form10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________

FORM 10-Q

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

For the quarterly period ended September 30, 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 T No £
Dynegy Holdings Inc.
Yes T 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.
  
T
  
£
  
£
  
£
Dynegy Holdings Inc.
  
£
  
£
  
T
  
£

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 T
Dynegy Holdings Inc.
Yes £ No T

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, 505,561,433 shares outstanding as of October 29, 2009; Class B common stock, $0.01 par value per share, 340,000,000 shares outstanding as of October 29, 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.:
  
     
 
4
 
5
 
6
 
7
 
8
 
9
 
10
 
11
12
     
Item 2.
54
Item 3.
87
Item 4.
89
     
PART II. OTHER INFORMATION
  
     
Item 1.
90
Item 1A.
90
Item 2.
90
Item 6.
90

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 nine-month period ended September 30, 2009 and constituting nearly 100 percent of Dynegy’s total consolidated asset base as of September 30, 2009.  Unless the context indicates otherwise, throughout this report, the terms “the Company”, “we”, “us”, “our” and “ours” are used to refer to both Dynegy and DHI and their direct and indirect subsidiaries.  Discussions or areas of this report that apply only to Dynegy or DHI are clearly noted in such section.

2

DEFINITIONS

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

 
ACES
The American Clean Energy and Security Act of 2009
 
APB
Accounting Principles Board
 
BTA
Best technology available
 
Cal ISO
The California Independent System Operator
 
CARB
California Air Resources Board
 
CAA
Clean Air Act
 
CCA
Coal combustion ash
 
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.
 
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
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
 
PSD
Prevention of significant deterioration
 
PUHCA
Public Utility Holding Company Act of 1935, as amended
 
RGGI
Regional Greenhouse Gas Initiative
 
RMR
Reliability Must Run
 
RSG
Revenue Sufficiency Guarantee
 
SCEA
Sandy Creek Energy Associates, LP
 
SCH
Sandy Creek Holdings LLC
 
SEC
U.S. Securities and Exchange Commission
 
SPDES
State Pollutant Discharge Elimination System
 
VaR
Value at Risk
 
VIE
Variable Interest Entity

3

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)

   
September 30,
2009
    
December 31,
2008
  
ASSETS
            
Current Assets
            
Cash and cash equivalents
   $ 703     $ 693  
Restricted cash and investments
     115       87  
Short-term investments
     2       25  
Accounts receivable, net of allowance for doubtful accounts of $22 and $22, respectively
     253       340  
Accounts receivable, affiliates
     1       1  
Inventory
     157       184  
Assets from risk-management activities
     927       1,263  
Deferred income taxes
     4       6  
Prepayments and other current assets
     339       204  
Assets held for sale
     1,273       —  
Total Current Assets
     3,774       2,803  
Property, Plant and Equipment
     8,895       10,869  
Accumulated depreciation
     (1,880 )     (1,935 )
Property, Plant and Equipment, Net
     7,015       8,934  
Other Assets
                
Unconsolidated investments
     —       15  
Restricted cash and investments
     1,164       1,158  
Assets from risk-management activities
     295       114  
Goodwill
     —       433  
Intangible assets
     399       437  
Accounts receivable, affiliates
     8       4  
Other long-term assets
     369       315  
Total Assets
   $ 13,024     $ 14,213  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current Liabilities
                
Accounts payable
   $ 231     $ 303  
Accrued interest
     124       56  
Accrued liabilities and other current liabilities
     149       160  
Liabilities from risk-management activities
     834       1,119  
Notes payable and current portion of long-term debt
     65       64  
Deferred income taxes
     8       —  
Liabilities associated with assets held for sale
     31       —  
Total Current Liabilities
     1,442       1,702  
Long-term debt
     5,928       5,872  
Long-term debt, affiliates
     200       200  
Long-Term Debt
     6,128       6,072  
Other Liabilities
                
Liabilities from risk-management activities
     313       288  
Deferred income taxes
     945       1,166  
Other long-term liabilities
     451       500  
Total Liabilities
   $ 9,279     $ 9,728  
Commitments and Contingencies (Note 13)
                
Stockholders’ Equity
                
Class A Common Stock, $0.01 par value, 2,100,000,000 shares authorized at September 30, 2009 and December 31, 2008; 508,175,228 and 505,821,277 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively
     5       5  
Class B Common Stock, $0.01 par value, 850,000,000 shares authorized at September 30, 2009 and December 31, 2008; 340,000,000 shares issued and outstanding at September 30, 2009 and December 31, 2008
     3       3  
Additional paid-in capital
     6,494       6,485  
Subscriptions receivable
     (2 )     (2 )
Accumulated other comprehensive loss, net of tax
     (179 )     (215 )
Accumulated deficit
     (2,582 )     (1,690 )
Treasury stock, at cost, 2,777,376 and 2,568,286 shares at September 30, 2009 and December 31, 2008, respectively
     (71 )     (71 )
Total Dynegy Inc. Stockholders’ Equity
     3,668       4,515  
Noncontrolling interests
     77       (30 )
Total Stockholders’ Equity
     3,745       4,485  
Total Liabilities and Stockholders’ Equity
   $ 13,024     $ 14,213  

See the notes to condensed consolidated financial statements.

4

DYNEGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) (in millions, except per share data)

   
Three Months Ended September 30,
    
Nine Months Ended September 30,
  
   
2009
    
2008
    
2009
    
2008
  
Revenues
   $ 673     $ 1,759     $ 2,027     $ 2,550  
Cost of sales
     (286 )     (498 )     (927 )     (1,326 )
Operating and maintenance expense, exclusive of depreciation shown separately below
     (121 )     (122 )     (373 )     (344 )
Depreciation and amortization expense
     (83 )     (85 )     (258 )     (258 )
Gain on sale of assets
     —       57       —       83  
Goodwill impairments
     —       —       (433 )     —  
Impairment and other charges, exclusive of goodwill impairments shown separately above
     (148 )     —       (535 )     —  
General and administrative expenses
     (42 )     (48 )     (125 )     (126 )
                                 
Operating income (loss)
     (7 )     1,063       (624 )     579  
Earnings (losses) from unconsolidated investments
     (8 )     (5 )     13       (17 )
Interest expense
     (115 )     (105 )     (311 )     (322 )
Other income and expense, net
     2       11       10       46  
                                 
Income (loss) from continuing operations before income taxes
     (128 )     964       (912 )     286  
Income tax benefit (expense) (Note 15)
     34       (392 )     147       (121 )
                                 
Income (loss) from continuing operations
     (94 )     572       (765 )     165  
Income (loss) from discontinued operations, net of tax (expense) benefit of $84, $(22), $91 and $(10), respectively (Note 2)
     (129 )     32       (141 )     13  
                                 
Net income (loss)
     (223 )     604       (906 )     178  
Less: Net loss attributable to the noncontrolling interests
     (11 )     (1 )     (14 )     (3 )
Net income (loss) attributable to Dynegy Inc.
   $ (212 )   $ 605     $ (892 )   $ 181  
                                 
Earnings (Loss) Per Share (Note 12):
                                
Basic earnings (loss) per share attributable to Dynegy Inc. common stockholders:
                                
Earnings (loss) from continuing operations
   $ (0.10 )   $ 0.68     $ (0.89 )   $ 0.20  
Income (loss) from discontinued operations
     (0.15 )     0.04       (0.17 )     0.02  
                                 
Basic earnings (loss) per share attributable to Dynegy Inc. common stockholders
   $ (0.25 )   $ 0.72     $ (1.06 )   $ 0.22  
                                 
Diluted earnings (loss) per share attributable to Dynegy Inc. common stockholders:
                                
Earnings (loss) from continuing operations
   $ (0.10 )   $ 0.68     $ (0.89 )   $ 0.20  
Income (loss) from discontinued operations.
     (0.15 )     0.04       (0.17 )     0.02  
                                 
Diluted earnings (loss) per share attributable to Dynegy Inc. common stockholders
   $ (0.25 )   $ 0.72     $ (1.06 )   $ 0.22  
                                 
Basic shares outstanding
     843       840       842       840  
Diluted shares outstanding
     846       842       845       842  

See the notes to condensed consolidated financial statements.

5

DYNEGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in millions)

   
Nine Months Ended
September 30,
  
   
2009
    
2008
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net income (loss)
   $ (906 )   $ 178  
Adjustments to reconcile net loss to net cash flows from operating activities:
                
Depreciation and amortization
     279       281  
Goodwill impairments
     433       —  
Impairment and other charges, exclusive of goodwill impairments shown separately above
     793       —  
(Earnings) losses from unconsolidated investments, net of cash distributions
     (13 )     17  
Risk-management activities
     73       (127 )
Gain on sale of assets
     (10 )     (83 )
Deferred income taxes
     (246 )     116  
Legal and settlement charges
     —       7  
Other
     66       37  
Changes in working capital:
                
Accounts receivable
     (4 )     43  
Inventory
     (7 )     27  
Prepayments and other assets
     (134 )     (75 )
Accounts payable and accrued liabilities
     81       75  
Changes in non-current assets
     (91 )     (84 )
Changes in non-current liabilities
     (10 )     (15 )
                 
Net cash provided by operating activities
     304       397  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Capital expenditures
     (429 )     (460 )
Unconsolidated investments
     1       (1 )
Proceeds from asset sales, net
     105       452  
Decrease (increase) in short-term investments
     14       (127 )
(Increase) decrease in restricted cash and restricted investments
     (35 )     17  
Other investing
     3       11  
                 
Net cash used in investing activities
     (341 )     (108 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Proceeds from long-term borrowings, net
     75       153  
Repayments of long-term borrowings, net
     (28 )     (21 )
Proceeds from issuance of capital stock
     —       2  
Other financing, net
     —       (1 )
                 
Net cash provided by financing activities
     47       133  
                 
Net increase in cash and cash equivalents
     10       422  
Cash and cash equivalents, beginning of period
     693       328  
                 
Cash and cash equivalents, end of period
   $ 703     $ 750  
                 
Other non-cash investing activity:
                
Non-cash capital expenditures
   $ 19     $ 3  

See the notes to condensed consolidated financial statements.

6

DYNEGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited) (in millions)

   
Three Months Ended
September 30,
  
   
2009
    
2008
  
             
Net income (loss)
   $ (223 )   $ 604  
Cash flow hedging activities, net:
                
Unrealized mark-to-market gains (losses) arising during period, net
     45       (21 )
Reclassification of mark-to-market losses to earnings, net
     1       3  
Deferred gains (losses) on cash flow hedges, net
     (2 )     2  
                 
Changes in cash flow hedging activities, net (net of tax (expense) benefit of $(11) and $4, respectively)
     44       (16 )
Amortization of unrecognized prior service cost and actuarial loss (net of tax benefit of $2 and zero)
     (1 )     —  
Unconsolidated investments other comprehensive loss, net (net of tax benefit of $3 and $3)
     (3 )     (4 )
                 
Other comprehensive income (loss), net of tax
     40       (20 )
                 
Comprehensive income (loss)
     (183 )     584  
Less: Comprehensive income (loss) attributable to the noncontrolling interests
     25       (11 )
                 
Comprehensive income (loss) attributable to Dynegy Inc.
   $ (208 )   $ 595  


   
Nine Months Ended
September 30,
  
   
2009
    
2008
  
             
Net income (loss)
   $ (906 )   $ 178  
Cash flow hedging activities, net:
                
Unrealized mark-to-market gains (losses) arising during period, net
     160       (27 )
Reclassification of mark-to-market losses to earnings, net
     1       10  
Deferred losses on cash flow hedges, net
     (8 )     —  
                 
Changes in cash flow hedging activities, net (net of tax (expense) benefit of $(26) and 4, respectively)
     153       (17 )
Amortization of unrecognized prior service cost and actuarial gain (net of tax expense of $3 and zero)
     1       1  
Net unrealized losses, (net of tax benefit of zero and $8, respectively)
     —       (12 )
Unconsolidated investments other comprehensive income (loss), net (net of tax (expense) benefit of $(2) and $7)
     3       (11 )
                 
Other comprehensive income (loss), net of tax
     157       (39 )
                 
Comprehensive income (loss)
     (749 )     139  
Less: Comprehensive income (loss) attributable to the noncontrolling interests
     107       (15 )
                 
Comprehensive income (loss) attributable to Dynegy Inc.
   $ (856 )   $ 154  

See the notes to condensed consolidated financial statements.

7

DYNEGY HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited) (in millions)

   
September 30,
2009
    
December 31,
 2008
  
ASSETS
            
Current Assets
            
Cash and cash equivalents
   $ 519     $ 670  
Restricted cash and investments
     115       87  
Short-term investments
     2       24  
Accounts receivable, net of allowance for doubtful accounts of $20 and $20, respectively
     255       343  
Accounts receivable, affiliates
     1       1  
Inventory
     157       184  
Assets from risk-management activities
     927       1,263  
Deferred income taxes
     4       4  
Prepayments and other current assets
     340       204  
Assets held for sale
     1,273       —  
Total Current Assets
     3,593       2,780  
Property, Plant and Equipment
     8,895       10,869  
Accumulated depreciation
     (1,880 )     (1,935 )
Property, Plant and Equipment, Net
     7,015       8,934  
Other Assets
                
Restricted cash and investments
     1,164       1,158  
Assets from risk-management activities
     295       114  
Goodwill
     —       433  
Intangible assets
     399       437  
Accounts receivable, affiliates
     8       4  
Other long-term assets
     368       314  
Total Assets
   $ 12,842     $ 14,174  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current Liabilities
                
Accounts payable
   $ 231     $ 284  
Accrued interest
     124       56  
Accrued liabilities and other current liabilities
     147       157  
Liabilities from risk-management activities
     834       1,119  
Notes payable and current portion of long-term debt
     65       64  
Deferred income taxes
     10       1  
Liabilities associated with assets held for sale
     31       —  
Total Current Liabilities
     1,442       1,681  
Long-term debt
     5,928       5,872  
Long-term debt, affiliates
     200       200  
Long-Term Debt
     6,128       6,072  
Other Liabilities
                
Liabilities from risk-management activities
     313       288  
Deferred income taxes
     808       1,052  
Other long-term liabilities
     451       498  
Total Liabilities
     9,142       9,591  
Commitments and Contingencies (Note 13)
                
Stockholders’ Equity
                
Capital Stock, $1 par value, 1,000 shares authorized at September 30, 2009 and December 31, 2008
     —       —  
Additional paid-in capital
     5,545       5,684  
Affiliate receivable
     (823 )     (827 )
Accumulated other comprehensive loss, net of tax
     (179 )     (215 )
Accumulated deficit
     (920 )     (29 )
Total Dynegy Holdings Inc. Stockholder’s Equity
     3,623       4,613  
Noncontrolling interests
     77       (30 )
Total Stockholders’ Equity
     3,700       4,583  
Total Liabilities and Stockholders’ Equity
   $ 12,842     $ 14,174  

See the notes to condensed consolidated financial statements.

8

DYNEGY HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) (in millions)

   
Three Months Ended September 30,
    
Nine Months Ended September 30,
  
   
2009
    
2008
    
2009
    
2008
  
Revenues
   $ 673     $ 1,759     $ 2,027     $ 2,550  
Cost of sales
     (286 )     (498 )     (927 )     (1,326 )
Operating and maintenance expense, exclusive of depreciation shown separately below
     (121 )     (122 )     (375 )     (344 )
Depreciation and amortization expense
     (83 )     (85 )     (258 )     (258 )
Gain on sale of assets
     —       57       —       83  
Goodwill impairments
     —       —       (433 )     —  
Impairment and other charges, exclusive of goodwill impairments shown separately above
     (148 )     —       (535 )     —  
General and administrative expenses
     (42 )     (48 )     (125 )     (126 )
                                 
Operating income (loss)
     (7 )     1,063       (626 )     579  
Earnings (losses) from unconsolidated investments
     (8 )     (5 )     12       (7 )
Interest expense
     (115 )     (105 )     (311 )     (322 )
Other income and expense, net
     2       11       9       45  
                                 
Income (loss) from continuing operations before income taxes
     (128 )     964       (916 )     295  
Income tax benefit (expense) (Note 15)
     35       (391 )     152       (127 )
                                 
Income (loss) from continuing operations
     (93 )     573       (764 )     168  
Income (loss) from discontinued operations, net of tax (expense) benefit of $74, $(22), $91 and $(10), respectively (Note 2)
     (139 )     32       (141 )     13  
                                 
Net income (loss)
     (232 )     605       (905 )     181  
Less: Net loss attributable to the noncontrolling interests
     (11 )     (1 )     (14 )     (3 )
Net income (loss) attributable to Dynegy Holdings Inc.
   $ (221 )   $ 606     $ (891 )   $ 184  

See the notes to condensed consolidated financial statements.

9

DYNEGY HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in millions)

   
Nine Months Ended
September 30,
  
   
2009
    
2008
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net income (loss)
   $ (905 )   $ 181  
Adjustments to reconcile net loss to net cash flows from operating activities:
                
Depreciation and amortization
     279       281  
Goodwill impairments
     433       —  
Impairment and other charges, exclusive of goodwill impairments shown separately above
     793       —  
(Earnings) losses from unconsolidated investments, net of cash distributions
     (12 )     7  
Risk-management activities
     73       (127 )
Gain on sale of assets, net
     (10 )     (83 )
Deferred income taxes
     (248 )     123  
Legal and settlement charges
     —       7  
Other
     64       33  
Changes in working capital:
                
Accounts receivable
     (4 )     43  
Inventory
     (7 )     27  
Prepayments and other assets
     (134 )     (75 )
Accounts payable and accrued liabilities
     100       76  
Changes in non-current assets
     (91 )     (84 )
Changes in non-current liabilities
     (9 )     (16 )
                 
Net cash provided by operating activities
     322       393  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Capital expenditures
     (429 )     (460 )
Unconsolidated investments
     —       10  
Proceeds from asset sales, net
     105       452  
Decrease (increase) in short-term investments
     13       (120 )
(Increase) decrease in restricted cash and restricted investments
     (35 )     17  
Affiliate transactions
     (2 )     2  
Other investing
     3       7  
                 
Net cash used in investing activities
     (345 )     (92 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Proceeds from long-term borrowings, net
     75       153  
Repayments to long-term borrowings
     (28 )     (21 )
Dividend to affiliate
     (175 )     —  
Other financing, net
     —       (1 )
                 
Net cash provided by (used in) financing activities
     (128 )     131  
                 
Net increase (decrease) in cash and cash equivalents
     (151 )     432  
Cash and cash equivalents, beginning of period
     670       292  
                 
Cash and cash equivalents, end of period
   $ 519     $ 724  
                 
Other non-cash investing activity:
                
Non-cash capital expenditures
   $ 19     $ 3  

See the notes to condensed consolidated financial statements.

10

DYNEGY HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited) (in millions)

   
Three Months Ended
September 30,
  
   
2009
    
2008
  
             
Net income (loss)
   $ (232 )   $ 605  
Cash flow hedging activities, net:
                
Unrealized mark-to-market gains (losses) arising during period, net
     45       (21 )
Reclassification of mark-to-market losses to earnings, net
     1       3  
Deferred gains (losses) on cash flow hedges, net
     (2 )     2  
                 
Changes in cash flow hedging activities, net (net of tax (expense) benefit of $(11) and $4, respectively)
     44       (16 )
Amortization of unrecognized prior service cost and actuarial loss (net of tax expense of $2 and zero)
     (1 )     —  
Unconsolidated investments other comprehensive loss, net (net of tax benefit of $3 and $3)
     (3 )     (4 )
                 
Other comprehensive income (loss), net of tax
     40       (20 )
                 
Comprehensive income (loss)
     (192 )     585  
Less: Comprehensive income (loss) attributable to the noncontrolling interests
     25       (11 )
 
                
Comprehensive income (loss) attributable to Dynegy Holdings Inc.
   $ (217 )   $ 596  


   
Nine Months Ended
September 30,
  
   
2009
    
2008
  
             
Net income (loss)
   $ (905 )   $ 181  
Cash flow hedging activities, net:
                
Unrealized mark-to-market gains (losses) arising during period, net
     160       (27 )
Reclassification of mark-to-market losses to earnings, net
     1       10  
Deferred losses on cash flow hedges, net
     (8 )     —  
                 
Changes in cash flow hedging activities, net (net of tax (expense) benefit of $(26) and $4, respectively)
     153       (17 )
Amortization of unrecognized prior service cost and actuarial gain (net of tax expense of $3 and zero)
     1       1  
Net unrealized loss on securities, net (net of tax benefit of zero and $8, respectively)
     —       (12 )
Unconsolidated investments other comprehensive income (loss), net (net of tax (expense) benefit of $(2) and $7)
     3       (11 )
                 
Other comprehensive income (loss), net of tax
     157       (39 )
                 
Comprehensive income (loss)
     (748 )     142  
Less: Comprehensive income (loss) attributable to the noncontrolling interests
     107       (15 )
                 
Comprehensive income (loss) attributable to Dynegy Holdings Inc.
   $ (855 )   $ 157  

See the notes to condensed consolidated financial statements.

11

DYNEGY INC. and DYNEGY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended September 30, 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 the adoption of authoritative guidance for noncontrolling interests as discussed below.  These interim financial statements do 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, as supplemented by our Current Report on Form 8-K dated September 28, 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

Business Combinations.  On January 1, 2009, we adopted authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on business combinations.  The guidance 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 of the financial statements all 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.

Fair Value Measurements.  On January 1, 2009, we adopted authoritative guidance issued by the for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  Please read Note 5—Fair Value Measurements for further discussion.

Noncontrolling Interests.  On January 1, 2009, we adopted authoritative guidance issued by the FASB for noncontrolling interests.  Please read Note 3—Noncontrolling Interests for further discussion.

12

DYNEGY INC. and DYNEGY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2009 and 2008

Disclosures about Derivative Instruments and Hedging Activities.  On January 1, 2009, we adopted authoritative guidance issued by the FASB for the disclosure of derivative instruments and hedging activities.  Please read Note 4—Risk Management Activities, Derivatives and Financial Instruments for further discussion.

Subsequent Events.  On June 30, 2009, we adopted authoritative guidance issued by the FASB which provides guidance on management’s assessment of subsequent events.  We have evaluated  subsequent events through November 5, 2009, the date our financial statements were issued and up to the time of the filing of our financial statements with the SEC.

Accounting Standards Codification.  Effective July 1, 2009, we adopted authoritative guidance issued by the FASB which superseded all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered non-SEC accounting literature not included in the Codification is no longer considered authoritative.  The adoption of this adopted authoritative had no impact on our financial condition, results of operations or cash flows.

Third Party Credit Enhancement.  On January 1, 2009, we adopted authoritative guidance issued by the FASB which applies to liabilities issued with an inseparable third-party credit enhancement when they are measured or disclosed at fair value on a recurring basis.  Please read Note 5—Fair Value Measurements for further discussion.

Fair Value of Financial Instruments.  On June 30, 2009, we adopted authoritative guidance issued by the FASB which requires the disclosure of the estimated fair value of financial instruments.  Please read Note 5—Fair Value Measurements for further discussion.

Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.  On June 30, 2009, we adopted authoritative guidance issued by the FASB which provides guidance on (i) estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly decreased and (ii) identifying transactions that are not orderly.  The adoption of this authoritative guidance had no impact on our financial statements.  Please read Note 5—Fair Value Measurements for further discussion.

Accounting Principles Not Yet Adopted

Employers’ Disclosures about Pensions and Other Postretirement Benefits.  On January 1, 2009, the FASB issued authoritative guidance 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 authoritative guidance are to be provided for fiscal years ending after December 15, 2009.  We are currently evaluating the disclosure implications of this standard; however, this authoritative guidance will have no impact on our financial condition, results of operations or cash flows.

Variable Interest Entities.  On June 12, 2009, the FASB issued authoritative guidance which amends the consolidation guidance that applies to variable interest entities.  The FASB’s objective in issuing this authoritative guidance is to improve financial reporting by enterprises involved with variable interest entities.  This authoritative guidance is effective for fiscal years beginning after November 15, 2009.  We are currently evaluating the impact of this standard on our consolidated financial statements.

13

DYNEGY INC. and DYNEGY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2009 and 2008

Note 2—Dispositions and Discontinued Operations

Dispositions

LS Power Transaction.  On August 9, 2009, we entered into a purchase and sale agreement with LS Power Partners, L.P. and certain of  its affiliates (collectively, “LS Power”) pursuant to which we agreed to (i) sell to LS Power our interests in: Dynegy Arlington Valley, LLC; Griffith Energy LLC; Bridgeport Energy LLC; Rocky Road Power, LLC; Tilton Energy LLC; Riverside Generating Company, L.L.C.; Bluegrass Generation Company, L.L.C.; Renaissance Power, L.L.C.; Sandy Creek Services, LLC; and Dynegy Sandy Creek Holdings, LLC, and (ii) issue to Adio Bond, LLC, an affiliate of LS Power, $235 million aggregate principal amount of DHI 7.50 percent senior unsecured notes due 2015.  In exchange for the ownership interests and notes, we will receive at closing (i) approximately $1.025 billion in cash (consisting, in part, of the release of $175 million of restricted cash on our unaudited condensed consolidated balance sheets that was used to support our funding commitment to Sandy Creek and approximately $200 million for the unsecured notes), subject to working capital adjustments, and (ii) 245 million shares of Dynegy’s Class B common stock (currently held by LS Power), with the remaining 95 million shares of Dynegy’s Class B common stock held by LS Power converted at closing to the same number of shares of Dynegy’s Class A common stock.  Concurrent with the execution of the purchase and sale agreement, LS Power and Dynegy entered into a new shareholder agreement, which upon the closing of the transaction will eliminate special approval rights, board representation and certain other rights associated with the former Class B common shares and limit the acquisition and transfer of Dynegy’s Class A common stock to be held by LS Power.  This shareholder agreement provides that following closing we cannot issue Dynegy’s equity securities for our own purposes until the earlier of (i) 121 days following the closing of the transaction with LS Power or (ii) the first date following closing of the transaction in which LS Power owns, in aggregate, less than 10 percent of Dynegy’s then outstanding Class A common stock.  The sale is expected to close in the fourth quarter 2009 assuming all necessary closing conditions are satisfied or waived.

In connection with the signing of the purchase and sale agreement with LS Power on August 9, 2009, our Arizona power generation assets, as defined below, and our Bluegrass power generation facility met the requirements for classification as discontinued operations.  Accordingly, the results of operations for these facilities have been reclassified as discontinued operations for all periods presented (see Discontinued Operations discussed below).  The Renaissance, Tilton, Riverside/Foothills, Rocky Road and Bridgeport power generation facilities did not meet the requirements for classification as discontinued operations, based on our continuing presence in the markets where these assets are located; however, these assets are reported as held for sale.  The major classes of current and long-term assets and liabilities at September 30, 2009 classified as assets held for sale or liabilities associated with assets held for sale and included in the LS Power transaction are as follows (in millions):

Current Assets:
      
Accounts receivable
   $ 39  
Inventory
     18  
Assets from risk management activities
     5  
Prepayments and other current assets
     11  
         
Total Current Assets
   $ 73  
         
Long-Term Assets:
        
Property, plant and equipment
   $ 1,163  
Assets from risk management activities
     4  
Other
     33  
         
Total Long-Term Assets
   $ 1,200  
         
Current Liabilities:
        
Accounts payable
   $ 17  
Current liabilities and accrued liabilities
     8  
         
Total Current Liabilities
   $ 25  
         
Long-Term Liabilities:
        
Other
   $ 6  
         
Total Long-Term Liabilities
   $ 6  

14

DYNEGY INC. and DYNEGY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2009 and 2008

We recorded pre-tax impairment charges of $147 million and $326 million, inclusive of costs to sell, related to the assets included in the LS Power transaction that did not meet the criteria for classification as discontinued operations in the three and nine month periods ended September 30, 2009, respectively, which is included in Impairment and other charges in our unaudited condensed consolidated statements of operations.  Please read Note 6—Impairment Charges for further discussion of these impairments.

We discontinued depreciation and amortization of property, plant and equipment included in the LS Power transaction that did not meet the criteria for classification as discontinued operations during the third quarter 2009.  Depreciation and amortization expense related to these assets totaled $3 million and $24 million in the three and nine month periods ended September 30, 2009, respectively, compared to $8 million and $23 million in the three and nine months ended September 30, 2008, respectively.

Rolling Hills.  On July 31, 2008, we completed the sale of the Rolling Hills power generation facility (“Rolling Hills”) to an affiliate of Tenaska Capital Management, LLC for approximately $368 million, net of transaction costs.  We recorded a $57 million gain in the third quarter 2008 related to the sale, which is included in Gain on sale of assets in our unaudited condensed consolidated statements of operations.  The gain includes the impact of allocating approximately $5 million of goodwill associated with the GEN-MW reporting unit to Rolling Hills.  The amount of goodwill allocated to Rolling Hills was based on the relative fair values of Rolling Hills and the portion of the GEN-MW reporting unit being retained.

The sale of Rolling Hills represented the sale of a significant portion of a reporting unit.  As such, we assessed the goodwill of the GEN-MW reporting unit for impairment during the third quarter 2008.  No impairment was indicated as a result of this assessment.

We discontinued depreciation and amortization of Rolling Hills’ property, plant and equipment during the second quarter 2008.  Depreciation and amortization expense related to Rolling Hills totaled zero and approximately $3 million in the three and nine month periods ended September 30, 2008, respectively.

NYMEX Securities.  In November 2006, the New York Mercantile Exchange (“NYMEX”) completed its initial public offering.  At the time, we had two membership seats on the NYMEX, and therefore, we received 90,000 NYMEX shares for each membership seat.  During August 2007, we sold 30,000 shares for approximately $4 million, and we recognized a gain of $4 million.  During the second quarter 2008, we sold our remaining 150,000 shares and both of our membership seats for approximately $16 million, and we recognized a gain of $15 million, which is included in Gain on sale of assets in our unaudited condensed consolidated statements of operations partially offset by a reduction of $8 million, net of tax of $5 million, in our unaudited condensed consolidated statements of other comprehensive loss.

Oyster Creek.  In May 2008, we sold the beneficial interest in Oyster Creek Limited for approximately $11 million, which is included in Gain on sale of assets in our unaudited condensed consolidated statements of operations.

15

DYNEGY INC. and DYNEGY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2009 and 2008

Discontinued Operations

Arlington Valley, Griffith and Bluegrass.  On August 9, 2009, we entered into a purchase and sale agreement to sell our interests in, among others, the Arlington Valley, Griffith and Bluegrass power generation facilities as part of the LS Power transaction, as discussed above.

The Arlington Valley and Griffith  facilities (collectively, the “Arizona power generation facilities”), as well as our Bluegrass facility, met the criteria of held for sale during the third quarter 2009 and are classified as such on our unaudited condensed consolidated balance sheet.  At that time, we discontinued depreciation and amortization of Arlington Valley’s, Griffith’s and Bluegrass’ property, plant and equipment.  Depreciation and amortization expense related to the Arizona power generation facilities totaled approximately $4 and $14 million in the three and nine months ended September 30, 2009, respectively, compared to approximately $5 million and $15 million in the three and nine months ended September 30, 2008, respectively.  Depreciation and amortization expense related to Bluegrass totaled approximately zero and $1 million in the three and nine months ended September 30, 2009, respectively, compared to approximately zero and $1 million in the three and nine months ended September 30, 2008, respectively.  We recorded an impairment charge of $235 million related to the Arizona power generation facilities during the third quarter 2009.  We previously recorded impairment charges of $5 million and $18 million related to the Bluegrass facility during the first and second quarters of 2009, respectively.  Please read Note 6—Impairment Charges for further discussion.  We are reporting the results of operations for the Arizona power generation facilities  and the Bluegrass power generation facility in discontinued operations for all periods presented.

Heard County.  On April 30, 2009, we completed the sale of our interest in the Heard County power generation facility for approximately $105 million.  We recorded a $10 million pre-tax gain during the second quarter 2009 related to the sale, which is included in Income from discontinued operations on our unaudited condensed consolidated statements of operations.

Heard County was classified as held for sale during the first quarter 2009.  At that time, we discontinued depreciation and amortization of Heard County’s property, plant and equipment.  Depreciation and amortization expense related to Heard County totaled approximately zero and $1 million in the three and nine months ended September 30, 2009, respectively, compared to approximately $1 million and $3 million in the three and nine months ended September 30, 2008, respectively.  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 for approximately $56 million, net of transaction costs.

Calcasieu was classified as held for sale during the first quarter 2007.  At that time, we discontinued depreciation and amortization of Calcasieu’s property, plant and equipment.  Depreciation and amortization expense related to Calcasieu totaled zero in the three and nine months ended September 30, 2008.  We are reporting the results of Calcasieu’s operations in discontinued operations for the three months ended March 31, 2008.

16

DYNEGY INC. and DYNEGY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2009 and 2008

Summary.  The following table summarizes information related to Dynegy’s discontinued operations:

   
GEN-MW
    
GEN-WE
    
Total
  
         
(in millions)
        
Three Months Ended September 30, 2009
                  
Revenues
   $ 1     $ 54     $ 55  
Loss from operations before taxes
     —       (213 )(2)     (213 )
Loss from operations after taxes
     —       (129 )     (129 )
                         
Three Months Ended September 30, 2008
                        
Revenues
   $ 1     $ 126     $ 127  
Income from operations before taxes
     —       53       53  
Income from operations after taxes
     —       32       32  
Gain on sale before taxes
     —       1       1  
Gain on sale after taxes
     —       —       —  
                         
Nine Months Ended September 30, 2009
                        
Revenues
   $ 4     $ 96     $ 100  
Loss from operations before taxes
     (23 )(1)     (219 )(2)     (242 )
Loss from operations after taxes
     (14 )     (133 )     (147 )
Gain on sale before taxes
     —       10       10  
Gain on sale after taxes
     —       6       6  
                         
Nine Months Ended September 30, 2008
                        
Revenues
   $ 2     $ 202     $ 204  
Income (loss) from operations before taxes
     (1 )     24       23  
Income (loss) from operations after taxes
     (1 )     14       13  
____________________________
 
(1)
Includes $23 million of impairment charges related to our Bluegrass power generation facility.
 
(2)
Includes $235 million of impairment charges related to our Arizona power generation facilities.

17

DYNEGY INC. and DYNEGY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2009 and 2008

Summary.  The following table summarizes information related to DHI’s discontinued operations:

   
GEN-MW
    
GEN-WE
    
Total
  
         
(in millions)
        
Three Months Ended September 30, 2009
                  
Revenues
   $ 1     $ 54     $ 55  
Loss from operations before taxes
     —       (213 )(2)     (213 )
Loss from operations after taxes
     —       (139 )     (139 )
                         
Three Months Ended September 30, 2008
                        
Revenues
   $ 1     $ 126     $ 127  
Income from operations before taxes
     —       53       53  
Income from operations after taxes
     —       32       32  
Gain on sale before taxes
     —       1       1  
Gain on sale after taxes
     —       —       —  
                         
Nine Months Ended September 30, 2009
                        
Revenues
   $ 4     $ 96     $ 100  
Loss from operations before taxes
     (23 )(1)     (219 )(2)     (242 )
Loss from operations after taxes
     (14 )     (139 )     (153 )
Gain on sale before taxes
     —       10       10  
Gain on sale after taxes
     —       12       12  
                         
Nine Months Ended September 30, 2008
                        
Revenues
   $ 2     $ 202     $ 204  
Income (loss) from operations before taxes
     (1 )     24       23  
Income (loss) from operations after taxes
     (1 )     14       13  
____________________________
 
(1)
Includes $23 million of impairment charges related to our Bluegrass power generation facility.
 
(2)
Includes $235 million of impairment charges related to our Arizona power generation facilities.

Note 3—Noncontrolling Interests

On January 1, 2009, we adopted authoritative guidance which requires: (i) ownership interests in subsidiaries held by parties other than the parent to be clearly identified, labeled, and presented in the consolidated statements 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 income (loss) attributable to Dynegy’s and DHI’s stockholders:

18

DYNEGY INC. and DYNEGY HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2009 and 2008

   
Dynegy Inc.
    
Dynegy Holdings Inc.
  
   
Three Months Ended
September 30,
    
Three Months Ended
September 30,
  
   
2009
    
2008
    
2009
    
2008
  
   
(in millions)
  
Income (loss) from continuing operations
   $ (83 )   $ 573     $ (82 )   $ 574  
Income (loss) from discontinued operations, net of tax benefit (expense) of $84, ($22), $74 and ($22), respectively
     (129 )     32       (139 )     32  
                                 
Net income (loss)
   $ (212 )   $ 605     $ (221 )   $ 606  


   
Dynegy Inc.
    
Dynegy Holdings Inc.
  
   
Nine Months Ended
September 30,
    
Nine Months Ended
September 30,
  
   
2009
    
2008
    
2009
    
2008
  
   
(in millions)
  
Income (loss) from continuing operations
   $ (751 )   $ 168     $ (750 )   $ 171  
Income (loss) from discontinued operations, net of tax benefit (expense) of $91, ($10), $91 and ($10), respectively
     (141 )     13       (141 )     13  
                                 
Net income (loss)
   $ (892 )   $ 181     $ (891 )   $ 184  

The following table presents a reconciliation of the carrying amount of total equity, equity attributable to Dynegy and the equity attributable to the noncontrolling interests at the beginning and the end of the nine months ended September 30, 2009:

   
Controlling Interest
    
Noncontrolling Interests
    
Total
  
         
(in millions)