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Dynegy, Inc. (NYSE:DYN)

Q4 2009 Earnings Call Transcript

February 25, 2010 10:00 am ET

Executives

Norelle Lundy – VP, Investor and Public Relations

Bruce Williamson – Chairman, President and CEO

Holli Nichols – EVP and CFO

Chuck Cook – EVP, Commercial and Market Analytics

Analysts

Neel Mitra – Simmons & Company International

Lasan Johong – RBC Capital Markets

Dan Eggers – Credit Suisse

Gregg Orrill – Barclays Capital

Ameet Thakkar – Bank of America/Merrill Lynch

Andy Smith – J.P. Morgan

Brandon Blossman – Tudor Pickering

Julien Dumoulin-Smith – UBS

Brian Russo – Ladenburg Thalmann

Brian Chin – Citigroup

Craig Shere – Tuohy Brothers Investment Research

Ivana Ergovic – Jefferies

Operator

Welcome to the Dynegy 2009 annual and fourth quarter financial results teleconference. At the request of Dynegy, this conference is being recorded for instant replay purposes. Please note that all lines will be in a listen-only mode until the question and answer portion of today's call. (Operator Instructions)

I'd now like to turn the conference over to Ms. Norelle Lundy, Vice President of Investor and Public Relations. Ma'am, you may begin.

Norelle Lundy

Good morning, everyone and welcome to Dynegy's investor conference call and webcast highlighting the company's 2009 annual and fourth quarter results. As is our customary practice before we begin this morning, I would like to remind you that our call will include statements reflecting assumptions, expectations, projections, intentions or beliefs about future events with respect to our business strategy and 2010 estimates.

These and other statements not relating strictly to historical or current facts are intended as forward-looking statements. Actual results though may vary materially from those expressed or implied in any forward-looking statement. For a description of the factors that may cause such a variance I will direct you to the forward-looking statements legend contained in today's news release and in our SEC filings which are available free of charge through our website at Dynegy.com.

With that I will now turn it over to our Chairman, President and CEO, Bruce Williamson.

Bruce Williamson

Thanks, Norelle. Good morning and thank you for joining us. With me this morning are several members of Dynegy's management team including Holli Nichols, our Chief Financial Officer.

Let's now turn to the agenda for the call which is highlighted on slide three for those of you who are following along online via the Webcast. I'll begin today with our accomplishments in 2009, a year in which Dynegy continued to operate and commercialize well in the face of some very tough economic conditions. I'll touch on our strategic achievements during the year that position us for the future.

Next, Holli will provide full year 2009 financial results, discuss annual performance drivers for each of the key regions and turn to our 2010 estimate. I'll then provide my perspective on the industry, discuss why we believe – and discuss why we believe Dynegy is a long term value play. Finally our Management team will join me in answering your questions.

Please turn to slide four. Significantly lower commodity prices reduced demand and made 2009 a very challenging year for the company and the electricity sector as a whole. Despite a tough economic landscape, Dynegy continues to execute well by staying focused on three key objectives, operating and commercializing well, prudent financial management and strategic positioning.

Here I'd like to spend a few minutes discussing our significant accomplishments in each of these areas for 2009. Starting with our operations, our base load coal fleet continued its reliable track record achieving end market availability above 90%.

Of U.S. electricity demand dropped by about 4% in 2009, our production volumes were essentially flat. This can be attributed to the diversity of our fleet and our constant focus on reliability.

On the commercial side, our strategy has helped us increase near term earnings predictability. In fact, our commercial activities more than offset lower commodity prices in 2009. We also significantly exceeded our 2009 guidance estimates and today we're reaffirming our 2010 guidance estimates. Holli will provide more details in a few minutes.

Another key accomplishment last year was our successful execution of our strategic transaction that substantially increased our liquidity and preserved a strong diversified asset base, 30% of our outstanding shares were redeemed in this transaction eliminating the dual class stock structure and associated rights and restrictions.

The transaction created 100% publicly held company for the first time in our corporate history. With cash proceeds from the transaction we then repurchased approximately 830 million of 2011 and 2012 debt obligations and we initiated a cost savings program expected to save 400 million to 450 million over the next four years. So we're now able to center our focus on the operational and commercial aspects of our business while being in a position to capitalize on expected longer term power market improvements.

With that, I'll turn the call over to Holli to discuss 2009 financial results.

Holli Nichols

Thanks, Bruce. Please turn to slide six. Before I begin I'd like to point out that this presentation does contain non-GAAP measures that are reconciled later in the presentation and fourth quarter results are also covered in the appendix of this presentation.

Now turning to full year financial results, annual adjusted EBITDA decreased only 2% from 818 million in 2008 to 803 million in 2009, despite the significant decline in market power prices and spark spreads which negatively impacted our results from generation.

The decline in market prices and spreads was more than offset by the impact of contracting 2009 volumes at higher energy prices, actively managing swap and option positions and other commercial activities.

We also benefited from a net increase in capacity and tolling revenues, improving – I'm sorry – improved basis in Illinois and stronger run times from our natural gas combined cycle facilities in the Midwest and Northeast due to positive spark spreads and fewer planned outages.

These benefits were partially offset by a significant decrease in interest income due to a drop in interest rates as well as an increase in operating expenses related to more planned outages associated with our coal fleet in Illinois and Moss Landing in California.

Turning to capital and liquidity, we had net debt and other obligations of 4.9 billion as of December 31, '09. This included cash on hand and investments of 471 million and restricted cash and investments of 869 million. At the end of the year, Dynegy had collateral of 827 million posted and liquidity of 1.9 billion. This asset increased to 2.3 billion as of February 19, 2010.

The increase in cash on hand reflects increased cash in-flows from the company's collateral clearing agent due to margin requirements and reduced options position. However, as prices and positions move, you can see a very reversal of this trend.

Relating to our GAAP results, Dynegy reported a net loss of 1.2 billion for 2009 compared to net income of 174 million for 2008. In both years there were a number of notable items that impacted GAAP results. In 2009, we had after-tax charges of 922 million primarily related to impairment, a 184 million after-tax loss on asset sales and after-tax net mark-to-market losses of 111 million.

In 2008 we had $157 million in after-tax net mark-to-market gains as commodity prices sell dramatically in the last half of the year. Please turn to slide seven for a discussion of our 2009 regional performance drivers.

Despite lower market prices, total volumes in 2009 were relatively flat year-over-year as demonstrated by the graph on the far left. This was primarily due to stronger run times in our combined cycle units. These volumes and those specific to our business segments do include the megawatts generated from the assets sold in the fourth quarter.

Moving to our Midwest segment even with lower power prices, the Midwest adjusted EBITDA was flat period over period. Midwest results benefited from contracting volumes at higher energy prices, actively managing swap and option positions and other commercial activity including the sale and assignment of a multi-year power sales contract.

Additional benefits included the reduced impact at the base of differential between liquid market and power delivery prices and increased contributions from the Midwest natural gas combined cycle facilities. These benefits were offset by a net expense relating to the purchase of options that should benefit future periods, increased operating expenses due to planned outages at coal facilities, a net reduction in capacity and tolling revenues and lower emission credit sales.

Midwest production volumes increased 2% due to a 74% increase in volumes associated with the company's natural gas combined cycle units. The company's coal fleet volumes decreased by 5% for the year primarily due to lower demand as a result of milestone of weather, increased transmission line outages, off-peak wind generation and imports. In addition, coal volumes were impacted by more planned outages period over period. Reliability remained strong with the Midwest coal fleet achieving in market availability of approximately 90%.

In the West, adjusted EBITDA increased 8% primarily due to increased capacity and tolling revenues and actively managing swap and option positions as well as other commercial activities such as the net benefit of selling options. These positive factors were offset by lower spark spreads and increased operating expenses related to a planned the outage at the Moss Landing facility. Overall production decreased 28% as a result of weak spark spreads attributed to lower demand.

Moving to the Northeast, adjusted EBITDA increased 12% despite the negative impact from falling prices. Commercial efforts more than offset the price decline as we contracted volumes at higher energy prices. In addition we actively managed swap and option positions and benefited from other commercial activities such as the net benefit of selling options.

Also, the Northeast benefited from stronger run times at natural gas combined cycle facilities and higher capacity and emission credit sales. These positive factors were offset by allowance costs associated with the regional greenhouse gas initiative and a coal inventory write-down that reduced the book value of inventory to lower market prices during the first nine months of the year.

Production volumes increased 29% due to stronger combined cycle run times, combined cycle plants benefited from fewer planned outages and reduced transmission outages and congestion issues which negatively impacted the independence in Casco Bay facilities in 2008. The increase in production volumes was partially offset by milder weather and a 23% reduction in production volume from the Danskammer facility due to lower market prices. While run time was down, Danskammer still achieved end market availability of approximately 95%. Please turn to slide eight.

Now I'd like to cover our full year actual results compared to our last guidance estimates provided on November 5, 2009. I'll focus on adjusted measures but GAAP measures are included at the bottom of this slide and in more detail in the appendix of this presentation.

Let's begin with adjusted EBITDA, which is the financial measure that many analysts base their expectations on. 2009 adjusted EBITDA came in at 803 million, about 40 million more than the top end of our range. Adjusted cash flow from operations was 170 million, 65 million greater than the top of our range and adjusted free cash flow was a negative 315 million. That's about 80 million better than amounts we provided in November.

Results exceeded prior estimates due to a number of factors so let me cover some of these. We benefited from active management of commodity positions including the net benefit from option premiums; G&A was lower than forecasted which was partially offset by reduced income – interest income. Actual initial margin postings were lower than estimates and maintenance CapEx was reduced due to the cancellation of non-essential projects.

The key take away here is that we finished the year in line or a bit improved over the most recent estimates. This is the result of an effective commercial strategy that added predictability to our results despite the market downturn as well as a focus on cost control and operations of our facilities.

Please turn to slide nine. Now I'll cover our consolidated 2010 earnings estimates. I'm going to focus on adjusted measures but GAAP measures are included at the bottom of this slide and in more detail in the appendix of the presentation. Today we are reaffirming our 2010 guidance ranges which include adjusted EBITDA of 425 million to 550 million for 2010, the estimates we're providing are based on 2010 forward natural gas price at 5.72 per MMBtu as of January 26, 2010. We're projecting a range of adjusted cash flow from operations of negative 15 million to positive 110 million which includes interest payments and working capital.

Taking into consideration maintenance CapEx of 120 million and environmental CapEx of 200 million and capitalized interest of 25 million, we're projecting an adjusted free cash flow range of negative 360 million to negative 235 million. I'd like to mention here that we're winding down our consent decree investment which includes back houses, dry scrubbers and mercury controls at eight coal units in Illinois. Consent decree spending peaked at 280 million in 2009. We're looking forward to the completion of the remaining projects and the emission reductions that these investments are producing.

With that I want to thank you for your time and turn it back over to Bruce.

Bruce Williamson

Thanks, Holli. Please turn to slide 11. Over the long term, we expect commodity prices and demand to rise while U.S. electric demand declined approximately 4% in 2009 it's important to remember it's still within the five year average range shown on this slide. As for 2010, the business environment may continue to be challenging with commodity prices remaining volatile. Even so, weather spikes offer opportunities to capture incremental value as we experienced in late 2009 and in January.

Many of you have asked how we can capture value even though volumes are essentially 100% contracted for 2009 and why our adjusted EBITDA range is wide. A bit of explanation here. When we say volumes are 100% contracted this does not mean all of our assets potential production capacity is sold. Instead this percentage represents contracted volumes using a current commodity price curve and evaluating the probability of whether or not it will be economical for an asset to run.

For example, as of December 31, we have sold approximately 25% of the production capacity of the Independence facility in January; however the January weather event gave us the ability to sell additional megawatts from Independence. This allowed us to capture the power price volatility on an interim month basis.

Now turning to the graph on the bottom left of the slide you can see that commodity prices are trending upward. Over the next two years, U.S. electricity demand is projected to increase by about 2%. On a supply side of the equation we believe that new generation will come on line at a very slow rate given the slowdown of new Power Plant development and construction activities.

Barriers to entry remain very high in a capital intensive industry and very few base load and intermediate development projects are actually being built. So looking at long term industry fundamentals we believe that power markets will improve as supply and demand tighten and natural gas prices rise over time which should result in an increase in power prices.

Please turn to slide 12. A number of you have asked about two issues specific to the coal fleet. Our coal contracts in the environmental investments that we are making in clean technologies. Here I'd like to provide some additional insight starting with our coal contracts on the left of the slide.

Our Midwest base load fleet uses 100% Powder River Basin coal or PRB. Some types of coal have shown dramatic volatility over the past two years due to global demand. In fact the uptick in central app and so South American coal prices that we have seen on the last quarter stems mostly from increased steel production overseas. On the other hand PRB coal prices have stayed relatively flat because for the most part PRB is a regional commodity with a limited market of end-users so it's not as impacted by global demand. As you can see by this graph it's also less expensive than other types of coal.

Excluding delivery costs PRB coal prices remain lower than they were two years ago despite a challenging winter that caused transportation disruptions. As for our contracts, our Midwest rail transportation cost is contracted through 2013 with no fuel price escalators. In addition, our Midwest coal supply is 100% priced through 2010 and as you can see delivered PRB to Baldwin has remained relatively flat over the past two years increasing by only about (inaudible) from 2008. Together, these contracts continue to provide us with stability.

Looking at the right side of the slide, I would shift my focus to the ongoing progress on our Midwest clean air investments. We believe that our Midwest consent decree spending and associated control should lessen the impact of potential changes in air regulations. To sum up the scope of this work, bag houses, scrubbers and mercury control projects are being introduced at eight of the coal fired units in Illinois. Final projects are currently under way at Baldwin with full completion in early 2013.

Through 2009, we spent about 545 million on these projects with investments totaling 415 million remaining through 2013. As the graph on the bottom right demonstrates, annual spending declined through 2013. Further, our liquidity of 2.3 billion as of February 19, 2010 which includes 746 million of cash on hand is well in excess of these CapEx requirements.

The benefits of this work are substantial. Combining with our earlier investments in low sulfur PRB coal, we're anticipating reductions of nitrous oxide, sulfur dioxide and mercury of approximately 90%, as well as significant drops in particulate matter and other emissions. We are often asked to speculate on how this may help meet future environmental requirements.

While we do not know what standards will be established we believe that the back end controls that are being installed on our fleet in Illinois demonstrate our ongoing commitment to meeting regulatory standards. I would also note that we're employing about 600 people in the Heartland to do this work. This comes to about one contractor for every operating job at our plants.

So these are real green energy jobs that are not reliant on government funding or guarantees to do the right thing and improve our country and clean up the environment while at the same time preserving good well paying operating jobs in America.

Please turn to slide 13. One of our hallmarks of our business has been the constant re-working of our capital structure to ensure that it is integrated with our commercial strategy. In addition to operating and commercializing well, our prudent financial management was a major accomplishment in 2009. The strategic transaction and subsequent liability management program reused to repurchase 830 million at 2011 and 2012 bonds so we have no significant bond maturities until 2015. And we did this while still leaving us with current liquidity of 2.3 billion. While there is some debt related to our interest in the Plum Point construction project that has been accounted for as current, it is non-recoursed to Dynegy. Our maximum liability on this debt is about 15 million.

Turning to our commercial profile in the near and intermediate term, we're essentially fully contracted to increase predictability of earnings and cash flow while also protecting against downside risk. Our commercial arrangements include tolling arrangements, swaps and a variety of option positions. The percentage of expected generation volumes that we've contracted on a consolidated basis currently is greater than 95% for 2010. In January 2010 we were at about 85% contracted for 2011. As we had in the past, we will continue to contract 2011 as we see market opportunities.

Our long-term strategy is to stay relatively un-contracted which positions us to capture value as the economy strengthens and supply and demand tighten. In addition, the purchase and sale of options allows for the capture of some additional upside and help mitigates downside risk. For more information on our use of options please see the appendix of this presentation.

Please turn to slide 14. Dynegy's proposition for investors is that of a long term value play. We believe that there are three objectives that will help us create this future value. These are identified in an earlier slide and I would revisit them in this context. First, operating commercialize well, second prudent financial management and third strategic positioning.

In wrapping up today's presentation, I would like to demonstrate how we're meeting each of these objectives. In terms of operating and commercializing well, our asset diversity helps us to manage many of the risks inherent in our business. We continue to maximize cash flows by maintaining a low cost reliable operating platform and our commercial strategy remains open to harvest value as supply and demand are expected to tighten in longer term.

Relating to prudent financial management, we demonstrated in 2009 the ongoing proactive management of our capital structure to facilitate our commercial strategy. We're maintaining a simple flexible capital structure and we have largely eliminated a significant portion of our bond maturities until 2015. We've also driven down costs through a multi-year cost saving program.

Finally, we've eliminated our dual-class stock structure and simplified our stock structure in which all of our outstanding equity is now publicly held for the first time in our 26 year corporate history. This provides strategic flexibility to participate in the future consolidation of the industry. We have long held and we continue to believe that the industry consolidation remains an attractive proposition based on significant synergies and cost savings that should be able to be achieved through combinations. Our diligence in success at meeting these objectives positions us to capture this long term value.

With that let's move to the question and answer portion of the presentation. Operator, we'll take the first call now.

Question-and-Answer Session

Operator

Thank you. Our first question comes from Neel Mitra with Simmons & Company International. Your line is open.

Neel Mitra – Simmons & Company International

Good morning.

Bruce Williamson

Hi, Neel.

Neel Mitra – Simmons & Company International

Can you give us some more information regarding the option or caller positions for 2011, specifically how much upside it allows you to retain if synergy prices improve? I'm looking at the disclosures and it seems like the weighted average around the clock pricing on the hedges is somewhere between $30 and $40 a megawatt hour. How much higher could you receive if the power prices and the floor curves are a day-ahead increase above that?

Holli Nichols

Maybe Neel, I'll start. As you can imagine, it's probably not in our best interest to talk details of the positions we have. One of the things that we highlighted on the call today is it takes a lot of active management around these positions. So we – what I would say is, what we tend to do is, we'll buy our puts at market but we'll sell the calls above market and so we do feel like there is room for upside associated with the callers that we put on but I think I'd rather not go into details about what the value is associated with those.

Neel Mitra – Simmons & Company International

Okay. And then just in general, what do you believe it needs to happen in MISO for power prices to recover beyond the natural gas prices increasing? Does a significant amount of coal capacity need to be retired or wind buildo-ut moderated? Just what are your thoughts and also the timing of a recovery in the region as well?

Bruce Williamson

Well, probably, Neel. Probably, the biggest thing is just more of just a recovery in general demand. There has been curtailments on the industrial side all through the Midwest with auto parts manufacturers and things like that, that all reaches down into our region while agribusiness has been I think relatively speaking compared with manufacturing, I think the agricultural side has been somewhat unscathed. You just generally need an overall trend in the right direction in terms of economic recovery. In addition I don't think we should forget that 2009 was a year where there basically was not a summer in the Midwest. We had more of a normal weather pattern but beyond that–

Neel Mitra – Simmons & Company International

Okay. Great. Thank you.

Bruce Williamson

Operator, we're getting a lot of static on the line. I don't know if there's anything on your end.

Operator

One moment. Our next question comes from –

Bruce Williamson

A lot better.

Operator

Lasan Johong with RBC Capital Markets. Your line is open.

Lasan Johong – RBC Capital Markets

Thank you. Good morning, Bruce, Holli.

Holli Nichols

Good morning.

Lasan Johong – RBC Capital Markets

You got me excited there for a second when you said commercial activity was one of the reasons why you did better. I'm assuming that's not going to be prop trading?

Holli Nichols

That's correct. Any of the activities we do from a commercial perspective are more about reducing risk around our margin.

Lasan Johong – RBC Capital Markets

That's disappointing. A couple questions around sensitivities. There is a chart in the back that details $5 gas and kind of what you expect from there but $4 gas environment I think it's pretty clear that there's some risk to the downside and you may trigger some debt covenants in the third quarter. Can you talk about what if any consequences there are to triggering those covenants?

Holli Nichols

Well, I might start, Lasan with the fact that given the level of commercial activity that we've executed for '10 and '11, those sensitivities are quite small to changes in gas prices. So when we look at our earnings, I would say for '10 the things that we would look to more are going to be around what sort of outage rates we have, what happens with basis, what happens with capacity markets, it's really probably less tied to natural gas price changes in the near term.

But that said and I would say that we don't have concern around the covenants, I would start maybe with that statement as an overall statement but to give you a little more detail, we do have three different covenants. One of those is the interest coverage ratio which actually if you trip that it is a default. There's another that would if tripped what it would do is to impact our access to the revolver so it could reduce the capacity of the revolver. And the third has to do with just it's an incurrence test that in the event we want to sell assets or incur more debt we would have to be in compliance with that.

So don't have concerns as we look out over 2010 with the interest coverage ratio. Depending on where some of these other factors as I mentioned earlier fall out there could be some reduction in capacity around the revolver but that's when we take into account the level of liquidity we have and match that to our Commercial Operations, we don't have any concerns about lack of or sufficient

Lasan Johong – RBC Capital Markets

Excellent. Bruce, you mentioned that your Midwest coal procurement was locked in through 2010 but if you believe that commodity prices are headed up in the near future, shouldn't you be looking at renewing your coal contracts in the near future?

Bruce Williamson

I'll turn that to Chuck.

Chuck Cook

Yes. We certainly are doing that right now.

Lasan Johong – RBC Capital Markets

That's all you're going to tell us?

Bruce Williamson

Yes.

Lasan Johong – RBC Capital Markets

Okay.

Bruce Williamson

We give you guidance one year at a time. I think you look at the graph and whichever slide that was on that I referred to with coal costs, it really came out of the last equity conference that was out there, there was a lot of discussion about rising Appalachian coal prices and we just wanted to remind people that PRB is not as volatile as Appalachian was. So if we get a good global economic recovery, China recovery, Far East recovery and a rise like it happened the last time, you should see a corresponding rise in Appalachian coal prices.

PRB picked up a little bit. We're going to be mindful of that, be prudent how we manage it and Chuck and Rudy and the team will be out looking to go ahead and lock in '11 and do things like that at prudent levels but it's not an exposure that's going to sky rocket like Central App has in the past.

Lasan Johong – RBC Capital Markets

Understood, understood. One last question, Coal to gas switching impacts going forward, do you see any positive or negative?

Bruce Williamson

Well, this past year, we definitely saw coal to gas switching and we saw I think overall for the year our Midwest gas was probably up in the 10% plus or minus range, Northeast gas plants were up higher than that, so that was a positive, net positive for us for our coal fleet. I don't think we were impacted to the negative side with coal to gas switching in the Midwest because of the low cost PRB position that we've got.

As we look forward, that could be something that's going to be pretty detrimental to people that aren't running PRB in particular I would think because those were the plants that were first to be impacted with coal to gas switching or those that are running Central App coal and more of a gas at the margin world, with us running PRB in MISO where coal, higher cost coal sets the margin, half or more of the year, I don't think that's necessarily going to be a big negative for us.

Lasan Johong – RBC Capital Markets

Great. Thank you.

Bruce Williamson

Okay.

Operator

Our next question comes from Dan Eggers of Credit Suisse. Your line is open.

Dan Eggers – Credit Suisse

Good morning. Can you talk a little bit more about the O&M cost savings over the 450 million over four years and kind of what milestones we should be looking for and how you expect that to layer in relative to guidance this year?

Bruce Williamson

Well, I think the main milestone you want to be looking for is just that we're hitting the cost targets in terms of the savings. What we've put in place is from an internal standpoint. The O&M for this year is in the range of around 30 to $40 million is what was targeted over last year but more importantly I think you'd want to also be watching to say okay are we keeping that 90% in-market availability up because you don't want to be sort of pound foolish, here if you will, by cutting costs and then impacting your reliability.

So this was a pretty carefully comprised plan of looking all through the operating side of things, CapEx side as well as G&A coming up with specifics that we could tie the cost reductions to without impacting reliability or being in the market.

Dan Eggers – Credit Suisse

And I guess the other question, just the demand in the first quarter has been pretty good in your markets. Any feel for how that's affecting guidance for the full year or are we too early to start making weather calls?

Bruce Williamson

Well it's obviously very early in the year. We gave guidance for 2010 and we're just reaffirming those numbers for 2010.

Dan Eggers – Credit Suisse

Okay. Thank you.

Bruce Williamson

Yes.

Operator

Gregg Orrill with Barclays Capital. Your line is open.

Gregg Orrill – Barclays Capital

Thanks very much.

Bruce Williamson

Hi. Gregg.

Gregg Orrill – Barclays Capital

Hi there. Just following up on Dan's question around the O&M savings, just whether there's sort of a schedule on how that's going to come in that you're willing to disclose?

Holli Nichols

From a year to year perspective or –

Gregg Orrill – Barclays Capital

Right.

Bruce Williamson

Or a multi-year going forward?

Gregg Orrill – Barclays Capital

Yes.

Bruce Williamson

Yeah. I don't think at this point we would want to go out with a multi-year schedule. I think we would just stay within the range that I just gave to Dan of around 30 to $ 40 million year-over-year.

Gregg Orrill – Barclays Capital

Okay. And obviously that would accelerate over time?

Bruce Williamson

I'm just going to say, it's 30 to $40 million for 2010 and go with that for right now. It's an overall program of savings that add up across O&M, G&A, CapEx to around 400 to 450 million. That's over 2010 through 2013. In terms of your modeling if you assumed I think relatively flat, that's probably a good way to be.

Gregg Orrill – Barclays Capital

Okay. And then just on the power volumes hedged in the Midwest in '10 and '11, you show 80 – I'm sorry, 75% hedge for 2011 on slide 32. Is there pricing information that you're willing to confirm for the Midwest for '10 and '11 there on your hedges?

Bruce Williamson

We did for '10 in terms of – Holli referred to what the gas price is based on for our guidance, not for when the hedges are put on however.

Gregg Orrill – Barclays Capital

Okay. That really is the $40?

Bruce Williamson

I think you referred to it off of a gas price? Right, Holli?

Holli Nichols

Right, right.

Gregg Orrill – Barclays Capital

Okay.

Bruce Williamson

I mean going forward from there, no, at this point, we're going to stick with our model of giving guidance out, Gregg one year at a file for 2010 and will be 2011 towards the end of this year.

Gregg Orrill – Barclays Capital

Okay. And then just last, the fourth quarter looked strong and I was wondering if your comments talk more about the year than the quarter, if you could talk about some of the drivers there including Commercial Operations.

Bruce Williamson

For the fourth quarter?

Gregg Orrill – Barclays Capital

Yes.

Holli Nichols

Yes. We had some detail certainly in the appendix on that but I think what you would, the best way to think about it, Gregg, is that period-over-period, what we found, I'm sorry, Norelle help me with the –

Norelle Lundy

Slide 20.

Holli Nichols

May be we can work from slide 20 and talk from there and again, these are going to be regional for each of the, there will be slides for the Midwest, West and Northeast that we can go through. But I would say overall, what we found is we probably had a little more in the way of active, certainly commercial management and a focus on costs. But if you look on, you'll see on the Midwest on Page 19 that we're down only slightly on an adjusted EBITDA basis. On the West we are down from 26 to 10 million on an adjusted EBITDA basis given the lower demand out there.

And then the Northeast we're up a couple of million from 20 to 22 million out there so the biggest driver though being the Midwest which puts us relatively flat then to only being slightly down for the fourth quarter, with, I would say, a similar set of drivers as we had for the year.

Gregg Orrill

Okay. Thank you.

Operator

Our next question comes from Ameet Thakkar with Bank of America/Merrill Lynch. You may ask your question.

Ameet Thakkar – Bank of America/Merrill Lynch

Hi.

Operator

Please check your mute button.

Ameet Thakkar – Bank of America/Merrill Lynch

I always, sorry about that. I had a quick follow-up question on Gregg's question on the fourth quarter. Do the results include the assets that are going over to LS?

Holli Nichols

Yes. They do.

Ameet Thakkar – Bank of America/Merrill Lynch

Okay. Thank you very much.

Bruce Williamson

That transaction closed December 1st, 2009 so you have two months, two out of three for the quarter.

Ameet Thakkar – Bank of America/Merrill Lynch

Okay. And then Bruce, on the coal supply issue, I understand that you guys are looking at the actual tons and '11 now but on the transportation side, understanding that you guys are hedged through '13, would the idea be that you would come address the transportation piece as you have kind of a view on how you want to commercialize the underlying power in the Midwest before you start I guess contracting up the rail?

Bruce Williamson

It's probably – you'd probably address the rail contract when you get closer to '13. That's something you would be working on it in '12, maybe you'd be working on it in '11 but I don't know that you should be doing too much in front of that because it's a very cost advantaged contract. If you go to do much of anything there might be a blend and extend option but that's raising near term prices to have a longer term contract. I think we like the contract we've got, the provider’s performance has been good and probably something will be acted upon more around late 2011 or 2012 time frame.

Ameet Thakkar – Bank of America/Merrill Lynch

Okay. Thank you very much, guys.

Bruce Williamson

Okay.

Operator

Andy Smith with J.P. Morgan. You may ask your question.

Andy Smith – J.P. Morgan

Hi good morning guys.

Bruce Williamson

Hi. Andy.

Holli Nichols

Good Morning.

Andy Smith – J.P. Morgan

Wanted to see – just kind of looking back, you guys commented on about a 5% drop in coal production for 2009 and you mentioned weather demand, wind plants backing it down on the off peak, I think there was one other factor there. If you had to break down that 5%, could you sort of give us a rough range of like what the biggest driver, was weather the bulk of that? What was going on in terms of behind that number?

Bruce Williamson

Giving an answer would probably be anecdotal at this point. I think probably '09 clearly the absence of a summer or any kind of warm weather was a pretty big impact. The off peak in wind was probably more of an off-peak in pricing more than it was backing off our actual plants. I don't think we really – I'm looking at Chuck, I don't think we really had our plants, they were not backed off to need to cycle or something. That was impacted more of the higher cost plants in the region, that didn't impact ours, that’s right.

Bruce Williamson

And beyond that, I think given the absence of the summer, you really in the Midwest, Andy, you didn't have the period of a typical year where gas would set more of the marginal power price or I guess given the low gas prices and low demand you could argue well maybe it did. But it was more around sort of that absence of the summer and really just an overall low price all through the summer that probably was the biggest impact in 2009 in the Midwest.

Andy Smith – J.P. Morgan

Okay. Got you. So it would be fair to say then that you guys, we should maybe think about putting meaningful leverage for you guys from a weather dynamic to the extent that you lost? It sounds like what you're saying is you lost a large number of what normally would be gas based hours in terms of the dispatch?

Bruce Williamson

In a more, yeah. In a normal weather and historic gas price environment, yes.

Andy Smith – J.P. Morgan

Okay. Very good. That's helpful. I just wanted to get a little color around that. Thanks guys.

Bruce Williamson

Okay.

Operator

Brandon Blossman with Tudor Pickering. Your line is open.

Bruce Williamson

Hi, Brandon.

Brandon Blossman – Tudor Pickering

Hi, how are you?

Bruce Williamson

Good. How are you?

Brandon Blossman – Tudor Pickering

Good. Good. Actually, got most of my questions addressed. The remaining one, what's the status on Plum Point? Are you making any additional efforts around the sale of that or is that pencils down?

Holli Nichols

Now, we are I think, I don't know that I'd say pencils down, Brandon, but given that construction is progressing and expect that to be online this summer. As we've talked a little bit before, one of the risks associated with that plant was a construction risk and there were certainly people that were more and less comfortable with that. So I think it makes more sense for us to pursue something around that once we've taken that risk off the table. So we're certainly active and still understanding the opportunities and such but I wouldn't expect anything before construction is completed.

Brandon Blossman

Okay. So it's still non-strategic maybe relaunch of process once it's up and running?

Holli Nichols

That's correct. Wouldn't expect to hold it long-term.

Brandon Blossman – Tudor Pickering

And total dollars spent to kind of COD, cash spent to COD, is that the $25 million?

Bruce Williamson

Well, that's an interesting one because it was 100 – these are from back in the frothy capital market days, it was 100% debt finance so our exposure is a $15 million LC. And we've sold out a couple of pieces of it before so it's arguable on a net cash basis. I guess cash in, cash out we're already probably net positive on the investment. So…

Brandon Blossman – Tudor Pickering

Capitalized interest sounds like is what's left?

Bruce Williamson

Yeah. I mean I don't know on book value or something like that. But I mean it's – I think you summed it up pretty well to say it's still a non-strategic asset and relaunch of process. But our view is more from our corporate development guys running the process. The basic view was people were sort of discounting too much in for the remaining construction risk given how far along it is. It's already at some test burns and things like that. At this point, it's better to get it to COD and get it up and then just not have construction risk on the table.

Brandon Blossman – Tudor Pickering

Okay. That's helpful.

Bruce Williamson

Okay.

Brandon Blossman – Tudor Pickering

That's it. Thanks, guys.

Bruce Williamson

Okay. Thanks, Brandon.

Operator

Our next question comes from Julien Dumoulin-Smith with UBS. You may ask your question.

Julien Dumoulin-Smith – UBS

Most of them have actually have already been asked. But I'll follow-up on this one. As far as the hedging strategy goes, I see 85% in 2011 at this point. On a go forward basis let's say 2011, would you anticipate to have that kind of a hedging level? Or did I hear you right on the call sort of moving back to the original L plus one kind of approach?

Bruce Williamson

No. I think when, Julian, when we get to the kind of end of this year or around the end of this year when we're giving guidance for 2011. I would expect that it'll be – 2011 would be pretty well taken care of just like 2010 was as it came into this year.

Julien Dumoulin-Smith – UBS

And then more for 2012, let's say is that more of a 50% target at this point? Or just trying to get a flavor as to where your sort of long-term view on hedging sales stands?

Bruce Williamson

I think still given the way the market is, it's still probably looking out a couple of years and having pretty firm numbers around those. And then being more open beyond that because that seems to have worked very well since we sort of reworked the commercial strategy and the commercial management around the end of right around the end of 2008, first part of 2009.

Julien Dumoulin-Smith – UBS

All right. Great. Well, really appreciate the time.

Bruce Williamson

Okay.

Julien Dumoulin-Smith – UBS

See you guys soon.

Operator

Our next question comes from Brian Russo with Ladenburg Thalmann. You may ask your questions.

Brian Russo – Ladenburg Thalmann

Hi, good morning.

Holli Nichols

Good morning.

Brian Russo – Ladenburg Thalmann

On the third quarter call and presentation, you outlined the expected volumes from each segment in 2010. Just could you comment on any changes on the expected volumes since that time?

Holli Nichols

I don't think there are any material changes to that, Brian.

Brian Russo – Ladenburg Thalmann

Okay. Thank you.

Bruce Williamson

Okay.

Operator

Our next question comes from Brian Chin with Citigroup. You may ask your questions.

Brian Chin – Citigroup

Hi, good morning.

Bruce Williamson

Hi, Brian.

Brian Chin – Citigroup

And please remind me again, what percent of Danskammer's coal is sourced from South America?

Bruce Williamson

Effectively all of it.

Holli Nichols

Practically 100%. We have options to be able to bring in some coal through rail. The infrastructure is there but we have typically used the South American coal.

Brian Chin – Citigroup

Okay. And when do those contracts roll and/or the options to bring it in by rail?

Bruce Williamson

Yeah. Well, the options to bring it on rail are really that there is a rail siding and there is an ability to do it. I mean I don't know we haven't done it.

Chuck Cook

We did some, we've done it some. It's not a major portion of our coal delivery strategy and with respect to the contracts we buy fiscal coal as we believe we need it delivered. And we hedge our coal requirements with financial instruments to the extent that we want to sell power past the amount that we could generate with the fiscal coal we procured.

Holli Nichols

And maybe just to be clear, that was a poor choice of words on my part, Brian, when I said we have options. We have alternatives. We don't actually have an option in place to do the rail delivery.

Brian Chin – Citigroup

I see, that's right. My mistake. And lastly just a follow-up on Ameet's earlier question, I know you've got rail contracts for the Midwest out until 2013. But what are sort of the market quotes right now for rail costs per ton or per MMBtu from PRB into Illinois?

Bruce Williamson

Brian, it depends on what kind of volume you've got and the term of the contract. I mean I don't know that there's an exact replication that you can come up with for as much we, as big as that contract is coming to eight different plants and the volume that comes through. So it's really more of a negotiated thing. I mean you can look at some spot rail rates and things like that but I think it's a different market.

Brian Chin – Citigroup

Okay. Great. Thanks, guys.

Bruce Williamson

Okay.

Operator

Our next question comes from Craig Shere with Tuohy Brothers Investment Research. Your line is open.

Craig Shere – Tuohy Brothers Investment Research

Hi, Bruce. Hi, Holli.

Bruce Williamson

Hi, Craig.

Holli Nichols

Hi.

Craig Shere – Tuohy Brothers Investment Research

Bruce, a couple kind of just quick macro questions for you. The first kind of taking off on Neel's question about recovery in MISO. Some of your peers, Bruce, have been talking about some pretty significant coal fired generation being retired because it's unlike your slide 12, it's not economic to do the environmental CapEx on those units.

Bruce Williamson

We're very much in favor of them doing that.

Craig Shere – Tuohy Brothers Investment Research

Okay. Well, I just thought maybe you could comment on how real you believe this trend is in MISO and the advantages it may have for your efficient Baldwin unit and any combined cycle plants? And just the final question, you've talked for really quite a few years about the benefits of consolidation in the industry. And we've had a lot of false starts that never really get anywhere in the industry. Do you think that there's any reality over the horizon there?

Bruce Williamson

Well, I mean first off with regard to retirement. I think we aren't going to, I would just say we're not going to bake into our numbers or guidance because we only go out a year. We're not going to try to bake into some forecast that – X number of plants are retired or things like that. I do think the work that we're doing around our coal fleet will result in a very clean set of coal fired power plants with some of the lowest levels of SOx, NOx, mercury and particulates or what some people might call traditional pollutants.

There are a number of plants around the country that haven't moved forward with that. They weren't pursued as aggressively under new source review over the last maybe eight or nine year. And if EPA gets aggressive with new source review I think that could become a major issue in terms of people having to look at their plants. Particularly, some smaller coal plants, particularly plants that are also burning Appalachian coal that they could probably be pretty well impacted by having to run the economics and say, look it's going to cost XXX $100 million to put scrubbers and bag houses and back end controls on it.

And when you run the math that plant is just not economic. That in the long run is good for plants that have made the investment, that have cleaned themselves up because they are going to be on the ground. And they will be operating with relative stability for a long period of time. And I think that's really where our Midwest fleet falls into that second category.

With regard to consolidation, we just feel that as we've talked for several years that it does make sense. You can run a much larger portfolio with the same number of G&A structure and you can have significant synergies. There's been a number of reasons I think over the last few years why things haven't come to pass. When the market was just trending up, I think everybody was convinced that we had more upside than the other guy did.

When we ran into the economic downturn and financial markets locked up pretty much for the last say couple of years, year and a half. When you look around the sector and you see the amount of change and control triggered debt that's in other people's capital structures, it's not in ours. That could be an in pediment a combination because you would have been looking at several billion dollars of debt that needed to be refinanced.

So a return to more open capital markets removes that potential block from M&A activity. And when you look at the cost savings today that could be achieved in a consolidation I guess I would say two comments on that. Having done – we did a transaction where we grew substantially and our G&A went up very little. So we've done it once.

I guess I would say the following two things. First, in today's depressed equity market you take $150 to $200 million of synergies, you capitalize them with you give me the multiple of six to eight. That's a significant amount of value on a percentage of equity cap for anybody in the power sector right now. And so you could argue that it's a more compelling story to do now in terms of capturing that amount of equity value and sharing it between two shareholder groups.

The other way to look at it though is also to say if we're worried about a low gas price environment for a protracted period of time, combining and harvesting those type of synergies is probably tantamount to lowering the strike price in gas equivalent terms of by buck or $2. And so companies should be much more resilient in terms of a low gas price environment as well. So I think it does make more sense now probably than it ever has and it's something that we think we've done in the past and we're open to pursuing in the future.

Craig Shere – Tuohy Brothers Investment Research

A quick follow-up on the MISO question. Do you see the potential benefits of this being like a two to three years from some retirements? Or is this really just a longer term trend?

Bruce Williamson

With regard to that, I mean I think you'd have to, I guess I would say give Lisa Jackson a call at EPA and ask how aggressive her team is going to be on pursuing new source review on coal plants that haven't put in the backend controls to have the best available control technology.

Craig Shere – Tuohy Brothers Investment Research

Fair enough. Thanks a lot.

Bruce Williamson

Okay. Operator, we'll do one more question.

Operator

Thank you. Our next question comes from Ivana Ergovic with Jefferies. You may ask your question.

Ivana Ergovic – Jefferies

Hi, I have a quick question on depreciation. Basically, I see 2009 depreciation was $335 million and grows to $316 in 2010. I mean I would assume it would go down given that you still owed your assets? Or could you just explain why is it going up or whether $335 already excludes the depreciation from sold assets?

Holli Nichols

I think when you think about the depreciable base in 2009 you're right. It's changed with assets going down as well as with some impairments but, gosh, those impairments went through a separate line from depreciation. But we're also with the capital spend program between consent decree and maintenance, we're obviously increasing the base for that.

Ivana Ergovic – Jefferies

Okay.

Holli Nichols

Let us maybe take that off line and we can get you some details around that and be happy to walk you through it.

Ivana Ergovic – Jefferies

Okay. Thanks.

Bruce Williamson

Okay. Operator, that concludes today's call. We look forward to seeing some of you at the J.P. Morgan conference in Miami next week. Thank you again for your time this morning and your interest in Dynegy.

Operator

This concludes today's conference. Thank you for your participation. You may disconnect at this time.

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Source: Dynegy, Inc. Q4 2009 Earnings Call Transcript
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