Dyne Therapeutics, Inc.
Q2 2008 Earnings Call Transcript

Published: 7 Aug 2008

[Operator:]

Good morning, hello and welcome to the Dynegy Incorporated Second Quarter 2008 Financial Results Teleconference. At the request of Dynegy, this conference is being recorded for instant replay purposes. Please note that all lines will be in a listen-only mode until the question-and-answer portion of today's call. [Operator Instructions]. I'd now like to turn the conference over to Ms. Norelle Lundy, Vice President of Investor and Public Relations. Ma'am, you may begin.

[Norelle Lundy:]

Good morning everyone and welcome to Dynegy's investor conference call and webcast covering the company's second quarter 2008 results. As is our customary practice before we begin this morning, I'd like to remind you that our call will include statements reflecting assumptions, expectations, projections, intentions, or beliefs about future events, especially with respect to our growth strategy and 2008 estimates. These and other statements not relating strictly to historical or current facts are intended as forward-looking statements. Actual results that 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 [inaudible] contained in today's news release and in our SEC filings, which are available free of charge through our website at dynegy.com. With that, I will now turn it over to our Chairman, President and CEO, Bruce Williamson.

[Bruce Williamson:]

Good morning and thank you for joining us. Here with me this morning is Holli Nichols, our Chief Financial Officer along with 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 along online via the webcast. I will begin this morning by discussing recent developments as well as overall market trends and issues that are creating volatility and power crisis in the regions where we operate. In addition, I will address ways in which we are creating financial flexibility to transact in today's environment. Holli will then provide our second quarter financial results, discuss regional factors that impacted the quarter, and update our 2008 guidance. I'll then close with a few remarks on our strategy and value drivers and then we will go to Q&A. Please turn to slide 4. In the second quarter Dynegy's solid operational and commercial execution captured higher power prices, which mitigated the impact of some challenging market issues. In the Midwest, basis and overall demand were negatively influenced by weather including the recent flooding in the area and transmission line congestion caused by a utilities extended transmission line interruption. In addition, compressed realized spark spreads in the Northeast and West also impacted sales volumes. Another thing to remember is that the second quarter is traditionally a shoulder period for us. And we took the opportunity to conduct maintenance to prepare our diverse power generation fleet for the summer season. In addition to higher pricing, strengthening market conditions were evidenced by two opportunistic asset sales. These transactions demonstrate the value of our projects in operation or under construction in an environment where costs continue to rise and development is becoming more difficult. Last week we closed the sale of the Rolling Hills power generation facility, a peaking plant in Ohio for approximately $370 million in cash. This purchase price equates to more than $450 per kw for a simple cycle peaking assets, which was not earning high returns today. This demonstrates the ability to capture value from our diverse portfolio either over time as markets improve or in various selective asset sales, where we can capture an attractive price. In June, Dynegy and our joint development partner agreed to sell a portion of our indirect interest in the Sandy Creek power generation facility to the Lower Colorado River Authority. LCRA recognizes the long-term value of the project, which is under construction, and the transaction also offered strong value capture for us. As planned, we secured an attractive cash flow stream and reduced merchant risk by executing a long-term contract for Sandy Creek's outlook with a pass through of fuel, transportation and emissions expenses. The key takeaway here is that while this was a volatile quarter for us, we executed on our operate well and commercialize well strategy to offset some of these external events. Now let's go into more depth on one of the issues we faced this quarter and what we're doing to mitigate future risk. Please turn to slide five. I'd like to take a minute to provide some background on the impact of widening basis in the Midwest. Dynegy uses forward power contracts to commercialize our assets. In the Midwest, we have the option to transact at delivery points such as Illinois Hub, Cinergy Hub or PJM. However we sell physical power primarily into the Illinois Hub because it is closest to our facilities. Illinois Hub does not have a very liquid forward market so to sell power forward we often transact in Cinergy Hub and on occasion at PJM, because they are both liquid markets with historical correlations to the Illinois Hub. Last year as we saw prices rise in PJM, we sold more into the forward market with the expectation of higher returns. However, when we enter into forward contracts for Illinois assets and Cinergy or PJM any disruptions to the correlation can cause earnings volatility and this was certainly the case in the second quarter. While Illinois, Cinergy, and PJM have traditionally moved within a pretty narrow range, the June 2008 basis moved well outside the anticipated range for a number of reasons. First, increasing natural gas prices caused a widening between PJM and Cinergy, as PJM is more exposed to movements in the natural gas market. Warmer temperatures in the east compound of the issue causing a substantial difference in prices between PJM and Cinergy. In addition in Indiana, a utilities transmission line outage caused congestion that further impacted the spread between the hubs, as power could not move from west to east. This caused the price difference between Illinois and Cinergy to widen. The net result is that the Midwest segment experienced lower earnings period-over-period and less than expected due to higher price variances between PJM and Cinergy and the actual delivery points of power. So in June, we saw the culmination of a number of events that ultimately led to this widening of basis. In July, power prices at all three of these hubs have now moved back to levels that are much closer to their historic correlation. We'll continue to monitor the transmission system closely and continue purchasing firm transmission rights to the extent they are available at reasonable costs that help mitigate basis. We believe these steps will help manage our basis risks while continuing to allow us to extract strong prices for our stockholders when we see opportunities around the Midwest asset. Please turn to slide 6. Here I would like to spend a few minutes discussing recent market trends. We are operating in a volatile commodity price environment as evidenced by the price of fuels we used to generate electricity and the price of electricity. Looking at 2008 prices in Cinergy you can see the dramatic price swings. Near-term pricing has been impacted by natural gas volatility or lack of liquidity due to the absence of financial players, and the recent federal court decision impacting the Clean Air Interstate Rule. Dynegy is substantially hedged for 2008, so we've been protected from the dramatic swings in near-term prices. Despite this volatility and near-term market prices, our commercial strategy allows us the flexibility to respond to market shifts by selling into rising markets and potentially reloading or buying back at opportune times if we see significant temporary dips in pricing that we feel are worth bringing back to floating prices. Over the long term, business fundamentals however remained strong, and we are continuing to see historically high prices in the forward markets, which we are working to capture. Now let's take a look at coal prices, another key cost component. Our Midwest base load fleet uses 100% Powder River Basin coal, which has not seen the dramatic price increases the eastern coal has experienced as a result of global demand. However our 370-megawatt Danskammer plant in the Northeast burn low sulfur South American coal, a global commodity that has experienced a significant rise in price. The suppliers recently increased prices and we're actively working to mitigate 2009 and 2010 increases in projected coal costs. With our Midwest coal fleet we are well positioned to capture margin benefit in an anticipated rising coal price environment. We have strategic contracts that significantly lessen our exposure to the volatility of the spot coal market. These contracts are meant to ensure an adequate and affordable supply of fuel to run our plants. This yields a significant competitive advantage for our fleet and for our investors. In addition, 100% of our rail transportation costs is contracted at a fixed price through 2013 with no fuel escalators. And most recently the majority of our coal supply pricing is now locked in through 2010. As you can see on the graph our delivered coal cost has been very stable and has significant cost advantages providing a unique value opportunity for Dynegy. Some of you have asked, if we had any issues with our coal inventory in light of the Midwest flooding issue that also impacted the basis that I mentioned earlier. Flooding did cause delays in coal shipments, but our ample inventory helped us... get us through this period without any substantial disruption to our operations. Although drawing down on lower quality coal that has [inaudible] inventory does reduce our capacity to some extent. Our deliveries in Illinois are now returning to normal and we should be in good shape through the summer cooling season. Please turn to slide 7. In a rising price environment we decided to add some new sources of liquidity to increase our flexibility and ability to execute our commercial strategy. While Dynegy has more than adequate liquidity, we wanted an incremental sort of opportunity creator in the event of higher commodity prices. In other words, this new facility is about creating additional offensive capability, it's not a defensive facility. Our traditional liquidity facilities include cash on hand of $271 million or $1.15 billion revolving credit facility and an $850 million term letter of credit facility. In June, we closed a $300 million unsecured bilateral contingent letter of credit facility that is available at our discretion in a rising price environment. The new contingent letter of credit facility will become available if 2009 natural gas prices rise about $13 per MMBtu and for every dollar increase 40 million in capacity is available. The facilities' availability will fully amortize by December 2009 but could be renewed and maintained if both parties are interested in doing so at that time. This is a low cost approach, it's available if we want to pursue additional commercial opportunities, while at the same time we are moving any credit concerns in a high price scenario. We also put in place, first lien hedging structures which give us the ability to get liquidity from counterparties rather than going directly to the capital markets. Dynegy has already transacted on this basis and we are negotiating future use of this structure with additional commercial counterparties and financial institutions. As we have said previously, in our opinion Dynegy has one of the strongest and most flexible capital structures in the industry, and these are as such part of a proactive approach to build on that financial platform. With that, I will turn it over to Holli to cover our second quarter results.

[Holli Nichols:]

Thanks Bruce. Before I begin, I would like to point out that these materials do contain non-GAAP measures that are reconciled in the appendix to this presentation for your reference. Now, let's turn to Slide 9 for a look at our second quarter highlights. Adjusted EBITDA decreased from $215 million in the second quarter of '07 to $185 million in the second quarter 2008, as our strong operational performance in the quarter was more than offset by challenging market conditions. Higher realized prices in the Midwest were not enough to offset the basis [inaudible] Bruce just covered. Again, the basis between our plants and the more liquid market was much wider than it has historically been particularly in June and this had a negative impact on our Midwest results for the quarter. Also compressed realized spark spreads at certain times during the quarter in the Northeast and West led to lower volumes when compared to last year. Adjusted cash flow from operations decreased period over period primarily due to higher collateral postings and higher cash interest payments for the first six months of the year. Higher cash collateral postings are a reflection of the rising commodity prices through the end of the quarter and higher cash interest payments were driven by the fact that 2008 reflects a full six months of increased debt associated with LSR combination which closed in the second quarter of 2007. Year-to-date, free cash flow includes environmental capital expenditures of $94 million, reflecting our continued investment in environmental upgrades to further reduce emissions. On a GAAP basis, we reported a net loss of $272 million for the second quarter of '08, which included net mark-to-market losses of $481 million. This compared to net income of $76 million for the second quarter of '07, which included mark-to-market gains of $57 million. Higher mark-to-market losses in '08 resulted primarily from value changes in forward sales of power, as the forward strip for 2008 and 2009 increased. A significant portion of these mark-to-market losses has since reversed with the fall on the forwards in the latter part of July. As you can see, our capital and liquidity measures remained strong, with liquidity at approximately $900 million as of the end of the second quarter. That was even during a very commodity pricing environment that showed the remaining gas strip for 2008 is more than $13 and the 2009 strip between $12 and $13, which required us to post $1.8 billion in collateral. I'd also like to point out that our liquidity as of June 30, does not include the cash proceeds of approximately $370 million received for the sale of the Rolling Hills peaking facility. As of August 1, liquidity of $1.7 billion now includes these proceeds and lower collateral postings with correspond to the recent fall in near-term energy prices. Let's move on to the discussion of our performance drivers for the quarter by segments. Please turn to slide 10. Despite quarterly results being down 14 % from the prior year, we continue to focus on operating reliably and safely to produce power and maximizing the commercial opportunities around our diverse fleet. For the second quarter of '08, we achieved 90% end-market availability across our base load coal fleet. In the Midwest, adjusted EBITDA declined only slightly to $170 million for the second quarter of '08. While power prices increased, flooding in Illinois and surrounding areas reduced demand. Additionally, warmer weather in PJM as compared to MISO combined with the transmission congestion caused by the transmission line outage negatively impacted basis and also limited our sales volumes in the Midwest region. In addition, volumes were down compared to the prior period due to the timing of planned outages at Baldwin to prepare the plant for the summer cooling season. Lastly, I would highlight that the Midwest base load fleet was back on track with end-market availability of 91% for the quarter. Moving to the West, adjusted EBITDA was $31 million for the second quarter of '08 down from $42 million last year. Volumes decreased period over period due to compressed realized spark spreads and this was partially offset by a favorable tolling contract related to the Griffith facility in Arizona that went into effect during the second quarter. In the Northeast, adjusted EBITDA was $12 million for the current quarter compared to $32 million for the same period last year. Volumes declined at Danskammer due to an extended planned outage and compressed realized spark spreads in the Northeast also contributed to decreased volumes for the Independence facility. And this was partially offset by improved volumes at Casco Bay, as it underwent a major outage in second quarter of '07 [inaudible] planned creating the difference over this year. And finally for the quarter, our base load unit in the Northeast had end-market availability of 88%. For more information on our segment performance during the second quarter you can refer to the appendix where we've included more detailed information. Please turn to slide 11 for an update on our '08 guidance. Today we are reducing estimates from the previous guidance presented on May 8 of 2008. We are revising our estimates largely to reflect the power price basis differentials leaving the lower earnings in the Midwest segment, specifically the widening of basis in June and what is reflected in the forward markets are greater than we previously anticipated. Compressed realized spark spreads in the Northeast and the extended outrage at Danskammer also contributed to the adjustment. Additionally, maintenance and environmental capital expenditures were actually reduced by $40 million primarily due to the projects that were no longer required or have been delayed to future years. The new estimates are $955 million of adjusted EBITDA, $510 million of adjusted cash flow from operations and finally $140 million of adjusted free cash flow, which was down $45 million from our previous estimates. I'd also like to point out that we don't attempt to reforecast changes in working capital or collateral, as these items will ultimately be based on pricing at December 31, which we don't try to predict. As Bruce and I have discussed, we face a number of challenges during the quarter and there were circumstances both outside and within our control that impacted our performance. In both cases, our short-term commercial strategy enabled us to capture high prices mitigating some of the impact of the market issue. As Bruce will cover, given our outlook for 2009 and beyond, we remain optimistic about our ability to deliver long-term value to investors. So, thank you for your time this morning and with that I'll turn it over to Bruce.

[Bruce Williamson:]

Thanks Holli. Please turn to Slide 13. In closing, our focus is on leveraging our unique strengths and incumbent asset positions to seize opportunities in the tightening electricity market. Despite the recent near-term volatility in these markets, longer-term fundamentals remain strong, as we continue to see increased barriers to entry that limit new supply and while electricity demand looks to continue to increase. During the second quarter, our commercial team capitalized on the high forward prices in 2009, in particular, which we generally refer to as the plus one-year by forward selling at some pretty attractive prices. For example we have recently financially contracted approximately 1,400 megawatts of our Midwest coal fleet's 2009 on-peak power at an average price of approximately $79 per megawatt hour. Based on forward supply and demand in the Midwest and recent market trends, these positions have entered... that we have entered into look very attractive. The price level demonstrates the fundamental increases that we've been seeing over the longer-term cycle. As you can see on the slide, prices in Cinergy in 2006, 2007 and 2008 have been dramatically increased over the last... over the past three years. And certainly we have all seen the fall off in forward pricing over the last two to three weeks reflecting the volatility of the marketplace. However our view is that the fundamentals remain strong and we believe this trend of rising commodity prices is ongoing, and we will continue to be active in the market, as we work to identify additional opportunities in line with our current plus one commercial strategy. Based on what we have been able to achieve through our commercial program and market price trends and given our focus on strong operations, we believe we are well positioned to capture value for our stockholders. With that let's move to the question-and-answer portion of our presentation. Operator, we will take the first call now. Question and Answer

[Operator:]

Thank you sir. [Operator Instructions]. Our first question comes from Lasan Johong. Your line is open.

[Bruce Williamson:]

Hi Lasan.

[Lasan Johong:]

Hi Bruce. Disappointing on the quarter obviously, but I'm sure, a bunch of the effect was due to flooding issues in the Midwest. Is there any way you can quantify that number as to what that impact was?

[Bruce Williamson:]

We really had a couple of things going on at the same time. You have got gas that was... it was moving up very sharply so that's increasing pricing in PJM. But you had flooding in the Midwest region and that's doing a couple of things, that's obviously reducing demand over on coal at the western side of the Midwest, while at the same time cutting off some transmission and things like that. So, they all sort of blended together, I think, we kicked it around this morning and we probably would put it at roughly what we have decided about two-thirds, one-third with... probably two-thirds of it being the rise in gas, one-third being the flooding and transmission cut-off or demand cut-off, I think, more than anything that happened around the flooding, but it's difficult to kind of pair those two things apart.

[Lasan Johong:]

I understand that. In the first quarter call you had mentioned that the spaces risk was there and that Dynegy is prepared to deal with it, and going forward you are saying that you might be able to do so again potentially with some financial transmission rights. Has that view changed at all and what actually prevented you from better mitigating the risks to the hub in the... to the basis, I mean in the second quarter?

[Bruce Williamson:]

Well, I will ask Lynn and Jason to chime in. I mean I think, when we talk about buying those transmission rights, they have to be able... available in the market at a price that's worth the purchase and I think that probably more than anything is what drives it is you got to compare the price that you'd have to pay to acquire those relative to what the current basis is, Lynn you want to add anything?

[Lynn A. Lednicky:]

Yeah, the only other thing I would add is to continue to do that. Remember and we showed in the graph that the basis was particularly wide in June. Things have come back in line. So the FERs are one thing that we do, and changing how we allocate our forward sales across the different market sales point is the other thing that we have done on more of a mid-term basis.

[Lasan Johong:]

How frequently do you think this happens going forward this kind of situation?

[Bruce Williamson:]

Well, we'd generally just be speculating I mean, we can... we showed you some...

[Lasan Johong:]

Historically then.

[Bruce Williamson:]

Well, historically we haven't seen it in years.

[Lasan Johong:]

That is?

[Bruce Williamson:]

It's a somewhat unusual confluence of what commodity prices we're doing at the same time that weather was doing a certain thing at the same time that the transmission system was doing something. So, you wouldn't expect that to happen very often, but we are trying to set ourselves up in a way with the combination of FERs and how we make the sales that even if it does happen the impact is manageable.

[Lynn A. Lednicky:]

Yeah, I mean, I think we saw it as it sort of is the combination rather than I mean, to get to your point, it's... when was the last time that we had flooding in the Midwest and extended transmission line down by a utility and screaming high gas prices in the eastern part of the region, the answer is probably never. So, what we need to do is position ourselves to be opportunistic around those and I think that goes in line with largely with the commercial strategy, it's staying a little on the shorter end of things only going out about a year, not exposing yourself by basically assuming that all the correlations and everything hold and selling things out two, three, four, five years at a time. I think that could expose you to even worse occurrences.

[Lasan Johong:]

That I think...

[Bruce Williamson:]

I think by staying, sort of staying flexible and keeping the optionality there yeah, we do get... we can get exposed like we did here over a short period of time, but we can also respond to that by a fairly quick period of time, because we are not locking things up for the extended period.

[Lasan Johong:]

I agree. Just one last quick question. How hard did Roseton run in the quarter and how hard is it running now?

[Bruce Williamson:]

During the quarter, Rich?

[Richard W. Eimer:]

Very little generation during the quarter. We are trying to take some advantage of the market now, probably running in the 15% capacity factor range right about now but it's hard to tell whether that can continue or not.

[Lasan Johong:]

Great. Thank you.

[Bruce Williamson:]

Yeah.

[Operator:]

Our next question comes from John Kiani with Deutsche Bank. Sir, your line is open.

[John Kiani:]

Good morning.

[Bruce Williamson:]

Good morning, John.

[John Kiani:]

Not to belabor the basis differential issue, but I just wanted to be clear on some of your comments Bruce. So, going forward are you all going to continue to use PJM West because of your view that it provides much better liquidity as a piece of your forward sale hedging portfolio, this is my first question. And my second question is, if so, are you then going to institute a practice of always buying firm transmission rights understanding that the cost can be onerous but so to insulate the company from this basis exposure that is created by selling into the West hub?

[Bruce Williamson:]

Well, the first answer to that John is, we almost never say always and never say never.

[John Kiani:]

Sure.

[Bruce Williamson:]

Because it comes down... everything comes down relative to price.

[John Kiani:]

Right.

[Bruce Williamson:]

If we had an opportunity to sell PJM at... I will pick an outrageous number, $150 a megawatt hour and wear the basis risk, you probably would say that's a reasonable risk to take. On the other hand, I think what it means is that it sharpens the requirement that we look at basis. The further we get away from Illinois Hub, on that one slide, it sort of is, there is an added benefit to liquidity the further out you go, but there is obviously added basis risk, risk that goes with that. So, we have to sort of temper and take the balance of the benefits of liquidity and the benefits of the price that you are receiving marking it in effect back for basis exposure, to the extent that we can supplement things if we go all the way to PJM with some firm transmission rights, that's fine to the extent that we might put some trades on and sell PJM and then over time roll it sort of back to Cinergy as that market liquidity gets to where it is equal to PJM, for example if that happened as time rolls on that's another way for the trade floor to in effect manage that. So, I think the long and the short answer, the long answer to your question is, we will continue to look at all three. We probably need to just make sure that we are monitoring things and to the extent that we can mitigate the basis risk, if we can still get a good prize then we will do that.

[John Kiani:]

Thanks, that's helpful. And then one more question, you were talking about the South American, I think it's Colombian coal perhaps that you burn at Danskammer, Roseton and I know it's a much smaller piece of your portfolio but you did mention that you are going through some pricing discussions with suppliers, in the past the company has provided guidelines of about an estimated 10% increase in overall coal costs from... in '08 to '09 and '09 to '10 because of the highly hedged PRB portfolio. But the fact that there are some escalators in there, has that 10% changed because of the Colombian coal pricing increase or is that still pretty consistent?

[Bruce Williamson:]

Well, the dollars per MMBtu that I think you are referring to like right now it's $1.39 delivered to Baldwin, that was always just PRB and for the Midwest. I think when we did guidance, we did do dollars per MMBtu for hold due [ph] in the Northeast and I don't know what that number is right in front of me, but we would update that for '09 when we do guidance for '09 based on what would be contracted and then locked up at that point in time.

[John Kiani:]

Right. And I guess what I meant Bruce, was that I think there are some escalators perhaps in the Midwest coal supply contracts, and I believe you all had indicated that you could... we could expect, on average, roughly no more than a 10% overall utilized coal price increase for the company sort of year-over-year and what I'm wondering is... ?

[Lynn A. Lednicky:]

You mean for the Midwest.

[Holli Nichols:]

I think that may be the difference John. We were talking more about the Midwest and we spoke of that $0.10 to10% increase, that obviously still applies, when you think about the increased potential in the Northeast for Danskammer it could be more than that. But when you think about it in perspective...

[John Kiani:]

It's small.

[Holli Nichols:]

The volumes compared to the Midwest, it's not going to have a significant impact on that overall company average coal price.

[John Kiani:]

Got it. That's helpful. Thanks for clarifying that.

[Lynn A. Lednicky:]

Yeah and John for the Midwest, just for people on the phone, you said 10%, I think we have generally referred to that, it's somewhere between a $0.10 increase and a 10% which would be about a $0.13 or $0.14 increase, which puts you going from $1.39 to somewhere around $1.50 to the low $1.50...

[John Kiani:]

Great.

[Lynn A. Lednicky:]

That's probably still... that's a very solid place to be for next year.

[John Kiani:]

Yeah. Okay thanks. That's helpful.

[Operator:]

Our next question comes from Elizabeth Parrella with Merrill Lynch. Your line is open.

[Elizabeth Parrella:]

Thank you. You mentioned that you put on some additional hedges in the second quarter of this year, I think, 1,400 megawatts in the Midwest full fleet on peak, were there any other meaningful amounts of hedging activity in the quarter, did you do anything again off peak for example where prices have come down since then or in other markets?

[Lynn A. Lednicky:]

Yeah. We just provided that as an example, I mean, obviously, we are looking at the forward markets all of the time across our entire portfolio. It is true that we have a number of forward sales in the Midwest during the off peak hours. So those are looking attractive as well. And then around our gas-fired fleet, we have various positions that we would sell forward. We weren't really trying today to take you through an entire review of where we are, we will do that more when we get to guidance and give you what the snapshot looks like at that point. We are really just trying to give that as an example. But you are correct, we have made forward sales in other places and as prices have come off some of those are looking quite attractive.

[Bruce Williamson:]

Elizabeth, what we're trying to do with people is, we want to point out that as the prices ran up, and that unfortunately given the way accounting works drives the mark-to-market loss with quotes around that. The team was also being very optimistic hitting the plus one year 2009 and working different regions of the country, we used the Midwest as Lynn said as an example, and what we wanted to do is sort of give you some guidance, I guess a little bit of guidance there that when we see that run-up, we transact on it, we are not changing our strategy though and running out and locking up 100% of things, but we are not sitting on our hands watching prices go up, and then watching them fall again. And I think that's incumbent with what we need to do, given that we have the sort of the option for investors, and when we see an attractive price, we need to go ahead and take advantage of that.

[Elizabeth Parrella:]

Can you tell us what the hedging levels are now for 2009 and how you define that versus say where we were at the end of the first quarter for us to kind of get a better sense as to how much incremental activity there was in Q2?

[Bruce Williamson:]

I'm not going to set a percentage, because what we really want to do and when we give guidance is, we would like to get the percentage based on the EBITDA and the gross margin rather than on megawatts because we get into... not all megawatts are equal, so I am probably going to avoid that until we get to the guidance later in the year, other than to say, it's been moving up, and as we saw strong prices, we go ahead and take that off the table for our investors.

[Elizabeth Parrella:]

Okay. Just one other question, you mentioned that you tried to enhance some of your flexibility on hedging and the like. Can you talk a little more about the first lien hedging structure, what your capacity under that is and how much you currently use?

[Bruce Williamson:]

The first lien or the contingent facility?

[Elizabeth Parrella:]

The first lien. I understand on the contingent... contingent, did you use any of it at all during the quarter?

[Holli Nichols:]

We have transacted under the first lien, we know the contingent facility was it doesn't knock in until the '09 line is above $13.

[Elizabeth Parrella:]

Right.

[Holli Nichols:]

And so, we didn't utilize that facility, but on the first lien we don't have limits on the amount of that that we can structure. And so, again we have a couple in place and we'll look for other counterparties and it will be a mixture of industry partners as well as financial institutions and it just gives us more flexibility of who we can go out and transact with.

[Bruce Williamson:]

And Elizabeth, the real key there for investors when you look at when you transact, whether you do it under a facility where you post collateral or whether you do it under a first lien or even if you try to do a transaction with no collateral there is going to be a pricing reduction that's going to take place in there. And so there is a co-coordinated activity that takes place between the commercial group and the P&L asset management group and the credit group to in effect see what is the best pricing point to take advantage of. So, just because somebody is doing something under first lien, it doesn't mean it's a free lunch there because the price is going to be lower than what it would be if you do it under a facility where you post collateral. So, what we try to do is make sure that we have got multiple avenues, so that we can extract what we think is the best pricing and really just bring that home.

[Elizabeth Parrella:]

Okay. And then if I may ask one other question. You commented on the last call regarding your stocks on buyback. Can you just give us your current thoughts on buyback when you might consider what other considerations are there. Have you talked to the banks at all about the issue of maybe... now that you've got the Rolling Hills proceeds in as to whether any of that might become available?

[Holli Nichols:]

Maybe more. Generally, you know how the particulars of the current agreement are that there has been specified asset sales that open up a basket, and today that's the CoGen Lyondell and the Calcasieu facility which is $525 million. And certainly if we wanted to try to extend that basket, we don't have the rights under the current forms, but as you said, we can always go back to the banks and talk about those sorts of things but I would say that share repurchases are always part of the mix, when we think about our capital allocation alternatives, but it goes back to, as a lot of the conversations we have already had, to today's Q&A is that, our commitment is to make sure that we are delivering value to shareholders, and when you think about a volatile commodity environment like we are operating in today, liquidity is a tremendous asset and even though we've seen prices fall off here recently, we think the fundamentals are still strong and we would expect to see uplift as we go back forward and we want to be positioned to go to take advantage of those, and that's why we did the contingent letter of credit facility. That is a committed facility and if you find yourself in a position where there is $13 gas that is obviously going to translate into high power prices and we want to make sure that we are ready and able to take advantage of those situations and to be able to enter into more forward sales. And so it just goes back to why we don't sell forward two to three, four or five years. We do think there is value that can be added by participating the near-term forward market rather than just being a completely floating portfolio, and because of that, liquidity is very valuable to us. And in a market like we are seeing today with commodities being so volatile, I just don't see us taking steps to reduce our liquidity at least not here in the near-term.

[Elizabeth Parrella:]

Okay, thank you.

[Operator:]

Our next question comes from Brian Russo with Ladenburg Thalmann. Your line is open.

[Brian Russo:]

Good morning.

[Bruce Williamson:]

Good morning.

[Brian Russo:]

Could you comment on the 1,400 megawatts price that $79 forward. How did that compare with the current hedges you have at the base load Illinois facilities?

[Bruce Williamson:]

In terms of current price levels?

[Brian Russo:]

Can you remind us of the pricing of your current hedges?

[Lynn A. Lednicky:]

Well, I think that's what we were trying to describe, Brian. We said again as an example for '09, that we have roughly 1,400 megawatts that sold forward around those Midwest coal assets and the weighted average price of those is around $79. So that's a slice of our forward sale portfolio, so we gave you volume and we gave you price around that.

[Brian Russo:]

Okay. So directionally the price is higher?

[Lynn A. Lednicky:]

Yes, absolutely.

[Brian Russo:]

Yes, have you taken steps to mitigate any basis differential risk on that 1,400 megawatts?

[Bruce Williamson:]

Yeah. We've in effect, although we would utilize all of those, I can tell you the majority of that is back in Cinergy and we take into account the basis risk that we in effect saw on the last quarter.

[Brian Russo:]

Okay. And are there any other assets in your portfolio that you might consider as the sale candidates?

[Bruce Williamson:]

When we, a little over a year ago, when we closed the acquisition of the assets from LS, we did say that we had a couple of peakers, one in Georgia, one in Kentucky. We ultimately didn't sell those, those obviously, if you are willing to sell them at one point, you are probably wiling to sell them still today if you saw that you could get a good price for those. Those probably still spring to mind that beyond that and not giving you the obvious question that everything is for sale at the right price, those would be the ones that probably still are not right in the fair way of Northeast, Midwest and West portfolio. So those are probably the ones that do spring to mind.

[Brian Russo:]

Okay. And then lastly, there seem to have been some storms in early August in Illinois as reported by Exelon and Ameren with outages. Has that had any impact on your operations?

[Bruce Williamson:]

No.

[Brian Russo:]

Okay. Thank you.

[Bruce Williamson:]

Okay.

[Operator:]

Thank you sir. Our next question comes from Shalini Mahajan with UBS. Your line is open.

[Shalini Mahajan:]

Thank you and good morning.

[Bruce Williamson:]

Good morning.

[Shalini Mahajan:]

As we look at your reduced guidance, EBITDA guidance for 2008, is that $85 million differential driven by the below plan 2Q performance or have you reduced your expectations for second half as well?

[Holli Nichols:]

I think the majority, Shalini is more around our second quarter performance, but it is also just... we also obviously look forward at the curve for the balance of the year but I would say the primary driver is the basis issue a lot of which we saw in June as well as some of the compression of spark spreads that we experienced in the Northeast in the second quarter, and some of the reduce [ph] were on time that we saw there.

[Shalini Mahajan:]

Okay. And then the dark spreads in the Cinergy and North Illinois have compressed a lot in the second quarter. Could you talk to that, what in your mind is causing that and how long do you expect that trend to sustain?

[Richard W. Eimer:]

Well, look it is true that you saw a run-up in prices through the certainly most of the second quarter, and in the first part of July, mid-part of July, you saw some pretty sharp fall in prices, and so with respect to dark spreads, those dark spreads are obviously compressing as those prices come down. How long that is going to last, I don't think that's hard to say, it is probably largely a function of what the gas market is going to do. We told you how we dealt with that, which was to sell into the shrink as those prices went up and we will watch the market as prices move around in the current spot markets. I mean naturally as it is typical driven by what summer weather really looks like. To the extent that you are talking about spark spreads across gas units, those have compressed some as well across the year, we think that's largely because gas prices have simply moved faster than power prices and we would expect that to be a temporary phenomena that will correct itself over time. I don't know that we have any magic crystal ball as to whether that correction takes place over three weeks or three quarters, my guess would be at some place in between all of that. And so again, in terms of the spot markets and things that would affect 2008 that's going to largely be driven by what happens with weather events. So we have our plants ready to run to capture those opportunities and longer term, we will watch the forward markets and we will sell where we think those prices are attractive.

[Shalini Mahajan:]

We also have seen dark spreads compressed during the last six years and it's kind of outlined [ph] if you are looking going far onto the rest where PRBs on the margin a significant period of time.

[Bruce Williamson:]

It is true that all three prices have come down and there are probably a number of reasons that drive that. For the most part we do try to sell forward in the off peaks where we can find attractive prices because that market, the liquidity can be difficult in the nearer term. So, we sold the great portion of our off-peak for '08 forward and so we are somewhat insulated from those price decreases. We are watching it in the forward markets but given what's happened with gas prices, given what's happened with care there seem to be a number of things that may be driving those off-peak prices. Fortunately, that's not been a huge issue for us today.

[Shalini Mahajan:]

Okay, great. And one last question. If you could comment on your hedging of PRB closed for your Midwest fleet beyond 2010. I know you guys are pretty well hedged till the end but as you look beyond 2010, we are seeing several eastern generators increase their blending of PRBs. So if that could put upward pressure on PRB pricing as well, so, if you could just maybe comment on that?

[Richard W. Eimer:]

Yes, it could. We think that there are a number of other things that will affect the coal markets over time and this is probably not the place to go into all of that. But the coal markets have become more global markets over the last few months than they have historically been. So as you look forward we think that there will be some downward pressure on some of the eastern prices as you go further out. And as far as our supply arrangements with the PRB suppliers that we have, we have things tied up through 2010 and we are looking at what we can do beyond that. So we are starting to think about those things but again we don't want to get too far ahead of the curve at this point.

[Shalini Mahajan:]

Great. Thanks so much.

[Bruce Williamson:]

Okay.

[Operator:]

Our next question comes from Neo [ph] with Siemens and Company International. Your line is open.

[Unidentified Analyst:]

Hi, thanks. I just kind of wanted to understand the recent fall off in off-peak power price in Cinergy, I understand that now gas forward prices have come down quite a bit. But central coal prices are still about $100 a ton. Yet off-peak power prices are now trading at about January levels when coal prices were $60 a ton. And I was trying to understand, I know there is a lack of liquidity, but if you could provide any further insight into those markets?

[Bruce Williamson:]

Yeah well, again we can't necessarily tell you exactly everything that drives prices at a particular time. I would make a couple of observations about what's going on with those off-peak prices. First of all, it is not necessarily true that everybody will sell into markets based on the current spot coal price. You may have contracts for coal that give you a price that is different from what the spot price is, and different companies have different bidding strategies. And so, when you start to see spot prices move around quite a... volatilely [ph] you can get some disconnects between what people's bidding strategy is, and so that might give you results that look a little different than what you expect. It is also true that particularly over the last couple of months we have seen a number of min load situations in the Midwest and what that means is that the MISO is trying to get generation off of the system and that means that you are going to lower and lower dispatch units in the dispatch stack. You also are probably aware of what happened with the care regulations in July, there has been a fair amount of speculation that, that has had some impact on the off-peak pricing. And again, that just depends on how everybody executes their bidding strategy and we are obviously not privy to that beyond our own. So, I think all of those things probably have some impact on those prices.

[Unidentified Analyst:]

Okay, great. Thank you.

[Operator:]

Our next question comes from Greg Orrell with Lehman Brothers. Your line is open.

[Greg Orrell:]

Thanks. My questions have been answered.

[Bruce Williamson:]

Thanks, Greg .

[Operator:]

Thank you. Our next question will come from Brian Chin with Citigroup. Sir, your line is open.

[Brian Chin:]

Hi, any challenges to Plum Point that could get a boost given what Georgia did with Long Leaf?

[Bruce Williamson:]

We don't really think so Brian, I mean, the project is under construction, it's moving along well, we're about two years out from commercial operations on that, it has all of its permits in hand. So litigation is always a possibility but we feel comfortable with where we are in that project.

[Brian Chin:]

So, basically once the project is under construction it has already received the environmental permits, like the end of a successful legal challenge has gone down considerably, the environmental challenges have to nip it in the bud in order for something to really have a lot of risk effectively, is that sort of the take away?

[Bruce Williamson:]

No, they don't have to be, Brian. But in effect think of it like not to deflect in a way from Plum Point but more to Sandy Creek, I mean, that got us permits, than they were challenged in court, they went through at least one level of court, I mean, I am looking at Lynn or Jason, it was one or two levels here, one level and so it's upheld at the state court level. So, that's in effect going from the regulator to being challenged in court, you are really challenging the prudency of the regulator at that point, they are upheld there and then that's probably a strong enough position as you go ahead and take things along, what happened with Long Leaf is in effect they weren't upheld at that court challenge level.

[Greg Orrell:]

Okay, Great.

[Bruce Williamson:]

So that's the difference between those two scenarios.

[Greg Orrell:]

Okay great. Thanks a lot.

[Bruce Williamson:]

Okay.

[Operator:]

Our next question comes from Clark Orsky with KDP Investment Advisors. Sir, your line is open.

[Clark Orsky:]

Hi. I just wanted to ask you, I know you won't talk about '09 but can you say how much, how hedged you are for the rest of '08?

[Bruce Williamson:]

I think we just would say substantially hedged. In effect, not a lot of movement that's going to take place up or down for the rest of 2008.

[Clark Orsky:]

Okay. And on the revision to the CapEx, is that related to care or is that something else?

[Bruce Williamson:]

No. It's really more over, it's related to, as Rich's team gets to work on capital projects and they go into each year they have a rotational plan that goes from unit to unit at different plants. They have work that they know they are going to do for a scheduled outage and then what they have to is the major driver as you then have what they call emerging projects. And that is as they open a unit up and they do the required maintenance based on their sort of history and their sort of contingency plan that went well when we have this unit open, we could find that we need to also do project X, Y or Z and what they found for the majority of that reduction on the operating side was they didn't need to pursue as much on the emerging project front and so that's just work that doesn't need to take place, there was also some shifting of some work out in time and that can come from a variety of things, for example, when we have the cooling tower issue in the first quarter at one of the plans, obviously that got rebuilt, so it's not going to get rebuilt in late '08 or in early '09 like it otherwise would have been because it got rebuilt and so you have timing shifts to take place, because of when you do some of these emerging work.

[Clark Orsky:]

Thanks. That's helpful. And I guess just the last question, was on the [inaudible] you talked about some things you're doing to mitigate pressure on coal. Can you kind of be more... give a little more detail there?

[Bruce Williamson:]

What you want to do there, I mean, that does use call it internationally priced coal like Eastern coal is obviously the South American coal is driven more around that same international price market and so what you want to do there is basically still lock up as much as you can and then also, you wouldn't want to find yourself in a position of selling forward on the power and being open or floating on the coal. So you've got to work those two things together. And we've got to work with different suppliers but the majority of that coal does come from Venezuela and Columbia. And that's the best chemistry and it still is the best price point even compared to Central Appalachia as we have an alternative.

[Clark Orsky:]

Okay. Thanks.

[Operator:]

Our next question comes from Ivana Ergovic with Jefferies. Your line is open.

[Ivana Ergovic:]

Hi. Good morning. Back in I think December, you provided the sensitivity related to natural gas and I was just wondering whether these numbers still make sense or you could provide us with new numbers?

[Bruce Williamson:]

Well when we give you that at the start of any year, you know, that number is ineffective I think as we've talked with a number of analysts, that number is good sort of on January 1, because it is based on where we're at, for what's hedged and what's floating, when we start the year, if nothing changes even in the hedge percentages if it was just completely linear throughout the year by the time you get halfway through the year, half the year is obviously 100% fixed and the other half of the year if we were I think, we said we were between 50% and 65% hedged. So we're down to where we have only got half a year remaining and in effect I am not saying that if we were still 50% to 65% hedged I don't know what the map on that would be. But we would be down to...we would just I think we would be at roughly 75% or more hedged at that point. And what we have tried to guide people to is as we have gone through the year in the first part of the year as we saw some run-up in pricing and things like that we have in effect gone out and I would just say largely or substantially commercialized 2008. So, the long and the short of it is now the volatility around the dollar and move in natural gas is not really applicable at this point in time for 2008. On that same page in December we also gave you an unhedged look for what we would be on an unhedged basis, so you can look a little longer term and more forward that is, that should still be applicable going forward on the assumption that gases moving in a historic basis relative to power and that the transmission basis is also in a similar sort of a correlation.

[Ivana Ergovic:]

Okay. Just one other question, in terms of Long Leaf, what is your strategy given the recent court decision?

[Bruce Williamson:]

That's really that is managed by our development joint venture partner, where we have the right to co-invest in that project and they obtained permits there, but they were overturned at the court level and I think they are looking at what their legal options are.

[Ivana Ergovic:]

Okay. But you don't really know, you still haven't made a decision on what you can do about it?

[Bruce Williamson:]

Anything you want to add to that, Jason?

[Jason A. Hochberg:]

We have filed an appeal, but essentially there are two tracks you can go, you can go through the courts and you can go back through the agency. So, we are trying to keep all of our options open and will see which one looks most productive for us.

[Ivana Ergovic:]

Do you have an estimate how long this production will [inaudible] on your projects or do you expect to delay it?

[Bruce Williamson:]

No, not at this point.

[Ivana Ergovic:]

Okay. Just one other quick question given you talked about higher South American coal prices, do you [inaudible] going forward given current [inaudible] is going to earn much less than it used to?

[Bruce Williamson:]

No, I think it's just a matter of pointing out to people that that plant is more exposed to international coal prices and so, look for coal prices given how that pricing trend have been, you'd expect the next year Danskammer's coal prices would be higher than what they were this year. I guess, I would tend to assume that the markets still needs the power off of Danskammer and so we will have to adjust what price we would be longing to run the plant at but it is not going to be a marginal plant in the market. So, it's really its revenue is going to be set by the marginal plant in the market, its cost could go up, but I wouldn't anticipate that its runtime probably really changes.

[Ivana Ergovic:]

Okay, thank you.

[Operator:]

Our last question will come from [inaudible]. Sir, your line is open.

[Bruce Williamson:]

Hello?

[Operator:]

Mr. Arnold, please check your mute button on your phone. Your line is open for question.

[Bruce Williamson:]

Okay. Must have a problem there. Well, before ending this morning's call I would like to tell you all about some upcoming events that various members of the management team will be participating in this call. In early September, we will be at the Lehman Brothers CEO Energy/Power Conference in New York. And also that month we will be making a European investor marketing trip, which includes the UBS Best of America Conference in London. In late September, we will be at the Merrill Lynch 2008 Power and Gas Conference in New York and in November the EEI Financial Conference in Phoenix. Thank you again for joining us this morning, I look forward to seeing a number of you at the upcoming investor conferences.

[Operator:]

That does conclude this morning's conference call, we thank you all for participating. You may now disconnect and have a great day.