Chapter 11 Filing and Emergence from Bankruptcy. On November 7, 2011, DH and four of its 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 DH, 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 U.S. Bankruptcy Court for the Southern District of New York, Poughkeepsie Division (the “Bankruptcy Court”). The DH Chapter 11 Cases were assigned to the Honorable Cecelia G. Morris and were being jointly administered for procedural purposes only. On July 6, 2012, Legacy 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”). Only Legacy Dynegy and the DH Debtor Entities filed voluntary petitions for relief under the Bankruptcy Code, and none of our other direct or indirect subsidiaries are or were debtors thereunder. Consequently, our other direct or indirect subsidiaries continued to operate their business in the ordinary course. Coal Holdco and Dynegy GasCo Holdings, LLC and their indirect, wholly-owned subsidiaries (including DMG and DPC) were not included in the Chapter 11 Cases. The commencement of the Chapter 11 Cases did not constitute an event of default under either the DMG Credit Agreement or the DPC Credit Agreement. Legacy Dynegy and the DH Debtor Entities (together, the “Debtor Entities”) remained in possession of their property and continued 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 was a necessary step to facilitate the restructuring contemplated by the Plan, the Settlement Agreement and the Plan Support Agreement (each as defined and described below), including the Merger.
On September 10, 2012, the Bankruptcy Court entered an order confirming the Plan and on October 1, 2012, (the “Plan Effective Date”), we consummated our reorganization under Chapter 11 pursuant to the Plan and Dynegy exited bankruptcy. Dynegy Northeast Generation, Hudson, Danskammer and Roseton (the “DNE Debtor Entities”) remained in Chapter 11 bankruptcy and continued to operate their businesses as “debtors-in-possession” (the “DNE Bankruptcy Cases”) until the effectiveness of the DNE Joint Plan of Liquidation on November 4, 2013 (as described in Note 23—Dispositions and Discontinued Operations). As a result, we deconsolidated the DNE Debtor Entities on the Plan Effective Date. Please read Note 22—Condensed Combined Financial Statements of the Debtor Entities for further discussion.
On the Plan Effective Date, we applied “fresh-start accounting.” Fresh-start accounting requires us to allocate the reorganization value to our assets and liabilities in a manner similar to that which is required using the acquisition method of accounting for a business combination. Under the provisions of fresh-start accounting, a new entity has been created for financial reporting purposes. References to “Successor” in the financial statements are in reference to reporting dates on or after October 2, 2012. References to “Predecessor” in the financial statements are in reference to reporting dates through October 1, 2012, including the impact of the Plan provisions and the application of fresh-start accounting. As such, our financial information for the Successor is presented on a basis different from, and is therefore not comparable to, our financial information for the Predecessor for the period ended and as of October 1, 2012 or for prior periods.
Settlement Agreement and Plan Support Agreement. On May 1, 2012, Legacy Dynegy and certain of its subsidiaries, including the DH Debtor Entities, entered into a settlement agreement with certain of DH’s creditors, including certain beneficial holders of DH’s then-outstanding senior notes, the owners and lessors of the Roseton and part of the Danskammer facilities, and U.S. Bank, in its capacity as trustee under an indenture governing certain lease certificates guaranteed by DH (the “Original Settlement Parties”). On May 30, 2012, the Original Settlement Parties, holders of a majority of DH’s then-outstanding subordinated notes, and, solely with respect to certain sections of the Settlement Agreement, Wells Fargo N.A., as successor trustee under the indenture governing DH’s subordinated notes, entered into an amended and restated settlement agreement (the “Settlement Agreement”).
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. Pursuant to the Settlement Agreement and the Approval Order, Legacy Dynegy and DH took certain steps towards their emergence from Chapter 11 bankruptcy, including the DMG Acquisition and the filing of the Plan. In addition, parties to certain prepetition litigations and adversary proceedings (relating to the Roseton and Danskammer facilities) filed stipulations of dismissals in their respective litigations or proceedings. Furthermore, certain intercompany receivables pursuant to an agreement by Legacy Dynegy to make specified payments to Dynegy Gas Investments, LLC (“DGIN”) (the “Undertaking Agreement”) and a related DH promissory note were cancelled.
On September 10, 2012, the Bankruptcy Court entered an order confirming the Plan (the “Confirmation Order”). On September 30, 2012, pursuant to the terms of the Plan, DH merged with and into Dynegy, thereby consummating the Merger. On the Plan Effective Date, we consummated our reorganization under Chapter 11 pursuant to the Plan and exited bankruptcy. The DNE Debtor Entities remained in Chapter 11 bankruptcy and continued to operate their businesses as “debtors-in-possession.” As a result, Dynegy deconsolidated the DNE Debtor Entities, which included two facilities totaling approximately 1,700 MW, effective October 1, 2012. The bankruptcy court approved agreements to sell the Danskammer and Roseton facilities (the “Danskammer APA” and the “Roseton APA,” respectively) for a combined cash purchase price of $23 million and the assumption of certain liabilities (the “Facilities Sale Transactions”). On March 12, 2013, the Bankruptcy Court approved the Plan of Liquidation for the DNE Debtor Entities. On April 30, 2013, we completed the sale of the Roseton facility. The Bankruptcy Court ordered the original purchaser of the Danskammer facility to close the transaction by July 31, 2013. The Danskammer facility sale did not close by July 31, 2013 as ordered by the Bankruptcy Court and Danskammer terminated its obligations under the original Danskammer asset purchase agreement. On August 29, 2013, the Bankruptcy Court approved the sale of the Danskammer assets to a new purchaser at the same price and on terms similar to the original Danskammer asset purchase agreement. On November 1, 2013 the Danskammer assets were sold to Helios Power Capital, LLC. On November 4, 2013, the DNE Joint Plan of Liquidation became effective and Hudson Power, Dynegy Danskammer and Dynegy Roseton were deemed to have been merged into DNE or dissolved. The proceeds from the Facilities Sale Transactions have been distributed pursuant to the Joint Plan of Liquidation, including any modification thereto. Please read Note 23—Dispositions and Discontinued Operations for further discussion.
In addition to the Merger, the Plan included the following key elements (Capitalized terms used, but not defined, in this section only shall have the meanings ascribed to them in the Plan):
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• | On the Plan Effective Date, all of Dynegy’s equity interests, including Dynegy’s old common stock, were cancelled. |
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• | Each holder of Allowed General Unsecured Claims received its Pro Rata Share of (a) 99 million shares of Dynegy Common Stock and (b) a $200 million cash payment (the “Plan Cash Payment”). |
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• | In full satisfaction of the Dynegy Administrative Claim (otherwise referred to herein as the “Administrative Claim”), the beneficial holders thereof (which were the holders of Dynegy’s old common stock) received their Pro Rata Share of (a) one million shares of Dynegy Common Stock and (b) warrants to purchase approximately 15.6 million shares of Dynegy Common Stock for an exercise price of $40 per share (subject to adjustment) expiring on October 2, 2017 (the “Warrants”). |
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• | In addition, each holder of an Allowed General Unsecured Claim received, as applicable, their Pro Rata Share of the proceeds of the sale of the Roseton and Danskammer generation facilities (the “Facilities”) allocated to Dynegy (the “Facilities Sale”) according to the Settlement Agreement; provided that, the Lease Trustee (on behalf of itself and the Lease Certificate Holders) will not receive a distribution of any amounts paid pursuant to the Facilities Sale in its capacity as holder of the Lease Guaranty Claim. |
On the Plan Effective Date, and pursuant to the Plan, outstanding obligations of approximately $4 billion in aggregate principal amount, were cancelled. These obligations included the following series of our notes and related indentures and guaranties, as applicable:
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• | 8.75 percent senior notes due 2012; |
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• | 7.5 percent senior unsecured notes due 2015; |
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• | 8.375 percent senior unsecured notes due 2016; |
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• | 7.125 percent senior debentures due 2018; |
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• | 7.75 percent senior unsecured notes due 2019; |
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• | 7.625 percent senior notes due 2026; and |
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• | Series B 8.316 percent subordinated debentures due 2027 (the “2027 Notes”). |
In addition, on the Plan Effective Date, in connection with the cancellation of the 2027 Notes, the Series B 8.316 percent subordinated capital income securities due 2027 (the “NGC Notes”) issued by NGC Corporation Capital Trust I were cancelled, our guarantee of the NGC Notes was terminated and the indenture governing the NGC Notes was cancelled.
Finally, on the Plan Effective Date, our obligations as a guarantor of the leases of the Facilities under the guaranty dated as of May 1, 2001, made by us with respect to Roseton Units 1 and 2 and the guaranty, dated as of May 1, 2001, made by us with respect to Danskammer Units 3 and 4 (the “Guaranties”) and all obligations thereunder were cancelled. In connection with the cancellation of the Guaranties, our obligations as a lessee guarantor under the Pass Through Trust Agreement, dated as of May 1, 2001 (the “Pass Through Trust Agreement”), among Roseton, Danskammer, and The Chase Manhattan Bank, as pass through trustee were terminated.
DNE Lease Termination Claim. As further described above, in connection with the DH Chapter 11 Cases, on November 7, 2011, the DH Debtor Entities filed a motion with the Bankruptcy Court for authorization to reject the Roseton and Danskammer leases. On December 20, 2011, the Bankruptcy Court entered a stipulated order approving the rejection of such leases, as amended by a stipulated order entered by the Bankruptcy Court on December 28, 2011.
The Bankruptcy Court approved agreements to sell the Danskammer and Roseton facilities for a combined cash purchase price of $23 million and the assumption of certain liabilities (the “Facilities Sale Transactions”). On April 30, 2013, we completed the sale of the Roseton facility. On November 1, 2013 the Danskammer assets were sold to Helios Power Capital, LLC. On November 4, 2013, the DNE Joint Plan of Liquidation became effective and Hudson Power, Dynegy Danskammer and Dynegy Roseton were deemed to have been merged into DNE or dissolved. The proceeds from the Facilities Sale Transactions have been distributed pursuant to the Joint Plan of Liquidation, including any modification thereto.
As of December 31, 2011, we estimated the allowed claim arising from the lease rejection to be $300 million (or $190 million net of the claim of PSEG which has already been allowed by the Bankruptcy Court in the amount of $110 million).
During the first quarter 2012, the estimated amount of the allowed claim related to the Roseton and Danskammer leases was adjusted to $695 million as a result of the Settlement Agreement. As a result, we recorded a charge of $395 million which is included in Income (loss) from discontinued operations on our consolidated statement of operations.
Senior Notes and Subordinated Debentures. As of December 31, 2011, the redemption amount associated with these securities totaled $200 million. We may defer payment of interest on the Subordinated Debentures as described in the indenture, and we deferred our $8 million June 2011 payment of interest. The estimated amount of the allowed claim related to our senior notes was estimated at the face amount of the outstanding notes, plus the amount of accrued interest through November 7, 2011.
The estimated amount of the allowed claim related to the Subordinated debentures payable to affiliates, including accrued interest, was reduced to $55 million as a result of executing an amendment to the Settlement Agreement on May 30, 2012. As a result, we recorded a gain of approximately $161 million in Bankruptcy reorganization items, net on our consolidated statements of operations during the second quarter 2012.
Accounting Impact of Emergence. Upon emergence on the Plan Effective Date, we applied the provisions of fresh-start accounting to our consolidated financial statements because (i) the reorganization value of the assets of the emerging entity immediately before the date of confirmation was less than the total of all postpetition liabilities and allowed claims and (ii) the holders of the existing voting shares of the Predecessor’s common stock immediately before confirmation received less than 50 percent of the voting shares of the emerging entity.
Reorganization Value
As part of the bankruptcy process we engaged an independent financial advisor to assist in the determination of our reorganized enterprise value. The reorganization value represents the fair value of an entity before liabilities and approximates the amount a willing buyer would pay for the assets of the entity immediately after restructuring. The independent financial advisor estimated a range for our reorganization enterprise value of $3.2 billion to $4.5 billion. Our net debt was then subtracted to estimate a range of the Successor equity value of between $2.3 billion and $3.6 billion. These ranges were approved by the Bankruptcy Court. In the application of fresh-start accounting, our reorganization equity value was determined to be approximately $2.6 billion, which is within the range approved by the Bankruptcy Court.
Allocation of Reorganization Value
When allocating the reorganization equity value to our property, plant and equipment, we used a DCF analysis based upon a debt-free, free cash flow model. This DCF model was created for each power generation facility based on its remaining useful life. The DCF included gross margin forecasts for each power generation facility determined using forward commodity market prices obtained from third party quotations for 2013 and 2014, management’s forecast of operating and maintenance expenses and capital expenditures. For 2015 through 2020, we used price curves developed using forward NYMEX gas prices and incorporated assumptions about reserve margins, basis differentials and capacity. For periods beyond 2020, we assumed a 2.5 percent growth rate. The resulting cash flows were then discounted using a range of discount rates of 10 percent to 11 percent based on the characteristics of the power generation facility.
Contracts with terms that are not at current market value were also valued using a DCF analysis. The cash flows generated by the contracts were compared with current market prices with the resulting difference recorded as an intangible asset or liability.
We recorded the fair value of some assets and liabilities at historical cost, which was an appropriate measure of fair value (i.e. cash, restricted cash, accounts receivable, accounts payable). Other assets and liabilities were adjusted to fair value based on then-current market prices (i.e. inventory). Our outstanding long-term debt was fair valued based upon the trading price of the debt on the Plan Effective Date. The Warrants were initially valued using a Black-Scholes calculation.
The following balance sheet illustrates the impact of (i) the implementation of the Plan, (ii) the application of fresh-start accounting, and (iii) the deconsolidation of the DNE Debtor Entities as of the Plan Effective Date, resulting in the opening balance sheet of the Successor: |
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| | As of October 1, 2012 |
(amounts in millions) | | Predecessor (a) | | Deconsolidation of DNE (b) | | Effects of Plan (c) | | Fresh-start Adjustments (d) | | Successor |
Current Assets | | | | | | | | | | |
Cash and cash equivalents | | $ | 677 |
| | $ | (22 | ) | | $ | (200 | ) | | $ | — |
| | $ | 455 |
|
Restricted cash and investments | | 357 |
| | — |
| | — |
| | — |
| | 357 |
|
Accounts receivable, net | | 131 |
| | — |
| | — |
| | (22 | ) | (i) | 109 |
|
Inventory | | 124 |
| | (23 | ) | | — |
| | 1 |
| (j) | 102 |
|
Assets from risk-management activities | | 563 |
| | — |
| | — |
| | (522 | ) | (k) | 41 |
|
Broker margin account | | 43 |
| | — |
| | — |
| | (13 | ) | (k) | 30 |
|
Intangible assets | | 211 |
| | — |
| | — |
| | 60 |
| (l) | 271 |
|
Prepayments and other current assets | | 124 |
| | (19 | ) | | (2 | ) | (e) | (32 | ) | (m) | 71 |
|
Total current assets | | 2,230 |
| | (64 | ) | | (202 | ) | | (528 | ) | | 1,436 |
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Property, plant and equipment, net | | 3,270 |
| | — |
| | — |
| | (251 | ) | (n) | 3,019 |
|
Restricted cash and investments | | 289 |
| | — |
| | — |
| | — |
| | 289 |
|
Assets from risk-management activities | | 16 |
| | — |
| | — |
| | (9 | ) | (k) | 7 |
|
Intangible assets | | 96 |
| | — |
| | — |
| | 42 |
| (l) | 138 |
|
Deferred income taxes | | — |
| | — |
| | — |
| | 96 |
| (o) | 96 |
|
Other long-term assets | | 69 |
| | — |
| | — |
| | 5 |
| (p) | 74 |
|
Total assets | | $ | 5,970 |
| | $ | (64 | ) | | $ | (202 | ) | | $ | (645 | ) | | $ | 5,059 |
|
| | | | | | | | | | |
Current Liabilities | | | | | | | | | | |
Accounts payable | | $ | 92 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 93 |
|
Accounts payable, affiliate | | — |
| | — |
| | — |
| | — |
| | — |
|
Accrued interest | | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Accrued liabilities and other current liabilities | | 133 |
| | (29 | ) | | (18 | ) | (f) | (4 | ) | (q) | 82 |
|
Claims Reserve | | — |
| | — |
| | 23 |
| (f) | — |
| | 23 |
|
Liabilities from risk-management activities | | 625 |
| | — |
| | — |
| | (561 | ) | (k) | 64 |
|
Liabilities from risk-management activities, affiliate | | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
Deferred income taxes | | — |
| | — |
| | — |
| | 96 |
| (o) | 96 |
|
Current portion of long-term debt | | 16 |
| | — |
| | — |
| | 20 |
| (r) | 36 |
|
Total current liabilities | | 867 |
| | (27 | ) | | 5 |
| | (449 | ) | | 396 |
|
Liabilities subject to compromise | | 4,290 |
| | (50 | ) | | (4,240 | ) | | — |
| | — |
|
Long-term debt | | 1,661 |
| | — |
| | — |
| | 66 |
| (r) | 1,727 |
|
Liabilities from risk-management activities | | 48 |
| | — |
| | — |
| | — |
| (s) | 48 |
|
Other long-term liabilities | | 255 |
| | (30 | ) | | 28 |
| (g) | 37 |
| (t) | 290 |
|
Total liabilities | | 7,121 |
| | (107 | ) | | (4,207 | ) | | (346 | ) | | 2,461 |
|
| | | | | | | | | | |
Stockholders’ Equity (Deficit) | | | | | | | | | | |
Common stock, predecessor | | 1 |
| | — |
| | (1 | ) | | — |
| | — |
|
Common stock, successor | | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Additional paid-in-capital, predecessor | | 5,149 |
| | — |
| | (5,149 | ) | | — |
| | — |
|
Additional paid-in-capital, successor | | — |
| | — |
| | 2,597 |
| | — |
| | 2,597 |
|
Accumulated other comprehensive loss, net of tax | | (24 | ) | | — |
| | — |
| | 24 |
| | — |
|
Accumulated equity (deficit) | | (6,277 | ) | | 43 |
| | 6,557 |
| (h) | (323 | ) | | — |
|
Total stockholders’ equity (deficit) | | (1,151 | ) | | 43 |
| | 4,005 |
| | (299 | ) | | 2,598 |
|
Total liabilities and stockholders’ equity (deficit) | | $ | 5,970 |
| | $ | (64 | ) | | $ | (202 | ) | | $ | (645 | ) | | $ | 5,059 |
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________________________________________
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(a) | Represents the consolidated balance sheet of our Predecessor as of October 1, 2012. |
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(b) | Reflects the deconsolidation of the DNE Debtor Entities as of October 1, 2012. The DNE Debtor Entities did not emerge from protection under Chapter 11 of the Bankruptcy Code; therefore, the DNE Debtor Entities were deconsolidated as of October 1, 2012. These adjustments (i) remove the balances associated with the DNE Debtor Entities from our October 1, 2012 balance sheet; (ii) impair the $13 million note receivable, which was included in Prepayments and other current assets, related to the debtor-in-possession financing provided by us to the DNE Debtor Entities; and (iii) moves balances related to service agreements and risk management activities to affiliate accounts. |
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(c) | Represents amounts recorded for the implementation of the Plan on the Plan Effective Date. This includes the settlement of liabilities subject to compromise through a cash payment of approximately $200 million, the authorization and distribution of New Common Stock and Warrants, and the cancellation of the Old Common Stock. Additionally, these adjustments remove the historical accumulated deficit of the predecessor. The following reflects the calculation of the total pre-tax gain (amounts in millions): |
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Value of claims | $ | 4,240 |
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Less amounts issued to settle claims: | |
Common stock (at par) (Successor) | (1 | ) |
Additional paid-in-capital (Successor) | (2,597 | ) |
Warrants (Successor) | (28 | ) |
Cash payment | (200 | ) |
Total pre-tax gain on settlement of claims | $ | 1,414 |
|
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(d) | Represents the adjustments of assets and liabilities to fair value in conjunction with the application of fresh-start accounting. |
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(e) | Reflects an adjustment to prepayments related to professional fees. |
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(f) | Reflects adjustments to the Claims reserve. The Claims reserve is included in Accrued liabilities and other current liabilities on our consolidated balance sheet and primarily consists of accruals for professional fees. The following reflects the components of the Claims reserve as of the Plan Effective Date (amounts in millions): |
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| | | |
Professional fees accrued at Emergence | $ | 5 |
|
Professional fees reclassified from accrued liabilities | 18 |
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Claims reserve at emergence | $ | 23 |
|
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(g) | Reflects the issuance of Warrants pursuant to our Plan of Reorganization. Please read Note 17—Capital Stock for further discussion. |
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(h) | Reflects the impact of the reorganization adjustments (amounts in millions): |
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| | | |
Total pre-tax gain | $ | 1,414 |
|
Additional professional fees | (7 | ) |
Total impact on statement of operations | 1,407 |
|
Cancellation of Predecessor common stock | 1 |
|
Cancellation of Predecessor additional paid-in capital | 5,149 |
|
Total reorganization adjustments | $ | 6,557 |
|
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(i) | Reflects a reclassification of receivables to Other long-term assets. |
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(j) | Reflects the fair value adjustment related to inventory. |
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(k) | In the application of fresh-start accounting, the Successor changed its accounting policy related to the presentation of certain derivative contracts. We have elected to present these contracts on a net basis where the right of offset exists. As a result, we recorded reductions to Assets from risk-management activities (current), Broker margin account, and Assets from risk management activities (long-term) of $522 million, $13 million, and $9 million, respectively. In addition, we recorded reductions to Liabilities from risk management activities (current) and Liabilities from risk management activities (long-term) of $561 million and $9 million, respectively. |
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(l) | Reflects the fair value adjustment for short-term and long-term identifiable intangible assets of $60 million and $42 million, respectively. These contracts consist of favorable capacity contracts, tolling agreements and rail transportation contracts, which were valued based on comparing contract terms to market prices. |
(m) Reflects the adjustments to eliminate historical short-term deferred financing costs of $5 million and $26 million of collateral netted against liabilities from risk management activities as discussed in (k) above.
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(n) | Represents the adjustment required to present Property, plant and equipment at its estimated fair value of approximately $3 billion as of October 1, 2012. |
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(o) | Reflects the re-measurement of the Company’s deferred tax assets and liabilities, unrecognized tax benefits and other tax related accounts as a result of implementing the Plan and the application of fresh-start accounting. |
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(p) | Reflects a $22 million reclassification of receivables as discussed in (i) above offset by the $17 million adjustment to eliminate historical long-term deferred financing costs. |
(q) Reflects the fair value adjustment needed to record transportation and coal contracts included in accrued liabilities and other current liabilities at fair value, which were valued based on comparing contract terms to market prices.
(r) Reflects the amounts required to present debt at its estimated fair value. The amount has been allocated between Current portion of long-term debt and Long-term debt based on scheduled principal amounts and amortization of the premium over the next twelve months.
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(s) | Reflects a $9 million increase in the liability related to our interest rate swaps as a result of a change in the calculation of the credit reserve offset by a reduction of $9 million due to the net presentation of our risk management positions as discussed in (k) above. |
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(t) | Reflects the fair value adjustment to other long-term liabilities which is comprised of a $42 million increase in our pension and other post-retirement benefit liabilities and a $5 million increase in our AROs, partially offset by a $7 million decrease in liabilities related to the long-term portion of unfavorable contracts as discussed in (q) above. |
