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| DYN > SEC Filings for DYN > Form 10-Q on 7-Aug-2008 | All Recent SEC Filings |
7-Aug-2008
Quarterly Report
Item 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-DYNEGY INC. AND DYNEGY HOLDINGS INC.
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 Forms 10-K.
We are holding companies and conduct substantially all of our business operations through our subsidiaries. Our current business operations are focused primarily on the power generation sector of the energy industry. We report the results of our power generation business as three separate segments in our consolidated financial statements: (i) the Midwest segment ("GEN-MW"); (ii) the West segment ("GEN-WE"); and (iii) the Northeast segment ("GEN-NE"). Our unaudited condensed consolidated financial results also reflect corporate-level expenses such as general and administrative, interest and depreciation and amortization.
In addition to our operating generation facilities, we own an approximate 37 percent interest in PPEA which in turn owns a 57 percent undivided interest in Plum Point, a 665 MW coal-fired power generation facility under construction in Arkansas, which is included in GEN-MW. We also own a 50 percent interest in SCH, which through a subsidiary owns an approximate 64 percent undivided interest in the Sandy Creek Project, an 898 MW power generation facility under construction in McLennan County, Texas, which is included in GEN-WE. Finally, through its interest in DLS Power Holdings, Dynegy owns a 50 percent interest in a portfolio of greenfield development and brownfield expansion projects and repowering and/or expansion opportunities which is included in Other.
Recent Developments
Rolling Hills. On July 31, 2008, we completed the sale of the Rolling Hills power generation facility to an affiliate of Tenaska Capital Management, LLC for approximately $368 million, net of transaction costs. We expect to record a gain of approximately $50 million related to the sale of the facility in the third quarter 2008. Please read Note 3-Dispositions and Discontinued Operations-Dispositions-Rolling Hills for further discussion.
Contingent LC Facility. On June 17, 2008, DHI entered into the Contingent LC Facility with Morgan Stanley. Availability under the Contingent LC Facility is contingent on natural gas prices rising above $13/MMBtu during 2009. In the event that the Contingent LC Facility is utilized, it will complement existing liquidity instruments as a source of additional letters of credit to meet our collateral requirements. Such letters of credit will be available for the purpose of supporting certain commercial and trading contracts and related netting agreements described in the Credit Agreement. Please read Note 7-Debt-Contingent LC Facility for further discussion.
Sandy Creek. On June 6, 2008, SCEA sold an 11 percent undivided interest in the Sandy Creek Project, to an unaffiliated third party, reducing its undivided interest in the project from approximately 75 percent to approximately 64 percent. Earnings from unconsolidated investments includes income of approximately $13 million related to the sale. Using cash on hand and the proceeds of the sale, SCEA repaid approximately $45 million in project related debt and approximately $7 million in affiliate debt. In addition, both the Dynegy Member and the LSP Member received a distribution of approximately $7 million during the second quarter 2008. Please read Note 6-Variable Interest Entities-Sandy Creek for further discussion.
In this section, we describe our liquidity and capital requirements and our internal and external liquidity and capital resources. Our liquidity and capital requirements are primarily a function of our debt maturities and debt service requirements, collateral requirements, fixed capacity payments and contractual obligations, capital expenditures (including required environmental expenditures) and working capital needs. Examples of working capital needs include prepayments or cash collateral associated with purchases of commodities, particularly natural gas and coal, facility maintenance costs and other costs such as payroll. Our liquidity and capital resources are primarily derived from cash flows from operations, cash on hand, borrowings under our financing agreements, asset sale proceeds and proceeds from capital market transactions to the extent we engage in these activities. Additionally, DHI may borrow money from time to time from Dynegy.
We use a significant portion of our capital resources, in the form of cash and letters of credit, to satisfy counterparty collateral demands. These counterparty collateral demands reflect our non-investment grade credit ratings and counterparties' views of our financial condition and ability to satisfy our performance obligations, as well as commodity prices and other factors. The following table summarizes our consolidated collateral postings to third parties by business at August 1, 2008, June 30, 2008 and December 31, 2007:
August 1, June 30, December 31,
2008 2008 2007
------------ ----------- ----------------
(in millions)
By Business:
Generation $ 1,371 $ 1,572 $ 1,130
Other 189 189 202
- ----- - ----- -- --------
Total $ 1,560 $ 1,761 $ 1,332
- ----- - ----- -- --------
By Type:
Cash (1) $ 2 $ 28 $ 53
Letters of Credit 1,558 1,733 1,279
- ----- - ----- -- --------
Total $ 1,560 $ 1,761 $ 1,332
- ----- - ----- -- --------
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The changes in collateral postings from December 31, 2007 to June 30, 2008 and to August 1, 2008 are primarily due to the effect of changing commodity prices on the demand for collateral postings to support our ongoing power sales and fuel purchase programs. We also reduced our letters of credit posting by $48 million on June 6, 2008 as a result of SCEA's sale of an 11 percent undivided interest in the Sandy Creek Project.
Going forward, we expect counterparties' collateral demands to continue to reflect changes in commodity prices, including seasonal changes in weather-related demand, as well as their views of our creditworthiness. We believe that we have sufficient capital resources to satisfy counterparties' collateral demands, including those for which no collateral is currently posted, for the foreseeable future.
We have incurred various contractual obligations and financial commitments in the normal course of our operations and financing activities. Contractual obligations include future cash payments required under existing contractual arrangements, such as debt and lease agreements. These obligations may result from both general financing activities and from commercial arrangements that are directly supported by related revenue-producing
activities. Contingent financial commitments represent obligations that become payable only if certain pre-defined events occur, such as financial guarantees.
As of June 30, 2008, there were no material changes to our contractual obligations and contingent financial commitments since December 31, 2007.
Dividend payments on Dynegy's common stock are at the discretion of Dynegy's Board of Directors. Dynegy did not declare or pay a dividend on its common stock during the second quarter 2008, and does not foresee a declaration of dividends in the near term.
Our primary internal liquidity sources are cash flows from operations, cash on hand and available capacity under our Credit Agreement, which is scheduled to mature in April 2012, and under our Contingent LC Facility.
Current Liquidity. The following table summarizes our consolidated revolver capacity and liquidity position at August 1, 2008, June 30, 2008 and December 31, 2007:
August 1, June 30, December 31,
2008 2008 2007
------------ ------------ ----------------
(in millions)
Revolver capacity $ 1,150 $ 1,150 $ 1,150
Borrowings against revolver capacity - - -
Term letter of credit capacity, net of
required reserves 825 825 825
Plum Point and Sandy Creek letter of
credit capacity 377 377 425
Available contingent letter of credit
facility capacity (1) - - -
Outstanding letters of credit (1,558 ) (1,733 ) (1,279 )
- ------ - ------ -- --------
Unused capacity 794 619 1,121
Cash-DHI 880 238 292
- ------ - ------ -- --------
Total available liquidity-DHI 1,674 857 1,413
Cash-Dynegy 32 33 36
- ------ - ------ -- --------
Total available liquidity-Dynegy $ 1,706 $ 890 $ 1,449
- ------ - ------ -- --------
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Cash Flows from Operations. Dynegy had operating cash inflows of $32 million for the six months ended June 30, 2008. This consisted of $324 million in operating cash flows from our power generation business, offset by $292 million of cash outflows relating to corporate-level expenses and our former customer risk management business.
DHI had operating cash inflows of $29 million for the six months ended June 30, 2008. This consisted of $324 million in operating cash flows from our power generation business, offset by $295 million of cash outflows relating to corporate-level expenses and our former customer risk management business.
Please read "-Results of Operations-Operating Income (Loss)" and "-Cash Flow Disclosures" for further discussion of factors impacting our operating cash flows for the periods presented.
Our future operating cash flows will vary based on a number of factors, many of which are beyond our control, including the price of natural gas and its correlation to power prices, the cost of coal and fuel oil, the value of ancillary services and capacity and legal and regulatory requirements. Additionally, availability of our plants
during peak demand periods will be required to allow us to capture attractive market prices when available. Over the longer term, our operating cash flows also will be impacted by, among other things, our ability to tightly manage our operating costs, including maintenance costs, in balance with ensuring that our plants are available to operate when markets offer attractive returns.
Cash on Hand. At August 1, 2008 and June 30, 2008, Dynegy had cash on hand of $912 million and $271 million, respectively, as compared to $328 million at December 31, 2007. The decrease in cash on hand at June 30, 2008 as compared to the end of 2007 is primarily attributable to an increase in cash margin postings on futures and exchange-cleared derivative positions partially offset by a reduction in cash collateral posting for the Sandy Creek Project, proceeds from the sale of the Calcasieu power generating facility and the sales of other assets, as well as cash provided by the operations of our power generating facilities. The increase in cash on hand from June 30, 2008 to August 1, 2008 was primarily due to proceeds received from the sale of the Rolling Hills power generation facility, as well as cash inflows arising from the daily settlements of our exchange - traded or brokered commodity futures positions held with our futures clearing manager.
At August 1, 2008 and June 30, 2008, DHI had cash on hand of $880 million and $238 million, respectively, as compared to $292 million at December 31, 2007. The decrease in cash on hand at June 30, 2008 as compared to the end of 2007 is primarily attributable to an increase in cash margin postings on futures and exchange-cleared derivative positions partially offset by a reduction in cash collateral posting for the Sandy Creek Project, proceeds from the sale of the Calcasieu power generating facility and the sales of other assets, as well as cash provided by the operations of our power generating facilities. The increase in cash on hand from June 30, 2008 to August 1, 2008 was primarily due to proceeds received from the sale of the Rolling Hills power generation facility, as well as cash inflows arising from the daily settlements of our exchange - traded or brokered commodity futures positions held with our futures clearing manager.
Our primary external liquidity sources are proceeds from asset sales and other types of capital-raising transactions, including potential debt and equity issuances.
Asset Sale Proceeds. On July 31, 2008, we completed the sale of the Rolling Hills power generation facility to an affiliate of Tenaska Capital Management, LLC for approximately $368 million, net of transaction costs. Please read Note 3-Dispositions and Discontinued Operations-Dispositions-Rolling Hills for further discussion.
On March 31, 2008, we completed our sale of the Calcasieu power generation facility for approximately $56 million, net of transaction costs. Please read Note 3-Disposition and Discontinued Operations-Discontinued Operations-Calcasieu for further discussion.
Consistent with industry practice, we regularly evaluate our generation fleet based primarily on geographic location, fuel supply, market structure and market recovery expectations. We consider divestitures of non-core generation assets where the balance of the above factors suggests that such assets' earnings potential is limited or that the value that can be captured through a divestiture outweighs the benefits of continuing to own and operate such assets. Moreover, dispositions of one or more generation facilities could occur in 2008 or beyond. Were any such sale or disposition to be consummated, the disposition could result in accounting charges related to the affected asset(s), and our future earnings and cash flows could be affected.
Capital-Raising Transactions. As part of our ongoing efforts to maintain a capital structure that is closely aligned with the cash-generating potential of our asset-based business, which is subject to cyclical changes in commodity prices, we may explore additional sources of external liquidity. The timing of any transaction may be impacted by events, such as strategic growth opportunities, development activities, legal judgments or regulatory requirements, which could require us to pursue additional capital in the near-term. The receptiveness of the capital markets to an offering of debt or equity securities cannot be assured and may be negatively impacted by, among other things, our non-investment grade credit ratings, significant debt maturities, long-term business prospects and other factors beyond our control. Any issuance of equity by Dynegy likely would have other effects as well, including stockholder dilution. Our ability to issue debt securities is limited by our financing agreements, including our Fifth Amended and Restated Credit Facility, as amended.
In addition, we continually review and discuss opportunities to grow our company and to participate in what we believe will be continuing consolidation of the power generation industry. No such definitive transaction has been agreed to and none can be guaranteed to occur; however, we have successfully executed on similar opportunities in the past and could do so again in the future. Depending on the terms and structure of any such
transaction, we could issue significant debt and/or equity securities for capital-raising purposes. We also could be required to assume substantial debt obligations and the underlying payment obligations.
Capital Allocation. We continually review our investment options with respect to our capital resources. We do not have any material debt maturities until 2011, and between now and then we expect to enhance our current capital resources through the results of our operating business. We will seek to invest these capital resources in various projects and activities based on their return to stockholders. Potential investments could include, among others: add-on or other enhancement projects associated with our current power generation assets; greenfield or brownfield development projects; merger and acquisition activities; and returns of capital to stockholders through, for example, a share buy-back. Capital allocation determinations generally are subject to the discretion of Dynegy's Board of Directors as well as availability of capital and related investment opportunities, and may be limited by the provisions of our credit agreement. Any particular use of capital in an amount that is not considered material may be made without any prior public disclosure and could occur at any time.
Please read "Uncertainty of Forward-Looking Statements and Information" for additional factors that could impact our future operating results and financial condition.
Overview. In this section, we discuss our results of operations, both on a consolidated basis and, where appropriate, by segment, for the three and six month periods ended June 30, 2008 and 2007. At the end of this section, we have included our outlook for each segment.
We report the results of our power generation business as three separate geographical segments in our unaudited condensed consolidated financial statements. Beginning in the first quarter 2008, the results of our former customer risk management business are included in Other as it does not meet the criteria required to be an operating segment as of January 1, 2008. Accordingly, we have restated the corresponding items of segment information for prior periods. Our unaudited condensed consolidated financial results also reflect corporate-level expenses such as general and administrative, interest and depreciation and amortization.
Three Months Ended June 30, 2008 and 2007
Summary Financial Information. The following tables provide summary financial data regarding Dynegy's consolidated and segmented results of operations for the three month periods ended June 30, 2008 and 2007, respectively:
Dynegy's Results of Operations for the Three Months Ended June 30, 2008
Power Generation
------------------------------------
GEN-MW GEN-WE GEN-NE Other Total
---------- ---------- ---------- --------- ----------
(in millions)
Revenues $ 66 $ 178 $ 78 $ 1 $ 323
Cost of sales (137 ) (163 ) (155 ) (1 ) (456 )
Operating and maintenance expense,
exclusive of depreciation and
amortization expense shown
separately below (47 ) (33 ) (51 ) 6 (125 )
Depreciation and amortization
expense (52 ) (25 ) (14 ) (2 ) (93 )
Gain on sale of assets, net - 11 - 15 26
General and administrative expense - - - (39 ) (39 )
- ---- - ---- - ---- - --- - ----
Operating loss $ (170 ) $ (32 ) $ (142 ) $ (20 ) $ (364 )
Earnings (losses) from
unconsolidated investments - 3 - (6 ) (3 )
Other items, net 2 4 - 11 17
Interest expense (108 )
- ----
Loss from continuing operations
before income taxes (458 )
Income tax benefit 186
- ----
Net loss $ (272 )
- ----
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Dynegy's Results of Operations for the Three Months Ended June 30, 2007
Power Generation
------------------------------------
GEN-MW GEN-WE GEN-NE Other Total
---------- ---------- ---------- --------- ----------
(in millions)
Revenues $ 406 $ 145 $ 279 $ (2 ) $ 828
Cost of sales (142 ) (101 ) (159 ) 33 (369 )
Operating and maintenance expense,
exclusive of depreciation and
amortization expense shown
separately below (54 ) (33 ) (54 ) - (141 )
Depreciation and amortization
expense (50 ) (23 ) (12 ) (3 ) (88 )
General and administrative expense - - - (48 ) (48 )
- ---- - ---- - ---- - --- - ----
Operating income (loss) $ 160 $ (12 ) $ 54 $ (20 ) $ 182
Losses from unconsolidated
investments - - - (2 ) (2 )
Other items, net (9 ) - - 10 1
Interest expense (84 )
- ----
Income from continuing operations
before income taxes 97
Income tax expense (30 )
- ----
Income from continuing operations 67
Income from discontinued
operations, net of taxes 9
- ----
Net income $ 76
- ----
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The following tables provide summary financial data regarding DHI's consolidated and segmented results of operations for the three month periods ended June 30, 2008 and 2007, respectively:
DHI's Results of Operations for the Three Months Ended June 30, 2008
Power Generation
------------------------------------
GEN-MW GEN-WE GEN-NE Other Total
---------- ---------- ---------- --------- ----------
(in millions)
Revenues $ 66 $ 178 $ 78 $ 1 $ 323
Cost of sales (137 ) (163 ) (155 ) (1 ) (456 )
Operating and maintenance expense,
exclusive of depreciation and
amortization expense shown
separately below (47 ) (33 ) (51 ) 6 (125 )
Depreciation and amortization
expense (52 ) (25 ) (14 ) (2 ) (93 )
Gain on sale of assets, net - 11 - 15 26
General and administrative expense - - - (39 ) (39 )
- ---- - ---- - ---- - --- - ----
Operating loss $ (170 ) $ (32 ) $ (142 ) $ (20 ) $ (364 )
Earnings from unconsolidated
investments - 3 - - 3
. . .
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