Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 1, 2017)
  • 10-Q (Aug 4, 2017)
  • 10-Q (May 5, 2017)
  • 10-Q (Nov 2, 2016)
  • 10-Q (Aug 4, 2016)
  • 10-Q (May 4, 2016)

 
8-K

 
Other

Dynegy 10-Q 2012
DYN-2012.9.30_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, 2012
 
o      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to ________

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

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

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

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




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 classes of common stock, as of the latest practicable date: Common stock, $0.01 par value per share, 99,999,196 shares outstanding as of November 2, 2012.
 



TABLE OF CONTENTS
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
Item 1.
FINANCIAL STATEMENTS:
 
 
 
Condensed Consolidated Balance Sheets:
 
September 30, 2012 and December 31, 2011
Condensed Consolidated Statements of Operations:
 
For the three and nine months ended September 30, 2012 and 2011
Condensed Consolidated Statements of Comprehensive Loss:
 
For the three and nine months ended September 30, 2012 and 2011
Condensed Consolidated Statements of Cash Flows:
 
For the nine months ended September 30, 2012 and 2011
Notes to Condensed Consolidated Financial Statements
 
 
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 4.
CONTROLS AND PROCEDURES
 
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
LEGAL PROCEEDINGS
Item 1A.
RISK FACTORS
 
 
 
Item 6.
EXHIBITS









i



DEFINITIONS
 
As used in this Form 10-Q, the abbreviations contained herein have the meanings set forth below.
 
ARO
 
Asset Retirement Obligation
ASC
 
Accounting Standards Codification
ASU
 
Accounting Standards Update
BTA
 
Best technology available
CAIR
 
Clean Air Interstate Rule
CAISO
 
The California Independent System Operator
CCR
 
Coal Combustion Residuals
CEQA
 
California Environmental Quality Act
CERCLA
 
The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended
CEO
 
Chief Executive Officer
CFO
 
Chief Financial Officer
CO2
 
Carbon Dioxide
CRCG
 
Commodity Risk Control Group
CSAPR
 
Cross-State Air Pollution Rule
CWA
 
Clean Water Act
DCIH
 
Dynegy Coal Investments Holdings, LLC
DGIN
 
Dynegy Gas Investments, LLC
DH
 
Dynegy Holdings, LLC (formerly known as Dynegy Holdings Inc.)
DMSLP
 
Dynegy Midstream Services L.P.
EBITDA
 
Earnings before interest, taxes, depreciation and amortization
EMA
 
Energy Management Agency Services Agreement
EMT
 
Executive Management Team
EPA
 
Environmental Protection Agency
FASB
 
Financial Accounting Standards Board
FERC
 
Federal Energy Regulatory Commission
FTR
 
Financial Transmission Rights
GAAP
 
Generally Accepted Accounting Principles of the United States of America
GHG
 
Greenhouse Gas
ICC
 
Illinois Commerce Commission
IFRS
 
International Financial Reporting Standards
IMA
 
In-market asset availability
IRS
 
Internal Revenue Service
ISO
 
Independent System Operator
ISO-NE
 
Independent System Operator New England
LC
 
Letter of Credit
LIBOR
 
London Interbank Offered Rate
MISO
 
Midwest Independent Transmission System Operator, Inc.
MMBtu
 
One million British thermal units
MW
 
Megawatts
MWh
 
Megawatt hour
NM
 
Not Meaningful
NOL
 
Net operating loss
NOx
 
Nitrogen oxide
NPDES
 
National Pollutant Discharge Elimination System
NRG
 
NRG Energy, Inc.

ii


NYISO
 
New York Independent System Operator
NYSDEC
 
New York State Department of Environmental Conservation
OTC
 
Over-the-counter
PJM
 
PJM Interconnection, LLC
RFO
 
Request for offer
RGGI
 
Regional Greenhouse Gas Initiative
RMR
 
Reliability Must Run
RPM
 
Reliability Pricing Model
RTO
 
Regional Transmission Organization
SCE
 
Southern California Edison
SEC
 
U.S. Securities and Exchange Commission
SIP
 
State Implementation Plan
SO2
 
Sulfur dioxide
SPDES
 
State Pollutant Discharge Elimination System
VaR
 
Value at Risk
VIE
 
Variable Interest Entity
VLGC
 
Very Large Gas Carrier

iii




Item 1—FINANCIAL STATEMENTS

DYNEGY INC.
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (in millions)
 
 
 
September 30, 2012
 
December 31, 2011
ASSETS
 
 

 
 

Current Assets
 
 

 
 

Cash and cash equivalents
 
$
677

 
$
398

Restricted cash and investments
 
357

 
159

Accounts receivable, net of allowance for doubtful accounts of $29 and $12, respectively
 
131

 
147

Accounts receivable, affiliates
 

 
26

Interest receivable, affiliates
 

 
8

Inventory
 
125

 
65

Assets from risk-management activities
 
563

 
2,615

Assets from risk-management activities, affiliates
 

 
2

Broker margin account
 
43

 
23

Intangible assets
 
211

 
49

Prepayments and other current assets
 
124

 
77

Total Current Assets
 
2,231

 
3,569

Property, Plant and Equipment
 
4,436

 
3,911

Accumulated depreciation
 
(1,166
)
 
(1,090
)
Property, Plant and Equipment, Net
 
3,270

 
2,821

Other Assets
 
 

 
 

Restricted cash and investments
 
289

 
455

Assets from risk-management activities
 
16

 
26

Intangible assets
 
96

 
92

Undertaking receivable, affiliate
 

 
1,250

Deferred income taxes
 

 
44

Other long-term assets
 
69

 
54

Total Assets
 
$
5,971

 
$
8,311

 
See the notes to condensed consolidated financial statements.

1


DYNEGY INC.
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (in millions, except share data)

 
 
 
September 30, 2012
 
December 31, 2011
LIABILITIES AND STOCKHOLDERS' AND MEMBER'S EQUITY (DEFICIT)
 
 

 
 

Current Liabilities
 
 

 
 

Accounts payable
 
$
92

 
$
80

Accounts payable, affiliates
 

 
47

Accrued interest
 
1

 
1

Deferred income taxes
 

 
50

Accrued liabilities and other current liabilities
 
133

 
64

Liabilities from risk-management activities
 
625

 
2,798

Liabilities from risk-management activities, affiliates
 

 
4

Notes payable and current portion of long-term debt
 
16

 
7

Total Current Liabilities
 
867

 
3,051

Liabilities subject to compromise
 
4,290

 
4,012

Long-term debt
 
1,661

 
1,069

Other Liabilities
 
 

 
 

Liabilities from risk-management activities
 
48

 
20

Liabilities from risk-management activities, affiliates
 

 
3

Other long-term liabilities
 
255

 
124

Total Liabilities
 
7,121

 
8,279

Commitments and Contingencies (Note 14)
 


 


 
 
 
 
 
Stockholders’/Member's Equity (Deficit)
 
 
 
 
Common Stock, $0.01 par value, 420,000,000 shares authorized at September 30, 2012; 123,630,089 shares issued and outstanding at September 30, 2012
 
1

 

Member's Contribution
 

 
5,135

Affiliate Receivable
 

 
(846
)
Additional paid-in capital
 
5,159

 

Accumulated other comprehensive loss, net of tax
 
(24
)
 
1

Accumulated deficit
 
(6,286
)
 
(4,258
)
Total Stockholders’/Member's Equity (Deficit)
 
(1,150
)
 
32

Total Liabilities and Stockholders'/Member's Equity (Deficit)
 
$
5,971

 
$
8,311


See the notes to condensed consolidated financial statements.


2



DYNEGY INC.
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) (in millions)
 
 
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
Revenues
 
$
477

 
$
467

 
$
1,042

 
$
1,298

Cost of sales
 
(332
)
 
(278
)
 
(697
)
 
(781
)
Gross margin, exclusive of depreciation shown separately below
 
145

 
189

 
345

 
517

Operating and maintenance expense, exclusive of depreciation shown separately below
 
(84
)
 
(87
)
 
(196
)
 
(303
)
Depreciation and amortization expense
 
(45
)
 
(60
)
 
(110
)
 
(261
)
Impairment and other charges
 

 
(3
)
 

 
(6
)
General and administrative expenses
 
(29
)
 
(25
)
 
(66
)
 
(87
)
Operating income (loss)
 
(13
)
 
14

 
(27
)
 
(140
)
Bankruptcy reorganization charges
 
18

 

 
(252
)
 

Interest expense
 
(48
)
 
(105
)
 
(121
)
 
(283
)
Debt extinguishment costs
 

 
(21
)
 

 
(21
)
Impairment of Undertaking receivable, affiliate
 

 

 
(832
)
 

Other income and expense, net
 

 
7

 
31

 
11

Loss before income taxes
 
(43
)
 
(105
)
 
(1,201
)
 
(433
)
Income tax benefit (expense) (Note 17)
 
2

 
(24
)
 
9

 
109

Net loss
 
$
(41
)
 
$
(129
)
 
$
(1,192
)
 
$
(324
)
 
See the notes to condensed consolidated financial statements.

 

3



DYNEGY INC.
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited) (in millions)
 
 
 
Three Months Ended September 30,
 
 
2012
 
2011
Net loss
 
$
(41
)
 
$
(129
)
Amortization of unrecognized prior service cost and actuarial loss (net of tax expense of zero and zero)
 
1

 
1

Total Other comprehensive income, net of tax
 
1

 
1

Comprehensive loss
 
$
(40
)
 
$
(128
)
 
 
 
Nine Months Ended September 30,
 
 
2012
 
2011
Net loss
 
$
(1,192
)
 
$
(324
)
Amortization of unrecognized prior service cost and actuarial loss (net of tax expense of zero and $1)
 

 
2

Total Other comprehensive income, net of tax
 

 
2

Comprehensive loss
 
$
(1,192
)
 
$
(322
)
 
See the notes to condensed consolidated financial statements.



4


DYNEGY INC.
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in millions)
 
 
Nine Months Ended September 30,
 
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net loss
 
$
(1,192
)
 
$
(324
)
Adjustments to reconcile net loss to net cash flows from operating activities:
 
 
 
 
Depreciation and amortization
 
118

 
278

Bankruptcy reorganization charges
 
213

 

Impairment and other charges
 

 
2

Impairment of Undertaking receivable, affiliate
 
832

 

Risk-management activities
 
(79
)
 
142

Risk-management activities, affiliate
 
(3
)
 
(2
)
Deferred income taxes
 
(9
)
 
(109
)
Debt extinguishment costs
 

 
21

Amortization of intangibles
 
79

 
30

Other
 
2

 
3

Changes in working capital:
 
 
 
 
Accounts receivable
 
9

 
54

Inventory
 
7

 
17

Broker margin account
 
(12
)
 
(53
)
Prepayments and other assets
 
(31
)
 
(40
)
Affiliate transactions
 
19

 
(47
)
Accounts payable and accrued liabilities
 
26

 
91

Changes in non-current assets
 
(16
)
 
(69
)
Changes in non-current liabilities
 

 
2

Net cash used in operating activities
 
(37
)
 
(4
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Capital expenditures
 
(63
)
 
(163
)
Maturities of short-term investments
 

 
444

Purchases of short-term investments
 

 
(269
)
Decrease in restricted cash and investments
 
88

 
178

Acquisitions/divestitures
 
256

 
(441
)
Payments received for Undertaking, receivable affiliate
 
16

 

Other investing
 
3

 
10

Net cash provided by (used in) investing activities
 
300

 
(241
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Proceeds from long-term borrowings, net of financing costs
 

 
2,022

Repayments of borrowings
 
(11
)
 
(1,623
)
Recapitalization of Legacy Dynegy
 
27

 

Debt extinguishment costs
 

 
(21
)
Net cash provided by financing activities
 
16

 
378

Net increase in cash and cash equivalents
 
279

 
133

Cash and cash equivalents, beginning of period
 
398

 
253

Cash and cash equivalents, end of period
 
$
677

 
$
386

Other non-cash investing activity:
 
 

 
 

Non-cash capital expenditures
 
$
(3
)
 
$
(3
)
Other non-cash financing activity:
 
 
 
 
Undertaking agreement, affiliate
 
$

 
$
(1,250
)
DMG Acquisition
 
$
466

 
$

 
See the notes to condensed consolidated financial statements. 

5

DYNEGY INC.
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2012 and 2011


EXPLANATORY NOTE

On September 30, 2012, pursuant to the terms of the Joint Chapter 11 Plan of Reorganization (the “Plan”) for Dynegy Holdings, LLC (“DH”) and Dynegy Inc. (“Dynegy”), DH merged with and into Dynegy, with Dynegy continuing as the surviving legal entity (the “Merger”). As described in Note 1—Basis of Presentation and Organization, the accounting treatment of the Merger is reflected as a recapitalization of DH and, similar to a reverse merger, DH is the surviving accounting entity for financial reporting purposes. Therefore, our historical results for periods prior to the Merger are the same as DH's historical results; accordingly, we refer to Dynegy as "Legacy Dynegy" for periods prior to the Merger.

Note 1—Basis of Presentation and Organization
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to interim financial reporting as prescribed by the SEC.  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. Discussions or areas of this report that apply only to Dynegy or DH are clearly noted in such sections or areas and specific defined terms may be introduced for use only in those sections or areas. 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 consolidated financial statements: (i) the Coal segment (“Coal”); (ii) the Gas segment (“Gas”) and (iii) the Dynegy Northeast segment (“DNE”).

The Gas segment includes Dynegy Power, LLC (“DPC”), which owns, directly and indirectly, substantially all of our wholly-owned natural gas-fired power generation facilities. DPC, a bankruptcy remote entity, and its direct and indirect subsidiaries are organized into a ring-fenced group for the benefit of the creditors of DPC.

The Coal segment includes Dynegy Midwest Generation, LLC (“DMG”), which owns, directly and indirectly, substantially all of the coal-fired power generation facilities. DMG, also a bankruptcy remote entity, and its direct and indirect subsidiaries are organized into a ring-fenced group for the benefit of the creditors of DMG. On September 1, 2011, DH sold 100 percent of the outstanding membership interests of Dynegy Coal Holdco (“Coal Holdco”) to Dynegy (the “DMG Transfer”). Therefore, the results of our Coal segment are only included in our consolidated results for the period from January 1, 2011 through August 31, 2011. On June 5, 2012, in connection with the Settlement Agreement (as defined and discussed below), DH reacquired Coal Holdco (including its subsidiary, DMG) from Dynegy (the “DMG Acquisition”). Therefore, the results of our Coal segment are only included in our consolidated results for the period from June 6, 2012 through September 30, 2012. Please read Note 5—Merger and Acquisition—DMG Acquisition for further discussion.

On September 30, 2012, pursuant to the terms of the Plan, DH merged with and into Legacy Dynegy, with Legacy Dynegy continuing as the surviving legal entity. Immediately prior to the Merger, Legacy Dynegy had no substantive operations, and our Coal, Gas and DNE operations were primarily conducted through subsidiaries of DH. Further, as a result of the DH Chapter 11 Cases in 2011, under applicable accounting standards, Dynegy was no longer deemed to have a controlling financial interest in DH and its wholly-owned subsidiaries; therefore, DH and its consolidated subsidiaries were no longer consolidated in Dynegy's consolidated financial statements as of November 7, 2011. As a result of these factors, the Merger was accounted for in a manner similar to a reverse merger, whereby DH is the surviving accounting entity for financial reporting purposes. Further, the net assets contributed by Legacy Dynegy, which amounted to $54 million, did not constitute a business and were therefore treated in a manner similar to a recapitalization and were credited to stockholder's equity. Prior to the Merger, DH was organized as a limited liability company and the capital structure of DH did not change until September 30, 2012. Although Legacy Dynegy's shares were publicly traded, DH did not have any publicly traded shares for any period presented; therefore, no earnings per share is presented on our unaudited condensed consolidated statement of operations for any period presented.

The year-end condensed consolidated balance sheet data was derived from the audited consolidated financial statements of DH but does not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP").  These interim financial statements should be read together with the consolidated financial statements

6

DYNEGY INC.
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2012 and 2011

and notes thereto included in DH's annual report on Form 10-K for the year ended December 31, 2011, filed on September 18, 2012, which, as a result of the Merger, we refer to as our “Form 10-K.”

Chapter 11 Filing by Certain Subsidiaries. On November 7, 2011, DH and four of its wholly-owned subsidiaries, Dynegy Northeast Generation, Inc. (“Dynegy Northeast Generation”), Hudson Power, L.L.C. (“Hudson”), Dynegy Danskammer, L.L.C. (“Danskammer”) and Dynegy Roseton, L.L.C. (“Roseton”, and together with DH, DNE, Hudson and Danskammer, the “DH Debtor Entities”) filed voluntary petitions (the “DH Chapter 11 Cases”) for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York, Poughkeepsie Division (the “Bankruptcy Court”). The DH Chapter 11 Cases were assigned to the Honorable Cecelia G. Morris and are being jointly administered for procedural purposes only. On July 6, 2012, Legacy Dynegy filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court (the “Dynegy Chapter 11 Case,” and together with the DH Chapter 11 Cases, the “Chapter 11 Cases”). The Dynegy Chapter 11 Case was also assigned to the Honorable Cecelia G. Morris, but was separately administered under the caption In re: Dynegy Inc., Case No. 12-36728. Only Legacy Dynegy and the DH Debtor Entities filed voluntary petitions for relief under the Bankruptcy Code, and none of our other direct or indirect subsidiaries are or were debtors thereunder. Consequently, our other direct or indirect subsidiaries continued to operate their business in the ordinary course. Legacy Dynegy and the DH Debtor Entities (together, the “Debtor Entities”) remained in possession of their property and continued to operate their business as “debtors in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Dynegy Chapter 11 Case was a necessary step to facilitate the restructuring contemplated by the Plan, the Settlement Agreement and the Plan Support Agreement (each as defined and described in Note 3—Chapter 11 Cases), including the Merger.

On September 10, 2012, the Bankruptcy Court entered an order confirming the Plan and on October 1, 2012, (the “Effective Date”), we consummated our reorganization under Chapter 11 pursuant to the Plan and Dynegy exited bankruptcy. Dynegy Northeast Generation, Hudson, Danskammer and Roseton (the “DNE Entities”) remain in Chapter 11 bankruptcy and continue to operate their businesses as “debtors-in-possession” (the “DNE Bankruptcy Cases”).

The consolidated financial statements as of and for all periods as included herein have neither been adjusted to reflect any changes in our capital structure as a result of the Plan nor have they been adjusted to reflect any changes in the fair value of assets and liabilities as a result of the adoption of fresh start accounting. Such adjustments will be applied to our financial statements from the Effective Date, and will be reported in our Form 10-K for the year ending December 31, 2012. Accordingly, our financial statements for periods subsequent to the Effective Date will not be comparable to previous periods as such previous periods do not give effect to any adjustments to the carrying values of assets or amounts of liabilities that might be necessary as a consequence of the Plan or the related application of fresh start accounting. Additional details regarding the status of the Chapter 11 Cases are included herein under Note 3—Chapter 11 Cases.

Going Concern

Our previously issued consolidated financial statements included cautionary language about our ability to continue as a going concern due to the Chapter 11 Cases. Dynegy, excluding the DNE Entities, emerged from Chapter 11 protection on October 1, 2012 and we believe we have sufficient liquidity to fund our operations. Please read Note 3—Chapter 11 Cases for further information.

Note 2—Accounting Policies

Use of Estimates
 
The preparation of consolidated financial statements in conformity with GAAP requires management to make informed estimates and judgments that affect our reported financial position and results of operations based on currently available information.  Actual results could differ materially from our estimates. The results of operations for the interim periods presented in this Form 10-Q are not necessarily indicative of the results to be expected for the full year or any other interim period due to seasonal fluctuations in demand for our energy products and services, changes in commodity prices, timing of maintenance and other expenditures, and other factors.


7

DYNEGY INC.
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2012 and 2011

Accounting Principles Adopted During the Current Period

Fair Value Measurement Disclosures.  In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04—Fair Value Measurement (Topic 820):  Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU No. 2011-04”).  This authoritative guidance changes the wording used to describe the requirements in GAAP for measuring fair value and requires additional disclosure about fair value measurements.  ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011.  The implementation of this guidance has been reflected in our fair value disclosures.

Presentation of Comprehensive Income.  In June 2011, the FASB issued ASU 2011-05—Comprehensive Income (Topic 220):  Presentation of Comprehensive Income (“ASU No. 2011-05”).  The FASB’s objective in issuing this guidance is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  ASU No. 2011-05 eliminates the option of presenting components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The standard requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  We have elected to present comprehensive income as two separate consecutive statements.

Accounting Principles Not Yet Adopted

Disclosures about Offsetting Assets and Liabilities.  In December 2011, the FASB issued ASU 2011-11—Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.  This statement requires entities to disclose both gross and net information about instruments and transactions eligible for offsetting in the statement of financial position, as well as instruments and transactions subject to an agreement similar to a master netting arrangement.  Implementation of this guidance would affect disclosures around financial derivative contracts, however would have no impact on the statement of financial position or the statement of operations.  This guidance is effective for the quarter ending March 31, 2013.

Note 3—Chapter 11 Cases

On November 7, 2011, the DH Debtor Entities commenced the DH Chapter 11 Cases.  On July 6, 2012, we commenced the Dynegy Chapter 11 Case. Throughout the pendency of the Chapter 11 Cases, the Debtor Entities remained in possession of their property and continued to operate their businesses as “debtors-in-possession” under the jurisdiction of and in accordance with the orders of the Bankruptcy Court and the Bankruptcy Code.

Only the Debtor Entities sought relief under the Bankruptcy Code, and none of our other direct or indirect subsidiaries were or are debtors thereunder. Coal Holdco and Dynegy GasCo Holdings, LLC and their indirect, wholly-owned subsidiaries (including DMG and DPC) were not included in the Chapter 11 Cases. The normal day-to-day operations of the coal-fired power generation facilities held by DMG and the gas-fired power generation facilities held by DPC continued without interruption during the Chapter 11 Cases (and continue, notwithstanding the ongoing DNE Bankruptcy Cases). The commencement of the Chapter 11 Cases did not constitute an event of default under either the DMG Credit Agreement or the DPC Credit Agreement.

On May 1, 2012, Dynegy and certain of its subsidiaries, including the DH Debtor Entities, entered into a settlement agreement with certain of DH's creditors, including certain beneficial holders of DH's then-outstanding senior notes, the owners and lessors of the Roseton and part of the Danskammer facilities, and U.S. Bank, in its capacity as trustee under an indenture governing certain lease certificates guaranteed by DH (the “Original Settlement Parties”).  On May 30, 2012, the Original Settlement Parties, holders of a majority of DH's then-outstanding subordinated notes, and, solely with respect to certain sections of the Settlement Agreement, Wells Fargo N.A., as successor trustee under the indenture governing DH's subordinated notes, entered into an amended and restated settlement agreement (the “Settlement Agreement”).

The Bankruptcy Court entered an order approving the Settlement Agreement on June 1, 2012 (the “Approval Order”) and the Settlement Agreement became effective on June 5, 2012.  Pursuant to the Settlement Agreement and the Approval Order, Dynegy and DH took certain steps towards their emergence from Chapter 11 bankruptcy, including the DMG Acquisition and the filing of the Plan.  In addition, parties to certain prepetition litigations (as discussed in Note 14—Commitments and Contingencies—Legal Proceedings—Creditor Litigation) and adversary proceedings (relating to the Roseton

8

DYNEGY INC.
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2012 and 2011

and Danskammer facilities) filed stipulations of dismissals in their respective litigations or proceedings and certain intercompany receivables pursuant to an agreement by Dynegy to make specified payments to Dynegy Gas Investments, LLC ("DGIN") (the "Undertaking Agreement") and a related DH promissory note were cancelled.

On September 10, 2012, the Bankruptcy Court entered an order confirming the Plan (the “Confirmation Order”). On September 30, 2012, pursuant to the terms of the Plan, DH merged with and into Dynegy, thereby consummating the Merger. On the Effective Date, we consummated our reorganization under Chapter 11 pursuant to the Plan and exited bankruptcy. The DNE Entities remain in Chapter 11 bankruptcy and continue to operate their businesses as “debtors-in-possession.” Capitalized terms used, but not defined, in this section only shall have the meanings ascribed to them in the Plan.

In addition to the Merger, the Plan included the following key elements:

On the Effective Date, all of Dynegy's Equity Interests, including Dynegy's old common stock, were cancelled.
Each holder of Allowed General Unsecured Claims received its Pro Rata Share of (a) 99 million shares of Dynegy Common Stock and (b) a $200 million cash payment (the “Plan Cash Payment”).
In full satisfaction of the Dynegy Administrative Claim (otherwise referred to herein as the “Administrative Claim”), the beneficial holders thereof (which were the holders of Dynegy's old common stock) received their Pro Rata Share of (a) one million shares of Dynegy Common Stock and (b) warrants to purchase approximately 15.6 million shares of Dynegy Common Stock for an exercise price of $40 per share (subject to adjustment) expiring on October 2, 2017 (the “Warrants”).
In addition, each holder of an Allowed General Unsecured Claim will receive, as applicable, their Pro Rata Share of the proceeds of the sale of the Roseton and Danskammer generation facilities (the “Facilities”) allocated to Dynegy (the “Facilities Sale”) according to the Settlement Agreement (the amount of which, if any, is to be determined); provided that, the Lease Trustee (on behalf of itself and the Lease Certificate Holders) will not receive a distribution of any amounts paid pursuant to the Facilities Sale in its capacity as holder of the Lease Guaranty Claim.

On the Effective Date, and pursuant to the Plan, outstanding obligations of approximately $4 billion in aggregate principal amount, were cancelled. These obligations included the following series of notes and related indentures and guaranties, as applicable:

DH's 8.75 percent senior notes due 2012;
DH's 7.5 percent senior unsecured notes due 2015;
DH's 8.375 percent senior unsecured notes due 2016;
DH's 7.125 percent senior debentures due 2018;
DH's 7.75 percent senior unsecured notes due 2019;
DH's 7.625 percent senior notes due 2026; and
DH's Series B 8.316 percent subordinated debentures due 2027 (the “2027 Notes”).

In addition, on the Effective Date, in connection with the cancellation of the 2027 Notes, the Series B 8.316 percent subordinated capital income securities due 2027 (the “NGC Notes”) issued by NGC Corporation Capital Trust I were cancelled, DH's guarantee of the NGC Notes was terminated and the indenture governing the NGC Notes was cancelled.

Finally, on the Effective Date, DH's obligations as a guarantor of the leases of the Facilities under the guaranty dated as of May 1, 2001, made by DH with respect to Roseton Units 1 and 2 and the guaranty, dated as of May 1, 2001, made by DH with respect to Danskammer Units 3 and 4 (the “Guaranties”) and all obligations thereunder were cancelled. In connection with the cancellation of the Guaranties, DH's obligations as a lessee guarantor under the Pass Through Trust Agreement, dated as of May 1, 2001 (the “Pass Through Trust Agreement”), among Roseton, Danskammer, and The Chase Manhattan Bank, as pass through trustee were terminated.


9

DYNEGY INC.
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2012 and 2011

We continue to be obligated to the terms of DH's $26 million cash collateralized letter of credit facility, which is collateralized by $27 million in restricted cash, as well as our approximately $1 million cash collateralized letter of credit facility.

Accounting Impact of Emergence

Upon emergence, we will apply fresh start accounting to our consolidated financial statements because (i) the reorganization value of the assets of the emerging entity immediately before the date of confirmation was less than the total of all post-petition liabilities and allowed claims and (ii) the holders of the existing voting shares of the predecessor's common stock immediately before confirmation received less than 50 percent of the voting shares of the emerging entity. Our Annual Report on Form 10-K for the fiscal year ending December 31, 2012 will reflect the consummation of the Plan and the adoption of fresh start accounting.

In the application of fresh start accounting, we will allocate our reorganization value to the fair value of assets and liabilities in conformity with the guidance for the acquisition method of accounting for business combinations. The amount remaining after allocation of the reorganization value to the fair value of identified tangible and intangible assets and liabilities, if any, will be reflected as goodwill and subject to periodic evaluation for impairment. In addition to fresh start accounting, our future consolidated financial statements will reflect all effects of the transactions contemplated by the Plan. Accordingly, our future financial statements will not be comparable in many respects to our consolidated financial statements for periods prior to the adoption of fresh start accounting and prior to accounting for the effects of the Plan.

Under the terms of the Plan, in exchange for the elimination of approximately $4 billion in debt and other obligations, unsecured creditors received approximately 99 million shares of Dynegy Common Stock and $200 million in cash on or about October 1, 2012. Legacy stockholders, as beneficiaries of the Administrative Claim, received (i) approximately one million shares of Dynegy Common Stock and (ii) Warrants that expire October 2, 2017, to purchase up to approximately 15.6 million shares of Dynegy Common Stock (on a fully-diluted basis) to be exercisable at $40 per share. Dynegy initiated the distributions of Dynegy Common Stock and the Plan Cash Payment to creditors and beneficial holders of the Dynegy Administrative Claim, according to the terms of the Plan, starting on the Effective Date. Dynegy has approximately 15.6 million Warrants outstanding (with shares of Dynegy Common Stock authorized and reserved for issuance on a one-for-one basis), and approximately 6.1 million shares of Dynegy Common Stock authorized and reserved for issuance for distributions to be made under Dynegy's long term incentive plan.

The Bankruptcy Court approved a range of $2.3 billion to $3.6 billion for our reorganization value. While we are currently in the process of determining the adjustments that will result from the application of fresh start accounting, we expect our final reorganization value to be at the lower end of the range approved by the Bankruptcy Court.

As discussed above, the DNE Entities have not emerged from Chapter 11 protection; Therefore, the DNE Entities will be deconsolidated as of October 1, 2012.

Note 4—DMG Transfer and Undertaking Agreement

On September 1, 2011, we completed the DMG Transfer which resulted in the transfer of our Coal segment (including DMG) to Legacy Dynegy in exchange for the Undertaking Agreement. In connection with the DMG Transfer, we recognized a loss of $1.77 billion, which was recorded as a reduction of member's equity because the transaction was between entities that were under common control at that time.

Note 5—Merger and Acquisition

Merger. On September 30, 2012, pursuant to the terms of the Plan, DH merged with and into Legacy Dynegy with Legacy Dynegy continuing as the surviving legal entity of the Merger. Immediately prior to the Merger, Legacy Dynegy had no substantive operations, and our Coal, Gas and DNE operations were primarily conducted through subsidiaries formerly held by DH. There was no consideration exchanged in the transaction and Legacy Dynegy, as the accounting acquiree, did not meet the definition of a business; therefore, we accounted for DH's acquisition of Legacy Dynegy as a “recapitalization.” Under this method of accounting, the net assets of $54 million contributed by Legacy Dynegy were credited directly to stockholder's

10

DYNEGY INC.
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2012 and 2011

equity. Furthermore, the surviving legal entity's historical results for periods prior to the Merger are the same as DH's historical results.
 
DMG Acquisition. On June 5, 2012, pursuant to the Settlement Agreement, Legacy Dynegy and DH consummated the DMG Acquisition. The DMG Acquisition was accounted for as a business combination in DH's financial statements as Legacy Dynegy deconsolidated DH, effective November 7, 2011, as a result of the DH Chapter 11 Cases. Accordingly, the assets acquired and liabilities assumed were recognized at their fair value as of the acquisition date.

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

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition (in millions):
Cash
$
256

Restricted cash (including $75 million current)
117

Accounts receivable
3

Inventory
69

Assets from risk management activities (including $84 million current)
85

Prepaids and other current assets
46

Property, plant and equipment
514

Intangible assets (including $162 million current)
257

Total assets acquired
1,347

Current liabilities and accrued liabilities
(60
)
Liabilities from risk management activities (including $66 million current)
(76
)
Long-term debt (including $9 million current)
(610
)
Asset retirement obligations
(53
)
Unfavorable coal contract (including $15 million current)
(38
)
Pension liabilities
(44
)
Total liabilities assumed
(881
)
Net assets acquired
$
466


In connection with the DMG Acquisition, we recorded intangible assets and liabilities related to rail transportation agreements and coal purchase agreements. These amounts are being amortized over their remaining contract terms which expire at the end of 2013 and 2015. The following table summarizes the activity related to these intangibles:


Coal Contracts
 
(in millions)
December 31, 2011
$

DMG Acquisition
219

Amortization expense
(49
)
September 30, 2012
$
170





11

DYNEGY INC.
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2012 and 2011

Pro Forma Results. Revenue and net loss attributable to the DMG Acquisition is included in our unaudited condensed consolidated statements of operations since the date of the acquisition of June 5, 2012. For the nine months ended September 30, 2012, the DMG Acquisition contributed approximately $166 million to our revenue and increased our net loss by approximately $87 million.

The unaudited pro forma financial results for the nine months ended September 30, 2012 show the effect of the DMG Acquisition as if the acquisition had occurred as of January 1, 2012. The unaudited pro forma financial results for the nine months ended September 30, 2011 disregard the DMG Transfer that occurred on September 1, 2011. This is presented for informational purposes only and is not indicative of future operations or results that would have been achieved had the acquisitions been completed as of January 1, 2011.
 
 
Nine Months Ended
September 30,
 

 
2012
 
2011
 
 
 
(in millions)
 
Revenue
 
$
1,272


$
1,347

 
Net loss
 
$
(447
)

$
(259
)
 

Note 6—Condensed Combined Financial Statements of the Debtor Entities
Condensed combined financial statements of the Debtor Entities are set forth below (in millions):

Condensed Combined Balance Sheet
 
September 30, 2012 (1)
 
December 31, 2011 (2)
Cash
$
292

 
$
33

Restricted cash and investments (including $27 million current)
30

 
27

Accounts receivable
26

 
8

Inventory
23

 
34

Investment in consolidated subsidiaries
6,431

 
5,568

Risk management, affiliate
3

 

Accrued interest from affiliate

 
8

Undertaking receivable from affiliate

 
1,250

Deferred income taxes

 
44

Other
33

 
14

Total assets
$
6,838

 
$
6,986

 
 
 
 

Current liabilities and accrued liabilities
$
60

 
$
10

Liabilities subject to compromise
4,290

 
4,012

Intercompany payable
465

 
1,577

Intercompany accrued interest
799

 
10

Long-term debt to affiliates
2,255

 
1,262

Deferred income taxes

 
50

Other
119

 
33

Total liabilities
$
7,988

 
$
6,954

Total member's equity
$
(1,150
)
 
$
32

Total liabilities and member's equity
$
6,838

 
$
6,986

__________________________________________
(1) Includes all Debtor Entities as of September 30, 2012, including the amounts acquired in the Merger.

12

DYNEGY INC.
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2012 and 2011

(2) Includes only DH Debtor Entities at December 31, 2011.

See Note 15—Liabilities Subject to Compromise for additional discussion of liabilities subject to compromise.

Condensed Combined Statement of Operations
 
Three Months Ended
September 30, 2012 (1)
 
Nine Months Ended September 30, 2012 (1)
Revenues
$
35

 
$
61

Cost of sales
(21
)
 
(35
)
Operating expenses
(16
)
 
(46
)
General and administrative expenses
(3
)
 
(7
)
Operating loss
(5
)
 
(27
)
Bankruptcy reorganization charges
18

 
(252
)
Equity losses
(46
)
 
(1,373
)
Interest expense, affiliate

 
(1
)
Other income and expense, net
(10
)
 
452

Income tax expense
2

 
9

Net loss
$
(41
)
 
$
(1,192
)
__________________________________________
(1) DH Debtor Entities included for the periods July 1, 2012 through September 30, 2012 and January 1, 2012 to September 30, 2012 for the three and nine months ended September 30, 2012, respectively.

Condensed Combined Statement of Cash Flows
 
Nine Months Ended September 30, 2012
Net cash provided by:
 
Operating activities
$
32

Investing activities
27

Financing activities
200

Net increase in cash and cash equivalents
259

Cash and cash equivalents, beginning of period
33

Cash and cash equivalents, end of period
$
292

Basis of Presentation.  The condensed combined financial statements only include the financial statements of the Debtor Entities. Transactions and balances of receivables and payables among the Debtor Entities are eliminated in consolidation. However, the condensed combined balance sheet includes receivables from related parties and payables to related parties that are not Debtor Entities. Actual settlement of these related party receivables and payables is, by historical practice, made on a net basis.
Interest Expense.  The Debtor Entities have discontinued recording interest on unsecured liabilities subject to compromise (“LSTC”). Contractual interest on LSTC not reflected in the condensed combined financial statements was approximately $74 million and $217 million for the three and nine months ended September 30, 2012, respectively.
Bankruptcy Reorganization Charges.  Bankruptcy reorganization charges represent the direct and incremental costs of bankruptcy, such as professional fees, pre-petition liability claim adjustments and losses related to terminated contracts that are probable and can be estimated. Bankruptcy reorganization charges, as shown in the condensed combined statement of operations above, consist of expense or income incurred or earned as a direct and incremental result of the bankruptcy filings. The table below lists the significant items within this category for the three and nine months ended September 30, 2012.

13

DYNEGY INC.
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2012 and 2011

 
Three Months Ended
September 30, 2012
 
Nine Months Ended September 30, 2012
 
(in millions)
Adjustments of estimated allowable claims:
 
 
 
DNE Leases (1)
$

 
$
(395
)
Subordinated notes (1)

 
161

Write-off of note payable, affiliate (2)

 
10

Other
(1
)
 
(5
)
Total adjustments for estimated allowable claims
(1
)
 
(229
)
Change in value of Administrative Claim (3)
26

 
17

Professional fees (4)
(7
)
 
(40
)
Total Bankruptcy reorganization charges
$
18

 
$
(252
)
__________________________________________
(1)
The estimated allowable claims related to the Facilities and the Subordinated Capital Income Securities were adjusted based on the terms of the Settlement Agreement. Please read Note 3—Chapter 11 Cases for further discussion.
(2)
It was determined that no claim related to a Note payable, affiliate would be made. Therefore, the estimated amount was reduced to zero.
(3)
The Administrative Claim was issued on the effective date of the Settlement Agreement. Please read Note 8—Fair Value Measurements—Fair Value of Financial Instruments and Note 3—Chapter 11 Cases for further discussion.
(4)
Professional fees relate primarily to the fees of attorneys and consultants working directly on the Chapter 11 Cases.

Note 7—Risk Management Activities, Derivatives and Financial Instruments
 
The nature of our business necessarily involves market and financial risks.  Specifically, we are exposed to commodity price variability related to our power generation business.  Our commercial team manages these commodity price risks with financially settled and other types of contracts consistent with our commodity risk management policy.  Our commercial team also uses financial instruments in an attempt to capture the benefit of fluctuations in market prices in the geographic regions where our assets operate.  Our treasury team manages our financial risks and exposures associated with interest expense variability.
 
Our commodity risk management strategy gives us the flexibility to sell energy and capacity through a combination of spot market sales and near-term contractual arrangements (generally over a rolling 1 to 3 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.  Increasing collateral requirements and our liquidity position could impact our ability to effectively employ our risk management strategy.
 
Many of our contractual arrangements are derivative instruments and are accounted for at fair value as part of Revenues in our unaudited condensed consolidated statements of operations.  We also manage commodity price risk by entering into capacity forward sales arrangements, tolling arrangements, RMR contracts, fixed price coal purchases and other arrangements that do not receive recurring fair value accounting treatment because these arrangements do not meet the definition of a derivative or are designated as “normal purchase normal sales.”  As a result, the gains and losses with respect to these arrangements are not reflected in the unaudited condensed consolidated statements of operations until the delivery occurs.
 
Quantitative Disclosures Related to Financial Instruments and Derivatives
 
The following disclosures and tables present information concerning the impact of derivative instruments on our unaudited condensed consolidated balance sheets and statements of operations.  In the table below, commodity contracts primarily consist of derivative contracts related to our power generation business that we have not designated as accounting hedges that are entered into for purposes of economically hedging future fuel requirements and sales commitments and securing commodity prices. We elect not to designate any of our commodity instruments as accounting hedges.  As of September 30, 2012, our commodity derivatives were comprised of both purchases and sales of commodities.  As of September 30, 2012, we

14

DYNEGY INC.
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2012 and 2011

had net purchases and sales of commodity derivative contracts and notional interest swaps outstanding in the following quantities:
Contract Type
 
Hedge Designation
 
Quantity
 
Unit of Measure
 
Net Fair Value
 
 
 
 
(in millions)
 
 
 
(in millions)
Commodity contracts:
 
 
 
 

 
 
 
 

Electric energy (1)
 
Not designated
 
(30
)
 
MWh
 
$
(13
)
Natural gas (1)
 
Not designated
 
10

 
MMBtu
 
$
(42
)
Heat rate derivatives
 
Not designated
 
(3)/21

 
MWh/MMBtu
 
$
(2
)
Crude oil
 
Not designated
 

 
BBL
 
$

Interest rate contracts:
 

 
 
 
 
 
 
  Interest rate swaps
 
Not designated
 
1,110

 
Dollars
 
$
(37
)
Interest rate caps
 
Not designated
 
1,400

 
Dollars
 
$

__________________________________________
(1) Mainly comprised of swaps, options and physical forwards.

Derivatives on the Balance Sheet.  We execute a significant volume of transactions through futures clearing managers.  Our daily cash payments (receipts) with our futures clearing managers consist of three parts: (i) fair value of open positions (exclusive of options) (“Daily Cash Settlements”); (ii) initial margin requirements of open positions (“Initial Margin”); and (iii) fair value related to options (“Options”, and collectively with Daily Cash Settlements and Initial Margin, “Collateral”).  We do not offset fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement and we do not elect to offset the fair value amounts recognized for the Daily Cash Settlements paid or received against the fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement.  As a result, our unaudited condensed consolidated balance sheets present derivative assets and liabilities, as well as related Collateral, as applicable, on a gross basis.

In addition to the transactions we execute through the futures clearing managers, we also execute transactions through multiple bilateral counterparties.  Our transactions with these counterparties are collateralized using cash collateral and first liens.  As of September 30, 2012, we had $94 million posted with these counterparties, which is included in Prepayments and other current assets on our unaudited condensed consolidated balance sheets.

The following table presents the fair value and balance sheet classification of derivatives in the unaudited condensed consolidated balance sheet as of September 30, 2012 and the consolidated balance sheet as of December 31, 2011 segregated by type of contract segregated by assets and liabilities.
 
Contract Type
 
Balance Sheet Location
 
September 30, 2012
 
December 31, 2011
 
 
 
 
(in millions)
Derivative Assets:
 
 
 
 

 
 

Commodity contracts
 
Assets from risk management activities
 
$
579

 
$
2,639

Commodity contracts, affiliates
 
Assets from risk management activities, affiliates
 

 
2

Interest rate contracts
 
Assets from risk management activities
 

 
2

Derivative Liabilities:
 
 
 
 

 
 

Commodity contracts
 
Liabilities from risk management activities
 
(636
)
 
(2,810
)
Commodity contracts, affiliates
 
Liabilities from risk management activities, affiliates
 

 
(7
)
Interest rate contracts
 
Liabilities from risk management activities
 
(37
)
 
(8
)
Total derivatives, net
 
 
 
$
(94
)
 
$
(182
)
 

15

DYNEGY INC.
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2012 and 2011

Impact of Derivatives on the Consolidated Statements of Operations
The following discussion and table presents the location and amount of gains and losses on derivative instruments in our consolidated statements of operations. We had no derivatives that were designated in qualifying hedging relationships during the three and nine months ended September 30, 2012 and 2011.
Financial Instruments Not Designated as Hedges.    We elect not to designate derivatives related to our power generation business and interest rate instruments as cash flow or fair value hedges.  Thus, we account for changes in the fair value of these derivatives within the consolidated statements of operations (herein referred to as “mark-to-market accounting treatment”).  As a result, these mark-to-market gains and losses are not reflected in the unaudited condensed consolidated statements of operations in the same period as the underlying activity for which the derivative instruments serve as economic hedges.
 
For the three months ended September 30, 2012, our revenues included approximately $17 million of unrealized mark-to-market gains related to this activity compared to $17 million of unrealized mark-to-market losses in the same period in the prior year.  For the nine months ended September 30, 2012, our revenues included approximately $103 million of unrealized mark-to-market gains related to this activity compared to $144 million of unrealized mark-to-market losses in the same period in the prior year.
 
The impact of derivative financial instruments, including realized and unrealized gains and losses, that have not been designated as hedges on our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011 is presented below.  Note that this presentation does not reflect the expected gains or losses arising from the underlying physical transactions associated with these financial instruments.  Therefore, this presentation is not indicative of the economic gross margin we expect to realize when the underlying physical transactions settle.
 
Derivatives Not Designated
as Hedges
 
Location of Gain ( Loss)
Recognized in Income on
Derivatives
 
Amount of Gain (Loss) Recognized in Income on Derivatives for the Three Months Ended September 30,
 
Amount of Gain (Loss) Recognized in Income on Derivatives for the Nine Months Ended September 30,
 
 
 
 
2012
 
2011
 
2012
 
2011
 
 
 
 
(in millions)
Commodity contracts
 
Revenues
 
$
(61
)
 
$
(62
)
 
$
(60
)
 
$
(132
)
Commodity contracts, affiliates
 
Revenues
 

 
(5
)
 
(6
)
 
(5
)
Interest rate contracts
 
Interest Expense
 
(12
)
 

 
(24
)
 


Note 8—Fair Value Measurements
 
We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best available information.  Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  For example, assets and liabilities from risk management activities may include exchange-traded derivative contracts and OTC derivative contracts.  Some exchange-traded derivatives are valued using broker or dealer quotations, or market transactions in either the listed or OTC markets.  In such cases, these exchange-traded derivatives are classified within Level 2.  OTC derivative trading instruments include swaps, forwards, options and complex structures that are valued at fair value.  In certain instances, these instruments may utilize models to measure fair value.  Generally, we use a similar model to value similar instruments.  Valuation models utilize various inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability, and market-corroborated inputs.  Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2.  Certain OTC derivatives trade in less active markets with a lower availability of pricing information.  In addition, complex or structured transactions, such as heat-rate call options, can introduce the need for internally-developed model inputs that might not be observable in or corroborated by the market.  When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3.  We have consistently used this valuation technique for all periods presented.  Please read Note 2—Summary of Significant Accounting Policies—Fair Value Measurements in our Form 10-K for further discussion.


16

DYNEGY INC.
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2012 and 2011

The finance organization monitors commodity risk through the CRCG.  The EMT monitors interest rate risk.  The EMT has delegated the responsibility for managing interest rate risk to the CFO.  The CRCG is independent of our commercial operations and has direct access to the Audit Committee. The Finance and Risk Management Committee, comprised of members of management and chaired by the CFO, meets periodically and is responsible for reviewing our overall day-to-day energy commodity risk exposure, as measured against the limits established in our Commodity Risk Policy.

Each quarter, as part of its internal control processes, representatives from the CRCG review the methodology and assumptions behind the pricing of the forward curves.  As part of this review, liquidity periods are established based on third party market information, the basis relationship between direct and derived curves is evaluated, and changes are made to the forward power model assumptions.

The CRCG reviews changes in value on a daily basis through the use of various reports.  The pricing for power, natural gas and fuel oil curves is automatically entered into our commercial system nightly based on data received from our market data provider.  The CRCG reviews the data provided by the market data provider by utilizing third party broker quotes for comparison purposes.  In addition, our traders are required to review various reports to ensure accuracy on a daily basis.

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, 2012 and December 31, 2011.  These financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

 
 
Fair Value as of September 30, 2012
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in millions)
Assets:
 
 

 
 

 
 

 
 

Assets from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
116

 
$
7

 
$
123

Natural gas derivatives
 

 
450

 

 
450

Heat rate derivatives
 

 

 
3

 
3

Other derivatives
 

 
3

 

 
3

Total assets from commodity risk management activities
 
$

 
$
569

 
$
10

 
$
579

   Assets from interest rate contracts
 

 

 

 

   Total
 
$

 
$
569

 
$
10

 
$
579

Liabilities:
 
 

 
 

 
 

 
 

Liabilities from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
(137
)
 
$
(2
)
 
$
(139
)
Natural gas derivatives
 

 
(490
)
 

 
(490
)
Heat rate derivatives
 

 

 
(5
)
 
(5
)
Other derivatives
 

 
(2
)
 

 
(2
)
Total liabilities from commodity risk management activities
 
$

 
$
(629
)
 
$
(7
)
 
$
(636
)
 Liabilities from interest rate contracts
 

 

 
(37
)
 
(37
)
Administrative Claim (1)
 

 

 
(47
)
 
(47
)
Total
 
$

 
$
(629
)
 
$
(91
)
 
$
(720
)


17

DYNEGY INC.
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2012 and 2011

__________________________________________
(1)
Amount represents the fair value of the Administrative Claim that was issued to Dynegy upon the effective date of the Settlement Agreement. Please read Note 3—Chapter 11 Cases for further discussion.
 
 
 
Fair Value as of December 31, 2011
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in millions)
Assets:
 
 

 
 

 
 

 
 

Assets from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
211

 
$
26

 
$
237

Electricity derivatives, affiliates
 

 
1

 
1

 
2

Natural gas derivatives
 

 
2,387

 

 
2,387

Other derivatives
 

 
15

 

 
15

Total assets from commodity risk management activities:
 
$

 
$
2,614

 
$
27

 
$
2,641

Assets from interest rate contracts
 

 

 
2

 
2

Total
 
$

 
$
2,614

 
$
29

 
$
2,643

Liabilities:
 
 

 
 

 
 

 
 

Liabilities from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
(169
)
 
$
(2
)
 
$
(171
)
Electricity derivatives, affiliates
 

 
(2
)
 
(5
)
 
(7
)
Natural gas derivatives
 

 
(2,607
)
 

 
(2,607
)
Heat rate derivatives
 

 

 
(17
)
 
(17
)
Other derivatives
 

 
(15
)
 

 
(15
)
Total liabilities from commodity risk management activities
 
$

 
$
(2,793
)
 
$
(24
)
 
$
(2,817
)
Liabilities from interest rate contracts
 

 

 
(8
)
 
(8
)
Total
 
$

 
$
(2,793
)
 
$
(32
)
 
$
(2,825
)
 
Level 3 Valuation Methods. The electricity contracts classified within level 3 are primarily financial swaps executed in illiquid trading locations and capacity contracts.  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.  Additionally, FTRs are classified within the electricity contracts, which are also an illiquid product.  The forward market price of FTRs is derived using historical congestion patterns within the marketplace.  Heat rate option 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. The interest rate contracts classified within Level 3 include an implied credit fee that impacted the day one value of the instruments.  We revalue the credit fee each quarter in conjunction with revaluing the actual interest rate derivative.  The interest rate derivatives are revalued using the forward LIBOR curve each period and the credit fee is revalued by determining the change in credit factors, such as credit default swaps, period over period.

We initially recorded the Administrative Claim granted in the Settlement Agreement at its estimated fair value of $64 million. We estimated the fair value of the Administrative Claim using the market capitalization of Dynegy as of the date of the DMG Acquisition. We believe the market capitalization of Dynegy represents a reasonable estimate of the fair value of the Administrative Claim because the previous holders of Dynegy's common stock became the holders of beneficial interests in the Administrative Claim upon our emergence from bankruptcy. The Administrative Claim had the potential to be settled in cash under certain circumstances, as such we accounted for the Administrative Claim as a liability and adjusted the carrying amount of the claim to its estimated fair value each reporting period. As of September 30, 2012, the fair value of the Administrative Claim was approximately $47 million; therefore, we recorded a credit of approximately $26 million and $17 million in

18

DYNEGY INC.
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2012 and 2011

Bankruptcy reorganization charges on our unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2012, respectively. The fair value of the Administrative Claim is classified within Level 3 of the fair value hierarchy. Please read Note 3—Chapter 11 Cases for further discussion.
 
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, estimates of forward congestion power price spreads, assumptions of illiquid power location pricing basis to liquid locations, and estimates of counterparty credit risk and our own non-performance risk. These assumptions are generally independent of each other. Volatility curves and power prices 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. A change in the assumption used for the probability of default is accompanied by a directionally similar change in the adjustment to reflect the estimated default risk of counterparties on their contractual obligations, or the estimated risk of default on our own contractual obligations to counterparties.  Any change in the value of the unobservable inputs used for level 3 valuations could have a significant impact on the calculated fair value.
 
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, 2012
 
 
Electricity
Derivatives
 
Heat Rate Derivatives
 
Administrative Claim
 
Interest Rate Swaps
 
Total
 
 
(in millions)
Balance at June 30, 2012
 
$
8

 
$
(8
)
 
$
(73
)
 
$
(25
)
 
$
(98
)
Total gains (losses) included in earnings
 
(1
)
 
(1
)
 
26

 
(12
)
 
12

Settlements
 
(2
)
 
7

 

 

 
5

Issuance of Administrative Claim
 

 

 

 

 

       DMG Acquisition
 

 

 

 

 

Balance at September 30, 2012
 
$
5

 
$
(2
)
 
$
(47
)
 
$
(37
)
 
$
(81
)
Unrealized gains (losses) relating to instruments held as of September 30, 2012
 
$
(15
)
 
$
(1
)
 
$
26

 
$
(12
)
 
$
(2
)

 
 
Nine Months Ended September 30, 2012
 
 
Electricity
Derivatives
 
Heat Rate Derivatives
 
Administrative Claim
 
Interest Rate Swaps
 
Total
 
 
(in millions)
Balance at December 31, 2011
 
$
20

 
$
(17
)
 
$

 
$
(6
)
 
$
(3
)
Total gains (losses) included in earnings
 
(33
)
 
1

 
17

 
(24
)
 
(39
)
Settlements
 
14

 
14

 

 

 
28

Issuance of Administrative Claim
 

 

 
(64
)
 

 
(64
)
       DMG Acquisition
 
4

 

 

 
(7
)
 
(3
)
Balance at September 30, 2012
 
$
5

 
$
(2
)
 
$
(47
)
 
$
(37
)
 
$
(81
)
Unrealized gains (losses) relating to instruments (net of affiliates) held as of September 30, 2012
 
$
(11
)
 
$
1

 
$
17

 
$
(28
)
 
$
(21
)


19

DYNEGY INC.
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2012 and 2011

 
 
Three Months Ended September 30, 2011
 
 
Electricity
Derivatives
 
Natural Gas
Derivatives
 
Heat Rate
Derivatives
 
Total
 
 
(in millions)
Balance at June 30, 2011
 
$
35

 
$

 
$
(23
)
 
$
12

Total losses included in earnings
 
(14
)
 
(2
)
 
(1
)
 
(17
)
 Settlements
 
(2
)
 

 
5

 
3

Balance at September 30, 2011
 
$
19

 
$
(2
)
 
$
(19
)
 
$
(2
)
Unrealized losses relating to instruments (net of affiliates) held as of September 30, 2011
 
$
(4
)
 
$
(2
)
 
$
(5
)
 
$
(11
)

 
 
Nine Months Ended September 30, 2011
 
 
Electricity
Derivatives
 
Natural Gas
Derivatives
 
Heat Rate
Derivatives
 
Total
 
 
(in millions)
Balance at December 31, 2010
 
$
49

 
$
5

 
$
(31
)
 
$
23

Total losses included in earnings
 
(22
)
 
(7
)
 
(2
)
 
(31
)
 Settlements
 
(8
)
 

 
14

 
6

Balance at September 30, 2011
 
$
19

 
$
(2
)
 
$
(19