Commercial Operations Steve Muscato Chief Commercial Officer
PORTFOLIO OPTIMIZATION ERCOT MARKET KEY TAKEAWAYS
POWER PORTFOLIO AS A SERIES OF OPTIONS Vistra converts unit parameters and fuel logistics into a series of options to create value from the intersection of plant characteristics and load INVENTORY & SUPPLY Time Arbitrage Cost Optimization TRANSPORTATION Locational Arbitrage POWER PLANT Commodity Arbitrage TRANSMISSION Locational Arbitrage LOAD Function of Weather & Customer Behavior Coal Inventory & Suppliers Gas Storage (Balancing) & Suppliers Rail / Barge Pipeline LONG Capacity Energy Ancillaries Power Plant Series of Physical Options Unit Parameters Starts / Day Ramp Max / Min Output Variable O&M Fuel Cost Heat Rate Transmission Congestion SHORT Capacity Energy Ancillaries Load Series of Physical Options 3
HEDGING & OPTIMIZATION FRAMEWORK Hedging tactics and portfolio optimization take place in an iterative process informed by our point of view and financial objectives VISTRA HEDGING & PORTFOLIO OPTIMIZATION FRAMEWORK 1 Develop Commodity POV 3a Initial Hedging Tactics 1 2 Commodity Fundamental Point of View Starting point is development of Vistra s proprietary view of commodity prices. This outlook informs both the Strategic Policy and hedging strategies. Financial Objectives Thresholds for hedging requirements are based on Vistra s financial objectives (e.g., adjusted EBITDA and FCF) and informs tactical hedging and portfolio optimization strategies. 3a Initial Hedging Tactics 2 Financial Objectives 3b Portfolio Optimization Strategy 3b Combination of (1) and (2) leads to development of a tactical plan that is based upon hedging the intrinsic value or starting value of portfolio. Portfolio Optimization Strategy Following 3a, incremental tactics are developed to capture extrinsic value of portfolio. This can include actively trading in and out of positions and trading second order instruments (e.g., options). 4
INITIAL HEDGING TACTICS Vistra converts its power position into its natural gas and heat rate components, which create the baseline for hedging activities KEY INITIAL HEDGING TACTICS Optimize Retail Procurement Modify timing of hedge purchases & generation sales to take advantage of market conditions Determine Hedge Instruments Utilize Multiple Sales Channels Consider Delivery Locations Optimize Liquidity Power products (fixed price power, heat rate, options) Gas products (NYMEX, basis, options) Cross commodity products Retail electric providers Munis / coops Other major counterparties (e.g., other IPPs, banks) Wholesale (exchanges, OTC) Gas Basis Congestion products (FTR, TCC, CRR) Consideration of trade-off between gross margin and total collateral requirements 5
VOLATILITY IN FORWARD CURVES Forward curves moving up and down relative to fundamentals over time afford Vistra the opportunity to attractively hedge Point of View (POV) is fundamental to hedging strategy and execution Given 2-3 years of liquidity, Vistra has 400-600 opportunities to transact Liquidity also provides ability to recalibrate positions based on changing market conditions $/MWh Illustrative Power Price Vistra hedging opportunity POV Range TIME Vistra s goal is to use volatility to create EBITDA and FCF stability; limiting downside risk while maintaining some opportunity to capture upside 6
PORTFOLIO OPTIMIZATION EXAMPLES Retail Load Supports Flexible Hedging Convert generation into natural gas and heat rate components Hedge natural gas component given increased liquidity relative to power At a future date, sell fixed price power to Retail, which adds the heat rate hedge and Vistra buys back the gas hedge Make vs. Buy Decisions Sell forward delivery obligation Settle obligation by buying power from the market when wholesale prices are lower than cost to generate power from fleet, improving margin from the hedge Supplying Retail Contract at market for forward delivery obligation to Retail Depending on POV, Vistra can buy power from the market to satisfy obligation to Retail and reserve length to sell in the market at higher prices 7
PORTFOLIO OPTIMIZATION ERCOT MARKET KEY TAKEAWAYS
MMBtu/MWh $/MMBtu ERCOT AND WAHA GAS Houston Ship Channel is the primary natural gas source setting power prices in ERCOT; Vistra has a basis advantage at Ennis, Forney, Lamar, Midlothian, and Odessa On Peak North Hub Heat Rate Spread Waha less HSC Rolling 30-Day Average Onpk Spread Waha Basis 7.00-6.00 ($ 0.20) 5.00 4.00 ($ 0.40) 3.00 ($ 0.60) 2.00 1.00 0.00 ($ 0.80) ($ 1.00) -1.00 ($ 1.20) 9
Marginal Cost ($/MWh) WAHA BASIS IMPACT ON ERCOT SUPPLY STACK Assuming all other basis is unchanged, changes in Waha basis would impact the marginal costs of the units directly sourcing gas from Waha, as well as the supply stack after redispatch Waha Basis Impact on ERCOT Supply Curve $80 $70 -$1.25 Waha Basis -$0.25 Waha Basis 2018 Projected Peak Demand 72.8 GW* $60 $50 2018 Projected Average Demand 42.3 GW* $40 $30 Odessa CCGT @ -$0.25 Waha Basis $20 $10 $0 Odessa CCGT @ -$1.25 Waha Basis 0 10 20 30 40 50 60 70 80 90 Cumulative Generation Capacity / ERCOT Demand (GW) *Peak and average demand are based on the latest projections from ERCOT. 10
$/MWh ERCOT BACKWARDATION ERCOT forwards do not support new build economics, indicating the forwards are not reflecting the likely supply/demand dynamics in 2020 and beyond $40 7x16 North Hub Spark Spreads 1 $35 ~$36 $30 Range where new build CCGT becomes economic $25 ~$25 $20 ~$20 New build CCGT is uneconomic $15 ~$14.2 ~$12.6 $10 2018² 2019 2020 2021 2022 ¹ North Hub Sparks derived using HSC gas prices; forward curve date 5/22/2018. ² 2018 prices calculated using an average of 1/1/2018 5/21/18 settled prices and 5/22/18 12/31/18 broker quotes. 11
PORTFOLIO OPTIMIZATION ERCOT MARKET KEY TAKEAWAYS
KEY TAKEAWAYS Vistra s fundamental point of view forms the baseline of Vistra s portfolio optimization strategy Vistra takes advantage of volatility in the forward curves to create EBITDA and FCF stability The goal of Vistra s Commercial Optimization strategy is to limit downside risk while maintaining some opportunity to capture upside 13
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