Annual Reports

 
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8-K

  • 8-K (Aug 6, 2014)
  • 8-K (Jun 2, 2014)
  • 8-K (May 28, 2014)
  • 8-K (May 7, 2014)
  • 8-K (Apr 11, 2014)
  • 8-K (Feb 27, 2014)

 
Other

Dynegy 8-K 2009

Documents found in this filing:

  1. 8-K
  2. Ex-23.1
  3. Ex-23.2
  4. Ex-23.3
  5. Ex-23.4
  6. Ex-23.4
k8form.htm


 



 

 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 8-K
 
 
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
Date of Report (Date of earliest event reported)
September 28, 2009
 
 
 
DYNEGY HOLDINGS INC.
(Exact name of registrant as specified in its charter)
 
 
 
         
Delaware
Delaware
 
001-33443
000-29311
 
20-5653152
94-3248415
(State or Other Jurisdiction
of Incorporation)
 
(Commission File Number)
 
(I.R.S. Employer
Identification No.)
 
     
1000 Louisiana, Suite 5800, Houston, Texas
 
77002
(Address of principal executive offices)
 
(Zip Code)
 
(713) 507-6400
(Registrant’s telephone number, including area code)
 
N.A.
(Former name or former address, if changed since last report)
 
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 
 
 
 
 
 


 
 
 
 




On April 30, 2009, Dynegy Inc. (“Dynegy”) and Dynegy Holdings Inc. (“DHI”), collectively “we”, “us” or “our”, completed the sale of our interest in the Heard County power generation facility for approximately $105 million.  We reported our operations with respect to the Heard County facility as a discontinued operation in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2009 and June 30, 2009.

On January 1, 2009, we adopted SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“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.  SFAS No. 160 also requires retrospective application of all disclosure requirements.  We have reported the Plum Point Project’s third-party ownership interests as noncontrolling interests within our financial statements in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2009 and June 30, 2009.

This Current Report on Form 8-K was prepared to provide updated financial information that (i) presents the Heard County facility as a discontinued operation and (ii) presents noncontrolling interests pursuant to SFAS No. 160 for all periods presented, as applicable in our Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009.  It should be noted that Dynegy’s net income (loss) attributable to Dynegy Inc., or DHI’s net income (loss) attributable to Dynegy Holdings Inc., was not impacted by the reclassification of our operations with respect to the Heard County facility to discontinued operations.  Furthermore, our adoption of SFAS No. 160 did not impact the Dynegy Inc.'s net income (loss) attributable to Dynegy Inc. common stockholders.

This report includes the combined filing of Dynegy and DHI.  Unless the context indicates otherwise, throughout this report on Form 8-K, 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 discussions or areas.

Please note that we have not otherwise updated our financial information or business discussion for activities or events occurring after the date this information was presented in our 2008 Form 10-K, except for discloure of certain significant subsequent events in Note 25—Subsequent Events.  You should read our Quarterly Reports on Form 10-Q for the periods ended March 31, 2009 and June 30, 2009, respectively, and our Current Reports on Form 8-K and any amendments thereto filed since our 2008 Form 10-K, for updated information.

This filing includes updated information for the following items included in our 2008 Form 10-K:

Item 6.    Selected Financial Data
 
Item 7.    Management’s Discussion and Analysis

Item 8.    Financial Statements and Supplementary Data

Unaffected items of our 2008 Form 10-K have not been repeated in this Form 8-K.

Cross references that are included in the above items and that refer to information included on page numbers that are preceded by an “F” refer to the corresponding page included in this filing.  Other cross references are to pages in our 2008 Form 10-K.


 
 

 
 

 
Item 6.  Selected Financial Data

The selected financial information presented below was derived from, and is qualified by reference to, our Consolidated Financial Statements, including the notes thereto, contained elsewhere herein.  The selected financial information should be read in conjunction with the Consolidated Financial Statements and related notes and Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Dynegy’s Selected Financial Data

 
Year Ended December 31,
 
 
2008
   
2007
   
2006
   
2005
   
2004
 
 
(in millions, except per share data)
 
Statement of Operations Data (1):
                           
Revenues
$ 3,543     $ 3,092     $ 1,761     $ 2,010     $ 2,250  
Depreciation and amortization expense
  (367 )     (320 )     (212 )     (204 )     (216 )
Impairment and other charges
              (119 )     (46 )     (78 )
General and administrative expenses
  (157 )     (203 )     (196 )     (468 )     (330 )
Operating income (loss)
  756       605       105       (832 )     (59 )
Interest expense and debt conversion expense
  (427 )     (384 )     (631 )     (389 )     (453 )
Income tax (expense) benefit
  (95 )     (151 )     152       393       155  
Income (loss) from continuing operations
  195       123       (321 )     (800 )     (153 )
Income (loss) from discontinued operations (3)
  (24 )     148       (13 )     895       141  
Cumulative effect of change in accounting principles
              1       (5 )      
Net income (loss)
$ 171     $ 271     $ (333 )   $ 90     $ (12 )
Net income (loss) attributable to Dynegy Inc. common stockholders
  174       264       (342 )     68       (37 )
Basic earnings (loss) per share from continuing operations attributable to Dynegy Inc. common stockholders
$ 0.24     $ 0.15     $ (0.72 )   $ (2.12 )   $ (0.47 )
Basic net income (loss) per share attributable to Dynegy Inc. common stockholders
  0.20       0.35       (0.75 )     0.18       (0.10 )
Diluted earnings (loss) per share from continuing operations attributable to Dynegy Inc. common stockholders
$ 0.24     $ 0.15     $ (0.72 )   $ (2.12 )   $ (0.47 )
Diluted net income (loss) per share attributable to Dynegy Inc. common stockholders
  0.20       0.35       (0.75 )     0.18       (0.10 )
Shares outstanding for basic EPS calculation
  840       752       459       387       378  
Shares outstanding for diluted EPS calculation
  842       754       509       513       504  
Cash dividends per common share
$     $     $     $     $  
Cash Flow Data:
                                     
Net cash provided by (used in) operating activities
$ 319     $ 341     $ (194 )   $ (30 )   $ 5  
Net cash provided by (used in) investing activities
  (102 )     (817 )     358       1,824       262  
Net cash provided by (used in) financing activities
  148       433       (1,342 )     (873 )     (115 )
Cash dividends or distributions to partners, net
              (17 )     (22 )     (22 )
Capital expenditures, acquisitions and investments
  (640 )     (504 )     (163 )     (315 )     (314 )

 
1

 


 
December 31,
 
 
2008
   
2007
   
2006
   
2005
   
2004
 
 
(in millions)
 
Balance Sheet Data (2):
                           
Current assets
$ 2,803     $ 1,663     $ 1,989     $ 3,706     $ 2,728  
Current liabilities
  1,702       999       1,166       2,116       1,802  
Property and equipment, net
  8,934       9,017       4,951       5,323       6,130  
Total assets
  14,213       13,221       7,537       10,126       9,843  
Long-term debt (excluding current portion)
  6,072       5,939       3,190       4,228       4,332  
Notes payable and current portion of long-term debt
  64       51       68       71       34  
Series C convertible preferred stock
                    400       400  
Capital leases not already included in long-term debt
  4       5       6              
Total equity
  4,485       4,529       2,267       2,140       2,062  

(1)
The Merger (April 2, 2007) and the Sithe Energies acquisition (February 1, 2005) were each accounted for in accordance with the purchase method of accounting and the results of operations attributable to the acquired businesses are included in our financial statements and operating statistics beginning on the acquisitions’ effective date for accounting purposes.
(2)
The Merger and the Sithe Energies acquisition were each accounted for under the purchase method of accounting.  Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the effective dates of each transaction.  Please read note (1) above for respective effective dates.
(3)
Discontinued operations include the results of operations from the following businesses:
 
·  
Heard County power generating facility (sold second quarter 2009);
·  
Calcasieu power generating facility (sold first quarter 2008);
·  
CoGen Lyondell power generating facility (sold third quarter 2007); and
·  
DMSLP (sold fourth quarter 2005).

Dynegy Holdings’ Selected Financial Data

 
Year Ended December 31,
 
 
2008
   
2007
   
2006
   
2005
   
2004
 
 
(in millions, except per share data)
 
Statement of Operations Data (1):
                           
Revenues
$ 3,543     $ 3,092     $ 1,761     $ 2,010     $ 1,448  
Depreciation and amortization expense
  (367 )     (320 )     (212 )     (204 )     (205 )
Impairment and other charges
              (119 )     (40 )     (24 )
General and administrative expenses
  (157 )     (184 )     (193 )     (375 )     (285 )
Operating income (loss)
  756       624       108       (733 )     (195 )
Interest expense and debt conversion expense
  (427 )     (384 )     (579 )     (383 )     (332 )
Income tax (expense) benefit
  (143 )     (116 )     125       374       163  
Income (loss) from continuing operations
  229       183       (296 )     (727 )     (240 )
Income (loss) from discontinued operations (2)
  (24 )     148       (12 )     813       139  
Cumulative effect of change in accounting principles
                    (5 )      
Net income (loss)
$ 205     $ 331     $ (308 )   $ 81     $ (101 )
Net income (loss) attributable to Dynegy Holdings Inc.
$ 208     $ 324     $ (308 )   $ 81     $ (104 )
Cash Flow Data:
                                     
Net cash provided by (used in) operating activities
$ 319     $ 368     $ (205 )   $ (24 )   $ (160 )
Net cash provided by (used in) investing activities
  (87 )     (688 )     357       1,839       (211 )
Net cash provided by (used in) financing activities
  146       369       (1,235 )     (734 )     289  
Capital expenditures, acquisitions and investments
  (626 )     (350 )     (155 )     (169 )     (219 )

 
2

 


 
December 31,
 
 
2008
   
2007
   
2006
   
2005
   
2004
 
 
(in millions)
 
Balance Sheet Data (1):
                           
Current assets
$ 2,780     $ 1,614     $ 1,828     $ 3,457     $ 2,192  
Current liabilities
  1,681       999       1,165       2,212       1,773  
Property and equipment, net
  8,934       9,017       4,951       5,323       6,130  
Total assets
  14,174       13,107       8,136       10,580       10,129  
Long-term debt (excluding current portion)
  6,072       5,939       3,190       4,003       4,107  
Notes payable and current portion of long-term debt
  64       51       68       191       34  
Capital leases not already included in long-term debt
  4       5       6              
Total equity
  4,583       4,620       3,036       3,331       3,191  
                                       

(1)  
The Contributed Entities’ assets were contributed to DHI contemporaneously with the Merger.  This contribution was accounted for as a transaction between entities under common control.  As such, the assets and liabilities were recorded by DHI at Dynegy’s historical cost on Dynegy’s date of acquisition.
 
Please read Note 3—Business Combination and Acquisitions—LS Assets Contribution for further discussion.  Additionally, the Sithe Energies assets were contributed to DHI on April 2, 2007.  This contribution was accounted for as a transaction between entities under common control.  As such, the assets and liabilities were recorded by DHI at Dynegy’s historical cost on Dynegy’s date of acquisition, January 31, 2005.  In addition, DHI’s historical financial statements have been adjusted in all periods presented to reflect the contribution as though DHI had owned these assets beginning January 31, 2005.  Please read Note 3—Business Combination and Acquisitions—LS Assets Contribution for further discussion.
(2)
Discontinued operations include the results of operations from the following businesses:
 
·  
Heard County power generating facility (sold second quarter 2009);
·  
Calcasieu power generating facility (sold first quarter 2008);
·  
CoGen Lyondell power generating facility (sold third quarter 2007); and
·  
DMSLP (sold fourth quarter 2005).



 
3

 

    Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
We have updated Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 8-K to provide updated financial information that (i) presents the Heard County facility as a discontinued operation and (ii) presents noncontrolling interests pursuant to SFAS No. 160 for all periods presented, as applicable in our Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009.  We have not otherwise updated our financial information or business discussion in this Item 7 for activities or events occurring after the date this information was presented in our 2008 Form 10-K.  You should read our Quarterly Reports on Form 10-Q for the periods ended March 31, 2009 and June 30, 2009, respectively, and our Current Reports on Form 8-K and any amendments thereto filed since our 2008 Form 10-K, for updated information.
 
The following discussion should be read together with the audited consolidated financial statements and the notes thereto included in this report.

OVERVIEW

We are holding companies and conduct substantially all of our business operations through our subsidiaries.  Our current business operations are focused primarily on the power generation sector of the energy industry.  We report the results of our power generation business as three separate segments in our consolidated financial statements: (i) GEN-MW; (ii) GEN-WE; and (iii) GEN-NE.  Because of the diversity among their respective operations, we report the results of each business as a separate segment in our consolidated financial statements.  Beginning in the first quarter 2008, the results of our former customer risk management business are included in Other as it does not meet the criteria required to be an operating segment as of January 1, 2008.  Accordingly, we have restated the corresponding items of segment information for prior periods.  Our consolidated financial results also reflect corporate-level expenses such as general and administrative, interest and depreciation and amortization.  Dynegy’s 50 percent investment in DLS Power Development, the dissolution of which will be completed in the first quarter of 2009, is included in Other for segment reporting purposes.

In addition to our operating generation facilities, we own an approximate 37 percent interest in PPEA which, through its wholly owned subsidiary, owns an approximate 57 percent undivided interest in Plum Point, a 665 MW coal-fired power generation facility under construction in Mississippi County, Arkansas, which is included in GEN-MW.  We also own a 50 percent interest in SCH, which owns an approximate 64 percent undivided interest in Sandy Creek, an 898 MW power generation facility under construction in McLennan County, Texas, which is included in GEN-WE.

The following is a brief discussion of each of our power generation segments, including a list of key factors that have affected, and are expected to continue to affect, their respective earnings and cash flows.  We also present a brief discussion of our corporate-level expenses.  This “Overview” section concludes with a discussion of our 2008 company highlights.  Please note that this “Overview” section is merely a summary and should be read together with the remainder of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as our audited consolidated financial statements, including the notes thereto, and the other information included in this report.

Business Discussion

Power Generation Business

We generate earnings and cash flows in the three segments within our power generation business through sales of electric energy, capacity and ancillary services.  Primary factors affecting our earnings and cash flows in the power generation business include:
 
 
·
Prices for power, natural gas, coal and fuel oil, which in turn are largely driven by supply and demand.  Demand for power can vary due to weather and general economic conditions, among other things.  For example, a warm summer or a cold winter typically increases demand for electricity.  Power supplies similarly vary by region and are impacted significantly by available generating capacity, transmission capacity and federal and state regulation;
 
 
·
The relationship between prices for power and natural gas and prices for power and fuel oil, commonly referred to as the “spark spread”, which impacts the margin we earn on the electricity we generate.  We believe that our coal-fired generating facilities provide a certain level of predictability of earnings in the near term since our delivered cost of coal, particularly in the Midwest region, is relatively stable and positions us for potential increases in earnings and cash flows in an environment where power prices increase; and

 
4

 
 
 
·
Our ability to enter into commercial transactions to mitigate near term earnings volatility and our ability to better manage our liquidity requirements resulting from potential changes in collateral requirements as prices move.

Other factors that have affected, and are expected to continue to affect, earnings and cash flows for this business include:
 
 
·
Transmission constraints, congestion, and other factors that can affect the price differential between the locations where we deliver generated power and the liquid market hub;
 
 
·
Our ability to control capital expenditures, which primarily include maintenance, safety, environmental and reliability projects, and to control other costs through disciplined management;
 
 
·
Overall electricity demand patterns;
 
 
·
Our ability to optimize our assets by maintaining a high in-market availability, reliable run-time and safe, efficient operations; and
 
 
·
The cost of compliance with existing and future environmental requirements that are likely to be more stringent and more comprehensive.

Please read Item 1A.  Risk Factors for additional factors that could affect our future operating results, financial condition and cash flows.

In addition to these overarching factors, other factors have influenced, and are expected to continue to influence, earnings and cash flows for our three reportable segments within the power generation business as further described below.

Power Generation—Midwest Segment.>  Our assets in the Midwest segment include a coal-fired fleet and a natural gas-fired fleet.  The following specific factors affect or could affect the performance of this reportable segment:
 
 
·
Our ability to maintain sufficient coal inventories, which is dependent upon the continued performance of the railroads for deliveries of coal in a consistent and timely manner, and its impact on our ability to serve the critical winter and summer on-peak loads;
 
 
·
Our requirement for the next four years to utilize a significant amount of cash for capital expenditures required to comply with the Consent Decree;
 
 
·
Changes in the MISO market design or associated rules; and
 
 
·
Changes in the existing PJM RPM capacity markets or in the bilateral MISO capacity markets and any resulting effect on future capacity revenues.

 
 
·
Our ability to maintain the necessary permits to continue to operate our Moss Landing power generation facility with a once-through, seawater cooling system;
 
 
·
Our ability to maintain and operate our plants in a manner that ensures we receive full capacity payments under our various tolling agreements; and
 
 
·
The economic life of our facilities, which could be adversely impacted by contractual obligations, regulatory actions or other factors.

 
5

 
 
 
 
·
Our ability to maintain sufficient coal and fuel oil inventories, including continued deliveries of coal in a consistent and timely manner, and maintain access to natural gas, impacts our ability to serve the critical winter and summer on-peak loads; and
 
 
·
State-driven programs aimed at capping mercury and CO2 emissions will impose additional costs on our power generation facilities.

Other

Other includes corporate-level expenses such as general and administrative and interest.  Significant items impacting future earnings and cash flows include:
 
 
·
Interest expense, which reflects debt with a weighted-average rate of approximately 7 percent;
 
 
·
General and administrative costs, which will be impacted by, among other things, (i) staffing levels and associated expenses; (ii) funding requirements under our pension plans; and (iii) any future corporate-level litigation reserves or settlements; and
 
 
·
Income taxes, which will be impacted by our ability to realize our significant alternative minimum tax credits.

Other also includes our former CRM segment, which primarily consists of a minimal number of legacy power and natural gas trading positions that will remain until 2010 and 2017, respectively.

2008 Highlights

DLS Power Holdings and DLS Power Development Dissolution.>  Effective January 1, 2009, Dynegy entered into an agreement with LS Associates to dissolve DLS Power Holdings and DLS Power Development, our development joint ventures with LS Power Associates.  Under the terms of this agreement, we acquired exclusive rights related to repowering and expansion opportunities at our existing facilities.  In return, LS Power Associates received a cash payment of approximately $19 million, as well as full rights to new greenfield development opportunities previously held by the joint venture.  As a result of this agreement, we recorded a $71 million pre-tax charge related to our investment in the joint ventures, which consisted of a $24 million impairment and a $47 million loss on dissolution.  This dissolution has no effect on our ownership rights in the Plum Point or Sandy Creek projects.  Please read Note 13—Variable Interest Entities—DLS Power Holdings and DLS Power Development for further discussion.




 
6

 
 
LIQUIDITY AND CAPITAL RESOURCES

Overview

In this section, we describe our liquidity and capital requirements including our sources and uses of liquidity and capital resources.  Our liquidity and capital requirements are primarily a function of our debt maturities and debt service requirements, collateral requirements, fixed capacity payments and contractual obligations, capital expenditures (including required environmental expenditures), potential funding commitments for our equity investment and working capital needs.  Examples of working capital needs include purchases of commodities, particularly natural gas and coal, facility maintenance costs and other costs such as payroll.

Our primary sources of internal liquidity are cash flows from operations, cash on hand, available capacity under our Credit Agreement, of which the revolver capacity of $1,080 million is scheduled to mature in April 2012 and the term letter of credit capacity of $850 million is scheduled to mature in April 2013, and available capacity under our Contingent LC Facility, as described further below.  Our primary sources of external liquidity are asset sales proceeds and proceeds from capital market transactions to the extent we engage in these transactions.  Operating cash flows provided by our power generation assets and the available cash we currently hold are expected to be sufficient to fund the operation of our business, as well as our planned capital expenditure program, including expenditures in connection with the Consent Decree, and debt service requirements over the next twelve months.  We maintain capacity under the Credit Agreement in order to post collateral in the form of letters of credit or cash, and we believe we have sufficient capacity should we be required to post additional collateral.  Please read Note 16—Debt—Fifth Amended and Restated Credit Facility for a discussion of the financial covenants contained in the Credit Agreement, as well as the discussion below regarding our Revolver Capacity.  Additionally, DHI may borrow money from time to time from Dynegy.

Market Conditions

The latter half of 2008 was characterized by turmoil in the financial markets that many have referred to as a liquidity crisis.  Several large financial institutions have failed, and stock prices across industries, including Dynegy’s, have fallen sharply.  These market conditions have resulted in a decreased willingness on the part of lenders to enter into new loans.  Although recent market developments have not had a material adverse impact on our ability to conduct our business, they have affected us directly in several ways:
 
 
·
Lehman Commercial Paper Inc. (“Lehman CP”), a lender under our Credit Agreement, entered bankruptcy proceedings.  As a result, our effective availability under the Credit Agreement may be reduced  by $70 million to $1.9 billion;
 
 
·
We recorded a reserve of $3 million as a result of the bankruptcy of LBH.  This reserve represents the uncollateralized portion of our $15 million net position arising from our outstanding commercial transactions with a subsidiary of LBH;
 
 
·
A large money market fund in which we invested a portion of our cash balance lowered its share price below $1, subsequently suspended distributions and commenced liquidation.  As a result, we reclassified our $127 million investment from cash equivalents to short-term investments and recorded a $2 million impairment.  We have received approximately $100 million of distributions as of December 31, 2008; and
 
 
·
A decrease in liquidity in the bilateral markets for forward power sales, resulting in increased exchange-traded transactions settling through our futures clearing manager that can potentially result in the need for additional cash collateral postings.

The banks and other counterparties with which we transact have also been affected by market developments in various ways, which could affect their ability to enter into transactions with us and further impact the way we conduct our business.

Also, as a result of the recent decline in the overall capital markets, the value of our pension plan assets has decreased as of December 31, 2008.  Please read Note 22—Employee Compensation, Savings and Pension Plan—Pension and Other Post-Retirement Benefits for further discussion.

 
7

 
 
Corporate Matters

On September 14, 2006, Dynegy entered into the Shareholder Agreement with the LS Entities that, among other things, limits the LS Entities’ ownership of Dynegy’s common stock and restricts the manner in which the LS Entities may transfer their shares of Class B common stock.  Specifically, subsequent to April 2, 2009, the LS Entities may:
 
 
·
continue to hold their 40 percent investment in Dynegy;
 
 
·
make an offer to purchase all of the outstanding shares of Dynegy’s common stock.  Upon such offer, we may either (i) accept the offer or (ii) if requested by the LS Entities, conduct an auction of Dynegy in which the LS Entities may elect whether or not to participate; or
 
 
·
freely transfer (i.e. sell) their shares of Dynegy’s Class B common stock to any person so long as such transfer would not result in such person owning more than 15 percent of the outstanding shares of Dynegy’s common stock.

Current Liquidity.>  The following table summarizes our consolidated revolver capacity and liquidity position at February 20, 2009, December 31, 2008 and December 31, 2007:

 
February 20,
2009
   
December 31,
2008
   
December 31,
2007
 
 
(in millions)
 
Revolver capacity (1) (2) (3)
$ 1,080     $ 1,080     $ 1,150  
Borrowings against revolver capacity
               
Term letter of credit capacity, net of required reserves
  825       825       825  
Plum Point and Sandy Creek letter of credit capacity
  377       377       425  
Available contingent letter of credit facility capacity (4)
               
Outstanding letters of credit
  (1,104 )     (1,135 )     (1,279 )
                       
Unused capacity
  1,178       1,147       1,121  
Cash—DHI
  675       670       292  
                       
Total available liquidity—DHI
  1,853       1,817       1,413  
Cash—Dynegy
  183       23       36  
                       
Total available liquidity—Dynegy
$ 2,036     $ 1,840     $ 1,449  
 
____________
 
(1)
Lehman CP filed for protection from creditors under the bankruptcy law in October 2008, thus potentially reducing the available capacity of the revolving portion of the Credit Agreement by $70 million.  Please read Note 16—Debt—Credit Agreement for further discussion.  We continue to believe that we maintain sufficient liquidity despite any such reduction in the available capacity under the revolving portion of our Credit Agreement.
 
(2)
We currently have 15 lenders participating in the revolving portion of our Credit Agreement with commitments ranging from $10 million to $105 million.  Other than the commitment from Lehman CP, we have not experienced, nor do we currently anticipate, any difficulties in obtaining funding from any of the remaining lenders at this time.  However, we continue to monitor the environment, and any lack of or delay in funding by a significant member or multiple members of our banking group could negatively affect our liquidity position.
 
(3)
Based on management’s current forecast of financial performance during 2009, DHI’s available liquidity under the Fifth Amended and Restated Credit Facility may be reduced temporarily in order to remain in compliance with the secured debt to adjusted EBITDA ratio.
 
(4)
Under the terms of the Contingent LC Facility, up to $300 million of capacity can become available, contingent on 2009 forward natural gas prices rising above $13/MMBtu.  Over the course of 2009, the ratio of availability per dollar increase in natural gas prices will be reduced, on a pro rata monthly basis, to zero by year-end.

 
8

 
 
Cash on Hand.>  At February 20, 2009 and December 31, 2008, Dynegy had cash on hand of $858 million and $693 million, respectively, as compared to $328 million at the end of 2007. The increase in cash on hand at February 20, 2009 compared with December 31, 2008 is the result of cash provided by the operating activities of our generating business. The change in cash on hand at December 31, 2008 as compared to the end of 2007 is primarily attributable to cash provided by the operating activities of our generating business, proceeds received from the sale of our Rolling Hills and Calcasieu power generation facilities and reduced capital commitments in connection with the Sandy Creek Project due to the sale of an approximate 11 percent ownership interest, partly offset by capital expenditures and payments on our DNE Leveraged lease.

At February 20, 2009 and December 31, 2008, DHI had cash on hand of $675 million and $670 million, respectively, as compared to $292 million at the end of 2007. Cash provided by the operating activities of our generating business for the period from December 31, 2008 to February 20, 2009 was offset by the payment of $175 million dividend from DHI to Dynegy in January, 2009. The increase in cash on hand at December 31, 2008 as compared to the end of 2007 is primarily attributable to cash provided by the operating activities of our generating business and proceeds received from the sale of our Rolling Hills and Calcasieu power generation facilities and reduced capital commitments in connection with the Sandy Creek Project due to the sale of an approximate 11 percent ownership interest, partly offset by capital expenditures, dividends paid to Dynegy and payments on our DNE Leveraged lease.

Revolver Capacity>.  On April 2, 2007, DHI entered into the Fifth Amended and Restated Credit Facility, which is our primary credit facility.  On May 24, 2007, DHI entered into an amendment to the Fifth Amended and Restated Credit Facility.  As of February 20, 2009, $1,104 million in letters of credit are outstanding but undrawn, and we have no revolving loan amounts drawn under the Fifth Amended and Restated Credit Facility.  The Fifth Amended and Restated Credit Facility has financial covenants which could restrict our ability to realize full capacity utilization based on levels of realized EBITDA, all as defined in Section 7.11 of the Fifth Amended and Restated Credit Facility.  Based on management’s current forecast of financial performance during 2009, DHI’s available liquidity under the Fifth Amended and Restated Facility may be reduced temporarily in order to remain in compliance with the secured debt to adjusted EBITDA ratio. Please read Note 16—Debt—Fifth Amended and Restated Credit Facility for further discussion of our amended credit facility.

Operating Activities

Historical Operating Cash Flows.>  Dynegy’s cash flow provided by operations totaled $319 million for the twelve months ended December 31, 2008.  DHI’s cash flow provided by operations totaled $319 million for the twelve months ended December 31, 2008.  During the period, our power generation business provided positive cash flow from operations of $869 million from the operation of our power generation facilities, reflecting positive earnings for the period, partly offset by additional collateral requirements due to an increase in the volume of our hedging positions and increased payments associated with our DNE leveraged lease.  Corporate and other operations included a use of approximately $550 million in cash by Dynegy and DHI primarily due to interest payments to service debt, general and administrative expenses and a $17 million legal settlement payment previously reserved, partially offset by interest income.

Dynegy’s cash flow provided by operations totaled $341 million for the twelve months ended December 31, 2007.  DHI’s cash flow provided by operations totaled $368 million for the twelve months ended December 31, 2007.  During the period, our power generation business provided positive cash flow from operations of $934 million primarily due to positive earnings for the period, partly offset by an increased use of working capital.  Corporate and other operations included a use of approximately $593 million in cash by Dynegy and approximately $566 million in cash by DHI relating to corporate-level expenses and our former customer risk management business.

 
9

 
 
Dynegy’s cash flow used in operations totaled $194 million for the twelve months ended December 31, 2006.  DHI’s cash flow used in operations totaled $205 million for the twelve months ended December 31, 2006.  During the period, our power generation business provided positive cash flow from operations of $698 million primarily due to positive earnings for the period, decreases in working capital due to returns of cash collateral postings and decreased accounts receivable balances.  Corporate and other operations included a use of approximately $892 million in cash by Dynegy and approximately $903 million in cash by DHI relating to corporate-level expenses and our former customer risk management business.



 
February 20,
2009
   
December 31,
2008
   
December 31,
2007
 
 
(in millions)
 
By Business:
               
Generation business
$ 1,128     $ 1,064     $ 1,130  
Other
  189       189       202  
                       
Total
$ 1,317     $ 1,253     $ 1,332  
By Type:
                     
Cash (1)
$ 213     $ 118     $ 53  
Letters of credit
  1,104       1,135       1,279  
                       
Total
$ 1,317     $ 1,253     $ 1,332  
 
____________
 
(1)
Cash collateral postings exclude the effect of cash inflows and outflows arising from the daily settlements of our exchange-traded or brokered commodity futures positions held with our futures clearing manager.

The changes in collateral postings are primarily due to the volume of forward power sales and fuel purchase transactions and the effect of changing commodity prices on such transactions.  Letters of credit posted under the letter of credit portion of our Credit Agreement and the stand-alone letter of credit facility posted in support of our Sandy Creek facility are supported with restricted cash.

Going forward, we expect counterparties’ collateral demands to continue to reflect changes in commodity prices, including seasonal changes in weather-related demand, as well as their views of our creditworthiness.  We believe that we have sufficient capital resources to satisfy counterparties’ collateral demands, including those for which no collateral is currently posted, for the foreseeable future.

We have structured our liquidity facilities to provide us with the flexibility to enable us to post additional collateral to support our financial positions as needed in the event that natural gas and power prices increase.  For example, at June 30, 2008, the average natural gas prices for the remainder of 2008 and for 2009 were $13.54/MMBtu and $12.47/MMBtu, respectively.  Even in this environment of high prices, we maintained $890 million of available liquidity.
 
 
10

 
 
   Investing Activities


 
December 31,
 
 
2008
   
2007
   
2006
 
 
(in millions)
 
GEN-MW
$ 530     $ 300     $ 101  
GEN-WE
  29       17       24  
GEN-NE
  36       47       22  
Other
  16       15       8  
                       
Total
$ 611     $ 379     $ 155  

Capital spending in our GEN-MW segment primarily consisted of environmental and maintenance capital projects, as well as approximately $203 million and $161 million spent on development capital related to the Plum Point Project during the years ended December 31, 2008 and 2007, respectively.  Capital spending in our GEN-WE and GEN-NE segments primarily consisted of maintenance projects.

We expect capital expenditures for 2009 to approximate $490 million, which is comprised of $431 million, $16 million, $28 million and $15 million in GEN-MW, GEN-WE, GEN-NE and other, respectively.  The $431 million of spending planned for GEN-MW includes $80 million related to construction of the Plum Point facility and approximately $245 million of environmental expenditures related to the Consent Decree.  The capital expenditures related to Plum Point will be funded by non-recourse project debt.  Please read Note 16—Debt—Plum Point Credit Agreement Facility for further discussion.  Other spending primarily includes maintenance capital projects, environmental projects and limited development projects.  The capital budget is subject to revision as opportunities arise or circumstances change.

The Consent Decree was finalized in July 2005.  It prohibits us from operating certain of our power generating facilities after specified dates unless certain emission control equipment is installed.  Our long-term capital expenditures in the GEN-MW segment will be significantly impacted by this Consent Decree.  We anticipate our costs associated with the Consent Decree projects, which we expect to incur through 2012, to be approximately $960 million, which includes approximately $290 million spent to date.  This estimate, which is broken down by year below, includes a number of assumptions about uncertainties that are beyond our control.  For instance, we have assumed for purposes of this estimate that labor and material costs will increase at four percent per year over the remaining project term.  The following are the estimated capital expenditures required to comply with the Consent Decree:

2009
 
2010
 
2011
 
2012
 
(in millions)
 
$ 245   $ 215   $ 165   $ 45  

If the costs of these capital expenditures become great enough to render the operation of the affected facility or facilities uneconomical, we could, at our option, cease to operate the facility or facilities and forego these capital expenditures without incurring any further obligations under the Consent Decree.  Please read Note 20—Commitments and Contingencies—Other Commitments and Contingencies—Midwest Consent Decree for further discussion.

Finally, the SPDES permits renewal application at our Roseton power generating facility and the NPDES permit at our Moss Landing power generating facility have been challenged by local environmental groups which contend the existing once-through, seawater cooling systems currently in place should be replaced with closed-cycle cooling systems.  A decision to install a closed cycle cooling system at the Roseton or Moss Landing facilities would be made on a case-by-case basis considering all relevant factors at such time, including any relevant costs or applicable remediation requirements.  If mandated installation of closed cycle cooling systems at either of these facilities would result in a material capital expenditure that renders the operation of a plant uneconomical, we could, at our option, and subject to any applicable financing agreements or other obligations, reduce operations or cease to operate such facility and forego these capital expenditures.

 
11

 
 
Please read Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Disclosure of Contractual Obligations and Contingent Financial Commitments—Off-Balance Sheet Arrangements—DNE Leveraged Lease for further discussion of early lease termination payments.  Please read Note 20—Commitments and Contingencies—Legal Proceedings—Roseton State Pollutant Discharge Elimination System Permit and —Commitments and Contingencies—Legal Proceedings—Moss Landing National Pollutant Discharge Elimination System Permit for further discussion.

Asset Dispositions.>  Proceeds from asset sales in 2008 totaled $451 million, net of transaction costs, related to the sales of the Rolling Hills power generating facility, Calcasieu power generating facility, the NYMEX shares and seats, and the beneficial interest in Oyster Creek.  Proceeds from asset sales in 2007 totaled $558 million and primarily consisted of $472 million from the sale of our CoGen Lyondell power generation facility and $82 million received in connection with the sale of a portion of our interest in the Plum Point Project.  Proceeds from asset sales in 2006 totaled $227 million, net, and primarily related to the sale of our Rockingham facility for $194 million.  Please read Note 4—Dispositions, Contract Terminations and Discontinued Operations for further discussion.

On February 25, 2009, we entered into an agreement to sell our interest in the Heard County power generation facility to Oglethorpe.  This transaction closed on April 30, 2009.  Please read Note 4—Dispositions, Contract Terminations and Discontinued Operations—Dispositions and Contract Terminations—Heard County for further discussion.

Consistent with industry practice, we regularly evaluate our generation fleet based primarily on geographic location, fuel supply, market structure and market recovery expectations.  We consider divestitures of non-core generation assets where the balance of the above factors suggests that such assets’ earnings potential is limited or that the value that can be captured through a divestiture outweighs the benefits of continuing to own and operate such assets.  Additional dispositions of one or more generation facilities or other investments could occur in 2009 or beyond.  Were any such sale or disposition to be consummated, the disposition could result in accounting charges related to the affected asset(s), and our future earnings and cash flows could be affected.


Cash outflows related to short-term investments during the year ended December 31, 2008 increased by $27 million and $25 million for Dynegy and DHI, respectively, as a result of a reclassification from cash equivalents to short-term investments.  There was a $128 million, net of cash acquired, cash outflow during the year ended December 31, 2007 used in connection with the completion of the Merger.  Please read Note 3—Business Combinations and Acquisitions—LS Power Business Combination for more information.

Proceeds from the exchange of unconsolidated investments, net of cash acquired, totaled $165 million during the year ended December 31, 2006.  This included net cash proceeds of $205 million from the sale of our 50 percent ownership interest in West Coast Power to NRG.  Please read Note 4—Dispositions, Contract Terminations and Discontinued Operations—Dispositions and Contract Terminations—West Coast Power for further information.  This was partially offset by a payment of $45 million for our acquisition of NRG’s 50 percent ownership interest in Rocky Road, which included $5 million of cash on hand.  Please read Note 3—Business Combinations and Acquisitions—Rocky Road for more information.

There was an $80 million cash inflow during the year ended December 31, 2008 due to changes in restricted cash balances primarily due to a reduction of our cash collateral as a result of SCEA’s sale of an 11 percent undivided interest in the Sandy Creek Project, the release of restricted cash and the use of restricted cash for the ongoing construction of the Plum Point project, partially offset by interest income.  The increase in restricted cash and investments of $871 million during the twelve months ended December 31, 2007 related primarily to a $650 million deposit associated with our cash collateralized facility, and $323 million posted in support of our proportionate share of capital commitments in connection with the Sandy Creek Project. These additional postings were partially offset by the release of Independence restricted cash in exchange for the posting of a letter of credit.  The decrease in restricted cash of $121 million during the twelve months ended December 31, 2006 related primarily to the return of our $335 million deposit associated with our former cash collateralized facility, offset by a $200 million deposit associated with our new cash collateralized facility and a $14 million increase in the Independence restricted cash balance.

Finally, Other included $7 million of insurance proceeds and $4 million of proceeds from the liquidation of an investment during the year ended December 31, 2008.  Other included $11 million of proceeds related to an interconnection agreement offset by $3 million of sales and use taxes during the year ended December 31, 2006.

 
12

 
 
Financing Activities


Dynegy’s net cash provided by financing activities during the twelve months ended December 31, 2007 totaled $433 million, which primarily related to $2,758 million of proceeds from long-term borrowings, net of approximately $35 million of debt issuance costs, partially offset by $2,320 million of payments.

DHI’s net cash provided by financing activities during the twelve months ended December 31, 2007 totaled $369 million, which primarily related to $2,758 million of proceeds from long-term borrowings, net of approximately $35 million of debt issuance costs, partially offset by $2,045 million of payments.  Cash used in financing activities includes dividend payments of $342 million to Dynegy.

Dynegy’s net cash used in financing activities during the twelve months ended December 31, 2006 totaled $1,342 million, which primarily related to $1,930 million of payments, partially offset by $1,071 million of proceeds from long-term borrowings, net of approximately $29 million of debt issuance costs.  In addition, Dynegy had debt conversion costs of $249 million and paid $400 million in cash, plus accrued and unpaid dividends totaling approximately $6.3 million, to redeem the Series C Preferred in May 2006.  Proceeds from the issuance of common stock consisted primarily of approximately $178 million from a public offering of 40.25 million shares of Dynegy’s  Class A common stock at $4.60 per share, net of underwriting fees.  Dividend payments totaling $17 million were also made on our Series C Preferred prior to its redemption.

DHI’s net cash used in financing activities during the twelve months ended December 31, 2006 totaled $1,235 million, which primarily related to $1,930 million of payments, partially offset by $1,071 million of proceeds from long-term borrowings, net of approximately $29 million of debt issuance costs.  In addition, DHI had debt conversion costs of $204 million and payments to Dynegy of $170 million, which consists of repayments of borrowings of $120 million and a one-time dividend payment of $50 million.

Summarized Debt and Other Obligations.>  The following table depicts our consolidated third party debt obligations, including the present value of the DNE leveraged lease payments discounted at 10 percent, and the extent to which they are secured as of December 31, 2008 and 2007:


 
December 31,
2008
   
December 31,
2007
 
 
(in millions)
 
First secured obligations
$ 919     $ 920  
Unsecured obligations
  4,945       5,015  
               
Total corporate obligations
  5,864       5,935  
Secured non-recourse obligations (1)
  959       806  
               
Total obligations
  6,823       6,741  
Less: DNE lease financing (2)
  (700 )     (770 )
Other (3)
  13       19  
               
Total notes payable and long-term debt (4)
$ 6,136     $ 5,990  
 
____________
 
(1)
Includes PPEA’s non-recourse project financing of $515 million and tax-exempt bonds of $100 million for its share of the construction of the Plum Point facility.  Although we own a 37 percent economic interest in PPEA, we consolidate PPEA and its debt, as we are the primary beneficiary of this VIE.  Also includes project financing associated with our Independence facility.  Please read Note 13—Variable Interest Entities for further discussion.
 
(2)
Represents present value of future lease payments discounted at 10 percent.
 
(3)
Consists of net premiums on debt of $13 million and $19 million at December 31, 2008 and 2007, respectively.
 
(4)
Does not include letters of credit.

 
13

 
 
During 2008, we continued our efforts to enhance our capital structure flexibility.  In June 2008, DHI entered into a Facility and Security Agreement (the “Contingent LC Facility”) with Morgan Stanley Capital Group Inc. (“Morgan Stanley”), as lender, issuing bank, collateral agent and paying agent.  Availability under the Contingent LC Facility is contingent on natural gas prices rising above $13/MMBtu during 2009.  For every dollar increase above $13/MMBtu in 2009 forward natural gas prices, $40 million in capacity will initially be available, up to a total of $300 million.  In the event that the Contingent LC Facility is utilized, it will complement existing liquidity instruments as a source of additional letters of credit to meet our collateral requirements.  Letter of credit availability will accrue ongoing fees at an annual rate of 3.2 percent.  Over the course of 2009, the ratio of availability per dollar increase in natural gas prices will be reduced, on a pro rata monthly basis, to zero by year-end.  Should forward natural gas and electricity prices increase to levels that are in excess of the forward prices experienced at June 30, 2008, creating the need for us to post significantly more collateral for our forward power sales or natural gas purchases, we believe cash flow from operations and available borrowings under our credit facilities (including the Contingent LC Facility) will be sufficient to meet our liquidity needs in the coming twelve months.  Such letters of credit will be available for the purpose of supporting certain commercial and trading contracts and related netting agreements described in the Credit Agreement.  As of December 31, 2008, no amounts were available under the Contingent LC Facility.

Additionally, during 2008, certain commodity counterparties were granted liens pari-passu with lenders under the Fifth Amended and Restated Credit Agreement.  The first liens were granted in lieu of other forms of collateral we may have needed to provide in support of commodity transactions.  As of December 31, 2008, our net discounted exposure on the agreements collateralized by liens was approximately $39 million.

In September 2008, LBH filed for protection from creditors under Chapter 11 bankruptcy law.  Lehman CP, the Lehman entity acting as one of our lenders for the revolving portion of our Credit Agreement, was not initially part of the bankruptcy estate.  However, in early October 2008, Lehman CP also filed for protection from creditors under the bankruptcy law.  Lehman CP’s lending obligations were not assumed by Barclays, which had acquired most of Lehman’s North American banking operations in September 2008.  The bankruptcy filing increases the likelihood that Lehman CP will not fund any borrowing requests under our Credit Agreement, thereby reducing our effective availability under the Credit Agreement by $70 million to $1.9 billion.

Please read Note 16—Debt for further discussion of these items.  Following these transactions, our debt maturity profile as of December 31, 2008 includes $64 million in 2009, $68 million in 2010, $575 million in 2011, $582 million in 2012, $1,004 million in 2013 and approximately $3,843 million thereafter.  Maturities for 2009 represent principal payments on the Sithe Senior Notes.

Financing Trigger Events.> Our debt instruments and other financial obligations include provisions, which, if not met, could require early payment, additional collateral support or similar actions.  These trigger events include leverage ratios and other financial covenants, insolvency events, defaults on scheduled principal or interest payments, acceleration of other financial obligations and change of control provisions.  We do not have any trigger events tied to specified credit ratings or stock price in our debt instruments and are not party to any contracts that require us to issue equity based on credit ratings or other trigger events, although certain interest rate swaps to which Plum Point is a party could be terminated if a credit downgrade of Plum Point occurs and there is also a default by the insurer that has provided credit insurance for the swaps.

Financial Covenants.>  Our Fifth Amended and Restated Credit Agreement contains certain financial covenants, including (i) a covenant (measured as of the last day of the relevant fiscal quarter as specified below) that requires DHI and certain of its subsidiaries to maintain a ratio of secured debt to adjusted EBITDA for DHI and its relevant subsidiaries of no greater than 2.75:1 (December 31, 2008 and March 31, 2009); and 2.5:1 (June 30, 2009 and thereafter); and (ii) a covenant that requires DHI and certain of its subsidiaries to maintain a ratio of adjusted EBITDA to consolidated interest expense for DHI and its relevant subsidiaries as of the last day of the measurement periods ending December 31, 2008 of no less than 1.5:1; ending March 31, 2009 and June 30, 2009 of no less than 1.625:1; and ending September 30, 2009 and thereafter of no less than 1.75:1.  We are in compliance with these covenants as of December 31, 2008.  In addition, we expect to be in compliance with these covenants in the near- and long-term based on management’s forecast of financial performance of the markets in which we operate. However, based on management’s current forecast of financial performance during 2009, DHI’s available liquidity under the Fifth Amended and Restated Credit Facility may be reduced temporarily in order to remain in compliance with the secured debt to adjusted EBITDA ratio.

 
14

 
 
Subject to certain exceptions, DHI and its relevant subsidiaries are subject to restrictions on asset sales incurring additional indebtedness, limitations on investments and certain limitations on dividends and other payments in respect of capital stock.  Our lenders agreed to amend certain of these restrictions or limitations effective as of February 13, 2009.  Based on our available liquidity as of December 31, 2008 and the additional capacity available under the Contingent LC Facility, we do not believe these limitations will affect our liquidity. Please read Note 16—Debt—Fifth Amended and Restated Credit Facility for further discussion of our amended credit facility.

Capital-Raising Transactions.>  As part of our ongoing efforts to maintain a capital structure that is closely aligned with the cash-generating potential of our asset-based business, which is subject to cyclical changes in commodity prices, we may explore additional sources of external liquidity.  The timing of any transaction may be impacted by events, such as strategic growth opportunities, legal judgments or regulatory requirements, which could require us to pursue additional capital in the near term.  The receptiveness of the capital markets to an offering of debt or equity securities cannot be assured and may be negatively impacted by, among other things, our non-investment grade credit ratings, significant debt maturities, long-term business prospects and other factors beyond our control, including current market conditions.  Any issuance of equity by Dynegy likely would have other effects as well, including stockholder dilution.  Our ability to issue debt securities is limited by our financing agreements, including the Credit Agreement, as amended.  Please read Note 16—Debt for further discussion.

In addition, we continually review and discuss opportunities to participate in what we believe will be continuing consolidation of the power generation industry.  No such definitive transaction has been agreed to and none can be guaranteed to occur; however, we have successfully executed on similar opportunities in the past and could do so again in the future.  Depending on the terms and structure of any such transaction, we could issue significant debt and/or equity securities for capital-raising purposes.  We also could be required to assume substantial debt obligations and the underlying payment obligations.

Capital Allocation.>  We continually review our investment options with respect to our capital resources.  We do not have any material debt maturities until 2011, and between now and then we expect to enhance our current capital resources through the results of our operating business.  We will seek to invest these capital resources in various projects and activities based on their return to stockholders.  Potential investments could include, among others: add-on or other enhancement projects associated with our current power generation assets; brownfield development projects; merger and acquisition activities; returns of capital to stockholders and early repayment of repurchase of debt. Any such future purchases of debt may be made through open market or privately negotiated transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices as we may determine.  Capital allocation determinations generally are subject to the discretion of Dynegy’s Board of Directors as well as availability of capital and related investment opportunities, and may be limited by the provisions of our financing agreements.  Any particular use of capital in an amount that is not considered material may be made without any prior public disclosure and could occur at any time.


Credit Ratings

Our credit rating status is currently non-investment grade; our senior unsecured debt is rated “B” by Standard & Poor’s, “B2” by Moody’s, and “B+” by Fitch.  Over the past several years, we have established a successful record of accomplishment with the financial community.  Specifically, we have made timely principal and interest payments, complied with our debt covenants and followed a disciplined approach to managing our capital structure while ensuring our growth and profitability.  As a result, we do not expect a credit rating downgrade in the foreseeable future.  However, any future downgrade of our credit rating, if one were to occur, would not have a material impact on our collateral posting requirements, nor would such a downgrade impact any of our debt covenants or the timing of our debt maturities.

 
15

 
 
Disclosure of Contractual Obligations and Contingent Financial Commitments

We have incurred various contractual obligations and financial commitments in the normal course of our operations and financing activities.  Contractual obligations include future cash payments required under existing contracts, such as debt and lease agreements.  These obligations may result from both general financing activities and from commercial arrangements that are directly supported by related revenue-producing activities.  Contingent financial commitments represent obligations that become payable only if specified events occur, such as financial guarantees.  Details on these obligations are set forth below.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2008.  Cash obligations reflected are not discounted and do not include accretion or dividends.

 
Expiration by Period
 
 
Total
   
Less than 1 Year
   
1 – 3 Years
   
3 - 5 Years
   
More than 5 Years
 
 
(in millions)
 
Long-term debt (including current portion)
$ 6,136     $ 64     $ 643     $ 1,586     $ 3,843  
Interest payments on debt
  3,148       419       755       676       1,298  
Operating leases
  1,196       171       258       355       412  
Capital leases
  12       2       4       4       2  
Capacity payments
  345       46       95       92       112  
Transmission obligations
  193       6       12       12       163  
Interconnection obligations
  19       1       2       2       14  
Construction service agreements
  877       39       142       123       573  
Pension funding obligations
  80       27       53              
Other obligations
  41       14       10       6       11  
                                       
Total contractual obligations
$ 12,047     $ 789     $ 1,974     $ 2,856     $ 6,428  

 
16

 
 



In addition, we are party to two charter party agreements relating to two VLGCs previously utilized in our former global liquids business.  The aggregate minimum base commitments of the charter party agreements are approximately $14 million each year for the years 2009 through 2012, and approximately $17 million from 2013 through lease expiration.  The charter party rates payable under the two charter party agreements vary in accordance with market-based rates for similar shipping services.  The $14 million and $17 million amounts set forth above are based on the minimum obligations set forth in the two charter party agreements.  The primary terms of the charter party agreements expire September 2013 and September 2014, respectively.  On January 1, 2003, in connection with the sale of our global liquids business, we sub-chartered both VLGCs to a wholly owned subsidiary of Transammonia Inc.  The terms of the sub-charters are identical to the terms of the original charter agreements.  We continue to rely on the sub-charters with a subsidiary of Transammonia to satisfy the obligations of our two charter party agreements.  To date, the subsidiary of Transammonia has complied with the terms of the sub-charter agreements.







Other Obligations.>  Other obligations include the following items:
 
 
·
A payment of $8.5 million in 2009 related to Illinois rate relief legislation.  Please read Note 20—Commitments and Contingencies—Illinois Auction Complaints for further discussion;
 
 
·
Payments associated with a capacity contract between Independence and Con Edison.  The aggregate payments through the 2014 expiration are approximately $13 million as of December 31, 2008;
 
 
·
$6 million of reserves recorded in connection with FIN No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”).  Please read Note 18—Income Taxes—Unrecognized Tax Benefits for further discussion;
 
 
·
Amounts related to a long-term coal agreement to assist in the delivery of coal to our Danskammer plant in Newburgh, New York.  The agreement extends until 2010, and the minimum aggregate payments through expiration total approximately $7 million as of December 31, 2008; and
 
 
·
Agreements for the supply of water to our generating facilities.

 
17

 
 
Contingent Financial Obligations

The following table provides a summary of our contingent financial obligations as of December 31, 2008 on an undiscounted basis.  These obligations represent contingent obligations that may require a payment of cash upon the occurrence of specified events.

 
Expiration by Period
 
 
Total
   
Less than 1 Year
   
1–3 Years
   
3-5 Years
   
More than 5 Years
 
 
(in millions)
 
Letters of credit (1)
$ 1,135     $ 835     $ 300     $     $  
Surety bonds (2)
  7       7                    
                                       
Total financial commitments
$ 1,142     $ 842     $ 300     $     $  
____________
(1)
Amounts include outstanding letters of credit.
(2)
Surety bonds are generally on a rolling 12-month basis.  The $7 million of surety bonds are supported by collateral.

Off-Balance Sheet Arrangements

DNE Leveraged Lease.>  In May 2001, we entered into an asset-backed sale-leaseback transaction to provide us with long-term financing for our acquisition of certain power generating facilities.  In this transaction, which was structured as a sale-leaseback to minimize our operating cost of the facilities on an after-tax basis and to transfer ownership to the purchaser, we sold four of the six generating units comprising the facilities to Danskammer OL LLC and Roseton OL LLC, each of which was newly formed by an unrelated third party investor, for approximately $920 million and we concurrently agreed to lease them back from these entities, which we refer to as the owner lessors.  The owner lessors used $138 million in equity funding from the unrelated third party investor to fund a portion of the purchase of the respective facilities.  The remaining $800 million of the purchase price and the related transaction expenses were derived from proceeds obtained in a private offering of pass-through trust certificates issued by two of our subsidiaries, Dynegy Danskammer, L.L.C. and Dynegy Roseton, L.L.C., which serve as lessees of the applicable facilities.  The pass-through trust certificate structure was employed, as it has been in similar financings historically executed in the airline and energy industries, to optimize the cost of financing the assets and to facilitate a capital markets offering of sufficient size to enable the purchase of the lessor notes from the owner lessors.  The pass-through trust certificates were sold to qualified institutional buyers in a private offering and the proceeds were used to purchase debt instruments, referred to as lessor notes, from the owner lessors.  The pass-through trust certificates and the lessor notes are held by pass-through trusts for the benefit of the certificate holders.  The lease payments on the facilities support the principal and interest payments on the pass-through trust certificates, which are ultimately secured by a mortgage on the underlying facilities.

As of December 31, 2008, future lease payments are $141 million for 2009, $95 million for 2010, $112 million for 2011, $179 million for 2012, $142 million for 2013, $143 million for 2014 and $248 million in the aggregate due from 2015 through lease expiration.  The Roseton lease expires on February 8, 2035 and the Danskammer lease expires on May 8, 2031.  We have no option to purchase the leased facilities at the end of their respective lease terms.  DHI has guaranteed the lessees’ payment and performance obligations under their respective leases on a senior unsecured basis.  At December 31, 2008, the present value (discounted at 10 percent) of future lease payments was $700 million.
 
 
18

 

The following table sets forth our lease expenses and lease payments relating to these facilities for the periods presented.

 
2008
   
2007
   
2006
 
 
(in millions)
 
Lease Expense
$ 50     $ 50     $ 50  
Lease Payments (Cash Flows)
$ 144     $ 107     $ 60  

If one or more of the leases were to be terminated because of an event of loss, because it had become illegal for the applicable lessee to comply with the lease or because a change in law had made the facility economically or technologically obsolete, DHI would be required to make a termination payment in an amount sufficient to compensate the lessor for termination of the lease, including redeeming the pass-through trust certificates related to the unit or facility for which the lease was terminated at par plus accrued and unpaid interest.  As of December 31, 2008, the termination payment at par would be approximately $930 million for all of the leased facilities, which exceeds the $920 million we received on the sale of the facilities.  If a termination of this type were to occur with respect to all of the leased facilities, it would be difficult for DHI to raise sufficient funds to make this termination payment.  Alternatively, if one or more of the leases were to be terminated because we determine, for reasons other than as a result of a change in law, that it has become economically or technologically obsolete or that it is no longer useful to our business, DHI must redeem the related pass-through trust certificates at par plus a make-whole premium in an amount equal to the discounted present value of the principal and interest payments still owing on the certificates being redeemed less the unpaid principal amount of such certificates at the time of redemption.  For this purpose, the discounted present value would be calculated using a discount rate equal to the yield-to-maturity on the most comparable U.S. Treasury security plus 50 basis points.

Commitments and Contingencies

Please read Note 20—Commitments and Contingencies, which is incorporated herein by reference, for further discussion of our material commitments and contingencies.


 
19

 

RESULTS OF OPERATIONS


We report results of our power generation business as three separate geographical segments as follows: (i) GEN-MW, (ii) GEN-WE and (iii) GEN-NE.  Because of the diversity among their respective operations, we report the results of each business as a separate segment in our consolidated financial statements.  Beginning in the first quarter 2008, the results of our former customer risk management business are included in Other as it did not meet the criteria required to be an operating segment as of January 1, 2008.  Accordingly, we have restated the corresponding items of segment information for prior periods.  Our consolidated financial results also reflect corporate-level expenses such as general and administrative, interest and depreciation and amortization.  Dynegy’s 50 percent investment in DLS Power Development, which was terminated effective January 1, 2009, is included in Other for segment reporting.

Summary Financial Information.>  The following tables provide summary financial data regarding Dynegy’s consolidated and segmented results of operations for 2008, 2007 and 2006, respectively.

Dynegy’s Results of Operations for the Year Ended December 31, 2008

 
Power Generation
             
 
GEN-MW
   
GEN-WE
   
GEN-NE
   
Other
   
Total
 
 
(in millions)
 
Revenues
$ 1,623     $ 919     $ 1,006     $ (5 )   $ 3,543  
Cost of sales
  (584 )     (574 )     (705 )     10       (1,853 )
Operating and maintenance expense, exclusive of depreciation and amortization expense shown separately below
  (205 )     (122 )     (180 )     15       (492 )
Depreciation and amortization expense
  (206 )     (97 )     (54 )     (10 )     (367 )
Impairment and other charges
                           
Gain on sale of assets
  56       11             15       82  
General and administrative expense
                    (157 )     (157 )
                                       
Operating income (loss)
$ 684     $ 137     $ 67     $ (132 )   $ 756  
Losses from unconsolidated investments
        (40 )           (83 )     (123 )
Other items, net
        5       6       73       84  
Interest expense
                                  (427 )
                                       
Income from continuing operations before income taxes
                                  290  
Income tax expense
                                  (95 )
                                       
Income from continuing operations
                                  195  
Loss from discontinued operations, net of taxes
                                  (24 )
                                       
Net income
                                  171  
Less:  Net loss attributable to the noncontrolling interests
                                  (3 )
                                       
Net income attributable to Dynegy Inc.
                                $ 174  

 
20

 

Dynegy’s Results of Operations for the Year Ended December 31, 2007

 
Power Generation
             
 
GEN-MW
   
GEN-WE
   
GEN-NE
   
Other
   
Total
 
 
(in millions)
 
Revenues
$ 1,325     $ 678     $ 1,076     $ 13     $ 3,092  
Cost of sales
  (482 )     (396 )     (688 )     19       (1,547 )
Operating and maintenance expense, exclusive of depreciation and amortization expense shown separately below
  (193 )     (84 )     (179 )     (4 )     (460 )
Depreciation and amortization expense
  (194 )     (68 )     (45 )     (13 )     (320 )
Gain on sale of assets
  39                   4       43  
General and administrative expense
                    (203 )     (203 )
                                       
Operating income (loss)
$ 495     $ 130     $ 164     $ (184 )   $ 605  
Earnings (losses) from unconsolidated investments
        6             (9 )     (3 )
Other items, net
                    56       56  
Interest expense
                                  (384 )
                                       
Income from continuing operations before income taxes
                                  274  
Income tax expense
                                  (151 )
                                       
Income from continuing operations
                                  123  
Income from discontinued operations, net of taxes
                                  148  
                                       
Net income
                                  271  
Less: Net income attributable to the noncontrolling interests
                                  7  
                                       
Net income attributable to Dynegy Inc.
                                $ 264  

 
21

 

Dynegy’s Results of Operations for the Year Ended December 31, 2006

 
Power Generation
             
 
GEN-MW
   
GEN-WE
   
GEN-NE
   
Other
   
Total
 
 
(in millions)
 
Revenues
$ 969     $ 78     $ 609     $ 105     $ 1,761  
Cost of sales
  (318 )     (64 )     (370 )     (44 )     (796 )
Operating and maintenance expense, exclusive of depreciation and amortization expense shown separately below
  (165 )     (4 )     (160 )     (7 )     (336 )
Depreciation and amortization expense
  (168 )     (3 )     (24 )     (17 )     (212 )
Impairment and other charges
  (110 )     (9 )                 (119 )
Gain on sale of assets
                    3       3  
General and administrative expense
                    (196 )     (196 )
                                       
Operating income (loss)
$ 208     $ (2 )   $ 55     $ (156 )   $ 105  
Losses from unconsolidated investments
        (1 )                 (1 )
Other items, net
  2       1       9       42       54  
Interest expense and debt conversion costs
                                  (631 )
                                       
Loss from continuing operations before income taxes
                                  (473 )
Income tax benefit
                                  152  
                                       
Loss from continuing operations
                                  (321 )
Loss from discontinued operations, net of taxes
                                  (13 )
Cumulative effect of change in accounting principle, net of taxes
                                  1  
                                       
Net loss attributable to Dynegy Inc.
                                $ (333 )

 
22

 

The following tables provide summary financial data regarding DHI’s consolidated and segmented results of operations for 2008, 2007 and 2006, respectively.

DHI’s Results of Operations for the Year Ended December 31, 2008

 
Power Generation
             
 
GEN-MW
   
GEN-WE
   
GEN-NE
   
Other
   
Total
 
 
(in millions)
 
Revenues
$ 1,623     $ 919     $ 1,006     $ (5 )   $ 3,543  
Cost of sales
  (584 )     (574 )     (705 )     10       (1,853 )
Operating and maintenance expense, exclusive of depreciation and amortization expense shown separately below
  (205 )     (122 )     (180 )     15       (492 )
Depreciation and amortization expense
  (206 )     (97 )     (54 )     (10 )     (367 )
Impairment and other charges
                           
Gain on sale of assets
  56       11             15       82  
General and administrative expense
                    (157 )     (157 )
                                       
Operating income (loss)
$ 684     $ 137     $ 67     $ (132 )   $ 756  
Losses from unconsolidated investments
        (40 )                 (40 )
Other items, net
        5       6       72       83  
Interest expense
                                  (427 )
                                       
Income from continuing operations before income taxes
                                  372  
Income tax expense
                                  (143 )
                                       
Income from continuing operations
                                  229  
Loss from discontinued operations, net of taxes
                                  (24 )
                                       
Net income