Dyne Therapeutics, Inc. (DYN) Q1 2015 Earnings Report, Transcript and Summary

Hello, and welcome to the Dynegy Incorporated First Quarter 2015 Financial Results Teleconference. Please note that all lines will be in 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 Mr. Andy Smith, Managing Director of Investor Relations. Sir, you may begin.

Thank you, Riza. Good morning, everyone, and welcome to Dynegy’s investor conference call and webcast covering the company's first quarter 2015 results. As is our customary practice, before we begin this morning, I would like to remind you that our call will include statements reflecting assumptions, expectations, projections, intentions, or beliefs about future events and views of market dynamics. These and other statements not relating strictly to historical or current facts are intended as forward-looking statements. Actual results though may vary materially from those expressed or implied in any forward-looking statements. For a description of the factors that may cause such a variance, I would direct you to the forward-looking statements legend contained in last night’s news release and in our SEC filings, which are available free of charge through our website at dynegy.com. With that, I will now turn it over to our President and CEO, Bob Flexon.

Good morning and thank you for joining us today. With me today are Clint Freeland, our Chief Financial Officer; Hank Jones, our Chief Commercial Officer; Catherine Callaway, our General Counsel; and Sheree Petrone, our Executive Vice President of Retail; Dean Ellis, our Vice President of Regulatory Affairs; and Carolyn Burke, our Executive Vice President of Business Operations and Systems. We posted our earnings release, presentation, and management's prepared remarks on our website last night. Following a few opening remarks, we will devote the bulk of our scheduled earnings time to your questions. Our safety performance improved in the first quarter as two initiatives launched in the fourth quarter last year are contributing to our pursuit of an injury free work place. The first is a program to raise awareness of the dangers of allowing complacency to set into the workplace. This may happen when employees perform repetitive task as part of their work responsibilities, which can lead to increased safety risk. Second, our winter safety preparations resulted in no slip and fall injuries this winter versus four recordable slip and fall injuries last year. We will continue to focus on safety and look to build on this improving trend. We closed on our transformative transactions at the beginning of April. The completion of these acquisitions evolves the company into one of the leading independent power producers in the U.S. Dynegy is well positioned to capitalize from a tightening market condition that exists in our core markets. Our integration of these acquisitions is in advanced stage with system integration onto the Dynegy platform at 97% complete. In conjunction with the closing of the acquisitions, we allocated $100 million of capital to reduce the equity issuance at closing for the EquiPower and Brayton Point acquisitions. Our decision to allocate capital and lower the equity compensation reduced the shares that otherwise would have been issued to fund the transaction by 3.5 million shares. This was financially equivalent to repurchasing our shares at $28.90 and reduce ECP’s ownership stake below the 5% threshold, which would have required their inclusion in our Section 382 ownership change calculation. By doing so, Dynegy eliminated the possibility of this transaction, but negatively impact the existing tax loss carry-forward position in the future. We previously announced an increase in our expected EBITDA synergies to $100 million from $40 million and we are now increasing our balance sheet synergies from the original target of $200 million to $375 million. These incremental synergies provide additional capital that can be made available for higher return uses. We continue to focus on capturing synergies from the acquisition and expect to provide finalized updates to our synergy targets at our upcoming investor day on June 2015 in New York. MISO conducted its annual capacity option for planning year 2015-2016 in Zone 4, which is comprised of Central and Southern Illinois, cleared at $150 per megawatt day. Dynegy cleared 553 megawatts that will receive capacity payments of $150 per megawatt day. We also self-scheduled volume through the auction that backs our retail load. Dynegy’s mass market retail customers and a portion of its C&I customers are not adversely affected from the increase in Zone 4 auction prices. They had already purchased capacity through our Homefield Energy retail business. While Zone 4 priced separately from the rest of the zone in MISO, the full effect of after retirements has not yet been sold in MISO. Generating assets that received the one-year mass expansion must be compliant with the regulations by April 2016 will retire. By MISO zone estimates, the reserve margin for planning year 2016-2017 falls below MISO’s target reserve margin. We expect capacity in MISO to become increasingly valuable as a reserve margins continue to tighten. We are affirming our 2015 adjusted EBITDA range of $825 million to $1.025 billion and our free cash flow guidance range of $100 million to $300 million. Based on forward curves, as of April 21, assuming normal weather in plant operations, our projections placed our results in the top half of our guidance range. Finally, before we move to Q&A, today is Andy’s last earnings call. Andy will remain in Investor Relations role through our upcoming investor day, but he would then move to lead our Financial Planning and Analysis organization. Rodney McMahan, who currently leads our Financial Planning and Analysis organization, will be moving into the Investor Relations role. Riza, at this point, I would like to open up the session for Q&A.

Thank you. We will now begin the Q&A session. [Operator Instructions] Our first question is from Abe Azar from Deutsche Bank. Your line is open.

Hi, good morning, guys.

Good morning.

Good morning.

Good morning. Two questions today. First one is, all the rail cost savings that you show on slide 16 already included in the synergy assumption or is it only a portion of those related to the new assets?

All of what is show on slide 16 for the rail cost savings, which includes Kincaid, Duck Creek, and Joppa, are included in our synergy number. What’s not included in our synergy number, which will be part of our final update, will be the impact at these lower delivered coal rates have on dispatch. So we expect incremental generation by having lower dispatch cost and we are just finalizing our review of those numbers and we will provide a final update on that in June.

Good. And then my other question is with spark spreads up by $1 to $3 megawatt hour in most regions and your comments on last call that you were – generally guide conservatively and your point estimate would have been in the top end of the range anyway, are there any new downward drivers that we should be thinking about in 2015?

Well, when we updated our – these serve to affirm our guidance and we use the curve data of April 21. And I will say that, when we did that analysis, it actually showed a little bit of an uplift from where we were from the last time we present a guidance. So, I think where we sit right now, it’s generally – I don’t see anything that would drive it down otherwise unless we have any operational issues or again an unseasonably cold summer. But I will turn it to Clint to see if he has any comments on that.

Yeah, Abe, if you recall, when we set our original guidance range that was based on curves as of February 10. And in general, what we’ve seen since then particularly for the last nine months of the year is, as you said, you’ve seen power prices and sparks improve in PJM and in New York Zone A, but you’ve actually seen them come down somewhat in New England. And so, I think the net effect of that certainly is positive for us. So I would say from everything that we’ve seen that that offset to some extent in New England, maybe tempering some of the upside that you see in PJM in New York. But otherwise, like Bob said, we will watch our operations, weather and so forth throughout the year.

Great. Thank you.

Thank you. And our next question is from Greg Gordon of Evercore ISI. Your line is open.

This is actually Igor in for Greg. A quick question on hedges. I know you guys give percentages, but you don’t provide actual hedge prices or margins. Can you estimate sort of what the impact that hedges has in 2015, in other words, what would your open EBITDA be relative to your guidance of upper half of the range in 2015 if you were to strip out the hedges?

Igor, I actually don’t have what an open EBITDA on the full fleet would be at this point, I would say that I think we were relatively flat in the first quarter for hedge settlement, but for balance of the year, I don’t know what that number looks like.

Got it. And with slightly more hedges obviously now that you have a bigger retail position, do you anticipate providing some of those details going forward or for competitive reasons you are going to leave it out?

I mean, typically we don’t do that, I mean the only way that you can really see that is via the balance sheet where our derivative positions are, but I don’t know, I don’t think we planned to put that out separately.

Got it. Thank you very much.

And then our next question from Julien Dumoulin-Smith of UBS. Your line is open Smith.

Good morning.

Good morning Julien.

So, first quick question if you will, can you elaborate further on some of the coal saving opportunities, you alluded to quite a number in the presentation here, just I suppose transport and otherwise that could be coming down the pipeline. First, just with regards to the timeline that when would those potential savings kick-in and also any sense on magnitude thus far as you kind of think about it?

And Julien, you are referencing things like Barge and blank [ph] coal and fuel blending of those?

Yeah exactly, perhaps identify the couple that are most relevant as best you see it.

Julien this is Hank. I will take a stab at that. The blending issue is looking at the opportunities to increase our blends of Illinois Basin versus Northern App coal at the former Duke facilities, and there is a testing required and trying to find an optimal operational balance. So that’s a very active process and we are working hard on that. I can’t give you any timelines on that at the moment because there is lot of work to do there. In terms of the refined coal that probably, that’s something that we can do with speed. We don’t have estimates on timing yet, but we are pursuing that very, very aggressively. As you know, we just picked up the barge transportation agreements and all the obligations and back ground around that. So, we are – it will be in negotiation on the barge rates over the coming months and hope to provide some added value on that and added clarity on that over the coming months.

Great and then just talking to the IP or the potential IP treasure fits down the line, environment to larger fit specifically, any opportunities there to share those costs with anyone or anything like that. I mean I just want to kind of get a sense where you stand on those and opportunities that are [indiscernible] the cost?

Well, Julien, we’ve had some conversations with Foresight, but I would think most of those conversations have gotten quite, quite with the change of ownership that they’ve been experiencing. So, I mean still our base level case is to go add it alone. Some of the real savings that we identify, one of the biggest contributors or I should say the biggest contributors, those real savings happens to be jobs that which, why that doesn’t necessarily kick until 2018, certainly will help the liquidity position as we really ramp up that spending in 2017, 2018. So, we will continue to look for the opportunities to see if there is a way to do it as cost effectively as we possibly can, but certainly the outlook for Genco and its liquidity given where capacity is clearing, where we are doing what the retail, the performance of the retail business within IPH, the lower rail rates are all contributing to I think a much more bullish outlook for Genco, but to your point we will continue to see if there is ways to more effectively make that spend for the scrubbers.

Great and then a last little detail on the GP&S case out in California and Masscan you give us a little bit more of a sense on in terms of what are your delivered cost, or what your basis is for that unit today and kind of what the high and low range could be coming out of this case in terms of an impact to that basis?

Well, I think on that Julien, it’s the briefs that have been prepared on both sides and it’s been reviewed by a judge at the moment, so for us to telegraph something probably wouldn’t be in our best interest, but certainly argument around this is, if you put a fairly high fixed charge on, you’re going to hurt the plan dispatch and they are not going to collect anything. So, hopefully that they see the wisdom and allowing the plant to run at good capacity factor where they could actually be better off versus coming in with a high fixed rate charge and that’s kind of the basis of what we are trying to persuade them and the judge in this process.

Actually if I can, if you may on the MISO capacity auction, just bilaterally have you seen any transactions in zone four, since the auction took place and where is that pricing just generally speaking and are you seeing the longer tenders?

I will make a couple comments and I would like Hank pitch in. So, we are in the over the counter market that the price of wired simply traded as really basically sticking around the reference price for 2016, 2017, which right now we are seeing in the market. It’s about $3 or a capacity in 2016, 2017, but I think one of the interesting dynamics that has, that kind of illustrates the uniqueness of MISO is that some of the surrounding zones are approaching us for capacity because they are sure, but yet if you look at the last option the way the utilities bid in, they always bid in at basically at zero, so while they are short, they are actually coming to our zone to buy higher price capacity versus the zone where it cleared at $16 a megawatt day. So, we are seeing the impacts of plant retirements affecting various zones within MISO by the kind of enquiries, the inbound enquiries we are getting for capacity for 2016, 2017. So, I mean that’s kind of the state of what we are seeing and Hank you may comment on maybe the wholesale side of it as well.

Right so again the indicative number is around $3 over the counter trade, there has been to our knowledge nothing has gone through. There are – the other two roots to market for us are our retail business is somewhat seasonal and that activity we would expect the big thrust of that activity will be in the fall. In terms of the wholesale transactions those are longer term, somewhat structured transactions with Muni’s, Co-ops and load serving entities throughout the system. Those conversations are ongoing and weren’t disrupted in the process and we continue to work, continue to have interest from load serving entities in longer capacity in MISO and it’s an acknowledgement by long-standing market participants that the reserve margins are tightening and they are interested in contract out into the future.

Great, thanks again.

Thank you and our next question is from Angie Storozynski of Macquarie. Your line is open.

Questions, first of all so there is ongoing work on transmission lines and Southern Illinois it’s somewhat weighing on your output, sometime on your coal plant, given the ongoing work and then the transmission debottlenecking, do you think that there will be some improvement in the basis of Baldwin in particular going forward?

Angie, two comments on that, I mean the first is that the impact of congestion on if that occurred, I think it was late February, it was like the coldest week during the winter, which MISO coincidently decided to do a plan transmission outage that particular week which drove prices higher to the, I guess to the North and to the East and left our plans from Southern Illinois at facing a lot of congestion, so that was kind of a one-off as the explanation we got from MISO was that it was to set-up additional transmission work in the Spring that they needed to do to prepare for that. Certainly our analysis of transmission around, particularly the assets in the South highlighted that the ones that aren’t being addressed by the MISO projects are the ones that we initiated, which will be the Baldwin transformer and the re-conducting of some lines in that area, but our analysis shows that the MTEP [ph] projects that are scheduled will serve to relieve congestion in the Central and Southern Illinois.

Okay, but should we spill or project about a 15% discount versus Indy Hub roughly for the entire portfolio?

Hey Angie, I would still use that once we did the Baldwin transformer should be completed for the end of the month, before the end of May. So, we should see a little bit of improvement once that is in place, but for the time being, I would stick with the range that’s you just said.

Okay. And separately on capacity, so with $150 in MISO, does it change at all your strategy as for as bidding some of the IPH assets into the PJM auction. How does it reflect your cost structure and MISO? Is $150 enough, clearly many of your plants didn’t clear what – I suggest that you were bidding above this level. Could you comment on all about what you view on these prices?

I guess for the first part of the question, I would expect that we will continue to bid in the PJM because if there is either plan around PJM, where you’ve got the three years advance option and AP [ph] coming in, it’s a more stable level of cash flows. MISO with the vertical demand curve and lack of any pricing for new build makes it much more difficult for an independent power producer like ourselves to live in that environment. But I would say our forecast for MISO which is consistent with MISO’s own forecast is that, they don’t have enough system resources starting next year to meet the planning reserve margin. So I don’t think next year is going to be an issue around [indiscernible] Zone 4 clear versus other zones. I think the question for next year is, does MISO have enough supply resources where they don’t have to actually go to the administrative cap which would be over $8 a kw month. So we’ve made this the whole system wide to club for us, well short of their reserve requirement and MISO’s current projection say it well.

Okay. Thank you.

Thanks, Andy.

Thank you. [Operator Instructions]

Riza, if there is no more questions, I would like to thank the callers for dialing in and look forward to future dialog. Thank you.

We do have one more question coming in from Michael Lapides of Goldman Sachs.

Alright. We’ll get Michael in.

Thanks, Bob. Much appreciated. Real quick, I may have missed this at the beginning, just hopping over from another call. Can you talk about California little bit? You went through the process of potentially looking at strategic alternatives there. We are now into our summer where hydrous really low the potential opportunity for gas generators. It’s kind of those one off events that sometimes happen more than one time every 20 years or so. How are you thinking about where California fits within the broader strategic positioning of Dynegy and other markets where maybe you don’t have assets or don’t have significant scale where you would like to have scale?

When I think about the California assets, I mean certainly our scale is in Illinois going east, not west. And with Moss Landing, the two challenges that we saw when we had the process earlier in the year was around the gas rate case and the one through cooling. The one through cooling has been – the permitting issues there have been resolved, there is low CapEx and we view that we comply now with all of the rules, not only up to 2020 but anything beyond 2020 assuming there are no rule changes fits completely compliant. The other issue is the gas rate case, transport rate case which we won’t – there is in a definitive timeline on when it actually gets wrote upon, but we expect it somewhere during the summer whether that’s late second or into the third quarter is our guess on the time table for that. So that will provide a lot more clarity to the dispatch cost of Moss Landing, how much it was run. And again the other thing that we just highlight that we would like to emphasis regulators is that, the amount of water that’s lost through the combined cycle plants that use the municipal water and there is about 12 gigs that use that, consumes terrible amount of water in states that’s facing serious drought conditions. Moss Landing which is one of the most efficient combined cycle units in California can save the space right now, 2 billion a gallon of water starting today, it was dispatched more and your cycle down some of the other combined cycle units. So that’s the message that we are trying to get out there and we will see if it takes hold or not, but Moss Landing has a lot of value to power generation in the State of California and still 6 to 7 have the fastest ramping capability more so than in the other asset in Northern California that brings firming capability that others just can’t match. So there is value there, when it comes down to from a portfolio standpoint that we will always constantly look at the value of the cash flows in our ownership versus what you could monetize it for and to date given the environment in California, it looks like it’s a hold strategy not a sales strategy at this point and we are going to do everything we can to protect Moss Landing and again to be as efficient as it possibly can, so it should be an important part of the generation profile for the state.

Okay. Can you comment about other market spending, you don’t have a lot of scale in New York. You have no assets in Texas. Can you just talk about your views on how those two reasonably sized power markets fit into your broader kind of long-term strategic positioning or plant?

Well, for Independence, I look at that from a standpoint on how to source fuel in the region, and you look at the plants that we have in the pipeline that are on and the carriers and the like. This is right in our sweet spot. So Independence I just think about it kind of in the Marcellus footprint where we have the bulk of our combined cycle units and Independence is an incredibly valuable unit, it gets gas at negative basis, so it’s one of the most excitable units of our portfolio. And again I just view from a scale situation, it’s part of the Marcellus footprint that we have. So that’s an important strategic asset for us. And then I would think when you look at our profile, one that I think that sets us apart from others is our access to gas in Ohio and Pennsylvania. And to the extent we can leverage that and expand on that, I think that’s an important thing for us to do. Texas, we are not – obviously not in Texas other than the headquarters, not necessarily looking at anything in Texas. Right now our focus is the successful integration which we’ve done I think Carolyn Burke and her team and the organization has done an outstanding job of having absolutely no disruption on integrating two acquisitions at the same time. And as I said in our materials, we are at very advanced stages of completing that. And I think we are really positioned well given, we’ve got close to 5 gigs being retired in PJM this month with AP assets coming out of the market. Markets are just going to tighten CPs coming in, so our focus is to make sure we have our assets ready for that and I think [indiscernible]. We will always make sure we are aware of other opportunities and does it all for a compelling investment proposal, but absent that this company is going to be directing a lot of cash in a while. This year we’ve allocated $100 million to repurchasing shares and constantly evaluate that not only this year but going into next year. You certainly see a very strong cash profile going into next year given that we have the whole portfolio in the first quarter of next year which we didn’t have this year. And so I expect significant amount of cash will be used to be deployed to return to shareholders. The only thing that ever changed is, if there is some type of compelling opportunity, but right now I don’t necessarily see what that would be.

Got it. Thank you, Bob. Much appreciated.

Thanks, Michael. So, Riza, is there anyone from the queue?

At this time, we do not have any further questions.

Great. Thank you, Riza, and thank you callers for dialing in.

Thank you, speakers. And that concludes today’s conference call. Thank you all for joining. You may now disconnect.