Dynegy (DYN)

 

SFAS No. 157.>  On January 1, 2009, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis, which had been deferred under FSP SFAS No. 157-2.  Please read Note 5—Fair Value Measurements for further discussion.

SFAS No. 160.>  On January 1, 2009, we adopted SFAS No. 160.  Please read Note 3—Noncontrolling Interests for further discussion.

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DYNEGY INC. and DYNEGY HOLDINGS INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Unaudited)

 

For the Interim Periods Ended March 31, 2009 and 2008

 

SFAS No. 161.>  On January 1, 2009, we adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”).  Please read Note 4—Risk Management Activities, Derivatives and Financial Instruments for further discussion.

 

EITF Issue 08-5.>  On January 1, 2009, we adopted EITF Issue 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value with a Third Party Credit Enhancement” (“EITF Issue No. 08-5”).  Please read Note 5—Fair Value Measurements for further discussion.

 

Accounting Principle Not Yet Adopted

FSP SFAS 132(R)-1.>  FSP SFAS 132(R)-1 amends SFAS No. 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan.  The objectives of the disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan are to provide users of financial statements with an understanding of: (i) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (ii) the major categories of plan assets; (iii) the inputs and valuation techniques used to measure the fair value of plan assets; (iv) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period and (v) significant concentrations of risk within plan assets.  The disclosures about plan assets required by this FSP are to be provided for fiscal years ending after December 15, 2009.  We are currently evaluating the disclosure implications of this standard; however, this statement will have no impact on our financial condition, results of operations or cash flows.

Note 2—Discontinued Operations

Heard County.>  On April 30, 2009, we completed our sale of our interest in the Heard County power generation facility to Oglethorpe Power Corporation (“Oglethorpe”) for approximately $105 million and will record a gain of approximately $10 million in the second quarter 2009.

Beginning in the first quarter 2009, Heard County met the held for sale classification requirements of SFAS No. 144, "Accounting for the impairment or Disposal of Long-Lived Assets", and is classified as such on our unaudited condensed consolidated balance sheet.  The major classes of current and long-term assets classified as assets held for sale at March 31, 2009 are approximately $95 million of property, plant and equipment, net, less than $1 million of inventory, $11 million of deferred tax liabilities and less than $1 million of accrued liabilities and other current liabilities.

In accordance with SFAS No. 144, we discontinued depreciation and amortization of Heard County’s property, plant and equipment during the first quarter 2009.  Depreciation and amortization expense related to Heard County totaled approximately $1 million in the three-month periods ended March 31, 2009 and 2008.  Also pursuant to SFAS No. 144, we are reporting the results of Heard County’s operations in discontinued operations for all periods presented.

Calcasieu.>  On March 31, 2008, we completed the sale of the Calcasieu power generation facility to Entergy Gulf States, Inc. for approximately $56 million, net of transaction costs.

In accordance with SFAS No. 144, we discontinued depreciation and amortization of Calcasieu’s property, plant and equipment during the first quarter 2007.  Depreciation and amortization expense related to Calcasieu totaled zero in the three-month period ended March 31, 2008.  Also pursuant to SFAS No. 144, we are reporting the results of Calcasieu’s operations in discontinued operations for the three-month period ended March 31, 2008.

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DYNEGY INC. and DYNEGY HOLDINGS INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Unaudited)

 

For the Interim Periods Ended March 31, 2009 and 2008

 

Summary.>  The following table summarizes information related to both Dynegy’s and DHI’s discontinued operations (all of which are included in our GEN-WE segment):

		Heard County				Calcasieu				Total
		(in millions)
Three Months Ended March 31, 2009
Revenues		$	2			$	—			$	2
Income from operations before taxes			1				—				1
Income from operations after taxes			1				—				1
Three Months Ended March 31, 2008
Revenues		$	2			$	—			$	2
Loss on sale before taxes			—				(1	)			(1	)
Loss on sale after taxes			—				—				—

Note 3—Noncontrolling Interests

 

On January 1, 2009, we adopted SFAS No. 160, which requires: (i) ownership interests in subsidiaries held by parties other than the parent to be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; (ii) the amount of consolidated net income (loss) attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statements of operations; (iii) changes in a parent’s ownership interests that do not result in deconsolidation to be accounted for as equity transactions; and (iv) that a parent recognize a gain or loss in net income upon deconsolidation of a subsidiary, with any retained noncontrolling equity investment in the former subsidiary initially measured at fair value.  The following table presents the net loss attributable to Dynegy’s and DHI’s stockholders:

		Dynegy Inc.								Dynegy Holdings Inc.
		Three Months Ended March 31,								Three Months Ended March 31,
		2009				2008				2009				2008
		(in millions)
Loss from continuing operations		$	(336	)		$	(152	)		$	(336	)		$	(153	)
Income from discontinued operations, net of tax benefit of zero, $1, zero and $1, respectively			1				—				1				—
Net loss		$	(335	)		$	(152	)		$	(335	)		$	(153	)

 

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DYNEGY INC. and DYNEGY HOLDINGS INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Unaudited)

 

For the Interim Periods Ended March 31, 2009 and 2008

 

The following table presents a reconciliation of the carrying amount of total equity, equity attributable to Dynegy and the equity attributable to the noncontrolling interest at the beginning and the end of the three months ended March 31, 2009:

		Controlling Interest				Noncontrolling Interest				Total
		(in millions)
December 31, 2008		$	4,515			$	(30	)		$	4,485
Net loss			(335	)			(2	)			(337	)
Other comprehensive loss, net of tax:
Unrealized mark-to-market gains arising during period			4				30				34
Reclassification of mark-to-market gains (losses) to earnings			(1	)			1				—
Deferred losses on cash flow hedges			—				(3	)			(3	)
Amortization of unrecognized prior service cost and actuarial loss			(1	)			—				(1	)
Unconsolidated investments other comprehensive loss			1				—				1
Total other comprehensive income, net of tax			3				28				31
Other equity activity:
Options and restricted stock granted			2				—				2
401(k) plan and profit sharing stock			1				—				1
Board of directors stock compensation			(2	)			—				(2	)
March 31, 2009		$	4,184			$	(4	)		$	4,180

The following table presents a reconciliation of the carrying amount of total equity, equity attributable to Dynegy and the equity attributable to the noncontrolling interest at the beginning and the end of the three months ended March 31, 2008:

		Controlling Interest				Noncontrolling Interest				Total
		(in millions)
December 31, 2007		$	4,506			$	23			$	4,529
Net loss			(152	)			—				(152	)
Other comprehensive loss, net of tax:
Unrealized mark-to-market losses arising during period			(15	)			(11	)			(26	)
Reclassification of mark-to-market gains to earnings			8				—				8
Net unrealized loss on securities			(4	)			—				(4	)
Total other comprehensive loss, net of tax			(11	)			(11	)			(22	)
Other equity activity:
Subscriptions receivable			2				—				2
401(k) plan and profit sharing stock			1				—				1
Options and restricted stock granted			4				—				4
March 31, 2008		$	4,350			$	12			$	4,362

 

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DYNEGY INC. and DYNEGY HOLDINGS INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Unaudited)

 

For the Interim Periods Ended March 31, 2009 and 2008

 

The following table presents a reconciliation of the carrying amount of total equity, equity attributable to DHI and the equity attributable to the noncontrolling interest at the beginning and the end of the of the three months ended March 31, 2009.

		Controlling Interest				Noncontrolling Interest				Total
		(in millions)
December 31, 2008		$	4,613			$	(30	)		$	4,583
Net loss			(335	)			(2	)			(337	)
Other comprehensive loss, net of tax:
Unrealized mark-to-market gains arising during period			4				30				34
Reclassification of mark-to-market gains (losses) to earnings			(1	)			1				—
Deferred losses on cash flow hedges			—				(3	)			(3	)
Amortization of unrecognized prior service cost and actuarial loss			(1	)			—				(1	)
Unconsolidated investments other comprehensive loss			1				—				1
Total other comprehensive income, net of tax			3				28				31
Other equity activity:
Dividend to Dynegy			(175	)			—				(175	)
Contribution from Dynegy			36				—				36
Affiliate activity			(2	)			—				(2	)
March 31, 2009		$	4,140			$	(4	)		$	4,136

The following table presents a reconciliation of the carrying amount of total equity, equity attributable to DHI and the equity attributable to the noncontrolling interest at the beginning and the end of the of the three months ended March 31, 2008.

		Controlling Interest				Noncontrolling Interest				Total
		(in millions)
December 31, 2007		$	4,597			$	23			$	4,620
Net loss			(153	)			—				(153	)
Other comprehensive loss, net of tax:
Unrealized mark-to-market losses arising during period			(15	)			(11	)			(26	)
Reclassification of mark-to-market gains to earnings			8				—				8
Net unrealized loss on securities			(4	)			—				(4	)
Total other comprehensive loss, net of tax			(11	)			(11	)			(22	)
Other equity activity:
Affiliate activity			5				—				5
March 31, 2008		$	4,438			$	12			$	4,450

Note 4—Risk Management Activities, Derivatives and Financial Instruments

 

The nature of our business necessarily involves market and financial risks.  Specifically, we are exposed to commodity price variability related to our power generation business.  Our commercial team seeks to manage these commodity price risks with financially settled and other types of contracts consistent with our commodity risk management policy.  Our commercial team also uses financial instruments in an attempt to capture the benefit of fluctuations in market prices in the geographic regions where our assets operate.  Our treasury team seeks to manage our financial risks and exposures associated with interest expense variability.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Unaudited)

 

For the Interim Periods Ended March 31, 2009 and 2008

 

 

Our commodity risk management strategy gives us the flexibility to sell energy and capacity through a combination of spot market sales and near-term contractual arrangements (generally over a rolling 12 to 36 month time frame).  Our commodity risk management goal is to increase predictability of cash flows in the near-term while keeping the ability to capture value from rising commodity prices over the longer term.  Many of our contractual arrangements are derivative instruments and must be accounted for at fair value pursuant to the guidance in SFAS No. 133.  We also manage commodity price risk by entering into capacity forward sales arrangements, tolling arrangements, RMR contracts, fixed price coal purchases and other arrangements that do not receive fair value accounting treatment because these arrangements do not meet the definition of a derivative or are designated as “normal purchase normal sales.”  As a result, the gains and losses with respect to these arrangements are not reflected in the unaudited condensed consolidated statements of operations until the settlement dates.

 

Quantitative Disclosures Related to Financial Instruments and Derivatives

 

On January 1, 2009, we adopted SFAS No. 161, which requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format.  It also provides more information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk-related and it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments.

 

The following disclosures and tables present information concerning the impact of derivative instruments on our unaudited condensed consolidated balance sheets and statements of operations.  In the table below, commodity contracts primarily consist of derivative contracts related to our power generation business that we have not designated as accounting hedges, that are entered into for purposes of hedging future fuel requirements and sales commitments and securing commodity prices.  Interest rate contracts primarily consist of derivative contracts related to managing our interest rate risk.  As of March 31, 2009, our commodity derivatives were comprised of both long and short positions; a long position is a contract to purchase a commodity, while a short position is a contract to sell a commodity.  As of March 31, 2009, we had net long/(short) commodity derivative contracts outstanding and notional interest rate swaps outstanding in the following quantities:

Contact Type		Hedge Designation		Quantity (in millions)			Unit of Measure		Net Fair Value (in millions)
Commodity contracts:
Electric energy		Not designated			(68	)	MW		$	364
Natural gas		Not designated			199		MMBtu		$	12
Other		Not designated			2		Misc.		$	(1	)
Interest rate contracts:
Interest rate swaps