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 an approximate 64 percent undivided interest in the Sandy Creek Project, an 898 MW power generation facility under construction in Texas, which is included in GEN-WE. On August 9, 2009, we entered into a transaction with LS Power to sell our interests in the Sandy Creek Project. Please read Recent Developments below for further information.

Recent Developments

LS Power Transaction. On August 9, 2009, we entered into a purchase and sale agreement with LS Power in which we agreed: (i) to sell our ownership interests in 4,788 MW of peaking and combined-cycle power generation assets, as well as our remaining noncontrolling interests in the Sandy Creek Project under construction in Texas and (ii) to issue $235 million principal amount of DHI 7.50 percent senior unsecured notes due 2015. We will receive $1.025 billion in cash (consisting, in part, of $175 million of restricted cash on our unaudited condensed consolidated balance sheets to be released to Dynegy from the Sandy Creek restricted account) and 245 million of Dynegy's Class B shares from LS Power.

Upon closing of the transaction, which is expected to occur during the second half of 2009 subject to receipt of required regulatory approvals, the remaining 95 million shares of Dynegy's Class B common stock held by LS Power will be converted into an equivalent number of shares of Dynegy's Class A common stock, representing approximately 15 percent of Dynegy's outstanding Class A common stock. Concurrent with the execution of the purchase and sale agreement, LS Power and Dynegy entered into a new Shareholder Agreement, which, upon closing of the transaction, generally will restrict LS Power from increasing their future ownership above 15 percent for a specified period and eliminate special approval, board representation and other certain rights associated with the former Class B common shares. Please see Note 2-Dispositions and Discontinued Operations-Dispositions-LS Power Transaction for further information.

Based on the fair value at June 30, 2009 of the consideration to be received from LS Power as now reflected in the definitive transaction documents, we expect to record further pre-tax impairment charges of approximately $355 million in the third quarter 2009 upon the asset groups meeting the criteria of held for sale, as well as a net loss on sale of assets of approximately $130 million upon closing of the transaction, based on our stock price and the value of our investment in Sandy Creek at June 30, 2009. However, the estimates of the total impairment charge and loss on sale could change materially based on changes in the fair value of the shares of Class B common stock that is part of the consideration to be received in the sales transaction. Please read Note 6-Impairment Charges for further discussion of these impairments.

Credit Facility Amendment. On August 5, 2009, we entered into Amendment No. 4 to the Credit Facility. Among certain other changes, Amendment No. 4 (a) modifies the financial covenants relating to the ratios of Secured Debt to EBITDA and of EBITDA to Consolidated Interest Expense; (b) further modifies certain conditions precedent to, incurring of certain DHI indebtedness, adding revolver commitments, making certain investments, or certain sales of assets and engaging in certain other permitted activities; (c) increases the amount of assets eligible for disposition outside the asset sale, reinvestment and prepayment provisions of the Credit Facility; (d) expands our ability to prepay additional debt of DHI under certain conditions; and (e) increases applicable margin for borrowings and the unused commitment fee payable on the unused portion of the revolving facility. Please read Note 10-Debt-Credit Facility Amendment for further discussion.

Cost Saving Initiative. Beginning in the third quarter 2009, we have implemented an extensive, multi-year program to reduce costs across the company. We expect to begin realizing these savings in 2010. Savings are expected to be generated through reductions in capital expenditures, operations and maintenance costs, and corporate general and administrative expenses. We expect to record a restructuring charge of less than $5 million in the third quarter 2009 in connection with this effort.

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 is scheduled to mature in April 2012 and the term letter of credit capacity of $850 million is scheduled to mature in April 2013. 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 ("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 10-Debt- Credit Facility Amendment for a discussion of the financial covenants contained in the Credit Facility.

Current Liquidity. The following table summarizes our consolidated revolver capacity and liquidity position at August 3, 2009, June 30, 2009 and December 31, 2008:

                                               August 3,       June 30,     December 31,
                                                 2009            2009           2008
                                                             (in millions)
Revolver capacity (1)(2)                      $       903     $      875      $      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                        (947 )       (1,024 )          (1,135 )

Unused capacity                                     1,158          1,053             1,147

Cash-DHI                                              532            411               670

Total available liquidity-DHI                       1,690          1,464             1,817
Cash-Dynegy                                           183            183                23

Total available liquidity-Dynegy              $     1,873     $    1,647      $      1,840

(1) We currently have a syndicate of lenders participating in the revolving portion of our Credit Facility with commitments ranging from $10 million to $105 million. We have not experienced, nor do we currently anticipate, any difficulties in obtaining funding from any of the 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 would negatively affect our liquidity position.

(2) As of June 30, 2009, DHI's available liquidity under the Credit Facility was reduced temporarily as a result of borrowing limitations under the covenant regarding the ratio of secured debt to EBITDA. Although our available liquidity is reduced, we have adequate liquidity to meet expected needs for the remainder of this quarter. As of September 30, 2009, the reduction is expected to be lifted in connection with Amendment No. 4 to DHI's Credit Facility. Please read Note10-Credit Facility Amendment 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 August 3, 2009 and June 30, 2009, Dynegy had cash on hand of $715 million and $594 million, respectively, as compared to $693 million at December 31, 2008. The decrease in cash on hand as compared to the end of 2008 is primarily attributable to capital expenditures and an increase in cash collateral on futures and exchange-cleared derivatives partially offset by cash provided by the operating activities of our power generation business and the receipt of proceeds from the Heard County sale.

At August 3, 2009 and June 30, 2009, DHI had cash on hand of $532 million and $411 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, an increase in capital expenditures and cash collateral on futures and exchange-cleared derivatives partially offset by cash provided by the operating activities of our power generation business and the receipt of proceeds from the Heard County sale.

Operating Activities

Historical Operating Cash Flows. Dynegy's cash flow provided by operations totaled $60 million for the six months ended June 30, 2009. DHI's cash flow provided by operations totaled $80 million for the six months ended June 30, 2009. During the period, our power generation business provided positive cash flow from operations of $338 million from the operation of our power generation facilities. Cash provided by the operations of our power generation facilities was partly offset by a $166 million increase in collateral postings, including the effect of cash inflows and outflows arising from the daily settlements of our exchange-traded or brokered commodity futures positions held with our futures clearing manager. Corporate and other operations included a use of approximately $278 million and $258 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 operating cash flow also reflected the payment of $19 million to LS Associates in conjunction with the dissolution of DLS Power Holdings and DLS Power Development.

Dynegy's cash flow provided by operations totaled $32 million for the six months ended June 30, 2008. DHI's cash flow provided by operations totaled $29 million for the six months ended June 30, 2008. During the period, our power generation business provided positive cash flow from operations of $324 million. Cash provided by the operations of our power generation facilities was partly offset by a $186 million increase in collateral postings, including the effect of cash inflows and outflows arising from the daily settlements of our exchange-traded or brokered commodity futures positions held with our futures clearing manager. Corporate and other operations include a use of approximately $292 million and $295 million in cash by Dynegy and DHI, respectively, primarily due to interest payments to service debt, general and administrative expenses and a $17 million legal settlement payment previously reserved, partially offset by interest income.

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, environmental and regulatory requirements. Additionally, the increased costs associated with the Credit Facility amendment, the cost savings initiative and LS Power transaction will impact our future operating cash flows. 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 increased maintenance and environmental 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 August 3, 2009, June 30, 2009 and December 31, 2008:

                                  August 3,       June 30,      December 31,
                                    2009            2009            2008
                                                (in millions)
             By Business:
             Generation          $     1,042     $    1,119     $       1,064
             Other                       189            189               189

             Total               $     1,231     $    1,308     $       1,253
             By Type:
             Cash (1)            $       284     $      284     $         118
             Letters of Credit           947          1,024             1,135

             Total               $     1,231     $    1,308     $       1,253


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The changes in collateral postings from December 31, 2008 to June 30, 2009 and to August 3, 2009 are primarily related to increases in initial margin requirements associated with 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 $303 million and $299 million in
capital expenditures during the six months ended June 30, 2009 and 2008. Our
capital spending by reportable segment was as follows:

                                   For the Six Months Ended
                                           June 30,
                                   2009                 2008
                                         (in millions)

                      GEN-MW   $        274         $        249
                      GEN-WE              8                   21
                      GEN-NE             18                   22
                      Other               3                    7

                      Total    $        303         $        299

Capital spending in our GEN-MW segment primarily consisted of environmental and maintenance capital projects, as well as approximately $47 million and $120 million spent on development capital related to the Plum Point Project during the six months ended June 30, 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 $45 million higher than originally planned, primarily due to the change in timing.

Asset Dispositions. 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.

On August 9, 2009, we entered into a purchase and sale agreement with LS Power in which we agreed to: (i) sell our ownership interests in 4,788 MW of peaking and combined-cycle power generation assets, as well as our remaining noncontrolling interest in the Sandy Creek Project under construction in Texas and (ii) issue $235 million principal amount of DHI 7.50 percent senior unsecured notes due 2015. We will receive $1.025 billion in cash (consisting, in part, of $175 million of restricted cash on our unaudited condensed consolidated balance sheets to be released to Dynegy from the Sandy Creek restricted account) and 245 million of Dynegy's Class B shares held by LS Power. Please see Note 2-Dispositions and Discontinued Operations-Dispositions-LS Power Transaction for further information.

Proceeds from asset sales during the six months ended June 30, 2008 totaled $84 million and primarily related to the sale of our Calcasieu power generating facility, net of transaction costs, the NYMEX shares and seats, and the beneficial interest in Oyster Creek. Please read Note 2-Dispositions 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 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. We have previously indicated that we consider Plum Point a non-core asset and intend to pursue alternatives regarding our remaining ownership interest.

Other Investing Activities. Cash inflow related to short-term investments during the six months ended June 30, 2009 totaled $14 million and $13 million for both Dynegy and DHI, respectively, reflecting a distribution from our short-term investments. There was a $33 million cash outflow during the six months ended June 30, 2009 related to changes in restricted cash balances primarily due to a $39 million increase in the Independence restricted cash balance. Other included $3 million of insurance proceeds.

Dynegy made $11 million in contributions to DLS Power Holdings during the six months ended June 30, 2008 offset by the distribution of approximately $7 million and repayment of approximately $3 million of an affiliate receivable from the Dynegy Member. Please see Note 8-Variable Interest Entities-Sandy Creek for further discussion.

There was a $28 million cash inflow during the six months ended June 30, 2008 related to changes in restricted cash balances primarily due to a reduction of our cash collateral as a result of SCEA's sale of an 11 percent undivided interest in the Sandy Creek Project, the release of restricted cash and the use of restricted cash for the ongoing construction of the Plum Point Project, partially offset by interest income. Finally, Other included $7 million of insurance proceeds and $4 million of proceeds from the liquidation of an investment during the six months ended June 30, 2008.

Financing Activities

Historical Cash Flow from Financing Activities. Dynegy's net cash provided by financing activities during the six months ended June 30, 2009 totaled $54 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 six months ended June 30, 2009 totaled $121 million. This included a one-time dividend payment from DHI to Dynegy of $175 million offset by $54 million primarily related to proceeds from long-term borrowings under the Plum Point Credit Agreement Facility.

Dynegy's cash provided by financing activities during the six months ended June 30, 2008 totaled $88 million, which primarily related to proceeds of $111 million from long-term borrowings under the Plum Point Credit Agreement Facility, partly offset by a $21 million principal payment on our 9.00 percent secured bonds due 2013. DHI's cash provided by financing activities during the six months ended June 30, 2008 totaled $86 million, which primarily related to proceeds of $111 million from long-term borrowings under the Plum Point Credit Agreement Facility, partly offset by a $21 million principal payment on our 9.00 percent secured bonds due 2013.

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. The fair value of the Plum Point interest rate swaps at June 30, 2009 was $105 million of a liability.

Capital-Structuring Transactions. Following the pending transaction with LS Power, we will be focused on deploying the proceeds from the transaction in a manner that best aligns with our capital allocation objectives. We are considering executing one or more financing transactions in the near-term designed to reduce existing debt or other obligations or replace certain debt obligations with longer-term obligations. Transactions to redeem outstanding debt may require us to pay a premium over market price. 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 as well as the provisions of the agreements with LS Power. 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.

Further, 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, including public or private debt or equity issuances. Matters to be considered will include reducing cash interest expense, covenant flexibility, return on investment and maturity profile, all to be balanced with maintaining adequate liquidity. The timing of any transaction may be impacted by events, such as strategic growth opportunities, legal judgments or regulatory or environmental 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, and our ability to issue equity securities will be limited by the agreements with LS Power entered into on August 9, 2009. This agreement provides that we have agreed not to issue Dynegy's equity securities for our own purposes until the earlier of (i) 121 days following the closing of the transaction with LS Power and (ii) the first date following closing of the transaction in which LS Power owns, in aggregate, less than 10 percent of Dynegy's then outstanding Class A common stock. Further, 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.

Dividends and Dynegy Common Stock. Dividend payments on Dynegy's common stock . . .