Dynegy's (DYN) CEO Robert Flexon on Q1 2014 Results - Earnings Call Transcript

May. 8.14 | About: Dynegy Inc. (DYN)

Dynegy (NYSE:DYN)

Q1 2014 Earnings Call

May 08, 2014 9:00 am ET

Executives

Andy Smith -

Robert C. Flexon - Chief Executive Officer, President and Director

Hank Jones -

Analysts

Jonathan Cohen - ISI Group Inc., Research Division

Paul Zimbardo - UBS Investment Bank, Research Division

Neil Mehta - Goldman Sachs Group Inc., Research Division

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Andrew Bischof - Morningstar Inc., Research Division

Amer Tiwana - CRT Capital Group LLC

Operator

Hello, and welcome to the Dynegy Incorporated First Quarter 2014 Review Teleconference. [Operator Instructions] I'd now like to turn the conference over to Mr. Andy Smith, Managing Director, Investor Relations. Sir, you may begin.

Andy Smith

Thank you, Shirley. Good morning, everyone, and welcome to Dynegy's investor conference call and webcast covering the company's first quarter 2014 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 and views of 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 statements. For a description of the factors that may cause such a variance, I would direct you to the forward-looking statements legend contained in last night'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 President and CEO, Bob Flexon.

Robert C. Flexon

Good morning, and thank you for joining us today. With me today are Clint Freeland, our Chief Financial Officer; Hank Jones, our Chief Commercial Officer; Catherine Callaway, our General Counsel; and Sheree Petrone, our Vice President of Retail.

As we frequently discuss, our PRIDE Initiatives exist to find better and more effective ways of running our company. We employ that philosophy in all aspects of our business, and have extended that to include our quarterly earnings call. In discussions with our investors and the analyst community, spending more time on questions and less time on prepared remarks with the overwhelming sentiment we heard, accordingly we are introducing a new call format for this quarter. We posted the earnings release, the presentation and managements prepared remarks on the Dynegy website last night. Following a few opening remarks, we will devote the bulk of our schedule time to address your questions. We hope you find this approach helpful, and we look forward to your feedback and suggestions.

Prior to opening the line for questions, I'd like to highlight several takeaways from the first quarter. Adjusted EBITDA for the quarter was $152 million versus $43 million in the first quarter of 2013. Significantly higher prices, the acquisition of IPH and PRIDE, all contributed to this 253% improvement. Guidance has been maintained at the $300 million to $350 million range for adjusted EBITDA, and $10 million to $60 million for free cash flow. As our first quarter adjusted EBITDA result is more than 50% of the bottom of the guidance range, we would expect to exceed the range assuming our operations achieve budgeted performance levels and a weather normal summer leads to expected LMP prices on the unhedged portion of our portfolio. We had a strong operational performance in the first quarter, and although there were outages, the equivalent availability factor for the Coal segment and IPH was a respectable 89%, while the Gas segment achieved 96%. Commercially prices strengthened initially in the first quarter driven by weather, then the balance of the year followed and continued into the 2015 and 2016 forwards, where strong gains have occurred.

In addition, since our April 11, 2014 Investor Day, we have added additional forward bilateral MISO capacity sales at average prices in excess of $2/kw-month. These power and capacity price increases reinforce our view that coal plant retirements that have taken place with more plan to occur, combined with the substantial capacity being exported for MISO will continue to tighten reserve margins eventually leading to a shortfall of capacity in the MISO region. One additional commercial event to note is the additional 240 megawatts of firm import transmission into PJM recently secured by IPH at no cost. This brings IPH's total firm transmission into PGM to 1140 megawatts by planning year of 2017, 2018.

The final point I'll make is to highlight the company's liquidity. As of March 31, 2004, Dynegy's liquidity exclusive of IPH, was $1,037,000,000 where IPH liquidity stood at $268 million.

At this point, Shirley, I would like to open the phone lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Looks like our first question comes from Jon Cohen with ISI.

Jonathan Cohen - ISI Group Inc., Research Division

I know you probably don't want to endorse any specific numbers beyond 2014, but directionally, and thinking about the various puts and takes to your unhedged EBITDA, would it be correct to take the $505 million number that you gave at the Analyst Day, and then look at the difference between where 2014 INDY prices were at February 10th? And then kind of the outyear INDY prices today, and kind of multiply that delta by your expected generation to get the uplift that we saw on the power side?

Robert C. Flexon

It would be correct, John, on coming up with a revenues. Obviously, you have to work through the other components around costs and what have a view on Coal costs, as well, these have to build in, and then, obviously what happens with capacity pricings as well. But from a revenue standpoint, projecting out the energy revenues, that would be correct.

Jonathan Cohen - ISI Group Inc., Research Division

Okay. So on your Pages 10 and 11 that's kind of seems like that's kind of what you're getting at here?

Robert C. Flexon

That's exactly right. We put it there to show what's happening with the forward market versus where we were when we set the guidance, which is what that open number you referenced was developed around.

Jonathan Cohen - ISI Group Inc., Research Division

Okay. And then on Page 16 you say that your...

Robert C. Flexon

John, one thing that I want to clarify too on that $500 million, on one thing that it did not include was -- that included all like the financial third-party hedges out there to the extent that you match IPH generation with its retail loads, that was not done on a mark-to-market. So that actually would be additive to the $500 million just as a point of reference.

Jonathan Cohen - ISI Group Inc., Research Division

So as that hedge position in IPH goes down, there's upside there?

Robert C. Flexon

That's right. Once those -- I mean, the retail contracts typically are 1 year to 2 years and as they roll off, yes, they are replaced by the current market prices. So that's how that would flow through.

Jonathan Cohen - ISI Group Inc., Research Division

Got it. Okay. And then on Page 16, you say that this $45 million impact from polar vortex assumes that 100% of the price uplift in January and February is due to the polar vortex? Obviously, the January and February pricing for '15, '16 and '17 is higher now than where the 2014 January and February pricing was at the end of the year? So if we're just looking at the year-over-year impact of the polar vortex, might that $45 million be a little bit lower, I mean, is that a fair way to look at it?

Robert C. Flexon

Yes. I mean, I think that's right. You just need to be sure that you're factoring in any of the other incremental costs that may be coming in future years, as it relates to whether it's coal commodity or rail or other factors. But again, from a revenue standpoint that's correct.

Jonathan Cohen - ISI Group Inc., Research Division

Okay, great. And then one last question on these, the bilateral contracts you've been signing. Have you said or are you willing to say how many total megawatts that's up to now with the most recent deals?

Robert C. Flexon

We haven't said it to this point in time, and I don't think we're going to give a number at this point. I'd say in total, it's less than 1,000 megawatts.

Operator

Your next question comes from Julien Dumoulin-Smith with UBS.

Paul Zimbardo - UBS Investment Bank, Research Division

This is actually Paul Zimbardo here. Quick question on the PJM imports that you mentioned from IPH, have you disclosed what units those relate to?

Robert C. Flexon

It'll be coming off of Joppa.

Paul Zimbardo - UBS Investment Bank, Research Division

Okay, great.

Robert C. Flexon

All right, I'm sorry, go ahead. Ask your second part of your question. I can add a -- I wanted to make another comment, but go ahead.

Paul Zimbardo - UBS Investment Bank, Research Division

Just at a high level, what are your latest thoughts on balance sheet, deployment capacity, given the strong first quarter and the commodity movements?

Robert C. Flexon

Well, I'll come back to that in a second, and I just want to answer the other part of your question. And that's on the Joppa transmission into PJM, right now we're not necessarily planning to bid that into the upcoming auction. There's another leg to that transmission outside the PJM that we need to firm up. So eventually they bid it into incremental options in the PJM for the 2017 planning year. Well we'll keep it in mind, so depending on what the markets are looking like. But we have the firm transmission from 2017 and beyond. So I just wanted to make that clarification around that. And then, Paul, on the balance sheet capacity, I mean, the thing that we continue to wrestle with it is, certainly we're building up very strong liquidity in the company we've got excess capital, we continue to evaluate whether we utilize that capacity for returning shareholders or what's happening in the M&A marketplace. And so we're just waiting for things to play out a little bit more before we make a firm commitment in a particular direction.

Operator

Your next question comes from Neil Mehta with Goldman Sachs.

Neil Mehta - Goldman Sachs Group Inc., Research Division

Bob, just to confirm, there's nothing that we should read here into you not raising guidance this morning about 2Q results, because of you taking a conservative wait-and-see approach to the results?

Robert C. Flexon

Well, this is a conservative CFO talking to a former conservative CFO. That's probably the biggest problem. No, there's nothing you should read into it. When we did our year-end call on originally established guidance, I indicated that time that assuming that we meet our targets for operations, we would expect to exceed guidance. We also said it at that time, during that time period we've been pressed on questions around the weather impact that we're seeing in the quarter, that if you took the polar vortex impact out, we wouldn't have changed our guidance. And you can see from Clint's portion of the presentation where he went through and quantified polar vortex for the first quarter, taking fairly conservative approach assuming any price difference related to the weather for the first 2 months. And then that's $45 million. So it gives you an idea, we expect to exceed that top end range of guidance, and we just haven't elected to move it at this point in time, because as you approach a summer months, again, we're still gaining familiarity with the IPH fleet and reliability, they have a fairly hedged position going into the summer. So the only thing you can read into it is that, we're just waiting to get through the summer, and assuming we get normal weather and we hit our targets and operations, I would fully expect to raise our guidance at our second quarter call that would happen at the end of July or beginning of August. So I think everyway -- I think the way that people are looking at the numbers is the right way to do it. And there's no underlying concern that there's something that people are missing. I would expect that we'd exceed top end of the range.

Neil Mehta - Goldman Sachs Group Inc., Research Division

And then on MISO capacity, can you provide some high-level thoughts from the most recent auctions, anything surprise you, not in just in the results, but also in the drivers. And then, talk about puts and takes going into the next year's auction?

Robert C. Flexon

I'll comment first, and I'll let Hank add a little additional color. I mean, we went in there and we had 2 objectives. The first objective is to make sure we cover our retail and wholesale obligations. So from our bidding perspective, we wanted to ensure that we didn't find ourselves short, because we didn't clear enough capacity to cover our retail and wholesale contract. So a portion of our bid was just meant to match the generation with the low serving requirement that we have. Beyond that, what we want to do is ensure that we got a fair economic return on the remaining portion of the portfolio, and our bidding behavior was built around that. And I don't know if we put in the materials and I don't recall, but on the -- primarily on the Coal segment fleet, we didn't clear any capacity. So it cleared lower than what we thought would be the right economic return for us for those assets. And like I said, at the Investor Day, when it came to capacity revenues in our guidance for this year, we had very little expectations, but we bid based upon what we think a proper economic return should be. We don't have at this point in time the details from MISO on the different awards and bids, and what actually happened, but to some extent it must mean that there's a lot of spill folks going in there just being price takers, and we went in there with a philosophy that any asset that has length needs a fair economic return. But, Hank, I'll see if you have any additional comments for Neil..

Hank Jones

Just to say that there was no real surprises than the auction result, but just to reemphasize the point that we've made in our most recent conversations that the preferred route to market is by not only registrations or retail and wholesale customers, and the auction is viewed primarily as a price signal to stimulate that activity. And while the results were 16x higher than it were last year, they're still insufficient to inspire new-build or to change the trajectory of the announced and high risk retirements.

Robert C. Flexon

Because this is also we continue to pursue pathways in the PJM as well, because we want to get the appropriate economic returns for the fleet. So to the extent that MISO is not rewarding capacity in their auction or we can't find sufficient levels of bilateral capacity sales, we have an alternative, and that's to go into PJM, and with IPH now having over 1,100 megawatts moving into PJM, that gives us great optionality on how to get the most for our fleet.

Neil Mehta - Goldman Sachs Group Inc., Research Division

All right. And last question for me. But in terms of M&A, can you talk about in broad strokes, what a desirable acquisition would have, what are the different features of it? And then you made a comment at the Analyst Day around timing that you wouldn't expect any transaction to ultimately close until early 2015, is that still the way we should be thinking about that?

Robert C. Flexon

Since I still don't have any transaction to announce, definitely not closing in 2014. For the first part of the question on what's desirable, I think, again, the counter-parties or the folks that we would be most interested in working with are the hybrid utilities that have emergency that no longer want to be in that business. And there's various opportunities out there and the highest synergy opportunities are the ones in which you just have the hybrid utility having full ownership where you have split ownerships those opportunities don't necessarily have the same level of synergies, but they still do. But we're only half of the equation. The other half for the other counter-parties and they have their own views and objectives on what they're trying to accomplish and whether we ultimately get something done or not to be seen. But we're going to try to be very -- make sure careful in what we do, because, with our portfolio as it exists today what's happening in the commodities market, we had tremendous leverage to the upside for our shareholders, and we don't want to compromise that in any way. So anything that we look at, we look at through the prism of what's the best thing to do for our shareholders, and what are the best opportunities out there, and we'll continue to be very active in looking, participating. We think we bring a lot to the table, we have the right infrastructure, we've proven that we can integrate swiftly and manage and run fleets very, very well. I would certainly like to work with counter-parties on the other side on putting something together, but time will tell whether we're successful at doing that or not. And again, anything that we do has to have the right, certainly the right result for our shareholders. And also not compromise our balance sheet either. So we'll be prudent in what we do, opportunities are there, but a lot of it depends on what the other side wants to do.

Operator

Next question comes from Brandon Blossman with Tudor, Pickering.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Things seems to be running pretty darn well. I guess first question, IPH outages, Q1, 89% availability, not bad. Were there any surprises either to the upside or downside as you get and start working those units?

Robert C. Flexon

There's a series of kind of recurring issues with some of the facilities that we've created a priority of addressing in the very near term. We're going to do more outages this year than what we had a originally planned to. Some examples, Duck Creek for example, they have continuingly had issues with flooding and water drainage in their coal yard. We just addressed that. That's creates plug-in and things of that nature. There were outages, most of their outages were early in the quarter where a lot of the weather events were happening, so there's lessons to be learned there. But there weren't any particularly, really significant major issues that suddenly have revealed themselves. I think, there's and the same might can be said for the Coal segment fleet. There's a series of issues that every plant -- that tend to hit reliability and Dan Thompson who runs our both Coal segment fleet and the IPH fleet and his team, has gone through unidentified like the top 16 things that we can address very quickly in each of the segments and the units that will improve reliability, things that have historically created problems and the capital or OpEx to do this is not significant, and the payback that we think we'll be getting from that can be measured in months. So we're going to spend a little extra this year to address those things, to drive reliability further. We want to get that EAF above 90%. But like you said overall, 89%, given the challenges and the weather and the like, not a bad result in those fleets hit that mark. So I think overall it was good result for the first quarter and we see for him to make it better later in the year.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. Good all around. No surprises, we shouldn't expect anything as far as upper guidance on maintenance CapEx for this year?

Robert C. Flexon

No, I mean, nothing of any measurable.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then on hedging, and particularly on the fuel side, ERV markets moving up not as quickly as the power market, but up -- there is some upward pressure on there. Is there any incremental or new or different thoughts around fuel procurement for '15 and '16 on the Coal side?

Robert C. Flexon

I'll comment first, and let Hank spread some additional color on this. But this is kind of the open season period, now where we're getting it into the procurement of our Coal for '15. I think we're also looking to see if there's opportunities to go little bit beyond '15 that we now purchased 27 million tons or so of coal. So we've got some good buying power. so we're in the process right now of trying to meet our Coal needs for 2015, and looking at, are there opportunities to do a little bit beyond 2015. Hank, is there additional thoughts on that?

Hank Jones

Nothing really to add anything other than just to emphasize the price discovery, the current now and in over the coming weeks, and then we'll be receiving the prices for '15 in several years out into the future right now.

Operator

[Operator Instructions] .

Our next question comes from Andy Bischof with Morningstar Research.

Andrew Bischof - Morningstar Inc., Research Division

You mentioned that capacity auction results are still kind of well below the level needed to support spending on some noncompliant MISO plants. In your view, what level would capacity prices really need to be, to support these investments in these plants?.

Robert C. Flexon

Well, I think, the one thing that we highlighted in Investor Day is that the plants that are noncompliant tend to be small in size and up there in years. So I don't think there really is a number that would justify the investment on average, I think we sized them up to in the order of magnitude to 100 megawatts plants that are 50-plus years old. So it really doesn't make any sense to invest in those plants. And certainly, even if you get MISO to converse with RTO pricing and in PJM you're still nowhere close.

Operator

Our next question comes from Amer Tiwana with CRT Capital.

Amer Tiwana - CRT Capital Group LLC

I wanted to sort of step back and talk about strategy for a moment. When you think about how gas prices have moved up and obviously, you guys have a significant amount of leverage to rising gas prices, how do you think about hedging going forward, or as a strategy, how would you employ hedging?

Robert C. Flexon

Well, with the runoffs, we've actually increased our hedging on some of our hedging activity around 2015. Not much at all done yet on 2016. I don't necessarily feel the urge to -- we're not doing anything in '16. But I think we'll be, during the course of your, we'll see strength in the market will continue to layer on 2015. Again, we have limitations around how much we can get done, because we don't want to take the basis risk between INDY and the LNP of the plant. So to the extent that we can hedge in the strengthening market we will do so, but I think overall for the Coal segment fleet, we're pretty much limit to about half of that in terms of liquidity in the market to protect ourselves against basis risk. And on the IPH side, the only hedging that we'll be doing there is through the retail book in the existing wholesale contracts that they have.

Operator

At this time, I'm showing no further questions. We'll turn the call back over to the speakers.

Robert C. Flexon

Good. I like to thank everybody for joining us on the call, and then hopefully you found the new format helpful, but please give Andy a feedback on whether or not this is any better than the prior format, and we'll certainly try to get better each quarter at how we do it. But thank you for joining us, and thanks for your support.

Operator

We do have another question if you'd like to take it at this time?

Robert C. Flexon

I have time. Go ahead.

Operator

We have one question from Jon Cohen with ISI.

Jonathan Cohen - ISI Group Inc., Research Division

I figured since we're only at half an hour I could ask a few more. When you gave guidance I think you said that there is very little expectation of capacity price improvement embedded in guidance? Based on where you're signing these deals, is it fair to say that you're seeing upside in the out years versus where 2014 is from some of these bilateral contracts?

Robert C. Flexon

Up dramatically. Yes, absolutely. The amount of capacity revenues in our guidance for this year, is what, less than 10 million? Yes, it's very, very small. So dramatic difference.

Jonathan Cohen - ISI Group Inc., Research Division

So anything you sign in capacity is going to be additional upside?

Robert C. Flexon

Absolutely.

Jonathan Cohen - ISI Group Inc., Research Division

And then just back to the sort of MISO capacity option dynamics this past year, am I correct in hearing you that you didn't clear anything beyond what you retained to serve the Homefield load?

Robert C. Flexon

Well, we have obligations, some of there's still existing obligations in addition to the retail load that on the wholesale, both -- not majority of which is in IPH, but there's also some of that, a little bit of that on the Coal segment side. But beyond that, anything that did not have an obligation, we do not clear.

Jonathan Cohen - ISI Group Inc., Research Division

Right. I mean, I understand that MISO is going to release more detail about who cleared, and I mean, just seems that there may have been some very big baseload units that we thought were not going to be price takers that were price takers, I mean, is that how you're seeing it as well?

Robert C. Flexon

That's a great question, John. I think that's a big question that's out there. If there's anybody that's unhappy that they're not getting compensated fairly and then if there are price takers, that would be kind of silly. But I don't know. I don't know what the bidding behavior was of anybody.

Jonathan Cohen - ISI Group Inc., Research Division

All right. So if Clinton were to have cleared at $16.75, then it does kind of take away a little bit of their argument that prices are too low, I would think right?

Robert C. Flexon

I would think so. I wasn't necessarily talking about Clinton?

Operator

We do have a few more questions if you like to take them?

Robert C. Flexon

Sure.

Operator

Okay. One second please, we do have one from Neil Mehta with Goldman Sachs.

Neil Mehta - Goldman Sachs Group Inc., Research Division

One last one in terms of liquidity that you're seeing in the forward curve into this recent strength, how much liquidity is there in '15 and '16 specifically in MISO?

Robert C. Flexon

So, Neil, in '15 and '16, the liquidity has picked up significantly with the volatility in price increase. So there's been a number of transactions over the last 4 to 5 weeks. We even saw a 2018 trade go through at the INDY Hub 2 weeks ago.

Operator

We do have a question from William [indiscernible] Management.

Unknown Analyst

Just one clarification on you mentioned on the Investor Day I think based on the February forward curves that net head settlements was $185 million, can you just clarify how much of that you think was Q1 related?

Robert C. Flexon

Yes. I think, Bill, about $112 million of that was related to first quarter.

Unknown Analyst

So it's safe to assume that based on the forward at that point, the balance of the year, you don't have hedges that are as I guess underwater versus the market?

Robert C. Flexon

Yes. And let me clarify that. The $112 million I was talking about was actually some of our financial settlements, we also have some other hedges that are treated differently that are more physical. So the number was really $146 million on the ROE. So I think that's right. When you think about the hedge settlement for this year, the lion's share of those was for Q1 with much smaller numbers for the balance of the year.

Unknown Analyst

Got you. And just one clarification on Slide 12, the generation volumes hedged in 2014, compared to February and May, when I look at May, is that, do I look at that from May to the rest of the year or do I say the that the entire year?

Robert C. Flexon

May figures are for the balance of the year.

Operator

At this time, I'm showing no further questions.

Robert C. Flexon

Great. Well, thank you.

Operator

Thank you. And this does conclude today's conference. We thank you for your participation. At this time you may disconnect your line.

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