Edgar Filing: DYNEGY INC.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

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

For the transition period from to

Commission file number: 001-33443

DYNEGY INC.

(Exact name of registrant as specified in its charter)

State of Incorporation		I.R.S. Employer Identification No.
Delaware		20-5653152

1000 Louisiana, Suite 5800
Houston, Texas		77002
(Address of principal executive offices)		(Zip Code)

(713) 507-6400

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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

Large accelerated filer o		Accelerated filer x

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of our classes of common stock, as of the latest practicable date: Common stock, $0.01 par value per share, 122,710,776 shares outstanding as of November 8, 2011.

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DYNEGY INC.

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION

Item 1.	FINANCIAL STATEMENTS:

Condensed Consolidated Balance Sheets:
September 30, 2011 and December 31, 2010		4
Condensed Consolidated Statements of Operations:
For the three and nine months ended September 30, 2011 and 2010		5
Condensed Consolidated Statements of Cash Flows:
For the three and nine months ended September 30, 2011 and 2010		6
Condensed Consolidated Statements of Comprehensive Income (Loss):
For the three and nine months ended September 30, 2011 and 2010		7
Notes to Condensed Consolidated Financial Statements		8

Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	45
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	74
Item 4.	CONTROLS AND PROCEDURES	75

PART II. OTHER INFORMATION

Item 1.	LEGAL PROCEEDINGS	76
Item 1A.	RISK FACTORS	76
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	79
Item 3.	Defaults Upon Senior Securities	80
Item 6.	EXHIBITS	81

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DEFINITIONS

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

ASC		Accounting Standards Codification
ASU		Accounting Standards Update
BACT		Best available control technology
BART		Best available retrofit technology
BTA		Best technology available
CAA		Clean Air Act
CAIR		Clean Air Interstate Rule
CAISO		The California Independent System Operator
CAMR		Clean Air Mercury Rule
CARB		California Air Resources Board
CAVR		The Clean Air Visibility Rule
CCR		Coal Combustion Residuals
CEQA		California Environmental Quality Act
CERCLA		The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended
CO2		Carbon Dioxide
CSAPR		Cross-State Air Pollution Rule
CWA		Clean Water Act
DH		Dynegy Holdings, LLC (formerly known as Dynegy Holdings Inc.)
DMSLP		Dynegy Midstream Services L.P.
EBITDA		Earnings before interest, taxes, depreciation and amortization
EGU		Electric generating unit
EPA		Environmental Protection Agency
FASB		Financial Accounting Standards Board
FERC		Federal Energy Regulatory Commission
GAAP		Generally Accepted Accounting Principles of the United States of America
GEN Finance		Dynegy Gen Finance Company, LLC
GHG		Greenhouse Gas
HAPs		Hazardous air pollutants, as defined by the Clean Air Act
ICC		Illinois Commerce Commission
IMA		In-market asset availability
ISO		Independent System Operator
ISO-NE		Independent System Operator New England
MACT		Maximum achievable control technology
MGGA		Midwest Greenhouse Gas Accord
MGGRP		Midwestern Greenhouse Gas Reduction Program
MISO		Midwest Independent Transmission System Operator, Inc.
MMBtu		One million British thermal units
MW		Megawatts
MWh		Megawatt hour
NOL		Net operating loss
NOx		Nitrogen oxide
NPDES		National Pollutant Discharge Elimination System
NRG		NRG Energy, Inc.
NSPS		New Source Performance Standard
NYISO		New York Independent System Operator
NYSDEC		New York State Department of Environmental Conservation
OAL		Office of Administrative Law
OTC		Over-the-counter
PJM		PJM Interconnection, LLC
PPEA		Plum Point Energy Associates, LLC
PPEA Holding		Plum Point Energy Associates Holding Company, LLC
PSD		Prevention of significant deterioration
RACT		Reasonably available control technology
RCRA		Resource Conservation and Recovery Act
RGGI		Regional Greenhouse Gas Initiative
RMR		Reliability Must Run
SEC		U.S. Securities and Exchange Commission
SIP		State Implementation Plan
SO2		Sulfur dioxide
SPDES		State Pollutant Discharge Elimination System
VaR		Value at Risk
VIE		Variable Interest Entity
WCI		Western Climate Initiative

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PART I. FINANCIAL INFORMATION

Item 1—FINANCIAL STATEMENTS

DYNEGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited) (in millions, except share data)

	September 30, 2011			December 31, 2010
ASSETS
Current Assets
Cash and cash equivalents	$	881		$	291
Restricted cash and investments	164			81
Short-term investments	—			106
Accounts receivable, net of allowance for doubtful accounts of $31 and $32, respectively	180			230
Accounts receivable, affiliates	—			1
Inventory	105			121
Assets from risk-management activities	2,016			1,199
Deferred income taxes	4			12
Broker margin account	22			80
Prepayments and other current assets	208			123
Total Current Assets	3,580			2,244
Property, Plant and Equipment	8,749			8,593
Accumulated depreciation	(2,571		)	(2,320		)
Property, Plant and Equipment, Net	6,178			6,273
Other Assets
Restricted cash and investments	633			859
Assets from risk-management activities	136			72
Intangible assets	104			141
Other long-term assets	475			424
Total Assets	$	11,106		$	10,013

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	166		$	134
Accrued interest	118			36
Accrued liabilities and other current liabilities	95			109
Liabilities from risk-management activities	2,099			1,138
Notes payable and current portion of long-term debt (Note 10)	3,357			148
Short term debt, affiliates (Note 10)	200			—
Total Current Liabilities	6,035			1,565
Long-term debt	1,656			4,426
Long-term debt, affiliates	—			200
Long-Term Debt	1,656			4,626
Other Liabilities
Liabilities from risk-management activities	159			99
Deferred income taxes	454			641
Other long-term liabilities	315			336
Total Liabilities	8,619			7,267
Commitments and Contingencies (Note 9)
Stockholders’ Equity
Common Stock, $0.01 par value, 420,000,000 shares authorized at September 30, 2011 and December 31, 2010; 123,316,599 and 121,687,198 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively	1			1
Additional paid-in capital	6,073			6,067
Subscriptions receivable	(2		)	(2		)
Accumulated other comprehensive loss, net of tax	(50		)	(53		)
Accumulated deficit	(3,464		)	(3,196		)
Treasury stock, at cost, 729,190 and 628,014 shares at September 30, 2011 and December 31, 2010, respectively	(71		)	(71		)
Total Stockholders’ Equity	2,487			2,746
Total Liabilities and Stockholders’ Equity	$	11,106		$	10,013

See the notes to condensed consolidated financial statements.

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DYNEGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Revenues	$	516		$	775		$	1,347		$	1,872
Cost of sales	(298		)	(334		)	(801		)	(873		)

Gross margin, exclusive of depreciation shown separately below	218			441			546			999
Operating and maintenance expense, exclusive of depreciation shown separately below	(107		)	(110		)	(323		)	(341		)
Depreciation and amortization expense	(73		)	(96		)	(274		)	(261		)
Impairment and other charges	(1		)	(134		)	(2		)	(135		)
General and administrative expenses	(32		)	(51		)	(97		)	(110		)

Operating income (loss)	5			50			(150		)	152
Losses from unconsolidated investments	—			—			—			(34		)
Interest expense	(107		)	(92		)	(285		)	(272		)
Debt extinguishment costs	(21		)	—			(21		)	—
Other income and expense, net	—			1			4			3

Loss from continuing operations before income taxes	(123		)	(41		)	(452		)	(151		)
Income tax benefit (Note 12)	48			17			184			80

Loss from continuing operations	(75		)	(24		)	(268		)	(71		)
Income from discontinued operations, net of taxes	—			—			—			1

Net loss	$	(75	)	$	(24	)	$	(268	)	$	(70	)

Loss Per Share (Note 13):
Basic loss per share:
Loss from continuing operations	$	(0.61	)	$	(0.20	)	$	(2.20	)	$	(0.59	)
Income from discontinued operations	—			—			—			0.01

Basic loss per share	$	(0.61	)	$	(0.20	)	$	(2.20	)	$	(0.58	)

Diluted loss per share:
Loss from continuing operations	$	(0.61	)	$	(0.20	)	$	(2.20	)	$	(0.59	)
Income from discontinued operations	—			—			—			0.01

Diluted loss per share	$	(0.61	)	$	(0.20	)	$	(2.20	)	$	(0.58	)

Basic shares outstanding	122			120			122			120
Diluted shares outstanding	122			121			122			121

See the notes to condensed consolidated financial statements.

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DYNEGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited) (in millions)

	Nine Months Ended September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(268	)	$	(70	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization	291			273
Impairment and other charges	2			135
Losses from unconsolidated investments, net of cash distributions	—			34
Risk-management activities	139			(123		)
Deferred income taxes	(183		)	(79		)
Debt extinguishment costs	21			—
Other	37			55
Changes in working capital:
Accounts receivable	48			11
Inventory	11			15
Broker margin account	(26		)	353
Prepayments and other assets	(46		)	7
Accounts payable and accrued liabilities	87			111
Changes in non-current assets	(67		)	(51		)
Changes in non-current liabilities	4			(1		)

Net cash provided by operating activities	50			670

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(185		)	(270		)
Unconsolidated investments	—			(15		)
Maturities of short-term investments	475			143
Purchases of short-term investments	(284		)	(428		)
Decrease (increase) in restricted cash and investments	142			(53		)
Other investing	11			9

Net cash provided by (used in) investing activities	159			(614		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings, net of financing costs of $44 and $5, respectively	2,022			(5		)
Repayments of borrowings	(1,623		)	(31		)
Debt extinguishment costs	(21		)	—
Net proceeds from issuance of capital stock	3			—

Net cash provided by (used in) financing activities	381			(36		)

Net increase in cash and cash equivalents	590			20
Cash and cash equivalents, beginning of period	291			471

Cash and cash equivalents, end of period	$	881		$	491

Other non-cash investing activity:
Non-cash capital expenditures	$	(1	)	$	10

See the notes to condensed consolidated financial statements.

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DYNEGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited) (in millions)

	Three Months Ended September 30,
	2011			2010

Net loss	$	(75	)	$	(24	)
Amortization of unrecognized prior service cost and actuarial loss (net of tax expense of $1 and zero)	1			1

Other comprehensive income, net of tax	1			1

Comprehensive loss	$	(74	)	$	(23	)

	Nine Months Ended September 30,
	2011			2010

Net loss	$	(268	)	$	(70	)
Amortization of unrecognized prior service cost and actuarial loss (net of tax expense of $2 and $1)	3			3

Other comprehensive income, net of tax	3			3

Comprehensive loss	$	(265	)	$	(67	)

See the notes to condensed consolidated financial statements.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended September 30, 2011 and 2010

Note 1—Organization and Basis of Presentation

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to interim financial reporting as prescribed by the SEC. Unless the context indicates otherwise, throughout this report, the terms “the Company,” “we,” “us,” “our,” and “ours” are used to refer to Dynegy Inc. and its direct and indirect subsidiaries. The year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. These interim financial statements should be read together with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2010, filed on March 8, 2011, which we refer to as our “Form 10-K”.

Reorganization

In August 2011, we completed a reorganization of our subsidiaries (the “Reorganization”), whereby, (i) substantially all of our coal-fired power generation facilities are held by Dynegy Midwest Generation, LLC (“DMG”), (ii) substantially all of our natural gas-fired power generation facilities are held by Dynegy Power, LLC (“DPC”), an indirect wholly owned subsidiary of Dynegy Holdings, LLC (“DH”) and (iii) 100 percent of the ownership interests of Dynegy Northeast Generation, Inc., the entity that indirectly holds the equity interest in the subsidiaries that operate the Roseton and Danskammer power generation facilities, including the leased units, are held by DH. As a result of the Reorganization, DPC owns a portfolio of eight primarily natural gas-fired intermediate (combined cycle) and peaking (combustion and steam turbines) power generation facilities diversified across the West, Midwest and Northeast regions of the United States, totaling 6,771 MW of generating capacity. DMG owns a portfolio of six primarily coal-fired baseload power generation facilities located in the Midwest, totaling 3,132 MW of generating capacity. The DPC and DMG asset portfolios were designed to be separately financeable. DPC and DMG are bankruptcy remote, thereby accommodating the financings reflected by the credit agreements and to provide us with greater flexibility in our efforts to address leverage and liquidity issues and to realize the value of our assets. Please read Note 10—Debt—New Credit Agreements for discussion of the new credit agreements. Our remaining assets (including our leasehold interests in the Danskammer and Roseton facilities) are not a part of either DPC or DMG.

DMG Acquisition. On September 1, 2011, Dynegy and Dynegy Gas Investments, LLC (“DGIN”), a direct wholly owned subsidiary of DH, entered into a Membership Interest Purchase Agreement pursuant to which DGIN sold 100 percent of the outstanding membership interests of Dynegy Coal HoldCo, LLC (“Coal HoldCo”), a wholly owned subsidiary of DGIN, to Dynegy (the “DMG Acquisition”). Our management and Board of Directors, as well as DGIN’s board of managers, concluded that the fair value of the acquired equity stake in Coal HoldCo at the time of the transaction was approximately $1.25 billion, after taking into account all debt obligations of DMG, including in particular DMG’s $600 million, five-year senior secured term loan facility. Dynegy provided this value to DGIN in exchange for Coal HoldCo through Dynegy’s obligation, pursuant to an Undertaking Agreement (the “Undertaking Agreement”), to make certain specified payments over time which coincide in timing and amount with the payments of principal and interest that DH is obligated to make under a portion of its $1.1 billion of 7.75 percent senior unsecured notes due 2019 and its $175 million of 7.625 percent senior debentures due 2026. The Undertaking Agreement does not provide any rights or obligations with respect to any outstanding DH notes or debentures, including the notes and debentures due in 2019 and 2026.

Immediately after closing the DMG Acquisition, DGIN assigned its right to receive payments under the Undertaking Agreement to DH in exchange for a promissory note (the “Promissory Note”) in the amount of $1.25 billion that matures in 2027 (the “Assignment”). The Promissory Note bears annual interest at a rate of 4.24 percent, which will be payable upon maturity. As a condition to Dynegy’s consent to the Assignment, the Undertaking Agreement was amended and restated to be between DH and Dynegy and to provide for the reduction of Dynegy’s obligations if the outstanding principal amount of any of DH’s $3.5 billion of outstanding notes and debentures is decreased as a result of any exchange offer, tender offer or other purchase or repayment by Dynegy or its subsidiaries (other than DH and its subsidiaries, unless Dynegy guarantees the debt securities of DH or such subsidiary in connection with such exchange offer, tender offer or other purchase or repayment); provided, that such principal amount is retired, cancelled or otherwise forgiven.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2011 and 2010

There was no impact on our condensed consolidated financial position, results of operations or cash flows as the transaction was between Dynegy and its wholly owned subsidiaries.

Overview of Bankruptcy Remote and Ring-Fencing Measures. The Reorganization created new companies, some of which are “bankruptcy remote.” In addition, as part of the Reorganization, some companies within our portfolio were reorganized into ring-fenced groups. The special purpose bankruptcy remote entities entered into limited liability company operating agreements, which contain certain restrictions including not allowing the “bankruptcy remote” or “ring-fenced” companies to act as an agent for a non ring-fenced company. Furthermore, bankruptcy remote and ring-fenced companies are required to present themselves to the public as separate entities and correct misunderstandings that they are not separate entities. They maintain separate books, records and bank accounts and separately appoint officers. Additionally, they pay liabilities from their own funds, they conduct business in their own names (other than any business relating to the trading activities of us and our subsidiaries), they observe a higher level of formalities, and they have restrictions on pledging their assets for the benefit of certain other persons.

Further, the bankruptcy remote entities each have one independent manager. Unanimous consent of such a ring-fenced entity’s board of managers, including the independent manager, is required for filing any bankruptcy proceeding, seeking or consenting to the appointment of any receiver, making or consenting to any assignment for the benefit of creditors, admitting in writing the inability to pay the entity’s debts, consenting to substantive consolidation, dissolving or liquidating, engaging in any business beyond those set forth in the entity’s organizational documents, amending the bankruptcy remoteness provisions in such entity’s organizational documents and, at any time following execution of the applicable credit agreement, amending, terminating or entering material intercompany relationships with other entities.

Relationships with Third Parties. Each ring-fenced entity bills its customers on invoices clearly referencing solely such ring-fenced entity. Other than in the limited context of Services (defined and described below), when transacting business with third parties, including vendors and customers, employees of the ring-fenced entities do not hold themselves out as agents or representatives of non-ring-fenced entities. Similarly, other than in the limited context of Services, when transacting business with third parties, employees of non-ring-fenced entities do not hold themselves out as agents or representatives of ring-fenced entities.

Service Agreements. Service Agreements between us and each of Dynegy Gas Investments Holdings, LLC (“DGIH”), Dynegy Coal Investments Holdings, LLC (“DCIH”), Dynegy Northeast Generation, Inc. and certain other subsidiaries of Dynegy, which were entered into at the Reorganization, govern the terms under which identified services (the “Services”) are provided. Under the Service Agreements, we and certain of our subsidiaries (the “Providers”) provide Services to DGIH, DCIH, Dynegy Northeast Generation, Inc., their respective subsidiaries and certain of our subsidiaries (the “Recipients”).

The Providers act as agents for the Recipients for the limited purpose of providing the Services set forth in the Service Agreement. The Providers may perform additional services at the request of the Recipients, and will be reimbursed for all costs and expenses related to such additional services. Prior to the beginning of each fiscal year in which Services are to be provided pursuant to the Service Agreement, the Providers and the Recipients must agree on a budget for the Services, outlining, among other items, the contemplated scope of the Services to be provided in the following fiscal year and the cost of providing each Service. The Recipients will pay the Providers an annual management fee as agreed in the budget, which shall include reimbursement of out-of pocket costs and expenses related to the provision of the Services and will provide reasonable assistance, such as information, services and materials, to the Providers.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2011 and 2010

Going Concern

Our accompanying unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve month period following the date of these unaudited condensed consolidated financial statements. However, continued low power prices over the past several years have had a significant adverse impact on our business and continue to negatively impact our projected future liquidity.

As noted above, we recently completed the Reorganization and in connection therewith, certain of our subsidiaries (DPC and DMG) entered into two new credit agreements on August 5, 2011 which resulted in the repayment in full and termination of commitments under our former Fifth Amended and Restated Credit Agreement. While these new credit agreements were designed to provide sufficient operating liquidity for DPC and DMG for the foreseeable future, they contain certain restrictions related to distributions by DPC and DMG to their respective parent companies, including us and DH. Please read Note 10—Debt—New Credit Agreements for further discussion.

Also as noted above, on September 1, 2011, we completed the DMG Acquisition, pursuant to which Dynegy acquired 100 percent of the outstanding membership interests of Coal HoldCo from a wholly owned subsidiary of DH. As a result of that transaction, Dynegy has an unsecured obligation of $1.25 billion to DH under the Undertaking Agreement, and DH has an unsecured obligation of $1.25 billion to DGIN under the Promissory Note.

On November 7, 2011, DH still had significant debt service requirements in connection with its outstanding notes and debentures, and there were significant payment obligations related to the leasehold interests in the Danskammer and Roseton facilities. On that date, DH and four of its wholly owned subsidiaries, Dynegy Northeast Generation, Inc., Hudson Power, L.L.C., Dynegy Danskammer, L.L.C. and Dynegy Roseton, L.L.C. (collectively, the “Debtor Entities”), filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York, Poughkeepsie Division (the “Chapter 11 Cases”). We and our subsidiaries, other than the five Debtor Entities, did not file voluntary petitions for relief and are not debtors under Chapter 11 of the Bankruptcy Code. Please see Note 15—Subsequent Events—Bankruptcy Filing for further information.

The Reorganization, DMG Acquisition, and Chapter 11 Cases represent steps in addressing our liquidity concerns. Over the next twelve months, under the strategic direction of the Finance and Restructuring Committee of our Board of Directors, we may participate in additional debt restructuring activities, which may include direct or indirect transfers of our subsidiaries’ equity interests, refinancing of existing debt and lease obligations, and/or further reorganizations of our subsidiaries as well as other similar initiatives. However, we cannot provide any assurances that we will be successful in accomplishing any such activities.

Our ability to continue as a going concern is dependent on many factors, including, among other things, the generation by DPC and DMG of sufficient positive operating results to enable DPC and DMG to make certain restricted distributions to their parents (as described in Note 10—Debt), the terms and conditions of an approved plan of reorganization that allows the Debtor Entities to emerge from bankruptcy, execution of any further restructuring strategies, and the successful execution of the company-wide cost reduction initiatives that are ongoing. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of the foregoing uncertainties except for the reclassification of the DH Senior Notes and Debentures, including the Subordinated Capital Income Securities reflected as affiliated debt, and associated deferred financing costs due to the Chapter 11 Cases discussed above. Please read Note 10—Debt—Senior Notes and Debentures and Subordinated Capital Income Securities for further discussion.

Note 2—Accounting Policies

Use of Estimates

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

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2011 and 2010

Accounting Principles Not Yet Adopted

Fair Value Measurement Disclosures. In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04—Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU No. 2011-04”). This authoritative guidance changes the wording used to describe the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011. We do not expect the implementation of this guidance to have a significant impact on our financial condition, results of operations or cash flows.

Presentation of Comprehensive Income. In June 2011, the FASB issued ASU 2011-05—Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU No. 2011-05”). The FASB’s objective in issuing this guidance is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. ASU No. 2011-05 eliminates the option of presenting components of other comprehensive income as part of the statement of changes in stockholders’ equity. The standard requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We do not expect the implementation of this guidance to have a significant impact on our financial condition, results of operations or cash flows.

Note 3—Investments

The amortized cost basis, unrealized gains and losses and fair values of investments in available for sale investments is shown in the table below:

	Investments as of December 31, 2010
	Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Available for Sale investments:
Commercial Paper	$	45	$	—	$	—	$	45
Certificates of Deposit	20		—		—		20
Corporate Securities	6		—		—		6
U.S. Treasury and Government Securities (1)	120		—		—		120

Total—Dynegy	$	191	$	—	$	—	$	191

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2011 and 2010

(1) Includes $85 million in Broker margin account on our unaudited condensed consolidated balance sheets in support of transactions with our futures clearing manager.

We did not have any investments as of September 30, 2011.

Note 4—Risk Management Activities, Derivatives and Financial Instruments

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

Our commodity risk management strategy gives us the flexibility to sell energy and capacity through a combination of spot market sales and near-term contractual arrangements (generally over a rolling 1 to 3 year time frame). Our commodity risk management goal is to protect cash flow in the near-term while keeping the ability to capture value longer-term. Increasing collateral requirements and our liquidity position could impact our ability to effectively employ our risk management strategy.

Many of our contractual arrangements are derivative instruments and must be accounted for at fair value. We also manage commodity price risk by entering into capacity forward sales arrangements, tolling arrangements, RMR contracts, fixed price coal purchases and other arrangements that do not receive fair value accounting treatment because these arrangements do not meet the definition of a derivative or are designated as “normal purchase normal sales”. As a result, the gains and losses with respect to these arrangements are not reflected in the unaudited condensed consolidated statements of operations until the settlement dates.

Quantitative Disclosures Related to Financial Instruments and Derivatives

The following disclosures and tables present information concerning the impact of derivative instruments on our unaudited condensed consolidated balance sheets and statements of operations. In the table below, commodity contracts primarily consist of derivative contracts related to our power generation business that we have not designated as accounting hedges, that are entered into for purposes of economically hedging future fuel requirements and sales commitments and securing commodity prices. As of September 30, 2011, our commodity derivatives were comprised of both long and short positions; a long position is a contract to purchase a commodity, while a short position is a contract to sell a commodity. As of September 30, 2011, we had net long/(short) commodity derivative contracts outstanding in the following quantities:

Contract Type	Hedge Designation	Quantity		Unit of Measure	Net Fair Value
		(in millions)			(in millions)
Commodity contracts:
Electric energy (1)	Not designated	(26	)	MW	$	73
Natural gas (1)	Not designated	(25	)	MMBtu	$	(162	)
Heat rate derivatives	Not designated	(3)/27		MW/MMBtu	$	(18	)
Other (2)	Not designated	2		Misc.	$	1

(1) Mainly comprised of swaps, options and physical forwards.

(2) Comprised of emissions, coal, crude oil and fuel oil options, swaps and physical forwards.

Derivatives on the Balance Sheet. We execute a significant volume of transactions through futures clearing managers. Our daily cash payments (receipts) to (from) our futures clearing managers consist of three parts: (i) fair value of open positions (exclusive of options) (“Daily Cash Settlements”); (ii) initial margin requirements of open positions (“Initial Margin”); and (iii) fair value related to options (“Options”, and collectively with Daily Cash Settlements and Initial Margin, “Collateral”). We do not offset fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement and we do not elect to offset the fair value amounts recognized for the Daily Cash Settlements paid or received against the fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement. As a result, our unaudited condensed consolidated balance sheets present derivative assets and liabilities, as well as related Collateral, as applicable, on a gross basis.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2011 and 2010

We have used short-term investments to collateralize a portion of our collateral requirements. The broker required that we post approximately 103 percent of any collateral requirement collateralized with short-term investments. Accordingly, our Broker margin account included approximately $3 million related to this requirement at December 31, 2010. Additionally, we posted $7 million of short-term investments which were not utilized as collateral at December 31, 2010. There were no short-term investments in our Broker margin account at September 30, 2011.

In addition to the transactions we execute through the futures clearing managers, we also execute transactions through a bilateral counterparty. Our transactions with this counterparty are collateralized using only cash collateral. As of September 30, 2011, we had $41 million posted with this counterparty, which is included in Prepayments and other current assets on our unaudited condensed consolidated balance sheets.

The following table presents the fair value and balance sheet classification of derivatives in the unaudited condensed consolidated balance sheet as of September 30, 2011, and December 31, 2010 segregated between designated, qualifying hedging instruments and those that are not, and by type of contract segregated by assets and liabilities.

Contract Type	Balance Sheet Location	September 30, 2011			December 31, 2010
		(in millions)
Derivatives designated as hedging instruments:
Derivative Assets:
Interest rate contracts	Assets from risk management activities	$	—		$	1

Total derivatives designated as hedging instruments		—			1

Derivatives not designated as hedging instruments:
Derivative Assets:
Commodity contracts	Assets from risk management activities	2,152			1,265
Interest rate contracts	Assets from risk management activities	—			5
Derivative Liabilities:
Commodity contracts	Liabilities from risk management activities	(2,258		)	(1,231		)
Interest rate contracts	Liabilities from risk management activities	—			(6		)

Total derivatives not designated as hedging instruments		(106		)	33

Total derivatives, net		$	(106	)	$	34

Impact of Derivatives on the Consolidated Statements of Operations

The following discussion and tables include the location and amount of gains and losses on derivative instruments in our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010, segregated between designated, qualifying hedging instruments and those that are not, by type of contract.

Cash Flow Hedges. We may enter into financial derivative instruments that qualify, and that we may elect to designate, as cash flow hedges. Interest rate swaps have been used to convert floating interest rate obligations to fixed interest rate obligations. We had no cash flow hedges in place during the three and nine months ended September 30, 2011 and 2010.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2011 and 2010

Fair Value Hedges. We also enter into derivative instruments that qualify, and that we may elect to designate, as fair value hedges. We previously used interest rate swaps to convert a portion of our non-prepayable fixed-rate debt into floating-rate debt. These derivatives and the corresponding hedged debt matured April 1, 2011. During the three and nine months ended September 30, 2011 and 2010, there was no ineffectiveness from changes in the fair value of hedge positions and no amounts were excluded from the assessment of hedge effectiveness. During the three and nine months ended September 30, 2011 and 2010, there were no gains or losses related to the recognition of firm commitments that no longer qualified as fair value hedges.

The impact of interest rate swap contracts designated as fair value hedges and the related hedged item on our unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2011 and 2010 was immaterial for all periods.

Financial Instruments Not Designated as Hedges. We elect not to designate derivatives related to our power generation business and certain interest rate instruments as cash flow or fair value hedges. Thus, we account for changes in the fair value of these derivatives within the consolidated statements of operations (herein referred to as “mark-to-market accounting treatment”). As a result, these mark-to-market gains and losses are not reflected in the unaudited condensed consolidated statements of operations in the same period as the underlying activity for which the derivative instruments serve as economic hedges.

For the three-month period ended September 30, 2011, our revenues included approximately $16 million of mark-to-market losses related to this activity compared to $132 million of mark-to-market gains in the same period in the prior year. For the nine months ended September 30, 2011, our revenues included approximately $143 million of mark-to-market losses related to this activity compared to $127 million of mark-to-market gains in the same period in the prior year.

The impact of derivative financial instruments that have not been designated as hedges on our unaudited condensed consolidated statements of operations for the three months ended September 30, 2011 and 2010 is presented below. Note that this presentation does not reflect the expected gains or losses arising from the underlying physical transactions associated with these financial instruments. Therefore, this presentation is not indicative of the economic gross margin we expect to realize when the underlying physical transactions settle.

Derivatives Not Designated as	Location of Gain ( Loss) Recognized in Income on	Amount of Gain (Loss) Recognized in Income on Derivatives for the Three Months Ended September 30,
Hedging Instruments	Derivatives	2011			2010
		(in millions)
Commodity contracts	Revenues	$	(54	)	$	106

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2011 and 2010

The impact of derivative financial instruments that have not been designated as hedges on our unaudited condensed consolidated statements of operations for the nine months ended September 30, 2011 and 2010 is presented below. Note that this presentation does not reflect the expected gains or losses arising from the underlying physical transactions associated with these financial instruments. Therefore, this presentation is not indicative of the economic gross margin we expect to realize when the underlying physical transactions settle.

Derivatives Not Designated as Hedging	Location of Gain (Loss) Recognized in Income on	Amount of Gain (Loss) Recognized in Income on Derivatives for the Nine Months Ended September 30,
Instruments	Derivatives	2011			2010
		(in millions)
Commodity contracts	Revenues	$	(124	)	$	246

Interest rate contracts	Interest expense	—			(1		)

Note 5—Fair Value Measurements

The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2011 and December 31, 2010. These financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

	Fair Value as of September 30, 2011
	Level 1		Level 2			Level 3			Total
	(in millions)
Assets:
Assets from commodity risk management activities:
Electricity derivatives	$	—	$	299		$	31		$	330
Natural gas derivatives	—		1,818			1			1,819
Other derivatives	—		3			—			3

Total	$	—	$	2,120		$	32		$	2,152

Liabilities:
Liabilities from commodity risk management activities:
Electricity derivatives	$	—	$	(245	)	$	(13	)	$	(258	)
Natural gas derivatives	—		(1,978		)	(4		)	(1,982		)
Heat rate derivatives	—		—			(17		)	(17		)
Other derivatives	—		(1		)	—			(1		)

Total	$	—	$	(2,224	)	$	(34	)	$	(2,258	)

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2011 and 2010

	Fair Value as of December 31, 2010
	Level 1		Level 2			Level 3			Total
	(in millions)
Assets:
Assets from commodity risk management activities:
Electricity derivatives	$	—	$	526		$	77		$	603
Natural gas derivatives	—		613			5			618
Other derivatives	—		44			—			44

Total assets from commodity risk management activities	—		1,183			82			1,265
Assets from interest rate swaps	—		6			—			6
Short-term investments:
Commercial paper	—		45			—			45
Certificates of deposit	—		20			—			20
Corporate securities	—		6			—			6
U.S. Treasury and government securities (1)	—		120			—			120

Total short-term investments	—		191			—			191

Total	$	—	$	1,380		$	82		$	1,462

Liabilities:
Liabilities from commodity risk management activities:
Electricity derivatives	$	—	$	(311	)	$	(28	)	$	(339	)
Natural gas derivatives	—		(825		)	—			(825		)
Heat rate derivatives	—		—			(31		)	(31		)
Other derivatives	—		(36		)	—			(36		)

Total liabilities from commodity risk management activities	$	—	$	(1,172	)	$	(59	)	$	(1,231	)
Liabilities from interest rate swaps	—		(6		)	—			(6		)

Total	$	—	$	(1,178	)	$	(59	)	$	(1,237	)

(1) Includes $85 million in Broker margin account on our unaudited condensed consolidated balance sheets in support of transactions with our futures clearing manager.

We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. For example, assets and liabilities from risk management activities may include exchange-traded derivative contracts and OTC derivative contracts. Some exchange-traded derivatives are valued using broker or dealer quotations, or market transactions in either the listed or OTC markets. In such cases, these exchange-traded derivatives are classified within Level 2. OTC derivative trading instruments include swaps, forwards, options and complex structures that are valued at fair value. In certain instances, these instruments may utilize models to measure fair value. Generally, we use a similar model to value similar instruments. Valuation models utilize various inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability, and market-corroborated inputs. Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2. Certain OTC derivatives trade in less active markets with a lower availability of pricing information. In addition, complex or structured transactions, such as heat-rate call options, can introduce the need for internally-developed model inputs that might not be observable in or corroborated by the market. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3. We have consistently used this valuation technique for all periods presented. Please read Note 2—Summary of Significant Accounting Policies—Fair Value Measurements in our Form 10-K for further discussion.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2011 and 2010

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

	Three Months Ended September 30, 2011
	Electricity Derivatives			Natural Gas Derivatives			Heat Rate Derivatives			Total
	(in millions)
Balance at June 30, 2011	$	35		$	—		$	(23	)	$	12
Total losses included in earnings	(14		)	(3		)	(1		)	(18		)
Settlements	(3		)	—			6			3

Balance at September 30, 2011	$	18		$	(3	)	$	(18	)	$	(3	)

Unrealized losses relating to instruments held as of September 30, 2011	$	(4	)	$	(4	)	$	(4	)	$	(12	)

	Nine Months Ended September 30, 2011
	Electricity Derivatives			Natural Gas Derivatives			Heat Rate Derivatives			Total
	(in millions)
Balance at December 31, 2010	$	49		$	5		$	(31	)	$	23
Total losses included in earnings	(22		)	(8		)	(1		)	(31		)
Settlements	(9		)	—			14			5

Balance at September 30, 2011	$	18		$	(3	)	$	(18	)	$	(3	)

Unrealized losses relating to instruments held as of September 30, 2011	$	(1	)	$	(7	)	$	(4	)	$	(12	)

	Three Months Ended September 30, 2010
	Electricity Derivatives			Natural Gas Derivatives		Heat Rate Derivatives			Total
	(in millions)
Balance at June 30, 2010	$	23		$	5	$	(23	)	$	5
Total gains included in earnings	27			—		5			32
Sales and settlements:
Sales	—			—		(1		)	(1		)
Settlements	(2		)	—		(4		)	(6		)

Balance at September 30, 2010	$	48		$	5	$	(23	)	$	30

Unrealized gains relating to instruments still held as of September 30, 2010	$	28		$	—	$	1		$	29

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2011 and 2010

	Nine Months Ended September 30, 2010
	Electricity Derivatives			Natural Gas Derivatives		Heat Rate Derivatives			Interest Rate Swaps			Total
	(in millions)
Balance at December 31, 2009	$	6		$	5	$	17		$	(50	)	$	(22	)
Deconsolidation of Plum Point	—			—		—			50			50
Total gains included in earnings	70			—		15			—			85
Purchases, sales and settlements:
Purchases	1			—		2			—			3
Sales	(13		)	—		(22		)	—			(35		)
Settlements	(16		)	—		(35		)	—			(51		)

Balance at September 30, 2010	$	48		$	5	$	(23	)	$	—		$	30

Unrealized gains (losses) relating to instruments still held as of September 30, 2010	$	60		$	—	$	(3	)	$	—		$	57

Gains and losses (realized and unrealized) for Level 3 recurring items are included in Revenues on the unaudited condensed consolidated statements of operations. We believe an analysis of instruments classified as Level 3 should be undertaken with the understanding that these items generally serve as economic hedges of our power generation portfolio. We did not have any transfers between Level 1, Level 2 and Level 3 for the three and nine months ended September 30, 2011 and 2010.

Nonfinancial Assets and Liabilities. The following table sets forth by level within the fair value hierarchy our fair value measurements with respect to nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis. These assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

	Fair Value Measurements as of September 30, 2010
	Level 1		Level 2		Level 3		Total		Total Losses
	(in millions)
Assets held and used	$	—	$	—	$	275	$	275	$	(135	)
Equity method investment	—		—		—		—		(37		)

Total	$	—	$	—	$	275	$	275	$	(172	)

During the nine months ended September 30, 2010, long-lived assets held and used were written down to their fair value of $275 million, resulting in pre-tax impairment charges of $135 million, which is included in Impairment and other charges on our unaudited condensed consolidated statements of operations. Please read Note 6—Impairment Charges for further discussion.

On January 1, 2010, we recorded an impairment of our investment in PPEA Holding as part of our cumulative effect of a change in accounting principle. We determined the fair value of our investment using assumptions that reflected our best estimate of third party market participants’ considerations based on the facts and circumstances related to our investment at that time. The fair value of our investment on January 1, 2010 was considered a Level 3 measurement because the fair value was determined based on probability weighted cash flows resulting from various alternative scenarios including no change in the financing structure, a restructuring of the project debt and insolvency. These scenarios and the related probability weighting were consistent with the scenarios used at December 31, 2009 in our long-lived asset impairment analysis. At March 31, 2010, we fully impaired our investment in PPEA Holding due to the uncertainty and risk surrounding PPEA’s financing structure. Please read Note 7—Impairment and Restructuring Charges—2010 Impairment Charges—Other in our Form 10-K.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2011 and 2010

Fair Value of Financial Instruments. We have determined the estimated fair-value amounts using available market information and selected valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair-value amounts.

The carrying values of financial assets and liabilities (cash, accounts receivable, restricted cash and investments, short-term investments and accounts payable) not presented in the table below approximate fair values due to the short-term maturities of these instruments. The fair value of debt as reflected in the table has been calculated based on the average of certain available broker quotes for the periods ending September 30, 2011 and December 31, 2010, respectively.

	September 30, 2011						December 31, 2010
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
	(in millions)
Interest rate derivatives designated as fair value accounting hedges (1)	$	—		$	—		$	1		$	1
Interest rate derivatives not designated as accounting hedges(1)	—			—			(1		)	(1		)
Commodity-based derivative contracts not designated as accounting hedges (1)	(106		)	(106		)	34			34
Term Loan B, due 2013	—			—			(68		)	(67		)
Term Facility, floating rate due 2013	—			—			(850		)	(845		)
DPC Credit Agreement due 2016 (2)	(1,078		)	(1,081		)	—			—
DMG Credit Agreement due 2016 (3)	(588		)	(580		)	—			—
Senior Notes and Debentures:
6.875 percent due 2011 (4)	—			—			(80		)	(79		)
8.75 percent due 2012	(89		)	(69		)	(89		)	(87		)
7.5 percent due 2015 (5)	(771		)	(504		)	(768		)	(592		)
8.375 percent due 2016 (6)	(1,044		)	(643		)	(1,043		)	(777		)
7.125 percent due 2018	(172		)	(102		)	(172		)	(116		)
7.75 percent due 2019	(1,100		)	(682		)	(1,100		)	(728		)
7.625 percent due 2026	(171		)	(97		)	(171		)	(107		)
Subordinated Debentures payable to affiliates, 8.316 percent, due 2027	(200		)	(76		)	(200		)	(83		)
Sithe Senior Notes, 9.0 percent due 2013 (7)	—			—			(233		)	(233		)
Other (8)	—			—			191			191

(1)	Included in both current and non-current assets and liabilities on the unaudited condensed consolidated balance sheets.
(2)	Includes unamortized discounts of $22 million at September 30, 2011.
(3)	Includes unamortized discounts of $12 million at September 30, 2011.
(4)	Payment in full was made on April 1, 2011, which was the maturity date of this debt.
(5)	Includes unamortized discounts of $14 million and $17 million at September 30, 2011 and December 31, 2010, respectively.
(6)	Includes unamortized discounts of $3 million and $4 million at September 30, 2011 and December 31, 2010, respectively.
(7)	Includes unamortized premiums of $8 million at December 31, 2010.
(8)	Other represents short-term investments, including $85 million of short-term investments included in the Broker margin account, at December 31, 2010.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2011 and 2010

Note 6—Impairment Charges

Casco Bay Impairment. On August 13, 2010, Dynegy entered into a merger agreement with an affiliate of The Blackstone Group L.P. (“Blackstone”), pursuant to which Dynegy would be acquired and our stockholders would receive $4.50 per share in cash. On November 16, 2010, the merger agreement was amended to increase the merger consideration to $5.00 per share in cash. The merger agreement was not approved by our stockholders at the special stockholders’ meeting on November 23, 2010 and was subsequently terminated by the parties in accordance with the terms of the agreement.

In August 2010, in connection with the merger agreement, we determined it was more likely than not that our Moss Landing, Morro Bay, Oakland and Casco Bay facilities would be disposed of before the end of their previously estimated useful lives, as Blackstone had entered into a separate agreement to sell these facilities to a third party upon the closing of the merger agreement. Based on the terms of the merger agreement and our impairment analysis of the impact of such agreement on the recoverability of the carrying value of our long-lived assets, we recorded a pre-tax impairment charge of $134 million ($81 million after-tax) during the three months ended September 30, 2010 to reduce the carrying value of our Casco Bay facility and related assets to its fair value. This charge is included in Impairment and other charges in our consolidated statements of operations in the Gas segment. Please read Note 14—Segment Information for further discussion of changes to our reportable segments.

In performing the impairment analysis, we concluded that the assets Blackstone planned to sell to a third party did not meet the criteria of “held for sale”, as the agreement to sell these assets was a contractual arrangement between Blackstone and the third party. Management had not committed to any plan to dispose of these assets prior to the end of their previously estimated useful lives. As such, we assessed the recoverability of the carrying value of these certain assets using expected cash flows from the proceeds from the potential sale of these assets, probability weighted with the expected cash flow from continuing to hold and use the assets. We performed this analysis considering a range of likelihoods that management considered reasonable regarding whether the sale of these assets would be completed. In any of the scenarios within this range of the probabilities we considered reasonable, the expected undiscounted cash flows from the Moss Landing, Morro Bay and Oakland facilities were sufficient to recover their carrying values, while the expected undiscounted cash flows from the Casco Bay facility were not. Therefore, we recorded an impairment charge to reduce the carrying value of the Casco Bay facility and related assets to its estimated fair value. We determined the fair value of the facility based on assumptions that reflect our best estimate of third party market participants’ considerations, and corroborated these assumptions based upon the terms of the proposed sale of the facilities. The merger agreement ultimately did not receive stockholder approval, and at December 31, 2010, we no longer considered it more likely than not that these facilities would be disposed of before the end of their currently estimated useful lives.

Other. In the first quarter of 2010, as a result of uncertainty and risk surrounding PPEA’s financing structure, we recorded a pre-tax impairment charge of approximately $37 million to reduce the carrying value of our investment in PPEA Holding to zero. In the fourth quarter 2010, we sold our interest in this investment. Please read Note 14—Unconsolidated Investments in our Form 10-K for additional information.

Our impairment analysis of our generating assets is based on forward-looking projections of our estimated future cash flows based on discrete financial forecasts developed by management for planning purposes. These projections incorporate certain assumptions including forward power and capacity prices, forward fuel costs and costs of complying with environmental regulations. As additional information becomes available regarding the significant assumptions used in our analysis, we may conclude that it is necessary to update our impairment analyses in future periods to assess the recoverability of our assets and additional impairment charges could be required.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2011 and 2010

Note 7—Accumulated Other Comprehensive Loss

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

	September 30, 2011			December 31, 2010
	(in millions)
Cash flow hedging activities, net	$	3		$	3
Unrecognized prior service cost and actuarial loss, net	(53		)	(56		)

Accumulated other comprehensive loss, net of tax	$	(50	)	$	(53	)

Note 8—Variable Interest Entities

PPEA Holding Company, LLC. Until the sale of our interest on November 10, 2010, we owned an approximate 37 percent interest in PPEA Holding, which through PPEA, its wholly-owned subsidiary, owned an approximate 57 percent undivided interest in the Plum Point Project. On November 10, 2010, we completed the sale of our interest in PPEA Holding to one of the other investors in PPEA Holding. Please read Note 7—Impairment and Restructuring Charges—2010 Impairment Charges—Other in our Form 10-K.

Due to the uncertainty and risk surrounding PPEA’s financing structure as a result of events that occurred in 2010, we concluded that there was an other-than-temporary impairment of our investment in PPEA Holding and fully impaired our equity investment at March 31, 2010. As a result, we recorded an impairment charge of approximately $37 million for the three months ended March 31, 2010, which is included in Losses from unconsolidated investments in our unaudited condensed consolidated statements of operations. The impairment was a Level 3 non-recurring fair value measurement and reflected our best estimate of third party market participants’ considerations including probabilities related to restructuring of the project debt and potential insolvency. Please read Note 5—Fair Value Measurements for further discussion.

Summarized aggregate financial information for unconsolidated equity investments and our equity share thereof was:

	Three Months Ended September 30, 2010
	Total			Equity Share
	(in millions)
Revenues	$	13		$	—
Operating income	3			—
Net loss	(20		)	—

	Nine Months Ended September 30, 2010
	Total			Equity Share
	(in millions)
Revenues	$	13		$	—
Operating income	1			—
Net income (loss)	(53		)	3

During the second and third quarters of 2010, we did not recognize our share of losses from our investment in PPEA Holding as our investment in PPEA Holding was valued at zero at September 30, 2010, and we did not have an obligation to provide further financial support.

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Losses from unconsolidated investments for the nine months ended September 30, 2010 were $34 million, which includes an impairment loss of $37 million, discussed above. This impairment was partially offset by equity earnings of $3 million, comprised primarily of mark-to-market gains related to PPEA’s interest rate swaps, partly offset by financing expenses.

Note 9—Commitments and Contingencies

Legal Proceedings

Set forth below is a summary of our material ongoing legal proceedings. Pursuant to the requirements of FASB ASC 450 and related guidance, we record accruals for estimated losses from contingencies when available information indicates that a loss is probable and the amount of the loss, or range of loss, can be reasonably estimated. In addition, we disclose matters for which management believes a material loss is reasonably possible. In all instances, management has assessed the matters below based on current information and made judgments concerning their potential outcome, giving consideration to the nature of the claim, the amount, if any, and nature of damages sought and the probability of success. Management regularly reviews all new information with respect to each such contingency and adjusts its assessment and estimates of such contingencies accordingly. Because litigation is subject to inherent uncertainties including unfavorable rulings or developments, it is possible that the ultimate resolution of our legal proceedings could involve amounts that are different from our currently recorded accruals and that such differences could be material.

In addition to the matters discussed below, we are party to other routine proceedings arising in the ordinary course of business or related to discontinued business operations. Any accruals or estimated losses related to these matters are not material. In management’s judgment, the ultimate resolution of these matters will not have a material effect on our financial condition, results of operations or cash flows.

Bondholder Litigation. On September 21, 2011, an ad-hoc group of bondholders (the “Avenue Plaintiffs”) of DH filed a complaint in the Supreme Court of the State of New York, County of New York, captioned Avenue Investments, L.P. et al v. Dynegy Inc., Dynegy Holdings, LLC, Dynegy Gas Investments, LLC, Clint C. Freeland, Kevin T. Howell and Robert C. Flexon (Index No. 652599/11) (“Avenue Investments Matter”). The Avenue Plaintiffs challenge the September 2011 DMG Acquisition. On September 27, 2011, the successor indenture trustees under the Roseton and Danskammer Indenture Agreements (the “Indenture Trustee Plaintiffs”) filed a complaint in the Supreme Court of the State of New York, captioned The Successor Lease Indenture Trustee et al v. Dynegy Inc., Dynegy Holdings, LLC, Dynegy Gas Investments, LLC, E. Hunter Harrison, Thomas W. Elward, Michael J. Embler, Robert C. Flexon, Vincent J. Intrieri, Samuel Merksamer, Felix Pardo, Clint C. Freeland, Kevin T. Howell John Doe 1, John Doe 2, John Doe 3, Etc. (Index No. 652642/2011). The Indenture Trustee Plaintiffs similarly challenge the DMG Acquisition. Plaintiffs in both actions allege, among other claims, breach of contract, breach of fiduciary duties, and violations of prohibitions on fraudulent transfers in connection with the DMG Acquisition and also seek to have the DMG Acquisition set aside, and request unspecified damages as well as attorneys’ fees. We filed motions to dismiss the actions on October 31, 2011. On November 7, 2011, Dynegy, DH and the Consenting Noteholders (as defined in Note 15—Subsequent Events) agreed to enter into a stipulation that suspends the prosecution of the Consenting Noteholders’ claims in the Avenue Investments Matter.

On November 4, 2011, the owner-lessors of the Danskammer and Roseton facilities (the “Owner Lessor Plaintiffs”) filed a lawsuit in NY state court, captioned Resources Capital Management Corp., Roseton OL, LLC and Danskammer OL, LLC, v. Dynegy Inc., Dynegy Holdings, Inc., Dynegy Holdings, LLC, Dynegy Gas Investments, LLC, Thomas W. Elward, Michael J. Embler, Robert C. Flexon, E. Hunter Harrison, Vincent J. Intrieri, Samuel J. Merksamer, Felix Pardo, Clint. C. Freeland, Kevin T. Howell, Icahn Capital LP, and Seneca Capital Advisors, LLC, alleging, among other claims, that the Reorganization, the DPC and DMG Credit Agreements, and the DMG Acquisition constitute an integrated scheme involving fraudulent transfers, breach of contract, and breach of fiduciary duties, and seek a judgment to unwind all the transactions. We believe the plaintiffs’ complaints in all three lawsuits lack merit and we will continue to oppose their claims vigorously.

Reorganization Litigation. On July 21, 2011, certain holders of obligations with potential recourse rights to DH initiated legal proceedings seeking to enjoin our restructuring efforts disclosed on July 10, 2011. The lawsuits, Libertyview Credit Opportunities Fund, L.P. et al v. Dynegy Holdings, Inc., (Index No. 651998/11) in the Supreme Court of the State of New York (the “New York Action”) and Roseton OL, LLC and Danskammer OL, LLC v. Dynegy Holdings, Inc., (C.A. No. 6689-VCP) in the Court of Chancery of the State of Delaware (the “Delaware Action”), sought to enjoin the proposed reorganization based on purported breaches of guarantees issued by DH in connection with two sale-leaseback transactions in which DH’s subsidiaries, Dynegy Roseton, L.L.C. and Dynegy Danskammer, L.L.C., leased certain power-generating facilities. Shortly after filing, the New York Action was stayed pending resolution of the Delaware Action. The plaintiffs in the Delaware Action filed a motion for a temporary restraining order (“TRO”) to enjoin the Reorganization on July 21, 2011. DH opposed the motion by arguing, among other things, that the unambiguous language of the Guaranties permitted the reorganization. On July 29, 2011, the Delaware court denied the TRO in the Delaware Action, finding that plaintiffs had failed to show a likelihood of success on the merits, irreparable harm or that the balancing of the equities weighed in their favor. Thereafter, plaintiffs sought certification of an interlocutory appeal, which was denied by the Delaware Chancery Court on August 4, 2011 and subsequently denied by the Delaware Supreme Court on August 5, 2011. Following the Delaware Supreme Court’s action, plaintiffs in the Delaware action voluntarily dismissed their claims without prejudice. Thereafter, the New York action was dismissed without prejudice by the New York court on its own initiative.

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Stockholder Litigation Relating to the Blackstone and Icahn Merger Agreements. In connection with the 2010 and 2011 terminations of the merger agreement with an affiliate of The Blackstone Group L.P. and the merger agreement with an affiliate of Icahn Enterprises L.P., respectively, numerous stockholder lawsuits and one stockholder derivative lawsuit previously filed in the District Courts of Harris County, Texas, the Southern District of Texas, and the Court of Chancery of the State of Delaware were dismissed. On March 28, 2011, plaintiff’s lead class counsel in the consolidated Texas state court actions filed a motion seeking attorneys’ fees and expenses. In July 2011, the Court granted the motion and awarded approximately $2 million in fees and expenses. We are appealing the decision.

Gas Index Pricing Litigation. We, several of our affiliates, our former joint venture affiliate and other energy companies were named as defendants in numerous lawsuits in state and federal court claiming damages resulting from alleged price manipulation and false reporting of natural gas prices to various index publications in the 2000-2002 timeframe. Many of the cases have been resolved. All of the remaining cases contain similar claims that individually, and in conjunction with other energy companies, we engaged in an illegal scheme to inflate natural gas prices in four states by providing false information to natural gas index publications. In November 2009, following defendants’ motion for reconsideration, the court invited defendants to renew their motions for summary judgment on preemption of plaintiffs’ state law claims, which were filed shortly thereafter. Plaintiffs concurrently moved to amend their complaints to add federal claims. In October 2010, the court denied plaintiffs’ motion to amend.

On July 18, 2011, the Court granted defendants’ motions for summary judgment, thereby dismissing all of plaintiffs’ state law claims. Plaintiffs are appealing the decision to the Ninth Circuit Court of Appeals.

Plaintiff in one of the pending actions, Multiut Corporation v. Dynegy, Inc. et al, had previously filed similar claims under federal law, which are not subject to the Court’s July 18, 2011 order. Multiut Corporation is presently proceeding before the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division having petitioned for Chapter 11 in May 2009. In April 2011, the bankruptcy court denied confirmation of Multiut’s proposed plan of reorganization and entered an order converting the case under Chapter 7 of the bankruptcy code and appointed a Trustee to oversee the liquidation of Mulitut’s assets, one of which is Multiut’s claim against us in the gas index litigation. We are the largest creditor in that proceeding and have negotiated a settlement-in-principle of Multiut’s claim with the Trustee, which will need to be approved by the bankruptcy court.

Native Village of Kivalina and City of Kivalina v. ExxonMobil Corporation, et al. In February 2008, the Native Village of Kivalina and the City of Kivalina, Alaska initiated an action in federal court in the Northern District of California against DH and 23 other companies in the energy industry. Plaintiffs claim that defendants’ emissions of GHG including CO2 contribute to climate change and have caused significant damage to a native Alaskan Eskimo village through increased vulnerability to waves, storm surges and erosion. In September 2009, the court dismissed all of the plaintiffs’ claims based on lack of subject matter jurisdiction and because plaintiffs lacked standing to bring the suit. Shortly thereafter, plaintiffs appealed to the Ninth Circuit. The appeal was fully briefed and in February 2011, the Ninth Circuit issued an order staying the scheduling of oral argument until the United States Supreme Court’s ruling in AEP v. Connecticut (“AEP”). On June 20, 2011, the Supreme Court issued its decision in AEP. The Court was equally divided by a vote of 4-4 on the question of whether the plaintiffs had standing to bring the suit and, therefore, affirmed the court’s exercise of jurisdiction. On the merits the Court ruled by a vote of 8-0 that the CAA and EPA action authorized by the Act displace any federal common law right to seek abatement of carbon dioxide emissions from fossil fuel-fired power plants. In August 2011, the Ninth Circuit lifted its stay of the Kivalina proceedings and scheduled oral argument on November 28, 2011. On October 26, 2011, the Ninth Circuit issued an order allowing any party to file a supplemental brief by November 4, 2011 addressing the significance of the Supreme Court’s decision in AEP. We believe the plaintiffs’ suit lacks merit and we will continue to oppose their claims vigorously.

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Illinova Generating Company Arbitration. In May 2007, our subsidiary Illinova Generating Company (“IGC”) received an adverse award in an arbitration brought by Ponderosa Pine Energy, LLC (“PPE”). The award required IGC to pay PPE $17 million, which IGC paid in June 2007 under protest while simultaneously seeking to vacate the award in the District Court of Dallas County, Texas. In March 2010, the Dallas District Court vacated the award, finding that one of the arbitrators had exhibited evident partiality. PPE is appealing that decision to the Fifth District Court of Appeals in Dallas, Texas. Coincident with the appeal, IGC filed a claim against PPE seeking recovery of the $17 million plus interest. In September 2010, the Dallas District Court ordered PPE to deposit the $17 million principal in an interest-bearing escrow account jointly owned by IGC and PPE pending the Dallas Court of Appeals decision, which has not yet been issued. As a result of the uncertainty surrounding the outcome of PPE’s appeal, our receivable from PPE is fully reserved at September 30, 2011.

Other Commitments and Contingencies

Cooling Water Intake Permits. The cooling water intake structures at several of our power generation facilities are regulated under Section 316(b) of the Clean Water Act. This provision generally provides that standards set for power generation facilities require that the location, design, construction and capacity of cooling water intake structures reflect the BTA for minimizing adverse environmental impact. These standards are developed and implemented for power generating facilities through the NPDES permits or individual SPDES permits on a case-by-case basis.

The environmental groups that participate in our NPDES and SPDES permit proceedings generally argue that only closed cycle cooling meets the BTA requirement. The issuance and renewal of NPDES or SPDES permits for three of our power generation facilities (Danskammer, Roseton and Moss Landing) have been challenged on this basis. The Danskammer SPDES permit, which was renewed and issued in June 2006, does not require installation of a closed cycle cooling system; however, it does require aquatic organism mortality reductions resulting from NYSDEC’s determination of BTA requirements under its regulations. All appeals of this permit have been exhausted. Two permit challenges are still pending.

· Roseton SPDES Permit — In April 2005, the NYSDEC issued a Draft SPDES Permit renewal for the Roseton plant. The permit is opposed by environmental groups challenging the BTA determination. In October 2006, various holdings in the administrative law judge’s ruling admitting the environmental group petitioners to party status and setting forth the issues to be adjudicated in the permit renewal hearing were appealed to the Commissioner of NYSDEC by the petitioners, NYSDEC staff and us. The permit renewal hearing will be scheduled after the Commissioner rules on those appeals. We believe that the petitioners’ claims lack merit and we plan to oppose those claims vigorously.

· Moss Landing NPDES Permit — The California Regional Water Quality Control Board (“Water Board”) issued an NPDES permit for the Moss Landing power generating facility in 2000 that did not require closed cycle cooling. A local environmental group challenged the BTA determination of the permit. The Water Board’s decision was affirmed by the Superior Court in 2004 and by the Court of Appeals in 2007. The Supreme Court of California granted review in March 2008 and held oral argument in May 2011. On August 15, 2011, the Supreme Court of California issued its decision in this case, affirming the appellate court’s decision upholding the NPDES permit issued for Moss Landing.

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Due to the nature of these claims, an adverse result in these proceedings could have a material effect on our financial condition, results of operations and cash flows; however, given the numerous variables and factors involved in calculating the potential costs associated with installing a closed cycle cooling system, any decision to install such a system at any of our facilities would be made on a case-by-case basis considering all relevant factors at such time. If capital expenditures related to cooling water systems become great enough to render the operation of the plant uneconomical, we could, at our option, and subject to any applicable financing agreements or other obligations, reduce operations or cease to operate that facility and forego the capital expenditures.

Guarantees and Indemnifications

In the ordinary course of business, we routinely enter into contractual agreements that contain various representations, warranties, indemnifications and guarantees. Examples of such agreements include, but are not limited to, service agreements, equipment purchase agreements, engineering and technical service agreements, asset sales and procurement and construction contracts. Some agreements contain indemnities that cover the other party’s negligence or limit the other party’s liability with respect to third party claims, in which event we will effectively be indemnifying the other party. Virtually all such agreements contain representations or warranties that are covered by indemnifications against the losses incurred by the other parties in the event such representations and warranties are false. While there is always the possibility of a loss related to such representations, warranties, indemnifications and guarantees in our contractual agreements, and such loss could be significant, in most cases management considers the probability of loss to be remote. Related to the indemnifications discussed below, we have accrued approximately $1 million as of September 30, 2011.

LS Power Indemnities. In connection with the LS Power Transactions we agreed in the purchase and sale agreement to indemnify LS Power against claims regarding any breaches in our representations and warranties and certain other potential liabilities. Claims for indemnification shall survive until twelve months subsequent to closing with exceptions for tax claims, which shall survive for the applicable statute of limitations plus 30 days, and certain other representations and potential liabilities, which shall survive indefinitely. The indemnifications provided to LS Power are limited to $1.3 billion in total; however, several categories of indemnifications are not available to LS Power until the liabilities incurred in the aggregate are equal to or exceed $15 million and are capped at a maximum of $100 million. Further, the purchase and sale agreement provides in part that we may not reduce or avoid liability for a valid claim based on a claim of contribution. In addition to the above indemnities related to the LS Power Transactions, we have agreed to indemnify LS Power against claims related to the Riverside/Foothills Project for certain aspects of the project. Namely, LS Power has been indemnified for any disputes that arise as to ownership, transfer of bonds related to the project, and any failure by us to obtain approval for the transfer of the payment in-lieu of taxes program already in place. The indemnities related solely to the Riverside/Foothills Project are capped at a maximum of $180 million and extend until the earlier of the expiration of the tax agreement or December 26, 2026. At this time, we have incurred no significant expenses under these indemnities. Please read Note 4—Dispositions, Contract Terminations and Discontinued Operations—Dispositions and Contract Terminations—LS Power Transactions in our Form 10-K for further discussion.

West Coast Power Indemnities. In connection with the sale of our 50 percent interest in West Coast Power to NRG on March 31, 2006, an agreement was executed to allocate responsibility for managing certain litigation and provide for certain indemnities with respect to such litigation. The indemnification agreement in relevant part provides that NRG assumes responsibility for all defense costs and any risk of loss, subject to certain conditions and limitations, arising from a February 2002 complaint filed at FERC by the California Public Utilities Commission alleging that several parties, including West Cost Power subsidiaries, overcharged the State of California for wholesale power. FERC found the rates charged by wholesale suppliers to be just and reasonable; however, this matter was appealed and ultimately remanded back to FERC for further review. On May 24, 2011 and May 26, 2011, FERC issued two orders in these dockets. The first order denied the request of the California Parties for consolidation of various dockets and denied their request for summary disposition on market manipulation issues. The second order addressed treatment of settled parties and the scope of hearing issues in the ongoing proceedings.

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Targa Indemnities. During 2005, as part of our sale of our midstream business (“DMSLP”), we agreed to indemnify Targa Resources, Inc. (“Targa”) against losses it may incur under indemnifications DMSLP provided to purchasers of certain assets, properties and businesses disposed of by DMSLP prior to our sale of DMSLP. We have incurred no material expense under these prior indemnities. We have recorded an accrual of less than $1 million for remediation of groundwater contamination at the Breckenridge Gas Processing Plant sold by DMSLP in 2001. The indemnification provided by DMSLP to the purchaser of the plant has a limit of $5 million.

Illinois Power Indemnities. Dynegy has indemnified third parties against losses resulting from possible adverse regulatory actions taken by the ICC that could prevent Illinois Power from recovering costs incurred in connection with purchased natural gas and investments in specified items. Although there is no absolute limitation on Dynegy’s liability under this indemnity, the amount of the indemnity is limited to 50 percent of any such losses. Dynegy has made certain payments in respect of these indemnities following regulatory action by the ICC, and has established reserves for further potential indemnity claims. Further events, which fall within the scope of the indemnity, may still occur. However, Dynegy is not required to accrue a liability in connection with these indemnifications, as management cannot reasonably estimate a range of outcomes or at this time considers the probability of an adverse outcome as only reasonably possible. Dynegy intends to contest any proposed regulatory actions.

Black Mountain Guarantee. Through one of our subsidiaries, we hold a 50 percent ownership interest in Black Mountain (Nevada Cogeneration) (“Black Mountain”), in which our partner is a Chevron subsidiary. Black Mountain owns the Black Mountain power generation facility and has a power purchase agreement with a third party that extends through April 2023. In connection with the power purchase agreement, pursuant to which Black Mountain receives payments which decrease in amount over time, we agreed to guarantee 50 percent of certain payments that may be due to the power purchaser under a mechanism designed to protect it from early termination of the agreement. At September 30, 2011, if an event of default due to early termination had occurred under the terms of the mortgage on the facility entered into in connection with the power purchase agreement, we could have been required to pay the power purchaser approximately $54 million under the guarantee.

Other Indemnities. We entered into indemnifications regarding environmental, tax, employee and other representations when completing asset sales such as, but not limited, to the Rolling Hills, Calcasieu, CoGen Lyondell and Heard County power generating facilities. As of September 30, 2011, no claims have been made against these indemnities. There is no limitation on our liability under certain of these indemnities. However, management is unaware of any existing claims.

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Note 10—Debt

Sithe Senior Notes

On August 26, 2011, Sithe/ Independence Funding Corporation (“Sithe”) commenced a cash tender offer (“Sithe Tender Offer”) to purchase Sithe’s outstanding $192 million in principal amount of 9.0 percent Secured Bonds due 2013 (“Sithe Senior Notes”). Sithe also solicited consents to certain proposed amendments to the indenture governing the Sithe Senior Notes. At the expiration of the early consent period on September 9, 2011, Sithe entered into a supplemental indenture, which eliminated or modified substantially all of the restrictive covenants, certain events of default and certain other provisions. On September 12, 2011, Sithe accepted for purchase all Sithe Senior Notes validly tendered prior to the consent date and satisfied and discharged the indenture and remaining Sithe Senior Notes. Also on September 12, 2011, Sithe/Independence Power Partners, LP (“SIPP”) filed with the New York State Public Service Commission (the “NYPSC”), and certain other parties, a verified petition for approval of financing, seeking NYPSC authorization for SIPP to grant liens/security interests in its assets and properties as collateral security for the DPC Credit Agreement (as defined below). We anticipate that the NYPSC will issue an order on the petition in December 2011 or January 2012. On the final payment date, September 26, 2011, Sithe accepted to purchase substantially all of the Sithe Senior Notes that were tendered after the consent date.

Sithe purchased the Sithe Senior Notes at a price of 108 percent of the principal amount plus consent fees. Total cash paid to purchase the Sithe Senior Notes, including fees and accrued interest, was $217 million, which was funded from proceeds from the DPC Credit Agreement (as defined and discussed below). We recorded a charge of approximately $16 million associated with this transaction, of which $21 million is included in Debt extinguishment costs offset by the write-off of $5 million of premiums included in Interest expense on our unaudited condensed consolidated statements of operations. As a result of the successful cash tender offer and consent solicitation, $43 million in restricted cash previously held at Sithe was returned to DPC when the transaction closed.

We also made scheduled repayments of the Sithe Senior Notes totaling $33 million during the second quarter 2011.

New Credit Agreements

On August 5, 2011, we completed the Reorganization of our legal entity structure to facilitate the execution of two new credit agreements. Please read Note 1—Organization and Basis of Presentation—Reorganization for further discussion. The new credit agreements, which were entered into on August 5, 2011, provided for a $1,100 million, five year senior secured term loan to DPC and a $600 million, five year senior secured term loan to DMG. As further discussed below, these new credit agreements limit the amount of distributions that can be made by DPC and DMG. DPC and DMG have restricted consolidated net assets of approximately $1,964 million and $2,709 million, respectively, as of September 30, 2011 as a result of these new credit agreements.

DPC Credit Agreement. DPC entered into a $1,100 million senior secured term loan (the “DPC Credit Agreement”) with Credit Suisse AG, Cayman Islands Branch (“CS”), as Administrative Agent and as Collateral Trustee, Credit Suisse Securities (USA) LLC and Goldman Sachs Lending Partners LLC, as Joint Bookrunners and Joint Lead Arrangers, Barclays Capital, the investment banking division of Barclays Bank PLC, as Co-Manager, other agents named therein and other financial institutions party thereto as lenders.

The DPC Credit Agreement is a senior secured term loan facility with an aggregate principal amount of $1,100 million, which was borrowed in a single drawing on the closing date. Amounts borrowed under the DPC Credit Agreement that are repaid or prepaid may not be re-borrowed. The DPC Credit Agreement will mature on August 5, 2016 and will amortize in equal quarterly installments in aggregate annual amounts equal to 1.00 percent of the original principal amount of the DPC Credit Agreement with the balance payable on the fifth anniversary of the closing date.

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The proceeds of the borrowing under the DPC Credit Agreement were used by DPC to (i) repay an intercompany obligation of a DPC subsidiary to DH and to repay certain outstanding indebtedness under our Fifth Amended and Restated Credit Agreement, (ii) fund cash collateralized letters of credit and provide cash collateral for existing and future collateral requirements, (iii) repay approximately $192 million of debt relating to Sithe Energies, Inc. (the intermediate project holding company that indirectly holds the Independence facility in New York), (iv) make a $200 million restricted payment to a parent holding company of DPC, (v) pay related transaction fees and expenses and (vi) fund additional cash to the balance sheet to provide the DPC asset portfolio with liquidity for general working capital and liquidity purposes.

All obligations of DPC under (i) the DPC Credit Agreement (the “DPC Borrower Obligations”) and (ii) at the election of DPC, (x) cash management arrangements and (y) interest rate protection, commodity trading or hedging or other permitted hedging or swap arrangements (the “Hedging/Cash Management Arrangements”) are unconditionally guaranteed jointly and severally on a senior secured basis (the “DPC Guarantees”) by each existing and subsequently acquired or organized direct or indirect material domestic subsidiary of DPC (the “DPC Guarantors”), in each case, as otherwise permitted by applicable law, regulation and contractual provision and to the extent such guarantee would not result in adverse tax consequences as reasonably determined by DPC. None of DPC’s parent companies are obligated to repay the DPC Borrower Obligations.

The DPC Borrower Obligations, the DPC Guarantees and any Hedging/Cash Management Arrangements are secured by first priority liens on and security interests in 100 percent of the capital stock of DPC (as discussed below) and substantially all of the present and after-acquired assets of DPC and each DPC Guarantor (collectively, the “DPC Collateral”). Accordingly, such assets are only available for the creditors of DGIH and its subsidiaries. In September 2011, as discussed above, Sithe completed the Sithe Tender Offer. Following authorization from the NYPSC and certain other parties, the equity and assets of SIPP and Sithe will be subject to a lien in favor of DPC’s secured parties. Please read Sithe Senior Notes above for further discussion of the Sithe Tender Offer and related regulatory approvals.

The DPC Credit Agreement bears interest, at DPC’s option, at either (a) 7.75 percent per annum plus LIBOR, subject to a LIBOR floor of 1.50 percent, with respect to any Eurodollar term loan or (b) 6.75 percent per annum plus the alternate base rate with respect to any ABR term loan. DPC may elect from time to time to convert all or a portion of the term loan from any ABR Borrowing into a Eurodollar Borrowing or vice versa. With some exceptions, the DPC Credit Agreement is non-callable for the first two years and is subject to a prepayment premium.

The DPC Credit Agreement contains mandatory prepayment provisions. The outstanding loan under the DPC Credit Agreement is to be prepaid with (a) 100 percent of the net cash proceeds of all asset sales by DPC and its subsidiaries, subject to the right of DPC to reinvest such proceeds if such proceeds are reinvested (or committed to be reinvested) within 12 months and, if so committed to reinvestment, reinvested within six months after such initial 12 month period, (b) 50 percent of the net cash proceeds of issuance of equity securities of DPC and its subsidiaries (except to the extent used for permitted capital expenditures), (c) commencing with the first full fiscal year of DPC to occur after the closing date, 100 percent of excess cash flow; provided that (i) excess cash flow shall be determined after reduction for amounts used for capital expenditures and restricted payments and (ii) any voluntary prepayments of the term loans shall be credited against excess cash flow prepayment obligations, and (d) 100 percent of the net cash proceeds of issuances, offerings or placements of debt obligations of DPC and its subsidiaries (other than all permitted debt). Notwithstanding the above, the proceeds of a sale of up to 20 percent of the membership interests in DPC are not required to be used to prepay the outstanding loan under the DPC Credit Agreement.

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The DPC Credit Agreement contains customary events of default and affirmative and negative covenants including, subject to certain specified exceptions, limitations on amendments to constitutive documents, liens, capital expenditures, acquisitions, subsidiaries and joint ventures, investments, the incurrence of debt, fundamental changes, asset sales, sale-leaseback transactions, hedging arrangements, restricted payments, changes in nature of business, transactions with affiliates, burdensome agreements, amendments of debt and other material agreements, accounting changes and prepayment of indebtedness or repurchases of equity interests.

The DPC Credit Agreement contains a requirement that DPC shall establish and maintain a segregated account, subject to the control of the Collateral Trustee (the “DPC Collateral Posting Account”), into which a specified collateral posting amount shall be deposited. DPC may withdraw amounts from the DPC Collateral Posting Account: (i) for the purpose of meeting collateral posting requirements of DPC and the DPC Guarantors; (ii) to prepay the term loan under the DPC Credit Agreement; (iii) to repay certain other permitted indebtedness; and (iv) to the extent any excess amounts are determined to be in the DPC Collateral Posting Account.

The DPC Credit Agreement limits distributions to $135 million per year provided the borrower and its subsidiaries possess at least $50 million of cash and cash equivalents and short-term investments as of the date of the proposed distribution.

DMG Credit Agreement. DMG entered into a $600 million senior secured term loan (the “DMG Credit Agreement”) with CS as Administrative Agent and as Collateral Trustee, Credit Suisse Securities (USA) LLC and Goldman Sachs Lending Partners LLC, as Joint Bookrunners and Joint Lead Arrangers, Barclays Capital, the investment banking division of Barclays Bank PLC, as Co-Manager, other agents named therein, and other financial institutions party thereto as lenders.

The DMG Credit Agreement is a senior secured term loan facility with an aggregate principal amount of $600 million, which was borrowed in a single drawing on the closing date. Amounts borrowed under the DMG Credit Agreement that are repaid or prepaid may not be re-borrowed. The DMG Credit Agreement will mature on August 5, 2016 and will amortize in equal quarterly installments in aggregate annual amounts equal to 1.00 percent of the original principal amount of the DMG Credit Agreement with the balance payable on the fifth anniversary of the closing date.

The proceeds of the borrowing under the DMG Credit Agreement were used by DMG, to (i) fund cash collateralized letters of credit and provide cash collateral for existing and future collateral requirements, (ii) make a $200 million restricted payment to a parent holding company of DMG, (iii) pay related transaction fees and expenses and (iv) fund additional cash to the balance sheet to provide the DMG asset portfolio with cash to be used for general working capital and general corporate purposes.

All obligations of DMG under (i) the DMG Credit Agreement (the “DMG Borrower Obligations”) and (ii) at the election of DMG, Hedging/Cash Management Arrangements are unconditionally guaranteed jointly and severally on a senior secured basis (the “DMG Guarantees”) by each existing and subsequently acquired or organized direct or indirect material domestic subsidiary of DMG (the “DMG Guarantors”), in each case, as otherwise permitted by applicable law, regulation and contractual provision and to the extent such guarantee would not result in adverse tax consequences as reasonably determined by DMG. None of DMG’s parent companies are obligated to repay the DMG Borrower Obligations.

The DMG Borrower Obligations, the DMG Guarantees and any Hedging/Cash Management Arrangements are secured by first priority liens on and security interests in 100 percent of the capital stock of DMG and substantially all of the present and after-acquired assets of DMG and each DMG Guarantor. Accordingly, such assets are only available for the creditors of DCIH and its subsidiaries.

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(Unaudited)

For the Interim Periods Ended September 30, 2011 and 2010

The DMG Credit Agreement bears interest, at DMG’s option, at either (a) 7.75 percent per annum plus LIBOR, subject to a LIBOR floor of 1.50 percent, with respect to any Eurodollar term loan or (b) 6.75 percent per annum plus the alternate base rate with respect to any ABR term loan. DMG may elect from time to time to convert all or a portion of the term loan from any ABR Borrowing into a Eurodollar Borrowing or vice versa. With some exceptions, the DMG Credit Agreement is non-callable for the first two years and is subject to a prepayment premium.

The DMG Credit Agreement contains mandatory prepayment provisions. The outstanding loan under the DMG Credit Agreement is to be prepaid with (a) 100 percent of the net cash proceeds of all asset sales by DMG and its subsidiaries, subject to the right of DMG to reinvest such proceeds if such proceeds are reinvested (or committed to be reinvested) within 12 months and, if so committed to reinvestment, reinvested within six months after such initial 12 month period, (b) 50 percent of the net cash proceeds of issuance of equity securities of DMG and its subsidiaries (except to the extent used (x) to prepay the Loans, (y) for capital expenditures and (z) for permitted acquisitions), (c) commencing with the first full fiscal year of DMG to occur after the closing date, 100 percent of excess cash flow; provided that (i) excess cash flow shall be determined after reduction for amounts used for capital expenditures, and restricted payments made and (ii) any voluntary prepayments of the term loans shall be credited against excess cash flow prepayment obligations and (d) 100 percent of the net cash proceeds of issuances, offerings or placements of debt obligations of DMG and its subsidiaries (other than all permitted debt).

The DMG Credit Agreement contains customary events of default and affirmative and negative covenants including, subject to certain specified exceptions, limitations on amendments to constitutive documents, liens, capital expenditures, acquisitions, subsidiaries and joint ventures, investments, the incurrence of debt, fundamental changes, asset sales, sale-leaseback transactions, hedging arrangements, restricted payments, changes in nature of business, transactions with affiliates, burdensome agreements, amendments of debt and other material agreements, accounting changes and prepayment of indebtedness or repurchases of equity interests.

The DMG Credit Agreement contains a requirement that DMG shall establish and maintain a segregated account, subject to the control of the Collateral Trustee (the “DMG Collateral Posting Account”), into which a specified collateral posting amount shall be deposited. DMG may withdraw amounts from the DMG Collateral Posting Account: (i) for the purpose of meeting collateral posting requirements of DMG and the DMG Guarantors; (ii) to prepay the term loan under the DMG Credit Agreement; (iii) to repay certain other permitted indebtedness; and (iv) to the extent any excess amounts are determined to be in the DMG Collateral Posting Account.

The DMG Credit Agreement limits distributions to $90 million per year provided the borrower and its subsidiaries possess at least $50 million of cash and cash equivalents and short-term investments as of the date of the proposed distribution.

Letter of Credit Facilities. DPC entered into a $300 million fully cash collateralized Letter of Credit Reimbursement and Collateral Agreement with Barclays Bank PLC (“Barclays”) pursuant to which Barclays agrees to issue letters of credit at DPC’s request provided that DPC deposits in an account controlled by Barclays an amount of cash sufficient to cover the face value of such requested letter of credit plus an additional percentage thereof.

DPC also entered into a $215 million fully cash collateralized Letter of Credit Reimbursement and Collateral Agreement with CS pursuant to which CS agreed to issue letters of credit at DPC’s request provided that DPC deposits in an account controlled by CS an amount of cash sufficient to cover the face value of such requested letter of credit plus an additional percentage thereof.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2011 and 2010

DMG entered into a $100 million fully cash collateralized Letter of Credit Reimbursement and Collateral Agreement with CS pursuant to which CS agreed to issue letters of credit at DMG’s request provided that DMG deposits in an account controlled by CS an amount of cash sufficient to cover the face value of such requested letter of credit plus an additional percentage thereof.

DH entered into a $26 million fully cash collateralized Letter of Credit Reimbursement and Collateral Agreement with CS pursuant to which CS agreed to issue letters of credit at DH’s request provided that DH deposits in an account controlled by CS an amount of cash sufficient to cover the face value of such requested letter of credit plus an additional percentage thereof.

DH’s Credit Facility

During the second quarter 2011, we borrowed $400 million under our former Fifth Amended and Restated Credit Agreement. This borrowing was repaid on August 5, 2011 in connection with the closing of the two new credit agreements entered into as part of the Reorganization. Please read Note 1—Organization and Basis of Presentation—Reorganization for further discussion. In addition, our former term facility of $850 million was repaid with current restricted cash and the term loan of $68 million was repaid using proceeds from the DPC Credit Agreement.

Senior Notes and Debentures and Subordinated Capital Income Securities

We made scheduled repayments on our Senior Notes and Debentures of $80 million during the second quarter 2011.

As permitted under the Subordinated Capital Income Securities indenture, we deferred our $8 million June 2011 payment of interest.

On September 15, 2011, we commenced offers to exchange (the “Exchange Offers”) up to $1,250 million principal amount of the outstanding notes, debentures and capital income securities (the “Old Notes”) of DH, our direct, wholly-owned subsidiary, for our new 10 percent Senior Secured Notes due 2018 (the “New Notes”) and cash. On November 3, 2011, we terminated the Exchange Offers. As a result of the termination, all of the previously tendered (and not validly withdrawn) Old Notes were not accepted for exchange and were promptly returned to the holders thereof.

On November 7, 2011, DH filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. Please see Note 15—Subsequent Events—Bankruptcy Filing for further information. Accordingly, we have reclassified DH’s outstanding Senior Notes and Debentures, including the Subordinated Capital Income Securities reflected as affiliated debt, and associated deferred financing costs from long-term to current at September 30, 2011 on our unaudited condensed consolidated balance sheets.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2011 and 2010

Restricted Cash and Investments

The following table depicts our restricted cash and investments:

	September 30, 2011		December 31, 2010
	(in millions)
DPC LC facilities (1)	$	530	$	—
DMG LC facility (1)	103		—
DH LC facility (1)	27		—
DPC Collateral Posting Account (2)	101		—
DMG Collateral Posting Account (2)	36		—
DH Credit facility (3)	—		850