At this time, I would like to welcome everyone to the Vistra Energy Second 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.

Thank you, and good morning, everyone. Welcome to Vistra Energy's investor webcast covering second 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 David Campbell, Executive Vice President and Chief Financial Officer. We 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 2 and 3 in the investor presentation on our website that 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.

Thank you, Molly, and good morning to everyone on the call. As always, we appreciate your interest in Vistra Energy. Before we get into the materials, I would like to comment on what has been happening to our stock price the last three months, seemingly started by the ERCOT CDR report and then exacerbated by a series of various events such as weather, prospect for PJM, capacity auction, potential new CCGTs and PJM and nuclear subsidies, clearly not a good stretch. It is important to note that we are grounded in today's reality and recognize where forward curves are today. However, that does not mean that we have to agree with the forwards, and we certainly do not have to transact at the current price levels especially in 2021 and beyond. It is as if some investors in the competitive power sector were conditioned to sell off at the first whisper of any potential bad news. Yet we are a vastly different company than the IPPs of the past with lower debt, integrated operations with strong retail brands and a much lower cost structure. We have continued to execute, return capital, make sound investments, lower costs, strengthen our balance sheet and diversify our earnings stream from a substantially expanded and improved asset base and retail businesses, all things we committed to and delivered. We have clearly differentiated ourselves from the failed IPPs of the past, and we have strength and staying power. We have inexplicably, to us anyway, lost approximately $3 billion of equity value, yet we expect our EBITDA for 2019 and 2020 will be over $3 billion with free cash flow expected to be in excess of $2 billion. Sure, the curves have fallen off, but we believe we have a concrete pipeline of future revenue streams on…

Thank you, Curt. Turning now to Slide 13. Vistra delivered second quarter 2019 adjusted EBITDA from ongoing operations of $707 million, $44 million higher than second quarter 2018. The quarter-over-quarter improvement was driven by the 8 days of incremental ownership of Dynegy in 2019, with the merger closing on April 9, 2018, as well as higher retail gross margins from the seasonal shaping of power costs. We saw a similar quarter-over-quarter phenomenon in the retail segment in Q1, with first quarter 2019 retail adjusted EBITDA $53 million higher than the first quarter 2018. As we explained on the first quarter call, the 2019 quarter-over-quarter variance was expected in the extreme peak in 2019 August heat rates we were observing at the time we procured power for the year. The peaky nature of August 2019 heat rates drove up our third quarter cost of goods sold and as a result, we expect a higher gross margin from retail in the first, second and fourth quarters of this year, all of which we expect will be normalized with the third quarter offset. In fact, our plan calls for negative adjusted EBITDA in our retail segment in isolation for the third quarter due to this phenomenon. Year-to-date, Vistra's adjusted EBITDA from ongoing operations is $1.522 billion, which is in line with management expectations for the first half of the year. One final note on the quarter-over-quarter analysis relates to the information shown on Slide 23 of the appendix. You'll see that our estimated realized prices for 2019 and 2020 are down quarter-over-quarter in all markets relative to the data shown in our first quarter appendix slides. These changes reflect the recent decline in forward curves. While this decline is expected to result in lower generation revenues in 2019 and 2020, the impact to…

[Operator Instructions] Your first question comes from the line of Greg Gordon from Evercore. Your line is open.

Thanks. Good morning, guys.

Hey, Greg.

A couple of questions. Looking at the upside that you guys laid out on Page 11, Curt, there is actually, from my perspective, a couple of things that actually aren't in there. I know that there's a lot of debate over what's going to happen in Illinois this fall in the veto session with regard to Exelon's and renewable energy consortiums potentially passing a bill. But you also have a proposal in there that would allow you to replace some of your coal generation with renewables. That doesn't look like it's specifically in the build up here on your '21 potential upsides. Is that correct?

Yes. That's correct. I mean - and you may remember this, Greg. There's two elements of that coal to solar and battery program if we were successful. One is that there would be some incremental payments, almost like a pseudo-capacity payment in the -- to the existing coal plants until 2025. And that is obviously to help them stay alive. And then there would be a transition to solar and batteries, and we would invest in those to come on roughly in that 2025. And then there would be economics from those investments as well. But we have not included those just because of the uncertainty with what's going to happen. I think you're well aware. I'm not speaking out of turn here. This is public. But we're a little concerned with some of the lobbying issues that are going on that appears ComEd has gotten itself into. And although I do hear Exelon, I think Chris Crane said he was feeling pretty good about something actually happening in the fall. We'd obviously work with Exelon and others because I think if this is going to happen, it will probably be part of a broader energy legislation. But we just have been conservative on this, and we have not put it in there at this point in time.

Yeah. And then the other thing I know you probably have to be cautious about addressing is, one of the other things that's impacted your shares in addition to the -- your competitors is concern over the Just Energy process, still a large retailer, and they put themselves up for sale. You guys have obviously been opportunistic, successfully opportunistic and continuing to leg out into retail when you see it as good value. You are a net long generator in some of the regions where they have customers. So to the extent you can comment on that, how much more retail do you think you guys need sort of to be a structurally sustainable countercyclical business model?

Yeah, that's a very good question. I mean, look, here's how I see it. We don't comment on anything specifically, as you might understand. I would say though that we're not focused on any particular transaction that involves retail that would have a significant non-U.S. presence. So that probably gives you some indication of where our focus would be or would not be. Are we interested in other potential opportunities? We are. But we would remain extremely disciplined, especially given where our stock price is. It would have to be something very compelling. I will say that there are a few opportunities that may be out there that are attractive. And we'll see what happens about that. But we got to be really careful about something like that in today's environment. So I think I wanted to make sure that you guys, rest assured, that if we were to come forward with something, it would have to be very compelling to us. Now in getting to where we would like to be, I think I've been very clear about this. Over the next 2 to 4 years, we'd like to have a mass that's somewhere around 70%. Now some of that is going to happen naturally because I expect us to shrink our generation size because some of our coal, I believe we're going to have 2,000 megawatts, for example, that comes out with MPS. There may be others. So we're going to naturally going to shrink back. And we're pushing 50% as it is now and some of that is actually going to push us closer to 60%. But I wouldn't be surprised in the next few years that we do something. There is - the good portfolios are getting more scarce. And so I will say that if an opportunity came around, you have to take a look just because of that. But we're going to be disciplined about it. And as I said, we'd like to be 70 plus or so percent mass. We still like to be somewhat long. And I think in particular in ERCOT, we think it's good from a risk management standpoint. But we also think it's good just from an opportunistic standpoint given the fact that there are going to be -- with an all energy market, there is going to be -- and I know it's hard to contemplate this right now given where the forwards are, but there are going to be opportunities where this market is tight and where it's maybe not as tight. And those opportunities, those options that -- in the form of assets in ERCOT can be quite lucrative in the periods where things can get tight.

Okay. Thanks for the details here. Have a great day.

All right.

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

Thanks so much. Hi, guys.

Hey, Praful.

Hi. And really appreciate the detailed discussion on the call today, so it was very clear. I guess just following up a little bit on the retail. I know, Curt, when you've talked about acquisitions in the past, you've talked about it as comparing the opportunity to buy back stock. So now when you've highlighted the evaluation that you see your current stock price at, I'm assuming that's the bar you're talking about when you're talking about retail acquisitions and the value that you see in a potential acquisition.

Absolutely. We - you know this, Praful. I mean the real -- when you're doing that analysis, the assumptions that you make as to the timing and the level of your stock price, appreciation for buying back your shares, is fundamental. So we look at it under a variety of scenarios as to how quickly and how high our stock price would move, because obviously if we buy back our shares, that's an investment. But we look at it - just like we look at when we do an investment in something like a retail business, we look at it under a number of scenarios. And so that is exactly how we will look at anything if we decide to do something, is how does it compare on a return basis relative to buying back our shares. And so it has to be. I will mention, because I'm sure it's going to come up and if you don't mind, I'd just going to pile on, on this one. But we have, as you guys know, we have obviously a number of constituents, but very key to us obviously are our shareholders. But also key to us are those who have loaned money to us, our creditors. And we still have more wood to chop as it relates to reducing the cost of our debt. We just were recently out in the debt markets. They've been pretty favorable to us. And so we are going to take a balanced approach, including continuing down the path of reducing our leverage to the 2.5 times. And I want to make sure to be clear about that. Even though I think if you pencil it out math-wise, paying down debt even at 7% relative to free cash flow yields at 20%, you can talk yourself into maybe pushing out, reducing your leverage. We understand that math, but we also have to balance out the different constituencies. And also, we want to have a very strong balance sheet to go forward on. So we still have a lot of dry powder left in our current buyback program. We can -- we are anxious to continue to buy back our shares at this price. But we're also mindful of the fact that we want to get our balance sheet where we would like it to be. And so we're committed to those balancing effects, and we are going to continue to stay that way.

Got you. That's super helpful. And that's where I was going, which is, there's so much significant free cash flow that you will generate between now and, let's say, 2021. If you are getting to your leverage target, let's say 2.5 is still the number you want to hit, you will still have significant dry powder like you said. Should we think about dividend being an opportunity in terms of an increase in that? Or do you kind of look at the current targets as where you want to go in terms of growth of the dividend? And otherwise, is it more growth potentially on the storage side? Where else are the avenues you think that capital allocation can go?

Well, so I want to be clear though that a lot of our cash is spoken for until we get to 2021 in order to get to the leverage targets we want to be at. We obviously have some incremental room in all that. But that also assumes a dividend that we -- a current dividend. And management will more than likely recommend to the Board that we grow that at somewhere between 6% and 8%, as we've said. And we feel comfortable that we've got growth projects already in the pipeline that will more than -- well more than cover 6% to 8%. I don't think that you'll see us change though the dividend in and of itself other than some growth between 6% and 8%. But we also will look at -- we have some opportunities in California to continue to develop our two sites, which are very good sites. Those feel to me like they're going to be more 2021 and beyond-type investment. So they're not going to really affect our 2020 investment. So I'm -- we're not really concerned. Of course, I think we all know that we're somewhat interested in growing our retail book. But that is going to be opportunistic in nature, and I can't sit here and tell you that there is something out there that would affect '19 or '20. So bottom line is that we will continue to look at that balanced capital allocation plan. What's interesting about retail acquisitions is they have such a high conversion of EBITDA to free cash flow. And if you have operating retail businesses, the cash flow is immediate. And so while an acquisition would have obviously an outflow of cash to pay for it immediately from a retail position. Within a very short period of time though, you're generating cash and the effect on your leverage ratios is minimal. I mean I think Crius was 0.03. And so I don't know if I call it self-funding, but they don't really distract. So it's not really -- in a retail deal, it's really not a choice between getting to the leverage ratio and doing that deal, it's just a matter of timing in terms of getting to the leverage ratio. And that's something we'll have to balance, right, at the end of the day. And of course as I said to you a minute ago, we're always going to put that up against buying back our shares. I mean it has to be compelling for us to be able to do it.

Got you. Super helpful as always Curt. Thanks so much.

Thanks, Praful.

Your next question comes from the line of Steve Fleishman from Wolfe Research. Your line is open.

Hey, good morning.

Hey, Steve.

Hey, Curt. So I can't help but listening to your soliloquy this morning, sounds a little bit like that hell a little years ago with Calpine. So I guess my question is, I know this is a little premature, but just if the like public markets aren't going to give you credit for this model, how are you thinking about alternatives in the future? And do you think the private markets still value these businesses a lot higher than the public markets?

Yes. So that's a very good question. In fact, I just was with Thad a day or so ago, and he was smiling a lot. So I don't know what that meant. But look here's how I think about it, Steve. We talked about this and I think I've talked about it on the call before, we still have faith that the public markets will ultimately value this for what it is, as a strong value play. And that we can replicate this thing year in and year out, and on average we can generate really strong cash flows and that we're disciplined with our money and that will result in a stock price that we feel comfortable with. I will say that this recent downturn, which, look, we get, right? I mean commodity prices are down. We're a commodity business. While I don't like the magnitude of it and I think that people were not recognizing what we are capable of doing in terms of managing it, I understand it. But this -- the management team of this company and the board are going to constantly look at what's the best way to unlock value for this business. And I don't know with a sector of two, it's difficult. I don't know whether the public markets are going to embrace it or not. And I know this, that I've spent a lot of time, and David's joining me now too, trying to go out and talk to people, new investors, long-term investors that buy the story because we believe in it and we believe strongly into it. I'm hoping that through execution this year and next year and people getting more and more comfortable that we're not the old IPPs of the past through our actions and execution, that…

Okay. One other question just on the Ohio law that just passed. Could you maybe give your view on how -- what actions you might take, both with your portfolio and with the law overall?

Yes. So it -- so Steve, I'll tell you what -- first of all, I mean this isn't going to be surprising to you or anybody on this call, I mean, we were obviously against that. We're against -- in a well-functioning market, which I believe PJM is, we just talked about the numbers. $9 to $12 KW a month in a market that has a 28% reserve margin is a pretty good margin for combined cycle plants given that kind of reserve margin. So it's hard to argue that PJM hasn't been functioning in a reasonable manner. I think what we're concerned about is what happens from here with all these state-by-state activity. I think with the FERC, what's happening with FERC and Commissioner Lafleur leaving with a 2:1, I think there's probably going to be some action. And I think what happens really will be dependent on what they come up with. So we tried -- we were against the bailout. We -- I'll be clear about that. We continue to be against it. We think it's a fair thing that if those who are trying to get a referendum in place to let the citizens of Ohio decide on this one because the polling was quite clear that consistently through this that Ohio citizens did not like this bailout. And so if they get a chance to vote on it, we'll see what happens there. But I've always felt in this whole thing when people went to Illinois and they tried to go to the court system that this is going to ultimately have to be settled by FERC, and it has to be begun by the ISO. And I think PJM has to put forth something that FERC can take a look at. And then ultimately…

Thank you.

Your next question comes from the line of Shar Pourreza from Guggenheim and Partners. Your line is open.

Hey, guys. It's actually James for Shar.

Hey, James. How are you doing?

Good. I just have a little bit of a narrow question I guess versus some of the other ones. But following on your combined cycle comments, has the addition of the Crius book versus kind of the dynamics that we've seen in MISO changed your thoughts around the independent combined cycle?

I'm sorry, I....

Independence.

Oh, Independence. In terms of whether we keep it or not or hold it?

Yes. Exactly, exactly.

Yes, I'll tell you, frankly, it's a great asset and I think we're trying to do some things around it to improve it. I mean I've said this before: one asset in a market is not strategy. But I also will say that we're not going to do something -- we don't have to do anything because it either has decent cash flows, it's a nice asset. The team there is very good. And so we're not going to sell something that's dilutive, and that's not a particularly good market right now to sell something in. So our math says we're betting running it, getting the cash flow from it and keeping the asset right now than it is to sell it. Now if there's somebody that wants to build a business or has a business in New York that wants to pay what we think fair value is for it or more, we're happy to talk about that. But that's true probably pretty much of any asset we have, if somebody wants to pay us more than what it's worth. But we don't have any activity going on around Independence right now that -- in terms of selling that asset.

Understood. And then just one more regarding the MPS amendment in Illinois. JCAR is running a little behind, I guess. If we don't get an answer until like late September, could that impact your plans to update with 3Q? Or is it kind of pretty immediate thereafter, you'll know?

So depending on the timing, that could affect things, although I will tell you that the indications we're getting from MISO and Ameren, who are the two -- in terms of whether these would be needed for reliability purposes and whether -- because we've already done some prework on this. Already had both Ameren and MISO assess these plants. There could be a fairly quick action in terms of being able to retire the plant. So my sense is, is that under any scenario as it relates to JCAR that we will be able to retire these plants by the end of this year, and that's what we're counting on. I will also say, and I'm not sure that it's out yet. But I think we believe that we're going to be on the August 13, I can't remember if it's definite or not, but we're going to be on the -- what's that?

It's not definite.

Okay. So it's not definite yet, but we think we're going to be on the August 13 JCAR agenda. And the reason we also know that is we're getting questions from JCAR staffers. So that's usually a sign you're going to be on the agenda. If we're on the agenda in August either - I think they may have two, maybe one on the 13 and one on the 28, if I remember correctly, there's going to be no issues of going through the process and then ultimately retiring plants by the end of the year, which is something that we would like to do. And clearly, we would also try be pretty well hedged up. And then we also like to do a fair amount of hedging around our retail business. We're - we don't take a lot of risk as we come into the summer as some do and leave a lot of open position there, especially in Texas. And so look, I think between those two, we'll be pretty well hedged up by the end of the year. But that could depend on just exactly where we see prices. What I also can tell you is that we look, we have a point of view. And we will measure any kind of hedging relative to where we think the market will ultimately settle, and we'll be disciplined about that.

This is all the time that we have for today's question. I will turn the call back over to the presenters for closing remarks.

Well, 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. We hope that it's helpful. And we look forward to continuing the dialogue. As I mentioned earlier, I will mention this again, that in the third quarter, David and I are expect to have another sort of deep discussion around sort of long-term prospects for the company. We're doing a lot of work around that. And it's obvious that it's something that we should cover, and so we're going to do that on the third quarter call. I think it's instrumental to unlocking the long-term value of the company. So thank you for your time.

This concludes today's conference call. You may now disconnect.