Dynegy (DYN)

Recent Developments

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

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

42

Recent Developments

          Rolling Hills. On July 31, 2008, we completed the sale of the Rolling Hills power generation facility to an affiliate of Tenaska Capital Management, LLC for approximately $368 million, net of transaction costs. We expect to record a gain of approximately $50 million related to the sale of the facility in the third quarter 2008. Please read Note 3—Dispositions and Discontinued Operations—Dispositions—Rolling Hills for further discussion.

          Contingent LC Facility. On June 17, 2008, DHI entered into the Contingent LC Facility with Morgan Stanley. Availability under the Contingent LC Facility is contingent on natural gas prices rising above $13/MMBtu during 2009. In the event that the Contingent LC Facility is utilized, it will complement existing liquidity instruments as a source of additional letters of credit to meet our collateral requirements. Such letters of credit will be available for the purpose of supporting certain commercial and trading contracts and related netting agreements described in the Credit Agreement. Please read Note 7—Debt—Contingent LC Facility for further discussion.

          Sandy Creek. On June 6, 2008, SCEA sold an 11 percent undivided interest in the Sandy Creek Project, to an unaffiliated third party, reducing its undivided interest in the project from approximately 75 percent to approximately 64 percent. Earnings from unconsolidated investments includes income of approximately $13 million related to the sale. Using cash on hand and the proceeds of the sale, SCEA repaid approximately $45 million in project related debt and approximately $7 million in affiliate debt. In addition, both the Dynegy Member and the LSP Member received a distribution of approximately $7 million during the second quarter 2008. Please read Note 6—Variable Interest Entities—Sandy Creek for further discussion.

41

Recent Developments

LS Power. On September 14, 2006, Dynegy entered into the Merger Agreement with the LS Contributing Entities, Merger Sub and Dynegy Illinois to, among other transactions, combine the LS Contributing Entities’ operating generation portfolio with Dynegy’s generation assets, acquire a 50 percent ownership interest in a development joint venture with LS Associates and merge Merger Sub with and into Dynegy Illinois pursuant to the Merger. On March 29, 2007, at a special meeting of the shareholders of Dynegy Illinois, the shareholders of Dynegy Illinois adopted the Merger Agreement and approved the Merger.

49

Table of Contents

Pursuant to the transactions with the LS Contributing Entities contemplated by the Merger Agreement, which were completed on April 2, 2007, the LS Contributing Entities received 340 million shares of Dynegy’s Class B common stock (which are convertible, under the circumstances described in Dynegy’s amended and restated certificate of incorporation, into shares of Dynegy’s Class A common stock), $100 million in cash and a promissory note in the aggregate principal amount of $275 million (which was simultaneously issued and repaid in full without interest or prepayment penalty) in exchange for their contribution of their entire operating generation portfolio and a 50 percent interest in each of DLS Power Holdings and DLS Power Development (together comprising the development joint venture with LS Associates). Dynegy also, via its indirect wholly owned subsidiary Griffith Holdings, LLC, simultaneously issued to the LS Contributing Entities, and repaid in full without interest or prepayment penalty and cancelled, an additional $70 million of project-related debt (the “Griffith Debt”) in connection with the completion of the Merger Agreement transactions. Dynegy also assumed approximately $1.9 billion in debt from the LS Contributing Entities, and utilized $100 million of cash on hand and borrowings by DHI (and subsequent permitted distributions to Dynegy) of (i) an aggregate $275 million under the Revolving Facility (to repay the above-mentioned promissory note) and (ii) an aggregate $70 million under the new Term Loan B (to repay the above-mentioned project-related debt) in connection with the completion of the Merger Agreement.

Pursuant to the Merger, which was also completed on April 2, 2007, Merger Sub, Dynegy’s then-wholly owned subsidiary, merged with and into Dynegy Illinois. As a result of the Merger, Dynegy Illinois became Dynegy’s wholly owned subsidiary, the then-shareholders of Dynegy Illinois became Dynegy’s stockholders and each Dynegy Illinois shareholder, including CUSA (Dynegy Illinois’ then-largest shareholder), received one share of Dynegy’s Class A common stock for each share of Class A common stock or Class B common stock of Dynegy Illinois held by it.

As part of the transactions contemplated by the Merger Agreement, LS Associates transferred its interests in certain power generation development projects to DLS Power Holdings, and contributed 50% of the membership interests in DLS Power Holdings to Dynegy. In addition, immediately after the completion of the Merger, LS Associates and Dynegy each contributed $5 million to DLS Power Holdings as their initial capital contributions, and also contributed their respective interests in certain additional power generation development projects to DLS Power Holdings. LS Associates and Dynegy also each now own 50% of the membership interests in DLS Power Development.

LS Assets Contribution. In April 2007, in connection with the completion of the Merger Agreement, Dynegy contributed to Dynegy Illinois its interest in the Contributed Entities. Following such contribution, Dynegy Illinois contributed to DHI its interest in the Contributed Entities and, as a result, the Contributed Entities became subsidiaries of DHI.

In addition, in connection with the completion of the Merger and the other transactions contemplated by the Merger Agreement, Dynegy Acquisition, Inc.’s name was changed to Dynegy Inc. Please see Note 2—LS Power Business Combination and Dynegy Illinois Entity Contributions for further discussion.

Sithe Contribution. In April 2007, Dynegy Illinois contributed to DHI all of its interest in New York Holdings, together with its indirect interest in the subsidiaries of New York Holdings. New York Holdings, together with its wholly owned subsidiaries, owns various assets in the Northeast, which we commonly refer to as the “Sithe Assets”. The Sithe Assets primarily consist of the Independence generation facility, a 1,064 MW facility located in Scriba, New York, which Dynegy Illinois acquired in January 2005. As a result of the contribution, DHI’s Sithe toll has now become an intercompany agreement in DHI’s GEN-NE segment. The Sithe Assets contributed to DHI also include four hydroelectric generation facilities in Pennsylvania. Please read Note 7—Variable Interest Entities for further information.

Fifth Amended and Restated Credit Facility. On April 2, 2007, we entered into the Fifth Amended and Restated Credit Facility which amended DHI’s credit facility (the Fourth Amended and Restated Credit Facility, which was last amended on July 11, 2006) by increasing the amount of the existing $470 million revolving credit facility (the “Revolving Facility”) to $850 million, increasing the amount of the existing $200 million term letter of credit facility (the “Term L/C Facility”) to $400 million and adding a $70 million senior secured term loan facility (“Term Loan B”). On May 24, 2007, we entered into an Amendment No. 1, dated as of May 24, 2007 (the “Credit

50

Table of Contents

Agreement Amendment”), to the Fifth Amended and Restated Credit Facility. The Credit Agreement Amendment amended the Fifth Amended and Restated Credit Facility by increasing the amount of the existing $850 million Revolving Facility to $1.15 billion and increasing the amount of the existing $400 million term letter of the Term L/C Facility to $850 million; the Credit Agreement Amendment did not affect the existing $70 million senior secured Term Loan B under the Fifth Amended and Restated Credit Facility. The Credit Agreement Amendment also amended a pro forma leverage ratio requirement in the Fifth Amended and Restated Credit Facility to allow DHI to issue the Notes (as defined below). Please see Note 8—Debt—Fifth Amended and Restated Credit Facility for further discussion.

Senior Unsecured Bond Offering. On May 24, 2007, DHI issued $1.1 billion aggregate principal amount of its 2019 Notes and $550 million aggregate principal amount of its 2015 Notes pursuant to the terms of a purchase agreement, dated as of May 17, 2007, by and among DHI and the Purchasers. DHI used the net proceeds from the sale of the Notes to repay a portion of the debt assumed in the Merger Agreement with LS Power. Please see Note 2—LS Power Business Combination and Dynegy Illinois Entity Contributions and Note 8—Debt—Senior Unsecured Notes offering for further discussion.

CoGen Lyondell Sale. On August 1, 2007, we completed our sale of our CoGen Lyondell power generation facility for approximately $470 million to EnergyCo., LLC (“EnergyCo.”), a joint venture between PNM Resources and a subsidiary of Cascade Investment, LLC. We expect to record an estimated $200 million gain related to the sale of the asset in the third quarter 2007.

Illinois Rate Relief. Legislative leaders from the state of Illinois, including the Speaker of the House and the Senate President, announced a comprehensive transitional rate relief package for electric consumers on July 23, 2007. The expected program, once effective, is expected to provide approximately $1 billion to help fund a new power procurement agency and provide assistance to utility customers in Illinois.

As a part of this rate relief package, and subject to passage of certain legislation, we anticipate making payments of up to $25 million over a 29-month period. These payments will be contingent on certain conditions related to the absence of future electric rate and tax legislation in Illinois. We anticipate making payments of $7.5 million in 2007, $9.0 million in 2008 and $8.5 million in 2009. Our payment of $7.5 million in 2007 is to be used as funding for the Illinois Power Agency, which is to be created as part of Illinois’ comprehensive legislative package. Our expected payments for 2008 and 2009 will be made in monthly installments, provided that if at any time prior to December 2009, as further described in the rate relief package and related agreements, Illinois imposes an electric rate freeze or imposes an additional tax on generators, our obligations to make the monthly payments will cease. The monthly payments will be paid into an escrow account established to support rate relief activities for Ameren Illinois Utilities’ customers. The rate relief package and related agreements, once effective, will result in motions to dismiss several ongoing court and regulatory cases surrounding the 2006 Illinois reverse power procurement auction. We recorded a second quarter 2007 pre-tax charge of $25 million, included as a cost of sales on our unaudited condensed consolidated statements of operations. Please read Note 10—Commitments and Contingencies—Illinois Auction Complaints for further discussion.

We expect that the contracts originally entered into by DPM and the Ameren Illinois Utilities as a result of the auction will remain in place following the effectiveness of the rate relief package and related agreements.

51

Table of Contents

Recent Developments

LS Power. On September 14, 2006, we entered into the Merger Agreement with the LS Contributing Entities, Merger Sub and Dynegy Illinois to, among other transactions, combine the LS Contributing Entities’ operating generation portfolio with our generation assets, acquire a 50 percent ownership interest in a development joint venture with LS Associates and merge Merger Sub with and into Dynegy Illinois pursuant to the Merger. On March 29, 2007, at a special meeting of the shareholders of Dynegy Illinois, the shareholders of Dynegy Illinois adopted the Merger Agreement and approved the Merger.

Pursuant to the transactions with the LS Contributing Entities contemplated by the Merger Agreement, which were completed on April 2, 2007, the LS Contributing Entities received 340 million shares of our Class B common stock (which are convertible, under the circumstances described in our amended and restated certificate of incorporation, into shares of our Class A common stock), $100 million in cash and a promissory note in the aggregate principal amount of $275 million (which was simultaneously issued and repaid in full without interest or prepayment penalty) in exchange for their contribution of their entire operating generation portfolio and the 50 percent interest in each of DLS Power Holdings and DLS Power Development (together comprising the development joint venture with LS Associates). Dynegy also, via its indirect wholly owned subsidiary Griffith Holdings, LLC, simultaneously issued to the LS Contributing Entities, and repaid in full without interest or prepayment penalty and cancelled, an additional $70 million of project-related debt (the “Griffith Debt”) in

28

Table of Contents

connection with the completion of the Merger Agreement transactions. We also assumed approximately $1.8 billion in net debt (debt less restricted cash and investments) from the LS Contributing Entities, and utilized $100 million of cash on hand and borrowings by DHI (and subsequent permitted distributions to Dynegy) of (i) an aggregate $275 million under the Revolving Facility and (ii) an aggregate $70 million under the new Term Loan B in connection with the completion of the Merger Agreement.

Pursuant to the Merger, which was also completed on April 2, 2007, Merger Sub, our then-wholly owned subsidiary, merged with and into Dynegy Illinois. As a result of the Merger, Dynegy Illinois became our wholly owned subsidiary, the then-shareholders of Dynegy Illinois became our stockholders and each Dynegy Illinois shareholder, including Chevron U.S.A. Inc. (Dynegy Illinois’ then-largest shareholder) (“Chevron”), received one share of our Class A common stock for each share of Class A common stock or Class B common stock of Dynegy Illinois held by it.

As part of the transactions contemplated by the Merger Agreement, LS Associates transferred its interests in certain power generation development projects to DLS Power Holdings, and contributed 50% of the membership interests in DLS Power Holdings to Dynegy. In addition, immediately after the completion of the Merger, LS Associates and Dynegy each contributed $5 million to DLS Power Holdings as their initial capital contributions, and also contributed their respective interests in certain additional power generation development projects to DLS Power Holdings. LS Associates and Dynegy each now own 50% of the membership interests in DLS Power Development.

In addition, in connection with the completion of the Merger and the other transactions contemplated by the Merger Agreement, our name was changed from Dynegy Acquisition, Inc. to Dynegy Inc. Please see Note 2—LS Power Business Combination for further discussion.

Fifth Amended and Restated Credit Facility. On April 2, 2007, we entered into the Fifth Amended and Restated Credit Facility which amends DHI’s former credit facility (the Fourth Amended and Restated Credit Facility, which was last amended on July 11, 2006) by increasing the amount of the existing $470 million revolving credit facility (the “Revolving Facility”) to $850 million, increasing the amount of the existing $200 million term letter of credit facility (the “Term L/C Facility”) to $400 million and adding a $70 million senior secured term loan facility (“Term Loan B”). Please see Note 7—Debt—Fifth Amended and Restated Credit Facility for further discussion.

Calcasieu Sale. On January 31, 2007, we entered into an agreement to sell our interest in the Calcasieu power generation facility to Entergy for approximately $57 million, subject to regulatory approval. The transaction is expected to close in early 2008. Please read Note 3—Discontinued Operations—Calcasieu for further discussion.

29

Table of Contents