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, as supplemented by our Current Report on Form 8-K dated September 28, 2009, which we refer to as each registrant's "Form 10-K".

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 McLennan County, Texas, which is included in GEN-WE. On August 9, 2009, we entered into an agreement with LS Power to sell our interests in various power generation facilities, including the Sandy Creek Project together with certain other assets. 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 pursuant to 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 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 to Adio Bond, LLC, an affiliate of LS Power. We will receive at closing approximately $1.025 billion in cash (consisting, in part, of the release of $175 million of restricted cash on our unaudited condensed consolidated balance sheets that was used to support our funding commitment to Sandy Creek and approximately $200 million for the unsecured notes), subject to working capital adjustments, and 245 million of Dynegy's Class B shares from LS Power.

Upon closing of the transaction, the remaining 95 million shares of Dynegy's Class B common stock held by LS Power will be converted into the same 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 for a specified period and eliminate special approval, board representation and certain other rights associated with the former Class B common shares. We expect to close the LS Power transaction in the fourth quarter 2009 assuming all necessary closing conditions are satisfied. Please read Note 2-Dispositions and Discontinued Operations-Dispositions-LS Power Transaction for further information.

Based on the fair value at September 30, 2009 of the consideration to be received from LS Power, we recorded further pre-tax impairment charges of approximately $382 million in the third quarter 2009 upon the asset groups meeting the criteria of held for sale. Of the $382 million, approximately $235 million is included in Income (loss) from discontinued operations in our unaudited condensed consolidated statements of operations in the GEN-WE segment. The impairment charges recorded in the third quarter were based on our estimate of the fair value of the proceeds to be received from LS Power and its affiliates which reflects Dynegy's stock price at September 30, 2009 of $2.55 per share. We will record additional gains or losses on the sale based on changes between September 30, 2009 and the closing of the transaction in the fair value of consideration received. Any such gains or losses could be material. Additionally, we expect to record a fourth quarter net loss on the sale of assets of approximately $85 million, related to the sale of our Sandy Creek investment. However, this estimate could change materially based on changes in the value of our investment in Sandy Creek from September 30, 2009 through the time the transaction is closed. 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 (i) modified the financial covenants relating to the ratios of Secured Debt to EBITDA and of EBITDA to Consolidated Interest Expense; (ii) further modified 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; (iii) increased the amount of assets eligible for disposition outside the asset sale, reinvestment and prepayment provisions of the Credit Facility; (iv) expanded our ability to prepay additional debt of DHI under certain conditions; and (v) increased 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.

Multi-Year Cost Savings Initiative. Separate from the LS Power transaction, on August 10, 2009, we announced an extensive, multi-year program to eliminate certain costs throughout the company. Cumulative savings, relative to our original plan, are expected to be $400 million to $450 million over a four-year period beginning in 2010. Annual savings are expected to be generated through reduced capital expenditures, operational expenditures and general and administrative expenditures.

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 and 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 proceeds from asset sales 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 October 29, 2009, September 30, 2009 and December 31, 2008:

                                                      October 29,       September 30,       December 31,
                                                         2009               2009                2008
                                                                        (in millions)
Revolver capacity (1) (2)                            $       1,080     $           903     $        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 (3)                                                   377                 377                377
Outstanding letters of credit                                 (894 )              (886 )           (1,135 )

Unused capacity                                              1,388               1,219              1,147

Cash-DHI                                                       486                 519                670

Total available liquidity-DHI                                1,874               1,738              1,817
Cash-Dynegy                                                    183                 184                 23

Total available liquidity-Dynegy                     $       2,057     $         1,922     $        1,840


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(2) From July 1, 2009 to September 30, 2009, DHI's ability to draw on its 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. As of October 1, 2009, the capacity was restored.

(3) Includes $275 million of capacity related to our investment in Sandy Creek. Under the terms of our purchase and sale agreement with LS Power, this capacity will be eliminated, and $175 million of the $275 million of restricted cash supporting this letter of credit facility will be released to us upon completion of the sale of Sandy Creek to LS Power. See Note 2-Dispositions and Discontinued Operations-Dispositions-LS Power Transaction for further discussion.

Cash on Hand. At October 29, 2009 and September 30, 2009, Dynegy had cash on hand of $669 million and $703 million, respectively, as compared to $693 million at December 31, 2008.

At October 29, 2009 and September 30, 2009, DHI had cash on hand of $486 million and $519 million, respectively, as compared to $670 million at December 31, 2008. The decrease in cash on hand through October 29, 2009 and September 30, 2009 as compared to the end of 2008 is primarily attributable to a dividend of $175 million paid to Dynegy in January 2009.

Operating Activities

Historical Operating Cash Flows. Dynegy's cash flow provided by operations totaled $304 million for the nine months ended September 30, 2009. DHI's cash flow provided by operations totaled $322 million for the nine months ended September 30, 2009. During the period, our power generation business provided positive cash flow from operations of $683 million from the operation of our power generation facilities. Cash provided by the operations of our power generation facilities was partly offset by a $160 million increase in collateral postings, excluding 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 $379 million and $361 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 $397 million for the nine months ended September 30, 2008. DHI's cash flow provided by operations totaled $393 million for the nine months ended September 30, 2008. During the period, our power generation business provided positive cash flow from operations of $757 million. Cash provided by the operations of our power generation facilities was partly offset by a $79 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 $360 million and $364 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, the run time of our generating facilities, the effectiveness of our commercial strategy, legal, environmental and regulatory requirements and our ability to capture value associated with commodity price volatility. Additionally, the increased costs associated with the Credit Facility amendment and decreased cash outflows related to our cost savings initiative 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 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 October 29, 2009, September 30, 2009 and December 31, 2008:

                       October 29, 2009      September 30, 2009       December 31, 2008
                                                (in millions)
  By Business:
  Generation          $            1,003     $               975     $             1,064
  Other                              188                     189                     189

  Total               $            1,191     $             1,164     $             1,253
  By Type:
  Cash (1)            $              297     $               278     $               118
  Letters of Credit                  894                     886                   1,135

  Total               $            1,191     $             1,164     $             1,253


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The changes in collateral postings from December 31, 2008 to September 30, 2009 and to October 29, 2009 are primarily related to a increase (decrease) in letters of credit related to certain hedge positions partially offset by increases in initial margin requirements associated with the volume of forward commodity 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 $429 million and $460 million in capital expenditures during the nine months ended September 30, 2009 and 2008. Our capital spending by reportable segment was as follows:

                            For the Nine Months Ended September 30,
                               2009                        2008
                                         (in millions)

                GEN-MW   $             394           $             394
                GEN-WE                  10                          26
                GEN-NE                  20                          29
                Other                    5                          11

                Total    $             429           $             460

Capital spending in our GEN-MW segment primarily consisted of environmental and maintenance capital projects, as well as approximately $66 million and $165 million spent on development capital related to the Plum Point Project during the nine months ended September 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 fourth quarter 2009 to be approximately $40 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-Dispositions and Discontinued Operations-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 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 that was used to support our funding commitment to Sandy Creek and approximately $200 million for the unsecured notes), subject to working capital adjustments, and 245 million of Dynegy's Class B shares held by LS Power. The $175 million of Sandy Creek restricted cash currently appears on our unaudited condensed consolidated balance sheet as part of Restricted cash and investments. Please see Note 2-Dispositions and Discontinued Operations-Dispositions-LS Power Transaction for further information.

Proceeds from asset sales, net of transaction costs, during the nine months ended September 30, 2008 totaled $452 million and primarily related to the sale of our Rolling Hills power generation facility, our Calcasieu power generating facility, the NYMEX shares and seats, and the beneficial interest in Oyster Creek. Please read Note 2-Dispositions and Discontinued Operations-Discontinued Operations.

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 nine months ended September 30, 2009 totaled $14 million and $13 million for Dynegy and DHI, respectively, reflecting a distribution from our short-term investments. There was a $35 million cash outflow during the nine months ended September 30, 2009 for both Dynegy and DHI, related to changes in restricted cash balances. Other included $3 million of insurance proceeds.

Dynegy made $11 million in contributions to DLS Power Holdings during the nine months ended September 30, 2008. We received a distribution of approximately $7 million and repayment of approximately $3 million of an affiliate receivable upon the sale of a partial interest in Sandy Creek during the nine months ended September 30, 2008. Please see Note 8-Variable Interest Entities-Sandy Creek for further discussion.

Cash outflows related to short-term investments increased by $127 million and $120 million for the nine months ended September 30, 2008 for Dynegy and DHI, respectively, as a result of a reclassification from cash equivalents to short-term investments. Additionally, there was a $17 million cash inflow during the nine months ended September 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. Dynegy received $4 million of proceeds from the liquidation of an investment during the nine months ended September 30, 2008.

Financing Activities

Historical Cash Flow from Financing Activities. Dynegy's net cash provided by financing activities during the nine months ended September 30, 2009 totaled $47 million, primarily related to $91 million of proceeds from long-term borrowings under the Plum Point Credit Agreement Facility, partly offset by a $28 million principal payment on our 9.00 percent secured bonds due 2013 and $14 million of financing fees related to the Credit Facility Amendment No. 4. DHI's net cash used in financing activities during the nine months ended September 30, 2009 totaled $128 million. This included a one-time dividend payment from DHI to Dynegy of $175 million, a $28 million principal payment on our 9.00 percent secured bonds due 2013 and $14 million of financing fees related to the Credit Facility Amendment No. 4 offset by $91 million of proceeds from long-term borrowings under the Plum Point Credit Agreement Facility.

Dynegy's cash provided by financing activities during the nine months ended September 30, 2008 totaled $133 million, which primarily related to proceeds of $158 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 nine months ended September 30, 2008 totaled $131 million, which primarily related to proceeds of $158 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 Dynegy or DHI credit ratings or Dynegy's 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.

On October 16, 2009, Standard & Poor's downgraded PPEA's credit rating. Because of this downgrade, certain interest rate swaps to which Plum Point is a party may be terminated by the counterparties if there is also a default by the insurer, Ambac, which has provided credit insurance for the swaps. The termination value of the Plum Point interest rate swaps at September 30, 2009 was approximately $135 million. Termination of the interest rate swaps, if not paid by PPEA, could result in the acceleration of the PPEA debt. Our obligations related to our investment in PPEA, excluding the noncontrolling interest holders' obligation, are limited to our $15 million letter of credit issued under our Credit Facility to support our contingent equity contribution to the Plum Point Project. Please read Note 10-Debt-Plum Point Credit Agreement Facility for further discussion.

Capital-Structuring Transactions. Following the completion of 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 the pursuit of one or more financing transactions in the near-term designed to reduce existing debt or other obligations. 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 . . .