our business model and as you know, we take input from our debt and equity holders very seriously. In the meantime, we look forward to focusing on execution and delivering on our commitments in 2019.

With that, operator, we're now ready to open the lines for questions.

[Operator]

Certainly. [Operator Instructions].

Shahriar Pourreza with Guggenheim Partners. Your line is open.

[Shahriar Pourreza, Guggenheim Partners]

So just on MISO to start-off a couple of questions here. So it sounds like Curt, you remain confident that when the legislative session Illinois ends at the end of the month, we should see a positive outcome with the Coal to Solar Act. So the two gigawatts that would retire under the MPS agreement should obviously the Pollution Board accepted, how and when could we sort of see an OPI update in the context of your accretion guidance, you just highlighted. Is it sort of a fourth quarter driver or could we see visibility sooner?

[Curt Morgan, President & CEO]

And so lot of things in that. Number one, I will never predict the outcome of a legislative session in particular in my home state of Illinois. So I would say this sure that I actually think it's probably less than 50% that will get energy legislation in this session. I think we're in May the session ends within a month and I think things happen really quick with legislation in the state legislatures. But I would handicap it less than 50%.

But in Illinois, they have the VETO session which is in November and I do think there is a higher probability that something gets done on energy with a new Governor and he's got other priorities. I just don't know that we'll see legislation on energy which is not in the top three or four priorities of the state. I'm not sure we'll get it done in this legislative session but I think ultimately in the VETO session, we have a reasonable chance. I mean it's hard to predict any kind of legislation.

I think this one makes a lot of sense because we're cycling out coal and in the State of Illinois, I think that's really what the state and the citizens want to see. But we're also bridging the gap for downstate markets where many of these plants are very small communities that need property tax base and so it allows for a rotation of that property tax base. And it's also in an orderly fashion where we make sure that the electricity market doesn't get shocked quickly with a significant amount of retirements and prices rise quickly. So I think there's an opportunity there.

With regard to this OPI and the interrelationship that that has with the overall MISO profitability, the way we see this is that we can either achieve OPI results which are with some of these assets or we into the extent that the OPI is not enough to reduce the negative EBITDA and the negative free cash flow to a positive situation then we will retire those plants either way, if there will be a significant EBITDA improvement, I think we gave those numbers that's $50 million to $100 million.

And then the last part of your question, I think is around just generally the OP update. I think that is more of a probably a third quarter earnings call timing that we would probably talk about whether there is an increase, a further increase in our OP efforts. I think things are going well and so but we're not prepared yet. As I told you guys before, we want to prove this stuff up before we come out with it. And I think we need between now and sort of the third quarter call to get that done. So I think I hope those answer all your questions.

[Shahriar Pourreza, Guggenheim Partners]

No, that's perfect. And then just on around ERCOT, obviously thanks for the incremental thoughts around the dynamics down there and there's obviously been some better arguments and obviously it was somewhat of a healthy print for the quarter. So to what degree was the impact in the quarter from like sort of what you saw with the early March cold snap or additional sort of run times at a Dayton or West Hub peakers with access to cheap law.

[Curt Morgan, President & CEO]

Yes. So I think most of it was really March and that was really predominantly where the strength of the quarter, we did have a good quarter. So I look at it like an NBA basketball game. I mean you can look at first quarter but you'd better show up in the fourth quarter and you're never going to know who is going to win until you get there. But we like what we did in this quarter. But I think it was really in ERCOT, it was a March -- it was a March driven quarter for us really.

[Shahriar Pourreza, Guggenheim Partners]

Got it. And then just lastly on the capital allocation, $700 million is less than the buyback. You've got a very healthy dividend that's in place now. You kind of alluded to how you're thinking about capital allocation 2.0 you did obviously highlight given where the stock trades incremental buybacks are obviously that are out there. How are you sort of thinking about potentially additional retail deals and when do you sort of plan to update on a new phase of your capital allocation strategy?

[Curt Morgan, President & CEO]

So, good question. On retail, I think we are optimistic obviously, we'll close relatively soon in Crius, I think I've said this before. That was the one acquisition that we wanted to do. And when Crius came in play, we wanted to make that happen. We were able to do that and it does advance us significantly in these retail markets outside of Texas also helps us in Texas too. But I wouldn't expect anything in particular in 2019 around any kind of retail acquisition. What I think we're really focused on is we have the retail expansion strategy that we talked about before which was an organic strategy. And I think we're going to be focused given that we now have this catalyst in Crius to accelerate that expansion opportunity, we think it's a very good base to do that. So I wouldn't -- I don't know that we'll see really any kind of deployment in the acquisitions for retail in 2019.

It's hard for me to say beyond 2019 though when we get into 2020 or 2021 on retail because it is an area, we'd like to grow. And so if there was an opportunity that suit our fancy, we would take a hard look at it. I think both retail and renewables are the areas where you could see the company expand through investment. And but I don't know that there's any in both of those categories; there's anything big on the forefront. I think this is going to be done more on a bit-by-bit basis for right now.

And in particular given that 2019 is really -- we really have earmarked what we're going to do with the cash in 2019 later this year, we're going to obviously pay down a lot of debt we need to do that. We are held on getting to this 2.5 times range. And in 2022, we are going to pay down a lot of debt. Any kind of additional cash we would have, we would always balance as we always have, we balance between when we want to buyback our stock which will be a function of where it trades and whether we want to put it, deploy it, invest it in the business and those -- that's an economic analysis and we'll do that at the right time.

I do believe though that we will be up for a discussion around capital allocation. I think at the end of this year probably third quarter, fourth quarter, because I do believe as we've executed on a big chunk of the capital allocation throughout 2019, we can then begin to talk about 2020 and 2021. We'll be given guidance on 2020 and we always like to give you guys a little bit of a preview of the following year. So we'll give a preview on 2021 and in that context, I think the company also then needs to talk about how they're thinking about capital allocation. So that's how, I'd expect that timing to come out.

[Operator]

Abe Azar with Deutsche Bank. Your line is open.

[Abe Azar, Deutsche Bank]

Good morning. Thank you.

[Curt Morgan, President & CEO]

Hey, Abe.

[Abe Azar, Deutsche Bank]

Hey. So your estimates for the first reform in PJM is well below numbers, we've heard elsewhere. How much of that is due to the revisions that FERC kind of required versus initial expectations from others being too high?

[Curt Morgan, President & CEO]

I think it's a fair amount of what the ultimate order came out to be. I don't -- when we had done the work previously, our numbers were not that far off. We were probably a little bit shy of what others were saying but we were in that general ballpark. I think it's really our interpretation of the order and the impact of the order which was the big reason why it's different than what the other estimates that are out there.

[Abe Azar, Deutsche Bank]

Got it. Thanks for that. And then do you have any updates on potential non-core asset divestitures and could that be avenue to return to more capital?

[Curt Morgan, President & CEO]

Yes, good question on that front. So look we -- I guess I talk about it now. I mean we took a look at it and the market just wasn't there. We don't feel like we have a gun at the head in terms of generating additional cash that we weren't going to do a dilutive deal. And that's kind of what we were faced with. And I don't really want to get into what assets we were looking at because that's can be disruptive to the workforce and all kinds of things. But we took a look out there. We're always constantly be in the market assessing where the market is and whether there are what I'd call "non-strategic assets" that we could part with, if somebody is willing to pay more than we think they're worth. But we didn't get to the finish line where we felt like the deal was sufficient enough for us to pull the trigger. And so we felt like we'd rather run these assets than to do something that was dilutive and just not economic from our standpoint.

But we're always open to if there is a better use of capital and if somebody thinks that something that we own currently is worth more in their hands, we're all ears and we will test the market from time-to-time.

[Abe Azar, Deutsche Bank]

Got it. That makes sense. And then just a small clarification on Illinois, the $50 million to $100 million, I believe that was an EBITDA number, is that corresponding free cash flow impact as well with the maintenance capital?

[Curt Morgan, President & CEO]

On the free cash flow, hang on let me just a second. Sara, you are going to say?

[Sara Graziano, SVP, Corporate Development]

I think they were not eligible for capitalization without the cash flows.

[Bill Holden, EVP & CFO]

Right, right.

[Curt Morgan, President & CEO]

Yes, that’s what I was going to say. Okay, thank you. I'm glad I didn't say any stupid. I think they're one and the same because the way it works because these assets we've brought them over we did not capitalize them because they had no real ongoing value. Everything we spend on those assets, say, it goes to expense. We don't capitalize anything with regard to the MISO assets. So the EBITDA and the free cash flow numbers are the same.

[Operator]

Greg Gordon with Evercore. Your line is open.

[Greg Gordon, Evercore]

Thanks, good morning guys. Sorry to beat a dead horse here but I just want to be clear that I don't conflate the two different opportunities you're seeking in MISO, just resolving the multi-pollutant standard amendment issue either through getting it and being able to optimize the fleet or not getting it and closing those units equates to about $50 million to $100 million or is it both of them together, the coal to solar and the multiple?

[Curt Morgan, President & CEO]

It’s just Greg -- I'm sorry this is confusing to me certainly but it's just the fifth center -- just the MPS and the optimization of the fleet. The transition payments as well as any EBITDA we would get off of the solar and the battery storage facilities are all incremental to that. So that is purely optimization of the fleet without any of the coal to solar and battery legislation.

[Greg Gordon, Evercore]

No, it wasn't confusing; I'm just a little slow on Friday after 50 earnings. Thank you for clearing it up. The second question is you said you're going to give us an update. Obviously, 2020 guidance and talk about directionally where 2021 -- what 2021 looks like later in the year. I appreciate that but in the past you've said that you thought your business model would support EBITDA in a pretty tight range without much backwardation going out through time. I think if sell-side analysts were to sort of just mark their models to market for the decline -- 5% decline in the forward curve in Texas, we've seen since February that it would look like your EBITDA's backwardated. So to avoid investors sort of how do you give investors confidence that they will not just rely on that forward mark because you know the sell-side analysts and even investors -- most investors tend to just use the mark, the market which probably show backwardation here and I don't think that's the way you think that business is going to trend. So can you give us a little help with that?

[Curt Morgan, President & CEO]

Yes. So a couple. First of all, I think that's a very good question. And so I tried to talk a little bit about that in the script but I'll get into a little bit more. I think we also -- we believe in ERCOT for example that 2021, 2022, and 2023 that the backwardation in the curve is not fundamentally driven but it's more transactionally driven by a very small portion of transactions in the market meaning it's thinly traded. And we think it's a bit overdone out there. I will tell you that prices are likely going to be lower in 2021 and 2022 and 2023 than probably what they are in 2019. I think 2019 is probably a peak of the low-end of the reserve margin but that's all a function of what gets into ultimately gets built. But I do think that curve is a heck of a lot flatter. So one thing is I just think we're going to see higher contribution from the curves.

We also talked about many times, the market is going to ebb and flow and we're going to have opportunities as the market increases or decreases pricing anyway in the forward curves based on views of tightness and we will be able to hedge into that. And I think we could construct a realized price curve that will be better and we've done this historically better than what you're seeing in 2021, 2022, 2023.

The other thing is we have the Crius EBITDA, we have the up -- not up until, we have the Moss Landing and I'm sure we'll have some other things. So I believe that there are some things that are already baked into the system. And then the MISO uplift of $50 million to $100 million. So I'm pretty darn confident right now. I wouldn't go out to 2023 but I feel pretty good about that, remember, I've talked about this $3 billion plus number. I think we can achieve the $3 billion plus and I'll try to make that case. I mean we're not a sector where at least right now where the underlying product is growing much more than 2% in Texas and roughly 1% or less in other markets. And so for me to sit here and try to tell you that we're going to grow off of what is going to be hopefully a very big number in 2019, I can't tell you that. But what I've been trying to tell you guys is that we're a $3 billion plus a year EBITDA company. And what's more important than that is we're going to drop down 65% to 70% of that to free cash flow which is highly significant.

So I think that's really who we are. I think we're a value play at the end of the day, we've got a good strong dividend, we expect to grow, and then we're going to have significant amount of cash, we can deploy some of that back into the company to grow EBITDA and we turned some of that to shareholders. That's just for energy, that's who we are. But I do stand by this $3 billion plus number. And I feel like we will be able to hit those numbers and that's what we're shooting for.

[Operator]

Julien Dumoulin-Smith with Bank of America. Your line is open.

[Julien Dumoulin-Smith, Bank of America]

Hey can you hear me?

[Curt Morgan, President & CEO]

Hey Julien, how are you doing?

[Julien Dumoulin-Smith, Bank of America]

Hey good, thank you. I wanted to follow-up with a couple of items here. So just from a timeline perspective, just wanted to understand your comments earlier about the updates with third quarter, if they transpired that we don't have legislation in hand quite yet, right given the VETO session and all that in Illinois. And I know you don't want to necessarily predict that but just in terms of providing updates. Could we get an OP update with the third quarter timeframe even without some of the clarity in Illinois? And then separately later on whatever happens get a separate and discrete update on the future of the asset spend?

[Curt Morgan, President & CEO]

Yes, yes.

[Julien Dumoulin-Smith, Bank of America]

Okay. One does not preclude the other. Yes. Okay. We're just looking to clarify. And then separately just to understand the process itself. How are you thinking about the implications of legislation just in terms of leverage you have focusing more on the PJM side of the equation rather than necessarily the MISO leverage that you have at present that you've gone over already?

[Curt Morgan, President & CEO]

Well look, I mean you guys know this that there is a -- the way it works in Illinois, there's a big player and it's Exelon and I know that. And so Exelon is going to make some moves in Illinois. We think what we're doing is consistent with the things, they want to do. And so that's just the way Illinois goes. And so we don't have the big seat at the table that Exelon does. What I do think we have is, we have a very compelling and I think fair proposal. It's not a greedy proposal and it has a lot for everybody. It has something for the local communities. It has something for the environmental groups in terms of getting a certainty around what's going to happen with the coal fleet. And it also has reinvestment in renewables where that's where the state wants to go. And I think it's reasonably priced and in terms of its total impact on a customer bill, it's minuscule.

And so I think we have -- we have a -- what I would consider, we have a lot of good things in that legislation which is why I think it has some strength. It's yet to be seen, where how high the support for it will go. But we've actually had really good reception on this legislation. I'm going to Illinois to spend a couple of days here pretty soon; I'll get a better read of that when I get there. Julien and I can always, we can pass that along through Molly and other, when we get back but I think that's why I say I think it's a reasonable shot here especially if energy, a broad energy reform bill gets moved in Illinois. And I still think that's got a better chance in the VETO session in this current session. But if it does get moved, I think there's a really good chance that this could get tacked onto it. And so that's why I feel pretty good about what can happen in Illinois.

And clearly, PJM is a bigger, a bigger deal for us. I mean we've got more megawatts. Our retail business is going to end up being bigger there ultimately. And so that means a lot to the company and so we -- when we emphasize our time, we spend a lot of time around PJM. It's pretty simple. I think I can't remember the numbers but I think it's like 90-plus-percent comes from ERCOT, PJM and ISO New England in that order. And so we do spend a lot of time and I've spent time in Pennsylvania, I've spent time in Ohio because of the nuclear subsidy efforts that are going on there. And so we do put a lot of emphasis around PJM because it is important to our company.

[Julien Dumoulin-Smith, Bank of America]

A quick follow-up, if you don't mind more of a detailed question just 1Q adjusted EBITDA obviously straightforward. How do you think about cash flow for the quarter just to get it out there [indiscernible]?

[Bill Holden, EVP & CFO]

Yes, Julien so adjusted free cash flow from ongoing ops for the quarter was $395 million. Now that's about I think a 48% convergent ratio. But if you recall, we have some fairly lumpy outflows in Q1 that don't recur in the rest of the year. Those would include property tax payments and also the timing of annual incentive payout.

[Operator]

Steve Fleishman with Wolfe Research. Your line is open.

[Steve Fleishman, Wolfe Research]

Hi good morning. Just I know this is you don't necessarily know this information but just curious Curt, if you have any sense on any updates on the selling shareholders on what we might see when they report holdings, I guess in mid-May?

[Curt Morgan, President & CEO]

I do know that the two large shareholders have and this is significant for our -- for the tax free nature of the spin that we had. We basically win, we became Vistra. But I think they're both below 5%. In terms of exactly where they are, Molly, probably has a better sense of that. I really Steve, I don't know exactly but Molly would you have anything to add around kind of where they are?

[Molly Sorg, VP, IR]

Not exact positions but definitely they've both been selling in the first quarter.

[Curt Morgan, President & CEO]

Yes. And we do know that that's the other thing, Steve, is that we know they've been active selling. And so I just don't have the exact numbers but I expect that we're going to see a pretty -- a pretty material move in their holdings when it's 13 has to come out. I think we're going to see a pretty precipitous move here.

The nice thing I would tell you is that I think both Oaktree and Apollo have sort of settled into a selling operation, if you will, that's been kind of ratable, systematic, and I think my own, I don't talk to them about this, this is not my business. But I think we try to do some large trade, those tend to send signals to the market. They tend to be a little bit disruptive. I will tell you that the banks that actually execute them sometimes get a little ahead of themselves and create issues. And so they've kind of backed away from that and they're doing this more in a very systematic way.

And I think because of that, we've seen that -- we've been able to sort of incrementally move the stock price up while they're doing that. And I like that better but I think they've moved quite a bit. I just don't have a guess at the numbers.

[Steve Fleishman, Wolfe Research]

Okay. One other question, just you and NRG had much different retail kind of outcomes this quarter. I think it's mainly just due to the way, they do their transfer pricing. But just maybe if could you give a view of kind of just retail trends in ERCOT and just how you're seeing margins, customer account things like that?

[Curt Morgan, President & CEO]

Yes. So I will speak just quickly on us and ERCOT. I mean we -- I mean us and NRG. NRG does more of an average transfer price and we do not the pricing to retail in that market at any given point in time. So we should see lower margin -- contribution margins in retail and EBITDA in the third quarter than what NRG will see. And so I don't guide NRG that's just generally what we know about how it works. And we liked what we do it, the same they liked what they do it and that is a difference and that's so, I think that is a difference in this quarter for us versus them. Not the only difference but that's one of them. In terms of what was the other question -- was just generally around retail.

[Steve Fleishman, Wolfe Research]

It was just the overall trends. Yes.

[Curt Morgan, President & CEO]

That's generally around retail. I mean we did have a bit of attrition in the first quarter but very small attrition. We grew accounts last year; we still feel like that we have a shot at having a pretty good year on terms of residential attrition and small business because we're going to see some really peaky pricing in the summer. And sometimes what happens, when that happens is that we tend to get customers coming our way.

In our guidance, we do have some net attrition. We always do. But we feel pretty good in a higher price environment we sometimes see customers come our way and we're obviously working toward that. We'll see.

And then of course I think NRG said this, and I think I wouldn't say it again is that you never know what could happen this summer but some big books could come our way. I did say that we're not looking to do any real acquisitions but sometimes in this type of environment, if a retailer is not prepared well enough and we get some really spiky costs, we may see some opportunities to take on some additional customers from somebody that can't make it. So that could come our way as well.

In terms of just margins, I would just say that our margins continue to be strong. I think our team does a tremendous job on how we price. And we're very cognizant of the attrition levels of our customers and so it's always a balance in terms of how much price you want to move someone up when wholesale prices go up and also being able to retain that customer. We tend to take a long-term view but over time, we're able to move prices up as the market moves up and we've got a very sophisticated and analytical group that helps us think through what's the right time to do that. Jim, I don't know if you have anything?

[Jim Burke, EVP & COO]

Yes, Curt. The only thing I would add, Steve this is Jim Burke. The market all retailers entering 2019 were facing a higher annual power cost entering 2019 than they were facing entering 2018. That's on the order of about $10 a megawatt hour on the 7X24 basis. And then when you shape it then you have swing and ancillary just about a $15 increase. All of that was really showing up in third quarter pricing. So as Curt said we're trying to levelize our prices for our customers, our experienced quarter one 2018 versus quarter one 2019, power costs since we are transferring at market that did not vary much at all. But our revenue was higher in Q1 2019 in anticipation of having to deal with this higher annualized power cost. That's why Curt was emphasizing the margin for retail is really going to be in Q1, Q2, and Q4 because we're all climbing not only a rising curve but a peak year curve in 3Q.

And so that's just a little bit of the financial dynamic that's different. I would say that's generally true across all retailers. The difference in intercompany may be if one company prices differently between segments and we do it on a monthly shape basis like the market unfolds.

[Steve Fleishman, Wolfe Research]

Thank you.

[Curt Morgan, President & CEO]

Did that help, Steve?

[Steve Fleishman, Wolfe Research]

Yes, thank you.

[Operator]

Your last question comes from the line of Angie Storozynski with Macquarie. Your line is open.

[Angie Storozynski, Macquarie]

Thank you. So two quick questions. So on the Waha granted only a few of your plants really benefit from the weakness in this gas price but is there a way to actually tap into this hub with more generation assets. And then secondly, we've seen quite a dramatic move in RA prices in California. How does it -- how is it impacting Oakland and/or anything round Moss Landing before you actually start building your battery? Thank you.

[Curt Morgan, President & CEO]

Okay. I just want to make sure we will get to that last piece. I think the first piece was around just the Permian Basin and the advantage pricing, Angie is that right? And just kind of how that -- how do we think about it?

[Angie Storozynski, Macquarie]

Yes. I mean in the past you mentioned that there is that you're working potentially on sourcing gas from Waha for more of your gas plants.

[Curt Morgan, President & CEO]

Yes, yes, okay. So well as it relates to what's happening right now on the ground. First of all, I want to -- because I know there's been a lot of interest as to how much could this end up being in terms of this favorability in our guidance. I mean look I will tell you that both Odessa and then our Peakers that we have out there, either plants have done well because we're actually getting paid in some instances to take gas.

It's not material enough because we just don't have as much capacity out there. But I mean it is -- when we build our guidance and our plans and I think you guys know this, at the end of the day we have value that we expect to get because we're in multiple markets. We have multiple revenue streams and there's a lot of optionality in our fleet. It's not necessarily defined but we know we will achieve it. And so part of that value in this particular year of that bucket, I think is partly being filled by the fact that we have a better gas price or fuel price, we are spilling up the bucket to get to the guidance. And so that's why we're not moving things around. Plus it's just not material enough to do that.

In terms of your question about can other plants benefit? The reality is right now just because of the pipes that benefit is exclusively in the Permian area. We're not able to get that but we are advantaged with some of our plants because we see discount pricing off of some of the price points that we have. It's still the case that the Houston Ship Channel gas price, the units that use Houston Ship Channel gas price still set the price for power from many of our plants discounted gas price relative to the Houston Ship Channel. Today that's the reality. That may shift a little bit as the pipelines get built and a lot of gas wants to find its way to the ship channel but that's also a function of LNG but also just the overall balancing of the system because this system will be more balanced in that scenario because there's a heck of a lot more pipes down there than there are in the West Texas area which is the real problem.

So I don't expect us to get a big advantage, incremental advantage from Permian gas prices for our other fleet that's outside of the Permian Basin in Texas. But we already have an advantage of some of our plants because we have discounted gas pricing. So that -- there was another question.

[Angie Storozynski, Macquarie]

So I was trying to gauge, if there is a way for you to benefit from the recent move up in RA or capacity crisis in California?

[Curt Morgan, President & CEO]

Well, I think we have. So in my comments, I probably there is a little bit vague on it but I talked about the fact that California has been a nice upside surprise for us and it's really because of that. But also there's been some issues around gas which has pushed up power pricing and we saw that last summer, we may see that again this summer. And so Moss Landing actually -- for Moss Landing EBITDA, we've seen probably a roughly 20% increase in EBITDA off of just Moss Landing, less so at Oakland, that's not really getting much of that.

And then of course we still feel like Moss Landing, we're working on may have another opportunity at Moss Landing for another battery storage project and we've got a couple other opportunities at Oakland on that side for battery storage as well.

So what we like about California is we think we can create a reasonable EBITDA out of something that we would pay for and we didn't expect to really have much of an EBITDA. But your point is exactly right. And Moss Landing has benefited and we expect it to continue to benefit.

And what we're finding is and this is why we made the statement about Illinois is these flexible combined cycle plants in markets that have significant intermittent resources actually can see times where they actually are used more and actually can see higher pricing.

[Operator]

I will now turn the call back over to Curt Morgan for closing remarks.

[Curt Morgan, President & CEO]

Thank you for taking the time to join us this morning. As I stated at the beginning of the call, we do appreciate your interest in Vistra Energy and we look forward to continuing the conversation. Thanks a lot. Have a great day.

[Operator]

This concludes the Vistra Energy first quarter 2019 results conference call. Thank you for your participation. You may now disconnect.