Dynegy (DYN)

Fair Value Measurements.>  On January 1, 2009, we adopted authoritative guidance issued by the for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  Please read Note 5—Fair Value Measurements for further discussion.

Noncontrolling Interests.>  On January 1, 2009, we adopted authoritative guidance issued by the FASB for noncontrolling interests.  Please read Note 3—Noncontrolling Interests for further discussion.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the Interim Periods Ended September 30, 2009 and 2008

Disclosures about Derivative Instruments and Hedging Activities.>  On January 1, 2009, we adopted authoritative guidance issued by the FASB for the disclosure of derivative instruments and hedging activities.  Please read Note 4—Risk Management Activities, Derivatives and Financial Instruments for further discussion.

Subsequent Events.>  On June 30, 2009, we adopted authoritative guidance issued by the FASB which provides guidance on management’s assessment of subsequent events.  We have evaluated  subsequent events through November 5, 2009, the date our financial statements were issued and up to the time of the filing of our financial statements with the SEC.

Accounting Standards Codification.>  Effective July 1, 2009, we adopted authoritative guidance issued by the FASB which superseded all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered non-SEC accounting literature not included in the Codification is no longer considered authoritative.  The adoption of this adopted authoritative had no impact on our financial condition, results of operations or cash flows.

Third Party Credit Enhancement.>  On January 1, 2009, we adopted authoritative guidance issued by the FASB which applies to liabilities issued with an inseparable third-party credit enhancement when they are measured or disclosed at fair value on a recurring basis.  Please read Note 5—Fair Value Measurements for further discussion.

Fair Value of Financial Instruments.>  On June 30, 2009, we adopted authoritative guidance issued by the FASB which requires the disclosure of the estimated fair value of financial instruments.  Please read Note 5—Fair Value Measurements for further discussion.

Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.>  On June 30, 2009, we adopted authoritative guidance issued by the FASB which provides guidance on (i) estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly decreased and (ii) identifying transactions that are not orderly.  The adoption of this authoritative guidance had no impact on our financial statements.  Please read Note 5—Fair Value Measurements for further discussion.

Accounting Principles Not Yet Adopted

Employers’ Disclosures about Pensions and Other Postretirement Benefits.>  On January 1, 2009, the FASB issued authoritative guidance to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan.  The objectives of the disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan are to provide users of financial statements with an understanding of: (i) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (ii) the major categories of plan assets; (iii) the inputs and valuation techniques used to measure the fair value of plan assets; (iv) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period and (v) significant concentrations of risk within plan assets.  The disclosures about plan assets required by this authoritative guidance are to be provided for fiscal years ending after December 15, 2009.  We are currently evaluating the disclosure implications of this standard; however, this authoritative guidance will have no impact on our financial condition, results of operations or cash flows.

Variable Interest Entities.>  On June 12, 2009, the FASB issued authoritative guidance which amends the consolidation guidance that applies to variable interest entities.  The FASB’s objective in issuing this authoritative guidance is to improve financial reporting by enterprises involved with variable interest entities.  This authoritative guidance is effective for fiscal years beginning after November 15, 2009.  We are currently evaluating the impact of this standard on our consolidated financial statements.

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For the Interim Periods Ended September 30, 2009 and 2008

Note 2—Dispositions and Discontinued Operations

Dispositions

LS Power Transaction.>  On August 9, 2009, we entered into a purchase and sale agreement with LS Power Partners, L.P. and certain of  its affiliates (collectively, “LS Power”) pursuant to which we agreed to (i) sell to LS Power our interests in: Dynegy Arlington Valley, LLC; Griffith Energy LLC; Bridgeport Energy LLC; Rocky Road Power, LLC; Tilton Energy LLC; Riverside Generating Company, L.L.C.; Bluegrass Generation Company, L.L.C.; Renaissance Power, L.L.C.; Sandy Creek Services, LLC; and Dynegy Sandy Creek Holdings, LLC, and (ii) issue to Adio Bond, LLC, an affiliate of LS Power, $235 million aggregate principal amount of DHI 7.50 percent senior unsecured notes due 2015.  In exchange for the ownership interests and notes, we will receive at closing (i) 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 (ii) 245 million shares of Dynegy’s Class B common stock (currently held by LS Power), with the remaining 95 million shares of Dynegy’s Class B common stock held by LS Power converted at closing to the same number of shares of Dynegy’s 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 the closing of the transaction will eliminate special approval rights, board representation and certain other rights associated with the former Class B common shares and limit the acquisition and transfer of Dynegy’s Class A common stock to be held by LS Power.  This shareholder agreement provides that following closing we cannot 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 or (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.  The sale is expected to close in the fourth quarter 2009 assuming all necessary closing conditions are satisfied or waived.

In connection with the signing of the purchase and sale agreement with LS Power on August 9, 2009, our Arizona power generation assets, as defined below, and our Bluegrass power generation facility met the requirements for classification as discontinued operations.  Accordingly, the results of operations for these facilities have been reclassified as discontinued operations for all periods presented (see Discontinued Operations discussed below).  The Renaissance, Tilton, Riverside/Foothills, Rocky Road and Bridgeport power generation facilities did not meet the requirements for classification as discontinued operations, based on our continuing presence in the markets where these assets are located; however, these assets are reported as held for sale.  The major classes of current and long-term assets and liabilities at September 30, 2009 classified as assets held for sale or liabilities associated with assets held for sale and included in the LS Power transaction are as follows (in millions):

Current Assets:
Accounts receivable		$	39
Inventory			18
Assets from risk management activities			5
Prepayments and other current assets			11
Total Current Assets		$	73
Long-Term Assets:
Property, plant and equipment		$	1,163
Assets from risk management activities			4
Other			33
Total Long-Term Assets		$	1,200
Current Liabilities:
Accounts payable		$	17
Current liabilities and accrued liabilities			8
Total Current Liabilities		$	25
Long-Term Liabilities:
Other		$	6
Total Long-Term Liabilities		$	6

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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For the Interim Periods Ended September 30, 2009 and 2008

We recorded pre-tax impairment charges of $147 million and $326 million, inclusive of costs to sell, related to the assets included in the LS Power transaction that did not meet the criteria for classification as discontinued operations in the three and nine month periods ended September 30, 2009, respectively, which is included in Impairment and other charges in our unaudited condensed consolidated statements of operations.  Please read Note 6—Impairment Charges for further discussion of these impairments.

We discontinued depreciation and amortization of property, plant and equipment included in the LS Power transaction that did not meet the criteria for classification as discontinued operations during the third quarter 2009.  Depreciation and amortization expense related to these assets totaled $3 million and $24 million in the three and nine month periods ended September 30, 2009, respectively, compared to $8 million and $23 million in the three and nine months ended September 30, 2008, respectively.

Rolling Hills.>  On July 31, 2008, we completed the sale of the Rolling Hills power generation facility (“Rolling Hills”) to an affiliate of Tenaska Capital Management, LLC for approximately $368 million, net of transaction costs.  We recorded a $57 million gain in the third quarter 2008 related to the sale, which is included in Gain on sale of assets in our unaudited condensed consolidated statements of operations.  The gain includes the impact of allocating approximately $5 million of goodwill associated with the GEN-MW reporting unit to Rolling Hills.  The amount of goodwill allocated to Rolling Hills was based on the relative fair values of Rolling Hills and the portion of the GEN-MW reporting unit being retained.

The sale of Rolling Hills represented the sale of a significant portion of a reporting unit.  As such, we assessed the goodwill of the GEN-MW reporting unit for impairment during the third quarter 2008.  No impairment was indicated as a result of this assessment.

We discontinued depreciation and amortization of Rolling Hills’ property, plant and equipment during the second quarter 2008.  Depreciation and amortization expense related to Rolling Hills totaled zero and approximately $3 million in the three and nine month periods ended September 30, 2008, respectively.

NYMEX Securities.>  In November 2006, the New York Mercantile Exchange (“NYMEX”) completed its initial public offering.  At the time, we had two membership seats on the NYMEX, and therefore, we received 90,000 NYMEX shares for each membership seat.  During August 2007, we sold 30,000 shares for approximately $4 million, and we recognized a gain of $4 million.  During the second quarter 2008, we sold our remaining 150,000 shares and both of our membership seats for approximately $16 million, and we recognized a gain of $15 million, which is included in Gain on sale of assets in our unaudited condensed consolidated statements of operations partially offset by a reduction of $8 million, net of tax of $5 million, in our unaudited condensed consolidated statements of other comprehensive loss.

Oyster Creek.>  In May 2008, we sold the beneficial interest in Oyster Creek Limited for approximately $11 million, which is included in Gain on sale of assets in our unaudited condensed consolidated statements of operations.

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For the Interim Periods Ended September 30, 2009 and 2008

Discontinued Operations

Arlington Valley, Griffith and Bluegrass.>  On August 9, 2009, we entered into a purchase and sale agreement to sell our interests in, among others, the Arlington Valley, Griffith and Bluegrass power generation facilities as part of the LS Power transaction, as discussed above.

The Arlington Valley and Griffith  facilities (collectively, the “Arizona power generation facilities”), as well as our Bluegrass facility, met the criteria of held for sale during the third quarter 2009 and are classified as such on our unaudited condensed consolidated balance sheet.  At that time, we discontinued depreciation and amortization of Arlington Valley’s, Griffith’s and Bluegrass’ property, plant and equipment.  Depreciation and amortization expense related to the Arizona power generation facilities totaled approximately $4 and $14 million in the three and nine months ended September 30, 2009, respectively, compared to approximately $5 million and $15 million in the three and nine months ended September 30, 2008, respectively.  Depreciation and amortization expense related to Bluegrass totaled approximately zero and $1 million in the three and nine months ended September 30, 2009, respectively, compared to approximately zero and $1 million in the three and nine months ended September 30, 2008, respectively.  We recorded an impairment charge of $235 million related to the Arizona power generation facilities during the third quarter 2009.  We previously recorded impairment charges of $5 million and $18 million related to the Bluegrass facility during the first and second quarters of 2009, respectively.  Please read Note 6—Impairment Charges for further discussion.  We are reporting the results of operations for the Arizona power generation facilities  and the Bluegrass power generation facility in discontinued operations for all periods presented.

Heard County.>  On April 30, 2009, we completed the sale of our interest in the Heard County power generation facility for approximately $105 million.  We recorded a $10 million pre-tax gain during the second quarter 2009 related to the sale, which is included in Income from discontinued operations on our unaudited condensed consolidated statements of operations.

Heard County was classified as held for sale during the first quarter 2009.  At that time, we discontinued depreciation and amortization of Heard County’s property, plant and equipment.  Depreciation and amortization expense related to Heard County totaled approximately zero and $1 million in the three and nine months ended September 30, 2009, respectively, compared to approximately $1 million and $3 million in the three and nine months ended September 30, 2008, respectively.  We are reporting the results of Heard County’s operations in discontinued operations for all periods presented.

Calcasieu.>  On March 31, 2008, we completed the sale of the Calcasieu power generation facility for approximately $56 million, net of transaction costs.

Calcasieu was classified as held for sale during the first quarter 2007.  At that time, we discontinued depreciation and amortization of Calcasieu’s property, plant and equipment.  Depreciation and amortization expense related to Calcasieu totaled zero in the three and nine months ended September 30, 2008.  We are reporting the results of Calcasieu’s operations in discontinued operations for the three months ended March 31, 2008.

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Summary.>  The following table summarizes information related to Dynegy’s discontinued operations:

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		GEN-MW				GEN-WE				Total
						(in millions)
Three Months Ended September 30, 2009
Revenues		$	1			$	54			$	55
Loss from operations before taxes			—				(213	)(2)			(213	)
Loss from operations after taxes			—				(129	)			(129	)
Three Months Ended September 30, 2008
Revenues		$	1			$	126			$	127
Income from operations before taxes			—				53				53
Income from operations after taxes			—				32				32
Gain on sale before taxes			—				1				1
Gain on sale after taxes			—				—				—
Nine Months Ended September 30, 2009
Revenues		$	4			$	96			$	100
Loss from operations before taxes			(23