10-Q 1 dh-2012331x10q.htm 10-Q DH-2012.3.31-10Q
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 March 31, 2012
 
¨            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: 002-29311
  
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)

 
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 ¨ 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 ¨ 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 ¨ No ý
 
All of the registrant’s outstanding membership interests are owned directly by Dynegy Inc.

1


DYNEGY HOLDINGS, LLC
 
TABLE OF CONTENTS
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.
FINANCIAL STATEMENTS:
 
 
 
 
 
 
Condensed Consolidated Balance Sheets:
 
 
March 31, 2012 and December 31, 2011
 
Condensed Consolidated Statements of Operations:
 
 
For the three months ended March 31, 2012 and 2011
 
Condensed Consolidated Statements of Comprehensive Loss:
 
 
For the three months ended March 31, 2012 and 2011
 
Condensed Consolidated Statements of Cash Flows:
 
 
For the three months ended March 31, 2012 and 2011
 
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 3
DEFAULTS UPON SENIOR SECURITIES
 
Item 6.
EXHIBITS
 


i


DEFINITIONS
 
As used in this Form 10-Q, the abbreviations contained herein have the meanings set forth below.
 


ASU
 
Accounting Standards Update
CAISO
 
The California Independent System Operator
CARB
 
California Air Resources Board
CFO
 
Chief Financial Officer
CRCG
 
Commodity Risk Control Group
DGIN
 
Dynegy Gas Investments, LLC
DH
 
Dynegy Holdings, LLC (formerly known as Dynegy Holdings Inc.)
DMG
 
Dynegy Midwest Generation, LLC
DMSLP
 
Dynegy Midstream Services L.P.
DNE
 
Dynegy Northeast Segment
DPC
 
Dynegy Power, LLC
EMT
 
Executive Management Team
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
GHG
 
Greenhouse Gas
IMA
 
In-market asset availability
IFRS
 
International Financial Reporting Standards
ISO
 
Independent System Operator
ISO-NE
 
Independent System Operator New England
LC
 
Letter of credit
LSTC
 
Liabilities Subject To Compromise
MISO
 
Midwest Independent Transmission System Operator, Inc.
MMBtu
 
One million British thermal units
MW
 
Megawatts
MWh
 
Megawatt hour
NAAQS
 
National Ambient Air Quality Standards
NOL
 
Net operating loss
NOx
 
Nitrogen oxide
NRG
 
NRG Energy, Inc.
NYISO
 
New York Independent System Operator
OTC
 
Over-the-counter
PJM
 
PJM Interconnection, LLC
RCM
 
Resource Capital Management
RFO
 
Request for offer
RGGI
 
Regional Greenhouse Gas Initiative
RMR
 
Reliability Must Run
SEC
 
U.S. Securities and Exchange Commission
VaR
 
Value at Risk
WCI
 
Western Climate Initiative

ii


PART I. FINANCIAL INFORMATION
 
Item 1—FINANCIAL STATEMENTS
 
DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (in millions)
 
 
 
March 31,
2012
 
December 31,
2011
ASSETS
 
 

 
 

Current Assets
 
 

 
 

Cash and cash equivalents
 
$
389

 
$
398

Restricted cash
 
169

 
159

Accounts receivable, net of allowance for doubtful accounts of $12 and $12, respectively
 
124

 
147

Accounts receivable, affiliates
 
24

 
26

Interest receivable, affiliates
 
32

 
8

Inventory
 
66

 
65

Assets from risk-management activities
 
2,735

 
2,615

Assets from risk-management activities, affiliates
 
3

 
2

Broker margin account
 
21

 
23

Prepayments and other current assets
 
227

 
126

Total Current Assets
 
3,790

 
3,569

Property, Plant and Equipment
 
3,882

 
3,911

Accumulated depreciation
 
(1,089
)
 
(1,090
)
Property, Plant and Equipment, Net
 
2,793

 
2,821

Other Assets
 
 

 
 

Restricted cash and investments
 
297

 
455

Assets from risk-management activities
 
31

 
26

Intangible assets
 
80

 
92

Undertaking receivable, affiliate
 
418

 
1,250

Deferred income taxes
 
49

 
44

Other long-term assets
 
63

 
54

Total Assets
 
$
7,521

 
$
8,311


See the notes to condensed consolidated financial statements.
 
















1




DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (in millions)
 
 
March 31,
2012
 
December 31,
2011
LIABILITIES AND MEMBER'S EQUITY (DEFICIT)
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable
 
$
74

 
$
80

Accounts payable, affiliates
 
30

 
47

Accrued interest
 
1

 
1

Deferred income taxes
 
50

 
50

Accrued liabilities and other current liabilities
 
82

 
64

Liabilities from risk-management activities
 
2,872

 
2,798

Liabilities from risk-management activities, affiliates
 
8

 
4

Notes payable and current portion of long-term debt
 
7

 
7

Total Current Liabilities
 
3,124

 
3,051

Liabilities subject to compromise
 
4,241

 
4,012

Long-term debt
 
1,068

 
1,069

Other Liabilities
 
 
 
 
Liabilities from risk-management activities
 
30

 
20

Liabilities from risk-management activities, affiliates
 
1

 
3

Other long-term liabilities
 
102

 
124

Total Liabilities
 
8,566

 
8,279

Commitments and Contingencies (Note 9)
 

 

Total Member's Equity (Deficit)
 
(1,045
)
 
32

Total Liabilities and Member's Equity (Deficit)
 
$
7,521

 
$
8,311


See the notes to condensed consolidated financial statements.


2


DYNEGY HOLDINGS, LLC
 (A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) (in millions)
 
 
 
Three Months Ended
March 31,
 
 
2012
 
2011
Revenues
 
$
275

 
$
505

Cost of sales
 
(186
)
 
(278
)
Gross margin, exclusive of depreciation shown separately below
 
89

 
227

Operating and maintenance expense, exclusive of depreciation shown separately below
 
(49
)
 
(110
)
Depreciation and amortization expense
 
(22
)
 
(126
)
General and administrative expenses
 
(20
)
 
(41
)
Operating loss
 
(2
)
 
(50
)
Bankruptcy reorganization charges
 
(247
)
 

Interest expense
 
(31
)
 
(89
)
Impairment of Undertaking receivable, affiliate
 
(832
)
 

Other income and expense, net
 
24

 
1

Loss before income taxes
 
(1,088
)
 
(138
)
Income tax benefit (Note 11)
 
6

 
58

Net loss
 
$
(1,082
)
 
$
(80
)
 
See the notes to condensed consolidated financial statements.

3


DYNEGY HOLDINGS, LLC
 (A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited) (in millions)
 
 
 
Three Months Ended
 March 31,
 
 
2012
 
2011
Net loss
 
$
(1,082
)
 
$
(80
)
Other comprehensive income:
 
 

 
 

Amortization of unrecognized prior service cost and actuarial loss (net of tax expense of zero and $1)
 
(1
)
 
1

Total other comprehensive income, net of tax
 
(1
)
 
1

Total Comprehensive loss
 
$
(1,083
)
 
$
(79
)
 
See the notes to condensed consolidated financial statements.

4


DYNEGY HOLDINGS, LLC
 (A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in millions)
 
 
 
Three Months Ended
 March 31,
 
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net loss
 
$
(1,082
)
 
$
(80
)
Adjustments to reconcile net loss to net cash flows from operating activities:
 
 
 
 
Depreciation and amortization
 
24

 
130

Impairment of Undertaking, receivable affiliate
 
832

 

Risk-management activities
 
(41
)
 
(3
)
Risk-management activities, affiliates
 
1

 

Deferred income taxes
 
(6
)
 
(57
)
Reorganization charges
 
228

 

Other
 
10

 
8

Changes in working capital:
 
 
 
 
Accounts receivable
 
24

 
51

Inventory
 
(3
)
 
(9
)
Broker margin account
 
2

 
5

Prepayments and other assets
 
(107
)
 
8

Accounts payable and accrued liabilities
 
7

 
34

Affiliate transactions
 
(29
)
 

Changes in non-current assets
 
(6
)
 
(7
)
Changes in non-current liabilities
 
1

 
3

Net cash provided by (used in) operating activities
 
(145
)
 
83

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Capital expenditures
 
(9
)
 
(66
)
Maturities of short-term investments
 

 
56

Purchases of short-term investments
 

 
(69
)
Decrease in restricted cash and investments
 
148

 
20

Other investing
 

 
4

Net cash provided by (used in) investing activities
 
139

 
(55
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Repayments of borrowings
 
(3
)
 

Net cash used in financing activities
 
(3
)
 

Net increase (decrease) in cash and cash equivalents
 
(9
)
 
28

Cash and cash equivalents, beginning of period
 
398

 
253

Cash and cash equivalents, end of period
 
$
389

 
$
281

Other non-cash investing activity:
 
 
 
 
Non-cash capital expenditures
 
$
(1
)
 
$
(8
)
 
See the notes to condensed consolidated financial statements.

5

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011




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 3—Chapter 11 Cases and Note 15—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, 2011, filed on September 17, 2012, which we refer to as our “Form 10-K”.

Our current business operations are focused primarily on the power generation sector of the energy industry. We report the results of our power generation business as three segments in our consolidated financial statements: (i) the Coal segment ("Coal"); (ii) the Gas segment ("Gas") and (iii) the Dynegy Northeast segment ("DNE"). Prior to the third quarter 2011, we reported results for the following segments: (i) Gen-MW (ii) GEN-WE and (iii) GEN-NE. 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.

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. On September 1, 2011, we sold 100% of the outstanding membership interests of Dynegy Coal Holdco, LLC ("Coal Holdco") to Dynegy (the "DMG Transfer"); therefore, the results of the Coal segment (including DMG) are not included in our consolidated results as of, and for the three months ended March 31, 2012. On June 5, 2012, the effective date of the Settlement Agreement (as defined and discussed below), we reacquired Coal Holdco (the "DMG Acquisition"). Please read Note 3—Chapter 11 Cases and Note 15—Subsequent Events for further discussion.



6

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


Chapter 11 Filing by Certain Subsidiaries.  On November 7, 2011, the DH Debtor Entities filed the DH Chapter 11 Cases. The DH Chapter 11 Cases were assigned to the Honorable Cecelia G. Morris and are being jointly administered for procedural purposes only. On July 6, 2012, Dynegy filed a voluntary 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”). The Dynegy Chapter 11 Case was also assigned to the Honorable Cecilia G. Morris, but it is being separately administered under the caption In re: Dynegy Inc., Case No. 12-36728. Only the DH Debtor Entities and our parent, Dynegy, filed voluntary petitions for relief under the Bankruptcy Code, and none of our other direct or indirect subsidiaries are debtors thereunder. Consequently, they continue to operate their business in the ordinary course. Dynegy and the DH Debtor Entities (together, the "Debtor Entities") remain in possession of their property and continue to operate their business as “debtors in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Dynegy Chapter 11 Case is a necessary step to facilitate the restructuring contemplated by the Plan, the Settlement Agreement and the Plan Support Agreement (each as defined and described in Note 3—Chapter 11 Cases), including the planned merger of Dynegy and DH (the “Merger”).

We are a wholly-owned subsidiary of Dynegy and we have historically been consolidated by Dynegy in its consolidated financial statements. However, as a result of the DH Chapter 11 Cases, on November 7, 2011, Dynegy deconsolidated its investment in us and, instead, began accounting for its investment in us as an equity method investment.

Going Concern

Our accompanying unaudited condensed consolidated financial statements were prepared assuming that we would continue as a going concern, and therefore contemplate 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.

On November 7, 2011, the DH Debtor Entities filed the DH Chapter 11 Cases. On July 6, 2012, Dynegy filed the Dynegy Chapter 11 Case. Only the DH Debtor Entities and our parent Dynegy Inc. filed voluntary petitions for relief, and none of our other direct or indirect subsidiaries are debtors under Chapter 11 of the Bankruptcy Code. Please read Note 3—Chapter 11 Cases 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 their parents, the terms and conditions of an approved plan of reorganization that allows us to emerge from bankruptcy (as described in Note 3—Chapter 11 Cases), 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 be necessary if the Settlement Agreement and Plan of Reorganization are not successful.

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.

Accounting Principles Adopted During the Current Period
 
Fair Value Measurement Disclosures.  In May 2011, the FASB issued Accounting Standards Update (“ASU”)

7

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


No. 2011-04—Fair Value Measurement (Topic 820):  Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU No. 2011-04”).  This authoritative guidance changes the wording used to describe the requirements in GAAP for measuring fair value and requires additional disclosure about fair value measurements.  ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011.  The implementation of this guidance has been reflected in our fair value disclosures.
 
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 nonowner 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 have elected to present comprehensive income as two separate consecutive statements.

Accounting Principles Not Yet Adopted

Disclosures about Offsetting Assets and Liabilities.  In December 2011, the FASB issued ASU 2011-11—Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.  This statement requires entities to disclose both gross and net information about instruments and transactions eligible for offsetting in the statement of financial position, as well as instruments and transactions subject to an agreement similar to a master netting arrangement.  Implementation of this guidance would affect disclosures around financial derivative contracts, however would have no impact on the statement of financial position or the statement of operations.  This guidance is effective for the quarter ending March 31, 2013.

Note 3—Chapter 11 Cases
 
On November 7, 2011, the DH Debtor Entities commenced the DH Chapter 11 Cases. On July 6, 2012, our parent, Dynegy commenced the Dynegy Chapter 11 Case. Only the DH Debtor Entities, and our parent Dynegy sought relief under the Bankruptcy Code, and none of our other direct or indirect subsidiaries are debtors thereunder. The Debtor Entities remain in possession of their property and continue to operate their business as “debtors in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Dynegy Chapter 11 Case is a necessary step to facilitate the restructuring contemplated by the Plan and the Agreements (as defined and discussed below), including the planned Merger.
Dynegy Gas Holdco, LLC and its indirect, wholly-owned subsidiaries, including DPC and all of its subsidiaries, are not included in the Chapter 11 Cases. The normal day-to-day operations of the natural gas-fired power generation facilities held by DPC have continued without interruption. The commencement of the Chapter 11 Cases did not constitute a default under the DPC Credit Agreement (as defined below).
Lease Rejection. On November 7, 2011, the DH Debtor Entities filed a motion with the Bankruptcy Court for authorization to reject the leases of the Roseton and Danskammer power generation facilities (the “Facilities”) and sought to impose a cap on the lease rejection damages under Section 502(b)(6) of the Bankruptcy Code. On December 13, 2011, Dynegy and the DH Debtor Entities entered into a binding term sheet with Resource Capital Management Corporation (“RCM”), Resources Capital Asset Recovery, L.L.C., Series DD and Series DR, Roseton OL LLC, Danskammer OL LLC, Roseton OP LLC and Danskammer OP LLC (collectively with RCM, the “PSEG Entities”), as the owners and lessors of the Roseton and a portion of Danskammer facilities, to settle and resolve issues among them in lieu of further litigation, regarding, among other things, the Roseton and Danskammer leases and all of the parties' rights and claims arising under the related lease documents, including certain tax indemnity agreements (the “PSEG Settlement”).
On December 20, 2011, the Bankruptcy Court entered a stipulated order (as amended by a stipulated order entered by the Bankruptcy Court on December 28, 2011) approving the rejection of the Roseton and Danskammer leases subject to certain conditions. The rejection damages claim of RCM was stipulated and allowed by the Bankruptcy Court in the amount of $110 million. The applicable DH Debtor Entities have operated and plan to continue operating the Facilities until such Facilities can be sold in accordance with the terms of the Agreements (as defined below) and in compliance with applicable federal and state regulatory requirements. Please read the section entitled “Settlement Agreement and Plan Support Agreement”

8

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


below for further discussion.
Adversary Proceeding and Examiner Report.    On November 11, 2011, U.S. Bank National Association (“U.S. Bank”), in its capacity as successor lease indenture trustee (the “Lease Trustee”) under the Indenture of Trust, Mortgage, Assignment of Leases and Rents and Security Agreement related to Roseton Units 1 and 2, dated as of May 8, 2001, and the Indenture of Trust, Mortgage, Assignment of Leases and Rents and Security Agreement related to Danskammer Units 3 and 4, dated as of May 8, 2001 (collectively, the “Lease Indentures”), commenced an adversary proceeding against Danskammer, Roseton and DH (the “Adversary Proceeding”). The Lease Indentures govern the terms of the notes issued by Roseton OL LLC and Danskammer OL LLC, as owner lessors of the Facilities, to the pass through trust established under the Roseton-Danskammer 2001-Series B Pass Through Trust Agreement, dated as of May 1, 2001 (the “Pass Through Trust Agreement”). The Adversary Proceeding sought, among other things, a declaration that: (i) the leases of the Facilities to Roseton and Danskammer are not leases of real property; (ii) the leases are financings, not leases; (iii) notwithstanding the lease rejection claims, claims arising from DH's guaranty of certain of the Facilities' lease obligations are not subject to a cap pursuant to section 502(b)(6) of the Bankruptcy Code; and (iv) a determination of the allowed amount of the Lease Trustee's claims against Danskammer, Roseton, and DH.
Danskammer, Roseton and DH contested the claims made in the Adversary Proceeding, including the attempt to re-characterize the leases of the Facilities as financings and not as leases of real property and the applicability of Section 502(b)(6) of the Bankruptcy Code. The parties to the Adversary Proceeding filed motions seeking judgment on the pleadings and subsequently agreed to an informal stay of the proceedings, pending further settlement negotiations among the parties as discussed below under “Settlement Agreement and Plan Support Agreement.”
On November 11, 2011, the Lease Trustee also filed a motion with the Bankruptcy Court seeking the appointment of an examiner. On December 29, 2011, the Bankruptcy Court entered an order directing the appointment of the examiner (the “Examiner”), which order provided, among other things, that the Examiner investigate (i) the DH Debtor Entities' conduct in connection with the prepetition 2011 restructuring and reorganization of the DH Debtor Entities and their non-debtor affiliates (the "Reorganization"), (ii) any possible fraudulent conveyances and (iii) whether DH was capable of confirming a Chapter 11 plan of reorganization. On March 9, 2012, the Examiner filed a report with the Bankruptcy Court and on March 20, 2012, Dynegy filed a preliminary response to such report.
All disputes and claims related to the Adversary Proceeding or otherwise related to the rejection of the Lease Documents have been resolved by the Settlement Agreement (as defined and discussed below). Upon the effectiveness of the Settlement Agreement, the Adversary Proceeding was dismissed with prejudice and any potential claims relating to or arising from disputes with respect to, among other things, the Adversary Proceeding and the Lease Documents were released. In addition, pursuant to the Settlement Agreement, Dynegy , DH and the other settling parties have released any potential claims relating to or arising from disputes with respect to the matters investigated by the Examiner, including, among other things, the Reorganization and including, without limitation, any claims that have been or could have been brought in connection with the DMG Transfer, the related Undertaking Agreement or the DH note.

Settlement Agreement and Plan Support Agreement.   On May 1, 2012, Dynegy, DGIN, Coal Holdco, the DH Debtor Entities, certain beneficial holders of approximately $1.9 billion of our outstanding senior notes (the “Consenting Senior Noteholders”), the PSEG Entities and the Lease Trustee, as directed by a majority of, and on behalf of all holders of those certain pass through trust certificates issued pursuant to the Pass Through Trust Agreement (the “Lease Certificate Holders” and, collectively the “Original Settlement Parties”) entered into a settlement agreement (the "Original Settlement Agreement”). On May 30, 2012, the Original Settlement Parties, holders of a majority of the outstanding subordinated notes (the "Consenting Sub Debt Holders") and, solely with respect to certain sections of the Settlement Agreement (as defined below), the successor trustee under our subordinated notes indenture ("Wells Fargo" and collectively, with the Original Settlement Parties and the Consenting Sub Debt Holders, the "Settlement Parties") entered into an amended and restated settlement agreement (the "Settlement Agreement").
Also on May 1, 2012, DGIN, Coal Holdco, the Debtor Entities, the Consenting Senior Noteholders, the PSEG Entities and certain Lease Certificate Holders (the "Consenting Lease Certificate Holders") entered into a plan support agreement (the “Original Plan Support Agreement”). On May 30, 2012, the parties to the Original Plan Support Agreement entered into an amended and restated plan support agreement including the Consenting Sub Debt Holders (the “Plan Support Agreement” and, together with the Settlement Agreement, the “Agreements”), providing for, among other things, the treatment of claims and

9

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


certain rights and obligations of the supporting creditor parties as well as the Consenting Senior Noteholders thereunder. Additionally, pursuant to the Plan Support Agreement, DH and Dynegy each agreed, subject to the terms of the Plan Support Agreement, to amend the then existing plan of reorganization for DH to reflect the terms contained in the Plan Support Agreement. On July 31, 2012, Dynegy , DH, the Consenting Senior Noteholders, the Consenting Lease Certificate Holders and RCM (the “Amendment Parties) entered into the First Amendment to the Plan Support Agreement (the “First Amendment”). The First Amendment makes certain modifications and conforming changes to the Plan Support Agreement related to the modifications made to the Plan (as defined and discussed below). The material terms of the Plan are described below under the heading “Plan of Reorganization.” As of the date of the Original Plan Support Agreement, the earlier noteholder restructuring support agreement, dated November 7, 2011, which was entered into in connection with the filing of the DH Chapter 11 Cases, and amended and restated on December 26, 2011, was terminated.
The Bankruptcy Court entered an order approving the Settlement Agreement on June 1, 2012 (the “Approval Order”) and the Settlement Agreement became effective on June 5, 2012 (the "Settlement Effective Date"). Pursuant to the Settlement Agreement, Dynegy and DH undertook the DMG Acquisition. In full consideration for such contribution and in accordance with the terms of the Settlement Agreement and the Approval Order, (i) Dynegy received an allowed administrative claim pursuant to sections 503(b) and 507(a) of the Bankruptcy Code in an unliquidated amount against us in the DH Chapter 11 Cases (the “Administrative Claim”), (ii) the Prepetition Litigation (as defined below), the Adversary Proceeding and the affiliate payable to DH were dismissed with prejudice or released and (iii) the parties to the Settlement Agreement issued and received the releases set forth in the Settlement Agreement and described above under "-Adversary Proceeding and Examiner Report." Also pursuant to the Settlement Agreement on June 5, 2012, the Undertaking Agreement and the DH note were terminated with no further obligations thereunder.

Plan of Reorganization.    On December 1, 2011, Dynegy and DH, as co-plan proponents (the “Plan Proponents”), filed a proposed Chapter 11 plan of reorganization and a related disclosure statement for DH with the Bankruptcy Court, which was subsequently amended and filed with the Bankruptcy Court on each of January 19, 2012, March 6, 2012 and June 8, 2012, as the proposed amended plan, the proposed second amended plan and the proposed third amended plan of reorganization for DH. On June 18, 2012, the Plan Proponents filed a proposed modified third amended plan of reorganization (the "Third Amended Plan") and related disclosure statement (the “Third Amended Disclosure Statement”) for DH with the Bankruptcy Court. Like earlier versions, the Third Amended Plan addressed claims against and interests in DH only and did not address claims against and interests in the other DH Debtor Entities. On July 3, 2012, in the DH Chapter 11 Cases, the Bankruptcy Court entered an order (i) approving (a) the Third Amended Disclosure Statement, and (b) solicitation and voting procedures and (ii) scheduling the plan confirmation process (the “DH Disclosure Statement Order”), which authorized DH and Dynegy, in the event Dynegy later commenced a Chapter 11 case in the Bankruptcy Court, among other things, to modify the Third Amended Plan and Third Amended Disclosure Statement as necessary to constitute a plan of reorganization and disclosure statement for both DH and Dynegy, as debtors.

On July 6, 2012, upon the commencement of the Dynegy Chapter 11 Case, Dynegy submitted a first day motion to the Bankruptcy Court seeking to have certain relief entered in the DH Chapter 11 Cases made applicable to the Dynegy Chapter 11 Case, including the DH Disclosure Statement Order. On July 10, 2012, the Bankruptcy Court entered an order in the Dynegy Chapter 11 Case (i) approving (a) the Third Amended Disclosure Statement, and (b) solicitation and voting procedures and (ii) scheduling the plan confirmation process in the Dynegy Chapter 11 Case (the “Dynegy Disclosure Statement Order,” and together with the DH Disclosure Statement Order, the “Disclosure Statement Orders”), which, among other things, authorized DH and Dynegy to modify the Third Amended Plan and Third Amended Disclosure Statement as necessary to constitute a plan of reorganization and disclosure statement for both DH and Dynegy, as debtors.
In accordance with the Disclosure Statement Orders, Dynegy and DH (together, the “Plan Debtors”) made certain modifications to the Third Amended Plan (as so modified, the “Plan”) and the Third Amended Disclosure Statement (as so modified, the “Disclosure Statement”), to reflect the commencement of the Dynegy Chapter 11 Case and to have such documents constitute a plan of reorganization and disclosure statement for both Plan Debtors. On July 12, 2012, the Plan and Disclosure Statement were filed with the Bankruptcy Court [Dynegy Case Docket No. 28; DH Case Docket No. 861] and the Plan Debtors commenced solicitation of votes to accept or reject the proposed Plan in accordance with the Disclosure Statement Orders.
The material terms of the Plan have been agreed upon by Dynegy, DH, a majority of the Consenting Senior Noteholders, the Consenting Sub Debt Holders, the Lease Trustee and the official committee of creditors holding unsecured claims appointed

10

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


in the DH Chapter 11 Cases (the “Creditors' Committee”) and include, among other things:
on or prior to the effective date of the Plan (such date, the "Effective Date"), Dynegy and DH will be merged (the entity surviving such merger being the "Surviving Entity") and, by virtue of the Merger, all our equity interests issued and outstanding immediately prior to the effective time of the Merger will be canceled;

the initial Board of Directors of the Surviving Entity will be selected pursuant to a process agreed upon among a majority of the Consenting Senior Noteholders, the Lease Trustee and the Creditors' Committee with existing Board members eligible for service on the new Board of the Surviving Entity;

holders of allowed general unsecured claims will receive their pro rata share of: (a) 99% of the fully-diluted common shares of the Surviving Entity to be outstanding immediately following the Plan Effective Date (subject to dilution), (b) any amounts to which they may be entitled as a result of the sale of the Facilities, and (c) a cash payment of $200 million;

holders of equity interests in Dynegy, DH or the Surviving Entity shall not receive any distribution or retain any interest or property under the Plan on account of such holder's equity interest; and

the Administrative Claim will be satisfied in full under the Plan with: (a) 1.0% of the fully-diluted common shares of the Surviving Entity to be outstanding immediately following the Effective Date (subject to dilution by the Warrants (as defined below)) and options, restricted stock or other equity interests issued as equity compensation to officers, employees or directors of the Surviving Entity or its affiliates, and (b) warrants with a 5-year term to purchase an aggregate of 13.5% of the fully-diluted common shares of the Surviving Entity (the “Warrants”) (subject to dilution) for an exercise price to be determined based on a net equity value of the Surviving Entity of $4 billion, and containing customary anti-dilution adjustments, as provided in the Settlement Agreement.

The parties to the Plan Support Agreement as amended by the First Amendment (the "Amended Plan Support Agreement") agreed to use their commercially reasonable efforts to support the Plan and complete the transactions contemplated thereby.

On August 27, 2012, the results of the vote on the Plan were filed with the Bankruptcy Court, with creditors holding over $3.5 billion of claims, or more than 99% of the value of the claims that voted, approving the Plan (this reflects approximately 87% of the number of creditors who voted). Further, Dynegy announced that the Consenting Senior Noteholders, the Lease Trustee and the Creditors' Committee selected the initial directors to be appointed to Dynegy's Board. At a hearing on September 5, 2012, the Bankruptcy Court found that DH and Dynegy had met all Plan confirmation requirements under the Bankruptcy Code. Accordingly, on September 10, 2012, the Bankruptcy Court entered its order confirming the Plan (the "Confirmation Order"). The occurrence of the Effective Date of the Plan and the emergence of the Surviving Entity from bankruptcy remain subject to certain conditions precedent set forth in Section 11.2 of the Plan, including, among other things, that no “Non-Conforming Plan Assertion” (as defined in the Amended Plan Support Agreement) has been made, or the Bankruptcy Court has ruled on such Non-Conforming Plan Assertion and determined that the Plan is a “Conforming Plan” (as defined in the Amended Plan Support Agreement). As mentioned above, the Plan addressed claims against and interests in Dynegy and DH only and did not address claims against and interests in the other DH Debtor Entities. The remaining DH Debtor Entities, with the cooperation of the PSEG Entities, will use commercially reasonable efforts to sell the Facilities with the proceeds of any sale to pay transaction expenses and to be distributed as set forth in the Settlement Agreement and Amended Plan Support Agreement.

Financial Obligations.  The direct financial obligations of the DH Debtor Entities and obligations under their off-balance sheet arrangements, and the approximate principal amount of debt currently outstanding thereunder, include the following:

The following outstanding unsecured notes and debentures issued by us: (i) 8.75 percent senior unsecured notes due February 15, 2012; (ii) 7.5 percent senior unsecured notes due June 1, 2015; (iii) 8.375 percent senior unsecured notes due May 1, 2016; (iv) 7.75 percent senior unsecured notes due June 1, 2019; (v) 7.125 percent senior debentures due May 15, 2018; and (vi) 7.625 percent senior debentures due October 15, 2026 (collectively, the “Old Notes”), issued

11

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


under the Indenture dated September 26, 1996, as amended and restated as of March 14, 2001, and under the First through Sixth Supplemental Indentures thereto (the "Old Notes Indenture"), between us and Wilmington Trust Company (as successor to JP Morgan Chase Bank, N .A., successor to Bank One Trust Company, National Association), as trustee, in the outstanding aggregate principal amount of approximately $3,370 million;
 
Our Series B 8.316 percent Subordinated Capital Income Securities issued under the Indenture dated May 28, 1997, between NGC Corporation (a predecessor of ours) and the First National Bank of Chicago, as trustee, as amended and restated, in the outstanding aggregate principal amount of $200 million (the "Subordinated Capital Income Securities");

Our approximately $26 million cash collateralized letter of credit facility, which is collateralized by $27 million in restricted cash; and

The sale-leaseback arrangements for the Roseton and Danskammer power generation facilities under which the rent payments paid by each of them are assigned to an indenture trustee for the respective facility.  The indenture trustee then pays a portion of those payments to each of two pass-through trusts, and such pass-through trusts pay these amounts to holders of certificates in the pass-through trusts.  The current total outstanding principal of the certificates is approximately $550 million. 
 
Upon the commencement of the DH Chapter 11 Cases, our senior notes and debentures, including the Subordinated Capital Income Securities were reclassified as Liabilities subject to compromise on our unaudited condensed consolidated balance sheet. Please read Note 8—Liabilities Subject to Compromise for further discussion.

Note 4—Condensed Combined Financial Statements of the Debtor Entities

12

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


Condensed combined financial statements of the Debtor Entities are set forth below (in millions):
Condensed Combined Balance Sheet
 
March 31,
2012
 
December 31,
2011
Cash
$
21

 
$
33

Restricted cash and investments (including $27 million current)
27

 
27

Accounts receivable
8

 
8

Inventory
34

 
34

Investment in consolidated subsidiaries
5,556

 
5,568

Risk management, affiliate
15

 

Accrued interest from affiliate
32

 
8

Undertaking receivable from affiliate
418

 
1,250

Deferred income taxes
49

 
44

Other
14

 
14

Total assets
$
6,174

 
$
6,986

 
 
 
 

Current liabilities and accrued liabilities
$
31

 
$
10

Risk management, affiliate
14

 

Liabilities subject to compromise
4,241

 
4,012

Intercompany payable
1,589

 
1,587

Long-term debt to affiliates
1,262

 
1,262

Deferred income taxes
50

 
50

Other
32

 
33

Total liabilities
$
7,219

 
$
6,954

 
 
 


Total member's equity
$
(1,045
)
 
$
32

 
 
 


Total liabilities and member's equity
$
6,174

 
$
6,986

See Note 8—Liabilities Subject to Compromise for additional discussion of liabilities subject to compromise.


13

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011



Condensed Combined Statement of Operations
For the Three Months Ended March 31, 2012
Revenues
$
7

Cost of sales
(6
)
Operating expenses
(15
)
General and administrative expenses
(2
)
Operating loss
(16
)
Bankruptcy reorganization charges
(247
)
Equity losses
(17
)
Interest expense, affiliate

Other income and expense, net
(808
)
Income tax expense
6

Net loss
$
(1,082
)

Condensed Combined Statement of Cash Flows
For the Three Months Ended March 31, 2012
Net cash provided by (used in):
 
Operating activities
$
(12
)
Investing activities

Financing activities

Net increase in cash and cash equivalents
(12
)
Cash and cash equivalents, beginning of period
33

Cash and cash equivalents, end of period
$
21

Basis of Presentation.    The condensed combined financial statements only include the financial statements of the Debtor Entities. Transactions and balances of receivables and payables among the Debtor Entities are eliminated in consolidation. However, the condensed combined balance sheet includes receivables from related parties and payables to related parties that are not Debtor Entities. Actual settlement of these related party receivables and payables is, by historical practice, made on a net basis.
Interest Expense.    The Debtor Entities have discontinued recording interest on unsecured or undersecured liabilities subject to compromise ("LSTC"). Contractual interest on LSTC not reflected in the condensed combined financial statements was approximately $71 million; representing interest expense for the three month period ended March 31, 2012.
Bankruptcy Reorganization Charges.    Bankruptcy reorganization charges represent the direct and incremental costs of bankruptcy, such as professional fees, pre-petition liability claim adjustments and losses related to terminated contracts that are probable and can be estimated. Bankruptcy reorganization charges, as shown in the condensed combined statement of operations above, consists of expenses or income incurred or earned as a direct and incremental result of the bankruptcy filings.
The table below lists the significant items within this category for the three months ended March 31, 2012 (in millions).

14

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


Adjustments of estimated allowable claims:


DNE Leases (1)
$
395

Subordinated debt (1)
(161
)
Write-off of note payable, affiliate (2)
(10
)
Other
4

Total adjustments of estimated allowable claims
228

Professional fees (3)
19

Total Bankruptcy reorganization charges
$
247

_______________________________________________________________
(1)
The estimated allowable claim related to the Facilities and the Subordinated Capital Income Securities were adjusted based on the terms of the Settlement Agreement. Please read Note 3—Chapter 11 Cases—Settlement Agreement and Plan Support Agreement for further discussion.
(2)
It was determined that no claim related to a Note payable, affiliate would be made. Therefore, the estimated amount was reduced to zero.
(3)
Professional fees relate primarily to the fees of attorneys and consultants working directly on the Chapter 11 Cases.

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 the 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 not designated as accounting hedges that are 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 March 31, 2012, our commodity derivatives are comprised of both purchases and sales of commodities. As of March 31, 2012, we had net purchases and sales of commodity derivative contracts outstanding and notional interest swaps outstanding in the following quantities:
 

15

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


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

 
 
 
 

Electric energy (1)
 
Not designated
 
(19
)
 
MWh
 
$
131

Electric energy, affiliates
 
Not designated
 

 
MWh
 
$
(6
)
Natural gas (1)
 
Not designated
 
109

 
MMBtu
 
$
(248
)
  Heat rate derivatives
 
Not designated
 
(1)/12

 
MWh/MMBtu
 
$
(11
)
  Crude oil
 
Not designated
 

 
BBL
 
$
1

Interest rate contracts:
 
 
 
 

 
 
 
 

Interest rate swaps
 
Not designated
 
788

 
Dollars
 
$
(10
)
Interest rate caps
 
Not designated
 
900

 
Dollars
 
$
1

_______________________________________________________________
(1)   Mainly comprised of swaps, options 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.

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 March 31, 2012, we had $121 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 sheets as of March 31, 2012 and December 31, 2011 segregated by type of contract segregated by assets and liabilities.
 

16

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


Contract Type
 
Balance Sheet Location
 
March 31,
2012
 
December 31,
2011
 
 
 
 
(in millions)
 
 
 
 
 

 
 

Derivative Assets:
 
 
 
 

 
 

Commodity contracts
 
Assets from risk management activities
 
$
2,765

 
$
2,639

Commodity contracts, affiliates
 
Assets from risk management activities, affiliates
 
3

 
2

Interest rate contracts
 
Assets from risk management activities
 
1

 
2

Derivative Liabilities:
 
 
 
 

 
 

Commodity contracts
 
Liabilities from risk management activities
 
(2,892
)
 
(2,810
)
Commodity contracts, affiliates
 
Liabilities from risk management activities, affiliates
 
(9
)
 
(7
)
Interest rate contracts
 
Liabilities from risk management activities
 
(10
)
 
(8
)
Total derivatives, net
 
 
 
$
(142
)
 
$
(182
)
 
Impact of Derivatives on the Consolidated Statements of Operations
The following discussion and table presents the location and amount of gains and losses on derivative instruments in our consolidated statements of operations segregated between designated, qualifying hedging instruments and those that are not, by type of contract. We had no derivatives that were designated in qualifying hedging relationships during the three months ended March 31, 2012.
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 periods ended March 31, 2012 and 2011, our revenues included approximately $43 million and $2 million of unrealized mark-to-market gains, respectively, related to this activity.
 
The impact of derivative financial instruments, including realized and unrealized gains and losses, that have not been designated as hedges on our unaudited condensed consolidated statements of operations for the three months ended March 31, 2012 and 2011 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 March 31,
Hedging Instruments
 
Derivatives
 
2012
 
2011
 
 
 
 
(in millions)
Commodity contracts
 
Revenues
 
$
8

 
$
19

Commodity contracts, affiliates
 
Revenues
 
(6
)
 

Interest rate contracts
 
Interest expense
 
3

 



17

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


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 March 31, 2012 and December 31, 2011.  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 assets and liabilities and their placement within the fair value hierarchy levels.
 
 
 
Fair Value as of March 31, 2012
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in millions)
Assets:
 
 

 
 

 
 

 
 

Assets from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
364

 
$
27

 
$
391

Electricity derivatives, affiliates
 

 
2

 
1

 
3

Natural gas derivatives
 

 
2,359

 

 
2,359

Other derivatives
 

 
15

 

 
15

Total assets from commodity risk management activities
 
$

 
$
2,740

 
$
28

 
$
2,768

Assets from interest rate contracts
 

 

 
1

 
1

Total
 
$

 
$
2,740

 
$
29

 
$
2,769

Liabilities:
 
 

 
 

 
 

 
 

Liabilities from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
(259
)
 
$
(1
)
 
$
(260
)
Electricity derivatives, affiliates
 

 
(4
)
 
(5
)
 
(9
)
Natural gas derivatives
 

 
(2,607
)
 

 
(2,607
)
Heat rate derivatives
 

 

 
(11
)
 
(11
)
Other derivatives
 

 
(14
)
 

 
(14
)
Total liabilities from commodity risk management activities
 
$

 
$
(2,884
)
 
$
(17
)
 
$
(2,901
)
Liabilities from interest rate contracts
 

 

 
(10
)
 
(10
)
Total
 
$

 
$
(2,884
)
 
$
(27
)
 
$
(2,911
)
 
_______________________________________________________________

 

18

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


 
 
Fair Value as of December 31, 2011
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in millions)
Assets:
 
 

 
 

 
 

 
 

Assets from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
211

 
$
26

 
$
237

Electricity derivatives, affiliates
 

 
1

 
1

 
2

Natural gas derivatives
 

 
2,387

 

 
2,387

Other derivatives
 

 
15

 

 
15

Total assets from commodity risk management activities
 
$

 
$
2,614

 
$
27

 
$
2,641

Assets from interest rate contracts
 

 

 
2

 
2

Total
 
$

 
$
2,614

 
$
29

 
$
2,643

Liabilities:
 
 

 
 

 
 

 
 

Liabilities from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
(169
)
 
$
(2
)
 
$
(171
)
Electricity derivatives, affiliates
 

 
(2
)
 
(5
)
 
(7
)
Natural gas derivatives
 

 
(2,607
)
 

 
(2,607
)
Heat rate derivatives
 

 

 
(17
)
 
(17
)
Other derivatives
 

 
(15
)
 
$

 
(15
)
Total liabilities from commodity risk management activities
 
$

 
$
(2,793
)
 
$
(24
)
 
$
(2,817
)
Liabilities from interest rate contracts
 

 

 
(8
)
 
(8
)
Total
 
$

 
$
(2,793
)
 
$
(32
)
 
$
(2,825
)
 
Level 3 valuation methods:
The electricity contracts classified within level 3 are primarily financial swaps executed in illiquid trading locations and capacity contracts.  The curves used to generate the fair value of the financial swaps are based on basis adjustments applied to forward curves for liquid trading points, while the curves for the capacity deals are based upon auction results in the marketplace, which are infrequently executed.  Additionally, FTRs are classified within the electricity contracts, which are also an illiquid product.  The forward market price of FTRs is derived using historical congestion patterns within the marketplace.  Heat rate option valuations are derived using a Black-Sholes spread model, which uses forward natural gas and power prices, market implied volatilities and modeled power/natural gas correlation values. The interest rate contracts classified within Level 3 include an implied credit fee that impacted the day one value of the instruments.  We revalue the credit fee each quarter in conjunction with revaluing the actual interest rate derivative.  The interest rate derivatives are revalued using the forward LIBOR curve each period and the credit fee is revalued by determining the change in credit factors, such as credit default swaps, period over period.
 
Sensitivity to Changes in Significant unobservable inputs for level 3 valuations:
The significant unobservable inputs used in the fair value measure of our commodity instruments categorized within Level 3 of the fair value hierarchy are estimates of future price correlation, future market volatility, estimates of forward congestion power price spreads, assumptions of illiquid power location pricing basis to liquid locations, and estimates of counterparty credit risk and our own non-performance risk. These assumptions are generally independent of each other. Volatility curves and power prices spreads are generally based on observable markets where available, or derived from historical prices and forward market prices from similar observable markets when not available. Increases in the price or volatility of the spread on a long/short position in isolation would result in a higher/lower fair value measurement. A change in the assumption used for the probability of default is accompanied by a directionally similar change in the adjustment to reflect the estimated default risk of counterparties on their contractual obligations, or the estimated risk of default on our own contractual obligations to

19

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


counterparties.  Any change in the value of the unobservable inputs used for level 3 valuations could have a significant impact on the calculated fair value.

We primarily apply the market approach for recurring fair value measurements.  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.
 
The finance organization monitors commodity risk through the CRCG.  The EMT monitors interest rate risk.  The EMT has delegated the responsibility for managing interest rate risk to the CFO.  The CRCG is independent of our commercial operations and has direct access to the Audit and Compliance Committee of our parent. The Finance and Risk Management Committee, chaired by the CFO, meets periodically and is responsible for reviewing our overall day-to-day energy commodity risk exposure as measured against the limits established in our Commodity Risk Policy.
 
Each quarter, as part of its internal control processes, representatives from the CRCG review the methodology and assumptions behind the pricing of the forward curves.  As part of this review, liquidity periods are established based on third party market information, the basis relationship between direct and derived curves is evaluated, and changes are made to the forward power model assumptions.
 
The CRCG reviews changes in value on a daily basis through the use of various reports.  The pricing for power, natural gas and fuel oil curves is automatically entered into our commercial system nightly based on data received from our market data provider.  The CRCG reviews the data provided by the market data provider by utilizing third party broker quotes for comparison purposes.  In addition, our traders are required to review various reports to ensure accuracy on a daily basis.
 
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 March 31, 2012
 
 
Electricity
Derivatives
 
Natural Gas Derivatives
 
Heat Rate Derivatives
 
Interest Rate
Swaps
 
Total
 
 
(in millions)
Balance at December 31, 2011
 
$
20

 

 
$
(17
)
 
$
(6
)
 
$
(3
)
Total gains (losses) included in earnings, net of affiliates
 
2

 

 
2

 
(3
)
 
1

Settlements, net of affiliates
 

 

 
4

 

 
4

Balance at March 31, 2012
 
$
22

 
$

 
$
(11
)
 
$
(9
)
 
$
2

Unrealized losses relating to instruments (net of affiliates) held as of March 31, 2012
 
$
(1
)
 
$

 
$

 
$
(3
)
 
$
(4
)
 

20

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


 
 
Three Months Ended March 31, 2011
 
 
Electricity
Derivatives
 
Natural Gas
Derivatives
 
Heat Rate
Derivatives
 
Interest Rate Swaps
 
Total
 
 
(in millions)
Balance at December 31, 2010
 
$
49

 
$
5

 
$
(31
)
 

 
$
23

Total gains included in earnings, net of affiliates
 
4

 

 
1

 

 
5

Sales and Settlements:
 
 
 
 
 
 
 
 
 


Sales
 

 

 

 

 

Settlements
 
(5
)
 

 
4

 

 
(1
)
Balance at March 31, 2011
 
$
48

 
$
5

 
$
(26
)
 

 
$
27

Unrealized gains relating to instruments (net of affiliates) held as of March 31, 2011
 
$
7

 
$
1

 
$
2

 
$

 
$
10

 
Gains and losses (realized and unrealized) for Level 3 recurring items are included in Revenues, Interest expense and Bankruptcy reorganization charges on the unaudited condensed consolidated statements of operations for commodity derivatives and interest rate swaps, respectively.  We believe an analysis of commodity 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 months ended March 31, 2012 and 2011.

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 the estimated fair value amounts.
 
The carrying values of current financial assets and liabilities such as cash, accounts receivable, short-term investments and accounts payable which are not presented in the table below, approximate fair values due to the short-term maturities of these instruments.  The $840 million and $846 million Accounts receivable, affiliate balances with Dynegy classified within member's equity, as of March 31, 2012 and December 31, 2011, respectively, do not have a fair value as there are no defined payment terms, they are not evidenced by any promissory note and there has never been an intent for payment to occur. The Accounts receivable, affiliate balance was settled on June 5, 2012. Please read Note 13—Related Party Transactions—Accounts receivable, affiliate and Note 15—Subsequent Events for further discussion.  Unless otherwise noted, 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 March 31, 2012 and December 31, 2011, respectively.
 
 
 
March 31, 2012
 
December 31, 2011
 
 
Carrying
Amount
 
Fair
 Value
 
Carrying
Amount
 
Fair
 Value
 
 
(in millions)
Undertaking receivable, affiliate (1)
 
$
418

 
$
418

 
$
1,250

 
$
728

Interest rate derivatives not designated as accounting hedges (2)
 
(9
)
 
(9
)
 
(6
)
 
(6
)
Commodity-based derivative contracts not designated as accounting hedges (2)
 
(133
)
 
(133
)
 
(176
)
 
(176
)
DPC Credit Agreement due 2016 (3)
 
(1,075
)
 
(1,144
)
 
(1,076
)
 
(1,118
)
_______________________________________________________________
(1)
As of March 31, 2012, the fair value of the Undertaking receivable from Dynegy was impaired as result of entering into the Settlement Agreement. As a result, we recorded a charge of approximately $832 million on our consolidated statement of operations for the three months ended March 31, 2012. Our March 31, 2012 estimate of the fair value of the Undertaking receivable from Dynegy was determined based on the fair value of the underlying assets supporting the Undertaking, considering the contractual rights to those cash flows. The fair value was corroborated by the fair

21

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


value of the assets received in the Settlement Agreement. Please read Note 15—Subsequent Events for further discussion. The fair value of the Undertaking receivable from Dynegy is classified within Level 3 of the fair value hierarchy.  Our December 31, 2011 estimate of the fair value of the Undertaking receivable from Dynegy represents the $750 million fair value of the Undertaking as of November 7, 2011, less the $22 million payment in December 2011. Please read Note 13—Related Party Transactions—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 $20 million and $21 million at March 31, 2012 and December 31, 2011, respectively.  The fair value of the DPC Credit Agreement is classified within Level 2 of the fair value hierarchy.


Note 7—Accumulated Other Comprehensive Income
 
Accumulated other comprehensive income, net of tax, is included in members' equity on our unaudited condensed consolidated balance sheets as follows:
 
 
 
March 31,
2012
 
December 31,
2011
 
 
(in millions)
Cash flow hedging activities, net
 
$

 
$
1

Accumulated other comprehensive income (loss), net of tax
 
$

 
$
1

 

Note 8—Liabilities Subject to Compromise
A summary of our LSTC as of March 31, 2012 and December 31, 2011 is as follows:
 
March 31,
2012
 
December 31,
2011
 
(in millions)
DNE lease termination claim (1)
$
695

 
$
300

Senior Notes:
 
 

8.75 percent due 2012
88

 
88

7.5 percent due 2015
785

 
785

8.375 percent due 2016
1,047

 
1,047

7.125 percent due 2018
175

 
175

7.75 percent due 2019
1,100

 
1,100

7.625 percent due 2026
175

 
175

Subordinated Debentures payable to affiliates, 8.316 percent, due 2027 (2)
55

 
200

Interest accrued on Senior Notes and Subordinated Debentures as of November 7, 2011 (2)
116

 
132

Note payable, affiliate (3)

 
10

Other
5

 

Total Liabilities subject to compromise
$
4,241

 
$
4,012

_______________________________________________________________
(1)
The estimated amount of the allowed claim related to the DNE Leases was increased to approximately $695 million during 2012 as a result of entering into the Settlement Agreement. Please read Note 15—Subsequent Events for further discussion.
(2)
The estimated amount of the allowed claim related to the Subordinated Debentures payable to affiliate, including

22

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


accrued interest, was reduced to $55 million during the first quarter 2012 as a result of entering into the Settlement Agreement. Please read Note 15—Subsequent Events for further discussion.
(3)
During the first quarter 2012, it was determined that no claim related to the Note payable, affiliate would be made. Therefore, the estimated amount of the allowed claim was reduced to zero.


Note 9—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.  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 3—Chapter 11 Cases) 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

23

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


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 3—Chapter 11 Cases.
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, et al, however, plaintiffs voluntarily dismissed the case shortly after filing.
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.

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. 

 Other Commitments and Contingencies
 
In conducting our operations, we have routinely entered into long-term commodity purchase and sale commitments, as well as agreements that commit future cash flow to the lease or acquisition of assets used in our businesses.  These commitments have been typically associated with commodity supply arrangements, capital projects, reservation charges associated with firm transmission, transportation, storage and leases for office space, equipment, plant sites, power generation assets and LPG vessel charters.  The following describes the more significant commitments outstanding at March 31, 2012.
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.
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

24

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


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 at 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 3—Chapter 11 Cases 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 approximately $1 million accrued as of March 31, 2012.
 
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 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

25

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


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 March 31, 2012, 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 $53 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 March 31, 2012, 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 10—Restricted Cash

The following table depicts our restricted cash:
 
 
March 31, 2012
 
December 31, 2011
 
 
(in millions)
DPC LC facilities (1)
 
$
297

 
$
455

DH LC facility (1)
 
27

 
27

DPC Collateral Posting Account (2)
 
142

 
132

Total restricted cash
 
$
466

 
$
614


_______________________________________________________________
(1)
Includes cash posted to support the letter of credit reimbursement and collateral agreements. Please read Note 20—Debt—DPC Credit Agreement—Letter of Credit Facilities in our Form 10-K for further discussion.
(2)
Amounts are restricted and may be used for future collateral posting requirements or released per the terms of the applicable DPC Credit Agreement.


Note 11—Income Taxes
 
Effective Tax Rate.  We compute our quarterly taxes under the effective tax rate method based on applying an anticipated

26

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


annual effective rate to our year-to-date income or loss, except for significant unusual or extraordinary transactions.  Income taxes for significant unusual or extraordinary transactions are computed and recorded in the period that the specific transaction occurs. 
 
 
 
Three Months Ended
 March 31,
 
 
2012
 
2011
 
 
(in millions, except rates)
Income tax benefit
 
$
6

 
$
58

 
 
 
 
 
Effective tax rate
 
1
%
 
42
%
 
For the three month period ended March 31, 2012, the difference between the effective rate of 1 percent and the statutory rate of 35 percent resulted primarily from a valuation allowance to eliminate our net deferred tax assets partially offset by the impact of state taxes.  As of March 31, 2012, we do not believe we will produce sufficient future taxable income, nor are there tax strategies available, to realize our net deferred tax assets not otherwise realized by reversing temporary differences.
 
For the period ended March 31, 2011, the difference between the effective rate of 42 percent and the statutory rate of 35 percent resulted primarily from the impact of state taxes including a benefit of $6 million related to an increase in state NOLs due to the acceptance of amended returns, which we filed as a result of a change in a tax position, partially offset by an expense of $2 million related to an increase in the Illinois statutory rate.

Note 12—Inventory
 
A summary of our inventories is as follows:
 
 
 
March 31,
2012
 
December 31,
2011
 
 
(in millions)
Materials and supplies
 
$
39

 
$
40

Coal
 
17

 
16

Fuel oil
 
9

 
8

 Emissions allowances
 
1

 
1

Total
 
$
66

 
$
65

 

Note 13—Related Party Transactions

The following tables summarize the Accounts receivable, affiliates, and Accounts payable, affiliates, on our consolidated balance sheets as of March 31, 2012 and December 31, 2011 and cash received during the three months ended March 31, 2012 related to various agreements with Dynegy, as discussed below:
 
 
March 31, 2012
 
Three
 Months Ended
March 31, 2012
 
 
Accounts
 receivable,
 affiliates
 
Accounts
 payable,
 affiliates
 
Cash received (paid)
 
 
(in millions)
Service Agreements
 
$
4

 
$
2

 
$
11

EMA Agreements
 
20

 
28

 
1

Total
 
$
24

 
$
30

 
$
12


27

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


 
 
December 31, 2011
 
 
Accounts
Receivable,
Affiliates
 
Accounts
Payable,
Affiliates
 
 
(in millions)
Service Agreements
 
$
4

 
$
6

EMA Agreements
 
22

 
41

Total
 
$
26

 
$
47

 
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 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.

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 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 $129 million of power purchased from affiliates, which is reflected in Revenues, and $55 million of coal sold to affiliates, which is reflected in Costs of sales for the three months ended March 31, 2012.  This affiliate activity is presented net of third party activity within revenue and cost of sales. In addition, as of March 31, 2012, we have approximately $7 million of broker collateral payable to Dynegy included in Accrued liabilities and other current liabilities on our consolidated balance sheet.  As a result of the DMG Acquisition, transactions executed under the Energy Management Agreement would no longer be considered related party transactions subsequent to June 5, 2012. Please read Note 15—Subsequent Events for further discussion.
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.

28

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


Cash Management.    The Prepetition Restructurings 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 prepetition Restructurings, 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.
Pursuant to our Cash Management Agreement, our ring-fenced entities maintain cash accounts separate from those of our non-ring-fenced entities. 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 during the three months ended March 31, 2012 related to the Cash Management Agreement.
 
DMG Transfer and Undertaking Agreement. During the three months ended March 31, 2012, we recognized $24 million in interest income related to the Undertaking Agreement which is included in Other income and expense, net, in our consolidated statement of operations.  In addition, we did not receive any payments from Dynegy during the three months ended March 31, 2012 related to the Undertaking Agreement.  We had approximately $32 million and $8 million as of March 31, 2012 and December 31, 2011, respectively, in interest receivable related to the undertaking, which is reflected in Interest receivable, affiliates on our consolidated balance sheet.

On June 5, 2012, the effective date of the Settlement Agreement, we reacquired Coal Holdco. At such time the Undertaking Agreement was terminated with no further obligations thereunder. Please read Note 3—Chapter 11 Cases—Settlement Agreement and Plan Support Agreement, Note 6—Fair Value Measurements and Note 15—Subsequent Events for further discussion. 
Note payable, affiliate.    On August 5, 2011, Coal Holdco 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, affiliate.  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 aggregate amount of $840 million and $846 million at March 31, 2012 and December 31, 2011, respectively.  This receivable is classified within 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.

The Accounts receivable, affiliate was settled on June 5, 2012 upon the effective date of the Settlement Agreement. Please read Note 15—Subsequent Events for further discussion.

Employee benefits.    Our employees participate in the pension plans of our parent, Dynegy.

 
Note 14—Segment Information
 
As reflected in this report, we have changed our reportable segments.  Prior to this report, we reported results for the following segments: (i) GEN-MW, (ii) GEN-WE and (iii) GEN-NE.  Beginning with the third quarter 2011, as a result of the Reorganization, our reportable segments are: (i) the Coal segment ("Coal"); (ii) the Gas segment (“Gas”) and (iii) the Dynegy

29

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


Northeast segment (“DNE”).  Accordingly, we have recast the corresponding items of segment information for all prior periods.  Our unaudited condensed 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. 

Additionally, on September 1, 2011, we completed the DMG Transfer; therefore, the results of the Coal segment (including DMG) are not included in our consolidated results for the three months ended March 31, 2012.
 
Reportable segment information, including inter-company transactions accounted for at prevailing market rates, for the three months ended March 31, 2012 and 2011 is presented below:
Segment Data as of and for the Three Months Ended March 31, 2012

(in millions)
 
 
Gas
 
DNE
 
Other and
Eliminations
 
Total
Unaffiliated revenues:
 
 
 
 
 
 

 
 

Domestic
 
$
268

 
$
7

 
$

 
$
275

Total revenues
 
$
268

 
$
7

 
$

 
$
275

 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
(20
)
 
$

 
$
(2
)
 
$
(22
)
General and administrative expense
 
(15
)
 
(1
)
 
(4
)
 
(20
)
Operating income (loss)
 
$
19

 
$
(15
)
 
$
(6
)
 
$
(2
)
Impairment of Undertaking receivable, affiliate
 

 

 
(832
)
 
(832
)
Other items, net
 

 

 
24

 
24

Bankruptcy reorganization charges
 
 
 
 
 
 
 
(247
)
Interest expense
 
 
 
 
 
 
 
(31
)
Loss from continuing operations before income taxes
 
 
 
 
 
 
 
(1,088
)
Income tax benefit
 
 
 
 
 
 
 
6

Net loss
 
 
 
 
 
 
 
$
(1,082
)
 
 
 
 
 
 
 
 
 
Identifiable assets (domestic)
 
$
6,808

 
$
59

 
$
654

 
$
7,521

Capital expenditures
 
$
(8
)
 
$

 
$
(1
)
 
$
(9
)

 

30

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


Segment Data as of and for the Three Months Ended March 31, 2011
(in millions)
 
 
 
Coal
 
Gas
 
DNE
 
Other and
Eliminations
 
Total
Unaffiliated revenues:
 
 
 
 

 
 

 
 

 
 

Domestic
 
$
200

 
$
267

 
$
38

 
$

 
$
505

Total revenues
 
$
200

 
$
267

 
$
38

 
$

 
$
505

 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
(90
)
 
$
(34
)
 
$

 
$
(2
)
 
$
(126
)
General and administrative expense
 
(11
)
 
(13
)
 
(4
)
 
(13
)
 
(41
)
Operating income (loss)
 
$
(32
)
 
$
13

 
$
(15
)
 
$
(16
)
 
$
(50
)
Other items, net
 

 

 

 
1

 
1

Interest expense
 
 
 
 

 
 

 
 

 
(89
)
Loss from continuing operations before income taxes
 
 
 
 

 
 

 
 

 
(138
)
Income tax benefit
 
 
 
 

 
 

 
 

 
58

Net loss
 
 
 
 

 
 

 
 

 
$
(80
)
 
 
 
 
 
 
 
 
 
 
 
Identifiable assets (domestic)
 
$
3,766

 
$
4,145

 
$
406

 
$
1,438

 
$
9,755

Capital expenditures
 
$
(42
)
 
$
(24
)
 
$

 
$

 
$
(66
)


Note 15—Subsequent Events

As described in Note 3—Chapter 11 Cases—Settlement Agreement and Plan Support Agreement, on June 5, 2012, the effectiveness of the Settlement Agreement resulted in (i) the DMG Acquisition, (ii) the termination of the Undertaking Agreement with Dynegy; (iii) the extinguishment of the Accounts receivable, affiliate; and (iv) the granting of the Administrative Claim to Dynegy. The consideration for the DMG Acquisition consisted of the fair value of the Undertaking Agreement of approximately $402 million plus the fair value of the Administrative Claim of approximately $64 million. The purchase price was preliminarily allocated as follows:


31

DYNEGY HOLDINGS, LLC
(A LIMITED LIABILITY COMPANY)
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended March 31, 2012 and 2011


(in millions)
Cash
$
256

Restricted cash (including $75 million current)
117

Accounts receivable
3

Inventory
69

Assets from risk management activities (including $84 million current)
85

Prepaids and other current assets
46

Property, plant and equipment
514

Intangible assets (including $162 million current)
257

Total assets acquired
1,347

Current liabilities and accrued liabilities
(60
)
Liabilities from risk management activities (including $66 million current)
(76
)
Long-term debt (including $9 million current)
(610
)
Asset retirement obligations
(53
)
Unfavorable coal contract (including $15 million current)
(38
)
Pension liabilities
(44
)
Total liabilities assumed
(881
)
Net assets acquired
$
466



Impact on Undertaking Agreement and Accounts receivable, affiliate. When considering the impact of the Settlement Agreement and the related DMG Acquisition on June 5, 2012, the Undertaking receivable was impaired to approximately $418 million as of March 31, 2012, resulting in a charge of approximately $832 million. The carrying value of the Undertaking was adjusted to the value received in the DMG Acquisition plus interest payments received subsequent to March 31, 2012. The extinguishment of the Accounts receivable, affiliate was accounted for as a distribution and, accordingly, had no impact on our consolidated statement of operations.

DNE Lease Claims. The Settlement Agreement also set the amounts of the allowed claims related to the rejection of the leases for the Roseton and Danskammer power generation facilities. The Settlement Agreement provides that the Lease Trustee will be granted (i) a senior unsecured claim of approximately $540 million against DH on account of all claims arising from or related to DH's guaranty of the lease documents or otherwise related to the lease documents; (ii) an unsecured claim of approximately $455 million against Roseton on account of all claims arising under or related to the Roseton facility and the Roseton lease documents; (iii) an unsecured claim of approximate $85 million against Danskammer on account of all claims arising under or related to the Danskammer facility and the Danskammer lease documents; (iv) an administrative claim of approximately $42 million against Roseton on account of post-petition rent; and (v) and an administrative claim of approximately $3 million against Danskammer on account of post-petition rent (collectively the "Lessor Claims"). The Settlement Agreement caps the recovery on account of the Lessor Claims at approximately $571 million. As a result, we increased the estimated amount of the allowed claims against DH, Roseton, and Danskammer related to the rejection of the leases for the Roseton and Danskammer power generation facilities to approximately $695 million (inclusive of PSEG's $110 million allowed claim) during the three months ended March 31, 2012. This charge is reflected in Bankruptcy reorganization charges on our consolidated statement of operations.

Subordinated Capital Income Securities Claim. Additionally, pursuant to the Settlement Agreement, DH agreed to provide Wells Fargo, as trustee for the Subordinated Capital Income Securities, with an allowed general unsecured claim in the aggregate amount of $55 million (which claim is not subject to subordination) in full satisfaction of all Subordinated Capital Income Securities and related interest. Therefore, we reduced our previous estimate of the allowed claims related to the Subordinated Capital Income Securities and related interest by approximately $161 million during the three months ended March 31, 2012. The reduction in the estimated allowable claim is reflected in Bankruptcy reorganization charges on our consolidated statement of operations.

32


DYNEGY HOLDINGS, LLC
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
For the Interim Periods Ended March 31, 2012 and 2011
 
Item 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read together with the unaudited condensed consolidated financial statements and the notes thereto included in this report and with the audited consolidated financial statements and the notes thereto included in our 2011 Form 10-K.
 
We are a holding company and conduct substantially all of our business operations through our subsidiaries.  Our current business operations are focused on the power generation sector of the energy industry.  We report the results of our power generation business as three separate segments in our unaudited condensed consolidated financial statements.  Prior to the third quarter 2011, we reported results for the following segments: (i) GEN-MW, (ii) GEN-WE and (iii) GEN-NE.  Beginning with the third quarter 2011, our reportable segments are: (i) Coal; (ii) Gas and (iii) DNE.  Accordingly, we have recast the corresponding items of segment information for all prior periods.  Our unaudited condensed 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. As further described below, we transferred the Coal segment to our parent, Dynegy, effective September 1, 2011. Therefore, the results of our Coal segment are not included in our consolidated results as of and for the three months ended March 31, 2012.
 
Chapter 11 Cases.   On November 7, 2011, the DH Debtor Entities filed the DH Chapter 11 Cases. On July 6, 2012, Dynegy commenced the Dynegy Chapter 11 Case. Only the DH Debtor Entities and our parent Dynegy sought relief under the Bankruptcy Code, and none of our other direct or indirect subsidiaries are debtors thereunder. The normal day-to-day operations of the natural gas-fired power generation facilities held by DPC have continued without interruption. The commencement of either of the Chapter 11 Cases did not constitute a default under the DPC Credit Agreements. Please see Note 3—Chapter 11 Cases for further discussion of the Chapter 11 Cases and the related Settlement Agreement and Plan Support Agreement.

Going Concern. Our accompanying unaudited condensed consolidated financial statements were prepared assuming that we would continue as a going concern, and therefore contemplate 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.

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 their parents (as described in Note 20—Debt in our Form 10-K), 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 be necessary if the Plan is not successful.
     

LIQUIDITY AND CAPITAL RESOURCES
 
Overview
 
In this section, we describe our liquidity and capital requirements including our sources and uses of liquidity and capital resources.  Our liquidity and capital requirements are primarily a function of our debt maturities and debt service requirements, fixed capacity payments and contractual obligations, capital expenditures (including required environmental expenditures) and working capital needs.  Examples of working capital needs include purchases and sales of commodities and associated margin and collateral requirements, facility maintenance costs and other costs such as payroll.

Effective June 5, 2012, we completed the DMG Acquisition. Please read Note 3—Chapter 11 Cases—Settlement Agreement and Note 15—Subsequent Events for further discussion.

33



Our primary sources of internal liquidity are cash flows from operations and cash on hand.  Cash on hand includes cash proceeds from the DPC Credit Agreement and the DMG Credit Agreement, which is limited in use and distribution as further described in footnote 1 to the liquidity table below.
 
Our primary sources of external liquidity are proceeds from capital market transactions to the extent we engage in such transactions.
 
Current Liquidity.  The following tables summarize our liquidity position at September 7, 2012 and March 31, 2012:
 
 
 
September 7, 2012
 
 
DPC 
 
DMG (1)
 
Other (2)
 
Total
 
 
(in millions)
LC capacity, inclusive of required reserves (3)
 
$
252

 
$
34

 
$
27

 
$
313

Less: Required reserves (3)
 
(8
)
 
(1
)
 
(1
)
 
(10
)
Less: Outstanding letters of credit
 
(236
)
 
(29
)
 
(26
)
 
(291
)
LC availability
 
8

 
4

 

 
12

Cash and cash equivalents
 
59

 
60

 
561

 
680

Collateral posting account (4)
 
238

 
69

 

 
307

Total available liquidity (5)
 
$
305

 
$
133

 
$
561

 
$
999

 
 
 
March 31, 2012
 
 
DPC 
 
Other (2)
 
Total
 
 
(in millions)
LC capacity, inclusive of required reserves (3)
 
$
297

 
$
27

 
$
324

Less: Required reserves (3)
 
(8
)
 
(1
)
 
(9
)
Less: Outstanding letters of credit
 
(283
)
 
(26
)
 
(309
)
LC availability
 
6

 

 
6

Cash and cash equivalents
 
50

 
339