Dynegy Inc. Q2 2010 Earnings Call Transcript

Aug. 6.10 | About: Dynegy Inc. (DYN)

Dynegy Inc. (NYSE:DYN)

Q2 2010 Earnings Call Transcript

August 6, 2010 10:00 am ET

Executives

Norelle Lundy – VP, Investor and Public Relations

Bruce Williamson – Chairman, President and CEO

Holli Nichols – EVP and CFO

Charles Cook – EVP, Commercial and Market Analytics

Lynn Lednicky – EVP, Operations

Analysts

Neel Mitra – Simmons & Company International

Angie Storozynski – Macquarie

Terran Miller – Knight

Brandon Blossman – Tudor, Pickering, Holt & Company

Ameet Thakkar – Banc of America

Charles Fishman – Pritchard Capital

Andy Smith – JPMC

Kevin Cole – Credit Suisse

Julien Dumoulin-Smith – UBS

Ella Vuernick – RBC Capital Markets

Carlos Rodriguez – Hartford Investment

Operator

Hello, and welcome to the Dynegy 2010 second 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 would now like to turn the teleconference over to 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 covering the company's second quarter 2010 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 2010 financial estimates and views of long-term market dynamics.

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 would 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. On the call with me this morning is Holli Nichols, our Chief Financial Officer, along with several other members of the management team. Let’s now turn to the agenda for the call which is highlighted on Slide 3 for those of you following along online via the webcast.

I’ll begin this morning with some of our recent highlights. Holli will then provide second quarter financial results and discuss regional performance drivers for the quarter, and she will discuss our 2010 guidance range, which we are narrowing today. I will then wrap up with remarks and then we will go on to Q&A.

Let's turn to Slide 4. Here, I will go over our recent highlights. As you can see from the graph on the right, our adjusted EBITDA was essentially flat period-over-period. This was primarily due to reduced revenues – reduced capacity revenues and energy contributions from the assets we sold in the fourth quarter of 2009, increased contributions from physical transactions that reflect stronger market pricing, reduced contributions from financial transactions, and we had more planned and unplanned outages in the second quarter.

Additionally, we experienced reduced G&A and O&M costs, which were a benefit to adjusted EBITDA. Another way of looking at our second quarter results is that after excluding the assets we sold in the fourth quarter, in effect comparing only those plants we still own, our adjusted EBITDA increased 16% year-over-year. We maintained our focus on operating and commercializing well, despite the impact of an extended outage at Baldwin that lowered our end-market availability to 85%.

During the quarter, we prepared for future power market improvements by adding a $150 million contingent letter of credit facility that would support commercial activity around our combined-cycle fleet in 2012. This facility becomes available when spark spreads widen and provides us with an additional tool for capturing incremental market opportunities. And more recently, we secured and priced substantially all of our Midwest coal supply requirements through 2012 and approximately 60% contracted through 2015 on favorable terms that support our commitment to being a lower-cost generator.

We continue to drive cost out of our business through our successful and ongoing cost saving initiatives, which is on track to achieve savings of $400 million to $450 million over the next four years. And we made significant progress towards completion of our Midwest environmental project, with second quarter work focused on the remaining scrubber and baghouse projects at the Baldwin facility.

During the second quarter, the Unit 3 scrubber and baghouse at Baldwin were installed and are now being tested. Unit 1 work is about one-third complete and Unit 2 is also well underway.

Now, I would like to turn it over to Holli who will cover our first quarter [ph] results, regional performance drivers, and 2010 guidance estimates in more detail.

Holli Nichols

Thanks, Bruce. Before starting, I would like to point out that these materials do contain non-GAAP measures that are reconciled in the appendix of this presentation for your reference.

Now, let's turn to Slide 6 for a look at our second quarter highlights. As Bruce stated earlier, adjusted EBITDA was essentially flat period-over-period at $125 million in the second quarter of '09 and $124 million in the second quarter of '10. On a GAAP basis, we reported a net loss of $191 million for the second quarter of 2010, which includes after-tax mark-to-market losses of $162 million. This compares to a net loss of $345 million for the second quarter of 2009, which includes after-tax impairment charges of $249 million and after-tax net mark-to-market losses of $62 million.

Moving on to capital and liquidity, as of June 30, 2010, Dynegy had net debt and other obligations of $4.1 billion and collateral postings of $547 million. At the end of the quarter, liquidity was approximately $2 billion with about $500 million of cash on hand and short-term investments.

Please turn to Slide 7. Here, I will cover our regional performance drivers period-over-period. But before moving into the discussion, I want to explain what we mean by energy contributions, which is a term I will use frequently in this regional discussion. Energy contributions include both physical and financial transactions. Physical transactions can be defined as generation sales, while financial transactions refer to hedging activities that include financial swaps and options activity.

Also, I want to provide some additional color on option activity since the net benefit of premiums for options related to future periods was a positive driver that influenced our results. In total, the net benefit period-over-period was approximately $35 million for the quarter and approximately $55 million on a year-to-date basis. The 2010 year-to-date net benefit from premiums for options related to future periods is generally in line with what we anticipated when we developed our full year guidance forecast in late 2009. Our forecast for the second half of 2010 doesn't anticipate a material additional benefit of premiums from options.

To put this in a little more context, we were active in the last half of 2009 and we recognized a larger net benefit from premiums during the third and fourth quarters and '09 than we would expect in 2010. However, in 2010, we have been active in the first and second quarters and have seen a net benefit from premiums period-over-period. Although we were active in the first half of '10, this does not mean we will transact at the same levels in the third and fourth quarters.

So, back to our regional performance. And starting with the Midwest, adjusted EBITDA decreased 33% and production volumes decreased 6%. Energy contributions declined period-over-period, however, physical transactions improved due to higher power prices and spark spreads. This is partially offset by reduced volumes from unplanned outages and financial transactions were less favorable.

Also contributing to the decrease was the loss of PJM capacity revenues from assets sold in the fourth quarter of '09. These decreases were partially offset by net increase in capacity and tolling revenue from our Kendall facility. The company's coal fleet production volumes decreased 4%, primarily due to an outage at the Baldwin plant that was longer than expected. This contributed to an 83% in-market availability rate for our Midwest coal fleet. In addition, combined-cycle production volumes decreased 10% due to unplanned outages.

In the West, adjusted EBITDA decreased 14% and production volumes decreased 62%. Energy contributions declined only slightly period-over-period. Tolling revenues declined due to assets sold in the fourth quarter of '09 and lower unit availability. The decrease in production volumes can be attributed to the sale of two assets in the fourth quarter of '09, compressed spark spreads, and outages.

In the Northeast, adjusted EBITDA increased 185% and production volumes decreased 26%. Energy contributions increased period-over-period. Contributions from physical transactions improved due to higher power prices and spark spreads, and financial transactions were also more favorable. Also contributing to the increase in adjusted EBITDA were lower operating and maintenance costs and a period-over-period net benefit associated with coal costs due to a coal inventory write-down in 2009.

These benefits were partially offset by the loss of energy and capacity revenues from an asset sold in the fourth quarter of '09. The decrease in production volumes can be attributed to the sale of an asset in the fourth quarter of 2009 and reduced dispatch of the Danskammer coal-fired facility. This decline in production volumes was partially offset by increased run-times from combined-cycle facilities and the Roseton dual fuel-fired facility given improvements in spark spreads.

For more detailed information on our segment performance during the second quarter, you can refer to the appendix of this presentation.

Please turn to Slide 8. First, turn to our 2010 guidance estimates, which we are narrowing from the estimates we last provided in May. With only five months remaining in 2010, we now have more certainty around our full year estimates. I am going to focus on adjusted measures. The GAAP measures are included at the bottom of the slide and in more detail in the appendix of this presentation.

Our new range of adjusted EBITDA is $465 million to $530 million based on a $4.80 per MMBtu 2010 forward gas curve. We are projecting a range of adjusted cash flow from operations of $200 million to $265 million, which includes interest payments and working capital.

The new ranges reflect a $175 million increase in adjusted cash flow from operations that resulted from a decrease in cash collateral postings with the company's futures clearing manager, including posting of a letter of credit in substitute of cash. Approximately of this $100 million of this $175 million increase is offset in cash used in investing activities. Since the increase in adjusted cash flow from operations is offset by a corresponding decrease in cash used in investing activities or an increase in letters of credit, this change has no resulting impact on liquidity.

Taking into consideration maintenance CapEx of $120 million, environmental CapEx of $200 million, and capitalized interest of $25 million, we are projecting an adjusted free cash flow range of negative $145 million to negative $80 million. I would like to mention here that our consent decree spending is tapering off and actually peaked in 2009. The investments included baghouses and dry scrubbers at eight coal units in Illinois. We are projecting our 2010 investments to be approximately $185 million with the projected spend in subsequent years estimated at $230 million.

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 10. In wrapping up this morning's presentation, I want to discuss our focusing on operating and commercializing well.

In terms of operating well, let's start with our competitive facilities which are characterized by geographic and dispatch diversity. We believe our lower-cost coal assets benefit from widening dark spreads, while our natural gas combined-cycle fleet will benefit from increased run times as heat rates expand as the economy recovers.

We are investing in our future through a consent decree program, but given more stringent environmental regulations in the future, should put our fleet of coal plants well ahead of others that have not acted to clean up their plants. This work is expected to be completed and substantially funded by 2012. With spending winding down, our cash flow is expected to increase following the completion of these projects.

In terms of commercializing well, we are maintaining our near-term hedging strategy to protect against downside risks, while maintaining open in outer years to capture potential upside. This commercial strategy is complemented by a simple flexible capital structure that includes liquidity of approximately $2 billion.

Further, we are continuing to focus on prudent financial management with no significant bond maturities until 2015 and a multiyear cost savings program that is continuing to provide benefits for the company.

With that, let's move to the Q&A portion of our presentation. Operator, we will take the first call now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). One moment for the first question. Neel Mitra, Simmons & Company International; your line is open.

Neel Mitra – Simmons & Company International

Hi, good morning.

Bruce Williamson

Hi, Neel.

Neel Mitra – Simmons & Company International

I was just wondering if you could provide a little bit more color on the $35 million benefit from options. Were those purely trading activities, you were selling call options or were they used to physically hedge any of your power (inaudible) outer years?

Bruce Williamson

Sure. Chuck, you want to take that?

Charles Cook

Sure. The – with respect to the options transaction that we enter into, we do that to volumetrically hedge our expected production and fuel use. So that's the basis for our option trading and it's not for a proprietary sort of account.

Neel Mitra – Simmons & Company International

Okay. And then just the second question on maybe some of the prospective debt refinancing in 2012 for the LC facility and the revolvers. Are you guys actively going out and looking at that? I know you have done some work on the LC facility, but what are you seeing in the market and when do you expect to address the majority of it?

Bruce Williamson

Okay. Holli?

Holli Nichols

Yes. I think the way we are thinking about it, Neel, is that you are right. The revolver expires in April of 2012 and then the term LC facility is about a year after that. The way we are looking at it is – you have seen people in the markets recently with either because of a combination of strategic future activities or just companies wanting to roll forward, and you are seeing those successful executions.

So what I would say the way we are thinking about it is within the next year, we would expect to be out in the market for our credit agreement and part of it is just balancing, you don't want to go too soon, you don't want to go too late, because we would expect to have an increase – increased costs associated with the revolver, given that when we amended it last – I guess about this time last year, we didn't necessarily go to market rate. And this time around, we would expect to go to market rate.

So like I said, I would say, as far as setting expectations, sometime in the next 12 months.

Neel Mitra – Simmons & Company International

Okay. And on the term LC facility, it looks like you can hedge pretty effectively by posting cash because of it. Is there going to be any impact on the way you look at hedging when you have to, I guess, roll over this facility in 2012?

Holli Nichols

Well, we are always thinking about how to manage the liquidity in outer years to make sure that we have sufficient liquidity to support the commercial activities. And that's one of the reasons that we entered into the contingent LC facility in the second quarter.

And one of the things we look at is, what are just the most cost-effective ways to be able to gain access to liquidity in those out years and that – certainly we think about having multiple options including the traditional credit agreement, including the contingent facility we have, including first lien arrangement. So all of those are available to us as we think about managing the potential collateral needs in the event that prices increase dramatically and we have calls on our collateral in excess of what we do today.

Neel Mitra – Simmons & Company International

Okay. Thank you very much.

Bruce Williamson

Okay. Thanks, Neel.

Operator

Your next question comes from Angie Storozynski, Macquarie. Your line is open.

Angie Storozynski – Macquarie

Thank you.

Bruce Williamson

Hi, Angie.

Angie Storozynski – Macquarie

I wanted to talk about the Slide 15, your disclosure about – on coal hedges. You are showing that average delivered PRB price should be – and midpoint of the range seems like below 2010 level. Is – I mean, it's a little bit surprising how low this price is. Is that a function of just the timing of coal hedges? And also the additions of those – additional PRB hedges, is that just your view on the likely pickup and forward PRB prices or is it just the timing of hedges?

Bruce Williamson

Okay. Chuck, you want to address that? I mean – but that's not a –based on actual things under contract, right?

Charles Cook

Right. That's correct. So we have –

Angie Storozynski – Macquarie

So should we assume that the delivered PRB for '11 is as lower than for '10?

Charles Cook

What we have done here is present a range for what we think the estimated price is going to be for '11 and '12 and include the benefit of all the contracts we have got for both transportation and for commodity.

Bruce Williamson

'10 is $1.49 and '11 through '12, $1.40 to $1.55.

Angie Storozynski – Macquarie

Okay.

Holli Nichols

And I think, Angie, maybe just to be clear, the way the contracts work from a pricing perspective is there are callers and that's why we can't tell you specifically what it will be. But that's why there is a range, but there is a contractual range.

Angie Storozynski – Macquarie

And how about the hedges that you added for future years? Should we assume the forward curve – and so anywhere between $15 and $16 per ton for PRB?

Bruce Williamson

For years, where – out beyond 2012?

Angie Storozynski – Macquarie

Yes.

Charles Cook

Yes. We have not used options to hedge coal prices in the Midwest for years past – so – or for years future. So our commodity contracts there, again as Holli mentioned, have a cap and a floor concept to them and we will price our coal as we go through time based on that cap and floor.

Angie Storozynski – Macquarie

Okay. Thank you.

Bruce Williamson

Okay.

Operator

Terran Miller, Knight; your line is open.

Bruce Williamson

Hi, Terran.

Terran Miller – Knight

Good morning, Bruce. How are you?

Bruce Williamson

Good.

Terran Miller – Knight

Just so I want to make sure I understand two things. Number one is, on the $35 million of options, does that run through the $124 million of EBITDA?

Holli Nichols

Yes.

Terran Miller – Knight

Okay. And have you given any indication of what you think that total number is going to be for 2010?

Bruce Williamson

No Terran, I think – Holli, you can take that, but I mean – in short, I mean, we gave guidance for EBITDA for the year. I don't think we have – we have not come out with any kind of a breakout for option portion of the EBITDA for the year.

Terran Miller – Knight

Okay.

Holli Nichols

Well, what I might say, Terran, is that if you looked at the first and the second quarter and this detail is provided in probably various places, it may be hard to pull it all together, but it – we were a less than $20 million in options for the first quarter and that $35 million that you just asked about, that's actually a period-over-period. The actual option activity in the second quarter was about $40 million. So what we are talking about year-to-date is about $60 million.

But as I mentioned in our prepared remarks, we don't anticipate a significant amount of activity in the back half of the year. So part of the period-over-period is probably a little out of context, because the majority of our activity in '09 was the back half of the year. The majority of our activity in '10 is in the front half of the year. So when you get to a year-to-date, it won't be this much of a spread period-over-period.

Terran Miller – Knight

So it's just partly timing?

Holli Nichols

Partly timing, yes.

Terran Miller – Knight

Okay. And I was wondering if you could just go into a little bit more detail, I guess, just as a follow-up of Angie's question. Exactly how much did you hedge in terms of coal through 2015? Is that all your anticipated PRB coal that's now being hedged?

Bruce Williamson

Chuck?

Charles Cook

No, it's not all of our PRB coal. It's about 60%.

Terran Miller – Knight

Okay. Thank you.

Operator

Your next question comes from Brandon Blossman, Tudor, Pickering, Holt & Company.

Brandon Blossman – Tudor, Pickering, Holt & Company

Good morning.

Bruce Williamson

Good morning. Hi.

Brandon Blossman – Tudor, Pickering, Holt & Company

Hi. Okay, I'll hit the options question one more time. The incremental hedging that we see on Slide 29 for '11 and '12, is it safe to assume that that incremental uptick in volume – hedge volume is associated with the option sales for this period? Or to put it another way, what periods do the option sales relate to?

Charles Cook

Yes. We have option sales that correspond to periods 2011 and 2012. But the increase in amount for – for May to July is all not all options related.

Brandon Blossman – Tudor, Pickering, Holt & Company

Okay. So, options plus incremental hedging?

Bruce Williamson

Yes.

Charles Cook

Yes. And again, we use options to volumetrically hedge our forward positions.

Brandon Blossman – Tudor, Pickering, Holt & Company

Okay. And is it safe to say that for the options that you sold during the quarter, they all relate to either '11 or '12?

Charles Cook

No. We sold some options with respect to '10 as well. Again, the number that we are talking about that we pull out is options with respect to future periods and those would be with respect to '11 and '12.

Brandon Blossman – Tudor, Pickering, Holt & Company

Okay, okay. Shifting to ops, can you detail some of the forced outages in the quarter?

Bruce Williamson

Yes. I mean, I'll start and then see if Lynn wants to clean me up or add any color. Basically what we had was a situation at Baldwin that was tied in with – as we brought the scrubber on, we elected – while that was going to be quite an extended outage, we elected to go ahead and do some significant turnaround work on the unit. And we basically had a situation where the turbine came back to the plant and there has been essentially nothing more complicated than a mistake done in balancing the plant – the turbine at the factory.

And so the turbine came all the way back, it could not be field [ph] balanced then and needed to go all the way back to the manufacturer for basically a recut of the balancing at the manufacturer and then turn around and come back to the plant. And it's really nothing more – really too much more complicated than that. That basically added – Lynn, probably about three weeks, four weeks to the turnaround? And it was simply put I think, Brandon, nothing more than just a mistake at the manufacturer.

Brandon Blossman – Tudor, Pickering, Holt & Company

Okay. That sounds frustrating. So at the Baldwin –

Bruce Williamson

That's putting it mildly.

Brandon Blossman – Tudor, Pickering, Holt & Company

Ex that outage, what would the gen run times be for the region year-over-year?

Bruce Williamson

I don't – Lynn, you got an eyeball on it?

Lynn Lednicky

I'm not sure we can tell you that directly.

Brandon Blossman – Tudor, Pickering, Holt & Company

Directionally can you?

Lynn Lednicky

Yes, well –

Bruce Williamson

I mean, I think it would have – that unit probably would have run four more weeks.

Lynn Lednicky

Yes. I mean, directionally, I think it would have, certainly on the coal fleet, very close to flat year over – or period-over-period. So that was the major – that was the major difference. We did have a couple of outages on a couple of our combined-cycle units as well. But on the coal fleet, if we had not had this problem at Baldwin, I think they would have been very similar year-over-year.

Bruce Williamson

Last year was probably 90% to – low-90%.

Lynn Lednicky

In terms of volume, that's right.

Brandon Blossman – Tudor, Pickering, Holt & Company

Okay. That's helpful. And the other forced outages, anything material there to note?

Lynn Lednicky

No. They were at the combined-cycle units. The combined-cycle units periodically have outages. We never know exactly when that will show up. But when we do our planning and we do our forecasting, we assume an outage rate that is just spread across the year.

Bruce Williamson

And I think so far, Lynn, we wouldn't say the combined-cycle outage rate is outside of our expectations.

Lynn Lednicky

Yes. That's right. It's only when you try to do a period-over-period comparison that you see those deviations.

Bruce Williamson

Yes.

Brandon Blossman – Tudor, Pickering, Holt & Company

Okay, good. Very helpful, guys. Thanks.

Bruce Williamson

Okay.

Operator

Your next question comes from Ameet Thakkar, Banc of America. Your line is open.

Ameet Thakkar – Banc of America

Hi, good morning, guys.

Bruce Williamson

Good morning.

Ameet Thakkar – Banc of America

Just real quick on the clean air transport rules. Is there any incremental CapEx you foresee kind of for your fleet above and beyond what you have kind of contemplated with the consent decree?

Bruce Williamson

No, there really isn't. Not at this time.

Ameet Thakkar – Banc of America

Okay. And then real quick on the – last question on the option premium stuff. Holli, I think you laid out the kind of the timing impacts from the second half of last year versus first (inaudible) first half of this year. Just from a kind of an overall reliance on options versus swaps versus prior year's, would you say this is kind of about normal or are you guys just seeing better value, any colors in options this year versus doing swaps?

Holli Nichols

Chuck can clean me up on this. But I – as I also stated, this is about what we expected when we did our plan back in October of '09. And the strategy that the commercial team employs to hedge our volume, there is a mixture – and you always have a range of – we will do about this much in swaps, about this much in options, and I don't think that we have seen period-over-period that that has changed materially.

Ameet Thakkar – Banc of America

Okay, great. Thanks, guys.

Operator

Your next question comes from Charles Fishman, Pritchard Capital. Your line is open.

Charles Fishman – Pritchard Capital

Thank you. I think you answered most of this question on the question before, but I – what I was going to ask was, you are lowering your O&M costs and I was curious if that had – you feel like that's having an impact on your unplanned outages. It sounds like at Baldwin, it definitely was not. On the CCGTs is – you made the statement that you are expect – you set an expectation level of unplanned outages. Has – have you increased that expectation level because of driving down the O&M cost and making that tradeoff?

Bruce Williamson

No, we really haven't. The changes in O&M so far, I don't think have had any impact on the outage levels on either the CCGTs or – yes, we just talked about Baldwin. I mean, that was literally, I think Brandon put it well, frustrating is putting it really mildly what we went through of getting a manufacturer to basically balance the turbine using the right specs for the turbine than was in the shop. So it was nothing more complicated than that and it doesn't tie into our O&M reduction.

Charles Fishman – Pritchard Capital

Okay. Thank you.

Bruce Williamson

Okay.

Operator

Andy Smith, JPMC; your line is open.

Andy Smith – JPMC

Hi, good morning, guys again.

Bruce Williamson

Hi, Andy.

Andy Smith – JPMC

A quick question. I'm going to follow up on Angie's question on the coal costs, maybe ask it a little bit differently. You indicate in terms of your hedging that you have gone forward, resulting in low placement and generation dispatch. Would you – do you guys expect the merit order dispatch of your coal fleet in Illinois to change materially based on the contracts you have laid in place for '13, '14, and '15 at this point?

Bruce Williamson

No, we really don't, because Andy, I think all these units – because of a combination of the forward pricing of the PRB that we have been doing, but moreover in the near-term, based on the rail contract which goes through '13, they are already down, I would say, pretty much below other people that have a more competitive rail and competitive PRB. So I think that takes us through '13. Beyond '13, we would be sort of at, I guess, along with everybody else at rail at that point in time. But I think the forward pricing of the PRB that Chuck's team has been doing, I think, is pretty opportunistic in terms of keeping us down ahead of people on the cost curve.

Andy Smith – JPMC

Okay, perfect.

Bruce Williamson

I guess the short answer to that is I wouldn't expect a degradation, but I don't – I can't see an improvement coming out of this. I think we are already ahead of the game.

Andy Smith – JPMC

Okay. No, I understood. That's very helpful, Bruce. Thanks a lot.

Operator

Your next question comes from Daniel Eggers, Credit Suisse. Your line is open.

Kevin Cole – Credit Suisse

Hi, guys. This is actually Kevin Cole. Can you help me better understand the order of operations for hedging coal? I mean, should we expect to see the hedge percentage for coal step up throughout the year and then a giant slug of rail at the end once you are committed on the coal side?

Bruce Williamson

Help me understand your question a little bit more.

Kevin Cole – Credit Suisse

Sure. When should we expect rail to be layered in? (Multiple Speakers)

Bruce Williamson

The rail is taken care of through 2013.

Kevin Cole – Credit Suisse

Right. Beyond 2013 though – I guess, with the new coal being – with the new coal hedges, when should we expect the – I guess, the revised or just new coal hedges being put in place beyond 2013 for the rail?

Bruce Williamson

Well, I think the rail, we don't do – we won't deal with until probably 2012 or so, because we – I mean, you have got a couple of years. If you work it in 2012 and 2013, in terms of working more coal in beyond 2012, I mean, Chuck, I think that's just something to be worked opportunistically over time as we continue?

Charles Cook

That's correct.

Kevin Cole – Credit Suisse

And where are you seeing rail prices end up today?

Bruce Williamson

Well, we are fixed at a very advantageous contract through 2013 and so that's what we are concerned with, is making sure our provider continues performing the excellent service that they have been under that contract. And we monitor things and will be meeting with that rail provider over time over the next – what, three plus years, three-and-a-half years to work out and see if there is an ability to extend that contract and continue with them or if it needs to go back to bid and go with the alternative provider from the region.

Kevin Cole – Credit Suisse

Okay. So for the 2014, '15, are you seeing contracts that are on the $30 per ton mark?

Charles Cook

Yes. I think it's – we are not – today, we are not ready to speculate on what transportation contracts are going to be in 2014 and '15.

Kevin Cole – Credit Suisse

Okay. Should we be able to expect that you should be able to execute a rail contract below market at some point? Do you have pricing powers that I should look into or realize in our model? Like if I'm seeing $30 a ton, should I assume you guys will come in less?

Bruce Williamson

I think we will cross that bridge when we get to it, like I said, around 2012, 2013. I think it will be driven by a variety of factors in terms of what's the economy like, what's the market like, how interested is our rail provider in maintaining this contract versus competing for with the alternative and vice versa. I don't – I'm not going to try to guess what the contracts are going to be like three years from now.

Operator

Your next question comes from Julien Smith, UBS. Your line is open.

Julien Dumoulin-Smith – UBS

Hi, good morning.

Bruce Williamson

Hi.

Julien Dumoulin-Smith – UBS

Just a quick question on the O&M front. It seems – for the quarter, it seems it was pretty decent especially given your latest comments about the unplanned outage there. It seems like this would be ahead of plan as far as you guys laid out for 2010. Any comment as far as how your overall savings initiative is going vis-à-vis the other segment, call it O&M and other?

Bruce Williamson

Lynn?

Lynn Lednicky

Well, sure. First of all, you are correct that we are tracking at or better than the cost reduction numbers that we set out for ourselves last year. I would point out that it is a little bit difficult for us to paint a clear picture around this through our financial information, because you have a different set of assets in the second quarter of 2009 than you have in 2010. And from an accounting standpoint, some of those were discontinued operations and some of them were not.

So we haven’t tried to take everybody through all of the numbers, but directionally, you are exactly right. We are tracking along in – favorable to the plan that we laid out last year and we have been happy with that. Some of that has been through optimizing what we do ourselves, what we – versus what we may do through third-party services. And some of that are things that are favorable on the outside with commodity prices coming down – for example, chemical costs. So those are a couple of the drivers that we see.

Julien Dumoulin-Smith – UBS

Excellent. And do you mind talking for a second about the basis in the quarter? I mean, the – how is that relative to first quarter and last year?

Bruce Williamson

Chuck?

Charles Cook

Yes, I think we have seen some relatively lower basis in the Midwest than we've seen – than we saw last year.

Holli Nichols

Another thing I would add is, back on page 14 of the slides, we did include the average basis for the second quarter of '10 was about $4.96 and – which compares to about $4.45 for the same period in 2009.

Julien Dumoulin-Smith – UBS

Great. And then finally, just a last question on the $150 million facility you announced this morning. Just what's the triggering of that for that debt facility? Is it a certain commodity price?

Bruce Williamson

It's linked to spark spreads. The last time we did a contingent one, we linked it to natural gas. This time, we did it with spark spreads. And Holli, I don't know where we are at on disclosure around the specifics on that.

Holli Nichols

Right. It's regional and it's spreads, as Bruce mentioned. And it will take a meaningful move before the facility kicks in, but obviously that's what we are trying to protect against, is that a little bit of that tail risk of a real blowout in prices. We do – I don't have that right on top of me, but that has – I think that contract was filed, and so we can get you the specific thresholds for the changes in pricing.

Julien Dumoulin-Smith – UBS

Great. Well, thanks so much for the time.

Bruce Williamson

Okay.

Operator

Your next question comes from RBC Capital Markets. Your line is open.

Ella Vuernick – RBC Capital Markets

Good morning. This is Ella Vuernick on for Lasan this morning. I know that this was discussed in the last quarter call, but I was hoping you could update us on your most recent thinking – current thinking about any potential thoughts on participation in the M&A markets.

Bruce Williamson

Well, like we have told Lasan and everyone for many years that – we basically are believers that the sector should consolidate and that M&A will be a part of it. But to date, it has come in sort of fits and starts and has been slow to materialize, and we will just have to see what happens in the future.

Ella Vuernick – RBC Capital Markets

Great. Thank you.

Bruce Williamson

Okay. And operator, we will take one more question.

Operator

Our final question comes from Carlos Rodriguez, Hartford Investment. Your line is open.

Carlos Rodriguez – Hartford Investment

Yes. Thanks for taking my question. Holli, just a quick question on the guidance on page eight. The net cash used in investing activities for the GAAP measures is a use of $700 million. If I back out the $100 million for the LC and I back out the maintenance, environmental, and capitalized interest, I'm coming up with about $255 million that seems unexplained. Can you help me understand what that is?

Holli Nichols

Sure. A piece of that is going to be associated with the fact that we are posting marketable securities or long-term – or short-term investments, I should say, as collateral. And so that will show up as a cash outflow and that's one of the things that we are mentioning in our balances. We didn't see the liquidity benefits from some of our activities around collateral. So that's going to be your biggest driver.

I was actually looking – I thought I had a note here, but I can’t find it. So you are hitting on the right thing. It's primarily going to be your CapEx, it's going to be investments in the securities, which I think for the year was about $300 million in total. So that's going to be probably the one piece that you wouldn't have had to explain that.

Carlos Rodriguez – Hartford Investment

And one final question on – just a follow-up on the rail discussion earlier. Who are the competing rail providers that would bring coal from Wyoming to Illinois? Is it Union Pacific? Is there another provider?

Bruce Williamson

Our current provider is – it's a 100% Burlington Northern and the competitor would be Union Pacific.

Carlos Rodriguez – Hartford Investment

Got it. Okay, thanks very much.

Bruce Williamson

Okay. Thank you, all for your interest today. We look forward to speaking with all of you again after third quarter results.

Operator

Thank you for participating in today's conference call. You may disconnect at this time.

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