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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 June 30, 2017
 
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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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)
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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, 131,372,747 shares outstanding as of July 13, 2017.
 

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TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 4.
Item 5.
Item 6.
 
 
 

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DEFINITIONS
As used in this Form 10-Q, the abbreviations contained herein have the meanings set forth below. 
ATSI
 
American Transmission Service, Inc.
CAA
 
Clean Air Act
CAISO
 
The California Independent System Operator
CDD
 
Cooling Degree Days
COMED
 
Commonwealth Edison
CPUC
 
California Public Utility Commission
CT
 
Combustion Turbine
EBITDA
 
Earnings Before Interest, Taxes, Depreciation and Amortization
EMAAC
 
Eastern Mid-Atlantic Area Council
EPA
 
Environmental Protection Agency
ERCOT
 
Electric Reliability Council of Texas
FCA
 
Forward Capacity Auction
FERC
 
Federal Energy Regulatory Commission
FTR
 
Financial Transmission Rights
HDD
 
Heating Degree Days
IMA
 
In-market Asset Availability
IPH
 
IPH, LLC
ISO
 
Independent System Operator
ISO-NE
 
Independent System Operator New England
kW
 
Kilowatt
LIBOR
 
London Interbank Offered Rate
MAAC
 
Mid-Atlantic Area Council
MISO
 
Midcontinent Independent System Operator, Inc.
MMBtu
 
One Million British Thermal Units
Moody’s
 
Moody’s Investors Service Inc.
MW
 
Megawatts
MWh
 
Megawatt Hour
NYISO
 
New York Independent System Operator
PJM
 
PJM Interconnection, LLC
PPL
 
PPL Electric Utilities, Corp.
PRIDE
 
Producing Results through Innovation by Dynegy Employees
RGGI
 
Regional Greenhouse Gas Initiative
RTO
 
Regional Transmission Organization
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)
 
 
 
June 30, 2017
 
December 31, 2016
ASSETS
 
 

 
 

Current Assets
 
 

 
 

Cash and cash equivalents
 
$
447

 
$
1,776

Restricted cash
 
—

 
62

Accounts receivable, net of allowance for doubtful accounts of $1 and $1, respectively
 
441

 
386

Inventory
 
477

 
445

Assets from risk management activities
 
83

 
130

Intangible assets
 
23

 
38

Prepayments and other current assets
 
119

 
150

Total Current Assets
 
1,590

 
2,987

Property, plant and equipment, net
 
9,485

 
7,121

Investment in unconsolidated affiliate
 
150

 
—

Restricted cash
 
—

 
2,000

Assets from risk management activities
 
46

 
16

Goodwill
 
799

 
799

Intangible assets
 
58

 
23

Assets held-for-sale
 
463

 
—

Other long-term assets
 
168

 
107

Total Assets
 
$
12,759

 
$
13,053

 
See the notes to consolidated financial statements.

1
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DYNEGY INC.
CONSOLIDATED BALANCE SHEETS
(unaudited) (in millions, except share data)

 
 
 
June 30, 2017
 
December 31, 2016
LIABILITIES AND EQUITY
 
 

 
 

Current Liabilities
 
 

 
 

Accounts payable
 
$
370

 
$
332

Accrued interest
 
116

 
81

Intangible liabilities
 
25

 
21

Accrued liabilities and other current liabilities
 
154

 
133

Liabilities from risk management activities
 
73

 
97

Asset retirement obligations
 
59

 
51

Debt, current portion, net
 
106

 
201

Total Current Liabilities
 
903

 
916

Liabilities subject to compromise (Note 18)
 
—

 
832

Debt, long-term portion, net
 
9,211

 
8,778

Liabilities from risk management activities
 
48

 
43

Asset retirement obligations
 
246

 
236

Deferred income taxes
 
30

 
5

Intangible liabilities
 
41

 
34

Other long-term liabilities
 
161

 
170

Total Liabilities
 
10,640

 
11,014

Commitments and Contingencies (Note 13)
 


 


 
 
 
 
 
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; 142,691,801 shares issued and 131,365,679 shares outstanding at June 30, 2017; 128,626,740 shares issued and 117,300,618 outstanding at December 31, 2016
 
1

 
1

Additional paid-in capital
 
3,320

 
3,547

Accumulated other comprehensive income, net of tax
 
28

 
21

Accumulated deficit
 
(1,626
)
 
(1,927
)
Total Dynegy Stockholders’ Equity
 
2,123

 
2,042

Noncontrolling interest
 
(4
)
 
(3
)
Total Equity
 
2,119

 
2,039

Total Liabilities and Equity
 
$
12,759

 
$
13,053


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 June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues
 
$
1,164

 
$
904

 
$
2,411

 
$
2,027

Cost of sales, excluding depreciation expense
 
(681
)
 
(493
)
 
(1,438
)
 
(1,038
)
Gross margin
 
483

 
411

 
973

 
989

Operating and maintenance expense
 
(282
)
 
(256
)
 
(514
)
 
(477
)
Depreciation expense
 
(209
)
 
(160
)
 
(409
)
 
(331
)
Impairments
 
(99
)
 
(645
)
 
(119
)
 
(645
)
Loss on sale of assets, net
 
(29
)
 
—

 
(29
)
 
—

General and administrative expense
 
(42
)
 
(39
)
 
(82
)
 
(76
)
Acquisition and integration costs
 
(7
)
 
3

 
(52
)
 
(1
)
Other
 
3

 
(16
)
 
1

 
(16
)
Operating loss
 
(182
)
 
(702
)
 
(231
)
 
(557
)
Bankruptcy reorganization items (Note 18)
 
(1
)
 
—

 
482

 
—

Earnings from unconsolidated investments
 
1

 
1

 
—

 
3

Interest expense
 
(159
)
 
(141
)
 
(326
)
 
(283
)
Other income and expense, net
 
29

 
30

 
46

 
31

Loss before income taxes
 
(312
)
 
(812
)
 
(29
)
 
(806
)
Income tax benefit (expense) (Note 14)
 
16

 
9

 
329

 
(7
)
Net income (loss)
 
(296
)
 
(803
)
 
300

 
(813
)
Less: Net loss attributable to noncontrolling interest
 
—

 
(2
)
 
(1
)
 
(2
)
Net income (loss) attributable to Dynegy Inc.
 
(296
)
 
(801
)
 
301

 
(811
)
Less: Dividends on preferred stock
 
6

 
6

 
11

 
11

Net income (loss) attributable to Dynegy Inc. common stockholders
 
$
(302
)
 
$
(807
)
 
$
290

 
$
(822
)
 
 
 
 
 
 
 
 
 
Earnings (Loss) Per Share (Note 16):
 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to Dynegy Inc. common stockholders
 
$
(1.96
)
 
$
(6.73
)
 
$
1.91

 
$
(6.97
)
Diluted earnings (loss) per share attributable to Dynegy Inc. common stockholders
 
$
(1.96
)
 
$
(6.73
)
 
$
1.76

 
$
(6.97
)
 
 
 
 
 
 
 
 
 
Basic shares outstanding
 
154

 
120

 
152

 
118

Diluted shares outstanding
 
154

 
120

 
171

 
118

 
See the notes to consolidated financial statements.

3
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DYNEGY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited) (in millions)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Net income (loss)
 
$
(296
)
 
$
(803
)
 
$
300

 
$
(813
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
Actuarial gain and plan amendment (net of tax of $4, zero, $4, and zero for each respective period)
 
(4
)
 
—

 
11

 
—

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
)
 
(2
)
Other comprehensive income (loss), net of tax
 
(6
)
 
(1
)
 
7

 
(2
)
Comprehensive income (loss)
 
(302
)
 
(804
)
 
307

 
(815
)
Less: Comprehensive loss attributable to noncontrolling interest
 
—

 
(2
)
 
(1
)
 
(2
)
Total comprehensive income (loss) attributable to Dynegy Inc.
 
$
(302
)
 
$
(802
)
 
$
308

 
$
(813
)

See the notes to consolidated financial statements.

4
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DYNEGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in millions)
 
 
Six Months Ended June 30,
 
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net income (loss)
 
$
300

 
$
(813
)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
 
 
 
 
Depreciation expense
 
409

 
331

Non-cash interest expense
 
32

 
23

Amortization of intangibles
 
15

 
13

Risk management activities
 
(1
)
 
(89
)
Loss on sale of assets, net
 
29

 
—

Earnings from unconsolidated investments
 
—

 
(3
)
Deferred income taxes
 
(329
)
 
7

Impairments
 
119

 
645

Change in value of common stock warrants
 
(15
)
 
(2
)
Bankruptcy reorganization items
 
(482
)
 
—

Other
 
29

 
18

Changes in working capital:
 
 
 
 
Accounts receivable, net
 
(13
)
 
15

Inventory
 
76

 
77

Prepayments and other current assets
 
44

 
156

Accounts payable and accrued liabilities
 
17

 
8

Changes in non-current assets
 
(1
)
 
(12
)
Changes in non-current liabilities
 
1

 
1

Net cash provided by operating activities
 
230

 
375

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Capital expenditures
 
(86
)
 
(286
)
Acquisitions, net of cash acquired
 
(3,263
)
 
—

Distributions from unconsolidated investments
 
2

 
8

Other investing
 
1

 
7

Net cash used in investing activities
 
(3,346
)
 
(271
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Proceeds from long-term borrowings, net of debt issuance costs
 
425

 
2,278

Repayments of borrowings
 
(331
)
 
(20
)
Proceeds from issuance of equity, net of issuance costs
 
150

 
362

Preferred stock dividends paid
 
(11
)
 
(11
)
Interest rate swap settlement payments
 
(9
)
 
(9
)
Acquisition of noncontrolling interest
 
(375
)
 
—

Payments related to bankruptcy settlement

 
(123
)
 
—

Other financing
 
(1
)
 
(2
)
Net cash provided by (used in) financing activities
 
(275
)
 
2,598

Net increase (decrease) in cash, cash equivalents and restricted cash
 
(3,391
)
 
2,702

Cash, cash equivalents and restricted cash, beginning of period
 
3,838

 
544

Cash, cash equivalents and restricted cash, end of period
 
$
447

 
$
3,246

 

See the notes to consolidated financial statements. 

5
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended June 30, 2017 and 2016


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, 2016, filed with the SEC on February 24, 2017, 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.
We sell electric energy, capacity and ancillary services primarily on a wholesale basis from our power generation facilities. We also serve residential, municipal, commercial and industrial customers primarily in MISO and PJM through our Homefield Energy and Dynegy Energy Services retail businesses. We report the results of our power generation business as six segments in our unaudited consolidated financial statements: (i) PJM, (ii) ISO-NE/NYISO (“NY/NE”), (iii) ERCOT, (iv) MISO, (v) IPH, and (vi) CAISO. 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 19—Segment Information for further discussion.
On February 2, 2017 (the “Emergence Date”), Illinois Power Generating Company (“Genco”) emerged from bankruptcy. Please read Note 18—Genco Chapter 11 Bankruptcy and Emergence for further discussion.
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. Except for the adoption of new policies as described below, there have been no significant changes to our accounting policies during the six months ended June 30, 2017.
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
Statement of Cash Flows. In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. We adopted this ASU on January 1, 2017 and applied the amendments on a retrospective basis. The adoption of this ASU affected the classification of prepayments for future planned outage work performed under long-term service agreements. The majority of the cash prepayments required under these agreements will now be reflected as cash outflows from investing activities and the remainder will be classified as cash outflows from operating activities, based on whether they are anticipated to be expensed or capitalized. As a result of the retrospective application of this ASU, we reclassified approximately $62 million of cash prepayments from operating activities to investing activities in our unaudited consolidated statement of cash flows for the six months ended June 30, 2016.
In November 2016, the FASB issued ASU 2016-18-Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally

6
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended June 30, 2017 and 2016

described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted this ASU as of January 1, 2017 and applied the amendments on a retrospective basis. As a result of the retrospective application of this ASU, changes in restricted cash of $4 million and $2.069 billion previously reflected as cash flows from operating activities and investing activities, respectively, are now reflected in Net increase (decrease) in cash, cash equivalents, and restricted cash in our unaudited consolidated statement of cash flows for the six months ended June 30, 2016. Additionally, restricted cash of $39 million and $2.104 billion are now reflected in the beginning of period and end of period cash, cash equivalents and restricted cash line items, respectively, in our unaudited consolidated statement of cash flows for the six months ended June 30, 2016. Please read Note 7—Cash Flow Information for further discussion.
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. We adopted this ASU on January 1, 2017 with no material impact on our unaudited consolidated financial statements.
Goodwill. In January 2017, the FASB issued ASU 2017-04-Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. To simplify the subsequent measure of goodwill, the amendments in this ASU eliminate step two from the goodwill impairment test. An entity will no longer be required to calculate the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination to determine the impairment of goodwill. The amendments in this ASU will now require goodwill impairment to be measured by the amount by which the carrying value of the reporting unit exceeds its fair value. The guidance in this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Upon adoption, an entity shall apply the guidance in this ASU prospectively with early adoption permitted for annual goodwill tests performed after January 1, 2017. We adopted this ASU on January 1, 2017 with no material impact on our unaudited consolidated financial statements.
Accounting Standards Not Yet Adopted
Financial Instruments with Down Round Features. In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): Accounting for Certain Financial Instruments with Down Round Features. The amendments of this ASU update the classification analysis of certain equity-linked financial instruments, or embedded features, with down round features, as well as clarify existing disclosure requirements for equity-classified instruments. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The guidance in this ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020, with early adoption permitted. We are currently evaluating this ASU and any potential impacts the adoption will have on our unaudited consolidated financial statements.
Business Combinations. In January 2017, the FASB issued ASU 2017-01-Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this ASU clarify the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. 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 will have on our unaudited consolidated financial statements.
Pensions. In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments of this ASU require an entity to report the service cost component of net benefit costs in the same line item as other compensation costs arising from services rendered by the related employees during the applicable service period. The other components of net benefit cost are required to be presented separately from the service cost component and below the subtotal of operating income. Additionally, only the service cost component of net benefit costs is eligible for capitalization. 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. The adoption of this standard must be applied on a retrospective basis for the amendments concerning income statement presentation and on a prospective basis for the amendments regarding the capitalization of the service cost component. We are currently evaluating this ASU and any potential impacts the adoption will have on our unaudited consolidated financial statements.

7
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended June 30, 2017 and 2016

Leases. In February 2016, the FASB issued ASU 2016-02-Leases (Topic 842). The provisions in this ASU will require lessees to recognize lease assets and lease liabilities, for all leases, including operating leases, on the 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 based on the present value of the minimum rental payments. Entities may make an accounting policy election to not recognize lease assets or lease liabilities for leases with a term of 12 months or less. The guidance in this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating this ASU and any potential impacts the adoption will have on our unaudited consolidated financial statements.
Revenue from Contracts with Customers. In May 2014, the FASB issued ASU 2014-09-Revenue from Contracts with Customers (Topic 606). This ASU supersedes current revenue recognition requirements and industry specific guidance and develops a common revenue recognition standard whereby an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. Additional disclosures will be required to describe the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers. The guidance in this ASU and its amendments are 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 have established an implementation team to assess the impact the new accounting standard will have on our financial statements upon adoption and have not currently identified any material changes to the timing of our revenue recognition. We continue to assess the impact of the standard by reviewing our revenue contracts to determine if changes in our recognition policies or controls are necessary. We believe changes to our disclosures will primarily include a regional presentation of our revenues disaggregated by revenue type - energy, capacity, and ancillary services.
Note 3—Acquisitions and Divestitures
Acquisition
ENGIE Acquisition. On February 7, 2017 (the “ENGIE Acquisition Closing Date”), pursuant to the terms of the stock purchase agreement, as amended and restated on June 27, 2016, (the “ENGIE Acquisition Stock Purchase Agreement”), Dynegy acquired approximately 9,017 MW of generation from GDF SUEZ Energy North America, Inc. (“GSENA”) and International Power, S.A. (the “Seller”), 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 “ENGIE Acquisition”).
Business Combination Accounting. The ENGIE Acquisition has been accounted for in accordance with ASC 805, Business Combinations, with identifiable assets acquired and liabilities assumed recorded at their estimated fair values on the acquisition date, February 7, 2017. A summary of the various techniques used to fair value the identifiable assets and liabilities, as well as their classification within the fair value hierarchy are listed below.
•
Working capital was valued using available market information (Level 2).
•
Acquired property, plant and equipment (“PP&E”), excluding those assets classified as held-for-sale, was valued using a discounted cash flow (“DCF”) analysis based upon a debt-free, free cash flow model (Level 3). The DCF model was created for each power generation facility based on its remaining useful life, and:
◦
for the years 2017 and 2018, included gross margin forecasts using quoted forward commodity market prices;
◦
for the years 2019 through 2026, 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 2026, we assumed a 2.5 percent growth rate.
We also used management’s forecasts of operations and maintenance expense, general and administrative expense, as well as capital expenditures for the years 2017 through 2021, and for years thereafter assumed a 2.5 percent growth rate. These cash flows were discounted using discount rates of approximately 9 percent to 13 percent for gas-fired, and approximately 13 percent to 14 percent for coal-fired, generation facilities, based upon the plant’s age, efficiency, region, and years until retirement.
•
Acquired PP&E classified as held-for-sale was valued based upon the sale price of the assets (Level 2).

8
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended June 30, 2017 and 2016

•
Acquired derivatives were valued using the methods described in Note 6—Fair Value Measurements (Level 2 or Level 3).
•
Contracts with terms that were not at current market prices were also valued using a DCF analysis (Level 3).  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.
•
Asset retirement obligations (“AROs”) were recorded in accordance with ASC 410, Asset Retirement and Environmental Obligations (Level 3).
The accounting for the ENGIE Acquisition is not complete because certain information and analysis that may impact our initial valuation is still being obtained or reviewed. Dynegy expects to finalize these amounts during the first quarter of 2018. The significant assets and liabilities for which provisional amounts are recognized are PP&E, deferred income taxes and taxes other than deferred income taxes. Additionally, some taxes have not yet been finalized with the associated taxing jurisdictions, resulting in a potential change to their fair value at acquisition. These changes may also impact the fair value of the acquired PP&E or deferred tax liability. As such, the provisional amounts recognized are subject to revision until our valuation is completed, not to exceed one year from the ENGIE Acquisition Closing Date, and any material adjustments identified that existed as of the acquisition date will be recognized in the period in which they are identified.
The following table summarizes the consideration paid and the provisional fair value amounts recognized for the assets acquired and liabilities assumed related to the ENGIE Acquisition, as of the acquisition date, February 7, 2017:
 (amounts in millions)
 
 
Base purchase price
 
$
3,300

Working capital adjustments and other
 
(31
)
Fair value of total consideration transferred
 
$
3,269

 
 
 
Cash
 
$
20

Accounts receivable
 
22

Inventory
 
101

Prepayments and other current assets
 
3

Assets from risk management activities (including current portion of $21 million)
 
25

Property, plant and equipment
 
2,756

Investment in unconsolidated affiliate
 
152

Intangible assets (including current portion of $7 million)
 
50

Assets held-for-sale
 
445

Other long-term assets
 
131

Total assets acquired
 
3,705

 
 
 
Accounts payable
 
28

Liabilities from risk management activities (including current portion of $13 million)
 
16

Asset retirement obligations
 
19

Intangible liabilities (including current portion of $16 million)
 
30

Deferred income taxes, net
 
342

Other long-term liabilities
 
1

Total liabilities assumed
 
436

Net assets acquired
 
$
3,269



9
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended June 30, 2017 and 2016

The following table summarizes certain information related to the ENGIE Acquisition, which is included in our unaudited consolidated statements of operations:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(amounts in millions)
 
2017
 
2016
 
2017
 
2016
Acquisition costs
 
$
4

 
$
—

 
$
35

 
$
2

Revenues
 
$
246

 
N/A

 
$
324

 
N/A

Operating income
 
$
20

 
N/A

 
$
4

 
N/A

Pro Forma Results. The unaudited pro forma financial results for the six months ended June 30, 2017 and 2016 assume the ENGIE Acquisition occurred on January 1, 2016. The unaudited pro forma financial results may not be indicative of the results that would have occurred had the acquisition been completed as of January 1, 2016, nor are they indicative of future results of operations. The unaudited pro forma financial results for the six months ended June 30, 2017 and 2016 include adjustments of $35 million and $2 million, respectively, for non-recurring acquisition costs attributable to the ENGIE Acquisition.
 
 
Six Months Ended June 30,
(amounts in millions)
 
2017
 
2016
Revenue
 
$
2,468

 
$
2,315

Net income (loss)
 
$
302

 
$
(948
)
Net income (loss) attributable to Dynegy Inc.
 
$
303

 
$
(946
)
AER Acquisition. On April 12, 2017, we received approximately $25 million of cash related to the 2013 AER Acquisition. As a result, we have recorded $25 million in Other income and expense, net in our unaudited consolidated statement of operations.
Divestitures
On July 11, 2017, Dynegy completed the sale of its equity ownership interests in two peaking facilities in PJM to LS Power (the “Troy and Armstrong Sale”) for approximately $480 million in cash, plus adjustments for capital expenditures and working capital. The facilities sold were recently acquired in the ENGIE Acquisition and total 1,269 MW. The proceeds are to be allocated to debt reduction.
The Troy and Armstrong facilities are classified as long-term assets held-for-sale as of June 30, 2017 and are presented below, in millions:
Inventory
 
$
11

Property, plant & equipment
 
452

Assets held-for-sale
 
$
463

Note 4—Unconsolidated Investments
Equity Method Investments
NELP. In connection with the ENGIE Acquisition, we acquired a 50 percent interest in Northeast Energy, LP (“NELP”), a joint venture with NextEra Energy, Inc., which indirectly owns the Bellingham NEA facility and the Sayreville facility. At June 30, 2017, our equity method investment in NELP included in our unaudited consolidated balance sheets was $150 million. Upon the acquisition, we recognized basis differences in the net assets of approximately $14 million related to PP&E. 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.
For the three and six months ended June 30, 2017, we recorded $1 million and less than $1 million in equity earnings, respectively, related to our investment in NELP which is reflected in Earnings from unconsolidated investments in our unaudited consolidated statements of operations. For the six months ended June 30, 2017, we received a distribution of $2 million, all of which was considered to be a return of investment using the cumulative earnings approach and reflected as Distributions from unconsolidated investments in our unaudited consolidated statements of cash flows.

10
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended June 30, 2017 and 2016

Elwood. On November 21, 2016, Dynegy sold its 50 percent equity interest in Elwood Energy, LLC, a limited liability company (“Elwood Energy”) and Elwood Expansion LLC, a limited liability company (and together with Elwood Energy “Elwood”), to J-Power USA Development Co. Ltd. for approximately $173 million (the “Elwood Sale”).
For the three and six months ended June 30, 2016, we recorded $1 million and $3 million, respectively, in equity earnings related to our investment in Elwood which is reflected in Earnings from unconsolidated investments in our unaudited consolidated statements of operations. For the six months ended June 30, 2016, we received distributions of $8 million, all of which was considered to be a return of investment using the accumulated earnings approach and reflected as Distributions from unconsolidated investments in our unaudited consolidated statements of cash flows.
Note 5—Risk Management Activities, Derivatives and Financial Instruments
The nature of our business 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. 
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 the unaudited consolidated statements of operations until the delivery occurs.
 Quantitative Disclosures Related to Financial Instruments and Derivatives
As of June 30, 2017, 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)
 
(65
)
 
MWh
 
$
40

Electricity basis derivatives (3)
 
(46
)
 
MWh
 
$
(9
)
Natural gas derivatives (2)
 
410

 
MMBtu
 
$
(17
)
Natural gas basis derivatives
 
135

 
MMBtu
 
$
(15
)
Physical heat rate derivatives
 
142/(15)

 
MMBtu/MWh
 
$
(11
)
Emissions derivatives
 
14

 
Metric Ton
 
$
(8
)
Interest rate swaps
 
1,965

 
U.S. Dollar
 
$
(18
)
Common stock warrants (4)
 
24

 
Warrant
 
$
(3
)
__________________________________________
(1)
Includes both asset and liability risk management positions but excludes margin and collateral netting of $46 million.
(2)
Mainly comprised of swaps and physical forwards.
(3)
Comprised of FTRs and swaps.
(4)
Each warrant is convertible into one share of Dynegy common stock.

11
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended June 30, 2017 and 2016

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 June 30, 2017 and December 31, 2016. As of June 30, 2017 and December 31, 2016, there were no gross amounts available to be offset that were not offset in our unaudited consolidated balance sheets.
 
 
 
 
 
June 30, 2017
 
 
 
 
 
 
 
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
 
$
300

 
$
(182
)
 
$
—

 
$
118

 
Interest rate contracts
 
Assets from risk management activities
 
11

 
—

 
—

 
11

 
Total derivative assets
 
 
 
$
311

 
$
(182
)
 
$
—

 
$
129

 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Liabilities from risk management activities
 
$
(320
)
 
$
182

 
$
46

 
$
(92
)
 
Interest rate contracts
 
Liabilities from risk management activities
 
(29
)
 
—

 
—

 
(29
)
 
Common stock warrants
 
Accrued liabilities and other current liabilities and other long-term liabilities
 
(3
)
 
—

 
—

 
(3
)
 
Total derivative liabilities
 
 
 
$
(352
)
 
$
182

 
$
46

 
$
(124
)
Total derivatives
 
 
 
$
(41
)
 
$
—

 
$
46

 
$
5


 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
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
 
$
311

 
$
(165
)
 
$
—

 
$
146

 
Total derivative assets
 
 
 
$
311

 
$
(165
)
 
$
—

 
$
146

 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Liabilities from risk management activities
 
$
(329
)
 
$
165

 
$
54

 
$
(110
)
 
Interest rate contracts
 
Liabilities from risk management activities
 
(30
)
 
—

 
—

 
(30
)
 
Common stock warrants
 
Accrued liabilities and other current liabilities
 
(1
)
 
—

 
—

 
(1
)
 
Total derivative liabilities
 
 
 
$
(360
)
 
$
165

 
$
54

 
$
(141
)
Total derivatives
 
 
 
$
(49
)
 
$
—

 
$
54

 
$
5

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 June 30, 2017, the aggregate fair value of all commodity derivative instruments containing credit-risk-related contingent features, in a liability position and not fully collateralized, is $15 million for which we have posted no collateral. Transactions with our clearing brokers are excluded as they are fully collateralized. Our

12
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended June 30, 2017 and 2016

remaining derivative instruments do not have credit-related collateral contingencies as they are included within our first-lien collateral program.
The following table summarizes our cash collateral posted as of June 30, 2017 and December 31, 2016, 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
 
June 30, 2017
 
December 31, 2016
(amounts in millions)
 
 
 
 
Gross collateral posted with counterparties
 
$
80

 
$
116

  Less: Collateral netted against risk management liabilities
 
46

 
54

Net collateral within Prepayments and other current assets
 
$
34

 
$
62

Impact of Derivatives on the Unaudited Consolidated Statements of Operations
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 six months ended June 30, 2017 and 2016 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 June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
(amounts in millions)
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Revenues
 
$
29

 
$
23

 
$
213

 
$
215

Interest rate contracts
 
Interest expense
 
$
1

 
$
(4
)
 
$
3

 
$
(12
)
Common stock warrants
 
Other income and (expense), net
 
$
3

 
$
—

 
$
15

 
$
1

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.

13
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended June 30, 2017 and 2016

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 June 30, 2017 and December 31, 2016, 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 June 30, 2017
 (amounts in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

Assets from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$
—

 
$
195

 
$
15

 
$
210

Natural gas derivatives
 
—

 
66

 
9

 
75

Physical heat rate derivatives
 
—

 
13

 
—

 
13

Emissions derivatives
 
—

 
2

 
—

 
2

Total assets from commodity risk management activities
 
—

 
276

 
24

 
300

Assets from interest rate contracts
 
—

 
11

 
—

 
11

Total assets
 
$
—

 
$
287

 
$
24

 
$
311

Liabilities:
 
 

 
 

 
 

 
.

Liabilities from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$
—

 
$
(163
)
 
$
(16
)
 
$
(179
)
Natural gas derivatives
 
—

 
(99
)
 
(8
)
 
(107
)
Physical heat rate derivatives
 
—

 
(22
)
 
(2
)
 
(24
)
Emissions derivatives
 
—

 
(10
)
 
—

 
(10
)
Total liabilities from commodity risk management activities
 
—

 
(294
)
 
(26
)
 
(320
)
Liabilities from interest rate contracts
 
—

 
(29
)
 
—

 
(29
)
Liabilities from outstanding common stock warrants
 
(3
)
 
—

 
—

 
(3
)
Total liabilities
 
$
(3
)
 
$
(323
)
 
$
(26
)
 
$
(352
)

 
 
Fair Value as of December 31, 2016
 (amounts in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

Assets from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$
—

 
$
118

 
$
20

 
$
138

Natural gas derivatives
 
—

 
169

 
4

 
173

Total assets from commodity risk management activities
 
$
—

 
$
287

 
$
24

 
$
311

Liabilities:
 
 

 
 

 
 

 
 

Liabilities from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$
—

 
$
(245
)
 
$
(12
)
 
$
(257
)
Natural gas derivatives
 
—

 
(52
)
 
(10
)
 
(62
)
Emissions derivatives
 
—

 
(10
)
 
—

 
(10
)
Total liabilities from commodity risk management activities
 
—

 
(307
)
 
(22
)
 
(329
)
Liabilities from interest rate contracts
 
—

 
(30
)
 
—

 
(30
)
Liabilities from outstanding common stock warrants
 
(1
)
 
—

 
—

 
(1
)
Total liabilities
 
$
(1
)
 
$
(337
)
 
$
(22
)
 
$
(360
)
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

14
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended June 30, 2017 and 2016

a discounted cash flow model, which uses modeled forward natural gas and power prices. 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.
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, and natural gas pricing, and the difference between our plant locational prices to liquid hub prices. Power price spreads, and natural gas 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 June 30, 2017 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)
 
(12
)
 
Million MWh
 
$
3

 
Basis spread + liquid location
 
Basis spread
 
$4.25 - $6.25
FTRs
 
(40
)
 
Million MWh
 
$
(4
)
 
Historical congestion
 
Forward price
 
$0 - $6.00
Physical heat rate derivatives
 
23/(3)

 
Million MMBtu/Million MWh
 
$
(2
)
 
Discounted Cash Flow
 
Forward price
 
$2.40 - $3.30 / $25 - $31
Natural gas derivatives (1)
 
103

 
Million MMBtu
 
$
1

 
Illiquid location fixed price
 
Forward price
 
$2.50 - $3.10
__________________________________________
(1)
Represents forward financial and physical transactions at illiquid pricing locations and long-dated contracts.
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 June 30, 2017
(amounts in millions)
 
Electricity
Derivatives
 
Natural Gas Derivatives
 
Heat Rate Derivatives
 
Total
Balance at March 31, 2017
 
$
(17
)
 
$
(2
)
 
$
—

 
$
(19
)
Total gains (losses) included in earnings
 
7

 
3

 
(2
)
 
8

Settlements (1)
 
9

 
—

 
—

 
9

Balance at June 30, 2017
 
$
(1
)
 
$
1

 
$
(2
)
 
$
(2
)
Unrealized gains (losses) relating to instruments held as of June 30, 2017
 
$
7

 
$
3

 
$
(2
)
 
$
8


 
 
Six Months Ended June 30, 2017
(amounts in millions)
 
Electricity
Derivatives
 
Natural Gas Derivatives
 
Heat Rate Derivatives
 
Total
Balance at December 31, 2016
 
$
8

 
$
(6
)
 
$
—

 
$
2

Acquired derivatives
 
1

 
—

 
—

 
1

Total gains (losses) included in earnings
 
(22
)
 
13

 
(2
)
 
(11
)
Settlements (1)
 
12

 
(6
)
 
—

 
6

Balance at June 30, 2017
 
$
(1
)
 
$
1

 
$
(2
)
 
$
(2
)
Unrealized gains (losses) relating to instruments held as of June 30, 2017
 
$
(22
)
 
$
13

 
$
(2
)
 
$
(11
)

15
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended June 30, 2017 and 2016


 
 
Three Months Ended June 30, 2016
(amounts in millions)
 
Electricity
Derivatives
 
Natural Gas Derivatives
 
Coal Derivatives
 
Total
Balance at March 31, 2016
 
$
(17
)
 
$
(18
)
 
$
1

 
$
(34
)
Total gains (losses) included in earnings
 
(12
)
 
—

 
—

 
(12
)
Settlements (1)
 
5

 
3

 
—

 
8

Balance at June 30, 2016
 
$
(24
)
 
$
(15
)
 
$
1

 
$
(38
)
Unrealized gains (losses) relating to instruments held as of June 30, 2016
 
$
(12
)
 
$
—

 
$
—

 
$
(12
)

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

 
$
(48
)
Total gains (losses) included in earnings
 
(5
)
 
3

 
—

 
(2
)
Settlements (1)
 
(1
)
 
14

 
(1
)
 
12

Balance at June 30, 2016
 
$
(24
)
 
$
(15
)
 
$
1

 
$
(38
)
Unrealized gains (losses) relating to instruments held as of June 30, 2016
 
$
(5
)
 
$
3

 
$
—

 
$
(2
)
_________________________________________
(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 material transfers between Level 1, Level 2 and Level 3 for the three and six months ended June 30, 2017 and 2016.
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 three and six months ended June 30, 2017 and 2016, we recorded impairment charges related to certain of our facilities using a discounted cash flow model classified as Level 3 within the fair value hierarchy. See Note 9—Property, Plant and Equipment for further discussion. During the six months ended June 30, 2017, we fair valued the ENGIE Acquisition and our acquisition of additional joint ownership interest in the Zimmer facility. See Note 3—Acquisitions and Divestitures for further discussion of the fair value hierarchy classifications of valuations of acquired identifiable assets and liabilities and Note 10—Joint Ownership of Generating Facilities for further discussion of the acquisition of additional joint ownership interest in the Zimmer facility.

16
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended June 30, 2017 and 2016

Fair Value of Financial Instruments.  The following table discloses the fair value of financial instruments which are not recognized at fair value 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 June 30, 2017 and December 31, 2016, respectively.
 
 
 
 
June 30, 2017
 
December 31, 2016
(amounts in millions)
 
Fair Value Hierarchy
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Dynegy Inc.:
 
 
 
 
 
 
 
 
 
 
Tranche C-1 Term Loan, due 2024 (1)
 
Level 2
 
$
(2,129
)
 
$
(2,213
)
 
$
(1,994
)
 
$
(2,025
)
Tranche B-2 Term Loan, due 2020 (1)
 
Level 2
 
$
—

 
$
—

 
$
(219
)
 
$
(225
)
Revolving Facility (1)
 
Level 2
 
$
(300
)
 
$
(300
)
 
$
—

 
$
—

6.75% Senior Notes, due 2019 (1)
 
Level 2
 
$
(2,085
)
 
$
(2,163
)
 
$
(2,083
)
 
$
(2,137
)
7.375% Senior Notes, due 2022 (1)
 
Level 2
 
$
(1,733
)
 
$
(1,735
)
 
$
(1,731
)
 
$
(1,665
)
5.875% Senior Notes, due 2023 (1)
 
Level 2
 
$
(493
)
 
$
(463
)
 
$
(492
)
 
$
(431
)
7.625% Senior Notes, due 2024 (1)
 
Level 2
 
$
(1,236
)
 
$
(1,213
)
 
$
(1,237
)
 
$
(1,156
)
8.034% Senior Notes, due 2024 (1)
 
Level 2
 
$
(184
)
 
$
(175
)
 
$
—

 
$
—

8.00% Senior Notes, due 2025 (1)
 
Level 2
 
$
(738
)
 
$
(729
)
 
$
(738
)
 
$
(703
)
7.00% Amortizing Notes, due 2019 (TEUs) (1)
 
Level 2
 
$
(58
)
 
$
(68
)
 
$
(78
)
 
$
(90
)
Forward capacity agreement (1)
 
Level 3
 
$
(210
)
 
$
(210
)
 
$
(205
)
 
$
(205
)
Inventory financing agreements
 
Level 3
 
$
(48
)
 
$
(48
)
 
$
(129
)
 
$
(127
)
Equipment financing agreements (1)
 
Level 3
 
$
(103
)
 
$
(103
)
 
$
(73
)
 
$
(73
)
Genco:
 
 
 
 
 
 
 
 
 
 
Liabilities subject to compromise (2)
 
Level 3
 
$
—

 
$
—

 
$
(825
)
 
$
(366
)
__________________________________________
(1)
Carrying amounts include unamortized discounts and debt issuance costs. Please read Note 12—Debt for further discussion.
(2)
Carrying amounts represent the Genco senior notes that were classified as liabilities subject to compromise as of December 31, 2016. The fair value of the senior notes was equal to the Genco Plan consideration and is a Level 3 valuation due to a lack of observable inputs that make up the consideration. Please read Note 22—Genco Chapter 11 Bankruptcy in our Form 10-K for further details.
Note 7—Cash Flow Information
The supplemental disclosures of our non-cash investing and financing information are as follows:
 
 
Six Months Ended June 30,
(amounts in millions)
 
2017
 
2016
Change in capital expenditures included in accounts payable
 
$
28

 
$
(3
)
Change in capital expenditures pursuant to an equipment financing agreement
 
$
27

 
$
4

Issuance of 2017 Warrants
 
$
17

 
$
—

Issuance of senior notes related to the Genco restructuring
 
$
185

 
$
—

Non-cash working capital adjustment to purchase price of the ENGIE acquisition
 
$
14

 
$
—

Sale of interest in Conesville facility
 
$
(57
)
 
$
—

Acquisition of interest in Zimmer facility
 
$
27

 
$
—


17
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended June 30, 2017 and 2016

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within our unaudited consolidated balance sheets that sum to the total of the same such amounts shown in our unaudited consolidated statements of cash flows:
(amounts in millions)
 
June 30, 2017
 
June 30, 2016
Cash and cash equivalents
 
$
447

 
$
1,142

Restricted cash included in current assets (1)
 
—

 
104

Restricted cash included in long-term assets (2)
 
—

 
2,000

Total cash, cash equivalents and restricted cash
 
$
447

 
$
3,246

    
__________________________________________
(1)
Includes $70 million placed in escrow for the issuance of the Tranche C Term Loan ($50 million of pre-funded interest and $20 million of pre-funded original issue discount) and $34 million related to collateral.
(2)
Relates to amounts placed into escrow for the issuance of the Tranche C Term Loan.
Note 8—Inventory
A summary of our inventories is as follows: 
(amounts in millions)
 
June 30, 2017
 
December 31, 2016
Materials and supplies
 
$
254

 
$
182

Coal
 
192

 
238

Fuel oil
 
13

 
17

Natural gas
 
15

 
—

Emissions allowances (1)
 
3

 
8

Total
 
$
477

 
$
445

__________________________________________
(1)
At June 30, 2017 and December 31, 2016, a portion of this inventory was held as collateral by one of our counterparties as part of an inventory financing agreement. Please read Note 12—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)

June 30, 2017

December 31, 2016
Power generation

$
10,065


$
7,537

Buildings and improvements

1,137


944

Office and other equipment

117


98

Property, plant and equipment

11,319


8,579

Accumulated depreciation

(1,834
)

(1,458
)
Property, plant and equipment, net

$
9,485


$
7,121


18
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended June 30, 2017 and 2016

Impairments
For the three and six months ended June 30, 2017 and 2016, we recognized the following impairments in our unaudited consolidated statements of operations (amounts in millions):
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Facility
 
Fair Value
 
2017
 
2016
 
2017
 
2016
Baldwin (1)
 
$
97

 
$
—

 
$
645

 
$
—

 
$
645

Killen (2)
 
$
—

 
—

 
—

 
20

 
—

Hennepin (1)
 
$
16

 
10

 
—

 
10

 
—

Havana (1)
 
$
37

 
89

 
—

 
89

 
—

  Total
 
 
 
$
99

 
$
645

 
$
119

 
$
645

_________________________________________
(1)
Units failed to recover their basic operating costs in the MISO capacity auctions.
(2)
In first quarter 2017, Dayton Power and Light Co., the partner and operator of Killen, announced the shutdown of the Killen generation facility by June 2018.
As a result of our impairment analysis on our coal facilities in MISO, we decreased the estimated useful lives of certain of the facilities.
Retirements
The Brayton Point facility officially retired on June 1, 2017. During the three and six months ended June 30, 2017, we recognized $5 million of severance costs, which were classified within Operating and maintenance expense in our unaudited consolidated statement of operations.
Note 10—Joint Ownership of Generating Facilities
We hold ownership interests in certain jointly owned generating facilities. We are entitled to the proportional share of the generating capacity and the output of each unit equal to our ownership interests. We pay our share of capital expenditures, fuel inventory purchases, and operating expenses, except in certain instances where agreements have been executed to limit certain joint owners’ maximum exposure to additional costs. Our share of revenues and operating costs of the jointly owned generating facilities is included within the corresponding financial statement line items in our unaudited consolidated statements of operations.
The following tables present the ownership interests of the jointly owned facilities as of June 30, 2017 and December 31, 2016 included in our unaudited consolidated balance sheets. Each facility is co-owned with one or more other generation companies.


June 30, 2017
(dollars in millions)

Ownership Interest

Property, Plant and Equipment

Accumulated Depreciation

Construction Work in Progress

Total
Miami Fort

64.0
%

$
209


$
(50
)

$
4


$
163

Stuart (1)(2)

39.0
%

$
—


$
—


$
2


$
2

Zimmer

71.9
%

$
125


$
(33
)