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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 June 30, 2012

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)

(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.

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, 122,889,323 shares outstanding as of July 30, 2012.

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DYNEGY INC.

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DEFINITIONS

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

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PART I. FINANCIAL INFORMATION

Item 1—FINANCIAL STATEMENTS

DYNEGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited) (in millions, except share data)

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)

See the notes to condensed consolidated financial statements

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DYNEGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited) (in millions)

See the notes to condensed consolidated financial statements

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DYNEGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited) (in millions)

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 June 30, 2012 and 2011

Note 1—Basis of Presentation and Organization

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 “Dynegy,” “the Company,” “we,” “us,” “our,” and “ours” are used to refer to Dynegy Inc.   Discussions or areas of this report that apply only to Dynegy or Dynegy Holdings, LLC (“DH”) are clearly noted in such sections or areas and specific defined terms may be introduced for use only in those sections or areas.  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.  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.  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, 2011, filed on March 8, 2012, which we refer to as our “Form 10-K”.

Organization

We are a holding company and conduct substantially all of our business operations through our subsidiaries.  Our current business operations are focused primarily on the power generation sector of the energy industry.  We report the results of our power generation business as three segments in our consolidated financial statements: (i) the Coal segment (“Coal”); (ii) the Gas segment (“Gas”) and (iii) the Dynegy Northeast segment (“DNE”).   Prior to the third quarter 2011, we reported results for the following segments: (i) GEN-MW, (ii) GEN-WE and (iii) GEN-NE.  Our consolidated financial results also reflect corporate-level expenses such as interest and depreciation and amortization.  General and administrative expenses are allocated to each reportable segment.  Accordingly, we have recast the corresponding items of segment information for all prior periods.

With the commencement of the DH Chapter 11 Cases (as defined below), DH and its direct and indirect subsidiaries, including the subsidiaries in our Gas and DNE segments, were deconsolidated effective November 7, 2011.  Financial statements presented after November 7, 2011 reflect our investment in, and the results of operations of, DH and its wholly-owned subsidiaries under the equity method of accounting.  For further discussion, please read Note 3—Chapter 11 Cases and Note 7—Variable Interest Entities.  Additionally, effective June 5, 2012, we transferred the Coal segment to DH; therefore, the results of the Coal segment are only included in our results through June 5, 2012.  See further discussion below.

Chapter 11 Filing by Dynegy and Certain Subsidiaries.  On November 7, 2011, 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 “DH Debtor Entities” ) filed voluntary petitions (the “DH Chapter 11 Cases”) for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York, Poughkeepsie Division (the “Bankruptcy Court”).  The DH Chapter 11 Cases were assigned to the Honorable Cecelia G. Morris and are being jointly administered for procedural purposes only under the caption In re: Dynegy Holdings, LLC, et. al, Case No. 11-38111.  On July 6, 2012, Dynegy filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court (the “Dynegy Chapter 11 Case,” and together with the DH Chapter 11 Cases, the “Chapter 11 Cases”).  The Dynegy Chapter 11 Case was also assigned to the Honorable Cecilia G. Morris, but it is being separately administered under the caption In re: Dynegy Inc., Case No. 12-36728.   Dynegy’s subsidiaries, other than the five DH Debtor Entities, did not file voluntary petitions for relief and are not debtors under  the Bankruptcy Code and, consequently, continue to operate their business in the ordinary course.  For further discussion, please read Note 3—Chapter 11 Cases.

Going Concern.  The accompanying financial statements have been prepared on a going concern basis of accounting.  However, as discussed in Note 3—Chapter 11 Cases, our ability to continue as a going concern is

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended June 30, 2012 and 2011

contingent upon the Bankruptcy Court’s approval of the Plan (as defined below) and our ability to successfully implement the Plan, among other factors.  As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to uncertainty.  Furthermore, on June 5, 2012, the effective date of the Settlement Agreement, (as defined and discussed in Note 3—Chapter 11 Cases) we assigned and contributed 100% of our outstanding equity interests in Dynegy Coal Holdco, LLC (“Coal Holdco”) to DH (the “Coal Holdco Transfer”).  Coal Holdco is the indirect owner of our assets in the Coal segment, therefore, subsequent to the transfer, we have no operating assets outside of our equity investment in DH.   As a result of the Coal Holdco Transfer and the lack of operating assets until DH’s expected emergence from bankruptcy, we believe there is substantial doubt about our ability to continue as a going concern.  Please read Note 3—Chapter 11 Cases for further discussion.

Note 2—Accounting Policies

Use of Estimates

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.  Actual results could differ materially from our estimates.  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, charges associated with the Chapter 11 Cases, and other factors.

Accounting Principles Adopted During the Current Period

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 IFRS (“ASU No. 2011-04”).  This authoritative guidance changes the wording used to describe the requirements in GAAP for measuring fair value and requires additional disclosure about fair value measurements.  ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011.  The implementation of this guidance has been reflected in Note 5—Fair Value Measurements.

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 have elected to present comprehensive income as two separate consecutive statements.

Note 3—Chapter 11 Cases

On November 7, 2011, the DH Debtor Entities commenced the DH Chapter 11 Cases.  On July 6, 2012, Dynegy commenced the Dynegy Chapter 11 Case.  Dynegy and the DH Debtor Entities (together, the “Debtor Entities”) remain in possession of their property and continue to operate their business as “debtors in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.  The Dynegy Chapter 11 Case is a necessary step to facilitate the restructuring contemplated by the Plan and the Agreements (as defined and discussed below), including the planned merger of Dynegy and DH (the “Merger”).

None of Dynegy’s direct or indirect subsidiaries, other than the five DH Debtor Entities, sought relief under the Bankruptcy Code, and none of those entities are debtors thereunder. Coal Holdco and Dynegy GasCo Holdings, LLC and their indirect, wholly-owned subsidiaries (including Dynegy Midwest Generation, LLC (“DMG”) and Dynegy Power, LLC

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended June 30, 2012 and 2011

(“DPC”)) are not included in the Chapter 11 Cases. The normal day-to-day operations of the coal-fired power generation facilities held by DMG and the gas-fired power generation facilities held by DPC have continued without interruption. The commencement of the Chapter 11 Cases did not constitute an event of default under either DMG’s senior secured term loan facility (the “DMG Credit Agreement) or DPC’s senior secured term loan facility (the “DPC Credit Agreement”).

On November 7, 2011, the DH Debtor Entities filed a motion with the Bankruptcy Court for authorization to reject the leases of the Roseton and Danskammer power generation facilities (the “Facilities”) and sought to impose a cap on the lease rejection damages under Section 502(b)(6) of the Bankruptcy Code. On December 13, 2011, Dynegy and the DH Debtor Entities entered into a binding term sheet with Resources Capital Management Corporation (“RCM”), Resources Capital Asset Recovery, L.L.C., Series DD and Series DR, Roseton OL LLC, Danskammer OL LLC, Roseton OP LLC and Danskammer OP LLC (collectively with RCM, the “PSEG Entities”), as the owners and lessors of the Roseton and a portion of Danskammer facilities, to settle and resolve issues among them in lieu of further litigation, regarding, among other things, the Roseton and Danskammer leases and all of the parties’ rights and claims arising under the related lease documents, including certain tax indemnity agreements (the “PSEG Settlement”).

On December 20, 2011, the Bankruptcy Court entered a stipulated order (as amended by a stipulated order entered by the Bankruptcy Court on December 28, 2011) approving the rejection of the Roseton and Danskammer leases subject to certain conditions. The DH Debtor Entities have operated and plan to continue operating the leased facilities until such facilities can be sold in accordance with the terms of the Agreements (as defined below) and in compliance with applicable federal and state regulatory requirements. Please read the section entitled “Settlement Agreement and Plan Support Agreement” below for further discussion.

Adversary Proceeding and Examiner Report.    On November 11, 2011, U.S. Bank National Association (“U.S. Bank”), in its capacity as successor lease indenture trustee (the “Lease Trustee”) under the Indenture of Trust, Mortgage, Assignment of Leases and Rents and Security Agreement related to Roseton Units 1 and 2, dated as of May 8, 2001, and the Indenture of Trust, Mortgage, Assignment of Leases and Rents and Security Agreement related to Danskammer Units 3 and 4, dated as of May 8, 2001 (collectively, the “Lease Indentures”), commenced an adversary proceeding against Dynegy Danskammer, L.L.C. (“Dynegy Danskammer”), Dynegy Roseton, L.L.C (“Dynegy Roseton”) and DH (the “Adversary Proceeding”). The Lease Indentures govern the terms of the notes issued by Roseton OL LLC and Danskammer OL LLC, as owner lessors of the Facilities, to the pass through trust established under the Roseton-Danskammer 2001-Series B Pass Through Trust Agreement, dated as of May 1, 2001 (the “Pass Through Trust Agreement”). The Adversary Proceeding sought, among other things, a declaration that: (i) the leases of the Facilities to Dynegy Roseton and Dynegy Danskammer are not leases of real property; (ii) the leases are financings, not leases; (iii) notwithstanding the lease rejection claims, claims arising from DH’s guaranty of certain of the Facilities’ lease obligations are not subject to a cap pursuant to section 502(b)(6) of the Bankruptcy Code; and (iv)  a determination of the allowed amount of the Lease Trustee’s claims against Dynegy Danskammer, Dynegy Roseton, and DH.

Dynegy Danskammer, Dynegy Roseton and DH contested the claims made in the Adversary Proceeding, including the attempt to recharacterize the leases of the Facilities as financings and not as leases of real property and the applicability of Section 502(b)(6) of the Bankruptcy Code. The parties to the Adversary Proceeding filed motions seeking judgment on the pleadings and subsequently agreed to an informal stay of the proceedings, pending further settlement negotiations among the parties as discussed below under  “Settlement Agreement and Plan Support Agreement.”

On November 11, 2011, the Lease Trustee also filed a motion with the Bankruptcy Court seeking the appointment of an examiner. On December 29, 2011, the Bankruptcy Court entered an order directing the appointment of the examiner (the “Examiner”), which order provided, among other things, that the Examiner investigate (i) the DH Debtor Entities’ conduct in connection with the prepetition 2011 restructuring and reorganization of the DH Debtor Entities and their non-debtor affiliates (the “Prepetition Restructurings”), (ii) any possible fraudulent conveyances and (iii) whether DH was capable of confirming a Chapter 11 plan of reorganization.  On March 9, 2012, the Examiner filed a report with the Bankruptcy Court and on March 20, 2012, Dynegy filed a preliminary response to such report.

All disputes and claims related to the Adversary Proceeding or otherwise related to the rejection of the Lease Documents have been resolved by the Settlement Agreement.  Upon the effectiveness of the Settlement Agreement, the Adversary Proceeding was dismissed with prejudice and any potential claims relating to or arising from disputes with respect to, among

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended June 30, 2012 and 2011

other things, the Adversary Proceeding and the Lease Documents were released.  In addition, pursuant to the Settlement Agreement, Dynegy, DH and the other settling parties have released any potential claims relating to or arising from disputes with respect to the matters investigated by the Examiner, including, among other things, the Prepetition Restructurings and including, without limitation, any claims that have been or could have been brought in connection with the transfer of the membership interests in Coal Holdco to Dynegy, the Undertaking Agreement or the DH note, described in Note 20-Related Party Transactions-Transactions with DH-DMG Transfer and Undertaking Agreement in our Form 10-K.

Settlement Agreement and Plan Support Agreement.   On May 1, 2012, Dynegy, DGIN, Coal Holdco, the DH Debtor Entities, certain beneficial holders of approximately $1.9 billion of DH’s outstanding senior notes (the “Consenting Senior Noteholders”), the PSEG Entities and the Lease Trustee, as directed by a majority of, and on behalf of all holders of those certain pass through trust certificates issued pursuant to the Pass Through Trust Agreement (the “Lease Certificate Holders” and, collectively the “Original Settlement Parties”) entered into a settlement agreement (the Original Settlement Agreement”). On May 30, 2012, the Original Settlement Parties, holders of a majority of the outstanding subordinated notes (the “Consenting Sub Debt Holders”) and, solely with respect to certain sections of the Settlement Agreement (as defined below), the successor trustee under DH’s subordinated notes indenture (“Wells Fargo” and collectively, with the Original Settlement Parties and the Consenting Sub Debt Holders, the “Settlement Parties”) entered into an amended and restated settlement agreement (the “Settlement Agreement”).

Also on May 1, 2012, Dynegy, DGIN, Coal Holdco, the Debtor Entities, the Consenting Senior Noteholders, the PSEG Entities and certain Lease Certificate Holders (the “Consenting Lease Certificate Holders”) entered into a plan support agreement (the “Original Plan Support Agreement”).  On May 30, 2012, the parties to the Original Plan Support Agreement entered into an amended and restated plan support agreement including the Consenting Sub Debt Holders (the “Plan Support Agreement” and, together with the Settlement Agreement, the “Agreements”), providing for, among other things, the treatment of claims and certain rights and obligations of the supporting creditor parties as well as the Consenting Senior Noteholders thereunder.  Additionally, pursuant to the Plan Support Agreement,  Dynegy and DH each agreed, subject to the terms of the Plan Support Agreement, to amend the then existing plan of reorganization for DH to reflect the terms contained in the Plan Support Agreement.  On July 31, 2012, as provided for in the Disclosure Statement, Dynegy, DH, the Consenting Senior Noteholders, the Consenting Lease Certificate Holders and RCM (the “Amendment Parties) entered into the First Amendment to the Plan Support Agreement (the “First Amendment”).  The First Amendment makes certain modifications and conforming changes to the Plan Support Agreement related to the modifications made to the Plan (as defined below) in connection with the filing of the Dynegy Chapter 11 Case. The material terms of the Plan are described below under the heading “Plan of Reorganization.” As of the date of the Original Plan Support Agreement, the earlier noteholder restructuring support agreement, dated November 7, 2011, which was amended and restated on December 26, 2011, was terminated.

The Bankruptcy Court entered an order approving the Settlement Agreement on June 1, 2012 (the “Approval Order”) and the Settlement Agreement became effective on June 5, 2012 (the “Settlement Effective Date”).  Pursuant to the Settlement Agreement, Dynegy and DH entered into a Contribution and Assignment Agreement (the “Contribution Agreement”), pursuant to which Dynegy and DH undertook the Coal Holdco Transfer.   In full consideration for such contribution and in accordance with the terms of the Settlement Agreement and the Approval Order, (i) Dynegy has received an allowed administrative claim pursuant to sections 503(b) and 507(a) of the Bankruptcy Code in an unliquidated amount against DH in the DH Chapter 11 Cases (the  “Administrative Claim”), (ii) the Prepetition Litigation (as defined below), the Adversary Proceeding and the affiliate payable to DH were dismissed with prejudice or released and (iii) the parties to the Settlement Agreement issued and received the releases set forth in the Settlement Agreement and described above under “—Adversary Proceeding and Examiner Report.”  Also pursuant to the Settlement Agreement on June 5, 2012, the Undertaking Agreement and the DH note were terminated with no further obligations thereunder.

Plan of Reorganization.    On December 1, 2011, Dynegy and DH, as co-plan proponents (the “Plan Proponents”), filed a proposed Chapter 11 plan of reorganization and a related disclosure statement for DH with the Bankruptcy Court, which was subsequently amended and filed with the Bankruptcy Court on each of January 19, 2012, March 6, 2012 and June 8, 2012,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended June 30, 2012 and 2011

as the proposed amended plan, the proposed second amended plan and the proposed third amended plan of reorganization for DH.  On June 18, 2012, the Plan Proponents filed a proposed modified third amended plan of reorganization (the “Third Amended Plan”) and related disclosure statement (the “Third Amended Disclosure Statement”) for DH with the Bankruptcy Court. Like earlier versions, the Third Amended Plan addressed claims against and interests in DH and Dynegy only and did not address claims against and interests in the other DH Debtor Entities. On July 3, 2012, in the DH Chapter 11 Cases, the Bankruptcy Court entered an order (i) approving (a) the Third Amended Disclosure Statement, (b) solicitation and voting procedures and (ii) scheduling the plan confirmation process (the “DH Disclosure Statement Order”), which authorized DH and Dynegy, in the event Dynegy later commenced a Chapter 11 case in the Bankruptcy Court, among other things, to modify the Third Amended Plan and Third Amended Disclosure Statement as necessary to constitute a plan of reorganization and disclosure statement for both DH and Dynegy, as debtors.

On July 6, 2012, upon the commencement of the Dynegy Chapter 11 Case, Dynegy submitted a first day motion to the Bankruptcy Court seeking to have certain relief entered in the DH Chapter 11 Cases made applicable to the Dynegy Chapter 11 Case, including the DH Disclosure Statement Order.  On July 10, 2012, the Bankruptcy Court entered an order in the Dynegy Chapter 11 Case (i) approving (a) the Third Amended Disclosure Statement, (b) solicitation and voting procedures and (ii) scheduling the plan confirmation process in the Dynegy Chapter 11 Case (the “Dynegy Disclosure Statement Order,” and together with the DH Disclosure Statement Order, the “Disclosure Statement Orders”), which, among other things, authorized DH and Dynegy to modify the Third Amended Plan and Third Amended Disclosure Statement as necessary to constitute a plan of reorganization and disclosure statement for both DH and Dynegy, as debtors.

In accordance with the Disclosure Statement Orders, Dynegy and DH (together, the “Plan Debtors”) made certain modifications to the Third Amended Plan (as so modified, the “Plan”) and the Third Amended Disclosure Statement (as so modified, the “Disclosure Statement”), to reflect the commencement of the Dynegy Chapter 11 Case and to have them constitute a plan of reorganization and disclosure statement for both Plan Debtors.  On July 12, 2012, the Plan and Disclosure Statement were filed with the Bankruptcy Court [Dynegy Case Docket No. 28; DH Case Docket No. 861] and the Plan Debtors commenced solicitation of votes to accept or reject the proposed Plan in accordance with the Disclosure Statement Orders.

The material terms of the Plan have been agreed upon by Dynegy, DH, a majority of the Consenting Senior Noteholders, the Consenting Sub Debt Holders, the Lease Trustee and the official committee of creditors holding unsecured claims appointed in the DH Chapter 11 Cases (the “Creditors’ Committee”) and include, among other things:

·      on or prior to the effective date of the Plan (such date, the “Effective Date”), Dynegy and DH will be merged (the entity surviving such merger being the “Surviving Entity”) and, by virtue of the Merger, all DH equity interests issued and outstanding immediately prior to the effective time of the Merger will be canceled;

·      the initial Board of Directors of the Surviving Entity will be selected pursuant to a process agreed upon among a majority of the Consenting Senior Noteholders, the Lease Trustee and the Creditors’ Committee with existing Board members eligible for service on the new Board of the Surviving Entity;

·      holders of allowed general unsecured claims will receive their pro rata share of: (a) 99% of the fully-diluted common shares of the Surviving Entity to be outstanding immediately following the Plan Effective Date (subject to dilution), (b) any amounts to which they may be entitled as a result of the sale of the Facilities, and (c) a cash payment of $200 million;

·      holders of equity interests in Dynegy, DH or the Surviving Entity shall not receive any distribution or retain any interest or property under the Plan on account of such holder’s equity interest; and

·      the Administrative Claim will be satisfied in full under the Plan with: (a) 1.0% of the fully-diluted common shares of the Surviving Entity to be outstanding immediately following the Effective Date (subject to dilution by the Warrants (as defined below) and options, restricted stock or other equity interests issued as equity compensation to officers, employees or directors of the Surviving Entity or its affiliates), (b) warrants to purchase  an aggregate of 13.5% of the fully-diluted common shares of the Surviving Entity (the “Warrants”) (subject to dilution) for an exercise price to be determined based on a net equity value of the Surviving Entity of $4 billion, and containing customary anti-dilution adjustments, as provided in the Settlement Agreement.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended June 30, 2012 and 2011

The parties to the Plan Support Agreement as amended by the First Amendment (the “Amended Plan Support Agreement”) agreed to use their commercially reasonable efforts to support the Plan and complete the transactions contemplated thereby.

The consummation of the Plan is contingent upon a number of factors including, among other things, that the Plan may not be confirmed by the Bankruptcy Court .  Further, the Amended Plan Support Agreement may be terminated if the Settlement Agreement terminates or if certain milestones established with respect to certain actions in the Chapter 11 Cases are not satisfied (such as the failure of the Bankruptcy Court to enter an order confirming the Plan on or prior to September 21, 2012) or if a “Non-Conforming Plan Assertion” (as defined in the Amended Plan Support Agreement) is made and the Bankruptcy Court determines that the Plan is not a “Conforming Plan” (as defined in the Amended Plan Support Agreement) because of claims asserted against Dynegy.

Accounting Impact.  Upon effectiveness of the Settlement Agreement on June 5, 2012 , we recognized a loss on the Coal Holdco Transfer of approximately $941 million.  The Settlement Agreement resulted in the termination of the Undertaking payable to DH and the Affiliate payable to DH.  In addition, we received the Administrative Claim.

The loss on the Coal Holdco Transfer represents the difference in (i) the carrying value of the Undertaking payable to DH of $1.25 billion, (ii) the carrying value of the Affiliate payable to DH of approximately $863 million, and (iii) the fair value of the Administrative Claim received in the transfer of approximately $64 million less the carrying value of our Coal segment of approximately $3.12 billion.   The fair value of the Administrative Claim was recorded as an additional investment in DH. Please read Note 5—Fair Value Measurements and Note 7—Variable Interest Entities for further discussion.

As a result of the Coal Holdco Transfer, we currently have no operating assets and our primary asset is our 100 percent equity ownership of DH.

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 rates.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended June 30, 2012 and 2011

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.

Many of our contractual arrangements are derivative instruments and are accounted for at fair value as part of Revenues in our unaudited condensed consolidated statements of operations.  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 delivery occurs.  Currently, we have chosen not to designate any of our derivatives as cash flow hedges nor fair value hedges.

Quantitative Disclosures Related to Financial Instruments and Derivatives

Derivatives on the Balance Sheet.  As a result of the Coal Holdco Transfer, we do not have any derivatives in our June 30, 2012 unaudited condensed consolidated balance sheet.  The following table presents the fair value and balance sheet classification of derivatives in the condensed consolidated balance sheet as of December 31, 2011 segregated by type of contract segregated by assets and liabilities.

Impact of Derivatives on the Consolidated Statements of Operations

For the three-month period ended June 30, 2012, our revenues included approximately $21 million of mark-to-market losses related to this activity compared to $129 million of mark-to-market losses in the same period in the prior year.  For the six-month period ended June 30, 2012, our revenues included approximately $9 million of mark-to-market gains related to this activity compared to $127 million of mark-to-market losses in the same period in the prior year.

The impact of derivative financial instruments on our unaudited condensed consolidated statements of operations for the six months ended June 30, 2012 and 2011 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.

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(Unaudited)

For the Interim Periods Ended June 30, 2012 and 2011

Note 5—Fair Value Measurements

Due to the Coal Holdco Transfer on June 5, 2012, we have no financial assets or liabilities as of June 30, 2012.  The following tables set forth by level within the fair value hierarchy our financial assets and liabilities, including transactions with affiliates, that were accounted for at fair value on a recurring basis as of December 31, 2011.    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 assets and liabilities and their placement within the fair value hierarchy levels.

We primarily apply the market approach for recurring fair value measurements.  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

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(Unaudited)

For the Interim Periods Ended June 30, 2012 and 2011

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.

The finance organization monitors commodity risk through the CRCG.  Our EMT monitors interest rate risk.  The EMT has delegated the responsibility for managing interest rate risk to the Chief Financial Officer.  The CRCG is independent of our commercial operations and has direct access to the Audit and Compliance Committee. The Finance and Risk Management Committee, chaired by the Chief Financial Officer, meets periodically and is responsible for reviewing our overall day-to-day energy commodity risk exposure as measured against the limits established in our Commodity Risk Policy.

Each quarter, as part of its internal control processes, representatives from the CRCG review the methodology and assumptions behind the pricing of the forward curves.  As part of this review, liquidity periods are established based on third party market information, the basis relationship between direct and derived curves is evaluated, and changes are made to the forward power model assumptions.

The CRCG reviews changes in value on a daily basis through the use of various reports.  The pricing for power, natural gas and fuel oil curves is automatically entered into our commercial system nightly based on data received from our market data provider.  The CRCG reviews the data provided by the market data provider by utilizing third party broker quotes for comparison purposes.  In addition, our traders are required to review various reports to ensure accuracy on a daily basis.

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:

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended June 30, 2012 and 2011

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended June 30, 2012 and 2011

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 current financial assets and liabilities such as cash, accounts receivable, and accounts payable not presented in the table below, approximate fair values due to the short-term maturities of these instruments. The $870 million non-current Accounts payable, affiliate balance with DH, as of December 31, 2011, does not have a fair value as there are no defined settlement terms, it is not evidenced by any promissory note and there has never been an intent for payment to occur. The Accounts payable, affiliate balance with DH was fully released on June 5, 2012, the Settlement Agreement Effective Date. Please read Note 15—Related Party Transactions—Transactions with DH—Accounts payable, affiliate for further discussion. Unless otherwise noted, the fair value of debt as reflected in the table has been calculated based on the average of certain available broker quotes for the period ended December 31, 2011. Due to the Coal Holdco Transfer and the termination of the Undertaking Agreement as of June 5, 2012 as a result of the Settlement Agreement and settlement of the Accounts payable, affiliate, we have no financial instruments as of June 30, 2012.

(1)          Included in both current and non-current assets and liabilities on the consolidated balance sheets.

(2)          The fair value of the Undertaking payable to DH is classified within Level 3 of the fair value hierarchy.  Our December 31, 2011 estimate of the fair value of the Undertaking payable to DH represents the $750 million fair value of the Undertaking as of November 7, 2011, less the $22 million payment in December 2011. Pursuant to the Settlement Agreement on June 5, 2012, the Undertaking Agreement was terminated.

(3)          Carrying amount includes unamortized discounts of $11 million at December 31, 2011.

Nonfinancial Assets and Liabilities.  We recorded the Administrative Claim received in the Coal Holdco Transfer at its estimated fair value of $64 million.  We estimated the fair value of the Administrative Claim using the market capitalization of Dynegy as of the date of the Coal Holdco Transfer.   We believe the market capitalization of Dynegy represents a reasonable estimate of the fair value of the Administrative Claim because the current holders of Dynegy’s common stock will be the beneficiaries of the Administrative Claim upon DH’s emergence from bankruptcy. The fair value of the Administrative Claim is classified within Level 3 of the fair value hierarchy.   Please read Note 3—Chapter 11 Cases for further discussion.

There were no other nonfinancial assets and liabilities measured at fair value on a nonrecurring basis during the three and six months ended June 30, 2012 or 2011.

Note 6—Accumulated Other Comprehensive Loss

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

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended June 30, 2012 and 2011