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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q/A

AMENDMENT NO. 1



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2004



| ̈ | 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: 000-29311



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DYNEGY HOLDINGS INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-3248415                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



1000 Louisiana,
Suite 5800

Houston, Texas 77002

(Address of principal executive offices)

(Zip Code)



(713) 507-6400

(Registrants telephone number, including area code)



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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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



All of the registrants outstanding stock is owned, directly or indirectly by Dynegy Inc.



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DYNEGY HOLDINGS INC.



TABLE OF
CONTENTS



|                                                                                                                        |  |                                              |  |     
|----------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- |  | ----
|                                                                                                                        |  |                                              |  | Page
|PART I.    FINANCIAL INFORMATION                                                                                        |  |                                             
|                                                                                                                        |  |                                             
|Item 1.                                                                                                                 |  | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: |  |     
|                                                                                                                        | 
|Condensed Consolidated Balance Sheets (Restated):September 30, 2004 and December 31, 2003                               |  | 4                                           
|Condensed Consolidated Statements of Operations:For the three and nine months ended September 30, 2004 and 2003         |  | 5                                           
|Condensed Consolidated Statements of Cash Flows:For the nine months ended September 30, 2004 and 2003                   |  | 6                                           
|Condensed Consolidated Statements of Comprehensive Loss:For the three and nine months ended September 30, 2004 and 2003 |  | 7                                           
|Notes to Condensed Consolidated Financial Statements                                                                    |  | 8                                           
|                                                                                                                        |  |                                             
|Item 4.                                                                                                                 |  | CONTROLS AND PROCEDURES                      |  | 43  
|                                                                                                                        | 
|PART II.    OTHER INFORMATION                                                                                           |  |                                             
|                                                                                                                        |  |                                             
|Item 6.                                                                                                                 |  | EXHIBITS                                     |  | 45  



INTRODUCTORY NOTE



Dynegy Holdings Inc. is filing this Amendment No. 1 on
Form 10-Q/A (Amendment No. 1) to reflect the effect of a $292 million increase to our deferred income tax liability at December 31, 2003 resulting from a tax basis balance sheet review on our historical unaudited condensed consolidated
financial statements and related information, as reported in our Quarterly Report on Form 10-Q for the period ended September 30, 2004, which was originally filed on November 22, 2004 (the Original Filing).



The aforementioned item is discussed in more detail in the Introductory Note
to the accompanying unaudited condensed consolidated financial statements beginning on page 8. Revised financial information for the periods presented reflecting these restatements was previously disclosed in our Annual Report on Form 10-K for the
year ended December 31, 2003, which was most recently amended by Amendment No. 1 thereto filed with the SEC on January 25, 2005 (the Form 10-K/A). The restated financial and other information included in this Amendment No. 1 should be
read together with the Form 10-K/A. The following Items of the Original Filing are amended by this Amendment No. 1:



Item 1.    Condensed Consolidated Financial Statements



Item 4.    Controls and Procedures



Item 6.    Exhibits



Unaffected items have not been repeated in this Amendment No. 1.



PLEASE NOTE THAT THE INFORMATION CONTAINED IN THIS AMENDMENT NO. 1, INCLUDING THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES
THERETO, DOES NOT REFLECT EVENTS OCCURRING AFTER THE DATE OF THE ORIGINAL FILING. SUCH EVENTS INCLUDE, AMONG OTHERS, THE EVENTS DESCRIBED IN OUR CURRENT REPORTS ON FORM 8-K. FOR A DESCRIPTION OF THESE EVENTS, PLEASE READ OUR EXCHANGE ACT REPORTS
FILED SINCE NOVEMBER 22, 2004, INCLUDING OUR CURRENT REPORTS ON FORM 8-K AND ANY AMENDMENTS THERETO.



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DEFINITIONS



As used in this Form 10-Q/A, the abbreviations listed below have the following meanings:



|                |  |                                                                                                                                                                 
|--------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|ARO             |  | Asset retirement obligation                                                                                                                                     
|Bbtu/d          |  | Billions of British thermal units per day                                                                                                                       
|Cal ISO         |  | The California Independent System Operator                                                                                                                      
|Cal PX          |  | The California Power Exchange                                                                                                                                   
|CDWR            |  | California Department of Water Resources                                                                                                                        
|CFTC            |  | Commodity Futures Trading Commission                                                                                                                            
|CPUC            |  | California Public Utilities Commission                                                                                                                          
|CRM             |  | Our customer risk management business segment                                                                                                                   
|$/Bbl           |  | Dollars per barrel                                                                                                                                              
|$/Gal           |  | Dollars per gallon                                                                                                                                              
|DMG             |  | Dynegy Midwest Generation, Inc.                                                                                                                                 
|DMS             |  | Dynegy Midstream Services                                                                                                                                       
|DPM             |  | Dynegy Power Marketing Inc.                                                                                                                                     
|Dynegy          |  | Dynegy Inc., our parent company, together with its subsidiaries                                                                                                 
|EITF            |  | Emerging Issues Task Force                                                                                                                                      
|EPA             |  | Environmental Protection Agency                                                                                                                                 
|ERCOT           |  | Electric Reliability Council of Texas, Inc.                                                                                                                     
|ERISA           |  | The Employee Retirement Income Security Act of 1974, as amended                                                                                                 
|FASB            |  | Financial Accounting Standards Board                                                                                                                            
|FERC            |  | Federal Energy Regulatory Commission                                                                                                                            
|FIN             |  | FASB Interpretation                                                                                                                                             
|Form 8-K        |  | Our Current Report on Form 8-K filed on September 23, 2004                                                                                                      
|Form 10-K       |  | Our Annual Report on Form 10-K for the year ended December 31, 2003, filed on March 5, 2004, as amended by Amendment No. 1 on Form 10-K/A filed on July 20, 2004
|Form 10-K/A     |  | Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2003, filed on January 25, 2005                                               
|Form 10-Q/A     |  | Amendment No. 1 to our Form 10-Q for the quarter ended September 30, 2004                                                                                       
|GAAP            |  | Accounting principles generally accepted in the United States of America                                                                                        
|GEN             |  | Our power generation business segment                                                                                                                           
|ICC             |  | Illinois Commerce Commission                                                                                                                                    
|Illinois Power  |  | Illinois Power Company                                                                                                                                          
|kW-yr           |  | Kilowatts per year                                                                                                                                              
|LIBOR           |  | The London Interbank Offered Rate                                                                                                                               
|LNG             |  | Liquefied natural gas                                                                                                                                           
|MBbls/d         |  | Thousands of barrels per day                                                                                                                                    
|MMBtu           |  | Millions of British thermal units                                                                                                                               
|MMCFD           |  | Million cubic feet per day                                                                                                                                      
|MW              |  | Megawatt                                                                                                                                                        
|MWh             |  | Megawatt hour                                                                                                                                                   
|NGL             |  | Our natural gas liquids business segment                                                                                                                        
|NOV             |  | Notice of Violation                                                                                                                                             
|NSPS            |  | New Source Performance Standard                                                                                                                                 
|Original Filing |  | Our Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, filed on November 22, 2004                                                          
|PRB             |  | Powder River Basin                                                                                                                                              
|PSD             |  | Prevention of Significant Deterioration                                                                                                                         
|SEC             |  | U.S. Securities and Exchange Commission                                                                                                                         
|SFAS            |  | Statement of Financial Accounting Standards                                                                                                                     
|SPE             |  | Special Purpose Entity                                                                                                                                          
|VaR             |  | Value at Risk                                                                                                                                                   
|VIE             |  | Variable Interest Entity                                                                                                                                        
|WEN             |  | Our former wholesale energy business segment                                                                                                                    



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DYNEGY HOLDINGS INC.



CONDENSED
CONSOLIDATED BALANCE SHEETS

(unaudited) (in millions)

See Explanatory Note



|                                                                                           |  |                   |        |   |                  |   |        |  
|------------------------------------------------------------------------------------------ |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                           |  | September 30,2004 |        |   | December 31,2003 |  
|                                                                                           |  | (Restated)        |       
|ASSETS                                                                                     |  |                   |        |   |                  |   |        |  
|Current Assets                                                                             |  |                   |        |   |                  |   |        |  
|Cash and cash equivalents                                                                  |  | $                 | 415    |   |                  | $ | 328    |  
|Accounts receivable, net of allowance for doubtful accounts of $151 and $174, respectively |  |                   | 667    |   |                  |   | 806    |  
|Accounts receivable, affiliates                                                            |  |                   | 612    |   |                  |   | 338    |  
|Inventory                                                                                  |  |                   | 260    |   |                  |   | 194    |  
|Assets from risk-management activities                                                     |  |                   | 797    |   |                  |   | 818    |  
|Prepayments and other current assets                                                       |  |                   | 434    |   |                  |   | 324    |  
|                                                                                           |  |                   |        |   |                  |   |        |  
|Total Current Assets                                                                       |  |                   | 3,185  |   |                  |   | 2,808  |  
|                                                                                           |  |                   |        |   |                  |   |        |  
|Property, Plant and Equipment                                                              |  |                   | 7,774  |   |                  |   | 7,691  |  
|Accumulated depreciation                                                                   |  |                   | (1,626 | ) |                  |   | (1,389 | )
|                                                                                           |  |                   |        |   |                  |   |        |  
|Property, Plant and Equipment, Net                                                         |  |                   | 6,148  |   |                  |   | 6,302  |  
|Other Assets                                                                               |  |                   |        |   |                  |   |        |  
|Unconsolidated investments                                                                 |  |                   | 451    |   |                  |   | 577    |  
|Assets from risk-management activities                                                     |  |                   | 634    |   |                  |   | 629    |  
|Goodwill                                                                                   |  |                   | 15     |   |                  |   | 15     |  
|Other long-term assets                                                                     |  |                   | 188    |   |                  |   | 146    |  
|                                                                                           |  |                   |        |   |                  |   |        |  
|Total Assets                                                                               |  | $                 | 10,621 |   |                  | $ | 10,477 |  
|                                                                                           |  |                   |        |   |                  |   |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                       |  |                   |        |   |                  |   |        |  
|Current Liabilities                                                                        |  |                   |        |   |                  |   |        |  
|Accounts payable                                                                           |  | $                 | 531    |   |                  | $ | 631    |  
|Accounts payable, affiliates                                                               |  |                   | 84     |   |                  |   | 74     |  
|Accrued liabilities and other current liabilities                                          |  |                   | 473    |   |                  |   | 415    |  
|Liabilities from risk-management activities                                                |  |                   | 879    |   |                  |   | 838    |  
|Notes payable and current portion of long-term debt                                        |  |                   | 24     |   |                  |   | 79     |  
|Current portion of long-term debt to affiliates                                            |  |                   |       |   |                  |   | 71     |  
|                                                                                           |  |                   |        |   |                  |   |        |  
|Total Current Liabilities                                                                  |  |                   | 1,991  |   |                  |   | 2,108  |  
|                                                                                           |  |                   |        |   |                  |   |        |  
|Long-term debt                                                                             |  |                   | 3,926  |   |                  |   | 3,464  |  
|Long-term debt to affiliates                                                               |  |                   | 200    |   |                  |   | 200    |  
|                                                                                           |  |                   |        |   |                  |   |        |  
|Long-Term Debt                                                                             |  |                   | 4,126  |   |                  |   | 3,664  |  
|Other Liabilities                                                                          |  |                   |        |   |                  |   |        |  
|Liabilities from risk-management activities                                                |  |                   | 718    |   |                  |   | 746    |  
|Deferred income taxes                                                                      |  |                   | 221    |   |                  |   | 186    |  
|Other long-term liabilities                                                                |  |                   | 324    |   |                  |   | 492    |  
|                                                                                           |  |                   |        |   |                  |   |        |  
|Total Liabilities                                                                          |  |                   | 7,380  |   |                  |   | 7,196  |  
|                                                                                           |  |                   |        |   |                  |   |        |  
|Minority Interest                                                                          |  |                   | 108    |   |                  |   | 121    |  
|Commitments and Contingencies (Note 8)                                                     |  |                   |        |   |                  |   |        |  
|Additional paid-in capital                                                                 |  |                   | 2,419  |   |                  |   | 2,419  |  
|Accumulated other comprehensive income (loss), net of tax                                  |  |                   | (24    | ) |                  |   | 33     |  
|Accumulated deficit                                                                        |  |                   | (294   | ) |                  |   | (324   | )
|Stockholders Equity                                                                       |  |                   | 1,032  |   |                  |   | 1,032  |  
|                                                                                           |  |                   |        |   |                  |   |        |  
|Total Stockholders Equity                                                                 |  |                   | 3,133  |   |                  |   | 3,160  |  
|                                                                                           |  |                   |        |   |                  |   |        |  
|Total Liabilities and Stockholders Equity                                                 |  | $                 | 10,621 |   |                  | $ | 10,477 |  
|                                                                                           |  |                   |        |   |                  |   |        |  



See the notes to
condensed consolidated financial statements.



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DYNEGY HOLDINGS INC.



CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited) (in millions)



|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                            |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                            |  | 2004                            |        |   | 2003                           |   |        | 2004 |  |   | 2003   |  
|Revenues                                                                    |  | $                               | 1,387  |   |                                | $ | 1,174  |      |  | $ | 3,945  |   |  | $ | 3,512  |  
|Cost of sales, exclusive of depreciation shown separately below             |  |                                 | (1,184 | ) |                                |   | (1,001 | )    |  |   | (3,304 | ) |  |   | (3,299 | )
|Depreciation and amortization expense                                       |  |                                 | (78    | ) |                                |   | (79    | )    |  |   | (238   | ) |  |   | (247   | )
|Impairment and other charges                                                |  |                                 | (2     | ) |                                |   | (1     | )    |  |   | (29    | ) |  |   | 6      |  
|Gain (loss) on sale of assets, net                                          |  |                                 | (1     | ) |                                |   |       |      |  |   | 52     |   |  |   | 15     |  
|General and administrative expenses                                         |  |                                 | (65    | ) |                                |   | (56    | )    |  |   | (203   | ) |  |   | (226   | )
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Operating income (loss)                                                     |  |                                 | 57     |   |                                |   | 37     |      |  |   | 223    |   |  |   | (239   | )
|Earnings from unconsolidated investments                                    |  |                                 | 26     |   |                                |   | 51     |      |  |   | 117    |   |  |   | 140    |  
|Interest expense                                                            |  |                                 | (85    | ) |                                |   | (103   | )    |  |   | (275   | ) |  |   | (239   | )
|Other income and expense, net                                               |  |                                 |       |   |                                |   | 1      |      |  |   | 6      |   |  |   | 14     |  
|Minority interest income (expense)                                          |  |                                 | (10    | ) |                                |   | (2     | )    |  |   | (19    | ) |  |   | 7      |  
|Accumulated distributions associated with trust preferred securities        |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   | (8     | )
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations before income taxes                |  |                                 | (12    | ) |                                |   | (16    | )    |  |   | 52     |   |  |   | (325   | )
|Income tax benefit (expense) (Note 11)                                      |  |                                 | 6      |   |                                |   | 6      |      |  |   | (13    | ) |  |   | 121    |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                                    |  |                                 | (6     | ) |                                |   | (10    | )    |  |   | 39     |   |  |   | (204   | )
|Loss from discontinued operations, net of taxes (Notes 2 and 11)            |  |                                 | (2     | ) |                                |   | (4     | )    |  |   | (9     | ) |  |   | (14    | )
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) before cumulative effect of change in accounting principles   |  |                                 | (8     | ) |                                |   | (14    | )    |  |   | 30     |   |  |   | (218   | )
|Cumulative effect of change in accounting principles, net of taxes (Note 1) |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   | 57     |  
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                                           |  | $                               | (8     | ) |                                | $ | (14    | )    |  | $ | 30     |   |  | $ | (161   | )
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  





See the notes to condensed consolidated financial statements.



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DYNEGY HOLDINGS INC.



CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited) (in millions)



|                                                                                        |  |                                 |      |   |      |   |        |  
|--------------------------------------------------------------------------------------- |  | ------------------------------- | ---- | - | ---- | - | ------ | -
|                                                                                        |  | Nine Months Ended September 30, |     
|                                                                                        |  | 2004                            |      |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                   |  |                                 |      |   |      |   |        |  
|Net income (loss)                                                                       |  | $                               | 30   |   |      | $ | (161   | )
|Adjustments to reconcile net income (loss) to net cash flows from operating activities: |  |                                 |      |   |      |   |        |  
|Depreciation and amortization                                                           |  |                                 | 265  |   |      |   | 298    |  
|Impairment and other charges                                                            |  |                                 | 29   |   |      |   |       |  
|Earnings from unconsolidated investments, net of cash distributions                     |  |                                 | (5   | ) |      |   | (26    | )
|Risk-management activities                                                              |  |                                 | (24  | ) |      |   | 373    |  
|Gain on sale of assets, net                                                             |  |                                 | (52  | ) |      |   | (16    | )
|Deferred income taxes                                                                   |  |                                 | 39   |   |      |   | (127   | )
|Cumulative effect of change in accounting principles (Note 1)                           |  |                                 |     |   |      |   | (57    | )
|Liability associated with gas transportation contracts (Note 2)                         |  |                                 | (148 | ) |      |   |       |  
|Other                                                                                   |  |                                 | (5   | ) |      |   | 25     |  
|Changes in working capital:                                                             |  |                                 |      |   |      |   |        |  
|Accounts receivable                                                                     |  |                                 | 137  |   |      |   | 1,598  |  
|Inventory                                                                               |  |                                 | (58  | ) |      |   | 107    |  
|Prepayments and other assets                                                            |  |                                 | (128 | ) |      |   | 830    |  
|Accounts payable and accrued liabilities                                                |  |                                 | (123 | ) |      |   | (1,991 | )
|Changes in non-current assets                                                           |  |                                 | (26  | ) |      |   | (26    | )
|Changes in non-current liabilities                                                      |  |                                 | 7    |   |      |   | (25    | )
|                                                                                        |  |                                 |      |   |      |   |        |  
|Net cash provided by (used in) operating activities                                     |  |                                 | (62  | ) |      |   | 802    |  
|                                                                                        |  |                                 |      |   |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                   |  |                                 |      |   |      |   |        |  
|Capital expenditures                                                                    |  |                                 | (129 | ) |      |   | (157   | )
|Proceeds from asset sales, net                                                          |  |                                 | 197  |   |      |   | 43     |  
|Affiliate transactions.                                                                 |  |                                 | (218 | ) |      |   | (239   | )
|                                                                                        |  |                                 |      |   |      |   |        |  
|Net cash used in investing activities                                                   |  |                                 | (150 | ) |      |   | (353   | )
|                                                                                        |  |                                 |      |   |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                   |  |                                 |      |   |      |   |        |  
|Net proceeds from long-term borrowings                                                  |  |                                 | 588  |   |      |   | 1,552  |  
|Repayments of long-term borrowings                                                      |  |                                 | (265 | ) |      |   | (1,989 | )
|Net cash flow from commercial paper and revolving lines of credit                       |  |                                 |     |   |      |   | (128   | )
|Other financing, net                                                                    |  |                                 | (23  | ) |      |   | (16    | )
|                                                                                        |  |                                 |      |   |      |   |        |  
|Net cash provided by (used in) financing activities                                     |  |                                 | 300  |   |      |   | (581   | )
|                                                                                        |  |                                 |      |   |      |   |        |  
|Effect of exchange rate changes on cash                                                 |  |                                 | (1   | ) |      |   | 7      |  
|Net increase (decrease) in cash and cash equivalents                                    |  |                                 | 87   |   |      |   | (125   | )
|Cash and cash equivalents, beginning of period                                          |  |                                 | 328  |   |      |   | 633    |  
|                                                                                        |  |                                 |      |   |      |   |        |  
|Cash and cash equivalents, end of period                                                |  | $                               | 415  |   |      | $ | 508    |  
|                                                                                        |  |                                 |      |   |      |   |        |  



See the notes to
condensed consolidated financial statements.



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DYNEGY HOLDINGS INC.



CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited) (in millions)



|                                                                                                          |  |                                 |     |   |      |   |      |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------------------- | --- | - | ---- | - | ---- | -
|                                                                                                          |  | Three Months EndedSeptember 30, |    
|                                                                                                          |  | 2004                            |     |   | 2003 |  
|Net loss                                                                                                  |  | $                               | (8  | ) |      | $ | (14  | )
|Cash flow hedging activities, net:                                                                        |  |                                 |     |   |      |   |      |  
|Unrealized mark-to-market gains (losses) arising during period, net                                       |  |                                 | (4  | ) |      |   | 7    |  
|Reclassification of mark-to-market losses (gains) to earnings, net                                        |  |                                 | 4   |   |      |   | (8   | )
|                                                                                                          |  |                                 |     |   |      |   |      |  
|Changes in cash flow hedging activities, net (net of tax benefit of zero)                                 |  |                                 |    |   |      |   | (1   | )
|Foreign currency translation adjustments                                                                  |  |                                 | 3   |   |      |   | (2   | )
|Minimum pension liability (net of tax expense of $7 and zero, respectively)                               |  |                                 | (12 | ) |      |   |     |  
|                                                                                                          |  |                                 |     |   |      |   |      |  
|Other comprehensive loss, net of tax                                                                      |  |                                 | (9  | ) |      |   | (3   | )
|                                                                                                          |  |                                 |     |   |      |   |      |  
|Comprehensive loss                                                                                        |  | $                               | (17 | ) |      | $ | (17  | )
|                                                                                                          |  |                                 |     |   |      |   |      |  
|                                                                                                          | 
|                                                                                                          |  | Nine Months EndedSeptember 30,  |    
|                                                                                                          |  | 2004                            |     |   | 2003 |  
|Net income (loss)                                                                                         |  | $                               | 30  |   |      | $ | (161 | )
|Cash flow hedging activities, net:                                                                        |  |                                 |     |   |      |   |      |  
|Unrealized mark-to-market gains (losses) arising during period, net                                       |  |                                 | (57 | ) |      |   | 52   |  
|Reclassification of mark-to-market losses (gains) to earnings, net                                        |  |                                 | 24  |   |      |   | (29  | )
|                                                                                                          |  |                                 |     |   |      |   |      |  
|Changes in cash flow hedging activities, net (net of tax benefit (expense) of $20 and $(7), respectively) |  |                                 | (33 | ) |      |   | 23   |  
|Foreign currency translation adjustments                                                                  |  |                                 | (12 | ) |      |   | 7    |  
|Minimum pension liability (net of tax expense of $7 and zero, respectively)                               |  |                                 | (12 | ) |      |   |     |  
|                                                                                                          |  |                                 |     |   |      |   |      |  
|Other comprehensive income (loss), net of tax                                                             |  |                                 | (57 | ) |      |   | 30   |  
|                                                                                                          |  |                                 |     |   |      |   |      |  
|Comprehensive loss                                                                                        |  | $                               | (27 | ) |      | $ | (131 | )
|                                                                                                          |  |                                 |     |   |      |   |      |  



See the notes to
condensed consolidated financial statements.



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DYNEGY HOLDINGS INC.



NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and Restated)

For the Interim Periods Ended September 30, 2004 and 2003



PLEASE NOTE THAT THESE FINANCIAL STATEMENTS AND THE NOTES THERETO DO NOT REFLECT EVENTS OCCURRING AFTER NOVEMBER 22, 2004 (THE DATE OF THE ORIGINAL FILING). FOR A
DESCRIPTION OF THESE EVENTS, PLEASE READ OUR EXCHANGE ACT REPORTS FILED SINCE NOVEMBER 22, 2004 AND ANY AMENDMENTS THERETO.



EXPLANATORY NOTE



This Amendment No. 1 to our Quarterly Report on Form 10-Q for the period ended September 30, 2004 includes restatements related to our audited
consolidated financial statements as of December 31, 2003 and our unaudited condensed consolidated financial statements for the periods ended September 30, 2004 and 2003. On January 25, 2005, we filed Amendment No. 1 to our Annual Report on Form
10-K for the fiscal year ended December 31, 2003. The Form 10-K/A also included restated financial information for the quarter ended September 30, 2003. The restatements relate to our deferred income tax accounts. Specifically, the restatements are
as follows:



Deferred Income Tax Accounts. As
discussed in the Form 10-K/A, and as previously disclosed in the Original Filing, we undertook an evaluation of our tax accounting and reconciliation controls and processes, including a tax basis balance sheet review, which we have recently
completed. Through this initiative, we determined that adjustments related to our deferred income tax accounts in periods prior to 2004 are required. These adjustments primarily related to errors associated with accounting for acquisitions,
incorrect classification of goodwill impairments as permanent differences for purposes of calculating the tax provision and other items. As a result of these errors, adjustments were also made to goodwill, accounts receivable (payable), affiliates
and other long-term liabilities accounts.



This restatement has
no effect on our previously reported net income (loss) or cash flows for the three and nine months ended September 30, 2004 or 2003.



Balance Sheet Summary. The table below summarizes the effects of the restatement on our December 31, 2003 and September 30, 2004 balance
sheets:



|                                         |  |                   |        |   |                  |   |        |  
|---------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                         |  | September 30,2004 |        |   | December 31,2003 |  
|                                         |  | (in millions)     |       
|Accounts receivable, affiliates          |  |                   |        |   |                  |   |        |  
|As previously reported                   |  | $                 | 178    |   |                  | $ | 25     |  
|Restatement                              |  |                   | 434    |   |                  |   | 313    |  
|                                         |  |                   |        |   |                  |   |        |  
|As restated                              |  | $                 | 612    |   |                  | $ | 338    |  
|                                         |  |                   |        |   |                  |   |        |  
|Other long-term assets                   |  |                   |        |   |                  |   |        |  
|As previously reported                   |  | $                 | 198    |   |                  | $ | 156    |  
|Restatement                              |  |                   | (10    | ) |                  |   | (10    | )
|                                         |  |                   |        |   |                  |   |        |  
|As restated                              |  | $                 | 188    |   |                  | $ | 146    |  
|                                         |  |                   |        |   |                  |   |        |  
|Total Assets                             |  |                   |        |   |                  |   |        |  
|As previously reported                   |  | $                 | 10,268 |   |                  | $ | 10,280 |  
|Restatement                              |  |                   | 353    |   |                  |   | 197    |  
|                                         |  |                   |        |   |                  |   |        |  
|As restated                              |  |                   | 10,621 |   |                  |   | 10,477 |  
|                                         |  |                   |        |   |                  |   |        |  
|Deferred income tax (assets) liabilities |  |                   |        |   |                  |   |        |  
|As previously reported                   |  | $                 | (71    | ) |                  | $ | (106   | )
|Restatement                              |  |                   | 292    |   |                  |   | 292    |  
|                                         |  |                   |        |   |                  |   |        |  
|As restated                              |  | $                 | 221    |   |                  | $ | 186    |  
|                                         |  |                   |        |   |                  |   |        |  
|Other long-term liabilities              |  |                   |        |   |                  |   |        |  
|As previously reported                   |  | $                 | 331    |   |                  | $ | 499    |  
|Restatement                              |  |                   | (7     | ) |                  |   | (7     | )
|                                         |  |                   |        |   |                  |   |        |  
|As restated                              |  | $                 | 324    |   |                  | $ | 492    |  
|                                         |  |                   |        |   |                  |   |        |  



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



|                       |  |                   |       |                  |   |      
|---------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                       |  | September 30,2004 |       | December 31,2003
|                       |  | (in millions)    
|Total Liabilities      |  |                   |       |                  |   |      
|As previously reported |  | $                 | 7,166 |                  | $ | 7,138
|Restatement            |  |                   | 214   |                  |   | 58   
|                       |  |                   |       |                  |   |      
|As restated            |  | $                 | 7,380 |                  | $ | 7,196
|                       |  |                   |       |                  |   |      
|Stockholders Equity   |  |                   |       |                  |   |      
|As previously reported |  | $                 | 2,994 |                  | $ | 3,021
|Restatement            |  |                   | 139   |                  |   | 139  
|                       |  |                   |       |                  |   |      
|As restated            |  | $                 | 3,133 |                  | $ | 3,160
|                       |  |                   |       |                  |   |      



Note 1Accounting Policies



The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the instructions to interim financial reporting as prescribed by the SEC. The year end condensed balance sheet data was derived from audited financial statements but does not include all
disclosures required by GAAP. These interim financial statements should be read together with the restated consolidated financial statements and notes thereto included in our Form 10-K/A, which includes restated financial statements reflecting the
adjustment described in the Explanatory Note above.



The
unaudited condensed consolidated financial statements contained in this report include all material adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. The results of
operations for the interim periods presented in this Form 10-Q/A are not necessarily indicative of the results to be expected for the full year or any other interim period, however, 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 preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect our reported financial position and results of operations. These estimates and assumptions also impact the nature and extent of disclosure, if any, of our contingent liabilities. We review significant estimates affecting our
consolidated financial statements on a recurring basis and record the effect of any necessary adjustments prior to their publication. Judgments and estimates are based on our beliefs and assumptions derived from information available at the time
such estimates are made. Adjustments made with respect to the use of these estimates often relate to information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial
statements. Estimates are primarily used in (1) developing fair value assumptions, including estimates of future cash flows and discount rates, (2) analyzing tangible and intangible assets for possible impairment, (3) estimating the useful lives of
our assets, (4) assessing future tax exposure and the realization of tax assets and (5) determining amounts to accrue for contingencies. Certain estimates may also effect such items as the calculated gain (loss) on sale of assets. Actual results
could differ materially from any such estimates.



We have
reclassified certain amounts reported in this Form 10-Q/A from prior periods to conform to the 2004 financial statement presentation. These reclassifications had no impact on reported net income (loss).



Principles of Consolidation.The accompanying unaudited
condensed consolidated financial statements include our accounts and the accounts of our majority-owned or controlled subsidiaries, and our proportionate share of assets, liabilities, revenues and expenses of undivided interests in certain gas
processing facilities, after eliminating intercompany accounts and transactions.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



Cash and Cash Equivalents.Cash and cash equivalents consist of all demand deposits and
funds invested in short-term investments with original maturities of three months or less.



Allowance for Doubtful Accounts.We establish provisions for losses on accounts receivable if it is reasonable to assume we will not collect all or part of outstanding balances. We review collectibility
and establish or adjust our allowance as necessary primarily using a percent of balance methodology. The specific identification method is also used in certain circumstances.



Investment in Unconsolidated Affiliates.Investments in affiliates over which we may exercise significant
influence, generally 20% to 50% ownership interests, are accounted for using the equity method. Any excess of our investment in affiliates, as compared to our share of the underlying equity, that is not recognized as goodwill is amortized over the
estimated economic service lives of the underlying assets. Other investments over which we may not exercise significant influence and that have readily determinable fair values are considered available-for-sale and are recorded at quoted market
values or at the lower of cost or net realizable value, if there are no readily determinable fair values. For securities with readily determinable fair values, the change in the unrealized gain or loss, net of deferred income tax, is recorded as a
separate component of other comprehensive income (loss) in the unaudited condensed consolidated statements of comprehensive loss. Realized gains and losses on investment transactions are determined using the specific identification method. All
investments in unconsolidated affiliates are periodically assessed for other-than-temporary declines in value, with write-downs recognized in earnings from unconsolidated investments in the unaudited condensed consolidated statements of operations.



Concentration of Credit Risk.We sell our energy
products and services to customers in the electric and gas distribution industries and to entities engaged in industrial and petrochemical businesses. These industry concentrations have the potential to impact our overall exposure to credit risk,
either positively or negatively, because the customer base may be similarly affected by changes in economic, industry, weather or other conditions.



Inventory.Our natural gas, natural gas liquids, coal and crude oil inventories are valued at the lower of weighted average cost or at
market. Our materials and supplies inventory is carried at the lower of cost or market using the specific identification method.



Property, Plant and Equipment.Property, plant and equipment, which has consisted principally of gas gathering, processing, fractionation,
terminaling and storage facilities, natural gas transportation and electric transmission lines, pipelines and power generating facilities, is recorded at historical cost. Expenditures for major replacements, renewals and major maintenance are
capitalized. We consider major maintenance to be expenditures incurred on a cyclical basis to maintain and prolong the efficient operation of our assets. Expenditures for repairs and minor renewals to maintain assets in operating condition are
expensed. Depreciation is provided using the straight-line method over the estimated economic service lives of the assets, ranging from three to 40 years. Composite depreciation rates, which we refer to as composite rates, are applied to functional
groups of assets having similar economic characteristics. The estimated economic service lives of our functional asset groups are as follows:



|                                                                      |  |               
|--------------------------------------------------------------------- |  | --------------
|Asset Group                                                           |  | Range of Years
|Power Generation Facilities                                           |  | 27 to 40      
|Natural Gas Gathering Systems and Processing Facilities               |  | 20            
|Fractionation, Terminaling and Natural Gas Liquids Storage Facilities |  | 20 to 25      
|Transportation Equipment                                              |  | 5 to 10       
|Buildings and Improvements                                            |  | 10 to 39      
|Office and Miscellaneous Equipment                                    |  | 3 to 20       



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



Gains and losses are not recognized for retirements of property, plant and equipment subject to
composite rates until the asset group subject to the composite rate is retired. Gains and losses on sales of individual assets are reflected in gain (loss) on sale of assets in the unaudited condensed consolidated statements of operations. We review
the carrying value of our long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses the accounting and reporting for the impairment or disposal of long-lived
assets. Under this standard, we evaluate an asset for impairment when events or circumstances indicate its carrying value may not be recovered. These events include market declines, changes in the manner in which we intend to use an asset or
decisions to sell an asset and adverse changes in the legal or business environment. When we decide to exit or sell a long-lived asset or group of assets, we adjust the carrying value of these assets downward, if necessary, to the estimated sales
price, less costs to sell.



Other Contingencies.
Environmental costs relating to current operations are expensed or capitalized, as appropriate, depending on whether they provide future economic benefit. Liabilities are recorded when environmental assessment indicate remedial efforts are probable
and the costs can be reasonably estimated. Measurement of liabilities is based on currently enacted laws and regulations, existing technology and site-specific costs. Liabilities may be recognized on a discounted basis if the amount and timing of
anticipated expenditures are fixed or reliably determinable; otherwise, such liabilities are recognized on an undiscounted basis. Liabilities incurred by providing indemnification in connection with assets sold or closed are recognized upon such
sale or closure to the extent they are probable, can be estimated and have not previously been reserved. In assessing liabilities, no offset is made for potential insurance recoveries. Recognition of any joint and several liability is based upon our
best estimate of our final pro rata share of such liability.



Liabilities for other contingencies are recognized in accordance with SFAS No. 5, Accounting for Contingencies, upon identification of an exposure, which, when fully analyzed, indicates that it is both probable a liability has
been incurred and the loss amount can be reasonably estimated. Non-capital costs to remedy such contingencies or other exposures are charged to a reserve, if one exists, or otherwise to current-period operations. We accrue the lesser end of the
range when a range of probable loss exists.



Goodwill and
Other Intangible Assets. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we subject goodwill to a fair value-based impairment test on at least an annual basis. The estimation of fair value is highly
subjective, inherently imprecise and can change materially from period to period based on, among other things, an assessment of market conditions, projected cash flows and discount rate. We currently perform our annual impairment test in the fourth
quarter after our annual budgetary process, and we may record further impairment losses in future periods as a result of such test.



Revenue Recognition. We utilize two comprehensive accounting models in reporting our consolidated financial position and results of
operations as required by GAAP: an accrual model and a fair value model. We determine whether to apply one comprehensive accounting model rather than the other based on guidance provided by the FASB and the SEC.



The accrual model has historically been used to account for substantially all
of the operations conducted in the GEN and NGL segments. Revenues from power generation are recognized upon output, product delivery or satisfaction of specific targets, all as specified by contractual terms. Revenues for product sales, gas
processing, storage and marketing and refinery services are recognized when title passes to the customer or when the service is performed. Fractionation and transportation revenues are recognized based on volumes received in accordance with
contractual terms. Shipping and handling costs are included in revenue when billed to customers with the sale of products.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



The fair value model is used to account for certain forward physical and financial transactions,
primarily in the GEN and CRM segments, which meet criteria defined by FASB for derivative instruments. These criteria require these contracts to relate to future periods, to contain price and volume components and to have terms that require or
permit net settlement of the contract in cash or its equivalent. The value of the assets and liabilities associated with these transactions is reported at estimated settlement value based on current prices and rates as of each balance sheet date.
The net gains or losses resulting from the revaluation of these contracts during the period are recognized currently in our consolidated statements of operations unless such contracts qualify and are designated as cash flow hedges, in which case the
same gains or losses are recorded in other comprehensive income (loss) until such time as the hedged transaction occurs. If the underlying transaction being hedged by the commodity, interest rate or foreign currency transaction is disposed of or
otherwise terminated, the gain or loss associated with such contract is no longer deferred and is recognized in the period the underlying contract is eliminated. Subsequent gains and losses associated with the change in value of interest rate or
foreign currency instruments are recognized in other income and expense, net, unless the instrument is redesignated as a hedge. If the hedging transaction is terminated prior to the occurrence of the underlying transaction being hedged, the gain or
loss associated with the hedging transaction is deferred and recognized in income in the period in which the underlying transaction being hedged occurs. Assets and liabilities associated with these transactions are reflected on our consolidated
balance sheets as risk-management assets and liabilities and classified as short- (i.e., current) or long-term pursuant to each contracts individual length.



We estimate the fair value of our marketing portfolio using a liquidation value approach assuming that our ability to
transact business in the market remains at historical levels. The estimated fair value of our portfolio is computed by multiplying all existing positions in our portfolio by estimated prices, reduced by a LIBOR-based time value of money adjustment
and deduction of reserves for credit and price. The estimated prices in this valuation are based either on (1) prices obtained from market quotes or, if market quotes are unavailable, (2) prices from a proprietary model that incorporates forward
energy prices derived from market quotes and values from executed transactions.



Cash inflows and outflows associated with the settlement of risk management activities are recognized in operating cash flows.



Income Taxes. Dynegy, our parent, files a consolidated U.S. federal income tax return and, for financial reporting purposes, accounts for
income taxes using the liability method in accordance with SFAS No. 109, Accounting for Income Taxes. Under this method, income taxes are provided for amounts currently payable or refundable and for amounts deferred as tax assets and
liabilities caused by differences between financial statement carrying amounts and the tax basis of certain assets and liabilities. Deferred income taxes are measured using the enacted tax rates that are assumed will be in effect when the
differences reverse. Valuation allowances are provided against deferred tax assets when, based on our estimates, it is more likely than not that a portion of those assets will not be realized in a future period. The estimates used to recognize
deferred tax assets are subject to revision, either higher or lower, in future periods based on new facts or circumstances.



We are included in the consolidated federal and state income tax returns filed by Dynegy. Pursuant to tax allocation arrangements, we record a receivable
in an amount equal to the tax benefits realized in Dynegys consolidated federal income tax return resulting from the utilization of our net operating losses and/or tax credits, or record a payable to Dynegy in an amount equal to the federal
income tax computed on our separate company taxable income less the tax benefits associated with net operating losses and/or tax credits generated by us which are utilized in Dynegys consolidated federal income tax return.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



Foreign Currency. For subsidiaries whose functional currency is not the U.S. Dollar,
assets and liabilities are translated at year-end rates of exchange and revenues and expenses are translated at monthly average exchange rates. Translation adjustments for the asset and liability accounts are included as a separate component of
accumulated other comprehensive income (loss) in stockholders equity.



Currency transaction gains and losses are recorded in other income and expense, net on our unaudited condensed consolidated statements of operations and totaled losses of $2 million and $1 million for the three months
ended September 30, 2004 and 2003, respectively, and gains of $1 million and $10 million for the nine months ended September 30, 2004 and 2003, respectively.



Minority Interest. Minority interest on our unaudited condensed consolidated balance sheets includes third-party investments in entities
that we consolidate, but do not wholly own. The net pre-tax results attributed to minority interest holders in consolidated entities are included in minority interest income (expense) in the unaudited condensed consolidated statements of operations.



Accounting Principles Adopted



EITF Issue 02-03.In October 2002, the EITF rescinded EITF
Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities, which previously required use of mark-to-market accounting for our energy trading contracts. While the rescission of EITF Issue 98-10
reduced the number of contracts accounted for on a mark-to-market basis, it did not eliminate mark-to-market accounting. All derivative contracts that either do not qualify, or are not designated, as hedges or as normal purchases or sales, as
defined by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, continue to be marked-to-market in accordance with SFAS No. 133. Any earnings or losses previously recognized under EITF Issue 98-10 that
would not have been recognized under SFAS No. 133 were reversed in 2003 in connection with our adoption of EITF Issue 02-03.



The cumulative effect of this change in accounting principle resulted in after-tax earnings of $21 million in the first quarter 2003 and comprised the
following items no longer required to be recorded using mark-to-market accounting (in millions):



|                                                                                                |  |   |      |  
|----------------------------------------------------------------------------------------------- |  | - | ---- | -
|Removal of net risk-management assets representing the value of natural gas storage contracts   |  | $ | (176 | )
|Removal of other net risk-management assets                                                     |  |   | (24  | )
|Removal of net risk-management liabilities representing the value of power tolling arrangements |  |   | 103  |  
|                                                                                                |  |   |      |  
|Net change in risk-management assets and liabilities                                            |  |   | (97  | )
|Addition of inventory previously included in risk-management assets (1)                         |  |   | 130  |  
|                                                                                                |  |   |      |  
|Pre-tax gain recorded from change in accounting principle                                       |  |   | 33   |  
|Income tax provision                                                                            |  |   | (12  | )
|                                                                                                |  |   |      |  
|After-tax gain recorded in the unaudited condensed consolidated statements of operations        |  | $ | 21   |  
|                                                                                                |  |   |      |  

---

|(1) | A substantial portion of this natural gas inventory was sold during the three months ended March 31, 2003, with the remainder being sold in the second quarter 2003.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



EITF Issue 03-11.In July 2003, the EITF reached consensus on Issue 03-11,
Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and Not Held for Trading Purposes as Defined in EITF Issue
02-03, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities. The consensus stated that determining whether realized gains and
losses on physically settled derivative contracts not held for trading purposes should be reported in the income statement on a gross or net basis is a matter of judgment that depends on the relevant facts and circumstances. The
consideration of the facts and circumstances, including economic substance, should be made in the context of the various activities of the entity rather than based solely on the terms of the individual contracts. We were not materially impacted by
the adoption of EITF Issue 03-11.



SFAS No. 143.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. We adopted SFAS No. 143, which provides accounting requirements for costs associated with legal obligations to retire tangible, long-lived assets,
effective January 1, 2003. Under SFAS No. 143, an ARO is recorded at fair value in the period in which it is incurred by increasing the carrying amount of the related long-lived asset by an amount equal to the ARO. In each subsequent period, the
liability is accreted towards the ultimate obligation amount and the capitalized ARO costs are depreciated over the useful life of the related asset.



As part of the transition adjustment in adopting SFAS No. 143, existing environmental liabilities in the amount of $73 million were reversed in the first
quarter 2003. The fair value of the remediation costs estimated to be incurred upon retirement of the respective assets is included in the ARO and was recorded upon adoption of SFAS No. 143. Since the previously accrued liabilities exceeded the fair
value of the future retirement obligations, the impact of adopting SFAS No. 143 was an increase in earnings, net of tax, of $34 million in the first quarter 2003, which is included in cumulative effect of change in accounting principles in the
unaudited condensed consolidated statements of operations. In addition to these liabilities, we also have potential retirement obligations for dismantlement of power generation facilities a fractionation facility and natural gas storage facilities.
Our current intent is to maintain these facilities in a manner such that they will be operated indefinitely. As such, we cannot estimate any potential retirement obligations associated with these assets. Liabilities will be recorded in accordance
with SFAS No. 143 at the time we are able to estimate any new AROs.



At January 1, 2004, our ARO liabilities were $30 million for our GEN segment and $10 million for our NGL segment. These retirement obligations related to activities such as ash pond and landfill capping, closure and post-closure costs,
environmental testing, remediation, monitoring and land lease obligations. During the three- and nine-month periods ended September 30, 2004, accretion expense recognized as our ARO liabilities accreted toward their ultimate redemption values
totaled approximately $1 million and $3 million, respectively. In the third quarter 2004, a land lease formerly held by Illinois Power was transferred to our GEN segment. The accompanying ARO liability, which totaled approximately $1 million at
September 30, 2004, was also transferred. There were no additional AROs recorded or settled, nor were there any revisions to estimated cash flows associated with existing AROs, during the three- and nine-month periods ended September 30, 2004. At
September 30, 2004, our aggregate ARO liability was $44 million.



SFAS No. 148. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation, and provides alternative methods of transition (prospective, modified prospective or retroactive) for entities that voluntarily change to the fair value-based method of accounting for stock-based employee compensation in a fiscal
year beginning before December 16, 2003. SFAS No. 148 requires prominent disclosure about the effects on reported net income of an entitys accounting policy decisions with respect to



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



stock-based employee compensation. Although we do not grant stock options to our employees, these employees do participate in Dynegys stock-based
employee compensation programs. We transitioned to a fair value based method of accounting for stock-based compensation in the first quarter 2003 and are using the prospective method of transition as described under SFAS No. 148.



Under the prospective method of transition, all stock options granted by
Dynegy after January 1, 2003 are accounted for on a fair value basis. We will incur compensation expense over the vesting period of the options in an amount equal to the fair value of the options. Options granted prior to January 1, 2003 continue to
be accounted for using the intrinsic value method. Accordingly, for options granted prior to January 1, 2003, compensation expense is not reflected for employee stock options unless they were granted at an exercise price lower than market value on
the grant date. We have recognized compensation expense over the applicable vesting periods for in-the-money stock options Dynegy previously granted. No in-the-money stock options have been granted by Dynegy since 1999.



Had compensation cost for all stock options granted prior to 2003 been
determined on a fair value basis consistent with SFAS No. 123, our net income (loss) would have approximated the following pro forma amounts for the three- and nine-month periods ended September 30, 2004 and 2003, respectively.



|                                                                                                                                            |  |                                      |     |   |                                |   |     |      |  |   |      |   |  |   |      |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | --- | - | ------------------------------ | - | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                                                                                                            |  | Three Months EndedSeptember 30,      |     |   | Nine Months EndedSeptember 30, |  
|                                                                                                                                            |  | 2004                                 |     |   | 2003                           |   |     | 2004 |  |   | 2003 |  
|                                                                                                                                            |  | (in millions, except per share data) |    
|Net income (loss) as reported                                                                                                               |  | $                                    | (8  | ) |                                | $ | (14 | )    |  | $ | 30   |   |  | $ | (161 | )
|Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects                           |  |                                      | 1   |   |                                |   |    |      |  |   | 3    |   |  |   | 1    |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                      | (4  | ) |                                |   | (7  | )    |  |   | (13  | ) |  |   | (24  | )
|                                                                                                                                            |  |                                      |     |   |                                |   |     |      |  |   |      |   |  |   |      |  
|Pro forma net income (loss)                                                                                                                 |  | $                                    | (11 | ) |                                | $ | (21 | )    |  | $ | 20   |   |  | $ | (184 | )
|                                                                                                                                            |  |                                      |     |   |                                |   |     |      |  |   |      |   |  |   |      |  



SFAS No.
149. In April 2003, the FASB issued SFAS No. 149, Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities, which clarifies and amends various issues related to derivatives and financial instruments addressed in
SFAS No. 133 and interpretations issued by the Derivatives Implementation Group. In particular, SFAS No. 149: (1) clarifies when a contract with an initial net investment meets the characteristics of a derivative; (2) clarifies when a derivative
contains a financing component that should be recorded as a financing transaction on the balance sheet and the statement of cash flows; (3) amends the definition of an underlying in SFAS No. 133 to conform to the language used in FIN No.
45; and (4) clarifies other derivative concepts. SFAS No. 149 is applicable to all contracts entered into or modified after June 30, 2003 and to all hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not
materially impact our financial statements.



SFAS No.
150.In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, which establishes how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. Instruments that have an unconditional obligation requiring the issuer to redeem the instrument by transferring an asset at a specified date are required to be classified as
liabilities on the balance sheet. Instruments that require the issuance of a variable number of equity shares by the issuer generally do not have the risks associated with equity instruments and as



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



such should also be classified as liabilities on the balance sheet. SFAS No. 150 was effective for contracts in existence or created or modified for the
first interim period beginning after June 15, 2003. Upon adoption, we reclassified approximately $200 million of Company Obligated Preferred Securities (now referred to as Subordinated Debentures), previously recorded in the mezzanine section of our
balance sheet between liabilities and stockholders equity, to long-term liabilities. Accordingly, the interest related to this instrument is recorded as interest expense beginning July 1, 2003. Prior year amounts have not been reclassified to
conform to this change. Previously, the preferred return on this instrument was reported in accumulated distributions associated with trust preferred securities in the unaudited condensed consolidated statements of operations.



FIN No. 46R. In the fourth quarter 2003, we adopted the initial
provisions of FIN No. 46R, Consolidation of Variable Interest EntitiesAn Interpretation of ARB No. 51. FIN No. 46R was effective on December 31, 2003 for entities considered SPEs. We adopted the remaining provisions of FIN No. 46R
on March 31, 2004. These provisions require that we review the structure of non-SPE legal entities in which we have an investment and other legal entities with whom we transact to determine whether such entities are VIEs, as defined by FIN No. 46R.
With respect to each of the VIEs we identified, we assessed whether we are the primary beneficiary, as defined by FIN No. 46R. We concluded that we were not the primary beneficiary of any of these entities and, therefore, the adoption
did not have an impact on our unaudited condensed consolidated financial statements.



FIN No. 46R requires additional disclosures for entities which meet the definition of a VIE in which we hold a significant variable interest but are not the primary beneficiary. We own 50% equity interests in various
generation facilities in Illinois and California which are accounted for using equity method accounting and are included in Unconsolidated investments in our unaudited condensed consolidated balance sheets. We acquired or began involvement with
these equity interests in 1997 and 1999. Total net generating capacity for these generating facilities ranges from 165 MW to 1,156 MW. As a result of various contractual arrangements into which these entities have entered, we have concluded that
they are VIEs. As we do not absorb a majority of the expected losses or receive a majority of the expected residual returns, we are not considered the primary beneficiary of these entities. Our equity investment balance in the facilities totaled
$346 million at September 30, 2004, and one of these entities has a loan outstanding to another of these entities, which totaled $20 million at September 30, 2004.



In July 2001, we entered into several agreements, including a power tolling agreement, a financial derivative instrument, an
energy management agreement and a natural gas supply agreement, with Sithe Independence Power Partners, L.P., which we refer to as Sithe Independence or Sithe Independence, L.P. and which owns and operates a 1,042 MW combined cycle natural gas
generation facility near Scriba, New York. We had previously been unable to assess whether the entity was a VIE, but have subsequently received the necessary financial and contractual information related to the entity. As a result of various
contractual arrangements into which this entity has entered, we have concluded that it is a VIE. However, as we do not absorb a majority of the expected losses or receive a majority of expected residual returns, we are not considered the primary
beneficiary of the entity. Our agreements with Sithe Independence Power Partners, L.P. are in effect through 2014. Our future obligations under these agreements are approximately $772 million, which includes the fixed capacity payments under our
power tolling contract and fixed payments related to the financial derivative instrument. In November 2004, Dynegy entered into an agreement to purchase from Exelon Corporation all of the outstanding capital stock of ExRes SHC, Inc., the parent
company of Sithe Energies, Inc. and Sithe Independence, L.P. Please read Note 2Acquisitions, Dispositions, Contract Terminations and Discontinued OperationsAcquisitionsSithe Energies below for further discussion.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



Cumulative Effect of Change in Accounting Principles



We adopted SFAS No. 143 and provisions of EITF Issue 02-03 in the first
quarter 2003. Please see above for a discussion of the impact of adopting these standards.



Note 2Acquisitions, Dispositions, Contract Terminations and Discontinued Operations



Acquisitions



Sithe Energies. In November 2004, Dynegy entered into an agreement to purchase from Exelon Corporation all of the outstanding capital
stock of ExRes SHC, Inc., the parent company of Sithe Energies, Inc. and Sithe Independence, L.P. Through this acquisition, Dynegy will acquire the 1,042 MW, 7,211-Btu heat rate, combined-cycle Independence power generation facility located near
Scriba, NY, four natural gas-fired merchant facilities in New York and four hydroelectric generation facilities in Pennsylvania. In addition, Sithe Independence, L.P. holds a 750 MW firm capacity sales agreement with Con Edison, a subsidiary of
Consolidated Edison, Inc. The capacity sales agreement, which runs through 2014, provides annual cash receipts of approximately $100 million. Sithe Independence, L.P. also holds power tolling and financial swap contracts with one of our
subsidiaries. At the time of closing, ExRes SHC, Inc. will not be consolidated by us. The acquisition transforms the tolling and swap contracts into Dynegy intercompany and our affiliate agreements. Other than the reporting of the transactions with
Sithe Independence, L.P. as affiliate transactions, we do not anticipate any other material impact to us from the transaction.



The transaction is subject to various closing conditions, including the receipt of approvals from various federal and state regulatory entities, including
the FERC and the New York Public Service Commission, as well as Hart-Scott-Rodino review by the Federal Trade Commission. The transaction is also subject to the receipt by Sithe Independence of a waiver or amendment from its bondholders under its
trust indenture.



Dispositions and Contract Terminations



Sale of Illinois Power and Power Purchase
Agreement. On September 30, 2004, Dynegy sold all of its outstanding common and preferred shares of Illinois Power Company, owned by Illinova Corporation, its subsidiary, as well as its 20% interest in the Joppa power generation facility, to
Ameren for $2.3 billion. Concurrent with that sale, we entered into a two-year power purchase agreement under which Illinois Power will annually purchase from us up to 2,800 MWs of capacity and 11.3 million MWh of energy at fixed prices beginning in
January 2005. We also agreed to sell an additional 300 MWs of capacity in 2005 and 150 MWs of capacity in 2006 to Illinois Power at a fixed price with an option to purchase energy at market-based prices.



Hackberry LNG Project.During the first quarter 2003, we
entered into an agreement to sell our ownership interest in Hackberry LNG Terminal LLC, the entity we formed in connection with our proposed LNG terminal/gasification project in Hackberry, Louisiana, to Sempra LNG Corp., a subsidiary of San
Diego-based Sempra Energy. The transaction closed in April 2003, after which we received contingent payments in 2003 based upon project development milestones. In March 2004, we sold our remaining financial interest in this project, which interest
included rights to receive future contingent payments under the 2003 agreement, for $17 million and recognized a pre-tax gain of $17 million on the sale. This gain is included in Gain (loss) on sale of assets, net on our unaudited condensed
consolidated statements of operations.



Indian
Basin. In April 2004, we sold our 16% interest in the Indian Basin Gas Processing Plant for approximately $48 million. In the second quarter 2004, we recognized a pre-tax gain on the sale of approximately $36 million. This gain is included
in Gain (loss) on sale of assets, net on our unaudited condensed consolidated statements of operations.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



Sherman. In November 2004, we sold our Sherman natural gas processing facility located
in Sherman, Texas. This sale resulted in a pre-tax gain of approximately $16 million.



Gas Transportation Contracts.In June 2004, we agreed to exit four long-term natural gas transportation contracts whose purpose was to secure firm pipeline capacity through 2014 in support of our former
third-party marketing and trading business. In exchange for exiting these obligations, we paid $20 million in June 2004 and will pay an additional $42 million in the first quarter 2005. This future payment obligation was recorded at its fair value
of $40 million and will be accreted to $42 million over the period July 1, 2004 through March 31, 2005. Additionally, we reversed an aggregate liability of $148 million associated with the transportation contracts that was originally established in
2001 and recognized a pre-tax gain of $88 million related to these transactions. This gain is included in Revenues on our unaudited condensed consolidated statements of operations and is included in the results of our CRM segment. This agreement
will eliminate our obligation to make approximately $295 million in aggregate fixed capacity payments from April 2005 through 2014.



Discontinued Operations



As part of our restructuring plan, we sold or liquidated some of our operations during 2003, including our U.K. CRM business, which have been accounted
for as discontinued operations under SFAS No. 144.



The
following table summarizes information related to our discontinued operations:



|                                           |  |               |   |         |   |     |               |  |   |       |   |  |   |     |  
|------------------------------------------ |  | ------------- | - | ------- | - | --- | ------------- |  | - | ----- | - |  | - | --- | -
|                                           |  | U.K.Storage   |   | U.K.CRM |   |     | GlobalLiquids |  |   | Total |  
|                                           |  | (in millions) |  
|Three Months Ended September 30, 2004      |  |               |   |         |   |     |               |  |   |       |   |  |   |     |  
|Income (loss) from operations before taxes |  | $             |  |         | $ | (2  | )             |  | $ | 1     |   |  | $ | (1  | )
|Loss from operations after taxes           |  |               |  |         |   | (2  | )             |  |   |      |   |  |   | (2  | )
|                                           |  |               |   |        
|Three Months Ended September 30, 2003      |  |               |   |         |   |     |               |  |   |       |   |  |   |     |  
|Loss from operations before taxes          |  | $             |  |         | $ | (7  | )             |  | $ | (2    | ) |  | $ | (9  | )
|Loss from operations after taxes           |  |               |  |         |   | (4  | )             |  |   | (1    | ) |  |   | (5  | )
|Gain on sale before taxes                  |  |               | 1 |         |   |    |               |  |   |      |   |  |   | 1   |  
|Gain on sale after taxes                   |  |               | 1 |         |   |    |               |  |   |      |   |  |   | 1   |  
|                                           |  |               |   |        
|                                           |  | U.K.Storage   |   | U.K.CRM |   |     | GlobalLiquids |  |   | Total |  
|                                           |  | (in millions) |  
|Nine Months Ended September 30, 2004       |  |               |   |         |   |     |               |  |   |       |   |  |   |     |  
|Income from operations before taxes        |  | $             |  |         | $ | 17  |               |  | $ | 1     |   |  | $ | 18  |  
|Loss from operations after taxes           |  |               |  |         |   | (9  | )             |  |   |      |   |  |   | (9  | )
|                                           |  |               |   |        
|Nine Months Ended September 30, 2003       |  |               |   |         |   |     |               |  |   |       |   |  |   |     |  
|Revenue                                    |  | $             |  |         | $ | 21  |               |  | $ |      |   |  | $ | 21  |  
|Loss from operations before taxes          |  |               |  |         |   | (18 | )             |  |   | (3    | ) |  |   | (21 | )
|Loss from operations after taxes           |  |               |  |         |   | (13 | )             |  |   | (2    | ) |  |   | (15 | )
|Gain on sale before taxes                  |  |               | 1 |         |   |    |               |  |   |      |   |  |   | 1   |  
|Gain on sale after taxes                   |  |               | 1 |         |   |    |               |  |   |      |   |  |   | 1   |  



In the first quarter
2004, we recognized $17 million of pre-tax income related to translation gains on foreign currency in the U.K. Please see Note 4Risk Management Activities and Accumulated Other Comprehensive LossNet investment hedges in foreign
operations for further discussion. In the second quarter 2004, we recognized a tax expense of $20 million related to charges resulting from the conclusion of prior year tax audits. Please see Note 11Income Taxes for further discussion.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



Note 3Restructuring Charges



In the nine months ended September 30, 2004, we recorded a $5 million pre-tax charge related to the impairment of one of our
midstream assets.



In October 2002, we announced a
restructuring plan designed to improve operational efficiencies and performance across our lines of business. The following is a schedule of 2004 activity for the liabilities recorded in connection with this restructuring:



|                              |  |               |     |   |                                     |   |    |       |  |   |     |  
|----------------------------- |  | ------------- | --- | - | ----------------------------------- | - | -- | ----- |  | - | --- | -
|                              |  | Severance     |     |   | CancellationFees andOperatingLeases |   |    | Total | 
|                              |  | (in millions) |    
|Balance at December 31, 2003  |  | $             | 20  |   |                                     | $ | 28 |       |  | $ | 48  |  
|2004 adjustments to liability |  |               | 18  |   |                                     |   | 6  |       |  |   | 24  |  
|Cash payments                 |  |               | (36 | ) |                                     |   | (8 | )     |  |   | (44 | )
|                              |  |               |     |   |                                     |   |    |       |  |   |     |  
|Balance at September 30, 2004 |  | $             | 2   |   |                                     | $ | 26 |       |  | $ | 28  |  
|                              |  |               |     |   |                                     |   |    |       |  |   |     |  



The adjustment to the
accrued liability during 2004 primarily reflects increases in the severance accrual due to changes in our estimate of the probable loss associated with the severance claims of Dynegys former chief executive officer and Dynegys former
president. Cash payments during 2004 reflect payments made to Dynegys former chief executive officer and Dynegys former president. Please see Note 8Commitments and ContingenciesSeverance Arbitrations for further discussion
regarding the status of these claims and settlement payments.



We expect the $26 million accrual associated with cancellation fees and operating leases to be paid by the end of 2007 when the leases expire.



Note 4Risk Management Activities and Accumulated Other Comprehensive Loss



The nature of our business necessarily involves market and financial risks. We enter into financial instrument contracts in
an attempt to mitigate or eliminate these various risks. These risks and our strategy for mitigating them are more fully described in Note 5Risk Management Activities and Financial Instruments beginning on page F-26 of our Form 10-K/A.



Cash flow hedges. We enter into financial
derivative instruments that qualify as cash flow hedges. Instruments related to our GEN, CRM and NGL businesses are entered into for purposes of hedging future fuel requirements and sales commitments and locking in future margin. Interest rate swaps
are used to convert the floating interest-rate component of some obligations to fixed rates.



During the three and nine months ended September 30, 2004, we recorded a $3 million charge related to ineffectiveness from changes in fair value of hedge positions and no amounts were excluded from the assessment of
hedge effectiveness related to the hedge of future cash flows. During the three and nine months ended September 30, 2003, there was no material ineffectiveness from changes in fair value of hedge positions and no amounts were excluded from the
assessment of hedge effectiveness related to the hedge of future cash flows. During the three and nine months ended September 30, 2004, no material amounts were reclassified to earnings in connection with forecasted transactions that were no longer
considered probable of occurring. During the three and nine months ended September 30, 2003, we recorded a $4 million charge related to the reclassification of earnings in connection with forecasted transactions that were no longer considered
probable of occurring.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



The balance in cash flow hedging activities, net at September 30, 2004 is expected to be reclassified
to future earnings, contemporaneously with the related purchases of fuel, sales of electricity or natural gas liquids and payments of interest, as applicable to each type of hedge. Of this amount, after-tax losses of approximately $27 million are
currently estimated to be reclassified into earnings over the 12-month period ending September 30, 2005. The actual amounts that will be reclassified to earnings over this period and beyond could vary materially from this estimated amount as a
result of changes in market conditions and other factors.



Fair value hedges. We also enter into derivative instruments that qualify as fair value hedges. We use interest rate swaps to convert a portion of our non-prepayable fixed-rate debt into variable-rate debt. During the three
and nine months ended September 30, 2004 and 2003, there was no ineffectiveness from changes in the fair value of hedge positions and no amounts were excluded from the assessment of hedge effectiveness. During the three and nine months ended
September 30, 2004, no amounts were recognized in relation to firm commitments that no longer qualified as fair value hedges. During the three and nine months ended September 30, 2003, we recorded a $6 million gain related to firm commitments that
no longer qualified as fair value hedges.



In July 2004, we
entered into interest rate swaps with a notional value of $500 million. These swaps were designated as fair value hedges and effectively convert a portion of our non-prepayable fixed-rate debt into variable-rate debt.



Net investment hedges in foreign operations. Although we have
exited a substantial amount of our foreign operations, we continue to have investments in foreign subsidiaries, the net assets of which are exposed to currency exchange-rate volatility. In the past, we used derivative financial instruments,
including foreign exchange forward contracts and cross-currency interest rate swaps, to hedge this exposure. As of September 30, 2004, we had no net investment hedges in place.



During the first quarter 2003, our efforts to exit the U.K. CRM business were substantially completed. As required by SFAS
No. 52, Foreign Currency Translation, a significant portion of unrealized gains and losses resulting from translation and financial instruments utilized to hedge currency exposures previously recorded in stockholders equity were
recognized in income, resulting in an after-tax loss of approximately $5 million in the nine months ended September 30, 2003. During the first quarter 2004, we repatriated a majority of our cash from the U.K., resulting in the substantial
liquidation of our investment in the U.K. As such, we recognized approximately $17 million of pre-tax translation gains in income that arose since April 1, 2003 and had accumulated in stockholders equity.



Accumulated other comprehensive income (loss).Accumulated
other comprehensive income (loss), net of tax, is included in stockholders equity on the unaudited condensed consolidated balance sheets as follows:



|                                                          |  |                   |     |   |                  |   |    |  
|--------------------------------------------------------- |  | ----------------- | --- | - | ---------------- | - | -- | -
|                                                          |  | September 30,2004 |     |   | December 31,2003 |  
|                                                          |  | (in millions)     |    
|Cash flow hedging activities, net                         |  | $                 | (23 | ) |                  | $ | 10 |  
|Foreign currency translation adjustment                   |  |                   | 14  |   |                  |   | 26 |  
|Minimum pension liability                                 |  |                   | (15 | ) |                  |   | (3 | )
|                                                          |  |                   |     |   |                  |   |    |  
|Accumulated other comprehensive income (loss), net of tax |  | $                 | (24 | ) |                  | $ | 33 |  
|                                                          |  |                   |     |   |                  |   |    |  



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



Note 5Unconsolidated Investments



A summary of our unconsolidated investments is as follows:



|                                 |  |                   |     |                  |   |    
|-------------------------------- |  | ----------------- | --- | ---------------- | - | ---
|                                 |  | September 30,2004 |     | December 31,2003
|                                 |  | (in millions)    
|Equity affiliates:               |  |                   |     |                  |   |    
|GEN investments                  |  | $                 | 373 |                  | $ | 495
|NGL investments                  |  |                   | 78  |                  |   | 82 
|                                 |  |                   |     |                  |   |    
|Total unconsolidated investments |  | $                 | 451 |                  | $ | 577
|                                 |  |                   |     |                  |   |    



Summarized aggregate
financial information for West Coast Power and our equity share thereof was:



|                 |  |                                 |     |              |   |       |  |              |     |  |   |    
|---------------- |  | ------------------------------- | --- | ------------ | - | ----- |  | ------------ | --- |  | - | ---
|                 |  | Nine Months Ended September 30,
|                 |  | 2004                            |     | 2003        
|                 |  | Total                           |     | Equity Share |   | Total |  | Equity Share
|                 |  | (in millions)                  
|Revenues         |  | $                               | 962 |              | $ | 481   |  | $            | 834 |  | $ | 417
|Operating income |  |                                 | 246 |              |   | 123   |  |              | 204 |  |   | 102
|Net income       |  |                                 | 247 |              |   | 123   |  |              | 205 |  |   | 102



Summarized aggregate
financial information for unconsolidated equity investments, exclusive of the West Coast Power information above, and our equity share thereof was:



|                 |  |                                 |     |              |   |       |  |              |       |  |   |    
|---------------- |  | ------------------------------- | --- | ------------ | - | ----- |  | ------------ | ----- |  | - | ---
|                 |  | Nine Months Ended September 30,
|                 |  | 2004                            |     | 2003        
|                 |  | Total                           |     | Equity Share |   | Total |  | Equity Share
|                 |  | (in millions)                  
|Revenues         |  | $                               | 434 |              | $ | 179   |  | $            | 1,053 |  | $ | 406
|Operating income |  |                                 | 99  |              |   | 44    |  |              | 151   |  |   | 65 
|Net income       |  |                                 | 75  |              |   | 33    |  |              | 102   |  |   | 41 



Earnings from
unconsolidated investments of $117 million for the nine months ended September 30, 2004 include $123 million from West Coast Power and the $33 million above and gains on the sales of our equity investment in Oyster Creek and Hartwell of $15 million
and $2 million, respectively. These gains were partially offset by a $45 million impairment of our investment in West Coast Power and an $8 million impairment of our Michigan Power equity investment discussed below, as well as $3 million primarily
due to amortization of the difference between the cost of our unconsolidated investments and our underlying equity in their net assets. Earnings from unconsolidated investments of $140 million for the nine months ended September 30, 2003 consist of
$102 million from West Coast Power and the $41 million above, partially offset by $3 million in losses due to impairments of cost investments.



In the third quarter 2004, we sold our unconsolidated investments in the Oyster Creek, Michigan Power and Hartwell generating facilities for aggregate net
cash proceeds of approximately $132 million. During the third quarter 2004, we recognized gains of $15 million and $2 million related to our sales of Oyster Creek and Hartwell, but did not recognize any gain or loss on the sale of Michigan Power.
However, during the nine months ended September 30, 2004, we recorded an impairment on our investment in Michigan Power totaling $8 million, to adjust our book value to the sale price.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



In July 2004, we entered into an agreement to sell our unconsolidated investment in the Commonwealth
generating facility. Closing of this transaction, targeted for the fourth quarter 2004, is subject to regulatory and other approvals. Under the terms of this agreement, we do not expect to recognize a material gain or loss on this sale.



Additionally, in September 2004, we recorded an impairment of $45 million
on our investment in West Coast Power, primarily due to the upcoming expiration of the CDWR contract in December 2004. As the remaining value of the CDWR contract is realized throughout 2004, the fair value of our investment in West Coast Power has
declined. We will continue to evaluate our investment in West Coast Power, and we anticipate that an additional impairment charge may become necessary in the fourth quarter 2004.



Note 6Debt



Revolvers. During the three- and nine-month periods ended September 30, 2004, we reduced an aggregate of approximately $53 million and $70
million, respectively, of letters of credit under our revolving credit facilities, resulting in a total of $118 million utilized at September 30, 2004. As of September 30, 2004, there were no borrowings outstanding under our $700 million revolving
credit facility. During the period from September 30,2004 through November 8, 2004, we reduced our outstanding letters of credit under this facility by $5 million.



Effective May 28, 2004, we entered into a $1.3 billion credit facility consisting of:



| |  |  | a $700 million secured revolving credit facility that matures on May 28, 2007; and
| | - |  | ----------------------------------------------------------------------------------



| |  |  | a $600 million secured amortizing term loan that matures on May 28, 2010.
| | - |  | -------------------------------------------------------------------------



The credit facility replaced our $1.1 billion revolving credit facility, which was scheduled to mature in February 2005.



The revolving credit facility provides funding for general corporate purposes
and is also available for the issuance of letters of credit. Borrowings under the revolving credit facility bear interest, at our option, at (i) a base rate plus 3.00% per annum or (ii) LIBOR plus 4.00% per annum. A letter of credit fee is payable
on the undrawn amount of each letter of credit outstanding at a percentage per annum equal to 4.00% of such undrawn amount. We also incur additional fees for issuing letters of credit. An unused commitment fee of 0.50% will be payable on the unused
portion of the revolving credit facility.



Of the
$600 million in proceeds from the term loan drawn at closing, a portion was used to post cash collateral in lieu of letters of credit, while approximately $19 million was used to pay upfront fees incurred in connection with the new facility. These
fees have been capitalized and are being amortized over the term of the credit facility. In August 2004, $154 million of the proceeds from the $600 million term loan were used to pre-pay all outstanding indebtedness and other amounts owed in
connection with the ABG Gas Supply financing. The remaining proceeds, subject to specified restrictions in the credit facility, are available for general corporate purposes. Borrowings under the term loan bear interest, at our option, at (i) a base
rate plus 3.00% per annum or (ii) LIBOR plus 4.00% per annum.



The credit facility contains mandatory prepayment events associated with specified asset sales and recovery events (i.e., certain payments in respect of insurance claims or condemnation proceedings). We must offer to repay the term loan or
permanently reduce the revolving credit facility with 100% of the net cash proceeds of all asset sales or any proceeds from recovery events, excluding (i) proceeds from sales of designated assets and the



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



minority GEN investments currently targeted for sale; (ii) up to $100 million of net cash proceeds from other asset sales as designated by us; and (iii) up
to $900 million of proceeds from asset sales and recovery events that are reinvested in the business, subject to specified restrictions. Sales of assets over a specified threshold require written confirmation from both Standard & Poors
Ratings Service and Moodys Investors Service that the credit ratings of the credit facility will not be lowered as a result. Further, any sale of our Baldwin facility or all or substantially all of our DMS assets would require the written
consent of a majority of the lenders under the new credit facility.



The credit facility provides for no amortization of principal amounts outstanding prior to the maturity dates except (i) upon the occurrence of a mandatory prepayment event and (ii) term loan amortization of 1% per annum.



The credit facility is secured by substantially the same collateral as the
$1.1 billion facility it replaced, including a first priority interest in substantially all our assets and the assets of our subsidiaries and on substantially all of the equity of our subsidiaries in each case to the extent permitted by other
applicable agreements. Dynegy Inc. and substantially all of its subsidiaries also guarantee this facility.



The credit facility contains affirmative and negative covenants, including negative covenants relating to the following which restrict us and our
subsidiaries but do not restrict Dynegy: liens; investments; indebtedness; dispositions; restricted payments; burdensome agreements; amendments to organizational documents; prepayments of indebtedness; and swap contracts. The credit facility also
contains the financial and capital expenditure-related covenants described below. We are currently in compliance with these restrictive covenants, and with the filing of this report, we have cured any possible non-compliance resulting from our
previous failure to file the Original Filing with the requisite review by our independent auditor and the certifications mandated by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as amended.



The credit facility generally prohibits us and our subsidiaries, subject to
specified exceptions, from incurring additional debt. Notwithstanding this restriction, we may issue, to the extent permitted by the more restrictive covenants with respect to secured debt in the indenture governing our second priority senior
secured notes, (i) up to $700 million of additional second lien or junior secured debt or unsecured debt, provided such additional debt matures at least six months after the term loan, and (ii) permitted refinancing indebtedness.



The credit facility generally prohibits us and our subsidiaries from
pre-paying, redeeming or repurchasing its outstanding debt or preferred stock. Notwithstanding this restriction, we may pre-pay, repurchase or redeem our remaining 2005 and 2006 senior notes and the Riverside facility. We also may pre-pay,
repurchase or redeem our other senior unsecured notes and our second priority senior secured notes, subject to specified conditions.



Dynegy and its subsidiaries, excluding Illinois Power and its subsidiaries, are also prohibited from (i) permitting our Secured Debt/EBITDA Ratio (as
defined in the credit facility) on and after September 30, 2004 to exceed specified ratios; (ii) permitting our liquidity to be less than $200 million for a period of more than ten consecutive business days; or (iii) making capital expenditures
during each four fiscal quarter period in excess of a designated amount, subject to specified exceptions.



The terms and conditions of the credit facility are described in more detail in the definitive agreements governing the credit facility, which are filed
and/or incorporated by reference as exhibits to our second quarter 2004 Form 10-Q/A.



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(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



Tilton Capital Lease.In September 1999, Illinois Power entered into an operating lease
on four gas turbines located in Tilton, Illinois and a separate land lease at the Tilton site. This facility consists of peaking units totaling 176 MWs of capacity. Illinois Power sublet the turbines to DMG in October 1999.



In September 2003, Illinois Power delivered notice of its intent to exercise
its option in order for DMG to purchase the turbines upon the expiration of the operating lease in September 2004. Based on Dynegys and our intent to purchase, GAAP required that we reflect the asset and the associated debt on our balance
sheets as a capital lease.



In July 2004, Illinois Power
terminated its lease arrangement, and DMG purchased the turbines for $81 million. This action resulted in a reduction of debt of $78 million. The difference between the purchase price and the debt balance was recorded as an increase to property,
plant and equipment of $3 million in our unaudited condensed consolidated balance sheets and represents the accretion to the end of the term of the original lease agreement.



ABG Gas Supply Credit Agreement.During 2004, we made scheduled payments of approximately $45 million related
to our ABG Gas Supply financing. Additionally, in August 2004, we used $154 million in proceeds from our $600 million term loan to pre-pay all remaining indebtedness and other obligations under our ABG Gas Supply financing as required by the terms
of our credit facility.



Note 7Related Party Transactions



We routinely engage in business transactions with
subsidiaries of Dynegy that are not part of our consolidated group. These transactions included among others, sales of energy and capacity to Illinois Power under a power purchase agreement, as well as purchases of natural gas from Illinois power.
Please read Note 13Related Party TransactionsOther beginning on page F-43 of our Form 10-K/A for further discussion. Additionally, we engage in transactions with ChevronTexaco Corporation and its affiliates, including purchases and sales
of natural gas and natural gas liquids, which we believe are executed on terms that are fair and reasonable. Please read Note 13Related Party Transactions beginning on page F-41 of our Form 10-K/A for further discussion.



Note 8Commitments and Contingencies



PLEASE NOTE THAT THE INFORMATION CONTAINED IN THIS NOTE 8, WHICH WAS
PRESENTED IN OUR THIRD QUARTER 2004 FORM 10-Q ORIGINALLY FILED WITH THE SEC ON NOVEMBER 22, 2004 IN ORDER TO REFLECT THE MATERIAL CHANGES IN OR UPDATES TO OUR MATERIAL LEGAL PROCEEDINGS SINCE THE ORIGINAL FILING OF OUR 2003 FORM 10-K, DOES NOT
REFLECT EVENTS OCCURRING AFTER NOVEMBER 22, 2004. FOR A DESCRIPTION OF THESE EVENTS, INCLUDING MATERIAL CHANGES IN, OR UPDATES TO, OUR MATERIAL LEGAL PROCEEDINGS, PLEASE READ OUR EXCHANGE ACT REPORTS FILED SINCE NOVEMBER 22, 2004, INCLUDING OUR
CURRENT REPORTS ON FORM 8-K AND ANY AMENDMENTS THERETO.



Set forth below is a description of our material legal proceedings. In addition to the matters described below, we are party to legal proceedings arising in the ordinary course of business. In managements opinion, the disposition of
these ordinary course matters will not materially adversely affect our financial condition, results of operations or cash flows.



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(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



We record reserves for estimated losses from contingencies when information available indicates that
a loss is probable and the amount of the loss is reasonably estimable under SFAS No. 5. During the first nine months of 2004, we recorded pre-tax legal and settlement charges of $57 million, including cash payments made in the period in excess of
our then-existing accruals. The charges recorded relate to contingencies for which, during the period, either the amount of loss became probable and reasonably estimable or our previous loss estimates were adjusted.



For environmental matters, we record liabilities when remedial efforts are
probable and the costs can be reasonably estimated. Please read Note 1Accounting PoliciesOther Contingencies for further discussion of our reserve policies. Environmental reserves do not reflect managements assessment of the
insurance coverage that may be applicable to the matters at issue, whereas litigation reserves do reflect such potential coverage. We cannot make any assurances that the amount of any reserves or potential insurance coverage will be sufficient to
cover the cash obligations we might incur as a result of litigation or regulatory proceedings, payment of which could be material.



With respect to some of the items listed below, management has determined that a loss is not probable or that any such loss, to the extent probable, is
not reasonably estimable. In some cases, management is not able to predict with any degree of certainty the range of possible loss that could be incurred. Notwithstanding these facts, management has assessed each of these matters based on current
information and made a judgment concerning its potential outcome, considering the nature of the claim, the amount and nature of damages sought and the probability of success. Managements judgment may, as a result of facts arising prior to
resolution of these matters or other factors, prove inaccurate and investors should be aware that such judgment is made subject to the known uncertainty of litigation.



Summary of Recent Developments. As described in greater detail below, the following significant developments
involving our material legal proceedings occurred since the original filing of our second quarter 2004 Form 10-Q:



| |  |  | Dynegy received the final approval from the FERC in October 2004 of the previously announced agreement on a comprehensive settlement of numerous contested FERC claims relating to
western electric energy market transactions that occurred between January 2000 and June 2001. As part of the settlement, West Coast Power will forego its right to collect approximately $259 million in past-due receivables, plus interest, from the
Cal ISO and the Cal PX related to the settlement period and pay $22.5 million in exchange for the dismissal of claims against Dynegy and West Coast Power related to the settlement period.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The judge presiding over Dynegys shareholder class action lawsuit entered an order in October 2004 dismissing a portion of the claims asserted by the plaintiff and
substantially narrowing the class period to March 2001 through May 2002. Also in October 2004, the plaintiff dismissed its claim relating to a debt offering. The trial has been scheduled to begin in May 2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dynegy reached a settlement with the plaintiff in our ERISA class action lawsuit, and the court granted preliminary approval of the settlement agreement in October 2004, scheduling
a fairness hearing for December 2004. Under this proposed settlement, Dynegy would pay the plaintiff $30.75 million for a full and final release of all claims. Dynegy expects to pay this amount using insurance proceeds.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Atlantigas Corporation, which recently dismissed its Maryland federal lawsuit, filed a class action lawsuit in West Virginia state court and filed an amended complaint in October
2004 naming us as a defendant. Plaintiff seeks unspecified compensatory and punitive damages resulting from allegations that, among other things, we conspired with the other defendants to receive preferential natural gas storage and transportation
services at off-tariff prices.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



The above summary of recent developments is qualified in its entirety by, and should be read in
conjunction with, the following description of our significant legal proceedings.



Shareholder Litigation. We and Dynegy are defending a class action lawsuit filed on behalf of purchasers of Dynegys publicly traded securities from January 2000 to July 2002 seeking unspecified
compensatory damages and other relief. The lawsuit principally asserts that we and Dynegy, certain of our current and former officers and directors violated the federal securities laws in connection with our disclosures, including accounting
disclosures, regarding Project Alpha (a structured natural gas transaction entered into by us in April 2001), round-trip trading, the submission of false trade reports to publications that calculate natural gas index prices, the alleged manipulation
of the California power market and the restatement of our financial statements for 1999-2001. The Regents of the University of California are lead plaintiff and Lerach Coughlin Stoia & Robbins, LLP is class counsel. The plaintiff filed an
amended complaint in January 2004 and, in March 2004, we filed motions to dismiss. Briefing on our motions was completed in June 2004. The judge entered an order on our motion in October 2004 dismissing all claims brought by the plaintiff under the
Securities Act of 1933, except those relating to our March 2001 note offering and December 2001 common stock offering, and the Securities Exchange Act of 1934, except those dealing with Project Alpha and two alleged round-trip trades. The judge also
narrowed the class period to cover purchasers of our publicly traded securities from March 2001 through May 2002 and scheduled the trial to commence in May 2005. Also in October 2004, the plaintiff voluntarily dismissed its claim under the
Securities Act of 1933 relating to our March 2001 note offering. An adverse result in this litigation could have a material adverse effect on our financial condition, results of operations and cash flows. Reserves have been provided in connection
with this litigation.



In addition, Dynegy is a nominal
defendant in several derivative lawsuits brought by shareholders on Dynegys behalf against certain of its former officers and current and former directors whose claims are similar to those described above. These lawsuits have been consolidated
into two groupsone pending in federal court and the other pending in state court. A motion to dismiss the federal derivative claim is currently pending and is set for hearing in January 2005. We do not expect to incur any material liability
with respect to these claims.



ERISA/401(k)
Litigation. Dynegy is defending a purported class action complaint filed in federal district court on behalf of participants holding Dynegy common stock in the Dynegy 401(k) Savings Plan during the period from April 1999 to January 2003.
This complaint alleges violations of ERISA in connection with Dynegys 401(k) Savings Plan, including claims that Dynegys Board and certain of Dynegys former and current officers, past and present members of Dynegys Benefit
Plans Committee, former employees who served on a predecessor committee to its Benefit Plans Committee, and Vanguard Fiduciary Trust Company and CG Trust Company (trustees of the trust that held Plan assets for portions of the class period) breached
their fiduciary duties to the Plans participants and beneficiaries in connection with the Plans investment in Dynegy common stockin particular with respect to Dynegys financial statements, Project Alpha, round-trip trades and
gas price index reporting. The lawsuit seeks unspecified damages for the losses to the Plan, as well as attorneys fees and other costs. In July 2003, Dynegy filed a motion to dismiss this action. The judge entered an order on this motion in
March 2004, dismissing several of the plaintiffs claims and all of the defendants except Dynegy and the members of its Benefit Plans Committee from January 2002 to January 2003, the substantially reduced class period established by the order.
In May 2004, in response to the plaintiffs request, the judge ordered the parties to engage in mediation. The parties mediated for two months, and ultimately reached a settlement under which the defendants agreed to pay $30.75 million to the
plaintiff for a full and final release of all claims. This amount falls within Dynegys applicable insurance limits, and Dynegy expects that the settlement will be paid by insurance proceeds. The Court granted preliminary approval of the
settlement agreement in October 2004, tentatively scheduling a fairness hearing for December 2004 at which class members can participate and file any



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(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



objections. We cannot predict with certainty what actions the Court may take in response to objections raised at the fairness hearings or, in the event the
settlement is ultimately rejected, whether we will incur any liability, nor can we estimate the damages, if any, that might be incurred in connection with this lawsuit absent the proposed settlement. In any case, we do not believe that any liability
we might incur as a result of this litigation would have a material adverse effect on our financial condition, results of operations or cash flows.



Baldwin Station Litigation. Illinois Power and DMG are the subject of an NOV from the EPA and a complaint filed by the EPA and the
Department of Justice in federal district court alleging violations of the Clean Air Act and related federal and Illinois regulations. Similar notices and complaints were filed against other owners of coal-fired power plants in what we refer to as
the Utility Enforcement Initiative. Both the NOV and the complaint allege that certain equipment repairs, replacements and maintenance activities at our three Baldwin Station generating units constituted major modifications under the PSD
regulations, the NSPS regulations and applicable Illinois regulations, and that we failed to obtain required operating permits under applicable Illinois regulations. When activities which are not otherwise exempt result in an increase in annual
emissions that exceeds the amount deemed significant under the PSD regulations, those activities are considered major modifications. When activities meeting this definition occur, the Clean Air Act and related regulations generally
subject those activities to PSD review and permit requirements and require that the generating facilities where the activities occur meet more stringent emissions standards, which may entail the installation of potentially costly pollution control
equipment.



We have significantly reduced emissions of sulphur
dioxide and nitrogen oxides at the Baldwin Station since the 1999 complaint by converting it from high to low sulfur coal and installing selective catalytic reduction equipment. However, the EPA may seek to require the installation of the best
available control technology, or the equivalent, at the Baldwin Station, which we estimate could require us to incur capital expenditures of up to $410 million. The EPA also has the authority to seek penalties for the alleged violations at the
rate of up to $27,500 per day for each violation.



In February
2003, the Court granted our motion for partial summary judgment based on the five-year statute of limitations. As a result, the EPA is not permitted to seek any monetary civil penalties for claims related to construction without a permit under the
PSD regulations. The Courts ruling also precludes monetary civil penalties for a portion of the claims under the NSPS regulations and the applicable Illinois regulations. We believe that we have meritorious defenses against the remaining
claims and vigorously defended against them at trial. The trial to resolve claims of liability began in June 2003 and closing arguments occurred in September 2003. Shortly after closing arguments, several interveners were granted the right to file
briefs in support of arguments they believe the United States ceased to pursue.



In October 2004, following the closing of the Illinois Power sale, Ameren caused Illinois Power to file a motion to stay the proceedings and to request a status conference in order to present its position on the
claims asserted against it. These interventions, delays in post-trial briefing and the recent Illinois Power motion have postponed the issuance of the liability order, and we cannot predict with certainty when a decision will be rendered. Reserves
have been provided in an aggregate amount we consider reasonable for potential penalties that could be imposed if the Court finds us liable and the EPA prosecutes successfully the remaining claims for penalties.



In August 2003, two significant decisions were handed down in other cases
that are part of the Utility Enforcement Initiative. The court in United States v. Ohio Edison applied the EPAs narrow interpretation of the routine maintenance, repair and replacement exclusion, which defines it with
respect to what is routine for the



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(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



specific unit where the projects occurred, while the court in United States v. Duke Energy Company rejected the EPAs narrow interpretation,
holding that the exclusion should be defined relative to what is routine for the particular industry. The Duke court also held that the hours and conditions of a units operations must be held constant when measuring emissions increases.
Under this rationale, an increase in maximum hourly emissions is required before activities would be considered major modifications. We are unable to predict the significance of these cases to our Baldwin Station litigation as they are
pending in other jurisdictions and are not binding authority.



None of our other facilities are covered in the complaint and NOV, but the EPA previously requested information, which we provided, concerning activities at our Vermilion, Wood River, Hennepin, Danskammer and Roseton plants. Although the
EPA could eventually commence enforcement actions based on activities at these plants, we are unable to assess the likelihood of any such additional EPA enforcement actions.



California Market Litigation. We and/or Dynegy and numerous other power generators and marketers are the
subject of numerous lawsuits arising from our participation in the western power markets during the California energy crisis. Eight of these lawsuits, which primarily allege manipulation of the California wholesale power markets and seek unspecified
treble damages, were consolidated before a single federal judge. That judge dismissed two of the cases in the first quarter 2003 on the grounds of FERC preemption and the filed rate doctrine. The Ninth Circuit Court of Appeals affirmed these
dismissals in June 2004 and September 2004, respectively. An appeal from the Ninth Circuits affirmation of the September 2004 dismissal has been taken to the United States Supreme Court. Regarding the remaining six consolidated cases, we are
awaiting a ruling from the Ninth Circuit, which we expect to occur prior to the end of 2004, on our appeal of a prior decision to remand those cases to state court.



In addition to the eight consolidated lawsuits discussed above, nine other putative class actions and/or representative
actions were filed in state and federal court on behalf of business and residential electricity consumers against us and/or Dynegy and numerous other power generators and marketers between April and October 2002. The complaints allege unfair,
unlawful and deceptive practices in violation of the California Unfair Business Practices Act and seek an injunction, restitution and unspecified damages. While some of the allegations in these lawsuits are similar to the allegations in the eight
lawsuits described above, these lawsuits include additional allegations relating to, among other things, the validity of the contracts between these power generators and the CDWR. The court dismissed eight of these nine actions, although the
plaintiffs have appealed, and the briefing on that appeal was completed in October 2004. A hearing on the appeal is scheduled for December 2004. The ninth case was remanded to state court, where a newly added defendant filed a motion in February
2004 to remove the case back to federal court. In September 2004, the court requested additional briefing on the remand issue, and the parties are complying with that request. Once a decision is made on this motion, we intend to file a motion to
dismiss this case.



In December 2002, two additional actions
were filed with similar allegations on behalf of residents of Washington and Oregon. In May 2003, the plaintiffs voluntarily dismissed these actions and refiled them in California Superior Court as a class action complaint. The complaint, which was
brought on behalf of consumers and businesses in Oregon, Washington, Utah, Nevada, Idaho, New Mexico, Arizona and Montana that purchased energy from the California market, alleges violations of the Cartwright Act and unfair business practices. This
action has been removed from state court and consolidated with existing actions pending before the United States District Court for the Northern District of California. The hearing on plaintiffs appeal to remand to state court occurred in
February 2004. The judge stayed his ruling on the appeal pending the Ninth Circuits ruling on the six consolidated cases referenced above.



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(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



In May 2004, Wah Chang, a division of TDY Industries, Inc., filed suit in Oregon federal court
against several energy companies, including Dynegy Power Marketing, Inc., seeking more than $30 million in compensatory damages resulting from alleged manipulation of the California wholesale power markets. We filed a motion to dismiss this lawsuit
in October 2004.



In June 2004, the City of Tacoma public
utility filed a lawsuit in Washington federal court against a number of energy companies, including us, alleging it paid inflated prices for electricity due to the defendants manipulation of the California wholesale power markets. The Court
has not yet set a schedule for this matter.



In July 2004, the
County of Santa Clara and the County and City of San Francisco filed two separate actions in California state court against us and several other defendants alleging that the defendants violated Californias anti-trust and deceptive business
practices statutes by manipulating the California wholesale power markets through, among other things, providing false information to gas index publications and engaging in multiple transactions in a short period of time to artificially inflate gas
prices. In September 2004, these cases were consolidated into the In re Western States Wholesale Natural Gas Anti-Trust Litigation. Please read Gas Index Pricing Litigation below for further discussion.



In September 2004, Dan Older, a retail consumer of natural gas, filed a
purported class action against us and several other energy company defendants and utilities alleging that plaintiff paid artificially inflated prices as a result of the defendants illegal conduct. The plaintiffs complaint raises
allegations similar to those described in the preceding paragraph. Plaintiff seeks unspecified compensatory damages, as well as treble damages. In September 2004, this case was consolidated into the In re Western States Wholesale Natural Gas
Anti-Trust Litigation. Please read Gas Index Pricing Litigation below for further discussion.



In October 2004, Preferred Energy Services, an independent electric services provider in California, filed suit against us and several other defendants
alleging that the defendants, in violation of the California anti-trust and unfair business practices statutes, engaged in unfair, unlawful and deceptive practices in the California wholesale energy market from May 2000 through December 2001.
Plaintiff, which formerly sold electricity generated from renewable sources in the California market, claims to have been forced out of business by the defendants conduct and is seeking $5 million in compensatory damages, as well as treble
damages. We have not yet been served with this lawsuit.



In
November 2004, each of Nurserymens Exchange, Inc., School Project for Utility Rate Reduction and the County of Alameda, California served Dynegy with lawsuits alleging price fixing, unfair competition and unjust enrichment arising from, among
other things, the provision of false information to gas index publications which inflated the retail prices for intra-state gas sales. We anticipate that these cases will be consolidated into the In re Western States Wholesale Natural Gas
Anti-Trust Litigation referenced above.



We believe that we
have meritorious defenses to these claims and intend to defend against them vigorously. We cannot predict with certainty whether we will incur any liability or estimate the range of possible loss, if any, that we might incur in connection with these
lawsuits. However, given the nature of the claims, an adverse result in any of these proceedings could have a material adverse effect on our financial condition, results of operations and cash flows.



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(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



FERC and Related Regulatory InvestigationsRequests for Refunds. In October 2004,
the FERC approved in all respects the agreement announced by Dynegy and West Coast Power in April 2004 which provides for the settlement of FERC claims relating to western energy market transactions that occurred from January 2000 through June 2001,
including:



| |  |  | the FERCs June 2003 order to show cause why the activities of certain participants in the California power markets from January 2000 to June 2001, including Dynegy, did not
constitute gaming and/or anomalous market behavior as defined in the Cal ISO and Cal PX tariffs, which matter was resolved by the January 2004 settlement providing that West Coast Power will pay approximately $3 million into a fund for the benefit
of California and Western electricity consumers. This January 2004 settlement has been incorporated into the broader settlement described below; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the FERCs July 2001 hearings and October 2003 orders relating to the establishment of (i) refunds to electricity customers, or offsets against amounts owed to electricity
suppliers, during the period of October 2000 through June 2001 and (ii) a methodology to calculate mitigated market clearing prices in the Cal ISO and the Cal PX markets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The parties to this settlement other than Dynegy and West Coast Power include the FERC, Pacific Gas and Electric Company,
Southern California Edison, San Diego Gas & Electric Company, the CDWR, the California Electricity Oversight Board and the California Attorney General. Other market participants may opt into this settlement and share in the distribution of the
settlement proceeds. As part of the settlement agreement, West Coast Power will (i) forego its right to collect approximately $259 million in past-due receivables, plus interest, from the Cal ISO and the Cal PX related to the settlement period, (ii)
forego natural gas cost recovery claims against the California settling parties related to the settlement period, and (iii) place into escrow accounts a total of $22.5 million, which includes the above-referenced $3 million settlement with the FERC
staff, for subsequent distribution to various California energy purchasers. In exchange, the other settling parties will forego (i) all claims relating to refunds or other monetary damages for sales of electricity during the settlement period, and
(ii) claims alleging receipt of unjust or unreasonable rates for the sale of electricity during the settlement period.



The settlement does not apply to the ongoing civil litigation related to the California energy markets described above in which we and/or Dynegy and West
Coast Power are defendants. The settlement also does not apply to the pending appeal by the CPUC and the California Electricity Oversight Board of the FERCs prior decision to affirm the validity of the West Coast Power-CDWR contract. We are
currently awaiting a ruling on this appeal and related filings and cannot predict their outcome.



West Coast Power. Through our interest in West Coast Power, we have credit exposure for transactions to the Cal ISO, which rely on cash
payments from California utilities to in turn pay their bills. In addition, West Coast Power currently sells directly to the CDWR pursuant to a long-term sales agreement which expires at the end of December 2004.



At September 30, 2004, our portion of the receivables owed to West Coast
Power by the Cal ISO and Cal PX approximated $214 million. Management periodically assesses our exposure through West Coast Power, relative to our California receivables and establishes and maintains reserves under SFAS 5. Our share of the total
reserve taken by West Coast Power, at September 30, 2004, with respect to receivables arising during the settlement period from January 2000 through June 2001 was approximately $194 million. The approval by the FERC in October 2004 of the
above-described settlement resolved the claims and disputes which initially gave rise to this reserve at West Coast Power.



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(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



Enron Trade Credit Litigation. Shortly before their bankruptcy filing in the fourth
quarter 2001, we determined that Enron Corp. and its affiliates had net exposure to us, including certain liquidated damages and other amounts relating to the termination of commercial transactions among the parties, of approximately $84 million.
This exposure was calculated by setting off approximately $230 million owed from Dynegy entities to Enron entities against approximately $314 million owed from Enron entities to Dynegy entities. The master netting agreement between Enron and us and
the valuation of the commercial transactions covered by the agreement, which valuation is based principally on the parties assessment of market prices for such period, remain subject to dispute by Enron. We are engaged in an ongoing process
with Enron to reconcile the differences between our respective valuations of the transactions and accounts receivable. As a result of ongoing refinement of the values of past transactions, we reduced the $84 million amount that we originally
believed we are owed by Enron to approximately $41 million, including the liabilities under the gas transportation agreement related to the Sithe Independence power tolling arrangement. This change in value had no impact on our results, as the net
receivable was fully reserved in the fourth quarter 2001. As required by the master netting agreement, we instituted arbitration proceedings against those Enron parties not in bankruptcy in 2002 and filed a motion with the Bankruptcy Court
requesting that we be allowed to proceed to arbitration against those Enron parties that are in bankruptcy. The Enron parties opposed our request and filed an adversary proceeding against us, alleging that the master netting agreement should not be
enforced and that the Enron companies should recover approximately $230 million from us. We have disputed such allegations and are vigorously defending our position regarding the setoff rights contained in the master netting agreement, although the
Bankruptcy Court has yet to rule on the enforceability of the master netting agreement.



In November 2003, we gave notice of our intent to pursue arbitration against Enron Canada Corp. as a non-bankrupt party to the master netting agreement. In response, Enron Canada Corp. filed a lawsuit in Canadian
District Court to recover the amounts that it claims to be owed by our Canadian subsidiary under the master netting agreement, contingent upon a Bankruptcy Court ruling on the enforceability of the master netting agreement. In December 2003, Enron
filed an application with the Bankruptcy Court for an injunction to prohibit this arbitration; the Bankruptcy Court ruled that the automatic stay of the bankruptcy applied to our request to pursue arbitration against Enron Canada Corp. under the
master netting agreement. Consequently, we are currently prohibited from enforcing the master netting agreement by arbitration. In March 2004, we appealed the enforcement of the automatic stay and requested permission from the appellate court to
proceed with arbitration against Enron Canada Corp. We also filed a motion with the Bankruptcy Court requesting a trial to determine the enforceability of the master netting agreement under the U.S. Bankruptcy Code. We are currently awaiting rulings
on the appeal and the motion. The Bankruptcy Court has ordered the parties to a second mediation, which is scheduled to occur in November 2004.



If the setoff rights are modified or disallowed, either by agreement or otherwise, the amount available for our entities to set off against sums that
might be due Enron entities could be reduced materially. In fact, we could be required to pay to Enron the full amount that it claims to be owed, while we would be an unsecured creditor of Enron to the extent of our claim. We cannot predict with
certainty whether we will incur any liability in connection with these disputes. However, given the size of the claims at issue, an adverse result could have a material adverse effect on our financial condition, results of operations and cash flows.



Severance Arbitrations. Dynegys former
CEO, Chuck Watson, former President, Steve Bergstrom, and former CFO, Rob Doty, each filed for arbitration pursuant to the terms of their employment/severance agreements. These former officers made arbitration claims seeking payments of up to
approximately $28.7 million, $10.4 million and $3.4 million, respectively. In May 2004, following arbitration, Dynegy paid Mr. Bergstrom $10.4 million plus attorneys fees, costs and interest in accordance with the arbitration panels



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(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



decisions. Shortly after the panels decisions in the Bergstrom matter and following mediation, Dynegy paid Mr. Watson $22 million to settle his
severance claims. We recorded an expense in the second quarter 2004 in the amount of the difference between this settlement amount and our severance accrual for this matter. Please read Note 3Restructuring Charges for further discussion
regarding the accrual relating to Mr. Watson.



The arbitration
with respect to Mr. Doty is scheduled to commence in May 2005. Mr. Dotys agreement is subject to interpretation and Dynegy maintains that the amount owed is substantially lower than the amount sought. We recorded a severance accrual we
consider reasonable relating to this proceeding.



Farnsworth Litigation. In August 2002, Bradley Farnsworth filed a lawsuit against Dynegy in state court claiming breach of contract and that he was demoted and ultimately fired from the position of Controller for refusing to
participate in illegal activities. Specifically, Mr. Farnsworth alleged, in the words of his amended complaint, that certain of Dynegys former executive officers requested that he shave or reduce for accounting purposes the forward
price curves associated with the natural gas business in the United Kingdom for the period of October 1, 2000 through March 31, 2001, in order to indicate a reduction in our mark-to-market losses. In March 2004, the judge dismissed Mr.
Farnsworths claim that he was asked to shave forward price curves. Under his remaining breach of contract claim, Mr. Farnsworth alleges he is entitled to a termination payment under his employment agreement, which he estimates at
$11 million, equal to 2.99 times the greater of his average base salary and incentive compensation for the highest three calendar years preceding termination or his base salary and target bonus amount for the year of termination. The agreement is
subject to interpretation and we maintain that the amount owed is substantially lower than the amount sought. Trial on the breach of contract claim is scheduled to commence in November 2004. We are defending this claim vigorously. Although reserves
have been provided with respect to this litigation, we do not believe that any liability we might incur as a result of this litigation would have a material adverse effect on our financial condition, results of operations or cash flows.



Apache Litigation. In May 2002, Apache Corporation filed
suit in state court against Versado, as purchaser and processor of Apaches gas, and DMS, as operator of the Versado assets in New Mexico, seeking more than $9 million in damages. The plaintiffs petition, as amended, alleges (i) excessive
field losses of natural gas from wells owned by the plaintiff, (ii) that Versado engaged in sham transactions with affiliates, resulting in Versado not receiving fair market value when it sells gas and liquids, and (iii) that the formula
for calculating the amount Versado receives from its buyers of gas and liquids is flawed since it is based on gas price indexes that these same affiliates are alleged to have manipulated by providing false price information to the index publisher.
At trial, the plaintiffs claim with respect to the alleged sham transactions and index manipulation, among others, were severed by the court and abated for a future trial, and the jury found in favor of the plaintiff on the
remaining lost gas claim, awarding approximately $1.6 million in damages. In May 2004, our motion to set aside this judgment was granted by the court and the jurys award to the plaintiff was vacated. The plaintiff filed its appeal with the
court in October 2004. We do not believe that any liability we might incur as a result of this litigation would have a material adverse effect on our financial condition, results of operations or cash flows.



Gas Index Pricing Litigation. We are defending the following
suits claiming damages resulting from the alleged manipulation of gas index publications and prices by us and others: Sierra Pacific Resources and Nevada Power Company v. El Paso Corp. et al.; Bustamante v. The McGraw Hill Companies
et al.; In re Natural Gas Commodity Litigation (a consolidation of two cases); People of the State of Montana et al. v. Williams Energy Marketing et al; In re Western States Wholesale Natural Gas Anti-Trust Litigation(a
consolidation of seven cases); and Nelson Brothers LLC v. Cherokee Nitrogen v. Dynegy Marketing and Trade and Dynegy Inc.In each of these suits, the plaintiffs allege that we and other energy companies engaged in an illegal scheme to inflate



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



natural gas prices by providing false information to gas index publications, thereby manipulating the price. All of the complaints rely heavily on the FERC
and CFTC investigations into and report concerning index-reporting manipulation in the energy industry. The plaintiffs generally seek unspecified actual and punitive damages relating to costs they claim to have incurred as a result of the alleged
conduct. These cases are in varying procedural stages, although we have not been served in the Montana case.



We are analyzing all of these claims and intend to defend against them vigorously. We cannot predict with certainty whether we will incur any liability or
to estimate the damages, if any, that might be incurred in connection with these lawsuits. We do not believe that any liability that we might incur as a result of this litigation would have a material adverse effect on our financial condition,
results of operations or cash flows.



Atlantigas Corp.
Litigation. In November 2003, Atlantigas Corporation filed suit in Maryland against us and several other defendants alleging certain conspiracies between natural gas shippers and storage facilities. The complaint alleged that the interstate
pipelines provided preferential storage and transportation services to their own unregulated marketing affiliate in return for percentages of the profits reaped by the marketing affiliate and that such conduct violated applicable FERC regulations
and the federal antitrust laws and constituted common law tortious interference with contractual and business relations. In addition, the complaint claimed we conspired with the other defendants to receive preferential natural gas storage and
transportation services at off-tariff prices. The complaint sought unspecified compensatory and punitive damages. In January 2004, the defendants filed motions to dismiss the plaintiffs claims. In July 2004, prior to the Courts ruling on
the defendants motions, the plaintiff voluntarily dismissed the Maryland federal court action against all defendants. Shortly thereafter, plaintiff filed a class action lawsuit in a West Virginia state court against several defendants,
excluding us, on similar grounds to the previous Maryland federal action. In October 2004, the plaintiff filed an amended class action complaint naming us as a defendant in the litigation. We are analyzing these claims and intend to defend against
them vigorously. We cannot predict with certainty whether we will incur any liability or to estimate the damages, if any, that might be incurred in connection with these lawsuits. We do not believe that any liability that we might incur as a result
of this litigation would have a material adverse effect on our financial condition, results of operations or cash flows.



Alleged Marketing Contract Defaults. We have posted collateral to support a portion of our obligations in our CRM business, including our
obligations under one of our power tolling arrangements. While we worked with various counterparties to provide mutually acceptable collateral or other adequate assurance under these contracts, we have not reached agreement with Sithe Independence
and Sterlington/Quachita Power LLC regarding a mutually acceptable amount of collateral in support of our obligations under our power tolling arrangements with either of these two parties. Although we are current on all contract payments to these
counterparties, we previously received a notice of default from each such party with regard to collateral. Despite receiving these notices, all parties are continuing to perform and we have fulfilled our economic commitments under these contracts.
Our average annual capacity payments under these two arrangements approximate $75 million and $63 million, respectively, and the contracts extend through 2014 and 2012, respectively, with a five-year extension option for Sterlington. If these two
parties were successfully to pursue claims that we defaulted on these contracts, they could declare a termination of their respective contracts, which generally provide for termination payments based on the agreed mark-to-market value of the
contracts. Because of the effects of changes in commodity prices on the mark-to-market value of these contracts, as well as the likelihood that we would differ with our counterparties as to the estimated value of these contracts, we cannot predict
with any degree of certainty the amounts of termination payments that could be required under these two contracts. Disputes relating to these two contracts, if resolved against us, could materially adversely affect our financial condition, results
of operations and cash flows.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



U.S. Attorney Investigations. The U.S. Attorneys office in Houston is continuing
its investigation of our actions relating to Project Alpha and our gas trade reporting practices. We have produced documents and witnesses for interviews in connection with this investigation. Seven of our natural gas traders were terminated in the
fourth quarter 2002 for violating our Code of Business Conduct after an ongoing internal investigation conducted by Dynegys Audit and Compliance Committee in collaboration with independent counsel discovered that inaccurate information
regarding natural gas trades had been reported to various energy industry publications. In January 2003, one of our former natural gas traders was indicted in Houston on three counts of knowingly causing the transmission of false trade reports used
to calculate the index price of natural gas and four counts of wire fraud. In August 2003, however, several of these counts were dismissed as unconstitutional. Upon request by the U.S. Attorneys office for reconsideration of this ruling, the
judge reinstated the dismissed counts. The case was originally set for trial in January 2004; however, both the U.S. Attorneys office and the defense have appealed the courts rulings regarding the dismissed and reinstated charges. The
Fifth Circuit Court of Appeals heard argument on these matters in October 2004, and the parties are awaiting its ruling.



In June 2003, three former Dynegy employees were indicted on charges of conspiracy, securities fraud and mail and wire fraud related to the Project Alpha
transaction. Subsequently, two of these former employees plead guilty to conspiracy to commit securities fraud. These former employees have not been sentenced pending the completion of the governments investigation. Trial on the indictment
against the third employee was held in November 2003. The defendant was convicted on all charges and, in March 2004, sentenced to a term of approximately 24 years in federal prison.



We are cooperating fully with the U.S. Attorneys office in its continuing investigation of these matters and cannot
predict the ultimate outcome of these investigations.



Additionally, the United States Attorneys office in the Northern District of California has issued a Grand Jury subpoena requesting information related to our activities in the California energy markets in November 2002. We have been,
and intend to continue, cooperating fully with the U.S. Attorneys office in its investigation of these matters, including production of substantial documents responsive to the subpoena and other requests for information. We cannot predict the
ultimate outcome of this investigation.



Department of
Labor Investigation. In August 2002, the U.S. Department of Labor commenced an official investigation pursuant to Section 504 of ERISA with respect to the benefit plans maintained by Dynegy and its ERISA affiliates. Dynegy has cooperated
with the Department of Labor throughout this investigation, which remains ongoing. As of this date, the investigation has focused on a review of plan documentation, plan reporting and disclosure, plan recordkeeping, plan investments and investment
options, plan fiduciaries and third-party service providers, plan contributions and other operational aspects of the plans. The Department of Labor has not yet provided definitive findings resulting from its investigation.



Note 9Regulatory Issues



We are subject to regulation by various federal, state, local and foreign
agencies, including extensive rules and regulations governing transportation, transmission and sale of energy commodities as well as the discharge of materials into the environment or otherwise relating to environmental protection. Compliance with
these regulations requires general and administrative, capital and operating expenditures including those related to monitoring, pollution control equipment, emission fees and permitting at various operating facilities and remediation obligations.
In addition, the United States Congress has before it a number of bills that could impact regulations or impose new regulations applicable to us and our subsidiaries. We cannot predict the outcome of these bills or other regulatory developments or
the effects that they might have on our business.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



Danskammer Water Permit. As previously disclosed, the state-issued water intake and
discharge permit associated with our Danskammer facility expired in 1992. However, under New York State law, each permit remains in effect and allows for continued operation under the terms of the original permit, provided that a timely and
sufficient application requesting renewal has been filed as required. In May 1992, the then owner of the Danskammer facility filed a renewal application which we believe was timely and sufficient.



In November 2002, several environmental groups filed suit in the Supreme
Court of the State of New York seeking, among other things, a declaratory judgment that the Danskammer water intake and discharge permit expired because of alleged deficiencies in the renewal application process. In September 2004, the Court ruled
that the water intake and discharge permit for our Danskammer facility is void, but stayed the enforcement of the decision pending further review by the Court or by the Appellate Division.



In October 2004, we filed our appeal of the Courts decision with the
Appellate Division, and we intend to pursue vigorously our challenge to the Courts ruling voiding our permit. We will also continue to seek approval of our application to renew the water intake and discharge permit in proceedings before the
New York State Department of Environmental Conservation. If our appeal is ultimately unsuccessful, we may be required to curtail operations at our Danskammer facility pending receipt of final approval of the renewal of our water intake and discharge
permit. We cannot predict with any certainty the outcome of these proceedings; however, an adverse outcome, particularly a requirement that we curtail operations at our Danskammer facility for any period of time, could have a material adverse effect
on our financial condition, results of operations and cash flows.



FERC Market-Based Rate Authority. Market-based rate authority allows the sale of power at negotiated rates through the bilateral market or within an organized energy market. In April 2004, the FERC issued an order concerning
the ability of companies to sell electricity at market-based rates. In this order, the FERC adopted two new tests for assessing generation market power. If an applicant for market-based rate authority is found to possess generation market power
under these tests and is unsuccessful in challenging that finding, the applicant may either propose mitigation measures or adopt cost-based rates. If the FERC finds that the proposed mitigation measures fail to eliminate the ability to exercise
market power, the applicants market-based rate authority will be revoked and the applicant will be subject to cost-based default rates, or other cost-based rates proposed by the applicant and approved by the FERC. The FERC issued a follow up
order in May 2004, which (i) addressed the implementation process for pending and new market-based rate applications and (ii) established a timeline for entities with FERC market-based rate authority to provide the FERC with their market power
assessment. Despite challenges from numerous industry participants, in July 2004 the FERC upheld the April 2004 order. These orders require entities that were previously granted market-based rate authority by the FERC, including several of our
entities with applications pending since February 2002, to resubmit their market power applications in accordance with the new directive by February 5, 2005. Although we cannot predict with any certainty whether these applications will be approved
or the loss of revenues that would result from the imposition of cost-based rates, an adverse outcome with respect to these applications, and the resulting requirement that we charge cost-based rates, could have a material adverse effect on our
financial condition, results of operations and cash flows.



Note
10Employee Compensation, Savings and Pension Plans



We have various defined benefit pension plans and post-retirement benefit plans, which are more fully described in Note 19Employee Compensation, Savings and Pension Plans beginning on page F-61 of our Form 10-K/A.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



Components of Net Periodic Benefit Cost.The components of net periodic benefit cost
were:



|                                              |  |                                  |      |   |                |   |      |      |  |      |     |  |   |      |  
|--------------------------------------------- |  | -------------------------------- | ---- | - | -------------- | - | ---- | ---- |  | ---- | --- |  | - | ---- | -
|                                              |  | Pension Benefits                 |      |   | Other Benefits |  
|                                              |  | Three Months Ended September 30, |     
|                                              |  | 2004                             |      |   | 2003           |   |      | 2004 |  | 2003 |    
|                                              |  | (in millions)                    |     
|Service cost benefits earned during period    |  | $                                | 1.8  |   |                | $ | 1.7  |      |  | $    | 0.2 |  | $ | 0.3  |  
|Interest cost on projected benefit obligation |  |                                  | 1.0  |   |                |   | 1.0  |      |  |      | 0.2 |  |   | 0.1  |  
|Expected return on plan assets                |  |                                  | (0.7 | ) |                |   | (0.6 | )    |  |      |    |  |   |     |  
|Recognized net actuarial (gain) loss          |  |                                  | 0.3  |   |                |   |     |      |  |      | 0.1 |  |   | (0.1 | )
|                                              |  |                                  |      |   |                |   |      |      |  |      |     |  |   |      |  
|Total net periodic benefit cost               |  | $                                | 2.4  |   |                | $ | 2.1  |      |  | $    | 0.5 |  | $ | 0.3  |  
|                                              |  |                                  |      |   |                |   |      |      |  |      |     |  |   |      |  
|                                              |  |                                 
|                                              |  | Pension Benefits                 |      |   | Other Benefits |  
|                                              |  | Nine Months Ended September 30,  |     
|                                              |  | 2004                             |      |   | 2003           |   |      | 2004 |  | 2003 |    
|                                              |  | (in millions)                    |     
|Service cost benefits earned during period    |  | $                                | 6.0  |   |                | $ | 5.5  |      |  | $    | 0.6 |  | $ | 0.5  |  
|Interest cost on projected benefit obligation |  |                                  | 2.8  |   |                |   | 2.4  |      |  |      | 0.6 |  |   | 0.5  |  
|Expected return on plan assets                |  |                                  | (1.9 | ) |                |   | (1.8 | )    |  |      |    |  |   |     |  
|Recognized net actuarial loss                 |  |                                  | 0.7  |   |                |   | 0.2  |      |  |      | 0.1 |  |   | 0.1  |  
|                                              |  |                                  |      |   |                |   |      |      |  |      |     |  |   |      |  
|Total net periodic benefit cost               |  | $                                | 7.6  |   |                | $ | 6.3  |      |  | $    | 1.3 |  | $ | 1.1  |  
|                                              |  |                                  |      |   |                |   |      |      |  |      |     |  |   |      |  



Contributions.In Note 19Employee Compensation, Savings and Pension PlansContributions beginning on page F-65 of our Form 10-K/A, we reported that we expected to contribute approximately $1 million to our pension and other postretirement
benefit plans in 2004. However, under the terms of Dynegys agreement to sell Illinois Power to Ameren, we accelerated approximately $7 million of future cash funding requirements in September 2004.



Note 11Income Taxes



Prior Year Tax Audits.In the second quarter 2004, we
recognized an expense of $17 million associated with the conclusion of prior year federal tax audits. A charge of $20 million related to our discontinued U.K. CRM business is included in Loss from discontinued operations on our unaudited condensed
consolidated statements of operations for the nine months ended September 30, 2004. An offsetting benefit of $3 million is reflected in Income tax benefit (expense) on our unaudited condensed consolidated statements of operations.



Note 12Segment Information



Amounts in this footnote have been restated. For further information, please
see the Explanatory Note beginning on page 8.



We report our
operations in the following segments: GEN, NGL and CRM. All direct general and administrative expenses and other income (expense) items incurred by us on behalf of our subsidiaries are charged to the applicable subsidiary as incurred.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



Prior to January 1, 2003, the GEN and CRM segments were operated together as an asset-based
third-party marketing, trading and risk-management business, referred to as the WEN segment. Most, but not all, of the WEN third-party purchase and sale contracts were held by a subsidiary that became part of the CRM segment. When we began reporting
results for the GEN and CRM segments, CRM continued to transact with third parties on behalf of GEN. When transacting on behalf of GEN and our other segments, CRM would record third party revenue related to GEN and our other segments, together with
its other third-party marketing and trading positions unrelated to our other segments. Transfer pricing between CRM and our other segments was set at the actual amount received or paid for the purchases and sales to the third parties. Therefore, our
other segments intersegment revenues included the effects of intra-month market price volatility, and represented amounts actually received from or paid to third parties.



Effective July 1, 2004, GEN began transacting directly with third parties on its own behalf. Therefore, certain generation
capacity, forward sales, and related market positions previously sold by GEN to CRM are now sold by GEN directly to third parties. The GEN segment now records revenues for such third party sales as unaffiliated revenues.



Pursuant to EITF Issue 02-03, all gains and losses on third-party
energy-trading contracts in the CRM segment, whether realized or unrealized, are presented net in the unaudited condensed consolidated statements of operations. For the purpose of the segment data presented below, intersegment transactions between
CRM and our other segments are presented net in CRM intersegment revenues but are presented gross in the intersegment revenues of our other segments, as the activities of our other segments are not subject to the net presentation requirements
contained in EITF Issue 02-03. If transactions between CRM and our other segments result in a net intersegment purchase by CRM, the net intersegment purchases and sales are presented as negative revenues in CRM intersegment revenues. In addition,
intersegment hedging activities are presented net pursuant to SFAS No. 133.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



Reportable segment information for the three- and nine-month periods ended September 30, 2004 and
2003 is presented below:



Dynegys Segment Data for the
Quarter Ended September 30, 2004

(in millions)



|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|----------------------------------------------- |  | --- | ----- | - | --- | - | ----- | --- |  | - | --------------------- | - |  | ----- | --- | - |  | - | ------ | -
|                                                |  | GEN |       |   | NGL |   |       | CRM |  |   | Other andEliminations |   |  | Total |    
|Unaffiliated revenues:                          |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Domestic                                        |  | $   | 273   |   |     | $ | 920   |     |  | $ | 94                    |   |  | $     |    |   |  | $ | 1,287  |  
|Other                                           |  |     |      |   |     |   |      |     |  |   | (14                   | ) |  |       |    |   |  |   | (14    | )
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|                                                |  |     | 273   |   |     |   | 920   |     |  |   | 80                    |   |  |       |    |   |  |   | 1,273  |  
|Affiliated revenues                             |  |     | 114   |   |     |   |      |     |  |   |                      |   |  |       |    |   |  |   | 114    |  
|Intersegment revenues                           |  |     | 42    |   |     |   | 76    |     |  |   | (71                   | ) |  |       | (47 | ) |  |   |       |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Total revenues                                  |  | $   | 429   |   |     | $ | 996   |     |  | $ | 9                     |   |  | $     | (47 | ) |  | $ | 1,387  |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Depreciation and amortization                   |  | $   | (50   | ) |     | $ | (21   | )   |  | $ | (1                    | ) |  | $     | (6  | ) |  | $ | (78    | )
|                                                |  |     |       |   |    
|Operating income (loss)                         |  | $   | 71    |   |     | $ | 72    |     |  | $ | (32                   | ) |  | $     | (54 | ) |  | $ | 57     |  
|Earnings from unconsolidated investments        |  |     | 23    |   |     |   | 3     |     |  |   |                      |   |  |       |    |   |  |   | 26     |  
|Other items, net                                |  |     |      |   |     |   | (6    | )   |  |   | (3                    | ) |  |       | (1  | ) |  |   | (10    | )
|Interest expense                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | (85    | )
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Loss from continuing operations before taxes    |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | (12    | )
|Income tax benefit                              |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | 6      |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Loss from continuing operations                 |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | (6     | )
|Loss from discontinued operations, net of taxes |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | (2     | )
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Net loss                                        |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  | $ | (8     | )
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Identifiable assets:                            |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Domestic                                        |  | $   | 5,427 |   |     | $ | 2,131 |     |  | $ | 1,362                 |   |  | $     | 917 |   |  | $ | 9,837  |  
|Other                                           |  |     |      |   |     |   | 7     |     |  |   | 770                   |   |  |       | 7   |   |  |   | 784    |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Total                                           |  | $   | 5,427 |   |     | $ | 2,138 |     |  | $ | 2,132                 |   |  | $     | 924 |   |  | $ | 10,621 |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Unconsolidated investments                      |  | $   | 373   |   |     | $ | 78    |     |  | $ |                      |   |  | $     |    |   |  | $ | 451    |  
|Capital expenditures                            |  | $   | (20   | ) |     | $ | (14   | )   |  | $ |                      |   |  | $     | (5  | ) |  | $ | (39    | )



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



Dynegys Segment Data for the Quarter Ended September 30, 2003

(in millions)



|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|------------------------------------------------- |  | --- | ----- | - | --- | - | ----- | --- |  | - | --------------------- | - |  | ----- | --- | - |  | - | ------ | -
|                                                  |  | GEN |       |   | NGL |   |       | CRM |  |   | Other andEliminations |   |  | Total |    
|Unaffiliated revenues:                            |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Domestic                                          |  | $   | 65    |   |     | $ | 620   |     |  | $ | 325                   |   |  | $     |    |   |  | $ | 1,010  |  
|Other                                             |  |     |      |   |     |   | 3     |     |  |   | (49                   | ) |  |       |    |   |  |   | (46    | )
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|                                                  |  |     | 65    |   |     |   | 623   |     |  |   | 276                   |   |  |       |    |   |  |   | 964    |  
|Affiliate revenues                                |  |     | 124   |   |     |   |      |     |  |   | 86                    |   |  |       |    |   |  |   | 210    |  
|Intersegment revenues                             |  |     | 286   |   |     |   | 58    |     |  |   | (360                  | ) |  |       | 16  |   |  |   |       |  
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Total revenues                                    |  | $   | 475   |   |     | $ | 681   |     |  | $ | 2                     |   |  | $     | 16  |   |  | $ | 1,174  |  
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Depreciation and amortization                     |  | $   | (48   | ) |     | $ | (19   | )   |  | $ |                      |   |  | $     | (12 | ) |  | $ | (79    | )
|                                                  |  |     |       |   |    
|Operating income (loss)                           |  | $   | 78    |   |     | $ | 31    |     |  | $ | (26                   | ) |  | $     | (46 | ) |  | $ | 37     |  
|Earnings (losses) from unconsolidated investments |  |     | 51    |   |     |   | 2     |     |  |   | (2                    | ) |  |       |    |   |  |   | 51     |  
|Other items, net                                  |  |     | 1     |   |     |   | (2    | )   |  |   | 4                     |   |  |       | (4  | ) |  |   | (1     | )
|Interest expense                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | (103   | )
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Loss from continuing operations before taxes      |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | (16    | )
|Income tax benefit                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | 6      |  
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Loss from continuing operations                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | (10    | )
|Loss from discontinued operations, net of taxes   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | (4     | )
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Net loss                                          |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  | $ | (14    | )
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Identifiable assets:                              |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Domestic                                          |  | $   | 5,128 |   |     | $ | 1,808 |     |  | $ | 2,246                 |   |  | $     | 740 |   |  | $ | 9,922  |  
|Other                                             |  |     |      |   |     |   | (22   | )   |  |   | 833                   |   |  |       |    |   |  |   | 811    |  
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Total                                             |  | $   | 5,128 |   |     | $ | 1,786 |     |  | $ | 3,079                 |   |  | $     | 740 |   |  | $ | 10,733 |  
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Unconsolidated investments                        |  | $   | 528   |   |     | $ | 95    |     |  | $ |                      |   |  | $     |    |   |  | $ | 623    |  
|                                                  |  |     |       |   |    
|Capital expenditures                              |  | $   | (23   | ) |     | $ | (11   | )   |  | $ |                      |   |  | $     | (2  | ) |  | $ | (36    | )



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



Dynegys Segment Data for the Nine Months Ended September 30, 2004

(in millions)



|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|----------------------------------------------- |  | --- | ----- | - | --- | - | ----- | --- |  | - | --------------------- | - |  | ----- | ---- | - |  | - | ------ | -
|                                                |  | GEN |       |   | NGL |   |       | CRM |  |   | Other andEliminations |   |  | Total |     
|Unaffiliated revenues:                          |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Domestic                                        |  | $   | 373   |   |     | $ | 2,440 |     |  | $ | 862                   |   |  | $     |     |   |  | $ | 3,675  |  
|Other                                           |  |     |      |   |     |   | 2     |     |  |   | (84                   | ) |  |       |     |   |  |   | (82    | )
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|                                                |  |     | 373   |   |     |   | 2,442 |     |  |   | 778                   |   |  |       |     |   |  |   | 3,593  |  
|Affiliated revenues                             |  |     | 346   |   |     |   |      |     |  |   | 6                     |   |  |       |     |   |  |   | 352    |  
|Intersegment revenues                           |  |     | 564   |   |     |   | 221   |     |  |   | (619                  | ) |  |       | (166 | ) |  |   |       |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Total revenues                                  |  | $   | 1,283 |   |     | $ | 2,663 |     |  | $ | 165                   |   |  | $     | (166 | ) |  | $ | 3,945  |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Depreciation and amortization                   |  | $   | (145  | ) |     | $ | (66   | )   |  | $ | (1                    | ) |  | $     | (26  | ) |  | $ | (238   | )
|Impairment and other charges                    |  |     |      |   |     |   | (5    | )   |  |   |                      |   |  |       | (24  | ) |  |   | (29    | )
|                                                |  |     |       |   |    
|Operating income (loss)                         |  | $   | 158   |   |     | $ | 214   |     |  | $ | 45                    |   |  | $     | (194 | ) |  | $ | 223    |  
|Earnings from unconsolidated investments        |  |     | 110   |   |     |   | 7     |     |  |   |                      |   |  |       |     |   |  |   | 117    |  
|Other items, net                                |  |     |      |   |     |   | (15   | )   |  |   | (1                    | ) |  |       | 3    |   |  |   | (13    | )
|Interest expense                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | (275   | )
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Income from continuing operations before taxes  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | 52     |  
|Income tax benefit                              |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | (13    | )
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Income from continuing operations               |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | 39     |  
|Loss from discontinued operations, net of taxes |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | (9     | )
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Net income                                      |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  | $ | 30     |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Identifiable assets:                            |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Domestic                                        |  | $   | 5,427 |   |     | $ | 2,131 |     |  | $ | 1,362                 |   |  | $     | 917  |   |  | $ | 9,837  |  
|Other                                           |  |     |      |   |     |   | 7     |     |  |   | 770                   |   |  |       | 7    |   |  |   | 784    |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Total                                           |  | $   | 5,427 |   |     | $ | 2,138 |     |  | $ | 2,132                 |   |  | $     | 924  |   |  | $ | 10,621 |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Unconsolidated investments                      |  | $   | 373   |   |     | $ | 78    |     |  | $ |                      |   |  | $     |     |   |  | $ | 451    |  
|                                                |  |     |       |   |    
|Capital expenditures                            |  | $   | (78   | ) |     | $ | (41   | )   |  | $ |                      |   |  | $     | (10  | ) |  | $ | (129   | )



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



Dynegys Segment Data for the Nine Months Ended September 30, 2003

(in millions)



|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|------------------------------------------------------------------ |  | --- | ----- | - | --- | - | ----- | --- |  | - | --------------------- | - |  | ----- | ---- | - |  | - | ------ | -
|                                                                   |  | GEN |       |   | NGL |   |       | CRM |  |   | Other andEliminations |   |  | Total |     
|Unaffiliated revenues:                                             |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Domestic                                                           |  | $   | 285   |   |     | $ | 2,218 |     |  | $ | 610                   |   |  | $     |     |   |  | $ | 3,113  |  
|Other                                                              |  |     |      |   |     |   | 3     |     |  |   | (46                   | ) |  |       |     |   |  |   | (43    | )
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|                                                                   |  |     | 285   |   |     |   | 2,221 |     |  |   | 564                   |   |  |       |     |   |  |   | 3,070  |  
|Affiliate revenues                                                 |  |     | 356   |   |     |   |      |     |  |   | 86                    |   |  |       |     |   |  |   | 442    |  
|Intersegment revenues                                              |  |     | 584   |   |     |   | 193   |     |  |   | (790                  | ) |  |       | 13   |   |  |   |       |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Total revenues                                                     |  | $   | 1,225 |   |     | $ | 2,414 |     |  | $ | (140                  | ) |  | $     | 13   |   |  | $ | 3,512  |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Depreciation and amortization                                      |  | $   | (136  | ) |     | $ | (60   | )   |  | $ | (1                    | ) |  | $     | (50  | ) |  | $ | (247   | )
|                                                                   |  |     |       |   |    
|Operating income (loss)                                            |  | $   | 178   |   |     | $ | 121   |     |  | $ | (348                  | ) |  | $     | (190 | ) |  | $ | (239   | )
|Earnings from unconsolidated investments                           |  |     | 133   |   |     |   | 7     |     |  |   |                      |   |  |       |     |   |  |   | 140    |  
|Other items, net                                                   |  |     | 4     |   |     |   | (12   | )   |  |   | 27                    |   |  |       | (6   | ) |  |   | 13     |  
|Interest expense                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | (239   | )
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Loss from continuing operations before taxes                       |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | (325   | )
|Income tax benefit                                                 |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | 121    |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Loss from continuing operations                                    |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | (204   | )
|Loss on discontinued operations, net of taxes                      |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | (14    | )
|Cumulative effect of change in accounting principles, net of taxes |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | 57     |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Net loss                                                           |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  | $ | (161   | )
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Identifiable assets:                                               |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Domestic                                                           |  | $   | 5,128 |   |     | $ | 1,808 |     |  | $ | 2,246                 |   |  | $     | 740  |   |  | $ | 9,922  |  
|Other                                                              |  |     |      |   |     |   | (22   | )   |  |   | 833                   |   |  |       |     |   |  |   | 811    |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Total                                                              |  | $   | 5,128 |   |     | $ | 1,786 |     |  | $ | 3,079                 |   |  | $     | 740  |   |  | $ | 10,733 |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Unconsolidated investments                                         |  | $   | 528   |   |     | $ | 95    |     |  | $ |                      |   |  | $     |     |   |  | $ | 623    |  
|Capital expenditures                                               |  | $   | (116  | ) |     | $ | (36   | )   |  | $ |                      |   |  | $     | (5   | ) |  | $ | (157   | )



Note 13Subsequent Events



On October 22, 2004, the American Jobs Creation Act of
2004 was signed into law. This legislation contains a number of changes to the Internal Revenue Code that may affect us. We are in the process of analyzing the law in order to determine its effects. At this time we do not expect any material impact
on our consolidated financial statements from this legislation.



In November 2004, Dynegy entered into an agreement to purchase from Exelon Corporation all of the outstanding capital stock of ExRes SHC, Inc., the parent company of Sithe Energies and Sithe Independence, L.P. Please read Note
2Acquisitions, Dispositions, Contract Terminations and Discontinued OperationsAcquisitionsSithe Energies for further discussion.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended September 30, 2004 and 2003



In November 2004, we sold our Sherman natural gas processing facility located in Sherman, Texas.
Please read Note 2Acquisitions, Dispositions, Contract Terminations and Discontinued OperationsDispositions and Contract TerminationsSherman.



On November 18, 2004, DPM entered into a power purchase agreement with Constellation Energy Commodities Group, Inc. under which Constellation will
receive DPMs rights to purchase approximately 570 megawatts of capacity and energy arising under DPMs tolling contract with LSP-Kendall Energy, LLC for a four year term from December 2004 through November 2008. DPM will remain party to
the Kendall tolling contract, but will receive offsetting payments from Constellation during the four year term.



Concurrently with the execution of the power purchase agreement, DPM and Constellation entered into an assignment agreement pursuant to which DPM would
transfer to Constellation all of its rights and obligations under the Kendall tolling contract through November 2008. The assignment will only become effective upon the satisfaction of a number of conditions, including the receipt of
LSP-Kendalls consent, and upon such effectiveness the Constellation power purchase agreement would terminate.



In connection with these transactions, DPM paid to Constellation $117.5 million in cash and effectively eliminated approximately $165 million in our
future fixed payment obligations under the Kendall tolling contract through November 2008.



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Item 4Controls and Procedures



Evaluation of Disclosure Controls and Procedures. Effective as of the end of the third quarter 2004, an evaluation was carried out under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). This evaluation
included consideration of the various processes carried out under the direction of Dynegys disclosure committee in an effort to ensure that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported
within the time periods specified by the SEC. This evaluation also considered the work completed as of the end of the third quarter 2004 relating to our participation in Dynegys efforts to achieve compliance with Section 404 of the
Sarbanes-Oxley Act of 2002, which is further described below. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective at the reasonable assurance level and designed to ensure that the
information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the requisite time periods. While our disclosure controls and procedures provide reasonable assurance that the appropriate information
will be available on a timely basis, this assurance is subject to limitations inherent in any control system, no matter how well it may be designed or administered.



Changes in Internal Controls. There were no changes in our internal controls over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal controls performed during the third quarter 2004, other than those noted below, that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial reporting.



During the second and third quarter 2004, deficiencies were identified that resulted in changes to the consolidated enterprises internal controls over financial reporting, including matters relating to system
access and system implementation controls, segregation of duties and documentation of controls and procedures and their effective operation and monitoring. Deficiencies were also identified in the consolidated enterprises tax accounting and
tax reconciliation controls and processes that make this an area of particular focus. In the third quarter 2004, we determined that adjustments related to our deferred income tax accounts in periods prior to 2004 were required. We identified these
deficiencies and promptly brought them to the attention of Dynegys audit and compliance committee and independent auditors. Accordingly, in this Form 10-Q/A, we have restated our unaudited condensed consolidated financial statements. In
addition, we believe we have addressed these tax deficiencies, by taking the following steps to improve our internal controls around our tax accounting and tax reconciliation controls and processes:



| |  |  | Increased the levels of review in the preparation of the quarterly and annual tax provision;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Formalized processes, procedures and documentation standards; and
| | - |  | -----------------------------------------------------------------



| |  |  | Restructured the consolidated enterprises Tax Department to ensure appropriate segregation of duties regarding preparation and review of the quarterly and annual tax
provision.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We are a wholly owned subsidiary of
Dynegy Inc. and the primary holding company for Dynegys GEN and NGL businesses. We are not subject to the disclosure requirements promulgated under Section 404 of the Sarbanes-Oxley Act of 2002 until we file our Annual Report on Form 10-K for
the year ended December 31, 2005. However, in seeking to achieve compliance with Section 404 within the prescribed period, Dynegy Inc.s management has formed an internal control steering committee, engaged outside consultants and adopted and
implemented a detailed project work plan to assess the adequacy of its internal controls over financial reporting, remediate any control weaknesses that may be identified, validate through testing that controls are functioning as documented and
implement a continuous reporting and improvement process for internal controls over financial reporting. Because we comprise a significant part of Dynegy as a consolidated enterprise, our internal controls over financial reporting are being reviewed
in connection with this effort.



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Additionally, the Public Company Accounting Oversight Board recently adopted very stringent standards
governing managements required evaluation of its internal controls over financial reporting and the independent auditors review of those controls and managements evaluation thereof. These standards will likely result in a
significant number of companies, which may include Dynegy, identifying significant deficiencies and/or material weaknesses in their internal controls. Indeed, the items referenced in the preceding paragraphs could preclude our independent auditors
from delivering an unqualified opinion on internal controls under Section 404 of Sarbanes-Oxley.



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DYNEGY HOLDINGS INC.



PART II.
OTHER INFORMATION



Item 6Exhibits



The following documents are included as exhibits to this Form 10-Q/A:



|      |  |                                                                                                                                                                                                                                                                             
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1  |  | Power Purchase Agreement dated September 30, 2004 between Illinois Power Company and Dynegy Power Marketing, Inc. (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q for the Quarter Ended September 30, 2004 of Dynegy Inc., File No. 1-15639)
|      | 
|+31.1 |  | Chief Executive Officer Certification Pursuant to Rule 13a-14(a) and 15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                       
|      | 
|+31.2 |  | Chief Financial Officer Certification Pursuant to Rule 13a-14(a) and 15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                       
|      | 
|*32.1 |  | Chief Executive Officer Certification Pursuant to 18 United States Code Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                 
|      | 
|*32.2 |  | Chief Financial Officer Certification Pursuant to 18 United States Code Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                 

---

|+ | Filed herewith.
|- | ---------------

|* | Pursuant to Securities and Exchange Commission Release No. 33-8238, this certification will be treated as accompanying this report and not filed as part of
such report for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act, and this certification will not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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DYNEGY HOLDINGS INC.



SIGNATURES



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



|                       |  |                      |  |                                                                                                                              
|---------------------- |  | -------------------- |  | -----------------------------------------------------------------------------------------------------------------------------
|                       |  | DYNEGY HOLDINGS INC.
|                       |  |                     
|Date: January 26, 2005 |  | By:                  |  | /s/    NICK J.
CARUSO                                                                                                        
|                       |  |                      |  | Nick J. Caruso Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal
Financial Officer)



46