commercial operations · waha basis impact on ercot supply curve-$1.25 waha basis-$0.25 waha basis...

Vistra Energy Analyst Day Presentat ion 2018

Commercial Operations

Steve Muscato Chief Commercial Officer


PORTFOLIO OPTIMIZATION

ERCOT MARKET

KEY TAKEAWAYS


POWER PORTFOLIO AS A SERIES OF OPTIONS

3

INVENTORY &

SUPPLY

Time Arbitrage

Cost Optimization

POWER PLANT

Commodity Arbitrage

Power

PlantSeries of

Physical

Options

Unit

ParametersStarts / Day

Ramp

Max / Min Output

Variable O&M

Fuel Cost

Heat Rate

LONG

Capacity

Energy

AncillariesCoal

Inventory &

Suppliers

TRANSPORTATION

Locational

Arbitrage

Gas

Storage

(Balancing)

& Suppliers

Pipeline

Rail / Barge

TRANSMISSION

Locational Arbitrage

Transmission

Congestion

LOAD

Function of Weather

& Customer Behavior

SHORT

Capacity

Energy

Ancillaries

LoadSeries of

Physical

Options

Vistra converts unit parameters and fuel logistics into a series of options to

create value from the intersection of plant characteristics and load


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.

Initial Hedging Tactics

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).

HEDGING & OPTIMIZATION FRAMEWORK

4

Hedging tactics and portfolio optimization take place in an iterative process

informed by our point of view and financial objectives

Develop

Commodity

POV

1

Financial

Objectives

2

Portfolio

Optimization

Strategy

Initial

Hedging

Tactics

VISTRA HEDGING & PORTFOLIO OPTIMIZATION FRAMEWORK

2

1

3a

3b

3a

3b


Vistra converts its power position into its natural gas and heat rate

components, which create the baseline for hedging activities

INITIAL HEDGING TACTICS

5

KEY INITIAL HEDGING TACTICS

Optimize Retail

Procurement

• Modify timing of hedge purchases & generation sales to

take advantage of market conditions

Determine Hedge

Instruments

• Power products (fixed price power, heat rate, options)

• Gas products (NYMEX, basis, options)

• Cross commodity products

Utilize Multiple Sales

Channels

• Retail electric providers

• Munis / coops

• Other major counterparties (e.g., other IPPs, banks)

• Wholesale (exchanges, OTC)

Consider Delivery

Locations

• Gas Basis

• Congestion products (FTR, TCC, CRR)

Optimize Liquidity • Consideration of trade-off between gross margin and total

collateral requirements


Forward curves moving up and down relative to fundamentals over time

afford Vistra the opportunity to attractively hedge

VOLATILITY IN FORWARD CURVES

Power Price

POV Range

Vistra hedging

opportunity

Illustrative

TIME

$/MWh

• 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

6

Vistra’s goal is to use volatility to create EBITDA and FCF stability;

limiting downside risk while maintaining some opportunity to capture upside


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



ERCOT MARKET

KEY TAKEAWAYS


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

ERCOT AND WAHA GAS

9

($ 1.20)

($ 1.00)

($ 0.80)

($ 0.60)

($ 0.40)

($ 0.20)

-

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

$/M

MB

tu

MM

Btu

/MW

h

On Peak North Hub Heat Rate Spread – Waha less HSC Rolling 30-Day Average

Onpk Spread Waha Basis


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

10

*Peak and average demand are based on the latest projections from ERCOT.

$0

$10

$20

$30

$40

$50

$60

$70

$80

0 10 20 30 40 50 60 70 80 90

Ma

rgin

al C

ost ($

/MW

h)

Cumulative Generation Capacity / ERCOT Demand (GW)

Waha Basis Impact on ERCOT Supply Curve

-$1.25 Waha Basis

-$0.25 Waha Basis

Odessa CCGT @

-$1.25 Waha Basis

Odessa CCGT @

-$0.25 Waha Basis

2018 Projected Average

Demand 42.3 GW*

2018 Projected Peak

Demand 72.8 GW*


ERCOT forwards do not support new build economics, indicating the forwards

are not reflecting the likely supply/demand dynamics in 2020 and beyond

ERCOT BACKWARDATION

$10

$15

$20

$25

$30

$35

$40

2018² 2019 2020 2021 2022

~$25

~$20

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.

$/M

Wh

~$36

~$14.2

~$12.6

Range where new build CCGT becomes economic

7x16 North Hub Spark Spreads1

New build CCGT is uneconomic

11



ERCOT MARKET

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

KEY TAKEAWAYS

13

The goal of Vistra’s Commercial Optimization strategy is to limit

downside risk while maintaining some opportunity to capture upside

END SLIDE

commercial operations · waha basis impact on ercot supply curve-$1.25 waha basis-$0.25 waha basis...

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