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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, 2016
 
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 ý
 
Accelerated filer o
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

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 ¨


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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, 117,293,478 shares outstanding as of October 12, 2016.
 

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TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 6.
 
 
 

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DEFINITIONS
As used in this Form 10-Q, the abbreviations contained herein have the meanings set forth below. 
CAA
 
Clean Air Act
CAISO
 
The California Independent System Operator
CPUC
 
California Public Utility Commission
CT
 
Combustion Turbine
EPA
 
Environmental Protection Agency
ERCOT
 
Electric Reliability Council of Texas
FCA
 
Forward Capacity Auction
FERC
 
Federal Energy Regulatory Commission
FTR
 
Financial Transmission Rights
IMA
 
In-market Asset Availability
IPCB
 
Illinois Pollution Control Board
IPH
 
IPH, LLC (formerly known as Illinois Power Holdings, LLC)
ISO
 
Independent System Operator
ISO-NE
 
Independent System Operator New England
kW
 
Kilowatt
LIBOR
 
London Interbank Offered Rate
MISO
 
Midcontinent Independent System Operator, Inc.
MMBtu
 
One Million British Thermal Units
Moody’s
 
Moody’s Investors Service Inc.
MW
 
Megawatts
MWh
 
Megawatt Hour
NM
 
Not Meaningful
NYISO
 
New York Independent System Operator
PJM
 
PJM Interconnection, LLC
PRIDE
 
Producing Results through Innovation by Dynegy Employees
RGGI
 
Regional Greenhouse Gas Initiative
RMR
 
Reliability Must Run
S&P
 
Standard & Poor’s Ratings Services
SEC
 
U.S. Securities and Exchange Commission

i
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PART I. FINANCIAL INFORMATION
Item 1—FINANCIAL STATEMENTS
DYNEGY INC.
CONSOLIDATED BALANCE SHEETS
(unaudited) (in millions, except share data)
 
 
 
September 30, 2016
 
December 31, 2015
ASSETS
 
 

 
 

Current Assets
 
 

 
 

Cash and cash equivalents
 
$
1,458

 
$
505

Restricted cash
 
85

 
39

Accounts receivable, net of allowance for doubtful accounts of $1 and $1, respectively
 
374

 
402

Inventory
 
447

 
597

Assets from risk management activities
 
73

 
100

Intangible assets
 
54

 
102

Prepayments and other current assets
 
148

 
187

Total Current Assets
 
2,639

 
1,932

Property, Plant and Equipment, Net
 
7,252

 
8,347

Investment in unconsolidated affiliate
 
173

 
190

Restricted cash
 
2,000

 
—

Assets from risk management activities
 
40

 
18

Goodwill
 
799

 
797

Intangible assets
 
28

 
62

Other long-term assets
 
93

 
113

Total Assets
 
$
13,024

 
$
11,459

 
See the notes to consolidated financial statements.

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DYNEGY INC.
CONSOLIDATED BALANCE SHEETS
(unaudited) (in millions, except share data)

 
 
 
September 30, 2016
 
December 31, 2015
LIABILITIES AND EQUITY
 
 

 
 

Current Liabilities
 
 

 
 

Accounts payable
 
$
263

 
$
292

Accrued interest
 
191

 
74

Intangible liabilities
 
33

 
85

Accrued liabilities and other current liabilities
 
120

 
125

Liabilities from risk management activities
 
92

 
103

Asset retirement obligations
 
45

 
50

Debt, current portion, net
 
167

 
80

Total Current Liabilities
 
911

 
809

Debt, long-term portion, net
 
9,356

 
7,129

Liabilities from risk management activities
 
69

 
105

Asset retirement obligations
 
238

 
230

Deferred income taxes
 
36

 
29

Intangible liabilities
 
39

 
55

Other long-term liabilities
 
168

 
183

Total Liabilities
 
10,817

 
8,540

Commitments and Contingencies (Note 14)
 


 


 
 
 
 
 
Stockholders’ Equity
 
 
 
 
Preferred stock, $0.01 par value, 20,000,000 shares authorized:
 
 
 
 
Series A 5.375% mandatory convertible preferred stock, $0.01 par value; 4,000,000 shares issued and outstanding, respectively
 
400

 
400

Common stock, $0.01 par value, 420,000,000 shares authorized; 128,619,600 shares issued and 117,293,478 shares outstanding at September 30, 2016; 128,228,477 shares issued and 116,902,355 outstanding at December 31, 2015
 
1

 
1

Additional paid-in capital
 
3,541

 
3,187

Accumulated other comprehensive income, net of tax
 
15

 
19

Accumulated deficit
 
(1,746
)
 
(686
)
Total Dynegy Stockholders’ Equity
 
2,211

 
2,921

Noncontrolling interest
 
(4
)
 
(2
)
Total Equity
 
2,207

 
2,919

Total Liabilities and Equity
 
$
13,024

 
$
11,459


See the notes to consolidated financial statements.

2
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DYNEGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) (in millions, except per share data)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues
 
$
1,184

 
$
1,232

 
$
3,211

 
$
2,854

Cost of sales, excluding depreciation expense
 
(660
)
 
(621
)
 
(1,698
)
 
(1,494
)
Gross margin
 
524

 
611

 
1,513

 
1,360

Operating and maintenance expense
 
(218
)
 
(219
)
 
(695
)
 
(580
)
Depreciation expense
 
(163
)
 
(174
)
 
(494
)
 
(413
)
Impairments
 
(212
)
 
(74
)
 
(857
)
 
(74
)
General and administrative expense
 
(41
)
 
(29
)
 
(117
)
 
(94
)
Acquisition and integration costs
 
(7
)
 
(8
)
 
(8
)
 
(121
)
Other
 
—

 
—

 
(16
)
 
(1
)
Operating income (loss)
 
(117
)
 
107

 
(674
)
 
77

Earnings (losses) from unconsolidated investment
 
4

 
(4
)
 
7

 
(1
)
Interest expense
 
(166
)
 
(145
)
 
(449
)
 
(413
)
Other income and expense, net
 
29

 
46

 
60

 
45

Income (loss) before income taxes
 
(250
)
 
4

 
(1,056
)
 
(292
)
Income tax benefit (expense) (Note 15)
 
1

 
(28
)
 
(6
)
 
473

Net income (loss)
 
(249
)
 
(24
)
 
(1,062
)
 
181

Less: Net loss attributable to noncontrolling interest
 
—

 
—

 
(2
)
 
(3
)
Net income (loss) attributable to Dynegy Inc.
 
(249
)
 
(24
)
 
(1,060
)
 
184

Less: Dividends on preferred stock
 
5

 
5

 
16

 
16

Net income (loss) attributable to Dynegy Inc. common stockholders
 
$
(254
)
 
$
(29
)
 
$
(1,076
)
 
$
168

 
 
 
 
 
 
 
 
 
Earnings (Loss) Per Share (Note 18):
 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to Dynegy Inc. common stockholders
 
$
(1.81
)
 
$
(0.23
)
 
$
(8.54
)
 
$
1.33

Diluted earnings (loss) per share attributable to Dynegy Inc. common stockholders
 
$
(1.81
)
 
$
(0.23
)
 
$
(8.54
)
 
$
1.31

 
 
 
 
 
 
 
 
 
Basic shares outstanding
 
140

 
126

 
126

 
126

Diluted shares outstanding
 
140

 
126

 
126

 
140

 
See the notes to consolidated financial statements.

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DYNEGY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited) (in millions)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net income (loss)
 
$
(249
)
 
$
(24
)
 
$
(1,062
)
 
$
181

Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
Actuarial gain and plan amendments (net of tax of zero, $2, zero, and $2 for each respective period)
 
—

 
13

 
—

 
8

Amounts reclassified from accumulated other comprehensive income:
 
 
 
 
 
 
 
 
Amortization of unrecognized prior service credit (net of tax of zero for each respective period)
 
(2
)
 
(1
)
 
(4
)
 
(3
)
Other comprehensive income (loss), net of tax
 
(2
)
 
12

 
(4
)
 
5

Comprehensive income (loss)
 
(251
)
 
(12
)
 
(1,066
)
 
186

Less: Comprehensive income (loss) attributable to noncontrolling interest
 
—

 
1

 
(2
)
 
(2
)
Total comprehensive income (loss) attributable to Dynegy Inc.
 
$
(251
)
 
$
(13
)
 
$
(1,064
)
 
$
188


See the notes to consolidated financial statements.

4
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DYNEGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in millions)
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net income (loss)
 
$
(1,062
)
 
$
181

Adjustments to reconcile net income (loss) to net cash flows from operating activities:
 
 
 
 
Depreciation expense
 
494

 
413

Non-cash interest expense
 
37

 
25

Amortization of intangibles
 
17

 
(18
)
Risk management activities
 
(75
)
 
(117
)
(Earnings) losses from unconsolidated investment
 
(7
)
 
1

Deferred income taxes
 
6

 
(473
)
Impairments
 
857

 
74

Change in value of common stock warrants
 
(5
)
 
(43
)
Other
 
1

 
38

Changes in working capital:
 
 
 
 
Accounts receivable, net
 
32

 
(48
)
Inventory
 
153

 
(52
)
Prepayments and other current assets
 
179

 
95

Accounts payable and accrued liabilities
 
104

 
227

Distributions from unconsolidated investment
 
1

 
3

Changes in restricted cash
 
(1
)
 
—

Changes in non-current assets
 
(94
)
 
(23
)
Changes in non-current liabilities
 
12

 
19

Net cash provided by operating activities
 
649

 
302

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Capital expenditures
 
(259
)
 
(171
)
Acquisitions, net of cash acquired
 
—

 
(6,078
)
Decrease (increase) in restricted cash
 
(2,045
)
 
5,148

Distributions from unconsolidated affiliate
 
14

 
8

Other investing
 
10

 
(6
)
Net cash used in investing activities
 
(2,280
)
 
(1,099
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Proceeds from long-term borrowings, net of debt issuance costs
 
2,277

 
57

Repayments of borrowings
 
(21
)
 
(29
)
Proceeds from issuance of equity, net of issuance costs
 
359

 
(6
)
Preferred stock dividends paid
 
(16
)
 
(17
)
Interest rate swap settlement payments
 
(13
)
 
(13
)
Repurchase of common stock
 
—

 
(127
)
Other financing
 
(2
)
 
(4
)
Net cash provided by (used in) financing activities
 
2,584

 
(139
)
Net increase (decrease) in cash and cash equivalents
 
953

 
(936
)
Cash and cash equivalents, beginning of period
 
505

 
1,870

Cash and cash equivalents, end of period
 
$
1,458

 
$
934

Other non-cash investing and financing activity:
 
 
 
 
Change in capital expenditures included in accounts payable
 
$
(10
)
 
$
(6
)
Non-cash consideration transferred for Acquisitions
 
$
—

 
$
(105
)
Change in capital expenditures pursuant to an equipment financing agreement
 
$
11

 
$
63

 

See the notes to consolidated financial statements. 

5
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2016 and 2015


Note 1—Basis of Presentation and Organization
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to interim financial reporting as prescribed by the SEC. The year-end consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by the Generally Accepted Accounting Principles of the United States of America (“GAAP”).  The unaudited 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. Certain prior period amounts in our unaudited consolidated financial statements have been reclassified to conform to current year presentation. 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, 2015, filed with the SEC on February 25, 2016, 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 unregulated power generation sector of the energy industry. We report the results of our power generation business as three segments in our unaudited consolidated financial statements: (i) the Coal segment (“Coal”), (ii) the IPH segment (“IPH”), and (iii) the Gas segment (“Gas”). Our consolidated financial results also reflect corporate-level expenses such as general and administrative expense, interest expense, and income tax benefit (expense). All significant intercompany transactions have been eliminated. Please read Note 20—Segment Information for further discussion.
IPH and its direct and indirect subsidiaries are organized into ring-fenced groups in order to maintain corporate separateness from Dynegy and its other subsidiaries. Certain of the entities in the IPH segment, including Illinois Power Generating Company (“Genco”), have an independent director whose consent is required for certain corporate actions, including material transactions with affiliates. Further, entities within the IPH segment present themselves to the public as separate entities.  They maintain separate books, records and bank accounts, and separately appoint officers.  Furthermore, they pay liabilities from their own funds, conduct business in their own names, and have restrictions on pledging their assets for the benefit of certain other persons.  These provisions restrict our ability to move cash out of these entities without meeting certain requirements as set forth in the governing documents. Genco’s $825 million Senior Notes are non-recourse to Dynegy.
Note 2—Accounting Policies
The accounting policies followed by the Company are set forth in Note 2—Summary of Significant Accounting Policies in our Form 10-K. The accompanying unaudited consolidated financial statements include our accounts and the accounts of our majority-owned or controlled subsidiaries. Accounting policies for all of our operations are in accordance with GAAP. There have been no significant changes to our accounting policies during the nine months ended September 30, 2016.
Use of Estimates. The preparation of unaudited 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
Hybrid Financial Instruments. In November 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-16-Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or Equity. The amendments in this ASU clarify how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The amendments in this ASU also clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (i.e., the relative strength of the debt-like or

6
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2016 and 2015

equity-like terms and features given the facts and circumstances) when considering how to weight those terms and features. The adoption of this ASU on January 1, 2016, did not have an impact on our unaudited consolidated financial statements.
Debt Issuance Costs. In April 2015, the FASB issued ASU 2015-03-Interest-Imputation of Interest (Subtopic 835-30).  The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for our debt issuance costs are not affected by the amendments in this update. 
In August 2015, the FASB issued ASU 2015-15-Interest-Imputation of Interest (Subtopic 835-30). The amendments in this ASU further clarify the guidance provided in ASU 2015-03 to include the presentation of debt issuance costs in relation to line-of-credit arrangements. The amendments state these costs may be presented as an asset and subsequently amortized ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.
We adopted these ASUs on January 1, 2016, on a retrospective basis affecting presentation on the unaudited consolidated balance sheets for all periods presented. Accordingly, we reclassified unamortized debt issuance costs of $3 million from Prepayments and other current assets to Debt, current portion, net and $77 million from Other long-term assets to Debt, long-term portion, net within our unaudited consolidated balance sheet as of December 31, 2015.
Consolidation. In February 2015, the FASB issued ASU 2015-02-Consolidation (Topic 810). The amendments in this ASU respond to concerns about the current accounting for consolidation of certain legal entities, in particular: (i) consolidation of limited partnerships and similar legal entities, (ii) evaluating fees paid to a decision maker or a service provider as a variable interest, (iii) the effect of fee arrangements on the primary beneficiary determination, (iv) the effect of related parties on the primary beneficiary determination, and (v) consolidation of certain investment funds. The adoption of this ASU on January 1, 2016, did not have an impact on our unaudited consolidated financial statements.
Extraordinary and Unusual Items. In January 2015, the FASB issued ASU 2015-01-Income Statement-Extraordinary and Unusual Items (Subtopic 225-20). The amendments in this ASU eliminate from GAAP the concept of extraordinary items and will no longer require separate classification of these items within the statement of operations. Presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The guidance in this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  The adoption of this ASU on January 1, 2016, did not have an impact on our unaudited consolidated financial statements.
Accounting Standards Not Yet Adopted
Statement of Cash Flows. In August 2016, the FASB issued ASU 2016-15-Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. To reduce current and future diversity in practice, the amendments in this ASU provide guidance for several cash flow classification issues identified where current GAAP is either unclear or does not include specific guidance. The guidance in this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We are currently evaluating this ASU and any potential impacts the adoption of this ASU will have on our unaudited consolidated financial statements.
Credit Losses. In June 2016, the FASB issued ASU 2016-13-Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU require the measurement of all expected credit losses for financial assets, which include trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance in this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for interim and annual periods beginning after December 15, 2018. We are currently evaluating this ASU and any potential impacts the adoption of this ASU will have on our unaudited consolidated financial statements.
Compensation. In March 2016, the FASB issued ASU 2016-09-Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this ASU simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance in this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. We are currently evaluating this ASU and any potential impacts the adoption of this ASU will have on our unaudited consolidated financial statements.
Debt Instruments. In March 2016, the FASB issued ASU 2016-06-Derivative and Hedging: Contingent Put and Call Options in Debt Instruments. The amendments in this ASU clarify what steps are required when assessing whether the economic

7
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2016 and 2015

characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. An entity performing the assessment under the amendments in this ASU is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. All entities have the option of adopting the new requirements early, including adoption in an interim period. If an entity early adopts the new requirements in an interim period, it must reflect any adjustments as of the beginning of the fiscal year that includes that interim period. We are currently evaluating this ASU; however, we do not anticipate the adoption of this ASU will have a material impact on our unaudited consolidated financial statements.
Leases. In February 2016, the FASB issued ASU 2016-02-Leases (Topic 842). The amendments in this ASU will mainly require lessees to recognize lease assets and lease liabilities, for those leases classified as operating leases under GAAP, in their balance sheet. The lease assets recognized in the balance sheet will represent a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The lease liability recognized in the balance sheet will represent the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. The guidance in this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are currently evaluating this ASU and any potential impacts the adoption of this ASU will have on our unaudited consolidated financial statements.
Going Concern. In August 2014, the FASB issued ASU 2014-15-Presentation of Financial Statements-Going Concern (Subtopic 205-40). The amendments in this ASU require management, in connection with preparing financial statements for each annual and interim reporting period, to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued, when applicable). Currently, there is no guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this ASU provide that guidance. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The guidance in this ASU is effective for fiscal years ending after December 15, 2016, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. We are currently evaluating this ASU; however, we do not anticipate the adoption of this ASU will have a material impact on our unaudited consolidated financial statements.
Revenue from Contracts with Customers. In May 2014, the FASB and International Accounting Standards Board jointly issued ASU 2014-09-Revenue from Contracts with Customers (Topic 606). This ASU, and subsequently issued amendments to the standard, develop a common revenue standard for GAAP and International Financial Reporting Standards by removing inconsistencies and weaknesses in revenue requirements, providing a more robust framework for addressing revenue issues, improving comparability of revenue recognition practices, providing more useful information to users of financial statements, and simplifying the preparation of financial statements. The guidance in this ASU and its amendments is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted for interim and annual periods beginning after December 15, 2016. We are currently evaluating this ASU; however, we do not anticipate the adoption of this ASU will have a material impact on our unaudited consolidated financial statements.
Note 3—Acquisitions
Delta Transaction. On February 24, 2016, Atlas Power Finance, LLC (“Atlas” or the “Purchaser”), a wholly owned subsidiary of Atlas Power, LLC (“Atlas Power”), entered into a Stock Purchase Agreement, as amended and restated on June 27, 2016, (the “Delta Stock Purchase Agreement”) with GDF SUEZ Energy North America, Inc. (“GSENA”) and International Power, S.A. (the “Seller”), indirect subsidiaries of Engie S.A. Pursuant to the Delta Stock Purchase Agreement, the Purchaser will acquire approximately 9,058 MW of generation, including (i) 15 natural gas-fired facilities located in Illinois, Massachusetts, New Jersey, Ohio, Pennsylvania, Texas, Virginia, and West Virginia, (ii) one coal-fired facility in Texas, and (iii) one waste coal-fired facility in Pennsylvania for a base purchase price of approximately $3.3 billion in cash, subject to certain adjustments (the “Delta Transaction”).
On June 27, 2016, a wholly owned subsidiary of Dynegy acquired the 35 percent interest in Atlas Power (the “ECP Buyout”) held by certain affiliated investment funds of Energy Capital Partners III, LLC (the “ECP Funds”). As a result, Atlas Power became an indirect wholly owned subsidiary of Dynegy. In accordance with the agreement with Energy Capital Partners (“ECP”), Dynegy will pay ECP $375 million (the “ECP Buyout Price”) on the later of December 31, 2016, or three months after the closing of the Delta Transaction (the “First Payment Date”). Alternatively, Dynegy may pay the ECP Buyout Price after the

8
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2016 and 2015

First Payment Date, but in such case, the ECP Buyout Price would be subject to quarterly escalation up to a maximum of $468.5 million. Dynegy intends to pay the buyout price at or prior to the First Payment Date.
The Purchaser and the Seller have agreed to indemnify the other for breaches of representations, warranties and covenants, and for certain other matters, subject to certain exceptions and limitations. The Delta Stock Purchase Agreement contains certain termination rights for both the Purchaser and the Seller, including if the closing does not occur within 12 months following the date of the Delta Stock Purchase Agreement. In the event the Delta Stock Purchase Agreement is terminated under certain circumstances, including the failure to obtain certain regulatory approvals, the Purchaser must pay GSENA the reverse termination fee of $132 million discussed below.
Dynegy also entered into an amended and restated limited guarantee in favor of GSENA, pursuant to which Dynegy guarantees 100 percent of the Purchaser’s obligation to pay the reverse termination fee of $132 million if such fee becomes payable. Please read Note 14—Commitments and Contingencies—Indemnifications and Guarantees for further discussion.
The Delta Stock Purchase Agreement includes customary representations, warranties and covenants by the parties. The Delta Transaction is subject to various closing conditions, including (i) expiration of the applicable waiting period, which was received on April 1, 2016, under the Hart-Scott-Rodino Act; (ii) obtaining required approvals from the FERC and the Public Utility Commission of Texas, the latter of which was received on July 20, 2016; (iii) no injunction or other orders preventing the consummation of the transactions contemplated under the Delta Stock Purchase Agreement; (iv) the completion of GSENA’s internal reorganization in all material respects in accordance with an exhibit attached to the Delta Stock Purchase Agreement; (v) the continuing accuracy of each party’s representations and warranties, and (vi) the satisfaction of other customary conditions. On June 8, 2016, we received a letter from FERC requesting additional information, to which we have responded. We expect the Delta Transaction to close in the fourth quarter of 2016 after satisfaction or waiver of these closing conditions.    
Delta Transaction Financing. On February 24, 2016, Dynegy entered into a Stock Purchase Agreement with Terawatt Holdings, LP (“Terawatt”), an affiliate of the ECP Funds (the “PIPE Stock Purchase Agreement”), pursuant to which Dynegy will sell and issue to Terawatt at the closing of the Delta Transaction 13,711,152 shares of Dynegy common stock for $150 million (the “PIPE Transaction”). The closing of the PIPE Transaction is contingent on the closing of the Delta Transaction. In addition, Dynegy has agreed to enter into an Investor Rights Agreement, in the form attached to the PIPE Stock Purchase Agreement (the “Investor Rights Agreement”), with Terawatt at the closing of the PIPE Transaction. Under the Investor Rights Agreement, Terawatt will be entitled to certain rights, including certain registration rights, rights of first refusal with respect to issuances of our common stock and the designation of one individual to serve on our Board of Directors as long as Terawatt and its affiliates own at least 10 percent of our common stock. Further, the Investor Rights Agreement subjects Terawatt to certain obligations, including certain voting obligations and customary standstill and lock-up periods.
On June 21, 2016, pursuant to a registered public offering, Dynegy issued 4.6 million tangible equity units (“TEUs”) for proceeds of $446 million, net of issuance costs of $14 million. Please read Note 12—Tangible Equity Units for further discussion.
On June 27, 2016, Dynegy Finance IV, Inc. (“Finance IV”), a direct wholly-owned subsidiary of Dynegy, entered into a term loan credit agreement with certain lenders providing for a $2.0 billion, seven-year senior secured term loan facility (the “Tranche C Term Loan”), the net proceeds of which were placed into escrow pending the closing of the Delta Transaction. Under the escrow agreement, the applicable borrowings are subject to full liquidation and release to the lenders if the Delta Transaction is terminated or not consummated by February 24, 2017.
Also, on June 27, 2016, Dynegy entered into a Third Amendment to the Credit Agreement (the “Third Amendment”), which, upon the release of funds from escrow, provides for (i) a $75 million revolving loan commitment increase to the incremental tranche B revolving loan commitments (the “Incremental Tranche B Revolver”), which has terms substantially the same as the terms of the existing incremental tranche B revolving loan commitments under the Credit Agreement, and (ii) conversion of the Tranche C Term Loan to an incremental $2.0 billion senior secured tranche C term loan. Please read Note 13—Debt—Credit Agreement and Finance IV Credit Agreement for further discussion.
Dynegy intends to use the net proceeds associated with the PIPE Transaction, the TEUs, the Tranche C Term Loan, borrowings under its revolving credit facilities, and cash-on-hand to fund the Delta Transaction and pay related fees and expenses.
EquiPower Acquisition. On April 1, 2015 (the “EquiPower Closing Date”), pursuant to the terms of a stock purchase agreement dated August 21, 2014, as amended, our wholly-owned subsidiary, Dynegy Resource II, LLC purchased 100 percent of the equity interests in EquiPower Resources Corp. (“ERC”) from certain affiliates of ECP (collectively, the “ERC Sellers”) thereby acquiring (i) five combined cycle natural gas-fired facilities in Connecticut, Massachusetts, and Pennsylvania, (ii) a partial

9
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2016 and 2015

interest in one natural gas-fired peaking facility in Illinois, (iii) two gas and oil-fired peaking facilities in Ohio, and (iv) one coal-fired facility in Illinois (the “ERC Acquisition”).
On the EquiPower Closing Date, in a related transaction, pursuant to a stock purchase agreement and plan of merger dated August 21, 2014, as amended, our wholly-owned subsidiary Dynegy Resource III, LLC purchased 100 percent of the equity interests in Brayton Point Holdings, LLC (“Brayton”) from certain affiliates of ECP (collectively, the “Brayton Sellers” and together with the ERC Sellers, the “ECP Sellers”), thereby acquiring a coal-fired facility in Massachusetts (the “Brayton Acquisition”).
The ERC Acquisition and the Brayton Acquisition (collectively, the “EquiPower Acquisition”) added approximately 6,300 MW of generation in Connecticut, Illinois, Massachusetts, Ohio, and Pennsylvania for an aggregate base purchase price of approximately $3.35 billion in cash plus approximately $105 million in common stock of Dynegy, subject to certain adjustments. In aggregate, the resulting operations from the two coal-fired facilities acquired from the ECP Sellers are reported within our Coal segment, while related operations from the six natural gas-fired and two gas and oil-fired facilities are reported within our Gas segment.
Duke Midwest Acquisition. On April 2, 2015, pursuant to the terms of the purchase and sale agreement dated August 21, 2014, as amended, our wholly-owned subsidiary Dynegy Resource I, LLC purchased 100 percent of the membership interests in Duke Energy Commercial Asset Management, LLC and Duke Energy Retail Sales, LLC, from two affiliates of Duke Energy Corporation (collectively, “Duke Energy”), thereby acquiring approximately 6,200 MW of generation in (i) three combined cycle natural gas-fired facilities located in Ohio and Pennsylvania, (ii) two natural gas-fired peaking facilities located in Ohio and Illinois, (iii) one oil-fired peaking facility located in Ohio, (iv) partial interests in five coal-fired facilities located in Ohio, and (v) a retail energy business for a base purchase price of approximately $2.8 billion in cash (the “Duke Midwest Acquisition”), subject to certain adjustments. We operate two of the five coal-fired facilities, the Miami Fort and Zimmer facilities, with other owners operating the three remaining facilities. The operations from the retail energy business, the five coal-fired and the one oil-fired facilities acquired from Duke Energy are reported within our Coal segment, while related operations from the five natural gas-fired facilities are reported within our Gas segment.
Business Combination Accounting. The EquiPower Acquisition and the Duke Midwest Acquisition (collectively, the “Acquisitions”) have been accounted for in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, with identifiable assets acquired and liabilities assumed recorded at their estimated fair values on the acquisition dates, April 1, 2015 and April 2, 2015, respectively. The valuation of these assets and liabilities is classified as Level 3 within the fair value hierarchy.
To fair value working capital, we used available market information. Asset retirement obligations (“AROs”) were recorded in accordance with ASC 410, Asset Retirement and Environmental Obligations. To fair value the acquired property, plant and equipment (“PP&E”), we used a discounted cash flow (“DCF”) analysis based upon a debt-free, free cash flow model.  The DCF model was created for each power generation facility based on its remaining useful life, and included gross margin forecasts for each facility using forward commodity market prices obtained from third party quotations for the years 2015 and 2016.  For the years 2017 through 2024, we used gross margin forecasts based upon commodity and capacity price curves developed internally using forward New York Mercantile Exchange natural gas prices and supply and demand factors.  For periods beyond 2024, we assumed a 2.5 percent growth rate. We also used management’s forecasts of operations and maintenance expense, general and administrative expense, and capital expenditures for the years 2015 through 2019 and assumed a 2.5 percent growth rate, based upon management’s view of future conditions, thereafter. The resulting cash flows were then discounted using plant specific discount rates of approximately 8 percent to 10 percent for gas-fired generation facilities and approximately 9 percent to 13 percent for coal-fired generation facilities, based upon the asset’s age, efficiency, region, and years until retirement. Contracts with terms that were not at current market prices were also valued using a DCF analysis.  The cash flows generated by the contracts were compared with their cash flows based on current market prices with the resulting difference recorded as either an intangible asset or liability. The 3,460,053 shares of common stock of Dynegy, issued as part of the consideration for the EquiPower Acquisition, were valued at approximately $105 million based on the closing price of Dynegy’s common stock on the EquiPower Closing Date.

10
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2016 and 2015

As of June 30, 2016, we completed our valuation of the assets acquired and liabilities assumed in connection with the Acquisitions. The following table summarizes the consideration paid and the fair value amounts recognized for the assets acquired and liabilities assumed related to the EquiPower Acquisition and Duke Midwest Acquisition, as of the respective acquisition dates, April 1, 2015 and April 2, 2015:
 (amounts in millions)
 
EquiPower Acquisition
 
Duke Midwest Acquisition
 
Total
Cash
 
$
3,350

 
$
2,800

 
$
6,150

Equity instruments (3,460,053 common shares of Dynegy)
 
105

 
—

 
105

Net working capital adjustment
 
206

 
(9
)
 
197

Fair value of total consideration transferred
 
$
3,661

 
$
2,791

 
$
6,452

 
 
 
 
 
 
 
Cash
 
$
267

 
$
—

 
$
267

Accounts receivable
 
49

 
126

 
175

Inventory
 
167

 
105

 
272

Assets from risk management activities (including current portion of $4 million and $30 million, respectively)
 
4

 
33

 
37

Prepayments and other current assets
 
32

 
69

 
101

Property, plant and equipment
 
2,773

 
2,734

 
5,507

Investment in unconsolidated affiliate
 
200

 
—

 
200

Intangible assets (including current portion of $67 million and $36 million, respectively)
 
111

 
84

 
195

Other long-term assets
 
28

 
35

 
63

Total assets acquired
 
3,631

 
3,186

 
6,817

 
 
 
 
 
 
 
Accounts payable
 
27

 
96

 
123

Accrued liabilities and other current liabilities
 
21

 
10

 
31

Debt, current portion
 
39

 
—

 
39

Liabilities from risk management activities (including current portion of $41 million and zero, respectively)
 
57

 
107

 
164

Asset retirement obligations
 
43

 
49

 
92

Intangible liabilities (including current portion of $24 million and $58 million, respectively)
 
73

 
93

 
166

Deferred income taxes, net
 
509

 
—

 
509

Other long-term liabilities
 
—

 
40

 
40

Total liabilities assumed
 
769

 
395

 
1,164

Identifiable net assets acquired
 
2,862

 
2,791

 
5,653

Goodwill
 
799

 
—

 
799

Net assets acquired
 
$
3,661

 
$
2,791

 
$
6,452

No acquisition costs related to the Acquisitions were incurred during the three and nine months ended September 30, 2016. We incurred acquisition costs of $1 million and $86 million related to the Acquisitions for the three and nine months ended September 30, 2015, respectively. These acquisition costs are included in Acquisition and integration costs in our unaudited consolidated statements of operations.
Revenues of $543 million and $1,675 million and operating loss of $34 million and income of $146 million, attributable to the Acquisitions, are included in our unaudited consolidated statements of operations for the three and nine months ended September 30, 2016, respectively. Revenues of $626 million and $1,128 million and operating income of $120 million and $190 million, attributable to the Acquisitions, are included in our unaudited consolidated statements of operations for the three and nine months ended September 30, 2015, respectively.

11
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2016 and 2015

Pro Forma Results. The unaudited pro forma financial results for the nine months ended September 30, 2015 assume the EquiPower Acquisition and the Duke Midwest Acquisition occurred on January 1, 2014. The unaudited pro forma financial results may not be indicative of the results that would have occurred had the acquisitions been completed as of January 1, 2014, nor are they indicative of future results of operations.
(amounts in millions)
 
Nine Months Ended September 30, 2015
Revenues
 
$
3,844

Net income
 
$
442

Net loss attributable to noncontrolling interests
 
$
(3
)
Net income attributable to Dynegy Inc.
 
$
445

Note 4—Unconsolidated Investment
Equity Method Investment
In connection with the EquiPower Acquisition, we acquired a 50 percent interest in Elwood Energy LLC, a limited liability company (“Elwood Energy”) and Elwood Expansion LLC, a limited liability company (“Elwood Expansion” and, together with Elwood Energy, “Elwood”).  Elwood Energy owns a 1,580 MW natural gas-fired facility located in Elwood, Illinois. At September 30, 2016 and December 31, 2015, our equity method investment included in our unaudited consolidated balance sheets was $173 million and $190 million, respectively. Upon the acquisition of our Elwood investment, we recognized basis differences in the net assets of approximately $89 million related to working capital, PP&E, debt, and intangibles. These basis differences are being amortized over their respective useful lives. Our risk of loss related to our equity method investment is limited to our investment balance. Holders of the debt of our unconsolidated investment do not have recourse to us and our other subsidiaries.
For the three and nine months ended September 30, 2016, we recorded $4 million and $7 million in equity earnings related to our investment in Elwood, respectively. For the three and nine months ended September 30, 2015, we recorded $4 million and $1 million in equity losses related to our investment in Elwood, respectively. These equity earnings (losses) are included in Earnings (losses) from unconsolidated investment in our unaudited consolidated statements of operations.
For the nine months ended September 30, 2016, we received a distribution of $15 million, of which $14 million was considered a return of investment. For the nine months ended September 30, 2015, we received a distribution of $11 million, of which $8 million was considered a return of investment. At September 30, 2016 and December 31, 2015, we have $10 million and $3 million in accounts receivable due from Elwood, respectively, which is included in Accounts receivable, net in our unaudited consolidated balance sheets.
On March 28, 2016, Dynegy Marketing and Trade, LLC (“DMT”), a subsidiary of Dynegy, entered into (i) an Asset Management Agreement and (ii) a Fuel Supply and Fuel Management Services Agreement with Elwood Energy.  Under these agreements, DMT provides gas supply and management services to meet Elwood Energy’s fuel supply requirements.  For the three and nine months ended September 30, 2016, we recorded $15 million and $27 million in revenues related to these agreements, respectively, which is reflected in Revenues in our unaudited consolidated statements of operations.
On August 3, 2016, Dynegy announced that it has entered into an agreement to sell its 50 percent equity interest in the Elwood Energy facility in Elwood, IL, to J-Power USA Development Co. Ltd. for approximately $173 million (“the Elwood Sale”). Under the agreement, Elwood will not make distributions to its members prior to the closing of the Elwood Sale. As a result, we recorded an impairment charge of $9 million to Impairments in our unaudited consolidated statements of operations for the three and nine months ended September 30, 2016, to write down our investment in Elwood to the sales price. Additionally, approximately $35 million of previously posted collateral will be returned to Dynegy at closing. Upon approval from the FERC, the sale is expected to close in the fourth quarter of 2016.
Note 5—Risk Management Activities, Derivatives, and Financial Instruments
The nature of our business necessarily involves commodity 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 and physically settled contracts consistent with our commodity risk management policy.  Our treasury team manages our interest rate risk. 

12
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2016 and 2015

Our commodity risk management policy 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 consolidated statements of operations.  We have other contractual arrangements such as capacity forward sales arrangements, tolling arrangements, fixed price coal purchases, and retail power sales which 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,” in accordance with ASC 815, Derivatives and Hedging.  As a result, the gains and losses with respect to these arrangements are not reflected in our unaudited consolidated financial statements until the delivery occurs.
 Quantitative Disclosures Related to Financial Instruments and Derivatives
As of September 30, 2016, we had net purchases and sales of derivative contracts outstanding in the following quantities:
Contract Type
 
Quantity
 
Unit of Measure
 
Fair Value (1)
(dollars and quantities in millions)
 
Purchases (Sales)
 
 
 
Asset (Liability)
Commodity contracts:
 
 

 
 
 
 

Electricity derivatives (2)
 
(58
)
 
MWh
 
$
25

Electricity basis derivatives (3)
 
(30
)
 
MWh
 
$
(8
)
Natural gas derivatives (2)
 
362

 
MMBtu
 
$
(64
)
Natural gas basis derivatives
 
64

 
MMBtu
 
$
(22
)
Coal derivatives (4)
 
—

 
Metric Ton
 
$
(7
)
Emissions derivatives
 
5

 
Metric Ton
 
$
(5
)
Interest rate swaps
 
771

 
U.S. Dollar
 
$
(40
)
Common stock warrants (5)
 
16

 
Warrant
 
$
(2
)
__________________________________________
(1)
Includes both asset and liability risk management positions but excludes margin and collateral netting of $73 million.
(2)
Mainly comprised of swaps, options, and physical forwards.
(3)
Comprised of FTRs and swaps.
(4)
Our net position rounds to less than 1 million tons.
(5)
Each warrant is convertible into one share of Dynegy common stock.

13
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2016 and 2015

Derivatives on the Balance Sheet.  The following tables present the fair value and balance sheet classification of derivatives in our unaudited consolidated balance sheets as of September 30, 2016 and December 31, 2015. As of September 30, 2016 and December 31, 2015, there were no gross amounts available to be offset that were not offset in our unaudited consolidated balance sheets.
 
 
 
 
 
September 30, 2016
 
 
 
 
 
 
 
Gross amounts offset in the balance sheet
 
 
Contract Type
 
Location on Balance Sheet
 
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
 
$
351

 
$
(238
)
 
$
—

 
$
113

 
Total derivative assets
 
 
 
$
351

 
$
(238
)
 
$
—

 
$
113

 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Liabilities from risk management activities
 
$
(432
)
 
$
238

 
$
73

 
$
(121
)
 
Interest rate contracts
 
Liabilities from risk management activities
 
(40
)
 
—

 
—

 
(40
)
 
Common stock warrants
 
Other long-term liabilities
 
(2
)
 
—

 
—

 
(2
)
 
Total derivative liabilities
 
 
 
$
(474
)
 
$
238

 
$
73

 
$
(163
)
Total derivatives
 
 
 
$
(123
)
 
$
—

 
$
73

 
$
(50
)

 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
Gross amounts offset in the balance sheet
 
 
Contract Type
 
Location on Balance Sheet
 
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
 
$
403

 
$
(285
)
 
$
—

 
$
118

 
Total derivative assets
 
 
 
$
403

 
$
(285
)
 
$
—

 
$
118

 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Liabilities from risk management activities
 
$
(557
)
 
$
285

 
$
106

 
$
(166
)
 
Interest rate contracts
 
Liabilities from risk management activities
 
(42
)
 
—

 
—

 
(42
)
 
Common stock warrants
 
Other long-term liabilities
 
(7
)
 
—

 
—

 
(7
)
 
Total derivative liabilities
 
 
 
$
(606
)
 
$
285

 
$
106

 
$
(215
)
Total derivatives
 
 
 
$
(203
)
 
$
—

 
$
106

 
$
(97
)
Certain of our derivative instruments have credit limits that require us to post collateral. The amount of collateral required to be posted is a function of the net liability position of the derivative as well as our established credit limit with the respective counterparty. If our credit rating were to worsen, the counterparties could require us to post additional collateral. The amount of additional collateral that would be required to be posted would vary depending on the extent of change in our credit rating as well as the requirements of the individual counterparty. As of September 30, 2016, the aggregate fair value of all commodity derivative instruments containing credit-risk-related contingent features which are in a liability position and not fully collateralized is $26 million for which we have posted $12 million in collateral. Transactions with our clearing brokers are excluded as they are fully collateralized. Our remaining derivative instruments do not have credit-related collateral contingencies as they are included within our first-lien collateral program.

14
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2016 and 2015

The following table summarizes our cash collateral posted as of September 30, 2016 and December 31, 2015, within Prepayments and other current assets in our unaudited consolidated balance sheets and the amount applied against short-term risk management activities:
Location on Balance Sheet
 
September 30, 2016
 
December 31, 2015
(amounts in millions)
 
 
 
 
Gross collateral posted with counterparties
 
$
119

 
$
162

  Less: Collateral netted against risk management liabilities
 
73

 
106

Net collateral within Prepayments and other current assets
 
$
46

 
$
56

Impact of Derivatives on the Unaudited Consolidated Statements of Operations
The following discussion and table present the location and amount of gains and losses on derivative instruments in our unaudited consolidated statements of operations.
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 our unaudited consolidated statements of operations.
Our unaudited consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015 include the impact of derivative financial instruments as presented below:
Derivatives Not Designated as Hedges
 
Location of Gain (Loss)
Recognized in Income on
Derivatives
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
(amounts in millions)
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Revenues
 
$
(27
)
 
$
48

 
$
188

 
$
120

Interest rate contracts
 
Interest expense
 
$
1

 
$
(9
)
 
$
(11
)
 
$
(17
)
Common stock warrants
 
Other income and (expense), net
 
$
4

 
$
45

 
$
5

 
$
43

Note 6—Fair Value Measurements  
We apply the market approach for recurring fair value measurements, employing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  We have consistently used the same valuation techniques for all periods presented.  Please read Note 2—Summary of Significant Accounting Policies—Fair Value Measurements in our Form 10-K for further discussion.

15
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2016 and 2015

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, 2016 and December 31, 2015, and are presented on a gross basis before consideration of amounts netted under master netting agreements and the application of collateral and margin paid:
 
 
Fair Value as of September 30, 2016
 (amounts in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

Assets from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$
—

 
$
248

 
$
38

 
$
286

Natural gas derivatives
 
—

 
51

 
10

 
61

Emissions derivatives
 
—

 
3

 
—

 
3

Coal derivatives
 
—

 
—

 
1

 
1

Total assets from commodity risk management activities
 
$
—

 
$
302

 
$
49

 
$
351

Liabilities:
 
 

 
 

 
 

 
.

Liabilities from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$
—

 
$
(221
)
 
$
(48
)
 
$
(269
)
Natural gas derivatives
 
—

 
(123
)
 
(24
)
 
(147
)
Emissions derivatives
 
—

 
(8
)
 
—

 
(8
)
Coal derivatives
 
—

 
(8
)
 
—

 
(8
)
Total liabilities from commodity risk management activities
 
—

 
(360
)
 
(72
)
 
(432
)
Liabilities from interest rate contracts
 
—

 
(40
)
 
—

 
(40
)
Liabilities from outstanding common stock warrants
 
(2
)
 
—

 
—

 
(2
)
Total liabilities
 
$
(2
)
 
$
(400
)
 
$
(72
)
 
$
(474
)

 
 
 
Fair Value as of December 31, 2015
 (amounts in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

Assets from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$
—

 
$
308

 
$
40

 
$
348

Natural gas derivatives
 
—

 
40

 
2

 
42

Coal derivatives
 
—

 
10

 
3

 
13

Total assets from commodity risk management activities
 
$
—

 
$
358

 
$
45

 
$
403

Liabilities:
 
 

 
 

 
 

 
 

Liabilities from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$
—

 
$
(267
)
 
$
(58
)
 
$
(325
)
Natural gas derivatives
 
—

 
(158
)
 
(34
)
 
(192
)
Diesel derivatives
 
—

 
(4
)
 
—

 
(4
)
Coal derivatives
 
—

 
(35
)
 
(1
)
 
(36
)
Total liabilities from commodity risk management activities
 
—

 
(464
)
 
(93
)
 
(557
)
Liabilities from interest rate contracts
 
—

 
(42
)
 
—

 
(42
)
Liabilities from outstanding common stock warrants
 
(7
)
 
—

 
—

 
(7
)
Total liabilities
 
$
(7
)
 
$
(506
)
 
$
(93
)
 
$
(606
)
Level 3 Valuation Methods. The electricity derivatives classified within Level 3 include financial swaps executed in illiquid trading locations or on long dated contracts, capacity contracts, 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. The forward market price of FTRs is derived using historical congestion patterns within the marketplace and heat rate derivative valuations are derived using

16
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2016 and 2015

a Black-Scholes spread model, which uses forward natural gas and power prices, market implied volatilities, and modeled correlation values. The natural gas derivatives classified within Level 3 include financial swaps, basis swaps, and physical purchases executed in illiquid trading locations or on long dated contracts. The coal derivatives classified within Level 3 include financial swaps executed in illiquid trading locations.
Sensitivity to Changes in Significant Unobservable Inputs for Level 3 Valuations. The significant unobservable inputs used in the fair value measurement of our commodity instruments categorized within Level 3 of the fair value hierarchy include estimates of forward congestion, power price spreads, natural gas and coal pricing, and the difference between our plant locational prices to liquid hub prices. Power price spreads, natural gas and coal pricing, and the difference between our plant locational prices to liquid hub prices 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 of the spread on a buy or sell 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, 2016 are as follows:
Transaction Type
 
Quantity
 
Unit of Measure
 
Net Fair Value
 
Valuation Technique
 
Significant Unobservable Input
 
Significant Unobservable Input Range
(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
 
Electricity derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
Forward contracts—power (1)
 
(10
)
 
Million MWh
 
$
(7
)
 
Basis spread + liquid location
 
Basis spread
 
$5.00 - $7.00
FTRs
 
(26
)
 
Million MWh
 
$
(3
)
 
Historical congestion
 
Forward price
 
$0 - $6.00
Natural gas derivatives (1)
 
78

 
Million MMBtu
 
$
(14
)
 
Illiquid location fixed price
 
Forward price
 
$1.05 - $1.35
Coal derivatives (1)
 
—

 
Thousand Tons
 
$
1

 
Illiquid location fixed price
 
Forward price
 
$6.10 - $7.45
__________________________________________
(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:
 
 
Three Months Ended September 30, 2016
(amounts in millions)
 
Electricity
Derivatives
 
Natural Gas Derivatives
 
Coal Derivatives
 
Total
Balance at June 30, 2016
 
$
(24
)
 
$
(15
)
 
$
1

 
$
(38
)
Total gains (losses) included in earnings
 
9

 
(4
)
 
1

 
6

Settlements (1)
 
5

 
5

 
(1
)
 
9

Balance at September 30, 2016
 
$
(10
)
 
$
(14
)
 
$
1

 
$
(23
)
Unrealized gains (losses) relating to instruments held as of September 30, 2016
 
$
9

 
$
(4
)
 
$
1

 
$
6


 
 
Nine Months Ended September 30, 2016
(amounts in millions)
 
Electricity
Derivatives
 
Natural Gas Derivatives
 
Coal Derivatives
 
Total
Balance at December 31, 2015
 
$
(18
)
 
$
(32
)
 
$
2

 
$
(48
)
Total gains included in earnings
 
4

 
—

 
—

 
4

Settlements (1)
 
4

 
18

 
(1
)
 
21

Balance at September 30, 2016
 
$
(10
)
 
$
(14
)
 
$
1

 
$
(23
)
Unrealized gains relating to instruments held as of September 30, 2016
 
$
4

 
$
—

 
$
—

 
$
4



17
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2016 and 2015

 
 
Three Months Ended September 30, 2015
(amounts in millions)
 
Electricity
Derivatives
 
Natural Gas Derivatives
 
Heat Rate Derivatives
 
Coal Derivatives
 
Total
Balance at June 30, 2015
 
$
(54
)
 
$
(11
)
 
$
(7
)
 
$
4

 
$
(68
)
Total gains (losses) included in earnings
 
2

 
(3
)
 
—

 
—

 
(1
)
Settlements (1)
 
3

 
—

 
5

 
(1
)
 
7

Balance at September 30, 2015
 
$
(49
)
 
$
(14
)
 
$
(2
)
 
$
3

 
$
(62
)
Unrealized gains (losses) relating to instruments held as of September 30, 2015
 
$
2

 
$
(3
)
 
$
—

 
$
—

 
$
(1
)

 
 
Nine Months Ended September 30, 2015
(amounts in millions)
 
Electricity
Derivatives
 
Natural Gas Derivatives
 
Heat Rate Derivatives
 
Coal Derivatives
 
Total
Balance at December 31, 2014
 
$
(4
)
 
$
—

 
$
—

 
$
—

 
$
(4
)
Acquisitions
 
(54
)
 
(14
)
 
(9
)
 
5

 
(72
)
Total gains included in earnings
 
7

 
—

 
—

 
—

 
7

Settlements (1)
 
2

 
—

 
7

 
(2
)
 
7

Balance at September 30, 2015
 
$
(49
)
 
$
(14
)
 
$
(2
)
 
$
3

 
$
(62
)
Unrealized gains relating to instruments held as of September 30, 2015
 
$
7

 
$
—

 
$
—

 
$
—

 
$
7

_________________________________________
(1)
For purposes of these tables, we define settlements as the beginning of period fair value of contracts that settled during the period.
Gains and losses recognized for Level 3 recurring items are included in Revenues in our unaudited consolidated statements of operations for commodity derivatives.  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, 2016 and 2015.
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 such assets and liabilities and their placement within the fair value hierarchy.
During the nine months ended September 30, 2016, as a result of impairment testing, we measured our Baldwin and Stuart facilities at fair value. See Note 9—Property, Plant and Equipment for further discussion. During the three and nine months ended September 30, 2015, we fair valued the EquiPower and Duke Midwest acquisitions. See Note 3—Acquisitions for further discussion. Each of these valuations is classified as Level 3 within the fair value hierarchy.    

18
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2016 and 2015

Fair Value of Financial Instruments.  The following table discloses the fair value of financial instruments recognized in our unaudited consolidated balance sheets.  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, 2016 and December 31, 2015, respectively.
 
 
 
 
September 30, 2016
 
December 31, 2015
(amounts in millions)
 
Fair Value Hierarchy
 
Carrying
Amount
 
Fair
 Value
 
Carrying
Amount
 
Fair
 Value
Dynegy Inc.:
 
 
 
 
 
 
 
 
 
 
6.75% Senior Notes, due 2019 (1)
 
Level 2
 
$
(2,081
)
 
$
(2,168
)
 
$
(2,077
)
 
$
(1,985
)
Tranche B-2 Term Loan, due 2020 (1)
 
Level 2
 
$
(762
)
 
$
(779
)
 
$
(766
)
 
$
(754
)
7.375% Senior Notes, due 2022 (1)
 
Level 2
 
$
(1,731
)
 
$
(1,724
)
 
$
(1,729
)
 
$
(1,531
)
5.875% Senior Notes, due 2023 (1)
 
Level 2
 
$
(492
)
 
$
(450
)
 
$
(491
)
 
$
(404
)
7.625% Senior Notes, due 2024 (1)
 
Level 2
 
$
(1,236
)
 
$
(1,225
)
 
$
(1,235
)
 
$
(1,078
)
7.00% Amortizing Notes, due 2019 (TEUs) (1)
 
Level 2
 
$
(84
)
 
$
(88
)
 
$
—

 
$
—

Forward capacity agreement (1)
 
Level 3
 
$
(203
)
 
$
(203
)
 
$
—

 
$
—

Inventory financing agreements
 
Level 3
 
$
(136
)
 
$
(135
)
 
$
(136
)
 
$
(137
)
Equipment financing agreements (1)
 
Level 3
 
$
(75
)
 
$
(75
)
 
$
(61
)
 
$
(61
)
Interest rate derivatives
 
Level 2
 
$
(40
)
 
$
(40
)
 
$
(42
)
 
$
(42
)
Commodity-based derivative contracts (2)
 
Various
 
$
(81
)
 
$
(81
)
 
$
(154
)
 
$
(154
)
Common stock warrants
 
Level 1
 
$
(2
)
 
$
(2
)
 
$
(7
)
 
$
(7
)
Dynegy Finance IV, Inc.:
 
 
 
 
 
 
 
 
 
 
Tranche C Term Loan, due 2023 (1)
 
Level 2
 
$
(1,995
)
 
$
(2,015
)
 
$
—

 
$
—

Genco:
 
 
 
 
 
 
 
 
 
 
7.00% Senior Notes Series H, due 2018 (1)
 
Level 2
 
$
(284
)
 
$
(119
)
 
$
(276
)
 
$
(204
)
6.30% Senior Notes Series I, due 2020 (1)
 
Level 2
 
$
(218
)
 
$
(99
)
 
$
(213
)
 
$
(148
)
7.95% Senior Notes Series F, due 2032 (1)
 
Level 2
 
$
(226
)
 
$
(107
)
 
$
(225
)
 
$
(162
)
__________________________________________
(1)
Carrying amounts include unamortized discounts and debt issuance costs. Please read Note 13—Debt for further discussion.
(2)
Carrying amounts exclude $73 million and $106 million of cash posted as collateral, as of September 30, 2016 and December 31, 2015, respectively.
Note 7—Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income, net of tax, by component, are as follows:
 
 
Nine Months Ended September 30,
(amounts in millions)
 
2016
 
2015
Beginning of period
 
$
19

 
$
20

Other comprehensive income (loss) before reclassifications:
 
 
 
 
Actuarial gain and plan amendments (net of tax of zero and $2, respectively)
 
—

 
7

Amounts reclassified from accumulated other comprehensive income:
 


 


Amortization of unrecognized prior service credit (net of tax of zero and zero, respectively) (1)
 
(4
)
 
(3
)
Net current period other comprehensive income (loss), net of tax
 
(4
)
 
4

End of period
 
$
15

 
$
24

__________________________________________
(1)
Amounts are associated with our defined benefit pension and other post-employment benefit plans and are included in the computation of net periodic pension cost (gain). Please read Note 16—Pension and Other Post-Employment Benefit Plans for further discussion.

19
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2016 and 2015

Note 8—Inventory
A summary of our inventories is as follows: 
(amounts in millions)
 
September 30, 2016
 
December 31, 2015
Materials and supplies
 
$
183

 
$
178

Coal (1)
 
233

 
350

Fuel oil (1)
 
17

 
17

Emissions allowances (2)
 
14

 
51

Other
 
—

 
1

Total
 
$
447

 
$
597

__________________________________________
(1)
At September 30, 2016, approximately $47 million and $16 million of the coal and fuel oil inventory, respectively, are part of an inventory financing agreement. At December 31, 2015, approximately $44 million and $16 million of the coal and fuel oil inventory, respectively, were part of an inventory financing agreement. Please read Note 13—Debt—Brayton Point Inventory Financing for further discussion.
(2)
At September 30, 2016 and December 31, 2015, a portion of this inventory was held as collateral by one of our counterparties as part of an inventory financing agreement. Please read Note 13—Debt—Emissions Repurchase Agreements for further discussion.
Note 9—Property, Plant and Equipment
A summary of our property, plant and equipment is as follows:
(amounts in millions)

September 30, 2016

December 31, 2015
Power generation

$
7,481


$
8,178

Buildings and improvements

938


956

Office and other equipment

103


101

Property, plant and equipment

8,522


9,235

Accumulated depreciation

(1,270
)

(888
)
Property, plant and equipment, net

$
7,252


$
8,347

Impairments    
Stuart. In the third quarter 2016, we held strategic discussions with our partners, including the operator, concerning changes to our long term views of required maintenance and environmental capital expenditures, as well as discussing the profitability of the facility. As a result of these discussions, combined with consistently poor reliability and a determination that the facility would experience recurring negative cash flows, we concluded the facility will not recover its book value, thereby failing the recoverability step of an impairment analysis. Due to the recurring nature of the forecasted negative cash flows, we fair valued the asset at zero, resulting in an impairment charge of $55 million recorded to Impairments in our unaudited consolidated statements of operations for the three and nine months ended September 30, 2016. The valuation is classified as Level 3 within the fair value hierarchy.
Newton. On September 2, 2016, IPH and Ameren Energy Medina Valley Cogen, LLC filed a motion with the IPCB to terminate the variance from the SO2 annual emission rate limits provided in the Illinois Multi-Pollutant Standards (“MPS”). IPH retired Newton Unit 2 on September 15, 2016. This retirement, along with the use of dispatch management, will allow IPH to continue to comply with the MPS SO2 limits, thereby eliminating the need for the variance. As a result, the FGD systems construction project at our Newton generation facility was terminated. On October 27, 2016, the IPCB granted the motion to terminate the variance. Capitalized costs not yet placed into service related to the project of $148 million were written-off and recorded to Impairments in our unaudited consolidated statements of operations for the three and nine months ended September 30, 2016.

20
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2016 and 2015

Baldwin. On May 3, 2016, Dynegy announced the shutdown of Units 1 and 3 at its Baldwin power generation facility in Baldwin, Illinois over the next year. This decision was made after the units failed to recover their basic operating costs in the most recent MISO auction. On October 17, 2016, we shut down Baldwin Unit 3. Due to bilateral sales of incremental capacity for Planning Year 2017-2018, we will continue to operate Baldwin Unit 1 through the next Planning Year. As a result of these shutdowns, we performed an impairment analysis on all our MISO plants. We performed step one of the impairment analysis using undiscounted cash flows for the estimated useful lives of the facilities and determined the book value of the Baldwin facility would not be recovered. We performed step two of the impairment analysis using a DCF model, utilizing a 13 percent discount rate, and assuming normal operations for the estimated useful lives of the