Dynegy Q3 2007 Earnings Call Transcript

Dynegy Inc. (DYN)

Q3 2007 Earnings Call

November 8, 2007 9:00 am ET

Executives

Norelle Lundy - VP of Investor and Public Relations

Bruce Williamson - Chairman and CEO

Holli Nichols - CFO and EVP

Lynn Lednicky - EVP, Commercial and Development

Analysts

Lasan Johong - RBC Capital Markets

Dan Eggers - Credit Suisse

Gregg Orrill - Lehman Brothers

Daniele Seitz - Dahlman Rose & Co

Brian Russo - Ladenburg Thalmann & Co

Elizabeth Parrella - Merrill Lynch

Andy Smith - J. P. Morgan

Presentation

Operator

Hello and welcome to the Dynegy Incorporated Third Quarter 2007 Earnings 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 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 covering the company's third quarter 2007 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, particularly with respect to our growth strategy and 2007 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 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 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 and CEO, Bruce Williamson.

Bruce Williamson

Good morning and thank you for joining us. Joining me in Houston this morning is Holli Nichols, our Chief Financial Officer and several other members of our management team.

Let's now turn to the agenda for our call, which is highlighted on slide three, for those of you following it along online via the webcast. I'll begin this morning by providing an overview of our third quarter highlights and recent developments. Holli will then cover the third quarter financial results in detail and provide a business segment financial review and an update to our 2007 cash flow and earnings estimates. I will follow up by discussing the year-to-date from a more strategic perspective. Then we will take your questions and finally provide a wrap-up by way of a calendar of upcoming investor events.

Please turn to slide four. During the third quarter, EBITDA from the power generation business improved from $92 million in the third quarter of 2006 to $624 million for the third quarter 2007. Our generation volumes increased to 106%, primarily due to the assets we acquired from LS Power.

In addition, in-market availability of our coal facilities, which is one of our key operational metrics and a key option for increased returns in markets characterized by increased demand and tightening reserve margins, remained very strong at approximately 94%.

EBITDA also included $217 million in pre-tax income from discontinued operations, primarily related to the company's opportunistic sale of the CoGen Lyondell power generation facility. This sale closed in August.

Third quarter EBITDA also included $20 million of pre-tax unrealized mark-to-market earnings.

These factors contributed to the third quarter net income of $220 million applicable to common stockholders.

As a financial highlight, we also repaid $275 million of outstanding debt under our revolving credit facility, so we currently have no outstanding debt under our revolving credit facility, which reduces our interest expense and provides greater financial flexibility.

Also during the third quarter, we repaid $11 million of the remaining Senior Secured Second Priority Notes, eliminating our highest coupon debt and further decreasing our interest expense going forward.

Please turn to the next slide. During our investor call, we sometimes deviate from our quarterly results to discuss some recent noteworthy developments that have occurred after the close of the quarter.

The first development I'd like to highlight pertains to the PJM auction relating to June 2009 and June 2010 time period, where we sold forward some of our PJM capacity in physical transaction.

Our largest presence in PJM is in the rest of market sub-region where we cleared approximately 2,300 megawatts in the auction, prices cleared at a $102 per megawatt day or $3.10 per kilowatt month.

Meanwhile in the MAAC APS region, we cleared approximately 500 megawatts, with prices clearing at about a $191 per megawatt day or $5.31 per kilowatt month.

Prices in the rest of the market were near our expectations, while MAAC APS prices were well above our expectations.

We believe these prices are indicative of a power market recovery in regions, where we have a strong physical presence, signaling greater earnings potential for our incumbent assets and our investors.

Clearly, we have seen a marked improvement in capacity prices in this region. However, the capacity prices are still not yet at levels that support new build economics. As the markets tightened, we believe the capacity prices will have to go higher to support new build economics.

Last development I want to mention pertains to Plum Point, our 665 megawatt facility under construction in Arkansas. Recently, we announced an agreement to sell a non-controlling interest in the facility to John Hancock Life Insurance Co., for $82 million in cash, net of project level non-recourse debt. This transaction is expected to close in the fourth quarter, and implies an overall value of the facility of approximately $2,800/KW.

Dynegy will maintain construction and commercial control of the facility and we will continue to own approximately a 140 megawatt. The transaction demonstrates the underlying value of the construction and development projects, and the flexibility we have to execute strategic options to harvest net present value for our investors. In this example, we were able to capture value by selling a portion of our interest in Plum Point to a company that had a lower cost of capital.

We were able to bring forward significant net present value while retaining a meaningful stake in the project, and moreover the transaction is an interesting benchmark for our existing fleet.

Essentially, a buyer was willing to pay approximately $2,800/KW for an asset that is not expected to enter commercial operation until 2010. When compared to our existing fleet, which is producing cash flow today, and adjusted for CapEx, one could argue that our coal assets are therefore not fully valued.

A key takeaway for all of this recent development is that we remain focused on identifying, capturing and implementing strategies to obtain the highest and best use of capital for our investors.

With that, I will turn over to Holli to discuss our financial results and provide a business segment financial review.

Holli Nichols

Thanks, Bruce. Turning now to slide seven and our financial performance for the quarter, I'd like to cover our income statement, cash flow statement and balance sheet. Before I begin, as is customary, at this in our call, I would highlight that EBITDA and free cash flow are non-GAAP measures.

For Reg G purposes, we have reconciled EBITDA to the GAAP measure of net income. In addition, we have reconciled free cash flow to the GAAP measures of cash flow from operating activities and cash flow from investing activities. We've included these reconciliations in the slide presentation accompanying this webcast, as well as in the attachments to our earnings news release.

Now turning to our results; for the third quarter 2007, we reported net income of $220 million or $0.26 per diluted share. This compares to a net loss of $69 million or $0.14 per diluted share for the third quarter of 2006.

As Bruce mentioned, our results were driven by a $217 million in pre-tax income from discontinued operation, primarily resulting from the sale of CoGen Lyondell, the addition of assets acquired from LS Power, higher volumes and prices in the Midwest and $20 million of unrealized pre-tax mark-to-market earnings.

For the nine months, ended September 30, 2007 Dynegy's free cash flow was the use of $137 million. This includes operating cash inflows of $366 million and investing cash outflow of $503 million. As discussed in the second quarter investor call, our investing cash outflow captures the refinancing of our liquidity facilities and the funding of the LS Power transaction, in addition to our capital expenditure program.

First, our refinancing following the LS Power transaction increased our synthetic letter of credit facility by $650 million in the second quarter. Borrowings under a six-year term loan raised cash, which was used to collateralize the letter of credit facility. Cash proceeds from the term loan borrowing are reflected as a financing cash inflow in accordance with GAAP.

The deposit of the cash in the collateralized account is reflected in investing activities as an increase in restricted cash. This accounting disclosure requirement actually results in a gross-up of a cash flow statement, and there is no impact on our unrestricted cash balance. In addition to our refinancing, at close, we paid LS Power $100 million in connection with the acquisition and incurred approximately $50 million in transaction cost.

This was offset by $16 million of cash acquired, and all of this is reflected as a net investing cash outflow. Also included in our investing cash flows is $236 million in capital expenditures, which includes routine maintenance CapEx and our environmental spending under the consent decree. CapEx also includes approximately $92 million associated with the construction of Plum Point, which is 100% financed with non-recourse debt.

Lastly, investing cash flows includes $462 million of proceeds received for the sale of the CoGen Lyondell facility. A sale of the facility also resulted in a collateral reduction of approximately $20 million in letters of credit and a return of working capital.

As of September 30, 2007 we had approximately $1.4 billion of collateral posted. The increase in collateral during the quarter is primarily due to the posting of a letter of credit related to Dynegy's equity commitment to the Sandy Creek development project, which is scheduled to begin construction in the fourth quarter of 2007 and commence commercial operation in 2012. Otherwise, collateral has remained relatively flat, since the close of LS Power transaction. We ended the quarter with total net debt and lease obligations of approximately $5.2 billion and our liquidity was nearly $1.4 billion.

Please turn to slide eight. As we discussed in last quarter's investor conference call, beginning in the second quarter of 2007, certain forward sales of power and purchases of fuel are no longer designated as cash flow hedges. Instead, these transactions now received mark-to-market accounting treatment as to the heat rate call options that were assumed with the LS Power portfolio. As values fluctuate due to market price volatility, value changes are reflected in the income statement. And the cash flow associated with these value changes will either occur daily through collateral requirements or upon final settlement, depending on the transaction.

The chart on this slide breaks down the unrealized mark-to-market earnings and losses in each region between 2007 positions and 2008 and beyond positions for the quarter. During the third quarter '07, we had $20 million of unrealized earnings, of which $4 million relates to positions that are expected to settle in 2007. The $16 million that relates to positions that are expected to settle in 2008 and beyond represents contracts for which the contracted price was higher than the forwards at September 30, 2007.

For these contracts related to 2008 and beyond, we've received approximately $4 million in cash as a result of specific collateral arrangements.

Importantly, the price ultimately realized will reflect the price that we view to be attractive at the time we executed the contracts. For a portion of our portfolio, we are protected against falling prices, and our remaining megawatts are available to participate in the open market, which can be volatile creating earnings opportunities.

Now, let's move on to the discussion of our segment results.

Please turn to slide nine. Midwest segment EBITDA increased to $191 million in the third quarter of 2007 from $34 million in the third quarter of 2006. Third quarter 2006 results included a $96 million pre-tax impairment charge related to the company's Bluegrass facility.

The remaining increase in EBITDA was driven by increased sales volumes and prices, offset by unrealized mark-to-market losses of $29 million, of which $12 million relates to 2007 positions.

Midwest volumes increased 32% from 5.7 million megawatt hours during the third quarter of '06 to 7.5 million megawatt hours during the third quarter of '07.

The addition of the Kendall and Ontelaunee facilities was the primarily driver of the increase in volumes, while increased availability of the Illinois coal fleet also contributed to higher volumes. Prices were also up from 2006.

Average actual on-peak market power prices in CIN Hub were higher by 10% as compared to the third quarter of 2006.

The higher end market availability of the Illinois coal fleet combined with these higher prices was the largest contributor to the improved EBITDA period-over-period.

Third quarter 2007 CapEx was higher than the third quarter of '06, due to planned environmental spending related to our consent decree agreement, as well as the construction of Plum Point.

I'd like to point out that our projected full year CapEx of $305 million, includes a $160 million related to the construction of Plum Point, $70 million for consent decree compliance and $75 million for routine maintenance. The 2007 projected CapEx spend related to the consent decree has been reduced to $70 million from $90 million due to a $20 million shift in construction projects to later years.

While the timing has shifted, our estimate of the total cost of compliance with the consent decree has not. The 2008 to 2012 spend is expected to be $660 million.

Please turn to slide 10. Beginning in the second quarter 2007, the company's former South segment was renamed the West segment. Today, the West segment primarily includes the assets acquired in the LS Power combination.

EBITDA for the West segment was $369 million in the third quarter of '07 compared to EBITDA of $17 million in the third quarter of '06. Third quarter 2007 results benefited from $213 million in income from discontinued operations, primarily resulting from the sale of CoGen Lyondell, as well as contributions from six former LS Power assets.

The third quarter also included unrealized mark-to-market earnings of approximately $68 million, of which $34 million related to 2007 positions. Volumes generated by the West facilities increased to 5.2 million megawatt hours during the third quarter of '07 compared to 0.3 million megawatt hours in the third quarter of '06, after excluding volumes associated with CoGen Lyondell and Calcasieu.

Spark spread for the predominantly gas-fired portfolio in the West is the key metric of performance. During the third quarter of '07, the natural gas spark spread decreased 9% compared to the third quarter of '06.

Third quarter '07 CapEx was lower than the third quarter of '06 due to planned major maintenance in '06 at the CoGen Lyondell facility. Because of the less predictable dispatch nature of combined cycle plants, their maintenance schedules are generally less static, as compared to our base load plants. Therefore, we expect CapEx could be higher next year than a relatively low CapEx spending projected for 2007.

As a final note, results for CoGen Lyondell and Calcasieu are reported in the discontinued operations in our income statement.

Please turn to slide 11. EBITDA for the Northeast segment was $64 million in the third quarter of '07 compared to $41 million in the third quarter of '06. The increase in 2007 EBITDA was primarily driven by the addition of the Bridgeport and Casco Bay assets, offset by unrealized mark-to-market losses of approximately $19 million, of which $18 million related to 2007 positions.

Average actual on-peak market power prices in New York Zone G were 7% lower compared to the third quarter of '06, while prices in New York Zone A were 3% higher period-over-period. The average fuel oil spark spread was negative for the quarter. However, while not a significant contributor to earnings, the spread was positive at times during the third quarter, allowing the Roseton facility to provide a modest contribution to earnings. The natural gas spark spread rose 3% period-over-period, benefiting our combined cycle plants.

Sales volume generated by the Northeast facilities increased 88% to 3.2 million megawatt hours during the third quarter of '07 compared to 1.7 million megawatt hours in the third quarter of '06. This is primarily due to the addition of two former LS Power assets and the increase in year-over-year CapEx is also due to the additions of these assets.

Please turn to slide 12 for a discussion of our Customer Risk Management results. The loss before interest, taxes, and depreciation and amortization for the Customer Risk Management segment totaled $10 million in the third quarter of '07 compared to a loss of $1 million in the third quarter of '06. Third quarter '07 results included a $16 million pre-tax loss related to legal and settlement charges.

In comparison, third quarter '06 results included a $22 million pre-tax loss related to legal and settlement charges, which was partially offset by mark-to-market income on legacy coal, natural gas, emissions and power positions.

Please turn to slide 13 where we will cover our other results for the quarter. Other consists primarily of general and administrative costs and legal and settlement charges, partially offset by interest income. In Other, the company recorded a $33 million loss before interest, taxes, and depreciation and amortization for the third quarter of '07 compared to a $29 million loss for the third quarter of '06.

Period-over-period general and administrative expenses were higher in the third quarter '07, as a result of the increased headcount and related expenses associated with the LS Power combination. This increase was partially offset by higher interest income earned on restricted cash balances. Cash used in operations includes general and administrative costs and interest expense, partially offset by interest income.

Please turn to slide 14, and let's now take a look at our updated 2007 estimates, beginning with cash flow and then moving to EBITDA. In connection with today's announcements, Dynegy is updating its 2007 estimates to reflect quoted forward commodity price curves as of October 9, 2007.

The company's updated cash flow and earnings estimate take into consideration 12 months of contributions from Dynegy and nine months of contributions from the assets acquired in the LS Power combination. The new estimates also reflect assumptions regarding among other things, sales volumes, fuel costs and other operational activities. In addition, the ranges of our estimates have been narrowed as we move towards the end of 2007.

The company's expected 2007 operating cash flow decreased to a range of $370 million to $420 million from the previous range of $485 million to $585 million. Our estimates have been adjusted for several items, most notably lower commodity prices and the corresponding impact on our third quarter earnings.

In addition, estimates take into consideration $40 million in legal and settlement payments, $25 million related to increased cash collateral postings, primarily on new positions, and $10 million related to the termination of the Bridgeport RMR contract.

In addition, cash flows are expected to be approximately $15 million lower, due to cash taxes resulting from the sale of CoGen Lyondell and the partial sale of the Plum Point project.

Also, we are anticipating a $10 million increase in general and administrative expenses, associated with higher headcount and incentive compensation, in association with LS Power transaction.

These reductions are partially offset by the receipt of approximately $35 million related to the termination of a financial hedging contract related to our Casco Bay facility in the Northeast segment.

Moving on to free cash flow; our new estimate for 2007 is an outflow of $530 million to $480 million, compared to the previously estimated outflow of $220 million to $120 million.

In addition to the operating cash flow changes I just covered, the reduction is largely attributed to the company's decision to utilize cash as collateral rather than letters of credit to reduce future interest costs.

A $325 million letter of credit associated with the Sandy Creek project is anticipated to be replaced with cash collateral, which will eliminate the letter of credit posting charge. Of note, that this cash posting can be replaced with a letter of credit at any time we choose to free up cash. This is partially offset by $90 of cash proceeds related to the sale of portions of the Plum Point and Sandy Creek projects.

The $20 million reduction in 2007 capital expenditures, primarily related to CoGen Lyondell, as well as a $20 million reduction in 2007 consent decree spending, which has been deferred to later years. Excluding adjustments that do not relate to core operations, our new free cash flow estimates from our core business now ranges from $215 to $255 million. This is approximately $40 million lower than the midpoint of our previous estimates, which is the most significant factor being lower commodity prices.

Please turn to slide 15 for an update on earnings estimates. The company's expected 2007 EBITDA range is $1.2 billion to $1.3 billion, and this includes offsetting changes from previous estimates. Changes include an increase due to approximately $80 million in earnings related to the sale of portions of the Plum Point and Sandy Creek projects, and I would note that the $70 million of earnings associated with the sale of an interest in Plum Point is an estimate and the actual financial statement impact will be finalized in the fourth quarter.

Also included in our EBITDA estimate is $40 million of unrealized mark-to-market earnings associated with 2008 and beyond positions, which as discussed, are subject to change based on commodity price movements subsequent to October 9th of '07.

These increases were offset by $75 million reduction in EBITDA as a result of lower commodity prices that largely occurred during the third quarter of '07, $20 million of legal and settlement charges, and $10 million of higher general and administrative expenses resulting from the increased headcount and other expenses associated with the LS Power transaction.

That wraps up our 2007 estimates update, and I'd like to now turn it back over to Bruce.

Bruce Williamson

Thank you, Holli. A year ago during our investor call for the third quarter 2006, I outlined Dynegy's to-do list at the time. Our three main tasks were to complete the acquisition of the assets from LS Power and integrate these assets into our business. Streamline, the right-hand side of our balance sheet to simplify our debt structure, reduce fees, increase flexibility and maximize capital available for our stockholders. And third, optimize the left-hand side of our balance sheet to release excess capital from some assets for the benefit of our stockholders.

Now, I would like to give you a progress report. Over the past year, we have executed on each of these initiatives, while delivering strong financial result, as demonstrated by our positive earnings for three consecutive quarters this year, which was achieved through our continued focus on leveraging our strong operational and commercial capabilities and strategies.

Additionally, we completed the combination with LS Power. This provided us with diversification, and gave us greater scale and scope in three of the best power markets in the country.

Next, we successfully integrated the LS Power assets, focusing on reducing costs and harvesting the consolidation of synergies, while combining the portfolio as quickly as possible in order to demonstrate the benefits of consolidation.

That takes us to task number two. We streamlined our capital structure by refinancing the project-based debt associated with the assets we acquired from LS Power through the use of Dynegy Holdings unsecured bonds. This eliminated cash flows sweeps and other restrictions and provided us with significant financial and commodity cycle flexibility.

We believe that Dynegy's capital structure is now one of the most simple and flexible in the industry, and that structure can serve our investors over the long-term. We also recently announced the completion of a $1 billion in project financing for Sandy Creek Energy Associates. This transaction allows the Sandy Creek Power Generation facility to begin construction in the fourth quarter of 2007.

In addition, Brazoz Electric is participating in the project through both the direct ownership interest and its purchase of 150 megawatts of output, signaling the need for reliable and economic energy to meet the needs of its customers in central Texas.

And finally, let's discuss the left-hand side of our balance sheet, where it comes to optimizing our assets. After the LS Power assets were acquired, we have reassessed our portfolio with a focus on three key regions. As a result, we opportunistically sold the CoGen Lyondell facility and announced the sale of the Calcasieu peaking facility, which is expected to close in early 2008.

More recently, you saw us continue to use fiscal discipline to optimize the asset portfolio. As I mentioned earlier, we agree to sell a portion of our interest in the Plum Point Construction project. This transaction demonstrates our ability to harvest value from a development opportunity. Bottom line is, Dynegy has executed extremely well over the past year and continues to be disciplined and opportunistic in building a solid foundations to maintain, create and capitalize on options for our investments.

Before we move to Q &A, I want to tell you about an important upcoming event on slide 18, which will be our earnings guidance estimates on December 12th in New York City. We will discuss how we are building a solid business foundation in the cyclical industry, creating and capitalizing on multiple options to deliver value for our investors through the highest and best use of capital.

In addition, we will provide fundamental views on the sector, the market and Dynegy's strategy for creating stockholder value, which includes our operational, commercial and hedging capabilities, as well as our development opportunities.

We will also be giving Dynegy's view of the future, covering forecasted earnings, cash flow, capital expenditures, sensitivities for 2008 and beyond.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Lasan Johong. You may ask your question and please state your company name.

Lasan Johong - RBC Capital Markets

Sure. RBC Capital Markets.

Bruce Williamson

Hi, Lasan.

Lasan Johong - RBC Capital Markets

Hi, Bruce, any more Plum Point type opportunities?

Bruce Williamson

Lasan, we just got done with one and…

Lasan Johong - RBC Capital Markets

It's a good transaction.

Bruce Williamson

I am sorry.

Lasan Johong - RBC Capital Markets

It's a good transaction. I'd like to see more.

Bruce Williamson

Thanks. I think I will make the comment and then maybe I will ask Lynn, who has the development responsibility here. We really just think that what that does is, it demonstrates that we can get value out of those development prospects, two different ways.

We can have them be built, owned, and operated and held for the long-term, and we can also be opportunistic about that, basically selling off pieces when we find a good opportunity to do that and sort of promoting people in, if you will. So we use kind of an E&P example.

And that was really the basic strategy behind it. It was good economics. It demonstrates good discipline and it was a good shareholder value transaction. Lynn, anything you want to add?

Lynn Lednicky

Yeah. The only thing I would add is that the notion of opportunity, I mean, we are always looking and when that opportunity is there, and we think that makes sense, then we'll take advantage of that.

But, otherwise we are in good shape with the program that we have and we move forward with, in the case of Plum Point construction and eventual operation of the facility.

Lasan Johong - RBC Capital Markets

More specific, I was thinking of Sandy Creek and White Pine.

Lynn Lednicky

Yeah. Same answer there. I mean, when we think that there is an opportunity that makes good sense for us around those facilities and opportunities that's better than continuing to move forward with our development activities or an opportunity to sell down a piece of that, we'll entertain that. But at this point, we are looking at those and we'll make the decision when we think it's appropriate.

Bruce Williamson

Are you making an offer, Lasan?

Lasan Johong - RBC Capital Markets

You never know.

Bruce Williamson

Okay.

Lasan Johong - RBC Capital Markets

Okay. I was kind of puzzled by the valuation of Plum Point, you said it was $2,800 a KW?

Bruce Williamson

Yeah.

Lasan Johong - RBC Capital Markets

It that then translates into the rest of your coal fleet does that means your underlying fundamental stock price is $8 without even any single gas plant, is that about right?

Bruce Williamson

I'd have to pull some of the parts and compare numbers with you. But, I mean, I leave that up to you to consider as you develop your NAVs and your analysis report.

But, I think we put some numbers out in the past where we've in some presentations pointed out some range of assets times the number of megawatts we have and it's a range, but I don't want to try to peg a number. I'll leave that up to all you sell side analysts.

Lasan Johong - RBC Capital Markets

Okay. And then I was a little confused about the spark spread comments made by Holli in California versus the Northeast. It was down 9% in California, up 3% in the Northeast. Is it weather driven, or was it natural gas price combination weather?

Lynn Lednicky

Well, I think it's a combination. I don't think you can necessarily compare spark spreads in two different regions at a single point in time and understand exactly why they may be different. I mean it may be weather, it may be things going on in the market in terms of supply-demand.

Lasan Johong - RBC Capital Markets

Okay. One last question, what would the recurring value of the development projects on your books today?

Holli Nichols

Lasan, it's relatively low. In the sense that when we went through the acquisition, we were required to go through an entire purchase price allocation process and your views of fair value and all the accounting rules that you go through around that are very specific.

And for something like a development project, it is particularly challenging to apply much value there. And I would say the rule of thumb is probably $100 million or less in book value.

Lasan Johong - RBC Capital Markets

So, basically at this point, if you do realize value out of that portfolio, it's all gravy?

Holli Nichols

That's the way you think about it. As you saw, I've mentioned that we have approximately $70 million and as a gain anticipated around the sale of a portion of Plum Point and that again it obviously had a very low basis.

Lasan Johong - RBC Capital Markets

Excellent. Thank you very much.

Bruce Williamson

Okay, thanks.

Operator

Thank you. Your next question comes from Dan Eggers. You may ask your question and please state your company.

Dan Eggers - Credit Suisse

Hey, good morning. Just want to talk a little bit about the thought process behind some of the coal plant development opportunities where you haven't turned a shovel yet, given some of the opposition we've seen on the market particularly in Nevada with Senator Reed getting more vocal these days?

Bruce Williamson

Okay. I will pass that one across to Lynn and put those on the call Dan with Credit Suisse.

Lynn Lednicky

Sure. I think, remember what we said in the past about our development activities. First of all, we have a portfolio that has a number of different technologies and a number of different locations and those development activities are premised on meeting a particular market need.

So, it's not a program in building out X number of megawatts or a program designed to push a particular technology. It's very much market driven around local needs. And so those needs are influenced by a number of factors, and where we see that market needs change or the impediments to development are large enough that we don't think the probability of success is high, then we will begin to change the emphasis and the resources that we allocate in the development portfolio.

And so that's why we have said from the beginning, that it's a dynamic portfolio and there are number of projects there, some of them will be successful, and some of them won't be. If you look at specifically at the project in Nevada, I mean we are looking at the prospects there. We think it's that the fundamentals make good sense. We have been working with the Nevada agencies and regulatory bodies to come up with something that does make sense there.

So, we are still moving forward with that. We will see where we get over time and then I would just say that general approach is going to apply to all of the other projects that we have in the portfolio, whether they are coal or whether they are gas or whether they are renewable. So we're looking for the right fit in the particular market.

Dan Eggers - Credit Suisse

I guess given the uncertain environmental policy backdrop we have now, should we look for you guys to look to accelerate some of the gas projects and push out some of the coal projects until you get greater clarity on the rules?

Lynn Lednicky

Well, I'm not sure, I would think of it quite that way. We're dealing with the fluid market, and as I said, we're trying to be responsive to what the market wants. Now, if the market suddenly becomes much more favorable towards gas and, yes, there would be some movement toward gas. But, it's not exactly easy to develop gas projects either. And that's not something that can happen in very short order.

So, what we try to do in the development side is look for the opportunities and advance as we can when those opportunities are there. And then in the meantime, the fact that it is hard to get any kind of new generation on the ground, just means that there is additional benefit that goes to our operating portfolio.

Bruce Williamson

I think that's really key point, Dan, is that it's very much a customer driven business venture, the development JVs, and if customers become more interested in natural gas or in renewals or things like that, and contracts can be put in place to support them, then the efforts would shift in that direction.

But as Lynn said, while it creates a good option for us, the more difficult it is to develop new projects be really to better the value of the incumbent assets that are already in the portfolio and on the ground running today.

Dan Eggers - Credit Suisse

That's fair. I guess one last question. We've been hearing talk that embedded heat rates or embedded capacity prices in MISO are moving up pretty nicely with PJM pricing. Is there any comment or color you care to give on what you are seeing on the market now as you look at contracting some of your generation?

Bruce Williamson

Lynn?

Lynn Lednicky

Well, I think, in general, your statement is right. In MISO, it's more of the bilateral markets. So it's not quite as transparent as what you see in PJM. But generally MISO tracks in the same sort of pattern that PJM does.

So, as we see prices strengthen in PJM in response to supply and demand balance, we are going to see the same thing in MISO, may not be at the same level, but you are certain going to see the same kind of trend.

Dan Eggers - Credit Suisse

I guess Lynn any color more on how far off of a best of pool price you are seeing particularly for the Illinois side of the business?

Lynn Lednicky

We really haven't talked about that publicly in large part, because as I said, this is mostly done in bilateral contracts.

Dan Eggers - Credit Suisse

Fair enough. I had to try. Thanks.

Bruce Williamson

Okay.

Operator

Thank you. Our next question comes from Gregg Orrill. You may ask your question and please state your company name.

Gregg Orrill - Lehman Brothers

Thanks very much. Lehman Brothers. I had two quick questions, the first was, could you talk a little bit more about the circumstances and the decision around the replacement of the $325 million letter of credit on the Sandy Creek project cash?

And then secondly. If you could talk a little bit about the changes to the capacity zones for the upcoming PJM auction and how that might affect you?

Bruce Williamson

Okay. I will pass the LC question off to Holli and then Lynn can pick up the capacity?

Holli Nichols

Sure. The way we think about managing our cash balances and liquidity and all our collateral needs is just to be as efficient as possible. And in the near-term, we do have a LC or collateral requirement associated with the equity commitment around the Sandy Creek development project, and I would consider this temporary.

What we would ultimately plan on doing is putting a more permanent financing structure in place at Sandy Creek over the next, I am not sure if it's 12 months, 18 months, 24 months, but in some timeframe in the future, that would reduce this requirement.

But at the time we have cash sitting on our balance sheet and we believe it's more efficient to go ahead and use that to satisfy this collateral need in the near-term rather than paying the LC charge of 150 basis points and it's just a more effective use of our liquidity.

Lynn Lednicky

On your question on PJM, you are correct that they have made some changes to the zones that they have, that's fairly typical of all the ISOs when they have some type of zonal system that periodically there'll be changes there.

And generally, it's a change driven by what the ISO sees in terms of supply and demand balance in a particular location and some times they need to redraw the lines a bit to make sure that the price signals are correct in individual locations.

So, that's what we saw earlier in the year and you begin to see some price differences in capacity across those zones and that's just reflecting the physical transmission system and the constraints that are located there. So, some zones are going to have relatively less supply and they will have higher capacity prices, and we saw that in the zone where the Ontelaunee facility is located this year.

Gregg Orrill - Lehman Brothers

So what will the zones be for the January auction?

Lynn Lednicky

I am not sure there are any changes. I think they will be the same.

Gregg Orrill - Lehman Brothers

Okay, thanks.

Lynn Lednicky

Okay, thank you.

Operator

Thank you. Our next question comes from Daniele Seitz. You may ask your question and please state your company name.

Daniele Seitz - Dahlman Rose & Co.

Thanks. Dahlman Rose. I was wondering if the MISO was still considering to capacity charges?

Lynn Lednicky

The MISO is looking at a number of improvements to their market. A form of capacity market is on their list. It's not at the top of the list. So, I think for the near-term future, we will continue to capacity in MISO being handled on a bilateral basis as opposed to a centralized market run through MISO.

Daniele Seitz - Dahlman Rose & Co.

So, you feel that the probability is relatively small?

Lynn Lednicky

For the near-term, yes.

Daniele Seitz - Dahlman Rose & Co.

Okay. And in terms of your interest costs, you anticipate that they may stay around this level, or slightly lower and then gradually rise with the addition of capital expenditures?

Holli Nichols

I think what, if you think about any plans we have around our capital structure, there is not anything significant. So, the debt balances that we have, there are some that are amortizing, like the debt around the Independence facility.

So, you would expect a bit of a reduction associated with interest, if that works its way down and that will be offset, though, in the sense that the Plum Point debt will be increasing between now and 2010. And therefore your interest will slightly rise, the points of the interest that aren't capitalized on that project.

Daniele Seitz - Dahlman Rose & Co.

The amount you intend to spend in Plum Point, I mean your share will be about a $160 million, between $160 million and [$280 million], but higher?

Holli Nichols

Well, one of the things that's a little confusing about it is that we do consolidate Plum Point.

Daniele Seitz - Dahlman Rose & Co

Right.

Holli Nichols

So, it will all show up on our balance sheet, but effectively the total debt will be around $800 million and we're around 20% of that.

Daniele Seitz - Dahlman Rose & Co

Okay. Great. And just one quick one, G&A, it seems to be going up. Is it just unusual or is this is a trend that you anticipate anyway, because of the expansion and construction etcetera?

Bruce Williamson

I think we expect G&A to be -- if ignoring legal settlements that we've cleaned up a few this year, we would expect G&A to be pretty well flat from this point forward, maybe modest changes one way or the other, but nothing material. The biggest changes that have come in this year relative to our plan have been a couple of legal settlements dealing with some old legacy issues.

Daniele Seitz - Dahlman Rose & Co

Thanks.

Bruce Williamson

Thank you.

Operator

Thank you. Our next question comes from Brian Russo. You may ask your question please state your company name.

Brian Russo - Ladenburg Thalmann & Co

Good morning.

Bruce Williamson

Good morning Brian.

Brian Russo - Ladenburg Thalmann & Co

Ladenburg Thalmann. Could you just update us on the development progress of the Georgia based Long Leaf plant?

Lynn Lednicky

Sure. That project is, as you may know, is still going through the final regulatory process. It received permits, some of the major permits that were required, those were under appeal and that is currently being litigated in Georgia. We expect that the litigation will wind up over the next three months or so. But there's not much we can really say beyond that, other than, we are winding through that final bit of litigation.

Assuming we get more favorable rulings than we would look at, moving forward with that project in 2008. And if we got unfavorable rulings, then we would obviously have to assess what the impacts of those rulings were. So, that's still moving forward, but there is really probably not going to be any news on that until we get through that regulatory process.

Brian Russo - Ladenburg Thalmann & Co

Okay. And can you also talk a little bit about any ground field expansion opportunities maybe in Connecticut and California?

Lynn Lednicky

Sure, we are looking at those opportunities as well. I am not sure if there is any particular highlight to give you right now. Obviously, you’ve mentioned that the two obvious ones looking at some expansions around the Bridgeport facility, and we are making progress there in the west. We are looking at and have been participating in various RFPs and RFOs. And we are hopeful, but that's a competitive business out there, and we'll see how things unfold as those RFPs go forward?

Brian Russo - Ladenburg Thalmann & Co

Okay. Just to focus on the west a little bit, you guys have a fairly significant presence there, and I am just wondering what your thoughts are on evolving those power markets structures and maybe capacity markets and so forth?

Bruce Williamson

Lynn you are on the role.

Lynn Lednicky

Well, in California, you are probably aware that California ISO is going through market redesign, which would be put in place next year. So, we've been watching closely those developments, and looking forward to those changes and looking for opportunities that maybe created there. So, other than that I don’t think there is going to be too much new that comes out of California. They have quite a bit on their plate at this point.

If you move over into the Arizona assets, those assets are in more of a bilateral market. You look for bilateral type contracts there as the main opportunity, and I think we would expect that to be more fruitful for us than any particular structural change in the markets. I don't really anticipate that you will see some type of ISO set up in the desert southwest, for example or formal capacity markets and the like. I think that will continue to be as it has been in the past more of bilateral market. And so, that's where we see the opportunities.

Brian Russo - Ladenburg Thalmann & Co

Okay. Thank you very much.

Operator

Thank you, Your next question comes from Elizabeth Parrella. You may ask your question, and please state your company name.

Elizabeth Parrella - Merrill Lynch

Merrill Lynch. Thank you. Bruce you mentioned the PJM capacity prices aren't yet high enough to support any build economics. Can you give us sense where think they need to be in PJM?

Bruce Williamson

Sure, I will again Lynn's getting all the business today. Let him go to the market, so I would lend an ear.

Lynn Lednicky

The first thing I would say, Elizabeth, is a combined cycle plan, maybe if we talk about that for just a minute. A combined cycle plant will make it's money through some combinations of margin from energy payments, ancillary services that are provided, and capacity. And I don't think that there's any necessary combination of those three, i.e. it's not necessarily the case that 40% comes from capacity, and 40% comes from energy, and 20% comes from ancillary services.

So, we always view that there's going to be some kind of rough balance between those, but again no necessary proportions. If you look at new build economics, we would probably tell you that capacity payments probably ought to be in the $6, $7, and $8 range. But then you have to make some assumptions about what kind of energy margin that you would expect to go along with that. And that's the function of some of the other market rules.

So, the point that Bruce was making was really that we've seen $4.5 as sort of the high in terms of capacity payments in PJM. And we would expect things to still be well above that before you get new build economic. The other way you might about it is look at what's happening in the New England area and the prices associated with capacity markets there, which are more up in the $7 or $8. And people are starting to talk about new facilities there. But we're still, I think everybody is still watching and waiting to see what happens. So, may be that gives you some sense of what kind of differential we are thinking about.

Elizabeth Parrella - Merrill Lynch

Well, you actually jumped on my next question which also is going to be, how you think about the New England capacity auction coming up in February playing out. Given some differences in the auction structure and the market themselves, and how do you think that auction kind of looks compared to the pricing we have seen in PJM?

Lynn Lednicky

My guess would be that the pricing there will be higher. But, we haven't had the auction yet, and it's hard to say particularly when you do have different rules and different structures. It's hard to draw direct comparisons from one region to another.

Elizabeth Parrella - Merrill Lynch

Okay. Thank you.

Operator

Our next question comes from Andy Smith. You may ask your question, and please state your company name.

Andy Smith - J. P. Morgan

Good morning. This is Andy Smith with J P Morgan.

Bruce Williamson

Hi, Andy

Andy Smith – J. P. Morgan

Hi guys. Quick question for you on Illinois, as we are seeing the new procurement process there, at least for the next year coming up are being proposed? It looks like to me one other things that's happened, is that the load shape risk is being transferred out of the old auction process and back on to the utilities, given your base load profile in Illinois, do you guys see maybe more opportunity or maybe a little more comfort in the potential to wave some contracts in place against these assets, under this new proposal or does it really change your thinking at all?

Bruce Williamson

I think the way you just put it, Andy, is probably the best way to think about it. I mean what the auction did was, it basically had every supplier provides were to call up the custom solution with the maximum amount of load shape and flexibility and every other possible risk dealt with in the price. So, if we go down the path you are talking and that's where we think they maybe headed. They are in effect going to buy sort of the wholesale components, and then the utility will have the obligation to assemble that and then have to manage some of flex and the load shape and thing like that.

Obviously, when we were faced with the other process, if we are faced with a lot of additional risks and things then we're going to price those in. Now, I think we're generally able to look at the selling the various wholesale components and just having an appropriate profit margin on the wholesale product. So, instead of selling the suit we maybe selling cloth and thread and button separately, so to speak. And we'll see how that all comes together.

Andy Smith – J. P. Morgan

Okay. Great, thanks.

Operator

Thank you. And this concludes the question-and-answer session. At this time I will turn the call over to the speakers.

Bruce Williamson

Thank you. Before ending this morning's call, I would like to tell you about a new initiative as we strive to provide continuous improvement for our stockholder communications. We invite all of you to enroll in a new program that provides the option of receiving your future stock-hold materials electronically. This initiative will help save investors money by reducing mailing cost and increasing efficiency. You will be receiving more information about this service in the mail, and you can enroll starting today on our website at dynegy.com.

Now, turn to slide 20, I would like to mention a few upcoming events that various members of the management team will be participating in. We will be at the Calyon Conference on November 29th in New York City. In addition, members of the management team will be making West Coast Investor Marketing trip that same week in November. And please remember our 2008 guidance estimates and future outlook call on December 12, from New York City.

Thank you again for your time this morning and your interest in Dynegy. I look forward to seeing a number of you at our upcoming investor event.

Operator

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

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