UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-Q





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





For
the quarterly period ended March 31, 2009





 ̈
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the transition period from ________ to ________










DYNEGY
INC.


DYNEGY
HOLDINGS INC.


(Exact
name of registrant as specified in its charter)





Entity
                Commission
                  File Number
                State
      of
                  Incorporation
                I.R.S.
      Employer
                  Identification No.Dynegy
      Inc.
                001-33443
                Delaware
                20-5653152Dynegy
      Holdings Inc.
                000-29311
                Delaware
                94-32484151000
      Louisiana, Suite 5800Houston,
      Texas
                
                
                77002(Address
      of principal executive offices)
                
                
                (Zip
      Code)





(713)
507-6400


(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




Dynegy
      Inc.
              Yes
      x No  ̈Dynegy
      Holdings Inc.
              Yes
      x No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).




Dynegy
      Inc.
              Yes
       ̈ No  ̈Dynegy
      Holdings Inc.
              Yes
       ̈ No  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.




Large
      accelerated filer
              Accelerated
      filer
              Non-accelerated
      filer
              Smaller
      reporting company(Do
      not check if a smaller reporting company)Dynegy
      Inc.
              x
               ̈
               ̈
               ̈Dynegy
      Holdings Inc.
               ̈
               ̈
              x
               ̈





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).




Dynegy
      Inc.
              Yes
       ̈ No xDynegy
      Holdings Inc.
              Yes
       ̈ No x





Indicate
the number of shares outstanding of Dynegy Inc.’s classes of common stock, as of
the latest practicable date: Class A common stock, $0.01 par value per share,
504,225,664 shares
outstanding as of May 1, 2009; Class B common stock, $0.01 par value per share,
340,000,000 shares
outstanding as of May 1, 2009.  All of Dynegy Holdings Inc.’s
outstanding common stock is owned by Dynegy Inc.





This
combined Form 10-Q is separately filed by Dynegy Inc. and Dynegy Holdings
Inc.  Information contained herein relating to any individual registrant is
filed by such registrant on its own behalf.  Each registrant makes no
representation as to information relating to a registrant other than
itself.





DYNEGY
INC. and DYNEGY HOLDINGS INC.





TABLE
OF CONTENTS





PagePART
      I. FINANCIAL INFORMATIONItem
      1.
                                                            FINANCIAL STATEMENTS—DYNEGY INC. AND DYNEGY HOLDINGS
      INC.:Condensed
      Consolidated Balance Sheets—Dynegy Inc.:March 31, 2009 and December 31, 2008
                                                            4Condensed
      Consolidated Statements of Operations—Dynegy Inc.:For the three months ended March 31, 2009 and
      2008
                                                            5Condensed
      Consolidated Statements of Cash Flows—Dynegy Inc.:For the three months ended March 31, 2009 and
      2008
                                                            6Condensed
      Consolidated Statements of Comprehensive Loss—Dynegy Inc.:For the three months ended March 31, 2009 and
      2008
                                                            7Condensed
      Consolidated Balance Sheets—Dynegy Holdings Inc.:March 31, 2009 and December 31, 2008
                                                            8Condensed
      Consolidated Statements of Operations—Dynegy Holdings
Inc.:For the three months ended March 31, 2009 and
      2008
                                                            9Condensed
      Consolidated Statements of Cash Flows—Dynegy Holdings
Inc.:For the three months ended March 31, 2009 and
      2008
                                                            10Condensed
      Consolidated Statements of Comprehensive Loss—Dynegy Holdings
      Inc.:For the three months ended March 31, 2009 and
      2008
                                                            11Notes to Condensed Consolidated Financial
      Statements
                                                            12





Item
      2.
                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS—DYNEGY INC. AND DYNEGY HOLDINGS
      INC.
                38Item
      3.
                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK—DYNEGY INC. AND DYNEGY HOLDINGS INC.
                59Item
      4.
                CONTROLS AND PROCEDURES—DYNEGY INC. AND DYNEGY HOLDINGS
      INC.
                61





PART
      II. OTHER INFORMATION





Item
      1.
                LEGAL PROCEEDINGS—DYNEGY INC. AND DYNEGY HOLDINGS
      INC.
                62Item
      1A.
                RISK FACTORS—DYNEGY INC. AND DYNEGY HOLDINGS
      INC.
                62Item
      2.
                UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS—DYNEGY
      INC.
                62Item
      6.
                EXHIBITS—DYNEGY INC. AND DYNEGY HOLDINGS
      INC.
                62





EXPLANATORY
NOTE




This
report includes the combined filing of Dynegy Inc. (“Dynegy”) and Dynegy
Holdings Inc. (“DHI”).  DHI is the principal subsidiary of Dynegy,
providing nearly 100 percent of Dynegy’s total consolidated revenue for the
three-month period ended March 31, 2009 and constituting nearly 100 percent of
Dynegy’s total consolidated asset base as of March 31, 2009.  Unless
the context indicates otherwise, throughout this report, the terms “the
Company”, “we”, “us”, “our” and “ours” are used to refer to both Dynegy and DHI
and their direct and indirect subsidiaries.  Discussions or areas of
this report that apply only to Dynegy or DHI are clearly noted in such
section.





2
 Table of Contents





DEFINITIONS




As used
in this Form 10-Q, the abbreviations contained herein have the meanings set
forth below.





APB
                Accounting
      Principles BoardBTA
                Best
      technology availableCal
      ISO
                The
      California Independent System OperatorCARB
                California
      Air Resources BoardCDWR
                California
      Department of Water ResourcesCEC
                California
      Energy CommissionCFTC
                Commodity
      Futures Trading CommissionCO2
                Carbon
      DioxideCRM
                Our
      former customer risk management business segmentCUSA
                Chevron
      U.S.A. Inc., a wholly owned subsidiary of Chevron
    CorporationDHI
                Dynegy
      Holdings Inc., Dynegy’s primary financing subsidiaryDMG
                Dynegy
      Midwest Generation, Inc.DMSLP
                Dynegy
      Midstream Services L.P.EITF
                Emerging
      Issues Task ForceEPA
                Environmental
      Protection AgencyFASB
                Financial
      Accounting Standards BoardFERC
                Federal
      Energy Regulatory CommissionFIN
                FASB
      InterpretationFSP
                FASB
      Staff PositionGAAP
                Generally
      Accepted Accounting Principles of the United States of
    AmericaGEN
                Our
      power generation businessGEN-MW
                Our
      power generation business - Midwest segmentGEN-NE
                Our
      power generation business - Northeast segmentGEN-WE
                Our
      power generation business - West segmentGHG
                Greenhouse
      GasICC
                Illinois
      Commerce CommissionIMA
                In-market
      asset availabilityISO
                Independent
      System OperatorLNG
                Liquefied
      natural gasMISO
                Midwest
      Independent Transmission Operator, Inc.MMBtu
                One
      million British thermal unitsMW
                MegawattsMWh
                Megawatt
      hourNPDES
                National
      Pollutant Discharge Elimination SystemNRG
                NRG
      Energy, Inc.NYSDEC
                New
      York State Department of Environmental ConservationPJM
                PJM
      Interconnection, LLCPPEA
                Plum
      Point Energy Associates, LLCPUHCA
                Public
      Utility Holding Company Act of 1935, as amendedRGGI
                Regional
      Greenhouse Gas InitiativeRSG
                Revenue
      Sufficiency GuaranteeSCEA
                Sandy
      Creek Energy Associates, LPSCH
                Sandy
      Creek Holdings LLCSEC
                U.S.
      Securities and Exchange CommissionSFAS
                Statement
      of Financial Accounting StandardsSPDES
                State
      Pollutant Discharge Elimination SystemVaR
                Value
      at RiskVIE
                Variable
      Interest Entity




3
 Table of Contents





PART
I. FINANCIAL INFORMATION





Item
1—FINANCIAL STATEMENTS—DYNEGY INC. AND DYNEGY HOLDINGS INC.





DYNEGY
INC.




CONDENSED CONSOLIDATED BALANCE SHEETS


(unaudited)
(in millions, except share data)








March
      31,
                        2009
                      
                      
                      December
      31,
                        2008ASSETSCurrent
      AssetsCash
      and cash equivalents
                      
                      $
                      722
                      
                      
                      $
                      693Restricted
      cash and investments
                      
                      
                      118
                      
                      
                      
                      87Short-term
      investments
                      
                      
                      8
                      
                      
                      
                      25Accounts
      receivable, net of allowance for doubtful accounts of $22 and $22,
      respectively
                      
                      
                      232
                      
                      
                      
                      340Accounts
      receivable, affiliates
                      
                      
                      1
                      
                      
                      
                      1Inventory
                      
                      
                      185
                      
                      
                      
                      184Assets
      from risk-management activities
                      
                      
                      1,531
                      
                      
                      
                      1,263Deferred
      income taxes
                      
                      
                      —
                      
                      
                      
                      6Prepayments
      and other current assets
                      
                      
                      243
                      
                      
                      
                      204Assets
      held for sale
                      
                      
                      96
                      
                      
                      
                      —Total
      Current Assets
                      
                      
                      3,136
                      
                      
                      
                      2,803Property,
      Plant and Equipment
                      
                      
                      10,801
                      
                      
                      
                      10,869Accumulated
      depreciation
                      
                      
                      (1,947
                      )
                      
                      
                      (1,935
                      )Property,
      Plant and Equipment, Net
                      
                      
                      8,854
                      
                      
                      
                      8,934Other
      AssetsUnconsolidated
      investments
                      
                      
                      —
                      
                      
                      
                      15Restricted
      cash and investments
                      
                      
                      1,159
                      
                      
                      
                      1,158Assets
      from risk-management activities
                      
                      
                      214
                      
                      
                      
                      114Goodwill
                      
                      
                      —
                      
                      
                      
                      433Intangible
      assets
                      
                      
                      438
                      
                      
                      
                      437Accounts
      receivable, affiliates
                      
                      
                      6
                      
                      
                      
                      4Other
      long-term assets
                      
                      
                      324
                      
                      
                      
                      315Total
      Assets
                      
                      $
                      14,131
                      
                      
                      $
                      14,213LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      payable
                      
                      $
                      158
                      
                      
                      $
                      303Accrued
      interest
                      
                      
                      125
                      
                      
                      
                      56Accrued
      liabilities and other current liabilities
                      
                      
                      199
                      
                      
                      
                      160Liabilities
      from risk-management activities
                      
                      
                      1,250
                      
                      
                      
                      1,119Notes
      payable and current portion of long-term debt
                      
                      
                      64
                      
                      
                      
                      64Deferred
      income taxes
                      
                      
                      8
                      
                      
                      
                      —Liabilities
      held for sale
                      
                      
                      11
                      
                      
                      
                      —Total
      Current Liabilities
                      
                      
                      1,815
                      
                      
                      
                      1,702Long-term
      debt
                      
                      
                      5,898
                      
                      
                      
                      5,872Long-term
      debt, affiliates
                      
                      
                      200
                      
                      
                      
                      200Long-Term
      Debt
                      
                      
                      6,098
                      
                      
                      
                      6,072Other
      LiabilitiesLiabilities
      from risk-management activities
                      
                      
                      314
                      
                      
                      
                      288Deferred
      income taxes
                      
                      
                      1,236
                      
                      
                      
                      1,166Other
      long-term liabilities
                      
                      
                      488
                      
                      
                      
                      500Total
      Liabilities
                      
                      
                      9,951
                      
                      
                      
                      9,728Commitments
      and Contingencies (Note 12)Stockholders’
      EquityClass
      A Common Stock, $0.01 par value, 2,100,000,000 shares authorized at March
      31, 2009 and December 31, 2008; 506,745,083 and 505,821,277 shares issued
      and outstanding at March 31, 2009 and December 31, 2008,
      respectively
                      
                      
                      5
                      
                      
                      
                      5Class
      B Common Stock, $0.01 par value, 850,000,000 shares authorized at March
      31, 2009 and December 31, 2008; 340,000,000 shares issued and outstanding
      at March 31, 2009 and December 31, 2008
                      
                      
                      3
                      
                      
                      
                      3Additional
      paid-in capital
                      
                      
                      6,486
                      
                      
                      
                      6,485Subscriptions
      receivable
                      
                      
                      (2
                      )
                      
                      
                      (2
                      )Accumulated
      other comprehensive loss, net of tax
                      
                      
                      (212
                      )
                      
                      
                      (215
                      )Accumulated
      deficit
                      
                      
                      (2,025
                      )
                      
                      
                      (1,690
                      )Treasury
      stock, at cost, 2,679,210 and 2,568,286 shares at March 31, 2009 and
      December 31, 2008, respectively
                      
                      
                      (71
                      )
                      
                      
                      (71
                      )Total
      Dynegy Inc. Stockholders’ Equity
                      
                      
                      4,184
                      
                      
                      
                      4,515Noncontrolling
      interest
                      
                      
                      (4
                      )
                      
                      
                      (30
                      )Total
      Stockholders’ Equity
                      
                      
                      4,180
                      
                      
                      
                      4,485Total
      Liabilities and Stockholders’ Equity
                      
                      $
                      14,131
                      
                      
                      $
                      14,213







See the
notes to condensed consolidated financial statements.





4
 Table of Contents





DYNEGY INC.





CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(unaudited)
(in millions, except per share data)








Three
      Months Ended
                          March
      31,2009
                        
                        
                        2008Revenues
                        
                        $
                        904
                        
                        
                        $
                        543Cost
      of sales
                        
                        
                        (381
                        )
                        
                        
                        (451
                        )Operating
      and maintenance expense, exclusive of depreciation and amortization shown
      separately below
                        
                        
                        (122
                        )
                        
                        
                        (111
                        )Depreciation
      and amortization expense
                        
                        
                        (92
                        )
                        
                        
                        (92
                        )Goodwill
      impairments
                        
                        
                        (433
                        )
                        
                        
                        —Impairment
      and other charges, exclusive of goodwill impairments shown separately
      above
                        
                        
                        (5
                        )
                        
                        
                        —General
      and administrative expenses
                        
                        
                        (38
                        )
                        
                        
                        (39
                        )Operating
      loss
                        
                        
                        (167
                        )
                        
                        
                        (150
                        )Earnings
      (losses) from unconsolidated investments
                        
                        
                        8
                        
                        
                        
                        (9
                        )Interest
      expense
                        
                        
                        (98
                        )
                        
                        
                        (109
                        )Other
      income and expense, net
                        
                        
                        4
                        
                        
                        
                        20Loss
      from continuing operations before income taxes
                        
                        
                        (253
                        )
                        
                        
                        (248
                        )Income
      tax (expense) benefit (Note 14)
                        
                        
                        (85
                        )
                        
                        
                        96Loss
      from continuing operations
                        
                        
                        (338
                        )
                        
                        
                        (152
                        )Income
      from discontinued operations, net of tax benefit of zero and $1,
      respectively (Notes 2 and 14)
                        
                        
                        1
                        
                        
                        
                        —Net
      loss
                        
                        
                        (337
                        )
                        
                        
                        (152
                        )Less:
      Net loss attributable to the noncontrolling interest
                        
                        
                        (2
                        )
                        
                        
                        —Net
      loss attributable to Dynegy Inc.
                        
                        $
                        (335
                        )
                        
                        $
                        (152
                        )Loss
      Per Share (Note 11):Basic
      loss per share:Loss
      from continuing operations attributable to Dynegy Inc.
                        
                        $
                        (0.40
                        )
                        
                        $
                        (0.18
                        )Income
      from discontinued operations attributable to Dynegy Inc.
                        
                        
                        —
                        
                        
                        
                        —Basic
      loss per share attributable to Dynegy Inc.
                        
                        $
                        (0.40
                        )
                        
                        $
                        (0.18
                        )Diluted
      loss per share:Loss
      from continuing operations attributable to Dynegy Inc.
                        
                        $
                        (0.40
                        )
                        
                        $
                        (0.18
                        )Income
      from discontinued operations attributable to Dynegy Inc.
                        
                        
                        —
                        
                        
                        
                        —Diluted
      loss per share attributable to Dynegy Inc.
                        
                        $
                        (0.40
                        )
                        
                        $
                        (0.18
                        )Basic
      shares outstanding
                        
                        
                        841
                        
                        
                        
                        839Diluted
      shares outstanding
                        
                        
                        843
                        
                        
                        
                        841







See the
notes to condensed consolidated financial statements.





5
 Table of Contents





DYNEGY INC.





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(unaudited)
(in millions)







Three
      Months Ended
                      March
      31,2009
                    
                    
                    2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                    
                    $
                    (337
                    )
                    
                    $
                    (152
                    )Adjustments
      to reconcile net loss to net cash flows from operating
      activities:Depreciation
      and amortization
                    
                    
                    94
                    
                    
                    
                    94Goodwill
      impairments
                    
                    
                    433
                    
                    
                    
                    —Impairment
      and other charges
                    
                    
                    5
                    
                    
                    
                    —(Earnings)
      losses from unconsolidated investments, net of cash
      distributions
                    
                    
                    (8
                    )
                    
                    
                    9Risk-management
      activities
                    
                    
                    (168
                    )
                    
                    
                    280Deferred
      income taxes
                    
                    
                    79
                    
                    
                    
                    (95
                    )Other
                    
                    
                    16
                    
                    
                    
                    —Changes
      in working capital:Accounts
      receivable
                    
                    
                    56
                    
                    
                    
                    36Inventory
                    
                    
                    (6
                    )
                    
                    
                    14Prepayments
      and other assets
                    
                    
                    (38
                    )
                    
                    
                    (55
                    )Accounts
      payable and accrued liabilities
                    
                    
                    42
                    
                    
                    
                    18Changes
      in non-current assets
                    
                    
                    (7
                    )
                    
                    
                    (7
                    )Changes
      in non-current liabilities
                    
                    
                    4
                    
                    
                    
                    4Net
      cash provided by operating activities
                    
                    
                    165
                    
                    
                    
                    146CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
                    
                    
                    (138
                    )
                    
                    
                    (131
                    )Unconsolidated
      investments
                    
                    
                    1
                    
                    
                    
                    (6
                    )Proceeds
      from asset sales, net
                    
                    
                    —
                    
                    
                    
                    57Decrease
      in short-term investments
                    
                    
                    8
                    
                    
                    
                    —Increase
      in restricted cash
                    
                    
                    (32
                    )
                    
                    
                    (25
                    )Other
      investing
                    
                    
                    —
                    
                    
                    
                    10Net
      cash used in investing activities
                    
                    
                    (161
                    )
                    
                    
                    (95
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from long-term borrowings, net
                    
                    
                    25
                    
                    
                    
                    51Other
      financing, net
                    
                    
                    —
                    
                    
                    
                    (1
                    )Net
      cash provided by financing activities
                    
                    
                    25
                    
                    
                    
                    50Net
      increase in cash and cash equivalents
                    
                    
                    29
                    
                    
                    
                    101Cash
      and cash equivalents, beginning of period
                    
                    
                    693
                    
                    
                    
                    328Cash
      and cash equivalents, end of period
                    
                    $
                    722
                    
                    
                    $
                    429Other
      non-cash investing activity:Non-cash
      capital expenditures
                    
                    $
                    23
                    
                    
                    $
                    9







See the
notes to condensed consolidated financial statements.





6
 Table of Contents




DYNEGY INC.





CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS


(unaudited)
(in millions)





Three
      Months Ended
                    March
      31,2009
                  
                  
                  2008Net
      loss
                  
                  $
                  (337
                  )
                  
                  $
                  (152
                  )Cash
      flow hedging activities, net:Unrealized
      mark-to-market gains (losses) arising during period, net
                  
                  
                  34
                  
                  
                  
                  (26
                  )Reclassification
      of mark-to-market losses to earnings, net
                  
                  
                  —
                  
                  
                  
                  8Deferred
      losses on cash flow hedges, net
                  
                  
                  (3
                  )
                  
                  
                  —Changes
      in cash flow hedging activities, net (net of tax (expense) benefit of $(9)
      and $5, respectively)
                  
                  
                  31
                  
                  
                  
                  (18
                  )Amortization
      of unrecognized prior service cost and actuarial loss (net of tax expense
      of $2 and zero)
                  
                  
                  (1
                  )
                  
                  
                  —Net
      unrealized loss on securities, net (net of tax benefit of zero and $3,
      respectively)
                  
                  
                  —
                  
                  
                  
                  (4
                  )Unconsolidated
      investments other comprehensive loss, net (net of tax expense of $1 and
      zero)
                  
                  
                  1
                  
                  
                  
                  —Other
      comprehensive income (loss), net of tax
                  
                  
                  31
                  
                  
                  
                  (22
                  )Comprehensive
      loss
                  
                  
                  (306
                  )
                  
                  
                  (174
                  )Less:
      Comprehensive income (loss) attributable to the noncontrolling
      interest
                  
                  
                  26
                  
                  
                  
                  (11
                  )Comprehensive
      loss attributable to Dynegy Inc.
                  
                  $
                  (332
                  )
                  
                  $
                  (163
                  )






See the
notes to condensed consolidated financial statements.





7
 Table of Contents





DYNEGY
HOLDINGS INC.




CONDENSED
CONSOLIDATED BALANCE SHEETS


(unaudited)
(in millions)








March
      31,
                            2009
                          
                          
                          December
      31,
                            2008ASSETSCurrent
      AssetsCash
      and cash equivalents
                          
                          $
                          539
                          
                          
                          $
                          670Restricted
      cash and investments
                          
                          
                          118
                          
                          
                          
                          87Short-term
      investments
                          
                          
                          8
                          
                          
                          
                          24Accounts
      receivable, net of allowance for doubtful accounts of $20 and $20,
      respectively
                          
                          
                          234
                          
                          
                          
                          343Accounts
      receivable, affiliates
                          
                          
                          1
                          
                          
                          
                          1Inventory
                          
                          
                          185
                          
                          
                          
                          184Assets
      from risk-management activities
                          
                          
                          1,531
                          
                          
                          
                          1,263Deferred
      income taxes
                          
                          
                          —
                          
                          
                          
                          4Prepayments
      and other current assets
                          
                          
                          243
                          
                          
                          
                          204Assets
      held for sale
                          
                          
                          96
                          
                          
                          
                          —Total
      Current Assets
                          
                          
                          2,955
                          
                          
                          
                          2,780Property,
      Plant and Equipment
                          
                          
                          10,801
                          
                          
                          
                          10,869Accumulated
      depreciation
                          
                          
                          (1,947
                          )
                          
                          
                          (1,935
                          )Property,
      Plant and Equipment, Net
                          
                          
                          8,854
                          
                          
                          
                          8,934Other
      AssetsRestricted
      cash and investments
                          
                          
                          1,159
                          
                          
                          
                          1,158Assets
      from risk-management activities
                          
                          
                          214
                          
                          
                          
                          114Goodwill
                          
                          
                          —
                          
                          
                          
                          433Intangible
      assets
                          
                          
                          438
                          
                          
                          
                          437Accounts
      receivable, affiliates
                          
                          
                          6
                          
                          
                          
                          4Other
      long-term assets
                          
                          
                          323
                          
                          
                          
                          314Total
      Assets
                          
                          $
                          13,949
                          
                          
                          $
                          14,174LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      payable
                          
                          $
                          158
                          
                          
                          $
                          284Accrued
      interest
                          
                          
                          125
                          
                          
                          
                          56Accrued
      liabilities and other current liabilities
                          
                          
                          193
                          
                          
                          
                          157Liabilities
      from risk-management activities
                          
                          
                          1,250
                          
                          
                          
                          1,119Notes
      payable and current portion of long-term debt
                          
                          
                          64
                          
                          
                          
                          64Deferred
      income taxes
                          
                          
                          10
                          
                          
                          
                          1Liabilities
      held for sale
                          
                          
                          11
                          
                          
                          
                          —Total
      Current Liabilities
                          
                          
                          1,811
                          
                          
                          
                          1,681Long-term
      debt
                          
                          
                          5,898
                          
                          
                          
                          5,872Long-term
      debt, affiliates
                          
                          
                          200
                          
                          
                          
                          200Long-Term
      Debt
                          
                          
                          6,098
                          
                          
                          
                          6,072Other
      LiabilitiesLiabilities
      from risk-management activities
                          
                          
                          314
                          
                          
                          
                          288Deferred
      income taxes
                          
                          
                          1,103
                          
                          
                          
                          1,052Other
      long-term liabilities
                          
                          
                          487
                          
                          
                          
                          498Total
      Liabilities
                          
                          
                          9,813
                          
                          
                          
                          9,591Commitments
      and Contingencies (Note 12)Stockholders'
      EquityCapital
      Stock, $1 par value, 1,000 shares authorized at March 31, 2009 and
      December 31, 2008
                          
                          
                          —
                          
                          
                          
                          —Additional
      paid-in capital
                          
                          
                          5,545
                          
                          
                          
                          5,684Affiliate
      receivable
                          
                          
                          (829
                          )
                          
                          
                          (827
                          )Accumulated
      other comprehensive loss, net of tax
                          
                          
                          (212
                          )
                          
                          
                          (215
                          )Accumulated
      deficit
                          
                          
                          (364
                          )
                          
                          
                          (29
                          )Total
      Dynegy Holdings Inc. Stockholder’s Equity
                          
                          
                          4,140
                          
                          
                          
                          4,613Noncontrolling
      interest
                          
                          
                          (4
                          )
                          
                          
                          (30
                          )Total
      Stockholders’ Equity
                          
                          
                          4,136
                          
                          
                          
                          4,583Total
      Liabilities and Stockholders’ Equity
                          
                          $
                          13,949
                          
                          
                          $
                          14,174






See the
notes to condensed consolidated financial statements.





8
 Table of Contents





DYNEGY
HOLDINGS INC.





CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(unaudited)
(in millions)








Three
      Months Ended
                    March
      31,2009
                  
                  
                  2008Revenues
                  
                  $
                  904
                  
                  
                  $
                  543Cost
      of sales
                  
                  
                  (381
                  )
                  
                  
                  (451
                  )Operating
      and maintenance expense, exclusive of depreciation and amortization shown
      separately below
                  
                  
                  (124
                  )
                  
                  
                  (111
                  )Depreciation
      and amortization expense
                  
                  
                  (92
                  )
                  
                  
                  (92
                  )Goodwill
      impairments
                  
                  
                  (433
                  )
                  
                  
                  —Impairment
      and other charges, exclusive of goodwill impairments shown separately
      above
                  
                  
                  (5
                  )
                  
                  
                  —General
      and administrative expenses
                  
                  
                  (38
                  )
                  
                  
                  (39
                  )Operating
      loss
                  
                  
                  (169
                  )
                  
                  
                  (150
                  )Earnings
      (losses) from unconsolidated investments
                  
                  
                  7
                  
                  
                  
                  (5
                  )Interest
      expense
                  
                  
                  (98
                  )
                  
                  
                  (109
                  )Other
      income and expense, net
                  
                  
                  4
                  
                  
                  
                  20Loss
      from continuing operations before income taxes
                  
                  
                  (256
                  )
                  
                  
                  (244
                  )Income
      tax (expense) benefit (Note 14)
                  
                  
                  (82
                  )
                  
                  
                  91Loss
      from continuing operations
                  
                  
                  (338
                  )
                  
                  
                  (153
                  )Income
      from discontinued operations, net of tax benefit of zero and $1,
      respectively (Notes 2 and 14)
                  
                  
                  1
                  
                  
                  
                  —Net
      loss
                  
                  
                  (337
                  )
                  
                  
                  (153
                  )Less:
      Net loss attributable to the noncontrolling interest
                  
                  
                  (2
                  )
                  
                  
                  —Net
      loss attributable to Dynegy Holdings Inc.
                  
                  $
                  (335
                  )
                  
                  $
                  (153
                  )







See the
notes to condensed consolidated financial statements.





9
 Table of Contents





DYNEGY
HOLDINGS INC.




CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(unaudited)
(in millions)








Three
      Months Ended
                      March
      31,2009
                    
                    
                    2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                    
                    $
                    (337
                    )
                    
                    $
                    (153
                    )Adjustments
      to reconcile net loss to net cash flows from operating
      activities:Depreciation
      and amortization
                    
                    
                    94
                    
                    
                    
                    94Goodwill
      impairments
                    
                    
                    433
                    
                    
                    
                    —Impairment
      and other charges
                    
                    
                    5
                    
                    
                    
                    —(Earnings)
      losses from unconsolidated investments, net of cash
      distributions
                    
                    
                    (7
                    )
                    
                    
                    5Risk-management
      activities
                    
                    
                    (168
                    )
                    
                    
                    280Deferred
      income taxes
                    
                    
                    80
                    
                    
                    
                    (90
                    )Other
                    
                    
                    16
                    
                    
                    
                    (1
                    )Changes
      in working capital:Accounts
      receivable
                    
                    
                    56
                    
                    
                    
                    36Inventory
                    
                    
                    (6
                    )
                    
                    
                    14Prepayments
      and other assets
                    
                    
                    (38
                    )
                    
                    
                    (55
                    )Accounts
      payable and accrued liabilities
                    
                    
                    58
                    
                    
                    
                    19Changes
      in non-current assets
                    
                    
                    (7
                    )
                    
                    
                    (6
                    )Changes
      in non-current liabilities
                    
                    
                    4
                    
                    
                    
                    3Net
      cash provided by operating activities
                    
                    
                    183
                    
                    
                    
                    146CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
                    
                    
                    (138
                    )
                    
                    
                    (131
                    )Proceeds
      from asset sales, net
                    
                    
                    —
                    
                    
                    
                    57Decrease
      in short-term investments
                    
                    
                    8
                    
                    
                    
                    —Increase in
      restricted cash
                    
                    
                    (32
                    )
                    
                    
                    (25
                    )Affiliate
      transactions
                    
                    
                    (2
                    )
                    
                    
                    1Other
      investing
                    
                    
                    —
                    
                    
                    
                    6Net
      cash used in investing activities
                    
                    
                    (164
                    )
                    
                    
                    (92
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from long-term borrowings, net
                    
                    
                    25
                    
                    
                    
                    51Dividend
      to affiliate
                    
                    
                    (175
                    )
                    
                    
                    —Other
      financing, net
                    
                    
                    —
                    
                    
                    
                    (1
                    )Net
      cash provided by (used in) financing activities
                    
                    
                    (150
                    )
                    
                    
                    50Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    (131
                    )
                    
                    
                    104Cash
      and cash equivalents, beginning of period
                    
                    
                    670
                    
                    
                    
                    292Cash
      and cash equivalents, end of period
                    
                    $
                    539
                    
                    
                    $
                    396Other
      non-cash investing activity:Non-cash
      capital expenditures
                    
                    $
                    23
                    
                    
                    $
                    9






See the
notes to condensed consolidated financial statements.





10
 Table of Contents





DYNEGY
HOLDINGS INC.





CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS


(unaudited)
(in millions)








Three
      Months Ended
                    March
      31,2009
                  
                  
                  2008Net
      loss
                  
                  $
                  (337
                  )
                  
                  $
                  (153
                  )Cash
      flow hedging activities, net:Unrealized
      mark-to-market gains (losses) arising during period, net
                  
                  
                  34
                  
                  
                  
                  (26
                  )Reclassification
      of mark-to-market losses to earnings, net
                  
                  
                  —
                  
                  
                  
                  8Deferred
      losses on cash flow hedges, net
                  
                  
                  (3
                  )
                  
                  
                  —Changes
      in cash flow hedging activities, net (net of tax (expense) benefit of $(9)
      and $5, respectively)
                  
                  
                  31
                  
                  
                  
                  (18
                  )Amortization
      of unrecognized prior service cost and actuarial loss (net of tax expense
      of $2 and zero)
                  
                  
                  (1
                  )
                  
                  
                  —Net
      unrealized loss on securities, net (net of tax benefit of zero and $3,
      respectively)
                  
                  
                  —
                  
                  
                  
                  (4
                  )Unconsolidated
      investments other comprehensive loss, net (net of tax expense of $1 and
      zero)
                  
                  
                  1
                  
                  
                  
                  —Other
      comprehensive income (loss), net of tax
                  
                  
                  31
                  
                  
                  
                  (22
                  )Comprehensive
      loss
                  
                  
                  (306
                  )
                  
                  
                  (175
                  )Less:
      Comprehensive income (loss) attributable to the noncontrolling
      interest
                  
                  
                  26
                  
                  
                  
                  (11
                  )Comprehensive
      loss attributable to Dynegy Holdings Inc.
                  
                  $
                  (332
                  )
                  
                  $
                  (164
                  )






See the
notes to condensed consolidated financial statements.





11
 Table of Contents





DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008






Note
1—Accounting Policies





Basis
of Presentation





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to interim financial reporting as
prescribed by the SEC.  The year-end condensed consolidated balance
sheet data was derived from audited financial statements, as adjusted for SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an
amendment of ARB No. 51” (“SFAS No. 160”), as discussed below, but does not
include all disclosures required by accounting principles generally accepted in
the United States of America.  These interim financial statements
should be read together with the consolidated financial statements and notes
thereto included in Dynegy’s and DHI’s Form 10-K for the year ended December 31,
2008 filed on February 26, 2009, which we refer to as each registrant’s “Form
10-K”.





The
unaudited condensed consolidated financial statements contained in this report
include all material adjustments of a normal and recurring nature that, in the
opinion of management, are necessary for a fair statement of the results for the
interim periods.  The results of operations for the interim periods
presented in this Form 10-Q are not necessarily indicative of the results to be
expected for the full year or any other interim period due to seasonal
fluctuations in demand for our energy products and services, changes in
commodity prices, timing of maintenance and other expenditures and other
factors.  The preparation of the unaudited condensed consolidated
financial statements in conformity with GAAP requires management to make
informed estimates and judgments that affect our reported financial position and
results of operations.  These estimates and judgments also impact the
nature and extent of disclosure, if any, of our contingent liabilities based on
currently available information.  We review significant estimates and
judgments affecting our consolidated financial statements on a recurring basis
and record the effect of any necessary adjustments.  Uncertainties
with respect to such estimates and judgments are inherent in the preparation of
financial statements.  Estimates and judgments are used in, among
other things, (i) developing fair value assumptions, including estimates of
future cash flows and discount rates, (ii) analyzing tangible and intangible
assets for possible impairment, (iii) estimating the useful lives of our assets,
(iv) assessing future tax exposure and the realization of tax assets, (v)
determining amounts to accrue for contingencies, guarantees and
indemnifications, (vi) estimating various factors used to value our pension
assets and liabilities and (vii) determining the primary beneficiary of certain
VIEs from a set of related parties.  Actual results could differ
materially from any such estimates.  Certain reclassifications have
been made to prior period amounts in order to conform to current year
presentation.





Accounting
Principles Adopted




SFAS No.
141(R).  On January 1, 2009, we adopted SFAS No. 141(R),
“Business Combinations” (“SFAS No. 141(R)”).  SFAS No. 141(R) requires
the acquiring entity in a business combination to recognize the assets acquired
and liabilities assumed in the transaction; establishes the acquisition-date
fair value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination.  The adoption of this statement
had no impact on our financial statements.




SFAS No.
157.  On January 1, 2009, we adopted SFAS No. 157, “Fair Value
Measurements” (“SFAS No. 157”) for nonfinancial assets and liabilities measured
at fair value on a nonrecurring basis, which had been deferred under FSP SFAS
No. 157-2.  Please read Note 5—Fair Value Measurements for further
discussion.





SFAS No.
160.  On January 1, 2009, we adopted SFAS No.
160.  Please read Note 3—Noncontrolling Interests for further
discussion.





12
 Table of Contents





DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008







SFAS No.
161.  On January 1, 2009, we adopted SFAS No. 161, “Disclosures
about Derivative Instruments and Hedging Activities” (“SFAS No.
161”).  Please read Note 4—Risk Management Activities, Derivatives and
Financial Instruments for further discussion.




EITF Issue
08-5.  On January 1, 2009, we adopted EITF Issue 08-5,
“Issuer’s Accounting for Liabilities Measured at Fair Value with a Third Party
Credit Enhancement” (“EITF Issue No. 08-5”).  Please read Note 5—Fair
Value Measurements for further discussion.




Accounting
Principle Not Yet Adopted





FSP SFAS
132(R)-1.  FSP SFAS 132(R)-1 amends SFAS No. 132(R),
“Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to
provide guidance on an employer’s disclosures about plan assets of a defined
benefit pension or other postretirement plan.  The objectives of the
disclosures about plan assets in an employer’s defined benefit pension or other
postretirement plan are to provide users of financial statements with an
understanding of: (i) how investment allocation decisions are made, including
the factors that are pertinent to an understanding of investment policies and
strategies; (ii) the major categories of plan assets; (iii) the inputs and
valuation techniques used to measure the fair value of plan assets; (iv) the
effect of fair value measurements using significant unobservable inputs (Level
3) on changes in plan assets for the period and (v) significant concentrations
of risk within plan assets.  The disclosures about plan assets
required by this FSP are to be provided for fiscal years ending after December
15, 2009.  We are currently evaluating the disclosure implications of
this standard; however, this statement will have no impact on our financial
condition, results of operations or cash flows.





Note
2—Discontinued Operations





Heard
County.  On April 30, 2009, we completed our sale of our
interest in the Heard County power generation facility to Oglethorpe Power
Corporation (“Oglethorpe”) for approximately $105 million and will record a gain
of approximately $10 million in the second quarter 2009.





Beginning
in the first quarter 2009, Heard County met the held for sale classification
requirements of SFAS No. 144, "Accounting for the impairment or Disposal of
Long-Lived Assets", and is classified as such on our unaudited condensed
consolidated balance sheet.  The major classes of current and
long-term assets classified as assets held for sale at March 31, 2009 are
approximately $95 million of property, plant and equipment, net, less than $1
million of inventory, $11 million of deferred tax liabilities and less than $1
million of accrued liabilities and other current liabilities.





In
accordance with SFAS No. 144, we discontinued depreciation and amortization of
Heard County’s property, plant and equipment during the first quarter
2009.  Depreciation and amortization expense related to Heard County
totaled approximately $1 million in the three-month periods ended March 31, 2009
and 2008.  Also pursuant to SFAS No. 144, we are reporting the results
of Heard County’s operations in discontinued operations for all periods
presented.





Calcasieu.  On
March 31, 2008, we completed the sale of the Calcasieu power generation facility
to Entergy Gulf States, Inc. for approximately $56 million, net of transaction
costs.





In
accordance with SFAS No. 144, we discontinued depreciation and amortization of
Calcasieu’s property, plant and equipment during the first quarter
2007.  Depreciation and amortization expense related to Calcasieu
totaled zero in the three-month period ended March 31, 2008.  Also
pursuant to SFAS No. 144, we are reporting the results of Calcasieu’s operations
in discontinued operations for the three-month period ended March 31,
2008.





13
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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008










Summary.  The
following table summarizes information related to both Dynegy’s and DHI’s
discontinued operations (all of which are included in our GEN-WE
segment):





Heard
      County
                  
                  
                  Calcasieu
                  
                  
                  Total(in
      millions)Three
      Months Ended March 31, 2009Revenues
                  
                  $
                  2
                  
                  
                  $
                  —
                  
                  
                  $
                  2Income
      from operations before taxes
                  
                  
                  1
                  
                  
                  
                  —
                  
                  
                  
                  1Income
      from operations after taxes
                  
                  
                  1
                  
                  
                  
                  —
                  
                  
                  
                  1Three
      Months Ended March 31, 2008Revenues
                  
                  $
                  2
                  
                  
                  $
                  —
                  
                  
                  $
                  2Loss
      on sale before taxes
                  
                  
                  —
                  
                  
                  
                  (1
                  )
                  
                  
                  (1
                  )Loss
      on sale after taxes
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —





Note
3—Noncontrolling Interests




On
January 1, 2009, we adopted SFAS No. 160, which requires: (i) ownership
interests in subsidiaries held by parties other than the parent to be clearly
identified, labeled, and presented in the consolidated statement of financial
position within equity, but separate from the parent’s equity; (ii) the amount
of consolidated net income (loss) attributable to the parent and to the
noncontrolling interest to be clearly identified and presented on the face of
the consolidated statements of operations; (iii) changes in a parent’s ownership
interests that do not result in deconsolidation to be accounted for as equity
transactions; and (iv) that a parent recognize a gain or loss in net income upon
deconsolidation of a subsidiary, with any retained noncontrolling equity
investment in the former subsidiary initially measured at fair
value.  The following table presents the net loss attributable to
Dynegy’s and DHI’s stockholders:





Dynegy
      Inc.
                    
                    
                    Dynegy
      Holdings Inc.Three
      Months Ended
                      March
      31,
                    
                    
                    Three
      Months Ended
                      March
      31,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(in
      millions)Loss
      from continuing operations
                    
                    $
                    (336
                    )
                    
                    $
                    (152
                    )
                    
                    $
                    (336
                    )
                    
                    $
                    (153
                    )Income
      from discontinued operations, net of tax benefit of zero, $1, zero and $1,
      respectively
                    
                    
                    1
                    
                    
                    
                    —
                    
                    
                    
                    1
                    
                    
                    
                    —Net
      loss
                    
                    $
                    (335
                    )
                    
                    $
                    (152
                    )
                    
                    $
                    (335
                    )
                    
                    $
                    (153
                    )




14
 Table of Contents





DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008







The
following table presents a reconciliation of the carrying amount of total
equity, equity attributable to Dynegy and the equity attributable to the
noncontrolling interest at the beginning and the end of the three months ended
March 31, 2009:





Controlling
                      Interest
                    
                    
                    Noncontrolling
                      Interest
                    
                    
                    Total(in
      millions)December
      31, 2008
                    
                    $
                    4,515
                    
                    
                    $
                    (30
                    )
                    
                    $
                    4,485Net
      loss
                    
                    
                    (335
                    )
                    
                    
                    (2
                    )
                    
                    
                    (337
                    )Other
      comprehensive loss, net of tax:Unrealized
      mark-to-market gains arising during period
                    
                    
                    4
                    
                    
                    
                    30
                    
                    
                    
                    34Reclassification
      of mark-to-market gains (losses) to earnings
                    
                    
                    (1
                    )
                    
                    
                    1
                    
                    
                    
                    —Deferred
      losses on cash flow hedges
                    
                    
                    —
                    
                    
                    
                    (3
                    )
                    
                    
                    (3
                    )Amortization
      of unrecognized prior service cost and actuarial loss
                    
                    
                    (1
                    )
                    
                    
                    —
                    
                    
                    
                    (1
                    )Unconsolidated
      investments other comprehensive loss
                    
                    
                    1
                    
                    
                    
                    —
                    
                    
                    
                    1Total
      other comprehensive income, net of tax
                    
                    
                    3
                    
                    
                    
                    28
                    
                    
                    
                    31Other
      equity activity:Options
      and restricted stock granted
                    
                    
                    2
                    
                    
                    
                    —
                    
                    
                    
                    2401(k)
      plan and profit sharing stock
                    
                    
                    1
                    
                    
                    
                    —
                    
                    
                    
                    1Board
      of directors stock compensation
                    
                    
                    (2
                    )
                    
                    
                    —
                    
                    
                    
                    (2
                    )March
      31, 2009
                    
                    $
                    4,184
                    
                    
                    $
                    (4
                    )
                    
                    $
                    4,180





The
following table presents a reconciliation of the carrying amount of total
equity, equity attributable to Dynegy and the equity attributable to the
noncontrolling interest at the beginning and the end of the three months ended
March 31, 2008:





Controlling
                      Interest
                    
                    
                    Noncontrolling
                      Interest
                    
                    
                    Total(in
      millions)December
      31, 2007
                    
                    $
                    4,506
                    
                    
                    $
                    23
                    
                    
                    $
                    4,529Net
      loss
                    
                    
                    (152
                    )
                    
                    
                    —
                    
                    
                    
                    (152
                    )Other
      comprehensive loss, net of tax:Unrealized
      mark-to-market losses arising during period
                    
                    
                    (15
                    )
                    
                    
                    (11
                    )
                    
                    
                    (26
                    )Reclassification
      of mark-to-market gains to earnings
                    
                    
                    8
                    
                    
                    
                    —
                    
                    
                    
                    8Net
      unrealized loss on securities
                    
                    
                    (4
                    )
                    
                    
                    —
                    
                    
                    
                    (4
                    )Total
      other comprehensive loss, net of tax
                    
                    
                    (11
                    )
                    
                    
                    (11
                    )
                    
                    
                    (22
                    )Other
      equity activity:Subscriptions
      receivable
                    
                    
                    2
                    
                    
                    
                    —
                    
                    
                    
                    2401(k)
      plan and profit sharing stock
                    
                    
                    1
                    
                    
                    
                    —
                    
                    
                    
                    1Options
      and restricted stock granted
                    
                    
                    4
                    
                    
                    
                    —
                    
                    
                    
                    4March
      31, 2008
                    
                    $
                    4,350
                    
                    
                    $
                    12
                    
                    
                    $
                    4,362




15
 Table of Contents





DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008







The
following table presents a reconciliation of the carrying amount of total
equity, equity attributable to DHI and the equity attributable to the
noncontrolling interest at the beginning and the end of the of the three months
ended March 31, 2009.





Controlling
                      Interest
                    
                    
                    Noncontrolling
                      Interest
                    
                    
                    Total(in
      millions)December
      31, 2008
                    
                    $
                    4,613
                    
                    
                    $
                    (30
                    )
                    
                    $
                    4,583Net
      loss
                    
                    
                    (335
                    )
                    
                    
                    (2
                    )
                    
                    
                    (337
                    )Other
      comprehensive loss, net of tax:Unrealized
      mark-to-market gains arising during period
                    
                    
                    4
                    
                    
                    
                    30
                    
                    
                    
                    34Reclassification
      of mark-to-market gains (losses) to earnings
                    
                    
                    (1
                    )
                    
                    
                    1
                    
                    
                    
                    —Deferred
      losses on cash flow hedges
                    
                    
                    —
                    
                    
                    
                    (3
                    )
                    
                    
                    (3
                    )Amortization
      of unrecognized prior service cost and actuarial loss
                    
                    
                    (1
                    )
                    
                    
                    —
                    
                    
                    
                    (1
                    )Unconsolidated
      investments other comprehensive loss
                    
                    
                    1
                    
                    
                    
                    —
                    
                    
                    
                    1Total
      other comprehensive income, net of tax
                    
                    
                    3
                    
                    
                    
                    28
                    
                    
                    
                    31Other
      equity activity:Dividend
      to Dynegy
                    
                    
                    (175
                    )
                    
                    
                    —
                    
                    
                    
                    (175
                    )Contribution
      from Dynegy
                    
                    
                    36
                    
                    
                    
                    —
                    
                    
                    
                    36Affiliate
      activity
                    
                    
                    (2
                    )
                    
                    
                    —
                    
                    
                    
                    (2
                    )March
      31, 2009
                    
                    $
                    4,140
                    
                    
                    $
                    (4
                    )
                    
                    $
                    4,136





The
following table presents a reconciliation of the carrying amount of total
equity, equity attributable to DHI and the equity attributable to the
noncontrolling interest at the beginning and the end of the of the three months
ended March 31, 2008.





Controlling
                      Interest
                    
                    
                    Noncontrolling
                      Interest
                    
                    
                    Total(in
      millions)December
      31, 2007
                    
                    $
                    4,597
                    
                    
                    $
                    23
                    
                    
                    $
                    4,620Net
      loss
                    
                    
                    (153
                    )
                    
                    
                    —
                    
                    
                    
                    (153
                    )Other
      comprehensive loss, net of tax:Unrealized
      mark-to-market losses arising during period
                    
                    
                    (15
                    )
                    
                    
                    (11
                    )
                    
                    
                    (26
                    )Reclassification
      of mark-to-market gains to earnings
                    
                    
                    8
                    
                    
                    
                    —
                    
                    
                    
                    8Net
      unrealized loss on securities
                    
                    
                    (4
                    )
                    
                    
                    —
                    
                    
                    
                    (4
                    )Total
      other comprehensive loss, net of tax
                    
                    
                    (11
                    )
                    
                    
                    (11
                    )
                    
                    
                    (22
                    )Other
      equity activity:Affiliate
      activity
                    
                    
                    5
                    
                    
                    
                    —
                    
                    
                    
                    5March
      31, 2008
                    
                    $
                    4,438
                    
                    
                    $
                    12
                    
                    
                    $
                    4,450





Note
4—Risk Management Activities, Derivatives and Financial Instruments




The
nature of our business necessarily involves market and financial
risks.  Specifically, we are exposed to commodity price variability
related to our power generation business.  Our commercial team seeks
to manage these commodity price risks with financially settled and other types
of contracts consistent with our commodity risk management
policy.  Our commercial team also uses financial instruments in an
attempt to capture the benefit of fluctuations in market prices in the
geographic regions where our assets operate.  Our treasury team seeks
to manage our financial risks and exposures associated with interest expense
variability.





16
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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008






Our
commodity risk management strategy gives us the flexibility to sell energy and
capacity through a combination of spot market sales and near-term contractual
arrangements (generally over a rolling 12 to 36 month time
frame).  Our commodity risk management goal is to increase
predictability of cash flows in the near-term while keeping the ability to
capture value from rising commodity prices over the longer term.  Many
of our contractual arrangements are derivative instruments and must be accounted
for at fair value pursuant to the guidance in SFAS No. 133.  We also
manage commodity price risk by entering into capacity forward sales
arrangements, tolling arrangements, RMR contracts, fixed price coal purchases
and other arrangements that do not receive fair value accounting treatment
because these arrangements do not meet the definition of a derivative or are
designated as “normal purchase normal sales.”  As a result, the gains
and losses with respect to these arrangements are not reflected in the unaudited
condensed consolidated statements of operations until the settlement
dates.




Quantitative
Disclosures Related to Financial Instruments and Derivatives




On
January 1, 2009, we adopted SFAS No. 161, which requires disclosure of the fair
values of derivative instruments and their gains and losses in a tabular
format.  It also provides more information about an entity’s liquidity
by requiring disclosure of derivative features that are credit risk-related and
it requires cross-referencing within footnotes to enable financial statement
users to locate important information about derivative instruments.




The
following disclosures and tables present information concerning the impact of
derivative instruments on our unaudited condensed consolidated balance sheets
and statements of operations.  In the table below,
commodity contracts primarily consist of derivative contracts related to our
power generation business that we have not designated as accounting hedges,that are entered into for purposes of hedging future fuel requirements
and sales commitments and securing commodity prices.  Interest rate
contracts primarily consist of derivative contracts related to managing our
interest rate risk.  As of March 31, 2009, our commodityderivatives were comprised of both long and short positions; a long
position is a contract to purchase a commodity, while a short position is a
contract to sell a commodity.  As of March 31, 2009, we had net
long/(short) commodity derivative contracts outstanding and notional interest
rate swaps outstanding in the following quantities:





Contact
      Type
                      
                      Hedge
      Designation
                      
                      Quantity
                        (in
      millions)
                      
                      Unit
      of Measure
                      
                      Net
      Fair Value
                        (in millions)Commodity
      contracts:Electric
      energy
                      
                      Not
      designated
                      
                      
                      (68
                      )
                      MW
                      
                      $
                      364Natural
      gas
                      
                      Not
      designated
                      
                      
                      199
                      
                      MMBtu
                      
                      $
                      12Other
                      
                      Not
      designated
                      
                      
                      2
                      
                      Misc.
                      
                      $
                      (1
                      )Interest
      rate contracts:Interest
      rate swaps
                      
                      Cash
      flow hedge
                      
                      
                      492
                      
                      Dollars
                      
                      $
                      (193
                      )Interest
      rate swaps
                      
                      Fair
      value hedge
                      
                      
                      25
                      
                      Dollars
                      
                      $
                      2Interest
      rate swaps
                      
                      Not
      designated
                      
                      
                      231
                      
                      Dollars
                      
                      $
                      (24
                      )Interest
      rate swaps
                      
                      Not
      designated
                      
                      
                      (206
                      )
                      Dollars
                      
                      $
                      21




17
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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008







Derivatives
on the Balance Sheet.The following
table presents the fair value and balance sheet classification of derivatives in the
unaudited condensed consolidated balance sheet as of March 31, 2009, segregated
between designated, qualifying SFAS No. 133 hedging instruments and those that
are not, and by type of contract segregated by assets and liabilities as
required by SFAS No. 161.  We do not offset fair value amounts
recognized for derivative instruments executed with the same counterparty under
a master netting agreement and we did not elect to adopt the netting provisions
allowed under FSP FIN 39-1, “Amendment of FASB Interpretation No. 39”, which
allows an entity to offset the fair value amounts recognized for cash collateral
paid or cash collateral received against the fair value amounts recognized for
derivative instruments executed with the same counterparty under a master
netting agreement.  As a result, our unaudited condensed consolidated
balance sheets present derivative assets and liabilities, as well as cash
collateral paid or received, on a gross basis consistent with the disclosure
requirements of SFAS No. 161.





Contact
      Type
                                            
                                            Balance
      Sheet Location
                                            
                                            March
      31,
                                              2009
                                            
                                            
                                            December
      31, 2008(in
      millions)Derivatives
      designated as hedging instruments under SFAS No. 133:Derivative
      Assets:Interest
      rate contracts
                                            
                                            Assets
      from risk management activities
                                            
                                            $
                                            2
                                            
                                            
                                            $
                                            3Derivative
      Liabilities:Interest
      rate contracts
                                            
                                            Liabilities
      from risk management activities
                                            
                                            
                                            (193
                                            )
                                            
                                            
                                            (238
                                            )Other
      contracts
                                            
                                            Liabilities
      from risk management activities
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Total
      derivatives designated as hedging instruments under SFAS No. 133,
      net
                                            
                                            
                                            (191
                                            )
                                            
                                            
                                            (235
                                            )Derivatives
      not designated as hedging instruments under SFAS No. 133:Derivative
      Assets:Commodity
      contracts
                                            
                                            Assets
      from risk management activities
                                            
                                            
                                            1,722
                                            
                                            
                                            
                                            1,355Interest
      rate contracts
                                            
                                            Assets
      from risk management activities
                                            
                                            
                                            21
                                            
                                            
                                            
                                            19Derivative
      Liabilities:Commodity
      contracts
                                            
                                            Liabilities
      from risk management activities
                                            
                                            
                                            (1,347
                                            )
                                            
                                            
                                            (1,147
                                            )Interest
      rate contracts
                                            
                                            Liabilities
      from risk management activities
                                            
                                            
                                            (24
                                            )
                                            
                                            
                                            (22
                                            )Total
      derivatives not designated as hedging instruments under SFAS No. 133,
      net
                                            
                                            
                                            372
                                            
                                            
                                            
                                            205Total
      derivatives, net
                                            
                                            
                                            
                                            $
                                            181
                                            
                                            
                                            $
                                            (30
                                            )





Impact
of Derivatives on the Consolidated Statements of Operations




The
following discussion and tables present the disclosure of the location and
amount of gains and losses on derivative instruments in our unaudited condensed
consolidated statements of operations for the three months ended March 31, 2009
and 2008 segregated between designated, qualifying SFAS No. 133 hedging
instruments and those that are not, by type of contract as required by SFAS No.
133.




Cash Flow
Hedges.  We enter into financial derivative instruments that
qualify, and that we may elect to designate, as cash flow
hedges.  Interest rate swaps have been used to convert floating
interest rate obligations to fixed interest rate obligations.




In the
second quarter 2007, one of our consolidated subsidiaries, PPEA, entered into
three interest rate swap agreements with an initial aggregate notional amount of
approximately $183 million.  These interest rate swap agreements
convert certain of PPEA’s floating rate debt exposure to a fixed interest rate
of approximately 5.3 percent.  These interest rate swap agreements
expire in June 2040.  Effective July 1, 2007, we designated these
agreements as cash flow hedges.  Therefore, the effective portion of
the changes in value after that date are reflected in other comprehensive income
(loss), and subsequently reclassified to interest expense contemporaneously with
the related accruals of interest expense, or depreciation expense in the event
the interest was capitalized, in either case to the extent of hedge
effectiveness.





18
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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008






During
the three months ended March 31, 2009 and 2008, we recorded no income related to
ineffectiveness from changes in fair value of derivative positions and no
amounts were excluded from the assessment of hedge effectiveness related to the
hedge of future cash flows in either of the periods.  During the three
months ended March 31, 2009 and 2008, no amounts were reclassified to earnings
in connection with forecasted transactions that were no longer considered
probable of occurring.




The
balance in cash flow hedging activities within Accumulated other comprehensive
income(loss), net at March 31, 2009 is expected to be reclassified to future
earnings when the forecasted hedged transaction impacts
earnings.  Because a significant majority of the interest expense
incurred by PPEA is capitalized in accordance with FAS No. 34, “Capitalization
of Interest Cost”, a significant portion of the current and future derivative
settlements will continue to be deferred in Accumulated other comprehensive
income (loss) and reclassified to depreciation expense over the expected life of
the plant once the Plum Point Project commences operations.  Because
not all of the interest expense is capitalized, of this amount, after-tax losses
of approximately $1 million are currently estimated to be reclassified into
earnings over the 12-month period ending March 31, 2010.  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
prices, hedging strategies, the probability of forecasted transactions occurring
and other factors.




The
impact of interest rate swap contracts designated as cash flow hedges and the
related hedged item on our unaudited condensed consolidated statements of
operations for the three months ended March 31, 2009 and 2008 is presented
below:





Derivatives
      in SFAS No. 133 Cash Flow Hedging Relationships
                                                    
                                                    Amount
      of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) For the
      Three Months EndedMarch
      31,
                                                    
                                                    Location
      of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective
      Portion)
                                                    
                                                    Amount
      of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective
      Portion) For the Three Months EndedMarch
      31,2009
                                                    
                                                    
                                                    2008
                                                    
                                                    
                                                    
                                                    2009
                                                    
                                                    
                                                    2008(in
      millions)
                                                    
                                                    
                                                    
                                                    (in
      millions)Interest
      rate contracts
                                                    
                                                    $
                                                    39
                                                    
                                                    
                                                    $
                                                    (26
                                                    )
                                                    Interest
      expense
                                                    
                                                    $
                                                    —
                                                    
                                                    
                                                    $
                                                    —Commodity
      contracts (1)
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    Revenues
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    (10
                                                    )Total
                                                    
                                                    $
                                                    39
                                                    
                                                    
                                                    $
                                                    (26
                                                    )
                                                    
                                                    
                                                    $
                                                    —
                                                    
                                                    
                                                    $
                                                    (10
                                                    )





(1)
            Beginning
      April 2, 2007, we chose to cease designating derivatives related to our
      power generation business.  These amounts represent
      recalssifications into earnings of amounts that were previously frozen
      in Accumulated other comprehensive income upon de-designation in
      April 2007.




Fair Value
Hedges.  We also enter into derivative instruments that
qualify, and that we may elect to designate, as fair value hedges.  We
use interest rate swaps to convert a portion of our non-prepayable fixed-rate
debt into floating-rate debt.  The maximum length of time for which we
have hedged our exposure for fair value hedges is through
2012.  During the three months ended March 31, 2009 and 2008, 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 three months ended March 31, 2009 and 2008,
there were no gains or losses related to the recognition of firm commitments
that no longer qualified as fair value hedges.





19
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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008








The
impact of interest rate swap contracts designated as fair value hedges and the
related hedged item on our unaudited condensed consolidated statement of
operations for the three months ended March 31, 2009 and 2008 is presented
below:





Derivatives
      in SFAS
                                                                                    No.
      133 Fair Value
                                                                                    Hedging
                                                                                  
                                                                                  Location
      of Gain
                                                                                    (Loss)
                                                                                    Recognized
      in
                                                                                    Income
      on
                                                                                  
                                                                                  Amount
      of Gain (Loss) Recognized in Income on Derivative for the Three Months
      Ended March 31,
                                                                                  
                                                                                  Hedged
      Itemsin
                                                                                    SFAS
      No. 133
                                                                                    Fair
      Value
                                                                                    Hedge
                                                                                  
                                                                                  Location
      of Gain
                                                                                    (Loss)
                                                                                    Recognized
      in
                                                                                    Income
      on Related
                                                                                  
                                                                                  Amount
      of Gain (Loss) Recognized in Income on Related Hedged Items For the Three
      Months EndedMarch
      31,Relationships
                                                                                  
                                                                                  Derivative
                                                                                  
                                                                                  2009
                                                                                  
                                                                                  
                                                                                  2008
                                                                                  
                                                                                  Relationship
                                                                                  
                                                                                  Hedged
    Items
                                                                                  
                                                                                  2009
                                                                                  
                                                                                  
                                                                                  2008(in
      millions)
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  (in
      millions)Interest
      rate contracts
                                                                                  
                                                                                  Interest
      expense
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1
                                                                                  
                                                                                  Fixed-rate
      debt
                                                                                  
                                                                                  Interest
      expense
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  $
                                                                                  (1
                                                                                  )





Financial
Instruments Not Designated as Hedges.  In accordance with SFAS
No. 133, we elect not to designate derivatives related to our power generation
business as cash flow hedges.  Thus, we apply mark-to-market
accounting treatment to these derivatives.  Accordingly, as fair
values fluctuate from period to period due to market price volatility, fair
value changes and unrealized and realized gains and losses are reflected in the
unaudited condensed consolidated statements of operations within Revenues
pursuant to EITF Issue 02-3, “Issues Involved in Accounting for Derivative
Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and
Risk Management Activities” (“EITF Issue No. 02-3”).  As such, these
mark-to-market gains and losses are not reflected in the unaudited condensed
consolidated statements of operations in the same period as the underlying power
sales from generation activity for which the derivative instruments serve as
economic hedges.




For the
three-month period ended March 31, 2009, our revenues included approximately
$168 million of mark-to-market gains related to this activity compared to $280
million of mark-to-market losses in the same period in the prior
year.




The
impact of derivative financial instruments that have not been designated as
hedges on our unaudited condensed consolidated statement of operations for the
three months ended March 31, 2009 and 2008 is presented below.  Note
that this presentation does not reflect the expected gains or losses arising
from the underlying physical transactions associated with these financial
instruments.  Therefore, this presentation is not indicative of the
economic gross profit we expect to realize when the underlying physical
transactions settle.




Amount of Gain (Loss) Recognized in Income on
      Derivatives for the
                                      Three Months Ended March
31,Derivatives Not Designated as Hedging Instruments
      under SFAS No. 133
                                    
                                    Location of Gain (Loss) Recognized in Income on
      Derivatives
                                    
                                    2009
                                    
                                    
                                    2008(in
      millions)Commodity
      contracts
                                    
                                    Revenues
                                    
                                    $
                                    267
                                    
                                    
                                    $
                                    (280
                                    )Interest
      Rate contracts
                                    
                                    Interest
      expense
                                    
                                    
                                    (1
                                    )
                                    
                                    
                                    (1
                                    )




20
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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008







Note
5—Fair Value Measurements





The
following table sets forth by level within the fair value hierarchy our
financial assets and liabilities that were accounted for at fair value on a
recurring basis as of March 31, 2009.  These financial assets and
liabilities are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement.  Our assessment of
the significance of a particular input to the fair value measurement requires
judgment, and may affect the valuation of fair value assets and liabilities and
their placement within the fair value hierarchy levels.





Fair
      Value as of March 31, 2009Level
      1
                      
                      
                      Level
      2
                      
                      
                      Level
      3
                      
                      
                      Total(in
      millions)Assets:Assets
      from commodity risk management activities
                      
                      $
                      —
                      
                      
                      $
                      1,681
                      
                      
                      $
                      41
                      
                      
                      $
                      1,722Assets
      from interest rate swaps
                      
                      
                      —
                      
                      
                      
                      23
                      
                      
                      
                      —
                      
                      
                      
                      23Other—DHI  (1)
                      
                      
                      —
                      
                      
                      
                      16
                      
                      
                      
                      —
                      
                      
                      
                      16Total—DHI
                      
                      
                      —
                      
                      
                      
                      1,720
                      
                      
                      
                      41
                      
                      
                      
                      1,761Other—Dynegy
      (1)
                      
                      
                      —
                      
                      
                      
                      1
                      
                      
                      
                      —
                      
                      
                      
                      1Total—Dynegy
      and DHI
                      
                      $
                      —
                      
                      
                      $
                      1,721
                      
                      
                      $
                      41
                      
                      
                      $
                      1,762Liabilities:Liabilities
      from commodity risk management activities
                      
                      $
                      —
                      
                      
                      $
                      1,339
                      
                      
                      $
                      8
                      
                      
                      $
                      1,347Liabilities
      from interest rate swaps
                      
                      
                      —
                      
                      
                      
                      217
                      
                      
                      
                      —
                      
                      
                      
                      217Total—Dynegy
      and DHI
                      
                      $
                      —
                      
                      
                      $
                      1,556
                      
                      
                      $
                      8
                      
                      
                      $
                      1,564





(1)
            Other
      represents short-term investments and long-term
    investments.




The
following table sets forth a reconciliation of changes in the fair value of
financial instruments classified as Level 3 in the fair value
hierarchy:





Three
      Months Ended March 31, 2009(in
      millions)Balance
      at December 31, 2008
                    
                    $
                    60Realized
      and unrealized losses, net
                    
                    
                    (5
                    )Purchases,
      issuances and settlements
                    
                    
                    (22
                    )Balance
      at March 31, 2009
                    
                    $
                    33Unrealized
      gains relating to instruments still held as of March 31,
    2009
                    
                    $
                    10





Gains and
losses (realized and unrealized) for Level 3 recurring items are included in
Revenues on the unaudited condensed consolidated statements of
operations.  We believe an analysis of instruments classified as Level
3 should be undertaken with the understanding that these items generally serve
as economic hedges of our power generation portfolio.





21
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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008







Transfers
in and/or out of Level 3 represent existing assets or liabilities that were
either previously categorized as a higher level for which the inputs to the
model became unobservable or assets and liabilities that were previously
classified as Level 3 for which the lowest significant input became observable
during the period.





On
January 1, 2009, we adopted EITF Issue No. 08-5, which applies to liabilities
issued with an inseparable third-party credit enhancement when they are measured
or disclosed at fair value on a recurring basis.  The underlying
principle in the consensus in EITF Issue No. 08-5 is that a third-party credit
enhancement does not relieve the issuer of its ultimate obligation under the
liability.  We had approximately $122 million of cash collateral
postings as of March 31, 2009 included in Prepayments and other current assets
on our unaudited condensed consolidated balance sheets, which represents the
effect of net cash outflows arising from the daily settlements of our
exchange-traded or brokered commodity futures positions held with our futures
clearing manager.  In addition, we had approximately $1,081 million of
letters of credit issued as collateral postings as of March 31,
2009.  Substantially all of our derivative liability positions with
our derivative counterparties are supported by letters of credit issued pursuant
to our Fifth Amended and Restated Credit Facility or by cash collateral
postings.  As a result of the consensus in EITF Issue No. 08-5, we no
longer can consider the letters of credit as credit enhancements in our
valuation of our derivative liabilities beginning in 2009.  Based on
our net risk management asset position as of January 1, 2009 and March 31, 2009,
we did not have significant letters of credit posted in support of our
derivative liabilities.  Accordingly, our adoption of  EITF
Issue No. 08-5 did not result in a material effect on our unaudited condensed
consolidated financial statements in the first quarter 2009.





On
January 1, 2009, we adopted SFAS No. 157 for nonfinancial assets and liabilities
measured at fair value on a nonrecurring basis, which had been deferred under
FSP SFAS No. 157-2.  The following table sets forth by level within
the fair value hierarchy our fair value measurements with respect to
nonfinancial assets and liabilities that are measured at fair value on a
nonrecurring basis as of March 31, 2009.  These assets and liabilities
are classified in their entirety based on the lowest level of input that is
significant to the fair value measurement.  Our assessment of the
significance of a particular input to the fair value measurement requires
judgment, and may affect the valuation of fair value assets and liabilities and
their placement within the fair value hierarchy levels.





Fair
      Value Measurements as of March 31, 2009Level
      1
                    
                    
                    Level
      2
                    
                    
                    Level
      3
                    
                    
                    Total
                    
                    
                    Total
      Losses(in
      millions)Assets:Goodwill
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    (433
                    )Assets
      held and used
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    58
                    
                    
                    
                    58
                    
                    
                    $
                    (5
                    )Total
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    58
                    
                    
                    $
                    58
                    
                    
                    $
                    (438
                    )





In
accordance with the provisions of SFAS No. 142, during the first quarter 2009,
goodwill with a carrying amount of $433 million was written down to its implied
fair value of zero, resulting in an impairment charge of $433 million, which is
included in Goodwill impairment on our unaudited condensed consolidated
statements of operations.  Please read Note 6—Impairment
Charge  and Note 9—Goodwill for further discussion and disclosures
addressing the description of the inputs and information used to develop the
inputs as well as the valuation techniques used to measure the goodwill
impairment.





In
accordance with the provisions of SFAS No. 144, during the first quarter 2009,
long-lived assets held and used with a carrying amount of $63 million were
written down to their fair value of $58 million, resulting in an impairment
charge of $5 million, which is included in Impairment and other charges on our
unaudited condensed consolidated statements of operations.  Please
read Note 6—Impairment Charge for further discussion.





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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008







Note
6—Impairment Charge





During
the first quarter 2009, we performed a goodwill impairment test due to changes
in market conditions that would more likely than not reduce the fair values of
our GEN-MW, GEN-WE and GEN-NE reporting units below their carrying
amounts.  Please read Note 9—Goodwill for further
discussion.  This decline in value also triggered testing of the
recoverability of our long-lived assets under SFAS No. 144.  In
accordance with SFAS No. 144, we performed an impairment analysis and recorded a
pre-tax impairment charge of $5 million ($3 million after tax).  This
charge, which relates to the Bluegrass power generation facility, is
included in Impairment and other charges in our unaudited condensed consolidated
statements of operations.  We determined the fair value of the
Bluegrass facility using assumptions that reflect our best estimate of third
party market participants' considerations in accordance with SFAS No.
157.





Note
7—Accumulated Other Comprehensive Loss





Accumulated
other comprehensive loss, net of tax, is included in Dynegy’s and DHI’s
stockholders’ equity on our unaudited condensed consolidated balance sheets as
follows:





March
      31,
                    2009
                  
                  
                  December
      31, 2008(in
      millions)Cash
      flow hedging activities, net
                  
                  $
                  (122
                  )
                  
                  $
                  (125
                  )Unrecognized
      prior service cost and actuarial loss
                  
                  
                  (67
                  )
                  
                  
                  (66
                  )Accumulated
      other comprehensive loss—unconsolidated investments
                  
                  
                  (23
                  )
                  
                  
                  (24
                  )Accumulated
      other comprehensive loss, net of tax
                  
                  $
                  (212
                  )
                  
                  $
                  (215
                  )





Note
8—Variable Interest Entities





Hydroelectric
Generation Facilities.  On January 31, 2005, Dynegy completed
the acquisition of ExRes, the parent company of Sithe Energies, Inc. and
Independence.  ExRes also owns through its subsidiaries four
hydroelectric generation facilities in Pennsylvania.  The entities
owning these facilities meet the definition of VIEs.  In accordance
with the purchase agreement, Exelon Corporation (“Exelon”) has the sole and
exclusive right to direct our efforts to decommission, sell, or otherwise
dispose of the hydroelectric facilities owned through the VIEs. Exelon is
obligated to reimburse ExRes for all costs, liabilities, and obligations of the
entities owning these facilities, and to indemnify ExRes with respect to the
past and present assets and operations of the entities.  As a result,
we are not the primary beneficiary of the entities and have not consolidated
them in accordance with the provisions of FIN No. 46(R), “Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN No.
46(R)”).  There was no material change during the three months ended
March 31, 2009.  Please see Note 12—Variable Interest
Entities—Hydroelectric Generation Facilities in our Form 10-K for discussion of
these entities.





PPEA Holding
Company LLC.  We own an approximate 37 percent interest in PPEA
Holding Company LLC (“PPEA Holding”) which, through its wholly-owned
subsidiary,  Plum Point Energy Associates, LLC (“PPEA”) owns an
approximate 57 percent undivided interest in a 665 MW coal fired power
generation facility (the “Plum Point Project”), which is under construction in
Mississippi County, Arkansas.  Our net investment in PPEA Holding at
March 31, 2009 was a liability of approximately $105 million.  Our
unaudited condensed consolidated balance sheet included $530 million of plant
construction in progress at March 31, 2009 that is collateral for the Plum Point
Project debt.  As of March 31, 2009, we have posted a $15 million
letter of credit to support our contingent equity contribution to the Plum Point
Project.  Please see Note 15—Debt—Plum Point Credit Agreement Facility
in our Form 10-K for discussion of Plum Point’s borrowings.  PPEA
Holding meets the definition of a VIE, and we have determined we are the primary
beneficiary of this entity.  As such, we have consolidated it in
accordance with the provisions of FIN No. 46(R).  Please see Note
12—Variable Interest Entities—PPEA Holding Company LLC in our Form 10-K for
further discussion.





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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008










Summarized
aggregate financial information for PPEA Holding, included in our unaudited
condensed consolidated financial statements, is included below:





March
      31,
                    2009
                  
                  
                  December
      31,
                    2008(in
      millions)Current assets
                  
                  $
                  1
                  
                  
                  $
                  1Property, plant and equipment, net
                  
                  533
                  
                  
                  
                  507Intangible asset
                  
                  193
                  
                  
                  
                  193Other non-current asset
                  
                  27
                  
                  
                  
                  29Total assets
                  
                  754
                  
                  
                  
                  730Current liabilities
                  
                  22
                  
                  
                  
                  19Long-term debt
                  
                  642
                  
                  
                  
                  615Non-current liabilities
                  
                  199
                  
                  
                  
                  244Noncontrolling interest
                  
                  (4
                  )
                  
                  
                  (30
                  )Operating loss
                  
                  (2
                  )
                  
                  
                  (1
                  )Net loss
                  
                  (1
                  )
                  
                  
                  (3
                  )




DLS
Power Holdings and DLS Power Development.  In December 2008,
Dynegy executed an agreement with LS Associates to dissolve DLS Power Holdings
and DLS Power Development effective January 1, 2009.  Under the terms
of the dissolution, Dynegy acquired exclusive rights, ownership and
developmental control of substantially all repowering or expansion opportunities
related to its existing portfolio of operating assets.  In the first
quarter 2009, Dynegy subsequently contributed these assets to DHI.  LS
Associates received approximately $19 million in cash from Dynegy on January 2,
2009, and acquired full ownership and developmental rights associated with
various “greenfield” power generation and transmission development projects not
related to Dynegy’s existing operating portfolio of assets.





Sandy
Creek.  Dynegy Sandy Creek Holdings, LLC (the “Dynegy Member”),
an indirectly wholly owned subsidiary of Dynegy and DHI, and LSP Sandy Creek
Member, LLC (the “LSP Member”) each own a 50 percent interest in Sandy Creek
Holdings LLC (“SCH”), which owns all of  Sandy Creek Energy
Associates, LP (“SCEA”).  SCEA owns an approximate 64 percent
undivided interest in the Sandy Creek Energy Station (“the Sandy Creek
Project”), which is an 898 MW facility under construction in McLennan County,
Texas.  In addition, Sandy Creek Services, LLC (“SC Services”) was
formed to provide services to SCH.  Dynegy Power Services and LSP
Sandy Creek Services LLC each own a 50 percent interest in SC
Services.





SCH and
SC Services both meet the definition of a VIE, as they will require additional
subordinated financial support to conduct their normal ongoing
operations.  However, we are not the primary beneficiary of the
entities, and, in accordance with FIN No. 46(R), do not consolidate
them.  We account for our investments in SCH and SC Services as equity
method investments pursuant to APB 18.  At March
31, 2009, we had $6 million included in non-current Accounts receivable,
affiliate and $68 million included in Other long-term liabilities on our
unaudited condensed consolidated balance sheets.We believe that
our maximum exposure to economic loss from these VIEs is limited to $281
million.




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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008








Note
9—Goodwill





Assets
and liabilities of companies acquired in purchase transactions are recorded at
fair value at the date of acquisition.  Goodwill represents the excess
purchase price over the fair value of net assets acquired, plus any identifiable
intangibles.  We review goodwill for potential impairment as of
November 1st of each year or more frequently if events or circumstances occur
that would more likely than not reduce the fair value of a reporting unit below
its carrying amount.  During the first quarter 2009, there were
several events and circumstances which, when considered in the aggregate,
indicated such a reduction in the fair value of our GEN-MW, GEN-WE and GEN-NE
reporting units:




·
            The
      first quarter 2009 was characterized by a steep decline in forward
      commodity prices.  Forward market prices for natural gas
      decreased by 27% and 17%, respectively, for the calendar years 2009 and
      2010, significantly impacting the current market and corresponding forward
      market prices for power;




·
            During
      the first quarter 2009, acquisition activity related to power generation
      facilities was very low, indicating a lack of demand for such
      transactions;




·
            Dynegy’s
      market capitalization continued to decline through the first quarter 2009,
      with Dynegy’s stock price falling from an average of $2.51 per share in
      the fourth quarter 2008 to an average of $1.73 per share in the first
      quarter 2009 and a closing price of $1.41 at March 31, 2009;
      and




·
            General
      economic indicators, such as economic growth forecasts and unemployment
      forecasts, deteriorated further during the first quarter
    2009.




Considered
individually, none of the foregoing events and circumstances would necessarily
indicate a significant reduction in the fair value of our reporting
units.  Dynegy’s stock price is likely to remain volatile throughout
2009, and may change significantly from the closing price on March 31,
2009.  However, in light of the significant drop in forward power
prices during the first quarter 2009 and the further deterioration in general
economic indicators, it is unlikely that Dynegy’s market capitalization will
exceed its book equity in the near future.  As a result, we concluded
that an impairment test of our goodwill on our GEN-MW, GEN-WE and GEN-NE
reporting units was required as of March 31, 2009.





The
impairment test is performed in two steps at the reporting unit
level.  The first step compares the fair value of the reporting unit
with its carrying amount, including goodwill.  If the fair value of
the reporting unit is higher than its carrying amount, no impairment to goodwill
is indicated and no further testing is required.  However, if the fair
value of the reporting unit is below its carrying amount, a second step must be
performed to determine the goodwill impairment required, if any.





Consistent
with historical practice, on November 1, 2008, we determined the fair value of
our reporting units using the income approach based on a discounted cash flows
model.  This approach used forward-looking projections of our
estimated future operating results based on discrete financial forecasts
developed by management for planning purposes.  Cash flows beyond the
discrete forecasts were estimated using a terminal value calculation, which
incorporated historical and forecasted financial trends and considered long-term
earnings growth rates based on growth rates observed in the power
sector.  In performing our impairment test at November 1, 2008, the
results of our fair value assessment using the income approach were corroborated
using market information about recent sales transactions for comparable assets
within the regions in which we operate.





Due to
further declines in our market capitalization through December 31, 2008, we
determined that assumptions utilized in the November 1, 2008 analysis required
updating.  We evaluated key assumptions including forward natural gas
and power pricing, power demand growth, and cost of capital.  While
some of the assumptions had changed subsequent to the November 1, 2008 analysis,
we determined that the impact of updating those assumptions would not have
caused the fair value of the individual reporting units to be below their
respective carrying values at December 31, 2008.





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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008







As a
result of the events and circumstances discussed above, as of March 31, 2009, we
updated our fair value assessment using the income approach, taking into account
the significant drop in forward prices we observed over the three months ended
March 31, 2009.  As our long-term outlook on power demand remains
unchanged, we did not change our expectations regarding commodity prices beyond
2011 for purposes of this analysis.  Additionally, we updated the
weighted average cost of capital assumptions used in our income approach to
reflect current market data as of March 31, 2009.





Based on
the decline in acquisition activity during the first quarter 2009 and the length
of time from the most recent asset sales transactions we used to corroborate the
results of our income approach valuation in November 2008, we were not able to
rely fully on recent sales transactions to corroborate the results of our fair
value assessment using the income approach in March 2009.  Therefore,
for our first quarter 2009 analysis, we also used a market-based approach,
comparing our forecasted earnings and Dynegy’s market capitalization to those of
similarly situated public companies by considering multiples of
earnings.





For each
of the reporting units included in our analysis, fair value assessed using the
income approach exceeded the fair value assessed using this market-based
approach.  However, given that Dynegy’s market capitalization has
continued to remain below its book equity for more than six months and given the
absence of recent asset sales transaction activity to reasonably corroborate the
results of our income approach valuation, we have determined that there has been
a shift in the manner in which market participants are currently valuing our
business, and believe that the market-based approach has become more relevant
for estimating the fair value of our reporting units as of March 31,
2009.  We therefore concluded that it was appropriate to place equal
weight on the market-based approach (rather than relying primarily on the income
approach) for the purpose of determining fair value in step one of the
impairment analysis.  Based on the results of our analysis discussed
above, our GEN-MW, GEN-WE and GEN-NE reporting units did not pass the first step
as of March 31, 2009.





Having
determined that the carrying values of the GEN-MW, GEN-WE and GEN-NE reporting
units exceeded their fair values, we performed the second step of the
analysis.  This second step compares the implied fair value of each
reporting unit’s goodwill with the carrying amount of such
goodwill.  We performed a hypothetical allocation of the fair value of
the reporting units determined in step one to all of the assets and liabilities
of the unit, including any unrecognized intangible assets.  After
making these hypothetical allocations, we determined no residual value remained
that could be allocated to goodwill within each of our GEN-MW, GEN-WE or GEN-NE
segments.  While we have not finalized this second step of our
impairment analysis due to the complexities involved in determining the implied
fair value of the goodwill of each reporting unit, based on the work performed
to date, which is substantially complete we have concluded that an impairment
loss is probable and can be reasonably estimated.  We have therefore
recorded impairment charges on all three of these reporting units, as
follows:





GEN-MW
                      
                      
                      GEN-WE
                      
                      
                      GEN-NE
                      
                      
                      Total(in
      millions)Goodwill
      at December 31, 2008
                      
                      $
                      76
                      
                      
                      $
                      260
                      
                      
                      $
                      97
                      
                      
                      $
                      433Impairment
      of Goodwill
                      
                      
                      (76
                      )
                      
                      
                      (260
                      )
                      
                      
                      (97
                      )
                      
                      
                      (433
                      )Goodwill
      at March 31, 2009
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —




We expect to finalize the
second step of our impairment analysis as soon as reasonably practicable and we
will record any further accounting entries that may be required, although none
are currently expected.




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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008







Note
10—Related Party Transactions





Equity
Investments.  We hold two investments in joint ventures in
which LS Power or its affiliates are also investors.  DHI has 50
percent ownership interests in SCEA and SC Services, and subsidiaries of LS
Power held the remaining 50 percent interests.  Please see Note
8—Variable Interest Entities—Sandy Creek for further discussion.





Other.  On
January 8, 2009, DHI paid a dividend of $175 million to Dynegy.





Subsequent
to the dissolution of DLS Power Holdings and DLS Power Development, Dynegy
acquired exclusive rights, ownership and developmental control of substantially
all repowering or expansion opportunities related to its existing portfolio of
operating assets, and subsequently contributed approximately $15 million of
these assets and approximately $19 million of deferred tax
assets associated with these assets to DHI.  Please read Note
8—Variable Interest Entities—DLS Power Holdings and DLS Power Developmentfor further
information.





Note
11—Dynegy’s Loss Per Share





Basic
loss per share represents the amount of losses for the period available to each
share of Dynegy common stock outstanding during the period.  Diluted
loss per share represents the amount of losses for the period available to each
share of Dynegy common stock outstanding during the period plus each share that
would have been outstanding assuming the issuance of common shares for all
dilutive potential common shares outstanding during the period.





The
reconciliation of basic loss per share from continuing operations to diluted
loss per share from continuing operations is shown in the following
table:





Three
      Months Ended March 31,2009
                      
                      
                      2008(in
      millions, except per share amounts)Loss
      from continuing operations
                      
                      $
                      (338
                      )
                      
                      $
                      (152
                      )Less:  Net
      loss attributable to the noncontrolling interest
                      
                      
                      (2
                      )
                      
                      
                      —Loss
      from continuing operations attributable to Dynegy
      Inc. for basic and diluted loss per share
                      
                      $
                      (336
                      )
                      
                      $
                      (152
                      )Basic
      weighted-average shares
                      
                      
                      841
                      
                      
                      
                      839Effect
      of dilutive securities:Stock
      options and restricted stock
                      
                      
                      2
                      
                      
                      
                      2Diluted
      weighted-average shares
                      
                      
                      843
                      
                      
                      
                      841Loss
      per share from continuing operations attributable to Dynegy
      Inc:Basic
                      
                      $
                      (0.40
                      )
                      
                      $
                      (0.18
                      )Diluted
      (1)
                      
                      $
                      (0.40
                      )
                      
                      $
                      (0.18
                      )





(1)
            When
      an entity has a net loss from continuing operations, SFAS No. 128,
      “Earnings per Share,” prohibits the inclusion of potential common shares
      in the computation of diluted per-share amounts.  Accordingly,
      Dynegy has utilized the basic shares outstanding amount to calculate both
      basic and diluted loss per share for the three months ended March 31, 2009
      and 2008.




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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008





Note
12—Commitments and Contingencies





Legal
Proceedings





Set forth
below is a summary of our material ongoing legal proceedings.  In
accordance with SFAS No. 5, “Accounting for Contingencies,” we record reserves
for contingencies when information available indicates that a loss is probable
and the amount of the loss is reasonably estimable.  In addition, we
disclose matters for which management believes a material loss is at least
reasonably possible.  In all instances, management has assessed the
matters below based on current information and made a judgment concerning their
potential outcome, giving due consideration to the nature of the claim, the
amount and nature of damages sought and the probability of
success.  Management’s judgment may prove materially inaccurate and
such judgment is made subject to the known uncertainty of
litigation.





Cooling Water
Intake Permits.  The cooling water intake structures at several
of our facilities are regulated under section 316(b) of the Clean Water
Act.  This provision generally requires that standards set for
facilities require that the location, design, construction, and capacity of
cooling water intake structures reflect the best technology available (“BTA”)
for minimizing adverse environmental impact.  These standards are
developed and implemented for power generating facilities through the National
Pollutant Discharge Elimination System (“NPDES”) permits or individual State
Pollutant Discharge Elimination System (“SPDES”)
permits.  Historically, standards for minimizing adverse environmental
impacts of cooling water intakes have been made by permitting agencies on a
case-by-case basis considering the best professional judgment of the permitting
agency.





The
environmental groups that participate in NPDES and SPDES permit proceedings
generally argue that only closed cycle cooling meets the BTA
requirement.  The issuance and renewal of NPDES or SPDES permits for
three of our facilities have been challenged on this basis.




·
            Danskammer
      SPDES Permit — In January 2005, the New York State Department of
      Environmental Conservation (“NYSDEC”) issued a Draft SPDES Permit renewal
      for the Danskammer facility.  Three environmental groups sought
      to impose a permit requirement that the Danskammer facility install a
      closed cycle cooling system.  A formal evidentiary hearing was
      held and the revised Danskammer SPDES Permit was issued on June 1, 2006
      with conditions generally favorable to us.  While the revised
      Danskammer SPDES Permit does not require installation of a closed cycle
      cooling system, it does require aquatic organism mortality reductions
      resulting from NYSDEC’s determination of BTA requirements under its
      regulations.  The petitioners appealed and on September 19,
      2008, the Appellate Division issued its Memorandum and Judgment confirming
      the determination of NYSDEC in issuing the revised Danskammer SPDES Permit
      and dismissed the appeal.  Both the Third Department and the New
      York Court of Appeals have denied petitions for leave to
      appeal.




·
            Roseton
      SPDES Permit — In April 2005, the NYSDEC issued a Draft SPDES Permit
      renewal for the Roseton facility.  The Draft Roseton SPDES
      Permit would require the facility to actively manage its water intake to
      substantially reduce mortality of aquatic organisms.  In July
      2005, a public hearing was held to receive comments on the Draft Roseton
      SPDES Permit.  Three environmental organizations filed petitions
      for party status in the permit renewal proceeding.  The
      petitioners are seeking to impose a permit requirement that the Roseton
      facility install a closed cycle cooling system.  In September
      2006, the administrative law judge issued a ruling admitting the
      petitioners to party status and setting forth the issues to be adjudicated
      in the permit renewal hearing.  Various holdings in the ruling
      have been appealed to the Commissioner of NYSDEC by the petitioners,
      NYSDEC staff and us.  We expect that the adjudicatory hearing on
      the Draft Roseton SPDES Permit will begin in 2009.  We believe
      that the petitioners’ claims lack merit and we plan to oppose those claims
      vigorously.




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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008






·
            Moss
      Landing NPDES Permit — The California Regional Water Quality Control Board
      (“Water Board”) issued an NPDES permit for the Moss Landing Facility in
      2000 in connection with modernization of the facility.  A local
      environmental group sought review of the permit contending that the once
      through seawater-cooling system at Moss Landing should be replaced with a
      closed cycle cooling system to meet the BTA
      requirements.  Following an initial remand from the courts, the
      Water Board affirmed its BTA finding.  The Water Board’s
      decision was affirmed by the Superior Court in 2004 and by the Court of
      Appeals in 2007.  The petitioners filed a Petition for Review by
      the Supreme Court of California, which was granted in March
      2008.  Further action was deferred pending final disposition of
      the U.S. Supreme Court challenge regarding the Cooling Water Intake
      Structures Phase II regulations (“Phase II Rules”), as further described
      below.   We believe that petitioner’s claims lack merit and
      we plan to oppose those claims
vigorously.




In 2004,
the U.S. EPA issued the Phase II Rules, which set forth standards to implement
the BTA requirements for cooling water intakes at existing
facilities.  The rules were challenged by several environmental groups
and in 2007 were struck down by the U.S. Court of Appeals for the Second Circuit
in Riverkeeper, Inc. v.
EPA.  The Court’s decision remanded several provisions of the
rules to the U.S. EPA for further rulemaking.  Several parties sought
review of the decision before the U.S. Supreme Court.  On April 1,
2009, the U.S. Supreme Court ruled that the U.S. EPA permissibly relied on
cost-benefit analysis in setting the national BTA performance standard and in
providing for cost-benefit variances from those standards as part of the Phase
II Rules.





We
believe the U.S. Supreme Court’s decision supports our position in the actions
described above.  Given the numerous variables and factors involved in
calculating the potential costs associated with installing a closed cycle
cooling system, any decision to install such a system at any of our plants,
should one be required, would be made on a case-by-case basis considering all
relevant factors at such time.  If capital expenditures related to
cooling water systems become great enough to render the operation of the plant
uneconomical, we could, at our option, and subject to any applicable financing
agreements or other obligations, reduce operations or cease to operate that
facility and forego the capital expenditures.





Gas Index Pricing
Litigation.  We, several of our affiliates and other energy
companies are named as defendants in numerous lawsuits in state and federal
court claiming damages resulting from alleged price manipulation and false
reporting of natural gas prices to certain index publications in the 2000-2002
timeframe.  The cases are pending in Nevada federal district court and
Tennessee state appellate court.  Recent developments
include:




·
              In
      February 2007, the Tennessee state court dismissed a putative class action
      on defendants’ motion.  Plaintiffs appealed and in November
      2007, the case was argued to the appellate court.  In October
      2008, the appellate court reversed the dismissal and remanded the case for
      further proceedings.  In December 2008, the defendants applied
      for leave to seek review of the appellate court decision by the Tennessee
      Supreme Court.


·
                In
      February 2008, the United States District Court in Las Vegas, Nevada
      granted defendants’ motion for summary judgment in a putative class action
      in Colorado, which was transferred to Nevada through the multi-district
      litigation management process, thereby dismissing the case and all of
      plaintiffs’ claims against certain defendants (including
      Dynegy).  Plaintiffs moved for reconsideration and the court
      ordered additional briefing on plaintiffs’ declaratory judgment claims
      against certain defendants (including Dynegy).  In January 2009,
      the court dismissed plaintiffs’ remaining declaratory judgment
      claims.  The decision is subject to
  appeal.


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INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008






·
            The
      remaining six cases, three of which seek class certification, are also
      pending in Nevada federal court.  Five of the cases were
      transferred through the multi-district litigation management process from
      other states, including Kansas, Wisconsin, Missouri and
      Illinois.  All of the cases contain similar claims that
      individually and in conjunction with other energy companies, we engaged in
      an illegal scheme to inflate natural gas prices by providing false
      information to natural gas index publications.  The complaints
      rely heavily on prior FERC and CFTC investigations into and reports
      concerning index manipulation in the energy industry.  The
      lawsuits seek actual and punitive damages, restitution and/or expenses,
      and are currently in the discovery phase.  In December 2008,
      class plaintiffs filed motions for class
      certification.  Defendant’s opposition is due by May 15,
      2009.




We
continue to analyze the Gas Index Pricing Litigation and are vigorously
defending the remaining matters.  Due to the uncertainty of
litigation, we cannot predict whether we will incur any liability in connection
with these lawsuits.  However, given the nature of the claims, an
adverse result in these proceedings could have a material effect on our
financial condition, results of operations and cash flows.





Nevada Power
Arbitration.  Through indirect subsidiaries, we and Chevron USA
are equal stakeholders in Nevada Cogeneration Associates #2 (“Black Mountain”),
a power generation facility located in Clark County, Nevada.  Black
Mountain operates under a long-term power sale agreement (“PSA”) with NV Energy
Inc (formerly known as Nevada Power Company) through April 2023.  In
October 2007, NV Energy Inc. (“NV Energy”) initiated an arbitration against the
joint venture seeking declaratory relief that (i) NV Energy’s methodology for
calculating a cumulative excess payment in the event of default or early
termination is correct and (ii) the joint venture is obligated to repay to NV
Energy the full amount of any outstanding excess payment in the event of a
default or early termination or upon the expiration of the PSA in
2023.  NV Energy alleged that as of December 31, 2007, the balance of
the cumulative excess payment was approximately $136 million and projected it to
be approximately $365 million in 2023.  In January 2009, the
arbitrator issued an order (the "January Order") in Black Mountain’s favor,
holding that under the PSA: (i) the cumulative excess payment was intended
solely as a remedy in the event of a material breach of the PSA by Black
Mountain, and that the cumulative excess payment amount, if one then exists, is
not owed at the end of the contract term; and (ii) the cumulative excess payment
must be calculated using simple interest, not compound interest.  In
April 2009, the arbitrator issued a final award confirming the January Order and
apportioning all costs associated with the arbitration to NV
Energy.





Native Village of
Kivalina and City of Kivalina v. ExxonMobil Corporation, et
al.  In February 2008, the Native Village of Kivalina and the
City of Kivalina, Alaska initiated an action in federal court in the Northern
District of California against DHI and 23 other companies in the energy
industry.  Plaintiffs claim that defendants’ emissions of greenhouse
gases including CO2 contribute
to climate change and have caused significant damage to a native Alaskan Eskimo
village through increased vulnerability to waves, storm surges and
erosion.  In June 2008, defendants filed multiple motions to dismiss
which are now fully briefed.  A hearing on defendants’ motions is
scheduled for May 2009.  We believe the plaintiffs’ suit lacks merit
and we intend to oppose their claims vigorously.





Information
Request under Section 114 of the Clean Air Act.  On March 9,
2009, we received an information request from the U.S. EPA regarding
maintenance, repair and replacement projects undertaken
between  January 1, 2000 and the present at the Danskammer
facility.  We submitted our initial response to the information
request on April 7, 2009 and are continuing to cooperate with the U.S. EPA to
provide additional information to assure a complete response is provided to the
agency’s request.  The information request is related to a nationwide
enforcement initiative by the U.S. EPA that could lead to an enforcement action,
the nature of which cannot be predicted at this time, but which could have a
material effect on our financial condition, results of operations and cash
flows.





Ordinary Course
Litigation.  In addition to the matters discussed above, we are
party to numerous legal proceedings arising in the ordinary course of business
or related to discontinued business operations.  In management’s
judgment, which may prove to be materially inaccurate as indicated above, the
disposition of these matters will not materially affect our financial condition,
results of operations or cash flows.





30
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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008





Guarantees
and Indemnifications





In the
ordinary course of business, we routinely enter into contractual agreements that
contain various representations, warranties, indemnifications and
guarantees.  Examples of such agreements include, but are not limited
to, service agreements, equipment purchase agreements, engineering and technical
service agreements, asset sales and procurement and construction
contracts.  Some agreements contain indemnities that cover the other
party’s negligence or limit the other party’s liability with respect to third
party claims, in which event we will effectively be indemnifying the other
party.  Virtually all such agreements contain representations or
warranties that are covered by indemnifications against the losses incurred by
the other parties in the event such representations and warranties are
false.  While there is always the possibility of a loss related to
such representations, warranties, indemnifications and guarantees in our
contractual agreements, and such loss could be significant, in most cases
management considers the probability of loss to be remote.  Related to
the indemnifications discussed below, we have accrued approximately $4 million
as of March 31, 2009.





West Coast Power
Indemnities.  In connection with the sale of our 50 percent
interest in West Coast Power to NRG on March 31, 2006, an agreement was executed
to allocate responsibility for managing certain litigation and provide for
certain indemnities with respect to such litigation.  The agreement
provides that we will manage the Gas Index Pricing Litigation described above
for which NRG could suffer a loss subsequent to the closing and that we would
indemnify NRG for all costs or losses resulting from such litigation, as well as
from other proceedings based on similar acts or omissions.  West Coast
Power is no longer a party to any active Gas Index Pricing Litigation
matters.  The indemnification agreement further provides that NRG
assumes responsibility for all defense costs and any risk of loss, subject to
certain conditions and limitations, arising from a February 2002 complaint filed
at FERC by the California Public Utilities Commission alleging that several
parties, including West Cost Power subsidiaries, overcharged the State of
California for wholesale power.  FERC found the rates charged by
wholesale suppliers to be just and reasonable.  However, this matter
was appealed to the U.S. Supreme Court, which remanded the case to FERC for
further review.





Targa
Indemnities.  During 2005, as part of our sale of DMSLP, we
agreed to indemnify Targa Resources, Inc. (“Targa”) against losses it may incur
under indemnifications DMSLP provided to purchasers of certain assets,
properties and businesses disposed of by DMSLP prior to our sale of
DMSLP.  We have incurred no significant expense under these prior
indemnities and deem their value to be insignificant.  We have
recorded an accrual in association with the remediation of groundwater
contamination at the Breckenridge Gas Processing Plant.  The
indemnification provided by DMSLP to the purchaser of the plant has a limit of
$5 million.  We have also indemnified Targa for certain tax matters
arising from periods prior to our sale of DMSLP.  We have recorded a
tax reserve associated with this indemnification.





Illinois Power
Indemnities.  As a condition of Dynegy’s 2004 sale of Illinois
Power and its interest in Electric Energy Inc.’s plant in Joppa, Illinois,
Dynegy provided indemnifications to third parties regarding environmental, tax,
employee and other representations.  These indemnifications are
limited to a maximum recourse of $400 million.  Additionally, Dynegy
has indemnified third parties against losses resulting from possible adverse
regulatory actions taken by the ICC that could prevent Illinois Power from
recovering costs incurred in connection with purchased natural gas and
investments in specified items.  Although there is no limitation on
Dynegy’s liability under this indemnity, the amount of the indemnity is limited
to 50 percent of any such losses.  Dynegy has made certain payments in
respect of these indemnities following regulatory action by the ICC, and has
established reserves for further potential indemnity claims.  Further
events, which fall within the scope of the indemnity, may still
occur.  However, Dynegy is not required to accrue a liability in
connection with these indemnifications, as management cannot reasonably estimate
a range of outcomes or at this time considers the probability of an adverse
outcome as only reasonably possible.  Dynegy intends to contest any
proposed regulatory actions.





31
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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008








Other
Indemnities.  During 2003, as part of our sales of the Rough
and Hornsea natural gas storage facilities and certain natural gas liquids
assets, we provided indemnities to third parties regarding tax representations.
Maximum recourse under these indemnities is limited to $857 million and $28
million, respectively.  As of March 31, 2009, no claims have been made
against these indemnities.  We also entered into similar
indemnifications regarding environmental, tax, employee and other
representations when completing other asset sales such as, but not limited to
the Rolling Hills, Calcasieu and CoGen Lyondell power generating
facilities.  As of March 31, 2009, no claims have been made against
these indemnities.





Note
13—Employee Compensation, Savings and Pension Plans





We have
various defined benefit pension plans and post-retirement benefit plans in which
our past and present employees participate, which are more fully described in
Note 21—Employee Compensation, Savings and Pension Plans in our Form
10-K.





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





Pension
      Benefits
                  
                  
                  Other
      BenefitsThree
      Months Ended March 31,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008(in
      millions)Service
      cost benefits earned during period
                  
                  $
                  3
                  
                  
                  $
                  3
                  
                  
                  $
                  1
                  
                  
                  $
                  1Interest
      cost on projected benefit obligation
                  
                  
                  3
                  
                  
                  
                  3
                  
                  
                  
                  1
                  
                  
                  
                  1Expected
      return on plan assets
                  
                  
                  (3
                  )
                  
                  
                  (3
                  )
                  
                  
                  —
                  
                  
                  
                  —Recognized
      net actuarial loss
                  
                  
                  1
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Net
      periodic benefit cost
                  
                  $
                  4
                  
                  
                  $
                  3
                  
                  
                  $
                  2
                  
                  
                  $
                  2





Contributions.  During
the three months ended March 31, 2009 and 2008, we made no contributions to our
pension plans or other postretirement benefit plans.  We expect to
make contributions of approximately $27 million to our pension plans and $1
million to other benefit plans during 2009.





Note
14—Income Taxes





Effective Tax
Rate.  We compute our quarterly taxes under the effective tax
rate method based on applying an anticipated annual effective rate to our
year-to-date income or loss, except for significant unusual or extraordinary
transactions.  Income taxes for significant unusual or extraordinary
transactions are computed and recorded in the period that the specific
transaction occurs.  Dynegy’s income taxes included in continuing
operations were as follows:





Three
      Months Ended
                    March
      31,2009
                  
                  
                  2008(in
      millions, except rates)Income
      tax (expense) benefit
                  
                  $
                  (85
                  )
                  
                  $
                  96Effective
      tax rate
                  
                  
                  (34
                  %)
                  
                  
                  39
                  %





For the
three months ended March 31, 2009, Dynegy’s overall effective tax rate on
continuing operations was different than the statutory rate of 35 percent due
primarily to nondeductible goodwill.  Additionally, a change in state
income tax law resulted in additional income tax expense of approximately $21
million for the three months ended March 31, 2009.  For the three
months ended March 31, 2008, Dynegy’s overall effective tax rate on continuing
operations was different than the statutory rate of 35 percent due primarily to
state income taxes.





32
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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008






DHI’s
income taxes included in continuing operations were as
follows:





Three
      Months Ended
                    March
      31,2009
                  
                  
                  2008(in
      millions, except rates)Income
      tax (expense) benefit
                  
                  $
                  (82
                  )
                  
                  $
                  91Effective
      tax rate
                  
                  
                  (32
                  %)
                  
                  
                  37
                  %





For the
three months ended March 31, 2009, DHI’s overall effective tax rate on
continuing operations was different than the statutory rate of 35 percent due
primarily to nondeductible goodwill.  Additionally, a change in state
income tax law resulted in additional income tax expense of approximately $15
million for the three months ended March 31, 2009.  For the three
months ended March 31, 2008, DHI’s overall effective tax rate on continuing
operations was different than the statutory rate of 35 percent due primarily to
state income taxes.





33
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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008







Note
15—Segment Information





We
reported results for the following segments: (i) GEN-MW, (ii) GEN-WE and (iii)
GEN-NE.  Our unaudited condensed consolidated financial results also
reflect corporate-level expenses such as general and administrative, interest
and depreciation and amortization.





Reportable
segment information for Dynegy, including intercompany transactions accounted
for at prevailing market rates, for the three months ended March 31, 2009 and
2008 is presented below:





Dynegy’s
Segment Data as of and for the Three Months Ended March 31, 2009


(in
millions)





Power
      GenerationGEN-MW
                        
                        
                        GEN-WE
                        
                        
                        GEN-NE
                        
                        
                        Other
                        
                        
                        TotalUnaffiliated
      revenues:Domestic
                        
                        $
                        525
                        
                        
                        $
                        82
                        
                        
                        $
                        297
                        
                        
                        $
                        —
                        
                        
                        $
                        904Total
      revenues
                        
                        $
                        525
                        
                        
                        $
                        82
                        
                        
                        $
                        297
                        
                        
                        $
                        —
                        
                        
                        $
                        904Depreciation
      and amortization
                        
                        $
                        (52
                        )
                        
                        $
                        (22
                        )
                        
                        $
                        (15
                        )
                        
                        $
                        (3
                        )
                        
                        $
                        (92
                        )Goodwill
      impairments
                        
                        
                        (76
                        )
                        
                        
                        (260
                        )
                        
                        
                        (97
                        )
                        
                        
                        —
                        
                        
                        
                        (433
                        )Impairment
      and other charges
                        
                        
                        (5
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (5
                        )Operating
      income (loss)
                        
                        $
                        200
                        
                        
                        $
                        (287
                        )
                        
                        $
                        (43
                        )
                        
                        $
                        (37
                        )
                        
                        $
                        (167
                        )Earnings
      from unconsolidated investments
                        
                        
                        —
                        
                        
                        
                        7
                        
                        
                        
                        —
                        
                        
                        
                        1
                        
                        
                        
                        8Other
      items, net
                        
                        
                        2
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        2
                        
                        
                        
                        4Interest
      expense
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (98
                        )Loss
      from continuing operations before income taxes
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (253
                        )Income
      tax expense
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (85
                        )Loss
      from continuing operations
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (338
                        )Income
      from discontinued operations, net of taxes
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1Net
      loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (337
                        )Less:
      Net loss attributable to the noncontrolling interest
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (2
                        )Net
      loss attributable to Dynegy Inc.
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        (335
                        )Identifiable
      assets:Domestic
                        
                        $
                        6,992
                        
                        
                        $
                        3,118
                        
                        
                        $
                        2,513
                        
                        
                        $
                        1,489
                        
                        
                        $
                        14,112Other
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        19
                        
                        
                        
                        19Total
                        
                        $
                        6,992
                        
                        
                        $
                        3,118
                        
                        
                        $
                        2,513
                        
                        
                        $
                        1,508
                        
                        
                        $
                        14,131Capital
      expenditures
                        
                        $
                        (128
                        )
                        
                        $
                        (1
                        )
                        
                        $
                        (7
                        )
                        
                        $
                        (2
                        )
                        
                        $
                        (138
                        )




34
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DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008







Dynegy’s
Segment Data As of and for the Three Months Ended March 31, 2008


(in
millions)





Power
      GenerationGEN-MW
                      
                      
                      GEN-WE
                      
                      
                      GEN-NE
                      
                      
                      Other
                      
                      
                      TotalUnaffiliated
      revenues:Domestic
                      
                      $
                      164
                      
                      
                      $
                      129
                      
                      
                      $
                      179
                      
                      
                      $
                      (1
                      )
                      
                      $
                      471Other
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      72
                      
                      
                      
                      —
                      
                      
                      
                      72Total
      revenues
                      
                      $
                      164
                      
                      
                      $
                      129
                      
                      
                      $
                      251
                      
                      
                      $
                      (1
                      )
                      
                      $
                      543Depreciation
      and amortization
                      
                      $
                      (53
                      )
                      
                      $
                      (23
                      )
                      
                      $
                      (13
                      )
                      
                      $
                      (3
                      )
                      
                      $
                      (92
                      )Operating
      loss
                      
                      $
                      (59
                      )
                      
                      $
                      (46
                      )
                      
                      $
                      (21
                      )
                      
                      $
                      (24
                      )
                      
                      $
                      (150
                      )Losses
      from unconsolidated investments
                      
                      
                      —
                      
                      
                      
                      (5
                      )
                      
                      
                      —
                      
                      
                      
                      (4
                      )
                      
                      
                      (9
                      )Other
      items, net
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      6
                      
                      
                      
                      14
                      
                      
                      
                      20Interest
      expense
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (109
                      )Loss
      from continuing operations before income taxes
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (248
                      )Income
      tax benefit
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      96Loss
      from continuing operations
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (152
                      )Loss
      from discontinued operations, net of taxes
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      —Net
      loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (152
                      )Less:
      Net income attributable to the noncontrolling interest
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      —Net
      loss attributable to Dynegy Inc.
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      (152
                      )Identifiable
      assets:Domestic
                      
                      $
                      7,650
                      
                      
                      $
                      3,778
                      
                      
                      $
                      1,958
                      
                      
                      $
                      1,380
                      
                      
                      $
                      14,766Other
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      46
                      
                      
                      
                      11
                      
                      
                      
                      57Total
                      
                      $
                      7,650
                      
                      
                      $
                      3,778
                      
                      
                      $
                      2,004
                      
                      
                      $
                      1,391
                      
                      
                      $
                      14,823Unconsolidated
      investments
                      
                      $
                      —
                      
                      
                      $
                      8
                      
                      
                      $
                      —
                      
                      
                      $
                      63
                      
                      
                      $
                      71Capital
      expenditures and investments in unconsolidated affiliates
                      
                      $
                      (115
                      )
                      
                      $
                      (3
                      )
                      
                      $
                      (10
                      )
                      
                      $
                      (9
                      )
                      
                      $
                      (137
                      )




35
 Table of Contents





DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008





Reportable
segment information for DHI, including intercompany transactions accounted for
at prevailing market rates, for the three months ended March 31, 2009 and 2008
is presented below:





DHI’s
Segment Data as of and for the Three Months Ended March 31, 2009


(in
millions)





Power
      GenerationGEN-MW
                        
                        
                        GEN-WE
                        
                        
                        GEN-NE
                        
                        
                        Other
                        
                        
                        TotalUnaffiliated
      revenues:Domestic
                        
                        $
                        525
                        
                        
                        $
                        82
                        
                        
                        $
                        297
                        
                        
                        $
                        —
                        
                        
                        $
                        904Total
      revenues
                        
                        $
                        525
                        
                        
                        $
                        82
                        
                        
                        $
                        297
                        
                        
                        $
                        —
                        
                        
                        $
                        904Depreciation
      and amortization
                        
                        $
                        (52
                        )
                        
                        $
                        (22
                        )
                        
                        $
                        (15
                        )
                        
                        $
                        (3
                        )
                        
                        $
                        (92
                        )Goodwill
      impairments
                        
                        
                        (76
                        )
                        
                        
                        (260
                        )
                        
                        
                        (97
                        )
                        
                        
                        —
                        
                        
                        
                        (433
                        )Impairment
      and other charges
                        
                        
                        (5
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (5
                        )Operating
      income (loss)
                        
                        $
                        200
                        
                        
                        $
                        (287
                        )
                        
                        $
                        (43
                        )
                        
                        $
                        (39
                        )
                        
                        $
                        (169
                        )Earnings
      from unconsolidated investments
                        
                        
                        —
                        
                        
                        
                        7
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        7Other
      items, net
                        
                        
                        2
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        2
                        
                        
                        
                        4Interest
      expense
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (98
                        )Loss
      from continuing operations before income taxes
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (256
                        )Income
      tax expense
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (82
                        )Loss
      from continuing operations
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (338
                        )Income
      from discontinued operations, net of taxes
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1Net
      loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (337
                        )Less:
      Net loss attributable to the noncontrolling interest
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (2
                        )Net
      loss attributable to Dynegy Holdings Inc.
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        (335
                        )Identifiable
      assets:Domestic
                        
                        $
                        6,992
                        
                        
                        $
                        3,118
                        
                        
                        $
                        2,513
                        
                        
                        $
                        1,307
                        
                        
                        $
                        13,930Other
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        19
                        
                        
                        
                        19Total
                        
                        $
                        6,992
                        
                        
                        $
                        3,118
                        
                        
                        $
                        2,513
                        
                        
                        $
                        1,326
                        
                        
                        $
                        13,949Capital
      expenditures
                        
                        $
                        (128
                        )
                        
                        $
                        (1
                        )
                        
                        $
                        (7
                        )
                        
                        $
                        (2
                        )
                        
                        $
                        (138
                        )





36
 Table of Contents




DYNEGY
INC. and DYNEGY HOLDINGS INC.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)




(Unaudited)




For
the Interim Periods Ended March 31, 2009 and 2008







DHI’s
Segment Data As of and for the Three Months Ended March 31, 2008


(in
millions)





Power
      GenerationGEN-MW
                      
                      
                      GEN-WE
                      
                      
                      GEN-NE
                      
                      
                      Other
                      
                      
                      TotalUnaffiliated
      revenues:Domestic
                      
                      $
                      164
                      
                      
                      $
                      129
                      
                      
                      $
                      179
                      
                      
                      $
                      (1
                      )
                      
                      $
                      471Other
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      72
                      
                      
                      
                      —
                      
                      
                      
                      72Total
      revenues
                      
                      $
                      164
                      
                      
                      $
                      129
                      
                      
                      $
                      251
                      
                      
                      $
                      (1
                      )
                      
                      $
                      543Depreciation
      and amortization
                      
                      $
                      (53
                      )
                      
                      $
                      (23
                      )
                      
                      $
                      (13
                      )
                      
                      $
                      (3
                      )
                      
                      $
                      (92
                      )Operating
      loss
                      
                      $
                      (59
                      )
                      
                      $
                      (46
                      )
                      
                      $
                      (21
                      )
                      
                      $
                      (24
                      )
                      
                      $
                      (150
                      )Losses
      from unconsolidated investment
                      
                      
                      —
                      
                      
                      
                      (5
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (5
                      )Other
      items, net
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      6
                      
                      
                      
                      14
                      
                      
                      
                      20Interest
      expense
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (109
                      )Loss
      from continuing operations before income taxes
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (244
                      )Income
      tax benefit
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      91Loss
      from continuing operations
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (153
                      )Loss
      from discontinued operations, net of taxes
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      —Net
      loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (153
                      )Less:
      Net income attributable to the noncontrolling interest
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      —Net
      loss attributable to attributable to Dynegy Holdings Inc.
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      (153
                      )Identifiable
      assets:Domestic
                      
                      $
                      7,650
                      
                      
                      $
                      3,778
                      
                      
                      $
                      1,958
                      
                      
                      $
                      1,266
                      
                      
                      $
                      14,652Other
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      46
                      
                      
                      
                      11
                      
                      
                      
                      57Total
                      
                      $
                      7,650
                      
                      
                      $
                      3,778
                      
                      
                      $
                      2,004
                      
                      
                      $
                      1,277
                      
                      
                      $
                      14,709Unconsolidated
      investments
                      
                      $
                      —
                      
                      
                      $
                      8
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      8Capital
      expenditures
                      
                      $
                      (115
                      )
                      
                      $
                      (3
                      )
                      
                      $
                      (10
                      )
                      
                      $
                      (3
                      )
                      
                      $
                      (131
                      )





Note
16—Subsequent Event





On April
30, 2009, we completed our sale of our Heard County power generation facility to
Oglethorpe for approximately $105 million.  Please read Note
2—Discontinued Operations—Heard County for further discussion.





37
 Table of Contents





DYNEGY
INC. and DYNEGY HOLDINGS INC.





MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS





For
the Interim Periods Ended March 31, 2009 and 2008





Item
2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS—DYNEGY INC. AND DYNEGY HOLDINGS INC.





The
following discussion should be read together with the unaudited condensed
consolidated financial statements and the notes thereto included in this report
and with the audited consolidated financial statements and the notes thereto
included in our Form 10-K.





We are
holding companies and conduct substantially all of our business operations
through our subsidiaries.  Our current business operations are focused
primarily on the power generation sector of the energy industry.  We
report the results of our power generation business as three separate segments
in our consolidated financial statements: (i) the Midwest segment (“GEN-MW”);
(ii) the West segment (“GEN-WE”); and (iii) the Northeast segment
(“GEN-NE”).  Our unaudited condensed consolidated financial results
also reflect corporate-level expenses such as general and administrative,
interest and depreciation and amortization.





In
addition to our operating generation facilities, we own an approximate 37
percent interest in PPEA Holding, which through its wholly owned subsidiary,
owns a 57 percent undivided interest in the Plum Point Project, a 665 MW
coal-fired power generation facility under construction in Arkansas, which is
included in GEN-MW.  We also own a 50 percent interest in SCEA, which
owns a 64 percent undivided interest in the Sandy Creek Project, an 898 MW power
generation facility under construction in McLennan County, Texas, which is
included in GEN-WE.





Recent
Developments





Goodwill
Impairment.  We review goodwill for potential impairment as of
November 1st of each
year or more frequently if events or circumstances occur that would more likely
than not reduce the fair value of a reporting unit below its carrying
amount.  During the first quarter 2009, there were several events and
circumstances which, considered in the aggregate, indicated a reduction in the
fair value of our reporting segments.  As a result, although we have
not yet finalized the second step of our impairment analysis, we recorded
impairment charges of $76 million, $260 million and $97 million for our GEN-MW,
GEN-WE and GEN-NE reporting units, respectively, as of March 31,
2009.  Please see Note 9—Goodwill for further discussion.





DLS Power
Holdings and DLS Power Development Dissolution.  In December
2008, Dynegy entered into an agreement with LS Associates to dissolve DLS Power
Holdings and DLS Power Development, our development joint ventures with LS Power
Associates effective January 1, 2009.  Under the terms of this
agreement, we acquired exclusive rights related to repowering and expansion
opportunities at our existing facilities.  In the first quarter 2009,
Dynegy subsequently contributed these assets to DHI.  In return, LS
Power Associates received a cash payment of approximately $19 million, as well
as full rights to new greenfield development opportunities previously held by
the joint venture.  Please read Note 8—Variable Interest Entities—DLS
Power Holdings and DLS Power Development for further discussion.





Heard
County.  On April 30,
2009, we completed our sale of the Heard County power generation facility to
Oglethorpe for approximately $105 million, net of transaction
costs.  Please read Note 2—Discontinued Operations—Heard County for
further discussion.





LIQUIDITY
AND CAPITAL RESOURCES





Overview





In this
section, we describe our liquidity and capital requirements and our internal and
external liquidity and capital resources.  Our liquidity and capital
requirements are primarily a function of our debt maturities and debt service
requirements, fixed capacity payments and contractual obligations, capital
expenditures (including required environmental expenditures) and working capital
needs.  Examples of working capital needs include prepayments or cash
collateral associated with purchases of commodities, particularly natural gas,
fuel oil and coal, facility maintenance costs and other costs such as
payroll.





38
 Table of Contents




Our
primary sources of internal liquidity are cash flows from operations, cash on
hand, available capacity under our Credit Facility, of which the revolver
capacity of $1,080 million is scheduled to mature in April 2012 and the term
letter of credit capacity of $850 million is scheduled to mature in April 2013,
and available capacity under our Contingent LC Facility, as described further
below.  Additionally, DHI may borrow money from time to time from
Dynegy.  Our primary sources of external liquidity are asset sales
proceeds and proceeds from capital market transactions to the extent we engage
in these transactions.





Operating
cash flows provided by our power generation assets and the available cash we
currently hold are expected to be sufficient to fund the operation of our
business, as well as our planned capital expenditure program, including
expenditures in connection with the Midwest Consent Decree, and debt service
requirements over the next twelve months.  We maintain capacity under
the Credit Facility in order to post collateral in the form of letters of
credit or cash, and we believe we have sufficient capacity should we be required
to post additional collateral.  Please read Note 15—Debt—Fifth Amended
and Restated Credit Facility in our Form 10-K for a discussion of the financial
covenants contained in the DHI's Fifth Amended and Restated Credit Facility (the
"Credit Facility"), as well as the discussion below regarding our Revolver
Capacity.





Current
Liquidity.  The following table summarizes our consolidated
revolver capacity and liquidity position at May 1, 2009, March 31, 2009 and
December 31, 2008:





May
      1,
                          2009
                        
                        
                        March
      31,
                          2009
                        
                        December
      31, 2008(in
      millions)Revolver
      capacity (1)(2)
                        
                        $
                        1,080
                        
                        
                        $
                        1,080
                        
                        
                        $
                        1,080Borrowings
      against revolver capacity
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Term
      letter of credit capacity, net of required reserves
                        
                        
                        825
                        
                        
                        
                        825
                        
                        
                        
                        825Plum
      Point and Sandy Creek letter of credit capacity
                        
                        
                        377
                        
                        
                        
                        377
                        
                        
                        
                        377Available
      contingent letter of credit facility capacity (3)
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Outstanding
      letters of credit
                        
                        (997
                        )
                        
                        
                        (1,081
                        )
                        
                        
                        (1,135
                        )Unused
      capacity
                        
                        1,285
                        
                        
                        
                        1,201
                        
                        
                        
                        1,147Cash—DHI
                        
                        646
                        
                        
                        
                        539
                        
                        
                        
                        670Total
      available liquidity—DHI
                        
                        1,931
                        
                        
                        
                        1,740
                        
                        
                        
                        1,817Cash—Dynegy
                        
                        183
                        
                        
                        
                        183
                        
                        
                        
                        23Total
      available liquidity—Dynegy
                        
                        $
                        2,114
                        
                        
                        $
                        1,923
                        
                        
                        $
                        1,840





(1)
            We
      currently have a syndicate of lenders participating in the revolving
      portion of our Credit Facility with commitments ranging from $10
      million to $105 million.  Other than the commitment from one
      lender that filed for protection from creditors under chapter 11
      bankruptcy law, we have not experienced, nor do we currently anticipate,
      any difficulties in obtaining funding from any of the lenders at this
      time.  However, we continue to monitor the environment, and any
      lack of or delay in funding by a significant member or multiple members of
      our banking group would negatively affect our liquidity
      position.




(2)
            Based
      on management’s current 2009 forecast of EBITDA, DHI’s available liquidity
      under the Credit Facility is expected to be reduced temporarily in
      mid-to late-2009 as a result of borrowing limitations under the
      covenant regarding the ratio of secured debt to EBITDA.  See
      “Revolver Capacity” below for further
  discussion.




(3)
            Under
      the terms of the Contingent LC Facility, up to $300 million of capacity
      can become available, contingent on 2009 forward natural gas prices rising
      above $13/MMBtu.  Over the course of 2009, the ratio of
      availability per dollar increase in natural gas prices will be reduced, on
      a pro rata monthly basis, to zero by
year-end.




39
 Table of Contents




Cash on
Hand.  At May 1, 2009 and March 31, 2009, Dynegy had cash on
hand of $829 million and $722 million, respectively, as compared to $693 million
at December 31, 2008.  The increase in cash on hand as compared to the
end of 2008 is primarily attributable to cash provided by operating activities
of our power generation business.





At May 1,
2009 and March 31, 2009, DHI had cash on hand of $646 million and $539
million, respectively, as compared to $670 million at December 31,
2008.  The decrease in cash on hand as compared to the end of 2008 is
primarily attributable to a dividend of $175 million paid to Dynegy in January
2009 partially offset by cash provided by the operating activities of our power
generation business.





Revolver
Capacity.  As of May 1,
2009, $997 million in letters of credit are outstanding but undrawn, and we have
no revolving loan amounts drawn under the Credit Facility, which is our primary
credit facility.  Based on management’s current 2009 forecast of
EBITDA, the potential use by DHI of available liquidity under the Credit
Facility is likely to be reduced temporarily during 2009 in order to
remain in compliance with the covenant set forth in Section 7.11 of the Credit
Facility regarding the ratio of secured debt to EBITDA (each as defined
therein).  The effect of reduced availability under the
Credit Facility would be less available liquidity to DHI.  However,
even after giving effect to this reduction, we believe we have sufficient
liquidity and capital resources to support our operations for the next twelve
months.  Please read Note 15—Debt—Fifth Amended and Restated Credit
Facility in our Form 10-K for further discussion of the Credit
Facility.





Operating
Activities





Historical
Operating Cash Flows.  Dynegy’s cash flow provided by
operations totaled $165 million for the three months ended March 31,
2009.  DHI’s cash flow provided by operations totaled $183 million for
the three months ended March 31, 2009.  During the period, our power
generation business provided positive cash flow from operations of $255 million
from the operation of our power generation facilities, reflecting positive
earnings for the period.  Corporate and other operations included a
use of approximately $90 million and $72 million in cash by Dynegy and DHI,
respectively, primarily due to interest payments to service debt and general and
administrative expenses, partially offset by interest income.





Dynegy’s
and DHI’s cash flow provided by operations totaled $146 million for the three
months ended March 31, 2008.  During the period, our power generation
business provided positive cash flow from operations of $239 million primarily
due to positive earnings for the period, partly offset by an increased use of
working capital.  Corporate and other operations included a use of
approximately $93 million in cash by Dynegy and DHI relating to corporate-level
expenses and our former customer risk management business.





Future Operating
Cash Flows.  Our future operating cash flows will vary based on
a number of factors, many of which are beyond our control, including the price
of natural gas and its correlation to power prices, the cost of coal and fuel
oil, collateral requirements, the value of capacity and ancillary services and
legal and regulatory requirements.  For example, continued depression
of commodity prices will affect our operating cash
flow.  Additionally, the availability of our plants during peak demand
periods will be required to allow us to capture attractive market prices when
available.  Over the longer term, our operating cash flows also will
be impacted by, among other things, our ability to tightly manage our operating
costs, including maintenance costs, in balance with ensuring that our plants are
available to operate when markets offer attractive returns.





40
 Table of Contents




Collateral
Postings.  We use a significant portion of our capital
resources, in the form of cash and letters of credit, to satisfy counterparty
collateral demands.  These counterparty collateral demands reflect our
non-investment grade credit ratings and counterparties’ views of our financial
condition and ability to satisfy our performance obligations, as well as
commodity prices and other factors.  The following table summarizes
our consolidated collateral postings to third parties by business at May 1,
2009, March 31, 2009 and December 31, 2008:





May
      1,
                            2009
                          
                          
                          March
      31,
                            2009
                          
                          
                          December
      31, 2008(in
      millions)By
    Business:Generation
                          
                          $
                          1,093
                          
                          
                          $
                          1,168
                          
                          
                          $
                          1,064Other
                          
                          
                          189
                          
                          
                          
                          189
                          
                          
                          
                          189Total
                          
                          $
                          1,282
                          
                          
                          $
                          1,357
                          
                          
                          $
                          1,253By Type:Cash (1)
                          
                          $
                          285
                          
                          
                          $
                          276
                          
                          
                          $
                          118Letters of Credit
                          
                          
                          997
                          
                          
                          
                          1,081
                          
                          
                          
                          1,135Total
                          
                          $
                          1,282
                          
                          
                          $
                          1,357
                          
                          
                          $
                          1,253




(1)
            Cash
      collateral postings exclude the effect of cash inflows and outflows
      arising from the daily settlements of our exchange-traded or brokered
      commodity futures positions held with our futures clearing
      manager.




The changes
in collateral postings from December 31, 2008 to March 31, 2009 and to May 1,
2009 is primarily due to the volume of forward power sales and fuel purchase
transactions.





Going
forward, we expect counterparties’ collateral demands to continue to reflect
changes in commodity prices, including seasonal changes in weather-related
demand, as well as their views of our creditworthiness.  We believe
that we have sufficient capital resources to satisfy counterparties’ collateral
demands, including those for which no collateral is currently posted, for the
foreseeable future.





Investing
Activities





Capital
Expenditures.We continue to tightly
manage our operating costs and capital expenditures.  We had
approximately $138 million and $131 million in capital expenditures during the
three months ended March 31, 2009 and 2008.  Our capital spending by
reportable segment was as follows:





March
      31,2009
                  
                  
                  2008GEN-MW
                  
                  $
                  128
                  
                  
                  $
                  115GEN-WE
                  
                  
                  1
                  
                  
                  
                  3GEN-NE
                  
                  
                  7
                  
                  
                  
                  10Other
                  
                  
                  2
                  
                  
                  
                  3Total
                  
                  $
                  138
                  
                  
                  $
                  131





Capital
spending in our GEN-MW segment primarily consisted of environmental and
maintenance capital projects, as well as approximately $23million and $54 million
spent on development capital related to the Plum Point project during the three
months ended March 31, 2009 and 2008, respectively.  Capital spending
in our GEN-WE and GEN-NE segments primarily consisted of maintenance
projects.





During
the first quarter 2009, we revised our estimate of the timing regarding a
maintenance capital project at our Moss Landing facility in
GEN-WE.  We expect capital expenditures for the remainder of 2009 to
be approximately $40 million higher than originally planned, primarily due to
the change in timing.





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 Table of Contents




Asset
Dispositions.  Proceeds from asset sales during the three
months ended March 31, 2008 totaled $56 million and primarily related to the
sale of our Calcasieu power generating facility, net of transaction
costs.  Please read Note 2—Discontinued Operations—Calcasieu for
further discussion.





On April
30, 2009, we completed our sale of the Heard County power generation facility to
Oglethorpe for approximately $105 million, net of transaction
costs.  Please read Note 2—Discontinued Operations—Heard County for
further discussion.





Consistent
with industry practice, we regularly evaluate our generation fleet based
primarily on geographic location, fuel supply, market structure and market
recovery expectations.  We consider divestitures of non-core
generation assets where the balance of the above factors suggests that such
assets’ earnings potential is limited or that the value that can be captured
through a divestiture outweighs the benefits of continuing to own and operate
such assets.  Additional dispositions of one or more generation
facilities or other investments could occur in 2009 or beyond.  Were
any such sale or disposition to be consummated, the disposition could result in
accounting charges related to the affected asset(s), and our future earnings and
cash flows could be affected.





Other Investing
Activities.  Cash inflow related to short-term investments
during the three months ended March 31, 2009 totaled $8 million for both Dynegy
and DHI, reflecting a distribution from our short-term
investments.  There was a $32 million cash outflow during the three
months ended March 31, 2009 due to changes in restricted cash balances primarily
due to a $35 million increase in the Independence restricted cash
balance.





Dynegy
made $6 million in contributions to DLS Power Holdings during the three months
ended March 31, 2008.  There was a $25 million cash outflow during the
three months ended March 31, 2008 due to changes in restricted cash balances
primarily due to a $30 million increase in the Independence restricted cash
balance.  Finally, Other included $6 million of insurance proceeds and
$4 million of proceeds from the liquidation of an investment during the three
months ended March 31, 2008.





Financing
Activities





Historical Cash
Flow from Financing Activities.  Dynegy’s net cash provided by
financing activities during the three months ended March 31, 2009 totaled $25
million primarily related to proceeds from long-term borrowings under the Plum
Point Credit Agreement Facility.  DHI’s net cash used in financing
activities during the three months ended March 31, 2009 totaled $150 million.
This includes a one-time dividend payment from DHI to Dynegy of $175 million
offset by $25 million primarily related to proceeds from long-term borrowings
under the Plum Point Credit Agreement Facility.





Dynegy’s
and DHI’s net cash provided by financing activities during three months ended
March 31, 2008 totaled $50 million, which primarily related to proceeds from
long-term borrowings under the Plum Point Credit Agreement
Facility.





Financing Trigger
Events.Our debt instruments and other financial obligations
include provisions which, if not met, could require early payment, additional
collateral support or similar actions.  These trigger events include
financial covenants, insolvency events, defaults on scheduled principal or
interest payments, acceleration of other financial obligations and change of
control provisions.  We do not have any trigger events tied to
specified credit ratings or stock price in our debt instruments and are not
party to any contracts that require us to issue equity based on credit ratings
or other trigger events.  However, certain interest rate swaps to
which Plum Point is a party could be terminated if a credit downgrade of Plum
Point occurs and there is also a default by the insurer that has provided
credit insurance for the swaps.





Financial
Covenants.  Our Credit Facility contains certain financial
covenants, including (i) a covenant (measured as of the last day of the relevant
fiscal quarter as specified below) that requires DHI and certain of its
subsidiaries to maintain a ratio of secured debt to EBITDA for DHI and its
relevant subsidiaries of no greater than 2.75:1 (March 31, 2009); and 2.5:1
(June 30, 2009 and thereafter); and (ii) a covenant that requires DHI and
certain of its subsidiaries to maintain a ratio of EBITDA to consolidated
interest expense for DHI and its relevant subsidiaries as of the last day of the
measurement periods ending March 31, 2009 and June 30, 2009 of no less than
1.625:1; and ending September 30, 2009 and thereafter of no less than
1.75:1.  We are in compliance with these covenants as of March 31,
2009, but expect a temporary reduction in availability of liquidity under our
Credit Facility in mid-to late-2009 as a result of forecasted EBITDA and a
corresponding borrowing limitation under the secured debt to EBITDA
covenant.  Despite this expected temporary reduction in our available
liquidity, we believe we have sufficient liquidity and capital resources to
support our operations for the next twelve months.   Going
foward, we will continue to monitor our compliance with the covenants relative
to the earnings potential of our asset-based power generation portfolio. 
Please read “Revolver Capacity” above for further discussion.





42
 Table of Contents




Subject
to certain exceptions, DHI and its relevant subsidiaries are subject to
restrictions on asset sales, incurring additional indebtedness, limitations on
investments and certain limitations on dividends and other payments in respect
of capital stock.  Our lenders agreed to amend certain of these
restrictions or limitations effective February 13, 2009.  Based on our
available liquidity as of March 31, 2009 and the additional capacity available
under the Contingent LC Facility, we do not believe these limitations will
affect our operations.  Please read Note 15—Debt—Fifth Amended and
Restated Credit Facility in our Form 10-K for further discussion of our Credit
Facility.





Capital-Raising
Transactions.  As part of our ongoing efforts to maintain a
capital structure that is closely aligned with the cash-generating potential of
our asset-based business, which is subject to cyclical changes in commodity
prices, we may explore additional sources of external liquidity.  The
timing of any transaction may be impacted by events, such as strategic growth
opportunities, legal judgments or regulatory requirements as well as any
decisions to seek an improved credit profile.  The receptiveness of
the capital markets to an offering of debt or equity securities cannot be
assured and may be negatively impacted by, among other things, our
non-investment grade credit ratings, significant debt maturities, long-term
business prospects and other factors beyond our control, including current
market conditions.  Any issuance of equity by Dynegy likely would have
other effects as well, including stockholder dilution.  Our ability to
issue debt securities is limited by our financing agreements, including our
Credit Facility.





In
addition, we continually review and discuss opportunities to participate in what
we believe will be continuing consolidation of the power generation
industry.  No such definitive transaction has been agreed to and none
can be guaranteed to occur; however, we have successfully executed on similar
opportunities in the past and could do so again in the
future.  Depending on the terms and structure of any such transaction,
we could issue significant debt and/or equity securities for capital-raising
purposes.  We also could be required to assume substantial debt
obligations and the underlying payment obligations.





Capital
Allocation.  Capital allocation determinations generally are
subject to the discretion of Dynegy’s Board of Directors as well as availability
of capital and related investment opportunities, and may be limited by the
provisions of our financing agreements.  Any particular use of capital
in an amount that is not considered material may be made without any prior
public disclosure and could occur at any time.





Dividends and
Dynegy Common Stock.Dividend payments on Dynegy’s common
stock are at the discretion of its Board of Directors.  Dynegy did not
declare or pay a dividend on its common stock during the first quarter 2009, and
does not expect to pay a dividend on any class of its common stock in the
foreseeable future.





Credit
Ratings





Our
credit rating status is currently “non-investment grade”; our senior unsecured
debt is rated “B” by Standard & Poor’s, “B3” by Moody’s, and “B+” by
Fitch.  On April 8, 2009, Moody’s downgraded our corporate family and
probability of default ratings of the electricity utility to “B2” from “B1”
based on projected lower power prices affecting credit metrics.  The
agency also cut our senior secured bank facilities rating to “Ba2” from “Ba1”,
and senior unsecured debt rating to “B3” from “B2”.  The downgrades
did not trigger any of our financing arrangements or other obligations and
otherwise have not impacted our operations or liquidity.





43
 Table of Contents




Disclosure
of Contractual Obligations and Contingent Financial Commitments





We have
incurred various contractual obligations and financial commitments in the normal
course of our operations and financing activities.  Contractual
obligations include future cash payments required under existing contractual
arrangements, such as debt and lease agreements.  These obligations
may result from both general financing activities and from commercial
arrangements that are directly supported by related revenue-producing
activities.  Contingent financial commitments represent obligations
that become payable only if certain pre-defined events occur, such as financial
guarantees.





As of
March 31, 2009, there were no material changes to our contractual obligations
and contingent financial commitments since December 31, 2008.





Please
read “Uncertainty of Forward-Looking Statements and Information” for additional
factors that could impact our future operating results and financial
condition.





44
 Table of Contents





RESULTS
OF OPERATIONS—DYNEGY INC. and DYNEGY HOLDINGS INC.





Overview.  In
this section, we discuss our results of operations, both on a consolidated basis
and, where appropriate, by segment, for the three month periods ended March 31,
2009 and 2008.  At the end of this section, we have included our
outlook for each segment.





We report
the results of our power generation business as three separate geographical
segments in our unaudited condensed consolidated financial
statements.  Our unaudited condensed consolidated financial results
also reflect corporate-level expenses such as general and administrative,
interest and depreciation and amortization.





Summary Financial
Information.  The following tables provide summary financial
data regarding Dynegy’s consolidated and segmented results of operations for the
three month periods ended March 31, 2009 and 2008, respectively:





Dynegy’s
Results of Operations for the Three Months Ended March 31, 2009





Power
      GenerationGEN-MW
                  
                  
                  GEN-WE
                  
                  
                  GEN-NE
                  
                  
                  Other
                  
                  
                  TotalRevenues
                  
                  $
                  525
                  
                  
                  $
                  82
                  
                  
                  $
                  297
                  
                  
                  $
                  —
                  
                  
                  $
                  904Cost
      of sales
                  
                  
                  (141
                  )
                  
                  
                  (54
                  )
                  
                  
                  (186
                  )
                  
                  
                  —
                  
                  
                  
                  (381
                  )Operating
      and maintenance expense, exclusive of depreciation and amortization
      expense shown separately below
                  
                  
                  (51
                  )
                  
                  
                  (33
                  )
                  
                  
                  (42
                  )
                  
                  
                  4
                  
                  
                  
                  (122
                  )Depreciation
      and amortization expense
                  
                  
                  (52
                  )
                  
                  
                  (22
                  )
                  
                  
                  (15
                  )
                  
                  
                  (3
                  )
                  
                  
                  (92
                  )Goodwill
      impairments
                  
                  
                  (76
                  )
                  
                  
                  (260
                  )
                  
                  
                  (97
                  )
                  
                  
                  —
                  
                  
                  
                  (433
                  )Impairment
      and other charges, exclusive of goodwill impairments shown separately
      above
                  
                  
                  (5
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (5
                  )General
      and administrative expense
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (38
                  )
                  
                  
                  (38
                  )Operating
      income (loss)
                  
                  $
                  200
                  
                  
                  $
                  (287
                  )
                  
                  $
                  (43
                  )
                  
                  $
                  (37
                  )
                  
                  $
                  (167
                  )Earnings
      from unconsolidated investments
                  
                  
                  —
                  
                  
                  
                  7
                  
                  
                  
                  —
                  
                  
                  
                  1
                  
                  
                  
                  8Other
      items, net
                  
                  
                  2
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2
                  
                  
                  
                  4Interest
      expense
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (98
                  )Loss
      from continuing operations before income taxes
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (253
                  )Income
      tax expense
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (85
                  )Loss
      from continuing operations
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (338
                  )Income
      from discontinued operations, net of taxes
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (337
                  )Less:
      Net loss attributable to the noncontrolling interest
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (2
                  )Net
      loss attributable to Dynegy Inc.
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (335
                  )




45
 Table of Contents





Dynegy’s
Results of Operations for the Three Months Ended March 31, 2008





Power
      GenerationGEN-MW
                  
                  
                  GEN-WE
                  
                  
                  GEN-NE
                  
                  
                  Other
                  
                  
                  TotalRevenues
                  
                  $
                  164
                  
                  
                  $
                  129
                  
                  
                  $
                  251
                  
                  
                  $
                  (1
                  )
                  
                  $
                  543Cost
      of sales
                  
                  
                  (124
                  )
                  
                  
                  (123
                  )
                  
                  
                  (213
                  )
                  
                  
                  9
                  
                  
                  
                  (451
                  )Operating
      and maintenance expense, exclusive of depreciation and amortization
      expense shown separately below
                  
                  
                  (46
                  )
                  
                  
                  (29
                  )
                  
                  
                  (46
                  )
                  
                  
                  10
                  
                  
                  
                  (111
                  )Depreciation
      and amortization expense
                  
                  
                  (53
                  )
                  
                  
                  (23
                  )
                  
                  
                  (13
                  )
                  
                  
                  (3
                  )
                  
                  
                  (92
                  )General
      and administrative expense
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (39
                  )
                  
                  
                  (39
                  )Operating
      loss
                  
                  $
                  (59
                  )
                  
                  $
                  (46
                  )
                  
                  $
                  (21
                  )
                  
                  $
                  (24
                  )
                  
                  $
                  (150
                  )Losses
      from unconsolidated investments
                  
                  
                  —
                  
                  
                  
                  (5
                  )
                  
                  
                  —
                  
                  
                  
                  (4
                  )
                  
                  
                  (9
                  )Other
      items, net
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  6
                  
                  
                  
                  14
                  
                  
                  
                  20Interest
      expense
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (109
                  )Loss
      from continuing operations before income taxes
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (248
                  )Income
      tax benefit
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  96Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (152
                  )Less:
      Net loss attributable to the noncontrolling interest
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  —Net
      loss attributable to Dynegy Inc.
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (152
                  )




46
 Table of Contents





The
following tables provide summary financial data regarding DHI’s consolidated and
segmented results of operations for the three month periods ended March 31, 2009
and 2008, respectively:





DHI’s
Results of Operations for the Three Months Ended March 31, 2009





Power
      GenerationGEN-MW
                  
                  
                  GEN-WE
                  
                  
                  GEN-NE
                  
                  
                  Other
                  
                  
                  TotalRevenues
                  
                  $
                  525
                  
                  
                  $
                  82
                  
                  
                  $
                  297
                  
                  
                  $
                  —
                  
                  
                  $
                  904Cost
      of sales
                  
                  
                  (141
                  )
                  
                  
                  (54
                  )
                  
                  
                  (186
                  )
                  
                  
                  —
                  
                  
                  
                  (381
                  )Operating
      and maintenance expense, exclusive of depreciation and amortization
      expense shown separately below
                  
                  
                  (51
                  )
                  
                  
                  (33
                  )
                  
                  
                  (42
                  )
                  
                  
                  2
                  
                  
                  
                  (124
                  )Depreciation
      and amortization expense
                  
                  
                  (52
                  )
                  
                  
                  (22
                  )
                  
                  
                  (15
                  )
                  
                  
                  (3
                  )
                  
                  
                  (92
                  )Goodwill
      impairments
                  
                  
                  (76
                  )
                  
                  
                  (260
                  )
                  
                  
                  (97
                  )
                  
                  
                  —
                  
                  
                  
                  (433
                  )Impairment
      and other charges, exclusive of goodwill impairments shown separately
      above
                  
                  
                  (5
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (5
                  )General
      and administrative expense
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (38
                  )
                  
                  
                  (38
                  )Operating
      income (loss)
                  
                  $
                  200
                  
                  
                  $
                  (287
                  )
                  
                  $
                  (43
                  )
                  
                  $
                  (39
                  )
                  
                  $
                  (169
                  )Earnings
      from unconsolidated investments
                  
                  
                  —
                  
                  
                  
                  7
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  7Other
      items, net
                  
                  
                  2
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2
                  
                  
                  
                  4Interest
      expense
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (98
                  )Loss
      from continuing operations before income taxes
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (256
                  )Income
      tax expense
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (82
                  )Loss
      from continuing operations
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (338
                  )Income
      from discontinued operations, net of taxes
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (337
                  )Less:
      Net loss attributable to the noncontrolling interest
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (2
                  )Net
      loss attributable to Dynegy Holdings Inc.
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (335
                  )




47
 Table of Contents




DHI’s
Results of Operations for the Three Months Ended March 31, 2008





Power
      GenerationGEN-MW
                  
                  
                  GEN-WE
                  
                  
                  GEN-NE
                  
                  
                  Other
                  
                  
                  TotalRevenues
                  
                  $
                  164
                  
                  
                  $
                  129
                  
                  
                  $
                  251
                  
                  
                  $
                  (1
                  )
                  
                  $
                  543Cost
      of sales
                  
                  
                  (124
                  )
                  
                  
                  (123
                  )
                  
                  
                  (213
                  )
                  
                  
                  9
                  
                  
                  
                  (451
                  )Operating
      and maintenance expense, exclusive of depreciation and amortization
      expense shown separately below
                  
                  
                  (46
                  )
                  
                  
                  (29
                  )
                  
                  
                  (46
                  )
                  
                  
                  10
                  
                  
                  
                  (111
                  )Depreciation
      and amortization expense
                  
                  
                  (53
                  )
                  
                  
                  (23
                  )
                  
                  
                  (13
                  )
                  
                  
                  (3
                  )
                  
                  
                  (92
                  )General
      and administrative expense
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (39
                  )
                  
                  
                  (39
                  )Operating
      loss
                  
                  $
                  (59
                  )
                  
                  $
                  (46
                  )
                  
                  $
                  (21
                  )
                  
                  $
                  (24
                  )
                  
                  $
                  (150
                  )Losses
      from unconsolidated investments
                  
                  
                  
                  
                  
                  
                  (5
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (5
                  )Other
      items, net
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  6
                  
                  
                  
                  14
                  
                  
                  
                  20Interest
      expense
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (109
                  )Loss
      from continuing operations before income taxes
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (244
                  )Income
      tax benefit
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  91Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (153
                  )Less:
      Net income attributable to the noncontrolling interest
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  —Net
      loss attributable to Dynegy Holdings Inc.
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (153
                  )





48
 Table of Contents




The
following table provides summary segmented operating statistics for the three
months ended March 31, 2009 and 2008, respectively:





Three
      Months Ended
                    March
      31,2009
                  
                  
                  2008GEN-MWMillion
      Megawatt Hours Generated
                  
                  
                  6.5
                  
                  
                  
                  5.9In
      Market Availability for Coal Fired Facilities (1)
                  
                  
                  86
                  %
                  
                  
                  82
                  %Average
      Capacity Factor for Combined Cycle Facilities (2)
                  
                  
                  30
                  %
                  
                  
                  10
                  %Average
      Quoted On-Peak Market Power Prices ($/MWh) (3):Cinergy
      (Cin Hub)
                  
                  $
                  39
                  
                  
                  $
                  68Commonwealth
      Edison (NI Hub)
                  
                  $
                  40
                  
                  
                  $
                  68PJM
      West
                  
                  $
                  55
                  
                  
                  $
                  79Average
      Market Spark Spreads ($/MWh) (4):PJM
      West
                  
                  $
                  11
                  
                  
                  $
                  9GEN-WEMillion
      Megawatt Hours Generated (5) (6)
                  
                  
                  1.5
                  
                  
                  
                  2.4Average
      Capacity Factor for Combined Cycle Facilities (2)
                  
                  
                  26
                  %
                  
                  
                  37
                  %Average
      Quoted On-Peak Market Power Prices ($/MWh) (3):North
      Path 15 (NP 15)
                  
                  $
                  40
                  
                  
                  $
                  80Palo
      Verde
                  
                  $
                  34
                  
                  
                  $
                  70Average
      Market Spark Spreads ($/MWh) (4):North
      Path 15 (NP 15)
                  
                  $
                  6
                  
                  
                  $
                  18Palo
      Verde
                  
                  $
                  5
                  
                  
                  $
                  9GEN-NEMillion
      Megawatt Hours Generated
                  
                  
                  3.1
                  
                  
                  
                  1.9In
      Market Availability for Coal Fired Facilities (1)
                  
                  
                  97
                  %
                  
                  
                  94
                  %Average
      Capacity Factor for Combined Cycle Facilities (2)
                  
                  
                  48
                  %
                  
                  
                  24
                  %Average
      Quoted On-Peak Market Power Prices ($/MWh) (3):New
      York—Zone G
                  
                  $
                  62
                  
                  
                  $
                  97New
      York—Zone A
                  
                  $
                  47
                  
                  
                  $
                  68Mass
      Hub
                  
                  $
                  59
                  
                  
                  $
                  90Average
      Market Spark Spreads ($/MWh) (4):New
      York—Zone A
                  
                  $
                  10
                  
                  
                  $
                  4Mass
      Hub
                  
                  $
                  15
                  
                  
                  $
                  19Fuel
      Oil
                  
                  $
                  (9
                  )
                  
                  $
                  (35
                  )Average
      natural gas price—Henry Hub ($/MMBtu) (7)
                  
                  $
                  4.58
                  
                  
                  $
                  8.58




(1)
            Reflects
      the percentage of generation available during periods when market prices
      are such that these units could be profitably
  dispatched.


(2)
            Reflects
      actual production as a percentage of available
  capacity.


(3)
            Reflects
      the average of day-ahead quoted prices for the periods presented and does
      not necessarily reflect prices realized by the
  Company.


(4)
            Reflects
      the simple average of the spark spread available to a 7.0 MMBtu/MWh heat
      rate generator selling power at day-ahead prices and buying delivered
      natural gas or fuel oil at a daily cash market price and does not reflect
      spark spreads available to the
Company.


(5)
            Includes
      our ownership percentage in the MWh generated by our GEN-WE investment in
      the Black Mountain power generation facility for the three months ended
      March 31, 2009 and 2008,
respectively.


(6)
            Excludes
      less than 0.1 million MWh generated by our Calcasieu power generation
      facility, which we sold on March 31, 2008, for the three months ended
      March 31, 2008.


(7)
            Reflects
      the average of daily quoted prices for the periods presented and does not
      reflect costs incurred by the
Company.





49
 Table of Contents




The
following table summarizes significant items on a pre-tax basis, with the
exception of the tax items, affecting net loss for the period
presented:





Three
      Months Ended March 31, 2009Power
      GenerationGEN-MW
                
                
                GEN-WE
                
                
                GEN-NE
                
                
                Other
                
                
                Total(in
      millions)Impairments
                
                $
                (81
                )
                
                $
                (260
                )
                
                $
                (97
                )
                
                $
                —
                
                
                $
                (438
                )Sandy
      Creek mark-to-market gains (1)
                
                
                —
                
                
                
                10
                
                
                
                —
                
                
                
                —
                
                
                
                10Taxes
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (15
                )
                
                
                (15
                )Total—DHI
                
                
                (81
                )
                
                
                (250
                )
                
                
                (97
                )
                
                
                (15
                )
                
                
                (443
                )Taxes
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (6
                )
                
                
                (6
                )Total—Dynegy
                
                $
                (81
                )
                
                $
                (250
                )
                
                $
                (97
                )
                
                $
                (21
                )
                
                $
                (449
                )





(1)
            These
      mark-to-market gains represent our 50 percent
  share.





There
were no such items reported for the three months ended March 31,
2008.





Operating
Loss





Operating
loss for Dynegy was $167 million for the three months ended March 31, 2009,
compared to operating loss of $150 million for the three months ended March 31,
2008.  Operating loss for DHI was $169 million for the three months
ended March 31, 2009, compared to operating loss of $150 million for the three
months ended March 31, 2008.





Our
operating loss for the first quarter 2009 was driven, in large part, by a $433
million impairment of goodwill.  Please read Note 9—Goodwill for
further discussion.





The
impairment of goodwill was partly offset by mark-to-market gains on forward
sales of power associated with our generating assets which are included in
Revenues in the unaudited condensed consolidated statements of
operations.  Such gains, which totaled $169 million for the three
months ended March 31, 2009, were a result of a decrease in forward market power
prices or forward spark spreads during the first quarter.  These gains
compared to $284 million of mark-to-market losses for the three months ended
March 31, 2008, when forward market power prices increased during the
quarter.





We do not
designate our commodity derivative instruments as cash flow hedges for
accounting purposes.  Please read Note 4—Risk Management Activities,
Derivatives and Financial Instruments for further discussion.  The
resulting mark-to-market accounting treatment results in the immediate
recognition of gains and losses within revenues in the unaudited condensed
consolidated statements of operations due to changes in the fair value of the
derivative instruments.  As a result, these mark-to-market gains and
losses are not reflected in the unaudited condensed consolidated statements of
operations in the same period as the underlying power sales from generation
activity for which the derivative instruments serve as economic
hedges.  Except for those positions that settled in the three months
ended March 31, 2009, the expected cash impact of the settlement of these
positions will be recognized over time largely through the end of 2010 based on
the prices at which such positions are contracted.  Our overall
mark-to-market position and the related mark-to-market value will change as we
buy or sell volumes within the forward market and as forward commodity prices
fluctuate.





Power
Generation—Midwest Segment.  Operating income for GEN-MW was
$200 million for the three months ended March 31, 2009, compared to an operating
loss of $59 million for the three months ended March 31, 2008.





Revenues
for the three months ended March 31, 2009 increased by $361 million compared to
the three months ended March 31, 2008, cost of sales increased by $17 million
and operating and maintenance expense increased by $5 million, resulting in a
net increase of $339 million.  The increase was primarily driven by
the following:





50
 Table of Contents




·
            Mark-to-market
      gains – GEN-MW’s results for the three months ended March 31, 2009
      included mark-to-market gains of $169 million related to forward sales,
      compared to $193 million of mark-to-market losses for the three months
      ended March 31, 2008.  Of the $169 million in 2009
      mark-to-market gains, $108 million of gains related to positions that
      settled or will settle in 2009, and the remaining $61 million related to
      positions that will settle in 2010 and
beyond;




·
            Additional
      capacity sales of approximately $9 million, as a result of improved
      capacity prices for 2009 compared with 2008;
and




·
            Increased
      volumes —Generated volumes increased by 10 percent, from 5.9 million MWh
      for the three months ended March 31, 2008, to 6.5 million MWh for the
      three months ended March 31, 2009.  The increase in volumes was
      primarily driven by lower natural gas prices and higher market heat rates
      at our Kendall and Ontelaunee facilities offset by a forced outage at our
      Baldwin facility.




These
items were partly offset by the following:




·
            Decreased
      market prices – The average actual on-peak prices in the Cin Hub pricing
      region decreased from $68 per MWh for the three months ended March 31,
      2008 to $39 per MWh for the three months ended March 31, 2009;
      and




·
            Increased
      operating expense – operating expense increased from $46 million for the
      three months ended March 31, 2008 to $51 million for the three months
      ended March 31, 2009, primarily as a result of the timing of planned
      outages at certain of our coal-fired generating
  facilities.




Depreciation
expense decreased from $53 million for the first quarter 2008 to $52 million for
the first quarter 2009.





Operating
income for the three months ended March 31, 2009 included a pre-tax charge of
approximately $76 million for the impairment of goodwill, reflected in Goodwill
impairment in our unaudited condensed consolidated statements of
operations.  Please read Note 9—Goodwill for further
discussion.





In
addition, we recorded a $5 million impairment of our Bluegrass power generating
facility, reflected in Impairment and other charges in our unaudited condensed
consolidated statements of operations.





Power
Generation—West Segment.  Operating loss for GEN-WE was $287
million for three months ended March 31, 2009, compared to a loss
of  $46 million for the three months ended March 31,
2008.  Such amounts do not include results from our Heard County power
generating facility, which have been classified as discontinued operations for
all periods presented.





Revenues
for the three months ended March 31, 2009 decreased by $47 million compared to
the three months ended March 31, 2008, cost of sales decreased by $69 million
and operating and maintenance expense increased by $4 million, resulting in a
net increase of $18 million.  The increase was primarily driven by the
following:  Reduced mark-to-market losses – GEN-WE’s results for the
three months ended March 31, 2009 included mark-to-market losses of $29 million,
compared to $47 million of mark-to-market losses for the three months ended
March 31, 2008.  Of the $29 million in 2009 mark-to-market losses, $18
million related to positions that settled or will settle in 2009, and the
remaining $11 million related to positions that will settle in 2010 and
beyond.





This item
was offset by decreased volumes.  Generated volumes were 1.5 million
MWh for the three months ended March 31, 2009, down from 2.4 million MWh for the
three months ended March 31, 2008.  The volume decrease was driven in
large part by decreased market spark spreads and reduced dispatch
opportunities.





Depreciation
expense decreased from $23 million for the first quarter 2008 to $22 million for
the first quarter 2009.




Operating
loss for the three months ended March 31, 2009 included a pre-tax charge of
approximately $260 million for the impairment of goodwill, reflected in Goodwill
impairment in our unaudited condensed consolidated statements of
operations.  Please read Note 9—Goodwill for further
discussion.





51
 Table of Contents




Power
Generation—Northeast Segment.  Operating loss for GEN-NE was
$43 million for the three months ended March 31, 2009, compared to an operating
loss of $21 million for the three months ended March 31, 2008.





Revenues
for the three months ended March 31, 2009 increased by $46 million compared to
the three months ended March 31, 2008, cost of sales decreased by $27 million
and operating and maintenance expense decreased by $4 million, resulting in a
net increase of $77 million.  The increase was primarily driven by the
following:




·
            Mark-to-market
      gains – GEN-NE’s results for the three months ended March 31, 2009
      included mark-to-market gains of $29 million related to forward sales,
      compared to losses of $44 million for the three months ended March 31,
      2008.  Of the $29 million in 2009 mark-to-market gains, $23
      million of gains related to positions that settled or will settle in 2009,
      and the remaining $6 million related to positions that will settle in 2010
      and beyond; and




·
            Increased
      volumes – Although on-peak market prices in New York Zone G, New York Zone
      A and Mass Hub decreased by 36 percent, 31 percent and 34 percent,
      respectively, spark spreads improved as a result of lower fuel prices
      resulting in higher volumes at each of our non-coal fired
      facilities.




Depreciation
expense increased from $13 million for the first quarter 2008 to $15 million for
the first quarter 2009.





Operating
loss for the three months ended March 31, 2009 included a pre-tax charge of
approximately $97million for the
impairment of goodwill, reflected in Goodwill impairment in our unaudited
condensed consolidated statements of operations.  Please read Note
9—Goodwill for further discussion.





Other.  Dynegy’s
other operating loss for the three months ended March 31, 2009 was $37 million,
compared to an operating loss of $24 million for the three months ended March
31, 2008.  DHI’s other operating loss for the three months ended March
31, 2009 was $39 million, compared to an operating loss of $24 million for the
three months ended March 31, 2008.  Operating losses in both periods
were comprised primarily of general and administrative expenses.





Cost of
sales for the three months ended March 31, 2008 included the release of a $9
million liability associated with an assignment of a natural gas transportation
contract.  Operating and maintenance expense for the three months
ended March 31, 2008 included the release of an $8 million of sales and use tax
liability.





Consolidated
general and administrative expenses were $38 million and $39 million for the
three months ended March 31, 2009 and 2008, respectively.





Earnings
(Losses) from Unconsolidated Investments





Dynegy’s
earnings from unconsolidated investments were $8 million for the three months
ended March 31, 2009 of which $7 related to the GEN-WE investment in Sandy
Creek.  The $7 million consisted of $10million mark-to-market
gains primarily related to interest rate swap contracts offset by $3 million of
financing costs.  Losses from unconsolidated investments were $9
million  for the three months ended March 31, 2008, including a $5
million loss related to the GEN-WE investment in Sandy Creek.  The
remaining $4 million loss related to Dynegy’s investment in DLS Power
Development, included in Other.





DHI’s
earnings from unconsolidated investments of $7 million for the three months
ended  March 31, 2009 related to the GEN-WE investment in Sandy
Creek.  The $7 million consisted of $10million mark-to-market
gains primarily related to interest rate swap contracts offset by $3 million of
financing costs.  Losses from unconsolidated investments for the three
months ended  March 31, 2008 were $5 million, related to the GEN-WE
investment in Sandy Creek.





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Other
Items, Net





Dynegy’s
and DHI’s other items, net, totaled $4 million of income for the three months
ended March 31, 2009, compared to $20 million of income for the three months
ended March 31, 2008.  The decrease is primarily associated with lower
interest income due to lower LIBOR rates in 2009.  In addition, during
the first quarter 2008, we recognized income of $6 million related to insurance
proceeds received in excess of the book value of damaged assets.





Interest
Expense





Dynegy’s
and DHI’s interest expense totaled $98 million for the three months ended March
31, 2009, compared to $109 million for the three months ended March 31,
2008.  The decrease was primarily attributable to lower LIBOR rates on
our variable-rate debt.





Income
Tax (Expense) Benefit





Dynegy
reported an income tax expense from continuing operations of $85 million for the
three months ended March 31, 2009, compared to an income tax benefit from
continuing operations of $96 million for the three months ended March 31,
2008.  The 2009 effective tax rate was (34) percent, compared to 39
percent in 2008.





DHI
reported an income tax expense from continuing operations of $82 million for the
three months ended March 31, 2009, compared to an income tax benefit of $91
million from continuing operations for the three months ended March 31,
2008.  The 2009 effective tax rate was (32) percent, compared to 37
percent in 2008.





The
primary difference between the effective rates of (34) and (32) percent for
Dynegy and DHI, respectively, and the statutory rate of 35 percent resulted from
the effect of the goodwill impairment charge.  As a result of this
charge, which was nondeductible, we reported income tax expense for the period
ended March 31, 2009, despite the fact that we reported a loss from continuing
operations before income taxes.  Additionally, for the three months
ended March 31, 2009, Dynegy and DHI recorded $21 million and $15 million,
respectively, of income tax expense related to a change in California state tax
law.  For the period ended March 31, 2008, the difference between the
effective rates of 39 and 37 percent for Dynegy and DHI, respectively and the
statutory rate of 35 percent resulted primarily from the effect of state income
taxes in the taxing jurisdictions in which our assets operate.





Discontinued
Operations





Income
(Loss) From Discontinued Operations Before Taxes





During
the three months ended March 31, 2009, our pre-tax income from discontinued
operations was $1 million, related to the operation of the Heard County power
generation facility.  During the three months ended March 31, 2008,
our pre-tax loss from discontinued operations was $1 million, related to a loss
on the sale of the Calcasieu power generation facility.





Income
Tax Benefit From Discontinued Operations





We
recorded an income tax expense from discontinued operations of less than $1
million during the three months ended March 31, 2009, compared to an income tax
benefit of $1 million during the three months ended March 31,
2008.  These amounts reflect effective rates of zero and 100 percent,
respectively.  FIN No. 18, “Accounting for Income Taxes in Interim
Periods an interpretation of APB Opinion No. 28” requires a detailed methodology
of allocating income taxes between continuing and discontinued
operations.  This methodology often results in an effective rate for
discontinued operations significantly different from the statutory rate of 35
percent.





Outlook





Our fleet
includes a diverse mixture of assets with various fuel, dispatch and merit order
characteristics within each of our three regions.  In commercializing
our assets, we seek to achieve a balance between providing greater cash flow
predictability in the near/intermediate term, while maintaining the ability to
capture value longer term as markets tighten.  We expect that a
majority of our sales will be achieved by selling energy and capacity through a
combination of spot market sales and near-term contracts over a rolling 12–36
month time frame in time periods that we describe as Current, Current +1, and
Current +2.  At any given point in time, we will seek to balance
predictability of earnings and cash flow with achieving the highest level of
earnings and cash flow possible over the Current, Current +1 and Current +2
periods.  In these periods, we understand that short-term market
volatility can negatively impact our profitability, and we will seek to reduce
those negative impacts through the disciplined use of near- and
intermediate-term forward sales.  As a result, our fleet-wide forward
sales profile is fluid and subject to change.  We expect to make fewer
forward sales beyond the Current+2 period in order to realize the anticipated
benefit of improved market prices over time as the supply and demand balance
tightens.





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We expect
that our future financial results will continue to reflect sensitivity to fuel
and commodity prices, market structure and prices for electric energy, ancillary
services and capacity, transportation and transmission logistics, weather
conditions and IMA.  Our commercial team actively manages commodity
price risk associated with our unsold power production by trading in the forward
markets that are correlated with our assets.  We also participate in
various regional auctions and bilateral opportunities.  Our regional
commercial strategies are particularly driven by the types of units that we have
within a given region and the operating characteristics of those
units.





Currently,
substantially all of our expected generation for 2009 is
contracted.  As we look forward to 2010 and beyond, we are actively
hedging and expect to enter 2010 with a substantial portion of the output of our
fleet contracted for that year.  Based on specific market conditions,
at any point in time we may enter into transactions that will increase or
decrease the portion of our output that has been contracted, since we actively
manage our near-term market positions of less than three years.  The
financial markets continue to be characterized by turmoil and stock prices
across industries, including ours, continue to be significantly
depressed.  These market conditions have resulted in a decreased
willingness on the part of lenders to enter into new loans and a reduction in
the number of counterparties participating in, and the volume of transactions
available for execution in, the bilateral energy markets.  Thus, it
can be more difficult for us to optimize the value of our assets.





To the
extent that we choose not to enter into forward sales, the gross margin from our
assets is a function of price movements in the coal, natural gas, fuel oil,
electric energy and capacity markets.





The
following summarizes unique business issues impacting our individual regions’
outlook.





GEN-MW.  Our
Midwest consent decree (“Midwest Consent Decree”) requires substantial emission
reductions from our Illinois coal-fired power plants and the completion of
several supplemental environmental projects in the Midwest.  We have
achieved all emission reductions scheduled to date under the Midwest Consent
Decree and are in the process of installing additional emission control
equipment to meet future Midwest Consent Decree emission limits.  We
expect our costs associated with the Midwest Consent Decree projects, which we
expect to incur through 2012, to be approximately $960 million, which includes
approximately $369 million spent to date.  This estimate includes a
number of assumptions and uncertainties beyond our control, including an
assumption that labor and material costs will increase at four percent per year
over the remaining project term.





Our
Midwest coal and transportation requirements are 100 percent contracted through
2010.  For 2009, the prices associated with these contracts are
fixed.  For 2010, approximately 25 percent of our coal requirements
are unpriced and will be negotiated in 2009, becoming effective January 1,
2010.  We expect that any price changes will be consistent with the
historical price trend over the past several years.





We expect
to participate in PJM’s future forward capacity auctions when they
occur.





GEN-WE.  Approximately
two-thirds of power plant capacity in the West is contracted under a variety of
tolling agreements with load-serving entities and Reliability Must Run
agreements with the California ISO.  A significant portion of the
remaining capacity is sold as a Resource Adequacy product in the California
market, and much of the production associated with the plants without tolls or
Reliability Must Run agreements has been hedged.





During
the first quarter 2009, we revised our estimated timeline to perform certain
maintenance activities at our Moss Landing power generation
facility.  We now expect this outage to occur in the latter half of
2009 rather than in 2010.  We expect capital expenditures for the Moss
Landing Facility to be approximately $40 million higher due to this change in
timing.





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GEN-NE.  We
continue to maintain sufficient coal and fuel oil inventories to effectively
manage our operations.  We have contracted 100 percent and
approximately 65 percent of our expected coal supply and freight requirements
for 2009 and 2010, respectively, for our Danskammer power generation facility
primarily from South American suppliers.  Multiple sourcing options
are available and under evaluation for the remainder of our 2010 supply
needs.  Coal prices in both the international and domestic markets
have decreased significantly from their historic highs reached in the middle of
2008.  We continue to explore various alternative contractual
commitments and financial options, as well as facility modifications, to ensure
stable fuel supplies and to further mitigate cost and supply risks for near and
long-term coal supplies.





The
volatility in fuel oil and natural gas commodity pricing and changes to spark
spreads may provide us opportunities to capture additive short-term market value
through strategic purchases of fuel oil and sales of power in the spot or
forward markets.  We believe lower commodity prices of fuel oil and
natural gas compared to historic highs we experienced in 2008 will position our
Roseton facility, which is capable of burning natural gas and fuel oil, to
capture these market opportunities to the extent they occur.





In New
England, the ISO-NE is in the process of restructuring its capacity market and
will be transitioning to a forward capacity market in 2010.  During
the transition from the pre-existing capacity markets in ISO-NE to the forward
capacity market, all listed ICAP resources will receive monthly capacity
payments, adjusted for each power year.  The transitional payments for
capacity commenced in December 2006, with a price of $3.05/KW-month, and
gradually rise to $4.10/KW-month through September 1, 2010, when the forward
capacity market will be fully effective.  Capacity auctions for the
2010/2011 and 2011/2012 were held in 2008 and resulted in capacity payments of
$4.50 KW/month and $3.60 KW/month respectively for our assets in New
England.





Regulatory
Matters





Climate Change
and Greenhouse Gases.  The federal government, and many states
where we have generation facilities, are considering or are in some stage of
implementing regulatory programs intended to reduce emissions of GHGs as a means
of addressing climate change issues.  On April 17, 2009, the
Administrator of the U.S. EPA issued a proposed finding that GHG emissions from
mobile sources cause or contribute to air pollution that endangers the public
health and welfare.  The endangerment finding was proposed under
Section 202(a) of the CAA in response to the U.S. Supreme Court’s ruling in
Massachusetts v. EPA,
549 U.S. 497 (2007).  If the proposal becomes final, the U.S. EPA will
be required to promulgate GHG emission standards under the CAA for GHGs emitted
by mobile sources, which could result in significant impacts on the power
generation industry through future rule-making activity.  The
imposition of limits on emissions of CO2, and
equivalents by the power generation sector, whether implemented by the federal
or state governments, could have the effect of altering the manner in which
generating facilities are dispatched.  Beginning in 2009, certain of
our generating facilities are required to obtain CO2
allowances, through purchases from the states where they operate, in sufficient
quantity to cover CO2
emissions.  The extent to which the costs of meeting mandated emission
reductions would be borne by power generators, or the ultimate users of
electricity, is not known.





On March
31, 2009, the House Energy and Commerce Committee released a discussion draft of
the American Clean Energy and Security Act of 2009.  Title III of the
discussion draft, entitled Reducing Global Warming Pollution, would establish a
federal cap-and-trade program for GHG emissions aimed at reducing GHG emissions
in the United States to 20% below 2005 levels by 2020 and to 83% below 2005
levels by 2050.  Leaders in both houses of Congress and President Obama’s
executive branch have expressed strong support for federal legislation to
address climate change.  While the discussion draft represents a
comprehensive effort to restructure the energy market in the United States, at
this early stage in the legislative process we cannot predict the specific
requirements of any legislation that may ultimately be adopted by Congress and
signed into law.  Any significant mandatory reduction of GHG emissions from
the electric generating sector aimed at addressing climate change could have a
material adverse effect on our financial condition, results and cash
flows.





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GEN-MW.  Our
market-based rate authority is predicated on a finding by FERC that our entities
with market-based rates do not have market power, and a market power analysis is
generally conducted every three years for each region on a rolling basis
(“triennial market power review”).  The triennial market power review
for our MISO assets will be filed with FERC in June 2009.





In the
electricity markets run by MISO, Revenue Sufficiency Guarantee (“RSG”) charges
are incurred when real-time energy demand exceeds prescheduled energy (in the
day ahead market) and MISO is required to dispatch generation to make up the
difference.  The generators committed to serve this excess real-time
energy demand are compensated for start-up and energy production costs via RSG
make whole payments.  RSG make whole payments are collected and funded
by MISO primarily though RSG charges assessed against certain market
participants.





In August
2007, three complaints were filed at FERC regarding the RSG allocation
methodology.  On November 10, 2008, FERC issued an order finding the
then-existing RSG charge methodology unjust and unreasonable because it was not
based on or related to cost-causation.  FERC’s order also established
a replacement cost allocation, which is currently being used to resettle RSG
charges for the period from August 2007 until a redesigned RSG allocation is
approved by FERC and implemented.  Under the replacement cost
allocation formula, we estimate that our net cash liability is approximately $6
million.  In addition, certain market participants are in default of
their share of the resettlement charges.  Presently, such short-pay
amounts are being apportioned to net creditors of MISO (including Dynegy);
however, MISO is ultimately expected to consider the defaulted charges
uncollectible and uplift the amount to all non-defaulting market participants,
resulting in a refund of some portion of the shortage back to the original
parties.  On April 28, 2009, proceedings were initiated in the U.S. Court
of Appeals for the D.C. Circuit, seeking modifications of FERC's order. 
Those proceeding are pending.





GEN-WE.  Our
assets in California will be subject to various state initiatives.  As
previously disclosed, we continue to be subject to the California Global Warming
Solutions Act, effective January 1, 2007, which requires development of a GHG
control program that will reduce the state’s GHG emissions to their 1990 levels
by 2020.  Regulations to achieve required emission reductions are to
be adopted by January 2011.





GEN-NE.  Our
assets in New York, Connecticut and Maine are subject to a mandatory
state-driven GHG program known as the RGGI.  The participating RGGI
states have implemented a rule regulating GHG using a cap-and-trade program to
reduce carbon emissions by at least 10 percent of base-year emission levels by
the year 2018.





On March
18, 2009, RGGI held its third auction, in which over 31 million allowances for
allocation year 2009, and over 2 million allowances for allocation year 2012,
were sold at clearing prices of $3.51 per allowance and $3.05 per allowance,
respectively.  We have participated in each of the RGGI auctions and
purchased a portion of the allowances required to cover our projected GHG
emissions in the Northeast for the compliance periods beginning in 2009 and
2012.  Auctions are expected to be held quarterly, with the fourth
auction scheduled for June 17, 2009.





Assuming
that 2009 CO2 emissions
from our generating facilities in New York, Maine and Connecticut are comparable
to 2008 CO2 emissions
from these facilities (5.2 million tons), our estimated cost of allowances
necessary to operate these facilities in 2009 would be approximately
$­­17 million, based on the average cost of allowances purchased to date
for the 2009 allocation year.  Compliance with the allowance
requirement under a cap-and-trade program can be achieved by reducing emissions,
purchasing allowances or securing offset allowances from an approved offset
project.





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RISK-MANAGEMENT
DISCLOSURES





The
following table provides a reconciliation of the risk-management data on the
unaudited condensed consolidated balance sheets:





As
      of and for the
                  Three
      Months Ended March 31, 2009(in
      millions)Balance
      Sheet Risk-Management AccountsFair
      value of portfolio at January 1, 2009
                
                $
                (30
                )Risk-management
      gains recognized through the income statement in the period,
      net
                
                
                250Cash
      received related to risk-management contracts settled in the period,
      net
                
                
                (78
                )Changes
      in fair value as a result of a change in valuation technique
      (1)
                
                
                —Non-cash
      adjustments and other (2)
                
                
                39Fair
      value of portfolio at March 31, 2009
                
                $
                181




(1)
            Our
      modeling methodology has been consistently
  applied.


(2)
            This
      amount consists of changes in value associated with fair value and cash
      flow hedges on debt.





The net
risk management asset of $181 million is the aggregate of the following line
items on our unaudited condensed consolidated balance sheets: Current
Assets—Assets from risk-management activities, Other Assets—Assets from
risk-management activities, Current Liabilities—Liabilities from risk-management
activities and Other Liabilities—Liabilities from risk-management
activities.





Risk-Management
Asset and Liability Disclosures.  The following tables depict
the mark-to-market value and cash flow components of our net risk-management
assets and liabilities at March 31, 2009 and December 31, 2008.  As
opportunities arise to monetize positions that we believe will result in an
economic benefit to us, we may receive or pay cash in periods other than those
depicted below:





Mark-to-Market
Value of Net Risk-Management Asset (1)





Total
                
                
                2009
      (2)
                
                
                2010
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                Thereafter(in
      millions)March
      31, 2009
                
                $
                372
                
                
                $
                271
                
                
                $
                103
                
                
                $
                (6
                )
                
                $
                1
                
                
                $
                1
                
                
                $
                2December
      31, 2008
                
                
                205
                
                
                
                158
                
                
                
                41
                
                
                
                1
                
                
                
                1
                
                
                
                1
                
                
                
                3Increase
      (decrease) (3)
                
                $
                167
                
                
                $
                113
                
                
                $
                62
                
                
                $
                (7
                )
                
                $
                —
                
                
                $
                —
                
                
                $
                (1
                )




(1)
            The
      table reflects the fair value of our net risk-management asset position,
      which considers time value, credit, price and other valuation adjustments
      necessary to determine fair value.  These amounts exclude the
      fair value associated with certain derivative instruments designated as
      hedges.  The net risk-management asset at March 31, 2009 of $181
      million on the unaudited condensed consolidated balance sheets includes
      the $372 million herein as well as hedging instruments.  Cash
      flows have been segregated between periods based on the delivery date
      required in the individual
contracts.


(2)
            Amounts
      represent April 1 to December 31, 2009 values in the March 31, 2009 row
      and January 1 to December 31, 2009 values in the December 31, 2008
      row.


(3)
            The
      increase in the net risk management asset is due to an increase in the
      volume of outstanding positions as well as a significant decrease in the
      prices associated with these positions during the three months ended March
      31, 2009.





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Cash
Flow Components of Net Risk-Management Asset





Three
      Months
                  Ended
                  March
      31, 2009
                
                
                Nine
      Months
                  Ended
                  December
      31,
                  2009
                
                
                Total
                  2009
                
                
                2010
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                Thereafter(in
      millions)March
      31, 2009 (1)
                
                $
                (83
                )
                
                $
                298
                
                
                $
                215
                
                
                $
                126
                
                
                $
                (5
                )
                
                $
                1
                
                
                $
                1
                
                
                $
                3December
      31, 2008
                
                
                
                
                
                
                
                
                
                
                175
                
                
                
                49
                
                
                
                1
                
                
                
                1
                
                
                
                1
                
                
                
                3Increase
      (decrease)
                
                
                
                
                
                
                
                
                
                $
                40
                
                
                $
                77
                
                
                $
                (6
                )
                
                $
                —
                
                
                $
                —
                
                
                $
                —




(1)
            The
      cash flow values for 2009 reflect realized cash flows for the three months
      ended March 31, 2009 and anticipated undiscounted cash inflows and
      outflows by contract based on the tenor of individual contract position
      for the remaining periods.  These anticipated undiscounted cash
      flows have not been adjusted for counterparty credit or other valuation
      adjustments.  These amounts exclude the cash flows associated
      with certain derivative instruments designated as
  hedges.





The
following table provides an assessment of net contract values by year as of
March 31, 2009, based on our valuation methodology:





Net
Fair Value of Risk-Management Portfolio





Total
                
                
                2009
                
                
                2010
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                Thereafter(in
      millions)Market
      quotations (1)
                
                $
                148
                
                
                $
                230
                
                
                $
                73
                
                
                $
                (19
                )
                
                $
                (15
                )
                
                $
                (12
                )
                
                $
                (109
                )Prices
      based on models
                
                
                33
                
                
                
                28
                
                
                
                8
                
                
                
                (7
                )
                
                
                1
                
                
                
                1
                
                
                
                2Total
      (2)
                
                $
                181
                
                
                $
                258
                
                
                $
                81
                
                
                $
                (26
                )
                
                $
                (14
                )
                
                $
                (11
                )
                
                $
                (107
                )




(1)
            Prices
      obtained from actively traded, liquid markets for
    commodities.


(2)
            The
      market quotations and prices based on models categorization differs from
      the SFAS No. 157 categories of Level 1, Level 2 and Level 3 due to the
      application of the different methodologies.  Please see Note
      5—Fair Value Measurements for further
  discussion.





UNCERTAINTY
OF FORWARD-LOOKING STATEMENTS AND INFORMATION





This Form
10-Q includes statements reflecting assumptions, expectations, projections,
intentions or beliefs about future events that are intended as “forward-looking
statements” by both Dynegy and DHI.  All statements included or
incorporated by reference in this quarterly report, other than statements of
historical fact, that address activities, events or developments that we or our
management expect, believe or anticipate will or may occur in the future are
forward-looking statements.  These statements represent our reasonable
judgment on the future based on various factors and using numerous assumptions
and are subject to known and unknown risks, uncertainties and other factors that
could cause our actual results and financial position to differ materially from
those contemplated by the statements.  You can identify these
statements by the fact that they do not relate strictly to historical or current
facts.  They use words such as “anticipate”, “estimate”, “project”,
“forecast”, “plan”, “may”, “will”, “should”, “expect” and other words of similar
meaning.  In particular, these include, but are not limited to,
statements relating to the following:




·
            beliefs
      about commodity pricing and generation
volumes;




·
            beliefs
      regarding the current economic downturn, its trajectory and its
      impacts;




·
            beliefs
      and assumptions relating to liquidity, available borrowing
      capacity and capital resources
generally;




·
            sufficiency
      of, access to and costs associated with coal, fuel oil and natural gas
      inventories and transportation;




·
            beliefs
      and assumptions about market competition, generation capacity and regional
      supply and demand characteristics of the wholesale power generation
      market;




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 Table of Contents




·
            strategies
      to capture opportunities presented by changes in commodity prices and to
      manage our exposure to energy price
volatility;




·
            beliefs
      and assumptions about weather and general economic
    conditions;




·
            expectations
      regarding environmental matters, including costs of compliance,
      availability and adequacy of emission credits, and the impact of ongoing
      proceedings and potential legislation and regulations, including those
      relating to climate change and
GHGs;




·
            projected
      operating or financial results, including anticipated cash flows from
      operations, revenues and
profitability;




·
            beliefs
      and assumptions regarding the current financial crisis and its impact on
      our liquidity needs and on the credit markets generally and our
      access thereto;




·
            beliefs
      and expectations regarding financing, development and timing of the Sandy
      Creek and Plum Point projects;




·
            expectations
      regarding our revolver capacity, collateral demands, capital expenditures,
      interest expense and other
payments;




·
            our
      focus on safety and our ability to efficiently operate our assets so as to
      maximize our revenue generating opportunities and operating
      margins;




·
            beliefs
      about the outcome of legal, regulatory, administrative and legislative
      matters;




·
            expectations
      and estimates regarding capital and maintenance expenditures, including
      the Midwest Consent Decree and its associated costs;
  and




·
            efforts
      to position our power generation business for future growth and pursuing
      and executing acquisition, disposition or combination
      opportunities.







Any or
all of our forward-looking statements may turn out to be wrong.  They
can be affected by inaccurate assumptions or by known or unknown risks,
uncertainties and other factors, many of which are beyond our control, including
those set forth under Part II–Other Information, Item 1A-Risk Factors and Item
1A-Risk Factors of our Form 10-K.





RECENT
ACCOUNTING PRONOUNCEMENTS





See Note
1—Accounting Policies to the unaudited condensed consolidated financial
statements for a discussion of recently issued accounting pronouncements
affecting us.





CRITICAL
ACCOUNTING POLICIES





Please
read “Critical Accounting Policies” in our Form 10-K for a complete description
of our critical accounting policies, with respect to which there have been no
material changes since the filing of such Form 10-K.





Item
3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK—DYNEGY INC. AND DYNEGY HOLDINGS INC.





Please
read Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our
Form 10-K for a discussion of our exposure to commodity price variability and
other market risks related to our net non-trading derivative assets and
liabilities, including foreign currency exchange rate risk.  Following
is a discussion of the more material of these risks and our relative exposures
as of March 31, 2009.





Value at Risk
(“VaR”).  The following table sets forth the aggregate daily
VaR of the mark-to-market portion of our risk-management portfolio primarily
associated with the GEN segments and the remaining legacy customer risk
management business.  The VaR calculation does not include market
risks associated with the accrual portion of the risk-management portfolio that
is designated as a cash flow hedge or a “normal purchase normal sale”, nor does
it include expected future production from our generating assets.  The
increase in the March 31, 2009 VaR was primarily due to increased forward sales
as compared to December 31, 2008.  Please read “Value at Risk” in our
Form 10-K for a complete description of our valuation methodology.





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Daily
and Average VaR for Risk-Management Portfolios





March
      31,
                  2009
                
                
                December
      31, 2008(in
      millions)One
      day VaR—95 percent confidence level
                
                $
                34
                
                
                $
                21One
      day VaR—99 percent confidence level
                
                $
                48
                
                
                $
                29Average
      VaR for the year-to-date period—95 percent confidence
level
                
                $
                26
                
                
                $
                42





Credit
Risk.  The following table represents our credit exposure at
March 31, 2009 associated with the mark-to-market portion of our risk-management
portfolio, on a net basis.





Credit
Exposure Summary





Investment
                    Grade
      Quality
                  
                  
                  Non-Investment
      Grade Quality
                  
                  
                  Total(in
      millions)Type
      of Business:Financial
      institutions
                  
                  $
                  180
                  
                  
                  $
                  —
                  
                  
                  $
                  180Utility
      and power generators
                  
                  
                  12
                  
                  
                  
                  —
                  
                  
                  
                  12Commercial,
      industrial and end users
                  
                  
                  —
                  
                  
                  
                  4
                  
                  
                  
                  4Other
                  
                  
                  —
                  
                  
                  
                  2
                  
                  
                  
                  2Total
                  
                  $
                  192
                  
                  
                  $
                  6
                  
                  
                  $
                  198




Of the $6
million in credit exposure to non-investment grade counterparties, none is
collateralized or subject to other credit exposure protection.




Interest Rate
Risk.  We are exposed to fluctuating interest rates related to
variable rate financial obligations.  As of March 31, 2009, our fixed
rate debt instruments, as a percentage of total debt instruments, were
approximately 74 percent.  Adjusted for interest rate swaps, net
notional fixed rate debt as a percentage of total debt was approximately 82
percent.  Based on sensitivity analysis of the variable rate financial
obligations in our debt portfolio as of March 31, 2009, it is estimated that a
one percentage point interest rate movement in the average market interest rates
(either higher or lower) over the 12 months ended March 31, 2010 would either
decrease or increase interest expense by approximately $11
million.  This exposure would be partially offset by an
approximate $9 million increase in interest income related to the restricted
cash balance of $850 million posted as collateral to support the term letter of
credit facility.  Over time, we may seek to reduce or increase the
percentage of fixed rate financial obligations in our debt portfolio through the
use of swaps or other financial instruments.





Derivative
Contracts.  The notional financial contract amounts associated
with our interest rate contracts were as follows at March 31, 2009 and December
31, 2008, respectively:





Absolute
Notional Contract Amounts





March
      31,
                  2009
                
                
                December
      31,
                  2008Cash
      flow hedge interest rate swaps (in millions of U.S.
    dollars)
                
                $
                492
                
                
                $
                471Fixed
      interest rate paid on swaps (percent)
                
                
                5.32
                
                
                
                5.32Fair
      value hedge interest rate swaps (in millions of U.S.
    dollars)
                
                $
                25
                
                
                $
                25Fixed
      interest rate received on swaps (percent)
                
                
                5.70
                
                
                
                5.70Interest
      rate risk-management contract (in millions of U.S.
dollars)
                
                $
                231
                
                
                $
                231Fixed
      interest rate paid on swaps (percent)
                
                
                5.35
                
                
                
                5.35Interest
      rate risk-management contract (in millions of U.S.
dollars)
                
                $
                206
                
                
                $
                206Fixed
      interest rate received on swaps (percent)
                
                
                5.28
                
                
                
                5.28




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Item 4—CONTROLS AND PROCEDURES—DYNEGY INC. AND DYNEGY HOLDINGS
INC.





Evaluation
of Disclosure Controls and Procedures





As of the
end of the period covered by this report, an evaluation was carried out under
the supervision and with the participation of Dynegy’s and DHI’s management,
including their Chief Executive Officer and their Chief Financial Officer, of
the effectiveness of the design and operation of Dynegy’s and DHI’s disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended).  This evaluation
included consideration of the various processes carried out under the direction
of Dynegy’s disclosure committee.  This evaluation also considered the
work completed relating to Dynegy’s and DHI’s compliance with Section 404 of the
Sarbanes-Oxley Act of 2002.  Based on this evaluation, Dynegy’s and
DHI’s CEO and CFO concluded that Dynegy’s and DHI’s disclosure controls and
procedures were effective as of March 31, 2009.





Changes
in Internal Controls Over Financial Reporting





There
were no changes in Dynegy’s and DHI’s internal control over financial
reporting that have materially affected or are reasonably likely to materially
affect Dynegy’s and DHI’s internal control over financial reporting during
the quarter ended March 31, 2009.





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DYNEGY
INC. and DYNEGY HOLDINGS INC.





PART
II. OTHER INFORMATION





Item
1—LEGAL PROCEEDINGS—DYNEGY INC. AND DYNEGY HOLDINGS
INC.





See Note
12—Commitments and Contingencies—Legal Proceedings to the accompanying unaudited
condensed consolidated financial statements for a discussion of the legal
proceedings that we believe could be material to us.





Item
1A—RISK FACTORS—DYNEGY INC. AND DYNEGY HOLDINGS
INC.





See Item
1A—Risk Factors, of our Form 10-K for factors, risks and uncertainties that may
affect future results.





Item 2—UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS—DYNEGY INC.





Upon
vesting of restricted stock awarded by Dynegy to employees, shares are withheld
to cover the employees’ withholding taxes.  Information on Dynegy’s
purchases of equity securities during the quarter follows:





Period
                
                (a)
                  Total
      Number of Shares Purchased
                
                
                (b)
                  Average
                  Price
      Paid
                  per Share
                
                
                (c)
                  Total
      Number of Shares Purchased as Part of Publicly Announced Plans or Programs
                
                
                (d)
                  Maximum
      Number of Shares that May Yet Be Purchased Under the Plans or ProgramsJanuary
      1-31
                
                
                1,765
                
                
                $
                2.38
                
                
                
                —
                
                
                
                N/AFebruary
      1-28
                
                
                2,483
                
                
                $
                1.84
                
                
                
                —
                
                
                
                N/AMarch
      1-31
                
                
                106,676
                
                
                $
                1.04
                
                
                
                —
                
                
                
                N/ATotal
                
                
                110,924
                
                
                $
                1.08
                
                
                
                —
                
                
                
                N/A





These
were the only purchases of equity securities made by us during the three months
ended March 31, 2009.  Dynegy does not have a stock repurchase
program.





Item
6—EXHIBITS—DYNEGY INC. AND DYNEGY HOLDINGS
INC.





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





Exhibit
                        Number
                      
                      
                      Description10.1
                      
                      
                      Dynegy
      Inc. 2009 Phantom Stock Plan (incorporated by reference to Exhibit 10.3 to
      the Current Report on Form 8-K of Dynegy Inc. filed on March 10, 2009,
      File No. 001-33443).10.2
                      
                      
                      Form
      of Performance Award Agreement (incorporated by reference to Exhibit 10.1
      to the Current Report on Form 8-K of Dynegy Inc. filed on March 10, 2009,
      File No.
001-33443).




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 Table of Contents




Exhibit
                              Number
                            
                            
                            Description10.3
                            
                            
                            Form
      of Performance Award Agreement between Dynegy Inc., all of its affiliates
      and Bruce A. Williamson (incorporated by reference to Exhibit 10.2 to the
      Current Report on Form 8-K of Dynegy Inc. filed on March 10, 2009, File
      No. 001-33443).10.4
                            
                            
                            Form
      of Phantom Stock Unit Award Agreement (for Managing Directors and
      Above)  (incorporated by reference to Exhibit 10.4 to the
      Current Report on Form 8-K of Dynegy Inc. filed on March 10, 2009, File
      No. 001-33443).**10.5
                            
                            
                            Form
      of Phantom Stock Unit Award Agreement (for Directors and
      Below).10.6
                            
                            
                            Form
      of Phantom Stock Unit Award Agreement between Dynegy Inc., all of its
      affiliates, and Bruce A. Williamson (incorporated by reference to Exhibit
      10.5 to the Current Report on Form 8-K of Dynegy Inc. filed on March 10,
      2009, File No. 001-33443).**10.7
                            
                            
                            Form
      of Non Qualified Stock Option Award Agreement.**10.8
                            
                            
                            Form
      of Non Qualified Stock Option Award Agreement between Dynegy Inc., all of
      its affiliates, and Bruce A. Williamson.10.9
                            
                            
                            Dissolution
      Agreement by and between Dynegy Inc. and LS Power Associates, L.P.,
      effective January 1, 2009 (incorporated by reference to Exhibit 10.14 to
      the Annual Report on Form 10-K of Dynegy Inc. filed on February 26, 2009,
      File No. 001-33443).**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.**31.1(a)
                            
                            
                            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.**31.2(a)
                            
                            
                            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.†32.1(a)
                            
                            
                            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.†32.2(a)
                            
                            
                            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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 Table of Contents




DYNEGY
INC. and DYNEGY HOLDINGS INC.





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) 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
      INC.Date:
      May 7, 2009
              By:
              /s/  HOLLIC.NICHOLSHolli
      C. Nichols
                Executive
      Vice President and Chief Financial Officer
                (Duly
      Authorized Officer and Principal Financial
  Officer)








DYNEGY
      HOLDINGS INC.Date:
      May 7, 2009
              By:
              /s/  HOLLIC.NICHOLSHolli
      C. Nichols
                Executive
      Vice President and Chief Financial Officer
                (Duly
      Authorized Officer and Principal Financial
  Officer)




64