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 Form 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 Holding, which through its wholly owned subsidiary, owns a 57 percent undivided interest in the Plum Point Project, 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 SCEA, which owns a 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.

Recent Developments

Goodwill Impairment. We review goodwill for potential impairment as of November 1st of each year or more frequently if events or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During the first quarter 2009, there were several events and circumstances which, considered in the aggregate, indicated a reduction in the fair value of our reporting segments. As a result, although we have not yet finalized the second step of our impairment analysis, we recorded impairment charges of $76 million, $260 million and $97 million for our GEN-MW, GEN-WE and GEN-NE reporting units, respectively, as of March 31, 2009. Please see Note 9-Goodwill for further discussion.

DLS Power Holdings and DLS Power Development Dissolution. In December 2008, Dynegy entered into an agreement with LS Associates to dissolve DLS Power Holdings and DLS Power Development, our development joint ventures with LS Power Associates effective January 1, 2009. Under the terms of this agreement, we acquired exclusive rights related to repowering and expansion opportunities at our existing facilities. In the first quarter 2009, Dynegy subsequently contributed these assets to DHI. In return, LS Power Associates received a cash payment of approximately $19 million, as well as full rights to new greenfield development opportunities previously held by the joint venture. Please read Note 8-Variable Interest Entities-DLS Power Holdings and DLS Power Development for further discussion.

Heard County. On April 30, 2009, we completed our sale of the Heard County power generation facility to Oglethorpe for approximately $105 million, net of transaction costs. Please read Note 2-Discontinued Operations-Heard County for further discussion.

Overview

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, fixed capacity payments and contractual obligations, capital expenditures (including required environmental expenditures) and working capital needs. Examples of working capital needs include prepayments or cash collateral associated with purchases of commodities, particularly natural gas, fuel oil and coal, facility maintenance costs and other costs such as payroll.

Our primary sources of internal liquidity are cash flows from operations, cash on hand, available capacity under our Credit Facility, 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 available capacity under our Contingent LC Facility, as described further below. Additionally, DHI may borrow money from time to time from Dynegy. Our primary sources of external liquidity are asset sales proceeds and proceeds from capital market transactions to the extent we engage in these transactions.

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 Midwest Consent Decree, and debt service requirements over the next twelve months. We maintain capacity under the Credit Facility 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 DHI's Fifth Amended and Restated Credit Facility (the "Credit Facility"), as well as the discussion below regarding our Revolver Capacity.

Current Liquidity. The following table summarizes our consolidated revolver capacity and liquidity position at May 1, 2009, March 31, 2009 and December 31, 2008:

                                                      May 1,         March 31,     December 31,
                                                       2009            2009            2008
                                                                    (in millions)
Revolver capacity (1)(2)                             $   1,080      $     1,080       $     1,080
Borrowings against revolver capacity                         -                -                 -
Term letter of credit capacity, net of required
reserves                                                   825              825               825
Plum Point and Sandy Creek letter of credit
capacity                                                   377              377               377
Available contingent letter of credit facility
capacity (3)                                                 -                -                 -
Outstanding letters of credit                             (997 )         (1,081 )          (1,135 )

Unused capacity                                          1,285            1,201             1,147

Cash-DHI                                                   646              539               670

Total available liquidity-DHI                            1,931            1,740             1,817
Cash-Dynegy                                                183              183                23

Total available liquidity-Dynegy                     $   2,114      $     1,923       $     1,840


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(2) Based on management's current 2009 forecast of EBITDA, DHI's available liquidity under the Credit Facility is expected to be reduced temporarily in mid-to late-2009 as a result of borrowing limitations under the covenant regarding the ratio of secured debt to EBITDA. See "Revolver Capacity" below for further discussion.

(3) 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. Over the course of 2009, the ratio of availability per dollar increase in natural gas prices will be reduced, on a pro rata monthly basis, to zero by year-end.

Cash on Hand. At May 1, 2009 and March 31, 2009, Dynegy had cash on hand of $829 million and $722 million, respectively, as compared to $693 million at December 31, 2008. The increase in cash on hand as compared to the end of 2008 is primarily attributable to cash provided by operating activities of our power generation business.

At May 1, 2009 and March 31, 2009, DHI had cash on hand of $646 million and $539 million, respectively, as compared to $670 million at December 31, 2008. The decrease in cash on hand as compared to the end of 2008 is primarily attributable to a dividend of $175 million paid to Dynegy in January 2009 partially offset by cash provided by the operating activities of our power generation business.

Revolver Capacity. As of May 1, 2009, $997 million in letters of credit are outstanding but undrawn, and we have no revolving loan amounts drawn under the Credit Facility, which is our primary credit facility. Based on management's current 2009 forecast of EBITDA, the potential use by DHI of available liquidity under the Credit Facility is likely to be reduced temporarily during 2009 in order to remain in compliance with the covenant set forth in Section 7.11 of the Credit Facility regarding the ratio of secured debt to EBITDA (each as defined therein). The effect of reduced availability under the Credit Facility would be less available liquidity to DHI. However, even after giving effect to this reduction, we believe we have sufficient liquidity and capital resources to support our operations for the next twelve months. Please read Note 15-Debt-Fifth Amended and Restated Credit Facility in our Form 10-K for further discussion of the Credit Facility.

Operating Activities

Historical Operating Cash Flows. Dynegy's cash flow provided by operations totaled $165 million for the three months ended March 31, 2009. DHI's cash flow provided by operations totaled $183 million for the three months ended March 31, 2009. During the period, our power generation business provided positive cash flow from operations of $255 million from the operation of our power generation facilities, reflecting positive earnings for the period. Corporate and other operations included a use of approximately $90 million and $72 million in cash by Dynegy and DHI, respectively, primarily due to interest payments to service debt and general and administrative expenses, partially offset by interest income.

Dynegy's and DHI's cash flow provided by operations totaled $146 million for the three months ended March 31, 2008. During the period, our power generation business provided positive cash flow from operations of $239 million primarily due to positive earnings for the period, partly offset by an increased use of working capital. Corporate and other operations included a use of approximately $93 million in cash by Dynegy and DHI relating to corporate-level expenses and our former customer risk management business.

Future Operating Cash Flows. 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, collateral requirements, the value of capacity and ancillary services and legal and regulatory requirements. For example, continued depression of commodity prices will affect our operating cash flow. Additionally, the 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.

Collateral Postings. 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 at May 1, 2009, March 31, 2009 and December 31, 2008:

                               May 1,       March 31,
                                2009          2009          December 31, 2008
                                                (in millions)
           By Business:
           Generation          $ 1,093     $     1,168     $             1,064
           Other                   189             189                     189

           Total               $ 1,282     $     1,357     $             1,253
           By Type:
           Cash (1)            $   285     $       276     $               118
           Letters of Credit       997           1,081                   1,135

           Total               $ 1,282     $     1,357     $             1,253


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The changes in collateral postings from December 31, 2008 to March 31, 2009 and to May 1, 2009 is primarily due to the volume of forward power sales and fuel purchase transactions.

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.

Investing Activities

Capital Expenditures. We continue to tightly manage our operating costs and
capital expenditures. We had approximately $138 million and $131 million in
capital expenditures during the three months ended March 31, 2009 and 2008. Our
capital spending by reportable segment was as follows:

                                           March 31,
                                        2009      2008

                               GEN-MW   $ 128     $ 115
                               GEN-WE       1         3
                               GEN-NE       7        10
                               Other        2         3

                               Total    $ 138     $ 131

Capital spending in our GEN-MW segment primarily consisted of environmental and maintenance capital projects, as well as approximately $23 million and $54 million spent on development capital related to the Plum Point project during the three months ended March 31, 2009 and 2008, respectively. Capital spending in our GEN-WE and GEN-NE segments primarily consisted of maintenance projects.

During the first quarter 2009, we revised our estimate of the timing regarding a maintenance capital project at our Moss Landing facility in GEN-WE. We expect capital expenditures for the remainder of 2009 to be approximately $40 million higher than originally planned, primarily due to the change in timing.

Asset Dispositions. Proceeds from asset sales during the three months ended March 31, 2008 totaled $56 million and primarily related to the sale of our Calcasieu power generating facility, net of transaction costs. Please read Note 2-Discontinued Operations-Calcasieu for further discussion.

On April 30, 2009, we completed our sale of the Heard County power generation facility to Oglethorpe for approximately $105 million, net of transaction costs. Please read Note 2-Discontinued Operations-Heard County 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 2009 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.

Other Investing Activities. Cash inflow related to short-term investments during the three months ended March 31, 2009 totaled $8 million for both Dynegy and DHI, reflecting a distribution from our short-term investments. There was a $32 million cash outflow during the three months ended March 31, 2009 due to changes in restricted cash balances primarily due to a $35 million increase in the Independence restricted cash balance.

Dynegy made $6 million in contributions to DLS Power Holdings during the three months ended March 31, 2008. There was a $25 million cash outflow during the three months ended March 31, 2008 due to changes in restricted cash balances primarily due to a $30 million increase in the Independence restricted cash balance. Finally, Other included $6 million of insurance proceeds and $4 million of proceeds from the liquidation of an investment during the three months ended March 31, 2008.

Financing Activities

Historical Cash Flow from Financing Activities. Dynegy's net cash provided by financing activities during the three months ended March 31, 2009 totaled $25 million primarily related to proceeds from long-term borrowings under the Plum Point Credit Agreement Facility. DHI's net cash used in financing activities during the three months ended March 31, 2009 totaled $150 million. This includes a one-time dividend payment from DHI to Dynegy of $175 million offset by $25 million primarily related to proceeds from long-term borrowings under the Plum Point Credit Agreement Facility.

Dynegy's and DHI's net cash provided by financing activities during three months ended March 31, 2008 totaled $50 million, which primarily related to proceeds from long-term borrowings under the Plum Point Credit Agreement Facility.

Financing Trigger Events. Our debt instruments and other financial obligations include provisions which, if not met, could require early payment, additional collateral support or similar actions. These trigger events include financial covenants, insolvency events, defaults on scheduled principal or interest payments, acceleration of other financial obligations and change of control provisions. We do not have any trigger events tied to specified credit ratings or stock price in our debt instruments and are not party to any contracts that require us to issue equity based on credit ratings or other trigger events. However, certain interest rate swaps to which Plum Point is a party could be terminated if a credit downgrade of Plum Point occurs and there is also a default by the insurer that has provided credit insurance for the swaps.

Financial Covenants. Our Credit Facility contains certain financial covenants, including (i) a covenant (measured as of the last day of the relevant fiscal quarter as specified below) that requires DHI and certain of its subsidiaries to maintain a ratio of secured debt to EBITDA for DHI and its relevant subsidiaries of no greater than 2.75:1 (March 31, 2009); and 2.5:1 (June 30, 2009 and thereafter); and (ii) a covenant that requires DHI and certain of its subsidiaries to maintain a ratio of EBITDA to consolidated interest expense for DHI and its relevant subsidiaries as of the last day of the measurement periods ending March 31, 2009 and June 30, 2009 of no less than 1.625:1; and ending September 30, 2009 and thereafter of no less than 1.75:1. We are in compliance with these covenants as of March 31, 2009, but expect a temporary reduction in availability of liquidity under our Credit Facility in mid-to late-2009 as a result of forecasted EBITDA and a corresponding borrowing limitation under the secured debt to EBITDA covenant. Despite this expected temporary reduction in our available liquidity, we believe we have sufficient liquidity and capital resources to support our operations for the next twelve months. Going foward, we will continue to monitor our compliance with the covenants relative to the earnings potential of our asset-based power generation portfolio. Please read "Revolver Capacity" above for further discussion.

Subject to certain exceptions, DHI and its relevant subsidiaries are subject to restrictions on asset sales, incurring additional indebtedness, limitations on investments and certain limitations on dividends and other payments in respect of capital stock. Our lenders agreed to amend certain of these restrictions or limitations effective February 13, 2009. Based on our available liquidity as of March 31, 2009 and the additional capacity available under the Contingent LC Facility, we do not believe these limitations will affect our operations. Please read Note 15-Debt-Fifth Amended and Restated Credit Facility in our Form 10-K for further discussion of our Credit Facility.

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, legal judgments or regulatory requirements as well as any decisions to seek an improved credit profile. 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 our Credit Facility.

In addition, we continually review and discuss opportunities 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. 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.

Dividends and Dynegy Common Stock. Dividend payments on Dynegy's common stock are at the discretion of its Board of Directors. Dynegy did not declare or pay a dividend on its common stock during the first quarter 2009, and does not expect to pay a dividend on any class of its common stock in the foreseeable future.

Credit Ratings

Our credit rating status is currently "non-investment grade"; our senior unsecured debt is rated "B" by Standard & Poor's, "B3" by Moody's, and "B+" by Fitch. On April 8, 2009, Moody's downgraded our corporate family and probability of default ratings of the electricity utility to "B2" from "B1" based on projected lower power prices affecting credit metrics. The agency also cut our senior secured bank facilities rating to "Ba2" from "Ba1", and senior unsecured debt rating to "B3" from "B2". The downgrades did not trigger any of our financing arrangements or other obligations and otherwise have not impacted our operations or liquidity.

Disclosure of Contractual Obligations and Contingent Financial Commitments

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 March 31, 2009, there were no material changes to our contractual obligations and contingent financial commitments since December 31, 2008.

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 month periods ended March 31, 2009 and 2008. 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. Our unaudited condensed consolidated financial results also reflect corporate-level expenses such as general and administrative, interest and depreciation and amortization.

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 March 31, 2009 and 2008, respectively:

    Dynegy's Results of Operations for the Three Months Ended March 31, 2009

. . .