May 19, 2017
Executives
Molly Sorg - VP, IR Curt Morgan - President & CEO Jim Burke - Chief Operating Officer and Chief Operating Officer Bill Holden - Executive Vice President and Chief Financial Officer
Analysts
Mike Weinstein - Credit Suisse Julien Dumoulin-Smith - UBS Michael Sullivan - Wolfe Research Ali Agha - SunTrust Mitchell Moss - Lord, Abbett & Co. LLC
Operator
Good morning my name is Mike and I will be your conference operator today. At this time I would like to welcome to the Vistra Energy First Quarter 2017 webcast and conference call.
[Operator Instructions]. I will now turn the call over to Molly Sorg, Vice President, Investor Relations.
You may begin your conference.
Molly Sorg
Thank you, Mike and good morning everyone. Welcome to Vistra Energy's first quarter 2017 investor conference call which has been broadcast live via webcast from the investor relation section of our website at www.vistraenergy.com.
Also available on our website are a copy of today's investor call presentation or 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 a few additional senior executives available to address questions in the second part of today’s call as necessary.
Before we began our presentation, I encourage all listeners to review the Safe Harbor Statements included on slide one and two which explain the risk of forward-looking statement 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 true only as of today’s date so which are subject to certain risk and uncertainties that could cause actual results to differ materially from those projected or implied by such forward-looking statements.
Further, our earnings release, slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures reconciliation to the most directly comparable GAAP measures are in the earnings release and in the appendices in the investor presentation.
I will now turn the call over to Curt Morgan to lead our discussion.
Curt Morgan
Thank you, Molly, and good morning to everyone on the call today. We appreciate your interest in our company.
Before we jump into the slides I would like to make a few opening remarks. In addition to Bill Holden you Jim Burke will be joining us.
We would like to begin what we expect to be a series of discussions during our earnings calls on topical matters relevant to Vistra and the overall power industry. On this call Jim Burke our Chief Operating Officer will cover our retail business, a topic of much interest from current and perspective investors and equity analysts.
It is our hope that you will enjoy these periodic topical discussions and of course we hope these discussions will assist the market in understanding the value proposition for Vistra Energy. It is our view that our retail business is the cornerstone of Vistra today and in the future.
Our retail operations combined with our high performance integrated power generation fleet and commercial team and our very strong balance sheet and industry leading conversion EBITDA to free cash flow as compared to our peers leads to what we believe is a unique and attractive investment opportunity in Vistra. With that we will begin our discussion today on Slide five of the deck that we have sent out with a brief highlight of our first quarter results.
Adjusted EBITDA for the quarter was 276 million, a strong quarter despite headwinds from a mild Texas winter. Even though first quarter results came in marginally lower than we would have expected in a normal weather year we are reaffirming our full year adjusted EBITDA and adjusted free cash flow guidance ranges for 2017.
We are comfortable with our previous guidance ranges for the full year 2017 with our highest EBITDA and free cash flow period ahead. Our newly introduced retail initiatives and our operational improvement program which we've talked about previously which is expected to be completed by the end of Q3 and those are just to name a few items that we have that we give us the confidence to reaffirm at this point in time.
Moving on from earnings, I'm sure you're aware that Vistra Energy began trading on the New York Stock Exchange on May 10th, already we are seeing materially improved liquidity in our stock which has seen an average daily trading volume of more than 1.5 million shares in our first six days listed on the New York Stock Exchange. If you follow this previously on the OTC you know that that average was somewhere around a 0.5 million shares, so we've seen a pretty big tick up here since we listed.
Having our shares listed on our major exchange was a key priority for Vistra after emerging bankruptcy and we're very pleased to keep the up listing in line with the timeline we previously communicated. I will also mention that on May 24th, we will be doing the opening bell ringing at the New York Stock Exchange something we're excited about and I do believe that we may get a few of the financial news networks where we can discuss our story to a broader audience.
In addition to the up listing we executed on a couple of initiatives in May. You probably saw our press release about acquiring a 180 megawatt solar development project in West Texas.
This acquisition will support our enhanced renewable offering for our retail organization and will further augment Vistra Energy's integrated portfolio. We continue to see interest for renewable energy products from our large and commercial industrial customers the public sector institutions, small businesses and residential customers many of which are looking for a contract -- enter into a contract for the solar products directly with someone who actually owns the project rather than through every retail energy provider that has a PPA.
The acquisition of the Upton County two solar projects that will enable us to better serve the continuously changing preferences of our retail customers, the integrated nature of our business provides the platform to achieve what we believe will be attractive economics and EBITDA contributions once the project is commercially operational which we expect to be in-line in the summer. A couple other points on this is that the economics on this would not be achievable with just a wholesale product.
In fact we don't see any merchant solar products out there, they are achieved by the integrated nature and the fact that we have a channel and multiple channels to market it in our retail business with the additional margin that comes with that. I also want to point out that the Upton 2 project build out multiples expected to be around six times which is an attractive multiple.
On the broader subject of growth and capital allocation which we have discussed previously, we continue to emphasize in all of the above approach, our focus is designed as we've mentioned is to look for opportunities that support our core business both retail and wholelsale especially in ERCOT and as you know there are a number of opportunities that may be out there given the low pricing in ERCOT we see them to be plentiful with potential for strong economics. Outside of ERCOT we're more conscious and that is predominately because these markets have completing influences and outsource external influences in their market that make us a bit more cautious and we don't have near the seat of the table that we have in Texas and I would also mention that the regulatory political environment in Texas is quite favourable for business.
We could look at most larger M&A as we've discussed and we've been predominantly focused on public market valuations, private market transactions have been bit up quite a bit in the marketplace because that's where the private equity firms have played predominantly. What I will say is that with the [indiscernible] throwing themselves into the mix and in play we've seen that private equity firms have now entered the mix.
We don't really know what that's going to look like and where that goes beyond [indiscernible] but what I can tell you is this we will be very disciplined, we are not going to enter a very highly competitive process and we're not going to overpay just to be in other markets. We do not have to diversify outside of ERCOT, we see a plethora of as I said earlier of opportunities in ERCOT and if need be we will stay there.
Any deal that we would do on a large M&A scale would have to have compelling value proposition. If we do not find that compelling investment opportunity we will revisit return of capital alternatives including stock repurchases and dividends.
Turning to slide 6, you will see that also in May TXU launched the new product free nights and solar day which combines TXU Energy's most probable right time pricing plan with solar energy for retail customers. At TXU Energy we're continuously advancing our product offerings to remain on the leading edge of changing customer needs and through our research we expect our roof product combining two of the elements customers most want, flexibility and control over their usage combined with renewable power to gain momentum in the marketplace.
TXU Energy's product innovation and relentless focus on customer experience continue to prove successful in the marketplace as it was evident by Vistra's Energy performance regarding residential customer counts in the first quarter of 2017 quite an achievement, we grew customers, we are excited about that in the first quarter 2017. Competing well in the highly competitive ERCOT residential market is a testament to a truly sophisticated retail marketing, they are sophisticated retail marketing capabilities of our retail team.
In the first quarter of 2017 TXU Energy also launched a new residential my account mobile first experience which extends txu.com's clean design to mobile devices reaching over 800,000 users and growing. Our users experience is now consistent across all devices with streamlined access to features reflecting TXU Energy's commitment to being at the forefront of capturing the mobile mindset.
We spend a lot of time at the senior level and throughout the company, we are focused on understanding how customers interact with us and interact in their home and what devices they use and we're constantly looking for ways to make their life easier. In essence we don't want our customers ever to have a reason to think about leaving us and we've been very good and proactive about that.
TXU Energy's innovation always begins with our customers. We listen to what they need and how their lifestyle has translated into energy usage and we're then able to create products designed to help them understand and manage their consumption and save on their record build.
Frankly this the core of our success and the reason our customers are loyal, because of our tailored innovative products based on customer needs, our customer service in our broad product and service offerings, in the end we believe our commitment to customer service, product innovation and product transparency will continue make TXU Energy the market leader in ERCOT which has been demonstrative of our long history of acquiring, retaining high quality customers. Turning to slide 7, Luminant once again delivered strong commercial performance during the quarter, commercial availability for our fossil fleet which is a measure of our fossil fleets ability to capture gross margin from the market when the assets are in the money was 95% for the quarter.
I can tell you with our many years of our experience in this business this is a very good performance especially for a fleet such as ours with over coal plants. Making sure our units are available in the marketplace when prices reflect attractive economics is a core priority for our operations team achieving results in the mid-90s demonstrates our excellence at generation and asset optimization with a focus on making our plants available in the period when we need them which is a critical to our integrated model and overall success as an organization.
High commercial availability also supports Vistra Energy's ability to opportunistically hedge our assets. Contributions from our opportunistic hedging and asset optimization activities that once again delivered great value to the enterprise.
In the first quarter of 2017 Luminant's commercial operations team realized prices that were nearly 55% higher than settled prices. On the lower right hand graph you can also see that we have consistently delivered higher than settled prices in both increasing and decrease price environments.
So long as we continue to see reasonable levels of volatility in the forward curves which we currently expect will be the case, we will continue to have the occasion to opportunistically hedge our wholesale length in future periods which should deliver meaningful value to the bottom line. It is the combination of the contributions from our commercial operations teams, the reliable operations of our generation assets and the stable earnings from our retail operations that drive Vistra's relatively stable earnings growth profile particularly as compared to our competition.
The lower right hand graph on slide 7 also demonstrates the stability of Vistra Energy's historical earnings and bearing wholesale power price environment. Because Vistra Energy maintains that link in the market is able to capture upside when the wholesale prices temporarily spike similar to what can occur in 2014.
This opportunity for Luminant to capture volatility in the market provides a nice counterbalance to any temporary retail margin compression that might be driven by short term wholesale power price spike. And last as it relates to our generation portfolio, our operational performance initiative remains on target to be complete by the end of third quarter.
We also plan to finalize our coal portfolio review by the end of the year and I want to be very clear on this point that we have not yet made any decisions regarding the long term viability of our coal, our older coal assets. We owe it to the many constituents that we have including our shareholders, and our employees to determine if these assets are economically viable in the long term.
We are presently working diligently on the analysis so we can be confident we'll make the right decision for all who are concerned. Turning to slide 8, we have once again included in our materials the projected market supply, demand and reserve margin forecast from the latest ERCOT CDR report published in May of this year.
The May CDR report reflects a few modest updates from the prior December version, though the CDR generally assumes reserve margins will remain above 18% through 20, 21. As you may ERCOT makes no attempt to assess the economic viability of additions to the market.
Any project with an interconnection agreement and air permit and proofs of adequate water supply is included in the ERCOT CDR. The gold line in the graph represents Vistra Energy's point of view on the forward reserve margins which takes into account economic viability of forecasted assets and assumes fewer new thermal and renewable resource additions through 2022 versus the ERCOT point of view as a result of the historically low wholesale power price environmental.
The Vistra Energy point of view assumes no asset retirements other than those that have already been announced. As we expressed on the March 30 earnings call any new thermal resource development is inexplicable in our view.
Recent new builds in ERCOT have filed for bankruptcy in the last several months further focusing [ph] our view that the new build economic are not justified in the current market environment. ERCOT as an energy [indiscernible] market has proven to be challenging for single asset owners who do not benefit from the strength and stability offered by an integrated portfolio such as Vistra's.
We continue to believe some of this irrational new investment will not be completed in which case we should start to see tightening the ERCOT market in future years. While on the subject of ERCOT market conditions I want to highlight a few points on the Waha gas basis differential subject which has been a topic of much discussion recently.
First we view the present basis differential that is evident in the marketplace is temporary primarily due to the ease of pipelines build out from the region. There are at least three five pipeline projects moving forward to transport gas east and south out of the region, in a couple days ago I think [indiscernible] gas daily both in Chronicle in an article about the Permian might be of interest if you haven't read that.
In addition some of the basis differential is being driven by increased hydro-activity in the West which is a short term effect. Moreover as only 2400 megawatt of generation capacity can source gas to Waha hub pricing, Waha prices do not typically set power prices in ERCOT.
Perhaps more important our interpretation of the overall power pricing environment at ERCOT is that low power prices are being driven by lower rates as opposed to a gas basis differential. Simply put we have an oversupply power market in ERCOT.
Looking at the market heat rates both Waha and Houston ship channel heat rates are depressed compared to historical averages. As a result we have concluded the market dynamics are reflecting to press heat rate likely due to wind, North to Houston congestion and a lack of clear scarcity in the market due to the ample reserve margins as opposed to a gas basis differential.
Increased prices in the south are being driven by the North of Houston congestion which has been increasing in prices in Houston since the beginning of the year. This congestion as a result of the Houston import project construction which will once it's up and running at about I think 3000 megawatts transmission capability in 2018 reducing the congestion and the magnitude of the recent price disparity.
In addition a new CCGT [ph] will be coming online in Houston area this summer which will further alleviate congestion in the region. For Vistra Energy specifically while the local heat rates are a bit of a drag in the near term, we also have an offset to this drag with [indiscernible] who are well-positioned to source attractively priced gas coming out of the mid-continent.
In short we view any Waha gas basis is differential to be a temporary and immaterial impact on the results of our operation. Finally on this topic some are expressing their view that the Permian gas situation is akin to the Marcellus, Utica, CCGT new build proliferation.
We see this as the case to several factors. Even with the advantage, CCGTs are still well over $10 a megawatt hour out of the money.
We also as I mentioned earlier the temporary nature of the advantage is likely to dissipate with a number of pipeline and we all know that Texas is a friendly state in terms of building our energy infrastructure. We have an oversupply market and building into an oversupply market is always a dangerous and dangerous case and as I've mentioned many times before we are hard pressed to find especially in ERCOT any new CCGTs at the original equity owners actually got a return on their investment.
And also in ERCOT the energy only market makes it much harder to finance and with the bankruptcies that have occurred recently and what we believe will end up being a recovery that is significant less than the debt itself ERCOT chilling effect on this. So there are so many things that go into this that are different than what's going on in PGM that we believe that this is not the next Marcellus Utica CCGT build out.
I will now turn the call over to Jim Burke, our Chief Operating Officer who along with his team built our retail operations and Jim is going to give you a little more -- a little bit more information about our retail organization and how it drives value for Vistra. Jim?
Jim Burke
Thank you, Curt Morgan. Let's start with some fundamentals on the ERCOT retail market and specifically why we believe it is the most attractive market in U.S.
Now turning to slide 10, ERCOT was a large and growing electricity market, it represents about 31% of the competitive served load in the U.S., about 250 kw hours and the consumption per residential customers 32% higher in ERCOT in the rest of the country. Moreover its projected to continue to grow, it's been growing at 1% to 2% annually and we expect that to continue with the strong economy.
Many other markets are actually shrinking. One thing to note about other markets that is a positive for them they actually have competition in many markets in electric and gas.
ERCOT is honestly focused on the electric competition. Nevertheless the electricity market structure and ERCOT is in our view the most constructive for retail competition particularly those with a strong set of capabilities.
For example in ERCOT the retail electric provider has full ownership of the customer relationship including performing the billing function in customer service with the exception of outages which is handled by the wireless company. This ownership gives up the direct customer relationship that allows TXU Energy to proactively manage the customer experience for example.
We just launched the free night and solar days plan that Curt mentioned. We have the systems to handle the time of use build, manage the 15 minute interval data, display that usage on mobile devices and gauge the customer on usage patterns.
In other markets these plans would be challenging to manage if you could even launch them given the interface for billing and services is largely through the regulated wireless company. In addition these regulated companies offer a default to provider of last resort rate, some others have municipal aggregation that effectively limits the amount of competition and with the constraints around product design and billing that not foster the innovation that exists in an open marketplace such ERCOT where willing buyers and sellers transact freely from their large commercial industrial level all the way down to residential that makes this market very unique.
Finally the regulatory legislative environment for retail and ERCOT has been stable as a result of the level of competition in the market. Customers in Texas have choice, for years now they have had over 300 offers available in everything zipcode where choices permitted.
Customers can switch in as little as five minutes, their switch can be effective same day. This is the marketplace we compete in, this is the market we've been competing in and I think what gives the regulators and the law makers comfort is that it's working.
Nearly every household has exercised their right to choose as evidenced by the public utility commissions 2016 study, determining that over 92% of customers in ERCOT have exercised their right to choose a retail electric provider at least once since the market opened to competition 15 years ago. No other market has seen this level of competition develop and a lot of it have to do with the retail market design.
Any assumption of TXU Energy's customer base reflects only legacy customers who've never taken advantage of the competitive offerings would be incorrect. TXU Energy's customers have chosen TXU because they value the overall proposition.
A proposition based on trust, innovator products and our commitment to putting the customer first which takes me to slide 11. To have a strong retail business you need a couple of things just on the retail side, you need a strong brand and a strong business model both are critical.
We stand behind our brand and I think it's pretty obvious TXU energy connects with Texas, it's inherent in our name. Our proposition is based on trust, innovation and ease of doing business for example if we were to change a customer's price we would first notify them of an impending price change and it would take effect prospectively.
Many time customers would react, call us and see if there is alternative plans that we can find as a better fit. Many other providers will change prices on customers retroactively without notice after the electricity has been consumed and they learn about it when they receive their bill.
This is just one difference of how we provide the stability and peace of mind that most customers seek in this category. We also operate a scale business with multichannel marketing and sales strong systems and a data driven approach to leverage its analytics for how we manage marketing, services, the whole customer lifecycle as well as of energy supply and risk management.
This is a very data intensive business to run well not unlike credit cards, insurance or other financial services. TXU Energy's approach is to use this data to reduce the effort of the customer and to be trustworthy.
As Curt said we don’t want to give the customer reason to consider any other provider. In fact in every category where choice exists and especially because choice exists brands matter, there's a lot of clutter out there and electricity is no different than every other category in that respect.
Furthermore it's not easy to enter the space today. We have to build awareness, trust, and preference and there's over 50 competitors already out there competing for mind share every day.
The strong business model is further enhanced by integration with Luminant, the largest generator in ERCOT. The integration of retail and wholesale allows Vistra Energy to avoid certain collateral and transaction cost leakage.
For example an non-integrator retailer or wholesaler will have to transact in the open market. We typically find itself on the wrong side of the big spread and would also typically to post collateral transactions all of which comes at a cost.
Vistra Energy keeps this collateral and transaction cost leakage inside the system driving value to the bottom and all also to Vistra shareholders. More over Luminant's assets in the market allows TXU Energy to procure these types of risk management products that are necessary to lever the volatility inherent in electricity consumption.
Owning generation is a necessity for a retail electricity provider of our size and it's the barriers to compete at our level. Luminant's assets also create an opportunity for Vistra energy to capture any potential scarcity provided pricing in the market as a result of our overall net rank [ph] creating an opportunity for upside while cotherwise is stable earnings enterprise as compared to our non-integrated peers.
So in terms of the result, what does the brand, the business model and the integration deliver? Well let's turn to slide 12 and you will see that on the upper left we still command the full position as ERCOT a position we've had since market open serving more residential customers than anybody else.
In fact if you look at the residential market here in ERCOT across the players to the right of the chart all of them have been at it at least 10 years. There's been a lot of new entry and they will always likely will be and many of those would extend off to the far right hand side of the page if we included them all.
But having a strong brand and a strong business model and able to introduce market share leadership to be maintained through time. As our capabilities, innovations and insights that grown our customer count performance has improved and our annual sales volume have been consistent.
Competition causes all of us to raise our game, certainly we're no exception to that. Furthermore we have a leading cost structure, this has helped us focus our resources on what matters most to customers, service innovation and peace of mind.
We recognize that all of our customers have a choice but so do all of the customer served by our competitors. Our retail teams thrive on serving customers and competing every day.
This approach has led to a very consistent earnings profile. In fact since 2009 TXU Energy averages a little lower 800 million in EBITDA per year.
There is very little CapEx required to support this business, less than $25 million per year. Equally important is that there are some natural cycles between the wholesale and retail segment that create a more stable earnings picture for us as compared to our non-integrated peers as what was depicted on what occurred on earlier slides.
As Curt mentioned we believe it's important to elaborate on some of these topics from time to time. We appreciate the interest of physically in the retail segment as we think it's a differentiator relative to our peers and given the prominence of retail our overall value proposition we thought this discussion would be a good first topic and hope it will help you as you evaluate our company and its relative attractiveness.
I will now turn the conversation over to Bill Holden to discuss our first quarter financial performance in more detail.
Bill Holden
Thanks, Jim. Good morning to everyone.
Since we allocated the portion of the call today to the retail discussion I'll be brief with our financial comments. Turning to slide 14, Vistra Energy delivered adjusted EBITDA in the first quarter of 2017 as $276 million of which Luminant contributed 96 million and TXU Energy contributed a 177 million.
As Curt highlighted in his remarks the mild first quarter weather had minor impact on Luminant as we were largely hedged for the quarter and operated with high commercial availability. TXU Energy's result were affected by lower volumes that resulted from the mild weather in the quarter but the impact of the lower volumes was partially offset by TXU Energy's strong margin management and the customer account performance.
We remain comfortable with our 2017 guidance ranges and still expect full year adjusted EBITDA in the range of 1.35 billion to 1.5 billion and adjusted free cash flow in the range of 745 million to 925 million. Turning to slide 15, we have updated our hedged profile and related sensitivity as of April 21, 2017.
As you can see we're nearly fully hedged for this year materially mitigating the impact of natural gas and heat break movements to our financial results. And finally as you can see on slide 16 we have had no changes to our capital structure since our March 30 earnings call and our leverage remains the lowest among our peers in the industry.
We're always mindful of our total leverage and we'll continue to be diligent and are now at the growth opportunities to ensure that we are transacting at the right value while maintaining a healthy balance sheet that will provide flexibility to allow us to stay on the right side of market cycle in the years to come. With that Operator we're now ready to open the lines for questions.
Operator
[Operator Instructions]. Your first question is from Ian Zaffino from Oppenheimer.
Unidentified Analyst
This is Mark on for Ian. So I guess I'll follow on the acquisition of Upton Solar asset, are there any specific asset types that you guys are looking more deeper into for additional solar or are you guys still open to I guess like what the market is offering or maybe CCGT assets given the heat environment environmental currently.
Curt Morgan
So I'll start with the last part of that first. We're and I think we have expressed this pretty clearly in ERCOT that we're interested in additional combined cycle plants and I'll just say that we're actively looking at opportunities in ERCOT.
We think this would be a good time to acquire and so we'll see if that proves out but we're going to try to remain as I've said we're going to remain disciplined around this, it's not something we have to do but something we certainly would like to do and we think we're matching up with a good time in the cycle they will do it. As far as additional total projects I want to be very clear that this was largely driven out of demand from our retail side of our business that we see and so we started this project around that.
We would not have built this on a merchant basis wholesale business and so I think what we're going to wait and see is if the demand is actually even greater than what we think it is and what we know now could we do another project, yes, but it's not the beginning at this point in time is you know a Vistra Energy build-out in Texas of merchant solar projects. We wanted to dovetail with our integrated business and the integrated economics are quite compelling.
Unidentified Analyst
And then just a little bit on the private equity activity, are there I guess any specific assets that they are looking at or is it, they are kind of going forward anything that attracted to them as well? Thank you.
Curt Morgan
So broadly speaking what we have seen previously is some of the smaller single asset may be some of the sale of assets that, coal plants, CCGTs coming out of some of the utilities. We did notice the private equity firms were heavily involved in those, they were more bike sized, probably more to their liking and we also know the private market valuations transactions were significantly higher than where the public market values were and are and so I think for a couple reasons we would not choose necessarily to buy individual assets, one we think the valuations are too high and we've got a tough way to sort of build out the kind of scale you want to be able to compete in markets like PJM and [indiscernible] and have been in those markets for a long time.
You need to have a seat at the table if you're just one of many -- one asset in large markets you really don't have a lot of opportunities to influence things and I think that's very important. What we've seen recently though I think was a bit of a departure.
I'm not sure how it all happened whether [indiscernible] was approached by a private equity firm or whether they approached it private equity, I don't know that really matters but we have now seen the private equity firms at least we see the same rivers everybody else does that there is a process going on Calpine is in it and they have thrown themselves into that put themselves in play and that they're taking a look at whether they sell the company, that's their decision, their boards decision but what I think you did change potentially is that the herd tends to move together and would that mean that other publicly traded IPP's might also look at that and be involved in that. What I said earlier and I will say it is -- we're not going to get caught up on some furore of a competitive process and overpay just to go outside of ERCOT, we're pretty comfortable with our position if there's a compelling value opportunity for us, we will absolutely look at that and we'll see where that goes but I think that's really where we are on that issue.
Operator
The next question is from Mike Weinstein from Credit Suisse.
Mike Weinstein
I wanted to ask about net attrition in the retail business, if most customers are sticking or have 92% have already chosen the suppliers, so they're choosing you by choice even in your own territory. If most customers are sticky how does the negative attrition rate flatten over time and I see it is flattening but how does it eventually go away without people switching as much as they used to?
Jim Burke
Well it's a good question Mike. I would say there's a couple things underneath really any of the retail businesses in Texas .First of all, Texas is a very active marketplace so I think one of sort of mysteries around Texas is are people going to wake up to choice.
People have been choosing for the 15 years and market cycle, people come in with new offers and they make a splash and some people might be interested in it but the market had a fundamental churn rate underneath it because there are 7 million meters about six of those are residential we obviously have a very intense focus on the residential segment, it's not the easiest to serve but it’s a segment we do well but there's nearly 3 million moves and switches every year in ERCOT really regardless of how much activity we TXU Energy might be generating. So we have to be active, you have to have a ground game, you've to have an air waves game, you have to have a digital game and you have to sort of meet the customer at their moment of choice.
So people are constantly moving to Texas, they're moving from apartments to homes, they are moving between cities. That's really the most frequent move activity.
So when you think about churn it isn’t about people sitting at home deciding today is a good day to switch my provider. There's usually a life of it, and when a life event happened it's a chance for people to reconsider all their choices not just electricity.
So I don't know if churn will ever go to zero, I can tell our goal as a company is to be as flat as we can and also grow, but when you are the market share leader and one of the most profitable retailer in Texas it is hard to be a share leader, a profit leader and grow. So we look at maintaining sort of our shares in this market as a really good position to be and we're going to look for growth opportunities more tactically.
Curt Morgan
Yes, so Jim I will add something to this. One when we think about capital allocation and growth we also are looking at the retail side and I think in our segment the sort of brand loyal type segment I think the way that we would have to grow that I think we think the economically is wait for the right time of the cycle do an acquisition.
However the other thing we've done is we've entered the market in different light with different brands that actually -- so those brands are getting at the different needs of the different customer segments and so we had this -- I think you guys know we had four change, we just announced Energy Express and we'll look at that -- we'll continue to look at brands and how we fill out the needs of customers and we do believe over time as we fill that out we will ultimately grow a customer base on an overall basis but I think when you're talking about the TXU Energy brand, the only way to really I think to grow that is to buy somebody who is in that segment of the market and then over time rebrand TXU Energy, we're open to that. We don’t think this is the right time to buy retail because of where wholesale prices are and there is not a lot of fear in the market but when we see another price spike which I know that everybody -- don't hold your breath when we do which I believe will happen in Texas that will shake the tree a little bit as it always does in Texas and that's when the right time to look at retail acquisitions.
Mike Weinstein
So if I hear you right I mean it would be wrong to maybe focus too much on customer counts when you're more focused on margin per customer?
Curt Morgan
Yes exactly, right. You see that on Jim's slide, slide 12, while we have had a decline net attrition our EBITDA has been really been stable and interestingly in the last two years we've been over $800 million a year and yet we've been and this is what I think the unique side of it is with our innovation and product offerings was actually gotten that net attrition out to 1%.
So we think that are probably what we can see in the future out of this business but I think growing customer count overall will probably come by positioning different brands along sort of the chain and we're doing at by introducing new brands and we will probably will do another one either through an acquisition or will start up an organic brand to try to compete with different segments in the market.
Mike Weinstein
On the other side of the business, can you talk about how the cost of scrubbers environmental controls has been changing over the past few years where it sits now, like how is that affecting your analysis and without revealing how the analysis is actually turning out I understand that’s one of the process, but how is it affecting the analysis of plant retirements?
Curt Morgan
Well a couple of things on that, we really haven't seen much of a change but we actually haven’t been actively out there trying to hire somebody to put scrubbers on to this. I can just assure you that they're probably $100 million plus a pop.
We're not putting scrubbers on some of the older plants, if that were to rear its head in the near term I think that would make a decision pretty easy of what we do with these coal plants. I think this kind of cool off a little bit in the EPA process, but they are still as you guys I mean as you guys -- you always do is read our financials and we will go in the legal section.
I mean there is still a bunch of tax on our coal business and we're going to have to play those out. But I think we would generally say there's less pressure and probably the time to implement anything out of having EPA has moved out in time but that's not really the driver, the driver for the challenge in our business [indiscernible] one is an overbuilt market and so depressed heat rates and gas prices have been I guess you could say historically low and so when you combine those two things that combined for a really tough market and that's what's putting pressure on our coal fleet and as they age just the pure maintenance and outage CapEx is high.
We have been trying to manage that as best we can but you've got to put money in the power plant you can't starve them or you will start having very significant forced outages but more important to me is you can start to create safety issues. So this is why it's really important when you decide whether you are going to stay at a plant, if you're going to do you also have to then agree that you're going to put money into it and that’s the challenge for us right now in this current heat rate and gas price environment some of these coal plants are challenged.
Mike Weinstein
And if these plants are I assume are less efficient than new plants, so if they retire the average heat rate for the region should actually go down right, would that be harmful situation to margins overall or?
Curt Morgan
No I don't think that -- I don’t believe that’s the case, they are run predominantly in the summer and so what it does is it takes capacity out. They're coming in and they're actually coming at a lower heat rate.
So when you have higher demand you've got 12, 14 heat rate peaking plants and gas steamers that are coming on and selling the price, this takes out the wedge and you get quicker into that part of the stack which means your selling price at a higher heat rate. So it actually has exact opposite of what you were saying.
Mike Weinstein
I see, it pushes the whole curve steeper is that what you're saying really.
Curt Morgan
Yes, it does. It gets into the higher heat rate or [indiscernible].
Operator
The next question is from Julien Dumoulin-Smith with UBS. Your line is open.
Julien Dumoulin-Smith
First quick question, I noticed the CapEx reductions, can you elaborate a little bit more of the source of those and then also try to tie it to the extent to which you can tie those back into the ongoing O&M reductions that we've been talking about. To what extent is this kind of a sneak peek or does -- is this really kind of separate and distinct from your other efforts here?
Curt Morgan
Yes, you're talking about the operational performance? Bill?
Bill Holden
Yes, I think just to the last part of I think it is separate. And just to put this in context you know the total reduction in CapEx that we're forecasting for 2017 is 48 million.
There's two components of that, one is in the non- recurring capital expenditures which is lower by 15 million that’s principally related to the cost associated with the consolidation of our corporate headquarters. The other 33 is related to CapEx that the legacy plants, those dollars essentially are being re-classed from capital expenditures to O&M, as you may recall that is part of the fresh start reporting valuations of those plants came in essentially at zero value.
So they're now recorded at zero book value on the balance sheet. So the result of that is what would have previously been CapEx of those plants is now being classified as O&M.
So if you look forward I think if you assume no changes to the composition of the fleet then I think you would expect this change would carry over in the form of lower CapEx but wouldn't necessarily be a change in cash to the extent the spend continues as most dollars would show up and O&M instead. The one other point I would add is just given the work that Curt mentioned that we're doing around the plants to make sure we can get to the right conclusion on their future.
You should expect in the short and intermediate term we are managing very tightly the expenditures on those plants and make sure that they pay back given the uncertainty around the futures.
Julien Dumoulin-Smith
Got it. But just to understand reaffirmed your EBITDA range to the extent to which that the CapEx was reclassified into O&M, is that kind of an implicit improvement in your EBITDA guidance given that you're now reflecting higher O&M in that guidance range?
Or is that again within the noise?
Bill Holden
I think it is generally within the noise and we were moving -- CapEx is now going to be O&M but Curt mentioned other things that we have in process and I think those things sort of balance each other out.
Curt Morgan
Also make sure Julien what you said its actually that we will be pushing us you would think all things being equal to lowering EBITDA--
Bill Holden
Having that the expense is classified.
Curt Morgan
Yes, the expense is classified and O&M. But we're confident even with the first quarter be a little bit below where we would like to come in and with that we're still confident that we are in the range and we're still confident that we're still think that this point is a good place for us.
Julien Dumoulin-Smith
Got it. My point rather was that the guidance being reaffirmed at that level was an offset that was giving you that confidence but I'll leave that aside.
Coming back to the solar project, I just want to clarify the 180 megawatts is this separate and distinct from the 116 you talked about a couple of years ago with Sun Edison, also Upton category is this the very same project and related to that how do you think about the economics and the return profile and or EBITDA contribution from this investment?
Curt Morgan
Yes. So the Sun Edison project, I wasn’t here, so if you remember this.
Jim Burke
Yes, Julien this is Jim we did have that project, if you remember just a PPA type structure and that project we effectively terminated and so this initiative came about as part of the effectively the same opportunity but with a new partner and obviously we're taking an ownership position and it's actually bigger as you noted. So economics are improved for us because the solar economics have continued to improve overall to see the net PPA was originally structured.
Julien Dumoulin-Smith
Got it. What about return profiles, how should we think about like total size of investment and EBITDA contribution or something like that?
Bill Holden
Julien I just want to make sure I have my numbers right, so the investment is about $240 million. We expect to project, finance the deal so we will be I think around $130 million equity investment we think that's the kind of the leverage there.
And I think was there anything else in that? And then on the returns we typically will go out tell people what our returns are but I will tell you that on an unlevered and levered basis we typically look at significant headroom between our cost of capital and our hurdle rate, on an unlevered basis somewhere in the 500 to 800 basis points higher and then on a levered basis about sort of 1000 basis points higher than our cost of capital and so I can tell you the mat was exceeded that return criteria.
I'm not going to give what our cost of capital is that most people can probably you know [indiscernible] going back into what it is but the bottom line is very attractive returns.
Operator
The next question is from Michael Sullivan from Wolfe Research.
Michael Sullivan
So just maybe firstly on the capital allocation plan and some of these opportunities that you guys are looking at maybe on the asset level basis, just wanted to get a sense is there any predetermined or idea of a time horizon there and if you don't see a compelling opportunity when you could potentially start to look at a dividend or share repurchase program?
Curt Morgan
I think the ideal for is near term and when I say near term I think we are you know looking between you know sort of now and the end of the year that we will hopefully find some opportunities. There's a number of reasons for that but you know I think that’s the sweet spot in our mind of when we believe we will be able to find opportunities and be able to transact and so I think that's where we are.
So then you could -- we're constantly thinking about -- so I should say we always think about whether we should buy back or stock, the one thing that prohibits us at this point in time from buying back our stock is part of the tax matters agreement when we exited bankruptcy with AFH is that typically when you do the busted three--
Jim Burke
Right and then the tax we spin off that was affected as part of the--
Curt Morgan
Yes for the number but when you step up the bases to be try to be simple because this is esoteric stuff but that there is about a two year grace period typically before you can buy-back your stock and it gets in all kinds of reasons, why that is the case but let's just it's sufficed to say that is the case, everybody knew what was going in. However there are pass where you can work with EFH or with IRS to try to find a path forward where you can do it sooner than that, we believe the best approach on this right now because part of it -- if we deal with AFH we thought we could part of the oncore transaction that clearly is uncertain and so we decided to now go to the to the IRS but it's going to take six months to come up with the answer.
We believe we have a very good chance of being able to buy back our stock. We started this a little bit ago and so we hope to be able to be in a position to at least repurchase stock after that six month period which actually is not a bad time frame with what I talked about in terms of acquiring assets in ERCOT.
And then just a dividend policy you know I think that will happen you know that's probably 2018 fodder, but we'll see how quickly things move. I also believe we can do, I don’t want to make this completely mutually exclusive.
So I think we're really trying to just make sure that we understand the opportunity set from a growth standpoint but I think once we've kind of work through what we think is a good time in the cycle I think we believe ultimately that we'll be able to potentially do both and we will look to do that and our cash flow conversion from EBITDA to free cash flow is quite good and with unlevered balance sheet by anybody's opinion. I think we will be able to potentially do that but that's something the board will have to talk about it and will have to figure out how we do that.
Michael Sullivan
And then secondly just and this may be both kind of tied to really the seasonality of the business but just want to check just on the free cash flow first that the negative 48 million for the Q1 that's kind of typical for Q1 for you guys and then secondly you showed this realized versus settled prices in prior years for the whole year you guys have averaged about 80% and then in Q1 its only about 50% higher. So just on kind of both of those topics just want to get a feel for how much of that is driven by seasonality and if there's any other kind of external factors involved?
Bill Holden
I'll take the one on the free cash flow and then on the realized prices I will turn it to Jim, but I think you had it right. Most of the adjusted free cash flow for us would typically be realized and the second through fourth quarter as opposed to Q1.
But there are a couple of items also that tend to occur every year in Q1 that are large uses of cash because they're paid in Q1 and that would be property taxes for example we paid 96 million of property taxes at the beginning of the year and those are only paid generally once a year, so they just happen to show us in Q1 and then consistent with the way most companies handle incentive compensation, all of the annual incentive payments are paid during Q1 as well and so that was a little over $80 million of cash. So I think those are probably the two largest items in addition to just the seasonal profile of the business.
Jim Burke
Michael you asked the question about realized prices, there are different opportunity set if you will for realizing prices greater than settled prices typically more in the summer months than the first quarter but I would also have to just say that generally speaking you know this '17 and '18 with new build is coming on has been what I will call has been less volatility and overall lower wholesale prices so you can't ignore that back. So I would expect this to come in with what I think is 55% plus realized prices for '17 above settled, I don't know that we will hit 80% but we'll still be above that but I wouldn’t be surprised to see something lower than 80 just because of the overall volatility and the overall just lower heat rate and price environment.
So I think that’s the big driver. Higher volatility obviously is our friend and we take advantage of it, we've just seen this has been a more lower volatility period of time.
Operator
The next question is from Ali Agha from SunTrust.
Ali Agha
I understand the points you made being very disciplined in terms of allocating capital, looking for acquisition opportunities but from a strategic perspective when you think about either A, expanding into taxes or B, diversifying out of taxes strategically what is more important to you right now?
Curt Morgan
We have emphasized ERCOT over-looking outside of Texas for a number of reasons from -- I believe one that with the integrated nature of our business you know the margins we can get from the wholesale group to the retail group are higher. We also obviously know this market as well as anybody and so we think that we have good visibility into where the market is going to go and we're major player in where it goes ultimately.
But I think probably more importantly is the market is cycling and when you have bankruptcies and strategic players wanting to get out and you see the market beginning to turn not a lot of investments being announced and we wouldn't expect any in the future frankly zero on the combined cycle, plant side of things that you see that the market has finally reached a point where there is a capitulation and that's usually a good sign that we're going to go into a phase where there is disciplined investment in the market because people are seeing what happens when you're undisciplined and invest in the market and so I think that is a key element and so that goes hand in hand with we think attractive pricing in the marketplace which is why we've been more, we just think the better opportunities are here. We also I know PGM, I have competed in it, ISO New England quite well, all those markets.
I would say that if you just take those markets separately number one PGM unfortunately there are still -- developers are still successfully selling the story of a long term basis differential advantage and each technology turbines are continue to be put-in in the Marcellus and Utica area sort of at a record pace, all with the idea again the backdrop that no one's really made any money, put in a new combined cycle through the beginning of time but they seem to continue to do that looking for that opportunity. That doesn't make it for a very good market and by the way most of the states in the PGM market are low growth states to no growth states, so implicit in a new investment is that you have to shove somebody else out of the market for you actually to compete and that's tough to do when you've got players who have some cost investments and they're looking to try to reduce costs.
We've proven just like on the upstream sector to be able to find ways to compete and so I just think it's a bit [indiscernible] when you do that until somebody actually capitulates. Our own personal view that once the gas market equilibrates and the loans are paid off, amortized on some of these investments and they've got to go up compete on an even playing field that you may see some capitulation but that's two, three maybe four years away in PJM and so that is not a market that's cycling in our opinion and I think that's borne out by the fact that you have had some very low capacity price clears.
So it's just not as attractive so therefore you have to be laser beam focused on getting a good upfront investment if you're going to be successful in that market. There's no slop around it, you're not going to get bailed out by a market getting recovered and so when you do that you've to mind on it and stay focused.
Iceland and New England is a little bit different than that, it's just a smaller market so any kind of addition to it can move there but more importantly I believe that what they did to the capacity market in terms of effectively putting a claw back mechanism if people try to permanently delist and they have multiple assets to put a call back mechanism on the capacity market and they've actually decoupled the dynamic delist price which is the price at which anybody can exit without any influence by the market monitor and they put big decoupled there by pushing that price down at the same time the penalties for their version of pay-for-performance in the capacity market is going up, the penalties are going up but the price at which you can exit is going down, it just makes it for just a less attractive market and there's risk in that. So I those are the reasons why we need to be very cautious when we enter those markets and make sure we are getting at the right entry point.
I'm not saying you can't make money, I've done it but you better be sure that you're getting in and then you better make srue if you're doing it in a big deal that there are really sustainable synergies that you can go after. I mean those are the kind of -- those are the things that you know you can get done, you completely control it but you've to have those things, good price that you're getting in at, and that there is big synergies that you can go after.
Ali Agha
And one other question I had and you alluded to that, its an interesting time for you to be fully listed here at a time when your closest peers are sort of floundering and perhaps looking at the private market. When you look at those valuation differentials you talked about as well.
Longer term do you think that public market is the right forum for an IPP business?
Curt Morgan
That’s a excellent question one that I have pondered. I mean you probably know that I came out of private equity Energy Capital Partners and I like that that because you had access to capital when no one else did and you were on the right side of the cycles and when markets got tough if you had -- and you had debt you had a cure, you know you could access capital instantly where as you guys know, if you're under a financial stress you're in distress you can't access equity markets in the public market.
But I will go back to say this, I think we did this to ourselves and we created that situation. I still think you can be successful as a public market company, but I think you can't carry the kind of leverage that these companies have been carrying.
I think that is the one thing I would say has been the reason -- the reason that we put ourselves in that place and when you get into a vicious cycle because when you're over levered and the cycle is good you then think you can put more leverage on because your stock price is up, your equity value is up and you think you debt capacity and so you finance acquisitions and growth at the height of the market because the stock prices are correlated heavily with commodity prices and you're out there buying at the absolute wrong time to be buying it's when prices are at the highs and then when the market the bottom falls out you've got too much leverage and then you're faced with the prospect of actually having to sell some of your core assets, that’s a business cycle and not the one, and when I was in private equity we were on the other side of that cycle. We were buying when they were selling and so -- but I don't think that’s a product of private equity or public I think that is a product of the fact that we have been over levered and that has created an environment where the only time you really feel like you can do something is at the top of the cycle but that's not the time to be doing which is why we were so focused to try to keep our leverage down for our business and so that we can be opportunistic that we can do that.
So I think you can be successful as a public company here if you do it right.
Operator
The next question is from Mitchell Moss from Lord, Abbett & Co. LLC.
Mitchell Moss
Just wanted to discuss which one of the Waha gas basis, lot of us familiar with some of the pipelines that are going to be build, do you see some of the gas going into sort of the North Texas Houston area or is most of the take away going further west?
Curt Morgan
Well right now or do you mean?
Mitchell Moss
Once the pipeline is built I guess.
Curt Morgan
Yes, the pipelines are really trying to find their way to Mexico in a big way and they're also trying to find their way east and south potentially to Gulf Coast, LNG export but that’s where they are trying to find their way to and not so much west.
Mitchell Moss
Okay. So I guess there could be -- are you saying there could be some pressure then on Houston ship channel prices as well as that gas moves in?
Curt Morgan
Not really because so you guys know this -- I mean if you go down in the Houston area it's like spaghetti city and what's going -- in regard again we're talking about the benchmark still Henry Hub, what is likely to happen is that thing will equilibrate rather quickly in that part of the world because it can move north, south, east and west. What might, if there were some -- if somehow gas trapped in the Houston ship channel which we cannot come up with that scenario, we just don't see it.
You might see something like that but that scenario just really doesn't exist that we can see with all of the pipeline down there and the way things are done typically work it will find a way to equilibrate across Texas and up into Henry Hub over into Louisiana and it just will and so there is enough pipe that it can happen naturally, you don't really need a lot of build out once the gas gets down.
Mitchell Moss
Okay. Just on modelling, looking at slide 20, I'm pretty familiar with the Forney and Lamar assets from before Vistra acquired them and I'm trying to understand the 6600 heat rate because I know that part of the capacity for both the plants is sort of peaking in dock [ph] firing.
So can you just give us a sense on what megawatts or how we should think about the heat rate numbers for the full plant specially also because 6600 seems to be you know sort of a new build-ish number and these plants are also I think 12 or 13 years old.
Curt Morgan
When we purchased together and you're always trying to figure to figure out what benchmark is the most relevant one to use, this is the heat rate without the debt firings so below -- but we also want to assure the full capacity we want to get the chart too busy. So that heat rate its most efficient use without the [indiscernible] that heat rate would degrade it.
I think the heat rate on Forney is around 8500 and about 8000 at Lamar, I don’t know if you knew that but that’s what it is. These are [indiscernible] so they fire at higher temperatures which allows for a lower heat rate and we've got a good success on the heat rate side of thing, so that was next step before they went in the age of technology to really bring down the heat rate.
I think the all-in heat rate if you're doing the CT peak firing the supplemental duct firing [ph] you'll get into the 7100, 7200 overall for the whole unit and as maybe more in line with what you were thinking about max capacity.
Mitchell Moss
Okay. And when I think about how many megawatts is the duct firing or how many megawatts is sort of the base configuration something you know just to figure out how much is actually at the 6600 heat rate?
Curt Morgan
I don’t remember, do you guys?
Mitchell Moss
I can follow-up offline if that’s--
Jim Burke
We can get around 340, its around 55 to 60 at Lamar.
Operator
The next question is from [indiscernible].
Unidentified Analyst
Just in-line with the questions about leverage, what do you think is the ideal leverage that you would like to target?
Curt Morgan
I think we have said before I think we still stick by it and Bill if you want to jump in too but I think what we've said is this is our gross basis and we will talk a little bit about that but on a gross basis we have said we'd like to be in the three to four times and so we will pick the midpoint of that, we think that 3.5 on an ongoing basis. Now that all depends on whether we buy something to get to the 3.5 that we feel good about and creates value, we have also said that we would be willing to go above slightly above the full range for a compelling transaction with the idea though given our cash flow that we have that within a year we'd be down on gross basis in the low 3s.
Generally speaking we've got about a turn I guess or so roughly from gross to net that could vary over time but let's just say that, but that's not how we feel about and the reason we feel strongly about what I've just went through the whole [indiscernible] why we think lower leverage is important in our sector but we also believe it leaves us the ability from a dry powder standpoint to be opportunistic and look for opportunities to grow our business. We don't want to be casted out and then be faced with the prospect of even having to divesting.
I think we feel like that on an ongoing basis that’s kind of three to four range well just say 3.5 feeling very comfortable on a gross basis.
Operator
And there are no further questions at this time. I will turn the call back over to the presenters.
Curt Morgan
Well thanks for your time and we look forward to seeing you somewhere along the way until our next earnings call for Q2. As we said before we appreciate your interest in our company and look forward to the future.
Thank you.
Operator
This concludes today's conference call. You may now disconnect.