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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

¨            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to              

Commission file number: 001-33443

DYNEGY INC.

(Exact name of registrant as specified in its charter)

(713) 507-6400

(Registrant’s telephone number, including area code)

1000 Louisiana, Suite 5800

Houston, Texas 77002

(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No x

Indicate the number of shares outstanding of our classes of common stock, as of the latest practicable date: Common stock, $0.01 par value per share, 122,893,088 shares outstanding as of May 4, 2012.

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DYNEGY INC.

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DEFINITIONS

As used in this Form 10-Q, the abbreviations contained herein have the meanings set forth below.

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PART I. FINANCIAL INFORMATION

Item 1—FINANCIAL STATEMENTS

DYNEGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited) (in millions, except share data)

See the notes to condensed consolidated financial statements.

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DYNEGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited) (in millions, except per share data)

See the notes to condensed consolidated financial statements.

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DYNEGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited) (in millions)

See the notes to condensed consolidated financial statements.

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DYNEGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited) (in millions)

See the notes to condensed consolidated financial statements.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended March 31, 2012 and 2011

Note 1— Basis of Presentation and Organization

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to interim financial reporting as prescribed by the SEC.  Unless the context indicates otherwise, throughout this report, the terms “Dynegy,” “the Company,” “we,” “us,” “our,” and “ours” are used to refer to Dynegy Inc. and its direct and indirect subsidiaries.  Discussions or areas of this report that apply only to Dynegy or DH are clearly noted in such sections or areas. The year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.  The unaudited condensed consolidated financial statements contained in this report include all material adjustments of a normal and recurring nature that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods.  These interim financial statements should be read together with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2011, filed on March 8, 2012, which we refer to as our “Form 10-K.”

Organization

We are a holding company and conduct substantially all of our business operations through our subsidiaries.  Our current business operations are focused on the power generation sector of the energy industry.  We report the results of our power generation business as three segments in our consolidated financial statements: (i) the Coal segment (“Coal”); (ii) the Gas segment (“Gas”) and (iii) the Dynegy Northeast segment (“DNE”).   Prior to the third quarter 2011, we reported results for the following segments: (i) GEN-MW, (ii) GEN-WE and (iii) GEN-NE.  Our consolidated financial results also reflect corporate-level expenses such as interest and depreciation and amortization.  General and administrative expenses are allocated to each reportable segment.  Accordingly, we have recast the corresponding items of segment information for all prior periods.

With the commencement of the Chapter 11 Cases (as defined below), Dynegy Holdings, LLC (“DH”) and its direct and indirect subsidiaries, including the subsidiaries in our Gas and DNE segments, were deconsolidated effective November 7, 2011.  Financial statements presented after November 7, 2011 reflect our investment in, and the results of operations of, DH and its wholly-owned subsidiaries under the equity method of accounting.  For further discussion, please read Note 3—Chapter 11 Cases and Note 7—Variable Interest Entities.

Chapter 11 Filing by Certain Subsidiaries.  On November 7, 2011, DH and four of its wholly-owned subsidiaries, Dynegy Northeast Generation, Inc., Hudson Power, L.L.C., Dynegy Danskammer, L.L.C. and Dynegy Roseton, L.L.C. (collectively, the “Debtor Entities”) filed voluntary petitions (the “Chapter 11 Cases”) for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York, Poughkeepsie Division (the “Bankruptcy Court”).  The Chapter 11 Cases were assigned to the Honorable Cecelia G. Morris and are being jointly administered for procedural purposes only under the caption In re: Dynegy Holdings, LLC, et. al, Case No. 11-38111.  Dynegy and its subsidiaries, other than the five Debtor Entities, did not file voluntary petitions for relief and are not debtors under Chapter 11 of the Bankruptcy Code and, consequently, continue to operate their business in the ordinary course.  For further discussion, please read Note 3—Chapter 11 Cases.

The accompanying financial statements have been prepared on a going concern basis of accounting.  However, as discussed in Note 3—Chapter 11 Cases, upon the effective date of the Settlement Agreement, we will assign, transfer and deliver 100% of our outstanding equity interest in, Dynegy Coal Holdco, LLC (“Coal Holdco”) to DH or Dynegy Gas Investments, LLC (“DGIN”) one of DH’s subsidiaries.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended March 31, 2012 and 2011

Coal Holdco is the indirect owner of our assests in the Coal segment, therefore, subsequent to the transfer, we will have no operating assets outside of our equity investment in DH.  As a result of the expected transfer of Coal Holdco and the lack of operating assets until DH’s expected emergence from bankruptcy, we believe there is substantial doubt about our ability to continue as a going concern.  Please read Note 3—Chapter 11 Cases for further discussion.

Note 2—Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make informed estimates and judgments that affect our reported financial position and results of operations based on currently available information.  Actual results could differ materially from our estimates. The results of operations for the interim periods presented in this Form 10-Q are not necessarily indicative of the results to be expected for the full year or any other interim period due to seasonal fluctuations in demand for our energy products and services, changes in commodity prices, timing of maintenance and other expenditures and other factors.

Accounting Principles Adopted During the Current Period

Fair Value Measurement Disclosures.  In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04—Fair Value Measurement (Topic 820):  Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU No. 2011-04”).  This authoritative guidance changes the wording used to describe the requirements in GAAP for measuring fair value and requires additional disclosure about fair value measurements.  ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011.  The implementation of this guidance has been reflected in our fair value disclosures.

Presentation of Comprehensive Income.  In June 2011, the FASB issued ASU 2011-05—Comprehensive Income (Topic 220):  Presentation of Comprehensive Income (“ASU No. 2011-05”).  The FASB’s objective in issuing this guidance is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  ASU No. 2011-05 eliminates the option of presenting components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The standard requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  We have elected to present comprehensive income as two separate consecutive statements.

Note 3—Chapter 11 Cases

On November 7, 2011, the Debtor Entities commenced the Chapter 11 Cases. Neither Dynegy nor any of its direct or indirect subsidiaries, other than the five Debtor Entities, sought relief under Chapter 11 of the Bankruptcy Code, and none of those entities are debtors under Chapter 11 of the Bankruptcy Code. The Debtor Entities have remained in possession of their property and continue to operate their businesses as “debtors in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended March 31, 2012 and 2011

The normal day-to-day operations of the coal-fired power generation facilities held by Dynegy Midwest Generation, LLC (“DMG”) and the gas-fired power generation facilities held by Dynegy Power, LLC (“DPC”) have continued without interruption. The commencement of the Chapter 11 Cases did not constitute an event of default under either DMG’s senior secured term loan facility (the “DMG Credit Agreement) or DPC’s senior secured term loan facility (the “DPC Credit Agreement”).

In connection with the commencement of the Chapter 11 Cases, DH and Dynegy had entered into a restructuring support agreement on November 7, 2011 with certain holders of DH’s unsecured senior notes and debentures regarding a potential consensual restructuring of over $4.0 billion of obligations owed by DH.  The restructuring support agreement was amended on December 26, 2011 but has been terminated and superseded by the Settlement Agreement and Plan Support Agreement described in more detail below.

On November 7, 2011, the Debtor Entities filed a motion with the Bankruptcy Court for authorization to reject the leases of the Roseton and Danskammer power generation facilities (the “Facilities”) and seeking to impose a cap on the lease rejection damages under Section 502(b)(6) of the Bankruptcy Code. On December 13, 2011, Dynegy and the Debtor Entities entered into a binding term sheet with Resources Capital Management Corporation (“RCM”), Resources Capital Asset Recovery, L.L.C., Series DD and Series DR, Roseton OL LLC, Danskammer OL LLC, Roseton OP LLC and Danskammer OP LLC (collectively with RCM, the “PSEG Entities”), as the owners and lessors of the Roseton and a portion of Danskammer facilities, to settle and resolve issues among them in lieu of further litigation, regarding, among other things, the Roseton and Danskammer leases and all of the parties’ rights and claims arising under the related lease documents, including certain tax indemnity agreements (the “PSEG Settlement”).

On December 20, 2011, the Bankruptcy Court entered a stipulated order (as amended by a stipulated order entered by the Bankruptcy Court on December 28, 2011) approving the rejection of the Roseton and Danskammer leases subject to, among other things, continued litigation over and determination in the Adversary Proceeding (defined below) of, (i) the effective date of the lease rejection, which was to be no later than December 2, 2011, and (ii) the amount of the Lease Indenture Trustee’s (as defined below) damages claim arising from the rejection. The Debtor Entities continue to operate the leased facilities until such facilities can be transferred or sold in compliance with applicable federal and state regulatory requirements. Please read the section entitled “Settlement Agreement and Plan Support Agreement” below for further discussion.

Adversary Proceeding.    On November 11, 2011, U.S. Bank National Association (“U.S. Bank”), in its capacity as successor lease indenture trustee (the “Lease Trustee”) under the Indenture of Trust, Mortgage, Assignment of Leases and Rents and Security Agreement related to Roseton Units 1 and 2, dated as of May 8, 2001, and the Indenture of Trust, Mortgage, Assignment of Leases and Rents and Security Agreement related to Danskammer Units 3 and 4, dated as of May 8, 2001 (collectively, the “Lease Indentures”), commenced an adversary proceeding against Dynegy Danskammer, L.L.C. (“Dynegy Danskammer”), Dynegy Roseton, L.L.C (“Dynegy Roseton”) and DH (the “Adversary Proceeding”). The Lease Indentures govern the terms of the notes issued by Roseton OL LLC and Danskammer OL LLC, as owner lessors of the Facilities, to the pass through trust established under the Roseton-Danskammer 2001-Series B Pass Through Trust Agreement, dated as of May 1, 2001 (the “Pass Through Trust Agreement”). The Adversary Proceeding seeks, among other things, a declaration that: (i) the leases of the Facilities to Dynegy Roseton and Dynegy Danskammer are not leases of real property; (ii) the leases are financings, not leases; (iii) notwithstanding the lease rejection claims, claims arising from DH’s guaranty of certain of the Facilities’ lease obligations are not subject to a cap pursuant to section 502(b)(6) of the Bankruptcy Code; and (iv)

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended March 31, 2012 and 2011

a determination of the allowed amount of the Lease Trustee’s claims against Dynegy Danskammer, Dynegy Roseton, and DH.

Dynegy Danskammer, Dynegy Roseton and DH have contested the claims made in the Adversary Proceeding, including the attempt to recharacterize the Facilities leases as financings and not as leases of real property and the applicability of Section 502(b)(6) of the Bankruptcy Code. The parties to the Adversary Proceeding have filed motions seeking judgment on the pleadings. The parties to the Adversary Proceeding agreed to an informal stay of the proceedings, pending further settlement negotiations among the parties as discussed below under “Settlement Agreement and Plan Support Agreement.”

On November 11, 2011, the Lease Trustee also filed a motion with the Bankruptcy Court seeking the appointment of an examiner. On December 29, 2011, the Bankruptcy Court entered an order directing the appointment of the examiner (the “Examiner”), which order provided, among other things, that the Examiner investigate (i) the Debtor Entities’ conduct in connection with the prepetition 2011 restructuring and reorganization of the Debtor Entities and their non-debtor affiliates (the “Prepetition Restructurings”), (ii) any possible fraudulent conveyances and (iii) whether DH is capable of confirming a Chapter 11 plan of reorganization. On March 9, 2012, the Examiner filed a report with the Bankruptcy Court and on March 20, 2012, Dynegy filed a preliminary response to such report.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended March 31, 2012 and 2011

Settlement Agreement and Plan Support Agreement.  After we announced an agreement in principle on April 4, 2012, subject to definitive documentation, on May 1, 2012, Dynegy, DGIN, Coal Holdco, the Debtor Entities, certain beneficial holders of approximately $1.9 billion of DH’s outstanding senior notes (the “Consenting Senior Noteholders”), the PSEG Entities and the Lease Trustee, as directed by a majority of, and on behalf of all holders (the “Lease Certificate Holders”) of those certain pass through trust certificates issued pursuant to the Pass Through Trust Agreement (collectively, the “Settling Claimants”) entered into a settlement agreement (the “Settlement Agreement”). The Settlement Agreement provides, among other things and subject to the terms and conditions contained therein, that when the Settlement Agreement becomes effective:

·      Dynegy will assign, transfer and deliver 100% of its outstanding equity interests in Coal Holdco to DH or DGIN;

·      Dynegy will receive in full consideration for such transfer and certain other agreements, an allowed administrative claim against DH in the Chapter 11 Cases (the “Administrative Claim”);

·      the Administrative Claim will be satisfied with 1.0% of the fully-diluted common shares of the surviving entity of the merger or combination of Dynegy and DH described below (the “Surviving Entity”), subject to dilution as set forth in the Agreements (as defined below), and five-year warrants to purchase an aggregate of 13.5% of the fully-diluted common shares of the Surviving Entity with an exercise price to be determined based on a net equity value of the Surviving Entity of $4 billion (the “Warrants” and together with the common shares, the “Equity Consideration”);

·      if the Plan (as defined below) is not confirmed, the amount of the Administrative Claim may be determined by arbitration and such claim may be satisfied with different consideration in each case, subject to the terms set forth in the Settlement Agreement;

·      the Prepetition Litigation described in Note 8—Commitments and Contingencies—Legal Proceedings—Bondholder Litigation and the Adversary Proceeding will be dismissed with prejudice and the parties to the Settlement Agreement will issue and receive mutual releases, including with respect to all claims and causes of action related to such litigation, as well as with respect to the accounts payable, affiliate owed by Dynegy to DH;

·      the Undertaking Agreement and the DH Note shall each be terminated (for further information, please read Note 14—Related Party Transactions—Undertaking Agreement) and until such termination, the Undertaking Agreement was amended such that any future payments owing from Dynegy to DH under the Undertaking Agreement shall be made directly by Coal Holdco;

·      the Lease Trustee will have certain allowed claims in the Chapter 11 Cases with an aggregate recovery (exclusive of certain fees and expenses) capped at $571,507,840 (the “Lessor Recovery Cap”); and

·      the Debtor Entities, with the cooperation of the PSEG Entities, will use commercially reasonable efforts to sell the Facilities with the proceeds of any sale to pay transaction expenses and to be distributed as set forth in the Settlement Agreement.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended March 31, 2012 and 2011

Also on May 1, 2012, Dynegy, DGIN, Coal Holdco, the Debtor Entities, the Consenting Senior Noteholders, the PSEG Entities and certain Lease Certificate Holders reached an agreement (the “Plan Support Agreement” and together with the Settlement Agreement, the “Agreements”) pursuant to which they agreed, subject to the terms and conditions stated therein, to pursue and support a plan of reorganization containing certain specified terms and conditions for the restructuring of DH (the “Plan”). The material terms of the Plan are described below under the heading “Plan of Reorganization.” As of the date of the Plan Support Agreement, the noteholder restructuring support agreement, dated November 7, 2011, which was amended and restated on December 26, 2011, has been terminated. The Agreements were filed with the Bankruptcy Court on May 1, 2012 and the Settlement Agreement remains subject to Bankruptcy Court approval, with a hearing scheduled for June 1, 2012.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended March 31, 2012 and 2011

Plan of Reorganization.    On December 1, 2011, Dynegy and DH, as co-plan proponents (the “Plan Proponents”), filed a proposed Chapter 11 plan of reorganization and a related disclosure statement for DH with the Bankruptcy Court. On January 19, 2012, the Plan Proponents filed a proposed amended plan and related disclosure statement for DH with the Bankruptcy Court. On March 6, 2012, the Plan Proponents filed a proposed second amended plan and related disclosure statement for DH with the Bankruptcy Court. The Plan Support Agreement contemplates that the Plan Proponents will file, prior to May 30, 2012, the Plan as a proposed third amended plan and a related disclosure statement (the “Disclosure Statement”) with the Bankruptcy Court. Like earlier versions, the Plan will address claims against and interests in DH only and will not address claims against and interests in the other Debtor Entities. The material terms of the Plan will be as agreed upon by Dynegy, DH, a majority of the Consenting Senior Noteholders, the Lease Trustee and the official committee of creditors holding unsecured claims appointed in the Chapter 11 Cases (the “Creditors’ Committee”) and will provide that:

·      on or prior to the Plan effective date, Dynegy and DH will be merged or combined (the “Combination”) and, by virtue of the Combination, all DH equity interests issued and outstanding immediately prior to the effective time of the Combination will be cancelled;

·      the Board of Directors of the Surviving Entity will be selected by the holders of allowed general unsecured claims against DH who are not insiders of DH pursuant to a process to be specified in the Plan with existing Board members eligible for service on the reconstituted Board of the Surviving Entity;

·      holders of allowed general unsecured claims against DH will receive: (a) 99% of the fully-diluted common shares of the Surviving Entity to be outstanding immediately following the Plan effective date (subject to dilution), (b) any amounts to which they may be entitled as a result of the sale of the Facilities, and (c) a cash payment of not less than $200 million;

·      holders of equity interests in Dynegy, DH or the Surviving Entity shall not receive any distribution or retain any interest or property under the Plan on account of such holder’s equity interest;

·      the Administrative Claim will be treated as provided in the Settlement Agreement; and

·      the Plan will provide for a registration rights agreement, including a customary shelf registration, for the benefit of any holder of 10% or more of the common shares of the Surviving Entity immediately following the effective date of the Plan.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended March 31, 2012 and 2011

The parties to the Plan Support Agreement agree to use their commercially reasonable efforts to support the Plan and complete the transactions contemplated thereby.

The Plan Support Agreement may be terminated if the Settlement Agreement terminates or if certain milestones established with respect to certain actions in the Chapter 11 Cases are not satisfied (such as filing of the Plan and Disclosure Statement with the Bankruptcy Court, confirmation of the Plan and completion of the Plan).

Accounting Impact.  Upon effectiveness of the Settlement Agreement resulting in the transfer of our interest in Coal HoldCo, we will have no operating assets and our primary assets will be our 100 percent equity ownership of DH and the Administrative Claim described above.   We are in the process of evaluating the accounting impact of the transfer of Coal HoldCo to DH.  If we account for the transfer as a sale, we would record a loss for the difference between (i) the carrying value of the Undertaking, the carrying value of the accounts payable, affiliate owed by Dynegy to DH and the value of the Administrative Claim and (ii) the carrying value of our investment in Coal HoldCo which was approximately $2.9 billion as of March 31, 2012.

Note 4—Risk Management Activities, Derivatives and Financial Instruments

The nature of our business necessarily involves market and financial risks.  Specifically, we are exposed to commodity price variability related to our power generation business.  Our commercial team manages these commodity price risks with financially settled and other types of contracts consistent with our commodity risk management policy.  Our commercial team also uses financial instruments in an attempt to capture the benefit of fluctuations in market prices in the geographic regions where our assets operate.  Our treasury team manages our financial risks and exposures associated with interest rates.

Our commodity risk management strategy gives us the flexibility to sell energy and capacity through a combination of spot market sales and near-term contractual arrangements (generally over a rolling 1 to 3 year time frame).  Our commodity risk management goal is to protect cash flow in the near-term while keeping the ability to capture value longer-term.  Increasing collateral requirements and our liquidity position could impact our ability to effectively employ our risk management strategy.

Many of our contractual arrangements are derivative instruments and are accounted for at fair value as part of Revenues in our unaudited condensed consolidated statements of operations.  We also manage commodity price risk

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended March 31, 2012 and 2011

by entering into capacity forward sales arrangements, tolling arrangements, RMR contracts, fixed price coal purchases and other arrangements that do not receive fair value accounting treatment because these arrangements do not meet the definition of a derivative or are designated as “normal purchase normal sales.”  As a result, the gains and losses with respect to these arrangements are not reflected in the unaudited condensed consolidated statements of operations until delivery occurs.  Currently, we have chosen not to designate any of our derivatives as cash flow hedges nor fair value hedges.

Quantitative Disclosures Related to Financial Instruments and Derivatives

The following disclosures and tables present information concerning the impact of derivative instruments on our unaudited condensed consolidated balance sheets and statements of operations.  In the table below, commodity contracts primarily consist of derivative contracts related to our power generation business that we have not designated as accounting hedges, that are entered into for purposes of economically hedging future fuel requirements and sales commitments and securing commodity prices.  Our commodity derivatives are comprised of both long and short positions; a long position is a contract to purchase a commodity, while a short position is a contract to sell a commodity.  As of March 31, 2012, we had net long/(short) commodity derivative contracts, including contracts with affiliates, outstanding in the following quantities:

(1)   Mainly comprised of swaps, options and physical forwards.

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended March 31, 2012 and 2011

Derivatives on the Balance Sheet  The following table presents the fair value and balance sheet classification of derivatives in the unaudited condensed consolidated balance sheets as of March 31, 2012 and December 31, 2011 segregated by type of contract segregated by assets and liabilities.

Impact of Derivatives on the Consolidated Statements of Operations

For the three-month periods ended March 31, 2012 and 2011, our revenues included approximately $30 million and $2 million of unrealized mark-to-market gains, respectively, related to this activity.

The impact of derivative financial instruments, including realized and unrealized gains and losses, that have not been designated as hedges on our unaudited condensed consolidated statements of operations for the three months ended March 31, 2012 and 2011 is presented below.  Note that this presentation does not reflect the expected gains or losses arising from the underlying physical transactions associated with these financial instruments.  Therefore, this presentation is not indicative of the economic gross margin we expect to realize when the underlying physical transactions settle.

Note 5—Fair Value Measurements

The following tables set forth by level within the fair value hierarchy our financial assets and liabilities, including transactions with affiliates, that were accounted for at fair value on a recurring basis as of March 31, 2012 and December 31, 2011.  These financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Our assessment of the significance of a particular

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DYNEGY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended March 31, 2012 and 2011

input to the fair value measurement requires judgment, and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels.

(1)   All commodity instruments classified within Level 3 are electricity derivatives relating to illiquid trading locations.  The curves used to generate the fair value are based on basis adjustments applied to forward curves for liquid trading points.  The basis difference is approximately 19.3% of the total value; therefore these instruments are classified entirely within Level 3.

(2)   The interest rate contracts classified within Level 3 include an implied credit fee that impacted the day one value of the instruments.  We revalue the credit fee each quarter in conjunction with revaluing the actual interest rate derivative.  The interest rate derivatives are revalued using the forward LIBOR curve each period and the credit fee is revalued by determining the change in credit factors, such as credit default swaps, period over period.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended March 31, 2012 and 2011

We primarily apply the market approach for recurring fair value measurements.  Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  For example, assets and liabilities from risk management activities may include exchange-traded derivative contracts and OTC derivative contracts.  Some exchange-traded derivatives are valued using broker or dealer quotations, or market transactions in either the listed or OTC markets.  In such cases, these exchange-traded derivatives are classified within Level 2.  OTC derivative trading instruments include swaps, forwards, options and complex structures that are valued at fair value.  In certain instances, these instruments may utilize models to measure fair value.  Generally, we use a similar model to value similar instruments.  Valuation models utilize various inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability, and market-corroborated inputs.  Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2.  Certain OTC derivatives trade in less active markets with a lower availability of pricing information.  In addition, complex or structured transactions, such as heat-rate call options, can introduce the need for internally-developed model inputs that might not be observable in or corroborated by the market.  When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3.  We have consistently used this valuation technique for all periods presented.  Please read Note 2—Summary of Significant Accounting Policies—Fair Value Measurements in our Form 10-K for further discussion.

The finance organization monitors commodity risk through the CRCG.  The EMT monitors interest rate risk.  The EMT has delegated the responsibility for managing interest rate risk to the CFO.  The CRCG is independent of our commercial operations and has direct access to the Audit and Compliance Committee. The Finance and Risk Management Committee, chaired by the CFO, meets periodically and is responsible for reviewing the overall day-to-day energy commodity risk exposure of Dynegy as measured against the limits established in our Commodity Risk Policy.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended March 31, 2012 and 2011

Each quarter, as part of its internal control processes, representatives from the CRCG review the methodology and assumptions behind the pricing of the forward curves.  As part of this review, liquidity periods are established based on third party market information, the basis relationship between direct and derived curves is evaluated, and changes are made to the forward power model assumptions.

The CRCG reviews changes in value on a daily basis through the use of various reports.  The pricing for power, natural gas and fuel oil curves is automatically entered into our commercial system nightly based on data received from our market data provider.  The CRCG reviews the data provided by the market data provider by utilizing third party broker quotes for comparison purposes.  In addition, our traders are required to review various reports to ensure accuracy on a daily basis.

The following tables set forth a reconciliation of changes in the fair value of financial instruments classified as Level 3 in the fair value hierarchy:

Fair Value of Financial Instruments.  We have determined the estimated fair value amounts using available market information and selected valuation methodologies.  Considerable judgment is required in interpreting market data to develop the estimates of fair value.  The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair value amounts.

The carrying values of current financial assets and liabilities such as cash, accounts receivable, short-term investments and accounts payable which are not presented in the table below, approximate fair values due to the short-term maturities of these instruments.  The $864 million and $870 million non-current Accounts payable,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Interim Periods Ended March 31, 2012 and 2011

affiliate balances with DH, as of March 31, 2012 and December 31, 2011, respectively, do not have a fair value as there are no defined payment terms, they are not evidenced by any promissory note and there has never been an intent for payment to occur.  Please read Note 14—Related Party Transactions—Transactions with DH—Accounts payable, affiliate for further discussion.  Unless otherwise noted, the fair value of debt as reflected in the table has been calculated based on the average of certain available broker quotes for the periods ending March 31, 2012 and December 31, 2011, respectively.

(1)          Included in both current and non-current assets and liabilities on the consolidated balance sheets.

(2)          Our March 31, 2012 estimate of the fair value of the Undertaking payable to DH, which is supported by the future cash flows that Dynegy receives from its Coal segment, was determined using the income approach, which uses estimates of the underlying assets’ cash flows based on a weighting of unlevered and levered discounted cash flows methodologies.  The fair value of the Undertaking payable to DH is classified within Level 3 of the fair value hierarchy.  Our December 31, 2011 estimate of the fair value of the Undertaking payable to DH represents the $750 million fair value of the Undertaking as of November 7, 2011,  less the $22 million payment in December 2011.

(3)          Carrying amount includes unamortized discounts of $10 million and $11 million at March 31, 2012 and December 31, 2011, respectively.  The fair value of the DMG Credit Agreement is classified within Level 2 of the fair value hierarchy.

Note 6—Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, net of tax, is included in stockholders’ equity on our unaudited condensed consolidated balance sheets as follows:

Note 7—Variable Interest Entities

Dynegy Holdings, LLC.  Effective November 7, 2011, DH, our wholly-owned subsidiary, was deconsolidated.  As of March 31, 2012 and December 31, 2011, we did not have any carrying amounts related to our investment in DH included in our consolidated balance sheets.  Our maximum exposure to loss related to our investment in DH is limited to our guarantee related to two charter agreements entered into by a DH subsidiary.  Please read Note 8—Commitments and Contingencies—Guarantees and Indemnifications—VLGC Guarantee for further discussion.  Also, please read Note 14—Related Party Transactions—Transactions with DH for a discussion of transactions with DH and its subsidiaries.

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DYNEGY INC.