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Dynegy 10-Q 2010
form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION>
Washington, D.C. 20549
 

 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2010
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to ________
 

 
DYNEGY INC.
DYNEGY HOLDINGS INC.
(Exact name of registrant as specified in its charter)
 
 
Entity
   
Commission
File Number
 
State of
Incorporation
 
I.R.S. Employer
Identification No.
Dynegy Inc.
 
001-33443
 
Delaware
 
20-5653152
Dynegy Holdings Inc.
 
000-29311
 
Delaware
 
94-3248415
                 
1000 Louisiana, Suite 5800
           
Houston, Texas
         
77002
(Address of principal executive offices)
         
(Zip Code)
 
(713) 507-6400
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Dynegy Inc.
Yes x No o
Dynegy Holdings Inc.
Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Dynegy Inc.
Yes x No o
Dynegy Holdings Inc.
Yes o No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
   
Large
accelerated filer
 
Accelerated
filer
 
Non-accelerated filer
 
Smaller reporting
company
           
(Do not check if a smaller
reporting company)
   
                 
Dynegy Inc.
 
x
 
o
 
o
 
o
Dynegy Holdings Inc.
 
o
 
o
 
x
 
o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Dynegy Inc.
Yes o No x
Dynegy Holdings Inc.
Yes o No x
 
Indicate the number of shares outstanding of Dynegy Inc.’s class of common stock, as of the latest practicable date: Common stock, $0.01 par value per share, 120,894,257 shares outstanding as of November 1, 2010.  All of Dynegy Holdings Inc.’s outstanding common stock is owned by Dynegy Inc.
 
This combined Form 10-Q is separately filed by Dynegy Inc. and Dynegy Holdings Inc.  Information contained herein relating to any individual registrant is filed by such registrant on its own behalf.  Each registrant makes no representation as to information relating to a registrant other than itself.
 


 
DYNEGY INC. and DYNEGY HOLDINGS INC.
 

     
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12
     
 
51
 
85
 
86
       
   
     
 
87
 
87
 
90
 
90

EXPLANATORY NOTE
 
This report includes the combined filing of Dynegy Inc. (“Dynegy”) and Dynegy Holdings Inc. (“DHI”).  DHI is the principal subsidiary of Dynegy, providing nearly 100 percent of Dynegy’s total consolidated revenue for the nine-month period ended September 30, 2010 and constituting nearly 100 percent of Dynegy’s total consolidated asset base as of September 30, 2010.  Unless the context indicates otherwise, throughout this report, the terms “the Company,” “we,” “us,” “our” and “ours” are used to refer to both Dynegy and DHI and their direct and indirect subsidiaries.  Discussions or areas of this report that apply only to Dynegy or DHI are clearly noted in such section.
 

DEFINITIONS
 
As used in this Form 10-Q, the abbreviations contained herein have the meanings set forth below.
 
ASU  
Accounting Standard Update
BACT
 
Best available control technology
BART
 
Best available retrofit technology
BTA
 
Best technology available
CAISO
 
The California Independent System Operator
CAA
 
Clean Air Act
CCR
 
Coal combustion residuals
CO2
 
Carbon Dioxide
DHI
 
Dynegy Holdings Inc.
DMSLP
 
Dynegy Midstream Services L.P.
DOJ
 
U.S. Department of Justice
EPA
 
Environmental Protection Agency
FERC
 
Federal Energy Regulatory Commission
FTC
 
Federal Trade Commission
GAAP
 
Generally Accepted Accounting Principles of the United States of America
GEN
 
Our power generation business
GEN-MW
 
Our power generation business - Midwest segment
GEN-NE
 
Our power generation business - Northeast segment
GEN-WE
 
Our power generation business - West segment
GHG
 
Greenhouse Gas
ISO
 
Independent System Operator
MISO
 
Midwest Independent Transmission System Operator, Inc.
MMBtu
 
One million British thermal units
MW
 
Megawatts
MWh
 
Megawatt hour
NPDES
 
National Pollutant Discharge Elimination System
NRG
 
NRG Energy, Inc.
NYSDEC
 
New York State Department of Environmental Conservation
OAL
 
Office of Administrative Law
OTC
 
Over-the-counter
PJM
 
PJM Interconnection, LLC
PPEA
 
Plum Point Energy Associates, LLC
PSD
 
Prevention of significant deterioration
RACT
 
Reasonably available control technology
RCRA
 
Resource Conservation and Recovery Act
RMR
 
Reliability Must Run
SC Services
 
Sandy Creek Services LLC
SCH
 
Sandy Creek Holdings LLC
SEC
 
U.S. Securities and Exchange Commission
SPDES
 
State Pollutant Discharge Elimination System
VaR
 
Value at Risk
VIE
 
Variable Interest Entity
 
 
 
 
DYNEGY INC.
(unaudited) (in millions, except share data)
             
   
September 30,
2010
   
December 31,
2009
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 491     $ 471  
Restricted cash and investments
    119       78  
Short-term investments
    182       9  
Accounts receivable, net of allowance for doubtful accounts of $33 and $22, respectively
    202       212  
Accounts receivable, affiliates
    1       2  
Inventory
    121       141  
Assets from risk-management activities
    1,691       713  
Deferred income taxes
    25       6  
Broker margin account
    36       286  
Prepayments and other current assets
    110       120  
Total Current Assets
    2,978       2,038  
Property, Plant and Equipment
    8,653       9,071  
Accumulated depreciation
    (2,289 )     (1,954 )
Property, Plant and Equipment, Net
    6,364       7,117  
Other Assets
               
Restricted cash and investments
    870       877  
Assets from risk-management activities
    344       163  
Intangible assets
    153       380  
Other long-term assets
    412       378  
Total Assets
  $ 11,121     $ 10,953  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities
               
Accounts payable
  $ 180     $ 181  
Accounts payable, affiliates
    12        
Accrued interest
    110       36  
Accrued liabilities and other current liabilities
    128       127  
Liabilities from risk-management activities
    1,548       696  
Notes payable and current portion of long-term debt
    146       807  
Total Current Liabilities
    2,124       1,847  
Long-term debt
    4,461       4,575  
Long-term debt, affiliates
    200       200  
Long-Term Debt
    4,661       4,775  
Other Liabilities
               
Liabilities from risk-management activities
    347       213  
Deferred income taxes
    757       780  
Other long-term liabilities
    342       359  
Total Liabilities
  $ 8,231     $ 7,974  
Commitments and Contingencies (Note 14)
               
Stockholders’ Equity (Note 17)
               
Common Stock, $0.01 par value, 420,000,000 shares authorized at September 30, 2010 and December 31, 2009, and 121,444,560 and 120,715,515 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively
    1       1  
Additional paid-in capital
    6,064       6,061  
Subscriptions receivable
    (2 )     (2 )
Accumulated other comprehensive loss, net of tax
    (70 )     (150 )
Accumulated deficit
    (3,032 )     (2,937 )
Treasury stock, at cost, 627,655 and 557,677 shares at September 30, 2010 and December 31, 2009, respectively
    (71 )     (71 )
Total Dynegy Inc. Stockholders’ Equity
    2,890       2,902  
Noncontrolling interests
          77  
Total Stockholders’ Equity
    2,890       2,979  
Total Liabilities and Stockholders’ Equity
  $ 11,121     $ 10,953  

See the notes to condensed consolidated financial statements.
 
 
DYNEGY INC.
(unaudited) (in millions, except per share data)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues
  $ 775     $ 673     $ 1,872     $ 2,027  
Cost of sales
    (334 )     (286 )     (873 )     (927 )
Operating and maintenance expense, exclusive of depreciation shown separately below
    (110 )     (121 )     (341 )     (373 )
Depreciation and amortization expense
    (96 )     (83 )     (261 )     (258 )
Goodwill impairments
                      (433 )
Impairment and other charges, exclusive of goodwill impairments shown separately above
    (134 )     (148 )     (135 )     (535 )
General and administrative expenses
    (51 )     (42 )     (110 )     (125 )
                                 
Operating income (loss)
    50       (7 )     152       (624 )
Earnings (losses) from unconsolidated investments
          (8 )     (34 )     13  
Interest expense
    (92 )     (115 )     (272 )     (311 )
Other income and expense, net
    1       2       3       10  
                                 
Loss from continuing operations before income taxes
    (41 )     (128 )     (151 )     (912 )
Income tax benefit (Note 16)
    17       34       80       147  
                                 
Loss from continuing operations
    (24 )     (94 )     (71 )     (765 )
Income (loss) from discontinued operations, net of tax benefit of zero, $84, zero and $91, respectively (Note 3)
          (129 )     1       (141 )
                                 
Net loss
    (24 )     (223 )     (70 )     (906 )
Less: Net loss attributable to the noncontrolling interests
          (11 )           (14 )
                                 
Net loss attributable to Dynegy Inc.
  $ (24 )   $ (212 )   $ (70 )   $ (892 )
                                 
Loss Per Share (Notes 13 and 17):
                               
Basic loss per share attributable to Dynegy Inc. common stockholders:
                               
Loss from continuing operations
  $ (0.20 )   $ (0.49 )   $ (0.59 )   $ (4.47 )
Income (loss) from discontinued operations
          (0.77 )     0.01       (0.84 )
                                 
Basic loss per share attributable to Dynegy Inc. common stockholders
  $ (0.20 )   $ (1.26 )   $ (0.58 )   $ (5.31 )
                                 
Diluted loss per share attributable to Dynegy Inc. common stockholders:
                               
Loss from continuing operations
  $ (0.20 )   $ (0.49 )   $ (0.59 )   $ (4.47 )
Income (loss) from discontinued operations
          (0.77 )     0.01       (0.84 )
                                 
Diluted loss per share attributable to Dynegy Inc. common stockholders
  $ (0.20 )   $ (1.26 )   $ (0.58 )   $ (5.31 )
                                 
Basic shares outstanding
    120       168       120       168  
Diluted shares outstanding
    121       169       121       169  

See the notes to condensed consolidated financial statements.
 
 
DYNEGY INC.
(unaudited) (in millions)
       
   
Nine Months Ended
September 30,
 
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (70 )   $ (906 )
Adjustments to reconcile net loss to net cash flows from operating activities:
               
Depreciation and amortization
    273       279  
Goodwill impairments
          433  
Impairment and other charges, exclusive of goodwill impairments shown separately above
    135       793  
(Earnings) losses from unconsolidated investments, net of cash distributions
    34       (13 )
Risk-management activities
    (123 )     73  
Gain on sale of assets
          (10 )
Deferred income taxes
    (79 )     (246 )
Other
    55       66  
Changes in working capital:
               
Accounts receivable
    11       (4 )
Inventory
    15       (7 )
Broker margin account
    353       (104 )
Prepayments and other assets
    7       (30 )
Accounts payable and accrued liabilities
    111       81  
Changes in non-current assets
    (51 )     (91 )
Changes in non-current liabilities
    (1 )     (10 )
                 
Net cash provided by operating activities
    670       304  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures
    (270 )     (429 )
Unconsolidated investments
    (15 )     1  
Proceeds from asset sales, net
          105  
Maturities of short-term investments
    152       14  
Purchases of short-term investments
    (428 )      
Increase in restricted cash and restricted investments
    (53 )     (35 )
Other investing
          3  
                 
Net cash used in investing activities
    (614 )     (341 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from long-term borrowings, net of financing costs
    (5 )     75  
Repayments of borrowings
    (31 )     (28 )
                 
Net cash used in financing activities
    (36 )     47  
                 
Net increase in cash and cash equivalents
    20       10  
Cash and cash equivalents, beginning of period
    471       693  
                 
Cash and cash equivalents, end of period
  $ 491     $ 703  
                 
Other non-cash investing activity:
               
Non-cash capital expenditures
  $ 10     $ 19  

See the notes to condensed consolidated financial statements.
 

DYNEGY INC.
(unaudited) (in millions)

   
Three Months Ended
September 30,
 
   
2010
   
2009
 
             
Net loss
  $ (24 )   $ (223 )
Cash flow hedging activities, net:
               
Unrealized mark-to-market gains arising during period, net
          45  
Reclassification of mark-to-market losses to earnings, net
          1  
Deferred losses on cash flow hedges, net
          (2 )
                 
Changes in cash flow hedging activities, net (net of tax expense of zero and $11, respectively)
          44  
Amortization of unrecognized prior service cost and actuarial gain (loss) (net of tax benefit of zero and $2)
    1       (1 )
Unconsolidated investments other comprehensive loss, net (net of tax benefit of zero and $3)
          (3 )
                 
Other comprehensive income, net of tax
    1       40  
                 
Comprehensive loss
    (23 )     (183 )
Less: Comprehensive income attributable to the noncontrolling interests
          25  
Comprehensive loss attributable to Dynegy Inc.
  $ (23 )   $ (208 )
 
   
Nine Months Ended
September 30,
 
   
2010
   
2009
 
             
Net loss
  $ (70 )   $ (906 )
Cash flow hedging activities, net:
               
Unrealized mark-to-market gains arising during period, net
          160  
Reclassification of mark-to-market losses to earnings, net
          1  
Deferred losses on cash flow hedges, net
          (8 )
                 
Changes in cash flow hedging activities, net (net of tax benefit (expense) of $1 and ($26), respectively)
          153  
Amortization of unrecognized prior service cost and actuarial gain (net of tax expense of $1 and $3)
    3       1  
Unconsolidated investments other comprehensive income, net (net of tax expense of $1 and $2)
          3  
                 
Other comprehensive income, net of tax
    3       157  
                 
Comprehensive loss
    (67 )     (749 )
Less: Comprehensive income attributable to the noncontrolling interests
          107  
Comprehensive loss attributable to Dynegy Inc.
  $ (67 )   $ (856 )

See the notes to condensed consolidated financial statements.
 

DYNEGY HOLDINGS INC.
(unaudited) (in millions)
             
   
September 30,
2010
   
December 31,
2009
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 457     $ 419  
Restricted cash and investments
    119       78  
Short-term investments
    163       8  
Accounts receivable, net of allowance for doubtful accounts of $14 and $20, respectively
    201       214  
Accounts receivable, affiliates
    1       2  
Inventory
    121       141  
Assets from risk-management activities
    1,691       713  
Deferred income taxes
    23       7  
Broker margin account
    36       286  
Prepayments and other current assets
    110       120  
Total Current Assets
    2,922       1,988  
Property, Plant and Equipment
    8,653       9,071  
Accumulated depreciation
    (2,289 )     (1,954 )
Property, Plant and Equipment, Net
    6,364       7,117  
Other Assets
               
Restricted cash and investments
    870       877  
Assets from risk-management activities
    344       163  
Intangible assets
    153       380  
Other long-term assets
    412       378  
Total Assets
  $ 11,065     $ 10,903  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities
               
Accounts payable
  $ 180     $ 181  
Accounts payable, affiliates
    12        
Accrued interest
    110       36  
Accrued liabilities and other current liabilities
    124       128  
Liabilities from risk-management activities
    1,548       696  
Notes payable and current portion of long-term debt
    146       807  
Total Current Liabilities
    2,120       1,848  
Long-term debt
    4,461       4,575  
Long-term debt, affiliates
    200       200  
Long-Term Debt
    4,661       4,775  
Other Liabilities
               
Liabilities from risk-management activities
    347       213  
Deferred income taxes
    686       704  
Other long-term liabilities
    342       360  
Total Liabilities
    8,156       7,900  
Commitments and Contingencies (Note 14)
               
Stockholders’ Equity
               
Capital Stock, $1 par value, 1,000 shares authorized at September 30, 2010 and December 31, 2009
           
Additional paid-in capital
    5,135       5,135  
Affiliate receivable
    (774 )     (777 )
Accumulated other comprehensive loss, net of tax
    (70 )     (150 )
Accumulated deficit
    (1,382 )     (1,282 )
Total Dynegy Holdings Inc. Stockholder’s Equity
    2,909       2,926  
Noncontrolling interests
          77  
Total Stockholders’ Equity
    2,909       3,003  
Total Liabilities and Stockholders’ Equity
  $ 11,065     $ 10,903  

See the notes to condensed consolidated financial statements.
 

DYNEGY HOLDINGS INC.
(unaudited) (in millions)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues
  $ 775     $ 673     $ 1,872     $ 2,027  
Cost of sales
    (334 )     (286 )     (873 )     (927 )
Operating and maintenance expense, exclusive of depreciation shown separately below
    (110 )     (121 )     (341 )     (375 )
Depreciation and amortization expense
    (96 )     (83 )     (261 )     (258 )
Goodwill impairments
                      (433 )
Impairment and other charges, exclusive of goodwill impairments shown separately above
    (134 )     (148 )     (135 )     (535 )
General and administrative expenses
    (47 )     (42 )     (106 )     (125 )
                                 
Operating income (loss)
    54       (7 )     156       (626 )
Earnings (losses) from unconsolidated investments
          (8 )     (34 )     12  
Interest expense
    (92 )     (115 )     (272 )     (311 )
Other income and expense, net
    1       2       3       9  
                                 
Loss from continuing operations before income taxes
    (37 )     (128 )     (147 )     (916 )
Income tax benefit (Note 16)
    15       35       71       152  
                                 
Loss from continuing operations
    (22 )     (93 )     (76 )     (764 )
Income (loss) from discontinued operations, net of tax benefit of zero, $74, zero and $91, respectively (Note 3)
          (139 )     1       (141 )
                                 
Net loss
    (22 )     (232 )     (75 )     (905 )
Less: Net loss attributable to the noncontrolling interests
          (11 )           (14 )
                                 
Net loss attributable to Dynegy Holdings Inc.
  $ (22 )   $ (221 )   $ (75 )   $ (891 )
 
See the notes to condensed consolidated financial statements.
 

DYNEGY HOLDINGS INC.
(unaudited) (in millions)
       
   
Nine Months Ended
September 30,
 
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (75 )   $ (905 )
Adjustments to reconcile net loss to net cash flows from operating activities:
               
Depreciation and amortization
    273       279  
Goodwill impairments
          433  
Impairment and other charges, exclusive of goodwill impairments shown separately above
    135       793  
(Earnings) losses from unconsolidated investments, net of cash distributions
    34       (12 )
Risk-management activities
    (123 )     73  
Gain on sale of assets, net
          (10 )
Deferred income taxes
    (69 )     (248 )
Other
    51       64  
Changes in working capital:
               
Accounts receivable
    14       (4 )
Inventory
    15       (7 )
Broker margin account
    353       (104 )
Prepayments and other assets
    7       (30 )
Accounts payable and accrued liabilities
    108       100  
Changes in non-current assets
    (51 )     (91 )
Changes in non-current liabilities
    (2 )     (9 )
                 
Net cash provided by operating activities
    670       322  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures
    (270 )     (429 )
Unconsolidated investments
    (15 )      
Proceeds from asset sales, net
          105  
Maturities of short-term investments
    149       13  
Purchases of short-term investments
    (406 )      
Increase in restricted cash and restricted investments
    (53 )     (35 )
Affiliate transactions
    (1 )     (2 )
Other investing
          3  
                 
Net cash used in investing activities
    (596 )     (345 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from long-term borrowings, net of financing costs
    (5 )     75  
Repayments of borrowings
    (31 )     (28 )
Dividend to affiliate
          (175 )
                 
Net cash used in financing activities
    (36 )     (128 )
                 
Net increase (decrease) in cash and cash equivalents
    38       (151 )
Cash and cash equivalents, beginning of period
    419       670  
                 
Cash and cash equivalents, end of period
  $ 457     $ 519  
                 
Other non-cash investing activity:
               
Non-cash capital expenditures
  $ 10     $ 19  

See the notes to condensed consolidated financial statements.
 

DYNEGY HOLDINGS INC.
(unaudited) (in millions)

   
Three Months Ended
September 30,
 
   
2010
   
2009
 
             
Net loss
  $ (22 )   $ (232 )
Cash flow hedging activities, net:
               
Unrealized mark-to-market gains arising during period, net
          45  
Reclassification of mark-to-market losses to earnings, net
          1  
Deferred losses on cash flow hedges, net
          (2 )
                 
Changes in cash flow hedging activities, net (net of tax expense of zero and $11, respectively)
          44  
Amortization of unrecognized prior service cost and actuarial gain (loss) (net of tax expense of zero and $2)
    1       (1 )
Unconsolidated investments other comprehensive loss, net (net of tax benefit of zero and $3)
          (3 )
                 
Other comprehensive income, net of tax
    1       40  
                 
Comprehensive loss
    (21 )     (192 )
Less: Comprehensive income attributable to the noncontrolling interests
          25  
Comprehensive loss attributable to Dynegy Holdings Inc.
  $ (21 )   $ (217 )
 
   
Nine Months Ended
September 30,
 
   
2010
   
2009
 
             
Net loss
  $ (75 )   $ (905 )
Cash flow hedging activities, net:
               
Unrealized mark-to-market gains arising during period, net
          160  
Reclassification of mark-to-market losses to earnings, net
          1  
Deferred losses on cash flow hedges, net
          (8 )
                 
Changes in cash flow hedging activities, net (net of tax benefit (expense) of $1 and ($26), respectively)
          153  
Amortization of unrecognized prior service cost and actuarial gain (net of tax expense of $2 and $3)
    2       1  
Unconsolidated investments other comprehensive income, net (net of tax expense of $1 and $2)
          3  
                 
Other comprehensive income, net of tax
    2       157  
                 
Comprehensive loss
    (73 )     (748 )
Less: Comprehensive income attributable to the noncontrolling interests
          107  
                 
Comprehensive loss attributable to Dynegy Holdings Inc.
  $ (73 )   $ (855 )

See the notes to condensed consolidated financial statements.
 
 
DYNEGY INC. and DYNEGY HOLDINGS INC.
Note 1—Accounting Policies
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to interim financial reporting as prescribed by the SEC.  These interim financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America.  These interim financial statements should be read together with the consolidated financial statements and notes thereto included in Dynegy’s and DHI’s Form 10-K for the year ended December 31, 2009 filed on February 25, 2010, which we refer to as each registrant’s “Form 10-K”.
 
The December 31, 2009 condensed consolidated balance sheet data was derived from audited consolidated financial statements, as adjusted for the 1-for-5 reverse stock split of Dynegy’s common stock that became effective on May 25, 2010.  Please read Note 17—Capital Stock for further discussion.
 
The unaudited condensed consolidated financial statements contained in this report include all material adjustments of a normal and recurring nature that, in the opinion of management, are necessary for a fair statement of the results for the interim periods.  The results of operations for the interim periods presented in this Form 10-Q are not necessarily indicative of the results to be expected for the full year or any other interim period due to seasonal fluctuations in demand for our energy products and services, changes in commodity prices, timing of maintenance and other expenditures and other factors.  The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make informed estimates and judgments that affect our reported financial position and results of operations.  These estimates and judgments also impact the nature and extent of disclosure, if any, of our contingent liabilities based on currently available information.  We review significant estimates and judgments affecting our consolidated financial statements on a recurring basis and record the effect of any necessary adjustments.  Uncertainties with respect to such estimates and judgments are inherent in the preparation of financial statements.  Estimates and judgments are used in, among other things, (i) developing fair value assumptions, including estimates of future cash flows and discount rates, (ii) analyzing tangible and intangible assets for possible impairment, (iii) estimating the useful lives of our assets, (iv) assessing future tax exposure and the realization of tax assets, (v) determining amounts to accrue for contingencies, guarantees and indemnifications, (vi) estimating various factors used to value our pension assets and liabilities and (vii) determining the primary beneficiary of certain VIEs from a set of related parties.  Actual results could differ materially from any such estimates.  Certain reclassifications have been made to prior period amounts in order to conform to current year presentation.
 
Short-Term Investments.>  Short-term investments consist of highly liquid investments, primarily U.S. Treasury, U.S. Agency and corporate debt securities, with original maturities over three months from the date of purchase.  Our investment policy restricts investments to high credit quality investments with limits on the length to maturity and the amount invested with any one issuer.  Debt securities which we have the ability and positive intent to hold to maturity are carried at amortized cost, net of unamortized premiums and unaccreted discounts, which approximates fair value.  At September 30, 2010, we did not hold any short-term investments that were classified as held-to-maturity.
 
Debt securities not held-to-maturity are classified as available for sale and are recorded at fair value.  Unrealized gains and losses, after applicable taxes, resulting from changes in fair value are recorded as a component of Other comprehensive loss.
 
Declines in the value of individual equity securities that are considered other than temporary result in write-downs to the individual securities to their fair value and the write-downs are included in the condensed consolidated statements of operations.  Declines in debt securities held-to-maturity and available for sale, that are considered other than temporary, result in write-downs when it is more likely than not that we will sell the securities before we recover our cost.  If we do not intend to sell an impaired debt security but do not expect to recover its cost, we determine whether a credit loss exists, and if so, the credit loss is recognized in the condensed consolidated statements of operations and any remaining impairment is recognized in Other comprehensive loss. The review for other-than-temporary declines considers the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and our intent and ability to retain the investment for a period of time sufficient to allow for recovery.
 
 
DYNEGY INC. and DYNEGY HOLDINGS INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
(Unaudited)
 
For the Interim Periods Ended September 30, 2010 and 2009
 
We consider all available for sale securities, including those with maturity dates beyond twelve months, as available to support current operational liquidity needs and therefore classify these securities as short-term investments within current assets on the consolidated balance sheets.  As of September 30, 2010, Dynegy and DHI held $286 million and $267 million, respectively, of available for sale securities with maturity dates within one year.  Of these amounts, $104 million is included in the Broker margin account on our unaudited condensed consolidated balance sheets.
 
Interest on securities, including the amortization of premiums and the accretion of discounts, is reported in Other income and expense, net using the interest method over the lives of the securities, adjusted for actual prepayments.  Gains and losses on the sale of securities are recorded on the trade date and recognized using the specific identification method and reported in Other income and expense, net.
 
Change in Accounting Estimate.>  In accordance with our policy, we review fixed assets for known facts that potentially would impact their estimated useful lives.  Based on events occurring in September 2010, we determined that it is not currently economical to continue to operate our Vermilion facility for the remainder of its estimated useful life.  As a result, effective September 1, 2010, we changed our estimate of the useful life of this facility to better reflect the estimated periods during which we expect the asset will remain in service.  The facility’s previously estimated remaining useful life of 15 years was decreased to 8 months.  The effect of this change in estimate was to increase depreciation expense by approximately $13 million ($8 million net of tax), or $0.07 per share (basic and diluted), for the three and nine months ended September 30, 2010.
 
Accounting Principle Adopted
 
Variable Interest Entities.>  On January 1, 2010, we adopted Accounting Standards Update (“ASU”) No. 2009-17—Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU No. 2009-17”).  This guidance replaces the previous quantitative-based analysis for determining the primary beneficiary of a variable interest entity with a framework that is based on qualitative judgments.  The new guidance identifies the primary beneficiary of a variable interest entity as the party that both: (i) has the power to direct the activities of a variable interest entity that most significantly impact its economic performance and (ii) has an obligation to absorb losses or a right to receive benefits that could potentially be significant to the variable interest entity.  As a result of applying this guidance, we have determined that we are not the primary beneficiary of PPEA Holding Company, LLC (“PPEA Holding”) because we lack the power to direct the activities that most significantly impact PPEA Holding’s economic performance.  The activities that most significantly impact PPEA Holding’s economic performance are changes to the costs to construct and operate the facility, modifications to the off-take agreements, and/or changes in the financing structure.  As PPEA Holding’s LLC Agreement currently requires that those activities be approved by all members, the power to direct these activities is shared with the other owners of PPEA Holding and the participants in the 665 MW coal-fired power generation facility (the “Plum Point Project”).  We have historically consolidated PPEA Holding in our consolidated financial statements.  On September 14, 2010, we entered into an agreement to sell our interest in PPEA Holding.  Please read Note 10—Variable Interest Entities—PPEA Holding Company LLC for further discussion.
 
 
DYNEGY INC. and DYNEGY HOLDINGS INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
(Unaudited)
 
For the Interim Periods Ended September 30, 2010 and 2009
 
The adoption of ASU No. 2009-17 resulted in a deconsolidation of our investment in PPEA Holding, which resulted in the cumulative effect of a change in accounting principle of approximately $41 million ($25 million after tax), which was recorded as an increase in Accumulated deficit on our unaudited condensed consolidated balance sheets as of January 1, 2010.  This pre-tax charge reflects the difference in the assets, liabilities and equity (including Other comprehensive loss) that we have historically included in our consolidated balance sheets and the carrying value of the equity investment and related accumulated other comprehensive loss that we would have recorded had we accounted for our investment in PPEA Holding as an equity method investment since April 2, 2007, the date we acquired an interest in PPEA Holding.  On January 1, 2010, we recorded an equity investment of approximately $19 million and accumulated other comprehensive loss of approximately $29 million ($17 million after tax).  The $19 million equity investment balance at January 1, 2010 reflects the fair value of our investment at that date, after an other than temporary pre-tax impairment charge of approximately $32 million that would have been recorded in 2009 had we accounted for our investment in PPEA Holding as an equity investment at that time.  Our assessment of the fair value of our investment in PPEA Holding at January 1, 2010 reflects the risk associated with PPEA Holding’s financing arrangement at that date.  Please read Note 7— Fair Value Measurements for further discussion about the assumptions used to determine the fair value of our investment as of January 1, 2010.  Please read Note 17—Debt—Plum Point (including PPEA Credit Agreement Facility and PPEA Tax Exempt Bonds) and Note 14—Variable Interest Entities—PPEA Holding Company, LLC in our Form 10-K for further discussion.  Summarized aggregate financial information for PPEA Holding, included in our December 31, 2009 consolidated balance sheets, is included below (in millions):

Current assets
  $ 6  
Property, plant and equipment, net
    611  
Intangible asset
    190  
Other non-current asset
    20  
Total assets
    827  
Current portion of long-term debt
    744  
Current liabilities
    74  
Noncontrolling interest
    77  
Accumulated other comprehensive loss
    (157 )
 
The adoption of ASU No. 2009-17 had no impact on our investment in the Hydroelectric Generation Facilities, which we sold in the third quarter of 2010.  Please read Note 10—Variable Interest Entities—Hydroelectric Generation Facilities for further discussion.
 
Disclosures about Fair Value Measurements.>  On January 1, 2010, we adopted ASU No. 2010-06—Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.  Please read Note 7—Fair Value Measurements for further discussion.
 
Note 2—Proposed Blackstone Merger and NRG Sale
 
On August 13, 2010, Dynegy entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Denali Parent Inc., a Delaware corporation (“Parent”), and Denali Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into Dynegy (the “Blackstone Merger”).  Both Parent and Merger Sub are affiliates of The Blackstone Group L.P. (“Blackstone”).  In the Blackstone Merger, each outstanding share of Dynegy common stock (except for shares owned by Parent, Merger Sub, Dynegy and their respective wholly owned subsidiaries and not held on behalf of third parties, and shares owned by stockholders who have properly demanded appraisal rights under applicable law) will be converted into the right to receive $4.50 in cash, without interest, less any applicable withholding taxes.  Dynegy will be the surviving corporation in the Blackstone Merger and will continue to do business following the Blackstone Merger.  As a result of the Blackstone Merger, Dynegy will cease to be a publicly traded company.
 
Concurrently with the execution of the Merger Agreement, Merger Sub entered into a Purchase and Sale Agreement (the “NRG PSA”) with NRG Energy, Inc., a Delaware corporation (“NRG”), pursuant to which NRG will, simultaneously with the closing of the Blackstone Merger, acquire the Casco Bay, Moss Landing, Morro Bay and Oakland power generation facilities and related assets currently owned by us for cash consideration of approximately $1.36 billion (the “NRG Sale”).  The completion of the Blackstone Merger between Dynegy and Merger Sub is contingent upon the concurrent closing of the NRG Sale.  The NRG Sale will not occur if the Blackstone Merger is not consummated.
 
 
DYNEGY INC. and DYNEGY HOLDINGS INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
(Unaudited)
 
For the Interim Periods Ended September 30, 2010 and 2009
 
The respective obligations of Dynegy, Parent and Merger Sub to consummate the Blackstone Merger are subject to the satisfaction or waiver of certain customary conditions, including the adoption of the Merger Agreement by Dynegy’s stockholders, receipt of required regulatory approvals, the absence of any legal prohibitions, the accuracy of the representations and warranties of the parties and compliance by the parties with their respective obligations under the Merger Agreement.  Parent’s and Merger Sub’s obligations to consummate the Blackstone Merger are also subject to the satisfaction or waiver of the conditions to the obligations of NRG and Merger Sub to effect the NRG Sale under the NRG PSA (other than those conditions that by their nature are to be satisfied at the closing of the NRG Sale, and the condition relating to the consummation of the Blackstone Merger) and to NRG being ready, willing and able to complete the NRG Sale.
 
Under the Merger Agreement, between the date thereof and the effective time of the Blackstone Merger, Dynegy has agreed, subject to certain exceptions in the Merger Agreement and the disclosure schedules Dynegy delivered in connection with the Merger Agreement, to conduct the businesses of Dynegy and its subsidiaries, in the ordinary course and has also agreed to certain customary negative covenants, including but not limited to limitations on our ability to incur indebtedness, issue letters of credit, issue equity interests, make acquisitions or dispositions and sell or purchase derivative products or commodities.
 
    Under specified circumstances, Dynegy, Parent or Merger Sub may have the right to terminate the Merger Agreement, or NRG or Merger Sub may have the right to terminate the NRG PSA.  In the event of a termination of the Merger Agreement and under specified circumstances, Dynegy may be required to pay to Parent a fee of up to $50 million in the aggregate (including any expenses of Parent, Merger Sub and their respective affiliates previously reimbursed by Dynegy) with respect to the termination of the Merger Agreement, or Dynegy may be required to reimburse Parent, Merger Sub and their affiliates for documented out-of-pocket expense up to $10 million, as applicable.  Under other specified circumstances, Parent may be obligated to pay Dynegy a $100 million fee less the sum of certain expense reimbursement and indemnification amounts paid by Parent in connection with certain financial and third party investment activities and/or 50 percent of certain negotiated amounts Merger Sub or any of its affiliates receive from NRG in connection with a termination of the NRG PSA or a failure of the NRG Sale to be consummated.
 
NRG is an intended third party beneficiary of the Merger Agreement.  NRG has the right to enforce the rights and obligations of Parent, Merger Sub and Dynegy to the extent such rights and obligations directly relate to the assets it is acquiring, and the liabilities it is assuming, in the NRG Sale.  No party to the Merger Agreement may amend or waive any condition thereunder if such waiver or amendment would be adverse to NRG as a third party beneficiary in any material respect without NRG’s consent.
 
Dynegy is an intended third party beneficiary of the NRG PSA.  Dynegy has the right of enforcement in respect of Merger Sub’s and NRG’s obligations under the NRG PSA.  No party to the NRG PSA may amend, supplement or otherwise modify the NRG PSA in a manner adverse to Dynegy as a third party beneficiary in any material respect without Dynegy’s consent.
 
The DOJ and the FTC granted early termination of the waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, applicable to the Blackstone Merger and NRG Sale on September 7, 2010 and September 8, 2010, respectively. Further, on October 29, 2010, FERC approved the joint applications related to the Blackstone Merger and NRG Sale.  Assuming receipt of the remaining required regulatory approvals and timely satisfaction of other closing conditions, including the approval by Dynegy stockholders of the proposal to adopt the Merger Agreement for which a special meeting of stockholders is scheduled for November 17, 2010, we anticipate that the Blackstone Merger will be completed by the end of November 2010.  We cannot assure you that the conditions to the Blackstone Merger will be satisfied or that the Blackstone Merger will be consummated on the terms agreed, if at all.
 
At the signing of the Merger Agreement and NRG PSA, on August 13, 2010 there was an expectation that it is more likely than not the facilities subject to the NRG PSA will be disposed of before the end of their previously estimated useful lives, requiring us to perform an impairment analysis.  Based on the terms of the NRG PSA and the recent impairment analysis of the impact of such agreement on the recoverability of the carrying value of our long-lived assets, we recorded a pre-tax impairment charge of $134 million during the third quarter 2010 to reduce the carrying value of our Casco Bay facility and related assets to its fair value.  After giving effect to this impairment charge, the carrying value of the net assets to be sold will exceed the expected sales price by approximately $180 million.  However, if the Merger Agreement is completed, the carrying value of the assets to be sold to NRG will be adjusted to reflect their fair value in purchase accounting for the Merger Agreement, and we would not record additional losses or impairment charges related to the NRG Sale.  Actual losses and impairment charges recorded could differ materially from these estimates based on various factors, including failure to satisfy closing conditions, changes to working capital adjustments and additional costs incurred in connection with the NRG Sale.  Please read Note 8—Impairment Charges for further discussion of these impairments.
 
 
DYNEGY INC. and DYNEGY HOLDINGS INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
(Unaudited)
 
For the Interim Periods Ended September 30, 2010 and 2009
 
Upon closing of the Blackstone Merger, the change in ownership of Dynegy’s stock may impact our ability to fully utilize our federal net operating loss carry forwards (“NOLs”) and our alternative minimum tax credits (“AMT”) under Sections 382 and 383 of the Internal Revenue Code.  As a result, if the proposed Blackstone Merger closes, we may be required to record a valuation allowance with respect to certain of our deferred tax assets.  At September 30, 2010, our net operating loss deferred tax asset attributable to our previously incurred federal NOLs was approximately $98 million and $77 million, for Dynegy and DHI, respectively.
 
Note 3—Dispositions and Discontinued Operations
 
Dispositions
 
LS Power Transactions.>  We consummated our transactions (the “LS Power Transactions”) with LS Power Partners, L.P. and certain of its affiliates (“LS Power”) in two parts, with the issuance of $235 million of notes by DHI on December 1, 2009, and the remainder of the transactions closing on November 30, 2009.  Please read Note 4—Dispositions, Contract Terminations and Discontinued Operations—Dispositions and Contract Terminations in our Form 10-K for further discussion of these transactions.
 
Discontinued Operations
 
 
The Arizona power generation facilities, as well as our Bluegrass facility, met the criteria of held for sale during the third quarter 2009.  At that time, we discontinued depreciation and amortization of the Arizona power generation facilities’ and Bluegrass’ property, plant and equipment.  Depreciation and amortization expense related to the Arizona power generation facilities totaled approximately $4 million and $14 million in the three- and nine-month periods ended September 30, 2009, respectively.  Depreciation and amortization expense related to Bluegrass totaled approximately zero and $1 million in the three- and nine-month periods ended September 30, 2009, respectively.  We recorded an impairment charge of $235 million related to the Arizona power generation facilities during the third quarter 2009.  We previously recorded impairment charges of $5 million and $18 million related to the Bluegrass facility during the first and second quarters of 2009, respectively.  We are reporting the results of operations for the Arizona power generation facilities and the Bluegrass power generation facility in discontinued operations for all periods presented.
 
 
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 zero and $1 million in the three- and nine-month periods ended September 30, 2009, respectively.  We are reporting the results of Heard County’s operations in discontinued operations for all periods presented.
 

DYNEGY INC. and DYNEGY HOLDINGS INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
(Unaudited)
 
For the Interim Periods Ended September 30, 2010 and 2009
 
Summary.>  The following table summarizes information related to Dynegy’s discontinued operations:

   
GEN-MW
   
GEN-WE
   
Total
 
   
(in millions)
 
Three Months Ended September 30, 2009
                 
Revenues
  $ 1     $ 54     $ 55  
Loss from operations before taxes (2)
          (213 )     (213 )
Loss from operations after taxes
          (129 )     (129 )
                         
Nine Months Ended September 30, 2010
                       
Revenues
  $     $     $  
Income from operations before taxes
          1       1  
Income from operations after taxes
          1       1  
                         
Nine Months Ended September 30, 2009
                       
Revenues
  $ 4     $ 96     $ 100  
Loss from operations before taxes (1) (2)
    (23 )     (219 )     (242 )
Loss from operations after taxes
    (14 )     (133 )     (147 )
Gain on sale before taxes
          10       10  
Gain on sale after taxes
          6       6  
 

 
(1)
Includes $23 million of impairment charges related to our Bluegrass power generation facility.
 
(2)
Includes $235 million of impairment charges related to our Arizona power generation facilities.
 
Summary.>  The following table summarizes information related to DHI’s discontinued operations:

   
GEN-MW
   
GEN-WE
   
Total
 
   
(in millions)
 
Three Months Ended September 30, 2009
                 
Revenues
  $ 1     $ 54     $ 55  
Income (loss) from operations before taxes (2)
          (213 )     (213 )
Income (loss) from operations after taxes
          (139 )     (139 )
                         
Nine Months Ended September 30, 2010
                       
Revenues
  $     $     $  
Income from operations before taxes
          1       1  
Income from operations after taxes
          1       1  
                         
Nine Months Ended September 30, 2009
                       
Revenues
  $ 4     $ 96     $ 100  
Loss from operations before taxes (1) (2)
    (23 )     (219 )     (242 )
Loss from operations after taxes
    (14 )     (139 )     (153 )
Gain on sale before taxes
          10       10  
Gain on sale after taxes
          12       12  


 
(1)
Includes $23 million of impairment charges related to our Bluegrass power generation facility.
 
(2)