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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q/A

AMENDMENT NO. 1



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



For the quarterly period ended March 31, 2004



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



For the transition period from              to



Commission file number: 000-29311



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DYNEGY HOLDINGS INC.

(Exact name of registrant as specified in its charter)



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



1000 Louisiana,
Suite 5800

Houston, Texas 77002

(Address of principal executive offices)

(Zip Code)



(713) 507-6400

(Registrants telephone number, including area code)



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



Indicate by check mark
whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



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



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DYNEGY HOLDINGS INC.



TABLE OF
CONTENTS



|                                 |  |                                                                                                                     |  |                                              |  |     
|-------------------------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- |  | ----
|                                 |  |                                                                                                                     |  |                                              |  | Page
|PART I.    FINANCIAL INFORMATION |  |                                                                                                                    
|                                 |  |                                                                                                                     | 
|                                 |  | Item 1.                                                                                                             |  | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: |  |     
|                                 |  |                                                                                                                    
|                                 |  | Condensed Consolidated Balance Sheets (Restated):March 31, 2004 and December 31, 2003                               |  | 5                                           
|                                 |  | Condensed Consolidated Statements of Operations:For the three months ended March 31, 2004 and 2003                  |  | 6                                           
|                                 |  | Condensed Consolidated Statements of Cash Flows:For the three months ended March 31, 2004 and 2003                  |  | 7                                           
|                                 |  | Condensed Consolidated Statements of Comprehensive Income (Loss):For the three months ended March 31, 2004 and 2003 |  | 8                                           
|                                 |  | Notes to Condensed Consolidated Financial Statements                                                                |  | 9                                           
|                                 |  |                                                                                                                     | 
|                                 |  | Item 4.                                                                                                             |  | CONTROLS AND PROCEDURES                      |  | 32  
|                                 | 
|PART II.
OTHER INFORMATION       |  |                                                                                                                    
|                                 |  |                                                                                                                     | 
|                                 |  | Item 6.                                                                                                             |  | EXHIBITS AND REPORTS ON FORM 8-K             |  | 34  



INTRODUCTORY NOTE



Dynegy Holdings Inc. is filing this Amendment No. 1 on
Form 10-Q/A (Amendment No. 1) to reflect the effect of a $292 million increase to our deferred income tax liability at December 31, 2003 resulting from our tax basis balance sheet review on our historical unaudited condensed consolidated
financial statements and related information, as reported in our Quarterly Report on Form 10-Q for the period ended March 31, 2004, which was originally filed on May 11, 2004 (the Original Filing).



The aforementioned item is discussed in more detail in the Explanatory Note
to the accompanying unaudited condensed consolidated financial statements beginning on page 9. Revised financial information for the periods presented reflecting these restatements was previously disclosed in our Annual Report on Form 10-K for the
year ended December 31, 2003, which was most recently amended by Amendment No. 1 thereto filed with the SEC on January 25, 2005 (the Form 10-K/A). The restated financial and other information included in this Amendment No. 1 should be
read together with the Form 10-K/A. The following Items of the Original Filing are amended by this Amendment No. 1:



| | Item  1. | Condensed Consolidated Financial Statements
| | -------- | -------------------------------------------



| | Item  4. | Controls and Procedures
| | -------- | -----------------------



| | Item  6. | Exhibits and Reports on Form 8-K
| | -------- | --------------------------------



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



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PLEASE NOTE THAT THE INFORMATION CONTAINED IN THIS AMENDMENT NO. 1, INCLUDING THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO, DOES NOT REFLECT EVENTS OCCURRING AFTER THE DATE OF THE ORIGINAL FILING. SUCH EVENTS INCLUDE, AMONG OTHERS, THE EVENTS DESCRIBED IN OUR QUARTERLY REPORTS ON FORM 10-Q FOR THE PERIODS ENDED
JUNE 30, 2004 AND SEPTEMBER 30, 2004 AND THE EVENTS SUBSEQUENTLY DESCRIBED IN OUR CURRENT REPORTS ON FORM 8-K. FOR A DESCRIPTION OF THESE EVENTS, PLEASE READ OUR EXCHANGE ACT REPORTS FILED SINCE MAY 11, 2004, INCLUDING OUR QUARTERLY REPORTS ON FORM
10-Q FOR THE PERIODS ENDED JUNE 30, 2004 AND SEPTEMBER 30, 2004, OUR CURRENT REPORTS ON FORM 8-K AND ANY AMENDMENTS THERETO.



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DEFINITIONS



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



|                |  |                                                                                                                   
|--------------- |  | ------------------------------------------------------------------------------------------------------------------
|ARO             |  | Asset retirement obligation.                                                                                      
|Bbtu/d          |  | Billions of British thermal units per day.                                                                        
|Cal ISO         |  | The California Independent System Operator.                                                                       
|Cal PX          |  | The California Power Exchange.                                                                                    
|CDWR            |  | California Department of Water Resources.                                                                         
|CFTC            |  | Commodity Futures Trading Commission.                                                                             
|CPUC            |  | California Public Utilities Commission.                                                                           
|CRM             |  | Our customer risk management business segment.                                                                    
|$/Bbl           |  | Dollars per barrel.                                                                                               
|$/Gal           |  | Dollars per gallon.                                                                                               
|DMG             |  | Dynegy Midwest Generation, Inc.                                                                                   
|DMS             |  | Dynegy Midstream Services.                                                                                        
|DPM             |  | Dynegy Power Marketing Inc.                                                                                       
|Dynegy          |  | Dynegy Inc., our parent company, together with its subsidiaries.                                                  
|EITF            |  | Emerging Issues Task Force.                                                                                       
|EPA             |  | Environmental Protection Agency.                                                                                  
|ERCOT           |  | Electric Reliability Council of Texas, Inc.                                                                       
|ERISA           |  | The Employee Retirement Income Security Act of 1974, as amended.                                                  
|FASB            |  | Financial Accounting Standards Board.                                                                             
|FERC            |  | Federal Energy Regulatory Commission.                                                                             
|FIN             |  | FASB Interpretation.                                                                                              
|Form 10-K       |  | Our Annual Report on Form 10-K for the year ended December 31, 2003, filed on March 5, 2004.                      
|Form 10-K/A     |  | Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2003, filed on January 25, 2005.
|Form 10-Q/A     |  | Amendment No. 1 to our Form 10-Q for the quarter ended March 31, 2004.                                            
|GAAP            |  | Accounting principles generally accepted in the United States of America.                                         
|GEN             |  | Our power generation business segment.                                                                            
|Illinois Power  |  | Illinois Power Company.                                                                                           
|ICC             |  | Illinois Commerce Commission.                                                                                     
|LNG             |  | Liquefied natural gas.                                                                                            
|MBbls/d         |  | Thousands of barrels per day.                                                                                     
|MMBtu           |  | Millions of British thermal units.                                                                                
|MMCFD           |  | Million cubic feet per day.                                                                                       
|MW              |  | Megawatt.                                                                                                         
|MWh             |  | Megawatt hour.                                                                                                    
|NGL             |  | Our natural gas liquids business segment.                                                                         
|NOV             |  | Notice of Violation.                                                                                              
|Original Filing |  | Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, filed on May 11, 2004.                    
|SEC             |  | U.S. Securities and Exchange Commission.                                                                          
|SFAS            |  | Statement of Financial Accounting Standards.                                                                      
|SPE             |  | Special Purpose Entity.                                                                                           
|VaR             |  | Value at Risk.                                                                                                    
|VIE             |  | Variable Interest Entity.                                                                                         



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DYNEGY HOLDINGS INC.



CONDENSED
CONSOLIDATED BALANCE SHEETS

(unaudited) (in millions)

See Explanatory Note



|                                                                                           |  |               |        |   |                  |   |        |  
|------------------------------------------------------------------------------------------ |  | ------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                           |  | March 31,2004 |        |   | December 31,2003 |  
|                                                                                           |  | (Restated)    |       
|ASSETS                                                                                     |  |               |        |   |                  |   |        |  
|Current Assets                                                                             |  |               |        |   |                  |   |        |  
|Cash and cash equivalents                                                                  |  | $             | 296    |   |                  | $ | 328    |  
|Accounts receivable, net of allowance for doubtful accounts of $161 and $174, respectively |  |               | 713    |   |                  |   | 806    |  
|Accounts receivable, affiliates                                                            |  |               | 376    |   |                  |   | 338    |  
|Inventory                                                                                  |  |               | 163    |   |                  |   | 194    |  
|Assets from risk-management activities                                                     |  |               | 942    |   |                  |   | 818    |  
|Prepayments and other current assets                                                       |  |               | 342    |   |                  |   | 324    |  
|                                                                                           |  |               |        |   |                  |   |        |  
|Total Current Assets                                                                       |  |               | 2,832  |   |                  |   | 2,808  |  
|                                                                                           |  |               |        |   |                  |   |        |  
|Property, Plant and Equipment                                                              |  |               | 7,710  |   |                  |   | 7,691  |  
|Accumulated depreciation                                                                   |  |               | (1,468 | ) |                  |   | (1,389 | )
|                                                                                           |  |               |        |   |                  |   |        |  
|Property, Plant and Equipment, Net                                                         |  |               | 6,242  |   |                  |   | 6,302  |  
|Other Assets                                                                               |  |               |        |   |                  |   |        |  
|Unconsolidated investments                                                                 |  |               | 581    |   |                  |   | 577    |  
|Assets from risk-management activities                                                     |  |               | 680    |   |                  |   | 629    |  
|Goodwill                                                                                   |  |               | 15     |   |                  |   | 15     |  
|Other long-term assets                                                                     |  |               | 157    |   |                  |   | 146    |  
|                                                                                           |  |               |        |   |                  |   |        |  
|Total Assets                                                                               |  | $             | 10,507 |   |                  | $ | 10,477 |  
|                                                                                           |  |               |        |   |                  |   |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                       |  |               |        |   |                  |   |        |  
|Current Liabilities                                                                        |  |               |        |   |                  |   |        |  
|Accounts payable                                                                           |  | $             | 541    |   |                  | $ | 631    |  
|Accounts payable, affiliates                                                               |  |               | 83     |   |                  |   | 74     |  
|Accrued liabilities and other current liabilities                                          |  |               | 384    |   |                  |   | 415    |  
|Liabilities from risk-management activities                                                |  |               | 1,017  |   |                  |   | 838    |  
|Notes payable and current portion of long-term debt                                        |  |               | 80     |   |                  |   | 79     |  
|Current portion of long-term debt to affiliates                                            |  |               | 74     |   |                  |   | 71     |  
|                                                                                           |  |               |        |   |                  |   |        |  
|Total Current Liabilities                                                                  |  |               | 2,179  |   |                  |   | 2,108  |  
|                                                                                           |  |               |        |   |                  |   |        |  
|Long-term debt                                                                             |  |               | 3,441  |   |                  |   | 3,464  |  
|Long-term debt to affiliates                                                               |  |               | 200    |   |                  |   | 200    |  
|                                                                                           |  |               |        |   |                  |   |        |  
|Long-Term Debt                                                                             |  |               | 3,641  |   |                  |   | 3,664  |  
|Other Liabilities                                                                          |  |               |        |   |                  |   |        |  
|Liabilities from risk-management activities                                                |  |               | 792    |   |                  |   | 746    |  
|Deferred income taxes                                                                      |  |               | 175    |   |                  |   | 186    |  
|Other long-term liabilities                                                                |  |               | 479    |   |                  |   | 492    |  
|                                                                                           |  |               |        |   |                  |   |        |  
|Total Liabilities                                                                          |  |               | 7,266  |   |                  |   | 7,196  |  
|                                                                                           |  |               |        |   |                  |   |        |  
|Minority Interest                                                                          |  |               | 121    |   |                  |   | 121    |  
|Commitments and Contingencies (Note 8)                                                     |  |               |        |   |                  |   |        |  
|Stockholders Equity                                                                       |  |               |        |   |                  |   |        |  
|Additional paid-in capital                                                                 |  |               | 2,419  |   |                  |   | 2,419  |  
|Accumulated other comprehensive income (loss), net of tax                                  |  |               | (28    | ) |                  |   | 33     |  
|Accumulated deficit                                                                        |  |               | (303   | ) |                  |   | (324   | )
|Stockholders equity                                                                       |  |               | 1,032  |   |                  |   | 1,032  |  
|                                                                                           |  |               |        |   |                  |   |        |  
|Total Stockholders Equity                                                                 |  |               | 3,120  |   |                  |   | 3,160  |  
|                                                                                           |  |               |        |   |                  |   |        |  
|Total Liabilities and Stockholders Equity                                                 |  | $             | 10,507 |   |                  | $ | 10,477 |  
|                                                                                           |  |               |        |   |                  |   |        |  



See the notes to
condensed consolidated financial statements.



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DYNEGY HOLDINGS INC.



CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited) (in millions)



|                                                                            |  |                             |        |   |      |   |        |  
|--------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                            |  | Three Months EndedMarch 31, |       
|                                                                            |  | 2004                        |        |   | 2003 |  
|Revenues                                                                    |  | $                           | 1,327  |   |      | $ | 1,541  |  
|Cost of sales, exclusive of depreciation shown separately below             |  |                             | (1,150 | ) |      |   | (1,277 | )
|Depreciation and amortization expense                                       |  |                             | (78    | ) |      |   | (84    | )
|Impairment and other charges                                                |  |                             | (10    | ) |      |   | 7      |  
|Gain on sale of assets                                                      |  |                             | 17     |   |      |   | 1      |  
|General and administrative expenses                                         |  |                             | (53    | ) |      |   | (59    | )
|                                                                            |  |                             |        |   |      |   |        |  
|Operating income                                                            |  |                             | 53     |   |      |   | 129    |  
|Earnings from unconsolidated investments                                    |  |                             | 39     |   |      |   | 52     |  
|Interest expense                                                            |  |                             | (88    | ) |      |   | (68    | )
|Other income and expense, net                                               |  |                             | 13     |   |      |   | 10     |  
|Minority interest income (expense)                                          |  |                             | (2     | ) |      |   | 17     |  
|Accumulated distributions associated with trust preferred securities        |  |                             |       |   |      |   | (4     | )
|                                                                            |  |                             |        |   |      |   |        |  
|Income from continuing operations before income taxes                       |  |                             | 15     |   |      |   | 136    |  
|Income tax expense                                                          |  |                             | (6     | ) |      |   | (50    | )
|                                                                            |  |                             |        |   |      |   |        |  
|Income from continuing operations                                           |  |                             | 9      |   |      |   | 86     |  
|Income (loss) on discontinued operations, net of taxes (Note 2)             |  |                             | 12     |   |      |   | (10    | )
|                                                                            |  |                             |        |   |      |   |        |  
|Income before cumulative effect of change in accounting principles          |  |                             | 21     |   |      |   | 76     |  
|Cumulative effect of change in accounting principles, net of taxes (Note 1) |  |                             |       |   |      |   | 57     |  
|                                                                            |  |                             |        |   |      |   |        |  
|Net income                                                                  |  | $                           | 21     |   |      | $ | 133    |  
|                                                                            |  |                             |        |   |      |   |        |  







See the notes to condensed consolidated financial statements.



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DYNEGY HOLDINGS INC.



CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited) (in millions)



|                                                                                 |  |                             |      |   |      |   |        |  
|-------------------------------------------------------------------------------- |  | --------------------------- | ---- | - | ---- | - | ------ | -
|                                                                                 |  | Three Months EndedMarch 31, |     
|                                                                                 |  | 2004                        |      |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                            |  |                             |      |   |      |   |        |  
|Net income                                                                       |  | $                           | 21   |   |      | $ | 133    |  
|Adjustments to reconcile net income to net cash flows from operating activities: |  |                             |      |   |      |   |        |  
|Depreciation and amortization                                                    |  |                             | 84   |   |      |   | 93     |  
|Impairment and other charges                                                     |  |                             | 10   |   |      |   |       |  
|Earnings from unconsolidated investments, net of cash distributions              |  |                             | (4   | ) |      |   | (41    | )
|Risk-management activities                                                       |  |                             | (24  | ) |      |   | 66     |  
|Gain on sale of assets                                                           |  |                             | (17  | ) |      |   | (1     | )
|Deferred income taxes                                                            |  |                             | 11   |   |      |   | 45     |  
|Cumulative effect of change in accounting principles (Note 1)                    |  |                             |     |   |      |   | (57    | )
|Other                                                                            |  |                             | (18  | ) |      |   | (6     | )
|Changes in working capital:                                                      |  |                             |      |   |      |   |        |  
|Accounts receivable                                                              |  |                             | 100  |   |      |   | 917    |  
|Inventory                                                                        |  |                             | 37   |   |      |   | 139    |  
|Prepayments and other assets                                                     |  |                             | (23  | ) |      |   | 215    |  
|Accounts payable and accrued liabilities                                         |  |                             | (125 | ) |      |   | (1,182 | )
|Changes in non-current assets and liabilities, net                               |  |                             | (13  | ) |      |   | (49    | )
|                                                                                 |  |                             |      |   |      |   |        |  
|Net cash provided by operating activities                                        |  |                             | 39   |   |      |   | 272    |  
|                                                                                 |  |                             |      |   |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                            |  |                             |      |   |      |   |        |  
|Capital expenditures                                                             |  |                             | (25  | ) |      |   | (52    | )
|Proceeds from asset sales, net                                                   |  |                             | 17   |   |      |   | 20     |  
|Affiliate transactions                                                           |  |                             | (40  | ) |      |   | 93     |  
|                                                                                 |  |                             |      |   |      |   |        |  
|Net cash provided by (used in) investing activities                              |  |                             | (48  | ) |      |   | 61     |  
|                                                                                 |  |                             |      |   |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                            |  |                             |      |   |      |   |        |  
|Repayments of borrowings                                                         |  |                             | (19  | ) |      |   | (131   | )
|Net cash flow from commercial paper and revolving lines of credit                |  |                             |     |   |      |   | 712    |  
|Other financing, net                                                             |  |                             | (3   | ) |      |   |       |  
|                                                                                 |  |                             |      |   |      |   |        |  
|Net cash provided by (used in) financing activities                              |  |                             | (22  | ) |      |   | 581    |  
|                                                                                 |  |                             |      |   |      |   |        |  
|Effect of exchange rate changes on cash                                          |  |                             | (1   | ) |      |   | (6     | )
|Net increase (decrease) in cash and cash equivalents                             |  |                             | (32  | ) |      |   | 908    |  
|Cash and cash equivalents, beginning of period                                   |  |                             | 328  |   |      |   | 633    |  
|                                                                                 |  |                             |      |   |      |   |        |  
|Cash and cash equivalents, end of period                                         |  | $                           | 296  |   |      | $ | 1,541  |  
|                                                                                 |  |                             |      |   |      |   |        |  



See the notes to
condensed consolidated financial statements.



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DYNEGY HOLDINGS INC.



CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited) (in millions)



|                                                                                              |  |                             |     |   |      |   |     |  
|--------------------------------------------------------------------------------------------- |  | --------------------------- | --- | - | ---- | - | --- | -
|                                                                                              |  | Three Months EndedMarch 31, |    
|                                                                                              |  | 2004                        |     |   | 2003 |  
|Net income                                                                                    |  | $                           | 21  |   |      | $ | 133 |  
|Cash flow hedging activities, net:                                                            |  |                             |     |   |      |   |     |  
|Unrealized mark-to-market gains (losses) arising during period, net                           |  |                             | (59 | ) |      |   | 12  |  
|Reclassification of mark-to-market (gains) losses to earnings, net                            |  |                             | 12  |   |      |   | (19 | )
|                                                                                              |  |                             |     |   |      |   |     |  
|Changes in cash flow hedging activities, net (net of tax benefit of $28 and $4, respectively) |  |                             | (47 | ) |      |   | (7  | )
|Foreign currency translation adjustments                                                      |  |                             | (14 | ) |      |   | 7   |  
|                                                                                              |  |                             |     |   |      |   |     |  
|Other comprehensive loss, net of tax                                                          |  |                             | (61 | ) |      |   |    |  
|                                                                                              |  |                             |     |   |      |   |     |  
|Comprehensive income (loss)                                                                   |  | $                           | (40 | ) |      | $ | 133 |  
|                                                                                              |  |                             |     |   |      |   |     |  









See the notes to condensed consolidated financial statements.



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DYNEGY HOLDINGS INC.



NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and Restated)

For the Interim Periods Ended March 31, 2004 and 2003



PLEASE NOTE THAT THESE FINANCIAL STATEMENTS AND THE NOTES THERETO DO NOT REFLECT EVENTS OCCURRING AFTER MAY 11, 2004 (THE DATE OF THE ORIGINAL FILING). FOR A
DESCRIPTION OF THESE EVENTS, PLEASE READ OUR EXCHANGE ACT REPORTS FILED SINCE MAY 11, 2004, INCLUDING OUR QUARTERLY REPORTS ON FORM 10-Q FOR THE PERIODS ENDED JUNE 30, 2004 AND SEPTEMBER 30, 2004, OUR CURRENT REPORTS ON FORM 8-K AND ANY
AMENDMENTS THERETO.



EXPLANATORY NOTE



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



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



This restatement has
no effect on our previously reported net income or cash flows for the three months ended March 31, 2004 or 2003.



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



|                                         |  |               |        |   |                  |   |        |  
|---------------------------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | -
|                                         |  | March 31,2004 |        |   | December 31,2003 |  
|                                         |  | (in millions) |       
|Accounts receivable, affiliates          |  |               |        |   |                  |   |        |  
|As previously reported                   |  | $             | 10     |   |                  | $ | 25     |  
|Restatement                              |  |               | 366    |   |                  |   | 313    |  
|                                         |  |               |        |   |                  |   |        |  
|As restated                              |  | $             | 376    |   |                  | $ | 338    |  
|                                         |  |               |        |   |                  |   |        |  
|Other long-term assets                   |  |               |        |   |                  |   |        |  
|As previously reported                   |  | $             | 167    |   |                  | $ | 156    |  
|Restatement                              |  |               | (10    | ) |                  |   | (10    | )
|                                         |  |               |        |   |                  |   |        |  
|As restated                              |  | $             | 157    |   |                  | $ | 146    |  
|                                         |  |               |        |   |                  |   |        |  
|Total Assets                             |  |               |        |   |                  |   |        |  
|As previously reported                   |  | $             | 10,268 |   |                  | $ | 10,280 |  
|Restatement                              |  |               | 239    |   |                  |   | 197    |  
|                                         |  |               |        |   |                  |   |        |  
|As restated                              |  | $             | 10,507 |   |                  | $ | 10,477 |  
|                                         |  |               |        |   |                  |   |        |  
|Accounts payable, affiliates             |  |               |        |   |                  |   |        |  
|As previously reported                   |  | $             | 151    |   |                  | $ | 195    |  
|Restatement                              |  |               | (68    | ) |                  |   | (121   | )
|                                         |  |               |        |   |                  |   |        |  
|As restated                              |  | $             | 83     |   |                  | $ | 74     |  
|                                         |  |               |        |   |                  |   |        |  
|Deferred income tax (assets) liabilities |  |               |        |   |                  |   |        |  
|As previously reported                   |  | $             | (117   | ) |                  | $ | (106   | )
|Restatement                              |  |               | 292    |   |                  |   | 292    |  
|                                         |  |               |        |   |                  |   |        |  
|As restated                              |  | $             | 175    |   |                  | $ | 186    |  
|                                         |  |               |        |   |                  |   |        |  
|Other long-term liabilities              |  |               |        |   |                  |   |        |  
|As previously reported                   |  | $             | 486    |   |                  | $ | 499    |  
|Restatement                              |  |               | (7     | ) |                  |   | (7     | )
|                                         |  |               |        |   |                  |   |        |  
|As restated                              |  | $             | 479    |   |                  | $ | 492    |  
|                                         |  |               |        |   |                  |   |        |  
|Total Liabilities                        |  |               |        |   |                  |   |        |  
|As previously reported                   |  | $             | 7,166  |   |                  | $ | 7,138  |  
|Restatement                              |  |               | 100    |   |                  |   | 58     |  
|                                         |  |               |        |   |                  |   |        |  
|As restated                              |  | $             | 7,266  |   |                  | $ | 7,196  |  
|                                         |  |               |        |   |                  |   |        |  
|Stockholders Equity                     |  |               |        |   |                  |   |        |  
|As previously reported                   |  | $             | 2,981  |   |                  | $ | 3,021  |  
|Restatement                              |  |               | 139    |   |                  |   | 139    |  
|                                         |  |               |        |   |                  |   |        |  
|As restated                              |  | $             | 3,120  |   |                  | $ | 3,160  |  
|                                         |  |               |        |   |                  |   |        |  



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended March 31, 2004 and 2003



Note 1Accounting Policies



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



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



EITF Issue 02-03.In October 2002, the EITF rescinded EITF
Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities, which previously required use of mark-to-market accounting for our energy trading contracts. While the rescission of EITF Issue 98-10
reduced the number of contracts accounted for on a mark-to-market basis, it did not eliminate mark-to-market accounting. All derivative contracts that either do not qualify, or are not designated, as hedges or as normal purchases or sales, as
defined by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, continue to be marked-to-market in accordance with SFAS No. 133. Any earnings or losses previously recognized under EITF Issue 98-10 that
would not have been recognized under SFAS No. 133 were reversed in 2003 pursuant to adopting the provisions of EITF Issue 02-03. The cumulative effect of this change in accounting principle resulted in after-tax earnings of $21 million in the first
quarter 2003 and comprised the following items that are no longer required to be recorded using mark-to-market accounting (in millions):



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



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended March 31, 2004 and 2003



---

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



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



As part of the transition adjustment in adopting SFAS No. 143, existing environmental liabilities in the amount of $73 million were reversed in the first
quarter 2003. The fair value of the remediation costs estimated to be incurred upon retirement of the respective assets is included in the ARO and was recorded upon adoption of SFAS No. 143. Since the previously accrued liabilities exceeded the fair
value of the future retirement obligations, the impact of adopting SFAS No. 143 was an increase in earnings, net of tax, of $36 million in the first quarter 2003, which is included in cumulative effect of change in accounting principles in the
unaudited condensed consolidated statements of operations. In addition to these liabilities, we also have potential retirement obligations for dismantlement of power generation facilities, a fractionation facility and natural gas storage facilities.
Our current intent is to maintain these facilities in a manner such that they will be operated indefinitely. As such, we cannot estimate any potential retirement obligations associated with these assets. Liabilities will be recorded in accordance
with SFAS No. 143 at the time we are able to estimate any new AROs.



At January 1, 2004, our ARO liabilities were $30 million for our GEN segment and $10 million for our NGL segment. These retirement obligations related to activities such as ash pond and landfill capping, closure and post-closure costs,
environmental testing, remediation, monitoring and land lease obligations. During the three-month periods ended March 31, 2004 and 2003, accretion expense recognized for the fair value for all of our ARO liabilities totaled approximately $1 million
and $1 million, respectively. There were no additional AROs recorded or settled, nor were there any revisions to estimated cash flows associated with existing AROs, during the three-month periods ended March 31, 2004 and 2003. At March 31, 2004, our
aggregate ARO liability was $41 million.



SFAS No.
148. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, and provides
alternative methods of transition (prospective, modified prospective or retroactive) for entities that voluntarily change to the fair value-based method of accounting for stock-based employee compensation in a fiscal year beginning before December
16, 2003. SFAS No. 148 requires prominent disclosure about the effects on reported net income of an entitys accounting policy decisions with respect to stock-based employee compensation. Although we do not grant stock options to our employees,
these employees do participate in Dynegys stock-based compensation programs. We transitioned to a fair value-based method of accounting for stock-based compensation in the first quarter 2003 and are using the prospective method of transition
as described under SFAS No. 148.



Under the prospective method
of transition, all stock options granted by Dynegy after January 1, 2003 are accounted for on a fair value basis. Options granted prior to January 1, 2003 continue to be accounted for using the intrinsic value method. Accordingly, for options
granted prior to January 1, 2003, compensation expense is not reflected for employee stock options unless they were granted at an exercise price lower than market value on



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended March 31, 2004 and 2003



the grant date. We have recognized compensation expense over the applicable vesting periods for in-the-money stock options previously granted by Dynegy. No
in-the-money stock options have been granted since 1999.



Had
compensation cost for all stock options granted prior to 2003 been determined on a fair value basis consistent with SFAS No. 123, our net income would have approximated the following pro forma amounts for the three-month periods ended March 31, 2004
and 2003, respectively.



|                                                                                                                                            |  |                             |    |   |      |   |     |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | -- | - | ---- | - | --- | -
|                                                                                                                                            |  | Three Months EndedMarch 31, |   
|                                                                                                                                            |  | 2004                        |    |   | 2003 |  
|                                                                                                                                            |  | (in millions)               |   
|Net income as reported                                                                                                                      |  | $                           | 21 |   |      | $ | 133 |  
|Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects                                    |  |                             |   |   |      |   | 1   |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                             | (5 | ) |      |   | (12 | )
|                                                                                                                                            |  |                             |    |   |      |   |     |  
|Pro forma net income                                                                                                                        |  | $                           | 16 |   |      | $ | 122 |  
|                                                                                                                                            |  |                             |    |   |      |   |     |  



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



FIN No. 46R requires additional disclosures for entities which meet the definition of a VIE in which we hold a significant variable interest but are not
the primary beneficiary. We own 50% equity interests in various generation facilities in Illinois, California, Georgia, Texas and Michigan, which are accounted for using equity method accounting and are included in Unconsolidated investments in our
unaudited condensed consolidated balance sheets. We acquired or began involvement with these equity interests in 1997 and 1999. Total net generating capacity for these generating facilities ranges from 62 MW to 1,156 MW. As a result of various
contractual arrangements into which these entities have entered, we have concluded that they are VIEs. As we do not absorb a majority of the expected losses or receive a majority of the expected residual returns, we are not considered the primary
beneficiary of these entities. Our equity investment balance in the facilities totaled $475 million at March 31, 2004, and one of our affiliates has a loan outstanding to one of these entities, which totaled $11 million at March 31, 2004.



FIN No. 46R also requires additional disclosure for entities
where we are unable to obtain financial information to determine (1) if the entity is a VIE and (2) if we are deemed to be the primary beneficiary of the entity. We identified one potential VIE for which we were unable to obtain adequate financial
information. As required to be disclosed by FIN No. 46R, the following is a description of the agreements with this potential VIE. In July 2001, we entered into several agreements, including a power tolling agreement, a financial derivative
instrument, an energy management agreement and a natural gas supply agreement, with Sithe Independence Power Partners, L.P., which owns and operates a 955 MW combined cycle natural gas generation facility in



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended March 31, 2004 and 2003



Oswego, New York. These agreements are in effect through 2014. Our future obligations under these agreements are approximately $807 million, which includes
the fixed capacity payments for our physical tolling contract and fixed payments related to the financial derivative instrument. We recorded expense of $6 million and $9 million under the tolling agreement and financial derivative instrument during
the quarters ended March 31, 2004 and 2003, respectively.



Cumulative Effect of Change in Accounting Principles



We adopted SFAS No. 143 and provisions of EITF Issue 02-03 in the first quarter 2003. We adopted provisions of FIN No. 46R in the first quarter 2004. Please see above for a discussion of the impact of adopting these
standards.



Note 2Dispositions and Discontinued Operations



Dispositions



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



Indian Basin. In April 2004, we
sold our 16% interest in the Indian Basin Gas Processing Plant for approximately $48 million. In the second quarter 2004, we expect to recognize a pre-tax gain on the sale of approximately $36 million.



Discontinued Operations



As part of our restructuring plan, we sold or liquidated some of our
operations during 2003, including our U.K. CRM business, which has been accounted for as discontinued operations under SFAS No. 144. The following table summarizes information related to our discontinued operations:



|                                    |  |               |     |  
|----------------------------------- |  | ------------- | --- | -
|                                    |  | U.K. CRM      |    
|                                    |  | (in millions) |    
|Three Months Ended March 31, 2004   |  |               |     |  
|Income from operations before taxes |  | $             | 17  |  
|Income from operations after taxes  |  |               | 12  |  
|Three Months Ended March 31, 2003   |  |               |     |  
|Revenue                             |  | $             | 21  |  
|Loss from operations before taxes   |  |               | (15 | )
|Loss from operations after taxes    |  |               | (10 | )



In the first quarter
2004, we recognized $17 million of pre-tax income related to translation gains on foreign currency in the U.K. Please see Note 4Risk Management Activities and Accumulated Other Comprehensive Income (Loss)Net investment hedges in foreign
operations for further information.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended March 31, 2004 and 2003



Note 3Restructuring Charges



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



|                              |  |               |    |   |                                     |   |    |       |  |   |    |  
|----------------------------- |  | ------------- | -- | - | ----------------------------------- | - | -- | ----- |  | - | -- | -
|                              |  | Severance     |    |   | CancellationFees andOperatingLeases |   |    | Total | 
|                              |  | (in millions) |   
|Balance at December 31, 2003  |  | $             | 20 |   |                                     | $ | 28 |       |  | $ | 48 |  
|2004 adjustments to liability |  |               | 8  |   |                                     |   | 2  |       |  |   | 10 |  
|Cash payments                 |  |               | (1 | ) |                                     |   | (3 | )     |  |   | (4 | )
|                              |  |               |    |   |                                     |   |    |       |  |   |    |  
|Balance at March 31, 2004     |  | $             | 27 |   |                                     | $ | 27 |       |  | $ | 54 |  
|                              |  |               |    |   |                                     |   |    |       |  |   |    |  



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



Note 4Risk Management Activities and Accumulated Other Comprehensive Income (Loss)



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



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



During the three months ended March 31, 2004 and 2003, there was no material ineffectiveness from changes in fair value of hedge positions and no amounts
were excluded from the assessment of hedge effectiveness related to the hedge of future cash flows. During the three months ended March 31, 2004 and 2003, 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, net at March 31, 2004 is expected to be reclassified to future earnings, contemporaneously with the related purchases of fuel, sales of electricity or natural gas liquids and payments of interest, as applicable to each
type of hedge. Of this amount, after-tax losses of approximately $34 million are currently estimated to be reclassified into earnings over the 12-month period ending March 31, 2005. The actual amounts that will be reclassified to earnings over this
period and beyond could vary materially from this estimated amount as a result of changes in market conditions and other factors.



Fair value hedges. We also enter into derivative instruments that qualify as fair value hedges. We use interest rate swaps to convert a
portion of our non-prepayable fixed-rate debt into variable-rate debt. During the



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended March 31, 2004 and 2003



three months ended March 31, 2004 and 2003, there was no ineffectiveness from changes in the fair value of hedge positions and no amounts were excluded from
the assessment of hedge effectiveness. During the three months ended March 31, 2004 and 2003, no amounts were recognized in relation to firm commitments that no longer qualified as fair value hedges.



Net investment hedges in foreign operations. We have
investments in foreign subsidiaries, the net assets of which are exposed to currency exchange-rate volatility. In the past, we used derivative financial instruments, including foreign exchange forward contracts and cross-currency interest rate
swaps, to hedge this exposure. As of March 31, 2004, we had no net investment hedges in place.



During the first quarter 2003, our efforts to exit the U.K. CRM business were substantially completed. As required by SFAS No. 52, Foreign Currency Translation, a significant portion of unrealized gains
and losses resulting from translation and financial instruments utilized to hedge currency exposures previously recorded in stockholders equity were recognized in income, resulting in an after-tax loss of approximately $5 million in the three
months ended March 31, 2003. During the first quarter 2004, we repatriated a majority of our cash from the U.K., resulting in the substantial liquidation of our investment in the U.K. As such, we recognized approximately $17 million of pre-tax
translation gains in income that arose since April 1, 2003 and had accumulated in stockholders equity.



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



|                                                          |  |               |     |   |                  |   |    |  
|--------------------------------------------------------- |  | ------------- | --- | - | ---------------- | - | -- | -
|                                                          |  | March 31,2004 |     |   | December 31,2003 |  
|                                                          |  | (in millions) |    
|Cash flow hedging activities, net                         |  | $             | (37 | ) |                  | $ | 10 |  
|Foreign currency translation adjustment                   |  |               | 12  |   |                  |   | 26 |  
|Minimum pension liability                                 |  |               | (3  | ) |                  |   | (3 | )
|                                                          |  |               |     |   |                  |   |    |  
|Accumulated other comprehensive income (loss), net of tax |  | $             | (28 | ) |                  | $ | 33 |  
|                                                          |  |               |     |   |                  |   |    |  



Note 5Unconsolidated
Investments



A summary of our unconsolidated investments
is as follows:



|                                 |  |               |     |                  |   |    
|-------------------------------- |  | ------------- | --- | ---------------- | - | ---
|                                 |  | March 31,2004 |     | December 31,2003
|                                 |  | (in millions)
|Equity affiliates:               |  |               |     |                  |   |    
|GEN investments                  |  | $             | 499 |                  | $ | 495
|NGL investments                  |  |               | 82  |                  |   | 82 
|                                 |  |               |     |                  |   |    
|Total unconsolidated investments |  | $             | 581 |                  | $ | 577
|                                 |  |               |     |                  |   |    



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended March 31, 2004 and 2003



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



|                 |  |                              |     |              |   |       |  |              |     |  |   |    
|---------------- |  | ---------------------------- | --- | ------------ | - | ----- |  | ------------ | --- |  | - | ---
|                 |  | Three Months Ended March 31,
|                 |  | 2004                         |     | 2003        
|                 |  | Total                        |     | Equity Share |   | Total |  | Equity Share
|                 |  | (in millions)               
|Revenues         |  | $                            | 283 |              | $ | 142   |  | $            | 259 |  | $ | 129
|Operating income |  |                              | 70  |              |   | 35    |  |              | 65  |  |   | 33 
|Net income       |  |                              | 70  |              |   | 35    |  |              | 59  |  |   | 29 



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



|                 |  |                              |     |              |   |       |  |              |     |  |   |    
|---------------- |  | ---------------------------- | --- | ------------ | - | ----- |  | ------------ | --- |  | - | ---
|                 |  | Three Months Ended March 31,
|                 |  | 2004                         |     | 2003        
|                 |  | Total                        |     | Equity Share |   | Total |  | Equity Share
|                 |  | (in millions)               
|Revenues         |  | $                            | 151 |              | $ | 62    |  | $            | 673 |  | $ | 243
|Operating income |  |                              | 31  |              |   | 13    |  |              | 64  |  |   | 24 
|Net income       |  |                              | 22  |              |   | 11    |  |              | 53  |  |   | 23 



Earnings from
unconsolidated investments of $39 million for the three months ended March 31, 2004, include the $11 million above and $35 million from West Coast Power offset by a $7 million impairment of our Michigan Power equity investment discussed below.
Earnings from unconsolidated investments of $52 million for the three months ended March 31, 2003 consist entirely of the net income related to such investments.



During the first quarter 2004, we entered into agreements to sell our unconsolidated investments in the Oyster Creek and
Michigan Power generation facilities for aggregate net cash proceeds of approximately $103 million. Closing of the transactions, targeted for the second quarter 2004, are subject to lender and counterparty consents and other closing conditions. In
the first quarter 2004, we recorded an impairment on our investment in Michigan Power totaling $7 million to adjust our book value to the selling price.



Note 6Debt



Revolvers and Commercial Paper. During the three-month period ended March 31, 2004, we issued an aggregate of approximately $20 million of letters
of credit under our $1.1 billion revolving credit facility for a total of $208 million at March 31, 2004. As of March 31, 2004, there were no borrowings outstanding under this facility. During the period from March 31, 2004 through May 3, 2004, we
reduced our outstanding letters of credit under this facility by $19 million.



Repayments. In the first quarter 2004, we made payments of $19 million related to the ABG Gas Supply financing.



Note 7Related Party Transactions



We routinely engage in business transactions with subsidiaries of Dynegy that are not part of our consolidated group. These transactions include, among
others, sales of energy and capacity to Illinois Power under a power purchase agreement, as well as purchases of natural gas from Illinois Power. Please see Note 13Related Party TransactionsOther beginning on page F-43 of our Form 10-K/A
for further discussion. Additionally, we engage



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended March 31, 2004 and 2003



in transactions with ChevronTexaco Corporation and its affiliates, including purchases and sales of natural gas and natural gas liquids, which we believe are
executed on terms that are fair and reasonable. Please see Note 13Related Party Transactions beginning on page F-41 of our Form 10-K/A for further discussion.



Note 8Commitments and Contingencies



PLEASE NOTE THAT THE INFORMATION CONTAINED IN THIS NOTE 8, WHICH WAS PRESENTED IN OUR FIRST QUARTER 2004 FORM 10-Q ORIGINALLY FILED WITH THE SEC ON
MAY 11, 2004 IN ORDER TO REFLECT THE MATERIAL CHANGES IN OR UPDATES TO OUR MATERIAL LEGAL PROCEEDINGS SINCE THE ORIGINAL FILING OF OUR 2003 FORM 10-K, DOES NOT REFLECT EVENTS OCCURRING AFTER MAY 11, 2004. FOR A DESCRIPTION OF THESE EVENTS,
INCLUDING MATERIAL CHANGES IN, OR UPDATES TO, OUR MATERIAL LEGAL PROCEEDINGS, PLEASE READ OUR EXCHANGE ACT REPORTS FILED SINCE MAY 11, 2004, INCLUDING OUR QUARTERLY REPORTS ON FORM 10-Q FOR THE QUARTERS ENDED JUNE 30, 2004 AND SEPTEMBER
30, 2004, OUR CURRENT REPORTS ON FORM 8-K AND ANY AMENDMENTS THERETO.



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



We record reserves for estimated losses from contingencies when information available indicates that a loss is probable and the amount of the loss is
reasonably estimable under SFAS No. 5, Accounting for Contingencies. For environmental matters, we record liabilities when remedial efforts are probable and the costs can be reasonably estimated. Please see Note 2Accounting
PoliciesOther Contingencies beginning on page F-     of our Form 10-K/A for further discussion of our reserve policies. Environmental reserves do not reflect managements assessment of the insurance coverage that may
be applicable to the matters at issue, whereas litigation reserves do reflect such potential coverage. We cannot make any assurances that the amount of any reserves or potential insurance coverage will be sufficient to cover the cash obligations we
might incur as a result of litigation or regulatory proceedings, payment of which could be material.



With respect to some of the items listed below, management has determined that a loss is not probable or that any such loss, to the extent probable, is
not reasonably estimable. In some cases, management is not able to predict with any degree of certainty the range of possible loss that could be incurred. Notwithstanding these facts, management has assessed these matters 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, as a result of facts
arising prior to resolution of these matters or other factors, prove inaccurate and investors should be aware that such judgment is made subject to the known uncertainty of litigation.



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



| |  |  | Dynegy announced an agreement on a comprehensive settlement of numerous contested FERC claims relating to western electric energy market transactions that occurred
between January 2000 and June 2001. As part of the settlement, which is subject to final documentation and approval by the FERC and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | the CPUC, West Coast Power will forego its right to collect past due receivables and interest from the Cal ISO and Cal PX related to the settlement period
and pay $22.5 million in exchange for the dismissal of claims against Dynegy and West Coast Power related to the settlement period.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The arbitration relating to Mr. Bergstroms severance agreement was tried before a panel of three arbitrators, which issued a decision awarding Mr. Bergstrom approximately
$10.4 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The judge presiding over Dynegys ERISA class action lawsuit entered an order that substantially reduced the class period, dismissed several of the plaintiffs claims and
dismissed all of the defendants except Dynegy and the members of the Dynegy Benefit Plans Committee from January 2002 to January 2003, the new class period established by the order.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Following our unsuccessful appeal of an adverse judgment in the Maxus litigation, we paid the judgment of approximately $6.9 million.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



The above summary of recent developments is qualified in its entirety by, and
should be read in conjunction with, the more detailed summary of our significant legal proceedings set forth below.



Shareholder Litigation. We and Dynegy are defending a class action lawsuit filed on behalf of purchasers of Dynegys publicly traded
securities from January 2000 to July 2002 seeking unspecified compensatory damages and other relief. The lawsuit principally asserts that we and Dynegy and certain of our current and former officers and directors violated the federal securities laws
in connection with our disclosures, including accounting disclosures, regarding Project Alpha (a structured natural gas transaction entered into by us in April 2001), round-trip trading, the submission of false trade reports to publications that
calculate natural gas index prices, the alleged manipulation of the California power market and financial restatements for 1999-2001. The Regents of the University of California have been appointed as lead plaintiff and Milberg Weiss is class
counsel. The plaintiff filed an amended complaint in January 2004 and, in March 2004, we filed a motion to dismiss. We expect the plaintiffs response and our corresponding reply to be filed in May and June 2004, respectively. An adverse result
in this action could have a material adverse effect on our financial condition, results of operations and cash flows. Dynegy previously recorded a reserve in connection with this litigation.



In addition, Dynegy is a nominal defendant in several derivative lawsuits
brought by shareholders on Dynegys behalf against certain of its former officers and current and former directors whose claims are similar to those described above. These lawsuits have been consolidated into two groupsone pending in
federal court and the other pending in state court. A motion to dismiss the federal derivative claim is currently pending and is set for hearing in June 2004. We do not expect to incur any material liability with respect to these claims.



ERISA/401(k) Litigation. Dynegy is defending a purported
class action complaint filed in federal district court on behalf of participants holding Dynegy common stock in the Dynegy 401(k) Savings Plan during the period from April 1999 to January 2003. This complaint alleges violations of ERISA in
connection with Dynegys 401(k) Savings Plan, including claims that Dynegys Board and certain of Dynegys former and current officers, past and present members of its Benefit Plans Committee, former employees who served on a
predecessor committee to its Benefit Plans Committee, and Vanguard Fiduciary Trust Company and CG Trust Company (trustees of the trust that held Plan assets for portions of the putative class period) breached their fiduciary duties to the
Plans participants and beneficiaries in connection with the Plans investment in Dynegy common stock  in particular with respect to Dynegys financial statements, Project Alpha, round-trip trades and the gas price index
investigation. The lawsuit seeks unspecified damages for the losses to the Plan, as well as attorneys fees and other costs. In July 2003, Dynegy filed a motion to dismiss this action. The judge entered an



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order on this motion in March 2004, dismissing several of the plaintiffs claims and all of the defendants except Dynegy and the members of the Dynegy
Benefit Plans Committee from January 2002 to January 2003, the substantially reduced class period established by the order. An answer was filed to the plaintiffs suit denying the remaining claims in April 2004. Discovery is proceeding. Dynegy
is analyzing these claims and has stated that it intends to defend against them vigorously. We cannot predict with certainty whether we will incur any liability or to estimate the damages, if any, that might be incurred in connection with this
lawsuit. However, given the nature of the claims, an adverse outcome could have a material adverse effect on our financial condition, results of operations and cash flows.



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



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



In February 2003, the Court granted our motion for partial summary judgment based on the five-year statute of limitations. As a result, the EPA is not
permitted to seek any monetary civil penalties for claims related to construction without a permit under the PSD regulations. The Courts ruling also precludes monetary civil penalties for a portion of the claims under the NSPS regulations and
the applicable Illinois regulations. We believe that we have meritorious defenses against the remaining claims and vigorously defended against them at trial. The trial to resolve claims of liability began in June 2003 and closing arguments occurred
in September 2003. Shortly after closing arguments, several interveners were granted the right to file briefs in support of arguments they believe the United States ceased to pursue. These interventions and delays in post-trial briefing have
postponed the issuance of the liability order, and we cannot predict with certainty when a decision will be rendered. We have recorded a reserve in an amount we consider reasonable for potential penalties that could be imposed if the Court finds us
liable and the EPA prosecutes successfully the remaining claims for penalties.



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



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



Also in August 2003, the EPA issued a new rule, the Equipment Replacement Provision of the Routine Maintenance, Repair
and Replacement Exclusion, the effectiveness of which has been delayed pending the resolution of an appeal filed by several northeastern states and environmental groups. The new rule, if sustained, would provide that replacing components of a
process unit with identical components (or functional equivalents) falls within the scope of the routine maintenance, repair and replacement exclusion if (i) the replacement cost is less than 20% of the total cost of replacing the unit, (ii) the
replacement does not alter the units basic design and (iii) the unit will continue to comply with applicable emission and operational standards.



None of our other facilities are covered in the complaint and NOV, but the EPA previously requested information, which we provided, concerning activities
at our Vermilion, Wood River, Hennepin, Danskammer and Roseton plants. The EPA could eventually commence enforcement actions based on activities at these plants, although the uncertainty surrounding the new rule makes it difficult to assess the
likelihood of additional EPA enforcement actions.



California Market Litigation. We and/or Dynegy and numerous other power generators and marketers are the subject of numerous lawsuits arising from our participation in the western power markets during the California energy
crisis. Eight of these lawsuits, which primarily allege manipulation of the California wholesale power markets and seek unspecified treble damages, were consolidated before a single federal judge. That judge dismissed two of the cases in the first
quarter 2003 on the grounds of FERC preemption and the filed rate doctrine. A decision on the plaintiffs appeal of that dismissal is not expected before the third quarter 2004. Regarding the other six consolidated cases, we are awaiting a
ruling from the Ninth Circuit Court of Appeals, which we do not expect to occur prior to the third quarter 2004, on our appeal of a prior decision to remand those cases to state court.



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



In December 2002, two additional actions were filed with similar allegations on behalf of residents of Washington and Oregon. In May 2003, the plaintiffs voluntarily dismissed these actions and refiled them in
California Superior Court as a class action complaint. The complaint, which was brought on behalf of consumers



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and businesses in Oregon, Washington, Utah, Nevada, Idaho, New Mexico, Arizona and Montana that purchased energy from the California market, alleges
violations of the Cartwright Act and unfair business practices. This action has been removed from state court and consolidated with existing actions pending before the United States District Court for the Northern District of California. The hearing
on plaintiffs appeal to remand to state court occurred in February 2004. The judge stayed his ruling on the appeal pending the Ninth Circuits ruling on the six consolidated cases referenced above. Most recently, the Montana
Attorney General has filed a case alleging similar antitrust and market manipulation claims, although we have not been served with this lawsuit.



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



FERC and Related Regulatory InvestigationsRequests for Refunds. In July 2001, the FERC initiated a hearing to establish refunds to electricity customers, or offsets against amounts owed to
electricity suppliers, during the period of October 2000 through June 2001. In particular, the FERC established a methodology to calculate mitigated market clearing prices in the Cal ISO and Cal PX markets. In December 2002, an administrative law
judge issued his recommendations regarding the appropriate level of refunds or offsets. Those recommendations, however, do not fully reflect proposed refund or offset amounts for individual companies. In October 2003, the FERC issued two orders
addressing various applications for rehearing, including ours, relating to its previous refund orders. The orders addressed numerous requests by the parties, the most significant of which was the refusal to change the gas pricing methodology and a
requirement that the Cal ISO and Cal PX recalculate the refund liability of market participants. The gas price methodology approved by the FERC in March 2003 replaces the gas prices used in the computation, thus reducing the mitigated market
clearing price for power and increasing calculated refunds, subject to a provision that provides full recoverability of actual gas costs paid by the generators to unaffiliated third parties. No final refund calculation is expected prior to August
2004. West Coast Power recorded a reserve in the fourth quarter 2003 relating to its estimated refund exposure.



In June 2003, the FERC issued an order to show cause why the activities of certain participants in the California power markets from January 2000 to June
2001, including us, did not constitute gaming and/or anomalous market behavior as defined in the Cal ISO and Cal PX tariffs. In January 2004, we and the FERC staff submitted a stipulation and settlement agreement to the presiding administrative law
judge to settle the issues raised in the June 2003 show cause order. This settlement, which provides that West Coast Power will pay approximately $3 million, following final FERC approval, into a fund established at the U.S. Treasury for the benefit
of California and Western electricity consumers, will be incorporated into the broader settlement described below.



Also in June 2003, the FERC issued an order requiring parties to demonstrate that certain bids did not constitute anomalous market behavior. Specifically,
the order requires the FERC staff to investigate all parties who bid above the level of $250/MWh in the Cal ISO and Cal PX markets during the period from May 2000 to October 2000. Parties identified through this process will be required to
demonstrate why this bidding behavior did not violate market protocols. The order also states that, to the extent such practices are not found to be legitimate business behavior, the FERC will require the disgorgement of all unjust profits for that
period and will consider other non-monetary remedies, such as the revocation of market-based rate authority.



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In April 2004, Dynegy and West Coast Power announced an agreement to settle FERC claims relating to
western energy market transactions that occurred from January 2000 through June 2001. The parties to this settlement other than Dynegy and West Coast Power include the FERC, Pacific Gas and Electric Company, Southern California Edison, San Diego Gas
& Electric Company, the CDWR, the California Electricity Oversight Board and the California Attorney General. Other market participants may opt into this settlement and share in the distribution of the settlement proceeds. As part of the
settlement agreement, West Coast Power will (i) forego its right to collect past-due receivables and interest from the Cal ISO and Cal PX related to the settlement period, (ii) forego natural gas cost recovery claims against the California settling
parties related to the settlement period, and (iii) place into escrow accounts a total of $22.5 million, which includes the above-referenced $3 million settlement with the FERC staff, for subsequent distribution to various California energy
purchasers. In exchange, the other settling parties will forego (i) all claims relating to refunds or other monetary damages for sales of electricity during the settlement period, and (ii) claims alleging receipt of unjust or unreasonable rates for
the sale of electricity during the settlement period.



The
settlement is subject to the execution of definitive agreements and approval by the FERC and the CPUC, which is expected in the third quarter 2004. We recorded an additional $5 million charge in the first quarter 2004 related to the settlement.



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



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



At March 31, 2004, our portion of the receivables owed to West
Coast Power by the Cal ISO and Cal PX, as reflected in West Coast Powers financial records, approximated $235 million. Management periodically assesses our exposure through West Coast Power, relative to our California receivables, and
establishes and maintains reserves under SFAS No. 5. Our share of the total reserve taken by West Coast Power at March 31, 2004 was approximately $196 million. We also recorded an additional $5 million charge in the first quarter 2004 related to the
above-described settlement which, if approved, will resolve the claims and disputes which initially gave rise to these reserves at West Coast Power.



Enron Trade Credit Litigation. At the time of their bankruptcy filing in the fourth quarter 2001, Enron Corp. and its affiliates had net
exposure to us, including certain liquidated damages and other amounts relating to the termination of commercial transactions among the parties, of approximately $84 million. This exposure, with respect to which we recognized a charge in our fourth
quarter 2001 financial statements, was calculated by setting off approximately $230 million owed from Dynegy entities to Enron entities against approximately $314 million owed from Enron entities to Dynegy entities. The master netting agreement
between Enron and us and the valuation of the commercial transactions covered by the agreement, which valuation is based principally on the parties assessment of market prices for such period, remain subject to dispute by Enron. We are engaged
in an ongoing process with Enron to reconcile the differences between our respective valuations of the transactions and accounts receivable. As a result of recalculations of mark-to-market values of past transactions, we have



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reduced the amount that we believe we are owed by Enron to approximately $68 million, including the liabilities under the gas transportation agreement
related to the Sithe Independence power tolling arrangement. As required by the master netting agreement, we instituted arbitration proceedings against those Enron parties not in bankruptcy in 2002 and filed a motion with the Bankruptcy Court
requesting that we be allowed to proceed to arbitration against those Enron parties that are in bankruptcy. The Enron parties opposed our request and filed an adversary proceeding against us, alleging that the master netting agreement should not be
enforced and that the Enron companies should recover approximately $230 million from us. We have disputed such allegations and are vigorously defending our position regarding the setoff rights contained in the master netting agreement, although the
Bankruptcy Court has yet to rule on the enforceability of the master netting agreement.



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



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



Trans-Elect Litigation. In October 2003, Trans-Elect, Inc. and Illinois Electric Transmission Company, LLC filed suit against Illinois Power
in the Northern District of Illinois requesting specific performance and estoppel, and claiming damages as a result of breach of contract and lost profits. These causes of action allegedly arise from Illinois Powers termination of an asset
purchase and sale agreement entered into by the parties in October 2002. Under the terms of the agreement, Illinois Power agreed to sell its transmission assets to Trans-Elect if, on or before July 7, 2003, the agreement received the required FERC,
ICC, SEC and Hart-Scott Rodino approvals. As of July 7, 2003, the agreement had not been approved by, among other entities, the FERC and, as a result, Illinois Power terminated the agreement in accordance with its terms on July 8, 2003. Trans-Elect
claims that Illinois Power breached the agreement by failing to use its best efforts to obtain the required approvals and/or to negotiate an alternate agreement that could be approved. In April 2004, the plaintiffs amended their
complaint to add Dynegy Inc. as a defendant, claiming that it tortiously interfered with the asset purchase and sale agreement. Trial has been scheduled in this matter for January 2005.



In April 2004, the plaintiffs also filed a separate lawsuit in Illinois state court against us, similarly claiming that we
tortiously interfered with the Illinois Power asset purchase and sale agreement. We intend to file an answer to this claim in May 2004.



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We deny these claims, in that we believe we complied with the terms of the agreement, and intend to
defend against them vigorously. We cannot predict with certainty whether we will incur any liability or estimate the damages, if any, that might be incurred in connection with these lawsuits. However, we do not believe that any liability we might
incur as a result of this litigation would have a material adverse effect on our financial condition or results of operations. Additionally, in connection with Dynegys proposed sale of Illinois Power to Ameren, Dynegy has retained this
contingent liability and does not expect that the outcome will negatively impact its ability to close the sale.



Severance Arbitrations. Dynegys former CEO, Chuck Watson, former President, Steve Bergstrom, and former CFO, Rob Doty, have each filed
for arbitration pursuant to the terms of their employment/severance agreements. In each case, the parties disagree as to the amounts that may be owed pursuant to their respective agreements. These former officers made arbitration claims seeking
payments of up to approximately $28.7 million, $10.4 million and $3.4 million, respectively. Their agreements are subject to interpretation and we believe that, with respect to the claims asserted by Messrs. Watson and Doty, the amounts owed are
substantially lower than the amounts sought.



The arbitration
relating to Mr. Bergstroms severance agreement was tried before a panel of three arbitrators in March 2004. In April 2004, the panel issued its decision with respect to his severance claim awarding Mr. Bergstrom approximately $10.4
million. We anticipate a decision on Mr. Bergstroms request for attorneys fees and interest in May 2004. The arbitrations with respect to Messrs. Watson and Doty are currently scheduled to commence in June and November 2004,
respectively.



Dynegy has taken severance accruals in amounts
it considers reasonable relating to these proceedings. Please read Note 3Restructuring Charges for further discussion regarding the accrual relating to Mr. Watson.



Farnsworth Litigation. In August 2002, Bradley Farnsworth filed a lawsuit against Dynegy in state court
claiming breach of contract and that he was demoted and ultimately fired from the position of Controller for refusing to participate in illegal activities. Specifically, Mr. Farnsworth alleges, in the words of his amended complaint, that certain
former executive officers requested that he shave or reduce for accounting purposes the forward price curves associated with the natural gas business in the United Kingdom for the period of October 1, 2000 through March 31,
2001, in order to indicate a reduction in our mark-to-market losses. Mr. Farnsworth, who seeks unspecified actual and exemplary damages and other compensation, also alleges that he is entitled to a termination payment under his employment
agreement equal to 2.99 times the greater of his average base salary and incentive compensation for the highest three calendar years preceding termination or his base salary and target bonus amount for the year of termination (currently estimated at
a range of approximately $700,000 to $1,200,000). In March 2004, the judge dismissed Mr. Farnsworths claim that he was asked to shave forward price curves. Trial on the claim concerning his employment agreement has been rescheduled
for October 2004. We are vigorously defending this claim. Although we have recorded a reserve with respect to this litigation, we do not believe that any liability we might incur as a result of this litigation would have a material adverse effect on
our financial condition, results of operations or cash flows.



Apache Litigation. In May 2002, Apache Corporation filed suit in state court against Versado, as purchaser and processor of Apaches gas, and DMS, as operator of the Versado assets in New Mexico, seeking more than $9
million in damages. The amended petition alleges that Versado engaged in sham transactions with affiliates, resulting in Versado not receiving fair market value when it sells gas and liquids, and that the formula for calculating the
amount Versado receives from its buyers of gas and liquids is flawed since it is based on gas price



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indexes that these same affiliates are alleged to have manipulated by providing false price information to the index publisher. At trial, the jury found in
favor of the plaintiff and awarded approximately $1.6 million in damages. We are awaiting a ruling from the court on a motion to set aside the judgment. Although we have recorded a reserve with respect to this litigation, we do not believe that any
liability we might incur as a result of this litigation would have a material adverse effect on our financial condition, results of operations or cash flows.



Gas Index Pricing Litigation. We are defending the following suits claiming damages resulting from the alleged manipulation of gas index
publications and prices by us and others: Sierra Pacific Resources and Nevada Power Company v. El Paso Corp. et al.; Bustamante v. The McGraw Hill Companies et al.; In re Natural Gas Commodity Litigation; Texas-Ohio Energy
Inc. et al. v. Centerpoint Energy et al; People of the State of Montana et al. v. Williams Energy Marketing et al; Benscheidt v. AEP Energy Services et al. In each of these suits, the plaintiffs allege that we and other energy
companies engaged in an illegal scheme to inflate natural gas prices by providing false information to gas index publications, thereby manipulating the price. All of the complaints rely heavily on the FERC and CFTC investigations into and report
concerning index-reporting manipulation in the energy industry. The plaintiffs generally seek unspecified actual and punitive damages relating to costs they claim to have incurred as a result of the alleged conduct. Our motion to dismiss the
Sierra Pacific suit was granted. In April 2004, in response to a motion by the plaintiff, the court affirmed its dismissal of the original complaint but allowed plaintiff leave to file an amended complaint. We have not yet received the
amended complaint. The other cases are in varying procedural stages, although we have not been served in the Montana case.



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



Triad
Litigation. In March 2003, Triad Energy Resources Corp. and five other alleged representatives of two plaintiffs classes filed a putative antitrust class action against NiSource Inc. and other defendants, including us, in federal
district court. The plaintiffs purport to represent classes of purchasers, marketers, wholesalers, managers, sellers and shippers of natural gas that allegedly were damaged by an illegal gas scheme devised by three federally regulated interstate
pipeline systems which are now owned by NiSource, and certain shippers on these pipelines. It alleges that the interstate pipelines provided preferential storage and transportation services to their own unregulated marketing affiliate, in violation
of FERC regulations, and in return for percentages of the profits reaped by the marketing affiliate. The complaint also alleges that certain shippers, including us, having learned of these preferential arrangements, demanded and received similar
preferential storage and transportation services that were not available to all shippers.



Although this alleged scheme was the subject of an October 2000 FERC order, which required the Columbia companies to pay $27.5 million to certain customers of Columbia Gas and Columbia Gulf, plaintiffs claim that the
FERC order did not remedy the competitive injury to plaintiffs caused by the scheme. The complaint seeks aggregate damages of approximately $1.716 billion, which damages are subject to trebling under federal antitrust laws. In October 2003, the
court granted defendants motion to dismiss for lack of jurisdiction and allowed time for the plaintiffs to amend their complaint. The plaintiffs have since filed a motion to voluntarily dismiss their complaint and indicated an intent to refile
in a proper jurisdiction, although plaintiffs have not yet re-filed. We are analyzing these claims and intend to defend against them vigorously. We cannot predict with certainty whether we will incur any liability or estimate the damages, if any,
that we might incur in connection with this lawsuit.



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Atlantigas Corp. Litigation. In November 2003, Atlantigas Corporation filed a
suit similar to Triad in Maryland against us and several other defendants alleging certain conspiracies between natural gas shippers and storage facilities. The complaint seeks unspecified compensatory and punitive damages. In addition, we are
alleged to have conspired with the other defendants to receive preferential natural gas storage and transportation services at off-tariff prices. Defendants are currently challenging plaintiff on the threshold issues of standing, statute of
limitations and jurisdiction. These issues were fully briefed in February 2004 and a hearing date has been requested but not scheduled. We are analyzing these claims and intend to defend against them vigorously. We cannot predict with certainty
whether we will incur any liability or to estimate the damages, if any, that we might incur in connection with this lawsuit.



Maxus Litigation. In April 2001, in the case of Natural Gas Clearinghouse v. Midgard Energy,formerly known as Maxus Exploration
Co., a Texas district court found us liable for failing to deliver processable wet gas to a Maxus processing plant. Following our appeal of the judgment, we filed an expedited writ with the Texas Supreme Court seeking further review,
which was denied in April 2004. We paid the judgment of approximately $6.9 million dollars in April 2004, against which we had recorded a reserve.



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



U.S.
Attorney Investigations. The U.S. Attorneys office in Houston is continuing its investigation of our actions relating to Project Alpha and our gas trade reporting practices. We have produced documents and witnesses for interviews in
connection with this investigation. Seven of our natural gas traders were terminated in the fourth quarter 2002 for violating our Code of Business Conduct after an ongoing internal investigation conducted by Dynegys Audit and Compliance
Committee in collaboration with independent counsel discovered that inaccurate information regarding natural gas trades had been reported to various energy industry publications. In January 2003, one of our former natural gas traders was indicted in
Houston on three counts of knowingly causing the transmission of false trade reports used to calculate the index price of natural gas and four counts of wire fraud. In August 2003, however, several of these counts were dismissed as unconstitutional.
Upon request by the U.S. Attorneys office for reconsideration of this ruling, the judge reinstated the dismissed counts. The case was originally set for trial in January 2004; however, both the U.S. Attorneys office and the defense have
appealed the courts rulings regarding the dismissed and reinstated charges. The appeals are pending and a new trial date has not been set.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended March 31, 2004 and 2003



In June 2003, three former Dynegy employees were indicted on charges of conspiracy, securities fraud
and mail and wire fraud related to the Project Alpha transaction. Subsequently, two of these former employees pleaded guilty to conspiracy to commit securities fraud and are scheduled to be sentenced in August 2004. Trial on the indictment against
the third employee was held in November 2003, and the defendant was convicted on all charges. In March 2004, this defendant was sentenced to a term of approximately 24 years in federal prison.



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



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



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



Note 9Regulatory Issues



We are subject to regulation by various federal, state, local and foreign agencies, including extensive rules and regulations governing transportation, transmission and sale of energy commodities as well as the discharge of materials into
the environment or otherwise relating to environmental protection. Compliance with these regulations requires general and administrative, capital and operating expenditures including those related to monitoring, pollution control equipment, emission
fees and permitting at various operating facilities and remediation obligations.



In addition, the United States Congress has before it a number of bills that could impact regulations or impose new regulations applicable to us and our subsidiaries. We cannot predict the outcome of these bills or
other regulatory developments or the effects that they might have on our business.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended March 31, 2004 and 2003



Note 10Employee Compensation, Savings and Pension Plans



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



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



|                                              |  |                         |      |   |                |   |      |      |  |      |     |  |   |    
|--------------------------------------------- |  | ----------------------- | ---- | - | -------------- | - | ---- | ---- |  | ---- | --- |  | - | ---
|                                              |  | Pension Benefits        |      |   | Other Benefits
|                                              |  | Quarter Ended March 31,
|                                              |  | 2004                    |      |   | 2003           |   |      | 2004 |  | 2003
|                                              |  | (in millions)          
|Service cost benefits earned during period    |  | $                       | 0.5  |   |                | $ | 0.4  |      |  | $    | 0.2 |  | $ | 0.1
|Interest cost on projected benefit obligation |  |                         | 0.6  |   |                |   | 0.5  |      |  |      | 0.2 |  |   | 0.2
|Expected return on plan assets                |  |                         | (0.6 | ) |                |   | (0.6 | )    |  |      |    |  |   |   
|Recognized net actuarial loss                 |  |                         | 0.1  |   |                |   | 0.1  |      |  |      |    |  |   | 0.1
|                                              |  |                         |      |   |                |   |      |      |  |      |     |  |   |    
|Total net periodic benefit cost               |  | $                       | 0.6  |   |                | $ | 0.4  |      |  | $    | 0.4 |  | $ | 0.4
|                                              |  |                         |      |   |                |   |      |      |  |      |     |  |   |    



Contributions. In our Form 10-K/A, we reported that we expected to contribute approximately $1 million to our pension plans in 2004. This expectation has not changed.



Note 11Segment Information



Amounts in this footnote have been restated. For further information, please
see the Explanatory Note beginning on page 9.



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



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



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended March 31, 2004 and 2003



Reportable segment information for the three-month periods ended March 31, 2004 and 2003 is presented
below.



Segment Data for the Quarter Ended March 31, 2004

(in millions)



|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|------------------------------------------------- |  | --- | ----- | - | --- | - | ----- | --- |  | - | --------------------- | - |  | ----- | --- | - |  | - | ------ | -
|                                                  |  | GEN |       |   | NGL |   |       | CRM |  |   | Other andEliminations |   |  | Total |    
|Unaffiliated revenues:                            |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Domestic                                          |  | $   | 46    |   |     | $ | 831   |     |  | $ | 364                   |   |  | $     |    |   |  | $ | 1,241  |  
|Other                                             |  |     |      |   |     |   |      |     |  |   | (44                   | ) |  |       |    |   |  |   | (44    | )
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|                                                  |  |     | 46    |   |     |   | 831   |     |  |   | 320                   |   |  |       |    |   |  |   | 1,197  |  
|Affiliate revenues                                |  |     | 124   |   |     |   |      |     |  |   | 6                     |   |  |       |    |   |  |   | 130    |  
|Intersegment revenues                             |  |     | 269   |   |     |   | 70    |     |  |   | (354                  | ) |  |       | 15  |   |  |   |       |  
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Total revenues                                    |  | $   | 439   |   |     | $ | 901   |     |  | $ | (28                   | ) |  | $     | 15  |   |  | $ | 1,327  |  
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Depreciation and amortization                     |  | $   | (48   | ) |     | $ | (20   | )   |  | $ |                      |   |  | $     | (10 | ) |  | $ | (78    | )
|Operating income (loss)                           |  | $   | 51    |   |     | $ | 67    |     |  | $ | (13                   | ) |  | $     | (52 | ) |  | $ | 53     |  
|Earnings from unconsolidated investments          |  |     | 37    |   |     |   | 2     |     |  |   |                      |   |  |       |    |   |  |   | 39     |  
|Other items, net                                  |  |     |      |   |     |   | (4    | )   |  |   | 3                     |   |  |       | 12  |   |  |   | 11     |  
|Interest expense                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | (88    | )
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Income from continuing operations before taxes    |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | 15     |  
|Income tax expense                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | (6     | )
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Income from continuing operations                 |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | 9      |  
|Income from discontinued operations, net of taxes |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | 12     |  
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Net income                                        |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  | $ | 21     |  
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Identifiable assets:                              |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Domestic                                          |  | $   | 5,133 |   |     | $ | 1,945 |     |  | $ | 1,986                 |   |  | $     | 600 |   |  | $ | 9,664  |  
|Other                                             |  |     |      |   |     |   | (26   | )   |  |   | 863                   |   |  |       | 6   |   |  |   | 843    |  
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Total                                             |  | $   | 5,133 |   |     | $ | 1,919 |     |  | $ | 2,849                 |   |  | $     | 606 |   |  | $ | 10,507 |  
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Unconsolidated investments                        |  | $   | 499   |   |     | $ | 82    |     |  | $ |                      |   |  | $     |    |   |  | $ | 581    |  
|Capital expenditures                              |  | $   | (14   | ) |     | $ | (9    | )   |  | $ |                      |   |  | $     | (2  | ) |  | $ | (25    | )



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended March 31, 2004 and 2003



Segment Data for the Quarter Ended March 31, 2003

(in millions)



|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|------------------------------------------------------------------ |  | --- | ----- | - | --- | - | ----- | --- |  | - | --------------------- | - |  | ----- | --- | - |  | - | ------ | -
|                                                                   |  | GEN |       |   | NGL |   |       | CRM |  |   | Other andEliminations |   |  | Total |    
|Unaffiliated revenues:                                             |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Domestic                                                           |  | $   | 116   |   |     | $ | 978   |     |  | $ | 286                   |   |  | $     |    |   |  | $ | 1,380  |  
|Other                                                              |  |     |      |   |     |   |      |     |  |   | 9                     |   |  |       |    |   |  |   | 9      |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|                                                                   |  |     | 116   |   |     |   | 978   |     |  |   | 295                   |   |  |       |    |   |  |   | 1,389  |  
|Affiliate revenues                                                 |  |     | 118   |   |     |   |      |     |  |   | 34                    |   |  |       |    |   |  |   | 152    |  
|Intersegment revenues                                              |  |     | 169   |   |     |   | 73    |     |  |   | (272                  | ) |  |       | 30  |   |  |   |       |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Total revenues                                                     |  | $   | 403   |   |     | $ | 1,051 |     |  | $ | 57                    |   |  | $     | 30  |   |  | $ | 1,541  |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Depreciation and amortization                                      |  | $   | (41   | ) |     | $ | (20   | )   |  | $ | (1                    | ) |  | $     | (22 | ) |  | $ | (84    | )
|Operating income (loss)                                            |  | $   | 83    |   |     | $ | 51    |     |  | $ | 38                    |   |  | $     | (43 | ) |  | $ | 129    |  
|Earnings from unconsolidated investments                           |  |     | 38    |   |     |   | 3     |     |  |   | 11                    |   |  |       |    |   |  |   | 52     |  
|Other items, net                                                   |  |     | 3     |   |     |   | (5    | )   |  |   | 26                    |   |  |       | (1  | ) |  |   | 23     |  
|Interest expense                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | (68    | )
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Income from continuing operations before taxes                     |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | 136    |  
|Income tax expense                                                 |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | (50    | )
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Income from continuing operations                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | 86     |  
|Loss on discontinued operations, net of taxes                      |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | (10    | )
|Cumulative effect of change in accounting principles, net of taxes |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   | 57     |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Net income                                                         |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  | $ | 133    |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Identifiable assets:                                               |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Domestic                                                           |  | $   | 6,450 |   |     | $ | 1,804 |     |  | $ | 4,808                 |   |  | $     | 274 |   |  | $ | 13,336 |  
|Other                                                              |  |     |      |   |     |   |      |     |  |   | 725                   |   |  |       |    |   |  |   | 725    |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Total                                                              |  | $   | 6,450 |   |     | $ | 1,804 |     |  | $ | 5,533                 |   |  | $     | 274 |   |  | $ | 14,061 |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |     |   |  |   |        |  
|Unconsolidated investments                                         |  | $   | 529   |   |     | $ | 98    |     |  | $ | 14                    |   |  | $     |    |   |  | $ | 641    |  
|Capital expenditures                                               |  | $   | (37   | ) |     | $ | (12   | )   |  | $ |                      |   |  | $     | (3  | ) |  | $ | (52    | )



Note 13Subsequent Events



In April 2004, we announced an agreement to settle
numerous FERC claims relating to transactions we conducted in the western electric markets, including California, between January 2000 and June 2001. Please read Note 8Commitments and ContingenciesFERC and Related Regulatory
InvestigationsRequests for Refunds for further discussion.



Also in April 2004, we sold our minority interest in the Indian Basin gas processing plant. Please see Note 2Dispositions and Discontinued Operations for further discussion.



In May 2004, we launched a new $1.3 billion credit facility. The new facility
is intended to replace our current $1.1 billion revolving credit facility, which is scheduled to mature in February 2005. We expect that the new facility will have a term loan component as well as a revolving credit component, with respect to which
we have received $625 million in aggregate commitments from the lead arrangers. The increased size of the new facility, which is targeted to close in the second quarter 2004, would be used to repay existing higher-cost debt and for general corporate
purposes.



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Item 4. CONTROLS AND PROCEDURES



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



Changes in Internal Controls. There was no change in the consolidated enterprises internal controls over financial reporting (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) identified in connection with the evaluation of the consolidated enterprises internal controls performed during the first quarter 2004 that has materially affected, or is
reasonably likely to materially affect, the consolidated enterprises internal controls over financial reporting.



During the second and third quarter 2004, deficiencies were identified by the consolidated enterprise that resulted in changes to our internal controls
over financial reporting, including matters relating to system access and system implementation controls, segregation of duties and documentation of controls and procedures and their effective operation and monitoring. Deficiencies were also
identified in the consolidated enterprises tax accounting and tax reconciliation controls and processes that make this an area of particular focus. In the third quarter 2004, we determined that adjustments related to our deferred income tax
accounts in periods prior to 2004 were required. We identified these deficiencies and promptly brought them to the attention of Dynegy audit and compliance committee and independent auditors. Accordingly, in this Form 10-Q/A, we have restated our
unaudited condensed consolidated financial statements. For further information, please see the Explanatory Note beginning on page 9. We believe we have addressed these tax deficiencies, by taking the following steps to improve our internal controls
around our tax accounting and tax reconciliation controls and processes:



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



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



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



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



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



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##### Table of Contents

DYNEGY HOLDINGS INC.



PART II.
OTHER INFORMATION



Item 6. EXHIBITS AND REPORTS ON FORM 8-K



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



|       |  |                                                                                                                                                                                                                                                                                                    
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1   |  | Amendment to the Dynegy Inc. 401(K) Savings Plan, effective January 1, 2004 (incorporated by reference to Exhibit 10.18 to the Annual Report on Form 10-K for the Year Ended December 31, 2003
of Dynegy Inc., File No. 1-15659).                                                                  
|       | 
|10.2   |  | Amendment to the Dynegy Northeast Generation, Inc. Savings Incentive Plan, effective January 1, 2004 (incorporated by reference to Exhibit 10.31 to the Annual Report on Form 10-K for the Year
Ended December 31, 2003 of Dynegy Inc., File No. 1-15659).                                         
|       | 
|10.3   |  | Purchase Agreement dated February 2, 2004 among Dynegy Inc., Illinova Corporation, Illinova Generating Company and Ameren Corporation (incorporated by reference to Exhibit 2.1 to the Current
Report on Form 8-K of Dynegy Inc. filed on February 4, 2004, File No. 1-15659).                     
|       | 
|10.4   |  | Amendment No. 1 to Stock Purchase Agreement dated March 23, 2004 among Dynegy Inc., Illinova Corporation, Illinova Generating Company and Ameren Corporation (incorporated by reference to
Exhibit 2.2 to the Current Report on Form 8-K of Dynegy Inc. filed on March 25, 2004, File No. 1-15659).
|       | 
|+ 31.1 |  | Chief Executive Officer Certification Pursuant to Rule 13a-14(a) and 15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                              
|       | 
|+ 31.2 |  | Chief Financial Officer Certification Pursuant to Rule 13a-14(a) and 15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                              
|       | 
|*32.1  |  | Chief Executive Officer Certification Pursuant to 18 United States Code Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                        
|       | 
|*32.2  |  | Chief Financial Officer Certification Pursuant to 18 United States Code Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                        

---

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

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



(b) Reports on Form 8-K of Dynegy Holdings Inc. filed during the first quarter 2004:



| | 1. | We filed a Current Report on Form 8-K on January 6, 2004. Items 5 and 7 were reported and no financial statements were filed.
| | -- | -----------------------------------------------------------------------------------------------------------------------------



| | 2. | We filed a Current Report on Form 8-K on January 21, 2004. Items 5 and 7 were reported and no financial statements were filed.
| | -- | ------------------------------------------------------------------------------------------------------------------------------



| | 3. | We filed a Current Report on Form 8-K on January 29, 2004. Items 7 and 12 were reported and no financial statements were filed.
| | -- | -------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

DYNEGY HOLDINGS INC.



SIGNATURES



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



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



35