Q2 2017 Earnings Call
Your conference operator today.
At this time I would like to welcome everyone to the Vista Energy second quarter, 2017 webcast and 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.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key.
Thank you Molly Sorg, Vice President Investor Relations. Please go ahead.
Thank you Emily and good morning, everyone. Welcome to Vista Energy second quarter, 2017, Investor Conference call, which is being broadcast live via webcast from the Investor Relations section of our website at Www Dot Viscera energy Dot com.
Also available on our website are a copy of today's investor call presentation, our 10-Q and the related earnings release.
Joining me for today's call are Curt Morgan, President and Chief Executive Officer, Bill Holden Executive Vice President and Chief Financial Officer.
Jim Burke Executive Vice President and Chief operating Officer, and Sara Graziano Senior Vice President of corporate development. We also have a few additional senior executives in the room to address questions in the second part of today's call as necessary before we begin our presentation I encourage all listeners to review the safe Harbor statements included on slides, one and two which explain that.
Our forward looking statements and the use of non-GAAP financial measures.
This call will contain forward looking statements, which are based on assumptions, we believe to be true 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 lead our discussion.
Thank you Molly and good morning to everyone on the call today, we appreciate your interest in district energy.
I'd like to begin our discussion today on slide five with a brief brief highlight of our second quarter financial results.
This first energy's finished the second quarter with adjusted EBITDA of $345 million and year to date adjusted EBITDA of $621 million strong performance in what proved to be a challenging quarter driven by a mild start to the Texas summer and the beginning of an unplanned.
And out of Comanche peak unit, two that I know many folks have been waiting for us to talk about what that will do right now.
Comanche peak outage began when our plant operators observed increasing temperatures inside the unit two steam turbine generator.
So Siemens.
Manufactured generator.
Want to be very clear that a steam turbine generator as many of you probably know is a standard power generation equipment and is wholly unrelated to the nuclear power reactors size of the plant there were no any.
Ancillary impact effect at all in fact, we were able to bring the unit down in the generator down without any any.
Issues at all the unit was brought into an unplanned outage on June 5th to investigate the rising temperatures further.
Our operations teams have determined the primary damage was to the units.
<unk>, which is the stationary component.
A generator.
Boeing extensive evaluation with several experts, including the manufacturer as I've mentioned Siemens we determined this theater was repairable.
The team worked for the balance of June in the month of July to repair the damage and perform tests to validate the effectiveness of the repairs, while the repair was quite detailed and tedious work.
I will say that this disassembly and reassembly.
Of the equipment is really what takes a lot of time, you would have to be very precise and putting back together a generator to make sure that everything is ready to run again, we presently expect the unit will return to service late next week.
Time to capture part of the important Texas summer season.
Just need to hope that the weather performed well for us in the remainder of the summer and we all have our fingers crossed on that one.
In total we expect the full year EBITDA impact from the outage to be approximately $75 million.
With approximately $20 million relates to the incremental <unk>.
<unk> expenses incurred during the outage and approximately $55 million relates to lost gross margin for the two month duration of the outage.
We have filed an insurance claim related to the outage and we are also evaluating whether we might have any indemnification claims against certain third parties.
At this time, we do expect to recover in full all of our out of pocket costs and expenses that are related to repairing the unit and that exceed our 5 million dollar deductible. It is likely however that the receipt of any insurance proceeds will not incur until 2018.
We do not expect any recovery however for the impact of the lost gross margin realized for the duration for the duration of the outage as our accidental outage insurance policy, which would cover such loss profits does not kick in until the unit has been out of service for more than 12 weeks.
As we expect the unit to return to service next week, we do not expect to be eligible to make a claim under this policy, which frankly is a good thing as we would rather have Comanche peak.
Unit, two up and running.
I should also add that our commercial team proactively and successfully took steps to mitigate any potential negative impacts from the outage on our retail operations or on our hedge positions.
As a result, our hedged portfolio and retail operations were effectively insulated from any negative impacts related to the outage.
I would be remiss not to acknowledge that the timing of the outage related right into this Texas summer was disappointing.
And especially in our first full year coming out of bankruptcy.
However, our team has worked tirelessly to return the unit to service as quickly as possible, while carefully observing all safety and quality control protocols and we do expect the unit to return to full load in time to benefit for more than half of the important third quarter.
Of ERCOT demand.
Lastly, I think it's important to reinforce that we believe this outage was a result of an incident isolated to unit two.
Nevertheless, we intend to take additional steps to give us the ability to install a replacement generator in the future should a similar event occur.
We have a spare rotor onsite at Comanche peak.
And it is likely we will have a spare stator manufactured we believe this has improved this is prudent given the importance of Comanche peak to our overall operations.
Moreover, even though we presently estimate the fee.
Full year impact of Comanche peak unit, two outage will be approximately $75 million, we remain confident in our full year adjusted EBITDA guidance rate range, both because we were tracking towards the higher end of our adjusted EBITDA guidance range. Following the first quarter and also as a result of known offsets, which bill and I will discuss later on.
On the call as a result, we are reaffirming our full year guidance ranges for 2017.
Moving on to capital allocation and I'm excited to announce that we did close on the acquisition of the.
Approximately one gigawatt Odessa plant on October one.
Thanks to quick efforts of our integrated team working on the transition and integration. This asset is now part of our portfolio as we enter the month of August in Texas, which is great timing for our generation business and a helpful offset in 2017 to the negative impacts.
The Comanche peak unit two outage.
The addition of this flexible gas fired generation asset to our portfolio is an important example of our commitment to opportunistically acquire high quality gas fired assets in ERCOT.
We believe the Odessa plant will be a valuable addition to our generation fleet.
Given its ideal location to capture the current natural gas.
Price advantage in the Permian Basin, which Sara Graziano.
Senior Vice President of corporate development will describe further in a few minutes.
They're a team also led the acquisition of the 180 megawatt Upton two solar development project, which remains on schedule to be online for the summer of 2018 as we have previously mentioned the Upton two project is a great addition to our fleet and is instrumental in our future retail product offerings.
Going forward, we remain opportunistic on both the potential to acquire additional gas fired generation assets in ERCOT.
Do further.
<unk> projects and on any potential ex ERCOT growth.
As we have stated previously we do not feel compelled to diversify outside of ERCOT to mitigate weather or market risk given the strength of our integrated portfolio. We have commented on a number of occasions that any large scale M&A transaction diversified vista outside of ERCOT would have to stand up to a number of comp.
<unk> self imposed criteria, such as customary control premiums relative ownership sharing of synergies and economic resilience under numerous market scenarios.
I will say, though that there are economies of scale in this sector.
And they are important and things that we look at and trying to to drive down cost in our business we remain.
Disciplined with our capital allocation approach and this discipline applies to maintaining the health of our balance sheet, which we believe is a key attribute for sustainable success in this business.
Vista, We believe is in an enviable position in today's market.
We've done our dirty work we've.
Cut our cost rationalization is complete and we have a very strong balance sheet with industry, leading conversion of EBITDA to free cash flow, we intend to remain vigilant with respect to capital allocation seeking meaningful return for our shareholders that we make as we make future investment decisions and to maintain a <unk>.
Leadership role in the industry to.
To the extent, we do not find investment opportunities in the market that we believe will create value for our shareholders. We could return capital to our shareholders in the form of potential share buybacks or potential dividends.
<unk> share repurchases. We recently received what we believe to be a favorable ruling from the IRS paving the way for potential share buybacks ahead of the 24 month restricted period contemplated in the FH bankruptcy tax matters agreement, we are working through the mechanics of how we can execute on such share for sure.
Repurchases should we determine to implement a plan in the future.
So we now believe we have a path forward.
Okay.
I am now going to turn to slide six.
We are providing today, an interim update on our operations performance initiative or as we call. It okay.
We have included a hot topic section to our presentation today.
Of which <unk> will be one of the topics that Jim Burke will cover.
While <unk> is not yet complete we are already capturing savings opportunities. This year, which are helpful offsets to the negative impact of Comanche peak unit two outage this summer.
As a result, we thought it would be helpful to provide you with an interim update on the process.
Through the <unk> process.
Completed in the first part of this year, we have identified approximately $28 million of EBITDA enhancement, we expect to achieve in 2017, which would translate to approximately $45 million to $50 million on a full run rate basis.
The EBITDA enhancements, we have identified are primarily driven by cost savings opportunities efficiencies and fuel handling and logistics as well as heat rate improvements as Jim Burke will describe in more detail. This is a process I have personally led at four different companies and the results are verifiable.
And create meaningful recurring.
<unk>.
We plan to report further results of <unk> on our third quarter earnings call. Similarly, as we have communicated a number of times previously any decisions related to the optimization of luminous generation fleet will likely be made in the fourth quarter.
As a final note on healthy we've been working through the process and implementing several ideas. However, given the nature of these types of improvements it is prudent to see the results before you count the value and communicated externally by.
By communicating the preliminary results today, we are indicating our high level of confidence in capturing the value described.
Now I'm going to move to slide seven.
This once again realized solid performance from our commercial and operations teams in the second quarter.
Consistent with our fossil fleet first quarter performance commercial availability was 96% for the quarter.
Portance of high commercial availability from our fossil fleet was highlighted in June with the unplanned outage at Comanche peak, making sure. Our units are available when market prices reflect attractive economics continues to be a core priority for our operations team and it is critical to our success our success as an organization.
Yeah.
Similarly contributions from our opportunistic hedging and asset optimization activities once again deliver meaningful value to the enterprise year to date luminous commercial operations team realized prices that were nearly 46% higher than settled prices during the same period.
Also on slide seven I would like to highlight highlight a new hedge disclosure we are providing for the first time and we will update on a quarterly basis going forward.
The table on the far right side of the slide now provide you with the hedge premium and generation, we expect to achieve for.
For the balance of 2017.
Premium includes all contract revenues for the balance of 2017, our mark to market hedge impact as of June 32017, as well as the shape and asset optimization impact we are anticipating over the same time period.
If a round the clock settled prices for the year come in lower than our current estimates the value derived from our hedges will be even greater.
As we have said before so long as we continue to see reasonable levels of volatility and the forward curves, which we currently expect will be the case, we will continue to have occasion to opportunistically hedge our wholesale length in future periods.
Slide eight is an example of this volatility as is depicted in the graph on the slide in the last several months ERCOT summer heat rates have increased materially for the years 2019 through 2021.
Illuminate the commercial operations team took advantage of this volatility to hedge some of our link and the summer periods at what we believe.
For attractive levels.
While the hedge levels for 2019 through 2021 are modest relative to our total open wholesale position in those years. It is an example of how our commercial team Opportunistically takes advantage of liquidity in the market to build a hedge book that year after year materially exceeds.
<unk> settled prices are.
Our commercial team looks for opportunities afforded them given the multitude of liquid forward curves available to hedge wholesale risk prior to real time settled.
We looked ahead to our wholesale risk at levels above our guidance and our point of view in the market for any given future point in time using this opportunistic hedging strategy year. After year. This first commercial team has been able to realize power prices materially in excess of annual federal prices as depicted on slide 19 in the appendix.
<unk> presentation.
We believe the second quarter of 2017, despite the disappointing weather.
And the Comanche peak unit two outage provides a clear indication that we are executing on the fundamental key factors for success in our business and delivering shareholder value and.
In our view these factors, our strong cost management, especially in our wholesale and support organizations commercial optimization of our wholesale commodity and retail customer business positions and prudent management of our balance sheet and capital allocation.
We believe there is a model for this sector.
Where companies can sustain a long term value proposition based on strategy execution and proper governance.
And ultimately attract long term investors.
We will now discuss Q2 hot topics.
First one is Ob that Jim Burke will take over the Mic here and then the next one will be Odessa that Sara Graziano will talk about Jim.
Thank you Kurt as Curt mentioned late in 2016.
We kicked off a process called the operations performance initiative or.
Or obi to ensure our plants and mines were running as competitively as possible in this challenging market environment. We have just completed our support cost reduction efforts in October of 2016.
So we then turned our attention to our field operations.
We describe on slide 10, our focus with this effort was much broader than cost. We are actively working ideas that could create additional value in revenue or margin as well as cost and capital efficiencies.
The opening process combined with external and internal expertise from a diverse set of disciplines experience base and technological prowess.
The process engages approximately 90% of each site's workforce and our third party business partners and workshops that have generated over 5000 ideas of which over 500 are in some form of further analysis and action.
Each idea was analyzed and evaluated for technical feasibility economic value ease of implementation and investment requirements just to name a few.
A rationalization process occurs and once we complete our review and are ready to fully implement we use an open tracking platform with regular reporting of results to ensure accountability and ultimately success.
Our initial focus was on our three largest coal sites in terms of generation and mining activity that Dean Martin Lake Oak Grove and Sandau. However, our efforts are continuing at other sites and we expect to have these wrapped up by the end of the third quarter.
To provide some insight to the approximately $28 million of results. We expect to capture in 2017, we wanted to break these EBITDA enhancements down to describe the items that are expense reductions, which we would classify as O&M savings versus the items that enhance gross margin, which relate to generation output and fuel expense.
So far this year given the activities that are already underway, we anticipate a reduction in 2017 O&M expense of approximately $22 million and improved gross margin of approximately $6 million.
These EBITDA impacts are not full year impacts as ideas were implemented at various times throughout the year in fact, largely on the basis of the partial year impact we would anticipate a full year run rate view of the activities already underway would yield closer to $45 million to $50 million on a recurring basis.
To provide more color I'd like to just share a few examples of our <unk> savings opportunities with you. So you have a sense for the types of initiatives. The teams are implementing.
On the O&M expense reduction side, the utilization of consumables has provided a sizeable savings opportunity for us at multiple sites, including Oak Grove Sandown Martin Lake in light of the effectiveness of our scrubbers were able to tune our utilization of activated carbon for Mercury control, realizing significant savings, while meeting or exceeding environmental compliance target.
Similarly by optimizing our scrubbing strategy of Martin Lake, we're able to reduce the utilization of excess limestone and at the same time reduce auxiliary load by 30000 megawatt hours, creating more value from the plant output.
When evaluating our maintenance strategy, we conducted a comprehensive review of our preventative maintenance programs to better align it with the current economic and operational environment. As a result of this review we are budgeting and tracking our contractor hours more aggressively adopting a broader utilization of non original equipment manufacturer parts and Ben.
Fitting from the best practices of existing contractors to save time and money for example at sand our business partner floor introduce introduced us to a new scaffolding technology and contractor that saves us time and money while streamlining the number of contractors, we have performing this function.
On the generation and mining side, we were able to add incremental generation at some of our facilities due to efficiencies from steam cycle improvement through better valve monitoring repair and in some cases replacements.
Grow replacing items, such as leaking turbine drains main streamline drains and boiler feed pump recirculation valves that help to improve plant heat rate by over 100 Btu per kilowatt hour. Our teams have better focus on ensuring that our units are capturing the energy throughout the steam cycle and generating megawatt hours. This is assisted by model.
During the thermocouple throughout the steam cycle, both on site and by our performance optimization center in Dallas, which closely monitors our sites.
Finally, our operators have better awareness of heat rate and the tools to manage performance real time, which has provided additional volume and margin as evidenced by our 96% commercial availability performance in the second quarter for our fossil fleet.
In addition, both Martin Lake and Oak Grove, we have.
Been able to lower our minimum sustained output known as low sustained limit or <unk> sell in low price environments. While also enabling our units to ramp up more quickly when called upon in response to improving market conditions and on the mining side. Our team was able to implement a number of techniques to improve productivity.
<unk> has been a faster diagnosis and repair for our conveyor belt at <unk> mine, which serves sandow, which will reduce downtime and additional hauling requirements, thereby lowering our overall cost per ton for lignite. We are already realizing several million dollars lower hauling expenses in 2017 is.
Compared to 2016.
In summary, these efforts are already underway with more to come and it would not be possible without the buying and ownership by the entire aluminum team.
We understand that this is how we compete by continuing to find ways to create value in a dynamic and challenging market.
We look forward to sharing more information about the complete effort on our third quarter earnings call with that I would like to turn it over to Sara Graziano, who led our efforts on our successful Odessa acquisition.
Thank you Ken.
We wanted to take a few minutes on todays earnings call to provide a little bit more color around our acquisition of the Odessa power plant in West Texas.
I mentioned in our July six press release, the ADESA Grant is ideally situated in west Texas to capture the current natural gas price advantage in the Permian Basin.
Drilling activity in the Permian Basin has caused a sharp increase in associated gas production, which has increased from approximately 5 million cubic feet per day in 2016, approximately $6 six as of July 2017, and is projected to further increase approximately 11 five bcf per day.
Good morning.
This increase in production has overwhelmed available takeaway capacity and create a deep discount and Permian gas pricing in todays market.
Slide 11 depicts the location of the ADESA, which has direct access to the El Paso and one out of the pipeline too much multiple cook eastern connected very few plant.
It could be even at current gas from deep within the Permian basin, and even deeper discounts.
Moreover, Odessa has an option to reconnect to the enterprise pipeline in the future should market conditions warrant.
Since the announcement of our agreement with clarity at that time, we have been in discussions with various producers or potential long term gas supply contract. We are seeing a great deal of interest.
And as a result, we believe we will be able to lock in an attractive gas supply for the asset for several years into the future.
We do believe that ultimately additional pipeline takeaway capacity out of the Permian will be done we intend to take advantage of the dislocations in the market to secure and manage supply.
However, I do want to caution that while the natural gas price advantage of materials for economics. It is in no way sufficient tirasemtiv ICU.
Cycle generation as is evidenced by our cricket right, which is that kind of approximately 60% discount to NAV.
Construction costs.
We have previously reported the purchase price for the asset with $350 million.
<unk> earn out payable only market conditions meaningfully improved spark spread eastern now destruction of 60 months.
I feel like that's a tire price gas part with.
Monthly strike price at a.
Opinions and market the earn out will only pay out.
These pre negotiated threshold.
The recent closing of the acquisition on August <unk>.
We are very excited to now have this high quality and flexible gas fired asset in our generation portfolio.
I will now turn the call over to Dallas to discuss the financial highlights from the second quarter.
Thanks Tara.
I'll start with the financial results on slide 13.
As Curt highlighted at the beginning of the call adjusted EBITDA for <unk> energy was $345 million in the second quarter and $621 million for the year to date.
For the quarter PX, two energy delivered $219 million of adjusted EBITDA.
Very solid performance for what was a mild weather spring.
To give a better sense of the second quarter weather and archive. We included a chart on the right side of slide 23, and the appendix showing the 10 year average for combined heating and cooling degree days in the north Central Texas market.
You can see that energy degree days in each of April may and June were lower than the 10 year average negatively impacting <unk>.
<unk> volumes for the period.
Despite the headwind from these mild weather conditions.
<unk> energy delivered solid adjusted EBITDA in the quarter as a result of strong margins and cost management.
Moreover district Energy's net residential attrition in the quarter of only one 5%.
Represents our best second quarter performance as organic customer acquisition and retention since 2008.
The retail team continues to focus on the customer experience and overall customer satisfaction levels to drive residential net attrition rate to near zero.
This relentless focus on the customer experience as evidenced by <unk> Energy's customer satisfaction scores for the quarter.
Which were at or near all time record highs across all major reporting categories.
Once again, our commitment to customer service.
<unk> innovation and marketing and cost management have led to solid financial results for our retail segment in the quarter.
Now turning to our wholesale segment limited EBITDA contribution for the quarter was $134 million.
Impressive results given the $26 million negative impact of the Comanche peak unit two outage in June .
The negative impact of this unplanned outage was offset by favorable fuel and O&M expense, including those realized from completed that'd be reviews.
And also by increased generation from our legacy hopefully during the period.
Following the solid second quarter performance by our integrated portfolio. We are reaffirming our 2017 guidance in the range of $1 35 to $1 5 billion for adjusted EBITDA.
And then the range of $745 to $925 million for adjusted free cash flow.
Now turning to slide 14, we have updated our hedge profile and related sensitivity as of June 32017.
As you can see we remain nearly fully hedged for 2017.
<unk> mitigating the effect of potential natural gas and heat rate movements.
On our financial results for the balance of the year.
We are also now 60, 66% hedged on our natural gas equivalent basis.
And 51% hedged on a heat rate basis in 2018.
Further narrowing the potential volatility of our future earnings profile.
Our commercial operations team has added these incremental hedges on an opportunistic basis as is our normal practice.
Last fronting to slide 15, our capital structure remains unchanged from our prior earnings call.
Our pro forma 2017 net leverage remains below two times adjusted EBITDAR EBITDA, even after accounting for the cash outflows related to the closing of the ADESA transaction on August <unk>.
And the construction of the Upton two solar facility.
For simplicity, we have conservatively assumed does not include any project financing.
As always we will remain mindful of our total leverage striving to maintain a healthy balance sheet that will afford financial flexibility in the years to come.
With that operator, we're now ready to open the lines for questions.
And at this time, if you would like to ask a question over the phone. Please press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key.
I'll pause for just a moment to compile the Q&A roster.
Yes.
Yes.
And your first question comes from the line of Neel Mitra from Tudor Pickering. Your line is open.
Hi, good morning.
Hey, Neal.
Margin enhancement from us what we can tell you is we constantly work to improve our product offering and we've actually saw a 2016 you saw that we actually had improved margins, we continually look to improve our margins.
So we'll be interested to see though they're smart people over there at NRG.
We're constantly mining information from others, we don't mind being a fast follower if there's an idea we're missing. So we'll say we're anxious to see that and we want them to be successful, but that's just not what we would do and we're not so if anybody is waiting for some kind of announcement around that it's not going to happen.
Okay, Great and my second question is around the Odessa acquisition.
So you guys outlined the discounted gas that you get in.
In the west market.
Relative to wall hub.
Is that a is that discount that you're getting.
Wider than what other plants in ERCOT west are getting or are you bullish on ERCOT west pricing I'm, just trying to figure out the competitive advantage that you have given that while hot price.
That's the price of power and in the west market for ERCOT.
Well first of all so there are various locations.
Sure.
Where gas is accessed by gas fuel generators.
Obviously, the Houston ship channel, which trades at almost at parity with Henry hub, which is I think right now probably I think the Permian is around 40 45.
As there are scale economies, especially around corporate center and support costs.
Those can be quite substantial and that's why we also look and have looked at larger you know sort of publicly traded companies because there's a there really is a big value proposition on the synergy side.
Okay, and I guess kind of related question to that one of the other issues. We've heard one other peer companies in the public space talked about.
That.
One of the.
Advantages also of that sort of a transaction is more liquidity to <unk>.
Talk and less volatility.
Given the lack of public float that sort of thing is that a factor in your thinking or how important do you think that is.
Yeah.
It is a factor in our thinking I do think that.
You know the relative size of the company is important but I think it has to be coupled where also though with our performance. So.
The big in your core performer.
That wont necessarily help but I do believe that that size.
In this instance matters I think Manny.
Matters also not just liquidity, but from economies of scale standpoint. So it is a function of that I also would say that we have been pretty clear about the fact that we don't feel compelled to diversify outside of ERCOT because of our retail position, but I will tell you that there are benefits to diversification even for a company.
Like ours and.
I think you see this a little bit right now where weather patterns are different and.
When Youre a single state company, we kind of roll with Texas.
Weather.
And that can be different obviously in PJM or ISO new England in any given year and that's helpful. So.
We can see some benefits I think the other thing that's a benefit and it really kind of struck me a little bit when we dissected the NRG transformation plan.
Is the.
The downside protection that capacity markets offer.
It's pretty formidable you can have a low performing low capacity factor set of assets and you can still have pretty good.
Margin and revenue stream from them because of the capacity market.
Where markets are in the cycle and it's not just that so I worry a little bit about the continued what we believe to be uneconomic build of combined cycles in PJM.
Iceland, New England is in a better position than PJM, right now and I'll explain that but what I will say around the zacks and I'll sneak predominantly around PJM, because it's where they're really front and center I have very high confidence.
There will be a mitigation measure will be put in place.
Something like PJM has put out on the capacity market, which will.
Excluding effectively the nuclear assets and also remove the load.
Sort of the commensurate amount of load now that in and of itself is not a great outcome, but it is at least a reasonable outcome I believe the work, though that PJM is doing on their energy market in terms of making sure that energy price formation takes into account resources that are used to support the market but that.
Currently do not get into setting price and the market is in my mind. The single most important thing that that PJM can and should do in fact, we're going to talk about it here in ERCOT, we think that's something that ERCOT ought to look at as well.
That's highly important change I think that PJM will get that through and so the solution around zacks, while I understand why it was through Copa.
Of course.
Court Battle is frankly, I think the courts were effectively saying this isn't really our deal I think that both PJM.
And first we'll put in measures to counter it.
And I don't like it I don't like anything out of the market, but I do believe that theyre going to do some good things I spent I've spent time with the CEO of PJM and I feel very confident that FERC will support what they want to do there.
And ISO new England.
I would tell you that I think what they're doing around their capacity market. I believe is quite good and I hope that they're successful in putting that in place as well in fact, I think the ISO new England.
Methodology is probably on point more capacity marked improvement than the P. J M. One.
And I'll leave it at that but we are all over this because if we're ever going to do anything.
We should know it and I should remind you guys you guys notice, but I spent most of my career working in the PJM, New York and in ISO New England markets. So I still have you know.
Some knowledge of that.
Very helpful. Thanks again.
Thank you.
Your next question comes from the line of Abe Azar from Deutsche Bank. Your line is open.
Good morning, and congratulations on a nice quarter.
Hey, Great How're you doing good.
Should we view phase one of the of the OPI is completing the optimization efforts at the at the fossil plants and sites to more focus on the nuclear plants or is there more to come on the fossil side as well.
Yes, there is more to come on the fossil side so.
Your next question comes from the line of Steve Fleishman from Wolfe Research. Your line is open.
Hey, good morning, Kurt.
Just.
Couple quick detailed questions.
How much is Odessa contributing to the 2017 guidance.
Hi.
You don't want to make sure.
Yes $15 million.
Okay and is there do you have a sense of like a full year run rate.
Yes, I think.
40% I think we're looking at $45 million to $50 million.
Great.
For the full year I know you reaffirmed your range is the segment at the beginning you gave like segment guidance for each one are those still roughly the same ranges as well for wholesale and retail.
Yes.
Yes, roughly.
Great and then it seems like your volumes this year are up pretty meaningfully.
Is that just an even with Comanche is that just the coal plants running a lot more than last year.
Yes.
Probably don't remember this.
I don't know how much we really talked about it but right at the end of 16 gas prices popped up.
Our commercial team was able to go out and hedge.
And we did not go into seasonal ops for the legacy plants.
And so we were able to estimate.
A positive EBITDA contribution.
So thats why youre seeing that because we didn't go into and the seasonal ops for the legacy coal plants, we've been running them and we expect to run them pretty much through the year.
Okay, Great and then one last question on Odessa So.
I get.
The ability to get really cheap gas in that region.
Can you, maybe just talk a little bit about.
Kind of.
How where you can bring the power from that plant I E.
Is the plan to able to get access to places where.
Power Power's more set based on higher priced gas.
Then in the Permian region.
We are.
Some of Thats credits that build out but yes.
No I think Steve you touched on a point that I think we're just open about is what will really be interesting to see is longer term and im talking three four maybe even six years out how much renewable build out occurs and what might happen to congestion getting from west to east.
But I think we've seen that ERCOT has been willing to make.
Kind of modest investments, we're not talking about <unk> I'm talking about kind of modest investments to make sure that plants like Odessa.
To the rest of the state.
And so.
We expect to be able to have freedom to move that power around to the higher price market and that's what's happening now and Thats, what we believe will continue to happen.
Great. Thank you.
Alright, Thanks, Dave.
Your next question comes from the line of Michael Lapides from Goldman Sachs. Your line is open.
Hey, guys.
Still trying to come up they might get a little bit here.
One is a question for you you talked a little bit about this at the beginning of the call.
How much in the off peak hours.
Can a generator like you guys ramp down your coal plants when power prices are weak given the amount of wind generation that hits I mean are you able to ramp them down all the way or down to a 10 or 20% utilization or I'm just trying to think physically how much will the machine actually lets you ramp down.
So Jim can step in here, but one of the things Jim talked about in our opening effort is let's call it with an acronym that MSL.
But it's basically the lowest point, where a coal plant can go down to.
And.
<unk>.
Physically and one of the keys in coal plants to try to keep them to survive, especially in Texas is to get that MSL as low as you, possibly can and that's what we're working on.
And so.
Just.
You cannot you cannot come down to zero there is always some threshold for a coal plant.
And again, the lowest would be the best if you really want to be at zero, you got to come off and that's an issue right.
Try not to do that with coal plants too much because.
That's kind of coming off and coming back on.
You have an issue with the equipment and the asset so Jim you want to add.
It does differ by plant and I think one of the key successes of the LP effort has been continuing to sort of creative thinking on what would it take to actually get the <unk> sell even lower and so all the plants have seen some level of improvement some of the units as an example, Martin Lake.
Used to be at about a 50% level now they are actually closer to a 25% level of Max which is a huge improvement on <unk> and you have to be stable not only through the same cycle, but you have to be stable through the entire environmental controls process as well. So you have to you do have to look at it end to end I'd say 25.
The 50% range of peak is.
<unk> captures about where the units are.
Got it and then I had one question on the retail business, which is we've seen lots of the other IPP coming outside of you guys in NRT.
<unk> seen a lot of the other guys talk about wanting to beef up their retail business.
But we haven't really seen much of an impact of that in Texas in terms of the gross margins that former incumbent retailers earn.
Why do you think that is what's driving that what's enabling that margin stickiness for you for NRG for some of the other incumbents.
Well.
Jim Jim I can see is probably up a bit.
So.
This business Jim built so but.
Don't care I still talk about it now.
Well look I think it's complicated, but I think in some ways. It's really not at the end of the day first of all customer segmentation in broad strokes, because it's far more segmented than what I'm about ready to tell you, but I think you can take this a bit to the bank is theres kind of a.
A segmentation around those who like named stable.
Product offerings.
People are comfortable with this as Jim described it as sort of a low involvement category product and so people really don't want to get into the sausage, making.
All you have to do is go to the.
Power to choose it will spin your head how you make that decision, but people really theyre happy with the brand, but I'll tell you can't just do that because you name it.
Have to do it because you have a product offering.
That people are comfortable with and we've gone to great lengths to provide people with stable pricing and a stable product offering and then we've also given them products that meet their needs and we proactively go to them. If we see that they are on a product that they shouldnt be on and they may be they use a lot of power overnight or.
Something will proactively try to get them on free nights or something.