10-Q 1 dyn-2014930x10q.htm 10-Q DYN-2014.9.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
  
FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
 
o      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to ________

Commission file number: 001-33443
 
DYNEGY INC.
(Exact name of registrant as specified in its charter)
State of
Incorporation
 
I.R.S. Employer
Identification No.
Delaware
 
20-5653152
 
 
 
601 Travis, Suite 1400
 
 
Houston, Texas
 
77002
(Address of principal executive offices)
 
(Zip Code)
(713) 507-6400
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ý
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x


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




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, 122,930,658 shares outstanding as of November 3, 2014.
 



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



DEFINITIONS
As used in this Form 10-Q, the abbreviations contained herein have the meanings set forth below. 
AER
 
New Ameren Energy Resources, LLC
Ameren
 
Ameren Corporation
ARO
 
Asset Retirement Obligation
ASC
 
Accounting Standards Codification
ASU
 
Accounting Standards Update
Brayton
 
Brayton Point Holdings, LLC
CAA
 
Clean Air Act
CAISO
 
The California Independent System Operator
CARB
 
California Air Resources Board
CCA
 
California Carbon Allowance
CCR
 
Coal Combustion Residuals
CEO
 
Chief Executive Officer
CERCLA
 
Comprehensive Environmental Response, Compensation, and Liability Act
CFO
 
Chief Financial Officer
CO2
 
Carbon Dioxide
CPUC
 
California Public Utility Commission
CSAPR
 
Cross-State Air Pollution Rule
DH
 
Dynegy Holdings, LLC (formerly known as Dynegy Holdings Inc.)
DMG
 
Dynegy Midwest Generation, LLC
DNE
 
Dynegy Northeast Generation, Inc.
DPC
 
Dynegy Power, LLC
DRI
 
Dynegy Resource I, LLC
Duke Energy CE
 
Duke Energy Commercial Enterprises, Inc.
Duke Energy SAM
 
Duke Energy SAM, LLC
DYPM
 
Dynegy Power Marketing, LLC
EBITDA
 
Earnings Before Interest, Taxes, Depreciation and Amortization
ECP
 
Energy Capital Partners
ECP Coinvest
 
Energy Capital Partners II (EquiPower Co-Invest), LP
ECP GP
 
Energy Capital Partners GP II, LP
ECP II
 
Energy Capital Partners II, LP
ECP II-A
 
Energy Capital Partners II-A, LP
ECP II-B
 
Energy Capital Partners II-B, LP
ECP II-C
 
Energy Capital Partners II-C (Direct IP), LP
ECP II-C Fund
 
Energy Capital Partners II-C, LP
ECP II-C (Cayman)
 
Energy Capital Partners II-C (Cayman), L.P.
ECP II-D
 
Energy Capital Partners II-D, LP
EEI
 
Electric Energy, Inc.
EGU
 
Electric Generating Units
EPA
 
Environmental Protection Agency
ERC
 
EquiPower Resources Corp.
FASB
 
Financial Accounting Standards Board
FCA
 
Forward Capacity Auction
FERC
 
Federal Energy Regulatory Commission
FTC
 
Federal Trade Commission

i


FTR
 
Financial Transmission Rights
GAAP
 
Generally Accepted Accounting Principles of the United States of America
GHG
 
Greenhouse Gas
GW
 
Gigawatts
HAPs
 
Hazardous Air Pollutants, as defined by the Clean Air Act
HSR
 
Hart-Scott Rodino Act of 1976
IASB
 
International Accounting Standards Board
IFRS
 
International Financial Reporting Standards
IGC
 
Illinova Generating Company
IGCC
 
Integrated Gasification Combined Cycle
IMA
 
In-market Asset Availability
IPCB
 
Illinois Pollution Control Board
IPGC or Genco
 
Illinois Power Generating Company (formerly known as Ameren Energy Generating Company)
IPH
 
Illinois Power Holdings, LLC
IPM
 
Illinois Power Marketing Company (formerly known as Ameren Energy Marketing Company)
IPR
 
Illinois Power Resources, LLC (formerly known as New Ameren Energy Resources, LLC)
IPRG
 
Illinois Power Resources Generating, LLC (formerly known as New AERG, LLC)
IRS
 
Internal Revenue Service
ISO
 
Independent System Operator
ISO-NE
 
Independent System Operator New England
kW
 
Kilowatt
LC
 
Letter of Credit
LGE
 
Louisville Gas and Electric Company
LIBOR
 
London Interbank Offered Rate
LMP
 
Locational Marginal Pricing
LPG
 
Liquefied Petroleum Gas
LSE
 
Load Serving Entity
MATS
 
Mercury and Air Toxic Standards
MISO
 
Midcontinent Independent System Operator, Inc.
MMBtu
 
One Million British Thermal Units
MPS
 
Multi-Pollutant Standards
Moody’s
 
Moody’s Investors Service Inc.
MW
 
Megawatts
MWh
 
Megawatt Hour
NM
 
Not Meaningful
NOL
 
Net Operating Loss
NOx
 
Nitrogen Oxide
NPDES
 
National Pollutant Discharge Elimination System
NSPS
 
New Source Performance Standards
NSR
 
New Source Review
NYISO
 
New York Independent System Operator
OCI
 
Other Comprehensive Income
PG&E
 
Pacific Gas and Electric Company
PJM
 
PJM Interconnection, LLC
PPE
 
Ponderosa Pine Energy, LLC
PRIDE
 
Producing Results through Innovation by Dynegy Employees

ii


PSD
 
Prevention of Significant Deterioration
RGGI
 
Regional Greenhouse Gas Initiative
RMR
 
Reliability Must Run
RPM
 
Reliability Pricing Model
S&P
 
Standard & Poor’s Ratings Services
SEC
 
U.S. Securities and Exchange Commission
SO2
 
Sulfur Dioxide
TVA
 
Tennessee Valley Authority
VaR
 
Value at Risk


iii


PART I. FINANCIAL INFORMATION
Item 1—FINANCIAL STATEMENTS
DYNEGY INC.
CONSOLIDATED BALANCE SHEETS
(unaudited) (in millions, except share data)
 
 
 
September 30, 2014
 
December 31, 2013
ASSETS
 
 

 
 

Current Assets
 
 

 
 

Cash and cash equivalents
 
$
1,032

 
$
843

Accounts receivable, net of allowance for doubtful accounts of $2 and zero, respectively
 
243

 
420

Inventory
 
186

 
181

Assets from risk management activities
 
2

 
25

Intangible assets
 
39

 
108

Prepayments and other current assets
 
89

 
108

Total Current Assets
 
1,591

 
1,685

Property, Plant and Equipment
 
3,604

 
3,527

Accumulated depreciation
 
(381
)
 
(212
)
Property, Plant and Equipment, Net
 
3,223

 
3,315

Other Assets
 
 

 
 

Assets from risk management activities
 
13

 
11

Intangible assets
 
46

 
68

Deferred income taxes
 
66

 
100

Other long-term assets
 
108

 
112

Total Assets
 
$
5,047

 
$
5,291

 
See the notes to consolidated financial statements.

1



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

 
 
 
September 30, 2014
 
December 31, 2013
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Current Liabilities
 
 

 
 

Accounts payable
 
$
173

 
$
329

Accrued interest
 
35

 
13

Deferred income taxes
 
66

 
100

Intangible liabilities
 
48

 
62

Accrued liabilities and other current liabilities
 
170

 
139

Liabilities from risk management activities
 
99

 
65

Debt, current portion
 
37

 
13

Total Current Liabilities
 
628

 
721

Debt, long-term portion
 
1,973

 
1,979

Other Liabilities
 
 

 
 

Liabilities from risk management activities
 
33

 
33

Asset retirement obligations
 
166

 
173

Other long-term liabilities
 
195

 
178

Total Liabilities
 
2,995

 
3,084

Commitments and Contingencies (Note 10)
 


 


 
 
 
 
 
Stockholders’ Equity
 
 
 
 
Common stock, $0.01 par value, 420,000,000 shares authorized at September 30, 2014 and December 31, 2013; 100,382,015 shares and 100,202,036 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
 
1

 
1

Additional paid-in capital
 
2,628

 
2,614

Accumulated other comprehensive income, net of tax
 
53

 
58

Accumulated deficit
 
(632
)
 
(463
)
Total Dynegy Stockholders’ Equity
 
2,050

 
2,210

Noncontrolling interest
 
2

 
(3
)
Total Equity
 
2,052

 
2,207

Total Liabilities and Equity
 
$
5,047

 
$
5,291


See the notes to consolidated financial statements.

2


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

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues
 
$
615

 
$
446

 
$
1,898

 
$
1,065

Cost of sales, excluding depreciation expense
 
(387
)
 
(290
)
 
(1,304
)
 
(827
)
Gross margin
 
228

 
156

 
594

 
238

Operating and maintenance expense
 
(114
)
 
(64
)
 
(360
)
 
(220
)
Depreciation expense
 
(61
)
 
(53
)
 
(185
)
 
(156
)
Gain on sale of assets, net
 
3

 

 
17

 
2

General and administrative expense
 
(25
)
 
(22
)
 
(80
)
 
(69
)
Acquisition and integration costs
 
(9
)
 
(2
)
 
(17
)
 
(6
)
Operating income (loss)
 
22

 
15

 
(31
)
 
(211
)
Earnings from unconsolidated investments
 

 

 
10

 

Interest expense
 
(32
)
 
(26
)
 
(104
)
 
(71
)
Loss on extinguishment of debt
 

 

 

 
(11
)
Other income and expense, net
 
5

 
15

 
(40
)
 
5

Income (loss) from continuing operations before income taxes
 
(5
)
 
4

 
(165
)
 
(288
)
Income tax benefit
 

 
20

 
1

 
20

Income (loss) from continuing operations
 
(5
)
 
24

 
(164
)
 
(268
)
Income (loss) from discontinued operations, net of tax (Note 3)
 

 
(2
)
 

 
3

Net income (loss)
 
(5
)
 
22

 
(164
)
 
(265
)
Less: Net income attributable to noncontrolling interest
 

 

 
5

 

Net income (loss) attributable to Dynegy Inc.
 
$
(5
)
 
$
22

 
$
(169
)
 
$
(265
)
 
 
 
 
 
 
 
 
 
Earnings (Loss) Per Share (Note 13):
 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to Dynegy Inc.:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
(0.05
)
 
$
0.24

 
$
(1.69
)
 
$
(2.68
)
Income (loss) from discontinued operations
 

 
(0.02
)
 

 
0.03

Basic earnings (loss) per share attributable to Dynegy Inc.
 
$
(0.05
)
 
$
0.22

 
$
(1.69
)
 
$
(2.65
)
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share attributable to Dynegy Inc.:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
(0.05
)
 
$
0.24

 
$
(1.69
)
 
$
(2.68
)
Income (loss) from discontinued operations
 

 
(0.02
)
 

 
0.03

Diluted earnings (loss) per share attributable to Dynegy Inc.
 
$
(0.05
)
 
$
0.22

 
$
(1.69
)
 
$
(2.65
)
 
 
 
 
 
 
 
 
 
Basic shares outstanding
 
100

 
100

 
100

 
100

Diluted shares outstanding
 
100

 
100

 
100

 
100

 
See the notes to consolidated financial statements.

3


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

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net income (loss)
 
$
(5
)
 
$
22

 
$
(164
)
 
$
(265
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
Actuarial gain (loss) and plan amendments (net of tax of zero, $25, zero and $25, respectively)
 

 
46

 
(3
)
 
46

Amounts reclassified from accumulated other comprehensive income:
 
 
 
 
 
 
 
 
Reclassification of curtailment gain included in net loss (net of tax of zero, zero, zero and zero, respectively)
 

 

 

 
(7
)
Amortization of unrecognized prior service credit and actuarial gain (net of tax of zero, zero, zero and zero, respectively)
 
(1
)
 

 
(3
)
 

Other comprehensive income (loss), net of tax
 
(1
)
 
46

 
(6
)
 
39

Comprehensive income (loss)
 
(6
)
 
68

 
(170
)
 
(226
)
Less: Comprehensive income attributable to noncontrolling interest
 

 

 
4

 

Total comprehensive income (loss) attributable to Dynegy Inc.
 
$
(6
)
 
$
68

 
$
(174
)
 
$
(226
)

See the notes to consolidated financial statements.

4


DYNEGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in millions)

 
 
Nine Months Ended September 30,
 
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net loss
 
$
(164
)
 
$
(265
)
Adjustments to reconcile net loss to net cash flows from operating activities:
 
 
 
 
Depreciation expense
 
185

 
156

Loss on extinguishment of debt
 

 
11

Non-cash interest expense (benefit)
 
15

 
(1
)
Amortization of intangibles
 
38

 
190

Risk management activities
 
57

 
10

Gain on sale of assets, net
 
(17
)
 
(2
)
Deferred income taxes
 
(1
)
 
(18
)
Change in value of common stock warrants
 
43

 
1

Other
 
27

 
8

Changes in working capital:
 
 
 
 
Accounts receivable, net
 
187

 
16

Inventory
 
1

 
26

Prepayments and other current assets
 
32

 
36

Accounts payable and accrued liabilities
 
(124
)
 
(23
)
Affiliate transactions
 

 
(1
)
Changes in non-current assets
 
(9
)
 
(7
)
Changes in non-current liabilities
 
6

 
(5
)
Net cash provided by operating activities
 
276

 
132

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Capital expenditures
 
(94
)
 
(67
)
Proceeds from asset sales, net
 
17

 
3

Decrease in restricted cash
 

 
335

Net cash provided by (used) in investing activities
 
(77
)
 
271

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Proceeds from long-term borrowings, net of financing costs
 
10

 
1,753

Repayments of borrowings, including debt extinguishment costs
 
(6
)
 
(1,915
)
Interest rate swap settlement payments
 
(13
)
 

Other financing
 
(1
)
 

Net cash used in financing activities
 
(10
)
 
(162
)
Net increase in cash and cash equivalents
 
189

 
241

Cash and cash equivalents, beginning of period
 
843

 
348

Cash and cash equivalents, end of period
 
$
1,032

 
$
589

 


See the notes to consolidated financial statements. 

5

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2014 and 2013


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 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 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, 2013, filed with the SEC on February 27, 2014, which we refer to as our “Form 10-K.” Unless the context indicates otherwise, throughout this report, the terms “Dynegy,” “the Company,” “we,” “us,” “our,” and “ours” are used to refer to Dynegy Inc. and its direct and indirect subsidiaries.
Our current business operations are focused primarily on the power generation sector of the energy industry. We report the results of our power generation business as three segments in our unaudited consolidated financial statements: (i) the Coal segment (“Coal”), (ii) the IPH segment (“IPH”) and (iii) the Gas segment (“Gas”). Our consolidated financial results also reflect corporate-level expenses such as general and administrative expense, interest expense and income tax benefit (expense). Please read Note 15—Segment Information for further discussion. All significant intercompany transactions have been eliminated.
Illinois Power Holdings, LLC (“IPH”) and its direct and indirect subsidiaries are organized into ring-fenced groups in order to maintain corporate separateness from Dynegy and its other subsidiaries. Certain of the entities in the IPH segment, including Illinois Power Generating Company (“IPGC” or “Genco”), have an independent director whose consent is required for certain corporate actions, including material transactions with affiliates. Further, entities within the IPH segment present themselves to the public as separate entities.  They maintain separate books, records and bank accounts and separately appoint officers.  Furthermore, they pay liabilities from their own funds, conduct business in their own names and have restrictions on pledging their assets for the benefit of certain other persons.  These provisions restrict our ability to move cash out of these entities without meeting certain requirements as set forth in the governing documents.
Note 2—Accounting Policies
The accounting policies followed by the Company are set forth in Note 2—Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in our Form 10-K. There have been no significant changes to these policies during the nine months ended September 30, 2014.
The preparation of consolidated financial statements in conformity with GAAP requires management to make informed estimates and judgments that affect our reported financial position and results of operations based on currently available information.  Actual results could differ materially from our estimates. The results of operations for the interim periods presented in this Form 10-Q are not necessarily indicative of the results to be expected for the full year or any other interim period due to seasonal fluctuations in demand for our energy products and services, changes in commodity prices, timing of maintenance and other expenditures and other factors.
Accounting Standards Adopted During the Current Period
Presentation of Unrecognized Tax Benefits. In July 2013, the FASB issued ASU 2013-11-Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The provisions of the rule require an unrecognized tax benefit to be presented as a reduction to a deferred tax asset in the financial statements for an NOL carryforward, a similar tax loss, or a tax credit carryforward except in circumstances when the carryforward or tax loss is not available at the reporting date under the tax laws of the applicable jurisdiction to settle any additional income taxes or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purposes. When those circumstances exist, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The new financial statement presentation provisions relating to this ASU are prospective and effective for interim and annual periods beginning after December 15, 2013. The adoption of this ASU did not have a material impact on our consolidated financial statements.

6

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2014 and 2013

Joint and Several Liability Arrangements. In February 2013, the FASB issued ASU 2013-04-Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. The provisions of the rule require an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of (i) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (ii) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. ASU 2013-04 is effective for interim and annual periods beginning after December 15, 2013. The adoption of this ASU did not have a material impact on our consolidated financial statements.
Accounting Standards Not Yet Adopted
Reporting Discontinued Operations and Asset Disposals. In April 2014, the FASB issued ASU 2014-08-Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity. The amendments in this ASU change the requirements for reporting discontinued operations in Subtopic 205-20. An entity is required to report within discontinued operations on the statement of operations the results of a component or group of components of an entity if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. Additionally, the associated assets and liabilities are required to be presented separately from other assets and liabilities on the balance sheet for all comparative periods. The ASU includes updated guidance regarding what meets the definition of a component of an entity. The new financial statement presentation provisions relating to this ASU are prospective and effective for interim and annual periods beginning after December 15, 2014, with early adoption permitted. We do not anticipate the adoption of this ASU having a material impact on our consolidated financial statements.
Revenue from Contracts with Customers. In May 2014, the FASB and IASB jointly issued ASU 2014-09-Revenue from Contracts with Customers (Topic 606). The amendments in this ASU develop a common revenue standard for U.S. GAAP and IFRS by removing inconsistencies and weaknesses in revenue requirements, providing a more robust framework for addressing revenue issues, improving comparability of revenue recognition practices, providing more useful information to users of financial statements and simplifying the preparation of financial statements. The guidance in this ASU is effective for interim and annual periods beginning after December 15, 2016. We are currently assessing this ASU; however, we do not anticipate the adoption of this ASU having a material impact on our consolidated financial statements.
Note 3—Acquisitions and Divestitures
Acquisitions
Duke Midwest Purchase Agreement. On August 21, 2014, our wholly-owned subsidiary, Dynegy Resource I, LLC (“DRI”), entered into a purchase and sale agreement, as amended (the “Duke Midwest Purchase Agreement”) with Duke Energy SAM, LLC (“Duke Energy SAM”) and Duke Energy Commercial Enterprises, Inc. (“Duke Energy CE” and, together with Duke Energy SAM, “Duke Energy”), pursuant to which DRI will, subject to the terms and conditions in the Duke Midwest Purchase Agreement, purchase from Duke Energy 100 percent of the membership interests in Duke Energy Commercial Asset Management, LLC and Duke Energy Retail Sales, LLC, thereby acquiring approximately 6,200 MW (based on winter capacity) in (i) five natural gas-fired power facilities located in Ohio, Pennsylvania and Illinois, (ii) one oil-fired power facility located in Ohio, (iii) partial interests in five coal-fired power facilities located in Ohio and (iv) a retail energy business for a base purchase price of $2.8 billion in cash, subject to certain adjustments (the “Duke Midwest Acquisition”). We will only operate two of the five coal-fired facilities, the Miami Fort and Zimmer facilities, with other owners operating the three remaining facilities. The closing of the Duke Midwest Acquisition is expected to occur by the end of the first quarter of 2015.
The Duke Midwest Purchase Agreement includes customary representations, warranties and covenants by the parties, and is subject to various closing conditions, including (i) obtaining approval of FERC under Section 203 of the Federal Power Act, as amended (“FERC Approval”), HSR approval and other required governmental consents and approvals; (ii) no injunction or other orders preventing the consummation of the transactions contemplated under the Duke Midwest Purchase Agreement; (iii) the continuing accuracy of each party’s representations and warranties; and (iv) the satisfaction of other conditions.

7

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2014 and 2013

Each party has agreed to indemnify the other for breaches of representations and warranties, breaches of covenants and certain other matters, subject to certain exceptions and limitations. The Duke Midwest Purchase Agreement contains certain termination rights for both DRI and Duke Energy, including if the closing does not occur within nine months following the date of the Duke Midwest Purchase Agreement (subject to extension to 12 months, if necessary to obtain applicable governmental approvals). In the event the Duke Midwest Purchase Agreement is validly terminated then each of the parties shall be relieved of its duties and obligations arising under this agreement.
Concurrently with the execution of the Duke Midwest Purchase Agreement, Dynegy entered into a guaranty (the “Duke Midwest Acquisition Guaranty”), capped at $2.8 billion, in favor of Duke Energy, whereby Dynegy will guarantee the payment and performance of DRI’s obligations under the Duke Midwest Purchase Agreement, as well as under a transition services agreement to be entered into upon the closing of the Duke Midwest Acquisition. Please read Note 10—Commitments and Contingencies—Guarantees for further discussion.
ECP Purchase Agreements. Also on August 21, 2014, our wholly-owned subsidiary, Dynegy Resource II, LLC (“ERC Purchaser”) entered into a stock purchase agreement (the “ERC Purchase Agreement”) with Energy Capital Partners II, LP (“ECP II”), Energy Capital Partners II-A, LP (“ECP II-A”), Energy Capital Partners II-B, LP (“ECP II-B”), Energy Capital Partners II-C (Direct IP), LP (“ECP II-C”), Energy Capital Partners II-D, LP (“ECP II-D”), and Energy Capital Partners II (EquiPower Co-Invest), LP (“ECP Coinvest” and, collectively with ECP II, ECP II-A, ECP II-B, ECP II-C and ECP II-D, the “ERC Sellers”), EquiPower Resources Corp. (“ERC”), and solely for certain limited purposes set forth therein, each of Energy Capital Partners II-C, LP (“ECP II-C Fund”), and Dynegy, pursuant to which the ERC Purchaser will, subject to the terms and conditions in the ERC Purchase Agreement, purchase from ERC Sellers 100 percent of the equity interests in ERC, thereby acquiring (i) five combined cycle gas facilities in Connecticut, Massachusetts and Pennsylvania, (ii) a partial interest in one natural gas-fired peaking facility in Illinois, (iii) two gas and oil fired peaking facilities in Ohio and (iv) one coal-fired facility in Illinois (the “ERC Acquisition”).
On August 21, 2014, in a related transaction, Dynegy’s wholly-owned subsidiaries, Dynegy Resource III, LLC, a Delaware limited liability company (the “Brayton Purchaser” and, together with the ERC Purchaser, the “ECP Purchasers”), and Dynegy Resource III-A, LLC, the (“Merger Sub”), entered into a stock purchase agreement and agreement and plan of merger (the “Brayton Purchase Agreement”) with Energy Capital Partners GP II, LP (“ECP GP”), ECP II, ECP II-A, ECP II-B, ECP II-D, and Energy Capital Partners II-C (Cayman), L.P. (“ECP II-C (Cayman)” and, collectively with ECP GP, ECP II, ECP II-A, ECP II-B and ECP II-D, the “Brayton Sellers” and, together with the ERC Sellers, the “ECP Sellers”), Brayton Point Holdings, LLC (“Brayton”), and, solely for certain limited purposes set forth therein, each of ECP II-C Fund and Dynegy, pursuant to which Brayton Purchaser will, subject to the terms and conditions in the Brayton Purchase Agreement, acquire from Brayton Sellers and other holders of equity interests in Brayton, through a stock purchase and the related merger of Merger Sub with and into Brayton, 100 percent of the equity interests in Brayton (the “Brayton Acquisition”). The closing of each of the ERC Acquisition and the Brayton Acquisition (collectively, the “EquiPower Acquisition”) is contingent on the simultaneous closing of the other acquisition, and such closings are expected to occur by the end of the first quarter of 2015. The EquiPower Acquisition will add approximately 6,300 MW (based on winter capacity) of generation in Connecticut, Illinois, Massachusetts, Ohio and Pennsylvania. The aggregate base purchase price for the EquiPower Acquisition is $3.25 billion in cash plus $200 million in common stock of Dynegy, subject to certain adjustments.
The ERC Purchase Agreement and the Brayton Purchase Agreement (collectively, the “ECP Purchase Agreements”) include customary representations, warranties and covenants by the respective parties thereto, and are subject to various closing conditions, including (i) obtaining FERC Approval, HSR approval and other required governmental approvals; (ii) no injunction or other legal prohibition preventing the closing under the applicable ECP Purchase Agreement; (iii) the continuing accuracy of each applicable party’s representations and warranties; and (iv) the satisfaction of other customary conditions.
Under the ECP Purchase Agreements, the applicable parties have agreed to indemnify the other applicable parties for breaches of representations and warranties, breaches of covenants and certain other matters, subject to certain exceptions and limitations.  The ECP Purchasers shall, in aggregate, not be entitled to indemnification in excess of $276 million, and a portion of the purchase price will be held in escrow for one year after closing to support the indemnification obligations of the ECP Sellers.
The ECP Purchase Agreements contain certain termination rights for the respective ECP Purchasers and ECP Sellers, including if the closings of the applicable ECP Purchase Agreements do not occur by May 8, 2015. The ECP Purchase Agreements provide for the payment of a termination fee, in aggregate, of $207 million by Dynegy under specific circumstances, including where either of the applicable ECP Purchase Agreements is terminated because of a breach of the representations, warranties or covenants by the applicable ECP Purchaser. Please read Note 10—Commitments and Contingencies—Guarantees for further discussion.

8

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2014 and 2013

Please read Note 16—Subsequent Events for discussion of the financing arrangements for the Duke Midwest Acquisition and EquiPower Acquisition.
AER Transaction Agreement. On December 2, 2013, pursuant to the terms of the definitive agreement dated as of March 14, 2013 and as amended on December 2, 2013 (the “AER Transaction Agreement”) by and between Illinois Power Holdings, LLC (“IPH”), an indirect wholly-owned subsidiary of Dynegy, and Ameren Corporation (“Ameren”), IPH completed its acquisition from Ameren of 100 percent of the equity interests of New Ameren Energy Resources, LLC (“AER”) and its subsidiaries (the “AER Acquisition”).  The acquisition added 4,062 MW of generation in Illinois and also included the Homefield Energy retail business. There was no cash consideration or stock issued as part of the purchase price. We acquired AER and its subsidiaries through IPH which maintains corporate separateness from our legal entities outside of IPH.
In connection with the AER Acquisition, Ameren retained certain historical obligations of Illinois Power Resources, LLC (“IPR”) and its subsidiaries, including certain historical environmental and tax liabilities.  Approximately $825 million in aggregate principal amount of Genco notes remained outstanding as an obligation of Genco. Additionally, Ameren is required to maintain its existing credit support, including all of its collateral obligations with respect to Illinois Power Marketing Company (“IPM”), for a period not to exceed two years following closing. Dynegy has provided a limited guaranty of certain obligations of IPH up to $25 million (the “Limited Guaranty”) as further described in Note 10—Commitments and ContingenciesGuarantees.    
We incurred acquisition and integration costs of less than $1 million and $8 million for the three and nine months ended September 30, 2014, respectively, and $2 million and $6 million for the three and nine months ended September 30, 2013, respectively. These costs were included in Acquisition and integration costs in our unaudited consolidated statements of operations. Revenues of $236 million and $619 million and net income of $14 million and net loss of $58 million attributable to IPH are included in our unaudited consolidated statements of operations for the three and nine months ended September 30, 2014, respectively. Please read Note 15—Segment Information for further discussion.
As noted in Note 3—Merger and Acquisitions in our Form 10-K, Dynegy recorded the assets acquired and liabilities assumed as part of the AER Transaction Agreement at their estimated fair values on the acquisition date. These assets and liabilities were recorded at provisional fair values. As of June 30, 2014, we completed our valuations which resulted in immaterial changes to the provisional fair values.
Pro Forma Results. The unaudited pro forma financial results for the nine months ended September 30, 2013 assume the AER Acquisition had occurred on January 1, 2013. 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, 2013, nor are they indicative of future results of operations.
(amounts in millions)
 
Nine Months Ended September 30, 2013
Revenues
 
$
1,996

Net loss
 
$
(307
)
Net loss attributable to noncontrolling interest
 
$
(3
)
Net loss attributable to Dynegy Inc.
 
$
(304
)
Divestiture
Black Mountain. On June 27, 2014, we completed the sale of our 50 percent interest in Nevada Cogeneration Associates #2, a partnership that owns Black Mountain, an 85 MW (43 net MW) natural gas-fired facility in Nevada. We received $3 million and $17 million in cash proceeds from the close of the transaction during the three and nine months ended September 30, 2014, respectively, which is reflected in Gain on sale of assets, net in our unaudited consolidated statements of operations. In connection with the sale, our guarantee associated with the power purchase agreement was terminated. Additionally, we received $10 million in cash distributions from Black Mountain, which is recorded as Earnings from unconsolidated investments in our unaudited consolidated statements of operations for the nine months ended September 30, 2014.
Discontinued Operations
On April 30, 2013, we completed the sale of Dynegy Roseton, L.L.C. (“Roseton”). On November 1, 2013, the Dynegy Danskammer, L.L.C. (“Danskammer”) assets were sold. Any activity related to our Roseton and Danskammer operations is included in Income from discontinued operations, net of tax in our unaudited consolidated statements of operations for the three and nine months ended September 30, 2013.

9

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2014 and 2013

Note 4—Risk Management Activities, Derivatives and Financial Instruments
The nature of our business necessarily involves commodity market and financial risks.  Specifically, we are exposed to commodity price variability related to our power generation business.  Our commercial team manages these commodity price risks with financially settled and other types of contracts consistent with our commodity risk management policy.  Our treasury team manages our financial risks and exposures associated with interest 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 manage commodity price risk by entering into capacity forward sales arrangements, tolling arrangements, RMR contracts, fixed price coal purchases and other arrangements that do not receive recurring fair value accounting treatment because these arrangements do not meet the definition of a derivative or are designated as “normal purchase, normal sale,” in accordance with ASC 815.  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, 2014, we had net purchases and sales of derivative contracts outstanding in the following quantities:
Contract Type
 
Hedge Designation
 
Quantity
 
Unit of Measure
 
Fair Value (1)
(dollars and quantities in millions)
 
 
 
Purchases (Sales)
 
 
 
Asset (Liability)
Commodity contracts:
 
 
 
 

 
 
 
 

Electricity derivatives (2)
 
Not designated
 
(31
)
 
MWh
 
$
(51
)
Electricity basis derivatives (3)
 
Not designated
 
(28
)
 
MWh
 
$
2

Natural gas derivatives (2)
 
Not designated
 
84

 
MMBtu
 
$
(21
)
Natural gas basis derivatives
 
Not designated
 
29

 
MMBtu
 
$
(10
)
Diesel fuel derivatives
 
Not designated
 
8

 
Gallon
 
$
(1
)
Coal derivatives
 
Not designated
 

 
Metric Ton
 
$
(2
)
Emissions derivatives
 
Not designated
 
4

 
Metric Ton
 
$

Interest rate swaps
 
Not designated
 
787

 
U.S. Dollar
 
$
(40
)
Common stock warrants (4)
 
Not designated
 
16

 
Warrant
 
$
(64
)
__________________________________________
(1)
Includes both asset and liability risk management positions, but excludes margin and collateral netting of $6 million.
(2)
Mainly comprised of swaps, options and physical forwards.
(3)
Comprised of FTRs and swaps.
(4)
Each warrant is convertible into one share of Dynegy common stock.
Derivatives on the Balance Sheet.  The following tables present the fair value and balance sheet classification of derivatives in the unaudited consolidated balance sheets as of September 30, 2014 and December 31, 2013. As of September 30, 2014 and December 31, 2013, there were no gross amounts available to be offset that were not offset in our unaudited consolidated balance sheets.

10

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2014 and 2013

 
 
 
 
 
September 30, 2014
 
 
 
 
 
 
 
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
 
$
60

 
$
(45
)
 
$


 
$
15

 
Total derivative assets
 
 
 
$
60

 
$
(45
)
 
$

 
$
15

 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Liabilities from risk management activities
 
$
(143
)
 
$
45

 
$
6

 
$
(92
)
 
Interest rate contracts
 
Liabilities from risk management activities
 
(40
)
 

 

 
(40
)
 
Common stock warrants
 
Other long-term liabilities
 
(64
)
 

 

 
(64
)
 
Total derivative liabilities
 
 
 
$
(247
)
 
$
45

 
$
6

 
$
(196
)
Total derivatives
 
 
 
$
(187
)
 
$

 
$
6

 
$
(181
)

 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
Gross amounts offset in the balance sheet
 
 
Contract Type
 
Balance Sheet Location
 
Gross Fair Value
 
Contract Netting
 
Collateral or Margin Received or Paid
 
Net Fair Value
(amounts in millions)
 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Assets from risk management activities
 
$
103

 
$
(67
)
 
$

 
$
36

 
Total derivative assets
 
 
 
$
103

 
$
(67
)
 
$

 
$
36

 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Liabilities from risk management activities
 
$
(122
)
 
$
67

 
$
4

 
$
(51
)
 
Interest rate contracts
 
Liabilities from risk management activities
 
(47
)
 

 

 
(47
)
 
Common stock warrants
 
Other long-term liabilities
 
(21
)
 

 

 
(21
)
 
Total derivative liabilities
 
 
 
$
(190
)
 
$
67

 
$
4

 
$
(119
)
Total derivatives
 
 
 
$
(87
)
 
$

 
$
4

 
$
(83
)
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 change, 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. The aggregate fair value of all commodity derivative instruments with credit-risk-related contingent features that are in a liability position that are not fully collateralized (excluding transactions with our clearing brokers that are fully collateralized) at September 30, 2014 is less than $1 million for which we have posted no collateral. Our remaining derivative instruments do not have credit-related collateral contingencies as they are included within our first-lien collateral program.

11

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2014 and 2013

The following table summarizes our total cash collateral posted as of September 30, 2014 and December 31, 2013, along with the location on the balance sheet and the amount applied against our short-term risk management liabilities.
Location on balance sheet
 
September 30, 2014
 
December 31, 2013
Collateral posted
 
Amount applied against short-term risk management liabilities
Collateral posted
 
Amount applied against short-term risk management liabilities
(amounts in millions)
 
 
 
 
 
 
 
 
Prepayments and other current assets
 
$
44

 
$
6

 
$
47

 
$
4

Impact of Derivatives on the Consolidated Statements of Operations
The following discussion and tables present the location and amount of gains and losses on derivative instruments in our unaudited consolidated statements of operations.
Financial Instruments Not Designated as Hedges.  We elect not to designate derivatives related to our power generation business and interest rate instruments as cash flow or fair value hedges.  Thus, we account for changes in the fair value of these derivatives within the consolidated statements of operations (herein referred to as “mark-to-market” accounting treatment).
The impact of mark-to-market gains (losses) on our unaudited consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013 is presented below.
Derivatives Not Designated
as Hedges
 
Location of Mark-to-market Gain (Loss) in Income on Derivatives
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
(amounts in millions)
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Revenues
 
$
10

 
$
29

 
$
(65
)
 
$
(8
)
Interest rate contracts
 
Interest expense
 
$
5

 
$
(5
)
 
$
7

 
$
(1
)
Common stock warrants
 
Other income (expense), net
 
$
6

 
$
8

 
$
(43
)
 
$
(1
)
The recognized impact of derivative financial instruments on our unaudited consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013 is 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,
 
 
2014
 
2013
 
2014
 
2013
(amounts in millions)
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Revenues
 
$
(3
)
 
$
(2
)
 
$
(212
)
 
$
(54
)
Interest rate contracts
 
Interest expense
 
$
1

 
$
(6
)
 
$
(6
)
 
$
(3
)
Common stock warrants
 
Other income (expense), net
 
$
6

 
$
8

 
$
(43
)
 
$
(1
)
Note 5—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 this valuation technique for all periods presented.  Please read Note 2Summary of Significant Accounting PoliciesFair Value Measurements in our Form 10-K for further discussion.
The following tables set forth, by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 and are presented on a gross basis before consideration of amounts netted under master netting agreements and the application of collateral and margin paid.

12

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2014 and 2013

 
 
Fair Value as of September 30, 2014
 (amounts in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

Assets from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
35

 
$
21

 
$
56

Natural gas derivatives
 

 
4

 

 
4

Total assets from commodity risk management activities
 
$

 
$
39

 
$
21

 
$
60

Liabilities:
 
 

 
 

 
 

 
.

Liabilities from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
(71
)
 
$
(34
)
 
$
(105
)
Natural gas derivatives
 

 
(34
)
 
(1
)
 
(35
)
Diesel fuel derivatives
 

 
(1
)
 

 
(1
)
Coal derivatives
 

 
(2
)
 

 
(2
)
Total liabilities from commodity risk management activities
 

 
(108
)
 
(35
)
 
(143
)
Liabilities from interest rate contracts
 

 
(40
)
 

 
(40
)
Liabilities from outstanding common stock warrants
 
(64
)
 

 

 
(64
)
Total liabilities
 
$
(64
)
 
$
(148
)
 
$
(35
)
 
$
(247
)

 
 
 
Fair Value as of December 31, 2013
 (amounts in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

Assets from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
44

 
$
50

 
$
94

Natural gas derivatives
 

 
9

 

 
9

Total assets from commodity risk management activities
 
$

 
$
53

 
$
50

 
$
103

Liabilities:
 
 

 
 

 
 

 
 

Liabilities from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
(55
)
 
$
(39
)
 
$
(94
)
Natural gas derivatives
 

 
(21
)
 

 
(21
)
Heat rate derivatives
 

 

 
(1
)
 
(1
)
Emissions derivatives
 

 
(2
)
 

 
(2
)
Coal derivatives
 

 
(4
)
 

 
(4
)
Total liabilities from commodity risk management activities
 

 
(82
)
 
(40
)
 
(122
)
Liabilities from interest rate contracts
 

 
(47
)
 

 
(47
)
Liabilities from outstanding common stock warrants
 
(21
)
 

 

 
(21
)
Total liabilities
 
$
(21
)
 
$
(129
)
 
$
(40
)
 
$
(190
)

13

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2014 and 2013

Level 3 Valuation Methods. The electricity derivatives classified within Level 3 include financial swaps executed in illiquid trading locations, capacity contracts, off-peak power options, FTRs and heat rate derivatives.  The curves used to generate the fair value of the financial swaps are based on basis adjustments applied to forward curves for liquid trading points, while the curves for the capacity deals are based upon auction results in the marketplace, which are infrequently executed.  Off-peak power options are valued using a Black-Scholes model which uses forward prices and market implied volatility. The forward market price of FTRs is derived using historical congestion patterns within the marketplace and heat rate derivative valuations are derived using a Black-Scholes spread model, which uses forward natural gas and power prices, market implied volatilities and modeled power/natural gas correlation values.  
Sensitivity to Changes in Significant Unobservable Inputs for Level 3 Valuations. The significant unobservable inputs used in the fair value measure of our commodity instruments categorized within Level 3 of the fair value hierarchy are estimates of future price correlation, future market volatility, forward congestion power price spreads and illiquid power location pricing basis to liquid locations. These estimates are generally independent of each other. Volatility curves and power price spreads are generally based on observable markets where available, or derived from historical prices and forward market prices from similar observable markets when not available. Increases in the price or volatility of the spread on a long/short position in isolation would result in a higher/lower fair value measurement. The significant unobservable inputs used in the valuation of Dynegy’s contracts classified as Level 3 as of September 30, 2014 are as follows:
Transaction Type
 
Quantity
 
Unit of Measure
 
Net Fair Value
 
Valuation Technique
 
Significant Unobservable Input
 
Significant Unobservable Inputs Range
(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
 
Electricity derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
Forward contracts—power (1)
 
(6
)
 
Million MWh
 
$
(17
)
 
Basis spread + liquid location
 
Basis spread
 
$7.00-$9.00
FTRs
 
22

 
Million MWh
 
$
4

 
Historical congestion
 
Forward price
 
$0.00-$11.00
Natural gas derivatives
 
1

 
MMBtu
 
$
(1
)
 
Illiquid pricing periods
 
Forward price
 
$2.65 - $3.25
Heat rate derivatives
 
46

 
Thousand Tons
 
$

 
Option model
 
Coal/power price correlation
 
0%-11%
 
(81
)
 
Thousand MWh
 
$

 
Option model
 
Power price volatility
 
71%-101%
__________________________________________
(1)
Represents forward financial and physical transactions at illiquid pricing locations.
The following tables set forth a reconciliation of changes in the fair value of financial instruments classified as Level 3 in the fair value hierarchy:
 
 
Three Months Ended September 30, 2014
(amounts in millions)
 
Electricity
Derivatives
 
Heat Rate Derivatives
 
Natural Gas Derivatives
 
Total
Balance at June 30, 2014
 
$
(14
)
 
$
(1
)
 
$

 
$
(15
)
Total gains (losses) included in earnings
 
3

 

 
(1
)
 
2

Settlements (1)
 
(2
)
 
1

 

 
(1
)
Balance at September 30, 2014
 
$
(13
)
 
$

 
$
(1
)
 
$
(14
)
Mark-to-market gains (losses) relating to instruments held as of September 30, 2014
 
$
3

 
$

 
$
(1
)
 
$
2



14

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2014 and 2013

 
 
Nine Months Ended September 30, 2014
(amounts in millions)
 
Electricity
Derivatives
 
Heat Rate Derivatives
 
Natural Gas Derivatives
 
Total
Balance at December 31, 2013
 
$
11

 
$
(1
)
 
$

 
$
10

Total losses included in earnings
 
(19
)
 

 
(1
)
 
(20
)
Settlements (1)
 
(5
)
 
1

 

 
(4
)
Balance at September 30, 2014
 
$
(13
)
 
$

 
$
(1
)
 
$
(14
)
Mark-to-market losses relating to instruments held as of September 30, 2014
 
$
(19
)
 
$

 
$
(1
)
 
$
(20
)

 
 
Three Months Ended September 30, 2013
(amounts in millions)
 
Electricity
Derivatives
 
Heat Rate Derivatives
 
Total
Balance at June 30, 2013
 
$
(3
)
 
$
1

 
$
(2
)
Total gains (losses) included in earnings
 
(5
)
 
1

 
(4
)
Settlements (1)
 

 
(1
)
 
(1
)
Balance at September 30, 2013
 
$
(8
)
 
$
1

 
$
(7
)
Mark-to-market gains (losses) relating to instruments held as of September 30, 2013
 
$
(5
)
 
$
1

 
$
(4
)
 
 
Nine Months Ended September 30, 2013
(amounts in millions)
 
Electricity
Derivatives
 
Heat Rate Derivatives
 
Total
Balance at December 31, 2012
 
$
5

 
$
2

 
$
7

Total losses included in earnings
 
(7
)
 

 
(7
)
Settlements (1)
 
(6
)
 
(1
)
 
(7
)
Balance at September 30, 2013
 
$
(8
)
 
$
1

 
$
(7
)
Mark-to-market losses relating to instruments held as of September 30, 2013
 
$
(7
)
 
$

 
$
(7
)
__________________________________________
(1)
For purposes of these tables, we define settlements as the beginning of period fair value of contracts that settled during the period.
Gains and losses recognized for Level 3 recurring items are included in Revenues on the unaudited consolidated statements of operations for commodity derivatives.  We believe an analysis of commodity instruments classified as Level 3 should be undertaken with the understanding that these items generally serve as economic hedges of our power generation portfolio.  We did not have any transfers between Level 1, Level 2 and Level 3 for the three and nine months ended September 30, 2014 and 2013.
Nonfinancial Assets and Liabilities.  Nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
We did not have any material nonfinancial assets or liabilities measured at fair value on a non-recurring basis during the three and nine months ended September 30, 2014 and 2013.    

15

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2014 and 2013

Fair Value of Financial Instruments.  The following table discloses the fair value of financial instruments recognized on our 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, 2014 and December 31, 2013, respectively.
 
 
September 30, 2014
 
December 31, 2013
(amounts in millions)
 
Carrying
Amount
 
Fair
 Value
 
Carrying
Amount
 
Fair
 Value
Dynegy Inc.:
 
 
 
 
 
 
 
 
Tranche B-2 Term Loan, due 2020 (1)(2)
 
$
(787
)
 
$
(783
)
 
$
(792
)
 
$
(802
)
5.875% Senior Notes, due 2023 (2)
 
$
(500
)
 
$
(465
)
 
$
(500
)
 
$
(468
)
Emissions Repurchase Agreements (2)
 
$
(29
)
 
$
(39
)
 
$
(17
)
 
$
(17
)
Interest rate derivatives (2)
 
$
(40
)
 
$
(40
)
 
$
(47
)
 
$
(47
)
Commodity-based derivative contracts (3)
 
$
(83
)
 
$
(83
)
 
$
(19
)
 
$
(19
)
Common stock warrants (4)
 
$
(64
)
 
$
(64
)
 
$
(21
)
 
$
(21
)
Genco:
 
 
 
 
 
 
 
 
7.95% Senior Notes Series F, due 2032 (2)(5)
 
$
(224
)
 
$
(274
)
 
$
(224
)
 
$
(216
)
7.00% Senior Notes Series H, due 2018 (2)(5)
 
$
(265
)
 
$
(287
)
 
$
(259
)
 
$
(252
)
6.30% Senior Notes Series I, due 2020 (2)(5)
 
$
(205
)
 
$
(235
)
 
$
(200
)
 
$
(196
)
__________________________________________
(1)
Carrying amount includes an unamortized discount of $3 million and $4 million as of September 30, 2014 and December 31, 2013, respectively. Please read Note 9—Debt for further discussion.
(2)
The fair values of these financial instruments are classified as Level 2 within the fair value hierarchy levels.
(3)
Carrying amount of commodity-based derivative contracts excludes $6 million and $4 million of cash posted as collateral, as of September 30, 2014 and December 31, 2013, respectively.
(4)
The fair value of the common stock warrants is classified as Level 1 within the fair value hierarchy levels.
(5)
Combined carrying amounts as of September 30, 2014 and December 31, 2013 include unamortized discounts of $131 million and $142 million, respectively. Please read Note 9—Debt for further discussion.
Note 6—Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income, net of tax, by component, associated with our defined benefit pension and other post-employment benefit plans are as follows:
 
 
Nine Months Ended September 30,
(amounts in millions)
 
2014
 
2013
Beginning of period
 
$
58

 
$
11

Other comprehensive income (loss) before reclassifications:

 
 
 
 
Actuarial gain (loss) and plan amendments (net of tax of zero and $25, respectively) (1)
 
(2
)
 
46

Amounts reclassified from accumulated other comprehensive income:

 


 


Reclassification of curtailment gain included in net loss (net of tax of zero) (2)
 

 
(7
)
Amortization of unrecognized prior service credit and actuarial gain (net of tax of zero) (3)
 
(3
)
 

Net current period other comprehensive income (loss), net of tax
 
(5
)
 
39

End of period
 
$
53

 
$
50

__________________________________________
(1)
As a result of amendments to certain of our pension and other post-employment benefit plans, we remeasured the affected plans during the third quarter 2013. Please read Note 18—Employee Compensation, Savings, Pension and Other Post-Employment Benefit Plans in our Form 10-K for further discussion.

16

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2014 and 2013

(2)
Amount related to the DNE pension curtailment gain and was recorded in Income from discontinued operations, net of tax on our unaudited consolidated statements of operations. Please read Note 12—Pension and Other Post-Employment Benefit Plans and Note 18—Employee Compensation, Savings, Pension and Other Post-Employment Benefit Plans in our Form 10-K for further discussion.
(3)
Amounts are associated with our defined benefit pension and other post-employment benefit plans and are included in the computation of net periodic pension cost (gain). Please read Note 12—Pension and Other Post-Employment Benefit Plans for further discussion.
Note 7—Inventory
A summary of our inventories is as follows: 
(amounts in millions)
 
September 30, 2014
 
December 31, 2013
Materials and supplies
 
$
83

 
$
81

Coal
 
96

 
92

Fuel oil
 
5

 
4

Emissions allowances (1)
 
2

 
4

Total
 
$
186

 
$
181

__________________________________________
(1)
As of December 31, 2013, this inventory was held as collateral by one of our counterparties as part of a financing arrangement. Please read Note 9—Debt—Emissions Repurchase Agreements for further discussion.
Note 8—Intangible Assets and Liabilities
In connection with fresh-start accounting on October 1, 2012 and the AER Acquisition on December 2, 2013, we recorded intangible assets and liabilities. The following table summarizes the components of our intangible assets and liabilities, on a net basis:    
 
 
September 30, 2014
 
December 31, 2013
(amounts in millions)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Electricity contracts, net
 
$
325

 
$
(247
)
 
$
78

 
$
330

 
$
(170
)
 
$
160

Coal contracts, net
 
39

 
(117
)
 
(78
)
 
39

 
(150
)
 
(111
)
Gas transport contracts
 
(24
)
 
15

 
(9
)
 
(24
)
 
9

 
(15
)
Total
 
$
340

 
$
(349
)
 
$
(9
)
 
$
345

 
$
(311
)
 
$
34

The following table presents our amortization of intangible assets and liabilities:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(amounts in millions)
 
2014
 
2013
 
2014
 
2013
Electricity contracts, net (1)
 
$
16

 
$
34

 
$
77

 
$
101

Coal contracts, net (2)
 
(11
)
 
31

 
(33
)
 
95

Gas transport contracts (2)
 
(2
)
 
(2
)
 
(6
)
 
(6
)
Total
 
$
3

 
$
63

 
$
38

 
$
190

__________________________________________
(1)
The amortization expense of these contracts is recognized in Revenues in our unaudited consolidated statements of operations.
(2)
The amortization expense of these contracts is recognized in Cost of sales in our unaudited consolidated statements of operations.

17

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2014 and 2013

Note 9—Debt
A summary of our long-term debt is as follows:
(amounts in millions)
 
September 30, 2014
 
December 31, 2013
Dynegy Inc.:
 
 
 
 
Tranche B-2 Term Loan, due 2020 (1)
 
$
790

 
$
796

5.875% Senior Notes, due 2023 (1)
 
500

 
500

Emissions Repurchase Agreements (1)
 
29

 
17

Genco:
 
 
 
 
7.95% Senior Notes Series F, due 2032 (1)
 
275

 
275

7.00% Senior Notes Series H, due 2018 (1)
 
300

 
300

6.30% Senior Notes Series I, due 2020 (1)
 
250

 
250

 
 
2,144

 
2,138

Unamortized discount on debt, net
 
(134
)
 
(146
)
 
 
2,010

 
1,992

Less: Current maturities, including unamortized discounts, net
 
37

 
13

Total Long-term debt
 
$
1,973

 
$
1,979

__________________________________________
(1)
Please read Note 12—Debt in our Form 10-K for further discussion.    
The Company has a $1.275 billion credit agreement that consists of (i) an $800 million seven-year senior secured term loan B facility (the “Tranche B-2 Term Loan”) and (ii) a $475 million five-year senior secured revolving credit facility (the “Revolving Facility,” and collectively with the Tranche B-2 Term Loan, the “Credit Agreement”). Dynegy and its Subsidiary Guarantors (as defined in the Credit Agreement) also entered into an indenture pursuant to which Dynegy issued $500 million in aggregate principal amount of unsecured senior notes (the “Senior Notes”) at par.
At September 30, 2014, there were no amounts drawn on the Revolving Facility; however, we had outstanding letters of credit of approximately $124 million, which reduces the amount available under the Revolving Facility.
The Credit Agreement contains customary events of default and affirmative and negative covenants, subject to certain specified exceptions, including a Senior Secured Leverage Ratio (as defined in the Credit Agreement) calculated on a rolling four quarters basis. Based on the calculation outlined in the Credit Agreement, we are in compliance at September 30, 2014.
    Subsequent to September 30, 2014, we completed our financings associated with the Duke Midwest Acquisition and the EquiPower Acquisition. Please read Note 16—Subsequent Events for further discussion.
Genco Senior Notes     
On December 2, 2013, in connection with the AER Acquisition, Genco’s approximately $825 million in aggregate principal amount of unsecured senior notes (the “Genco Senior Notes”) remained outstanding as an obligation of Genco, a subsidiary of IPH.
Genco’s indenture includes provisions that require Genco to maintain certain interest coverage and debt-to-capital ratios in order for Genco to pay dividends, to make principal or interest payments on subordinated borrowings, to make loans to or investments in affiliates, or to incur additional external, third-party indebtedness.         
The following table summarizes these required ratios:
 
 
Required Ratio
Restricted payment interest coverage ratio (1)
 
≥1.75
Additional indebtedness interest coverage ratio (2)
 
≥2.50
Additional indebtedness debt-to-capital ratio (2)
 
≤60%

18

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2014 and 2013

__________________________________________
(1)
As of the date of a restricted payment, as defined, the minimum ratio must have been achieved for the most recently ended four fiscal quarters and projected by management to be achieved for each of the subsequent four six-month periods.
(2)
Ratios must be computed on a pro forma basis considering the additional indebtedness to be incurred and the related interest expense. Other borrowings from third-party external sources are included in the definition of indebtedness and are subject to these incurrence tests.
Genco’s debt incurrence-related ratio restrictions under the indenture may be disregarded if both Moody’s and S&P reaffirm the ratings in place at the time of the debt incurrence after considering the additional indebtedness.    
Based on September 30, 2014 calculations, Genco’s interest coverage ratios are less than the minimum ratios required for Genco to pay dividends and borrow additional funds from external, third-party sources.
Letter of Credit Facilities
On January 29, 2014, IPM entered into a fully cash collateralized Letter of Credit and Reimbursement Agreement with Union Bank, N.A., as amended on May 16, 2014 (“LC Agreement”), pursuant to which Union Bank agreed to issue from time to time, one or more standby letters of credit in an aggregate stated amount not to exceed $25 million at any one time to support performance obligations and other general corporate activities of IPM, provided that IPM deposits in an account controlled by Union Bank an amount of cash sufficient to cover the face value of such requested letter of credit plus an additional percentage thereon. As of September 30, 2014, IPM had $10.5 million deposited with Union Bank and $10 million in letters of credit outstanding.
On September 18, 2014, Dynegy entered into a Letter of Credit Reimbursement Agreement with Macquarie Bank Limited (“Macquarie Bank”) and Macquarie Energy LLC (the “Lender”), pursuant to which the Lender agreed to cause the Macquarie Bank to issue a single-use standby letter of credit in an amount not to exceed $55 million. The facility has a one-year tenor and may be extended at the Lender’s option up to one additional year. At September 30, 2014, there was $55 million outstanding under this letter of credit.
Emissions Repurchase Agreements
During the fourth quarter 2013, we entered into two repurchase transactions with a third party in which we sold $6 million in California Carbon Allowance (“CCA”) credits and $11 million of Regional Greenhouse Gas Initiative (“RGGI”) inventory and received cash. In the first quarter 2014, we entered into an additional repurchase agreement with a third party in which we sold $12 million of RGGI inventory and received cash. We repurchased $6 million in CCA credits in October 2014 and are obligated to repurchase the RGGI inventory in February 2015 at a specified price that includes a carry cost of approximately 350 basis points.
Note 10—Commitments and Contingencies
 Legal Proceedings
Set forth below is a summary of our material ongoing legal proceedings. We record accruals for estimated losses from contingencies when available information i