Attached files

file filename
EX-95.A - MINE SAFETY DISCLOSURES - Vistra Energy Corp.vistra-2017630xexhibit95a.htm
EX-32.B - CERTIFICATION OF J. WILLIAM HOLDEN - Vistra Energy Corp.vistra-2017630xexhibit32b.htm
EX-32.A - CERTIFICATION OF CURTIS A. MORGAN - Vistra Energy Corp.vistra-2017630xexhibit32a.htm
EX-31.B - CERTIFICATION OF J. WILLIAM HOLDEN - Vistra Energy Corp.vistra-2017630xexhibit31b.htm
EX-31.A - CERTIFICATION OF CURTIS A. MORGAN - Vistra Energy Corp.vistra-2017630xexhibit31a.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 


FORM 10-Q


x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017

— OR —

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission File Number 001-38086


Vistra Energy Corp.

(Exact name of registrant as specified in its charter)

Delaware
 
36-4833255
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
6555 Sierra Drive, Irving, Texas 75039
 
(214) 812-4600
(Address of principal executive offices) (Zip Code)
 
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes x    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o  Accelerated filer o  Non-Accelerated filer x (Do not check if a smaller reporting company)
Smaller reporting company o  Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o No x

As of August 3, 2017, there were 427,589,702 shares of common stock, par value $0.01, outstanding of Vistra Energy Corp.
 



TABLE OF CONTENTS
 
 
PAGE
 
PART I.
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 

Vistra Energy Corp.'s (Vistra Energy) annual reports, quarterly reports, current reports and any amendments to those reports are made available to the public, free of charge, on the Vistra Energy website at http://www.vistraenergy.com, as soon as reasonably practicable after they have been filed with or furnished to the Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. The information on Vistra Energy's website shall not be deemed a part of, or incorporated by reference into, this quarterly report on Form 10-Q. The representations and warranties contained in any agreement that we have filed as an exhibit to this quarterly report on Form 10-Q, or that we have or may publicly file in the future, may contain representations and warranties made by and to the parties thereto at specific dates. Such representations and warranties may be subject to exceptions and qualifications contained in separate disclosure schedules, may represent the parties' risk allocation in the particular transaction, or may be qualified by materiality standards that differ from what may be viewed as material for securities law purposes.

This quarterly report on Form 10-Q and other Securities and Exchange Commission filings of Vistra Energy and its subsidiaries occasionally make references to Vistra Energy (or "we," "our," "us" or "the Company"), TXU Energy or Luminant when describing actions, rights or obligations of their respective subsidiaries. These references reflect the fact that the subsidiaries are consolidated with, or otherwise reflected in, their respective parent company's financial statements for financial reporting purposes. However, these references should not be interpreted to imply that the parent company is actually undertaking the action or has the rights or obligations of the relevant subsidiary company or vice versa.


i


GLOSSARY

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.
CCGT
 
combined cycle gas turbine
 
 
 
Chapter 11 Cases
 
Cases being heard in the US Bankruptcy Court for the District of Delaware (Bankruptcy Court) concerning voluntary petitions for relief under Chapter 11 of the US Bankruptcy Code (Bankruptcy Code) filed on April 29, 2014 by the Debtors. On the Effective Date, the TCEH Debtors (together with the Contributed EFH Debtors) emerged from the Chapter 11 Cases.
 
 
 
CME
 
Chicago Mercantile Exchange
 
 
 
Contributed EFH Debtors
 
certain EFH Debtors that became subsidiaries of Vistra Energy on the Effective Date
 
 
 
DIP Facility
 
TCEH's $3.375 billion debtor-in-possession financing facility, which was repaid in August 2016. See Note 9 to the Financial Statements.
 
 
 
DIP Roll Facilities
 
TCEH's $4.250 billion debtor-in-possession and exit financing facilities, which was converted to the Vistra Operations Credit Facilities on the Effective Date. See Note 9 to the Financial Statements.
 
 
 
Debtors
 
EFH Corp. and the majority of its direct and indirect subsidiaries, including EFIH, EFCH and TCEH but excluding the Oncor Ring-Fenced Entities. Prior to the Effective Date, also included the TCEH Debtors and the Contributed EFH Debtors.
 
 
 
EBITDA
 
earnings (net income) before interest expense, income taxes, depreciation and amortization
 
 
 
EFCH
 
Energy Future Competitive Holdings Company LLC, a direct, wholly owned subsidiary of EFH Corp. and, prior to the Effective Date, the indirect parent of the TCEH Debtors, depending on context
 
 
 
Effective Date
 
October 3, 2016, the date the TCEH Debtors and the Contributed EFH Debtors completed their reorganization under the Bankruptcy Code and emerged from the Chapter 11 Cases
 
 
 
EFH Corp.
 
Energy Future Holdings Corp. and/or its subsidiaries, depending on context, whose major subsidiaries include Oncor and, prior to the Effective Date, included the TCEH Debtors and the Contributed EFH Debtors
 
 
 
EFH Debtors
 
EFH Corp. and its subsidiaries that are Debtors in the Chapter 11 Cases, including EFIH and EFIH Finance Inc., but excluding the TCEH Debtors and the Contributed EFH Debtors
 
 
 
EFIH
 
Energy Future Intermediate Holding Company LLC, a direct, wholly owned subsidiary of EFH Corp. and the direct parent of Oncor Holdings
 
 
 
Emergence
 
emergence of the TCEH Debtors and the Contributed EFH Debtors from the Chapter 11 Cases as subsidiaries of a newly-formed company, Vistra Energy, on the Effective Date
 
 
 
EPA
 
US Environmental Protection Agency
 
 
 
ERCOT
 
Electric Reliability Council of Texas, Inc., the independent system operator and the regional coordinator of various electricity systems within Texas
 
 
 
Federal and State Income Tax Allocation Agreements
 
Prior to the Effective Date, EFH Corp. and certain of its subsidiaries (including EFCH, EFIH and TCEH, but not including Oncor Holdings and Oncor) were parties to a Federal and State Income Tax Allocation Agreement, executed in May 2012 but effective as of January 2010. The Agreement was rejected by the TCEH Debtors and the Contributed EFH Debtors on the Effective Date. See Note 5 to the Financial Statements.


 
 
 
GAAP
 
generally accepted accounting principles
 
 
 
GHG
 
greenhouse gas
 
 
 
GWh
 
gigawatt-hours
 
 
 
ICE
 
IntercontinentalExchange
 
 
 
IRS
 
US Internal Revenue Service
 
 
 
LIBOR
 
London Interbank Offered Rate, an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market
 
 
 

ii


LSTC
 
liabilities subject to compromise
 
 
 
Luminant
 
subsidiaries of Vistra Energy engaged in competitive market activities consisting of electricity generation and wholesale energy sales and purchases as well as commodity risk management, all largely in Texas
 
 
 
market heat rate
 
Heat rate is a measure of the efficiency of converting a fuel source to electricity. Market heat rate is the implied relationship between wholesale electricity prices and natural gas prices and is calculated by dividing the wholesale market price of electricity, which is based on the price offer of the marginal supplier in ERCOT (generally natural gas plants), by the market price of natural gas.
 
 
 
MMBtu
 
million British thermal units
 
 
 
MW
 
megawatts
 
 
 
MWh
 
megawatt-hours
 
 
 
NRC
 
US Nuclear Regulatory Commission
 
 
 
NYMEX
 
the New York Mercantile Exchange, a commodity derivatives exchange
 
 
 
Oncor
 
Oncor Electric Delivery Company LLC, a direct, majority-owned subsidiary of Oncor Holdings and an indirect subsidiary of EFH Corp., that is engaged in regulated electricity transmission and distribution activities
 
 
 
Oncor Holdings
 
Oncor Electric Delivery Holdings Company LLC, a direct, wholly owned subsidiary of EFIH and the direct majority owner of Oncor, and/or its subsidiaries, depending on context
 
 
 
Oncor Ring-Fenced Entities
 
Oncor Holdings and its direct and indirect subsidiaries, including Oncor
 
 
 
OPEB
 
postretirement employee benefits other than pensions
 
 
 
Petition Date
 
April 29, 2014, the date the Debtors filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code
 
 
 
Plan of Reorganization
 
Third Amended Joint Plan of Reorganization filed by the Debtors in August 2016 and confirmed by the Bankruptcy Court in August 2016 solely with respect to the TCEH Debtors and the Contributed EFH Debtors
 
 
 
PrefCo
 
Vistra Preferred Inc.
 
 
 
PUCT
 
Public Utility Commission of Texas
 
 
 
REP
 
retail electric provider
 
 
 
RCT
 
Railroad Commission of Texas, which among other things, has oversight of lignite mining activity in Texas
 
 
 
S&P
 
Standard & Poor's Ratings (a credit rating agency)
 
 
 
SEC
 
US Securities and Exchange Commission
 
 
 
Securities Act
 
Securities Act of 1933, as amended
 
 
 
SG&A
 
selling, general and administrative
 
 
 
Settlement Agreement
 
Amended and Restated Settlement Agreement among the Debtors, the Sponsor Group, settling TCEH first lien creditors, settling TCEH second lien creditors, settling TCEH unsecured creditors and the official committee of unsecured creditors of TCEH (collectively, the Settling Parties), approved by the Bankruptcy Court in December 2015.
 
 
 
Sponsor Group
 
Refers, collectively, to certain investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P., TPG Global, LLC (together with its affiliates, TPG) and GS Capital Partners, an affiliate of Goldman, Sachs & Co., that have an ownership interest in Texas Energy Future Holdings Limited Partnership, a limited partnership controlled by the Sponsor Group, that owns substantially all of the common stock of EFH Corp.
 
 
 
TRA
 
Tax Receivables Agreement, containing certain rights (TRA Rights) to receive payments from Vistra Energy related to certain tax benefits, including those it realized as a result of certain transactions entered into at Emergence (see Note 6)

iii


 
 
 
TCEH or Predecessor
 
Texas Competitive Electric Holdings Company LLC, a direct, wholly owned subsidiary of Energy Future Competitive Holdings Company LLC, and, prior to the Effective Date, the parent company of the TCEH Debtors, depending on context, that were engaged in electricity generation and wholesale and retail energy market activities, and whose major subsidiaries included Luminant and TXU Energy.
TCEH Debtors
 
the subsidiaries of TCEH that were Debtors in the Chapter 11 Cases
 
 
 
TCEH Senior Secured Facilities
 
Refers, collectively, to the TCEH First Lien Term Loan Facilities, TCEH First Lien Revolving Credit Facility and TCEH First Lien Letter of Credit Facility with a total principal amount of $22.616 billion. The claims arising under these facilities were discharged in the Chapter 11 Cases on the Effective Date pursuant to the Plan of Reorganization.
 
 
 
TCEH Senior Secured Notes
 
TCEH's and TCEH Finance, Inc.'s $1.750 billion principal amount of 11.5% First Lien Senior Secured Notes. The claims arising under these notes were discharged in the Chapter 11 Cases on the Effective Date pursuant to the Plan of Reorganization.
 
 
 
TCEQ
 
Texas Commission on Environmental Quality
 
 
 
TXU Energy
 
TXU Energy Retail Company LLC, a direct, wholly owned subsidiary of Vistra Energy that is a REP in competitive areas of ERCOT and is engaged in the retail sale of electricity to residential and business customers
 
 
 
US
 
United States of America
 
 
 
Vistra Energy or Successor
 
Vistra Energy Corp., formerly known as TCEH Corp., and/or its subsidiaries, depending on context. On the Effective Date, the TCEH Debtors and the Contributed EFH Debtors emerged from Chapter 11 and became subsidiaries of Vistra Energy Corp.
 
 
 
Vistra Operations Credit Facilities
 
Vistra Operations Company LLC's $5.360 billion senior secured financing facilities. See Note 9 to the Financial Statements.


iv


PART I. FINANCIAL INFORMATION

Item 1.
FINANCIAL STATEMENTS

VISTRA ENERGY CORP.
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(Unaudited) (Millions of Dollars, Except Per Share Amounts)
 
Successor
 
 
Predecessor
 
Successor
 
 
Predecessor
 
Three Months
Ended
June 30, 2017
 
 
Three Months
Ended
June 30, 2016
 
Six Months
Ended
June 30, 2017
 
 
Six Months
Ended
June 30, 2016
Operating revenues
$
1,296

 
 
$
1,233

 
$
2,653

 
 
$
2,283

Fuel, purchased power costs and delivery fees
(729
)
 
 
(654
)
 
(1,411
)
 
 
(1,208
)
Net loss from commodity hedging and trading activities

 
 
(118
)
 

 
 
(53
)
Operating costs
(195
)
 
 
(255
)
 
(409
)
 
 
(474
)
Depreciation and amortization
(172
)
 
 
(164
)
 
(341
)
 
 
(302
)
Selling, general and administrative expenses
(147
)
 
 
(154
)
 
(285
)
 
 
(318
)
Operating income (loss)
53

 
 
(112
)
 
207

 
 
(72
)
Other income (Note 16)
9

 
 
11

 
18

 
 
14

Other deductions (Note 16)
(5
)
 
 
(26
)
 
(5
)
 
 
(47
)
Interest expense and related charges (Note 7)
(69
)
 
 
(343
)
 
(93
)
 
 
(679
)
Impacts of Tax Receivable Agreement (Note 6)
(22
)
 
 

 
(42
)
 
 

Reorganization items (Note 2)

 
 
(30
)
 

 
 
(52
)
Income (loss) before income taxes
(34
)
 
 
(500
)
 
85

 
 
(836
)
Income tax (expense) benefit (Note 5)
8

 
 
1

 
(33
)
 
 
(6
)
Net income (loss)
$
(26
)
 
 
$
(499
)
 
$
52

 
 
$
(842
)
Weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
 
 
Basic
427,587,401

 
 
 
 
427,585,381

 
 
 
Diluted
427,587,401

 
 
 
 
427,846,563

 
 
 
Net income (loss) per weighted average share of common stock outstanding:
 
 
 
 
 
 
 
 
 
Basic
$
(0.06
)
 
 
 
 
$
0.12

 
 
 
Diluted
$
(0.06
)
 
 
 
 
$
0.12

 
 
 

See Notes to the Condensed Consolidated Financial Statements.

CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(Unaudited) (Millions of Dollars)
 
Successor
 
 
Predecessor
 
Successor
 
 
Predecessor
 
Three Months
Ended
June 30, 2017
 
 
Three Months
Ended
June 30, 2016
 
Six Months
Ended
June 30, 2017
 
 
Six Months
Ended
June 30, 2016
Net income (loss)
$
(26
)
 
 
$
(499
)
 
$
52

 
 
$
(842
)
Other comprehensive income (loss), net of tax effects:
 
 
 
 
 
 
 
 
 
Effects related to pension and other retirement benefit obligations (net of tax benefit of $— in all periods)

 
 
1

 

 
 
1

Total other comprehensive income

 
 
1

 

 
 
1

Comprehensive income (loss)
$
(26
)
 
 
$
(498
)
 
$
52

 
 
$
(841
)

See Notes to the Condensed Consolidated Financial Statements.

1



VISTRA ENERGY CORP.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited) (Millions of Dollars)
 
Successor
 
 
Predecessor
 
Six Months
Ended
June 30, 2017
 
 
Six Months
Ended
June 30, 2016
Cash flows — operating activities:
 
 
 
 
Net income (loss)
$
52

 
 
$
(842
)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
437

 
 
349

Deferred income tax expense, net
29

 
 

Contract claims adjustments of Predecessor (Note 2)

 
 
3

Unrealized net (gain) loss from mark-to-market valuations of derivatives
(48
)
 
 
253

Write-off of intangible and other assets (Note 16)

 
 
41

Impacts of Tax Receivable Agreement (Note 6)
42

 
 

Stock-based compensation
8

 
 

Other, net
22

 
 
32

Changes in operating assets and liabilities:
 
 
 
 
Margin deposits, net
147

 
 
(133
)
Accrued interest
(29
)
 
 
3

Accrued taxes
(73
)
 
 
(10
)
Accrued incentive plan
(60
)
 
 
(50
)
Other operating assets and liabilities, including liabilities subject to compromise
(194
)
 
 
(58
)
Cash provided by (used in) operating activities
333

 
 
(412
)
Cash flows — financing activities:
 
 
 
 
Borrowings under TCEH DIP Facility (Note 9)

 
 
1,115

Repayments/repurchases of debt (Note 9)
(24
)
 
 
(4
)
Other, net
(3
)
 
 

Cash (used in) provided by financing activities
(27
)
 
 
1,111

Cash flows — investing activities:
 
 
 
 
Capital expenditures
(63
)
 
 
(168
)
Nuclear fuel purchases
(35
)
 
 
(11
)
Solar development expenditures
(96
)
 
 

Lamar and Forney acquisition — net of cash acquired (Note 3)

 
 
(1,343
)
Changes in restricted cash
31

 
 
(9
)
Proceeds from sales of nuclear decommissioning trust fund securities (Note 16)
98

 
 
155

Investments in nuclear decommissioning trust fund securities (Note 16)
(107
)
 
 
(163
)
Other, net
9

 
 
5

Cash used in investing activities
(163
)
 
 
(1,534
)
 
 
 
 
 
Net change in cash and cash equivalents
143

 
 
(835
)
Cash and cash equivalents — beginning balance
843

 
 
1,400

Cash and cash equivalents — ending balance
$
986

 
 
$
565


See Notes to the Condensed Consolidated Financial Statements.

2



VISTRA ENERGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Millions of Dollars)
 
June 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
986

 
$
843

Restricted cash (Note 16)
64

 
95

Trade accounts receivable — net (Note 16)
651

 
612

Inventories (Note 16)
310

 
285

Commodity and other derivative contractual assets (Note 13)
207

 
350

Margin deposits related to commodity contracts
26

 
213

Prepaid expense and other current assets
153

 
75

Total current assets
2,397

 
2,473

Restricted cash (Note 16)
650

 
650

Investments (Note 16)
1,143

 
1,064

Property, plant and equipment — net (Note 16)
4,392

 
4,443

Goodwill (Note 4)
1,907

 
1,907

Identifiable intangible assets — net (Note 4)
2,936

 
3,205

Commodity and other derivative contractual assets (Note 13)
41

 
64

Accumulated deferred income taxes
1,093

 
1,122

Other noncurrent assets
225

 
239

Total assets
$
14,784

 
$
15,167

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Long-term debt due currently (Note 9)
$
44

 
$
46

Trade accounts payable
474

 
479

Commodity and other derivative contractual liabilities (Note 13)
118

 
359

Margin deposits related to commodity contracts
1

 
41

Accrued taxes
4

 
31

Accrued taxes other than income
79

 
128

Accrued interest
5

 
33

Other current liabilities
283

 
387

Total current liabilities
1,008

 
1,504

Long-term debt, less amounts due currently (Note 9)
4,531

 
4,577

Commodity and other derivative contractual liabilities (Note 13)
41

 
2

Tax Receivable Agreement obligation (Note 6)
622

 
596

Asset retirement obligations (Note 16)
1,689

 
1,671

Other noncurrent liabilities and deferred credits (Note 16)
235

 
220

Total liabilities
8,126

 
8,570


3



VISTRA ENERGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Millions of Dollars)
 
June 30,
2017
 
December 31,
2016
Commitments and Contingencies (Note 10)


 


Total equity (Note 11):
 
 
 
Common stock (par value — $0.01; number of shares authorized — 1,800,000,000)
(shares outstanding: June 30, 2017 — 427,587,401; December 31, 2016 —
427,580,232)
4

 
4

Additional paid-in-capital
7,750

 
7,742

Retained deficit
(1,102
)
 
(1,155
)
Accumulated other comprehensive income
6

 
6

Total equity
6,658

 
6,597

Total liabilities and equity
$
14,784

 
$
15,167


See Notes to the Condensed Consolidated Financial Statements.

4


VISTRA ENERGY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business

References in this report to "we," "our," "us" and "the Company" are to Vistra Energy and/or its subsidiaries in the Successor period, and to TCEH and/or its subsidiaries in the Predecessor periods, as apparent in the context. See Glossary for defined terms.

On April 29, 2014 (the Petition Date), EFH Corp. and the substantial majority of its direct and indirect subsidiaries, including EFIH, EFCH and TCEH but excluding the Oncor Ring-Fenced Entities (collectively, the Debtors), filed voluntary petitions for relief (the Bankruptcy Filing) under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court).

On October 3, 2016 (the Effective Date), subsidiaries of TCEH that were Debtors in the Chapter 11 Cases (the TCEH Debtors) and certain EFH Corp. subsidiaries (the Contributed EFH Debtors) completed their reorganization under the Bankruptcy Code and emerged from the Chapter 11 Cases (Emergence) as subsidiaries of a newly-formed company, Vistra Energy (our Successor). On the Effective Date, Vistra Energy was spun-off from EFH Corp. in a tax-free transaction to the former first lien creditors of TCEH (Spin-Off). As a result, as of the Effective Date, Vistra Energy is a holding company for subsidiaries principally engaged in competitive electricity market activities including power generation, wholesale energy sales and purchases, commodity risk management and retail sales of electricity to end users. TCEH is the Predecessor to Vistra Energy. See Note 2 for further discussion regarding the Chapter 11 Cases.

Vistra Energy is a holding company operating an integrated power business in Texas. Through our Luminant and TXU Energy subsidiaries, we are engaged in competitive electricity market activities including power generation, wholesale energy sales and purchases, commodity risk management and retail sales of electricity to end users. Prior to the Effective Date, TCEH was a holding company for subsidiaries principally engaged in the same activities as Vistra Energy.

Subsequent to the Effective Date, Vistra Energy has two reportable segments: our Wholesale Generation segment, consisting largely of Luminant, and our Retail Electricity segment, consisting largely of TXU Energy. Prior to the Effective Date, there were no reportable business segments for our Predecessor. See Note 15 for further information concerning reportable business segments.

Basis of Presentation

As of the Effective Date, Vistra Energy applied fresh start reporting under the applicable provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 852, Reorganizations (ASC 852). Fresh start reporting included (1) distinguishing the consolidated financial statements of the entity that was previously in restructuring (TCEH, or the Predecessor) from the financial statements of the entity that emerges from restructuring (Vistra Energy, or the Successor), (2) accounting for the effects of the Plan of Reorganization, (3) assigning the reorganization value of the Successor entity by measuring all assets and liabilities of the Successor entity at fair value, and (4) selecting accounting policies for the Successor entity. The financial statements of Vistra Energy for periods subsequent to the Effective Date are not comparable to the financial statements of TCEH for periods prior to the Effective Date, as those previous periods do not give effect to any adjustments to the carrying values of assets or amounts of liabilities that resulted from the Plan of Reorganization and the related application of fresh start reporting. The reorganization value of Vistra Energy was assigned to its assets and liabilities in conformity with the procedures specified by FASB ASC 805, Business Combinations, and the portion of the reorganization value that was not attributable to identifiable tangible or intangible assets was recognized as goodwill.

The condensed consolidated financial statements of the Predecessor reflect the application of ASC 852 as it applies to entities that have filed a petition for bankruptcy under Chapter 11 of the Bankruptcy Code. As a result, the condensed consolidated financial statements of the Predecessor have been prepared as if TCEH was a going concern and contemplated the realization of assets and liabilities in the normal course of business. During the Chapter 11 Cases, the Debtors operated their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. The guidance requires that transactions and events directly associated with the reorganization be distinguished from the ongoing operations of the business. In addition, the guidance provides for changes in the accounting and presentation of liabilities. Prior to the Effective Date, the Predecessor recorded the effects of the Plan of Reorganization in accordance with ASC 852. See Reorganization Items in Note 2 for further discussion of these accounting and reporting changes.


5


Adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations and financial position have been included therein. All intercompany items and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with US GAAP have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and footnotes required by US GAAP, they should be read in conjunction with the audited financial statements and related notes contained in our prospectus filed with the SEC pursuant to Rule 424(b) of the Securities Act in May 2017. The results of operations for an interim period may not give a true indication of results for a full year. All dollar amounts in the financial statements and tables in the notes are stated in millions of US dollars unless otherwise indicated.

Use of Estimates

Preparation of financial statements requires estimates and assumptions about future events that affect the reporting of assets and liabilities at the balance sheet dates and the reported amounts of revenue and expense, including fair value measurements, estimates of expected obligations, judgment related to the potential timing of events and other estimates. In the event estimates and/or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information.

Changes in Accounting Standards

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-02 (ASU 2016-02), Leases. The ASU amends previous GAAP to require the recognition of lease assets and liabilities for operating leases. The ASU will be effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Retrospective application to comparative periods presented will be required in the year of adoption. We are currently evaluating the impact of this ASU on our financial statements.

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which was further amended through several updates issued by the FASB in 2016 and 2017. The guidance under Topic 606 provides the core principle and key steps in determining the recognition of revenue and expands disclosure requirements related to revenue recognition. We intend to adopt the new standard on January 1, 2018 using the modified retrospective method and expect to elect the practical expedient available under Topic 606 for measuring progress toward complete satisfaction of a performance obligation and for disclosure requirements of remaining performance obligations. The practical expedient allows an entity to recognize revenue in the amount to which the entity has the right to invoice such that the entity has a right to the consideration in an amount that corresponds directly with the value to the customer for performance completed to date. In 2017, we continued to assess the new standard, including the expanded disclosure requirements. We do not anticipate that the adoption of the standard will have a material effect on our results of operations, cash flows or financial condition.

In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash. The ASU requires restricted cash to be included in the cash and cash equivalents and a reconciliation between the change in cash and cash equivalents and the amounts presented on the balance sheet. This ASU will be effective for fiscal years beginning after December 15, 2017. The ASU will modify the presentation of the statement of consolidated cash flows, but will not have a material impact on our statement of consolidated net income and consolidated balance sheet.

In January 2017, the FASB issued ASU 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU provides an updated model for determining if acquired assets and liabilities constitute a business. In a business combination, the acquired assets and liabilities are recognized at fair value and goodwill could be recognized. In an asset acquisition, the assets are allocated value based on relative fair value and no goodwill is recognized. The ASU narrows the definition of a business. We adopted this standard in the first quarter of 2017. ASU 2017-01 did not have a material impact on our financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). The ASU provides for the elimination of Step 2 from the goodwill impairment test. If impairment charges are recognized, the amount recorded will be the amount by which the carrying amount exceeds the reporting unit's fair value with certain limitations. We adopted this standard in the first quarter of 2017. ASU 2017-04 did not have a material impact on our financial statements.



6


2.    EMERGENCE FROM CHAPTER 11 CASES

On the Petition Date, EFH Corp. and the substantial majority of its direct and indirect subsidiaries, including EFIH, EFCH and TCEH, but excluding the Oncor Ring-Fenced Entities, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. On the Effective Date, the TCEH Debtors and the Contributed EFH Debtors completed their reorganization under the Bankruptcy Code and emerged from the Chapter 11 Cases as subsidiaries of Vistra Energy.

Separation of Vistra Energy from EFH Corp. and its Subsidiaries

Upon the Effective Date, Vistra Energy separated from EFH Corp. pursuant to a tax-free spin-off transaction that was part of a series of transactions that included a taxable component. The taxable portion of the transaction generated a taxable gain that resulted in no regular tax liability due to available net operating loss carryforwards of EFH Corp. The transaction did result in an alternative minimum tax liability of approximately $14 million payable by EFH Corp. to the IRS. Pursuant to the Tax Matters Agreement, Vistra Energy had an obligation to reimburse EFH Corp. 50% of such alternative minimum tax, and approximately $7 million was reimbursed during the three months ended June 30, 2017. The spin-off transaction resulted in Vistra Energy, including the TCEH Debtors and the Contributed EFH Debtors, no longer being an affiliate of EFH Corp. and its subsidiaries. In addition to the Plan of Reorganization, the separation was effectuated, in part, pursuant to the terms of a separation agreement, a transition services agreement and a tax matters agreement.

Separation Agreement

On the Effective Date, EFH Corp., Vistra Energy and a subsidiary of Vistra Energy entered into a separation agreement that provided for, among other things, the transfer of certain assets and liabilities by EFH Corp., EFCH and TCEH to Vistra Energy. Among other things, EFH Corp., EFCH and/or TCEH, as applicable, (a) transferred the TCEH Debtors and certain contracts and assets (and related liabilities) primarily related to the business of the TCEH Debtors to Vistra Energy, (b) transferred sponsorship of certain employee benefit plans (including related assets), programs and policies to a subsidiary of Vistra Energy and (c) assigned certain employment agreements from EFH Corp. and certain of the Contributed EFH Debtors to a subsidiary of Vistra Energy.

Tax Matters Agreement

On the Effective Date, Vistra Energy and EFH Corp. entered into a tax matters agreement (the Tax Matters Agreement), which provides for the allocation of certain taxes among the parties and for certain rights and obligations related to, among other things, the filing of tax returns, resolutions of tax audits and preserving the tax-free nature of the spin-off.

Pre-Petition Claims

On the Effective Date, the TCEH Debtors (together with the Contributed EFH Debtors) emerged from the Chapter 11 Cases and discharged approximately $33.8 billion in liabilities subject to compromise (LSTC). Initial distributions related to the allowed claims asserted against the TCEH Debtors and the Contributed EFH Debtors commenced subsequent to the Effective Date. As of June 30, 2017, the TCEH Debtors have approximately $54 million in escrow to (1) distribute to holders of currently contingent and/or disputed unsecured claims that become allowed and/or (2) make further distributions to holders of previously allowed unsecured claims, if applicable. The remaining contingent and/or disputed claims against the TCEH Debtors consist primarily of unsecured legal claims, including asbestos claims. These remaining claims and the related escrow balance for the claims are recorded in Vistra Energy's condensed consolidated balance sheet as other current liabilities and current restricted cash, respectively. A small number of other disputed, de minimis claims that are asserted as being entitled to priority and/or against the Contributed EFH Debtors, if allowed, will be paid by Vistra Energy, but all non-priority unsecured claims, including asbestos claims arising before the Petition Date, will be satisfied from the approximately $54 million in escrow.


7


Predecessor Reorganization Items

Expenses and income directly associated with the Chapter 11 Cases are reported separately in the condensed statements of consolidated income (loss) as reorganization items as required by ASC 852, Reorganizations. Reorganization items also included adjustments to reflect the carrying value of LSTC at their estimated allowed claim amounts, as such adjustments were determined. The following table presents reorganization items incurred in the three and six months ended June 30, 2016 as reported in the condensed statements of consolidated income (loss):
 
Predecessor
 
Three Months
Ended
June 30, 2016
 
Six Months
Ended
June 30, 2016
Expenses related to legal advisory and representation services
$
14

 
$
27

Expenses related to other professional consulting and advisory services
13

 
20

Contract claims adjustments
2

 
3

Other
1

 
2

Total reorganization items
$
30

 
$
52



8



3.
LAMAR AND FORNEY ACQUISITION — PREDECESSOR

In April 2016, Luminant purchased all of the membership interests in La Frontera Holdings, LLC (La Frontera), the indirect owner of two combined-cycle gas turbine (CCGT) natural gas fueled generation facilities representing nearly 3,000 MW of capacity located in ERCOT, from a subsidiary of NextEra Energy, Inc. (the Lamar and Forney Acquisition). The aggregate purchase price was approximately $1.313 billion, which included the repayment of approximately $950 million of existing project financing indebtedness of La Frontera at closing, plus approximately $236 million for cash and net working capital.

Purchase Accounting

The Lamar and Forney Acquisition was accounted for in accordance with ASC 805, Business Combinations (ASC 805), with identifiable assets acquired and liabilities assumed recorded at their estimated fair values on the acquisition date.

To fair value the acquired property, plant and equipment, a discounted cash flow analysis was used, classified as Level 3 within the fair value hierarchy levels (see Note 12). This discounted cash flow model was created for each generation facility based on its remaining useful life. The discounted cash flow model included gross margin forecasts for each power generation facility determined using forward commodity market prices obtained from long-term forecasts. Our Predecessor also used management's forecasts of generation output, operations and maintenance expense, SG&A and capital expenditures. The resulting cash flows, estimated based upon the age of the assets, efficiency, location and useful life, were then discounted using plant specific discount rates of approximately 9%.

See Note 6 to the audited financial statements contained in our prospectus filed with the SEC pursuant to Rule 424(b) of the Securities Act in May 2017 for a summary of the consideration paid and the allocation of the purchase price to the fair value amounts recognized for the assets acquired and liabilities assumed related to the Lamar and Forney Acquisition as of the acquisition date. During the three months ended September 30, 2016, the working capital adjustment included in the purchase price was finalized between the parties, and the purchase price allocation was completed. The Lamar and Forney Acquisition did not result in the recording of goodwill since the purchase price did not exceed the fair value of the net assets acquired.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information for the six months ended June 30, 2016 assumes that the Lamar and Forney Acquisition occurred on January 1, 2016. The unaudited pro forma financial information is provided for information purposes only and is not necessarily indicative of the results of operations that would have occurred had the Lamar and Forney Acquisition been completed on January 1, 2016, nor is the unaudited pro forma financial information indicative of future results of operations.
 
Predecessor
 
Six Months
Ended
June 30, 2016
Revenues
$
2,425

Net loss
$
(858
)

The unaudited pro forma financial information includes adjustments for incremental depreciation as a result of the fair value determination of the net assets acquired and interest expense on borrowings under our Predecessor's DIP Roll Facilities in lieu of interest expense incurred prior to the acquisition.


9



4.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

Goodwill

The carrying value of goodwill totaled $1.907 billion at both June 30, 2017 and December 31, 2016. The goodwill arose in connection with our application of fresh start reporting at Emergence and was allocated entirely to the Retail Electricity segment (see Note 2). Of the goodwill recorded at Emergence, $1.686 billion is considered purchased goodwill and is deductible for tax purposes over 15 years on a straight-line basis.

Identifiable Intangible Assets

Identifiable intangible assets, including the impact of fresh start reporting (see Note 2), are comprised of the following:
 
 
June 30, 2017
 
December 31, 2016
Identifiable Intangible Asset
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Retail customer relationship
 
$
1,648

 
$
362

 
$
1,286

 
$
1,648

 
$
152

 
$
1,496

Software and other technology-related assets
 
162

 
26

 
136

 
147

 
9

 
138

Electricity supply contract
 
190

 
6

 
184

 
190

 
2

 
188

Retail and wholesale contracts
 
164

 
89

 
75

 
164

 
38

 
126

Other identifiable intangible assets (a)
 
32

 
6

 
26

 
30

 
2

 
28

Total identifiable intangible assets subject to amortization
 
$
2,196

 
$
489

 
1,707

 
$
2,179

 
$
203

 
1,976

Retail trade names (not subject to amortization)
 
 
 
 
 
1,225

 
 
 
 
 
1,225

Mineral interests (not currently subject to amortization)
 
 
 
 
 
4

 
 
 
 
 
4

Total identifiable intangible assets
 
 
 
 
 
$
2,936

 
 
 
 
 
$
3,205

____________
(a)
Includes environmental allowances and credits and mining development costs.

Amortization expense related to finite-lived identifiable intangible assets (including the classification in the condensed statements of consolidated income (loss)) consisted of:
 
 
 
 
Successor
 
 
Predecessor
 
Successor
 
 
Predecessor
Identifiable Intangible Asset
 
Condensed Statements of Consolidated Income (Loss) Line
 
Three Months
Ended
June 30, 2017
 
 
Three Months
Ended
June 30, 2016
 
Six Months
Ended
June 30, 2017
 
 
Six Months
Ended
June 30, 2016
Retail customer relationship
 
Depreciation and amortization
 
$
105

 
 
$
3

 
$
210

 
 
$
6

Software and other technology-related assets
 
Depreciation and amortization
 
9

 
 
14

 
17

 
 
29

Electricity supply contract
 
Operating revenues
 
2

 
 

 
4

 
 

Retail and wholesale contracts
 
Operating revenues/fuel, purchased power costs and delivery fees
 
23

 
 

 
51

 
 

Other identifiable intangible assets
 
Operating revenues/fuel, purchased power costs and delivery fees/depreciation and amortization
 
2

 
 

 
4

 
 
3

Total amortization expense (a)
 
$
141

 
 
$
17

 
$
286

 
 
$
38

____________
(a)
Amounts recorded in depreciation and amortization totaled $116 million and $18 million for the three months ended June 30, 2017 and 2016, respectively, and $231 million and $38 million for the six months ended June 30, 2017 and 2016, respectively.


10


Estimated Amortization of Identifiable Intangible Assets

As of June 30, 2017, the estimated aggregate amortization expense of identifiable intangible assets for each of the next five fiscal years is as shown below.
Year
 
Estimated Amortization Expense
2017
 
$
546

2018
 
$
370

2019
 
$
266

2020
 
$
196

2021
 
$
135



5.
INCOME TAXES

Subsequent to the Effective Date, the TCEH Debtors and the Contributed EFH Debtors are no longer included in the consolidated federal income tax return of EFH Corp. and will be included in Vistra Energy's consolidated federal income tax return.

Prior to the Effective Date, EFH Corp. was the corporate parent of the EFH Corp. consolidated group, while each of EFIH, Oncor Holdings, EFCH and TCEH was classified as a disregarded entity for US federal income tax purposes. For the 2016 tax year (through the period until the Effective Date) EFH Corp. will file a US federal income tax return that will include the results of EFCH, EFIH, Oncor Holdings and TCEH. Pursuant to applicable US Treasury regulations and published guidance of the IRS, corporations that are members of a consolidated group have joint and several liability for the taxes of such group.

Prior to the Effective Date, EFH Corp. and certain of its subsidiaries (including EFCH, EFIH, and TCEH, but not including Oncor Holdings and Oncor) were parties to a Federal and State Income Tax Allocation Agreement, which provided, among other things, that any corporate member or disregarded entity in the EFH Corp. group is required to make payments to EFH Corp. in an amount calculated to approximate the amount of tax liability such entity would have owed if it filed a separate corporate tax return. Pursuant to the Plan of Reorganization, the TCEH Debtors and the Contributed EFH Debtors rejected this agreement on the Effective Date. See Note 2 for a discussion of the Tax Matters Agreement that was entered into on the Effective Date between EFH Corp. and Vistra Energy. Additionally, since the date of the Settlement Agreement, no further cash payments among the Debtors were made in respect of federal income taxes. The Settlement Agreement did not alter the allocation and payment for state income taxes, which continued to be settled prior to the Effective Date.

The calculation of our effective tax rate is as follows:
 
Successor
 
 
Predecessor
 
Successor
 
 
Predecessor
 
Three Months
Ended
June 30, 2017
 
 
Three Months
Ended
June 30, 2016
 
Six Months
Ended
June 30, 2017
 
 
Six Months
Ended
June 30, 2016
Income (loss) before income taxes
$
(34
)
 
 
$
(500
)
 
$
85

 
 
$
(836
)
Income tax (expense) benefit
$
8

 
 
$
1

 
$
(33
)
 
 
$
(6
)
Effective tax rate
23.5
%
 
 
0.2
%
 
38.8
%
 
 
(0.7
)%

Successor For the three months ended June 30, 2017, the effective tax rate of 23.5% related to our income tax benefit was lower than the US Federal statutory rate of 35% due primarily to the difference in the forecasted effective tax rate and the statutory tax rate applied to mark-to-market unrealized losses, offset by nondeductible TRA accretion and the Texas margin tax, net of federal benefit. For the six months ended June 30, 2017, the effective tax rate of 38.8% related to our income tax expense was higher than the US Federal statutory rate of 35% due primarily to nondeductible TRA accretion and the Texas margin tax, net of federal benefit, offset by the difference in the forecasted effective tax rate and the statutory tax rate applied to mark-to-market unrealized gains.


11


Predecessor For the three months ended June 30, 2016, the effective tax rate of 0.2% related to our income tax benefit was lower than the US Federal statutory rate of 35% due primarily to a valuation allowance recorded against deferred tax assets in 2016. For the six months ended June 30, 2016, the effective tax rate of (0.7)% related to our income tax benefit was lower than the US Federal statutory rate of 35% due primarily to a valuation allowance recorded against deferred tax assets and Texas margin tax expense on pretax losses in 2016.

Liability for Uncertain Tax Positions

Successor Vistra Energy has limited operational history and has yet to file a federal tax return. We currently have no liabilities for uncertain tax positions.


6.
TAX RECEIVABLE AGREEMENT OBLIGATION

On the Effective Date, Vistra Energy entered into a tax receivable agreement (the TRA) with a transfer agent on behalf of certain former first lien creditors of TCEH. The TRA generally provides for the payment by us to holders of TRA Rights of 85% of the amount of cash savings, if any, in US federal and state income tax that we realize in periods after Emergence as a result of (a) certain transactions consummated pursuant to the Plan of Reorganization (including the step-up in tax basis in our assets resulting from the PrefCo Preferred Stock Sale), (b) the tax basis of all assets acquired in connection with the Lamar and Forney Acquisition in April 2016 (see Note 3) and (c) tax benefits related to imputed interest deemed to be paid by us as a result of payments under the TRA, plus interest accruing from the due date of the applicable tax return.

Pursuant to the TRA, we issued the TRA Rights for the benefit of the first lien secured creditors of our Predecessor entitled to receive such TRA Rights under the Plan. Such TRA Rights are subject to various transfer restrictions described in the TRA and are entitled to certain registration rights more fully described in the Registration Rights Agreement (see Note 14).

The fair value of the obligation at the Emergence Date is being accreted to the amount of the gross expected obligation using the effective interest method. Changes in the amount of this obligation resulting from changes to either the timing or amount of cash flows are recognized in the period of change and measured using the discount rate inherent in the initial fair value of the obligation. During the three and six months ended June 30, 2017, the Impacts of Tax Receivable Agreement on the condensed statement of consolidated income (loss) totaled $22 million and $42 million, respectively, which represents accretion expense for the period. The balance at June 30, 2017 and December 31, 2016 totaled $638 million and $596 million, respectively. The balance at June 30, 2017 included $16 million recorded to other current liabilities in the condensed consolidated balance sheet.


7.
INTEREST EXPENSE AND RELATED CHARGES

 
Successor
 
 
Predecessor
 
Successor
 
 
Predecessor
 
Three Months
Ended
June 30, 2017
 
 
Three Months
Ended
June 30, 2016
 
Six Months
Ended
June 30, 2017
 
 
Six Months
Ended
June 30, 2016
Interest paid/accrued post-Emergence
$
52

 
 
$

 
$
105


 
$

Interest paid/accrued on debtor-in-possession financing

 
 
22

 

 
 
38

Adequate protection amounts paid/accrued

 
 
324

 

 
 
646

Unrealized mark-to-market net losses on interest rate swaps
15

 
 

 
6

 
 

Debt extinguishment gain

 
 

 
(21
)
 
 

Capitalized interest
(1
)
 
 
(3
)
 
(4
)
 
 
(6
)
Other
3

 
 

 
7

 
 
1

Total interest expense and related charges
$
69

 
 
$
343

 
$
93

 
 
$
679



12


Successor

In February 2017, certain pricing terms for the Vistra Operations Credit Facility were amended (see Note 9) which resulted in the recognition of a debt extinguishment gain. For accounting purposes, this amendment was treated as an extinguishment of the prior debt outstanding and the issuance of new debt. For the six months ended June 30, 2017, we recorded an extinguishment gain of approximately $21 million in interest expense in our condensed statement of consolidated of net income.

Predecessor

Interest expense for the three and six months ended June 30, 2016 reflects interest paid and accrued on debtor-in-possession financing (see Note 9) and adequate protection amounts paid and accrued, as approved by the Bankruptcy Court in June 2014 for the benefit of secured creditors in exchange for their consent to the senior secured, super-priority liens contained in the DIP Facility. The interest rate applicable to the adequate protection amounts paid/accrued for the six months ended June 30, 2016 was 4.93%.

The Bankruptcy Code generally restricts payment of interest on pre-petition debt, subject to certain exceptions. Other than amounts ordered or approved by the Bankruptcy Court, effective on the Petition Date, our Predecessor discontinued recording interest expense on outstanding pre-petition debt classified as LSTC. The table below shows contractual interest amounts, which are amounts due under the contractual terms of the outstanding debt, including debt subject to compromise during the Chapter 11 Cases. Interest expense reported in our condensed statements of consolidated income (loss) does not include contractual interest on pre-petition debt classified as LSTC totaling $205 million and $428 million for the three and six months ended June 30, 2016, respectively, which had been stayed by the Bankruptcy Court effective on the Petition Date. Adequate protection paid/accrued presented below excludes interest paid/accrued on TCEH first-lien interest rate and commodity hedge claims totaling $16 million and $31 million for the three and six months ended June 30, 2016, respectively, as such amounts are not included in contractual interest amounts below.
 
Predecessor
 
Three Months
Ended
June 30, 2016
 
Six Months
Ended
June 30, 2016
Contractual interest on debt classified as LSTC
$
513

 
$
1,043

Adequate protection amounts paid/accrued
308

 
615

Contractual interest on debt classified as LSTC not paid/accrued
$
205

 
$
428



8.
EARNINGS PER SHARE

Basic earnings per share available to common shareholders are based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using the treasury stock method and includes the effect of all potential issuances of common shares under stock-based incentive compensation arrangements.
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
 
Net Loss
 
Shares
 
Per Share Amount
 
Net Income
 
Shares
 
Per Share Amount
Net income (loss) available for common stock — basic
$
(26
)
 
427,587,401

 
$
(0.06
)
 
$
52

 
427,585,381

 
$
0.12

Dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock-based incentive compensation plan

 

 

 

 
261,182

 

Net income (loss) available for common stock — diluted
$
(26
)
 
427,587,401

 
$
(0.06
)
 
$
52

 
427,846,563

 
$
0.12


For the three and six months ended June 30, 2017, stock-based incentive compensation plan awards totaling 1,088,670 and 692,860 shares, respectively, were excluded from the calculation of diluted earnings per share because the effect would have been antidilutive.


13


9.
LONG-TERM DEBT

Successor

Amounts in the table below represent the categories of long-term debt obligations incurred by the Successor.
 
June 30,
2017
 
December 31,
2016
Vistra Operations Credit Facilities (a)
$
4,473

 
$
4,515

Mandatorily redeemable subsidiary preferred stock (b)
70

 
70

8.82% Building Financing due semiannually through February 11, 2022 (c)
32

 
36

Capital lease obligations

 
2

Total long-term debt including amounts due currently
4,575

 
4,623

Less amounts due currently
(44
)
 
(46
)
Total long-term debt less amounts due currently
$
4,531

 
$
4,577

____________
(a)
At June 30, 2017, borrowings under the Vistra Operations Credit Facilities in our condensed consolidated balance sheet include debt premiums of $4 million, debt discounts of $2 million and debt issuance costs of $10 million. At December 31, 2016, borrowings under the Vistra Operations Credit Facilities in our condensed consolidated balance sheet include debt premiums of $25 million, debt discounts of $2 million and debt issuance costs of $8 million. As discussed below, in February 2017 certain pricing terms for the Vistra Operations Credit Facilities were amended, resulting in the recognition of a debt extinguishment gain totaling $21 million.
(b)
Shares of mandatorily redeemable preferred stock in PrefCo issued as part of the spin-off of Vistra Energy from EFH Corp. (see Note 2). This subsidiary preferred stock is accounted for as a debt instrument under relevant accounting guidance.
(c)
Obligation related to a corporate office space capital lease contributed to Vistra Energy pursuant to the Plan of Reorganization. This obligation will be funded by amounts held in an escrow account and reflected in other noncurrent assets in our condensed consolidated balance sheets.

Vistra Operations Credit Facilities — The Vistra Operations Credit Facilities consist of up to $5.360 billion in senior secured, first lien financing consisting of a revolving credit facility of up to $860 million, including a $600 million letter of credit sub-facility (Revolving Credit Facility), an initial term loan facility of up to $2.850 billion (Initial Term Loan B Facility), an incremental term loan facility of up to $1.0 billion (Incremental Term Loan B Facility, and together with the Initial Term Loan B Facility, the Term Loan B Facility) and a term loan letter of credit facility of up to $650 million (Term Loan C Facility).

The Vistra Operations Credit Facilities and related available capacity at June 30, 2017 are presented below.
 
 
 
 
June 30, 2017
Vistra Operations Credit Facilities
 
Maturity Date
 
Facility
Limit
 
Cash
Borrowings
 
Available
Capacity
Revolving Credit Facility (a)
 
August 4, 2021
 
$
860

 
$

 
$
860

Initial Term Loan B Facility (b)(c)
 
August 4, 2023
 
2,850

 
2,836

 

Incremental Term Loan B Facility (c)
 
December 14, 2023
 
1,000

 
995

 

Term Loan C Facility (d)
 
August 4, 2023
 
650

 
650

 
175

Total Vistra Operations Credit Facilities
 
 
 
$
5,360

 
$
4,481

 
$
1,035

___________
(a)
Facility to be used for general corporate purposes.
(b)
Facility used to repay all amounts outstanding under our Predecessor's DIP Facility and issuance costs for the DIP Roll Facilities, with the remaining balance used for general corporate purposes.
(c)
Cash borrowings under the Term Loan B Facility reflect required scheduled quarterly payment in annual amount equal to 1% of the original principal amount with the balance paid at maturity. Amounts paid cannot be reborrowed.
(d)
Facility used for issuing letters of credit for general corporate purposes. Borrowings under this facility were funded to collateral accounts that are reported as restricted cash in our condensed consolidated balance sheets. At June 30, 2017, the restricted cash supported $475 million in letters of credit outstanding (see Note 16), leaving $175 million in available letter of credit capacity.


14


In February 2017, certain pricing terms for the Vistra Operations Credit Facility were amended. Amounts borrowed under the Revolving Credit Facility would bear interest based on applicable LIBOR rates, plus 2.75%, and there were no outstanding borrowings at June 30, 2017. Amounts borrowed under the Initial Term Loan B Facility and the Term Loan C Facility bear interest based on applicable LIBOR rates, subject to a 0.75% floor, plus 2.75%. At June 30, 2017, the interest rates before taking into consideration interest rate swaps on outstanding borrowings under the Initial Term Loan B Facility and the Term Loan C Facility were 3.98% and 3.79%, respectively. Amounts borrowed under the Incremental Term Loan B Facility bear interest based on applicable LIBOR rates, subject to a 0.75% floor, plus 3.25%, and the weighted average interest rate before taking into consideration interest rate swaps on outstanding borrowings was 4.47% at June 30, 2017. The Vistra Operations Credit Facilities also provide for certain additional fees payable to the agents and lenders, as well as availability fees payable with respect to any unused portions of the available Vistra Operations Credit Facilities.

Obligations under the Vistra Operations Credit Facilities are secured by a lien covering substantially all of Vistra Operations' (and its subsidiaries') consolidated assets, rights and properties, subject to certain exceptions set forth in the Vistra Operations Credit Facilities.

The Vistra Operations Credit Facilities also permit certain hedging agreements to be secured on a pari-passu basis with the Vistra Operations Credit Facilities in the event those hedging agreements met certain criteria set forth in the Vistra Operations Credit Facilities.

The Vistra Operations Credit Facilities provide for affirmative and negative covenants applicable to Vistra Operations (and its restricted subsidiaries), including affirmative covenants requiring it to provide financial and other information to the agents under the Vistra Operations Credit Facilities and to not change its lines of business, and negative covenants restricting Vistra Operations' (and its restricted subsidiaries') ability to incur additional indebtedness, make investments, dispose of assets, pay dividends, grant liens or take certain other actions, in each case except as permitted in the Vistra Operations Credit Facilities. Vistra Operations' ability to borrow under the Vistra Operations Credit Facilities is subject to the satisfaction of certain customary conditions precedent set forth therein.

The Vistra Operations Credit Facilities provide for certain customary events of default, including events of default resulting from non-payment of principal, interest or fees when due, material breaches of representations and warranties, material breaches of covenants in the Vistra Operations Credit Facilities or ancillary loan documents, cross-defaults under other agreements or instruments and the entry of material judgments against Vistra Operations. Solely with respect to the Revolving Credit Facility, and solely during a compliance period (which, in general, is applicable when the aggregate revolving borrowings and issued revolving letters of credit (in excess of $100 million) exceed 30% of the revolving commitments), the agreement includes a covenant that requires the consolidated first lien net leverage ratio, which is based on the ratio of net first lien debt compared to an EBITDA calculation defined under the terms of the facilities, not to exceed 4.25 to 1.00. Although we had no borrowings under the Revolving Credit Facility as of June 30, 2017, we would have been in compliance with this financial covenant if it was required to be tested at such date. Upon the existence of an event of default, the Vistra Operations Credit Facilities provide that all principal, interest and other amounts due thereunder will become immediately due and payable, either automatically or at the election of specified lenders.

Interest Rate Swaps — In the Successor period from October 3, 2016 through December 31, 2016, we entered into $3.0 billion notional amount of interest rate swaps to hedge a portion of our exposure to our variable rate debt. The interest rate swaps, which became effective in January 2017, expire in July 2023 and effectively fix the interest rates between 4.75% and 5.38% on $3.0 billion of our variable rate debt. The interest rate swaps are secured by a first lien secured interest on a pari-passu basis with the Vistra Operations Credit Facilities.

Predecessor

DIP Roll Facilities — In August 2016, the Predecessor entered into the DIP Roll Facilities. The facilities provided for up to $4.250 billion in senior secured, super-priority financing. The DIP Roll Facilities were senior, secured, super-priority debtor-in-possession credit agreements by and among the TCEH Debtors, the lenders that were party thereto from time to time and an administrative and collateral agent. On the Effective Date, the DIP Roll Facilities converted to the Vistra Operations Credit Facilities discussed above. Net proceeds from the DIP Roll Facilities were used to repay outstanding borrowings under the former DIP Facility, fund a collateral account used to backstop issuances of letters of credit and pay issuance costs. The remaining balance was used for general corporate purposes.


15


DIP Facility — The DIP Facility provided for up to $3.375 billion in senior secured, super-priority financing. The DIP Facility was a senior, secured, super-priority credit agreement by and among the TCEH Debtors, the lenders that were party thereto from time to time and an administrative and collateral agent. As discussed above, in August 2016, all outstanding amounts under the DIP Facility were repaid using proceeds from the DIP Roll Facilities.


10.
COMMITMENTS AND CONTINGENCIES

Guarantees

We have entered into contracts that contain guarantees to unaffiliated parties that could require performance or payment under certain conditions. As of June 30, 2017, there are no material outstanding claims related to our guarantee obligations, and we do not anticipate we will be required to make any material payments under these guarantees.

Letters of Credit

At June 30, 2017, we had outstanding letters of credit under the Vistra Operations Credit Facilities totaling $475 million as follows:

$346 million to support commodity risk management collateral requirements in the normal course of business, including over-the-counter and exchange-traded transactions and collateral postings with ERCOT;
$46 million to support executory contracts and insurance agreements;
$55 million to support our REP financial requirements with the PUCT, and
$28 million for other credit support requirements.

Litigation

Litigation Related to EPA Reviews In June 2008, the EPA issued an initial request for information to Luminant under the EPA's authority under Section 114 of the Clean Air Act (CAA). The stated purpose of the request is to obtain information necessary to determine compliance with the CAA, including New Source Review standards and air permits issued by the TCEQ for the Big Brown, Monticello and Martin Lake generation facilities. In April 2013, Luminant received an additional information request from the EPA under Section 114 related to our Big Brown, Martin Lake and Monticello facilities as well as an initial information request related to our Sandow 4 generation facility.

In July 2012, the EPA sent Luminant a notice of violation alleging noncompliance with the CAA's New Source Review standards and the air permits at our Martin Lake and Big Brown generation facilities. In August 2013, the US Department of Justice, acting as the attorneys for the EPA, filed a civil enforcement lawsuit against Luminant in federal district court in Dallas, alleging violations of the CAA, including its New Source Review standards, at our Big Brown and Martin Lake generation facilities. In August 2015, the district court granted Luminant's motion to dismiss seven of the nine claims asserted by the EPA in the lawsuit. In August 2016, the EPA filed an amended complaint, eliminating one of the two remaining claims and withdrawing with prejudice a request for civil penalties in the other remaining claim. The EPA also filed a motion for entry of final judgment so that it could seek to appeal the district court's dismissal decision. In September 2016, Luminant filed a response opposing the EPA's motion for entry of final judgment. In October 2016, the district court denied the EPA's motion for entry of final judgment and agreed that the remaining claim must be fully adjudicated at the district court or withdrawn with prejudice before the EPA may appeal the dismissal decision.

In January 2017, the EPA dismissed its two remaining claims with prejudice and the district court entered final judgment in our favor. In March 2017, the EPA and the Sierra Club appealed the final judgment to the US Court of Appeals for the Fifth Circuit (Fifth Circuit Court) and Luminant filed a motion in the district court to recover its attorney fees and costs. In April 2017, the district court stayed its consideration of Luminant's motion for attorney fees. In June 2017, the EPA and the Sierra Club filed their opening briefs in the Fifth Circuit Court. Luminant's response brief is due in August 2017. We believe that we have complied with all requirements of the CAA and intend to vigorously defend against the remaining allegations. The lawsuit requests the maximum civil penalties available under the CAA to the government of up to $32,500 to $37,500 per day for each alleged violation, depending on the date of the alleged violation, and injunctive relief, including an order requiring the installation of best available control technology at the affected units. An adverse outcome could require substantial capital expenditures that cannot be determined at this time or retirement of the plants at issue and could possibly require the payment of substantial penalties. We cannot predict the outcome of these proceedings, including the financial effects, if any.


16


Greenhouse Gas Emissions

In August 2015, the EPA finalized rules to address greenhouse gas (GHG) emissions from new, modified and reconstructed and existing electricity generation units, referred to as the Clean Power Plan. The rule for existing facilities would establish state-specific emissions rate goals to reduce nationwide CO2 emissions related to affected units by over 30% from 2012 emission levels by 2030. A number of parties, including Luminant, filed petitions for review in the US Court of Appeals for the District of Columbia Circuit (D.C. Circuit Court) for the rule for new, modified and reconstructed plants. In addition, a number of petitions for review of the rule for existing plants were filed in the D.C. Circuit Court by various parties and groups, including challenges from twenty-seven different states opposed to the rule as well as those from, among others, certain power generating companies, various business groups and some labor unions. Luminant also filed its own petition for review. In January 2016, a coalition of states, industry (including Luminant) and other parties filed applications with the US Supreme Court (Supreme Court) asking that the Supreme Court stay the rule while the D.C. Circuit Court reviews the legality of the rule for existing plants. In February 2016, the Supreme Court stayed the rule pending the conclusion of legal challenges on the rule before the D.C. Circuit Court and until the Supreme Court disposes of any subsequent petition for review. Oral argument on the merits of the legal challenges to the rule were heard in September 2016 before the entire D.C. Circuit Court.

In March 2017, President Trump issued an Executive Order entitled Promoting Energy Independence and Economic Growth (Order). The Order covers a number of matters, including the Clean Power Plan. Among other provisions, the Order directs the EPA to review the Clean Power Plan and, if appropriate, suspend, revise or rescind the rules on existing and new, modified and reconstructed generating units. In April 2017, in accordance with the Order, the EPA published its intent to review the Clean Power Plan. In addition, the Department of Justice has filed motions seeking to abate those cases until the EPA concludes its review of the rules, including any new rulemaking that results from that review. In April 2017, the D.C. Circuit Court issued orders holding the cases in abeyance for 60 days and directing the EPA to provide status reports at 30 day intervals. The D.C. Circuit Court further ordered that all parties file supplemental briefs in May 2017 on whether the cases should be remanded to the EPA rather than held in abeyance. The 60-day abeyance expired in June 2017, and the D.C. Circuit Court has yet to take further action. While we cannot predict the outcome of these rulemakings and related legal proceedings, or estimate a range of reasonably probable costs, if the rules are ultimately implemented or upheld as they were issued, they could have a material impact on our results of operations, liquidity or financial condition.


17


Cross-State Air Pollution Rule (CSAPR)

In July 2011, the EPA issued the CSAPR, compliance with which would have required significant additional reductions of sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions from our fossil fueled generation units. In February 2012, the EPA released a final rule (Final Revisions) and a proposed rule revising certain aspects of the CSAPR, including increases in the emissions budgets for Texas and our generation assets as compared to the July 2011 version of the rule. In June 2012, the EPA finalized the proposed rule (Second Revised Rule).

The CSAPR became effective January 1, 2015. In July 2015, following a remand of the case from the Supreme Court to consider further legal challenges, the D.C. Circuit Court unanimously ruled in favor of Luminant and other petitioners, holding that the CSAPR emissions budgets over-controlled Texas and other states. The D.C. Circuit Court remanded those states' budgets to the EPA for prompt reconsideration. While Luminant planned to participate in the EPA's reconsideration process to develop increased budgets for the 1997 ozone standard that do not over-control Texas, the EPA instead responded to the remand by proposing a new rulemaking that created new NOX ozone season budgets for the 2008 ozone standard without addressing the over-controlling budgets for the 1997 standard. Comments on the EPA's proposal were submitted by Luminant in February 2016. In August 2016, the EPA disapproved Texas's 2008 ozone SIP submittal and imposed a FIP in its place in October 2016. Texas filed a petition in the Fifth Circuit Court challenging the SIP disapproval and Luminant has intervened in support of Texas's challenge. The State of Texas and Luminant have also both filed challenges in the D.C. Circuit Court challenging the EPA's FIP and those cases are currently pending before that court. With respect to Texas's SO2 emission budgets, in June 2016, the EPA issued a memorandum describing the EPA's proposed approach for responding to the D.C. Circuit Court's remand for reconsideration of the CSAPR SO2 emission budgets for Texas and three other states that had been remanded to the EPA by the D.C. Circuit Court. In the memorandum, the EPA stated that those four states could either voluntarily participate in the CSAPR by submitting a State Implementation Plan (SIP) revision adopting the SO2 budgets that had been previously held invalid by the D.C. Circuit Court and the current annual NOx budgets or, if the state chooses not to participate in the CSAPR, the EPA could withdraw the CSAPR Federal Implementation Plan (FIP) by the fall of 2016 for those states and address any interstate transport and regional haze obligations on a state-by-state basis. Texas has not indicated that it intends to adopt the over-controlling budgets and, in November 2016, the EPA proposed to withdraw the CSAPR FIP for Texas. Because the EPA has not finalized its proposal to remove Texas from the annual CSAPR programs, these programs will continue to apply to Texas and Texas sources. At this time, the EPA has not populated the allowance accounts for Texas sources with 2017 annual CSAPR program allowances. While we cannot predict the outcome of future proceedings related to the CSAPR, including the EPA's recent actions concerning the CSAPR annual emissions budgets for affected states and participating in the CSAPR program, based upon our current operating plans we do not believe that the CSAPR itself will cause any material operational, financial or compliance issues to our business or require us to incur any material compliance costs.


18


Regional Haze — Reasonable Progress and Long-Term Strategies

The Regional Haze Program of the CAA establishes "as a national goal the prevention of any future, and the remedying of any existing, impairment of visibility in mandatory Class I federal areas, like national parks, which impairment results from man-made pollution." There are two components to the Regional Haze Program. First, states must establish goals for reasonable progress for Class I federal areas within the state and establish long-term strategies to reach those goals and to assist Class I federal areas in neighboring states to achieve reasonable progress set by those states towards a goal of natural visibility by 2064. In February 2009, the TCEQ submitted a SIP concerning regional haze (Regional Haze SIP) to the EPA. In December 2011, the EPA proposed a limited disapproval of the Regional Haze SIP due to its reliance on the Clean Air Interstate Rule (CAIR) instead of the EPA's replacement CSAPR program that the EPA proposed in July 2011. The EPA finalized the limited disapproval in June 2012. In August 2012, Luminant filed a petition for review in the Fifth Circuit Court challenging the EPA's limited disapproval of the Regional Haze SIP on the grounds that the CAIR continued in effect pending the D.C. Circuit Court's decision in the CSAPR litigation. In September 2012, Luminant filed a petition to intervene in a case filed by industry groups and other states and private parties in the D.C. Circuit Court challenging the EPA's limited disapproval and issuance of a FIP regarding the regional haze best available retrofit technology (BART) program. The Fifth Circuit Court case has since been transferred to the D.C. Circuit Court and consolidated with other pending BART program regional haze appeals. Briefing in the D.C. Circuit Court was completed in March 2017.

In June 2014, the EPA issued requests for information under Section 114 of the CAA to Luminant and other generators in Texas related to the reasonable progress program. After releasing a proposed rule in November 2014 and receiving comments from a number of parties, including Luminant and the State of Texas in April 2015, the EPA issued a final rule in January 2016 approving in part and disapproving in part Texas' SIP for Regional Haze and issuing a FIP for Regional Haze. In the rule, the EPA asserts that the Texas SIP does not show reasonable progress in improving visibility for two areas in Texas and that its long-term strategy fails to make emission reductions needed to achieve reasonable progress in improving visibility in the Wichita Mountains of Oklahoma. The EPA's proposed emission limits in the FIP assume additional control equipment for specific lignite/coal-fueled generation units across Texas, including new flue gas desulfurization systems (scrubbers) at seven electricity generating units and upgrades to existing scrubbers at seven generation units. Specifically, for Luminant, the EPA's FIP is based on new scrubbers at Big Brown Units 1 and 2 and Monticello Units 1 and 2 and scrubber upgrades at Martin Lake Units 1, 2 and 3, Monticello Unit 3 and Sandow Unit 4. Luminant is continuing to evaluate the requirements and potential financial and operational impacts of the rule, but new scrubbers at the Big Brown and Monticello units necessary to achieve the emission limits required by the FIP (if those limits are possible to attain), along with the existence of low wholesale electricity prices in ERCOT, would likely challenge the long-term economic viability of those units. Under the terms of the rule, the scrubber upgrades will be required by February 2019, and the new scrubbers will be required by February 2021.

In March 2016, Luminant and a number of other parties, including the State of Texas, filed petitions for review in the Fifth Circuit Court challenging the FIP's Texas requirements. Luminant and other parties also filed motions to stay the FIP while the court reviews the legality of the EPA's action. In July 2016, the Fifth Circuit Court denied the EPA's motion to dismiss Luminant's challenge to the FIP and denied the EPA's motion to transfer the challenges Luminant, the other industry petitioners and the State of Texas filed to the D.C. Circuit Court. In addition, the Fifth Circuit Court granted the motions to stay filed by Luminant, the other industry petitioners and the State of Texas pending final review of the petitions for review. The case was abated until the end of November 2016 in order to allow the parties to pursue settlement discussions. Settlement discussions were unsuccessful, and in December 2016 the EPA filed a motion seeking a voluntary remand of the rule back to the EPA for further consideration of Luminant's pending request for administrative reconsideration. Luminant and some of the other petitioners filed a response opposing the EPA's motion to remand and filed a cross motion for vacatur of the rule in December 2016. In March 2017, the Fifth Circuit Court remanded the rule back to the EPA for reconsideration in light of the Court's prior determination that we and the other petitioners demonstrated a substantial likelihood that the EPA exceeded its statutory authority and acted arbitrarily and capriciously, but the Court denied all of the other pending motions. The stay of the rule (and the emission control requirements) remains in effect. In addition, the Fifth Circuit Court denied the EPA's motion to lift the stay as to parts of the rule implicated in the EPA's subsequent BART proposal and the Court is retaining jurisdiction of the case and requiring the EPA to file status reports on its reconsideration every 60 days. While we cannot predict the outcome of the rulemaking and legal proceedings, or estimate a range of reasonably possible costs, the result may have a material impact on our results of operations, liquidity or financial condition.


19


Regional Haze — Best Available Retrofit Technology

The second part of the Regional Haze Program subjects certain electricity generation units built between 1962 and 1977, to BART standards designed to improve visibility if such units cause or contribute to impairment of visibility in a federal class I area. BART reductions of SO2 and NOX are required either on a unit-by-unit basis or are deemed satisfied by state participation in an EPA-approved regional trading program such as the CSAPR or other approved alternative program. In response to a lawsuit by environmental groups, the D.C. Circuit Court issued a consent decree in March 2012 that required the EPA to propose a decision on the Regional Haze SIP by May 2012 and finalize that decision by November 2012. The consent decree requires a FIP for any provisions that the EPA disapproves. The D.C. Circuit Court has amended the consent decree several times to extend the dates for the EPA to propose and finalize a decision on the Regional Haze SIP. The consent decree was modified in December 2015 to extend the deadline for the EPA to finalize action on the determination and adoption of requirements for BART for electricity generation. Under the amended consent decree, the EPA had until December 2016 to propose, and has until September 2017 to finalize, either approval of the state plan or a FIP for BART for Texas electricity generation sources if the EPA determines that BART requirements have not been met. The EPA issued its proposed BART FIP for Texas in January 2017. The EPA's proposed emission limits assume additional control equipment for specific lignite/coal-fueled generation units across Texas, including new flue gas desulfurization systems (scrubbers) at 12 electric generation units and upgrades to existing scrubbers at four electric generation units. Specifically, for Luminant, the EPA's emission limitations are based on new scrubbers at Big Brown Units 1 and 2 and Monticello Units 1 and 2 and scrubber upgrades at Martin Lake Units 1, 2 and 3 and Monticello Unit 3. Luminant is continuing to evaluate the requirements and potential financial and operational impacts of the proposed rule, but new scrubbers at the Big Brown and Monticello units necessary to achieve the emission limits required by the FIP (if those limits are possible to attain), along with the existence of low wholesale power prices in ERCOT, would likely challenge the long-term economic viability of those units. Under the terms of the rule, the scrubber upgrades will be required within three years of the effective date of the final rule and the new scrubbers will be required within five years of the effective date of the final rule. We submitted comments on the proposed FIP in May 2017. While we cannot predict the outcome of the rulemaking and potential legal proceedings, or estimate a range of reasonably possible costs, the result may have a material impact on our results of operations, liquidity or financial condition.

Intersection of the CSAPR and Regional Haze Programs

Historically the EPA has considered compliance with a regional trading program, such as the CSAPR, as satisfying a state's obligations under the BART portion of the Regional Haze Program. However, in the reasonable progress FIP, the EPA diverged from this approach and did not treat Texas' compliance with the CSAPR as satisfying its obligations under the BART portion of the Regional Haze Program. The EPA concluded that it would not be appropriate to finalize that determination given the remand of the CSAPR budgets. As described above, the EPA has now proposed to remove Texas from the annual CSAPR trading programs. If Texas were in the CSAPR annual trading programs, the EPA would have no basis for its BART FIP because it has made a determination for Texas and all other states that participate in the CSAPR annual trading programs that such participation satisfies their BART obligations. We do not believe that EPA's proposal to remove Texas from the CSAPR annual trading programs satisfies the D.C. Circuit Court's mandate to the EPA to develop non-over-controlling budgets for Texas and we submitted comments on the EPA's proposed rule to remove Texas from the CSAPR annual trading programs. While we cannot predict the outcome of these matters, or estimate a range of reasonably possible costs, the result may have a material impact on our results of operations, liquidity or financial condition.


20


Affirmative Defenses During Malfunctions

In February 2013, in response to a petition for rulemaking filed by the Sierra Club, the EPA proposed a rule requiring certain states to replace SIP exemptions for excess emissions during malfunctions with an affirmative defense. Texas was not included in that original proposal since it already had an EPA-approved affirmative defense provision in its SIP that was found to be lawful by the Fifth Circuit Court in 2013. In 2014, as a result of a D.C. Circuit Court decision striking down an affirmative defense in another EPA rule, the EPA revised its 2013 proposal to extend the EPA's proposed findings of inadequacy to states that have affirmative defense provisions, including Texas. The EPA's revised proposal would require Texas to remove or replace its EPA-approved affirmative defense provisions for excess emissions during startup, shutdown and maintenance events. In May 2015, the EPA finalized the proposal. In June 2015, Luminant filed a petition for review in the Fifth Circuit Court challenging certain aspects of the EPA's final rule as they apply to the Texas SIP. The State of Texas and other parties have also filed similar petitions in the Fifth Circuit Court. In August 2015, the Fifth Circuit Court transferred the petitions that Luminant and other parties filed to the D.C. Circuit Court, and in October 2015 the petitions were consolidated with the pending petitions challenging the EPA's action in the D.C. Circuit Court. Briefing in the D.C. Circuit Court on the challenges was completed in October 2016 and oral argument was originally set for May 2017. However, in April 2017, the court granted the EPA's motion to continue oral argument and ordered that the case be held in abeyance with the EPA to provide status reports to the court on the EPA's review of the action at 90-day intervals. We cannot predict the timing or outcome of this proceeding, or estimate a range of reasonably possible costs, but implementation of the rule as finalized may have a material impact on our results of operations, liquidity or financial condition.

SO2 Designations for Texas

In February 2016, the EPA notified Texas of the EPA's preliminary intention to designate nonattainment areas for counties surrounding our Big Brown, Monticello and Martin Lake generation plants based on modeling data submitted to the EPA by the Sierra Club. Such designation would potentially require the implementation of various controls or other requirements to demonstrate attainment. Luminant submitted comments challenging the use of modeling data rather than data from actual air quality monitoring equipment. In November 2016, the EPA finalized its proposed designations for Texas including finalizing the nonattainment designations for the areas referenced above. In doing so, the EPA ignored contradictory modeling that we submitted with our comments. The final designation mandates would be for Texas to begin the multi-year process to evaluate what potential emission controls or operational changes, if any, may be necessary to demonstrate attainment. In February 2017, the State of Texas and Luminant filed challenges to the nonattainment designations in the Fifth Circuit Court and protective petitions in the D.C. Circuit Court. In March 2017, the EPA filed a motion to transfer or dismiss our Fifth Circuit Court petition, and the State of Texas and Luminant have filed an opposition to that motion. Briefing on that motion in the Fifth Circuit Court was completed in May 2017, and the Fifth Circuit Court held oral argument on that motion in July 2017. In addition, Luminant has filed a request with the EPA to reconsider the rule and immediately stay its effective date. While we cannot predict the outcome of this matter, or estimate a range of reasonably possible costs, the result may have a material impact on our results of operations, liquidity or financial condition.

Other Matters

We are involved in various legal and administrative proceedings in the normal course of business, the ultimate resolutions of which, in the opinion of management, are not anticipated to have a material effect on our results of operations, liquidity or financial condition.



21


11.
EQUITY

Successor Shareholders' Equity

Vistra Energy did not declare or pay any dividends during the six months ended June 30, 2017. The agreement governing the Vistra Operations Credit Facilities (the Credit Facilities Agreement) generally restricts the ability of Vistra Operations Company LLC (Vistra Operations) to make distributions to any direct or indirect parent unless such distributions are expressly permitted thereunder. As of June 30, 2017, Vistra Operations can distribute approximately $560 million to Vistra Energy Corp. (Parent) under the Credit Facilities Agreement without the consent of any party. The amount that can be distributed by Vistra Operations to Parent was reduced by approximately $470 million due to net distributions made by Vistra Operations to Parent during the three months ended June 30, 2017. Additionally, Vistra Operations may make distributions to Parent in amounts sufficient for Parent to make any payments required under the TRA or the Tax Matters Agreement or, to the extent arising out of Parent's ownership or operation of Vistra Operations, to pay any taxes or general operating or corporate overhead expenses.

Under applicable Delaware General Corporate Law, we are prohibited from paying any distribution to the extent that such distribution exceeds the value of our "surplus," which is defined as the excess of our net assets above our capital (the aggregate par value of all outstanding shares of our stock).

The following table presents the changes to shareholder's equity for the six months ended June 30, 2017:
 
Vistra Energy Shareholders' Equity
 
Common
Stock (a)
 
Additional Paid-in Capital
 
Retained Earnings (Deficit)
 
Accumulated Other Comprehensive Income
 
Total Shareholders' Equity
Balance at December 31, 2016
$
4

 
$
7,742

 
$
(1,155
)
 
$
6

 
$
6,597

Net income

 

 
52

 

 
52

Effects of stock-based incentive compensation plans

 
8

 

 

 
8

Other

 

 
1

 

 
1

Balance at June 30, 2017
$
4

 
$
7,750

 
$
(1,102
)
 
$
6

 
$
6,658

________________
(a)
Authorized shares totaled 1,800,000,000 at June 30, 2017. Outstanding shares totaled 427,587,401 and 427,580,232 at June 30, 2017 and December 31, 2016, respectively.

Predecessor Membership Interests

The following table presents the changes to membership interests for the six months ended June 30, 2016:
 
TCEH Membership Interests
 
Capital Account
 
Accumulated Other Comprehensive Loss
 
Total Membership Interests
Balance at December 31, 2015
$
(22,851
)
 
$
(33
)
 
$
(22,884
)
Net loss
(842
)
 

 
(842
)
Net effects of cash flow hedges

 
1

 
1

Other
(1
)
 

 
(1
)
Balance at June 30, 2016
$
(23,694
)
 
$
(32
)
 
$
(23,726
)



22


12.
FAIR VALUE MEASUREMENTS

We utilize several different valuation techniques to measure the fair value of assets and liabilities, relying primarily on the market approach of using prices and other market information for identical and/or comparable assets and liabilities for those items that are measured on a recurring basis. We use a mid-market valuation convention (the mid-point price between bid and ask prices) as a practical expedient to measure fair value for the majority of our assets and liabilities and use valuation techniques to maximize the use of observable inputs and minimize the use of unobservable inputs. Our valuation policies and procedures were developed, maintained and validated by a centralized risk management group.

Fair value measurements of derivative assets and liabilities incorporate an adjustment for credit-related nonperformance risk. These nonperformance risk adjustments take into consideration master netting arrangements, credit enhancements and the credit risks associated with our credit standing and the credit standing of our counterparties (see Note 13 for additional information regarding credit risk associated with our derivatives). We utilize credit ratings and default rate factors in calculating these fair value measurement adjustments.

We categorize our assets and liabilities recorded at fair value based upon the following fair value hierarchy:

Level 1 valuations use quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. Our Level 1 assets and liabilities include CME or ICE (electronic commodity derivative exchanges) futures and options transacted through clearing brokers for which prices are actively quoted. We report the fair value of CME and ICE transactions without taking into consideration margin deposits, with the exception of certain margin amounts related to changes in fair value on certain CME transactions that, beginning in January 2017, are legally characterized as settlement of derivative contracts rather than collateral.

Level 2 valuations utilize over-the-counter broker quotes, quoted prices for similar assets or liabilities that are corroborated by correlations or other mathematical means, and other valuation inputs such as interest rates and yield curves observable at commonly quoted intervals. We attempt to obtain multiple quotes from brokers that are active in the markets in which we participate and require at least one quote from two brokers to determine a pricing input as observable. The number of broker quotes received for certain pricing inputs varies depending on the depth of the trading market, each individual broker's publication policy, recent trading volume trends and various other factors.

Level 3 valuations use unobservable inputs for the asset or liability. Unobservable inputs are used to the extent observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. We use the most meaningful information available from the market combined with internally developed valuation methodologies to develop our best estimate of fair value. Significant unobservable inputs used to develop the valuation models include volatility curves, correlation curves, illiquid pricing delivery periods and locations and credit-related nonperformance risk assumptions. These inputs and valuation models are developed and maintained by employees trained and experienced in market operations and fair value measurements and validated by the company's risk management group.

With respect to amounts presented in the following fair value hierarchy tables, the fair value measurement of an asset or liability (e.g., a contract) is required to fall in its entirety in one level, based on the lowest level input that is significant to the fair value measurement.


23


Assets and liabilities measured at fair value on a recurring basis consisted of the following at the respective balance sheet dates shown below:
June 30, 2017
 
Level 1
 
Level 2
 
Level 3 (a)
 
Reclassification (b)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Commodity contracts
$
30

 
$
77

 
$
106

 
$
25

 
$
238

Interest rate swaps

 
1

 

 
9

 
10

Nuclear decommissioning trust –
equity securities (c)
465

 

 

 

 
465

Nuclear decommissioning trust –
debt securities (c)

 
357

 

 

 
357

Sub-total
$
495

 
$
435

 
$
106

 
$
34

 
1,070

Assets measured at net asset value (d):
 
 
 
 
 
 
 
 
 
Nuclear decommissioning trust –
equity securities (c)
 
 
 
 
 
 
 
 
269

Total assets
 
 
 
 
 
 
 
 
$
1,339

Liabilities:
 
 
 
 
 
 
 
 
 
Commodity contracts
$
44

 
$
32

 
$
31

 
$
25

 
$
132

Interest rate swaps

 
18

 

 
9

 
27

Total liabilities
$
44

 
$
50

 
$
31

 
$
34

 
$
159


December 31, 2016
 
Level 1
 
Level 2
 
Level 3 (a)
 
Reclassification (b)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Commodity contracts
$
167

 
$
131

 
$
98

 
$

 
$
396

Interest rate swaps

 
5

 

 
13

 
18

Nuclear decommissioning trust –
equity securities (c)
425

 

 

 

 
425

Nuclear decommissioning trust –
debt securities (c)

 
340

 

 

 
340

Sub-total
$
592

 
$
476

 
$
98

 
$
13

 
1,179

Assets measured at net asset value (d):
 
 
 
 
 
 
 
 
 
Nuclear decommissioning trust –
equity securities (c)
 
 
 
 
 
 
 
 
247

Total assets
 
 
 
 
 
 
 
 
$
1,426

Liabilities:
 
 
 
 
 
 
 
 
 
Commodity contracts
$
302

 
$
15

 
$
15

 
$

 
$
332

Interest rate swaps

 
16

 

 
13

 
29

Total liabilities
$
302

 
$
31

 
$
15

 
$
13

 
$
361

____________
(a)
See table below for description of Level 3 assets and liabilities.
(b)
Fair values are determined on a contract basis, but certain contracts result in a current asset and a noncurrent liability, or vice versa, as presented in our condensed consolidated balance sheets.
(c)
The nuclear decommissioning trust investment is included in the other investments line in our condensed consolidated balance sheets. See Note 16.
(d)
The fair value amounts presented in this line are intended to permit reconciliation of the fair value hierarchy to the amounts presented in our condensed consolidated balance sheets. Certain investments measured at fair value using the net asset value per share (or its equivalent) have not been classified in the fair value hierarchy.


24


Commodity contracts consist primarily of natural gas, electricity, coal, fuel oil and uranium agreements and include financial instruments entered into for hedging purposes as well as physical contracts that have not been designated normal purchases or sales. Interest rate swaps are used to reduce exposure to interest rate changes by converting floating-rate interest to fixed rates. See Note 13 for further discussion regarding derivative instruments.

Nuclear decommissioning trust assets represent securities held for the purpose of funding the future retirement and decommissioning of our nuclear generation facility. These investments include equity, debt and other fixed-income securities consistent with investment rules established by the NRC and the PUCT.

The following tables present the fair value of the Level 3 assets and liabilities by major contract type and the significant unobservable inputs used in the valuations at June 30, 2017 and December 31, 2016:
June 30, 2017
 
 
Fair Value
 
 
 
 
 
 
Contract Type (a)
 
Assets
 
Liabilities
 
Total
 
Valuation Technique
 
Significant Unobservable Input
 
Range (b)
Electricity purchases and sales
 
$
31

 
$
(13
)
 
$
18

 
Valuation Model
 
Hourly price curve shape (c)
 
$0 to $35/ MWh
 
 
 
 
 
 
 
 
 
 
Illiquid delivery periods for ERCOT hub power prices and heat rates (d)
 
$20 to $65/ MWh
Electricity congestion revenue rights
 
48

 
(6
)
 
42

 
Market Approach (e)
 
Illiquid price differences between settlement points (f)
 
$0 to $10/ MWh
Other (g)
 
27

 
(12
)
 
15

 
 
 
 
 
 
Total
 
$
106

 
$
(31
)
 
$
75

 
 
 
 
 
 

December 31, 2016
 
 
Fair Value
 
 
 
 
 
 
Contract Type (a)
 
Assets
 
Liabilities
 
Total
 
Valuation Technique
 
Significant Unobservable Input
 
Range (b)
Electricity purchases and sales
 
$
32

 
$

 
$
32

 
Valuation Model
 
Hourly price curve shape (c)
 
$0 to $35/ MWh
 
 
 
 
 
 
 
 
 
 
Illiquid delivery periods for ERCOT hub power prices and heat rates (d)
 
$30 to $70/ MWh
Electricity congestion revenue rights
 
42

 
(6
)
 
36

 
Market Approach (e)
 
Illiquid price differences between settlement points (f)
 
$0 to $10/ MWh
Other (g)
 
24

 
(9
)
 
15

 
 
 
 
 
 
Total
 
$
98

 
$
(15
)
 
$
83

 
 
 
 
 
 
____________
(a)
Electricity purchase and sales contracts include power and heat rate hedging positions in ERCOT regions. Electricity congestion revenue rights contracts consist of forward purchase contracts (swaps and options) used to hedge electricity price differences between settlement points within ERCOT.
(b)
The range of the inputs may be influenced by factors such as time of day, delivery period, season and location.
(c)
Based on the historical range of forward average hourly ERCOT North Hub prices.
(d)
Based on historical forward ERCOT power price and heat rate variability.
(e)
While we use the market approach, there is insufficient market data to consider the valuation liquid.
(f)
Based on the historical price differences between settlement points within ERCOT hubs and load zones.
(g)
Other includes contracts for ancillary services, natural gas, electricity options, weather options, coal and coal options. Electricity option contracts consist of physical electricity options and spread options.

There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy for the three and six months ended June 30, 2017 and 2016. See the table below for discussion of transfers between Level 2 and Level 3 for the three and six months ended June 30, 2017 and 2016.


25


The following table presents the changes in fair value of the Level 3 assets and liabilities for the three and six months ended June 30, 2017 and 2016.
 
Successor
 
 
Predecessor
 
Successor
 
 
Predecessor
 
Three Months
Ended
June 30, 2017
 
 
Three Months
Ended
June 30, 2016
 
Six Months
Ended
June 30, 2017
 
 
Six Months
Ended
June 30, 2016
Net asset balance at beginning of period
$
107

 
 
$
25

 
$
83

 
 
$
37

Total unrealized valuation gains (losses)
(32
)
 
 
1

 
8

 
 
(4
)
Purchases, issuances and settlements (a):
 
 
 
 
 
 
 
 
 
Purchases
26

 
 
12

 
35

 
 
26

Issuances
(3
)
 
 
(4
)
 
(14
)
 
 
(16
)
Settlements
(23
)
 
 
(17
)
 
(42
)
 
 
(27
)
Transfers into Level 3 (b)

 
 
1

 
3

 
 
1

Transfers out of Level 3 (b)

 
 

 
2

 
 
1

Net liabilities assumed in the Lamar and Forney Acquisition (Note 3)

 
 
(27
)
 

 
 
(27
)
Net change (c)
(32
)
 
 
(34
)
 
(8
)
 
 
(46
)
Net asset (liability) balance at end of period
$
75

 
 
$
(9
)
 
$
75

 
 
$
(9
)
Unrealized valuation gains (losses) relating to instruments held at end of period
$
(31
)
 
 
$
(5
)
 
$
6

 
 
$
(8
)
____________
(a)
Settlements reflect reversals of unrealized mark-to-market valuations previously recognized in net income. Purchases and issuances reflect option premiums paid or received.
(b)
Includes transfers due to changes in the observability of significant inputs. All Level 3 transfers during the periods presented are in and out of Level 2.
(c)
Substantially all changes in value of commodity contracts (excluding net liabilities assumed in the Lamar and Forney Acquisition) are reported as operating revenues in our condensed statements of consolidated income (loss). Activity excludes change in fair value in the month positions settle.


26



13.
COMMODITY AND OTHER DERIVATIVE CONTRACTUAL ASSETS AND LIABILITIES

Strategic Use of Derivatives

We transact in derivative instruments, such as options, swaps, futures and forward contracts, to manage commodity price and interest rate risk. See Note 12 for a discussion of the fair value of derivatives.

Commodity Hedging and Trading Activity — We utilize natural gas and electricity derivatives to reduce exposure to changes in electricity prices primarily to hedge future revenues from electricity sales from our generation assets. We also utilize short-term electricity, natural gas, coal, fuel oil and uranium derivative instruments for fuel hedging and other purposes. Counterparties to these transactions include energy companies, financial institutions, electric utilities, independent power producers, oil and gas producers, local distribution companies and energy marketing companies. Unrealized gains and losses arising from changes in the fair value of derivative instruments as well as realized gains and losses upon settlement of the instruments are reported in our condensed statements of consolidated income (loss) in operating revenues and fuel, purchased power costs and delivery fees in the Successor period and net gain from commodity hedging and trading activities in the Predecessor period.

Interest Rate Swaps — Interest rate swap agreements are used to reduce exposure to interest rate changes by converting floating-rate interest rates to fixed rates, thereby hedging future interest costs and related cash flows. Unrealized gains and losses arising from changes in the fair value of the swaps as well as realized gains and losses upon settlement of the swaps are reported in our condensed statements of consolidated income (loss) in interest expense and related charges.

Financial Statement Effects of Derivatives

Substantially all derivative contractual assets and liabilities are accounted for under mark-to-market accounting consistent with accounting standards related to derivative instruments and hedging activities. The following tables provide detail of derivative contractual assets and liabilities as reported in our condensed consolidated balance sheets at June 30, 2017 and December 31, 2016. Derivative asset and liability totals represent the net value of the contract, while the balance sheet totals represent the gross value of the contract.
 
June 30, 2017
 
Derivative Assets
 
Derivative Liabilities
 
 
 
Commodity Contracts
 
Interest Rate Swaps
 
Commodity Contracts
 
Interest Rate Swaps
 
Total
Current assets
$
198

 
$

 
$
9

 
$

 
$
207

Noncurrent assets
27

 
10

 
4

 

 
41

Current liabilities
(1
)
 
(9
)
 
(96
)
 
(12
)
 
(118
)
Noncurrent liabilities
(11
)
 

 
(24
)
 
(6
)
 
(41
)
Net assets (liabilities)
$
213

 
$
1

 
$
(107
)
 
$
(18
)
 
$
89


 
December 31, 2016
 
Derivative Assets
 
Derivative Liabilities
 
 
 
Commodity Contracts