10-Q 1 dh-2011930_10q.htm 10-Q DH-2011.9.30_10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
  
FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2011
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                  to                  

Commission file number: 000-29311

DYNEGY HOLDINGS, LLC
(Exact name of registrant as specified in its charter)
State of
Incorporation
 
I.R.S. Employer
Identification No.
Delaware
 
94-3248415
601 Travis Street, Suite 1400
 
 
Houston, Texas
 
77002
(Address of principal executive offices)
 
(Zip Code)
 
(713) 507-6400
(Registrant’s telephone number, including area code)
 
Dynegy Holdings Inc.
1000 Louisiana, Suite 5800
Houston, TX 77002
(Former Name, Former Address and Formal Fiscal Year, if Changed Since Last Report)

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.  Yes o No ý

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).  Yes o  No ý
 
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 o
 
Accelerated filer ¨
Non-accelerated filer ý
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o  No ý
All of the registrant’s outstanding membership interests are owned directly by Dynegy Inc.



TABLE OF CONTENTS
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
Item 1.
FINANCIAL STATEMENTS:
 
 
 
Condensed Consolidated Balance Sheets:
 
September 30, 2011 and December 31, 2010
Condensed Consolidated Statements of Operations:
 
For the three and nine months ended September 30, 2011 and 2010
Condensed Consolidated Statements of Comprehensive Loss:
 
For the three and nine months ended September 30, 2011 and 2010
Condensed Consolidated Statements of Cash Flows:
 
For the three and nine months ended September 30, 2011 and 2010
Notes to Condensed Consolidated Financial Statements
 
 
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 4.
CONTROLS AND PROCEDURES
 
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
LEGAL PROCEEDINGS
Item 1A.
RISK FACTORS
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Item 3.
DEFAULTS UPON SENIOR SECURITIES
Item 6.
EXHIBITS


1


DEFINITIONS
 
As used in this Form 10-Q, the abbreviations contained herein have the meanings set forth below.
ASC
 
Accounting Standards Codification
ASU
 
Accounting Standards Update
BTA
 
Best technology available
CAA
 
Clean Air Act
CAIR
 
Clean Air Interstate Rule
CAISO
 
The California Independent System Operator
CARB
 
California Air Resources Board
CCR
 
Coal Combustion Residuals
CEQA
 
California Environmental Quality Act
CO2
 
Carbon Dioxide
CSAPR
 
Cross-State Air Pollution Rule
DH
 
Dynegy Holdings, LLC (formerly known as Dynegy Holdings Inc.)
DMSLP
 
Dynegy Midstream Services L.P.
EGU
 
Electric generating unit
EPA
 
Environmental Protection Agency
FASB
 
Financial Accounting Standards Board
FERC
 
Federal Energy Regulatory Commission
GAAP
 
Generally Accepted Accounting Principles of the United States of America
GEN Finance
 
Dynegy Gen Finance Company, LLC
GHG
 
Greenhouse Gas
HAPs
 
Hazardous air pollutants, as defined by the Clean Air Act
IMA
 
In-market asset availability
ISO
 
Independent System Operator
ISO-NE
 
Independent System Operator New England
MACT
 
Maximum achievable control technology
MISO
 
Midwest Independent Transmission System Operator, Inc.
MMBtu
 
One million British thermal units
MW
 
Megawatts
MWh
 
Megawatt hour
NM
 
Not meaningful
NOL
 
Net operating loss
NOx
 
Nitrogen oxide
NPDES
 
National Pollutant Discharge Elimination System
NRG
 
NRG Energy, Inc.
NSPS
 
New Source Performance Standard
NYISO
 
New York Independent System Operator
NYSDEC
 
New York State Department of Environmental Conservation
OTC
 
Over-the-counter
PJM
 
PJM Interconnection, LLC
PPEA
 
Plum Point Energy Associates, LLC
PPEA Holding
 
Plum Point Energy Associates Holding Company, LLC
RFO
 
Request for offer
RGGI
 
Regional Greenhouse Gas Initiative
RMR
 
Reliability Must Run
SEC
 
U.S. Securities and Exchange Commission
SIP
 
State Implementation Plan
SO2
 
Sulfur dioxide

2


SPDES
 
State Pollutant Discharge Elimination System
VaR
 
Value at Risk
VIE
 
Variable Interest Entity

3



Item 1—FINANCIAL STATEMENTS

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (in millions)
 
 
 
September 30,
 2011
 
December 31,
 2010
ASSETS
 
 

 
 

Current Assets
 
 

 
 

Cash and cash equivalents
 
$
386

 
$
253

Restricted cash and investments
 
128

 
81

Short-term investments
 

 
90

Accounts receivable, net of allowance for doubtful accounts of $12 and $13, respectively
 
174

 
229

Accounts receivable, affiliates
 
42

 
1

Interest receivable, affiliates
 
8

 

Inventory
 
60

 
121

Assets from risk-management activities
 
1,947

 
1,199

Assets from risk-management activities, affiliates
 
4

 

Deferred income taxes
 

 
3

Broker margin account
 
17

 
80

Prepayments and other current assets
 
193

 
123

Total Current Assets
 
2,959

 
2,180

Property, Plant and Equipment
 
3,902

 
8,593

Accumulated depreciation
 
(1,061
)
 
(2,320
)
Property, Plant and Equipment, Net
 
2,841

 
6,273

Other Assets
 
 

 
 

Restricted cash and investments
 
530

 
859

Assets from risk-management activities
 
131

 
72

Assets from risk management activities, affiliates
 
1

 

Intangible assets
 
104

 
141

Undertaking receivable, affiliate
 
1,250

 

Deferred income taxes
 

 
$

Other long-term assets
 
461

 
424

Total Assets
 
$
8,277

 
$
9,949

 
See the notes to condensed consolidated financial statements.

4


DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (in millions)

 
 
 
September 30,
 2011
 
December 31,
 2010
LIABILITIES AND MEMBER'S EQUITY
 
 

 
 

Current Liabilities
 
 

 
 

Accounts payable
 
$
151

 
$
134

Accounts payable, affiliates
 
49

 

Accrued interest
 
115

 
36

Deferred income taxes
 
2

 

Accrued liabilities and other current liabilities
 
68

 
106

Liabilities from risk-management activities
 
2,037

 
1,138

Liabilities from risk-management activities, affiliates
 
21

 

Short term debt, affiliates
 
200

 

Notes payable and current portion of long-term debt
 
3,354

 
148

Total Current Liabilities
 
5,997

 
1,562

Long-term debt
 
1,072

 
4,426

Long-term debt, affiliates
 
10

 
200

Long-Term Debt
 
1,082

 
4,626

Other Liabilities
 
 

 
 

Liabilities from risk-management activities
 
153

 
99

Liabilities from risk-management activities, affiliates
 
2

 

Deferred income taxes
 
139

 
606

Other long-term liabilities
 
160

 
337

Total Liabilities
 
7,533

 
7,230

Commitments and Contingencies (Note 10)
 


 


Member's Equity
 
744

 
2,719

Total Liabilities and Member's Equity
 
$
8,277

 
$
9,949


See the notes to condensed consolidated financial statements.


5


DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) (in millions)
 
 
 
Three Months Ended 
September 30,
 
Nine Months Ended 
September 30,
 
 
2011
 
2010
 
2011
 
2010
Revenues
 
$
467

 
$
775

 
$
1,298

 
$
1,872

Cost of sales
 
(278
)
 
(334
)
 
(781
)
 
(873
)
Gross margin, exclusive of depreciation shown separately below
 
189

 
441

 
517

 
999

Operating and maintenance expense, exclusive of depreciation shown separately below
 
(87
)
 
(110
)
 
(303
)
 
(341
)
Depreciation and amortization expense
 
(60
)
 
(96
)
 
(261
)
 
(261
)
Impairment and other charges
 
(3
)
 
(134
)
 
(6
)
 
(135
)
General and administrative expenses
 
(25
)
 
(47
)
 
(87
)
 
(106
)
Operating income (loss)
 
14

 
54

 
(140
)
 
156

Losses from unconsolidated investments
 

 

 

 
(34
)
Interest expense
 
(105
)
 
(92
)
 
(283
)
 
(272
)
Debt extinguishment costs
 
(21
)
 

 
(21
)
 

Other income and expense, net
 
7

 
1

 
11

 
3

Loss from continuing operations before income taxes
 
(105
)
 
(37
)
 
(433
)
 
(147
)
Income tax benefit (expense) (Note 14)
 
(24
)
 
15

 
109

 
71

Loss from continuing operations
 
(129
)
 
(22
)
 
(324
)
 
(76
)
Income from discontinued operations, net of taxes
 

 

 

 
1

Net loss
 
$
(129
)
 
$
(22
)
 
$
(324
)
 
$
(75
)
 
See the notes to condensed consolidated financial statements.

 

6


DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited) (in millions)
 
 
 
Three Months Ended
 September 30,
 
 
2011
 
2010
Net loss
 
$
(129
)
 
$
(22
)
Amortization of unrecognized prior service cost and actuarial loss (net of tax expense of zero and zero)
 
1

 
1

Total Other comprehensive income, net of tax
 
1

 
1

Comprehensive loss
 
$
(128
)
 
$
(21
)
 
 
 
Nine Months Ended
 September 30,
 
 
2011
 
2010
Net loss
 
$
(324
)
 
$
(75
)
Amortization of unrecognized prior service cost and actuarial loss (net of tax expense of $1 and $2)
 
2

 
2

Total Other comprehensive income, net of tax
 
2

 
2

Comprehensive loss
 
$
(322
)
 
$
(73
)
 
See the notes to condensed consolidated financial statements.



7


DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in millions)
 
 
Nine Months Ended
 September 30,
 
 
2011
 
2010
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net loss
 
$
(324
)
 
$
(75
)
Adjustments to reconcile net loss to net cash flows from operating activities:
 
 
 
 
Depreciation and amortization
 
278

 
273

Impairment and other charges
 
2

 
135

Losses from unconsolidated investments, net of cash distributions
 

 
34

Risk-management activities
 
142

 
(123
)
Risk-management activities, affiliates
 
(2
)
 

Deferred income taxes
 
(109
)
 
(69
)
Debt extinguishment costs
 
21

 

Other
 
33

 
51

Changes in working capital:
 
 
 
 
Accounts receivable
 
54

 
14

Inventory
 
17

 
15

Broker margin account
 
(53
)
 
353

Prepayments and other assets
 
(40
)
 
7

Accounts payable and accrued liabilities
 
91

 
108

Affiliate transactions
 
(47
)
 

Changes in non-current assets
 
(69
)
 
(51
)
Changes in non-current liabilities
 
2

 
(2
)
Net cash provided by (used in) operating activities
 
(4
)
 
670

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Capital expenditures
 
(163
)
 
(270
)
Unconsolidated investments
 

 
(15
)
Maturities of short-term investments
 
444

 
149

Purchases of short-term investments
 
(269
)
 
(406
)
Decrease (increase) in restricted cash and investments
 
178

 
(53
)
Affiliate transactions
 

 
(1
)
DMG Transfer
 
(441
)
 

Other investing
 
10

 

Net cash used in investing activities
 
(241
)
 
(596
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Proceeds from long-term borrowings, net of financing costs
 
2,022

 
(5
)
Repayments of borrowings
 
(1,623
)
 
(31
)
Debt extinguishment costs
 
(21
)
 

Net cash provided by (used in) financing activities
 
378

 
(36
)
Net increase in cash and cash equivalents
 
133

 
38

Cash and cash equivalents, beginning of period
 
253

 
419

Cash and cash equivalents, end of period
 
$
386

 
$
457

Other non-cash investing activity:
 
 

 
 

Non-cash capital expenditures
 
$
(3
)
 
$
10

Other non-cash financing activity:
 
 
 
 
Undertaking agreement, affiliate
 
$
(1,250
)
 
$

 
See the notes to condensed consolidated financial statements.
 

8

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010


EXPLANATORY NOTE

As explained herein, on November 7, 2011, we and four of our wholly owned subsidiaries, Dynegy Northeast Generation, Inc. ("Dynegy Northeast Generation"), Hudson Power, L.L.C. (“Hudson”), Dynegy Danskammer, L.L.C. (“Danskammer”) and Dynegy Roseton, L.L.C. (“Roseton”, and together with us, DNE, Hudson and Danskammer, the “DH Debtor Entities”) filed voluntary petitions (the “DH Chapter 11 Cases”) for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York, Poughkeepsie Division (the "Bankruptcy Court"). Since filing the DH Chapter 11 Cases, we have not filed our quarterly reports on Form 10-Q or our annual report on Form 10-K with the SEC. On the filing date hereof, we are simultaneously filing our quarterly report for the third quarter of 2011, our annual report for the year ended December 31, 2011, and our quarterly reports for the first and second quarters of 2012. In each of these reports, in a note to the financial statements, we have disclosed recent material developments with respect to our business, including with respect to the DH Chapter 11 Cases and other legal proceedings, in each case, as of the date of the filing of such reports. In this report, please see Note 16—Subsequent Events for a discussion of these developments. Further, additional disclosures regarding such developments can be found throughout each of these reports. For recent information regarding our financial condition and results of operations, please read our quarterly report on Form 10-Q for the second quarter of 2012.

Note 1—Basis of Presentation and Organization
 
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.  Unless the context indicates otherwise, throughout this report, the terms "DH," “the Company,” “we,” “us,” “our,” and “ours” are used to refer to Dynegy Holdings, LLC and its direct and indirect subsidiaries, unless the context clearly indicates otherwise. The term “Dynegy” refers to our parent company, Dynegy Inc., unless the context clearly indicates otherwise. The year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements but does 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 our annual report on Form 10-K for the year ended December 31, 2010, filed on March 8, 2011, which we refer to as our “Form 10-K.”

On September 1, 2011, DH, then a Delaware corporation, changed its corporate form to a Delaware limited liability company pursuant to Section 266 of the General Corporation Law of the State of Delaware.

As reflected in this report, we have changed our reportable segments. Beginning with the third quarter of 2011, as a result of the Reorganization (as defined and described below), we report the results of our power generation business as three separate segments: (i) the Gas segment ("Gas"), (ii) the Dynegy Northeast segment ("DNE"), and the Coal segment ("Coal"). Prior to this report, we reported results for the following segments: (i) Gen-MW (ii) GEN-WE and (iii) GEN-NE. Accordingly, we have recast the corresponding items of segment information for all prior periods. Our consolidated financial results also reflect corporate-level expenses such as interest and depreciation and amortization. General and administrative expenses are allocated to each reportable segment. Subsidiaries in our Gas, DNE, and Coal segments have entered into service agreements with certain of our affiliates. Please read "Service Agreements" for further discussion of the service agreements.

The Gas segment includes Dynegy Power, LLC ("DPC"), which owns, directly and indirectly, substantially all of our wholly-owned natural gas-fired power generation facilities. DPC, a bankruptcy remote entity, and its direct and indirect subsidiaries are organized into a ring-fenced group for the benefit of the creditors of DPC.
    
The Coal segment includes Dynegy Midwest Generation, LLC ("DMG"), which owns directly and indirectly, substantially all of the coal-fired power generation facilities. DMG, a bankruptcy remote entity, and its direct and indirect subsidiaries are organized into a ring-fenced group for the benefit of the creditors of DMG. Effective September 1, 2011, we transferred our Coal segment, which included approximately 3,100 MW, to our parent, Dynegy. On June 5, 2012, the effective date of the Settlement Agreement (as defined and discussed below in Note 16 to our financial statements), we reacquired the Coal segment. Please see Note 16—Subsequent Events—Bankruptcy Filing—Settlement Agreement and Plan Support Agreement for further discussion.

9

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010


Reorganization
 
In August 2011, Dynegy completed a reorganization of its subsidiaries (the “Reorganization”), whereby, (i) substantially all of the coal-fired power generation facilities are held by DMG, an indirect wholly-owned subsidiary of Dynegy (ii) substantially all of our natural gas-fired power generation facilities are held by DPC, and (iii) we continue to own 100 percent of the ownership interests of Dynegy Northeast Generation, Inc., the entity that indirectly holds the equity interest in the subsidiaries that operate the Roseton and Danskammer power generation facilities, including the leased units.  As a result of the Reorganization, DPC owns a portfolio of eight primarily natural gas-fired intermediate (combined cycle) and peaking (combustion and steam turbines) power generation facilities diversified across the West, Midwest and Northeast regions of the United States, totaling 6,771 MW of generating capacity.  DMG owns a portfolio of six primarily coal-fired baseload power generation facilities located in the Midwest, totaling 3,132 MW of generating capacity.  The DPC and DMG asset portfolios were designed to be separately financeable.  DPC and DMG are bankruptcy remote, thereby accommodating the financings reflected by the credit agreements and providing us with greater flexibility in our efforts to address leverage and liquidity issues and to realize the value of our assets.  Please read Note 11—Debt—Credit Agreements for discussion of the credit agreements.  Our remaining assets (including our leasehold interests in the Danskammer and Roseton facilities) are not a part of either DPC or DMG.
 
DMG Transfer.  On September 1, 2011, Dynegy and Dynegy Gas Investments, LLC (“DGIN”), our direct wholly-owned subsidiary, entered into a Membership Interest Purchase Agreement pursuant to which DGIN sold 100 percent of the outstanding membership interests of Dynegy Coal HoldCo, LLC (“Coal HoldCo”), a wholly owned subsidiary of DGIN, to Dynegy (the “DMG Transfer”).  Our management and Dynegy's Board of Directors, as well as DGIN’s board of managers, concluded that the fair value of the equity stake in Coal HoldCo at the time of the transfer was approximately $1.25 billion, after taking into account all debt obligations of DMG, including in particular DMG’s $600 million, five-year senior secured term loan facility.  Dynegy provided this value to DGIN in exchange for Coal HoldCo through Dynegy’s obligation, pursuant to an Undertaking Agreement (the “Undertaking Agreement”), to make certain specified payments over time which coincide in timing and amount with the payments of principal and interest that we are obligated to make under a portion of our $1.1 billion of 7.75 percent senior unsecured notes due 2019 and our $175 million of 7.625 percent senior debentures due 2026.  The Undertaking Agreement does not provide any rights or obligations with respect to any of our outstanding notes or debentures, including the notes and debentures due in 2019 and 2026.
 
Immediately after closing the DMG Transfer, DGIN assigned its right to receive payments under the Undertaking Agreement to the Company in exchange for a promissory note (the “Promissory Note”) in the amount of $1.25 billion that matures in 2027 (the “Assignment”).  The Promissory Note bears annual interest at a rate of 4.24 percent, which would be payable upon maturity.  As a condition to Dynegy’s consent to the Assignment, the Undertaking Agreement was amended and restated to be between us and Dynegy and to provide for the reduction of Dynegy’s obligations if the outstanding principal amount of any of our $3.5 billion of outstanding notes and debentures is decreased as a result of any exchange offer, tender offer or other purchase or repayment by Dynegy or its subsidiaries (other than us and our subsidiaries, unless Dynegy guarantees the debt securities of the Company or such subsidiary in connection with such exchange offer, tender offer or other purchase or repayment); provided, that such principal amount is retired, cancelled or otherwise forgiven. Please read Note 3—DMG Transfer and Undertaking Agreement for further discussion. On June 5, 2012, the effective date of the Settlement Agreement, we reacquired the Coal segment (including DMG). At such time the Undertaking Agreement and Promissory Note were terminated with no further obligations thereunder. Please see Note 16—Subsequent Events—Bankruptcy Filing—Settlement Agreement and Plan Support Agreement for further discussion.
 
Overview of Bankruptcy Remote and Ring-Fencing Measures.  The Reorganization created new companies, some of which are “bankruptcy remote.”  These bankruptcy remote entities have an independent manager whose consent is required for certain corporate actions and such entities are required to present themselves to the public as separate entities.  They maintain separate books, records and bank accounts and separately appoint officers.  Furthermore, they pay liabilities from their own funds, they conduct business in their own names (other than any business relating to the trading activities of us and our subsidiaries), they observe a higher level of formalities, and they have restrictions on pledging their assets for the benefit of certain other persons.   In addition, as part of the Reorganization, some companies within our portfolio were reorganized into “ring-fenced” groups. The upper-level companies in such ring-fenced groups are bankruptcy-remote entities governed by limited liability company operating agreements which, in addition to the bankruptcy remoteness provisions described above, contain certain additional restrictions prohibiting any material transactions with affiliates other than the direct and indirect

10

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

subsidiaries within the ring-fenced group without independent manager approval.
   
Relationships with Third Parties.  Each ring-fenced entity bills its customers on invoices clearly referencing solely such ring-fenced entity.  Other than in the limited context of Services (defined and described below), when transacting business with third parties, including vendors and customers, employees of the ring-fenced entities do not hold themselves out as agents or representatives of non-ring-fenced entities.  Similarly, other than in the limited context of Services, when transacting business with third parties, employees of non-ring-fenced entities do not hold themselves out as agents or representatives of ring-fenced entities.
 
Service Agreements.  Service Agreements between Dynegy and each of Dynegy Gas Investments Holdings, LLC (“DGIH”), Dynegy Coal Investments Holdings, LLC (“DCIH”), Dynegy Northeast Generation, Inc. and certain other subsidiaries of Dynegy, which were entered into at the Reorganization, govern the terms under which identified services (the “Services”) are provided.  Under the Service Agreements, Dynegy and certain of its subsidiaries (the “Providers”) provide Services to DGIH, DCIH and Dynegy Northeast Generation, Inc., their respective subsidiaries and certain of our other subsidiaries (the “Recipients”).
 
The Providers act as agents for the Recipients for the limited purpose of providing the Services set forth in the Service Agreements.  The Providers may perform additional services at the request of the Recipients, and will be reimbursed for all costs and expenses related to such additional services.  Prior to the beginning of each fiscal year in which Services are to be provided pursuant to the Service Agreements, the Providers and the Recipients must agree on a budget for the Services, outlining, among other items, the contemplated scope of the Services to be provided in the following fiscal year and the cost of providing each Service.  The Recipients will pay the Providers an annual management fee as agreed in the budget, which shall include reimbursement of out-of pocket costs and expenses related to the provision of the Services and will provide reasonable assistance, such as information, services and materials, to the Providers.

Chapter 11 Filings and Going Concern. Our accompanying unaudited condensed consolidated financial statements were prepared assuming that based on the information available in this reporting period, we would continue as a going concern, and therefore contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve month period following the date of these unaudited condensed consolidated financial statements.  However, continued low power prices over the past several years have had a significant adverse impact on our business and continue to negatively impact our projected future liquidity.
 
As noted above, certain of our subsidiaries (DPC and DMG) entered into two credit agreements on August 5, 2011 which resulted in the repayment in full and termination of commitments under our former Fifth Amended and Restated Credit Agreement. We also completed the DMG Transfer. While DPC's credit agreement was designed to provide sufficient operating liquidity for DPC for the foreseeable future, it contains certain restrictions related to distributions by DPC to its parent company.  Please read Note 11—Debt—Credit Agreements for further discussion.

 On November 7, 2011, we still had significant debt service requirements in connection with our outstanding notes and debentures, and there were significant payment obligations related to the leasehold interests in the Danskammer and Roseton facilities.  On that date, the DH Debtor Entities filed the DH Chapter 11 Cases in the Bankruptcy Court. The DH Chapter 11 Cases were assigned to the Honorable Cecelia G. Morris and are being jointly administered for procedural purposes only under the caption In re: Dynegy Holdings, LLC, et. al, Case No. 11-38111. Please see Note 16—Subsequent Events—Bankruptcy Filing for further information regarding the development of our case and Dynegy's subsequent petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court (the "Dynegy Chapter 11 Case," and together with the DH Chapter 11 Cases, the “Chapter 11 Cases”). Only the DH Debtor Entities filed voluntary petitions for relief and none of our other direct or indirect subsidiaries are debtors under Chapter 11 of the Bankruptcy Code. Consequently, they continue to operate their business in the ordinary course. Please see Note 16—Subsequent Events—Bankruptcy Filing for further information.
 
Our ability to continue as a going concern is dependent on many factors, including, among other things, the generation by DPC and DMG of sufficient positive operating results to enable DPC and DMG to make certain restricted distributions to its parents (as described in Note 11—Debt), the terms and conditions of an approved plan of reorganization that allows the DH Debtor Entities to emerge from bankruptcy, execution of any further restructuring strategies, and the successful execution of the company-wide cost reduction initiatives that are ongoing.  The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of the foregoing uncertainties except for the

11

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

reclassification of the DH Senior Notes and Debentures, including the Subordinated Capital Income Securities (as defined below in Note 16) reflected as affiliated debt, and associated deferred financing costs due to the DH Chapter 11 Cases discussed above.  Please read Note 11—Debt—Senior Notes and Debentures and Subordinated Capital Income Securities for further discussion.
 
Note 2—Accounting Policies
 
Use of Estimates
 
The preparation of consolidated financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make informed estimates and judgments that affect our reported financial position and results of operations based on currently available information.  Actual results could differ materially from our estimates. 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.
Subsequent Events.
DH financial statements as of December 31, 2011 and for the period from November 8, 2011 through December 31, 2011 were initially issued on March 8, 2012 in connection with the filing of Dynegy's 2011 Form 10-K. We have considered the impact of events occurring subsequent to March 8, 2012 for disclosure but have not recognized the impact of such events in these consolidated financial statements.

Accounting Principles Not Yet Adopted
 
Fair Value Measurement Disclosures.  In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04—Fair Value Measurement (Topic 820):  Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU No. 2011-04”).  This authoritative guidance changes the wording used to describe the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements.  ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011.  We do not expect the implementation of this guidance to have a significant impact on our financial condition, results of operations or cash flows.
 
Presentation of Comprehensive Income.  In June 2011, the FASB issued ASU 2011-05—Comprehensive Income (Topic 220):  Presentation of Comprehensive Income (“ASU No. 2011-05”).  The FASB’s objective in issuing this guidance is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  ASU No. 2011-05 eliminates the option of presenting components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The standard requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  We do not expect the implementation of this guidance to have a significant impact on our financial condition, results of operations or cash flows.

Note 3—DMG Transfer and Undertaking Agreement

On September 1, 2011, we completed the DMG Transfer which resulted in the transfer of our Coal segment to Dynegy Inc. in exchange for the Undertaking Agreement. In connection with the DMG Transfer, we recognized a loss of $1.77 billion, which was recorded as a reduction of member's equity because the transaction was between entities under common control.

On June 5, 2012, the effective date of the Settlement Agreement, we reacquired the Coal segment (including DMG). At such time, the Undertaking Agreement and Promissory Note were terminated with no further obligations thereunder. Please see Note 16—Subsequent Events—Settlement Agreement and Plan Support Agreement for further information on our reacquisition of the Coal segment.
 

12


Note 4—Investments
 
We did not have any investments as of September 30, 2011. The amortized cost basis, unrealized gains and losses and fair values of investments in available for sale investments as of December 31, 2010 is shown in the table below:
 
 
 
Investments as of December 31, 2010
 
 
Cost Basis
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
(in millions)
Available for Sale investments:
 
 

 
 

 
 

 
 

Commercial Paper
 
$
41

 
$

 
$

 
$
41

Certificates of Deposit
 
12

 

 

 
12

Corporate Securities
 
2

 

 

 
2

U.S. Treasury and Government Securities (1)
 
120

 

 

 
120

Total
 
$
175

 
$

 
$

 
$
175

_______________________________________________________________________________
(1)        Includes $85 million in Broker margin account on our unaudited condensed consolidated balance sheets in support of transactions with our futures clearing manager.
 
Note 5—Risk Management Activities, Derivatives and Financial Instruments
 
The nature of our business necessarily involves market and financial risks.  Specifically, we are exposed to commodity price variability related to our power generation business.  Our commercial team manages these commodity price risks with financially settled and other types of contracts consistent with our commodity risk management policy.  Our commercial team also uses financial instruments in an attempt to capture the benefit of fluctuations in market prices in the geographic regions where our assets operate.  Our treasury team manages our financial risks and exposures associated with interest expense variability.
 
Our commodity risk management strategy gives us the flexibility to sell energy and capacity through a combination of spot market sales and near-term contractual arrangements (generally over a rolling 1 to 3 year time frame).  Our commodity risk management goal is to protect cash flow in the near-term while keeping the ability to capture value longer-term.  Increasing collateral requirements and our liquidity position could impact our ability to effectively employ our risk management strategy.
 
Many of our contractual arrangements are derivative instruments and are accounted for at fair value as part of Revenues in our unaudited condensed consolidated statements of operations.  We also manage commodity price risk by entering into capacity forward sales arrangements, tolling arrangements, RMR contracts, fixed price coal purchases and other arrangements that do not receive fair value accounting treatment because these arrangements do not meet the definition of a derivative or are designated as “normal purchase normal sales."  As a result, the gains and losses with respect to these arrangements are not reflected in the unaudited condensed consolidated statements of operations until delivery occurs.
 
Quantitative Disclosures Related to Financial Instruments and Derivatives
 
The following disclosures and tables present information concerning the impact of derivative instruments on our unaudited condensed consolidated balance sheets and statements of operations.  In the table below, commodity contracts primarily consist of derivative contracts related to our power generation business that we have entered into for purposes of economically hedging future fuel requirements and sales commitments and securing commodity prices.  We elect not to designate any of our commodity instruments as accounting hedges. As of September 30, 2011, our commodity derivatives were comprised of both purchases and sales. As of September 30, 2011, we had net purchase and sales of commodity derivative contracts outstanding in the following quantities:
 

13

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

Contract Type
 
Hedge Designation
 
Quantity
 
Unit of Measure
 
Net Fair Value
 
 
 
 
(in millions)
 
 
 
(in millions)
Commodity contracts:
 
 
 
 

 
 
 
 

Electric energy (1)
 
Not designated
 
(15
)
 
MWh
 
$
66

Electric energy - affiliate (1)
 
Not designated
 
5

 
MWh
 
$
(18
)
Natural gas (1)
 
Not designated
 
(25
)
 
MMBtu
 
$
(162
)
Heat rate derivatives
 
Not designated
 
(3)/27

 
MWh/MMBtu
 
$
(17
)
Other (2)
 
Not designated
 
2

 
Misc.
 
$
1

_______________________________________________________________________________
(1) Mainly comprised of swaps, options and physical forwards.
(2) Comprised of emissions, coal, crude oil and fuel oil options, swaps, and physical forwards.

Derivatives on the Balance Sheet.  We execute a significant volume of transactions through futures clearing managers.  Our daily cash payments (receipts) to (from) our futures clearing managers consist of three parts: (i) fair value of open positions (exclusive of options) (“Daily Cash Settlements”); (ii) initial margin requirements of open positions (“Initial Margin”); and (iii) fair value related to options (“Options”, and collectively with Daily Cash Settlements and Initial Margin, “Collateral”).  We do not offset fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement and we do not elect to offset the fair value amounts recognized for the Daily Cash Settlements paid or received against the fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement.  As a result, our unaudited condensed consolidated balance sheets present derivative assets and liabilities, as well as related Collateral, as applicable, on a gross basis.

We have used short-term investments to collateralize a portion of our collateral requirements.  The broker required that we post approximately 103 percent of any collateral requirement collateralized with short-term investments.  Accordingly, our Broker margin account included approximately $3 million related to this requirement at December 31, 2010.  Additionally, we posted $7 million of short-term investments which were not utilized as collateral at December 31, 2010.  There were no short-term investments in our Broker margin account at September 30, 2011.
 
In addition to the transactions we execute through the futures clearing managers, we also execute transactions through multiple bilateral counterparties.  Our transactions with these counterparties are collateralized using only cash collateral.  As of September 30, 2011, we had $41 million posted with these counterparties, which is included in Prepayments and other current assets on our unaudited condensed consolidated balance sheets.
 
The following table presents the fair value and balance sheet classification of derivatives in the unaudited condensed consolidated balance sheet as of September 30, 2011, and December 31, 2010 segregated by type of contract segregated by assets and liabilities.
 

14

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

Contract Type
 
Balance Sheet Location
 
September 30,
 2011
 
December 31,
2010
 
 
 
 
(in millions)
Derivatives designated as hedging instruments:
 
 
 
 

 
 

Derivative Assets:
 
 
 
 

 
 

Interest rate contracts
 
Assets from risk management activities
 
$

 
$
1

Total derivatives designated as hedging instruments
 
 
 

 
1

Derivatives not designated as hedging instruments:
 
 
 
 

 
 

Derivative Assets:
 
 
 
 

 
 

Commodity contracts
 
Assets from risk management activities
 
$
2,078

 
$
1,265

Commodity contracts, affiliates
 
Assets from risk management activities, affiliates
 
5

 

Interest rate contracts
 
Assets from risk management activities
 

 
5

Derivative Liabilities:
 
 
 
 

 
 

Commodity contracts
 
Liabilities from risk management activities
 
(2,190
)
 
(1,231
)
Commodity contracts, affiliates
 
Liabilities from risk management activities, affiliates
 
(23
)
 

Interest rate contracts
 
Liabilities from risk management activities
 

 
(6
)
Total derivatives not designated as hedging instruments, net
 
 
 
$
(130
)
 
$
33

Total derivatives, net
 
 
 
$
(130
)
 
$
34

 
Impact of Derivatives on the Consolidated Statements of Operations
 
The following discussion and tables include the location and amount of gains and losses on derivative instruments in our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010, segregated between designated, qualifying hedging instruments and those that are not, by type of contract.

Fair Value Hedges.  We enter into derivative instruments that qualify, and that we may elect to designate, as fair value hedges.  We previously used interest rate swaps to convert a portion of our non-prepayable fixed-rate debt into floating-rate debt.  These derivatives and the corresponding hedged debt matured April 1, 2011.  During the three and nine months ended September 30, 2011 and 2010, there was no ineffectiveness from changes in the fair value of hedge positions and no amounts were excluded from the assessment of hedge effectiveness.  During the three and nine months ended September 30, 2011 and 2010, there were no gains or losses related to the recognition of firm commitments that no longer qualified as fair value hedges.
 
The impact of interest rate swap contracts designated as fair value hedges and the related hedged item on our unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2011 and 2010 was immaterial for all periods.
 
Financial Instruments Not Designated as Hedges.  We elect not to designate derivatives related to our power generation business and interest rate instruments as cash flow or fair value hedges.  Thus, we account for changes in the fair value of these derivatives within the consolidated statements of operations (herein referred to as “mark-to-market accounting treatment”).  As a result, these mark-to-market gains and losses are not reflected in the unaudited condensed consolidated statements of operations in the same period as the underlying activity for which the derivative instruments serve as economic hedges.
 
For the three-month period ended September 30, 2011, our revenues included approximately $17 million of mark-to-market losses related to this activity compared to $132 million of mark-to-market gains in the same period in the prior year.  For the nine months ended September 30, 2011, our revenues included approximately $144 million of mark-to-market losses

15

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

related to this activity compared to $127 million of mark-to-market gains in the same period in the prior year.
 
The impact of derivative financial instruments on our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010 is presented below.  Note that this presentation does not reflect the expected gains or losses arising from the underlying physical transactions associated with these financial instruments.  Therefore, this presentation is not indicative of the economic gross margin we expect to realize when the underlying physical transactions settle.
 
Derivatives Not Designated as
 
Location of Gain ( Loss)
Recognized in Income on
 
Amount of Gain (Loss) Recognized in
Income on Derivatives for the
Three Months Ended September 30,
 
Amount of Gain (Loss) Recognized in
Income on Derivatives for the
Nine Months Ended September 30,
Hedging Instruments
 
Derivatives
 
2011
 
2010
 
2011
 
2010
 
 
 
 
(in millions)
Commodity contracts
 
Revenues
 
$
(62
)
 
$
106

 
$
(132
)
 
$
246

Commodity contracts - affiliates
 
Revenues
 
(5
)
 

 
(5
)
 

Interest rate contracts
 
Interest expense
 

 

 

 
(1
)


Note 6—Fair Value Measurements
 
The following tables set forth by level within the fair value hierarchy our financial assets and liabilities, including transactions with affiliates, that were accounted for at fair value on a recurring basis as of September 30, 2011 and December 31, 2010.  These financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
 
 
 
Fair Value as of September 30, 2011
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in millions)
Assets:
 
 

 
 

 
 

 
 

Assets from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
226

 
$
30

 
$
256

Electricity derivatives, affiliates
 

 
1

 
4

 
5

Natural gas derivatives
 

 
1,819

 
1

 
1,820

Other derivatives
 

 
2

 

 
2

Total assets from commodity risk management activities
 
$

 
$
2,048

 
$
35

 
$
2,083

Liabilities:
 
 

 
 

 
 

 
 

Liabilities from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
(178
)
 
$
(12
)
 
$
(190
)
Electricity derivatives, affiliates
 

 
(19
)
 
(4
)
 
(23
)
Natural gas derivatives
 

 
(1,978
)
 
(4
)
 
(1,982
)
Heat rate derivatives
 

 

 
(17
)
 
(17
)
Other derivatives
 

 
(1
)
 

 
(1
)
Total liabilities from commodity risk management activities
 
$

 
$
(2,176
)
 
$
(37
)
 
$
(2,213
)


16

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

 
 
Fair Value as of December 31, 2010
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in millions)
Assets:
 
 

 
 

 
 

 
 

Assets from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
526

 
$
77

 
$
603

Natural gas derivatives
 

 
613

 
5

 
618

Other derivatives
 

 
44

 

 
44

Total assets from commodity risk management activities:
 

 
1,183

 
82

 
1,265

Assets from interest rate contracts
 

 
6

 

 
6

Short-term investments:
 
 

 
 

 
 

 
 

Commercial paper
 

 
41

 

 
41

Certificates of deposit
 

 
12

 

 
12

Corporate securities
 

 
2

 

 
2

U.S. Treasury and government securities (1)
 

 
120

 

 
120

Total short-term investments
 

 
175

 

 
175

Total
 
$

 
$
1,364

 
$
82

 
$
1,446

Liabilities:
 
 

 
 

 
 

 
 

Liabilities from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
(311
)
 
$
(28
)
 
$
(339
)
Natural gas derivatives
 

 
(825
)
 

 
(825
)
Heat rate derivatives
 

 

 
(31
)
 
(31
)
Other derivatives
 

 
(36
)
 

 
(36
)
Total liabilities from commodity risk management activities
 
$

 
$
(1,172
)
 
$
(59
)
 
$
(1,231
)
Liabilities from interest rate contracts
 

 
(6
)
 

 
(6
)
Total
 
$

 
$
(1,178
)
 
$
(59
)
 
$
(1,237
)
 _______________________________________________________________________________
(1)        Includes $85 million in Broker margin account on our unaudited condensed consolidated balance sheets in support of transactions with our futures clearing manager.
 
We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best available information.  Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  For example, assets and liabilities from risk management activities may include exchange-traded derivative contracts and OTC derivative contracts.  Some exchange-traded derivatives are valued using broker or dealer quotations, or market transactions in either the listed or OTC markets.  In such cases, these exchange-traded derivatives are classified within Level 2.  OTC derivative trading instruments include swaps, forwards, options and complex structures that are valued at fair value.  In certain instances, these instruments may utilize models to measure fair value.  Generally, we use a similar model to value similar instruments.  Valuation models utilize various inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability, and market-corroborated inputs.  Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2.  Certain OTC derivatives trade in less active markets with a lower availability of pricing information.  In addition, complex or structured transactions, such as heat-rate call options, can introduce the need for internally-developed model inputs that might not be observable in or corroborated by the market.  When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3.  We have consistently used this valuation technique for all periods presented.  Please read Note 2—Summary of Significant Accounting Policies—Fair Value Measurements in our Form 10-K for further discussion.

17

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010


The following tables set forth a reconciliation of changes in the fair value of financial instruments classified as Level 3 in the fair value hierarchy:
 
 
 
Three Months Ended September 30, 2011
 
 
Electricity
Derivatives
 
Natural Gas
Derivatives
 
Heat Rate
Derivatives
 
Total
 
 
(in millions)
Balance at June 30, 2011
 
$
35

 
$
(1
)
 
$
(22
)
 
$
12

Total losses included in earnings
 
(14
)
 
(2
)
 
(1
)
 
(17
)
Settlements
 
(2
)
 

 
5

 
3

Balance at September 30, 2011
 
$
19

 
$
(3
)
 
$
(18
)
 
$
(2
)
Unrealized losses relating to instruments held as of September 30, 2011
 
$
(4
)
 
$
(2
)
 
$
(5
)
 
$
(11
)
 
 
 
Nine Months Ended September 30, 2011
 
 
Electricity
Derivatives
 
Natural Gas
Derivatives
 
Heat Rate
Derivatives
 
Total
 
 
(in millions)
Balance at December 31, 2010
 
$
49

 
$
5

 
$
(31
)
 
$
23

Total losses included in earnings
 
(22
)
 
(8
)
 
(1
)
 
(31
)
Settlements
 
(8
)
 

 
14

 
6

Balance at September 30, 2011
 
$
19

 
$
(3
)
 
$
(18
)
 
$
(2
)
Unrealized losses relating to instruments held as of September 30, 2011
 
$
2

 
$
(7
)
 
$
(4
)
 
$
(9
)
 
 
 
Three Months Ended September 30, 2010
 
 
Electricity
Derivatives
 
Natural Gas
Derivatives
 
Heat Rate
Derivatives
 
Total
 
 
(in millions)
Balance at June 30, 2010
 
$
23

 
$
5

 
$
(23
)
 
$
5

Total gains included in earnings
 
27

 

 
5

 
32

Sales and settlements:
 


 


 


 

Sales
 

 

 
(1
)
 
(1
)
Settlements
 
(2
)
 

 
(4
)
 
(6
)
Balance at September 30, 2010
 
$
48

 
$
5

 
$
(23
)
 
$
30

Unrealized gains relating to instruments still held as of September 30, 2010
 
$
28

 
$

 
$
1

 
$
29




18

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

 
 
Nine Months Ended September 30, 2010
 
 
Electricity
Derivatives
 
Natural Gas
Derivatives
 
Heat Rate
Derivatives
 
Interest Rate
Swaps
 
Total
 
 
(in millions)
Balance at December 31, 2009
 
$
6

 
$
5

 
$
17

 
$
(50
)
 
$
(22
)
Deconsolidation of Plum Point
 

 

 

 
50

 
50

Total gains included in earnings
 
70

 

 
15

 

 
85

Purchases, sales and settlements:
 


 


 


 


 

Purchases
 
1

 

 
2

 

 
3

Sales
 
(13
)
 

 
(22
)
 

 
(35
)
Settlements
 
(16
)
 

 
(35
)
 

 
(51
)
Balance at September 30, 2010
 
$
48

 
$
5

 
$
(23
)
 
$

 
$
30

Unrealized gains (losses) relating to instruments still held as of September 30, 2010
 
$
60

 
$

 
$
(3
)
 
$

 
$
57

 
Gains and losses (realized and unrealized) for Level 3 recurring items are included in Revenues on the unaudited condensed consolidated statements of operations.  We believe an analysis of instruments classified as Level 3 should be undertaken with the understanding that these items generally serve as economic hedges of our power generation portfolio.  We did not have any transfers between Level 1, Level 2 and Level 3 for the three and nine months ended September 30, 2011 and 2010.
 
Nonfinancial Assets and Liabilities.  The following table sets forth by level within the fair value hierarchy our fair value measurements with respect to non-financial assets and liabilities that are measured at fair value on a nonrecurring basis.  These assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
 
 
 
Fair Value Measurements as of September 30, 2010
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Total Losses
 
 
(in millions)
Assets held and used
 
$

 
$

 
$
275

 
$
275

 
$
(135
)
Equity method investment
 

 

 

 

 
(37
)
Total
 
$

 
$

 
$
275

 
$
275

 
$
(172
)
 
During the nine months ended September 30, 2010, long-lived assets held and used were written down to their fair value of $275 million, resulting in pre-tax impairment charges of $135 million, which is included in Impairment and other charges on our unaudited condensed consolidated statements of operations.  Please read Note 7—Impairment Charges for further discussion.
 
On January 1, 2010, we recorded an impairment of our investment in PPEA Holding as part of our cumulative effect of a change in accounting principle.  We determined the fair value of our investment using assumptions that reflected our best estimate of third party market participants’ considerations based on the facts and circumstances related to our investment at that time.  The fair value of our investment on January 1, 2010 was considered a Level 3 measurement because the fair value was determined based on probability weighted cash flows resulting from various alternative scenarios including (i) no change in the financing structure, (ii) a restructuring of the project debt, and (iii) insolvency.  These scenarios and the related probability weighting were consistent with the scenarios used at December 31, 2009 in our long-lived asset impairment analysis.  At March 31, 2010, we fully impaired our investment in PPEA Holding due to the uncertainty and risk surrounding PPEA’s financing structure.  Please read Note 8—Impairment and Restructuring Charges—2010 Impairment Charges—Other in our Form 10-K.

Fair Value of Financial Instruments.  We have determined the estimated fair-value amounts using available market information and selected valuation methodologies.  Considerable judgment is required in interpreting market data to develop the estimates of fair value.  The use of different market assumptions or valuation methodologies could have a material effect on

19

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

the estimated fair-value amounts.
 
The carrying values of financial assets and liabilities (cash, accounts receivable, restricted cash and investments, short-term investments and accounts payable) not presented in the table below approximate fair values due to the short-term maturities of these instruments.  The fair value of debt as reflected in the table has been calculated based on the average of certain available broker quotes for the periods ending September 30, 2011 and December 31, 2010, respectively.

The fair value of the Undertaking receivable affiliate was determined based on the average of the September 1, 2011 and November 7, 2011 valuations for the Undertaking receivable. The valuations were based on estimated cash flows that Dynegy expects to generate from its Coal segment based on weighting of unlevered and levered discounted cash flow methodologies. These methodologies estimate the value of an asset or business by calculating the present value of expected future cash flows using a market participant's expected weighted average cost of capital (discount rate). The projections of Dynegy's Coal segment's estimated future operating results were based on discrete financial forecasts developed by Dynegy's management for planning purposes. In the levered discounted cash flows methodology, the future operating results were also based on discrete financial forecasts developed by Dynegy's management for planning purposes, but with the inclusion of the related term loan interest and principal payments. This methodology estimates the fair value of the future cash flows from Dynegy's Coal segment by calculating the present value of expected future cash flows using a discount rate that reflects a market participant's expected equity discount rate. Please read Note 12—Related Party Transactions—DMG Transfer and Undertaking Agreement for further discussion regarding the Undertaking receivable.
 
 
 
September 30, 2011
 
December 31, 2010
 
 
Carrying
Amount
 
Fair
 Value
 
Carrying
Amount
 
Fair
 Value
 
 
(in millions)
Undertaking receivable, affiliate (1)
 
$
1,250

 
$
1,000

 
$

 
$

Interest rate derivatives designated as fair value accounting hedges (2)
 

 

 
1

 
1

Interest rate derivatives not designated as accounting hedges (2)
 

 

 
(1
)
 
(1
)
Commodity-based derivative contracts not designated as accounting hedges (2)
 
(130
)
 
(130
)
 
34

 
34

Term Loan B, due 2013
 

 

 
(68
)
 
(67
)
Term Facility, floating rate due 2013
 

 

 
(850
)
 
(845
)
DPC Credit Agreement due 2016 (3)
 
(1,078
)
 
(1,081
)
 

 

Senior Notes and Debentures (4):
 


 


 


 


6.875 percent due 2011 (5)
 

 

 
(80
)
 
(79
)
8.75 percent due 2012
 
(89
)
 
(69
)
 
(89
)
 
(87
)
7.5 percent due 2015 (6)
 
(771
)
 
(504
)
 
(768
)
 
(592
)
8.375 percent due 2016 (7)
 
(1,044
)
 
(643
)
 
(1,043
)
 
(777
)
7.125 percent due 2018
 
(172
)
 
(102
)
 
(172
)
 
(116
)
7.75 percent due 2019
 
(1,100
)
 
(682
)
 
(1,100
)
 
(728
)
7.625 percent due 2026
 
(171
)
 
(97
)
 
(171
)
 
(107
)
Subordinated Debentures payable to affiliates, 8.316 percent, due 2027 (4)
 
(200
)
 
(76
)
 
(200
)
 
(83
)
Sithe Senior Notes, 9.0 percent due 2013 (8)
 

 

 
(233
)
 
(233
)
Other (9)
 

 

 
175

 
175

_______________________________________________________________________________
(1)
On September 1, 2011, we completed the DMG Transfer. Please read Note 3—DMG Transfer and Undertaking Agreement for further discussion.
(2)
Included in both current and non-current assets and liabilities on the unaudited condensed consolidated balance sheets.
(3)
Carrying amount includes unamortized discounts of $22 million at September 30, 2011.
(4)
Unless otherwise noted, this debt was reclassified to Liabilities Subject to Compromise upon the commencement of the DH Chapter 11 Cases. Please read Note 16—Subsequent Events for further discussion.
(5)
Payment in full was made on April 1, 2011, which was the maturity date of this debt.

20

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

(6)
Includes unamortized discounts of $14 million and $17 million at September 30, 2011 and December 31, 2010, respectively.
(7)
Includes unamortized discounts of $3 million and $4 million at September 30, 2011 and December 31, 2010, respectively.
(8)
Includes unamortized premiums of $8 million at December 31, 2010.
(9)
Other represents short-term investments, including $85 million of short-term investments included in the Broker margin account, at December 31, 2010.

Note 7—Impairment Charges
 
Casco Bay Impairment.  On August 13, 2010, Dynegy entered into a merger agreement with an affiliate of The Blackstone Group L.P. (“Blackstone”), pursuant to which Dynegy would be acquired. The merger agreement was not approved by Dynegy's stockholders at the special stockholders’ meeting on November 23, 2010 and was subsequently terminated by the parties in accordance with the terms of the merger agreement.
 
In connection with the merger agreement, we determined it was more likely than not that our Moss Landing, Morro Bay, Oakland and Casco Bay facilities would be disposed of before the end of their previously estimated useful lives as Blackstone had entered into a separate agreement to sell these facilities to a third party upon the closing of the merger agreement.  Based on the terms of the merger agreement and our 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 ($81 million after-tax) during the three months ended September 30, 2010 to reduce the carrying value of our Casco Bay facility and related assets to its fair value.  This charge is included in Impairment and other charges in our consolidated statements of operations in the Gas segment.  Please read Note 15—Segment Information for further discussion of changes to our reportable segments.
 
In performing the impairment analysis, we concluded that the assets Blackstone planned to sell to a third party did not meet the criteria of “held for sale”, as the agreement to sell these assets was a contractual arrangement between Blackstone and a third party.  Management had not committed to any plan to dispose of these assets prior to the end of their previously estimated useful lives.  As such, we assessed the recoverability of the carrying value of these assets using expected cash flows from the proceeds from the potential sale of these assets, probability weighted with the expected cash flow from continuing to hold and use the assets.  We performed this analysis considering a range of likelihoods that management considered reasonable regarding whether the sale of these assets would be completed.  In any of the scenarios within this range of the probabilities we considered reasonable, the expected undiscounted cash flows from the Moss Landing, Morro Bay and Oakland facilities were sufficient to recover their carrying values, while the expected undiscounted cash flows from the Casco Bay facility were not.  Therefore, we recorded an impairment charge to reduce the carrying value of the Casco Bay facility and related assets to its estimated fair value.  We determined the fair value of the facility based on assumptions that reflect our best estimate of third party market participants’ considerations, and corroborated these assumptions based upon the terms of the proposed sale of the facilities.  The merger agreement ultimately did not receive stockholder approval by Dynegy, and at December 31, 2010, we no longer considered it more likely than not that these facilities would be disposed of before the end of their currently estimated useful lives.
 
Other.  In the first quarter of 2010, as a result of uncertainty and risk surrounding PPEA’s financing structure, we recorded a pre-tax impairment charge of approximately $37 million to reduce the carrying value of our investment in PPEA Holding to zero.  In the fourth quarter 2010, we sold our interest in this investment.  Please read Note 15—Unconsolidated Investments in our Form 10-K for additional information.
 
Our impairment analysis of our generating assets is based on forward-looking projections of our estimated future cash flows based on discrete financial forecasts developed by management for planning purposes.  These projections incorporate certain assumptions including forward power and capacity prices, forward fuel costs and costs of complying with environmental regulations.  As additional information becomes available regarding the significant assumptions used in our analysis, we may conclude that it is necessary to update our impairment analyses in future periods to assess the recoverability of our assets and additional impairment charges could be required.



21

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

Note 8—Accumulated Other Comprehensive Loss
 
Accumulated other comprehensive loss, net of tax, is included in members’ equity on our unaudited condensed consolidated balance sheets as follows:
 
 
 
September 30,
 2011

 
December 31,
2010
 
 
(in millions)
Cash flow hedging activities, net
 
$
3

 
$
3

Unrecognized prior service cost and actuarial loss, net
 
(1
)
 
(56
)
Accumulated other comprehensive loss, net of tax
 
$
2

 
$
(53
)
 
Note 9—Variable Interest Entities
 
PPEA Holding Company, LLC.  Until the sale of our interest on November 10, 2010, we owned an approximate 37 percent interest in PPEA Holding, which through PPEA, its wholly-owned subsidiary, owned an approximate 57 percent undivided interest in the Plum Point Project.  On November 10, 2010, we completed the sale of our interest in PPEA Holding to one of the other investors in PPEA Holding.  Please read Note 8—Impairment and Restructuring Charges—2010 Impairment Charges—Other in our Form 10-K.
 
Due to the uncertainty and risk surrounding PPEA’s financing structure as a result of events that occurred in 2010, we concluded that there was an other-than-temporary impairment of our investment in PPEA Holding and fully impaired our equity investment at March 31, 2010.  As a result, we recorded an impairment charge of approximately $37 million for the three months ended March 31, 2010, which is included in Losses from unconsolidated investments in our unaudited condensed consolidated statements of operations.  The impairment was a Level 3 non-recurring fair value measurement and reflected our best estimate of third party market participants’ considerations including probabilities related to restructuring of the project debt and potential insolvency.  Please read Note 6—Fair Value Measurements for further discussion.
 
Summarized aggregate financial information for unconsolidated equity investments and our equity share thereof was:
 
 
 
Three Months Ended September 30, 2010
 
Nine Months Ended September 30, 2010
 
 
Total
 
Equity Share
 
Total
 
Equity Share
 
 
(in millions)
 
 
 
 
Revenues
 
$
13

 
$

 
$
13

 
$

Operating income
 
3

 

 
1

 

Net loss
 
(20
)
 

 
(53
)
 
3

 
During the second and third quarters of 2010, we did not recognize our share of losses from our investment in PPEA Holding as our investment in PPEA Holding was valued at zero at September 30, 2010, and we did not have an obligation to provide further financial support.

Losses from unconsolidated investments for the nine months ended September 30, 2010 were $34 million, which includes an impairment loss of $37 million, as discussed above.  This impairment was partially offset by equity earnings of $3 million, comprised primarily of mark-to-market gains related to PPEA’s interest rate swaps, partially offset by financing expenses.
 
Note 10—Commitments and Contingencies
 
Legal Proceedings
 
Set forth below is a summary of our material ongoing legal proceedings. We record accruals for estimated losses from contingencies when available information indicates that a loss is probable and the amount of the loss, or range of loss, can be reasonably estimated.  In addition, we disclose matters for which management believes a material loss is reasonably possible. 

22

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

In all instances, management has assessed the matters below based on current information and made judgments concerning their potential outcome, giving consideration to the nature of the claim, the amount, if any, and nature of damages sought and the probability of success.  Management regularly reviews all new information with respect to each such contingency and adjusts its assessment and estimates of such contingencies accordingly.  Because litigation is subject to inherent uncertainties including unfavorable rulings or developments, it is possible that the ultimate resolution of our legal proceedings could involve amounts that are different from our currently recorded accruals and that such differences could be material.
 
In addition to the matters discussed below, we are party to other routine proceedings arising in the ordinary course of business or related to discontinued business operations.  Any accruals or estimated losses related to these matters are not material. In management’s judgment, the ultimate resolution of these matters will not have a material effect on our financial condition, results of operations or cash flows.
 
Creditor Litigation.  On September 21, 2011, an ad-hoc group of our bondholders (the “Avenue Plaintiffs”) filed a complaint in the Supreme Court of the State of New York, captioned Avenue Investments, L.P. et al v. Dynegy Inc., Dynegy Holdings, LLC, Dynegy Gas Investments, LLC, Clint C. Freeland, Kevin T. Howell and Robert C. Flexon (Index No. 652599/11) (the “Avenue Investments Litigation”).  The Avenue Plaintiffs challenged the DMG Transfer.  On September 27, 2011, the Lease Trustee filed a complaint in the Supreme Court of the State of New York, captioned The Successor Lease Indenture Trustee et al v. Dynegy Inc., Dynegy Holdings, LLC, Dynegy Gas Investments, LLC, E. Hunter Harrison, Thomas W. Elward, Michael J. Embler, Robert C. Flexon, Vincent J. Intrieri, Samuel Merksamer, Felix Pardo, Clint C. Freeland, Kevin T. Howell, John Doe 1, John Doe 2, John Doe 3, Etc. (Index No. 652642/2011) (the “Lease Trustee Litigation”).  On November 4, 2011, certain of the PSEG Entities as owner-lessors of the Facilities filed a lawsuit in the Supreme Court of the State of New York, captioned Resources Capital Management Corp., Roseton OL, LLC and Danskammer OL, LLC, v. Dynegy Inc., Dynegy Holdings, Inc., Dynegy Holdings, LLC, Dynegy Gas Investments, LLC, Thomas W. Elward, Michael J. Embler, Robert C. Flexon, E. Hunter Harrison, Vincent J. Intrieri, Samuel J. Merksamer, Felix Pardo, Clint C. Freeland, Kevin T. Howell, Icahn Capital LP, and Seneca Capital Advisors, LLC (Index No. 635067/11) (the "PSEG Litigation").  The Avenue Investments Litigation, the Lease Trustee Litigation and the PSEG Litigation are collectively referred to as the "Prepetition Litigation".

The Prepetition Litigation challenged the DMG Transfer. Plaintiffs in all three actions alleged, among other claims, breach of contract, breach of fiduciary duties, and violations of prohibitions on fraudulent transfers in connection with the DMG Transfer and also sought to have the DMG Transfer set aside, and requested unspecified damages as well as attorneys' fees.  We filed motions to dismiss the Avenue Investments Litigation and Lease Trustee Litigation on October 31, 2011.  The complaint in the PSEG Litigation was never served on the Defendants. On November 7, 2011, Dynegy, DH and the Consenting Noteholders (as defined and discussed in Note 16—Subsequent Events) agreed to enter into a stipulation staying the Avenue Investments Litigation.
On November 21, 2011, the Prepetition Litigation defendants filed in each case a Notice of Filing of Bankruptcy Petition and of the Automatic Stay, which provided, among other things, that (i) “pursuant to section 362(a) of the Bankruptcy Code, this lawsuit is stayed in its entirety, as to all claims and all defendants (the “Automatic Stay”),” and (ii) “actions taken in violation of the Automatic Stay are void and may subject the person or entity taking such actions to the imposition of sanctions by the Bankruptcy Court.”  In addition, on November 21, 2011, the defendants filed two stipulations in the Avenue Investments Litigation and the Lease Trustee Litigation, pursuant to which the parties agreed, among other things, (i) to stay or take no action in the lawsuits, including the pending motions to dismiss, until further application, and (ii) to reserve all rights and/or arguments with respect to the scope or effect of the Automatic Stay. 
Pursuant to the Settlement Agreement, on the Settlement Effective Date, the plaintiffs or parties (as applicable) to the Prepetition Litigation filed necessary papers to dismiss and discontinue with prejudice each of the Avenue Investments Litigation, the Lease Trustee Litigation and the PSEG Litigation and any potential claims relating to or arising from disputes with respect to such actions were released by the parties thereto. For additional information see Note 16—Subsequent Events.
On April 2, 2012, a putative class action lawsuit on behalf of bondholders was filed in the Southern District of New York captioned Shirlee Schwartz v. Dynegy Inc., et al, however, plaintiffs voluntarily dismissed the case shortly after filing.
Reorganization Litigation.  On July 21, 2011, certain holders of obligations with potential recourse rights to DH initiated legal proceedings seeking to enjoin our restructuring efforts disclosed on July 10, 2011.  The lawsuits, Libertyview Credit Opportunities Fund, L.P. et al v. Dynegy Holdings, Inc., (Index No. 651998/11) in the Supreme Court of the State of New York

23

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

(the “New York Action”) and Roseton OL, LLC and Danskammer OL, LLC v. Dynegy Holdings, Inc., (C.A. No. 6689-VCP) in the Court of Chancery of the State of Delaware (the “Delaware Action”), sought to enjoin the proposed reorganization based on purported breaches of guarantees issued by DH in connection with two sale-leaseback transactions in which our subsidiaries, Roseton and Danskammer leased certain power-generating facilities.  Shortly after filing, the New York Action was stayed pending resolution of the Delaware Action.  The plaintiffs in the Delaware Action filed a motion for a temporary restraining order (“TRO”) to enjoin the Reorganization on July 21, 2011.  DH opposed the motion by arguing, among other things, that the unambiguous language of the Guaranties permitted the reorganization.  On July 29, 2011, the Delaware court denied the TRO in the Delaware Action, finding that plaintiffs had failed to show a likelihood of success on the merits, irreparable harm or that the balancing of the equities weighed in their favor.  Thereafter, plaintiffs sought certification of an interlocutory appeal, which was denied by the Delaware Chancery Court on August 4, 2011 and subsequently denied by the Delaware Supreme Court on August 5, 2011.  Following the Delaware Supreme Court’s action, plaintiffs in the Delaware action voluntarily dismissed their claims without prejudice.  Thereafter, the New York action was dismissed without prejudice by the New York court on its own initiative.
 
Gas Index Pricing Litigation.  We, several of our affiliates, our former joint venture affiliate and other energy companies were named as defendants in numerous lawsuits in state and federal court claiming damages resulting from alleged price manipulation and false reporting of natural gas prices to various index publications in the 2000-2002 timeframe. Many of the cases have been resolved. All of the remaining cases contain similar claims that individually, and in conjunction with other energy companies, we engaged in an illegal scheme to inflate natural gas prices in four states by providing false information to natural gas index publications. In July 2011, the court granted defendants' motions for summary judgment, thereby dismissing all of plaintiffs' claims. Plaintiffs have appealed the decision to the Ninth Circuit Court of Appeals which has set oral argument for October 19, 2012.

 Plaintiff in one of the pending actions, Multiut Corporation v. Dynegy, Inc. et al, had previously filed similar claims under federal law, which are not subject to the Court’s July 18, 2011 order.  Multiut Corporation is presently proceeding before the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division having petitioned for Chapter 11 protection in May 2009.  In April 2011, the bankruptcy court denied confirmation of Multiut’s proposed plan of reorganization and entered an order converting the case under Chapter 7 of the bankruptcy code and appointed a Trustee to oversee the liquidation of Mulitut’s assets, one of which is Multiut’s claim against us in the gas index litigation.  We settled Multiut's claim with the Trustee and it was dismissed.

Pacific Northwest Refund Proceedings. Dynegy Power Marketing, LLC (“DYPM”), along with numerous other companies that sold power in the Pacific Northwest in 2000-2001, are parties to a complaint filed in 2001 with FERC challenging bilateral contract pricing by claiming manipulation of the electricity market in California produced unreasonable prices in the Pacific Northwest.  DYPM previously settled all California refund claims, but did not settle with certain complainants seeking refunds in the Pacific Northwest.  In December 2011, DYPM received a Notice of Settlement from The City of Seattle (“Seattle”) claiming that it paid approximately $2 million to DYPM above the mitigated market clearing price set for the California market in 2000-2001.  In May 2012, Seattle made an initial settlement demand of $744 thousand plus interest.  Trial has been set for April 2013 and the parties are currently engaged in discovery.  DYPM intends to continue to defend its position in the proceeding vigorously. In addition to Seattle's claim, there is the risk for “ripple claims” from other sellers, but the efficacy of these claims is currently being litigated and any potential impact to DYPM from ripple claims is impossible to predict at this stage. 
 
Native Village of Kivalina and City of Kivalina v. ExxonMobil Corporation, et al.  In February 2008, the Native Village of Kivalina and the City of Kivalina, Alaska initiated an action in federal court in the Northern District of California against DH and 23 other companies in the energy industry.  Plaintiffs claim that defendants’ emissions of GHG including CO2 contribute to climate change and have caused significant damage to a native Alaskan Eskimo village through increased vulnerability to waves, storm surges and erosion.  In September 2009, the court dismissed all of the plaintiffs’ claims based on lack of subject matter jurisdiction and because plaintiffs lacked standing to bring the suit.  Shortly thereafter, plaintiffs appealed to the Ninth Circuit.  The appeal was fully briefed and in February 2011, the Ninth Circuit issued an order staying the scheduling of oral argument until the United States Supreme Court’s ruling in AEP v. Connecticut (“AEP”).  On June 20, 2011, the Supreme Court issued its decision in AEP.  The Court was equally divided by a vote of 4-4 on the question of whether the plaintiffs had standing to bring the suit and, therefore, affirmed the court’s exercise of jurisdiction.  On the merits the Court ruled by a vote of 8-0 that the CAA and EPA action authorized by the Act displace any federal common law right to seek abatement of carbon dioxide emissions from fossil fuel-fired power plants.  In August 2011, the Ninth Circuit lifted its stay of

24

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

the Kivalina proceedings and scheduled oral argument on November 28, 2011.  On October 26, 2011, the Ninth Circuit issued an order allowing any party to file a supplemental brief by November 4, 2011 addressing the significance of the Supreme Court’s decision in AEP.  Following the filing of the DH Chapter 11 Cases, the Plaintiffs voluntarily dismissed DH with prejudice on February 2, 2012. 

Other Commitments and Contingencies
 
Consent Decree. In 2005, we settled a lawsuit filed by the EPA and the United States Department of Justice in the U.S. District Court for the Southern District of Illinois that alleged violations of the Clean Air Act and related federal and Illinois regulations concerning certain maintenance, repair and replacement activities at our Baldwin generating station. A consent decree (the “Consent Decree”) was finalized in July 2005. Among other provisions of the Consent Decree, we are required to not operate certain of our power generating facilities after specified dates unless certain emission control equipment is installed. As of June 30, 2012, only Baldwin Unit 2 has material Consent Decree work yet to be performed, which is scheduled to be completed by the end of 2012. We have spent approximately $902 million through June 30, 2012 related to these Consent Decree projects.

Vermilion and Baldwin Groundwater. We have implemented hydrogeologic investigations for the CCR surface impoundment at our Baldwin facility and for two CCR surface impoundments at our Vermilion facility in response to a request by the Illinois EPA. Groundwater monitoring results indicate that these CCR surface impoundments impact onsite groundwater at these sites.

At the request of the Illinois EPA, in late 2011 we initiated an investigation at the Baldwin facility to determine if the facility's CCR surface impoundment impacts offsite groundwater. Results of the offsite groundwater quality investigation at Baldwin, as submitted to the Illinois EPA on April 24, 2012, indicate two localized areas where Class I groundwater standards were exceeded.  If these offsite groundwater results are ultimately attributed to the Baldwin CCR surface impoundment and remediation measures are necessary in the future, we may incur significant costs that could have a material adverse effect on our financial condition, results of operations and cash flows. At this time we cannot reasonably estimate the costs of corrective action that ultimately may be required at Baldwin.

On April 2, 2012, we submitted to the Illinois EPA proposed corrective action plans for two of the CCR surface impoundments at the Vermilion facility.  The proposed corrective action plans reflect the results of a hydrogeologic investigation, which indicate that the facility's old east and north CCR impoundments impact groundwater quality onsite and that such groundwater migrates offsite to the north of the property and to the adjacent Middle Fork of the Vermilion River.  The proposed corrective action plans include groundwater monitoring and recommend closure of both CCR impoundments, including installation of a geosynthetic cover.  In addition, we submitted an application to the Illinois EPA to establish a groundwater management zone while impacts from the facility are mitigated.  The preliminary estimated cost of the recommended closure alternative for both impoundments, including post-closure care, is approximately $14 million.  The Vermilion facility also has a third CCR surface impoundment, the new east impoundment that is lined and is not known to impact groundwater.  Although not part of the proposed corrective action plans, if we decide to close the new east impoundment by removing its CCR contents concurrent with the recommended closure alternative for the old east and north impoundments, the preliminary total estimated closure cost for all three impoundments would be approximately $16 million.  If the proposed corrective action plans are timely approved by the Illinois EPA, detailed proposed closure plans would be submitted to the Illinois EPA by year-end 2012 for approval.

In July 2012, the Illinois EPA issued violation notices alleging violations of groundwater standards onsite at the Baldwin and Vermilion facilities. In response, we have submitted to the Illinois EPA a proposed compliance agreement for each facility. For Vermilion, we proposed to implement the previously submitted corrective action plans and, for Baldwin, we proposed to perform additional studies of hydrogeologic conditions and apply for a groundwater management zone in preparation for submittal, as necessary, of a corrective action plan.
  
Cooling Water Intake Permits.  The cooling water intake structures at several of our power generation facilities are regulated under Section 316(b) of the Clean Water Act.  This provision generally provides that standards set for power generation facilities require that the location, design, construction and capacity of cooling water intake structures reflect the BTA for minimizing adverse environmental impact.  These standards are developed and implemented for power generating facilities through the NPDES permits or individual SPDES permits on a case-by-case basis.

25

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

 
The environmental groups that participate in our NPDES and SPDES permit proceedings generally argue that only closed cycle cooling meets the BTA requirement.  The issuance and renewal of NPDES or SPDES permits for three of our power generation facilities (Danskammer, Roseton and Moss Landing) have been challenged on this basis.  The Danskammer SPDES permit, which was renewed and issued in June 2006, does not require installation of a closed cycle cooling system; however, it does require aquatic organism mortality reductions resulting from NYSDEC’s determination of BTA requirements under its regulations.  All appeals of this permit have been exhausted.  The Moss Landing NPDES permit, which was issued in 2000, does not required closed cycle cooling and was challenged by a local environmental group. In August 2011, the Supreme Court of California affirmed the appellate court's decision upholding the permit. One permit challenge is still pending.
 
Roseton SPDES Permit — In April 2005, the NYSDEC issued a Draft SPDES Permit renewal for the Roseton plant.  The permit is opposed by environmental groups challenging the BTA determination.  In October 2006, various holdings in the administrative law judge’s ruling admitting the environmental group petitioners to party status and setting forth the issues to be adjudicated in the permit renewal hearing were appealed to the Commissioner of NYSDEC by the petitioners, NYSDEC staff and us.  The permit renewal hearing will be scheduled after the Commissioner rules on those appeals.  We believe that the petitioners’ claims lack merit and we have opposed those claims vigorously. In connection with the DH Chapter 11 Cases, the DH Debtor Entities rejected these long-term leases of the Roseton and Danskammer facilities. The applicable DH Debtor Entities have operated and plan to continue operating the leased facilities until such facilities can be sold in accordance with the terms of the Settlement Agreement and Plan Support Agreement and in compliance with applicable federal and state regulatory requirements. Please see Note 16—Subsequent Events for further information.
 
Other future NPDES or SPDES proceedings could have a material effect on our financial condition, results of operations and cash flows; however, given the numerous variables and factors involved in calculating the potential costs associated with installing a closed cycle cooling system, any decision to install such a system at any of our facilities would be made on a case-by-case basis considering all relevant factors at such time.  If capital expenditures related to cooling water systems become great enough to render the operation of the plant uneconomical, we could, at our option, and subject to any applicable financing agreements or other obligations, reduce operations or cease to operate that facility and forego the capital expenditures.
 
SCE Termination. In May 2012, Southern California Edison (“SCE”) notified Dynegy Morro Bay, LLC (“Morro Bay”)  and Dynegy Moss Landing, LLC (“Moss Landing”) that it was terminating certain energy and capacity contracts with those entities.  The validity of the purported terminations and subsequent actions by SCE are being disputed by Dynegy.  We intend to vigorously pursue all remedies and amounts due to us under these contracts.

Guarantees and Indemnifications
 
In the ordinary course of business, we routinely enter into contractual agreements that contain various representations, warranties, indemnifications and guarantees.  Examples of such agreements include, but are not limited to, service agreements, equipment purchase agreements, engineering and technical service agreements, asset sales agreements and procurement and construction contracts.  Some agreements contain indemnities that cover the other party’s negligence or limit the other party’s liability with respect to third party claims, in which event we will effectively be indemnifying the other party.  Virtually all such agreements contain representations or warranties that are covered by indemnifications against the losses incurred by the other parties in the event such representations and warranties are false.  While there is always the possibility of a loss related to such representations, warranties, indemnifications and guarantees in our contractual agreements, and such loss could be significant, in most cases management considers the probability of loss to be remote.  Related to the indemnifications discussed below, we have accrued approximately $1 million as of September 30, 2011.
 
LS Power Indemnities.  In connection with the LS Power Transactions we agreed in the purchase and sale agreement to indemnify LS Power against claims regarding any breaches in our representations and warranties and certain other potential liabilities.  Claims for indemnification shall survive until twelve months subsequent to closing with exceptions for tax claims, which shall survive for the applicable statute of limitations plus 30 days, and certain other representations and potential liabilities, which shall survive indefinitely.  The indemnifications provided to LS Power are limited to $1.3 billion in total; however, several categories of indemnifications are not available to LS Power until the liabilities incurred in the aggregate are equal to or exceed $15 million and are capped at a maximum of $100 million.  Further, the purchase and sale agreement provides in part that we may not reduce or avoid liability for a valid claim based on a claim of contribution.  In addition to the above indemnities related to the LS Power Transactions, we have agreed to indemnify LS Power against claims related to the

26

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

Riverside/Foothills Project for certain aspects of the project.  Namely, LS Power has been indemnified for any disputes that arise as to ownership, transfer of bonds related to the project, and any failure by us to obtain approval for the transfer of the payment in-lieu of taxes program already in place.  The indemnities related solely to the Riverside/Foothills Project are capped at a maximum of $180 million and extend until the earlier of the expiration of the tax agreement or December 26, 2026.  At this time, we have incurred no significant expenses under these indemnities.  Please read Note 5—Dispositions, Contract Terminations and Discontinued Operations—Dispositions and Contract Terminations—LS Power Transactions in our Form 10-K for further discussion.
 
West Coast Power Indemnities.  In connection with the sale of our 50 percent interest in West Coast Power to NRG on March 31, 2006, an agreement was executed to allocate responsibility for managing certain litigation and provide for certain indemnities with respect to such litigation.  The indemnification agreement in relevant part provides that NRG assumes responsibility for all defense costs and any risk of loss, subject to certain conditions and limitations, arising from a February 2002 complaint filed at FERC by the California Public Utilities Commission alleging that several parties, including West Cost Power subsidiaries, overcharged the State of California for wholesale power.  FERC found the rates charged by wholesale suppliers to be just and reasonable; however, this matter was appealed and ultimately remanded back to FERC for further review.  On May 24, 2011 and May 26, 2011, FERC issued two orders in these dockets.  The first order denied the request of the California Parties for consolidation of various dockets and denied their request for summary disposition on market manipulation issues.  The second order addressed treatment of settled parties and the scope of hearing issues in the ongoing proceedings. In April 2012, NRG and West Coast Power settled all claims brought by the California Parties.  The settlement does not exceed NRG’s indemnity obligation to Dynegy, therefore, we have no exposure in connection with the settlement.

Targa Indemnities.  During 2005, as part of our sale of our midstream business (“DMSLP”), we agreed to indemnify Targa Resources, Inc. (“Targa”) against losses it may incur under indemnifications DMSLP provided to purchasers of certain assets, properties and businesses disposed of by DMSLP prior to our sale of DMSLP.  We have incurred no material expense under these prior indemnities.  We have recorded an accrual of less than $1 million for remediation of groundwater contamination at the Breckenridge Gas Processing Plant sold by DMSLP in 2001.  The indemnification provided by DMSLP to the purchaser of the plant has a limit of $5 million.
 
Black Mountain Guarantee.  Through one of our subsidiaries, we hold a 50 percent ownership interest in Black Mountain (Nevada Cogeneration) (“Black Mountain”), in which our partner is a Chevron subsidiary.  Black Mountain owns the Black Mountain power generation facility and has a power purchase agreement with a third party that extends through April 2023.  In connection with the power purchase agreement, pursuant to which Black Mountain receives payments which decrease in amount over time, we agreed to guarantee 50 percent of certain payments that may be due to the power purchaser under a mechanism designed to protect it from early termination of the agreement.  At September 30, 2011, if an event of default due to early termination had occurred under the terms of the mortgage on the facility entered into in connection with the power purchase agreement, we could have been required to pay the power purchaser approximately $54 million under the guarantee.
 
Other Indemnities.  We entered into indemnifications regarding environmental, tax, employee and other representations when completing asset sales such as, but not limited to, the Rolling Hills, Calcasieu, CoGen Lyondell and Heard County power generating facilities.  As of September 30, 2011, no claims have been made against these indemnities.  There is no limitation on our liability under certain of these indemnities.  However, management is unaware of any existing claims.

Note 11—Debt
 
Sithe Senior Notes
 
On August 26, 2011, Sithe/Independence Funding Corporation (“Sithe”) commenced a cash tender offer (“Sithe Tender Offer”) to purchase Sithe’s outstanding $192 million in principal amount of 9.0 percent Secured Bonds due 2013 (“Sithe Senior Notes”).  Sithe also solicited consents to certain proposed amendments to the indenture governing the Sithe Senior Notes.  At the expiration of the early consent period on September 9, 2011, Sithe entered into a supplemental indenture, which eliminated or modified substantially all of the restrictive covenants, certain events of default and certain other provisions.  On September 12, 2011, Sithe accepted for purchase all Sithe Senior Notes validly tendered prior to the consent date and satisfied and discharged the indenture and remaining Sithe Senior Notes.  Also on September 12, 2011, Sithe/Independence Power Partners, LP (“SIPP”) filed with the New York State Public Service Commission (the “NYPSC”), and certain other parties, a verified petition for approval of financing, seeking NYPSC authorization for SIPP to grant liens/security interests in its assets and

27

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

properties as collateral security for the DPC Credit Agreement (as defined below). On the final payment date, September 26, 2011, Sithe accepted for purchase all of the Sithe Senior Notes that were validly tendered (and not validly withdrawn) on or prior to the consent date, and discharged the indenture and the remaining Sithe Senior Notes. The NYPSC issued an order approving the petition described above on December 21, 2011 and SIPP joined the DPC Credit Agreement and pledged its assets as security therefor on June 12, 2012.
 
Sithe purchased the Sithe Senior Notes at a price of 108 percent of the principal amount plus consent fees.  Total cash paid to purchase the Sithe Senior Notes, including fees and accrued interest, was $217 million, which was funded from proceeds from the DPC Credit Agreement (as defined and discussed below).  We recorded a charge of approximately $16 million associated with this transaction, of which $21 million is included in Debt extinguishment costs offset by the write-off of $5 million of premiums included in Interest expense on our unaudited condensed consolidated statements of operations.  As a result of the successful cash tender offer and consent solicitation, $43 million in restricted cash previously held at Sithe was returned to DPC when the transaction closed.
 
We also made scheduled repayments of the Sithe Senior Notes totaling $33 million during the second quarter 2011.
 
Credit Agreements
 
On August 5, 2011, we completed the Reorganization of our legal entity structure to facilitate the execution of two credit agreements.  Please read Note 1—Basis of Presentation and Organization—Reorganization for further discussion.  The credit agreements, which were entered into on August 5, 2011, provided for a $1,100 million, five year senior secured term loan to DPC (the "DPC Credit Agreement") and a $600 million, five year senior secured term loan to DMG (the "DMG Credit Agreement").  As further discussed below, these credit agreements limit the amount of distributions that can be made by DPC and DMG.  DPC has restricted consolidated net assets of approximately $1,964 million, as of September 30, 2011 as a result of the DPC Credit Agreement. DMG, including the related credit agreement, was transferred to Dynegy on September 1, 2011. On June 5, 2012, the effective date of the Settlement Agreement, we reacquired the Coal segment (including DMG). Please see Note 16—Subsequent Events—Settlement Agreement and Plan Support Agreement for further information on the Coal Holdco Transfer.
 
DPC Credit Agreement.  The DPC Credit Agreement is a senior secured term loan facility with an aggregate principal amount of $1,100 million, which was borrowed in a single drawing on the closing date.  Amounts borrowed under the DPC Credit Agreement that are repaid or prepaid may not be re-borrowed.  The DPC Credit Agreement will mature on August 5, 2016 and will amortize in equal quarterly installments in aggregate annual amounts equal to 1.00 percent of the original principal amount of the DPC Credit Agreement with the balance payable on the fifth anniversary of the closing date.

The proceeds of the borrowing under the DPC Credit Agreement were used by DPC to (i) repay an inter-company obligation of a DPC subsidiary to DH and to repay certain outstanding indebtedness under our Fifth Amended and Restated Credit Agreement, (ii) fund cash collateralized letters of credit and provide cash collateral for existing and future collateral requirements, (iii) repay approximately $192 million of debt relating to Sithe Energies, Inc. (the intermediate project holding company that indirectly holds the Independence facility in New York), (iv) make a $200 million restricted payment to a parent holding company of DPC, (v) pay related transaction fees and expenses and (vi) fund additional cash to the balance sheet to provide the DPC asset portfolio with liquidity for general working capital and liquidity purposes.
 
All obligations of DPC under (i) the DPC Credit Agreement (the “DPC Borrower Obligations”) and (ii) at the election of DPC, (x) cash management arrangements and (y) interest rate protection, commodity trading or hedging or other permitted hedging or swap arrangements (the “Hedging/Cash Management Arrangements”) are unconditionally guaranteed jointly and severally on a senior secured basis (the “DPC Guarantees”) by each existing and subsequently acquired or organized direct or indirect material domestic subsidiary of DPC (the “DPC Guarantors”), in each case, as otherwise permitted by applicable law, regulation and contractual provision and to the extent such guarantee would not result in adverse tax consequences as reasonably determined by DPC. None of DPC’s parent companies are obligated to repay the DPC Borrower Obligations.
 
The DPC Borrower Obligations, the DPC Guarantees and any Hedging/Cash Management Arrangements are secured by first priority liens on and security interests in 100 percent of the capital stock of DPC (as discussed below) and substantially all of the present and after-acquired assets of DPC and each DPC Guarantor (collectively, the “DPC Collateral”).  Accordingly, such assets are only available for the creditors of DGIH and its subsidiaries.  In September 2011, as discussed above, Sithe

28

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

completed the Sithe Tender Offer. Please read Sithe Senior Notes above for further discussion of the Sithe Tender Offer and related regulatory approvals. On December 21, 2011, the NYPSC issued an order approving the petition seeking NYPSC authorization for SIPP to grant liens/security interests in its assets and properties as part of the DPC Collateral.  SIPP joined the DPC Credit Agreement and pledged its assets as security therefor on June 12, 2012.
 
The DPC Credit Agreement bears interest, at DPC’s option, at either (a) 7.75 percent per annum plus LIBOR, subject to a LIBOR floor of 1.50 percent, with respect to any Eurodollar term loan or (b) 6.75 percent per annum plus the alternate base rate with respect to any ABR term loan.  DPC may elect from time to time to convert all or a portion of the term loan from an ABR Borrowing into a Eurodollar Borrowing or vice versa.  With some exceptions, the DPC Credit Agreement is non-callable for the first two years and is subject to a prepayment premium.
 
The DPC Credit Agreement contains mandatory prepayment provisions.  The outstanding loan under the DPC Credit Agreement is to be prepaid with (a) 100 percent of the net cash proceeds of all asset sales by DPC and its subsidiaries, subject to the right of DPC to reinvest such proceeds if such proceeds are reinvested (or committed to be reinvested) within 12 months and, if so committed to reinvestment, reinvested within six months after such initial 12 month period, (b) 50 percent of the net cash proceeds of issuance of equity securities of DPC and its subsidiaries (except to the extent used for permitted capital expenditures), (c) commencing with the first full fiscal year of DPC to occur after the closing date, 100 percent of excess cash flow; provided that (i) excess cash flow shall be determined after reduction for amounts used for capital expenditures and restricted payments and (ii) any voluntary prepayments of the term loans shall be credited against excess cash flow prepayment obligations, and (d) 100 percent of the net cash proceeds of issuances, offerings or placements of debt obligations of DPC and its subsidiaries (other than all permitted debt).  Notwithstanding the above, the proceeds of a sale of up to 20 percent of the membership interests in DPC are not required to be used to prepay the outstanding loan under the DPC Credit Agreement.

The DPC Credit Agreement contains customary events of default and affirmative and negative covenants including, subject to certain specified exceptions, limitations on amendments to constitutive documents, liens, capital expenditures, acquisitions, subsidiaries and joint ventures, investments, the incurrence of debt, fundamental changes, asset sales, sale-leaseback transactions, hedging arrangements, restricted payments, changes in nature of business, transactions with affiliates, burdensome agreements, amendments of debt and other material agreements, accounting changes and prepayment of indebtedness or repurchases of equity interests.
 
The DPC Credit Agreement contains a requirement that DPC shall establish and maintain a segregated account, subject to the control of the Collateral Trustee (the “DPC Collateral Posting Account”), into which a specified collateral posting amount shall be deposited.  DPC may withdraw amounts from the DPC Collateral Posting Account: (i) for the purpose of meeting collateral posting requirements of DPC and the DPC Guarantors; (ii) to prepay the term loan under the DPC Credit Agreement; (iii) to repay certain other permitted indebtedness; and (iv) to the extent any excess amounts are determined to be in the DPC Collateral Posting Account.
 
The DPC Credit Agreement limits distributions to $135 million per year provided the borrower and its subsidiaries possess at least $50 million of cash and cash equivalents and short-term investments as of the date of such proposed distribution.
 
DMG Credit Agreement.  The DMG Credit Agreement is a senior secured term loan facility with an aggregate principal amount of $600 million, which was borrowed in a single drawing on the closing date. Amounts borrowed under the DMG Credit Agreement that are repaid or prepaid may not be re-borrowed. The DMG Credit Agreement will mature on August 5, 2016 and will amortize in equal quarterly installments in aggregate annual amounts equal to 1.00 percent of the original principal amount of the DMG Credit Agreement with the balance payable on the fifth anniversary of the closing date.

The proceeds of the borrowing under the DMG Credit Agreement were used by DMG to (i) fund cash collateralized letters of credit and provide cash collateral for existing and future collateral requirements, (ii) make a $200 million restricted payment to a parent holding company of DMG, (iii) pay related transaction fees and expenses and (iv) fund additional cash to the balance sheet to provide the DMG asset portfolio with cash to be used for general working capital and general corporate purposes.

The DMG Credit Agreement bears interest, at DMG's option, at either (a) 7.75 percent per annum plus LIBOR, subject to a LIBOR floor of 1.50 percent, with respect to any Eurodollar term loan or (b) 6.75 percent per annum plus the alternate base

29

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

rate with respect to any ABR term loan.
The DMG Credit Agreement limits distributions to $90 million per year provided the borrower and its subsidiaries would possess at least $50 million of unrestricted cash and short-term investments on the date of such proposed distribution.
Letter of Credit Facilities.  DPC entered into two fully cash collateralized Letter of Credit Reimbursement and Collateral Agreements aggregating $515 million pursuant to which letters of credit will be issued at DPC’s request provided that DPC deposits in an account an amount of cash sufficient to cover the face value of such requested letter of credit plus an additional percentage thereof.
 
DMG entered into a $100 million fully cash collateralized Letter of Credit Reimbursement and Collateral Agreement pursuant to which letters of credit will be issued at DMG’s request provided that DMG deposits in an account an amount of cash sufficient to cover the face value of such requested letter of credit plus an additional percentage thereof.
 
We entered into a $26 million fully cash collateralized Letter of Credit Reimbursement and Collateral Agreement pursuant to which letters of credit would be issued at our request provided that we deposit in an account an amount of cash sufficient to cover the face value of such requested letter of credit plus an additional percentage thereof.
 
Credit Facility
 
During the second quarter 2011, we borrowed $400 million under our former Fifth Amended and Restated Credit Agreement.  This borrowing was repaid on August 5, 2011 in connection with the closing of the two credit agreements entered into as part of the Reorganization.  Please read Note 1—Basis of Presentation and Organization—Reorganization for further discussion.  In addition, our former term facility of $850 million was repaid with current restricted cash and the term loan of $68 million was repaid using proceeds from the DPC Credit Agreement.
 
Senior Notes and Debentures and Subordinated Capital Income Securities
 
We made scheduled repayments on our Senior Notes and Debentures of $80 million during the second quarter 2011.
 
As permitted under the Subordinated Capital Income Securities indenture (as defined below in Note 16), we deferred our $8 million June 2011 payment of interest.
 
On September 15, 2011, Dynegy commenced offers to exchange (the “Exchange Offers”) up to $1,250 million principal amount of the outstanding notes, debentures and capital income securities (the “Old Notes”) for new Dynegy Inc. 10 percent Senior Secured Notes due 2018 (the “New Notes”) and cash.  On November 3, 2011, Dynegy terminated the Exchange Offers.  As a result of the termination, all of the previously tendered (and not validly withdrawn) Old Notes were not accepted for exchange and were promptly returned to the holders thereof.
 
On November 7, 2011, we filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. Please see Note 16—Subsequent Events—Bankruptcy Filing for further information.  Accordingly, we have reclassified our outstanding Senior Notes and Debentures, including the Subordinated Capital Income Securities reflected as affiliated debt, and associated deferred financing costs from long-term to current at September 30, 2011 on our unaudited condensed consolidated balance sheets.

Restricted Cash and Investments
 
The following table depicts our restricted cash and investments:

30

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

 
 
 
September 30,
 2011

 
December 31,
 2010

 
 
(in millions)
DPC LC facilities (1)
 
$
530

 
$

DH LC facility (1)
 
27

 

DPC Collateral Posting Account (2)
 
101

 

DH Credit facility (3)
 

 
850

Sithe Energy (4)
 

 
40

GEN Finance (5)
 

 
50

Total restricted cash and investments
 
$
658

 
$
940

 _______________________________________________________________________________
(1)
Includes cash posted to support the respective letter of credit reimbursement and collateral agreements described above.
(2)
Amounts are restricted and may be used for future collateral posting requirements or released per the terms of the DPC Credit Agreement.
(3)
Included cash posted to support the letter of credit component of our former Fifth Amended and Restated Credit Agreement. The amount was used in the third quarter 2011 to repay the term facility under our former Fifth Amended and Restated Credit Agreement.
(4)
Included amounts related to the terms of the indenture governing the Sithe Senior Debt. These agreements were terminated as a result of the successful Sithe Tender Offer and the restricted cash was reclassified to cash and cash equivalents during the third quarter 2011.
(5)
Included amounts restricted under the terms of a security and deposit agreement associated with a collateral agreement and commodity hedges entered into by GEN Finance. These agreements were terminated and the $50 million held in restricted cash was reclassified to cash and cash equivalents during the first quarter 2011.


Note 12—Related Party Transactions

The following table summarizes the Accounts receivable, affiliates, and Accounts payable, affiliates, on our consolidated balance sheet as of September 30, 2011 and cash paid for the three and nine months ended September 30, 2011 related to various agreements with Dynegy, as discussed below:
 
 
September 30, 2011
 
Three months ended
September 30, 2011
 
Nine months ended
September 30, 2011
 
 
Accounts
Receivable,
Affiliates
 
Accounts
Payable,
Affiliates
 
Cash
Received
(Paid)
 
Cash
Received
(Paid)
 
 
(in millions)
Service Agreements
 
$
30


$
6


$
(8
)

$
(8
)
EMA Agreements
 
12


43





Total
 
$
42

 
$
49

 
$
(8
)
 
$
(8
)
Service Agreements.    Dynegy and certain of our subsidiaries (collectively, the "Providers") provide certain services (the "Services") to Dynegy Coal Investments Holdings, LLC ("DCIH") and certain of its subsidiaries, and certain of our subsidiaries (collectively, the "Recipients"). Service Agreements between Dynegy and the Recipients, which were entered into in connection with the Reorganization, govern the terms under which such Services are provided.
The Providers act as agents for the Recipients for the limited purpose of providing the Services set forth in the Service Agreement. The Providers may perform additional services at the request of the Recipients, and will be reimbursed for all costs and expenses related to such additional services. Prior to the beginning of each fiscal year in which Services are to be provided pursuant to the Service Agreement, the Providers and the Recipients must agree on a budget for the Services, outlining, among

31

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

other items, the contemplated scope of the Services to be provided in the following fiscal year and the cost of providing each Service. The Recipients will pay the Providers an annual management fee as agreed in the budget, which shall include reimbursement of out-of pocket costs and expenses related to the provision of the Services and will provide reasonable assistance, such as information, services and materials, to the Providers.
Energy Management Agreements.    Certain of our subsidiaries have entered into an Energy Management Agency Services Agreement (an "EMA") with DMG. Pursuant to the EMA, our subsidiaries will provide power management services to DMG, consisting of marketing power and capacity, capturing pricing arbitrage, scheduling dispatch of power, communicating with the applicable ISOs or RTOs, purchasing replacement power, and reconciling and settling ISO or RTO invoices. In addition, certain of our subsidiaries will provide fuel management services, consisting of procuring the requisite quantities of fuel and emissions credits, assisting with transportation, scheduling delivery of fuel, assisting DMG with development and implementation of fuel procurement strategies, marketing and selling excess fuel and assisting with the evaluation of present and long-term fuel purchase and transportation options. Our subsidiaries will also assist DMG with risk management by entering into one or more risk management transactions, the purpose of which is to set the price or value of any commodity or to mitigate or offset any change in the price or value of any commodity. Our subsidiaries may from time to time provide other services as the parties may agree. Our consolidated statement of operations includes $42 million of power purchased from affiliates, which is reflected in Revenues, and $15 million of coal sold to affiliates, which is reflected in Costs of sales, for the three and nine months ended September 30, 2011. This affiliate activity is presented net of third party activity within revenue and cost of sales as our consolidated subsidiaries are in substance acting as agent for the affiliates. Also, please read Note 5—Risk Management Activities, Derivatives and Financial Instruments for derivative balances with affiliates.
Tax Sharing Agreement.    Under U.S. federal income tax law, Dynegy is responsible for the tax liabilities of its subsidiaries, because Dynegy files consolidated income tax returns, which will necessarily include the income and business activities of the ring-fenced entities and Dynegy's other affiliates. To properly allocate taxes among Dynegy and each of its entities, Dynegy and certain of its entities, including us and our subsidiaries, have entered into a Tax Sharing Agreement under which Dynegy agrees to prepare consolidated returns on behalf of itself and its entities and make all required payments to relevant revenue collection authorities as required by law. Additionally, DPC agreed to make payments to Dynegy of the tax amounts for which DPC and its respective subsidiaries would have been liable if such subsidiaries began business on the restructuring date (August 5, 2011) and were eligible to, and elected to, file a consolidated return on a stand-alone basis beginning on the restructuring date. Further, each of Dynegy GasCo Holdings, LLC, Dynegy Gas Holdco, LLC, and Dynegy Gas Investments Holdings, LLC, agreed to make payments to Dynegy of amounts representing the tax that each such subsidiary would have paid if each began business on the restructuring date and filed a separate corporate income tax return (excluding from income any subsidiary distributions) on a stand-alone basis beginning on the restructuring date.
Cash Management.    The Reorganization created new companies, some of which are “bankruptcy remote.”  These bankruptcy remote entities have an independent manager whose consent is required for certain corporate actions and such entities are required to present themselves to the public as separate entities.  They maintain separate books, records and bank accounts and separately appoint officers.  Furthermore, they pay liabilities from their own funds, they conduct business in their own names (other than any business relating to the trading activities of us and our subsidiaries), they observe a higher level of formalities, and they have restrictions on pledging their assets for the benefit of certain other persons.   In addition, as part of the Reorganization, some companies within our portfolio were reorganized into “ring-fenced” groups. The upper-level companies in such ring-fenced groups are bankruptcy-remote entities governed by limited liability company operating agreements which, in addition to the bankruptcy remoteness provisions described above, contain certain additional restrictions prohibiting any material transactions with affiliates other than the direct and indirect subsidiaries within the ring-fenced group without independent manager approval.
Our ring-fenced entities maintain cash accounts separate from those of our non-ring-fenced entities. As such, cash collected by a ring-fenced entity is not swept into accounts held in the name of any non-ring-fenced entity and cash collected by a non-ring-fenced entity is not swept into accounts held in the name of any ring-fenced entity. The cash in deposit accounts owned by a ring-fenced entity is not used to pay the debts and/or operating expenses of any non-ring-fenced entity, and the cash in deposit accounts owned by a non-ring-fenced entity is not used to pay the debts and/or operating expenses of any ring-fenced entity. There were no material payments for the three and nine months ended September 30, 2011 related to the Cash Management Agreement.
DMG Transfer and Undertaking Agreement.    On September 1, 2011, Dynegy and DGIN completed the DMG Transfer. Dynegy's management and its Board of Directors, as well as DGIN's board of managers, concluded that the fair value of the

32

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

acquired equity stake in Coal HoldCo at the time of the transaction was approximately $1.25 billion, after taking into account all debt obligations of DMG, including in particular the DMG Credit Agreement. Dynegy provided this value to DGIN in exchange for Coal HoldCo through its obligation pursuant to an unsecured Undertaking Agreement.
During the period from September 1, 2011 through September 30, 2011, we recognized $7 million in interest income related to the Undertaking agreement which is included in Other income and expense, net, in our consolidated statement of operations.
On June 5, 2012, the effective date of the Settlement Agreement, we reacquired Coal Holdco. At such time, the Undertaking Agreement and Promissory Note were terminated with no further obligations thereunder. Please read Note 16—Subsequent Events-Settlement Agreement for further discussion.
Note payable, affiliates.    On August 5, 2011, Dynegy Coal Holdco, LLC made a loan to us of $10 million with a maturity of 3 years and an interest rate of 9.25 percent per annum.
The Note payable, affiliate was written off during the first quarter 2012 as it was determined that no claim would be filed related to the note.
Accounts receivable, affiliates.    We have historically recorded intercompany transactions in the ordinary course of business, including the reallocation of deferred taxes between legal entities in accordance with applicable IRS regulations. As a result of such transactions, we have recorded and adjusted over time an affiliate receivable balance in the amount of $745 million. This receivable is classified within member's equity as there are no defined payment terms, it is not evidenced by any promissory note, and there was never an intent for payment to occur. Please read Note 16—Subsequent Events—Settlement Agreement for further discussion.
Employee benefits.    Our employees participate in the pension plans sponsored by our parent, Dynegy. Please read Note 13—Employee Compensation, Savings and Pension Plans for further discussion.
Note 13—Employee Compensation, Savings and Pension Plans
 
Our parent, Dynegy, sponsors and administers defined benefit plans and defined contribution plans for the benefit of our employees and also provides other post retirement benefits to retirees who meet age and service requirements which are more fully described in Note 24—Employee Compensation, Savings and Pension Plans in our Form 10-K. Through August 31, 2011, we are and our subsidiaries were the primary participant in certain defined benefit pension and other post-employment benefit plans sponsored by our parent. As such, we accounted for our participation in these plans as a single employer plan. With the DMG Transfer on September 1, 2011, we are our subsidiaries were no longer the primary participant in these plans and therefore, we began accounting for our participation in these plans as multiemployer plans. From September 1, 2011 through September 30, 2011, we recorded our share of expenses in the plans based upon the amounts billed to us through the Service Agreements. Please read Note 12—Related Party Transactions—Service Agreements for further discussion.
 
Components of Net Periodic Benefit Cost.  The components of net periodic benefit cost were:
 
 
 
Pension Benefits
 
Other Benefits
 
 
Three Months Ended September 30,
 
 
2011
 
2010
 
2011
 
2010
 
 
(in millions)
Service cost benefits earned during period
 
$
2

 
$
2

 
$
1

 
$
1

Interest cost on projected benefit obligation
 
2

 
4

 
1

 
1

Expected return on plan assets
 
(3
)
 
(4
)
 

 

Recognized net actuarial loss
 
1

 

 

 

Curtailment gain
 

 
2

 

 

Net periodic benefit cost
 
$
2

 
$
4

 
$
2

 
$
2

 

33

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2011 and 2010

 
 
Pension Benefits
 
Other Benefits
 
 
Nine Months Ended September 30,
 
 
2011
 
2010
 
2011
 
2010
 
 
(in millions)
Service cost benefits earned during period
 
$
8

 
$
8

 
$
2

 
$
2

Interest cost on projected benefit obligation
 
10

 
11

 
3

 
3

Expected return on plan assets
 
(11
)
 
(12
)
 

 

Recognized net actuarial loss
 
4

 
4

 

 

Curtailment gain
 

 

 

 

Net periodic benefit cost
 
$
11

 
$
11

 
$
5

 
$
5

 
Contributions.  During the