Hello, and welcome to the Dynegy Inc. Second Quarter 2013 Financial Results Teleconference. [Operator Instructions] I'd now like to turn the conference over to Ms. Laura Hrehor, Managing Director, Investor Relations. Ma'am, you may begin.

Good morning, everyone, and welcome to Dynegy's investor conference call and webcast covering the company's second quarter 2013 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 statement. For a description of the factors that may cause such a variance, I would direct you to the forward-looking statements legend contained in today's news release and in our SEC filings, which are available free of charge through our website at dynegy.com. With that, I will now turn it over to our President and CEO, Bob Flexon.

Good morning, and thank you for joining us today. With me this morning are several members of Dynegy's management team, including Clint Freeland, our Chief Financial Officer; Hank Jones, our Chief Commercial Officer; and Catherine Callaway, our General Counsel. Our agenda for today's call is located on Slide 3. I'll provide an overview of the second quarter results, including changes to our 2013 guidance, our progress towards closing the Ameren Energy Resources acquisition and follow it with an update on operational results for the quarter. Hank will provide the update on our commercial activities, followed by a discussion on the state of the MISO market in light of the recent report from MISO's independent market monitor. Hank will conclude his remarks with a review of how changes in natural gas and heat rate sensitivities impact Dynegy's portfolio. Clint will review the second quarter financial performance and discuss the drivers behind the changes to our 2013 guidance. I will close the discussion, and with the remaining time, we will open the discussion for a Q&A session. An overview of the second quarter results is shown on Slide 4. During the spring of significant planned outages, the safety-oriented efforts of our employees, supported by our safety programs and company-wide engagement, resulted in significantly improved year-to-date safety performance. For the first 6 months of the year, we had 6 recordable injuries, down from 11 recordable injuries versus the same period last year. The Gas segment incurred 1 employee recordable injury, while the Coal segment had 5 employee recordable injuries. Generation from our gas fleet declined 28%, primarily due to outages and lower spark spreads. Coal-based generation was down slightly, primarily due to increased planned outages during the second quarter. Adjusted EBITDA for the Coal segment was down $29 million compared to last year…

Thank you, Bob. We have quite a few things to discuss in this so section, so we provided an overview of the discussion on Slide 11. First, I will provide a regular update on our hedging activity for our power generation and fuel supply. Next, I'll discuss why and how we adjusted our hedging strategy around the Coal portfolio due to the basis issues we've experienced this year. We will also -- I'll also provide an update on our transmission upgrade studies and request to gain access to PJM for our coal fleet. After discussion of basis, we'd like to provide additional insight into the MISO supply-demand balance based on the perspective of the MISO independent market monitor, as well as the impact of the exports of MISO capacity into PJM into 2016. Lastly, I will walk through the adjusted EBITDA sensitivities for the Coal segment to provide additional insight on how to utilize the sensitivity variables we've historically provided. Please turn to Slide 12. Due to a reduction in the inter-month correlation versus historical levels between our busbar prices and INDY Hub prices year-to-date and our expectation that this will continue for the balance of the year, we have reduced our balance of the year hedge levels for the Coal segment to 57% of expected generation. This leaves the portfolio more open to plant busbar pricing in 2013 while protecting a portion of the remaining hedges with financial transmission rights, or FTRs. Hedges for the Gas segment have also been slightly reduced for the balance of 2013 to account for any potential operational disruptions during peak periods. Hedges continue to be layered in for both portfolios in 2014, with hedge levels currently around 34% for the Coal segment and 41% for the Gas segment. We've initiated hedging our portfolios…

Thank you, Hank. The company's midyear financial summary is outlined on Slide 23. And as you can see, second quarter consolidated adjusted EBITDA totaled $8 million compared to $11 million in the second quarter of 2012, as a meaningful improvement in Gas segment results was more than offset by continued weakness at the Coal segment. Despite a 28% decline in total generation volumes and generally lower spark spreads, Gas segment adjusted EBITDA nearly doubled to $53 million, primarily due to the absence of negative settlements associated with legacy put options and other out of the money commercial positions, which adversely impacted results last year. The Coal segment, on the other hand, experienced a $29 million decline in quarter-over-quarter results, as outages at Baldwin and Hennepin, together with negative hedge settlements and higher rail costs, put downward pressure on quarterly results. Year-to-date, adjusted EBITDA totaled $51 million compared to $49 million during the first half of 2012. While year-over-year consolidated results were not materially different, segment results were, as a $47 million increase in Gas segment adjusted EBITDA offset a similar decline at the Coal segment, with a difference in consolidated results primarily attributable to lower G&A expenses period-over-period. Similar to the second quarter, the Gas segment benefited from the absence of legacy commercial positions, while the Coal segment expensed higher outages, higher transport costs and lower realized prices due to hedges being at lower prices than those in 2012. As previously disclosed, Dynegy completed its balance sheet restructuring during the quarter by refinancing its CoalCo and GasCo term loans with both secured and unsecured debt at the parent company level and replaced the subsidiary level revolver at GasCo with a larger parent company revolver at DI. We executed this refinancing earlier in the year than planned. But in so doing,…

Thank you, Clint. And for those of you on the call, I know our prepared remarks have been a bit more extensive than historically done, but we had a lot of topics that I thought were worth going to some level of depth on. Prior to beginning the Q&A session, on Slide 28, we just want to reaffirm that our complete belief in the investment thesis for Dynegy, while we are not in the least satisfied with our 2013 adjusted EBITDA performance, the second quarter continued our progress across the company in many areas that positions us for long-term success. And we will continue to advance the actions, projects and investments necessary to address the congestion issues impacting the Coal segment. Transmission network analysis we initiated during the fourth quarter of 2012 provided us the blueprint to address congestion points, both near and longer term. In addition, we remain focused on improving all aspects of the company and capitalizing on opportunities. And, Gwen, at this point, I would like to open up the phone lines for Q&A.

[Operator Instructions] The first question comes from Neil Mehta, Goldman Sachs.

So what's being implied as the basis differential in 2H 2013, implicit in your guidance? And then are you in a position, as you look towards 2014, to guide us to what you think the right level of basis to use in that year is? Is it something closer to 2012 levels?

Well, on the question in terms of the basis for the full year estimate, we have $7.11. And as the estimate for basis with the balance of the year, at $6.70. And when we think about 2014, what Hank spent a lot of time on, it was really to focus on how do we just really take basis, to a larger extent, out of the equation. So to the extent that we're hedging at INDY Hub, we're dealing so where it's perfected. We either have busbar swaps executed or FTRs to take the volatility out of the basis. So for 2014, it's going to be less of an issue than it is in 2013. By the way we've adjusted the way we're approaching our hedging. What we will be doing is leaving more the portfolio open. We're wearing that market risk today anyway, given the correlation reduction between the 2 points. So our combination of -- for 2014 in addressing, perfecting the hedges and having more open -- portfolio more open, we really reduced the basis issues. So what we've seen during the course of this year as well is not that the LMP prices saturated, it's just that the volatility has been more around Indiana Hub, whether it's for planned outages in and around Indiana or transmission line maintenance or outages. The volatility has been at the INDY Hub not at the LMP, and what we're looking to do is take that volatility away from our earnings.

Got it. And on the balance sheet, you're currently sitting on a $500 million of cash, you got almost $800 million of liquidity. Do you have a target cash balance or liquidity level in mind? And can you talk us through how you're thinking about capital allocation?

Well, I'll talk about capital allocation first, and then I'll let Clint talk about how we target the available liquidity and cash on hand. We continue to evaluate all options around capital allocation, and certainly, one of the things we have discussed at the board level is using some of that cash for share repurchases as well. In the very near term, given the way we're readjusting how we hedge the portfolio, we want to make sure that, if we have less hedged, that we have the ample liquidity to support that now, recognize that, that takes less collateral hedge, less collateral, but there will be -- could be more volatility around market prices, so we want to make sure that we have available liquidity to address that. In addition, in the near term, while we're going through the proceedings around the Ameren acquisition, at this point, I'm not knowing the full outcome of that. We want to make sure that we preserve the right amount of liquidity for the operations and not overcommitting any particular area at this point in time. But all those options remain on the table, and once we have, I guess, more clarity and stability in some of these areas, then we will act upon maybe some of the other alternatives that are out there for us. Clint, you want to talk about the balance, as you see it?

Yes, I think, Neil, what we've spoken about historically was, given our -- the existing business, that we felt like we needed somewhere around $500 million in excess liquidity or available liquidity to support things like working capital, fluctuations, collateral needs and so forth. And I think that remains the case, although as we think about going forward, to the extent that we're going to be hedging a little bit less, we may want to be a little bit more conservative on how much liquidity we want to maintain just to be able to -- to be comfortable with the volatility that may be associated with that lower hedge level. I would also note, though, that as you're hedging less at coal, your collateral requirements may go down, at least to some extent. A lot of that is being done by first lien. But in any event, you may see a benefit there, but I would say, relative to what we've said in the past, with a target of maybe $500 million, again, with lower hedge levels going forward at coal, we may want to be a little more conservative on that front.

The next question comes from Brandon Blossman, Tudor Pickering, Holt & Co.

I guess focusing on the basis last -- just issues. One, first half of the year, obviously, transmission outages played a role. Second half of the year, we're still looking up year-over-year on the basis spread. Is that primarily a Prairie State issue or have other things changed in the grid year-over-year?

No, it's primarily Prairie State. What we've seen is that as they have both units running, that puts us into the area of triggering that higher level of congestion. Prairie State operations, from what we can tell and looking at -- for various generation reports, that they still have a lot of ups and downs around their -- around both of their units. But clearly, when they're both running, the level of congestion that's impacting the system and basis is what -- when we think about the second half of this year, that's where I would say that we're most concerned about the impact from that.

Okay, fair enough. And then can you kind of -- maybe not quantify it, but order of magnitude, talk about success in busbar sales, either financial swaps or selling direct to a counter party?

Well, for 2014, like what Hank said in his comments, is that we had 500 megawatts of busbar swaps executed.

That's right.

We had -- Do we have any '13, Hank?

Yes. Yes, we do. 250.

There will be 250 megawatts for the balance of this year in busbar swaps as well. And when you think about pricing and the like, I mean, it's order of magnitude around our levels of guidance to where we think it is. So we view it pretty much as market based. It just gives us the insurance and takes out the volatility. In addition to the busbar sales through the balance of the year and for next year, we also have the FTRs, which also complement the busbar swaps as well. So those 2 together, and you'll see on the 1 slide that we put out there, I think it was Slide 15 that shows the amount we referred to as perfected hedges is significantly greater than what it has been historically. When you think about the balance of this year as well on the coal fleet, we're roughly a little over 50% hedged. And of that, half of the portfolio being hedged, half of that half is protected via busbar swaps and FTRs.

Okay, good color. And then on '14 coal hedges, 34%, you are obviously indicating that it'll be lighter. Will it be that light or will it be more like '13?

No, I think, probably, what we'll end up when you think about 2014, we think we can -- in terms of managing the hedges with perfected instrument around it, we can probably do about half of the portfolio or so, half of the coal portfolio.

Okay. And that's what you'll target?

Yes.

Your next question comes from Jon Cohen, ISI group.

Apologies if you covered this already, but -- so if the -- Illinois Pollution Control Board rejects your revised variance request, what are your options and would you consider waiving that condition to close?

Well, if they were to reject it, I mean, I think it would be an interesting outcome because the plant, in terms of being compliant with the multi-pollutant standards, it's not going to be able to happen by 2015. But from our standpoint, we would have to take it back to the board and discuss, what do we do from here? Do we go forward with it or do we not? If we were to decide to go forward with it, the way that we would have to comply would be to shut down plants, and that's not what we want to do, and that's not what the stakeholders in and around us want to do either. Or it's a condition in the purchase and sale agreement that if we don't achieve it -- if we don't get that variance, then we don't have to close. So we would have to take it back to the board, review the options, review the financial impact, shutting a couple of plants down but not making the investment and scrubber. As to whether or not, that's still is the right financial decision for this company going forward or not, so that's a board level decision that, at this point in time, we have not addressed. But we remain confident that we'll get the variance, and I have to say that the support that we're getting from the communities and from the unions throughout Illinois and the employees has been very encouraging, and we're hoping to be -- to successfully bring this process across the line later this year.

Presumably part of that financial analysis would take into account the potential for pricing uplift in MISO capacity and power pricing uplift or basis reduction from [indiscernible].

At this point in time, we haven't done any evaluation as to result in any other alternatives with it because we remain on path to close it and run all the plants.

Okay. And then one other question on -- I think you said that it's helpful when you're looking at supply-demand fundamentals, and MISO to look also at the zonal capacity versus the zonal supply and demand. So if I look at your Zone 4, it looks like the reserve margins there are actually higher than MISO as a whole. Does that hurt you or would you only benefit if the -- if Eurozone is tighter than the rest of MISO?

I mean, the capacity market for MISO is the entire area, so it doesn't necessarily hurt us. But if you take a look at Zone 4 in terms of what appears to be confirmed exports to PJM, and Zone 4 is a fairly tight market as well, the capacity market is -- the way the construct works is that the folks serving load, they can go into different zones to bid for capacity, those offering capacity can't go to other zones. It's one of the design constructs of the MISO capacity market that we would like to see a bit different.

Your next question comes from Amer Tiwana, CRT Capital.

My question, I know you're sort of busy with the Ameren transaction, but some of the other assets and some regions that you operate are also for sale at this point in time, and I'm specifically talking about Edison Mission. Have you looked at their coal portfolio? I know they're looking for more transaction there. How that fits into your portfolio and whether those would be assets that you would be interested in?

Well, I mean, at this point, I mean, I'd say that we have our hands full between the Ameren acquisition, managing the existing portfolio, we've got our union contract negotiations at the coal fleet going. So our focus is operations, protect this portfolio, be successful with Ameren. Certainly, Mario Alonso, who runs our strategy before, stays aware of what's happening in the marketplace. But right now, our focus is executing well on our operations and getting the Ameren transaction across the line. That's the priority for us.

Your last question comes from Julien Dumoulin-Smith, UBS.

So I wanted us to shift the focus here back to California lastly. Obviously, some great wins in the quarter. I'd be curious, can you speak to what the revenue uplift is from some of these awards, maybe specifically in '13 as it relates to the upside of the Gas portfolio?

Off the top of my head, Julien, I cannot -- Clint or Hank, do you have the revenue lift from the awards? Are you talking about the '13 awards or are you talking about the '14?

Well, I mean, we could use the '13 to back into '14 implicitly, I suppose, but...

So $13 million -- I'm sorry, for 2013, it's about $11 million.

Roughly, yes sir.

$11 million uplift?

Yes. And I think when we think about our guidance, there is an uplift associated with what we've gotten in California, it's probably a little bit more than half of that for guidance purposes.

True. Yes.

Got you. And then just to talk probably about California, how do you think about 6 and 7, given the outcome of the RFO, Morro Bay, et cetera?

Well, Julien, I think -- when I think about 6 and 7, there's a lot of different things that go into the equation. Certainly, we still believe the plant, with its capabilities, the ramping capabilities and flexible capacity, will be a key part of the equation in California for firming up renewables and grid reliability. Also, as we continue to work through a parallel path on our discussions with Southern Cal Edison, on the terminated contracts and with going down the dual path on that: one is litigation/arbitration; the other path is work through a new commercial arrangement. It's a parallel path, and certainly, I would desire the latter to get away from the legal arbitration path. And we're slowly making progress. And whether it comes to fruition or not, time will tell, but having Moss 6 and 7 can play into that as well. So I think there's a bridge for Moss 6 and 7 between now and when the flexible capacity market matures and develops, and Moss 6 and 7, I think, again, is with the best operating capabilities or ramping capabilities in the state. We remain confident and optimistic around Moss 6 and 7.

Excellent. Perhaps a big picture question on the coal portfolio, again. Obviously, we've gotten some drastic coal ash rules for state-specific standards in Illinois. And we've also seen some finalization of 1-hour SO2 standards. I'd be curious, does that change the environmental compliance program that you guys have laid out as of right now?

No. I mean, we've been doing all of our environmental planning and whether it's our fleet or are planning for Ameren, we've -- we stay close to the regulations and understand what's coming. So there's some change in our environmental CapEx spend. Again, thanks, everyone, for joining the call this morning.

Thank you.

This does conclude today's conference. Thank you for attending. You may disconnect at this time.