Edgar Filing: DYNEGY HOLDINGS INC

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2009

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

For the transition period from ________ to ________

DYNEGY INC.

DYNEGY HOLDINGS INC.

(Exact name of registrant as specified in its charter)

Entity	Commission File Number	State of Incorporation	I.R.S. Employer Identification No.
Dynegy Inc.	001-33443	Delaware	20-5653152
Dynegy Holdings Inc.	000-29311	Delaware	94-3248415


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.

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

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

Dynegy Inc.	Yes ¨ No ¨
Dynegy Holdings Inc.	Yes ¨ No ¨

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

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

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

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

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

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

DYNEGY INC. and DYNEGY HOLDINGS INC.

TABLE OF CONTENTS

			Page
PART I. FINANCIAL INFORMATION

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

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

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

PART II. OTHER INFORMATION

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

EXPLANATORY NOTE

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

Table of Contents

DEFINITIONS

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

APB	Accounting Principles Board
BTA	Best technology available
Cal ISO	The California Independent System Operator
CARB	California Air Resources Board
CDWR	California Department of Water Resources
CEC	California Energy Commission
CFTC	Commodity Futures Trading Commission
CO2	Carbon Dioxide
CRM	Our former customer risk management business segment
CUSA	Chevron U.S.A. Inc., a wholly owned subsidiary of Chevron Corporation
DHI	Dynegy Holdings Inc., Dynegy’s primary financing subsidiary
DMG	Dynegy Midwest Generation, Inc.
DMSLP	Dynegy Midstream Services L.P.
EITF	Emerging Issues Task Force
EPA	Environmental Protection Agency
FASB	Financial Accounting Standards Board
FERC	Federal Energy Regulatory Commission
FIN	FASB Interpretation
FSP	FASB Staff Position
GAAP	Generally Accepted Accounting Principles of the United States of America
GEN	Our power generation business
GEN-MW	Our power generation business - Midwest segment
GEN-NE	Our power generation business - Northeast segment
GEN-WE	Our power generation business - West segment
GHG	Greenhouse Gas
ICC	Illinois Commerce Commission
IMA	In-market asset availability
ISO	Independent System Operator
LNG	Liquefied natural gas
MISO	Midwest Independent Transmission Operator, Inc.
MMBtu	One million British thermal units
MW	Megawatts
MWh	Megawatt hour
NPDES	National Pollutant Discharge Elimination System
NRG	NRG Energy, Inc.
NYSDEC	New York State Department of Environmental Conservation
PJM	PJM Interconnection, LLC
PPEA	Plum Point Energy Associates, LLC
PUHCA	Public Utility Holding Company Act of 1935, as amended
RGGI	Regional Greenhouse Gas Initiative
RSG	Revenue Sufficiency Guarantee
SCEA	Sandy Creek Energy Associates, LP
SCH	Sandy Creek Holdings LLC
SEC	U.S. Securities and Exchange Commission
SFAS	Statement of Financial Accounting Standards
SPDES	State Pollutant Discharge Elimination System
VaR	Value at Risk
VIE	Variable Interest Entity

Table of Contents

PART I. FINANCIAL INFORMATION

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

DYNEGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited) (in millions, except share data)

	March 31, 2009			December 31, 2008
ASSETS
Current Assets
Cash and cash equivalents	$	722		$	693
Restricted cash and investments		118			87
Short-term investments		8			25
Accounts receivable, net of allowance for doubtful accounts of $22 and $22, respectively		232			340
Accounts receivable, affiliates		1			1
Inventory		185			184
Assets from risk-management activities		1,531			1,263
Deferred income taxes		—			6
Prepayments and other current assets		243			204
Assets held for sale		96			—
Total Current Assets		3,136			2,803
Property, Plant and Equipment		10,801			10,869
Accumulated depreciation		(1,947	)		(1,935	)
Property, Plant and Equipment, Net		8,854			8,934
Other Assets
Unconsolidated investments		—			15
Restricted cash and investments		1,159			1,158
Assets from risk-management activities		214			114
Goodwill		—			433
Intangible assets		438			437
Accounts receivable, affiliates		6			4
Other long-term assets		324			315
Total Assets	$	14,131		$	14,213

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	158		$	303
Accrued interest		125			56
Accrued liabilities and other current liabilities		199			160
Liabilities from risk-management activities		1,250			1,119
Notes payable and current portion of long-term debt		64			64
Deferred income taxes		8			—
Liabilities held for sale		11			—
Total Current Liabilities		1,815			1,702
Long-term debt		5,898			5,872
Long-term debt, affiliates		200			200
Long-Term Debt		6,098			6,072
Other Liabilities
Liabilities from risk-management activities		314			288
Deferred income taxes		1,236			1,166
Other long-term liabilities		488			500
Total Liabilities		9,951			9,728
Commitments and Contingencies (Note 12)
Stockholders’ Equity
Class A Common Stock, $0.01 par value, 2,100,000,000 shares authorized at March 31, 2009 and December 31, 2008; 506,745,083 and 505,821,277 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively		5			5
Class B Common Stock, $0.01 par value, 850,000,000 shares authorized at March 31, 2009 and December 31, 2008; 340,000,000 shares issued and outstanding at March 31, 2009 and December 31, 2008		3			3
Additional paid-in capital		6,486			6,485
Subscriptions receivable		(2	)		(2	)
Accumulated other comprehensive loss, net of tax		(212	)		(215	)
Accumulated deficit		(2,025	)		(1,690	)
Treasury stock, at cost, 2,679,210 and 2,568,286 shares at March 31, 2009 and December 31, 2008, respectively		(71	)		(71	)
Total Dynegy Inc. Stockholders’ Equity		4,184			4,515
Noncontrolling interest		(4	)		(30	)
Total Stockholders’ Equity		4,180			4,485
Total Liabilities and Stockholders’ Equity	$	14,131		$	14,213

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 March 31,
	2009			2008
Revenues	$	904		$	543
Cost of sales		(381	)		(451	)
Operating and maintenance expense, exclusive of depreciation and amortization shown separately below		(122	)		(111	)
Depreciation and amortization expense		(92	)		(92	)
Goodwill impairments		(433	)		—
Impairment and other charges, exclusive of goodwill impairments shown separately above		(5	)		—
General and administrative expenses		(38	)		(39	)

Operating loss		(167	)		(150	)
Earnings (losses) from unconsolidated investments		8			(9	)
Interest expense		(98	)		(109	)
Other income and expense, net		4			20

Loss from continuing operations before income taxes		(253	)		(248	)
Income tax (expense) benefit (Note 14)		(85	)		96

Loss from continuing operations		(338	)		(152	)
Income from discontinued operations, net of tax benefit of zero and $1, respectively (Notes 2 and 14)		1			—

Net loss		(337	)		(152	)
Less: Net loss attributable to the noncontrolling interest		(2	)		—

Net loss attributable to Dynegy Inc.	$	(335	)	$	(152	)

Loss Per Share (Note 11):
Basic loss per share:
Loss from continuing operations attributable to Dynegy Inc.	$	(0.40	)	$	(0.18	)
Income from discontinued operations attributable to Dynegy Inc.		—			—

Basic loss per share attributable to Dynegy Inc.	$	(0.40	)	$	(0.18	)

Diluted loss per share:
Loss from continuing operations attributable to Dynegy Inc.	$	(0.40	)	$	(0.18	)
Income from discontinued operations attributable to Dynegy Inc.		—			—

Diluted loss per share attributable to Dynegy Inc.	$	(0.40	)	$	(0.18	)

Basic shares outstanding		841			839
Diluted shares outstanding		843			841

See the notes to condensed consolidated financial statements.

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DYNEGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited) (in millions)

	Three Months Ended March 31,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(337	)	$	(152	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization		94			94
Goodwill impairments		433			—
Impairment and other charges		5			—
(Earnings) losses from unconsolidated investments, net of cash distributions		(8	)		9
Risk-management activities		(168	)		280
Deferred income taxes		79			(95	)
Other		16			—
Changes in working capital:
Accounts receivable		56			36
Inventory		(6	)		14
Prepayments and other assets		(38	)		(55	)
Accounts payable and accrued liabilities		42			18
Changes in non-current assets		(7	)		(7	)
Changes in non-current liabilities		4			4

Net cash provided by operating activities		165			146

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(138	)		(131	)
Unconsolidated investments		1			(6	)
Proceeds from asset sales, net		—			57
Decrease in short-term investments		8			—
Increase in restricted cash		(32	)		(25	)
Other investing		—			10

Net cash used in investing activities		(161	)		(95	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings, net		25			51
Other financing, net		—			(1	)

Net cash provided by financing activities		25			50

Net increase in cash and cash equivalents		29			101
Cash and cash equivalents, beginning of period		693			328

Cash and cash equivalents, end of period	$	722		$	429

Other non-cash investing activity:
Non-cash capital expenditures	$	23		$	9

See the notes to condensed consolidated financial statements.

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DYNEGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited) (in millions)

	Three Months Ended March 31,
	2009			2008

Net loss	$	(337	)	$	(152	)
Cash flow hedging activities, net:
Unrealized mark-to-market gains (losses) arising during period, net		34			(26	)
Reclassification of mark-to-market losses to earnings, net		—			8
Deferred losses on cash flow hedges, net		(3	)		—

Changes in cash flow hedging activities, net (net of tax (expense) benefit of $(9) and $5, respectively)		31			(18	)
Amortization of unrecognized prior service cost and actuarial loss (net of tax expense of $2 and zero)		(1	)		—
Net unrealized loss on securities, net (net of tax benefit of zero and $3, respectively)		—			(4	)
Unconsolidated investments other comprehensive loss, net (net of tax expense of $1 and zero)		1			—

Other comprehensive income (loss), net of tax		31			(22	)

Comprehensive loss		(306	)		(174	)
Less: Comprehensive income (loss) attributable to the noncontrolling interest		26			(11	)

Comprehensive loss attributable to Dynegy Inc.	$	(332	)	$	(163	)

See the notes to condensed consolidated financial statements.

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DYNEGY HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited) (in millions)

	March 31, 2009			December 31, 2008
ASSETS
Current Assets
Cash and cash equivalents	$	539		$	670
Restricted cash and investments		118			87
Short-term investments		8			24
Accounts receivable, net of allowance for doubtful accounts of $20 and $20, respectively		234			343
Accounts receivable, affiliates		1			1
Inventory		185			184
Assets from risk-management activities		1,531			1,263
Deferred income taxes		—			4
Prepayments and other current assets		243			204
Assets held for sale		96			—
Total Current Assets		2,955			2,780
Property, Plant and Equipment		10,801			10,869
Accumulated depreciation		(1,947	)		(1,935	)
Property, Plant and Equipment, Net		8,854			8,934
Other Assets
Restricted cash and investments		1,159			1,158
Assets from risk-management activities		214			114
Goodwill		—			433
Intangible assets		438			437
Accounts receivable, affiliates		6			4
Other long-term assets		323			314
Total Assets	$	13,949		$	14,174

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	158		$	284
Accrued interest		125			56
Accrued liabilities and other current liabilities		193			157
Liabilities from risk-management activities		1,250			1,119
Notes payable and current portion of long-term debt		64			64
Deferred income taxes		10			1
Liabilities held for sale		11			—
Total Current Liabilities		1,811			1,681
Long-term debt		5,898			5,872
Long-term debt, affiliates		200			200
Long-Term Debt		6,098			6,072
Other Liabilities
Liabilities from risk-management activities		314			288
Deferred income taxes		1,103			1,052
Other long-term liabilities		487			498
Total Liabilities		9,813			9,591
Commitments and Contingencies (Note 12)
Stockholders' Equity
Capital Stock, $1 par value, 1,000 shares authorized at March 31, 2009 and December 31, 2008		—			—
Additional paid-in capital		5,545			5,684
Affiliate receivable		(829	)		(827	)
Accumulated other comprehensive loss, net of tax		(212	)		(215	)
Accumulated deficit		(364	)		(29	)
Total Dynegy Holdings Inc. Stockholder’s Equity		4,140			4,613
Noncontrolling interest		(4	)		(30	)
Total Stockholders’ Equity		4,136			4,583
Total Liabilities and Stockholders’ Equity	$	13,949		$	14,174

See the notes to condensed consolidated financial statements.

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DYNEGY HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited) (in millions)

	Three Months Ended March 31,
	2009			2008
Revenues	$	904		$	543
Cost of sales		(381	)		(451	)
Operating and maintenance expense, exclusive of depreciation and amortization shown separately below		(124	)		(111	)
Depreciation and amortization expense		(92	)		(92	)
Goodwill impairments		(433	)		—
Impairment and other charges, exclusive of goodwill impairments shown separately above		(5	)		—
General and administrative expenses		(38	)		(39	)

Operating loss		(169	)		(150	)
Earnings (losses) from unconsolidated investments		7			(5	)
Interest expense		(98	)		(109	)
Other income and expense, net		4			20

Loss from continuing operations before income taxes		(256	)		(244	)
Income tax (expense) benefit (Note 14)		(82	)		91

Loss from continuing operations		(338	)		(153	)
Income from discontinued operations, net of tax benefit of zero and $1, respectively (Notes 2 and 14)		1			—

Net loss		(337	)		(153	)
Less: Net loss attributable to the noncontrolling interest		(2	)		—

Net loss attributable to Dynegy Holdings Inc.	$	(335	)	$	(153	)

See the notes to condensed consolidated financial statements.

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DYNEGY HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited) (in millions)

	Three Months Ended March 31,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(337	)	$	(153	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization		94			94
Goodwill impairments		433			—
Impairment and other charges		5			—
(Earnings) losses from unconsolidated investments, net of cash distributions		(7	)		5
Risk-management activities		(168	)		280
Deferred income taxes		80			(90	)
Other		16			(1	)
Changes in working capital:
Accounts receivable		56			36
Inventory		(6	)		14
Prepayments and other assets		(38	)		(55	)
Accounts payable and accrued liabilities		58			19
Changes in non-current assets		(7	)		(6	)
Changes in non-current liabilities		4			3

Net cash provided by operating activities		183			146

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(138	)		(131	)
Proceeds from asset sales, net		—			57
Decrease in short-term investments		8			—
Increase in restricted cash		(32	)		(25	)
Affiliate transactions		(2	)		1
Other investing		—			6

Net cash used in investing activities		(164	)		(92	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings, net		25			51
Dividend to affiliate		(175	)		—
Other financing, net		—			(1	)

Net cash provided by (used in) financing activities		(150	)		50

Net increase (decrease) in cash and cash equivalents		(131	)		104
Cash and cash equivalents, beginning of period		670			292

Cash and cash equivalents, end of period	$	539		$	396

Other non-cash investing activity:
Non-cash capital expenditures	$	23		$	9

See the notes to condensed consolidated financial statements.

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DYNEGY HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited) (in millions)

	Three Months Ended March 31,
	2009			2008

Net loss	$	(337	)	$	(153	)
Cash flow hedging activities, net:
Unrealized mark-to-market gains (losses) arising during period, net		34			(26	)
Reclassification of mark-to-market losses to earnings, net		—			8
Deferred losses on cash flow hedges, net		(3	)		—

Changes in cash flow hedging activities, net (net of tax (expense) benefit of $(9) and $5, respectively)		31			(18	)
Amortization of unrecognized prior service cost and actuarial loss (net of tax expense of $2 and zero)		(1	)		—
Net unrealized loss on securities, net (net of tax benefit of zero and $3, respectively)		—			(4	)
Unconsolidated investments other comprehensive loss, net (net of tax expense of $1 and zero)		1			—

Other comprehensive income (loss), net of tax		31			(22	)

Comprehensive loss		(306	)		(175	)
Less: Comprehensive income (loss) attributable to the noncontrolling interest		26			(11	)

Comprehensive loss attributable to Dynegy Holdings Inc.	$	(332	)	$	(164	)

See the notes to condensed consolidated financial statements.

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DYNEGY INC. and DYNEGY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended March 31, 2009 and 2008

Note 1—Accounting Policies

Basis of Presentation

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

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

Accounting Principles Adopted

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

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

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

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DYNEGY INC. and DYNEGY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended March 31, 2009 and 2008

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

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

Accounting Principle Not Yet Adopted

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

Note 2—Discontinued Operations

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

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

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

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

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

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DYNEGY INC. and DYNEGY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended March 31, 2009 and 2008

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

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

Three Months Ended March 31, 2008
Revenues	$	2	$	—		$	2
Loss on sale before taxes		—		(1	)		(1	)
Loss on sale after taxes		—		—			—

Note 3—Noncontrolling Interests

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

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

Net loss	$	(335	)	$	(152	)	$	(335	)	$	(153	)

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DYNEGY INC. and DYNEGY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended March 31, 2009 and 2008

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

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

March 31, 2009	$	4,184		$	(4	)	$	4,180

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

March 31, 2008	$	4,350		$	12		$	4,362

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DYNEGY INC. and DYNEGY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended March 31, 2009 and 2008

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

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

March 31, 2009	$	4,140		$	(4	)	$	4,136

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

March 31, 2008	$	4,438		$	12		$	4,450

Note 4—Risk Management Activities, Derivatives and Financial Instruments

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

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DYNEGY INC. and DYNEGY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended March 31, 2009 and 2008

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

Quantitative Disclosures Related to Financial Instruments and Derivatives

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

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

Contact Type	Hedge Designation	Quantity (in millions)			Unit of Measure	Net Fair Value (in millions)

Commodity contracts:
Electric energy	Not designated		(68	)	MW	$	364
Natural gas	Not designated		199		MMBtu	$	12
Other	Not designated		2		Misc.	$	(1	)

Interest rate contracts:
Interest rate swaps	Cash flow hedge		492		Dollars	$	(193	)
Interest rate swaps	Fair value hedge		25		Dollars	$	2
Interest rate swaps	Not designated		231		Dollars	$	(24	)
Interest rate swaps	Not designated		(206	)	Dollars	$	21

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DYNEGY INC. and DYNEGY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended March 31, 2009 and 2008

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

Contact Type	Balance Sheet Location	March 31, 2009			December 31, 2008
		(in millions)
Derivatives designated as hedging instruments under SFAS No. 133:
Derivative Assets:
Interest rate contracts	Assets from risk management activities	$	2		$	3
Derivative Liabilities:
Interest rate contracts	Liabilities from risk management activities		(193	)		(238	)
Other contracts	Liabilities from risk management activities		—			—
Total derivatives designated as hedging instruments under SFAS No. 133, net			(191	)		(235	)


Derivatives not designated as hedging instruments under SFAS No. 133:
Derivative Assets:
Commodity contracts	Assets from risk management activities		1,722			1,355
Interest rate contracts	Assets from risk management activities		21			19
Derivative Liabilities:
Commodity contracts	Liabilities from risk management activities		(1,347	)		(1,147	)
Interest rate contracts	Liabilities from risk management activities		(24	)		(22	)
Total derivatives not designated as hedging instruments under SFAS No. 133, net			372			205
Total derivatives, net		$	181		$	(30	)

Impact of Derivatives on the Consolidated Statements of Operations

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

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

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

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DYNEGY INC. and DYNEGY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended March 31, 2009 and 2008

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

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

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

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

Total	$	39	$	(26	)		$	—	$	(10	)

______________

(1)

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

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

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DYNEGY INC. and DYNEGY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended March 31, 2009 and 2008

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

Derivatives in SFAS

No. 133 Fair Value

Hedging

Location of Gain

(Loss)

Recognized in

Income on

Amount of Gain (Loss) Recognized in Income on Derivative for the Three Months Ended March 31,

Hedged Items in

SFAS No. 133

Fair Value

Hedge

Location of Gain

(Loss)

Recognized in

Income on Related

Amount of Gain (Loss) Recognized in Income on Related Hedged Items For the Three Months Ended March 31,

Relationships

Derivative

2009

2008

Relationship

Hedged Items

2009

2008

(in millions)

Interest rate contracts

Interest expense

—