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 2015
10-Q
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, 2015
 
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, 120,553,913 shares outstanding as of October 19, 2015.
 



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. 
CAISO
 
The California Independent System Operator
CAA
 
Clean Air Act
CT
 
Combustion Turbine
EGU
 
Electric Generating Units
EPA
 
Environmental Protection Agency
FCA
 
Forward Capacity Auction
FERC
 
Federal Energy Regulatory Commission
FTR
 
Financial Transmission Rights
IMA
 
In-market Asset Availability
IPH
 
IPH, LLC (formerly known as Illinois Power Holdings, LLC)
ISO
 
Independent System Operator
ISO-NE
 
Independent System Operator New England
kW
 
Kilowatt
LIBOR
 
London Interbank Offered Rate
MISO
 
Midcontinent Independent System Operator, Inc.
MMBtu
 
One Million British Thermal Units
Moody’s
 
Moody’s Investors Service Inc.
MW
 
Megawatts
MWh
 
Megawatt Hour
NM
 
Not Meaningful
NYISO
 
New York Independent System Operator
PJM
 
PJM Interconnection, LLC
PRIDE
 
Producing Results through Innovation by Dynegy Employees
RMR
 
Reliability Must Run
S&P
 
Standard & Poor’s Ratings Services
SEC
 
U.S. Securities and Exchange Commission

i


PART I. FINANCIAL INFORMATION
Item 1—FINANCIAL STATEMENTS
DYNEGY INC.
CONSOLIDATED BALANCE SHEETS
(unaudited) (in millions, except share data)
 
 
 
September 30, 2015
 
December 31, 2014
ASSETS
 
 

 
 

Current Assets
 
 

 
 

Cash and cash equivalents
 
$
934

 
$
1,870

Restricted cash
 

 
113

Accounts receivable, net of allowance for doubtful accounts of $2 and $2, respectively
 
436

 
270

Inventory
 
531

 
208

Assets from risk management activities
 
69

 
78

Intangible assets
 
120

 
27

Prepayments and other current assets
 
177

 
108

Total Current Assets
 
2,267

 
2,674

 
 
 
 
 
Property, Plant and Equipment
 
9,269

 
3,685

Accumulated depreciation
 
(784
)
 
(430
)
Property, Plant and Equipment, Net
 
8,485

 
3,255

Other Assets
 
 

 
 

Investment in unconsolidated affiliate
 
189

 

Restricted cash
 

 
5,100

Assets from risk management activities
 
48

 
2

Goodwill
 
818

 

Intangible assets
 
82

 
38

Deferred income taxes
 
54

 
20

Other long-term assets
 
214

 
143

Total Assets
 
$
12,157

 
$
11,232

 
See the notes to consolidated financial statements.

1



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

 
 
 
September 30, 2015
 
December 31, 2014
LIABILITIES AND EQUITY
 
 

 
 

Current Liabilities
 
 

 
 

Accounts payable
 
$
315

 
$
216

Accrued interest
 
180

 
80

Deferred income taxes
 
67

 
20

Intangible liabilities
 
98

 
45

Accrued liabilities and other current liabilities
 
185

 
157

Liabilities from risk management activities
 
94

 
132

Debt, current portion
 
71

 
31

Total Current Liabilities
 
1,010

 
681

Debt, long-term portion
 
7,208

 
7,075

Other Liabilities
 
 

 
 

Liabilities from risk management activities
 
135

 
31

Asset retirement obligations
 
326

 
205

Deferred income taxes
 
26

 

Intangible liabilities
 
73

 
36

Other long-term liabilities
 
198

 
181

Total Liabilities
 
8,976

 
8,209

Commitments and Contingencies (Note 14)
 


 


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

 
400

Common stock, $0.01 par value, 420,000,000 shares authorized; 128,179,226 shares issued and 123,182,927 shares outstanding at September 30, 2015; 124,436,941 shares issued and outstanding at December 31, 2014
 
1

 
1

Additional paid-in capital
 
3,309

 
3,338

Accumulated other comprehensive income, net of tax
 
24

 
20

Accumulated deficit
 
(552
)
 
(736
)
Total Dynegy Stockholders’ Equity
 
3,182

 
3,023

Noncontrolling interest
 
(1
)
 

Total Equity
 
3,181

 
3,023

Total Liabilities and Equity
 
$
12,157

 
$
11,232


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,
 
 
2015
 
2014
 
2015
 
2014
Revenues
 
$
1,232

 
$
615

 
$
2,854

 
$
1,898

Cost of sales, excluding depreciation expense
 
(621
)
 
(387
)
 
(1,494
)
 
(1,304
)
Gross margin
 
611

 
228

 
1,360

 
594

Operating and maintenance expense
 
(219
)
 
(114
)
 
(580
)
 
(360
)
Depreciation expense
 
(174
)
 
(61
)
 
(413
)
 
(185
)
Impairments and other charges
 
(74
)
 

 
(74
)
 

Gain (loss) on sale of assets, net
 

 
3

 
(1
)
 
17

General and administrative expense
 
(29
)
 
(25
)
 
(94
)
 
(80
)
Acquisition and integration costs
 
(8
)
 
(9
)
 
(121
)
 
(17
)
Operating income (loss)
 
107

 
22

 
77

 
(31
)
Earnings (losses) from unconsolidated investments
 
(4
)
 

 
(1
)
 
10

Interest expense
 
(145
)
 
(32
)
 
(413
)
 
(104
)
Other income and expense, net
 
46

 
5

 
45

 
(40
)
Income (loss) before income taxes
 
4

 
(5
)
 
(292
)
 
(165
)
Income tax benefit (expense) (Note 15)
 
(28
)
 

 
473

 
1

Net income (loss)
 
(24
)
 
(5
)
 
181

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

 

 
(3
)
 
5

Net income (loss) attributable to Dynegy Inc.
 
(24
)
 
(5
)
 
184

 
(169
)
Less: Dividends on preferred stock
 
5

 

 
16

 

Net income (loss) attributable to Dynegy Inc. common stockholders
 
$
(29
)
 
$
(5
)
 
$
168

 
$
(169
)
 
 
 
 
 
 
 
 
 
Earnings (Loss) Per Share (Note 18):
 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to Dynegy Inc. common stockholders
 
$
(0.23
)
 
$
(0.05
)
 
$
1.33

 
$
(1.69
)
Diluted earnings (loss) per share attributable to Dynegy Inc. common stockholders
 
$
(0.23
)
 
$
(0.05
)
 
$
1.31

 
$
(1.69
)
 
 
 
 
 
 
 
 
 
Basic shares outstanding
 
126

 
100

 
126

 
100

Diluted shares outstanding
 
126

 
100

 
140

 
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,
 
 
2015
 
2014
 
2015
 
2014
Net income (loss)
 
$
(24
)
 
$
(5
)
 
$
181

 
$
(164
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
Actuarial gain (loss) and plan amendments (net of tax of $2, zero, $2 and zero, respectively)
 
13

 

 
8

 
(3
)
Amounts reclassified from accumulated other comprehensive income:
 
 
 
 
 
 
 
 
Amortization of unrecognized prior service credit and actuarial gain (net of tax of zero, zero, zero and zero, respectively)
 
(1
)
 
(1
)
 
(3
)
 
(3
)
Other comprehensive income (loss), net of tax
 
12

 
(1
)
 
5

 
(6
)
Comprehensive income (loss)
 
(12
)
 
(6
)
 
186

 
(170
)
Less: Comprehensive income (loss) attributable to noncontrolling interest
 
1

 

 
(2
)
 
4

Total comprehensive income (loss) attributable to Dynegy Inc.
 
$
(13
)
 
$
(6
)
 
$
188

 
$
(174
)

See the notes to consolidated financial statements.

4


DYNEGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in millions)
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net income (loss)
 
$
181

 
$
(164
)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
 
 
 
 
Depreciation expense
 
413

 
185

Non-cash interest expense
 
25

 
15

Amortization of intangibles
 
(18
)
 
38

Risk management activities
 
(117
)
 
57

(Gain) loss on sale of assets, net
 
1

 
(17
)
Loss from unconsolidated investments

 
1

 

Deferred income taxes
 
(473
)
 
(1
)
Impairment of long-lived assets
 
74

 

Change in value of common stock warrants
 
(43
)
 
43

Other
 
37

 
27

Changes in working capital:
 
 
 
 
Accounts receivable, net
 
(48
)
 
187

Inventory
 
(52
)
 
1

Prepayments and other current assets
 
95

 
32

Accounts payable and accrued liabilities
 
227

 
(124
)
Distributions from unconsolidated investments
 
3

 

Changes in non-current assets
 
(23
)
 
(9
)
Changes in non-current liabilities
 
19

 
6

Net cash provided by operating activities
 
302

 
276

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Capital expenditures
 
(171
)
 
(94
)
Proceeds from asset sales, net
 

 
17

Acquisitions, net of cash acquired
 
(6,078
)
 

Decrease in restricted cash
 
5,148

 

Distributions from unconsolidated affiliates
 
8

 

Other investing
 
(6
)
 

Net cash used in investing activities
 
(1,099
)
 
(77
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Proceeds from long-term borrowings
 
88

 
12

Repayments of borrowings
 
(29
)
 
(6
)
Financing costs from debt issuance
 
(31
)
 
(2
)
Financing costs from equity issuance
 
(6
)
 

Dividends paid
 
(17
)
 

Interest rate swap settlement payments
 
(13
)
 
(13
)
Repurchase of common stock
 
(127
)
 

Other financing
 
(4
)
 
(1
)
Net cash used in financing activities
 
(139
)
 
(10
)
Net increase (decrease) in cash and cash equivalents
 
(936
)
 
189

Cash and cash equivalents, beginning of period
 
1,870

 
843

Cash and cash equivalents, end of period
 
$
934

 
$
1,032

Other non-cash investing and financing activity:
 
 
 
 
Non-cash capital expenditures
 
$
9

 
$
36

Non-cash consideration transferred for Acquisitions
 
$
105

 
$

Non-cash capital expenditures pursuant to an equipment financing agreement
 
$
63

 
$

 
See the notes to consolidated financial statements. 

5

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2015 and 2014


Note 1—Basis of Presentation and Organization
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to interim financial reporting as prescribed by the SEC. The year-end consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by the Generally Accepted Accounting Principles of the United States of America (“GAAP”).  The unaudited consolidated financial statements contained in this report include all material adjustments of a normal recurring nature that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. 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, 2014, filed with the SEC on February 25, 2015, which we refer to as our “Form 10-K.” Unless the context indicates otherwise, throughout this report, the terms “Dynegy,” “the Company,” “we,” “us,” “our,” and “ours” are used to refer to Dynegy Inc. and its direct and indirect subsidiaries.
Our current business operations are focused primarily on the unregulated power generation sector of the energy industry. We report the results of our power generation business as three segments in our unaudited consolidated financial statements: (i) the Coal segment (“Coal”), (ii) the IPH segment (“IPH”) and (iii) the Gas segment (“Gas”). Our consolidated financial results also reflect corporate-level expenses such as general and administrative expense, interest expense and income tax benefit (expense). All significant intercompany transactions have been eliminated. Please read Note 20—Segment Information for further discussion.
IPH and its direct and indirect subsidiaries are organized into ring-fenced groups in order to maintain corporate separateness from Dynegy and its other subsidiaries. Certain of the entities in the IPH segment, including Illinois Power Generating Company (“Genco”), have an independent director whose consent is required for certain corporate actions, including material transactions with affiliates. Further, entities within the IPH segment present themselves to the public as separate entities.  They maintain separate books, records and bank accounts and separately appoint officers.  Furthermore, they pay liabilities from their own funds, conduct business in their own names and have restrictions on pledging their assets for the benefit of certain other persons.  These provisions restrict our ability to move cash out of these entities without meeting certain requirements as set forth in the governing documents.
Note 2—Accounting Policies
Use of Estimates. The preparation of unaudited consolidated financial statements in conformity with GAAP requires management to make informed estimates and judgments that affect our reported financial position and results of operations based on currently available information.  Actual results could differ materially from our estimates. The results of operations for the interim periods presented in this Form 10-Q are not necessarily indicative of the results to be expected for the full year or any other interim period due to seasonal fluctuations in demand for our energy products and services, changes in commodity prices, timing of maintenance and other expenditures and other factors.
The accounting policies followed by the Company are set forth in Note 2—Summary of Significant Accounting Policies in our Form 10-K. The accompanying unaudited consolidated financial statements include our accounts and the accounts of our majority-owned or controlled subsidiaries. Accounting policies for all of our operations are in accordance with accounting principles generally accepted in the United States of America. There have been no significant changes to our accounting policies during the nine months ended September 30, 2015. Due to our Acquisitions in April 2015 and the authorization of a share repurchase program in August 2015, we have added the following significant policies:
Undivided Interest Accounting. We account for our undivided interests in certain of our coal-fired power generation facilities whereby our proportionate share of each facility’s assets, liabilities, revenues, and expenses are included in the appropriate classifications in the accompanying unaudited consolidated financial statements.
Goodwill. Goodwill represents, at the time of an acquisition, the excess of purchase price over fair value of net assets acquired. The carrying amount of our goodwill will be periodically reviewed, at least annually, for impairment and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  In accordance with Accounting Standards Codification (“ASC”) 350, Intangibles-Goodwill and Other, we can opt to perform a qualitative assessment to test goodwill for impairment or we can directly perform a two-step impairment test. Based on our qualitative assessment, if we determine that the fair value of a reporting unit is more likely than not (i.e., a likelihood of more than 50 percent) to be less than its carrying amount, the two-step impairment test will be performed.

6

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2015 and 2014

In the absence of sufficient qualitative factors, goodwill impairment is determined using a two-step process:
Step one—Identify potential impairment by comparing the fair value of a reporting unit to the book value, including goodwill. If the fair value exceeds book value, the goodwill of the reporting unit is not considered impaired. If the book value exceeds fair value, proceed to step two.
Step two—Compare the implied fair value of the reporting unit’s goodwill to the book value of the reporting unit’s goodwill. If the book value of goodwill exceeds the implied fair value, an impairment charge is recognized for the excess.
Treasury Stock. Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock, which is presented on our unaudited consolidated balance sheet as a reduction of Additional paid-in capital.
Accounting Standards Adopted During the Current Period
Business Combinations. In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-16-Business Combinations (Topic 805). The amendments in this ASU require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this ASU require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The guidance in this ASU is effective prospectively for interim and annual periods beginning after December 15, 2016, with early adoption permitted for financial statements that have not been issued. We adopted ASU 2015-16 as of September 30, 2015. Please see Note 3—Acquisitions for a summary of the impact on our unaudited consolidated financial statements.
Derivatives. In August 2015, the FASB issued ASU 2015-13-Derivatives and Hedging (Topic 815). The amendments in this ASU specify that the use of locational marginal pricing by an ISO does not constitute net settlement of a contract for the purchase or sale of electricity on a forward basis and, therefore, does not cause that contract to fail to meet the physical delivery criterion of the normal purchases and normal sales scope exception. If the physical delivery criterion is met, along with all of the other criteria of the normal purchases and normal sales scope exception, an entity may elect to designate that contract as a normal purchase or normal sale. The amendments in this ASU are effective upon issuance and should be applied prospectively. The adoption of this ASU did not have a material impact on our unaudited consolidated financial statements.
Inventory. In July 2015, the FASB issued ASU 2015-11-Inventory (Topic 330). The amendments in this ASU require that inventory is measured at the lower of cost and net realizable value (“NRV”), with the latter defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU eliminates the need to determine market or replacement cost and evaluate whether it is above the ceiling at NRV or below the floor (NRV less a normal profit margin). The guidance in this ASU is effective prospectively for interim and annual periods beginning after December 15, 2016, with early adoption permitted. We adopted ASU 2015-11 as of July 1, 2015. The adoption of this ASU did not have a material impact on our unaudited consolidated financial statements.
Retirement Benefits.  In April 2015, the FASB issued ASU 2015-04-Compensation-Retirement Benefits (Topic 715).  For an entity that has a significant event in an interim period that calls for a remeasurement of defined benefit plan or post retirement plan assets and obligations, the amendments in this ASU provide a practical expedient that permits the entity to remeasure the plan assets and obligations using the month-end that is closest to the date of the significant event.  The month-end remeasurement of defined benefit plan assets and obligations that is closest to the date of the significant event should be adjusted for any effects of the significant event that may or may not be captured in the month-end measurement.  An entity is required to disclose the accounting policy election and the date used to measure defined benefit plan assets and obligations in accordance with the amendments in this ASU. The amendments in this ASU are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption allowed.  The amendments in this ASU should be applied prospectively.  We adopted the guidance in this ASU on July 1, 2015.
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

7

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2015 and 2014

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. The adoption of this ASU did not have a material impact on our unaudited consolidated financial statements or disclosures.    
Accounting Standards Not Yet Adopted
Debt Issuance Costs. In April 2015, the FASB issued ASU 2015-03-Interest-Imputation of Interest (Subtopic 835-30).  The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. 
In August 2015, the FASB issued ASU 2015-15-Interest-Imputation of Interest (Subtopic 835-30). The amendments in this ASU further clarify the guidance provided in ASU 2015-03 to include the presentation of debt issuance costs in relation to line-of-credit arrangements. The amendments state these costs may be presented as an asset and subsequently amortized ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.
The guidance in these ASUs is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted.  The adoption of these ASUs should be applied on a retrospective basis, affecting all balance sheet periods presented.  We do not anticipate the adoption of these ASUs will have a material impact on our unaudited consolidated balance sheets.
Consolidation. In February 2015, the FASB issued ASU 2015-02-Consolidation (Topic 810). The amendments in this ASU respond to concerns about the current accounting for consolidation of certain legal entities, in particular: (i) consolidation of limited partnerships and similar legal entities, (ii) evaluating fees paid to a decision maker or a service provider as a variable interest, (iii) the effect of fee arrangements on the primary beneficiary determination, (iv) the effect of related parties on the primary beneficiary determination and (v) consolidation of certain investment funds. The guidance in this ASU is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted in an interim period. We do not anticipate the adoption of this ASU will have a material impact on our unaudited consolidated financial statements.
Extraordinary and Unusual Items. In January 2015, the FASB issued ASU 2015-01-Income Statement-Extraordinary and Unusual Items (Subtopic 225-20). The amendments in this ASU eliminate from GAAP the concept of extraordinary items and will no longer require separate classification of these items within the statement of operations. Presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The guidance in this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Reporting entities may elect to apply the amendments prospectively only, or retrospectively for all prior periods presented in the financial statements.  Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We do not anticipate the adoption of this ASU will have a material impact on our unaudited consolidated financial statements.
Revenue from Contracts with Customers. In May 2014, the FASB and International Accounting Standards Board (“IASB”) jointly issued ASU 2014-09-Revenue from Contracts with Customers (Topic 606). This ASU was further updated through the issuance of ASU 2015-14 in August 2015. The amendments in this ASU develop a common revenue standard for GAAP and International Financial Reporting Standards (“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, 2017, with early adoption permitted 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 will have a material impact on our unaudited consolidated financial statements.
Note 3—Acquisitions
Acquisitions
ECP Purchase Agreements. On April 1, 2015 (the “EquiPower Closing Date”), pursuant to the terms of the stock purchase agreement dated August 21, 2014, as amended (the “ERC Purchase Agreement”), our wholly-owned subsidiary, Dynegy Resource

8

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2015 and 2014

II, LLC (the “ERC Purchaser”) purchased 100 percent of the equity interests in EquiPower Resources Corp. (“ERC”) from certain affiliates of Energy Capital Partners (collectively, the “ERC Sellers”) thereby acquiring (i) five combined cycle natural gas-fired 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 the EquiPower Closing Date, in a related transaction, pursuant to a stock purchase agreement and plan of merger dated August 21, 2014, as amended (the “Brayton Purchase Agreement” and together with the ERC Purchase Agreement, the “ECP Purchase Agreements”), our wholly-owned subsidiary Dynegy Resource III, LLC (the “Brayton Purchaser” and together with the ERC Purchaser, the “ECP Purchasers”) purchased 100 percent of the equity interests in Brayton Point Holdings, LLC (“Brayton”) from certain affiliates of Energy Capital Partners (collectively, the “Brayton Sellers” and together with the ERC Sellers, the “ECP Sellers”), thereby acquiring a coal-fired facility in Massachusetts (the “Brayton Acquisition”).
The ERC Acquisition and the Brayton Acquisition (collectively, the “EquiPower Acquisition”) added approximately 6,300 MW of generation in Connecticut, Illinois, Massachusetts, Ohio and Pennsylvania for an aggregate base purchase price of approximately $3.35 billion in cash plus approximately $105 million in common stock of Dynegy, subject to certain adjustments. In aggregate, the resulting operations from the two coal-fired facilities acquired from the ECP Sellers are reported within our Coal segment, while related operations from the six natural gas-fired and two gas and oil-fired facilities are reported within our Gas segment.
Under the ECP Purchase Agreements, the ECP Purchasers and ECP Sellers 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.  Neither the ECP Purchasers nor the ECP Sellers, in the aggregate, are entitled to indemnification in excess of $276 million, and $104 million of the purchase price will be held in escrow for one year after closing to support the post-closing adjustment and the indemnification obligations of the ECP Sellers.
Duke Midwest Purchase Agreement. On April 2, 2015 (the “Duke Midwest Closing Date”), pursuant to the terms of the purchase and sale agreement dated August 21, 2014, as amended (the “Duke Midwest Purchase Agreement”), our wholly-owned subsidiary Dynegy Resource I, LLC (“DRI”) purchased 100 percent of the membership interests in Duke Energy Commercial Asset Management, LLC and Duke Energy Retail Sales, LLC, from two affiliates of Duke Energy Corporation (collectively, “Duke Energy”), thereby acquiring approximately 6,200 MW of generation in (i) three combined cycle natural gas-fired facilities located in Ohio and Pennsylvania, (ii) two natural gas-fired peaking facilities located in Ohio and Illinois, (iii) one oil-fired peaking facility located in Ohio, (iv) partial interests in five coal-fired facilities located in Ohio and (v) a retail energy business for a base purchase price of approximately $2.80 billion in cash (the “Duke Midwest Acquisition”), subject to certain adjustments. We operate two of the five coal-fired facilities, the Miami Fort and Zimmer facilities, with other owners operating the three remaining facilities. The operations from the retail energy business, the five coal-fired and the one oil-fired facilities acquired from Duke Energy are reported within our Coal segment, while related operations from the five natural gas-fired facilities are reported within our Gas segment.
Under the Duke Midwest Purchase Agreement, DRI and Duke Energy 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.  Dynegy has guaranteed, up to a maximum liability of $2.80 billion, the obligations of DRI under the Duke Midwest Purchase Agreement and related Transition Services Agreement (“TSA”). DRI shall, in the aggregate, not be entitled to indemnification in excess of $280 million for most matters and $2.80 billion for certain fundamental representations, tax matters and fraud.
Business Combination Accounting. The EquiPower Acquisition and the Duke Midwest Acquisition (collectively, the “Acquisitions”) have been accounted for in accordance with ASC 805, Business Combinations, with identifiable assets acquired and liabilities assumed recorded at their estimated fair values on the acquisition dates, April 1, 2015 and April 2, 2015, respectively. The valuation of these assets and liabilities are classified as Level 3 within the fair value hierarchy levels. The initial accounting for the Acquisitions is not complete because certain information and analysis that may impact our initial valuations are still being obtained or reviewed as a result of the short time period since the closing of the Acquisitions. The significant assets and liabilities for which provisional amounts are recognized at the respective acquisition dates are property, plant and equipment, intangible assets and liabilities, goodwill, investment in unconsolidated affiliate, working capital adjustments, deferred income taxes, taxes other than deferred income taxes and asset retirement obligations. The provisional amounts recognized are subject to revision until our valuations are completed, not to exceed one year, and any material adjustments identified that existed as of the acquisition date will be recognized in the current period.
To fair value working capital, we used available market information. Asset retirement obligations were recorded in accordance with ASC 410. To fair value the acquired property, plant and equipment, we used a Discounted Cash Flow (“DCF”)

9

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2015 and 2014

analysis, based upon a debt-free, free cash flow model.  This DCF model was created for each power generation facility based on its estimated remaining useful life.  The DCF model included gross margin forecasts for each power generation facility determined using forward commodity market prices obtained from third party quotations for the years 2015 through 2016.  For the years 2017 through 2024, we used commodity and capacity price curves developed internally utilizing forward NYMEX natural gas prices and supply and demand factors.  For periods beyond 2024, we assumed a 2.5 percent growth rate. We also used management’s forecasts of operations and maintenance expense, general and administrative expense and capital expenditures for the years 2015 through 2019 and assumed a 2.5 percent growth rate, based upon management’s view of future conditions, thereafter. The resulting cash flows were then discounted using plant specific discount rates of approximately 8 to 10 percent for gas-fired generation facilities and approximately 9 to 13 percent for coal-fired generation facilities, based upon the asset’s age, efficiency, region and years until retirement. Contracts with terms that were not at current market prices were also valued using a DCF analysis.  The cash flows generated by the contracts were compared with their cash flows based on current market prices with the resulting difference recorded as either an intangible asset or liability. The 3,460,053 shares of common stock of Dynegy issued as part of the consideration for the EquiPower Acquisition were valued at approximately $105 million based on the closing price of Dynegy’s common stock on the EquiPower Closing Date.
The following table summarizes the consideration paid and the provisional fair value amounts recognized for the assets acquired and liabilities assumed related to the EquiPower Acquisition and Duke Midwest Acquisition, as of the respective acquisition dates, April 1, 2015 and April 2, 2015:

10

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2015 and 2014

 (amounts in millions)
 
EquiPower Acquisition
 
Duke Midwest Acquisition
 
Total
Cash
 
$
3,350

 
$
2,800

 
$
6,150

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

 

 
105

Net working capital adjustment
 
206

 
(9
)
 
197

Fair value of total consideration transferred
 
$
3,661

 
$
2,791

 
$
6,452

 
 
 
 
 
 
 
Cash
 
$
267

 
$

 
$
267

Accounts receivable
 
47

 
124

 
171

Inventory
 
166

 
105

 
271

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

 
33

 
37

Prepayments and other current assets
 
32

 
69

 
101

Property, plant and equipment
 
2,769

 
2,740

 
5,509

Investment in unconsolidated affiliate
 
201

 

 
201

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

 
84

 
195

Other long-term assets
 
28

 
34

 
62

Total assets acquired
 
3,625

 
3,189

 
6,814

 
 
 
 
 
 
 
Accounts payable
 
27

 
92

 
119

Accrued liabilities and other current liabilities
 
21

 
11

 
32

Debt, current portion
 
39

 

 
39

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

 
107

 
164

Asset retirement obligations
 
52

 
53

 
105

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

 
93

 
166

Deferred income taxes, net
 
513

 

 
513

Other long-term liabilities
 

 
42

 
42

Total liabilities assumed
 
782

 
398

 
1,180

Identifiable net assets acquired
 
2,843

 
2,791

 
5,634

Goodwill
 
818

 

 
818

Net assets acquired
 
$
3,661

 
$
2,791

 
$
6,452

As a result of recording the stepped up fair market basis for GAAP purposes, but receiving primarily carryover basis for tax purposes in the EquiPower Acquisition, we recorded a net deferred tax liability of $537 million within our provisional valuation of the EquiPower Acquisition for the period ended June 30, 2015. As we had previously recorded a valuation allowance against our historical deferred tax assets, we released approximately $480 million of our valuation allowance as a result of these increased net deferred tax liabilities in the three months ended June 30, 2015.  Due to the availability of new information related to the EquiPower Acquisition, we reduced the deferred tax liability in the three months ended September 30, 2015 by $24 million, offset by a corresponding reduction to goodwill.  This reduction to the deferred tax liability resulted in a partial reversal of the previously recognized release of the valuation allowance by $21 million.  The initial release of the valuation allowance and the partial reversal were recorded as Income tax benefit (expense) in our unaudited consolidated statements of operations for the three and nine months ended September 30, 2015.
The goodwill of $818 million resulting from the EquiPower Acquisition reflects the excess of our purchase price over the fair value of the net assets acquired. We allocated all of the goodwill to our Gas reporting unit. None of the goodwill recognized is deductible for income tax purposes, and as such, no deferred taxes have been recorded related to goodwill. No goodwill was recognized as a result of the Duke Midwest Acquisition.

11

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2015 and 2014

We incurred acquisition costs of $1 million and $86 million for the three and nine months ended September 30, 2015, respectively, related to the Acquisitions, which are included in Acquisition and integration costs in our unaudited consolidated statement of operations. Acquisition costs for the nine months ended September 30, 2015 include $48 million of commitment fees associated with a temporary bridge facility, which were payable only upon the closing of the Acquisitions. No amounts were borrowed under the bridge facility, and the bridge facility was cancelled, as our permanent financing for the Acquisitions was executed. Revenues of $589 million and $1,071 million and operating income of $91 million and $133 million attributable to the Acquisitions for the three and nine months ended September 30, 2015, respectively, are included in our unaudited consolidated statement of operations.
Pro Forma Results. The unaudited pro forma financial results for the nine months ended September 30, 2015 and 2014 assume the EquiPower Acquisition and the Duke Midwest Acquisition occurred on January 1, 2014. The unaudited pro forma financial results may not be indicative of the results that would have occurred had the acquisition been completed as of January 1, 2014, nor are they indicative of future results of operations.
 
 
Nine Months Ended September 30,
(amounts in millions)
 
2015
 
2014
Revenues
 
$
3,844

 
$
4,155

Net income (loss)
 
$
442

 
$
(555
)
Net income (loss) attributable to noncontrolling interests
 
$
(3
)
 
$
5

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

 
$
(560
)
Note 4—Unconsolidated Investments
Equity Method Investments
Elwood. In connection with the EquiPower Acquisition, we acquired a 50 percent interest in Elwood Energy LLC, a limited liability company (“Elwood Energy”) and Elwood Expansion LLC, a limited liability company (“Elwood Expansion” and, together with Elwood Energy, “Elwood”).  Elwood Energy owns a 1,576 MW natural gas-fired facility located in Elwood, Illinois. As of September 30, 2015, our equity method investment included in our unaudited consolidated balance sheet was $189 million. Upon the acquisition of our Elwood investment, we recognized basis differences in the net assets of approximately $90 million related to property plant and equipment, debt and intangibles. These basis differences are being amortized over their respective useful lives. Our risk of loss related to our equity method investment is limited to our investment balance. Holders of the debt of our unconsolidated investment do not have recourse to us and our other subsidiaries; therefore, the debt of our unconsolidated investment is not reflected in our unaudited consolidated balance sheet.
We recorded $4 million and $1 million in equity losses related to our investment in Elwood, which is reflected in Earnings (losses) from unconsolidated investments in our unaudited consolidated statement of operations for the three and nine months ended September 30, 2015. For the three months ended September 30, 2015, we received a distribution of $11 million, of which $8 million was considered a return of investment. As of September 30, 2015, we have approximately $4 million in accounts receivable due from Elwood, which is included in Accounts receivable in our unaudited consolidated balance sheet.
Black Mountain. On June 27, 2014, we completed the sale of our 50 percent partnership interest in Nevada Cogeneration Associates #2, a partnership that owns Black Mountain, an 85 MW (43 net MW) natural gas-fired combined cycle gas turbine facility in Nevada. We received $3 million and $14 million in cash proceeds upon the close of the transaction, which is reflected in Gain on sale of assets, net in our unaudited consolidated statements of operations for the three and nine months ended September 30, 2014. In connection with the sale, our guarantee was terminated. Additionally, we received $10 million in cash distributions from Black Mountain, which is recorded as Earnings (losses) from unconsolidated investments in our unaudited consolidated statements of operations for the nine months ended September 30, 2014.
Note 5—Risk Management Activities, Derivatives and Financial Instruments
The nature of our business necessarily involves commodity market and financial risks.  Specifically, we are exposed to commodity price variability related to our power generation business.  Our commercial team manages these commodity price risks with financially and physically settled contracts consistent with our commodity risk management policy.  Our treasury team manages our interest rate risk. 

12

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2015 and 2014

Our commodity risk management policy gives us the flexibility to sell energy and capacity and purchase fuel through a combination of spot market sales and near-term contractual arrangements (generally over a rolling one- to three-year time frame).  Our commodity risk management goal is to protect cash flow in the near-term while keeping the ability to capture value longer-term. 
Many of our contractual arrangements are derivative instruments and are accounted for at fair value as part of Revenues in our unaudited consolidated statements of operations.  We have other contractual arrangements such as capacity forward sales arrangements, tolling arrangements, fixed price coal purchases and retail power sales which do not receive recurring fair value accounting treatment because these arrangements do not meet the definition of a derivative or are designated as “normal purchase, normal sale,” in accordance with ASC 815.  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, 2015, we had net purchases and sales of derivative contracts outstanding in the following quantities:
Contract Type
 
Quantity
 
Unit of Measure
 
Fair Value (1)
(dollars and quantities in millions)
 
Purchases (Sales)
 
 
 
Asset (Liability)
Commodity contracts:
 
 

 
 
 
 

Electricity derivatives (2)
 
(46
)
 
MWh
 
$
(25
)
Electricity basis derivatives (3)
 
(40
)
 
MWh
 
$
40

Natural gas derivatives (2)
 
313

 
MMBtu
 
$
(133
)
Natural gas basis derivatives
 
67

 
MMBtu
 
$
(12
)
Diesel fuel derivatives
 
4

 
Gallon
 
$
(5
)
Coal derivatives (4)
 

 
Metric Ton
 
$
(30
)
Heat rate derivatives
 
2

 
MWh/MMBtu
 
$
(2
)
Emissions derivatives
 
6

 
Metric Ton
 
$
5

Interest rate swaps
 
779

 
U.S. Dollar
 
$
(48
)
Common stock warrants (5)
 
16

 
Warrant
 
$
(18
)
__________________________________________
(1)
Includes both asset and liability risk management positions, but excludes margin and collateral netting of $98 million.
(2)
Mainly comprised of swaps, options and physical forwards.
(3)
Comprised of FTRs and swaps.
(4)
Our net position rounds to less than 1 million tons.
(5)
Each warrant is convertible into one share of Dynegy common stock.

13

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2015 and 2014

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, 2015 and December 31, 2014. As of September 30, 2015 and December 31, 2014, there were no gross amounts available to be offset that were not offset in our unaudited consolidated balance sheets.
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
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
 
$
423

 
$
(306
)
 
$

 
$
117

 
Total derivative assets
 
 
 
$
423

 
$
(306
)
 
$

 
$
117

 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Liabilities from risk management activities
 
$
(585
)
 
$
306

 
$
98

 
$
(181
)
 
Interest rate contracts
 
Liabilities from risk management activities
 
(48
)
 

 

 
(48
)
 
Common stock warrants
 
Other long-term liabilities
 
(18
)
 

 

 
(18
)
 
Total derivative liabilities
 
 
 
$
(651
)
 
$
306

 
$
98

 
$
(247
)
Total derivatives
 
 
 
$
(228
)
 
$

 
$
98

 
$
(130
)

 
 
 
 
 
December 31, 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
 
$
115

 
$
(35
)
 
$

 
$
80

 
Total derivative assets
 
 
 
$
115

 
$
(35
)
 
$

 
$
80

 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Liabilities from risk management activities
 
$
(163
)
 
$
35

 
$
9

 
$
(119
)
 
Interest rate contracts
 
Liabilities from risk management activities
 
(44
)
 

 

 
(44
)
 
Common stock warrants
 
Other long-term liabilities
 
(61
)
 

 

 
(61
)
 
Total derivative liabilities
 
 
 
$
(268
)
 
$
35

 
$
9

 
$
(224
)
Total derivatives
 
 
 
$
(153
)
 
$

 
$
9

 
$
(144
)
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, 2015 was $55 million, for which we have posted $10 million collateral. Our remaining derivative instruments do not have credit-related collateral contingencies as they are included within our first-lien collateral program.

14

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2015 and 2014

The following table summarizes our total cash collateral posted as of September 30, 2015 and December 31, 2014, 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, 2015
 
December 31, 2014
(amounts in millions)
 
 
 
 
Gross collateral posted with counterparties
 
$
148

 
$
49

Less: Collateral netted against risk management liabilities
 
98

 
9

Net collateral within Prepayments and other current assets
 
$
50

 
$
40

Impact of Derivatives on the Unaudited 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 our unaudited consolidated statements of operations.
Our unaudited consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014 include the impact of derivative financial instruments as presented below.
Derivatives Not Designated as Hedges
 
Location of Gain (Loss)
Recognized in Income on
Derivatives
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
(amounts in millions)
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Revenues
 
$
48

 
$
(3
)
 
$
120

 
$
(212
)
Interest rate contracts
 
Interest expense
 
$
(9
)
 
$
1

 
$
(17
)
 
$
(6
)
Common stock warrants
 
Other income (expense), net
 
$
45

 
$
6

 
$
43

 
$
(43
)
Note 6—Fair Value Measurements  
We apply the market approach for recurring fair value measurements, employing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  We have consistently used the same valuation techniques for all periods presented.  Please read Note 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, 2015 and December 31, 2014 and are presented on a gross basis before consideration of amounts netted under master netting agreements and the application of collateral and margin paid.

15

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2015 and 2014

 
 
Fair Value as of September 30, 2015
 (amounts in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

Assets from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
257

 
$
102

 
$
359

Natural gas derivatives
 

 
43

 
5

 
48

Emissions derivatives
 

 
5

 

 
5

Coal derivatives
 

 
7

 
4

 
11

Total assets from commodity risk management activities
 
$

 
$
312

 
$
111

 
$
423

Liabilities:
 
 

 
 

 
 

 
.

Liabilities from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
(193
)
 
$
(151
)
 
$
(344
)
Natural gas derivatives
 

 
(174
)
 
(19
)
 
(193
)
Heat rate derivatives
 

 

 
(2
)
 
(2
)
Diesel fuel derivatives
 

 
(5
)
 

 
(5
)
Coal derivatives
 

 
(40
)
 
(1
)
 
(41
)
Total liabilities from commodity risk management activities
 

 
(412
)
 
(173
)
 
(585
)
Liabilities from interest rate contracts
 

 
(48
)
 

 
(48
)
Liabilities from outstanding common stock warrants
 
(18
)
 

 

 
(18
)
Total liabilities
 
$
(18
)
 
$
(460
)
 
$
(173
)
 
$
(651
)

 
 
 
Fair Value as of December 31, 2014
 (amounts in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

Assets from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
88

 
$
22

 
$
110

Natural gas derivatives
 

 
3

 

 
3

Emissions derivatives
 

 
2

 

 
2

Total assets from commodity risk management activities
 
$

 
$
93

 
$
22

 
$
115

Liabilities:
 
 

 
 

 
 

 
 

Liabilities from commodity risk management activities:
 
 

 
 

 
 

 
 

Electricity derivatives
 
$

 
$
(27
)
 
$
(26
)
 
$
(53
)
Natural gas derivatives
 

 
(100
)
 

 
(100
)
Diesel derivatives
 

 
(6
)
 

 
(6
)
Crude oil derivatives
 

 
(3
)
 

 
(3
)
Coal derivatives
 

 
(1
)
 

 
(1
)
Total liabilities from commodity risk management activities
 

 
(137
)
 
(26
)
 
(163
)
Liabilities from interest rate contracts
 

 
(44
)
 

 
(44
)
Liabilities from outstanding common stock warrants
 
(61
)
 

 

 
(61
)
Total liabilities
 
$
(61
)
 
$
(181
)
 
$
(26
)
 
$
(268
)

16

DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Interim Periods Ended September 30, 2015 and 2014

Level 3 Valuation Methods. The electricity derivatives classified within Level 3 include financial swaps executed in illiquid trading locations or on long dated contracts, capacity contracts, heat rate derivatives and FTRs.  The curves used to generate the fair value of the financial swaps are based on basis adjustments applied to forward curves for liquid trading points, while the curves for the capacity deals are based upon auction results in the marketplace, which are infrequently executed. The forward market price of FTRs is derived using historical congestion patterns within the marketplace and heat rate derivative valuations are derived using a Black-Scholes spread model, which uses forward natural gas and power prices, market implied volatilities and modeled correlation values. The natural gas derivatives classified within Level 3 include financial swaps, basis swaps and physical purchases executed in illiquid trading locations or on long dated contracts. The coal derivatives classified within Level 3 include financial swaps executed in illiquid trading locations.
Sensitivity to Changes in Significant Unobservable Inputs for Level 3 Valuations. The significant unobservable inputs used in the fair value measurement of our commodity instruments categorized within Level 3 of the fair value hierarchy include estimates of forward congestion, power price spreads, natural gas and coal pricing and the difference between our plant locational prices to liquid hub prices. Power price spreads, natural gas and coal pricing and the difference between our plant locational prices to liquid hub prices are generally based on observable markets where available, or derived from historical prices and forward market prices from similar observable markets when not available. Increases in the price of the spread on a buy or sell position in isolation would result in a higher/lower fair value measurement. The significant unobservable inputs used in the valuation of Dynegy’s contracts classified as Level 3 as of September 30, 2015 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)
 
(5
)
 
Million MWh
 
$
(40
)
 
Basis spread + liquid location
 
Basis spread
 
$7.00 - $9.00
FTRs
 
35

 
Million MWh
 
$
(9
)
 
Historical congestion
 
Forward price
 
$0.00 - $2.00
Heat rate derivatives:
 

 
Million MWh
 
$
3

 
Option model
 
Gas/power price correlation
 
70% - 100%
 
 
2

 
Million MMBtu
 
$
(5
)
 
Option model
 
Power price volatility
 
14% - 34%
Natural gas derivatives (1)
 
39

 
Million MMBtu
 
$
(14
)
 
Illiquid location fixed price
 
Forward price
 
$1.61 - $1.97
Coal derivatives (1)
 
(50
)
 
Thousand Tons
 
$
3

 
Illiquid location fixed price
 
Forward price
 
$5.80 - $7.10
__________________________________________
(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, 2015
(amounts in millions)
 
Electricity
Derivatives
 
Natural Gas Derivatives
 
Heat Rate Derivatives
 
Coal Derivatives
 
Total
Balance at June 30, 2015
 
$
(54
)
 
$
(11
)
 
$
(7
)
 
$
4

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

 
(3
)
 

 

 
(1
)
Settlements (1)
 
3

 

 
5

 
(1
)
 
7

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

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

 
$
(3
)
 
$

 
$