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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, 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, 131,378,891 shares outstanding as of October 31, 2017.
 

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TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 4.
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
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
PPE
 
Ponderosa Pine Energy, 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)
 
 
 
September 30, 2017
 
December 31, 2016
ASSETS
 
 

 
 

Current Assets
 
 

 
 

Cash and cash equivalents
 
$
613

 
$
1,776

Restricted cash
 
—

 
62

Accounts receivable, net of allowance for doubtful accounts of $1 and $1, respectively
 
478

 
386

Inventory
 
429

 
445

Assets from risk management activities
 
50

 
130

Intangible assets
 
24

 
38

Prepayments and other current assets
 
110

 
150

Total Current Assets
 
1,704

 
2,987

Property, plant and equipment, net
 
8,929

 
7,121

Investment in unconsolidated affiliate
 
154

 
—

Restricted cash
 
—

 
2,000

Assets from risk management activities
 
49

 
16

Goodwill
 
772

 
799

Intangible assets
 
49

 
23

Assets held-for-sale
 
181

 
—

Other long-term assets
 
169

 
107

Total Assets
 
$
12,007

 
$
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)

 
 
 
September 30, 2017
 
December 31, 2016
LIABILITIES AND EQUITY
 
 

 
 

Current Liabilities
 
 

 
 

Accounts payable
 
$
288

 
$
332

Accrued interest
 
154

 
81

Intangible liabilities
 
18

 
21

Accrued taxes
 
57

 
45

Accrued liabilities and other current liabilities
 
136

 
88

Liabilities from risk management activities
 
58

 
97

Asset retirement obligations
 
57

 
51

Debt, current portion, net
 
99

 
201

Total Current Liabilities
 
867

 
916

Liabilities subject to compromise (Note 18)
 
—

 
832

Debt, long-term portion, net
 
8,648

 
8,778

Liabilities from risk management activities
 
20

 
43

Asset retirement obligations
 
268

 
236

Deferred income taxes
 
18

 
5

Intangible liabilities
 
36

 
34

Other long-term liabilities
 
166

 
170

Total Liabilities
 
10,023

 
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; 142,699,979 shares issued and 131,373,857 shares outstanding at September 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
 
26

 
21

Accumulated deficit
 
(1,758
)
 
(1,927
)
Total Dynegy Stockholders’ Equity
 
1,989

 
2,042

Noncontrolling interest
 
(5
)
 
(3
)
Total Equity
 
1,984

 
2,039

Total Liabilities and Equity
 
$
12,007

 
$
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 September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues
 
$
1,437

 
$
1,184

 
$
3,848

 
$
3,211

Cost of sales, excluding depreciation expense
 
(787
)
 
(660
)
 
(2,225
)
 
(1,698
)
Gross margin
 
650

 
524

 
1,623

 
1,513

Operating and maintenance expense
 
(236
)
 
(218
)
 
(750
)
 
(695
)
Depreciation expense
 
(202
)
 
(163
)
 
(611
)
 
(494
)
Impairments
 
(29
)
 
(212
)
 
(148
)
 
(857
)
Loss on sale of assets, net
 
(78
)
 
—

 
(107
)
 
—

General and administrative expense
 
(44
)
 
(41
)
 
(126
)
 
(117
)
Acquisition and integration costs
 
(3
)
 
(7
)
 
(55
)
 
(8
)
Other
 
—

 
—

 
1

 
(16
)
Operating income (loss)
 
58

 
(117
)
 
(173
)
 
(674
)
Bankruptcy reorganization items (Note 18)
 
12

 
—

 
494

 
—

Earnings from unconsolidated investments
 
4

 
4

 
4

 
7

Interest expense
 
(161
)
 
(166
)
 
(478
)
 
(449
)
Loss on early extinguishment of debt (Note 12)
 
(66
)
 
—

 
(75
)
 
—

Other income and expense, net
 
19

 
29

 
65

 
60

Loss before income taxes
 
(134
)
 
(250
)
 
(163
)
 
(1,056
)
Income tax benefit (expense) (Note 14)
 
1

 
1

 
330

 
(6
)
Net income (loss)
 
(133
)
 
(249
)
 
167

 
(1,062
)
Less: Net loss attributable to noncontrolling interest
 
(1
)
 
—

 
(2
)
 
(2
)
Net income (loss) attributable to Dynegy Inc.
 
(132
)
 
(249
)
 
169

 
(1,060
)
Less: Dividends on preferred stock
 
5

 
5

 
16

 
16

Net income (loss) attributable to Dynegy Inc. common stockholders
 
$
(137
)
 
$
(254
)
 
$
153

 
$
(1,076
)
 
 
 
 
 
 
 
 
 
Earnings (Loss) Per Share (Note 16):
 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to Dynegy Inc. common stockholders
 
$
(0.89
)
 
$
(1.81
)
 
$
1.01

 
$
(8.54
)
Diluted earnings (loss) per share attributable to Dynegy Inc. common stockholders
 
$
(0.89
)
 
$
(1.81
)
 
$
0.96

 
$
(8.54
)
 
 
 
 
 
 
 
 
 
Basic shares outstanding
 
154

 
140

 
152

 
126

Diluted shares outstanding
 
154

 
140

 
159

 
126

 
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,
 
 
2017
 
2016
 
2017
 
2016
Net income (loss)
 
$
(133
)
 
$
(249
)
 
$
167

 
$
(1,062
)
Other comprehensive income before reclassifications:
 
 
 
 
 
 
 
 
Actuarial gain and plan amendment (net of tax of zero, zero, $4, and zero for each respective period)
 
—

 
—

 
11

 
—

Amounts reclassified from accumulated other comprehensive income:
 
 
 
 
 
 
 
 
Amortization of unrecognized prior service credit (net of tax of zero for each respective period)
 
(2
)
 
(2
)
 
(6
)
 
(4
)
Other comprehensive income (loss), net of tax
 
(2
)
 
(2
)
 
5

 
(4
)
Comprehensive income (loss)
 
(135
)
 
(251
)
 
172

 
(1,066
)
Less: Comprehensive loss attributable to noncontrolling interest
 
(1
)
 
—

 
(2
)
 
(2
)
Total comprehensive income (loss) attributable to Dynegy Inc.
 
$
(134
)
 
$
(251
)
 
$
174

 
$
(1,064
)

See the notes to consolidated financial statements.

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

 
 

Net income (loss)
 
$
167

 
$
(1,062
)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
 
 
 
 
Depreciation expense
 
611

 
494

Non-cash interest expense
 
36

 
37

Amortization of intangibles
 
13

 
17

Risk management activities
 
(38
)
 
(75
)
Loss on sale of assets, net
 
107

 
—

Loss on early extinguishment of debt
 
75

 
—

Earnings from unconsolidated investments
 
(4
)
 
(7
)
Deferred income taxes
 
(330
)
 
6

Impairments
 
148

 
857

Change in value of common stock warrants
 
(16
)
 
(5
)
Bankruptcy reorganization items
 
(494
)
 
—

Other
 
50

 
1

Changes in working capital:
 
 
 
 
Accounts receivable, net
 
(20
)
 
32

Inventory
 
106

 
153

Prepayments and other current assets
 
81

 
179

Accounts payable and accrued liabilities
 
9

 
104

Distributions from unconsolidated investments
 
2

 
1

Changes in non-current assets
 
(2
)
 
(16
)
Changes in non-current liabilities
 
—

 
12

Net cash provided by operating activities
 
501

 
728

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Capital expenditures
 
(129
)
 
(337
)
Acquisitions, net of cash acquired
 
(3,249
)
 
—

Distributions from unconsolidated investments
 
7

 
14

Proceeds received from asset sales, net
 
600

 
—

Other investing
 
—

 
10

Net cash used in investing activities
 
(2,771
)
 
(313
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Proceeds from long-term borrowings, net of debt issuance costs
 
1,747

 
2,277

Repayments of borrowings
 
(2,261
)
 
(21
)
Proceeds from issuance of equity, net of issuance costs
 
150

 
359

Payments of debt extinguishment costs
 
(50
)
 
—

Preferred stock dividends paid
 
(16
)
 
(16
)
Interest rate swap settlement payments
 
(15
)
 
(13
)
Acquisition of noncontrolling interest
 
(375
)
 
—

Payments related to bankruptcy settlement
 
(133
)
 
—

Other financing
 
(2
)
 
(2
)
Net cash provided by (used in) financing activities
 
(955
)
 
2,584

Net increase (decrease) in cash, cash equivalents and restricted cash
 
(3,225
)
 
2,999

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

 
544

Cash, cash equivalents and restricted cash, end of period
 
$
613

 
$
3,543

 

See the notes to consolidated financial statements. 

5
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 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, PJM and NY/NE 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 nine months ended September 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 $80 million of cash prepayments from operating activities to investing activities in our unaudited consolidated statement of cash flows for the nine months ended September 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 explains 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 described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling

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

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 $1 million and $2.045 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 nine months ended September 30, 2016. Additionally, restricted cash of $39 million and $2.085 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 nine months ended September 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    
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.
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.

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

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 intend on adopting the ASU using the modified retrospective approach.
We have previously established an implementation team to assess the impact the new accounting standard will have on our financial statements, as well as accounting policies, business processes and controls upon adoption.
Currently, the Company has completed its contract assessments in accordance with the new standard and has also considered industry specific guidance as well as certain other non-authoritative interpretations. As a result, the Company has not identified any material changes to the timing of our revenue recognition. We will continue to assess any new contracts as well as monitor the issuance of any new interpretations of the standard through the adoption date.
We believe changes to our disclosures will primarily include a regional presentation of our revenues disaggregated by revenue type - energy, capacity, and ancillary services. Additionally, we have assessed our accounting policies and identified changes which will become effective upon adoption. We are also in process of assessing the impact to our internal control structure. and have identified certain changes mainly related to the assessment of new contracts as well as the disaggregation of our revenues which will be disclosed in our footnotes upon adoption.
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;

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

◦
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 3).
•
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.

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

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
 
2,716

Investment in unconsolidated affiliate
 
159

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

Assets held-for-sale
 
478

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

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

 
$
3

 
$
35

 
$
5

Revenues
 
$
345

 
N/A

 
$
669

 
N/A

Operating loss
 
$
(36
)
 
N/A

 
$
(32
)
 
N/A

Pro Forma Results. The unaudited pro forma financial results for the nine months ended September 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 nine months ended September 30, 2017 and 2016 include adjustments of $35 million and $5 million, respectively, for non-recurring acquisition costs attributable to the ENGIE Acquisition.
 
 
Nine Months Ended September 30,
(amounts in millions)
 
2017
 
2016
Revenue
 
$
3,905

 
$
3,942

Net income (loss)
 
$
169

 
$
(1,090
)
Net income (loss) attributable to Dynegy Inc.
 
$
171

 
$
(1,088
)

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

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 for the nine months ended September 30, 2017.
Divestitures
Troy and Armstrong. 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. The facilities sold were recently acquired in the ENGIE Acquisition and total 1,269 MW.
Lee. On July 10, 2017, Dynegy signed a membership interest purchase agreement (the “Lee Sale Agreement”) with an affiliate of Rockland Capital for the sale of its equity ownership interest in the Lee facility, a natural gas-fueled peaking facility in PJM, for $180 million in cash, plus adjustments for working capital. On October 4, 2017, the FERC approved our sale of Lee, and we completed the sale on October 12, 2017. Our Lee facility, associated inventory, and allocated goodwill of $9 million are classified as long-term assets held-for-sale as of September 30, 2017. Goodwill was allocated based on the relative fair values of the assets sold to the reporting unit.
For the three and nine months ended September 30, 2017, we wrote down the carrying value of the assets held-for-sale to the sales price and recognized an impairment of $15 million, which was recorded in Impairments in our unaudited consolidated statements of operations.
Dighton and Milford-MA. On September 22, 2017, Dynegy completed the sale of its equity ownership interests in two intermediate natural gas-fueled facilities in NY/NE to Starwood Energy Group for approximately $125 million in cash, including $6 million in working capital adjustments. This sale has fulfilled the mitigation plan approved by FERC regarding the Company’s purchase of ENGIE’s US-based asset portfolio. For the three and nine months ended September 30, 2017, we recognized a loss on sale of assets on our Dighton and Milford-MA facilities of $77 million, which includes $18 million of allocated goodwill. Goodwill was allocated based on the relative fair values of the assets sold to the reporting unit.
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 September 30, 2017, our equity method investment in NELP included in our unaudited consolidated balance sheets was $154 million. Upon the acquisition, we recognized basis differences in the net assets of approximately $14 million primarily 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 nine months ended September 30, 2017, we recorded $4 million and $4 million, respectively, in equity earnings related to our investment in NELP which is reflected in Earnings from unconsolidated investments in our unaudited consolidated statements of operations. For the nine months ended September 30, 2017, we received distributions of $9 million, of which $7 million 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.
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”). 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. For the three and nine months ended September 30, 2016, we recorded $4 million and $7 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 nine months ended September 30, 2016, we received distributions of $15 million, of which $14 million 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 September 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)
 
(60
)
 
MWh
 
$
14

Electricity basis derivatives (3)
 
(34
)
 
MWh
 
$
(7
)
Natural gas derivatives (2)
 
380

 
MMBtu
 
$
(1
)
Natural gas basis derivatives
 
108

 
MMBtu
 
$
(14
)
Physical heat rate derivatives
 
125/(13)

 
MMBtu/MWh
 
$
14

Emissions derivatives
 
17

 
Metric Ton
 
$
4

Interest rate swaps
 
1,963

 
U.S. Dollar
 
$
(11
)
Common stock warrants (4)
 
25

 
Warrant
 
$
(2
)
__________________________________________
(1)
Includes both asset and liability risk management positions but excludes margin and collateral netting of $22 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 September 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 September 30, 2017 and December 31, 2016. As of September 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.
 
 
 
 
 
September 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
 
$
204

 
$
(117
)
 
$
—

 
$
87

 
Interest rate contracts
 
Assets from risk management activities
 
12

 
—

 
—

 
12

 
Total derivative assets
 
 
 
$
216

 
$
(117
)
 
$
—

 
$
99

 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Liabilities from risk management activities
 
$
(194
)
 
$
117

 
$
22

 
$
(55
)
 
Interest rate contracts
 
Liabilities from risk management activities
 
(23
)
 
—

 
—

 
(23
)
 
Common stock warrants
 
Accrued liabilities and other current liabilities and other long-term liabilities
 
(2
)
 
—

 
—

 
(2
)
 
Total derivative liabilities
 
 
 
$
(219
)
 
$
117

 
$
22

 
$
(80
)
Total derivatives
 
 
 
$
(3
)
 
$
—

 
$
22

 
$
19


 
 
 
 
 
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 September 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 $9 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 September 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 September 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
 
September 30, 2017
 
December 31, 2016
(amounts in millions)
 
 
 
 
Gross collateral posted with counterparties
 
$
54

 
$
116

  Less: Collateral netted against risk management liabilities
 
22

 
54

Net collateral within Prepayments and other current assets
 
$
32

 
$
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 nine months ended September 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 September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
(amounts in millions)
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Revenues
 
$
29

 
$
(27
)
 
$
242

 
$
188

Interest rate contracts
 
Interest expense
 
$
1

 
$
1

 
$
4

 
$
(11
)
Common stock warrants
 
Other income and (expense), net
 
$
1

 
$
4

 
$
16

 
$
5

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 September 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 September 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 September 30, 2017
 (amounts in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

Assets from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$
—

 
$
100

 
$
21

 
$
121

Natural gas derivatives
 
—

 
45

 
6

 
51

Physical heat rate derivatives
 
—

 
20

 
1

 
21

Emissions derivatives
 
—

 
11

 
—

 
11

Total assets from commodity risk management activities
 
—

 
176

 
28

 
204

Assets from interest rate contracts
 
—

 
12

 
—

 
12

Total assets
 
$
—

 
$
188

 
$
28

 
$
216

Liabilities:
 
 

 
 

 
 

 
 
Liabilities from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$
—

 
$
(94
)
 
$
(20
)
 
$
(114
)
Natural gas derivatives
 
—

 
(60
)
 
(6
)
 
(66
)
Physical heat rate derivatives
 
—

 
(7
)
 
—

 
(7
)
Emissions derivatives
 
—

 
(7
)
 
—

 
(7
)
Total liabilities from commodity risk management activities
 
—

 
(168
)
 
(26
)
 
(194
)
Liabilities from interest rate contracts
 
—

 
(23
)
 
—

 
(23
)
Liabilities from outstanding common stock warrants
 
(2
)
 
—

 
—

 
(2
)
Total liabilities
 
$
(2
)
 
$
(191
)
 
$
(26
)
 
$
(219
)

 
 
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 September 30, 2017 and 2016

a DCF 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 September 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)
 
(14
)
 
Million MWh
 
$
4

 
Basis spread + liquid location
 
Basis spread
 
$4.25 - $6.25
FTRs
 
(29
)
 
Million MWh
 
$
(3
)
 
Historical congestion
 
Forward price
 
$0 - $6.00
Physical heat rate derivatives
 
23/(3)

 
Million MMBtu/Million MWh
 
$
1

 
Discounted Cash Flow
 
Forward price
 
$2.40 - $3.30 / $20 - $24
Natural gas derivatives (1)
 
102

 
Million MMBtu
 
$
—

 
Illiquid location fixed price
 
Forward price
 
$1.75 - $2.15
__________________________________________
(1)
Represents forward financial and physical transactions at illiquid pricing locations and long-dated contracts.

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

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, 2017
(amounts in millions)
 
Electricity
Derivatives
 
Natural Gas Derivatives
 
Heat Rate Derivatives
 
Total
Balance at June 30, 2017
 
$
(1
)
 
$
1

 
$
(2
)
 
$
(2
)
Total gains (losses) included in earnings
 
6

 
(1
)
 
3

 
8

Transfers out of level 3 (1)
 
(2
)
 
—

 
—

 
(2
)
Settlements (2)
 
(2
)
 
—

 
—

 
(2
)
Balance at September 30, 2017
 
$
1

 
$
—

 
$
1

 
$
2

Unrealized gains (losses) relating to instruments held as of September 30, 2017
 
$
6

 
$
(1
)
 
$
3

 
$
8


 
 
Nine Months Ended September 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
 
(16
)
 
10

 
1

 
(5
)
Settlements (2)
 
8

 
(4
)
 
—

 
4

Balance at September 30, 2017
 
$
1

 
$
—

 
$
1

 
$
2

Unrealized gains (losses) relating to instruments held as of September 30, 2017
 
$
(16
)
 
$
10

 
$
1

 
$
(5
)

 
 
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 (2)
 
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 (2)
 
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

_________________________________________
(1)
During the three months ended September 30, 2017, we had transfers from Level 3 to Level 2 due to changes in market liquidity.
(2)
For purposes of these tables, we define settlements as the beginning of period fair value of contracts that settled during the period.

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

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. 
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.
Impairments.  During the three and nine months ended September 30, 2017 and 2016, we recorded impairment charges related to certain of our facilities, materials and supplies inventory and assets held-for-sale using fair value measurements. See Note 3—Acquisitions and Divestitures, Note 8—Inventory and Note 9—Property, Plant and Equipment for further discussion.
Acquisitions.  We fair valued the ENGIE Acquisition and our acquisition of additional joint ownership interest in the Zimmer facility using fair value measurements. See Note 3—Acquisitions and Divestitures and Note 10—Joint Ownership of Generating Facilities for further discussion of the fair value hierarchy classifications of valuations of acquired identifiable assets and liabilities.
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 September 30, 2017 and December 31, 2016, respectively.
 
 
 
 
September 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
 
$
(1,940
)
 
$
(2,029
)
 
$
(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
 
$
(845
)
 
$
(881
)
 
$
(2,083
)
 
$
(2,137
)
7.375% Senior Notes, due 2022 (1)
 
Level 2
 
$
(1,733
)
 
$
(1,824
)
 
$
(1,731
)
 
$
(1,665
)
5.875% Senior Notes, due 2023 (1)
 
Level 2
 
$
(493
)
 
$
(498
)
 
$
(492
)
 
$
(431
)
7.625% Senior Notes, due 2024 (1)
 
Level 2
 
$
(1,237
)
 
$
(1,294
)
 
$
(1,237
)
 
$
(1,156
)
8.034% Senior Notes, due 2024 (1)
 
Level 2
 
$
(188
)
 
$
(190
)
 
$
—

 
$
—

8.00% Senior Notes, due 2025 (1)
 
Level 2
 
$
(739
)
 
$
(778
)
 
$
(738
)
 
$
(703
)
8.125% Senior Notes, due 2026 (1)
 
Level 2
 
$
(842
)
 
$
(880
)
 
$
—

 
$
—

7.00% Amortizing Notes, due 2019 (TEUs) (1)
 
Level 2
 
$
(58
)
 
$
(62
)
 
$
(78
)
 
$
(90
)
Forward capacity agreement (1)
 
Level 3
 
$
(212
)
 
$
(212
)
 
$
(205
)
 
$
(205
)
Inventory financing agreements
 
Level 3
 
$
(48
)
 
$
(48
)
 
$
(129
)
 
$
(127
)
Equipment financing agreements (1)
 
Level 3
 
$
(112
)
 
$
(112
)
 
$
(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.

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

Note 7—Cash Flow Information
The supplemental disclosures of our non-cash investing and financing information are as follows:
 
 
Nine Months Ended September 30,
(amounts in millions)
 
2017
 
2016
Change in capital expenditures included in accounts payable
 
$
5

 
$
(10
)
Change in capital expenditures pursuant to an equipment financing agreement
 
$
34

 
$
11

Issuance of 2017 Warrants
 
$
17

 
$
—

Issuance of senior notes related to the Genco restructuring
 
$
188

 
$
—

Sale of interest in Conesville facility
 
$
(58
)
 
$
—

Acquisition of interest in Zimmer facility
 
$
27

 
$
—

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)
 
September 30, 2017
 
September 30, 2016
Cash and cash equivalents
 
$
613

 
$
1,458

Restricted cash included in current assets (1)
 
—

 
85

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

 
2,000

Total cash, cash equivalents and restricted cash
 
$
613

 
$
3,543

    
__________________________________________
(1)
Includes $45 million placed in escrow for the issuance of the Tranche C Term Loan ($25 million of pre-funded interest and interest income earned and $20 million of pre-funded original issue discount) and $40 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)
 
September 30, 2017
 
December 31, 2016
Materials and supplies
 
$
236

 
$
182

Coal
 
165

 
238

Fuel oil
 
14

 
17

Natural gas
 
12

 
—

Emissions allowances (1)
 
2

 
8

Total
 
$
429

 
$
445

__________________________________________
(1)
At September 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.
As discussed in Note 10—Joint Ownership of Generating Facilities, Stuart Unit 1 was retired early on September 30, 2017, with remaining Stuart and Killen units scheduled to be retired by mid-2018. We determined that we would not be able to recover the carrying value of our Materials and supplies inventory at these facilities and, as a result, recognized a charge of $14 million in Impairments in our unaudited consolidated statements of operations for the three and nine months ended September 30, 2017.

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

Note 9—Property, Plant and Equipment
A summary of our property, plant and equipment is as follows:
(amounts in millions)

September 30, 2017

December 31, 2016
Power generation

$
9,845


$
7,537

Buildings and improvements

958


944

Office and other equipment

115


98

Property, plant and equipment

10,918


8,579

Accumulated depreciation

(1,989
)

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

$
8,929


$
7,121

Impairments
For the three and nine months ended September 30, 2017 and 2016, we recognized the following PP&E impairments in our unaudited consolidated statements of operations (amounts in millions). Each valuation is classified as Level 3 within the fair value hierarchy and is presented as of the date of its impairment.
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Facility
 
Fair Value
 
2017
 
2016
 
2017
 
2016
Baldwin (1)
 
$
97

 
—

 
—

 
—

 
645

Stuart (2)
 
$
—

 
—

 
55

 
—

 
55

Newton FGD (3)
 
$
—

 
—

 
148

 
—

 
148

Killen (4)
 
$
—

 
—

 
—

 
20

 
—

Hennepin (1)
 
$
16

 
—

 
—

 
10

 
—

Havana (1)
 
$
37

 
—

 
—

 
89

 
—