Dynegy Inc. (DYN)
Investor Day Conference Transcript
January 17, 2013 2:30 PM ET
Robert Flexon - President and CEO
Clint Freeland - Chief Financial Officer
Carolyn Burke - Executive Vice President and CAO
Catherine Callaway - EVP, Chief Compliance Officer and General Counsel
Mario Alonso - Vice President, Strategic Development
Kevin Howell - Chief Operating Officer
Pat Wood - Chairman
Hilary Ackermann - Independent Director
Jeff Stein - Independent Director
Mike Gray - VP, Commercial Operations
Brian Despard - VP, CoalCo Asset Management
Alan Padgett - VP, GasCo Asset Management
Dean Ellis - Senior Director, Government Affairs
Dan Thompson - Chief Operating Officer, CoalCo Operations
Marty Daley - Vice President, GasCo Operations
Gregg Orrill - Barclays
Previous Statements by DYN
» Dynegy Management Discusses Q3 2012 Results - Earnings Call Transcript
» Dynegy Management Discusses Q2 2012 Results - Earnings Call Transcript
» Dynegy Inc. Q2 2010 Earnings Call Transcript
There’s a lot of questions that have been coming up around, how do we see the earnings potential of the company, the liquidity, refinancing, capital allocation and our attempt today is to go through all of those issues with you and provide the detail that supports our thesis around why we believe Dynegy is a good investment.
With that, here we go, we’ll go through in terms of the presenters today and from the management team in addition to myself we have Clint Freeland, our Chief Financial Officer, who will obviously present the financial portion of the presentation. And then also the other members of the management team, Carolyn, Catherine and Mario are all here in attendance.
The one difference from the management team from the last time we’ve spoke publically is Kevin Howell, the Chief Operating Officer is transition back to semiretirement position. When I joined Dynegy back in July of ’11, Kevin was the first person I called and he was actually at Dynegy then before me. He immediately came down to help out and continue on and help with the restructuring. And Kevin now is, his plans always were to go back to retirement. We’re doing as much so can slowdown as we possibly can.
And Kevin is still on as an Advisor and certain things that Kevin has working on and particularly you’ll hear a lot today around. We are working to resolve the dispute with Southern [Kalidis] on the towing arrangement out in the west. Kevin is on point for that. He has developed the great working relationship to his counterpart over there and we are trying work through that in a very productive way and that’s one of the key area Kevin is focusing on.
And when we think about replacing Kevin, the thing that is a high priority to me is to get someone that is on the trade floor every single day. And so we've been looking for Chief Commercial Officer which when we talked about Kevin retiring, in the press release we announced that we would think we would have that person on Board or announce in the first quarter. And I’d say at this point in time we are very far long in those discussions and I’m very optimistic that that will be public in the next several weeks.
The Board of Directors, I guess that I -- I don’t know, I went in the wrong direction. I skipped which is never a good idea. But the Board of Directors was assembled by the creditors committee back in October and I’d say from the management perspective it’s an excellent Board, very involved, very proactive and very, very good experience is Chaired by Pat Wood and Pat is here in the audience today, in the back sitting next to Hilary Ackermann, also one of our new Board members and then, I guess, the three are right there together, Jeff Stein in the back as well.
So I know several of you know Jeff, Hilary and Pat. I just want to make sure that the whole room knows that they are here. So there is no advantage if you will and plus if you want to tackle them and not me that’s okay too.
So again from the Board perspective it’s worked out really well and we are thrilled to have as part of the team.
Other speakers today Mike Gray will cover the commercial area; Brian Despard to his left is our Co-Asset Manager; Alan Padgett, manages the gas fleet; Dean Ellis, Regulatory and Clint. And also we have Dan Thompson who runs the operations for CoalCo; and Marty Daley, who runs the operations for GasCo. So we’ve got a lot of our experts here and there is a few other folks from Dynegy spread out through the audience as well.
So that brings to the, why invest in Dynegy? What I want to do in my presentation is really to go through these three areas on why do we think on a risk-adjusted basis, on a value oriented play that Dynegy is a good investment.
We see it really pulls down the three things. We see limited downside risk. We see multiple ways in which earnings will develop within the company particularly at the CoalCo level, and finally, we have several capital allocation alternatives that we can do to drive value as well.
I’ll go through what I think supports each of these areas highlight on and then the balance of the presentation with our staff, we’ll go through and build out that detail to provide additional thoughts and support for those three areas.
So starting first around the balance sheet and say limited downside risk. We think about that in terms of liquidity, strength of the balance sheet, you can take a look at how we’re valued.
And we start up, I think, if our equity is trading at around $20 a share, we work through the debt that we’re carrying on net debt basis, you got enterprise value of $2.5 billion. If we say that all of the value is attributable to GasCo and divide that by -- if you take the $2.5 billion divide that by the megawatt of GasCo that comes out about $380 of kilowatt for GasCo.
And if you look on the top right-hand portion of the slide, shows comparable with how similar assets in PJM and NYISO have traded over the past year and $380 of kW for our gas fleet I believe a reasonable assumption, and I actually would argue it’s higher, but just in terms of relatively it's not out of the question.
So then I believes no value for CoalCo in our equity and in terms of our enterprise value, in terms of our equity value. And again, looking our comparable sales of coal plants that happened recently, say its $240 of kW, $240 of kW, we’ve got 3000 megawatts of coal that translates to additional $7 a share above where we are today.
So we believe in terms of how the market is looking and valuing us today, as well as other IPPs, there is limited value assigned to the coal generation assets. But additional downside protection we view through our hedging program and when we hedge our asset and Mike Gray will go into further depth around this. We view GasCo in the low gas environment is our stable cash flow and our hedging program is very much focus on a plant by plant basis within GasCo to lock down the cash flows.
We approach hedging for our coal fleet differently. We look at ways and how to protect the downside but allow the upside to remain and we utilize various caller strategies. So we are in a situation in 2013 where gas prices start falling because the winter doesn’t show up similar to last year than we have a put structure that puts a floor on the good portion of CoalCo’s earnings and we have an out of money call that helps finance that for a portion of our hedging.
So that leaves room for power prices to run and certainly the open portion of the fleet would greatly benefit from running natural gas prices. So our hedging program is to limit the downside allow the upside to exist.
The aspect of our portfolio from a limiting the downside risk is how the portfolio economically behaves. When you think about ‘14 and ‘15 where we open, largely open, generally speaking gas prices decline our GasCo assets run more, generate more gross margin, more energy revenues and it hurts CoalCo.
On the other side of that as gas prices rise you’ll see runtimes capacity factor than alike from the gas portfolio decline. But the offset of the rising gas prices benefit CoalCo far out way, far out way the amount of loss revenue that you’d see on the gas side.
So we've got an embedded hedge in the portfolio when its open, gas goes up, more valuable for the coal, gas prices go down, more valuable for the gas fleet and offset some of the loss on the CoalCo side. So we’ve got that embedded hedge within our portfolio.
Now moving to what’s going to drive some of the earnings as we go forward, the slide that I wanted to start with is a slide that John Bear who was the CEO of MISO came in and his team came in solace this past Friday. And we were talking with John, John had put together a presentational on how he sees the outlook for supply and demand for capacity prices within MISO in the next couple of years.
And I thought it was certainly an interesting discussion and I talked to John about sharing that information. So he actually took the presentation that they prepared for us and put it on the website this past weekend. This is one of those slides.
And the message from John is that as they factor in retirements within MISO and their retirement number is based upon their quarterly or semiannual surveys that they do with all the generators within MISO, how many retirements can they expect. So that’s factored in there. So you could see 12.5 gigawatts is what they’re forecasting in terms of incremental requirements from today.
The other aspect that John highlighted to me was you see on the potential gas fee rates which is for the winter resource adequacy. When they think about available capacity, if you don't have firm gas, you can’t consider that resource adequacy. It may not be available. Supply constraints peakers that aren’t going to contract the firm gas because they don't know if they’re going to run so they back that out.
So the message that John brought to us was we really are concerned about winter resource adequacy in 2015-2016 timeframe. They see a potential scenario that says they’re 11 to 12 gig short of generation.
And while he wants to talk about -- talk to the load serving entities around providing resource adequacy and locking in capacity, he recognizes that talking about the market design that looks like PJM in MISO is like the third rail that soon as you bring up RPM and the like, the members of MISO tend to automatically not want to engage in the discussions.
But the message that has John taken to on the load-serving entities is we really need to lock-in multiyear bilateral capacity contracts now. He feels that the first thing he needs to do is convince the member, the member of organization that we’re short. We’re short in the winter of ‘15 and ’16. And either there is going to be a harsh reality when that time come before we can smooth it out with multiyear bilateral capacity contracts. That's what I see happening.
As soon as this message starts to resonate more and more that you’re going to see the capacity payments starts ticking up. So we look at reserve margins in MISO using whether it's our own forecast or looking at third-party, everybody is really seeing the same type of tightening of the market, below 15%. And so value driver number one that I look to is capacity payments in MISO.
And we range that from $65 million to $130 million in the 2015-2016 timeframe. And the way we came up with the numbers, $65 million is based upon 2009 that 80% reserve margin and the clearing prices for capacity prices was $2 a Kw a month.
The way we come with $130 million is -- and Brian will talk about this is that we view that the market could converge where PJM RTO is and if you look at Northern Illinois, the capacity prices are clearing at $4 Kw a month that doubled to two that we experienced in 2009 when we had an 18% reserve margin. So if you take that, you multiply that against now that megawatts we had over the range of $65 million to $130 million of capacity revenue.
There is another impact that often is not thought about when you’re talking about retirements. It changes the dispatch effect. And what we did try to quantify that and what we came up with was another $85 million to $90 million of revenues is we reran 2012. So 2012, take the actual dispatch adjusted for the known retirements that are in the MISO central region, which is where Dynegy plants are and then re-run it and see where the margin of clearing price is.