Form 8-K DYNEGY INC. For: Apr 09

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported)

April 9, 2015

DYNEGY INC.

(Exact name of registrant as specified in its charter)

(713) 507-6400

(Registrant’s telephone number, including area code)

N.A.

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o            Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o            Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o            Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o            Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 8.01                        Other Events

Dynegy Inc. (the “Company”) is filing this Current Report on Form 8-K to provide certain financial information with respect to the Midwest Generation Business (as defined below), EquiPower Resources Corp. and Brayton Point Holdings, LLC and the  Company’s related recently completed acquisitions.

As previously disclosed in its Current Report on Form 8-K filed on August 26, 2014 (the “2014 Acquisition 8-K”), on August 21, 2014, the Company, through its wholly-owned subsidiary Dynegy Resources I, LLC (“DRI”), entered into a Purchase and Sale Agreement ( the “Duke Energy Acquisition”) with Duke Energy SAM, LLC (“Duke Energy SAM”) and Duke Energy Commercial Enterprises, Inc. (“Duke Energy CE” and together with Duke Energy SAM, “Duke Energy”) pursuant to which DRI agreed to purchase from Duke Energy 100% of the membership interests in certain subsidiaries of Duke Energy, thereby acquiring: (i) five natural gas-fired power facilities located in Ohio, Pennsylvania and Illinois, (ii) one oil-fired powered facility located in Ohio, (iii) partial interests in five coal-fired powered facilities located in Ohio and (iv) a retail energy business (the “Midwest Generation Business”).

As also previously disclosed in the 2014 Acquisition 8-K, on August 21, 2014, the Company, through its wholly-owned subsidiary, Dynegy Resources II, LLC (the “EquiPower Purchaser”), entered into a Stock Purchase Agreement, as amended, with Energy Capital Partners II, LP (“ECP II”), Energy Capital Partners II-A, LP (“ECP II-A”), Energy Capital Partners II-B, LP (“ECP II-B”), Energy Capital Partners II-C (Direct IP), LP (“ECP II-C”), Energy Capital Partners II-D, LP (“ECP II-D”), and Energy Capital Partners II (EquiPower Co-Invest), LP (“ECP Coinvest” and, collectively with ECP II, ECP II-A, ECP II-B, ECP II-C and ECP II-D, the “EquiPower Sellers”), EquiPower Resources Corp. (“EquiPower”) and certain other parties thereto for limited purposes, pursuant to which the EquiPower Purchaser agreed to purchase 100% of the equity interests in EquiPower, 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 “EquiPower Acquisition”).

In a related transaction, as previously disclosed in the 2014 Acquisition 8-K, also on August 21, 2014, the Company, through its wholly-owned subsidiary, Dynegy Resource III, LLC (the “Brayton Purchaser” and together with the EquiPower Purchaser, the “ECP Purchasers”), and Dynegy Resources III-A, LLC entered into a Stock Purchase Agreement and Agreement and Plan of Merger with Energy Capital Partners GP II, LP (“ECP GP”), ECP II, ECP II-A, ECP II-B, ECP II-D, Energy Capital Partners II-C (Cayman), L.P. (“ECP II-C (Cayman)” and, collectively with ECP GP, ECP II, ECP II-A, ECP II-B and ECP II-D, the “Brayton Sellers” and together with the EquiPower Sellers, the “ECP Sellers”), Brayton Point Holdings, LLC (“Brayton”) and certain other parties thereto for limited purposes, to acquire 100% of the equity interests in Brayton (the “Brayton Acquisition” and, together with the “Duke Energy Acquisition” and the “EquiPower Acquisition,” the “Acquisitions”).

As previously disclosed on the Company’s Current Reports on Form 8-K filed April 7, 2015 (the “ECP Closing 8-K) and April 8, 2015 (the “Duke Closing 8-K”), respectively, the Company consummated the Acquisitions on April 1, 2015, with respect to the EquiPower Acquisition and the Brayton Acquisition, and April 2, 2015, with respect to the Duke Energy Acquisition.

The purpose of this Current Report on Form 8-K, among other things, is to file the financial information related to the Acquisitions set forth in Item 9.01 below so that such financial information is incorporated by reference into the Company’s registration statements filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended.

Included in this filing as Exhibit 99.1 are the combined audited financial statements of the Midwest Generation Business of Duke Energy Corporation and subsidiaries for the periods described in Item 9.01(a) below and the notes related thereto.

Included in this filing as Exhibit 99.2 are the combined audited financial statements of EquiPower and Brayton for the periods described in Item 9.01(a) below and the notes related thereto.

Included in this filing as Exhibit 99.3 is the pro forma financial information described in Item 9.01(b) below giving effect to the Acquisitions.

Item 9.01                        Financial Statements and Exhibits.

(a)                                 Financial Statements of Businesses Acquired

Combined audited financial statements of the Midwest Generation Business of Duke Energy Corporation and its subsidiaries comprised of the combined balance sheets as of December 31, 2014 and 2013, the related combined

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statements of operations, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2014 and the related notes to the combined financial statements, attached as Exhibit 99.1 hereto.

Combined audited financial statements of EquiPower and its subsidiaries and Brayton and its subsidiary comprised of the combined balance sheets as of December 31, 2014, 2013 and 2012, the related combined statements of operations, stockholder’s equity, and cash flows for each of the years in the three-year period ended December 31, 2014 and the related notes to the combined financial statements, attached as Exhibit 99.2 hereto.

(b)                                 Pro Forma Financial Information

The unaudited pro forma condensed combined financial statements of the Company as of and for the year ended December 31, 2014, giving effect to the Acquisitions, attached as Exhibit 99.3 hereto.

(c)                                  Shell Company Transactions

Not applicable.

(d)                                 Exhibits:

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

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EXHIBIT INDEX

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Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in Dynegy, Inc.’s Registration Statement Nos. 333-191540 and 333-199179 on Form S-3 and Registration Statement No. 333-184590 on Form S-8 of our report dated March 25, 2015, relating to the combined financial statements of the Midwest Generation Business of Duke Energy Corporation as of December 31, 2014 and 2013, and for each of the three years in the period ended December 31, 2014 (which report expresses an unqualified opinion and includes an emphasis-of-matter paragraph relating to certain income and expense allocations), appearing in the Current Report on Form 8-K of Dynegy, Inc. dated April 9, 2015.

/s/ Deloitte & Touche LLP

Charlotte, North Carolina

April 9, 2015

Exhibit 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in Dynegy, Inc.’s Registration Statement Nos. 333-191540 and 333-199179 on Form S-3 and Registration Statement No. 333-184590 of Dynegy Inc. on Form S-8, of our report dated March 27, 2015, relating to the combined financial statements of EquiPower Resources Corp. and Subsidiaries and Brayton Point Holdings, LLC and Subsidiary as of and for the years ended December 31, 2014, 2013 and 2012, appearing in the Current Report on Form 8-K of Dynegy, Inc. dated April 9, 2015.

Exhibit 99.1

Midwest Generation Business of Duke Energy Corporation and Subsidiaries

Audited Financial Statements

As of December 31, 2014 and 2013 and for the Years Ended December 31, 2014, 2013 and 2012

TABLE OF CONTENTS

INDEPENDENT AUDITORS’ REPORT

To the Midwest Generation Business of Duke Energy Corporation and subsidiaries Charlotte, North Carolina

We have audited the accompanying combined financial statements of the Midwest Generation Business of Duke Energy Corporation and subsidiaries (the “Business”), which comprise the combined balance sheets as of December 31, 2014 and 2013, and the related combined statements of operations, changes in equity, and cash flows for each of the three years in the period ended December 31, 2014, and the related notes to the combined financial statements. The combined financial statements include the accounts of Duke Energy Commercial Asset Management, LLC, Duke Energy Retail Sales, LLC, and Duke Energy Beckjord, LLC, which are under common control ownership and common management.

Management’s Responsibility for the Combined Financial Statements

Management is responsible for the preparation and fair presentation of those combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Business’ preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Business’ internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.

We believe that the audit evidence that we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the combined financial statements referred to above present fairly, in all material respects the financial position of the Midwest Generation Business of Duke Energy Corporation and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in accordance with accounting principles generally accepted in the United States of America.

Emphasis-of-Matter

As discussed in Note 1 to the combined financial statements, the Business is comprised of the assets, liabilities, revenues and expenses specifically attributable to the Business’ operations. The combined financial statements also include income and expense allocations from Duke Energy Corporation and subsidiaries, including Duke Energy Ohio, Inc. These combined financial statements are not indicative of the financial position, results of operations and cash flows that would have existed had the Business operated as a separate entity for each of the three years in the period ended December 31, 2014. Our opinion is not modified with respect to this matter.

/s/ Deloitte & Touche LLP

March 25, 2015

MIDWEST GENERATION BUSINESS

Combined Statements of Operations

See Notes to Combined Financial Statements

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MIDWEST GENERATION BUSINESS

Combined Balance Sheets

See Notes to Combined Financial Statements

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MIDWEST GENERATION BUSINESS

Combined Statements of Cash Flows

See Notes to Combined Financial Statements

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MIDWEST GENERATION BUSINESS

Combined Statements of Changes in Equity

See Notes to Combined Financial Statements

8

Midwest Generation Business

Notes To Combined Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

NATURE OF OPERATIONS AND BASIS OF PRESENTATION

On February 17, 2014, Duke Energy Corporation (Duke Energy) announced it had initiated a process to exit its nonregulated Midwest generation business (the Business). The Business includes generating plants owned by Duke Energy Commercial Asset Management, LLC (DECAM), a retail sales operation owned by Duke Energy through its indirect wholly owned subsidiary Duke Energy Retail Sales, LLC (Duke Energy Retail), and the Beckjord generating plant owned by Duke Energy Ohio, Inc. (Duke Energy Ohio). The generating plants, other than Beckjord, were transferred to DECAM from an affiliate effective May 1, 2014 and are presented herein as if the transfer occurred January 1, 2012 since the transaction was between entities under common control. See Note 2 for additional information related to the transfer of the generating plants. The Business represents 100 percent of DECAM, 100 percent of Duke Energy Retail, and Duke Energy Ohio’s Beckjord generating plant.

On August 21, 2014, Duke Energy Commercial Enterprises, Inc., an indirect wholly owned subsidiary of Duke Energy Corporation, and Duke Energy SAM, LLC, a wholly owned subsidiary of Duke Energy Ohio, entered into a purchase and sale agreement (PSA) with a subsidiary of Dynegy Inc. (Dynegy) whereby Dynegy will acquire the Business, excluding the Beckjord generating plant, for approximately $2.8 billion in cash subject to adjustments at closing for changes in working capital and capital expenditures. The completion of the transaction is conditioned on approval by the Federal Energy Regulatory Commission (FERC). On January 16, 2015, FERC issued a letter requesting additional information in connection with the transaction application. The request was for further economic analysis relating to the combined market power impacts of the proposed transaction and Dynegy’s simultaneous acquisition of other assets in the PJM Interconnection, LLC (PJM) market, and information relating to rate protections for Dynegy’s customers. On February 6, 2015, Duke Energy and Dynegy made two filings with FERC. The first filing provided additional information requested by FERC. The second filing provided information related to Dynegy’s settlement agreement with the Independent Market Monitor for PJM, which no longer opposes the proposed transaction. The transaction is expected to close by the end of the second quarter of 2015.

As a result of the decision to exit the Business, Duke Energy and Duke Energy Ohio recorded net pretax impairments of approximately $929 million and $959 million, respectively, for the year ended December 31, 2014. The impairment was recorded to write-down the carrying amount of the assets to the estimated fair value of the Business based on the expected selling price to Dynegy, less estimated costs to sell. Duke Energy and Duke Energy Ohio will update the impairment, if necessary, based on the final sales price, after any adjustments at closing for working capital and capital expenditures. These impairment charges recorded by Duke Energy and Duke Energy Ohio are not reflected in the accompanying financial statements of the Business.

The following table presents information related to the generating plants owned by DECAM included in the Business.

(a)                                 Jointly owned with America Electric Power Generation Resources and The Dayton Power and Light Company.

(b)                                 Jointly owned with The Dayton Power & Light Company.

(c)                                  Station is not operated by the Business.

(d)                                 Total MW capacity is based on summer capacity.

The combined financial statements include Duke Energy Ohio’s proportionate ownership in the Beckjord generating plant. This plant is not included in the Dynegy acquisition. The Beckjord station was fully impaired in 2010 and Duke Energy Ohio retired the remaining coal-fired units, units 5 and 6, effective October 1, 2014.

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Midwest Generation Business

Notes To Combined Financial Statements

The accompanying combined financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States from the accounting records of Duke Energy and Duke Energy Ohio using the historical results of operations and cost basis of the assets and liabilities of Duke Energy and Duke Energy Ohio that comprise the Business. The Business’ financial statements present the historical financial position, results of operations and cash flows of the Business as it has been historically operated and may not be indicative of what they would have been had the Business been a separate stand-alone entity, nor are they indicative of what the Business’ financial position, results of operations or net cash flows may be in the future.

The accompanying combined financial statements include the assets, liabilities, revenues and expenses specifically related to the Business’ operations. The generating plants and certain other assets included in the Business were previously owned by a wholly owned subsidiary of Cinergy Corp. (Cinergy). Duke Energy acquired Cinergy in 2006 and stated the assets and liabilities acquired at fair value via push down accounting which is included in these financial statements.

Costs directly related to the Business have been included in the accompanying combined financial statements. The Business also receives services and support functions from Duke Energy and Duke Energy Ohio. The Business’ operations are dependent on Duke Energy and Duke Energy Ohio’s ability to perform these services and support functions which include accounting, finance, investor relations, planning, legal, communications, and human resources, as well as information technology services and other shared services such as corporate security, facilities management, office support services and purchasing and logistics.

Specific identification of costs and various allocation methodologies, including the combination of the Business’ proportionate share of gross margin, labor dollars, property, plant and equipment, revenue and headcount, were used to disaggregate service and support functions between the Business and Duke Energy’s non-Midwest generation related operations. These allocated costs are recorded primarily in Operation, maintenance and other in the Combined Statements of Operations.

In addition, Duke Energy uses a centralized approach to cash management and financing of its operations, including those of the Business. The centralized treasury activities include the investment of surplus cash, the issuance and repayment of short-term and long-term debt, and commodity price risk management. Accordingly, debt and interest expenses reflected in the combined financial statements represent only those debentures and notes that were directly issued by the Business; none of the debt, including interest thereon, managed at the Duke Energy or Duke Energy Ohio level has been reflected in these combined financial statements. Also, cash balances presented are held by legal entities that are specifically attributable to the Business. All of Duke Energy’s funding to the Business since inception has been accounted for as capital contributions from Duke Energy and all cash remittances from the Business to Duke Energy have been accounted for as distributions to Duke Energy, including the allocation of expenses and settlement of transactions with Duke Energy. These transactions are reflected as Distributions to parent, net and Contributions from parent, net on the Combined Statements of Changes in Equity. Net parent investment on the Combined Balance Sheets represents Duke Energy’s interest in the recorded net assets of the Business and represents the cumulative net investment by Duke Energy in the Business through the dates presented and includes cumulative operating results.

Management believes the assumptions and allocations underlying the combined financial statements are reasonable and appropriate under the circumstances. The expense and cost allocations have been determined on a basis considered by Duke Energy and the Business to be a reasonable reflection of the utilization of services provided to or the benefit received by the Business during the periods presented. However, these assumptions and allocations are not necessarily indicative of the costs the Business would have incurred if it had operated on a stand-alone basis or as an entity independent of Duke Energy during the periods presented.

SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

In preparing financial statements that conform to U.S. GAAP, the Business must make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses, including allocation of costs for service and support functions, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

Cash and Cash Equivalents

All highly liquid investments with maturities of three months or less at the date of acquisition are considered cash equivalents.

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Midwest Generation Business

Notes To Combined Financial Statements

Inventory

Inventory is used for operations and is recorded primarily using the average cost method. Inventory is valued at the lower of cost or market. Materials and supplies are recorded as inventory when purchased and subsequently charged to expense or capitalized to property, plant and equipment when installed. Reserves are established for excess and obsolete inventory. The components of inventory are presented in the table below.

Other Current Assets and Liabilities

Components of other current assets and other current liabilities are presented in the tables below.

Property, Plant and Equipment

Property, plant and equipment are stated at the lower of depreciated historical cost or fair value, if impaired. As noted under Nature of Operations and Basis of Presentation above, at the date of acquisition by Duke Energy in 2006, property, plant and equipment amounts were stated at fair value. The Business capitalizes all construction-related direct labor and material costs, as well as indirect construction costs such as general engineering, taxes and financing costs. Costs of renewals and betterments that extend the useful life of property, plant and equipment are also capitalized. The cost of repairs, replacements and major maintenance projects, which do not extend the useful life or increase the expected output of the asset, are expensed as incurred. Depreciation is generally computed over the estimated useful life of the asset using the composite straight-line method. Depreciation studies are conducted periodically to update composite rates.

When the Business sells property, the original cost and accumulated depreciation and amortization balances are removed from Property, Plant and Equipment on the Combined Balance Sheets. See Note 6 for further information.

Intangible Assets

Intangible assets held by the Business primarily consist of emission allowances. Emission allowances permit the holder of the allowance to emit certain gaseous by-products of fossil fuel combustion, including sulfur dioxide (SO2) and nitrogen oxide (NOx). Allowances are issued by the U.S. Environmental Protection Agency (EPA) at zero cost and may also be bought and sold via third-party transactions. Allowances allocated to or acquired by the Business are held primarily for consumption. Carrying amounts for emission allowances are based on the cost to acquire the allowances or, in the case of a business combination, on the fair value assigned in the allocation of the purchase price of the acquired business.

The Business also holds renewable energy certificates, which are used to measure compliance with renewable energy standards and are held primarily for consumption.

See Note 7 for further information.

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Midwest Generation Business

Notes To Combined Financial Statements

Long-Lived Asset Impairments

The Business evaluates long-lived assets for impairment when circumstances indicate the carrying value of those assets may not be recoverable. An impairment exists when a long-lived asset’s carrying value exceeds the estimated undiscounted cash flows expected to result from the use and eventual disposition of the asset. The estimated cash flows may be based on alternative expected outcomes that are probability weighted. If the carrying value of the long-lived asset is not recoverable based on these estimated future undiscounted cash flows, the carrying value of the asset is written-down to its then-current estimated fair value and an impairment charge is recognized.

The Business assesses fair value of long-lived assets using various methods, including recent comparable third-party sales, internally developed cash flow analysis and analysis from outside advisors. Significant changes in commodity prices, the condition of an asset or management’s interest in selling the asset are generally viewed as triggering events to re-assess cash flows.

Revenue Recognition and Unbilled Revenue

The Business participates in bid/offer-based wholesale energy, capacity, and ancillary services markets operated by PJM. PJM requires all generation owners such as the Business to submit hourly day-ahead and/or real-time bids and offers for energy and ancillary services. The PJM day-ahead and real-time transactions are grouped together, resulting in a net supply to or net purchase from PJM each hour of each day. The net supply to PJM is recorded in Operating Revenues and the net purchase from PJM is recorded in Cost of operations on the Combined Statements of Operations. DECAM and Duke Energy Retail are separate market participants in PJM. DECAM net sales to PJM and Duke Energy Retail net purchases from PJM have not been presented on a net basis in these combined financial statements. Revenues on sales of electricity to retail customers are recognized when service is provided. Revenues on sales of capacity are recognized in the period the capacity is made available at the rate established by PJM for the applicable period. Unbilled revenues are recognized by applying customer billing rates to the estimated volumes of energy delivered but not yet billed. Unbilled revenues can vary significantly from period to period as a result of seasonality, weather and customer usage patterns. Unbilled revenues of $61 million and $78 million were included within Receivables on the Combined Balance Sheets at December 31, 2014 and 2013.

Derivatives

Derivative and non-derivative instruments may be used in connection with commodity price risk management activities, including swaps, futures, forwards and options. All derivative instruments except those that are designated and qualify for the normal purchase/normal sale (NPNS) exception are recorded on the Combined Balance Sheets at their fair value. See Note 9 for further information.

Unamortized Debt Premium, Discount and Expense

Premiums, discounts and expenses incurred with the issuance of outstanding long-term debt are amortized over the term of the debt issue. Amortization expense is recorded as Interest Expense in the Combined Statements of Operations and is reflected as Depreciation and amortization within Net cash provided by operating activities on the Combined Statements of Cash Flows.

Loss Contingencies

Contingent losses are recorded when it is probable a loss has occurred and can be reasonably estimated. When a range of the probable loss exists and no amount within the range is a better estimate than any other amount, the minimum amount in the range is recorded. Unless otherwise required by U.S. GAAP, legal fees are expensed as incurred.

Employee Benefit Plans

Substantially all employees of the Business participate in pension and other post-retirement benefit plans administered and sponsored by Duke Energy. The Business’ pension plan assets and liabilities are combined with those related to other Duke Energy businesses. Duke Energy manages its pension and other post-retirement benefit plans on a combined basis with claims data and liability information related to the Business combined with other Duke Energy businesses. As such, the Business has accounted for its pension and other post-retirement benefit plans and its employee savings plan on a multi-employer basis and has not reflected any assets or liabilities on the Business’ combined balance sheets, and pension and other post-retirement expenses for the Business have been allocated to the Business and reflected in the results of operations.

See Note 11 for further information.

Stock Options and Other Share-Based Compensation

Employees of the Business participate in equity-based compensation plans sponsored by Duke Energy. The Business measures compensation cost for all share-based payments (including employee stock options) at fair value and recognizes the related cost over the vesting period. For the periods presented, these equity-based compensation plans were not material to these combined financial statements.

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Midwest Generation Business

Notes To Combined Financial Statements

Comprehensive Income

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income is the same as net income for all periods presented. Therefore, a separate statement of comprehensive income is not included in the accompanying combined financial statements.

Income Taxes

Historically, the Business’ operations were included in the consolidated federal income tax returns filed by Duke Energy. For the purposes of these combined financial statements, the Business has determined its U.S. income tax provision as if it were filing a separate consolidated U.S. tax return.

Accrued U.S. federal and state current income tax balances, including penalties and interest, are treated as being settled without payment as of the end of each period with Duke Energy. Therefore, the settlement of the current income tax liability without payment is treated as Distributions to parent, net and Contributions from parent, net in the accompanying Combined Statements of Changes in Equity.

Deferred income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income in the period that includes the enactment date of the rate change. The Business records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Business has considered future taxable income and ongoing feasible tax planning strategies in assessing the need for the valuation allowance.

Tax-related interest and penalties are recorded in Interest Expense and Other Income and Expenses, net, in the Combined Statements of Operations.

See Note 12 for further information.

NEW ACCOUNTING STANDARDS

New accounting standards adopted in 2014, 2013 and 2012 had no significant impact on the presentation or results of operations, cash flows or financial position of the Business.

The following new Accounting Standards Update (ASU) has been issued but not yet adopted by the Business as of December 31, 2014.

ASC 606 - Revenue from Contracts with Customers. In May 2014, the Financial Accounting Standards Board (FASB) issued revised accounting guidance for revenue recognition from contracts with customers. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this update also require disclosure of sufficient information to allow users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

This guidance is effective for interim and annual periods beginning January 1, 2017. The Business is currently evaluating the requirements. The ultimate impact of the new standard has not yet been determined.

2. REGULATORY MATTERS

Duke Energy Ohio Electric Security Plan

Ohio law provides the Public Utilities Commission of Ohio (PUCO) authority to approve an electric utility’s generation standard service offer, which may include an Electric Security Plan (ESP). In June 2011, Duke Energy Ohio filed for approval of an ESP to replace the then existing ESP that expired on December 31, 2011. The PUCO approved Duke Energy Ohio’s new ESP on November 22, 2011. The ESP includes competitive auctions for electricity supply for a term of January 1, 2012 through May 31, 2015. The ESP also includes a provision for a non-bypassable stability charge of $110 million per year to be collected from January 1, 2012 through December 31, 2014 and required Duke Energy Ohio to transfer its generational assets to a non-regulated affiliate on or before December 31, 2014. The transfer of the Business’ assets to DECAM was completed on May 1, 2014, other than the Beckjord generating plant, which was transferred to Duke Energy Beckjord, LLC on December 1, 2014.

The ESP effectively separated the generation of electricity from Duke Energy Ohio’s retail load obligation. As a result, Duke Energy Ohio’s generation assets no longer served retail load customers or received negotiated pricing under the ESP, which allowed for recovery of costs related to energy purchases, fuel and emission allowances. Beginning January 1, 2012, regulatory accounting is no longer applied to the coal-fired generation assets owned by DECAM. The generation assets began dispatching all of their electricity into unregulated markets in January 2012.

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Midwest Generation Business

Notes To Combined Financial Statements

3. COMMITMENTS AND CONTINGENCIES

INSURANCE

The Business has insurance and reinsurance coverage either directly or through indemnification from Duke Energy’s captive insurance company, Bison Insurance Company Limited (Bison), and its affiliates, consistent with companies engaged in similar commercial operations with similar type properties. The Business’ coverage includes (i) commercial general liability coverage for liabilities arising to third parties for bodily injury and property damage; (ii) workers’ compensation; (iii) automobile liability coverage; and (iv) property coverage for all real and personal property damage. Real and personal property damage coverage includes damages arising from boiler and machinery breakdowns, earthquakes, flood damage and extra expense, but not outage or replacement power coverage. All coverage is subject to certain deductibles or retentions, sublimits, exclusions, terms and conditions common for companies with similar types of operations.

The cost of the Business’ coverage can fluctuate year to year reflecting claims history and conditions of the insurance and reinsurance markets.

In the event of a loss, terms and amounts of insurance and reinsurance available might not be adequate to cover claims and other expenses incurred. Uninsured losses and other expenses, to the extent not recovered by other sources, could have a material effect on the Business’ results of operations, cash flows or financial position. The Business is responsible to the extent losses may exceed limits of the coverage available.

ENVIRONMENTAL

The Business is subject to federal, state, and local regulations regarding air and water quality, hazardous and solid waste disposal, and other environmental matters. These regulations can be changed from time to time, imposing new obligations on the Business.

Coal Combustion Residuals

On December 19, 2014, the EPA signed the first federal regulation for the disposal of coal combustion residuals (CCR) from power plants. The federal regulation classifies CCR as nonhazardous waste under the Resource Conservation and Recovery Act and applies to all new and existing landfills, new and existing surface impoundments, structural fills and CCR piles. The rule establishes requirements regarding landfill design, structural integrity design and assessment criteria for surface impoundments, groundwater monitoring and protection procedures and other operational and reporting procedures to ensure the safe disposal and management of CCR. In addition to the requirements of the federal CCR regulation, CCR landfills and surface impoundments will continue to be independently regulated by most states. The Business records an asset retirement obligation when it has a legal obligation to incur retirement costs associated with the retirement of a long-lived asset and the obligation can be reasonably estimated. Once the rule is effective in 2015, asset retirement obligation amounts will be recorded. At this time, the Business is evaluating the CCR regulation and developing cost estimates that will largely be dependent upon compliance alternatives selected to meet requirements of the regulations.

LITIGATION

Antitrust Lawsuit

In January 2008, four plaintiffs, including individual, industrial and nonprofit customers, filed a lawsuit against Duke Energy Ohio in federal court in the Southern District of Ohio. Plaintiffs alleged Duke Energy Ohio conspired with Duke Energy Retail to provide inequitable and unfair price advantages for certain large business consumers by entering into non-public option agreements in exchange for their withdrawal of challenges to Duke Energy Ohio’s Rate Stabilization Plan implemented in early 2005. In March 2014, a federal judge certified this matter as a class action. The parties have agreed to mediation on March 31, 2015. Trial has been set to begin on July 27, 2015. It is not possible to predict whether the Business will incur any liability or to estimate the damages, if any, that may be incurred in connection with this matter. Ultimate resolution of this matter could have a material effect on the results of operations, cash flows or financial position of the Business.

Any liability related to the lawsuit attributable to the Business will not be transferred to Dynegy upon the sale of the Midwest generation business transaction referenced in Note 1.

Asbestos-related Injuries and Damages Claims

Duke Energy Ohio has been named as a defendant or co-defendant in lawsuits related to asbestos exposure at its electric generating stations. The impact on the Business’ results of operations, cash flows or financial position of these cases to date has not been material. Based on estimates under varying assumptions concerning uncertainties, such as, among others: (i) the number of contractors potentially exposed to asbestos during construction or maintenance of Duke Energy Ohio generating plants, (ii) the possible incidence of various illnesses among exposed workers, and (iii) the potential settlement costs without federal or other legislation that addresses asbestos tort actions, the Business estimates that the range of reasonably possible exposure in existing and future suits over the foreseeable future is not material. This assessment may change as additional settlements occur, claims are made, and more case law is established.

14

Midwest Generation Business

Notes To Combined Financial Statements

OTHER COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

The Business leases land with a term that expires in 2042. Rental expense for this operating lease was $1 million for each of the years ended December 31, 2014, 2013 and 2012. These amounts are included in Operation, maintenance and other on the Combined Statements of Operations. Future minimum lease payments under this operating lease are $1 million or less per year for the remaining term of the lease.

W.C. Beckjord Fuel Release

On August 18, 2014, approximately 9,000 gallons of fuel oil were inadvertently discharged into the Ohio River during a fuel oil transfer at the W.C. Beckjord generating plant. The Ohio Environmental Protection Agency (Ohio EPA) issued a Notice of Violation related to the discharge. Duke Energy Ohio is cooperating with the Ohio EPA, the EPA and the U.S. Attorney for the Southern District of Ohio, responding to a Request for Information from the EPA. No Notice of Violation has been issued by the EPA and no civil or criminal penalty amount has been established. Total repair and remediation costs related to the release are not expected to be material. Other costs related to the release, including state or federal civil enforcement proceedings, cannot be reasonably estimated at this time.

4. LONG-TERM DEBT

SUMMARY OF DEBT AND RELATED TERMS

The following table summarizes outstanding debt.

(a)                                 Bonds are variable rate. The interest rate is reset weekly based on the current market rate as determined by the remarketing agent of the specific instrument. Bonds are secured by a Duke Energy master credit facility.

(b)                                Bonds are variable rate. The interest rates are two times the 1-month London Interbank Offer Rate (LIBOR) and are reset every seven or thirty-five days depending on the specific instrument. Bonds are secured through insurance.

The long-term debt of $402 million was repaid in 2014. The funds to repay the debt have been reflected as a contribution from parent in the Statement of Changes in Equity.

5. JOINT OWNERSHIP OF GENERATING FACILITIES

The Business holds ownership interests in certain jointly owned generating facilities. The Business is entitled to shares of the generating capacity and output of each unit equal to their respective ownership interests. The Business pays its ownership share of additional construction costs, fuel inventory purchases and operating expenses, except in certain instances where agreements have been executed to limit certain joint owners’ maximum exposure to the additional costs. The Business’ share of revenues and operating costs of the jointly owned generating facilities are included within the corresponding financial statement line items in the Combined Statements of Operations. Each participant in the jointly owned facilities must provide its own financing, except in certain instances where agreements have been executed to limit certain joint owners’ maximum exposure to the additional costs.

The following table presents the share of jointly owned plant or facilities included on the Combined Balance Sheets. All facilities are operated by the Business unless otherwise noted.

15

Midwest Generation Business

Notes To Combined Financial Statements

(a)         Jointly owned with American Electric Power Generation Resources and The Dayton Power and Light Company.

(b)         Jointly owned with The Dayton Power and Light Company.

(c)          Station is not operated by the Business.

6. PROPERTY, PLANT AND EQUIPMENT

The following table summarizes property, plant and equipment.

Capitalized interest was $2 million, $1 million and $2 million for the years ended December 31, 2014, 2013 and 2012.

7. INTANGIBLE ASSETS

The following table shows the carrying amount of intangible assets.

Expected amortization expense for the next five years is $2 million, $1 million, $1 million, $1 million and $1 million. The expected amortization expense includes estimates of emission allowance consumption. The amortization amounts are estimates and actual amounts may differ from these estimates due to such factors as changes in consumption patterns, sales or impairments of emission allowances or other intangible assets, additional intangible acquisitions and other events.

8. TRANSACTIONS WITH AFFILIATES

The Business receives services and support functions performed by Duke Energy and Duke Energy Ohio. The Business’ operations are dependent on Duke Energy and Duke Energy Ohio’s ability to perform these services and support functions, which include accounting, finance, investor relations, planning, legal, communications and human resources, as well as information technology services and other shared services such as corporate security, facilities management, office support services and purchasing and logistics. Specific identification of costs and various allocation methodologies, including a combination of the Business’ proportionate share of gross margin, labor dollars, property, plant and equipment, revenue and headcount, were used to disaggregate service and support functions between the Business and Duke Energy’s non-Midwest generation related operations. Management believes the assumptions and allocations underlying the combined financial statements are reasonable and appropriate. The total amount charged to the Business for corporate services was $65 million, $79 million and $94 million for the years ended December 31, 2014, 2013 and 2012, respectively. These allocated costs are recorded primarily in Operation, maintenance and other in the Combined Statements of Operations.

Duke Energy uses a centralized approach to cash management and financing of its operations, including those of the Business. At December 31, 2014 and 2013, the amount owed to Duke Energy, due to intercompany transactions, was $556 million and $133 million, respectively, and was recorded as Equity in the Combined Balance Sheets.

In addition to the amounts presented above, the Business records other allocations, including rental of office space, participation in a money pool arrangement, other operational transactions and their proportionate share of certain charged expenses. The net impact of these transactions was not material for the years ended December 31, 2014, 2013 and 2012.

16

Midwest Generation Business

Notes To Combined Financial Statements

The Business conducts activities including the execution of commodity transactions, third-party vendor and supply contracts, and service contracts for certain of Duke Energy’s nonregulated entities. The commodity contracts the Business enters are accounted for as undesignated contracts or NPNS. Consequently, mark-to-market impacts of intercompany contracts with, and sales of power to, Duke Energy’s nonregulated entities are reflected in the Business’ Combined Statements of Operations. These amounts totaled net revenue of $19 million, $25 million, and $57 million for the years ended December 31, 2014, 2013 and 2012, respectively.

9. DERIVATIVES

The Business uses commodity contracts to manage commodity price rate risk. The primary use of energy commodity derivatives is to hedge the generation portfolio against changes in the prices of electricity and natural gas. All derivative instruments not identified as NPNS are recorded at fair value as assets or liabilities on the Combined Balance Sheets. Cash collateral related to derivative instruments executed under master netting agreement is offset against the collateralized derivatives on the balance sheet.

Changes in the fair value of derivative agreements are reflected in current earnings.

COMMODITY PRICE RISK

The Business is exposed to the impact of changes in the future prices of electricity, coal, and natural gas. Exposure to commodity price risk is influenced by a number of factors including the term of contracts, the liquidity of markets, and delivery locations.

Commodity Fair Value and Cash Flow Hedges

At December 31, 2014, there were no open commodity derivative instruments designated as hedges.

Undesignated Contracts

Undesignated contracts may include contracts not designated as a hedge, contracts that do not qualify for hedge accounting, derivatives that do not or no longer qualify for the NPNS scope exception, and designated hedge contracts. These contracts expire as late as 2018.

The Business’s undesignated contracts are primarily associated with forward sales and purchases of electricity, coal, and natural gas.

Volumes

The tables show information relating to the volume of outstanding commodity derivatives. Amounts disclosed represent the notional volumes of commodity contracts excluding NPNS. Amounts disclosed represent the absolute value of notional amounts. The Business has netted contractual amounts where offsetting purchase and sale contracts exist with identical delivery locations and times of delivery. Where all commodity positions are perfectly offset, no quantities are shown.

The following table shows the fair value of derivatives and the line items in the Combined Balance Sheets where they are reported. Although derivatives subject to master netting arrangements are netted on the Combined Balance Sheets, the fair values presented below are shown gross and cash collateral on the derivatives has not been netted against the fair values shown.

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Midwest Generation Business

Notes To Combined Financial Statements

The tables below show the balance sheet location of derivative contracts subject to enforceable master netting agreements and include collateral posted to offset the net position. This disclosure is intended to enable users to evaluate the effect of netting arrangements on financial position. The amounts shown were calculated by counterparty. Accounts receivable or accounts payable may also be available to offset exposures in the event of bankruptcy. These amounts are not included in the tables below.

The following table shows the gains and losses during the year recognized on undesignated derivatives and the line items on the Combined Statements of Operations where the pretax gains and losses were reported.

CREDIT RISK

Certain derivative contracts contain contingent credit features. These features may include (i) material adverse change clauses or payment acceleration clauses that could result in immediate payments, (ii) the posting of letters of credit or termination of the derivative contract before maturity if specific events occur, such as a credit rating downgrade below investment grade.

The following tables show information with respect to derivative contracts that are in a net liability position and contain objective credit-risk related payment provisions.

The Business has elected to offset cash collateral and fair values of derivatives. For amounts to be netted, the derivative must be executed with the same counterparty under the same master netting agreement. Amounts disclosed below represent the receivables related to the right to reclaim cash collateral and payables related to the obligation to return cash collateral under master netting arrangements.