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 June 30, 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.

SFAS No. 165.>  On June 30, 2009, we adopted SFAS No. 165, “Subsequent Events” (“SFAS No. 165”).  SFAS No. 165 provides guidance on management’s assessment of subsequent events.  We have evaluated  subsequent events through August 10, 2009, the date our financial statements were issued and up to the time of the filing of our financial statements with the SEC.  SFAS No. 165 is effective for interim or annual financial periods ending after June 15, 2009.

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.

FSP SFAS 107-1.>  On June 30, 2009, we adopted FSP SFAS 107-1 and APB 28-1, “Disclosures about Fair Value of Financial Instruments” (“FSP 107-1 and APB 28-1”).  Please read Note 5—Fair Value Measurements for further discussion.

FSP SFAS 157-4.>  On June 30, 2009, we adopted FSP SFAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”).  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.

SFAS No. 167.>  On June 12, 2009, the FASB issued SFAS No. 167, “Amendments to FIN 46(R)” (“SFAS No. 167”), which amends the consolidation guidance that applies to variable interest entities.  The FASB’s objective in issuing this statement is to improve financial reporting by enterprises involved with variable interest entities.  The FASB undertook this project to address (i) the effects on certain provisions of FASB Interpretation No. 46, as a result of the elimination of the qualifying special-purpose entity concept in FASB Statement No. 166, “Accounting for Transfers of Financial Assets”, and (ii) constituent concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity.  This statement is effective for fiscal years beginning after November 15, 2009.  We are currently evaluating the impact of this standard on our consolidated financial statements.

SFAS No. 168>.  On June 29, 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162” (“SFAS No. 168”).  SFAS No. 168 will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative.  This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  We anticipate this statement will have no impact on our financial condition, results of operations or cash flows.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended June 30, 2009 and 2008

Note 2—Dispositions and Discontinued Operations

Dispositions

LS Power Transaction.>  On August 9, 2009, we entered into a purchase and sale agreement with LS Power Partners, L.P. and certain of its affiliates (collectively, “LS Power”) pursuant to which we agreed to  (i) sell to LS Power> our interests in: Dynegy Arlington Valley, LLC; Griffith Energy LLC; Bridgeport Energy LLC; Rocky Road Power, LLC; Tilton Energy LLC; Riverside Generating Company, L.L.C.; Bluegrass Generation Company, L.L.C.; Renaissance Power, L.L.C.; Sandy Creek Services, LLC; and Dynegy Sandy Creek Holdings, LLC, and (ii) issue to LS Power $235 million aggregate principal amount of DHI 7.50 percent senior unsecured notes due 2015.  In exchange for the ownership interests and notes, we will receive (i) $1.025 billion in cash (consisting, in part, of $175 million of restricted cash on our unaudited condensed consolidated balance sheets to be released to Dynegy from the Sandy Creek restricted account) and (ii) 245 million shares of Dynegy’s Class B common stock (currently held by LS Power), with the remaining 95 million shares of Dynegy’s Class B common stock held by LS Power to be converted at closing to an equivalent number of shares of Dynegy’s Class A common stock.  Concurrent with the execution of the purchase and sale agreement, LS Power and Dynegy entered into a new Shareholder Agreement, which upon closing of the transaction, will eliminate special approval rights, board representation and certain other rights associated with the former Class B common shares and limit the acquisition and transfer of Dynegy’s common stock held by LS Power.  This agreement provides that we have agreed not to issue Dynegy’s equity securities for our own purposes until the earlier of (i) 121 days following the closing of the transaction with LS Power and (ii) the first date following closing of the transaction in which LS Power owns, in aggregate, less than 10 percent of Dynegy’s then outstanding Class A common stock.  The parties have made customary representations and warranties and the completion of the transaction is conditioned upon obtaining certain regulatory approvals and the expiration or termination of the Hart-Scott-Rodino waiting period.  The agreement also includes other customary closing conditions, including the lack of a material adverse effect and contains customary termination rights by both parties.  Assuming all necessary conditions are satisfied, the sale is expected to close in the second half of 2009.

In connection with discussions leading to the agreement with LS Power, we determined it was more likely than not that certain assets would be sold prior to the end of their previously estimated useful lives.  Therefore, we updated our March 31, 2009 impairment analysis for each of the asset groups that we were considering for sale as part of the transaction with LS Power.  As a result of this evaluation, we recorded pre-tax impairment charges of $197 million during the second quarter 2009, which are included in Impairment and other charges in our unaudited condensed consolidated statements of operations.  The asset groups included in this transaction do not meet the criteria of held for sale at June 30, 2009.  Based on the fair value at June 30, 2009 of the consideration to be received from LS Power as now reflected in the definitive transaction documents,  we expect to record further pre-tax impairment charges of approximately $355 million in the third quarter 2009 upon the asset groups meeting the criteria of held for sale, as well as a net loss on sale of assets of approximately $130 million upon closing of the transaction, based on our stock price and the value of our investment in Sandy Creek at June 30, 2009.  However, the estimates of the total impairment charges and loss on sale could change materially based on changes in the fair value of the shares of Class B common stock that is part of the consideration to be received from LS Power transaction.  Please read Note 6—Impairment Charges for further discussion of these impairments.

NYMEX Securities.>  In November 2006, the New York Mercantile Exchange (“NYMEX”) completed its initial public offering.  At the time, we had two membership seats on the NYMEX, and therefore, we received 90,000 NYMEX shares for each membership seat.  During August 2007, we sold 30,000 shares for approximately $4 million, and we recognized a gain of $4 million.  During the second quarter 2008, we sold our remaining 150,000 shares and both of our membership seats for approximately $16 million, and we recognized a gain of $15 million, which is included in Gain on sale of assets in our unaudited condensed consolidated statements of operations partially offset by a reduction of $8 million, net of tax of $5 million, in our unaudited condensed consolidated statements of other comprehensive loss.

 

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DYNEGY INC. and DYNEGY HOLDINGS INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Unaudited)

 

For the Interim Periods Ended June 30, 2009 and 2008

Oyster Creek.>  In May 2008, we sold the beneficial interest in Oyster Creek Limited for approximately $11 million, which is included in Gain on sale of assets in our unaudited condensed consolidated statements of operations.

Discontinued Operations

Heard County.>  On April 30, 2009, we completed the sale of our interest in the Heard County power generation facility for approximately $105 million.  We recorded a $10 million pre-tax gain during the second quarter 2009 related to the sale, which is included in Income from discontinued operations on our unaudited condensed consolidated statements of operations.

Heard County was classified as held for sale during the first quarter 2009.  At that time, we discontinued depreciation and amortization of Heard County’s property, plant and equipment.  Depreciation and amortization expense related to Heard County totaled approximately zero and $1  million in the three- and six-month periods ended June 30, 2009, respectively, compared to approximately $1 million and $2 million in the three- and six-month periods ended June 30, 2008, respectively.  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 for approximately $56 million, net of transaction costs.

Calcasieu was classified as held for sale during the first quarter 2007.  At that time, we discontinued depreciation and amortization of Calcasieu’s property, plant and equipment.  Depreciation and amortization expense related to Calcasieu totaled zero in the three- and six-month periods ended June 30, 2008.  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 June 30, 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 June 30, 2009
Gain on sale before taxes		$	10			$	—			$	10
Gain on sale after taxes			6				—				6
Three Months Ended June 30, 2008
Revenues		$	1			$	—			$	1
Six Months Ended June 30, 2009
Revenues		$	2			$	—			$	2
Income from operations before taxes			1				—				1
Income from operations after taxes			1				—				1
Gain on sale before taxes			10				—				10
Gain on sale after taxes			6				—				6
Six Months Ended June 30, 2008 Revenues		$	3			$	—			$	3
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 statements 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 June 30,								Three Months Ended June 30,
		2009				2008				2009				2008
		(in millions)
Loss from continuing operations		$	(351	)		$	(272	)		$	(341	)		$	(269	)
Income from discontinued operations, net of tax expense of $4, zero, $4 and zero, respectively			6				—				6				—
Net loss		$	(345	)		$	(272	)		$	(335	)		$	(269	)

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Unaudited)

 

For the Interim Periods Ended June 30, 2009 and 2008

		Dynegy Inc.								Dynegy Holdings Inc.
		Six Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(in millions)
Loss from continuing operations		$	(687	)		$	(424	)		$	(677	)		$	(422	)
Income from discontinued operations, net of tax benefit (expense) of ($4), $1, ($4) and $1, respectively			7				—				7				—
Net loss		$	(680	)		$	(424	)		$	(670	)		$	(422	)

The following table presents a reconciliation of the carrying amount of total equity, equity attributable to Dynegy and the equity attributable to the noncontrolling interests at the beginning and the end of the six months ended June 30, 2009:

		Controlling Interest				Noncontrolling Interests				Total
		(in millions)
December 31, 2008		$	4,515			$	(30	)		$	4,485
Net loss			(680	)			(3	)			(683	)
Other comprehensive income (loss), net of tax:
Unrealized mark-to-market gains arising during period			25				90				115
Reclassification of mark-to-market gains (losses) to earnings			(2	)			2				—
Deferred gains (losses) on cash flow hedges			1				(7	)			(6	)
Amortization of unrecognized prior service cost and actuarial loss			2				—				2
Unconsolidated investments other comprehensive income			6				—				6
Total other comprehensive income, net of tax			32				85				117
Other equity activity:
Options exercised			(1	)			—				(1	)
Options and restricted stock granted			5				—				5
401(k) plan and profit sharing stock			3				—				3
Board of directors stock compensation			(2	)			—				(2	)
June 30, 2009		$	3,872			$	52			$	3,924

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(Unaudited)

 

For the Interim Periods Ended June 30, 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 interests at the beginning and the end of the six months ended June 30, 2008:

		Controlling Interest				Noncontrolling Interests				Total
		(in millions)
December 31, 2007		$	4,506			$	23			$	4,529
Net loss			(424	)			(2	)			(426	)
Other comprehensive income (loss), net of tax:
Unrealized mark-to-market losses arising during period			(6	)			—				(6	)
Reclassification of mark-to-market gains (losses) to earnings			8				(1	)			7
Deferred losses on cash flow hedges			(1	)			(1	)			(2	)
Amortization of unrecognized prior service cost and actuarial loss			1				—				1
Unconsolidated investments other comprehensive loss			(7	)			—				(7	)
Net unrealized loss on securities			(12	)			—				(12	)
Total other comprehensive loss, net of tax			(17	)			(2	)			(19	)
Other equity activity:
Subscriptions receivable			2				—				2
Options exercised			1				—				1
401(k) plan and profit sharing stock			3				—				3
Options and restricted stock granted			9				—				9
June 30, 2008		$	4,080			$	19			$	4,099

The following table presents a reconciliation of the carrying amount of total equity, equity attributable to DHI and the equity attributable to the noncontrolling interests at the beginning and the end of the of the six months ended June 30, 2009.

Controlling Interest

Noncontrolling Interests

Total