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, 2010

¨	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 (Do not check if a smaller reporting company)	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, 601,705,975 shares outstanding as of May 3, 2010; Class B common stock, $0.01 par value per share, zero shares outstanding as of May 3, 2010. 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, 2010 and December 31, 2009	4
Condensed Consolidated Statements of Operations—Dynegy Inc.:
For the three months ended March 31, 2010 and 2009	5
Condensed Consolidated Statements of Cash Flows—Dynegy Inc.:
For the three months ended March 31, 2010 and 2009	6
Condensed Consolidated Statements of Comprehensive Income (Loss)—Dynegy Inc.:
For the three months ended March 31, 2010 and 2009	7
Condensed Consolidated Balance Sheets—Dynegy Holdings Inc.:
March 31, 2010 and December 31, 2009	8
Condensed Consolidated Statements of Operations—Dynegy Holdings Inc.:
For the three months ended March 31, 2010 and 2009	9
Condensed Consolidated Statements of Cash Flows—Dynegy Holdings Inc.:
For the three months ended March 31, 2010 and 2009	10
Condensed Consolidated Statements of Comprehensive Income (Loss)—Dynegy Holdings Inc.:
For the three months ended March 31, 2010 and 2009	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.	29
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK—DYNEGY INC. AND DYNEGY HOLDINGS INC.	42
Item 4. CONTROLS AND PROCEDURES—DYNEGY INC. AND DYNEGY HOLDINGS INC.	44

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS—DYNEGY INC. AND DYNEGY HOLDINGS INC.	45
Item 1A. RISK FACTORS—DYNEGY INC. AND DYNEGY HOLDINGS INC.	45
Item 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS—DYNEGY INC.	45
Item 6. EXHIBITS—DYNEGY INC. AND DYNEGY HOLDINGS INC.	46

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, 2010 and constituting nearly 100 percent of Dynegy’s total consolidated asset base as of March 31, 2010. 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.

BART	Best Available Retrofit Technology
BTA	Best technology available
CAA	Clean Air Act
CAISO	The California Independent System Operator
CCR	Coal Combustion Residuals
CFTC	Commodity Futures Trading Commission
CO2	Carbon Dioxide
CUSA	Chevron U.S.A. Inc., a wholly owned subsidiary of Chevron Corporation
DHI	Dynegy Holdings Inc., Dynegy’s primary financing subsidiary
DMSLP	Dynegy Midstream Services L.P.
EBITDA	Earnings before interest, taxes, depreciation and amortization
EPA	Environmental Protection Agency
FERC	Federal Energy Regulatory Commission
FTR	Financial Transmission Rights
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
ISO-NE	Independent System Operator New England
MISO	Midwest Independent Transmission Operator, Inc.
MMBtu	One million British thermal units
MW	Megawatts
MWh	Megawatt hour
NOx	Nitrogen oxide
NPDES	National Pollutant Discharge Elimination System
NRG	NRG Energy, Inc.
NYISO	New York Independent System Operators
NYSDEC	New York State Department of Environmental Conservation
OAL	Office of Administrative Law
PJM	PJM Interconnection, LLC
PPEA	Plum Point Energy Associates, LLC
RCRA	Resource Conservation and Recovery Act
RMR	Reliability Must Run
RSG	Revenue Sufficiency Guarantee
SCEA	Sandy Creek Energy Associates, LP
SC Services	Sandy Creek Services, LLC
SEC	U.S. Securities and Exchange Commission
SFAS	Statement of Financial Accounting Standards
SO2	Sulfur dioxide
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, 2010			December 31, 2009
ASSETS
Current Assets
Cash and cash equivalents	$	688		$	471
Restricted cash and investments		112			78
Short-term investments		114			9
Accounts receivable, net of allowance for doubtful accounts of $36 and $22, respectively		164			212
Accounts receivable, affiliates		2			2
Inventory		138			141
Assets from risk-management activities		1,746			713
Deferred income taxes		7			6
Broker margin account		—			286
Prepayments and other current assets		126			120
Total Current Assets		3,097			2,038
Property, Plant and Equipment		8,548			9,071
Accumulated depreciation		(2,026	)		(1,954	)
Property, Plant and Equipment, Net		6,522			7,117
Other Assets
Restricted cash and investments		859			877
Assets from risk-management activities		430			163
Intangible assets		177			380
Other long-term assets		372			378
Total Assets	$	11,457		$	10,953

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	124		$	181
Accounts payable, affiliates		4			—
Accrued interest		111			36
Accrued liabilities and other current liabilities		148			127
Liabilities from risk-management activities		1,532			696
Notes payable and current portion of long-term debt		63			807
Total Current Liabilities		1,982			1,847
Long-term debt		4,575			4,575
Long-term debt, affiliates		200			200
Long-Term Debt		4,775			4,775
Other Liabilities
Liabilities from risk-management activities		374			213
Deferred income taxes		878			780
Other long-term liabilities		346			359
Total Liabilities		8,355			7,974
Commitments and Contingencies (Note 11)
Stockholders’ Equity
Class A Common Stock, $0.01 par value, 2,100,000,000 shares authorized at March 31, 2010 and December 31, 2009; 604,496,381 and 603,577,577 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively		6			6
Additional paid-in capital		6,058			6,056
Subscriptions receivable		(2	)		(2	)
Accumulated other comprehensive loss, net of tax		(71	)		(150	)
Accumulated deficit		(2,818	)		(2,937	)
Treasury stock, at cost, 2,890,833 and 2,788,383 shares at March 31, 2010 and December 31, 2009, respectively		(71	)		(71	)
Total Dynegy Inc. Stockholders’ Equity		3,102			2,902
Noncontrolling interests		—			77
Total Stockholders’ Equity		3,102			2,979
Total Liabilities and Stockholders’ Equity	$	11,457		$	10,953

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,
	2010			2009
Revenues	$	858		$	904
Cost of sales		(308	)		(378	)
Operating and maintenance expense, exclusive of depreciation and amortization shown separately below		(113	)		(115	)
Depreciation and amortization expense		(75	)		(86	)
Goodwill impairments		—			(433	)
General and administrative expenses		(31	)		(38	)

Operating income (loss)		331			(146	)
Earnings (losses) from unconsolidated investments		(34	)		8
Interest expense		(89	)		(98	)
Other income and expense, net		1			4

Income (loss) from continuing operations before income taxes		209			(232	)
Income tax expense (Note 13)		(65	)		(91	)

Income (loss) from continuing operations		144			(323	)
Income (loss) from discontinued operations, net of tax benefit of zero and $6, respectively (Note 2)		1			(14	)

Net income (loss)		145			(337	)
Less: Net loss attributable to the noncontrolling interests		—			(2	)

Net income (loss) attributable to Dynegy Inc.	$	145		$	(335	)

Earnings (Loss) Per Share (Note 10):
Basic earnings (loss) per share:
Earnings (loss) from continuing operations attributable to Dynegy Inc.	$	0.24		$	(0.38	)
Loss from discontinued operations attributable to Dynegy Inc.		—			(0.02	)
Basic earnings (loss) per share attributable to Dynegy Inc.	$	0.24		$	(0.40	)

Diluted earnings (loss) per share:
Earnings (loss) from continuing operations attributable to Dynegy Inc.	$	0.24		$	(0.38	)
Loss from discontinued operations attributable to Dynegy Inc.		—			(0.02	)
Diluted earnings (loss) per share attributable to Dynegy Inc.	$	0.24		$	(0.40	)

Basic shares outstanding		599			841
Diluted shares outstanding		604			843

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,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	145		$	(337	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization		79			94
Goodwill impairments		—			433
Impairment and other charges, exclusive of goodwill impairments shown separately above		—			5
(Earnings) losses from unconsolidated investments, net of cash distributions		34			(8	)
Risk-management activities		(253	)		(168	)
Deferred income taxes		62			79
Other		12			16
Changes in working capital:
Accounts receivable		47			56
Inventory		1			(6	)
Broker margin account		310			(36	)
Prepayments and other assets		(12	)		(2	)
Accounts payable and accrued liabilities		31			42
Changes in non-current assets		2			(7	)
Changes in non-current liabilities		—			4
Net cash provided by operating activities		458			165

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(101	)		(138	)
Unconsolidated investments		—			1
Distribution from short-term investments		9			8
Purchases of marketable securities		(114	)		—
Increase in restricted cash		(35	)		(32	)
Net cash used in investing activities		(241	)		(161	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings, net		—			25
Net cash provided by financing activities		—			25

Net increase in cash and cash equivalents		217			29
Cash and cash equivalents, beginning of period		471			693
Cash and cash equivalents, end of period	$	688		$	722

Other non-cash investing activity:
Non-cash capital expenditures	$	9		$	23
Non-cash unconsolidated investment	$	15		$	—

See the notes to condensed consolidated financial statements.

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DYNEGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited) (in millions)

	Three Months Ended March 31,
	2010		2009

Net income (loss)	$	145	$	(337	)
Cash flow hedging activities, net:
Unrealized mark-to-market gains arising during period, net		—		34
Deferred losses on cash flow hedges, net		—		(3	)

Changes in cash flow hedging activities, net (net of tax expense of zero and $9, respectively)		—		31
Amortization of unrecognized prior service cost and actuarial gain (loss) (net of tax expense of zero and $2)		2		(1	)
Unconsolidated investments other comprehensive income, net (net of tax expense of zero and $1)		—		1

Other comprehensive income, net of tax		2		31

Comprehensive income (loss)		147		(306	)
Less: Comprehensive income attributable to the noncontrolling interests		—		26

Comprehensive income (loss) attributable to Dynegy Inc.	$	147	$	(332	)

See the notes to condensed consolidated financial statements.

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DYNEGY HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited) (in millions)

	March 31, 2010			December 31, 2009
ASSETS
Current Assets
Cash and cash equivalents	$	635		$	419
Restricted cash and investments		112			78
Short-term investments		114			8
Accounts receivable, net of allowance for doubtful accounts of $17 and $20, respectively		166			214
Accounts receivable, affiliates		2			2
Inventory		138			141
Assets from risk-management activities		1,746			713
Deferred income taxes		6			7
Broker margin account		—			286
Prepayments and other current assets		126			120
Total Current Assets		3,045			1,988
Property, Plant and Equipment		8,548			9,071
Accumulated depreciation		(2,026	)		(1,954	)
Property, Plant and Equipment, Net		6,522			7,117
Other Assets
Restricted cash and investments		859			877
Assets from risk-management activities		430			163
Intangible assets		177			380
Other long-term assets		372			378
Total Assets	$	11,405		$	10,903

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	124		$	181
Accounts payable, affiliates		4			—
Accrued interest		111			36
Accrued liabilities and other current liabilities		148			128
Liabilities from risk-management activities		1,532			696
Notes payable and current portion of long-term debt		63			807
Total Current Liabilities		1,982			1,848
Long-term debt		4,575			4,575
Long-term debt, affiliates		200			200
Long-Term Debt		4,775			4,775
Other Liabilities
Liabilities from risk-management activities		374			213
Deferred income taxes		812			704
Other long-term liabilities		346			360
Total Liabilities		8,289			7,900
Commitments and Contingencies (Note 11)
Stockholders’ Equity
Capital Stock, $1 par value, 1,000 shares authorized at March 31, 2010 and December 31, 2009		—			—
Additional paid-in capital		5,135			5,135
Affiliate receivable		(779	)		(777	)
Accumulated other comprehensive loss, net of tax		(71	)		(150	)
Accumulated deficit		(1,169	)		(1,282	)
Total Dynegy Holdings Inc. Stockholder’s Equity		3,116			2,926
Noncontrolling interests		—			77
Total Stockholders’ Equity		3,116			3,003
Total Liabilities and Stockholders’ Equity	$	11,405		$	10,903

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,
	2010			2009
Revenues	$	858		$	904
Cost of sales		(308	)		(378	)
Operating and maintenance expense, exclusive of depreciation and amortization shown separately below		(113	)		(117	)
Depreciation and amortization expense		(75	)		(86	)
Goodwill impairments		—			(433	)
General and administrative expenses		(31	)		(38	)

Operating income (loss)		331			(148	)
Earnings (losses) from unconsolidated investments		(34	)		7
Interest expense		(89	)		(98	)
Other income and expense, net		1			4

Income (loss) from continuing operations before income taxes		209			(235	)
Income tax expense (Note 13)		(72	)		(88	)

Income (loss) from continuing operations		137			(323	)
Income (loss) from discontinued operations, net of tax benefit of zero and $6, respectively (Note 2)		1			(14	)

Net income (loss)		138			(337	)
Less: Net loss attributable to the noncontrolling interests		—			(2	)

Net income (loss) attributable to Dynegy Holdings Inc.	$	138		$	(335	)

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,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	138		$	(337	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization		79			94
Goodwill impairments		—			433
Impairment and other charges, exclusive of goodwill impairments shown separately above		—			5
(Earnings) losses from unconsolidated investments, net of cash distributions		34			(7	)
Risk-management activities		(253	)		(168	)
Deferred income taxes		73			80
Other		11			16
Changes in working capital:
Accounts receivable		47			56
Inventory		1			(6	)
Broker margin account		310			(36	)
Prepayments and other assets		(12	)		(2	)
Accounts payable and accrued liabilities		31			58
Changes in non-current assets		2			(7	)
Changes in non-current liabilities		—			4
Net cash provided by operating activities		461			183

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(101	)		(138	)
Distribution from short-term investments		8			8
Purchases of marketable securities		(114	)		—
Increase in restricted cash		(35	)		(32	)
Affiliate transactions		(3	)		(2	)
Net cash used in investing activities		(245	)		(164	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings, net		—			25
Dividend to affiliate		—			(175	)
Net cash used in financing activities		—			(150	)

Net increase (decrease) in cash and cash equivalents		216			(131	)
Cash and cash equivalents, beginning of period		419			670
Cash and cash equivalents, end of period	$	635		$	539

Other non-cash investing activity:
Non-cash capital expenditures	$	9		$	23
Non-cash unconsolidated investment	$	15		$	—

See the notes to condensed consolidated financial statements.

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DYNEGY HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited) (in millions)

	Three Months Ended March 31,
	2010		2009

Net income (loss)	$	138	$	(337	)
Cash flow hedging activities, net:
Unrealized mark-to-market gains arising during period, net		—		34
Deferred losses on cash flow hedges, net		—		(3	)

Changes in cash flow hedging activities, net (net of tax expense of zero and $9, respectively)		—		31
Amortization of unrecognized prior service cost and actuarial gain (loss) (net of tax expense of zero and $2)		2		(1	)
Unconsolidated investments other comprehensive income, net (net of tax expense of zero and $1)		—		1

Other comprehensive income, net of tax		2		31

Comprehensive income (loss)		140		(306	)
Less: Comprehensive income attributable to the noncontrolling interests		—		26

Comprehensive income (loss) attributable to Dynegy Holdings Inc.	$	140	$	(332	)

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, 2010 and 2009

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 consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. These interim financial statements should be read together with the consolidated financial statements and notes thereto included in Dynegy’s and DHI’s Form 10-K for the year ended December 31, 2009 filed on February 25, 2010, 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.

Marketable Securities. Short-term investments consist of highly liquid investments, primarily U.S. Treasury, U.S. Agency and corporate debt securities, with original maturities over three months from the date of purchase. Our investment policy restricts investments to high credit quality investments with limits on the length to maturity and the amount invested with any one issuer. Debt securities which we have the ability and positive intent to hold to maturity are carried at amortized cost, net of unamortized premiums and unaccreted discounts, which approximates fair value. At March 31, 2010, we did not hold any short-term investments that were classified as held-to-maturity.

Debt securities not held-to-maturity are classified as available for sale and are recorded at fair value. Unrealized gains and losses, after applicable taxes, resulting from changes in fair value are recorded as a component of Other comprehensive income (loss).

Declines in the value of individual equity securities that are considered other than temporary result in write-downs to the individual securities to their fair value and the write-downs are included in the condensed consolidated statements of operations. Declines in debt securities held-to-maturity and available for sale, that are considered other than temporary, result in write-downs when it is more likely than not that we will sell the securities before we recover our cost. If we do not intend to sell an impaired debt security but do not expect to recover its cost, we determine whether a credit loss exists, and if so, the credit loss is recognized in the condensed consolidated statements of operations and any remaining impairment is recognized in Other comprehensive income (loss). The review for other-than-temporary declines considers the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and our intent and ability to retain the investment for a period of time sufficient to allow for recovery.

We consider all available for sale securities, including those with maturity dates beyond twelve months, as available to support current operational liquidity needs and therefore classify these securities as short-term investments within current assets on the consolidated balance sheets. As of March 31, 2010, we held $114 million of available for sale securities with maturity dates within one year.

Interest on securities, including the amortization of premiums and the accretion of discounts, is reported in Other income and expense, net using the interest method over the lives of the securities, adjusted for actual prepayments. Gains and losses on the sale of securities are recorded on the trade date and recognized using the specific identification method and reported in Other income and expense, net.

Accounting Principle Adopted

Variable Interest Entities. On January 1, 2010, we adopted Accounting Standards Update (“ASU”) No. 2009-17—Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU No. 2009-17”). This guidance replaces the previous quantitative-based analysis for determining the primary beneficiary of a variable interest entity with a framework that is based on qualitative judgments. The new guidance identifies the primary beneficiary of a variable interest entity as the party that both: (i) has the power to direct the activities of a variable interest entity that most significantly impact its economic performance and (ii) has an obligation to absorb losses or a right to receive benefits that could potentially be significant to the variable interest entity. As a result of applying this guidance, we have determined that we are not the primary beneficiary of PPEA Holding Company, LLC (“PPEA Holding”) because we lack the power to direct the activities that most significantly impact PPEA Holding’s economic performance. The activities that most significantly impact PPEA Holding’s economic performance are changes to the costs to complete the facility, modifications to the off-take agreements, and/or changes in the financing structure. As the PPEA Holding Company, LLC Agreement currently requires that those activities be approved by all members, the power to direct these activities is shared with the other owners of PPEA Holding and the participants in the 665 MW coal-fired power generation facility (the “Plum Point Project”). We have historically consolidated PPEA Holding in our consolidated financial statements.

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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, 2010 and 2009

The adoption of ASU No. 2009-17 resulted in a deconsolidation of our investment in PPEA Holding, which resulted in the cumulative effect of a change in accounting principle of approximately $41 million ($25 million after tax), which was recorded as an increase in Accumulated deficit on our unaudited condensed consolidated balance sheets as of January 1, 2010. This pre-tax charge reflects the difference in the assets, liabilities and equity (including Other comprehensive loss) that we have historically included in our consolidated balance sheets and the carrying value of the equity investment and related accumulated other comprehensive loss that we would have recorded had we accounted for our investment in PPEA Holding as an equity method investment since April 2, 2007, the date we acquired an interest in PPEA Holding. On January 1, 2010, we recorded an equity investment of approximately $19 million and accumulated other comprehensive loss of approximately $29 million ($17 million after tax). The $19 million equity investment balance at January 1, 2010 reflects the fair value of our investment at that date, after an other than temporary pre-tax impairment charge of approximately $32 million that would have been recorded in 2009 had we accounted for our investment in PPEA Holding as an equity investment at that time. Our assessment of the fair value of our investment in PPEA Holding at January 1, 2010 reflects the risk associated with PPEA Holding’s financing arrangement at that date. Please read Note 6— Fair Value Measurements for further discussion about the assumptions used to determine the fair value of our investment as of January 1, 2010. Please read Note 17—Debt—Plum Point (including PPEA Credit Agreement Facility and PPEA Tax Exempt Bonds) and Note 14—Variable Interest Entities—PPEA Holding Company, LLC in our Form 10-K for further discussion. Summarized aggregate financial information for PPEA Holding, included in our December 31, 2009 consolidated balance sheets, is included below (in millions):

Current assets	$	6
Property, plant and equipment, net		611
Intangible asset		190
Other non-current asset		20
Total assets		827
Current portion of long-term debt		744
Current liabilities		74
Noncontrolling interest		77
Accumulated other comprehensive loss		(157	)

The adoption of ASU No. 2009-17 had no impact on our investment in the Hydroelectric Generation Facilities. Please read Note 8—Variable Interest Entities—Hydroelectric Generation Facilities for further discussion.

Disclosures about Fair Value Measurements. On January 1, 2010, we adopted ASU No. 2010-06—Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. Please read Note 6—Fair Value Measurements for further discussion.

Note 2—Dispositions and Discontinued Operations

Dispositions

LS Power Transactions. We consummated our transactions (the “LS Power Transactions”) with LS Power Partners, L.P. and certain of its affiliates (“LS Power”) in two parts, with the issuance of $235 million of notes by DHI on December 1, 2009, and the remainder of the transactions closing on November 30, 2009. Please read Note 18—Related Party Transactions in our Form 10-K for further discussion of these transactions.

Discontinued Operations

Arlington Valley, Griffith and Bluegrass. On November 30, 2009, we completed the sale of our interests in the Arlington Valley and Griffith power generation assets (collectively, the “Arizona power generation facilities”) and Bluegrass power generation facility as part of the LS Power Transactions.

The Arizona power generation facilities, as well as our Bluegrass facility, met the criteria of held for sale during the third quarter 2009. At that time, we discontinued depreciation and amortization of the Arizona power generation facilities’ and Bluegrass’ property, plant and equipment. Depreciation and amortization expense related to the Arizona power generation facilities totaled approximately $5 million in the three-month period ended March 31, 2009. Depreciation and amortization expense related to Bluegrass totaled approximately $1 million in the three-month period ended March 31, 2009. We recorded an impairment charge of $5 million related to the Bluegrass facility during the first quarter 2009. 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 our sale of our interest in the Heard County power generation facility for approximately $105 million.

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 less than $1 million in the three-month period ended March 31, 2009. We are reporting the results of Heard County’s operations in discontinued operations for all periods presented.

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

	GEN-MW			GEN-WE			Total
	(in millions)
Three Months Ended March 31, 2010
Revenues	$	—		$	—		$	—
Income from operations before taxes		—			1			1
Income from operations after taxes		—			1			1

Three Months Ended March 31, 2009
Revenues	$	1		$	1		$	2
Loss from operations before taxes (1)		(6	)		(14	)		(20	)
Loss from operations after taxes		(4	)		(10	)		(14	)

__________

(1)	Includes $5 million of impairment charges related to our Bluegrass power generation facility in the GEN-MW segment.

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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, 2010 and 2009

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 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. Effective January 1, 2010, with the deconsolidation of our investment in PPEA Holding, we no longer have income allocated to noncontrolling interest holders included in our consolidated statements of operations. The following table presents the net loss attributable to Dynegy’s and DHI’s stockholders for the three months ended March 31, 2009:

	Three Months Ended March 31, 2009
	Dynegy Inc			Dynegy Holdings Inc
	(in millions)
Loss from continuing operations	$	(321	)	$	(321	)
Loss from discontinued operations, net of tax benefit of $6 and $6, respectively		(14	)		(14	)

Net loss	$	(335	)	$	(335	)

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 three months ended March 31, 2009. As a result of the deconsolidation of PPEA Holding, effective January 1, 2010, there are no longer any noncontrolling interests in any of our consolidated subsidiaries, and as such, no reconciliation is needed for the three months ended March 31, 2010.

	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

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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, 2010 and 2009

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. As a result of the deconsolidation of PPEA Holding, effective January 1, 2010, there are no longer any noncontrolling interests in any of our consolidated subsidiaries, and as such, no reconciliation is needed for the three months ended March 31, 2010.

	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

Note 4—Investments

The amortized cost basis, unrealized gains and losses and fair values of investments in available for sale investments as of March 31, 2010, is shown in the table below:

	Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Available for Sale investments:
Commercial Paper	$	14	$	—	$	—	$	14
Certificates of Deposit		29		—		—		29
Corporate Securities		11		—		—		11
U.S. Treasury and Government Securities		60		—		—		60

Total	$	114	$	—	$	—	$	114

Note 5—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.

Our commodity risk management strategy gives us the flexibility to sell energy and capacity through a combination of spot market sales and near-term contractual arrangements (generally over a rolling 1 to 3 year time frame). Our commodity risk management goal is to increase predictability of cash flows in the near-term while keeping the ability to capture value from rising commodity prices that are anticipated over the longer term. Many of our contractual arrangements are derivative instruments and must be accounted for at fair value. We also manage commodity price risk by entering into capacity forward sales arrangements, tolling arrangements, RMR contracts, fixed price coal purchases and other arrangements that do not receive fair value accounting treatment because these arrangements do not meet the definition of a derivative or are designated as “normal purchase normal sales.” As a result, the gains and losses with respect to these arrangements are not reflected in the unaudited condensed consolidated statements of operations until the settlement dates.

Quantitative Disclosures Related to Financial Instruments and Derivatives

On January 1, 2009, we adopted authoritative guidance 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.

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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, 2010 and 2009

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, 2010, 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, 2010, we had net long/(short) commodity derivative contracts outstanding and notional interest rate swaps outstanding in the following quantities:

Contract Type	Hedge Designation	Quantity			Unit of Measure	Net Fair Value
		(in millions)				(in millions)
Commodity contracts:
Electric energy (1)	Not designated		(94	)	MW	$	495
Natural gas (1)	Not designated		248		MMBtu	$	(237	)
Heat rate derivatives	Not designated		(5)/39		MW/MMBtu	$	20
Other (2)	Not designated		1		Misc.	$	(8	)

Interest rate contracts:
Interest rate swaps	Fair value hedge		(25	)	Dollars	$	2
Interest rate swaps	Not designated		231		Dollars	$	(16	)
Interest rate swaps	Not designated		(206	)	Dollars	$	14

_______

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

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

Derivatives on the Balance Sheet. We execute a significant volume of transactions through a futures clearing manager. Our daily cash payments (receipts) to (from) our futures clearing manager consist of three parts: (1) fair value of open positions (exclusive of options) (“Daily Cash Settlements”); (2) initial margin requirements related to open positions (exclusive of options) (“Initial Margin”); and (3) fair value and margin requirements related to options (“Options”, and collectively with Initial Margin, “Collateral”). We do not offset fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement and we do not elect to offset the fair value amounts recognized for the Daily Cash Settlements paid or received against the fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement.

As a result, our consolidated balance sheets present derivative assets and liabilities, as well as related Daily Cash Settlements, on a gross basis. As of March 31, 2010, the net value of our transactions with a futures clearing manager totaled a liability of $24 million, which is included in Accrued liabilities on our consolidated balance sheets. Approximately $152 million of Collateral was more than offset by approximately $175 million of Daily Cash Settlements due to the broker. As of December 31, 2009, of the approximately $286 million included in Broker margin account on our consolidated balance sheets, approximately $288 million represented Collateral, offset by approximately $2 million representing Daily Cash Settlements.

The following table presents the fair value and balance sheet classification of derivatives in the unaudited condensed consolidated balance sheet as of March 31, 2010, and December 31, 2009 segregated between designated, qualifying hedging instruments and those that are not, and by type of contract segregated by assets and liabilities.

Contract Type	Balance Sheet Location	March 31, 2010			December 31, 2009
		(in millions)
Derivatives designated as hedging instruments:
Derivative Assets:
Interest rate contracts	Assets from risk management activities	$	2		$	2
Derivative Liabilities:
Interest rate contracts	Liabilities from risk management activities		—			—

Total derivatives designated as hedging instruments			2			2

Derivatives not designated as hedging instruments:
Derivative Assets:
Commodity contracts	Assets from risk management activities		2,160			861
Interest rate contracts	Assets from risk management activities		14			13
Derivative Liabilities:
Commodity contracts	Liabilities from risk management activities		(1,890	)		(844	)
Interest rate contracts	Liabilities from risk management activities		(16	)		(65	)

Total derivatives not designated as hedging instruments			268			(35	)

Total derivatives, net		$	270		$	(33	)

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, 2010 and 2009 segregated between designated, qualifying hedging instruments and those that are not, by type of contract.

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 2007, a formerly consolidated variable interest entity, PPEA, entered into three interest rate swap agreements which were designated as cash flow hedges. PPEA Holding was deconsolidated on January 1, 2010 upon adoption of ASU No. 2009-17, and therefore these instruments are not reflected in our consolidated risk management accounts at March 31, 2010. Please read Note 1—Accounting Policies—Accounting Policies Adopted—Variable Interest Entities for further discussion.

During the three months ended March 31, 2010 and 2009, 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, 2010 and 2009, no amounts were reclassified to earnings in connection with forecasted transactions that were considered probable of not occurring.

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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, 2010 and 2009

The balance in cash flow hedging activities within Accumulated other comprehensive loss, net at March 31, 2010, representing our share of the historical cash flow hedging activities of PPEA under the equity method, is expected to be reclassified to future earnings when the forecasted hedged transaction impacts earnings. Approximately $2 million is currently estimated to be reclassified into earnings over the 12-month period ending March 31, 2011. 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 amount of gain recognized in Other comprehensive loss on the effective portion of interest rate derivatives for the three months ended March 31, 2009 was $34 million. As of July 28, 2009, these derivatives no longer qualified for cash flow hedge accounting, and therefore, no additional gains or losses have been recognized in Other comprehensive loss since that date. During the three months ended March 31, 2010 and 2009, zero and $1 million, respectively, of losses were reclassified from Accumulated other comprehensive loss into earnings.

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 2011. During the three months ended March 31, 2010 and 2009, 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, 2010 and 2009, there were no gains or losses related to the recognition of firm commitments that no longer qualified as fair value hedges.

The impact of interest rate swap contracts designated as fair value hedges and the related hedged item on our unaudited condensed consolidated statement of operations for the three months ended March 31, 2010 and 2009 was immaterial.

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

For the three-month period ended March 31, 2010, our revenues included approximately $253 million of mark-to-market gains related to this activity compared to $168 million of mark-to-market gains in the same period in the prior year.

The impact of derivative financial instruments that have not been designated as hedges on our unaudited condensed consolidated statement of operations for the three months ended March 31, 2010 and 2009 is presented below. Note that this presentation does not reflect the expected gains or losses arising from the underlying physical transactions associated with these financial instruments. Therefore, this presentation is not indicative of the economic gross profit we expect to realize when the underlying physical transactions settle.

		Amount of Gain (Loss) Recognized in Income on Derivatives for the Three Months Ended March 31,
Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivatives	2010		2009
		(in millions)
Commodity contracts	Revenues	$	325	$	266
Interest rate contracts	Interest expense		—		(1	)

Note 6—Fair Value Measurements

The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2010 and December 31, 2009. These financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

	Fair Value as of March 31, 2010
	Level 1		Level 2			Level 3			Total
	(in millions)
Assets:
Assets from commodity risk management activities:
Electricity derivatives	$	—	$	1,142		$	108		$	1,250
Natural gas derivatives		—		864			5			869
Heat rate derivatives		—		—			22			22
Other derivatives		—		19			—			19

Total assets from commodity risk		—		2,025			135			2,160
Assets from interest rate swaps		—		16			—			16
Marketable securities:
Commercial paper		—		14			—			14
Certificates of deposit		—		29			—			29
Corporate securities		—		11			—			11
U.S. Treasury and government securities		—		60			—			60

Total marketable securities		—		114			—			114

Total—Dynegy and DHI	$	—	$	2,155		$	135		$	2,290

Liabilities:
Liabilities from commodity risk management activities:
Electricity derivatives	$	—	$	(717	)	$	(38	)	$	(755	)
Natural gas derivatives		—		(1,106	)		—			(1,106	)
Heat rate derivatives		—		—			(2	)		(2	)
Other derivatives		—		(27	)		—			(27	)

Total liabilities from commodity risk		—		(1,850	)		(40	)		(1,890	)
Liabilities from interest rate swaps		—		(16	)		—			(16	)

Total—Dynegy and DHI	$	—	$	(1,866	)	$	(40	)	$	(1,906	)

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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, 2010 and 2009

	Fair Value as of December 31, 2009
	Level 1		Level 2			Level 3			Total
	(in millions)
Assets:
Assets from commodity risk management activities:
Electricity derivatives	$	—	$	442		$	57		$	499
Natural gas derivatives		—		302			5			307
Heat rate derivatives		—		—			19			19
Other derivatives		—		36			—			36

Total assets from commodity risk		—		780			81			861
Assets from interest rate swaps		—		15			—			15
Other—DHI (1)		—		8			—			8

Total—DHI		—		803			81			884
Other—Dynegy (1)		—		1			—			1

Total—Dynegy and DHI	$	—	$	804		$	81		$	885

Liabilities:
Liabilities from commodity risk management activities:
Electricity derivatives	$	—	$	(361	)	$	(51	)	$	(412	)
Natural gas derivatives		—		(401	)		—			(401	)
Heat rate derivatives		—		—			(2	)		(2	)
Other derivatives		—		(29	)		—			(29	)

Total liabilities from commodity risk		—		(791	)		(53	)		(844	)
Liabilities from interest rate swaps		—		(15	)		(50	)		(65	)

Total—Dynegy and DHI	$	—	$	(806	)	$	(103	)	$	(909	)

_______

(1)	Other represents short-term investments.

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

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

	Electricity Derivatives			Natural Gas Derivatives		Heat Rate Derivatives			Interest Rate Swaps			Total
	(in millions)
Balance at December 31, 2009	$	6		$	5	$	17		$	(50	)	$	(22	)
Deconsolidation of Plum Point		—			—		—			50			50
Realized and unrealized gains, net		69			—		18			—			87
Purchases, issuances and settlements		(5	)		—		(15	)		—			(20	)

Balance at March 31, 2010	$	70		$	5	$	20		$	—		$	95

Unrealized gains relating to instruments still held as of March 31, 2010	$	64		$	—	$	14		$	—		$	78

	Electricity Derivatives			Natural Gas Derivatives			Heat Rate Derivatives			Interest Rate Swaps		Total
	(in millions)
Balance at December 31, 2008	$	7		$	7		$	46		$	—	$	60
Realized and unrealized gains, net		—			(1	)		(4	)		—		(5	)
Purchases, issuances and settlements		(6	)		—			(16	)		—		(22	)

Balance at March 31, 2009	$	1		$	6		$	26		$	—	$	33

Unrealized losses relating to instruments still held as of March 31, 2009	$	(5	)	$	(1	)