Item 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-DYNEGY INC. AND DYNEGY HOLDINGS INC.

The following discussion should be read together with the unaudited condensed consolidated financial statements and the notes thereto included in this report and with the audited consolidated financial statements and the notes thereto included in our Forms 10-K.

We are holding companies and conduct substantially all of our business operations through our subsidiaries. Our current business operations are focused primarily on the power generation sector of the energy industry. We report the results of our power generation business as three separate segments in our consolidated financial statements: (i) the Midwest segment ("GEN-MW"); (ii) the West segment ("GEN-WE"); and (iii) the Northeast segment ("GEN-NE"). Our unaudited condensed consolidated financial results also reflect corporate-level expenses such as general and administrative, interest and depreciation and amortization.

In addition to our operating generation facilities, we own an approximate 37 percent interest in PPEA which in turn owns an approximate 57 percent undivided interest in Plum Point, a 665 MW coal-fired power generation facility under construction in Arkansas, which is included in GEN-MW. We also own a 50 percent interest in SCH, which through a subsidiary owns an approximate 64 percent undivided interest in the Sandy Creek Project, an 898 MW power generation facility under construction in McLennan County, Texas, which is included in GEN-WE. Finally, through its interest in DLS Power Holdings, Dynegy owns a 50 percent interest in a portfolio of greenfield development and brownfield expansion projects and repowering and/or expansion opportunities which is included in Other.

Recent Developments

Market Conditions. The end of the third quarter and beginning of the fourth quarter 2008 has been characterized by turmoil in financial markets that many have referred to as a liquidity crisis. Several large financial institutions have failed, and stock prices across industries, including Dynegy's, have fallen sharply. These market conditions have resulted in a decreased willingness on the part of lenders to enter into new loans. Although recent market developments have not had a material adverse impact on our ability to conduct our business, they have affected us directly in several ways:

• Lehman CP became a defaulting lender under our Credit Agreement, thereby reducing our effective availability under the Credit Agreement by $70 million to $1.9 billion;

• We recorded a reserve of $3 million as a result of the bankruptcy of Lehman Brothers Holdings Inc. ("LBH"). This reserve represents the uncollateralized portion of our $15 million net position arising from our outstanding commercial transactions with a subsidiary of LBH;

• A large money market fund in which we invested a portion of our cash balance lowered its share price below $1, and subsequently suspended distributions, causing us to reclassify our $127 million investment from cash equivalents to short-term investments and to record a $2 million impairment; and

• A decrease in liquidity in the bilateral markets for forward power sales, resulting in increased exchange-traded transactions settling through our futures clearing manager.

The banks and other counterparties with which we transact have also been affected by market developments in various ways, which could affect their ability to enter into transactions with us and further impact the way we conduct our business. Please read Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources for further discussion of the impact of recent market developments on our business.

Rolling Hills. On July 31, 2008, we completed the sale of the Rolling Hills power generation facility to an affiliate of Tenaska Capital Management, LLC for approximately $368 million, net of transaction costs. We recorded a gain of approximately $57 million related to the sale of the facility in the third quarter 2008. Please read Note 3-Dispositions and Discontinued Operations-Dispositions-Rolling Hills for further discussion.

In this section, we describe our liquidity and capital requirements and our internal and external liquidity and capital resources. Our liquidity and capital requirements are primarily a function of our debt maturities and debt service requirements, collateral requirements, fixed capacity payments and contractual obligations, capital expenditures (including required environmental expenditures), potential funding commitments for our equity investments and working capital needs. Examples of working capital needs include prepayments or cash collateral associated with purchases of commodities, particularly natural gas and coal, facility maintenance costs and other costs such as payroll. Our liquidity and capital resources are primarily derived from cash flows from operations, cash on hand, borrowings under our financing agreements, asset sale proceeds and proceeds from capital market transactions to the extent we engage in these activities. Additionally, DHI may borrow money from time to time from Dynegy.

Our primary internal liquidity sources are cash flows from operations, cash on hand, and available capacity under our Credit Agreement, of which the revolver capacity of $1,080 million is scheduled to mature in April 2012 and the term letter of credit capacity of $850 million is scheduled to mature in April 2013, and under our Contingent LC Facility, as described further below. Operating cash flows provided by our power generation assets and the available cash we currently hold are expected to be sufficient to fund the operation of our business, as well as our planned capital expenditure program, including expenditures in connection with the Consent Decree, and debt service requirements over the next twelve months. We maintain capacity under the Credit Agreement in order to post collateral in the form of letters of credit or cash, and we believe we have sufficient capacity should we be required to post additional collateral. Please read Note 15-Debt-Fifth Amended and Restated Credit Facility in our Form 10-K for a discussion of the financial covenants contained in the Credit Agreement.

We have structured our liquidity facilities to provide us with the flexibility to enable us to post additional collateral to support our financial positions as needed in the event that natural gas and power prices increase. At June 30, 2008, the average natural gas prices for the remainder of 2008 and for 2009 were $13.54/MMBtu and $12.47/MMBtu, respectively, and, as shown in the table below, even in this environment of high prices, we maintained $890 million of available liquidity. If natural gas prices had increased further to $13/MMBtu for 2009, additional liquidity would have become available under our Contingent LC Facility. Should forward natural gas and electricity prices increase to levels that are in excess of the forward prices experienced at June 30, 2008, creating the need for us to post significantly more collateral for our forward power sales or natural gas purchases, we believe cash flow from operations and available borrowings under our credit facilities (including the Contingent LC facility) will be sufficient to meet our liquidity needs in the coming twelve months.

Based on our non-investment grade status, we have typically been required to collateralize our forward power sales and natural gas purchase positions. Therefore, any future downgrade of our credit rating, if one were to occur, would not have a material impact on our collateral posting requirements, nor would such a downgrade impact any of our debt covenants or the timing of our debt maturities.

Current Liquidity. The following table summarizes our consolidated revolver capacity and liquidity position at November 3, 2008, September 30, 2008, June 30, 2008 and December 31, 2007:

                                   November 3,      September 30,     June 30,      December 31,
                                      2008              2008            2008            2007
                                  -------------    ---------------    ---------    --------------
                                                           (in millions)
Revolver capacity (1)             $       1,080    $         1,150    $   1,150    $        1,150
Borrowings against revolver
capacity                                      -                  -            -                 -
Term letter of credit
capacity, net of required
reserves                                    825                825          825               825
Plum Point and Sandy Creek
letter of credit capacity                   377                377          377               425
Available contingent letter of
credit facility capacity (2)                  -                  -            -                 -
Outstanding letters of credit            (1,113 )           (1,172 )     (1,733 )          (1,279 )
                                  -- ----------    -- ------------    -- ------    -- -----------

Unused capacity (3)                       1,169              1,180          619             1,121

Cash-DHI (4)                                828                724          238               292
                                  -- ----------    -- ------------    -- ------    -- -----------

Total available liquidity-DHI             1,997              1,904          857             1,413
Cash-Dynegy (4)                              27                 26           33                36
                                  -- ----------    -- ------------    -- ------    -- -----------

Total available
liquidity-Dynegy                  $       2,024    $         1,930    $     890    $        1,449
                                  -- ----------    -- ------------    -- ------    -- -----------

(2) Under the terms of the Contingent LC Facility, up to $300 million of capacity can become available, contingent on 2009 forward natural gas prices rising above $13/MMBtu.

(3) We currently have 18 lenders participating in the revolving portion of our Credit Agreement with commitments ranging from $10 million to $105 million. Other than the commitment from Lehman CP, we have not experienced, nor do we currently anticipate, any difficulties in obtaining funding from any the remaining lenders at this time. However, we continue to monitor the environment, and any lack of or delay in funding by a significant member or multiple members of our banking group could negatively affect our liquidity position.

(4) At September 30, 2008, investments in a money market fund of $120 million for DHI and an additional $7 million for Dynegy, exclusive of DHI, were reclassified from cash equivalents to short-term investments as a result of the fund's decision to suspend redemptions pending a liquidation of the fund's assets. Please read Note 1-Accounting Policies-Available-for-Sale Securities for further discussion. On October 31, 2008, Dynegy and DHI received a cash distribution of $64 million and $61 million, respectively, from this investment.

Cash Flows from Operations. Dynegy had operating cash inflows of $397 million for the nine months ended September 30, 2008. This consisted of $757 million in operating cash flows from our power generation business, offset by $360 million of cash outflows relating to corporate-level expenses and our former customer risk management business.

DHI had operating cash inflows of $393 million for the nine months ended September 30, 2008. This consisted of $757 million in operating cash flows from our power generation business, offset by $364 million of cash outflows relating to corporate-level expenses and our former customer risk management business.

Please read "-Results of Operations-Operating Income" and "-Cash Flow Disclosures" for further discussion of factors impacting our operating cash flows for the periods presented.

Our future operating cash flows will vary based on a number of factors, many of which are beyond our control, including the price of natural gas and its correlation to power prices, the cost of coal and fuel oil, the value

of ancillary services and capacity and legal and regulatory requirements. Additionally, availability of our plants during peak demand periods will be required to allow us to capture attractive market prices when available. Over the longer term, our operating cash flows also will be impacted by, among other things, our ability to tightly manage our operating costs, including maintenance costs, in balance with ensuring that our plants are available to operate when markets offer attractive returns.

Cash on Hand. At November 3, 2008 and September 30, 2008, Dynegy had cash on hand of $855 million and $750 million, respectively, as compared to $328 million at December 31, 2007. The increase in cash on hand at September 30, 2008 as compared to the end of 2007 is primarily attributable to cash provided by the operating activities of our power generation business and proceeds received from the sale of our Rolling Hills power generation facility. These increases were partly offset by the reclassification of $127 million of investments in a money market fund from cash and cash equivalents to short-term investments. Our investment in this fund did not meet the definition of a cash equivalent at September 30, 2008, as the fund had suspended distributions pending an orderly liquidation. The increase in cash on hand from September 30, 2008 to November 3, 2008 was primarily attributable to cash provided by the operating activities of our power generation business and the receipt of a distribution from our investment in a money market fund which was classified as a short-term investment at September 30, 2008.

At November 3, 2008 and September 30, 2008, DHI had cash on hand of $828 million and $724 million, respectively, as compared to $292 million at December 31, 2007. The increase in cash on hand at September 30, 2008 as compared to the end of 2007 is primarily attributable to cash provided by the operating activities of our power generation business and proceeds received from the sale of our Rolling Hills power generation facility. These increases were partly offset by the reclassification of $120 million of investments in a money market fund from cash and cash equivalents to short-term investments. Our investment in this fund did not meet the definition of a cash equivalent at September 30, 2008, as the fund had suspended distributions pending an orderly liquidation. The increase in cash on hand from September 30, 2008 to November 3, 2008 was primarily attributable to cash provided by the operating activities of our power generation business and the receipt of a distribution from our investment in a money market fund which was classified as a short-term investment at September 30, 2008.

We use a significant portion of our capital resources, in the form of cash and letters of credit, to satisfy counterparty collateral demands. These counterparty collateral demands reflect our non-investment grade credit ratings and counterparties' views of our financial condition and ability to satisfy our performance obligations, as well as commodity prices and other factors. The following table summarizes our consolidated collateral postings to third parties by business November 3, 2008, September 30, 2008, June 30, 2008 and December 31, 2007:

                          November 3,     September 30,     June 30,    December 31,
                             2008             2008            2008          2007
                         -------------   ---------------   ----------   -------------
                                                (in millions)
     By Business:
     Generation          $       1,068   $         1,097   $    1,572   $       1,130
     Other                         188               207          189             202
                         -- ----------   --- -----------   -- -------   -- ----------

     Total               $       1,256   $         1,304   $    1,761   $       1,332
                         -- ----------   --- -----------   -- -------   -- ----------
     By Type:
     Cash (1)            $         143   $           132   $       28   $          53
     Letters of Credit           1,113             1,172        1,733           1,279
                         -- ----------   --- -----------   -- -------   -- ----------

     Total               $       1,256   $         1,304   $    1,761   $       1,332
                         -- ----------   --- -----------   -- -------   -- ----------

The changes in collateral postings are primarily due to the volume of forward power sales and fuel purchase transactions and the effect of changing commodity prices on such transactions. Letters of credit posted under the letter of credit portion of our Credit Agreement are supported with restricted cash.

Going forward, we expect counterparties' collateral demands to continue to reflect changes in commodity prices, including seasonal changes in weather-related demand, as well as their views of our creditworthiness. We believe that we have sufficient capital resources to satisfy counterparties' collateral demands, including those for which no collateral is currently posted, for the foreseeable future.

We have incurred various contractual obligations and financial commitments in the normal course of our operations and financing activities. Contractual obligations include future cash payments required under existing contractual arrangements, such as debt and lease agreements. These obligations may result from both general financing activities and from commercial arrangements that are directly supported by related revenue-producing activities. Contingent financial commitments represent obligations that become payable only if certain pre-defined events occur, such as financial guarantees.

As of September 30, 2008, there were no material changes to our contractual obligations and contingent financial commitments since December 31, 2007.

Dividend payments on Dynegy's common stock are at the discretion of Dynegy's Board of Directors. Dynegy did not declare or pay a dividend on its common stock during the third quarter 2008, and does not foresee a declaration of dividends in the near term.

Our potential external liquidity sources are proceeds from asset sales and other types of capital-raising transactions, including potential debt and equity issuances.

Asset Sale Proceeds. On July 31, 2008, we completed the sale of the Rolling Hills power generation facility to an affiliate of Tenaska Capital Management, LLC for approximately $368 million, net of transaction costs. Please read Note 3-Dispositions and Discontinued Operations-Dispositions-Rolling Hills for further discussion.

On March 31, 2008, we completed our sale of the Calcasieu power generation facility for approximately $56 million, net of transaction costs. Please read Note 3-Disposition and Discontinued Operations-Discontinued Operations-Calcasieu for further discussion.

Consistent with industry practice, we regularly evaluate our generation fleet based primarily on geographic location, fuel supply, market structure and market recovery expectations. We consider divestitures of non-core generation assets where the balance of the above factors suggests that such assets' earnings potential is limited or that the value that can be captured through a divestiture outweighs the benefits of continuing to own and operate such assets. Additional dispositions of one or more generation facilities or other investments could occur in 2008 or beyond. Were any such sale or disposition to be consummated, the disposition could result in accounting charges related to the affected asset(s), and our future earnings and cash flows could be affected.

Capital-Raising Transactions. As part of our ongoing efforts to maintain a capital structure that is closely aligned with the cash-generating potential of our asset-based business, which is subject to cyclical changes in commodity prices, we may explore additional sources of external liquidity. The timing of any transaction may be impacted by events, such as strategic growth opportunities, development activities, legal judgments or regulatory requirements, which could require us to pursue additional capital in the near-term. The receptiveness of the capital markets to an offering of debt or equity securities cannot be assured and may be negatively impacted by, among other things, our non-investment grade credit ratings, significant debt maturities, long-term business prospects and other factors beyond our control, including current market conditions. Any issuance of equity by Dynegy likely would have other effects as well, including stockholder dilution. Our ability to issue debt securities is limited by our financing agreements, including the Credit Agreement.

In addition, we continually review and discuss opportunities to grow our company and to participate in what we believe will be continuing consolidation of the power generation industry. No such definitive transaction has been agreed to and none can be guaranteed to occur; however, we have successfully executed on similar opportunities in the past and could do so again in the future. Depending on the terms and structure of any such transaction, we could issue significant debt and/or equity securities for capital-raising purposes. We also could be required to assume substantial debt obligations and the underlying payment obligations.

Capital Allocation. We continually review our investment options with respect to our capital resources. We do not have any material debt maturities until 2011, and between now and then we expect to enhance our current capital resources through the results of our operating business. We will seek to invest these capital resources in various projects and activities based on their return to stockholders. Potential investments could include, among others: add-on or other enhancement projects associated with our current power generation assets; greenfield or brownfield development projects; early repayment of debt; merger and acquisition activities; and returns of capital to stockholders through, for example, a share buy-back or dividend. Capital allocation determinations generally are subject to the discretion of Dynegy's Board of Directors as well as availability of capital and related investment opportunities, and may be limited by the provisions of our financing agreements. Any particular use of capital in an amount that is not considered material may be made without any prior public disclosure and could occur at any time.

Please read "Uncertainty of Forward-Looking Statements and Information" for additional factors that could impact our future operating results and financial condition.

Overview. In this section, we discuss our results of operations, both on a consolidated basis and, where appropriate, by segment, for the three and nine month periods ended September 30, 2008 and 2007. At the end of this section, we have included our outlook for each segment.

We report the results of our power generation business as three separate geographical segments in our unaudited condensed consolidated financial statements. Beginning in the first quarter 2008, the results of our former customer risk management business are included in Other as it does not meet the criteria required to be an operating segment as of January 1, 2008. Accordingly, we have restated the corresponding items of segment information for prior periods. Our unaudited condensed consolidated financial results also reflect corporate-level expenses such as general and administrative, interest and depreciation and amortization.

Three Months Ended September 30, 2008 and 2007

Summary Financial Information. The following tables provide summary financial data regarding Dynegy's consolidated and segmented results of operations for the three month periods ended September 30, 2008 and 2007, respectively:

  Dynegy's Results of Operations for the Three Months Ended September 30, 2008


                                                Power Generation
                                       -----------------------------------
                                         GEN-MW       GEN-WE      GEN-NE      Other     Total
                                       ----------   ----------   ---------   -------   -------
                                                            (in millions)
Revenues                               $      998   $      449   $     443   $    (4 ) $ 1,886
Cost of sales                                (194 )       (187 )      (179 )       2      (558 )
Operating and maintenance expense,
exclusive of depreciation and
amortization expense shown
separately below                              (55 )        (30 )       (46 )       1      (130 )
Depreciation and amortization
expense                                       (49 )        (26 )       (14 )      (2 )     (91 )
Gain on sale of assets                         57            -           -         -        57
General and administrative expense              -            -           -       (48 )     (48 )
                                       -- -------   -- -------   -- ------   -- ----   - -----
Operating income (loss)                $      757   $      206   $     204   $   (51 ) $ 1,116
Losses from unconsolidated
investments                                     -           (5 )         -         -        (5 )
Other items, net                                1            1          (1 )      11        12
Interest expense                                                                          (105 )
                                                                                       - -----
Income from continuing operations
. . .