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EX-32.A - CERTIFICATION OF CURTIS A. MORGAN - Vistra Energy Corp.vistra-2018630xexhibit32a.htm
EX-95.A - MINE SAFETY DISCLOSURES - Vistra Energy Corp.vistra-2018630xexhibit95a.htm
EX-32.B - CERTIFICATION OF J. WILLIAM HOLDEN - Vistra Energy Corp.vistra-2018630xexhibit32b.htm
EX-31.B - CERTIFICATION OF J. WILLIAM HOLDEN - Vistra Energy Corp.vistra-2018630xexhibit31b.htm
EX-31.A - CERTIFICATION OF CURTIS A. MORGAN - Vistra Energy Corp.vistra-2018630xexhibit31a.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, 2018

— 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 Securities Exchange Act of 1934.

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 2, 2018, there were 518,617,157 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 that may (i) be made by and to the parties thereto at specific dates, (ii) be subject to exceptions and qualifications contained in separate disclosure schedules, (iii) represent the parties' risk allocation in the particular transaction, or (iv) 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"), Luminant, TXU Energy, Value Based Brands LLC, Dynegy Energy Services or Homefield Energy 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.
2017 Form 10-K
 
Vistra Energy's annual report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 26, 2018, except for Part II, Items 7 and 8, which were amended in Vistra Energy's current report on Form 8-K filed with the SEC on June 15, 2018
 
 
 
ARO
 
asset retirement and mining reclamation obligation
 
 
 
CAA
 
Clean Air Act
 
 
 
CAISO
 
The California Independent System Operator
 
 
 
CCGT
 
combined cycle gas turbine
 
 
 
CFTC
 
U.S. Commodity Futures Trading Commission
 
 
 
CME
 
Chicago Mercantile Exchange
 
 
 
CO2
 
carbon dioxide
 
 
 
Dynegy
 
Dynegy Inc., and/or its subsidiaries, depending on context
 
 
 
EBITDA
 
earnings (net income) before interest expense, income taxes, depreciation and amortization
 
 
 
Effective Date
 
October 3, 2016, the date our predecessor completed its reorganization under Chapter 11 of the U.S. Bankruptcy Code
 
 
 
Emergence
 
emergence of our predecessor from reorganization under Chapter 11 of the U.S. Bankruptcy Code as subsidiaries of a newly formed company, Vistra Energy, on the Effective Date
 
 
 
EPA
 
U.S. Environmental Protection Agency
 
 
 
ERCOT
 
Electric Reliability Council of Texas, Inc.
 
 
 
FERC
 
U.S. Federal Energy Regulatory Commission
 
 
 
GAAP
 
generally accepted accounting principles
 
 
 
GWh
 
gigawatt-hours
 
 
 
ICE
 
IntercontinentalExchange
 
 
 
IRS
 
U.S. Internal Revenue Service
 
 
 
ISO
 
Independent System Operator
 
 
 
ISO-NE
 
Independent System Operator New England
 
 
 
kW
 
kilowatt
 
 
 
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
 
 
 
load
 
demand for electricity
 
 
 
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
 
 
 
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.
 
 
 
Merger
 
the merger of Dynegy with and into Vistra Energy, with Vistra Energy as the surviving corporation
 
 
 
Merger Agreement
 
the Agreement and Plan of Merger, dated as of October 29, 2017, by and between Vistra Energy and Dynegy, as it may be amended or modified from time to time
 
 
 

ii


Merger Date
 
April 9, 2018, the date Vistra Energy and Dynegy completed the transactions contemplated by the Merger Agreement
 
 
 
MISO
 
Midcontinent Independent System Operator, Inc.
 
 
 
MMBtu
 
million British thermal units
 
 
 
MW
 
megawatts
 
 
 
MWh
 
megawatt-hours
 
 
 
NERC
 
North American Electricity Reliability Corporation
 
 
 
NRC
 
U.S. Nuclear Regulatory Commission
 
 
 
NYMEX
 
the New York Mercantile Exchange, a commodity derivatives exchange
 
 
 
NYISO
 
New York Independent System Operator
 
 
 
PJM
 
PJM Interconnection, LLC
 
 
 
Plan of Reorganization
 
Third Amended Joint Plan of Reorganization filed by the parent company of our predecessor in August 2016 and confirmed by the U.S. Bankruptcy Court for the District of Delaware in August 2016 solely with respect to our Predecessor
 
 
 
PrefCo
 
Vistra Preferred Inc.
 
 
 
PrefCo Preferred Stock Sale
 
as part of the Spin-Off, the contribution of certain of the assets of our predecessor and its subsidiaries by a subsidiary of TEX Energy LLC to PrefCo in exchange for all of PrefCo's authorized preferred stock, consisting of 70,000 shares, par value $0.01 per share
 
 
 
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
 
U.S. Securities and Exchange Commission
 
 
 
SG&A
 
selling, general and administrative
 
 
 
Tax Matters Agreement
 
Tax Matters Agreement, dated as of the Effective Date, by and among Energy Future Holdings Corp. (EFH Corp.), Energy Future Intermediate Holding Company LLC, EFIH Finance Inc. and EFH Merger Co. LLC
TCEH
 
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 our predecessor, 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.
 
 
 
TCEQ
 
Texas Commission on Environmental Quality
 
 
 
TDSP
 
transmission and distribution service provider
 
 
 
TRA
 
Tax Receivable 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 8 to the Financial Statements)
 
 
 
TXU Energy
 
TXU Energy Retail Company LLC, an indirect, 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
 
 
 
U.S.
 
United States of America
 
 
 
Vistra Energy
 
Vistra Energy Corp. and/or its subsidiaries, depending on context
 
 
 
Vistra Operations Credit Facilities
 
Vistra Operations Company LLC's $8.342 billion senior secured financing facilities (see Note 10 to the Financial Statements).


iii


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)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Operating revenues (Note 5)
$
2,574


$
1,296


$
3,338


$
2,653

Fuel, purchased power costs and delivery fees
(1,216
)

(729
)

(1,866
)

(1,411
)
Operating costs
(386
)

(195
)

(580
)

(409
)
Depreciation and amortization
(389
)

(172
)

(542
)

(341
)
Selling, general and administrative expenses
(352
)

(147
)

(514
)

(285
)
Operating income (loss)
231


53


(164
)

207

Other income (Note 19)
7


9


18


18

Other deductions (Note 19)
(1
)

(5
)

(3
)

(5
)
Interest expense and related charges (Note 19)
(146
)

(69
)

(137
)

(93
)
Impacts of Tax Receivable Agreement (Note 8)
(64
)

(22
)

(82
)

(42
)
Equity in earnings of unconsolidated investment
4




4



Income (loss) before income taxes
31


(34
)

(364
)

85

Income tax benefit (expense) (Note 7)
74


8


163


(33
)
Net income (loss)
$
105


$
(26
)

$
(201
)

$
52

Less: Net loss attributable to noncontrolling interest
(3
)



(3
)


Net income (loss) attributable to Vistra Energy
$
108


$
(26
)

$
(198
)

$
52

Weighted average shares of common stock outstanding:











Basic
526,332,862


427,587,401


477,662,016


427,585,381

Diluted
533,786,824


427,587,401


477,662,016


427,846,563

Net income (loss) per weighted average share of common stock outstanding:











Basic
$
0.21


$
(0.06
)

$
(0.41
)

$
0.12

Diluted
$
0.20


$
(0.06
)

$
(0.41
)

$
0.12


See Notes to the Condensed Consolidated Financial Statements.

CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(Unaudited) (Millions of Dollars)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
105

 
$
(26
)
 
$
(201
)
 
$
52

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

 

 
1

 

Total other comprehensive income

 

 
1

 

Comprehensive income (loss)
$
105

 
$
(26
)
 
$
(200
)
 
$
52

Less: Comprehensive loss attributable to noncontrolling interest
(3
)
 

 
(3
)
 

Comprehensive income (loss) attributable to Vistra Energy
$
108

 
$
(26
)
 
$
(197
)
 
$
52


See Notes to the Condensed Consolidated Financial Statements.

1



VISTRA ENERGY CORP.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited) (Millions of Dollars)
 
Six Months Ended June 30,
 
2018
 
2017
 
 
 
 
Cash flows — operating activities:
 
 
 
Net income (loss)
$
(201
)

$
52

Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
619


437

Deferred income tax (benefit) expense, net
(159
)

29

Unrealized net (gain) loss from mark-to-market valuations of commodities
199


(54
)
Unrealized net (gain) loss from mark-to-market valuations of interest rate swaps
(86
)
 
6

Accretion expense
44


29

Impacts of Tax Receivable Agreement (Note 8)
82


42

Stock-based compensation (Note 16)
59


8

Other, net
(6
)

(7
)
Changes in operating assets and liabilities:



Margin deposits, net
(61
)

147

Accrued interest
(74
)

(29
)
Accrued taxes
(112
)

(73
)
Accrued incentive plan
(31
)

(60
)
Other operating assets and liabilities
(302
)

(194
)
Cash provided by (used in) operating activities
(29
)

333

Cash flows — financing activities:



Repayments/repurchases of debt (Note 10)
(1,338
)

(24
)
Stock repurchase
(63
)


Debt financing fee (Note 10)
(46
)

(3
)
Other, net
4



Cash used in financing activities
(1,443
)

(27
)
Cash flows — investing activities:



Capital expenditures
(153
)

(63
)
Nuclear fuel purchases
(28
)

(35
)
Cash acquired in the Merger
445



Solar development expenditures (Note 3)
(21
)

(96
)
Proceeds from sales of nuclear decommissioning trust fund securities (Note 19)
93


98

Investments in nuclear decommissioning trust fund securities (Note 19)
(103
)

(107
)
Other, net
9


9

Cash provided by (used in) investing activities
242


(194
)






Net change in cash, cash equivalents and restricted cash
(1,230
)

112

Cash, cash equivalents and restricted cash — beginning balance
2,046


1,588

Cash, cash equivalents and restricted cash — ending balance
$
816


$
1,700


See Notes to the Condensed Consolidated Financial Statements.

2



VISTRA ENERGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Millions of Dollars)
 
June 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
757

 
$
1,487

Restricted cash (Note 19)
59

 
59

Trade accounts receivable — net (Note 19)
1,149

 
582

Income taxes receivable
11

 

Inventories (Note 19)
465

 
253

Commodity and other derivative contractual assets (Note 14)
598

 
190

Margin deposits related to commodity contracts
200

 
30

Prepaid expense and other current assets
135

 
72

Total current assets
3,374

 
2,673

Restricted cash (Note 19)

 
500

Investments (Note 19)
1,290

 
1,240

Investment in unconsolidated subsidiary (Note 19)
135

 

Property, plant and equipment — net (Note 19)
14,981

 
4,820

Goodwill (Note 6)
1,907

 
1,907

Identifiable intangible assets — net (Note 6)
2,698

 
2,530

Commodity and other derivative contractual assets (Note 14)
244

 
58

Accumulated deferred income taxes
1,260

 
710

Other noncurrent assets
581

 
162

Total assets
$
26,470

 
$
14,600

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Long-term debt due currently (Note 10)
$
156

 
$
44

Trade accounts payable
795

 
473

Commodity and other derivative contractual liabilities (Note 14)
883

 
224

Margin deposits related to commodity contracts
3

 
4

Accrued income taxes

 
58

Accrued taxes other than income
143

 
136

Accrued interest
108

 
16

Asset retirement obligations (Note 19)
171

 
99

Other current liabilities
387

 
297

Total current liabilities
2,646

 
1,351

Long-term debt, less amounts due currently (Note 10)
11,807

 
4,379

Commodity and other derivative contractual liabilities (Note 14)
495

 
102

Accumulated deferred income taxes
5

 

Tax Receivable Agreement obligation (Note 8)
414

 
333

Asset retirement obligations (Note 19)
2,151

 
1,837

Identifiable intangible liabilities — net (Note 6)
187

 
36

Other noncurrent liabilities and deferred credits (Note 19)
345

 
220

Total liabilities
18,050

 
8,258


3



VISTRA ENERGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Millions of Dollars)
 
June 30,
2018
 
December 31,
2017
Commitments and Contingencies (Note 11)


 


Total equity (Note 12):
 
 
 
Common stock (par value — $0.01; number of shares authorized — 1,800,000,000)
(shares outstanding: June 30, 2018 — 521,214,879; December 31, 2017 — 428,398,802)
5

 
4

Additional paid-in-capital
10,015

 
7,765

Retained deficit
(1,591
)
 
(1,410
)
Accumulated other comprehensive income
(16
)
 
(17
)
Stockholders' equity
8,413

 
6,342

Noncontrolling interest in subsidiary
7

 

Total equity
8,420

 
6,342

Total liabilities and equity
$
26,470

 
$
14,600


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, as apparent in the context. See Glossary for defined terms.

Vistra Energy is a holding company operating an integrated retail and generation business in markets throughout the U.S. Through our 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.

Vistra Energy has six reportable segments: (i) Retail, (ii) ERCOT, (iii) PJM, (iv) NY/NE (comprising NYISO and ISO-NE), (v) MISO and (vi) Asset Closure. The Asset Closure segment was established as of January 1, 2018, and we have recast prior period information to reflect this change in reportable segments. See Note 18 for further information concerning reportable business segments.

Merger Transaction

On the Merger Date, Vistra Energy and Dynegy completed the transactions contemplated by the Merger Agreement entered into in October 2017. Pursuant to the Merger Agreement, Dynegy merged with and into Vistra Energy, with Vistra Energy continuing as the surviving corporation. Because the Merger closed on April 9, 2018, Vistra Energy's condensed consolidated financial statements and the notes related thereto do not include the financial condition or the operating results of Dynegy prior to April 9, 2018. See Note 2 for a summary of the Merger transaction and business combination accounting.

Basis of Presentation

The condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and on the same basis as the audited financial statements included in our 2017 Form 10-K, with the exception of the changes in reportable segments as detailed above. 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 U.S. 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 U.S. GAAP, they should be read in conjunction with the audited financial statements and related notes contained in our 2017 Form 10-K. 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 U.S. 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.

Unconsolidated Investments

We use the equity method of accounting for investments in affiliates over which we exercise significant influence. Our share of net income (loss) from these affiliates is recorded to equity in earnings (loss) of unconsolidated investment in the condensed statements of consolidated net income (loss). We use the cost method of accounting where we do not exercise significant influence. See Note 19.


5


Noncontrolling Interest

Noncontrolling interest is comprised of the 20% of Electric Energy, Inc. (EEI) that we do not own. EEI is our consolidated subsidiary that owns a coal facility in Joppa, Illinois. This noncontrolling interest is classified as a component of equity separate from stockholders' equity in the condensed consolidated balance sheets.

Treasury Stock

Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock, which is presented in our condensed consolidated balance sheets as a reduction to additional paid-in capital. See Note 12.

Adoption of New Accounting Standards

Revenue from Contracts with Customers On January 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) and all related amendments (new revenue standard) using the modified retrospective method for all contracts outstanding at the time of adoption. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The impact of the adoption of the new revenue standard was immaterial and we expect the adoption to continue to be immaterial to our net income on an ongoing basis. Our retail energy charges and wholesale generation, capacity and contract revenues will continue to be recognized when electricity and other services are delivered to our customers. The impact of adopting the new revenue standard primarily relates to the deferral of acquisition costs associated with retail contracts with customers that were previously expensed as incurred. Under the new revenue standard, these amounts will be capitalized and amortized over the expected life of the customer.

As of January 1, 2018, the cumulative effect of the changes made to our condensed consolidated balance sheet for the adoption of the new revenue standard was as follows:
 
December 31, 2017
 
Adoption of New Revenue Standard
 
January 1,
2018
Impact on condensed consolidated balance sheet:
 
 
 
 
 
Assets
 
 
 
 
 
Prepaid expense and other current assets
$
72

 
$
5

 
$
77

Accumulated deferred income taxes
$
710

 
$
(4
)
 
$
706

Other noncurrent assets
$
162

 
$
16

 
$
178

Equity
 
 
 
 
 
Retained deficit
$
(1,410
)
 
$
17

 
$
(1,393
)

The disclosure of the impact of adoption on our condensed statement of consolidated income (loss) and condensed consolidated balance sheet was as follows:
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
As Reported
 
Amount Without Adoption of New Revenue Standard
 
Effect of Change
Higher (Lower)
 
As Reported
 
Amount Without Adoption of New Revenue Standard
 
Effect of Change
Higher (Lower)
Impact on condensed statement of consolidated income (loss):
 
 
 
 
 
 
 
 
 
 
 
Operating revenues
$
2,574

 
$
2,573

 
$
1

 
$
3,338

 
$
3,336

 
$
2

Selling, general and administrative expenses
(352
)
 
(355
)
 
3

 
(514
)
 
(520
)
 
6

Net income (loss)
105

 
102

 
3

 
(201
)
 
(207
)
 
6



6


 
June 30, 2018
 
As Reported
 
Balances Without Adoption of New Revenue Standard
 
Effect of Change
Higher (Lower)
Impact on condensed consolidated balance sheet:
 
 
 
 
 
Assets
 
 
 
 
 
Prepaid expense and other current assets
$
135

 
$
129

 
$
6

Accumulated deferred income taxes
1,260

 
1,264

 
(4
)
Other noncurrent assets
581

 
558

 
23

Equity
 
 
 
 
 
Retained deficit
$
(1,591
)
 
$
(1,614
)
 
$
23


See Note 5 for the disclosures required by the new revenue standard.

Statement of Cash Flows 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 (see Note 19). We adopted the standard on January 1, 2018. The ASU modified our presentation of our condensed statements of consolidated cash flows, and retrospective application to comparative periods presented was required. For the six months ended June 30, 2017, our condensed statement of consolidated cash flows previously reflected a source of cash of $31 million reported as changes in restricted cash that is now reported in net change in cash, cash equivalents and restricted cash. See the condensed statements of consolidated cash flows and Note 19 for disclosures related to the adoption of this accounting standard.

Changes in Accounting Standards

In February 2016, the Financial Accounting Standards Board (FASB) issued 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 have identified the contracts that are within the scope of this ASU and are currently evaluating the impact of this ASU on our financial statements.


2.    MERGER TRANSACTION AND BUSINESS COMBINATION ACCOUNTING

Merger Transaction

On the Merger Date, Vistra Energy and Dynegy completed the transactions contemplated by the Merger Agreement entered into in October 2017. Pursuant to the Merger Agreement, Dynegy merged with and into Vistra Energy, with Vistra Energy continuing as the surviving corporation. The Merger is intended to qualify as a tax-free reorganization under the Internal Revenue Code, as amended, so that none of Vistra Energy, Dynegy or any of the Dynegy stockholders will recognize any gain or loss in the transaction, except that Dynegy stockholders could recognize a gain or loss with respect to cash received in lieu of fractional shares of Vistra Energy's common stock. Vistra Energy is the acquirer for both federal tax and accounting purposes.

At the closing of the Merger, each issued and outstanding share of Dynegy common stock, par value $0.01 per share, other than shares owned by Vistra Energy or its subsidiaries, held in treasury by Dynegy or held by a subsidiary of Dynegy, was automatically converted into 0.652 shares of common stock, par value $0.01 per share, of Vistra Energy (the Exchange Ratio), except that cash was paid in lieu of fractional shares, which resulted in Vistra Energy issuing 94,409,573 shares of Vistra Energy common stock to the former Dynegy stockholders, as well as converting stock options, equity-based awards, tangible equity units and warrants. The total number of Vistra Energy shares outstanding at the close of the Merger was 522,932,453 shares. Dynegy stock options and equity-based awards outstanding immediately prior to the Merger Date were generally automatically converted upon completion of the Merger into stock options and equity-based awards, respectively, with respect to Vistra Energy's common stock, after giving effect to the Exchange Ratio.


7


Business Combination Accounting

We believe the Merger provides a number of significant potential strategic benefits and opportunities to Vistra Energy, including increased scale and market diversification, rebalanced asset portfolio and improved earnings and cash flow. The Merger is being 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 Merger Date. The combined results of operations are reported in our consolidated financial statements beginning as of the Merger Date. A summary of the techniques used to estimate the preliminary fair value of the identifiable assets and liabilities, as well as their classification within the fair value hierarchy (see Note 13), is listed below:

Working capital was valued using available market information (Level 2).
Acquired property, plant and equipment was valued using a combination of an income approach and a market approach. The income approach utilized a discounted cash flow analysis based upon a debt-free, free cash flow model (Level 3).
Acquired derivatives were valued using the methods described in Note 13 (Level 1, Level 2 or Level 3).
Contracts with terms that were not at current market prices were also valued using a discounted cash flow analysis (Level 3). The cash flows generated by the contracts were compared with their cash flows based on current market prices with the resulting difference recorded as either an intangible asset or liability.
Long-term debt was valued using a market approach (Level 2).
AROs were recorded in accordance with ASC 410, Asset Retirement and Environmental Obligations (Level 3).

The following table summarizes the consideration paid and the preliminary allocation of the purchase price to the fair value amounts recognized for the assets acquired and liabilities assumed related to the Merger as of the Merger Date. Based on the opening price of Vistra Energy common stock on the Merger Date, the preliminary purchase price was approximately $2.3 billion. The purchase price allocation is ongoing and is dependent upon final valuation determinations, which have not been completed. The preliminary values included below represent our current best estimates for property plant and equipment, identifiable intangible assets and liabilities, inventories, asset retirement obligations and deferred taxes. The purchase price allocation is preliminary and each of these may change materially based upon the receipt of more detailed information, additional analyses and completed valuations. We currently expect the final purchase price allocation will be completed no later than the second quarter of 2019.
Dynegy shares outstanding as of April 9, 2018 (in millions)
173
Exchange Ratio
0.652

Vistra Energy shares issued for Dynegy shares outstanding (in millions)
113

Opening price of Vistra Energy common stock on April 9, 2018
$
19.87

Purchase price for common stock
$
2,245

Fair value of outstanding stock compensation awards attributable to pre-combination service
$
26

Fair value of outstanding warrants
$
2

Total purchase price
$
2,273



8


Preliminary Purchase Price Allocation
Cash and cash equivalents
$
445

Trade accounts receivables, inventories, prepaid expenses and other current assets
863

Property, plant and equipment
10,362

Accumulated deferred income taxes
391

Identifiable intangible assets
387

Other noncurrent assets
532

Total assets acquired
12,980

Trade accounts payable and other current liabilities
644

Commodity and other derivative contractual assets and liabilities, net
422

Asset retirement obligations, including amounts due currently
419

Long-term debt, including amounts due currently
8,920

Other noncurrent liabilities
292

Total liabilities assumed
10,697

Identifiable net assets acquired
2,283

Noncontrolling interest in subsidiary
10

Total purchase price
$
2,273


Acquisition costs incurred in the Merger totaled $50 million and $52 million for the three and six months ended June 30, 2018, respectively For the period from the Merger Date through June 30, 2018, our condensed statements of consolidated income (loss) include revenues and net income (loss) acquired in the Merger totaling $1.248 billion and $97 million, respectively.

Unaudited Pro Forma Financial Information — The following unaudited pro forma financial information for the six months ended June 30, 2018 and 2017 assumes that the Merger occurred on January 1, 2017. 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 Merger been completed on January 1, 2017, nor is the unaudited pro forma financial information indicative of future results of operations, which may differ materially from the pro forma financial information presented here.
 
Six Months Ended June 30,
 
2018
 
2017
Revenues
$
4,789

 
$
5,213

Net income (loss)
$
(439
)
 
$
18

Net income (loss) attributable to Vistra Energy
$
(435
)
 
$
7

Net income (loss) attributable to Vistra Energy per weighted average share of common stock outstanding — basic
$
(0.83
)
 
$
0.01

Net income (loss) attributable to Vistra Energy per weighted average share of common stock outstanding — diluted
$
(0.83
)
 
$
0.01


The unaudited pro forma financial information presented above includes adjustments for incremental depreciation and amortization as a result of the fair value determination of the net assets acquired, interest expense on debt assumed in the Merger, effects of the Merger on tax expense (benefit), changes in the expected impacts of the tax receivable agreement due to the Merger, and other related adjustments.


3.
ACQUISITION AND DEVELOPMENT OF GENERATION FACILITIES

Odessa Acquisition

In August 2017, La Frontera Holdings, LLC (La Frontera), an indirect wholly owned subsidiary of Vistra Energy, purchased a 1,054 MW CCGT natural gas fueled generation plant (and other related assets and liabilities) located in Odessa, Texas (Odessa Facility) from Odessa-Ector Power Partners, L.P., an indirect wholly owned subsidiary of Koch Ag & Energy Solutions, LLC (Koch) (altogether, the Odessa Acquisition). La Frontera paid an aggregate purchase price of approximately $355 million, plus a five-year earn-out provision, to acquire the Odessa Facility. The purchase price was funded by cash on hand.


9


The Odessa Acquisition was accounted for as an asset acquisition. Substantially all of the approximately $355 million purchase price was assigned to property, plant and equipment in our consolidated balance sheet. Additionally, the initial fair value associated with an earn-out provision of approximately $16 million was included as consideration in the overall purchase price. The earn-out provision requires cash payments to be made to Koch if spark-spreads related to the pricing point of the Odessa Facility exceed certain thresholds. Subsequent to the acquisition, the earn-out provision has been accounted for as a derivative in our consolidated financial statements, and partial buybacks of the earn-out provision were settled in February and May 2018.

Upton Solar Development

In May 2017, we acquired the rights to develop, construct and operate a utility scale solar photovoltaic power generation facility in Upton County, Texas (Upton). As part of this project, we entered a turnkey engineering, procurement and construction agreement to construct the approximately 180 MW facility. For the six months ended June 30, 2018, we have spent approximately $21 million related to this project primarily for progress payments under the engineering, procurement and construction agreement. The facility began test operations in March 2018 and commercial operations began in June 2018.

Battery Energy Storage Project

In June 2018, we announced that, subject to approval by the California Public Utilities Commission (CPUC), we will enter into a 20-year resource adequacy contract with Pacific Gas and Electric Company (PG&E) to develop a 300 MW battery energy storage project at our Moss Landing Power Plant site in California. In late June 2018, PG&E filed its application with the CPUC to approve the contract, and a decision is expected within 90 days of the filing. Pending the receipt of CPUC approval, we anticipate the battery storage project will enter commercial operations by the fourth quarter of 2020.


4.
RETIREMENT OF GENERATION FACILITIES

Two of our non-operated, jointly held power plants acquired in the Merger for which our proportional generation capacity was 883 MW, were retired in May 2018. These units were retired as previously scheduled. No gain or loss was recorded in conjunction with the retirement of these units, and the operational results of these facilities are included in our Asset Closure segment. The following table details the units retired.
Name
 
Location
 
Fuel Type
 
Net Generation Capacity (MW)
 
Ownership Interest
 
Date Units Taken Offline
Killen
 
Manchester, Ohio
 
Coal
 
204

 
33%
 
May 31, 2018
Stuart
 
Aberdeen, Ohio
 
Coal
 
679

 
39%
 
May 24, 2018
Total
 
 
 
 
 
883

 

 
 

In January and February 2018, we retired three power plants with a total installed nameplate generation capacity of 4,167 MW. Luminant decided to retire these units because they were projected to be uneconomic based on then current market conditions and would have faced significant environmental costs associated with operating such units. In the case of the Sandow units, the decision also reflected the execution of a contract termination agreement pursuant to which the Company and Alcoa agreed to an early settlement of a long-standing power and mining agreement. Expected retirement expenses were accrued in the third and fourth quarter of 2017 and, as a result, no retirement expenses were recorded related to these facilities in both the three and six months ended June 30, 2018. The operational results of these facilities are included in our Asset Closure segment. The following table details the units retired.
Name
 
Location (all in the state of Texas)
 
Fuel Type
 
Installed Nameplate Generation Capacity (MW)
 
Number of Units
 
Date Units Taken Offline
Monticello
 
Titus County
 
Lignite/Coal
 
1,880

 
3
 
January 4, 2018
Sandow
 
Milam County
 
Lignite
 
1,137

 
2
 
January 11, 2018
Big Brown
 
Freestone County
 
Lignite/Coal
 
1,150

 
2
 
February 12, 2018
Total
 
 
 
 
 
4,167

 
7
 
 



10


5.
REVENUE

The following tables disaggregate our revenue by major source:
 
Three Months Ended June 30, 2018
 
Retail
 
ERCOT
 
PJM
 
NY/NE
 
MISO
 
Asset
Closure
 
CAISO/Eliminations
 
Consolidated
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail energy charge in ERCOT
$
1,111

 
$

 
$

 
$

 
$

 
$

 
$

 
$
1,111

Retail energy charge in Northeast/Midwest
336

 

 

 

 

 

 

 
336

Wholesale generation revenue from ISO

 
208

 
367

 
118

 
180

 
15

 
13

 
901

Capacity revenue

 

 
119

 
82

 
29

 
10

 
11

 
251

Revenue from other wholesale contracts

 
50

 
8

 
6

 
12

 

 
2

 
78

Total revenue from contracts with customers
1,447

 
258

 
494

 
206

 
221

 
25

 
26

 
2,677

Other revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible amortization
(15
)
 

 

 
(2
)
 
(6
)
 

 

 
(23
)
Hedging and other revenues
22

 
229

 
(161
)
 
(29
)
 
(121
)
 
(25
)
 
5

 
(80
)
Affiliate sales

 
840

 
152

 
12

 
163

 
21

 
(1,188
)
 

Total other revenues
7

 
1,069

 
(9
)
 
(19
)
 
36

 
(4
)
 
(1,183
)
 
(103
)
Total revenues
$
1,454

 
$
1,327

 
$
485

 
$
187

 
$
257

 
$
21

 
$
(1,157
)
 
$
2,574


 
Six Months Ended June 30, 2018
 
Retail
 
ERCOT
 
PJM
 
NY/NE
 
MISO
 
Asset
Closure
 
CAISO/Eliminations
 
Consolidated
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail energy charge in ERCOT
$
2,059

 
$

 
$

 
$

 
$

 
$

 
$

 
$
2,059

Retail energy charge in Northeast/Midwest
336

 

 

 

 

 

 

 
336

Wholesale generation revenue from ISO

 
383

 
367

 
118

 
180

 
51

 
13

 
1,112

Capacity revenue

 

 
119

 
82

 
29

 
10

 
11

 
251

Revenue from other wholesale contracts

 
102

 
8

 
6

 
12

 
1

 
2

 
131

Total revenue from contracts with customers
2,395

 
485

 
494

 
206

 
221

 
62

 
26

 
3,889

Other revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail contract amortization
(27
)
 
(1
)
 

 
(2
)
 
(6
)
 

 

 
(36
)
Hedging and other revenues
58

 
(233
)
 
(161
)
 
(29
)
 
(121
)
 
(34
)
 
5

 
(515
)
Affiliate sales

 
543

 
152

 
12

 
163

 
21

 
(891
)
 

Total other revenues
31

 
309

 
(9
)
 
(19
)
 
36

 
(13
)
 
(886
)
 
(551
)
Total revenues
$
2,426

 
$
794

 
$
485

 
$
187

 
$
257

 
$
49

 
$
(860
)
 
$
3,338


Retail Energy Charges

Revenue is recognized when electricity is delivered to our customers in an amount that we expect to invoice for volumes delivered or services provided. Sales tax is excluded from revenue. Payment terms vary from 15 to 45 days from invoice date. Revenue is recognized over-time using the output method based on kilowatt hours delivered. Energy charges are delivered as a series of distinct services and are accounted for as a single performance obligation.


11


Wholesale Generation Revenue from ISOs

Revenue is recognized when volumes are delivered to the ISO. Revenue is recognized over time using the output method based on kilowatt hours delivered and cash is settled within 10 days of invoicing. Vistra Energy operates as a market participant within ERCOT, PJM, NYISO, ISO-NE, MISO and CAISO and expects to continue to remain under contract with each ISO indefinitely. Wholesale generation revenues are delivered as a series of distinct services and are accounted for as a single performance obligation.

Capacity Revenue

Revenues are recognized when the performance obligation is satisfied ratably over time in accordance with the contracts as our power generation facilities stand ready to deliver power to the customer. We provide capacity to customers through participation in capacity auctions held by the ISO or through bilateral sales. Generation facilities are awarded auction volumes through the ISO auction and bilateral sales are based on executed contracts with customers.

Revenue from Other Wholesale Contracts

Other wholesale contracts include other revenue activity with the ISOs, such as ancillary services, auction revenue, neutrality revenue and revenue from nonaffiliated retail electric providers. Revenue is recognized when the service is performed. Revenue is recognized over time using the output method based on kilowatt hours delivered or other applicable measurements, and cash settles as invoiced. Vistra Energy operates as a market participant within ERCOT, PJM, NYISO, ISO-NE, MISO and CAISO and expects to continue to remain under contract with each ISO indefinitely. Other wholesale contracts are delivered as a series of distinct services and are accounted for as a single performance obligation.

Contract and Other Customer Acquisition Costs

We defer costs to acquire retail contracts and amortize these costs over the expected life of the contract. The expected life of a retail contract is calculated using historical attrition rates, which we believe to be an accurate indicator of future attrition rates. The deferred acquisition and contract cost balance as of June 30, 2018 and January 1, 2018 was $31 million and $22 million, respectively. The amortization related to these costs during the three and six months ended June 30, 2018 totaled $3 million and $6 million, respectively, recorded as a reduction to selling, general and administrative expenses, and $1 million and $2 million, respectively, recorded as operating revenues in the condensed statement of consolidated income (loss).

Practical Expedients

The vast majority of revenues are recognized under the right to invoice practical expedient, which allows us to recognize revenue in the same amount that we invoice our customers. We do not disclose the value of unsatisfied performance obligations for contracts for which we recognize revenue using the right to invoice practical expedient. We use the portfolio approach in evaluating similar customer contracts with similar performance obligations. Sales taxes are not included in revenue.

Performance Obligations
 
Performance Obligations as of June 30, 2018
 
 
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter (a)
Total capacity sold (MW)
17,829
 
17,429
 
14,826
 
13,619
 
5,947
 
338
Average price per kW-month
$
5.66

 
$
4.99

 
$
4.22

 
$
4.46

 
$
4.76

 
$
4.39

____________
(a)
Average of performance obligations from 2023-2027.

The table above includes future performance obligations that are unsatisfied, or partially unsatisfied, at the end of the reporting period. Our performance obligations relate to capacity auction volumes awarded through capacity auctions held by the ISO or through bilateral sales. Therefore, an obligation exists as of the date of the results of the respective ISO capacity auction, or the contract execution date for bilateral customers. The transaction price is also set by the results of the capacity auction or executed contract.


12


Accounts Receivable

The following table presents trade accounts receivable relating to both contracts with customers and other activities:
 
June 30, 2018
Trade accounts receivable from contracts with customers — net
$
1,044

Other trade accounts receivable — net
105

Total trade accounts receivable — net
$
1,149



6.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS AND LIABILITIES

Goodwill

The carrying value of goodwill totaling $1.907 billion at both June 30, 2018 and December 31, 2017 arose in connection with our application of fresh start reporting at Emergence and was allocated entirely to our ERCOT Retail reporting unit. Of the goodwill recorded at Emergence, $1.686 billion is deductible for tax purposes over 15 years on a straight-line basis.

Identifiable Intangible Assets and Liabilities

Identifiable intangible assets and liabilities are comprised of the following:
 
 
June 30, 2018
 
December 31, 2017
Identifiable Intangible Asset
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Retail customer relationship
 
$
1,678

 
$
722

 
$
956

 
$
1,648

 
$
572

 
$
1,076

Software and other technology-related assets
 
227

 
76

 
151

 
183

 
47

 
136

Retail and wholesale contracts
 
445

 
126

 
319

 
154

 
87

 
67

Other identifiable intangible assets (a)
 
34

 
11

 
23

 
33

 
11

 
22

Total identifiable intangible assets subject to amortization
 
$
2,384

 
$
935

 
1,449

 
$
2,018

 
$
717

 
1,301

Retail trade names (not subject to amortization)
 
 
 
 
 
1,245

 
 
 
 
 
1,225

Mineral interests (not currently subject to amortization)
 
 
 
 
 
4

 
 
 
 
 
4

Total identifiable intangible assets
 
 
 
 
 
$
2,698

 
 
 
 
 
$
2,530

Identifiable Intangible Liability
 
 
 
 
 
 
 
 
 
 
 
 
Contractual service agreements
 
$
139

 
$

 
$
139

 
$

 
$

 
$

Purchase and sales contracts
 
69

 
21

 
48

 
49

 
13

 
36

Total identifiable intangible liabilities
 
$
208

 
$
21

 
$
187

 
$
49

 
$
13

 
$
36

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


13


Amortization expense related to finite-lived identifiable intangible assets and liabilities (including the classification in the condensed statements of consolidated income (loss)) consisted of:
Identifiable Intangible Assets and Liabilities
 
Condensed Statements of Consolidated Income (Loss) Line
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Retail customer relationship
 
Depreciation and amortization
$
77

 
$
105

 
$
150

 
$
210

Software and other technology-related assets
 
Depreciation and amortization
19

 
9

 
30

 
17

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

 
21

 
32

 
45

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

 
4

 
3

 
8

Total amortization expense (a)
$
121

 
$
139

 
$
215

 
$
280

____________
(a)
Amounts recorded in depreciation and amortization totaled $97 million and $116 million for the three months ended June 30, 2018 and 2017, respectively, and $182 million and $231 million for the six months ended June 30, 2018 and 2017, respectively.

Following is a description of the separately identifiable intangible assets and liabilities recorded in connection with the Merger (see Note 2). As part of purchase accounting, the intangible assets were adjusted based on their estimated fair value as of the Merger Date, based on observable prices or estimates of fair value using valuation models. The purchase price allocation is ongoing and is dependent upon final valuation determinations, which have not been completed.

Retail customer relationship – The acquired retail customer relationship intangible asset represents the estimated fair value of our non-contracted Northeast/Midwest retail customer base, including residential and business customers, and is being amortized using an accelerated method based on historical customer attrition rates and reflecting the expected pattern in which economic benefits are realized over their estimated useful life.

Retail trade names – Our acquired retail trade name intangible asset represents the fair value of the Homefield and Dynegy Energy Services trade names and was determined to be an indefinite-lived asset not subject to amortization. This intangible asset will be evaluated for impairment at least annually in accordance with accounting guidance related to goodwill and other indefinite-lived intangible assets.

Retail and wholesale contracts/purchase and sales contracts – Our acquired retail and wholesale contracts and purchase and sales contracts represent various types of customer and supplier contracts, including municipal supplier contracts, capacity contracts, gas transportation contracts, and other contracts. The contracts were identified as either assets or liabilities based on the respective fair values at the time of the Merger utilizing prevailing market prices for commodities or services compared to fixed prices contained in these agreements. The intangible assets and liabilities are being amortized in relation to the economic terms of the related contracts.

Contractual service agreements – Our acquired contractual service agreements represent the estimated fair value of unfavorable contract obligations with respect to long-term plant maintenance agreements and are being amortized based on the expected usage of the service agreements over the contract terms.

Estimated Amortization of Identifiable Intangible Assets and Liabilities

As of June 30, 2018, the estimated aggregate amortization expense of identifiable intangible assets and liabilities for each of the next five fiscal years is as shown below.
Year
 
Estimated Amortization Expense
2018
 
$
401

2019
 
$
321

2020
 
$
245

2021
 
$
175

2022
 
$
109




14


7.
INCOME TAXES

Income Tax Expense (Benefit)

The calculation of our effective tax rate is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Income (loss) before income taxes
$
31

 
$
(34
)
 
$
(364
)
 
$
85

Income tax benefit (expense)
$
74

 
$
8

 
$
163

 
$
(33
)
Effective tax rate
(238.7
)%
 
23.5
%
 
44.8
%
 
38.8
%

For the three months ended June 30, 2018, the effective tax rate of (238.7)% related to our income tax benefit was lower than the U.S. federal statutory rate of 21% due primarily to (a) Vistra Energy's expanded state tax footprint requiring a one-time remeasurement of historical Vistra Energy deferred tax balances and (b) the difference in the forecasted effective tax rate and the statutory tax rate applied to mark-to-market unrealized gains, partially offset by an increase in state tax expense. For the six months ended June 30, 2018, the effective tax rate of 44.8% related to our income tax benefit was higher than the U.S. federal statutory rate of 21% due primarily to Vistra Energy's expanded state tax footprint requiring a one-time remeasurement of historical Vistra Energy deferred tax balances and an increase in state tax expense.

For the three months ended June 30, 2017, the effective tax rate of 23.5% related to our income tax expense was lower than the U.S. 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 U.S. 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.

Liability for Uncertain Tax Positions

Vistra Energy and its subsidiaries file income tax returns in U.S. federal and state jurisdictions and are expected to be subject to examinations by the IRS and other taxing authorities. Vistra Energy has limited operational history and filed its first federal tax return in October 2017. Vistra Energy is not currently under audit for any period. Uncertain tax positions totaling $41 million at June 30, 2018 arose in connection with the Merger and our assessment of the assumed liabilities is not complete as discussed in Note 2. We had no uncertain tax positions at December 31, 2017.


8.
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 our predecessor. 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 U.S. 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 acquisition of two CCGT natural gas fueled generation facilities in April 2016 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 TCEH entitled to receive such TRA Rights under the Plan of Reorganization. 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 17).

During the three months ended June 30, 2018, we recorded an increase to the carrying value of the TRA obligation totaling approximately $46 million related to changes in the timing of estimated payments and new multistate tax impacts resulting from the Merger.


15


The following table summarizes the changes to the TRA obligation, reported as other current liabilities and Tax Receivable Agreement obligation in our condensed consolidated balance sheets, for the six months ended June 30, 2018 and 2017:
 
Six Months Ended June 30,
 
2018
 
2017
TRA obligation at the beginning of the period
$
357

 
$
596

Accretion expense
36

 
42

Changes in tax assumptions impacting timing of payments
46

 

TRA obligation at the end of the period
439

 
638

Less amounts due currently
(25
)
 
(16
)
Noncurrent TRA obligation at the end of the period
$
414

 
$
622


As of June 30, 2018, the estimated carrying value of the TRA obligation totaled $439 million, which represents the discounted amount of projected payments under the TRA. The primary driver of the change in the obligation for the three months ended June 30, 2018 is the Merger and the addition of estimated multistate tax benefit payments. The projected payments are based on certain assumptions, including but not limited to (a) the federal corporate income tax rate of 21%, (b) estimates of our taxable income in the current and future years and (c) additional states that Vistra Energy now operates in, its relevant tax rate and apportionment factor. Our taxable income takes into consideration the current federal tax code, various relevant state tax laws and reflects our current estimates of future results of the business. These assumptions are subject to change, and those changes could have a material impact on the carrying value of the TRA obligation. The aggregate amount of undiscounted federal and state payments under the TRA is estimated to be approximately $1.4 billion, with more than half of such amount expected to be attributable to the first 15 tax years following Emergence, and the final payment expected to be made approximately 40 years following Emergence (assuming that the TRA is not terminated earlier pursuant to its terms).

The carrying value of the obligation 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 TRA payments 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, 2018, the Impacts of Tax Receivable Agreement on the condensed statements of consolidated income (loss) totaled expense of $64 million and $82 million, respectively, which represents an increase to the carrying value of the TRA obligation discussed above and accretion expense totaling $18 million and $36 million, respectively. During the three and six months ended June 30, 2017, the Impacts of Tax Receivable Agreement on the condensed statements of consolidated income (loss) totaled $22 million and $42 million, respectively, which represents accretion expense for the period.



16


9.
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, 2018
 
Three Months Ended June 30, 2017
 
Net Income
 
Shares
 
Per Share Amount
 
Net Loss
 
Shares
 
Per Share Amount
Net income (loss) available for common stock — basic (a)
$
108

 
526,332,862

 
$
0.21

 
$
(26
)
 
427,587,401

 
$
(0.06
)
Dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock-based incentive compensation plan

 
7,453,962

 
0.01

 

 

 

Net income (loss) available for common stock — diluted
$
108

 
533,786,824

 
$
0.20

 
$
(26
)
 
427,587,401

 
$
(0.06
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
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 (a)
$
(198
)
 
477,662,016

 
$
(0.41
)
 
$
52

 
427,585,381

 
$
0.12

Dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock-based incentive compensation plan

 

 

 

 
261,182

 

Net income (loss) available for common stock — diluted
$
(198
)
 
477,662,016

 
$
(0.41
)
 
$
52

 
427,846,563

 
$
0.12

____________
(a)
The minimum settlement amount of tangible equity units, or 15,056,260 shares, are considered to be outstanding and are included in the computation of basic net income (loss) per share (see Note 12).

Stock-based incentive compensation plan awards excluded from the calculation of diluted earnings per share because the effect would have been antidilutive totaled 8,064,657 and 1,088,670 shares in the three months ended June 30, 2018 and 2017, respectively, and 18,392,470 and 692,860 shares in the six months ended June 30, 2018 and 2017, respectively.


17


10.
LONG-TERM DEBT

Amounts in the table below represent the categories of long-term debt obligations incurred by the Company.
 
June 30,
2018
 
December 31,
2017
Vistra Operations Credit Facilities
$
5,842

 
$
4,311

Senior Notes:
 
 
 
7.375% Senior Notes, due November 1, 2022
1,750

 

5.875% Senior Notes, due June 1, 2023
500

 

7.625% Senior Notes, due November 1, 2024
1,250

 

8.034% Senior Notes, due February 2, 2024
188

 

8.000% Senior Notes, due January 15, 2025
750

 

8.125% Senior Notes, due January 30, 2026
850

 

Total Senior Notes
5,288

 

Other:
 
 
 
7.000% Amortizing Notes, due July 1, 2019
38

 

Forward Capacity Agreements
241

 

Equipment Financing Agreements
138

 

Mandatorily redeemable subsidiary preferred stock (a)
70

 
70

8.82% Building Financing due semiannually through February 11, 2022 (b)
24

 
27

Total other long-term debt
511

 
97

Unamortized debt premiums, discounts and issuance costs
322

 
15

Total long-term debt including amounts due currently
11,963

 
4,423

Less amounts due currently
(156
)
 
(44
)
Total long-term debt less amounts due currently
$
11,807

 
$
4,379

____________
(a)
Shares of mandatorily redeemable preferred stock in PrefCo issued as part of the Plan of Reorganization. This subsidiary preferred stock is accounted for as a debt instrument under relevant accounting guidance.
(b)
Obligation related to a corporate office space capital lease. This obligation will be funded by amounts held in an escrow account that is reflected in other noncurrent assets in our condensed consolidated balance sheets.

Vistra Operations Credit Facilities

At June 30, 2018, the Vistra Operations Credit Facilities consisted of up to $8.342 billion in senior secured, first lien revolving credit commitments and outstanding term loans, consisting of revolving credit commitments of up to $2.5 billion, including a $2.3 billion letter of credit sub-facility (Revolving Credit Facility) and term loans of $2.807 billion (Term Loan B-1 Facility), $985 million (Term Loan B-2 Facility) and $2.050 billion (Term Loan B-3 Facility, and together with the Term Loan B-1 Facility and the Term Loan B-2 Facility, the Term Loan B Facility).

These amounts reflect an amendment to the Vistra Operations Credit Facilities in June 2018 whereby we incurred $2.050 billion of borrowings under the new Term Loan B-3 Facility and obtained $1.640 billion of incremental Revolving Credit Facility commitments. The letter of credit sub-facility was also increased by $1.585 billion. The maturity date of the Revolving Credit Facility was extended from August 4, 2021 to June 14, 2023. As discussed below, the proceeds from the Term Loan B-3 Facility were used to repay borrowings under the credit agreement that Vistra Energy assumed from Dynegy in connection with the Merger. Additionally, letter of credit term loans totaling $500 million (Term Loan C Facility) were repaid using $500 million of cash from collateral accounts used to backstop letters of credit. Fees and expenses related to the amendment to the Vistra Operations Credit Facilities totaled $45 million in the three months ended June 30, 2018, of which $34 million was recorded as interest expense and other charges on the condensed statements of consolidated income (loss) and $11 million was capitalized as a reduction in the carrying amount of the debt.


18


The Vistra Operations Credit Facilities and related available capacity at June 30, 2018 are presented below.
 
 
 
 
June 30, 2018
Vistra Operations Credit Facilities
 
Maturity Date
 
Facility
Limit
 
Cash
Borrowings
 
Available
Capacity
Revolving Credit Facility (a)
 
June 14, 2023
 
$
2,500

 
$

 
$
1,065

Term Loan B-1 Facility (b)
 
August 4, 2023
 
2,807

 
2,807

 

Term Loan B-2 Facility (b)
 
December 14, 2023
 
985

 
985

 

Term Loan B-3 Facility (b)
 
December 31, 2025
 
2,050

 
2,050

 

Total Vistra Operations Credit Facilities
 
 
 
$
8,342

 
$
5,842

 
$
1,065

___________
(a)
Facility to be used for general corporate purposes. Facility includes a $2.3 billion letter of credit sub-facility, of which $1.435 billion of letters of credit were outstanding at June 30, 2018 and which reduce our available capacity.
(b)
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. Principal amounts paid cannot be reborrowed.

In February and June 2018, certain pricing terms for the Vistra Operations Credit Facilities were amended. We accounted for these transactions as a modification of debt. At June 30, 2018, cash borrowings under the Revolving Credit Facility would bear interest based on applicable LIBOR rates, plus a fixed spread of 1.75%, and there were no outstanding borrowings. Letters of credit issued under the Revolving Credit Facility bear interest of 1.75%. Amounts borrowed under the Term Loan B-1 Facility bear interest based on applicable LIBOR rates plus a fixed spread of 2.00%. Amounts borrowed under the Term Loan B-2 Facility bear interest based on applicable LIBOR rates plus a fixed spread of 2.25%. Amounts borrowed under the Term Loan B-3 Facility bear interest based on applicable LIBOR rates plus a fixed spread of 2.00%. At June 30, 2018, the weighted average interest rates before taking into consideration interest rate swaps on outstanding borrowings were 4.09%, 4.34% and 4.07% under the Term Loan B-1, B-2 and B-3 Facilities, respectively. The Vistra Operations Credit Facilities also provide for certain additional fees payable to the agents and lenders, including fronting fees with respect to outstanding letters of credit and availability fees payable with respect to any unused portion of the Revolving Credit Facility.

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, provided that the amount of loans outstanding under the Vistra Operations Credit Facilities that may be secured by a lien covering certain principal properties of the Company is expressly limited by the terms of 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 $300 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. As of June 30, 2018, we were in compliance with this financial covenant. 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.


19


Interest Rate Swaps — Effective January 2017, 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 expire in July 2023. In May and June 2018, we entered into $3.0 billion notional amount of interest rate swaps that become effective in July 2023 and expire in July 2026.

In June 2018, we completed the novation of $1.959 billion of Vistra Energy (legacy Dynegy) interest rate swaps to Vistra Operations Company LLC (Vistra Operations). In June 2018, $238 million of these interest rate swaps expired. The remaining interest rate swaps expire between March 2019 and February 2024.

The interest rate swaps effectively fix the interest rates between 4.13% and 4.38% on $4.721 billion of our variable rate debt. The interest rate swaps that become effective in July 2023 and expire in July 2026 effectively fix the interest rates between 4.97% and 5.04% on $3.0 billion of our variable rate debt during the period. The interest rate swaps are secured by a first lien secured interest on a pari-passu basis with the Vistra Operations Credit Facilities.

Vistra Energy (legacy Dynegy) Credit Agreement

On the Merger Date, Vistra Energy assumed the obligations under Dynegy's $3.563 billion credit agreement consisting of a $2.018 billion senior secured term loan facility due 2024 and a $1.545 billion senior secured revolving credit facility. As of the Merger Date, there were no cash borrowings and $656 million of letters of credit outstanding under the senior secured revolving credit facility. On April 23, 2018, $70 million of the senior secured revolving credit facility matured. In June 2018, the $2.018 billion senior secured term loan facility due 2024 was repaid using proceeds from the Term Loan B-3 Facility. In addition, all letters of credit outstanding under the senior secured revolving credit facility were replaced with letters of credit under the amended Vistra Operations Credit Facilities discussed above, and the revolving credit facility assumed from Dynegy in connection with the Merger was paid off in full and terminated.

Senior Notes

On the Merger Date, Vistra Energy assumed $6.138 billion principal amount of Dynegy's senior notes. In May 2018, $850 million of outstanding 6.75% Senior Notes due 2019 were redeemed at a redemption price of 101.688% of the aggregate principal amount, plus accrued and unpaid interest to but not including the date of redemption. In June 2018, each of the Company's subsidiaries that guaranteed the Vistra Operations Credit Facilities (and did not already guarantee the senior notes) provided a guarantee on the senior notes that remained outstanding.

The senior notes are unsecured and unsubordinated obligations of Vistra Energy and are guaranteed by substantially all of its current and future wholly-owned domestic subsidiaries that from time to time are a borrower or guarantor under the agreement governing the Vistra Operations Credit Facilities (Credit Facilities Agreement) (see Note 20). The respective indentures of the senior notes limit, among other things, the ability of the Company or any of the guarantors to create liens upon any principal property to secure debt for borrowed money in excess of, among other limitations, 30% of total assets. The respective indentures of the senior notes also contain customary events of default which would permit the holders of the applicable series of senior notes to declare such notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely principal or interest payments on such notes or other indebtedness aggregating $100 million or more, the failure to satisfy covenants, and specified events of bankruptcy and insolvency.

Amortizing Notes

On the Merger Date, Vistra Energy assumed the obligations of Dynegy's senior amortizing note (Amortizing Notes) maturing on July 1, 2019. The Amortizing Notes were issued in connection with the issuance of the tangible equity units (TEUs) by Dynegy (see Note 12). Each installment payment per Amortizing Note will be paid in cash and will constitute a partial repayment of principal and a payment of interest, computed at an annual rate of 7.00%. Interest will be calculated on the basis of a 360-day year consisting of twelve 30-day months. Payments will be applied first to the interest due and payable and then to the reduction of the unpaid principal amount, allocated as set forth in the indenture.


20


The indenture for the Amortizing Notes limits, among other things, the ability of the Company to consolidate, merge, sell, or dispose all or substantially all of its assets. If a fundamental change occurs, or if the Company elects to settle the prepaid stock purchase contracts early, then the holders of the Amortizing Notes will have the right to require the Company to repurchase the Amortizing Notes at a repurchase price equal to the principal amount of the Amortizing Notes as of the repurchase date (as described in the supplemental indenture) plus accrued and unpaid interest. The indenture also contains customary events of default which would permit the holders of the Amortizing Notes to declare those Amortizing Notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely installment payments on the Amortizing Notes or other material indebtedness aggregating $100 million or more, the failure to satisfy covenants, and specified events of bankruptcy and insolvency.

Forward Capacity Agreements

On the Merger Date, the Company assumed the obligation of Dynegy's agreements under which a portion of the PJM capacity that cleared for Planning Years 2018-2019, 2019-2020 and 2020-2021 was sold to a financial institution (Forward Capacity Agreements). The buyer in this transaction will receive capacity payments from PJM during the Planning Years 2018-2019, 2019-2020 and 2020-2021 in the amounts of $10 million, $121 million and $110 million, respectively. We will continue to be subject to the performance obligations as well as any associated performance penalties and bonus payments for those planning years. As a result, this transaction is accounted for as a debt issuance of $241 million with an implied interest rate of 4.90%.

Equipment Financing Agreements

On the Merger Date, the Company assumed Dynegy's Equipment Financing Agreements. Under certain of our contractual service agreements in which we receive maintenance and capital improvements for our gas-fueled generation fleet, we have obtained parts and equipment intended to increase the output, efficiency and availability of our generation units. We have financed these parts and equipment under agreements with maturities ranging from 2019 to 2026. The portion of future payments attributable to principal will be classified as cash outflows from financing activities, and the portion of future payments attributable to interest will be classified as cash outflows from operating activities in our condensed statements of consolidated cash flows.

Maturities

Long-term debt maturities at June 30, 2018 are as follows:
 
June 30, 2018
Remainder of 2018
$
85

2019
182

2020
204

2021
130

2022
1,824

Thereafter
9,216

Unamortized premiums, discounts and debt issuance costs
322

Total long-term debt, including amounts due currently
$
11,963



21



11.
COMMITMENTS AND CONTINGENCIES

Guarantees

We have entered into contracts, including the assumed Dynegy senior notes described above, that contain guarantees to unaffiliated parties that could require performance or payment under certain conditions. As of June 30, 2018, 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, 2018, we had outstanding letters of credit under the Vistra Operations Credit Facilities totaling $1.435 billion as follows:

$1.221 billion 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 ISOs;
$51 million to support executory contracts and insurance agreements;
$55 million to support our REP financial requirements with the PUCT, and
$108 million for other credit support requirements.

Litigation

Gas Index Pricing Litigation — We, through our subsidiaries, and other energy companies are named as defendants in several lawsuits claiming damages resulting from alleged price manipulation through false reporting of natural gas prices to various index publications, wash trading and churn trading from 2000-2002. The cases allege that the defendants engaged in an antitrust conspiracy to inflate natural gas prices in three states (Kansas, Missouri and Wisconsin) during the relevant time period and seek damages under the respective state antitrust statutes. Four of the cases are putative class actions and one case, Reorganized FLI (nka J.P. Morgan Trust Co., National Assn.) v. Oneok Inc., et al., is an individual action on behalf of Farmland Industries, Inc. (Farmland), with Farmland seeking full consideration damages (i.e., the full amount it paid for natural gas purchases during the relevant timeframe). The cases are consolidated in a multi-district litigation proceeding pending in the U. S. District Court for Nevada. In March 2017, the court denied the class plaintiffs' motions to certify class actions in each of the states, which decision now is on an interlocutory appeal to U.S Court of Appeals for the Ninth Circuit (Ninth Circuit Court); the appeal is fully briefed and was argued in July 2018. As for the Farmland matter, in March 2018, the Ninth Circuit Court reversed a summary judgment in favor of the defendants and it shortly will be remanded for further discovery and other pretrial proceedings. While we cannot predict the outcome of these legal proceedings, or estimate a range of costs, they could have a material impact on our results of operations, liquidity or financial condition.

Advatech Dispute — In September 2016, , Illinois Power Generating Company (Genco), terminated its Second Amended and Restated Newton Flue Gas Desulfurization System Engineering, Procurement, Construction and Commissioning Services Contract dated as of December 15, 2014 with Advatech, LLC (Advatech). Advatech issued Genco its final invoice in September 2016 totaling $81 million. Genco contested the invoice in October 2016 and believes the proper amount is less than $1 million. In October 2016, Advatech initiated the dispute resolution process under the contract and filed for arbitration in March 2017. Settlement discussions required under the dispute resolution process have been unsuccessful. The arbitration hearing is scheduled for October 2018. We dispute the allegations and will defend our position vigorously. While we cannot predict the outcome of this legal proceeding, or estimate a range of costs, it could have a material impact on our results of operations, liquidity or financial condition.

Wood River Rail Dispute — In November 2017, Dynegy Midwest Generation, LLC (DMG) received notification that BNSF Railway Company and Norfolk Southern Railway Company were initiating dispute resolution related to DMG's suspension of its Wood River Rail Transportation Agreement with the railroads. Settlement discussions required under the dispute resolution process have been unsuccessful. In March 2018, BNSF Railway Company and Norfolk Southern Railway Company filed a demand for arbitration. We dispute the railroads' allegations and will defend our position vigorously. While we cannot predict the outcome of this legal proceeding, or estimate a range of costs, it could have a material impact on our results of operations, liquidity or financial condition.


22


Litigation Related to the Merger — In January 2018, a purported Dynegy stockholder filed a putative class action lawsuit in the U.S. District Court for the Southern Division of Texas, Houston Division, alleging that Dynegy, each member of the Dynegy board of directors and Vistra Energy violated federal securities laws by filing a Form S-4 Registration Statement in connection with the Merger that omitted purportedly material information. The lawsuit sought to enjoin the Merger and to have Dynegy and Vistra Energy issue an amended Form S-4 or, alternatively, damages if the Merger closed without an amended Form S-4 having been filed. Two other related lawsuits were also filed but neither of those named Vistra Energy as a respondent. In February 2018, Vistra Energy and Dynegy filed supplemental disclosures to the Registration Statement and the plaintiffs agreed to forego any further effort to enjoin the Merger and dismiss the individual claims with prejudice, and they dismissed without prejudice claims of the putative class following the stockholder vote on March 2, 2018. These cases have been dismissed.

Greenhouse Gas Emissions

In August 2015, the EPA finalized rules to address greenhouse gas emissions from new, modified and reconstructed and existing electricity generation units, referred to as the Clean Power Plan, including rules for existing facilities that would establish state-specific emissions rate goals to reduce nationwide CO2 emissions. Various parties (including Luminant) filed petitions for review in the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit Court) and subsequently, in January 2016, a coalition of states, industry (including Luminant) and other parties filed applications with the U.S. 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 was heard in September 2016 before the entire D.C. Circuit Court. The D.C. Circuit Court granted a renewed 60-day abeyance of the case on June 26, 2018, which will expire in August 2018.

Following a March 2017 Executive Order entitled Promoting Energy Independence and Economic Growth issued by President Trump covering a number of matters, including the Clean Power Plan (Order), in April 2017, in accordance with the Order, the EPA published its intent to review the Clean Power Plan. In October 2017, the EPA issued a proposed rule that would repeal the Clean Power Plan, with the proposed repeal focusing on what the EPA believes to be the unlawful nature of the Clean Power Plan and asking for public comment on the EPA's interpretations of its authority under the Clean Air Act. In December 2017, the EPA published an advance notice of proposed rulemaking (ANPR) soliciting information from the public as the EPA considers proposing a future rule. Vistra Energy submitted comments on the ANPR in February 2018. Vistra Energy submitted comments to the proposed repeal in April 2018. 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.

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. After certain EPA revisions to the rule, the CSAPR became effective January 1, 2015. With respect to Texas's SO2 and annual NOX emission budgets, in November 2016, the EPA proposed to withdraw the CSAPR Federal Implementation Plan (FIP) addressing SO2 and annual NOX for Texas, and in September 2017, the EPA finalized its proposal to remove Texas from these annual CSAPR programs. The Sierra Club and the National Parks Conservation Association filed a petition for review in the D.C. Circuit Court challenging that final rule and Luminant intervened on behalf of the EPA. On April 10, 2018, the D.C. Circuit Court granted the EPA's and petitioners' motion to hold the case in abeyance pending the EPA's consideration of a pending petition for administrative reconsideration. As a result of the EPA's action, Texas electric generating units are no longer subject to the CSAPR annual SO2 and NOX limits, but remain subject to the CSAPR's ozone season NOX requirements. In October 2016, the EPA issued a CSAPR update, which revised the ozone season NOX limits for 22 eastern states, including Texas. Various parties (including Luminant) filed petitions for review in the D.C. Circuit Court. The case has been fully briefed and is scheduled for oral argument in October 2018. While we cannot predict the outcome of future proceedings related to the CSAPR, based upon our current operating plans, including the retirements of our Monticello, Big Brown and Sandow 4 plants (see Note 4), we do not believe that the CSAPR in its current form will cause any material operational, financial or compliance issues to our business or require us to incur any material compliance costs.


23


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 which impairment results from man-made pollution." In February 2009, the TCEQ submitted a State Implementation Plan (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. The EPA finalized the limited disapproval of Texas's Regional Haze SIP in June 2012 and, on March 20, 2018, the D.C. Circuit Court issued a decision upholding the EPA's actions and denying all of Luminant's petitions for review.

In January 2016, the EPA issued a final rule approving in part and disapproving in part Texas's SIP addressing the reasonable progress component of the Regional Haze program and issuing a FIP. The EPA's 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. Under the terms of the rule, subject to the legal proceedings described in the following paragraph, the scrubber upgrades would be required by February 2019, and the new scrubbers would 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 U.S. Court of Appeals for the Fifth Circuit (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 granted the motions to stay filed by Luminant and the other parties 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. 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, and the EPA is required to file status reports of its reconsideration every 60 days. The retirements of our Monticello, Big Brown and Sandow 4 plants should have a favorable impact on this rulemaking and litigation. While we cannot predict the outcome of the rulemaking and legal proceedings, or estimate a range of reasonably possible costs, the result could have a material impact on our results of operations, liquidity or financial condition.

Regional Haze — Best Available Retrofit Technology (BART)