Dyne Therapeutics, Inc.
Q3 2007 Earnings Call Transcript

Published: 8 Nov 2007

[Operator:]

Hello and welcome to the Dynegy Incorporated Third Quarter2007 Earnings Teleconference. At the request of Dynegy, this conference isbeing recorded for instant replay purposes. Please note that all lines will bein a listen-only mode until the question and answer portion of today's call. (OperatorInstructions) I would now like to turn the conference over to Ms. NorelleLundy, Vice President of Investor and Public Relations. Ma'am, you may begin.

[Norelle Lundy:]

Good morning, everyone, and welcome to Dynegy's investorconference call and webcast covering the company's third quarter 2007 results. Asis our customary practice before we begin this morning, I would like to remindyou that our call will include statements reflecting assumptions, expectations,projections, intentions or beliefs about future events, particularly withrespect to our growth strategy and 2007 estimates. These and other statementsnot relating strictly to historical or current facts are intended asforward-looking statements. Actual results, though, may vary materially from thoseexpressed or implied in any forward-looking statements. For a description ofthe factors that may cause such a variance, I would direct you to theforward-looking statements legend contained in today's news release and in ourSEC filings, which are available free of charge through our website atDynegy.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 HolliNichols, our Chief Financial Officer and several other members of our managementteam. Let's now turn to the agenda for our call, which ishighlighted 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 quarterhighlights and recent developments. Holli will then cover the third quarterfinancial results in detail and provide a business segment financial review andan update to our 2007 cash flow and earnings estimates. I will follow up bydiscussing the year-to-date from a more strategic perspective. Then we will takeyour questions and finally provide a wrap-up by way of a calendar of upcominginvestor events. Please turn to slide four. During the third quarter, EBITDAfrom the power generation business improved from $92 million in the thirdquarter of 2006 to $624 million for the third quarter 2007. Our generationvolumes increased to 106%, primarily due to the assets we acquired from LSPower. In addition, in-market availability of our coal facilities,which is one of our key operational metrics and a key option for increasedreturns in markets characterized by increased demand and tightening reservemargins, remained very strong at approximately 94%. EBITDA also included $217 million in pre-tax income fromdiscontinued operations, primarily related to the company's opportunistic saleof the CoGen Lyondell power generation facility. This sale closed in August. Third quarter EBITDA also included $20 million of pre-taxunrealized 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 outstandingdebt under our revolving credit facility, so we currently have no outstandingdebt under our revolving credit facility, which reduces our interest expenseand provides greater financial flexibility. Also during the third quarter, we repaid $11 million of the remainingSenior Secured Second Priority Notes, eliminating our highest coupon debt andfurther decreasing our interest expense going forward. Please turn to the next slide. During our investor call, wesometimes deviate from our quarterly results to discuss some recent noteworthydevelopments that have occurred after the close of the quarter. The first development I'd like to highlight pertains to thePJM auction relating to June 2009 and June 2010 time period, where we soldforward some of our PJM capacity in physical transaction. Our largest presence in PJM is in the rest of marketsub-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 approximately500 megawatts, with prices clearing at about a $191 per megawatt day or $5.31per 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 marketrecovery in regions, where we have a strong physical presence, signalinggreater earnings potential for our incumbent assets and our investors. Clearly, we have seen a marked improvement in capacityprices in this region. However, the capacity prices are still not yet at levelsthat support new build economics. As the markets tightened, we believe thecapacity prices will have to go higher to support new build economics. Last development I want to mention pertains to Plum Point, our665 megawatt facility under construction in Arkansas. Recently, we announced anagreement to sell a non-controlling interest in the facility to John HancockLife Insurance Co., for $82 million in cash, net of project level non-recoursedebt. This transaction is expected to close in the fourth quarter, and impliesan overall value of the facility of approximately $2,800/KW. Dynegy will maintain construction and commercial control ofthe facility and we will continue to own approximately a 140 megawatt. Thetransaction demonstrates the underlying value of the construction anddevelopment projects, and the flexibility we have to execute strategic optionsto harvest net present value for our investors. In this example, we were able tocapture value by selling a portion of our interest in Plum Point to a companythat had a lower cost of capital. We were able to bring forward significant net present value whileretaining a meaningful stake in the project, and moreover the transaction is aninteresting benchmark for our existing fleet. Essentially, a buyer was willing to pay approximately $2,800/KWfor an asset that is not expected to enter commercial operation until 2010.When compared to our existing fleet, which is producing cash flow today, andadjusted for CapEx, one could argue that our coal assets are therefore notfully valued. A key takeaway for all of this recent development is that weremain focused on identifying, capturing and implementing strategies to obtainthe highest and best use of capital for our investors. With that, I will turn over to Holli to discuss ourfinancial results and provide a business segment financial review.

[Holli Nichols:]

Thanks, Bruce. Turning now to slide seven and our financialperformance for the quarter, I'd like to cover our income statement, cash flow statementand balance sheet. Before I begin, as is customary, at this in our call, Iwould highlight that EBITDA and free cash flow are non-GAAP measures. For Reg G purposes, we have reconciled EBITDA to the GAAPmeasure of net income. In addition, we have reconciled free cash flow to theGAAP measures of cash flow from operating activities and cash flow frominvesting activities. We've included these reconciliations in the slidepresentation accompanying this webcast, as well as in the attachments to ourearnings news release. Now turning to our results; for the third quarter 2007, wereported net income of $220 million or $0.26 per diluted share. This comparesto a net loss of $69 million or $0.14 per diluted share for the third quarterof 2006. As Bruce mentioned, our results were driven by a $217million in pre-tax income from discontinued operation, primarily resulting fromthe 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 freecash 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 thesecond quarter investor call, our investing cash outflow captures therefinancing of our liquidity facilities and the funding of the LS Powertransaction, in addition to our capital expenditure program. First, our refinancing following the LS Power transactionincreased our synthetic letter of credit facility by $650 million in the secondquarter. Borrowings under a six-year term loan raised cash, which was used tocollateralize the letter of credit facility. Cash proceeds from the term loanborrowing are reflected as a financing cash inflow in accordance with GAAP. The deposit of the cash in the collateralized account isreflected in investing activities as an increase in restricted cash. Thisaccounting disclosure requirement actually results in a gross-up of a cash flowstatement, and there is no impact on our unrestricted cash balance. In additionto our refinancing, at close, we paid LS Power $100 million in connection withthe acquisition and incurred approximately $50 million in transaction cost. This was offset by $16 million of cash acquired, and all ofthis is reflected as a net investing cash outflow. Also included in ourinvesting cash flows is $236 million in capital expenditures, which includesroutine maintenance CapEx and our environmental spending under the consentdecree. CapEx also includes approximately $92 million associated with theconstruction of Plum Point, which is 100% financed with non-recourse debt. Lastly, investing cash flows includes $462 million ofproceeds received for the sale of the CoGen Lyondell facility. A sale of the facilityalso resulted in a collateral reduction of approximately $20 million in lettersof credit and a return of working capital. As of September 30, 2007 we had approximately $1.4 billionof collateral posted. The increase in collateral during the quarter isprimarily due to the posting of a letter of credit related to Dynegy's equitycommitment to the Sandy Creek development project,which is scheduled to begin construction in the fourth quarter of 2007 and commencecommercial operation in 2012. Otherwise, collateral has remained relativelyflat, since the close of LS Power transaction. We ended the quarter with totalnet debt and lease obligations of approximately $5.2 billion and our liquidity wasnearly $1.4 billion. Please turn to slide eight. As we discussed in last quarter'sinvestor conference call, beginning in the second quarter of 2007, certain forwardsales of power and purchases of fuel are no longer designated as cash flowhedges. Instead, these transactions now received mark-to-market accountingtreatment 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 reflectedin the income statement. And the cash flow associated with these value changes willeither occur daily through collateral requirements or upon final settlement, dependingon the transaction. The chart on this slide breaks down the unrealized mark-to-marketearnings and losses in each region between 2007 positions and 2008 and beyondpositions for the quarter. During the third quarter '07, we had $20 million ofunrealized earnings, of which $4 million relates to positions that are expectedto settle in 2007. The $16 million that relates to positions that are expectedto settle in 2008 and beyond represents contracts for which the contractedprice was higher than the forwards at September 30, 2007. For these contracts related to 2008 and beyond, we'vereceived approximately $4 million in cash as a result of specific collateral arrangements. Importantly, the price ultimately realized will reflect theprice that we view to be attractive at the time we executed the contracts. Fora portion of our portfolio, we are protected against falling prices, and ourremaining megawatts are available to participate in the open market, which canbe volatile creating earnings opportunities. Now, let's move on to the discussion of our segment results. Please turn to slide nine. Midwestsegment EBITDA increased to $191 million in the third quarter of 2007 from $34million in the third quarter of 2006. Third quarter 2006 results included a $96million pre-tax impairment charge related to the company's Bluegrassfacility. The remaining increase in EBITDA was driven by increasedsales volumes and prices, offset by unrealized mark-to-market losses of $29million, 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 millionmegawatt hours during the third quarter of '07. The addition of the Kendall and Ontelaunee facilities wasthe primarily driver of the increase in volumes, while increased availability ofthe Illinoiscoal fleet also contributed to higher volumes. Prices were also up from 2006. Average actual on-peak market power prices in CIN Hub werehigher by 10% as compared to the third quarter of 2006. The higher end market availability of the Illinois coal fleet combined with thesehigher prices was the largest contributor to the improved EBITDAperiod-over-period. Third quarter 2007 CapEx was higher than the third quarterof '06, due to planned environmental spending related to our consent decreeagreement, as well as the construction of Plum Point. I'd like to point out that our projected full year CapEx of $305million, includes a $160 million related to the construction of Plum Point, $70million for consent decree compliance and $75 million for routine maintenance.The 2007 projected CapEx spend related to the consent decree has been reducedto $70 million from $90 million due to a $20 million shift in constructionprojects to later years. While the timing has shifted, our estimate of the total costof compliance with the consent decree has not. The 2008 to 2012 spend isexpected to be $660 million. Please turn to slide 10. Beginning in the second quarter2007, the company's former South segment was renamed the West segment. Today, theWest segment primarily includes the assets acquired in the LS Powercombination. EBITDA for the West segment was $369 million in the thirdquarter of '07 compared to EBITDA of $17 million in the third quarter of '06.Third quarter 2007 results benefited from $213 million in income fromdiscontinued 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-marketearnings of approximately $68 million, of which $34 million related to 2007positions. Volumes generated by the West facilities increased to 5.2 millionmegawatt hours during the third quarter of '07 compared to 0.3 million megawatthours in the third quarter of '06, after excluding volumes associated withCoGen Lyondell and Calcasieu. Spark spread for the predominantly gas-fired portfolio inthe West is the key metric of performance. During the third quarter of '07, thenatural gas spark spread decreased 9% compared to the third quarter of '06. Third quarter '07 CapEx was lower than the third quarter of '06due to planned major maintenance in '06 at the CoGen Lyondell facility. Becauseof the less predictable dispatch nature of combined cycle plants, theirmaintenance schedules are generally less static, as compared to our base load plants.Therefore, we expect CapEx could be higher next year than a relatively lowCapEx spending projected for 2007. As a final note, results for CoGen Lyondell and Calcasieu are reported in the discontinued operations inour income statement. Please turn to slide 11. EBITDA for the Northeast segmentwas $64 million in the third quarter of '07 compared to $41 million in thethird quarter of '06. The increase in 2007 EBITDA was primarily driven by theaddition of the Bridgeport and Casco Bay assets, offset by unrealized mark-to-market losses ofapproximately $19 million, of which $18 million related to 2007 positions. Average actual on-peak market power prices in New York ZoneG were 7% lower compared to the third quarter of '06, while prices in New YorkZone A were 3% higher period-over-period. The average fuel oil spark spread wasnegative for the quarter. However, while not a significant contributor toearnings, the spread was positive at times during the third quarter, allowingthe Roseton facility to provide a modest contribution to earnings. The naturalgas spark spread rose 3% period-over-period, benefiting our combined cycleplants. Sales volume generated by the Northeast facilities increased88% to 3.2 million megawatt hours during the third quarter of '07 compared to1.7 million megawatt hours in the third quarter of '06. This is primarily dueto the addition of two former LS Power assets and the increase inyear-over-year CapEx is also due to the additions of these assets. Please turn to slide 12 for a discussion of our CustomerRisk Management results. The loss before interest, taxes, and depreciation andamortization for the Customer Risk Management segment totaled $10 million inthe third quarter of '07 compared to a loss of $1 million in the third quarterof '06. Third quarter '07 results included a $16 million pre-tax loss relatedto legal and settlement charges. In comparison, third quarter '06 results included a $22million pre-tax loss related to legal and settlement charges, which waspartially 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 otherresults for the quarter. Other consists primarily of general and administrativecosts and legal and settlement charges, partially offset by interest income. InOther, the company recorded a $33 million loss before interest, taxes, anddepreciation and amortization for the third quarter of '07 compared to a $29million loss for the third quarter of '06. Period-over-period general and administrative expenses were higherin the third quarter '07, as a result of the increased headcount and relatedexpenses associated with the LS Power combination. This increase was partiallyoffset by higher interest income earned on restricted cash balances. Cash usedin 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 ourupdated 2007 estimates, beginning with cash flow and then moving to EBITDA. Inconnection with today's announcements, Dynegy is updating its 2007 estimates toreflect quoted forward commodity price curves as of October 9, 2007. The company's updated cash flow and earnings estimate takeinto consideration 12 months of contributions from Dynegy and nine months ofcontributions from the assets acquired in the LS Power combination. The newestimates also reflect assumptions regarding among other things, sales volumes,fuel costs and other operational activities. In addition, the ranges of ourestimates have been narrowed as we move towards the end of 2007. The company's expected 2007 operating cash flow decreased toa range of $370 million to $420 million from the previous range of $485 millionto $585 million. Our estimates have been adjusted for several items, mostnotably lower commodity prices and the corresponding impact on our thirdquarter earnings. In addition, estimates take into consideration $40 millionin legal and settlement payments, $25 million related to increased cash collateralpostings, primarily on new positions, and $10 million related to the terminationof the Bridgeport RMR contract. In addition, cash flows are expected to be approximately $15million lower, due to cash taxes resulting from the sale of CoGen Lyondell andthe partial sale of the Plum Point project. Also, we are anticipating a $10 million increase in generaland administrative expenses, associated with higher headcount and incentivecompensation, in association with LS Power transaction. These reductions are partially offset by the receipt ofapproximately $35 million related to the termination of a financial hedgingcontract related to our Casco Bay facility inthe Northeast segment. Moving on to free cash flow; our new estimate for 2007 is anoutflow of $530 million to $480 million, compared to the previously estimatedoutflow of $220 million to $120 million. In addition to the operating cash flow changes I justcovered, the reduction is largely attributed to the company's decision toutilize cash as collateral rather than letters of credit to reduce futureinterest costs. A $325 million letter of credit associated with the Sandy Creekproject is anticipated to be replaced with cash collateral, which willeliminate the letter of credit posting charge. Of note, that this cash postingcan be replaced with a letter of credit at any time we choose to free up cash. Thisis partially offset by $90 of cash proceeds related to the sale of portions of thePlum 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 2007consent decree spending, which has been deferred to later years. Excludingadjustments that do not relate to core operations, our new free cash flowestimates from our core business now ranges from $215 to $255 million. This isapproximately $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, andthis includes offsetting changes from previous estimates. Changes include an increasedue to approximately $80 million in earnings related to the sale of portions ofthe Plum Point and Sandy Creek projects, and I would note that the $70 millionof earnings associated with the sale of an interest in Plum Point is anestimate and the actual financial statement impact will be finalized in thefourth quarter. Also included in our EBITDA estimate is $40 million ofunrealized mark-to-market earnings associated with 2008 and beyond positions, whichas discussed, are subject to change based on commodity price movements subsequentto October 9th of '07. These increases were offset by $75 million reduction inEBITDA as a result of lower commodity prices that largely occurred during thethird quarter of '07, $20 million of legal and settlement charges, and $10million of higher general and administrative expenses resulting from theincreased headcount and other expenses associated with the LS Powertransaction. That wraps up our 2007 estimates update, and I'd like to nowturn it back over to Bruce.

[Bruce Williamson:]

Thank you, Holli. A year ago during our investor call forthe third quarter 2006, I outlined Dynegy's to-do list at the time. Our threemain tasks were to complete the acquisition of the assets from LS Power andintegrate these assets into our business. Streamline, the right-hand side ofour balance sheet to simplify our debt structure, reduce fees, increaseflexibility and maximize capital available for our stockholders. And third,optimize the left-hand side of our balance sheet to release excess capital fromsome assets for the benefit of our stockholders. Now, I would like to give you a progress report. Over thepast year, we have executed on each of these initiatives, while deliveringstrong financial result, as demonstrated by our positive earnings for threeconsecutive quarters this year, which was achieved through our continued focuson 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 inthree 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, whilecombining the portfolio as quickly as possible in order to demonstrate thebenefits of consolidation. That takes us to task number two. We streamlined our capitalstructure by refinancing the project-based debt associated with the assets weacquired from LS Power through the use of Dynegy Holdings unsecured bonds. Thiseliminated cash flows sweeps and other restrictions and provided us withsignificant financial and commodity cycle flexibility. We believe that Dynegy's capital structure is now one of themost simple and flexible in the industry, and that structure can serve ourinvestors over the long-term. We also recently announced the completion of a $1billion in project financing for Sandy Creek Energy Associates. Thistransaction allows the Sandy CreekPower Generation facility to begin construction in the fourth quarter of 2007. In addition, Brazoz Electric is participating in the projectthrough both the direct ownership interest and its purchase of 150 megawatts ofoutput, signaling the need for reliable and economic energy to meet the needsof its customers in central Texas. And finally, let's discuss the left-hand side of our balancesheet, where it comes to optimizing our assets. After the LS Power assets wereacquired, we have reassessed our portfolio with a focus on three key regions. Asa result, we opportunistically sold the CoGen Lyondell facility and announcedthe sale of the Calcasieu peaking facility,which is expected to close in early 2008. More recently, you saw us continue to use fiscal discipline tooptimize the asset portfolio. As I mentioned earlier, we agree to sell aportion of our interest in the Plum Point Construction project. Thistransaction demonstrates our ability to harvest value from a developmentopportunity. Bottom line is, Dynegy has executed extremely well over the pastyear and continues to be disciplined and opportunistic in building a solidfoundations to maintain, create and capitalize on options for our investments. Before we move to Q &A, I want to tell you about animportant upcoming event on slide 18, which will be our earnings guidanceestimates on December 12th in New York City. We will discuss how we are building a solidbusiness foundation in the cyclical industry, creating and capitalizing onmultiple options to deliver value for our investors through the highest andbest use of capital. In addition, we will provide fundamental views on thesector, the market and Dynegy's strategy for creating stockholder value, whichincludes our operational, commercial and hedging capabilities, as well as ourdevelopment opportunities. We will also be giving Dynegy's view of the future, coveringforecasted earnings, cash flow, capital expenditures, sensitivities for 2008and beyond. With that, let's move to the question and answer portion oftoday's call. Operator will take the first question now.

[Operator:]

Thank you. (Operator Instructions). Our first question comesfrom Lasan Johong. You may ask your question and please state your companyname.

[Lasan Johong:]

Sure. RBC Capital Markets.

[Bruce Williamson:]

Hi, Lasan.

[Lasan Johong:]

Hi, Bruce, any more Plum Point type opportunities?

[Bruce Williamson:]

Lasan, we just got done with one and…

[Lasan Johong:]

It's a good transaction.

[Bruce Williamson:]

I am sorry.

[Lasan Johong:]

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

[Bruce Williamson:]

Thanks. I think I will make the comment and then maybe Iwill ask Lynn, who has the development responsibility here. We really justthink that what that does is, it demonstrates that we can get value out ofthose development prospects, two different ways. We can have them be built, owned, and operated and held forthe long-term, and we can also be opportunistic about that, basically sellingoff pieces when we find a good opportunity to do that and sort of promotingpeople in, if you will. So we use kind of an E&P example. And that was really the basic strategy behind it. It wasgood economics. It demonstrates good discipline and it was a good shareholdervalue 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 thinkthat makes sense, then we'll take advantage of that. But, otherwise we are in good shape with the program that wehave and we move forward with, in the case of Plum Point construction andeventual operation of the facility.

[Lasan Johong:]

More specific, I was thinking of Sandy Creekand White Pine.

[Lynn Lednicky:]

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

[Bruce Williamson:]

Are you making an offer, Lasan?

[Lasan Johong:]

You never know.

[Bruce Williamson:]

Okay.

[Lasan Johong:]

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:]

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

[Bruce Williamson:]

I'd have to pull some of the parts and compare numbers withyou. But, I mean, I leave that up to you to consider as you develop your NAVsand your analysis report. But, I think we put some numbers out in the past where we'vein some presentations pointed out some range of assets times the number ofmegawatts 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:]

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

[Lynn Lednicky:]

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

[Lasan Johong:]

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

[Holli Nichols:]

Lasan, it's relatively low. In the sense that when we wentthrough the acquisition, we were required to go through an entire purchaseprice allocation process and your views of fair value and all the accountingrules that you go through around that are very specific. And for something like a development project, it isparticularly challenging to apply much value there. And I would say the rule ofthumb is probably $100 million or less in book value.

[Lasan Johong:]

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

[Holli Nichols:]

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

[Lasan Johong:]

Excellent. Thank you very much.

[Bruce Williamson:]

Okay, thanks.

[Operator:]

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

[Dan Eggers:]

Hey, good morning. Just want to talk a little bit about thethought process behind some of the coal plant development opportunities whereyou haven't turned a shovel yet, given some of the opposition we've seen on themarket particularly in Nevadawith 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 withCredit Suisse.

[Lynn Lednicky:]

Sure. I think, remember what we said in the past about ourdevelopment activities. First of all, we have a portfolio that has a number ofdifferent technologies and a number of different locations and thosedevelopment activities are premised on meeting a particular market need. So, it's not a program in building out X number of megawattsor a program designed to push a particular technology. It's very much marketdriven around local needs. And so those needs are influenced by a number offactors, and where we see that market needs change or the impediments todevelopment are large enough that we don't think the probability of success ishigh, then we will begin to change the emphasis and the resources that weallocate in the development portfolio. And so that's why we have said from the beginning, that it'sa dynamic portfolio and there are number of projects there, some of them willbe successful, and some of them won't be. If you look at specifically at theproject in Nevada,I mean we are looking at the prospects there. We think it's that the fundamentalsmake good sense. We have been working with the Nevada agencies and regulatory bodies tocome up with something that does make sense there. So, we are still moving forward with that. We will see wherewe get over time and then I would just say that general approach is going toapply to all of the other projects that we have in the portfolio, whether theyare coal or whether they are gas or whether they are renewable. So we'relooking for the right fit in the particular market.

[Dan Eggers:]

I guess given the uncertain environmental policy backdrop wehave now, should we look for you guys to look to accelerate some of the gasprojects and push out some of the coal projects until you get greater clarityon 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 beresponsive to what the market wants. Now, if the market suddenly becomes muchmore 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 notsomething that can happen in very short order. So, what we try to do in the development side is look forthe opportunities and advance as we can when those opportunities are there. Andthen in the meantime, the fact that it is hard to get any kind of newgeneration on the ground, just means that there is additional benefit that goesto our operating portfolio.

[Bruce Williamson:]

I think that's really key point, Dan, is that it's very mucha customer driven business venture, the development JVs, and if customersbecome more interested in natural gas or in renewals or things like that, andcontracts can be put in place to support them, then the efforts would shift inthat direction. But as Lynnsaid, while it creates a good option for us, the more difficult it is todevelop new projects be really to better the value of the incumbent assets thatare already in the portfolio and on the ground running today.

[Dan Eggers:]

That's fair. I guess one last question. We've been hearingtalk that embedded heat rates or embedded capacity prices in MISO are moving uppretty nicely with PJM pricing. Is there any comment or color you care to giveon what you are seeing on the market now as you look at contracting some ofyour 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 whatyou see in PJM. But generally MISO tracks in the same sort of pattern that PJMdoes. So, as we see prices strengthen in PJM in response to supplyand demand balance, we are going to see the same thing in MISO, may not be atthe same level, but you are certain going to see the same kind of trend.

[Dan Eggers:]

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

[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:]

Fair enough. I had to try. Thanks.

[Bruce Williamson:]

Okay.

[Operator:]

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

[Gregg Orrill:]

Thanks very much. Lehman Brothers. I had two quickquestions, the first was, could you talk a little bit more about thecircumstances and the decision around the replacement of the $325 millionletter of credit on the Sandy Creek project cash? And then secondly. If you could talk a little bit about thechanges to the capacity zones for the upcoming PJM auction and how that mightaffect you?

[Bruce Williamson:]

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

[Holli Nichols:]

Sure. The way we think about managing our cash balances andliquidity 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 withthe equity commitment around the Sandy Creek developmentproject, and I would consider this temporary. What we would ultimately plan on doing is putting a morepermanent financing structure in place at Sandy Creek over the next, I am notsure if it's 12 months, 18 months, 24 months, but in some timeframe in thefuture, that would reduce this requirement. But at the time we have cash sitting on our balance sheetand we believe it's more efficient to go ahead and use that to satisfy thiscollateral need in the near-term rather than paying the LC charge of 150 basispoints and it's just a more effective use of our liquidity.

[Lynn Lednicky:]

On your question on PJM, you are correct that they have madesome changes to the zones that they have, that's fairly typical of all the ISOswhen they have some type of zonal system that periodically there'll be changesthere. And generally, it's a change driven by what the ISO sees interms of supply and demand balance in a particular location and some times theyneed to redraw the lines a bit to make sure that the price signals are correctin individual locations. So, that's what we saw earlier in the year and you begin tosee some price differences in capacity across those zones and that's justreflecting the physical transmission system and the constraints that arelocated there. So, some zones are going to have relatively less supply and theywill have higher capacity prices, and we saw that in the zone where theOntelaunee facility is located this year.

[Gregg Orrill:]

So what will the zones be for the January auction?

[Lynn Lednicky:]

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

[Gregg Orrill:]

Okay, thanks.

[Lynn Lednicky:]

Okay, thank you.

[Operator:]

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

[Daniele Seitz -Dahlman Rose & Co.:]

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

[Lynn Lednicky:]

The MISO is looking at a number of improvements to theirmarket. A form of capacity market is on their list. It's not at the top of thelist. So, I think for the near-term future, we will continue to capacity inMISO being handled on a bilateral basis as opposed to a centralized market runthrough 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 thatthey may stay around this level, or slightly lower and then gradually rise withthe addition of capital expenditures?

[Holli Nichols:]

I think what, if you think about any plans we have aroundour capital structure, there is not anything significant. So, the debt balancesthat 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 withinterest, if that works its way down and that will be offset, though, in thesense that the Plum Point debt will be increasing between now and 2010. Andtherefore your interest will slightly rise, the points of the interest thataren't capitalized on that project.

[Daniele Seitz -Dahlman Rose & Co.:]

The amount you intend to spend in Plum Point, I mean yourshare 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 itis that we do consolidate Plum Point.

[Daniele Seitz -Dahlman Rose & Co:]

Right.

[Holli Nichols:]

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

[Daniele Seitz -Dahlman Rose & Co:]

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

[Bruce Williamson:]

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

[Daniele Seitz -Dahlman Rose & Co:]

Thanks.

[Bruce Williamson:]

Thank you.

[Operator:]

Thank you. Our next question comes from Brian Russo. You mayask 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 thedevelopment progress of the Georgiabased Long Leaf plant?

[Lynn Lednicky:]

Sure. That project is, as you may know, is still goingthrough the final regulatory process. It received permits, some of the majorpermits that were required, those were under appeal and that is currently beinglitigated 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 windingthrough that final bit of litigation. Assuming we get more favorable rulings than we would lookat, moving forward with that project in 2008. And if we got unfavorablerulings, then we would obviously have to assess what the impacts of thoserulings were. So, that's still moving forward, but there is really probably notgoing 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 groundfield expansion opportunities maybe in Connecticutand California?

[Lynn Lednicky:]

Sure, we are looking at those opportunities as well. I amnot 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 aroundthe Bridgeportfacility, and we are making progress there in the west. We are looking at andhave been participating in various RFPs and RFOs. And we are hopeful, but that'sa competitive business out there, and we'll see how things unfold as those RFPsgo forward?

[Brian Russo -Ladenburg Thalmann & Co:]

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

[Bruce Williamson:]

Lynnyou 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 thosedevelopments, and looking forward to those changes and looking foropportunities that maybe created there. So, other than that I don’t think thereis going to be too much new that comes out of California. They have quite a bit on theirplate at this point. If you move over into the Arizona assets, those assets are in more ofa bilateral market. You look for bilateral type contracts there as the mainopportunity, and I think we would expect that to be more fruitful for us than anyparticular structural change in the markets. I don't really anticipate that youwill see some type of ISO set up in the desert southwest, for example or formalcapacity markets and the like. I think that will continue to be as it has beenin the past more of bilateral market. And so, that's where we see theopportunities.

[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 PJMcapacity prices aren't yet high enough to support any build economics. Can yougive us sense where think they need to be in PJM?

[Bruce Williamson:]

Sure, I will again Lynn'sgetting 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 ifwe talk about that for just a minute. A combined cycle plant will make it'smoney through some combinations of margin from energy payments, ancillaryservices that are provided, and capacity. And I don't think that there's anynecessary combination of those three, i.e. it's not necessarily the case that40% comes from capacity, and 40% comes from energy, and 20% comes fromancillary services. So, we always view that there's going to be some kind of roughbalance between those, but again no necessary proportions. If you look at newbuild economics, we would probably tell you that capacity payments probablyought to be in the $6, $7, and $8 range. But then you have to make someassumptions about what kind of energy margin that you would expect to go alongwith that. And that's the function of some of the other market rules. So, the point that Bruce was making was really that we'veseen $4.5 as sort of the high in terms of capacity payments in PJM. And we wouldexpect 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 capacitymarkets there, which are more up in the $7 or $8. And people are starting totalk about new facilities there. But we're still, I think everybody is stillwatching and waiting to see what happens. So, may be that gives you some senseof what kind of differential we are thinking about.

[Elizabeth Parrella -Merrill Lynch:]

Well, you actually jumped on my next question which also isgoing to be, how you think about the New Englandcapacity auction coming up in February playing out. Given some differences inthe auction structure and the market themselves, and how do you think thatauction 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 youdo have different rules and different structures. It's hard to draw directcomparisons from one region to another.

[Elizabeth Parrella -Merrill Lynch:]

Okay. Thank you.

[Operator:]

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

[Andy Smith:]

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

[Bruce Williamson:]

Hi, Andy

[Andy Smith:]

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

[Bruce Williamson:]

I think the way you just put it, Andy, is probably the bestway to think about it. I mean what the auction did was, it basically had everysupplier provides were to call up the custom solution with the maximum amountof load shape and flexibility and every other possible risk dealt with in theprice. So, if we go down the path you are talking and that's where we thinkthey maybe headed. They are in effect going to buy sort of the wholesalecomponents, and then the utility will have the obligation to assemble that andthen have to manage some of flex and the load shape and thing like that. Obviously, when we were faced with the other process, if weare faced with a lot of additional risks and things then we're going to pricethose in. Now, I think we're generally able to look at the selling the variouswholesale components and just having an appropriate profit margin on thewholesale product. So, instead of selling the suit we maybe selling cloth andthread and button separately, so to speak. And we'll see how that all comestogether.

[Andy Smith:]

Okay. Great, thanks.

[Operator:]

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

[Bruce Williamson:]

Thank you. Before ending this morning's call, I would liketo tell you about a new initiative as we strive to provide continuousimprovement for our stockholder communications. We invite all of you to enrollin a new program that provides the option of receiving your future stock-holdmaterials electronically. This initiative will help save investors money byreducing mailing cost and increasing efficiency. You will be receiving moreinformation about this service in the mail, and you can enroll starting todayon our website at dynegy.com. Now, turn to slide 20, I would like to mention a fewupcoming events that various members of the management team will beparticipating in. We will be at the Calyon Conference on November 29th in New York City. Inaddition, members of the management team will be making West Coast InvestorMarketing trip that same week in November. And please remember our 2008guidance estimates and future outlook call on December 12, from New York City. Thank you again for your time this morning and your interestin Dynegy. I look forward to seeing a number of you at our upcoming investorevent.

[Operator:]

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