Edgar Filing: DYNEGY INC.

DYN-2013.9.30-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number: 001-33443

DYNEGY INC.

(Exact name of registrant as specified in its charter)



State of Incorporation		I.R.S. Employer Identification No.
Delaware		20-5653152

601 Travis, 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 x No ¨

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 x No ¨

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 ý
Non-accelerated filer o		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 x

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Indicate by check mark whether the registrant filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ¨

Indicate the number of shares outstanding of our class of common stock, as of the latest practicable date: Common stock, $0.01 par value per share, 100,099,163 shares outstanding as of November 4, 2013.

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TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION

Item 1.	FINANCIAL STATEMENTS:

Condensed Consolidated Balance Sheets:
As of September 30, 2013 and December 31, 2012		1
Condensed Consolidated Statements of Operations:
For the three and nine months ended September 30, 2013 (Successor) and 2012 (Predecessor)		3
Condensed Consolidated Statements of Comprehensive Income (Loss):
For the three and nine months ended September 30, 2013 (Successor) and 2012 (Predecessor)		4
Condensed Consolidated Statements of Cash Flows:
For the nine months ended September 30, 2013 (Successor) and 2012 (Predecessor)		5
Notes to Condensed Consolidated Financial Statements		6

Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	37
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	73
Item 4.	CONTROLS AND PROCEDURES	74

PART II. OTHER INFORMATION

Item 1.	LEGAL PROCEEDINGS	75
Item 1A.	RISK FACTORS	75
Item 6.	EXHIBITS	75

Signature		76

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DEFINITIONS

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



AEM		Ameren Energy Marketing Company
AER		Ameren Energy Resources Company, LLC
AERG		Ameren Energy Resources Generating Company
AOCI		Accumulated Other Comprehensive Income
ARO		Asset Retirement Obligation
ASU		Accounting Standards Update
BTA		Best Technology Available
CAIR		Clean Air Interstate Rule
CAISO		The California Independent System Operator
CARB		California Air Resources Board
CCR		Coal Combustion Residuals
CEC		California Energy Commission
CEO		Chief Executive Officer
CFO		Chief Financial Officer
CFTC		U.S. Commodity Futures Trading Commission
CO₂		Carbon Dioxide
CPUC		California Public Utility Commission
CS		Credit Suisse
CSAPR		Cross-State Air Pollution Rule
DCIH		Dynegy Coal Investments Holdings, LLC
DH		Dynegy Holdings, LLC (formerly known as Dynegy Holdings Inc.)
DMB		Dynegy Morro Bay, LLC
DMG		Dynegy Midwest Generation, LLC
DML		Dynegy Moss Landing, LLC
DMSLP		Dynegy Midstream Services L.P.
DPC		Dynegy Power, LLC
DYPM		Dynegy Power Marketing, LLC
EBITDA		Earnings Before Interest, Taxes, Depreciation and Amortization
ELG		Effluent Limitation Guidelines
EMA		Energy Management Agency Services Agreement
EPA		Environmental Protection Agency
FASB		Financial Accounting Standards Board
FERC		Federal Energy Regulatory Commission
FTR		Financial Transmission Rights
GAAP		Generally Accepted Accounting Principles of the United States of America
GHG		Greenhouse Gas
IBEW		International Brotherhood of Electrical Workers
IMA		In-market Asset Availability
IPCB		Illinois Pollution Control Board
IPH		Illinois Power Holdings, LLC
ISO		Independent System Operator
ISO-NE		Independent System Operator New England
kW		Kilowatt
LC		Letter of Credit
LIBOR		London Interbank Offered Rate
LMP		Locational Marginal Pricing

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LSE		Load Serving Entity
LOLE		Loss of Load Expectation
LPG		Liquefied Petroleum Gas
LRZ		Local Resource Zones
LTPP		Long-Term Procurement Plan
MISO		Midcontinent Independent System Operator, Inc.
MMBtu		One Million British Thermal Units
MW		Megawatts
MWh		Megawatt Hour
NAAQS		National Ambient Air Quality Standards
NM		Not Meaningful
NOL		Net operating loss
NPDES		National Pollutant Discharge Elimination System
NSPS		New Source Performance Standards
NYISO		New York Independent System Operator
OCI		Other Comprehensive Income
PG&E		Pacific Gas and Electric Company
PJM		PJM Interconnection, LLC
PRA		Planning Resource Auction
PRIDE		Producing Results through Innovation by Dynegy Employees
PSD		Prevention of Significant Deterioration
RFO		Request for Offer
RGGI		Regional Greenhouse Gas Initiative
RMR		Reliability Must Run
RPM		Reliability Pricing Model
RTO		Regional Transmission Organization
SCE		Southern California Edison
SEC		U.S. Securities and Exchange Commission
SO2		Sulfur Dioxide
SPDES		State Pollutant Discharge Elimination System
VaR		Value at Risk
VLGC		Very Large Gas Carrier

Item 1—FINANCIAL STATEMENTS

DYNEGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited) (in millions, except share data)



	September 30, 2013			December 31, 2012
ASSETS
Current Assets
Cash and cash equivalents	$	589		$	348
Restricted cash	—			98
Accounts receivable	94			108
Accounts receivable, affiliates	—			1
Inventory	75			101
Assets from risk management activities	14			13
Assets from risk management activities, affiliates	—			4
Broker margin account	16			40
Intangible assets	127			271
Prepayments and other current assets	63			59
Total Current Assets	978			1,043
Property, Plant and Equipment	3,133			3,064
Accumulated depreciation	(164		)	(42		)
Property, Plant and Equipment, Net	2,969			3,022
Other Assets
Restricted cash	—			237
Assets from risk management activities	7			—
Intangible assets	11			71
Deferred income taxes	95			95
Deferred financing costs	27			—
Other long-term assets	63			67
Total Assets	$	4,150		$	4,535

See the notes to condensed consolidated financial statements.

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DYNEGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited) (in millions, except share data)



	September 30, 2013			December 31, 2012
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	81		$	112
Accounts payable, affiliates	1			1
Accrued interest	11			—
Deferred income taxes	95			95
Accrued liabilities and other current liabilities	82			85
Liabilities from risk management activities	44			25
Current portion of long-term debt	7			29
Total Current Liabilities	321			347
Long-term debt	1,287			1,386
Other Liabilities
Liabilities from risk management activities	37			42
Other long-term liabilities	217			257
Total Liabilities	$	1,862		$	2,032
Commitments and Contingencies (Note 13)

Stockholders’ Equity
Common Stock, $0.01 par value, 420,000,000 shares authorized at September 30, 2013 and December 31, 2012; 100,039,215 shares and 99,999,196 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively	1			1
Additional paid-in capital	2,609			2,598
Accumulated other comprehensive income, net of tax	50			11
Accumulated deficit	(372		)	(107		)
Total Stockholders’ Equity	$	2,288		$	2,503
Total Liabilities and Stockholders’ Equity	$	4,150		$	4,535

See the notes to condensed consolidated financial statements.

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DYNEGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited) (in millions, except per share data)



	Successor						Predecessor
	Three Months Ended September 30, 2013			Nine Months Ended September 30, 2013			Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
Revenues	$	446		$	1,065		$	443		$	981
Cost of sales	(290		)	(827		)	(312		)	(662		)
Gross margin, exclusive of depreciation shown separately below	156			238			131			319
Operating and maintenance expense, exclusive of depreciation shown separately below	(64		)	(220		)	(68		)	(150		)
Depreciation expense	(53		)	(156		)	(45		)	(110		)
Gain on sale of assets, net	—			2			—			—
General and administrative expense	(22		)	(69		)	(29		)	(66		)
Acquisition and integration costs	(2		)	(6		)	—			—
Operating income (loss)	15			(211		)	(11		)	(7		)
Bankruptcy reorganization items, net	1			(2		)	18			147
Interest expense	(26		)	(71		)	(48		)	(120		)
Loss on extinguishment of debt	—			(11		)	—			—
Impairment of Undertaking receivable, affiliate	—			—			—			(832		)
Other income and expense, net	14			7			—			31
Income (loss) from continuing operations before income taxes	4			(288		)	(41		)	(781		)
Income tax benefit (Note 15)	20			20			2			9
Income (loss) from continuing operations	24			(268		)	(39		)	(772		)
Income (loss) from discontinued operations, net of tax (Note 5)	(2		)	3			(2		)	(420		)
Net income (loss)	$	22		$	(265	)	$	(41	)	$	(1,192	)

Earnings (Loss) Per Share (Note 17):
Basic earnings (loss) per share:
Income (loss) from continuing operations	$	0.24		$	(2.68	)	N/A			N/A
Income (loss) from discontinued operations	(0.02		)	0.03			N/A			N/A
Basic earnings (loss) per share	$	0.22		$	(2.65	)	N/A			N/A

Diluted earnings (loss) per share:
Income (loss) from continuing operations	$	0.24		$	(2.68	)	N/A			N/A
Income (loss) from discontinued operations	(0.02		)	0.03			N/A			N/A
Diluted earnings (loss) per share	$	0.22		$	(2.65	)	N/A			N/A

Basic shares outstanding	100			100			N/A			N/A
Diluted shares outstanding	100			100			N/A			N/A

See the notes to condensed consolidated financial statements.

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DYNEGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited) (in millions)



	Successor					Predecessor
	Three Months Ended September 30, 2013		Nine Months Ended September 30, 2013			Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
Net income (loss)	$	22	$	(265	)	$	(41	)	$	(1,192	)
Other comprehensive income before reclassifications:
Actuarial gain and plan amendments (net of tax expense of $25, $25, zero and zero, respectively)	46		46			—			—
Amounts reclassified from accumulated other comprehensive income (loss):
Reclassification of curtailment gain included in net loss, net of tax	—		(7		)	—			—
Amortization of unrecognized prior service cost and actuarial gain, net of tax	—		—			1			—
Other comprehensive income, net of tax	$	46	$	39		$	1		$	—
Total comprehensive income (loss)	$	68	$	(226	)	$	(40	)	$	(1,192	)

See the notes to condensed consolidated financial statements.

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DYNEGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited) (in millions)



	Successor			Predecessor
	Nine Months Ended September 30, 2013			Nine Months Ended September 30, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(265	)	$	(1,192	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation expense	156			110
Loss on extinguishment of debt	11			—
Non-cash interest expense (benefit)	(1		)	8
Amortization of intangibles	190			79
Bankruptcy reorganization items, net	—			213
Impairment of Undertaking receivable, affiliate	—			832
Risk management activities	10			(79		)
Risk management activities, affiliate	—			(3		)
Gain on sale of assets, net	(2		)	—
Deferred income taxes	(18		)	(9		)
Change in value of common stock warrants	1			—
Other	8			2
Changes in working capital:
Accounts receivable	16			9
Inventory	26			7
Broker margin account	24			(12		)
Prepayments and other current assets	12			(31		)
Accounts payable and accrued liabilities	(23		)	26
Affiliate transactions	(1		)	19
Changes in non-current assets	(7		)	(16		)
Changes in non-current liabilities	(5		)	—
Net cash provided by (used in) operating activities	$	132		$	(37	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(67		)	(63		)
Proceeds from asset sales, net	3			—
Decrease in restricted cash	335			88
DMG Acquisition	—			256
Payments received for Undertaking, receivable affiliate	—			16
Other investing	—			3
Net cash provided by investing activities	$	271		$	300
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings, net of financing costs	1,753			—
Repayments of borrowings, including debt extinguishment costs	(1,915		)	(11		)
Recapitalization of Legacy Dynegy	—			27
Net cash provided by (used in) financing activities	$	(162	)	$	16
Net increase in cash and cash equivalents	241			279
Cash and cash equivalents, beginning of period	348			398
Cash and cash equivalents, end of period	$	589		$	677
Other non-cash financing activity:
DMG Acquisition	$	—		$	466

See the notes to condensed consolidated financial statements.

DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended September 30, 2013 and 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. The year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements but does not include all disclosures required by GAAP. The unaudited condensed consolidated financial statements contained in this report include all material adjustments of a normal recurring nature that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. 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, 2012, filed with the SEC on March 14, 2013, which we refer to as our “Form 10-K.” Unless the context indicates otherwise, throughout this report, the terms “Dynegy,” “the Company,” “we,” “us,” “our,” and “ours” are used to refer to Dynegy Inc. and its direct and indirect 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 two segments in our consolidated financial statements: (i) the Coal segment (“Coal”) and (ii) the Gas segment (“Gas”). Our consolidated financial results also reflect corporate-level expenses such as general and administrative expense, interest expense and depreciation expense. Please read Note 18—Segment Information for further discussion.

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.

The Coal segment includes Dynegy Midwest Generation, LLC (“DMG”), which owns, directly and indirectly, substantially all of our coal-fired power generation facilities. On September 1, 2011, DH sold 100 percent of the outstanding membership interests of Dynegy Coal Holdco, LLC (“Coal Holdco”) to Legacy Dynegy (as defined below), (the “DMG Transfer”). On June 5, 2012, DH reacquired Coal Holdco (including its subsidiary, DMG) from Legacy Dynegy (the “DMG Acquisition”). Therefore, the results of our Coal segment are only included in our consolidated results subsequent to June 5, 2012. Please read Note 3—Acquisitions—DMG Acquisition for further discussion.

On September 10, 2012, the Bankruptcy Court (as defined and discussed below in Note 4—Chapter 11 Cases) entered an order confirming the Joint Chapter 11 Plan of Reorganization (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. As a result of the application of fresh-start accounting as of the Plan Effective Date, the financial statements on or prior to October 1, 2012 are not comparable with the financial statements after October 1, 2012. References to “Successor” refer to the Company after October 1, 2012, after giving effect to the application of fresh-start accounting. References to “Predecessor” refer to the Company on or prior to October 1, 2012. Additionally, on the Plan Effective Date, the DNE Debtor Entities (as defined and discussed below in Note 4—Chapter 11 Cases) did not emerge from bankruptcy; therefore, we deconsolidated our investment in these entities as of October 1, 2012 and began accounting for our investment using the cost method. Accordingly, any activity related to our Roseton and Danskammer operations is presented in discontinued operations for all periods presented.

Merger. On September 30, 2012, pursuant to the terms of the Plan, DH merged with and into Legacy Dynegy, with Dynegy continuing as the surviving legal entity (the “Merger”). Immediately prior to the Merger, Legacy Dynegy had no substantive operations as our power generation facilities were operated through subsidiaries of DH. Further, as a result of the DH Chapter 11 Cases (as defined in Note 4—Chapter 11 Cases) in 2011, under applicable accounting standards, Dynegy was no longer deemed to have a controlling financial interest in DH and its wholly-owned subsidiaries; therefore, DH and its consolidated subsidiaries were no longer consolidated in Dynegy’s consolidated financial statements as of November 7, 2011. As a result of these factors, the accounting treatment of the Merger is reflected as a recapitalization of DH, similar to a reverse merger, whereby DH is the surviving accounting entity for financial reporting purposes. Therefore, our historical results for periods prior to the Merger are the same as DH’s historical results; accordingly, we refer to Dynegy as “Legacy Dynegy” for periods prior to the Merger.

Prior to the Merger, DH was organized as a limited liability company and the capital structure of DH did not change until September 30, 2012. Although Legacy Dynegy’s shares were publicly traded, DH did not have any publicly traded shares prior to the Merger; therefore, no earnings (loss) per share is presented on our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2012.

DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended September 30, 2013 and 2012

Fresh-Start Accounting. On the Plan Effective Date, we applied “fresh-start accounting.” Fresh-start accounting required 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. The financial statements of the Predecessor include 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. For further information, please read Note 3—Emergence from Bankruptcy and Fresh-Start Accounting in our Form 10-K.

Note 2—Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with 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 Standards Adopted During the Current Period

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-02—Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This new guidance requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present significant amounts reclassified out of other comprehensive income by the respective line items of net income if the amount is reclassified in its entirety. ASU 2013-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. Please read Note 8—Accumulated Other Comprehensive Income (Loss) for further discussion.

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. The FASB added clarification to this guidance in ASU 2013-01—Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This new guidance 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. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. Please read Note 6—Risk Management Activities, Derivatives and Financial Instruments for further discussion.

Accounting Standards Not Yet Adopted

Presentation of Unrecognized Tax Benefits. In July 2013, the FASB issued ASU 2013-11—Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The provisions of the rule require an unrecognized tax benefit to be presented as a reduction to a deferred tax asset in the financial statements for an NOL carryforward, a similar tax loss, or a tax credit carryforward except in circumstances when the carryforward or tax loss is not available at the reporting date under the tax laws of the applicable jurisdiction to settle any additional income taxes or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purposes. When those circumstances exist, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The new financial statement presentation provisions relating to this update are prospective and effective for interim and annual periods beginning after December 15, 2013, with early adoption permitted. We are currently assessing the future impact of this update, but we do not anticipate a material impact on our financial condition, results of operations or cash flows.

Note 3—Acquisitions

AER Transaction Agreement

On March 14, 2013, Illinois Power Holdings, LLC (“IPH”), an indirect wholly-owned subsidiary of Dynegy, entered into a definitive agreement (the “AER Transaction Agreement”) with Ameren Corporation (“Ameren”) pursuant to which IPH will, subject to the terms and conditions in the AER Transaction Agreement, acquire from Ameren 100 percent of the equity

DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended September 30, 2013 and 2012

interests of Ameren Energy Resources Company, LLC (“AER”) (or, following a pre-closing reorganization contemplated by Ameren, a successor thereto) for no cash or stock consideration (the “AER Acquisition”). AER and its subsidiaries consist of a majority of Ameren’s merchant generation and its wholesale and retail marketing business. Pursuant to the AER Transaction Agreement, IPH will indirectly acquire AER’s subsidiaries, including (i) Ameren Energy Generating Company (“Genco”), (ii) Ameren Energy Resources Generating Company (“AERG”) (or, following a pre-closing reorganization contemplated by Ameren, a successor thereto), (iii) Ameren Energy Fuels and Services Company and (iv) Ameren Energy Marketing Company (“AEM”). Dynegy Inc. has provided a limited guaranty of certain obligations of IPH up to $25 million (the “Limited Guaranty”) as described below.

The transaction does not include AER’s gas-fired power generation facilities: Elgin, Gibson City and Grand Tower (the “Put Assets”). AERG, Genco and Ameren Energy Medina Valley Cogen L.L.C. (“Medina Valley”), an affiliate of AER that IPH will not be acquiring in the transaction, entered into an amendment to a put option agreement (the “Put Option Agreement”) whereby the Put Assets will be sold by Genco, subject to approval by FERC, to Medina Valley for a minimum of $133 million (the “Put Transaction”). On October 11, 2013, the Put Transaction was consummated following receipt of FERC approval. Pursuant to the AER Transaction Agreement, Ameren will cause Medina Valley to pay Genco minimum after-tax proceeds of approximately $138 million. Additionally, Genco may receive after-tax net proceeds realized in excess of $138 million following the closing of the sale of the Put Assets by Medina Valley to Rockland Capital.

In connection with the AER Acquisition, Ameren will retain certain historical obligations of AER and its subsidiaries, including certain historical environmental and tax liabilities. Genco’s approximately $825 million in aggregate principal amount of notes will remain outstanding as an obligation of Genco. The debt bears interest at rates from 6.30 percent to 7.95 percent and matures between 2018 and 2032. Additionally, Ameren is required to maintain its existing credit support, including all of its collateral obligations with respect to AEM, for a period not to exceed two years.

In addition to the Put Transaction proceeds, Ameren is required at closing to ensure that a minimum of $85 million of cash, plus approximately $8 million primarily for the proceeds of certain real estate sales, is available at AER and its subsidiaries. Approximately $70 million of cash, plus the proceeds of the Put Transaction described above will be held at Genco.

The AER Transaction Agreement includes customary representations, warranties and covenants by the parties. The closing of the transaction is expected to occur in December 2013, subject to certain conditions, including (i) consummation of the Put Transaction under the Put Option Agreement, which closed on October 11, 2013; (ii) approval of FERC under Section 203 of the Federal Power Act, as amended, which occurred on October 11, 2013 (“FERC Approval”); (iii) approval of certain license transfers by the Federal Communications Commission, which occurred in August 2013 (“FCC Approval”); (iv) approval by the Illinois Pollution Control Board (the “IPCB”) of the transfer to IPH of AER’s air variance; (v) no injunction or other orders preventing the consummation of the transactions under the AER Transaction Agreement; (vi) the continuing accuracy of each party’s representations and warranties; and (vii) the satisfaction of other conditions. On June 6, 2013, the IPCB rejected, on procedural grounds, AER’s and IPH’s motion to transfer the air variance, which granted AER a temporary exemption for the coal plants of its subsidiaries from certain air pollution limitations under the Illinois’ Multi-Pollutant Standard. The IPCB indicated that IPH may file its own request for variance relief. IPH and AER are pursuing such relief, and on July 22, 2013 IPH and certain co-petitioners filed their request for variance relief and a hearing was held on September 17, 2013. The IPCB is expected to make its decision on that request on or before November 21, 2013.

Each party has agreed to indemnify the other for breaches of representations and warranties, breaches of covenants and certain other matters, subject to certain exceptions. The AER Transaction Agreement contains certain termination rights for both IPH and Ameren, including if the closing does not occur within 12 months following the date of the AER Transaction Agreement.

The AER Transaction Agreement provides for the payment of a termination fee by each party under specific circumstances. In certain circumstances, including failure to receive FERC Approval, IPH must pay a termination fee of $25 million to Ameren.

Concurrently with the execution of the AER Transaction Agreement, Dynegy Inc. entered into the Limited Guaranty, capped at $25 million in favor of Ameren, pursuant to which we will guarantee payout by IPH of any required termination fee and, for a period of two years after the closing (subject to certain exceptions), up to $25 million with respect to IPH’s indemnification obligations and certain reimbursement obligations under the AER Transaction Agreement.

DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended September 30, 2013 and 2012

DMG Acquisition

On June 5, 2012, pursuant to a settlement agreement entered into with certain of DH’s creditors, Legacy Dynegy and DH consummated the DMG Acquisition. The DMG Acquisition was accounted for as a business combination in DH’s financial statements as Legacy Dynegy deconsolidated DH, effective November 7, 2011, as a result of the DH Chapter 11 Cases. Accordingly, the assets acquired and liabilities assumed were recognized at their fair value as of the acquisition date.

The purchase price was approximately $466 million. Consideration given by DH consisted of (i) approximately $402 million for the fair value of the Undertaking receivable, affiliate that was extinguished in connection with the transaction and (ii) approximately $64 million for the fair value of the Administrative Claim issued to Legacy Dynegy in the DH Chapter 11 Cases. As a result of entering into the settlement agreement, the Undertaking receivable was impaired to $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.

Pro Forma Results. The unaudited pro forma financial results for the nine months ended September 30, 2012 show the effect of the DMG Acquisition as if the acquisition had occurred as of January 1, 2012.



	Predecessor
(amounts in millions)	Nine Months Ended September 30, 2012
Revenues	$	1,211
Loss from continuing operations	$	(27	)
Loss from discontinued operations	$	(420	)
Net loss	$	(447	)

Note 4—Chapter 11 Cases

On November 7, 2011, DH and four of its wholly-owned subsidiaries, Dynegy Northeast Generation, Inc. (“DNE”), 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 United States Bankruptcy Court for the Southern District of New York, Poughkeepsie Division (the “Bankruptcy Court”). The DH Chapter 11 Cases were 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.

On the Plan Effective Date, we consummated our reorganization under Chapter 11 pursuant to the Plan and Dynegy exited bankruptcy. DNE, Hudson, Danskammer and Roseton (the “DNE Debtor Entities”) remain in Chapter 11 bankruptcy. As a result, we deconsolidated the DNE Debtor Entities on the Plan Effective Date and began accounting for our investment using the cost method. Accordingly, any activity related to our Roseton and Danskammer operations is reported in discontinued operations for all periods presented. Please read Note 5—Discontinued Operations for further discussion.

As of September 30, 2013 and December 31, 2012, we had approximately $1 million in net payables and less than $1 million in net receivables, respectively, from the DNE Debtor Entities related to the Service Agreements included in our unaudited condensed consolidated balance sheets. We account for our investment in the DNE Debtor Entities using the cost method and have a carrying amount of zero. Our maximum loss exposure related to our investment in the DNE Debtor Entities is limited to our net receivables as we have no obligation to provide funding to the DNE Debtor Entities on an ongoing basis.

DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended September 30, 2013 and 2012

For the three and nine months ended and as of September 30, 2013, we do not have any subsidiaries under Chapter 11 protection included in our unaudited condensed consolidated financial statements. The condensed combined financial statements of the Debtor Entities included in our results for the three and nine months ended September 30, 2012 are set forth below:

Condensed Combined Statements of Operations of the Debtor Entities



	Predecessor
(amounts in millions)	Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
Revenues	$	—		$	—
Cost of sales	—			—
Operating expense	—			—
General and administrative expense	(3		)	(7		)
Operating loss	(3		)	(7		)
Bankruptcy reorganization items, net	18			147
Equity losses	(46		)	(1,373		)
Impairment of Undertaking receivable, affiliate	—			(832		)
Other income and expense, net	(10		)	1,284
Income tax benefit	2			9
Loss from continuing operations	(39		)	(772		)
Loss from discontinued operations	(2		)	(420		)
Net loss	$	(41	)	$	(1,192	)

Condensed Combined Statement of Cash Flows of the Debtor Entities



	Predecessor
(amounts in millions)	Nine Months Ended September 30, 2012
Net cash provided by:
Operating activities	$	32
Investing activities	27
Financing activities	200
Net increase in cash and cash equivalents	259
Cash and cash equivalents, beginning of period	33
Cash and cash equivalents, end of period	$	292

Basis of Presentation. The condensed combined financial statements only include the financial statements of the DH Debtor Entities. Transactions among the DH Debtor Entities are eliminated in the condensed combined financial statements.

Interest Expense. The DH Debtor Entities discontinued recording interest on unsecured liabilities subject to compromise (“LSTC”) effective November 8, 2011. Contractual interest on LSTC not reflected in the condensed combined financial statements was approximately $74 million and $217 million for the three and nine months ended September 30, 2012, respectively.

Bankruptcy Reorganization Items, net. Bankruptcy reorganization items, net 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 items, net, as shown in the condensed combined statement of operations above, consist of expense or income incurred or earned as a direct and incremental result of the bankruptcy filings.

DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended September 30, 2013 and 2012

The table below lists the significant items within this category:



	Predecessor
(amounts in millions)	Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
Adjustments of estimated allowable claims:
DNE leases (1)	$	—		$	(395	)
Subordinated notes (2)	—			161
Write-off of note payable, affiliate (3)	—			10
Other	(1		)	(5		)
Total adjustments for estimated allowable claims	(1		)	(229		)
Change in value of Administrative Claim (4)	26			17
Professional fees (5)	(7		)	(40		)
Total Bankruptcy reorganization items, net	18			(252		)
Bankruptcy reorganization items, net included in discontinued operations	—			399
Total Bankruptcy reorganization items, net in continuing operations	$	18		$	147

__________________________________________


(1)	Amount represents adjustments to our estimate of the probable allowed claim associated with the DNE leases as a result of entering into the Settlement Agreement. Please read Note 3—Emergence from Bankruptcy and Fresh-Start Accounting in our Form 10-K for further discussion.


(2)	The estimated allowable claims related to the Subordinated Capital Income Securities were adjusted in the second quarter 2012 based on the terms of the Settlement Agreement, as amended. Please read Note 3—Emergence from Bankruptcy and Fresh-Start Accounting in our Form 10-K for further discussion.


(3)	It was determined that no claim related to the Note payable, affiliate would be made. Therefore, the estimated amount was reduced to zero.


(4)	The Administrative Claim was issued on the effective date of the Settlement Agreement. Please read Note 3—Emergence from Bankruptcy and Fresh-Start Accounting—Settlement Agreement and Plan Support Agreement in our Form 10-K for further discussion.


(5)	Professional fees relate primarily to the fees of attorneys and consultants working directly on the Chapter 11 Cases.

Note 5—Discontinued Operations

Discontinued Operations

The DNE Debtor Entities remain in Chapter 11 bankruptcy and continue to operate their businesses as “debtors-in-possession.” As a result, Dynegy deconsolidated the DNE Debtor Entities, effective October 1, 2012. 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. 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 3—Emergence from Bankruptcy and Fresh-Start Accounting and Note 6—Dispositions and Discontinued Operations in our Form 10-K for further discussion. Any activity related to DNE is reported as discontinued operations for all periods presented.

DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended September 30, 2013 and 2012

Summary. The amounts in the table below reflect the operating results of the businesses reported as discontinued operations:



	Successor						Predecessor
(amounts in millions)	Three Months Ended September 30, 2013			Nine Months Ended September 30, 2013			Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
Revenues	$	—		$	(2	)	$	34		$	61
Income (loss) from operations before taxes	$	—		$	5		$	(2	)	$	(420	)
Income (loss) from operations after taxes	$	(2	)	$	3		$	(2	)	$	(420	)

Note 6—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 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 and purchase fuel through a combination of spot market sales and near-term contractual arrangements (generally over a rolling one- to three-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.

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 recurring fair value accounting treatment because these arrangements do not meet the definition of a derivative or are designated as “normal purchase, normal sale.” 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. Interest rate contracts are entered into for purposes of reducing our exposure to interest rate fluctuations on our variable rate debt. Common stock warrants were issued in connection with our emergence from bankruptcy and allow the holder to purchase, on a one-to-one basis, one common share of Dynegy common stock at $40 per share. We elect not to designate any of our derivatives as accounting hedges. As of September 30, 2013, our commodity derivatives were comprised of both purchases and sales of commodities. As of September 30, 2013, we had net purchases and sales of derivative contracts outstanding in the following quantities:



Contract Type	Hedge Designation	Quantity		Unit of Measure	Fair Value (1)
(dollars and quantities in millions)		Purchases (Sales)			Asset (Liability)
Commodity contracts:
Electricity derivatives (2)	Not designated	(18	)	MWh	$	6
Natural gas derivatives (2)	Not designated	119		MMBtu	$	(25	)
Heat rate derivatives	Not designated	(1)/3		MWh/MMBtu	$	1
Emissions derivatives	Not designated	2		Metric Ton	$	(3	)
Interest rate contracts:
Interest rate swaps	Not designated	796		Dollars	$	(47	)
Common stock warrants	Not designated	16		Warrants	$	(21	)

DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended September 30, 2013 and 2012

__________________________________________


(1)	Includes both asset and liability risk management positions, but excludes margin and collateral netting, as discussed below.


(2)	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) with 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, “Margin”). In addition to these transactions we execute through the futures clearing managers, we also execute transactions through multiple bilateral counterparties. Our transactions with these counterparties are collateralized using cash collateral (“Collateral”), letters of credit and first liens. We elect to offset fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement, where the right of offset exists. We also offset Margin and Collateral paid to or received from all counterparties against the fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement. As a result, the consolidated balance sheets present derivative assets and liabilities, as well as cash paid to or received from all counterparties against those positions, on a net basis.

The following tables present the fair value and balance sheet classification of derivatives in the unaudited condensed consolidated balance sheet as of September 30, 2013 and the consolidated balance sheet as of December 31, 2012 segregated by type of contract segregated by assets and liabilities. As of September 30, 2013 and December 31, 2012, there were no gross amounts available to be offset that were not offset in our consolidated balance sheets.



			September 30, 2013
						Gross amounts offset in the balance sheet
Contract Type		Balance Sheet Location	Gross Fair Value			Contract Netting			Collateral or Margin Received or Paid		Net Fair Value
(amounts in millions)
Derivative assets:
	Commodity contracts	Assets from risk management activities	$	62		$	(41	)	$	—	$	21
	Total derivative assets		$	62		$	(41	)	$	—	$	21

Derivative liabilities:
	Commodity contracts	Liabilities from risk management activities	$	(83	)	$	41		$	8	$	(34	)
	Interest rate contracts	Liabilities from risk management activities	(47		)	—			—		(47		)
	Common stock warrants	Other long-term liabilities	(21		)	—			—		(21		)
	Total derivative liabilities		$	(151	)	$	41		$	8	$	(102	)
Total derivatives			$	(89	)	$	—		$	8	$	(81	)

DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended September 30, 2013 and 2012



			December 31, 2012
						Gross amounts offset in the balance sheet
Contract Type		Balance Sheet Location	Gross Fair Value			Contract Netting			Collateral or Margin Received or Paid		Net Fair Value
(amounts in millions)
Derivative assets:
	Commodity contracts	Assets from risk management activities	$	61		$	(48	)	$	—	$	13
	Commodity contracts, affiliates	Assets from risk management activities, affiliates	4			—			—		4
	Total derivative assets		$	65		$	(48	)	$	—	$	17

Derivative liabilities:
	Commodity contracts	Liabilities from risk management activities	$	(77	)	$	48		$	8	$	(21	)
	Interest rate contracts	Liabilities from risk management activities	(46		)	—			—		(46		)
	Common stock warrants	Other long-term liabilities	(20		)	—			—		(20		)
	Total derivative liabilities		$	(143	)	$	48		$	8	$	(87	)
Total derivatives			$	(78	)	$	—		$	8	$	(70	)

The following table summarizes our cash collateral posted as of September 30, 2013 and December 31, 2012, along with the location on the balance sheet and the amount applied against our short-term risk management liabilities.



Location on balance sheet	September 30, 2013				December 31, 2012
Location on balance sheet	Collateral posted		Amount applied against short-term risk management liabilities		Collateral posted		Amount applied against short-term risk management liabilities
(amounts in millions)
Broker margin	$	23	$	7	$	44	$	4
Prepayments and other current assets	$	3	$	1	$	17	$	4

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. We had no derivatives that were designated in qualifying hedging relationships during the three and nine months ended September 30, 2013 and 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 and nine months ended September 30, 2013, Revenues include unrealized mark-to-market losses of $29 million and unrealized mark-to-market gains of $8 million, respectively, related to our commodity derivatives compared to unrealized mark-to-market gains of $33 million and $103 million for the three and nine months ended September 30, 2012, respectively. For the three and nine months ended September 30, 2013, Interest expense includes unrealized mark-to-market losses of $5 million and $1 million, respectively, related to our interest rate derivatives compared to unrealized mark-to-market losses of $20 million and $33 million for the three and nine months ended September 30, 2012, respectively.

DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended September 30, 2013 and 2012

The realized and unrealized impact of derivative financial instruments on our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012 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 and interest payments are made.



		Successor						Predecessor
Derivatives Not Designated as Hedges	Location of Gain (Loss) Recognized in Income on Derivatives	Three Months Ended September 30, 2013			Nine Months Ended September 30, 2013			Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
(amounts in millions)
Commodity contracts	Revenues	$	(2	)	$	(52	)	$	(36	)	$	(60	)
Commodity contracts, affiliates	Revenues	$	—		$	(2	)	$	—		$	(6	)
Interest rate contracts	Interest expense	$	(6	)	$	(3	)	$	(22	)	$	(33	)
Common stock warrants	Other income (expense), net	$	8		$	(1	)	$	—		$	—

Note 7—Fair Value Measurements

We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. 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 following tables set forth, by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2013 and December 31, 2012 and are presented on a gross basis before consideration of amounts netted under master netting agreements and the application of collateral and margin paid. These financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.



	Fair Value as of September 30, 2013
(amounts in millions)	Level 1			Level 2			Level 3			Total
Assets:
Assets from commodity risk management activities:
Electricity derivatives	$	—		$	42		$	8		$	50
Natural gas derivatives	—			10			—			10
Heat rate derivatives	—			—			1			1
Emissions derivatives	—			1			—			1
Total assets from commodity risk management activities	$	—		$	53		$	9		$	62
Liabilities:										.
Liabilities from commodity risk management activities:
Electricity derivatives	$	—		$	(28	)	$	(16	)	$	(44	)
Natural gas derivatives	—			(35		)	—			(35		)
Emissions derivatives	—			(4		)	—			(4		)
Total liabilities from commodity risk management activities	—			(67		)	(16		)	(83		)
Liabilities from interest rate contracts	—			(47		)	—			(47		)
Liabilities from outstanding common stock warrants	(21		)	—			—			(21		)
Total liabilities	$	(21	)	$	(114	)	$	(16	)	$	(151	)

DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended September 30, 2013 and 2012



	Fair Value as of December 31, 2012
(amounts in millions)	Level 1			Level 2			Level 3			Total
Assets:
Assets from commodity risk management activities:
Electricity derivatives	$	—		$	37		$	11		$	48
Natural gas derivatives	—			14			—			14
Heat rate derivatives	—			—			3			3
Total assets from commodity risk management activities	$	—		$	51		$	14		$	65
Liabilities:
Liabilities from commodity risk management activities:
Electricity derivatives	$	—		$	(50	)	$	(6	)	$	(56	)
Natural gas derivatives	—			(20		)	—			(20		)
Heat rate derivatives	—			—			(1		)	(1		)
Total liabilities from commodity risk management activities	—			(70		)	(7		)	(77		)
Liabilities from interest rate contracts	—			(46		)	—			(46		)
Liabilities from outstanding common stock warrants	(20		)	—			—			(20		)
Total liabilities	$	(20	)	$	(116	)	$	(7	)	$	(143	)

Level 3 Valuation Methods. The electricity derivatives classified within Level 3 are primarily financial swaps executed in illiquid trading locations, capacity contracts, off-peak power options and FTRs. 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. Off-peak power options are valued using a Black-Scholes model which uses forward power prices and market implied volatility. The forward market price of FTRs is derived using historical congestion patterns within the marketplace and heat rate derivative valuations are derived using a Black-Scholes spread model, which uses forward natural gas and power prices, market implied volatilities and modeled power/natural gas correlation values.

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, forward congestion power price spreads and illiquid power location pricing basis to liquid locations. These estimates are generally independent of each other. Volatility curves and power price 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. The significant unobservable inputs used in the valuation of Dynegy’s contracts classified as Level 3 as of September 30, 2013 are as follows:



Transaction Type	Quantity		Unit of Measure	Net Fair Value			Valuation Technique	Significant Unobservable Inputs	Significant Unobservable Inputs Range
(dollars in millions)
Electricity derivatives:
Forward contracts—power (1)	(11	)	Million MWh	$	(6	)	Basis spread + liquid location	Basis spread	$6.00-$10.00
Capacity options	(1,100	)	MW month	$	—		Option models	Option price	$0.00-$0.10
Off-peak power options	(162	)	Thousand MWh	$	—		Option models	Power price volatility	13%-33%
FTRs	4		Million MWh	$	(2	)	Historical congestion	Forward price	$1.00-$11.00
Heat rate derivatives	3		Million MWh	$	—		Option models	Gas/power price correlation	57%-87%
Heat rate derivatives	(399	)	Thousand MMBtu	$	1		Option models	Power price volatility	13%-33%

DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended September 30, 2013 and 2012

__________________________________________


(1)	Represents forward financial and physical transactions at illiquid pricing locations.

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:



	Successor
	Three Months Ended September 30, 2013
(amounts in millions)	Electricity Derivatives			Heat Rate Derivatives			Total
Balance at June 30, 2013	$	(3	)	$	1		$	(2	)
Total gains (losses) included in earnings	(5		)	1			(4		)
Settlements (1)	—			(1		)	(1		)
Balance at September 30, 2013	$	(8	)	$	1		$	(7	)
Unrealized gains (losses) relating to instruments held as of September 30, 2013	$	(5	)	$	1		$	(4	)



	Successor
	Nine Months Ended September 30, 2013
(amounts in millions)	Electricity Derivatives			Heat Rate Derivatives			Total
Balance at December 31, 2012	$	5		$	2		$	7
Total losses included in earnings	(7		)	—			(7		)
Settlements (1)	(6		)	(1		)	(7		)
Balance at September 30, 2013	$	(8	)	$	1		$	(7	)
Unrealized losses relating to instruments held as of September 30, 2013	$	(7	)	$	—		$	(7	)



	Predecessor
	Three Months Ended September 30, 2012
(amounts in millions)	Electricity Derivatives			Heat Rate Derivatives			Administrative Claim			Interest Rate Swaps (2)			Total
Balance at June 30, 2012	$	8		$	(8	)	$	(73	)	$	(25	)	$	(98	)
Total gains (losses) included in earnings, net of affiliates	(1		)	(1		)	26			(12		)	12
Settlements, net of affiliates (1)	(2		)	7			—			—			5
Balance at September 30, 2012	$	5		$	(2	)	$	(47	)	$	(37	)	$	(81	)
Unrealized gains (losses) relating to instruments (net of affiliates) held as of September 30, 2012	$	(15	)	$	(1	)	$	26		$	(12	)	$	(2	)

DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended September 30, 2013 and 2012



	Predecessor
	Nine Months Ended September 30, 2012
(amounts in millions)	Electricity Derivatives			Heat Rate Derivatives			Administrative Claim			Interest Rate Swaps (2)			Total
Balance at December 31, 2011	$	20		$	(17	)	$	—		$	(6	)	$	(3	)
Total gains (losses) included in earnings, net of affiliates	(33		)	1			17			(24		)	(39		)
Settlements, net of affiliates (1)	14			14			—			—			28
Issuance of Administrative Claim	—			—			(64		)	—			(64		)
DMG Acquisition	4			—			—			(7		)	(3		)
Balance at September 30, 2012	$	5		$	(2	)	$	(47	)	$	(37	)	$	(81	)
Unrealized gains (losses) relating to instruments (net of affiliates) held as of September 30, 2012	$	(11	)	$	1		$	17		$	(28	)	$	(21	)

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(1)	For purposes of these tables, we define settlements as the beginning of period fair value of contracts that settled during the period.


(2)	The interest rate contracts classified within Level 3 in the predecessor period include an implied credit fee that impacted the day one value of the instruments. We revalued the credit fee in connection with the application of fresh-start accounting. As a result, these instruments are classified within Level 2 in the successor period.

Gains and losses (realized and unrealized) for Level 3 recurring items are included in Revenues and Interest expense 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 and nine months ended September 30, 2013 and 2012.

Nonfinancial Assets and Liabilities. Nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

We did not have any nonfinancial assets or liabilities measured at fair value on a non-recurring basis during the three and nine months ended September 30, 2013.

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 financial assets and liabilities (cash, accounts receivable, restricted cash and accounts payable) not presented in the table below approximate fair values due to the short-term maturities of these instruments. 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 as of September 30, 2013 and December 31, 2012, respectively.



	September 30, 2013						December 31, 2012
(amounts in millions)	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Interest rate derivatives not designated as accounting hedges (1)	$	(47	)	$	(47	)	$	(46	)	$	(46	)
Commodity-based derivative contracts not designated as accounting hedges (1)	$	(21	)	$	(21	)	$	(12	)	$	(12	)
DPC Credit Agreement, due 2016 (2)	$	—		$	—		$	(880	)	$	(874	)
DMG Credit Agreement, due 2016 (3)	$	—		$	—		$	(535	)	$	(537	)
Tranche B-2 Term Loan, due 2020 (4)	$	(794	)	$	(795	)	$	—		$	—
5.875% Senior Notes, due 2023 (5)	$	(500	)	$	(465	)	$	—		$	—
Common stock warrants	$	(21	)	$	(21	)	$	(20	)	$	(20	)

DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended September 30, 2013 and 2012

__________________________________________


(1)	Included in both current and non-current assets and liabilities on the unaudited condensed consolidated balance sheets.


(2)	Carrying amount includes an unamortized premium of $43 million at December 31, 2012. The fair value of the DPC Credit Agreement is classified within Level 2 of the fair value hierarchy. Please read Note 12—Debt for further discussion.


(3)	Carrying amount includes an unamortized premium of $18 million as of December 31, 2012. The fair value of the DMG Credit Agreement is classified within Level 2 of the fair value hierarchy. Please read Note 12—Debt for further discussion.


(4)	Carrying amount includes an unamortized discount of $4 million as of September 30, 2013. The fair value of the Tranche B-2 Term Loan is classified within Level 2 of the fair value hierarchy. Please read Note 12—Debt for further discussion.


(5)	The fair value of the Senior Notes is classified within Level 2 of the fair value hierarchy. Please read Note 12—Debt for further discussion.

Note 8—Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss), net of tax, by component, associated with our defined benefit pension and other post-employment benefit plans are as follows:



	Successor			Predecessor
(amounts in millions)	Nine Months Ended September 30, 2013			Nine Months Ended September 30, 2012
Beginning of period	$	11		$	1
Current period other comprehensive income:
Actuarial gain and plan amendments (net of tax of $25 and zero, respectively) (1)	46			—
Other comprehensive income before reclassifications	46			—
Amounts reclassified from accumulated other comprehensive income (loss) (2)	(7		)	—
Net current period other comprehensive income	39			—
DMG Acquisition	—			(25		)
End of period	$	50		$	(24