<Page>
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                            ------------------------

                                   FORM 10-Q

<Table>
<C>        <S>
   /X/     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</Table>

                 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002

<Table>
<C>        <S>
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</Table>

        FOR THE TRANSITION PERIOD FROM ______________ TO ______________

                        COMMISSION FILE NUMBER: 1-15659

                            ------------------------

                                  DYNEGY INC.

             (Exact name of registrant as specified in its charter)

<Table>
<S>                                            <C>
               ILLINOIS                                     74-2928353
     (State or other jurisdiction              (I.R.S. Employer Identification No.)
   of incorporation or organization)
</Table>

                           1000 LOUISIANA, SUITE 5800
                              HOUSTON, TEXAS 77002
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (713) 507-6400
              (Registrant's telephone number, including area code)

                            ------------------------

    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 / /

    Number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: Class A Common Stock, no par value per
share, 270,325,934 shares outstanding as of May 9, 2002; Class B Common Stock,
no par value per share, 96,891,014 shares outstanding as of May 9, 2002.

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<Page>
                                  DYNEGY INC.
                               TABLE OF CONTENTS

<Table>
<Caption>
                                                                PAGE
                                                              --------
<S>                                                           <C>
PART I. FINANCIAL INFORMATION

  Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

  Condensed Consolidated Balance Sheets:
    March 31, 2002 and December 31, 2001....................      3
  Condensed Consolidated Statements of Operations:
    For the three months ended March 31, 2002 and 2001......      4
  Condensed Consolidated Statements of Cash Flows:
    For the three months ended March 31, 2002 and 2001......      5
  Notes to Condensed Consolidated Financial Statements......      6

  Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS...............     24

  Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
          MARKET RISK.......................................     56

PART II. OTHER INFORMATION

  Item 1. LEGAL PROCEEDINGS.................................     57

  Item 6. EXHIBITS AND REPORTS ON FORM 8-K..................     57
</Table>

    This quarterly report includes financial statements which have not been
reviewed by an independent public accountant under Rule 10-01(d) of
Regulation S-X pursuant to the relief granted to former auditing clients of
Arthur Andersen LLP in SEC Release No. 34-45589. We expect that our new
independent public accountant, PricewaterhouseCoopers LLP, will complete the
quarterly review required by Rule 10-01(d) of Regulation S-X. If, upon
completion of the review, there is a change in the financial statements
contained in this quarterly report, we will amend this report to present the
reviewed financial statements, and we will discuss in the amended report any
material changes from the unreviewed financial statements contained in this
report. Otherwise, we will state in our first quarterly report following
completion of such review that the unreviewed financial statements contained in
this report have subsequently been reviewed by an accountant other than Arthur
Andersen LLP and that there were no material changes as a result of that review.

                                       2
<Page>
                                  DYNEGY INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS

                  (UNAUDITED) (IN MILLIONS, EXCEPT SHARE DATA)

<Table>
<Caption>
                                                              MARCH 31,    DECEMBER 31,
                                                                 2002          2001
                                                              ----------   -------------
<S>                                                           <C>          <C>
                                         ASSETS
CURRENT ASSETS
Cash and cash equivalents...................................   $   455        $   218
Accounts receivable, net of allowance for doubtful accounts
  of $115 million and $107 million, respectively............     3,588          3,680
Accounts receivable, affiliates.............................        57             80
Inventory...................................................       364            391
Assets from risk-management activities......................     4,830          4,015
Prepayments and other assets................................     1,314          1,370
                                                               -------        -------
  TOTAL CURRENT ASSETS......................................    10,608          9,754
                                                               -------        -------
PROPERTY, PLANT AND EQUIPMENT...............................    10,721          9,130
Accumulated depreciation....................................    (1,011)          (921)
                                                               -------        -------
  PROPERTY, PLANT AND EQUIPMENT, NET........................     9,710          8,209
                                                               -------        -------
OTHER ASSETS
Investments in unconsolidated affiliates (Note 8)...........       926            950
Investment in Northern Natural Gas Company (Note 3).........        --          1,501
Assets from risk-management activities......................     3,538          2,332
Goodwill....................................................     2,226          1,595
Other assets................................................     1,039            850
                                                               -------        -------
  TOTAL ASSETS..............................................   $28,047        $25,191
                                                               =======        =======
                          LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................   $ 3,273        $ 3,522
Accounts payable, affiliates................................        45             40
Accrued liabilities and other...............................     1,119          1,346
Liabilities from risk-management activities.................     4,657          3,562
Notes payable and current portion of long-term debt.........       852            402
                                                               -------        -------
  TOTAL CURRENT LIABILITIES.................................     9,946          8,872
LONG-TERM DEBT..............................................     4,250          3,608
OTHER LIABILITIES
Transitional funding trust notes............................       495            516
Liabilities from risk-management activities.................     3,089          2,073
Deferred income taxes.......................................     1,811          1,735
Other long-term liabilities.................................       925            909
                                                               -------        -------
  TOTAL LIABILITIES.........................................    20,516         17,713
                                                               -------        -------
MINORITY INTEREST...........................................     1,009          1,010
SERIAL PREFERRED SECURITIES OF A SUBSIDIARY.................        11             46
COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY
  TRUST.....................................................       200            200
SERIES B MANDATORILY CONVERTIBLE REDEEMABLE PREFERRED
  SECURITIES................................................     1,511          1,503
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY
Class A Common Stock, no par value, 900,000,000 shares
  authorized at March 31, 2002 and December 31, 2001,
  respectively; 269,131,356 and 268,718,640 shares issued
  and outstanding at March 31, 2002 and December 31, 2001,
  respectively..............................................     2,865          2,837
Class B Common Stock, no par value, 360,000,000 shares
  authorized at March 31, 2002 and December 31, 2001,
  respectively; 96,891,014 and 86,499,914 shares issued and
  outstanding at March 31, 2002 and December 31, 2001,
  respectively..............................................     1,006            801
Subscriptions receivable....................................        (4)           (25)
Accumulated other comprehensive loss, net of tax............       (35)           (35)
Retained earnings...........................................     1,040          1,212
Treasury stock, at cost: 1,808,729 shares at March 31, 2002
  and 1,766,800 shares at December 31, 2001                        (72)           (71)
                                                               -------        -------
  TOTAL STOCKHOLDERS' EQUITY................................     4,800          4,719
                                                               -------        -------
  TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................   $28,047        $25,191
                                                               =======        =======
</Table>

           See notes to condensed consolidated financial statements.

                                       3
<Page>
                                  DYNEGY INC.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA)

<Table>
<Caption>
                                                                 THREE MONTHS
                                                                ENDED MARCH 31,
                                                              -------------------
                                                                2002       2001
                                                              --------   --------
<S>                                                           <C>        <C>
Revenues....................................................   $8,652    $14,168
Cost of sales...............................................    8,144     13,691
                                                               ------    -------
  Operating margin..........................................      508        477
Depreciation and amortization...............................      117        107
General and administrative expenses.........................      139        115
                                                               ------    -------
  Operating income..........................................      252        255
Earnings (loss) from unconsolidated investments.............      (11)        32
Other income................................................       36         53
Interest expense............................................      (79)       (62)
Other expenses..............................................      (17)       (44)
Minority interest expense...................................      (10)       (19)
Accumulated distributions associated with trust preferred
  securities................................................       (4)        (6)
                                                               ------    -------
Income before income taxes and change in accounting
  principle.................................................      167        209
Income tax provision........................................       51         72
                                                               ------    -------
INCOME FROM OPERATIONS......................................      116        137
Cumulative effect of change in accounting principle, net
  (Notes 2 and 4)...........................................     (256)         2
                                                               ------    -------
NET INCOME (LOSS)...........................................   $ (140)   $   139
                                                               ======    =======
NET INCOME (LOSS) PER SHARE:
Net income (loss)...........................................   $ (140)   $   139
Less: preferred stock dividends.............................        8         --
                                                               ------    -------
Net income (loss) applicable to common stockholders.........   $ (148)   $   139
                                                               ======    =======
Basic earnings (loss) per share.............................   $(0.41)   $  0.43
                                                               ======    =======
Diluted earnings (loss) per share...........................   $(0.41)   $  0.41
                                                               ======    =======
Basic shares outstanding....................................      364        324
                                                               ======    =======
Diluted shares outstanding..................................      419        338
                                                               ======    =======
</Table>

           See notes to condensed consolidated financial statements.

                                       4
<Page>
                                  DYNEGY INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                           (UNAUDITED) (IN MILLIONS)

<Table>
<Caption>
                                                                 THREE MONTHS
                                                                ENDED MARCH 31,
                                                              -------------------
                                                                2002       2001
                                                              --------   --------
<S>                                                           <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...........................................   $(140)    $   139
Items not affecting cash flows from operating activities:
  Depreciation and amortization.............................     116         104
  (Earnings) losses from unconsolidated investments, net of
    cash distributions......................................      43         (27)
  Risk-management activities................................      78         131
  Deferred income taxes.....................................      46          27
  Cumulative effect of change in accounting principle.......     256          (2)
  Other.....................................................      46          12
Change in assets and liabilities resulting from operating
  activities:
  Accounts receivable.......................................     187         600
  Inventory.................................................      31         304
  Prepayments and other assets..............................      22         (43)
  Accounts payable and accrued liabilities..................    (366)       (978)
  Other, net................................................     (26)         (2)
                                                               -----     -------
Net cash provided by operating activities...................     293         265
                                                               -----     -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................    (175)     (1,133)
Investment in unconsolidated affiliates.....................      (3)        (13)
Business acquisitions, net of cash acquired.................     (20)        (20)
Proceeds from asset sales...................................       6          --
Other investing, net........................................    (179)         --
                                                               -----     -------
Net cash used in investing activities.......................    (371)     (1,166)
                                                               -----     -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from long-term borrowings......................     496         496
Repayments of long-term borrowings..........................     (22)         --
Net cash flow from commercial paper and money market lines
  of credit.................................................    (293)        545
Proceeds from sale of capital stock, options and warrants...     229          49
Purchase of serial preferred securities of a subsidiary.....     (28)         --
Purchase of treasury stock..................................      (1)         --
Dividends and other distributions, net......................     (28)        (34)
Other financing, net........................................     (23)         --
                                                               -----     -------
Net cash provided by financing activities...................     330       1,056
                                                               -----     -------
Effect of exchange rate changes on cash.....................     (15)          2
Net increase in cash and cash equivalents...................     237         157
Cash and cash equivalents, beginning of period..............     218          86
                                                               -----     -------
Cash and cash equivalents, end of period....................   $ 455     $   243
                                                               =====     =======
</Table>

           See notes to condensed consolidated financial statements.

                                       5
<Page>
                                  DYNEGY INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 1--ACCOUNTING POLICIES

    The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to interim financial reporting
as prescribed by the Securities and Exchange Commission ("SEC"). These interim
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Annual Report on
Form 10-K of Dynegy Inc. ("Dynegy" or the "Company") for the year ended
December 31, 2001 (the "Form 10-K"), as filed with the SEC.

    The financial statements include all material adjustments, which, in the
opinion of management, are necessary for a fair presentation of the results for
the interim periods. Interim period results are not necessarily indicative of
the results for the full year. The preparation of the condensed consolidated
financial statements in conformity with generally accepted accounting principles
requires management to develop estimates and make assumptions that affect
reported financial position and results of operations and that impact the nature
and extent of disclosure, if any, of contingent assets and liabilities. Actual
results could differ materially from those estimates. Certain reclassifications
have been made to prior period amounts in order to conform to current year
presentation.

NOTE 2--CHANGES IN ACCOUNTING PRINCIPLES

    On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("Statement No. 142"). Statement No. 142 discontinues
goodwill amortization over its estimated useful life; rather, goodwill is
subject to at least an annual fair-value based impairment test. The Company
adopted Statement No. 142 effective January 1, 2002. The changes in the carrying
amount of goodwill for each of Dynegy's reportable business segments for the
three-month period ended March 31, 2002 are as follows:

<Table>
<Caption>
                                          WHOLESALE    DYNEGY     TRANSMISSION       DYNEGY
                                           ENERGY     MIDSTREAM        &             GLOBAL
                                           NETWORK    SERVICES    DISTRIBUTION   COMMUNICATIONS    TOTAL
                                          ---------   ---------   ------------   --------------   --------
<S>                                       <C>         <C>         <C>            <C>              <C>
Balances as of January 1, 2002..........    $935         $16         $  388           $256         $1,595
Cumulative effect of change in
  accounting principle..................      --          --             --           (256)          (256)
Goodwill acquired during the period.....      --          --            887             --            887
                                            ----         ---         ------           ----         ------
Balances as of March 31, 2002...........    $935         $16         $1,275           $ --         $2,226
                                            ====         ===         ======           ====         ======
</Table>

    The Company has recognized a cumulative effect of change in accounting
principle of $256 million related to its Dynegy Global Communications segment in
accordance with Statement No. 142. The fair value of that reporting segment was
estimated using the expected present value of future cash flows to determine
impairment. The value was negatively impacted by continued weakness in the
telecommunications and broadband markets. Goodwill acquired during the period
relates to the acquisition of Northern Natural Gas Company ("Northern Natural").
(See Note 3 below.)

                                       6
<Page>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 2--CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED)
    The following table sets forth what net income and earnings per share
("EPS") would have been in the three months ended March 31, 2001 exclusive of
goodwill amortization compared to net loss and loss per share for the three
months ended March 31, 2002.

<Table>
<Caption>
                                                              THREE MONTHS ENDED
                                                                   MARCH 31,
                                                              -------------------
                                                                2002       2001
                                                              --------   --------
                                                                ($ IN MILLIONS)
<S>                                                           <C>        <C>
Reported net income (loss)..................................   $ (140)    $ 139
Add back: Goodwill amortization.............................       --        12
                                                               ------     -----
Adjusted net income (loss)..................................   $ (140)    $ 151
                                                               ======     =====
BASIC EPS:
Reported net income (loss)..................................   $(0.41)    $0.43
Goodwill amortization.......................................       --      0.04
                                                               ------     -----
Adjusted net income (loss)..................................   $(0.41)    $0.47
                                                               ======     =====
DILUTED EPS:
Reported net income (loss)..................................   $(0.41)    $0.41
Goodwill amortization.......................................       --      0.04
                                                               ------     -----
Adjusted net income (loss)..................................   $(0.41)    $0.45
                                                               ======     =====
</Table>

    In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("Statement No. 144"). Statement No. 144 addresses the accounting and reporting
for the impairment or disposal of long-lived assets and supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and APB Opinion No. 30, "Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The Company's adoption of Statement No. 144 on January 1, 2002
did not have any impact on its financial position, results of operations or cash
flows.

    ACCOUNTING PRINCIPLES NOT YET ADOPTED.  Also during 2001, the FASB issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("Statement No. 143"). Statement No. 143 requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred with the associated asset retirement costs
being capitalized as a part of the carrying amount of the long-lived asset. The
Company is evaluating the future financial effects of adopting Statement
No. 143 and will adopt the standard effective January 1, 2003.

    On April 30, 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections" ("Statement No. 145").
Statement No. 145 rescinds Statement of Financial Accounting Standards No. 4,
"Reporting Gains and Losses from Extinguishment of Debt" ("Statement No. 4"),
the amendment to Statement No. 4, and Statement of Financial Accounting
Standards No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" ("Statement No. 64"). Through

                                       7
<Page>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 2--CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED)
this rescission, Statement No. 145 eliminates the requirement (in both Statement
No. 4 and Statement No. 64) that gains and losses from the extinguishment of
debt be aggregated and, if material, classified as an extraordinary item, net of
the related income tax effect.

    Further, Statement No. 145 amends paragraph 14(a) of Statement of Financial
Accounting No. 13, "Accounting for Leases", to eliminate an inconsistency
between the accounting for sale-leaseback transactions and certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. Statement No. 145 also makes several other technical corrections
to existing pronouncements that may change accounting practice. Statement
No. 145 is effective for transactions occurring after May 15, 2002, and the
Company is currently evaluating the future financial effects, if any, of
adopting Statement No. 145.

NOTE 3--BUSINESS COMBINATIONS AND OTHER ACQUISITIONS

    In November 2001, Dynegy acquired 1,000 shares of Series A Preferred Stock
("Series A Preferred Stock") in Northern Natural for $1.5 billion. The Series A
Preferred Stock is entitled to cumulative dividends, as and if declared by the
board of directors of Northern Natural, at a rate of 6%, payable annually
beginning on January 31, 2003. Dividends of approximately $8 million are
reflected in Other Income on the Condensed Consolidated Statement of Operations
for the quarter ended March 31, 2002 for dividends earned by Dynegy prior to the
closing of the Northern Natural acquisition on January 31, 2002. The Series A
Preferred Stock is redeemable at the option of Northern Natural under certain
circumstances at a redemption price equal to the liquidation preference plus
accrued and unpaid dividends and other items. In connection with the investment,
Dynegy Holdings Inc. ("DHI"), a wholly owned subsidiary of Dynegy, acquired an
option to purchase all of the equity of Northern Natural's indirect parent
company. DHI exercised its option to acquire the indirect parent of Northern
Natural in November 2001 upon termination of the merger agreement with Enron.
The exercise price for the option was $23 million subject to adjustment based on
Northern Natural's indebtedness and for the amount of working capital at
closing. Subsequent litigation relating to the option was settled in part by the
parties on January 3, 2002, and the closing of the option exercise occurred on
January 31, 2002. Enron still maintains a damage action that DHI's exercise of
the option was wrongful. (See Note 10 below.)

    At January 31, 2002, Northern Natural had approximately $950 million of debt
outstanding. Approximately $500 million of this debt consisted of senior
unsecured notes with maturities ranging from 2005 to 2011. The remaining $450
million consisted of a secured line of credit due November 2002. In order to
obtain a bondholder consent required in connection with the Northern Natural
acquisition, DHI agreed to effect a tender offer for one series of $100 million
of Northern Natural's senior unsecured notes. On April 26, 2002, DHI purchased
$90 million of the notes due 2005 pursuant to such tender offer. An Enron
subsidiary has the option through June 30, 2002 to repurchase the Series A
Preferred Stock and equity in Northern Natural's parent by repayment of the
purchase price, subject to adjustments for working capital and indebtedness.

    Northern Natural is consolidated with Dynegy's operations beginning
February 1, 2002. The following table reflects certain unaudited pro forma
information for Dynegy for the periods presented

                                       8
<Page>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 3--BUSINESS COMBINATIONS AND OTHER ACQUISITIONS (CONTINUED)
as if the Northern Natural acquisition had taken place on January 1, 2001 (in
millions, except per share data).

<Table>
<Caption>
                                                           THREE MONTHS ENDED   THREE MONTHS ENDED
                                                             MARCH 31, 2002       MARCH 31, 2001
                                                           ------------------   ------------------
<S>                                                        <C>                  <C>
Pro forma revenues.......................................        $8,947              $14,343
Pro forma income from operations before change in
  accounting principle (Notes 2 and 4)...................           140                  185
Pro forma income from operations before change in
  accounting principle (per diluted share)...............          0.33                 0.55
Pro forma net income (loss) before preferred stock
  dividends..............................................          (116)                 187
Pro forma net income (loss) available to common
  shareholders...........................................          (124)                 187
Pro forma earnings (loss) per share (diluted)............         (0.34)                0.55
</Table>

NOTE 4--COMMERCIAL OPERATIONS, RISK MANAGEMENT ACTIVITIES AND FINANCIAL
INSTRUMENTS

    Provisions in FASB Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("Statement
No. 133"), as amended, affect the accounting and disclosure of certain
contractual arrangements and operations of the Company. Under Statement
No. 133, as amended, all derivative instruments are recognized in the balance
sheet at their fair values and changes in fair value are recognized immediately
in earnings, unless the derivatives which are not a part of the Company's
marketing activities qualify and are designated as hedges of future cash flows,
fair values or net investments or qualify, and are designated, as normal
purchases and sales. Derivatives treated as normal purchases or sales are
recorded and recognized in income using accrual accounting.

    The nature of the Company's business necessarily involves certain market and
financial risks. The Company routinely enters into financial instrument
contracts in an attempt to mitigate or eliminate these various risks. These
risks and the Company's strategy for mitigating these risks are more fully
described in Note 3 to the Form 10-K.

    The Company recorded the impact of the adoption of Statement No. 133, as
amended, as a cumulative effect adjustment in the Company's consolidated results
on January 1, 2001. The amounts recorded, which are immaterial to net income and
the Company's financial position, are as follows (in millions):

<Table>
<Caption>
                                                                               OTHER
                                                                           COMPREHENSIVE
                                                              NET INCOME      INCOME
                                                              ----------   -------------
<S>                                                           <C>          <C>
Adjustment to fair value of derivatives.....................     $ 3            $ 64
Income tax effects..........................................      (1)            (23)
                                                                 ---            ----
Total.......................................................     $ 2            $ 41
                                                                 ===            ====
</Table>

                                       9
<Page>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 4--COMMERCIAL OPERATIONS, RISK MANAGEMENT ACTIVITIES AND FINANCIAL
INSTRUMENTS (CONTINUED)
    Changes in stockholders' equity related to derivatives for the three-month
period ended March 31, 2002 were as follows, net of tax (in millions):

<Table>
<Caption>

<S>                                                           <C>
Balance at December 31, 2001................................   $  12
Current period decrease in fair value, net..................      (1)
Reclassifications to earnings, net..........................      (8)
                                                               -----
Balance at March 31, 2002...................................   $   3
                                                               =====
</Table>

    Accumulated other comprehensive loss, net of tax is included in
Stockholders' Equity on the Condensed Consolidated Balance Sheets as follows (in
millions):

<Table>
<Caption>

<S>                                                           <C>
Statement No. 133, net......................................   $   3
Currency translation adjustment.............................     (25)
Unrealized loss on available-for-sale securities, net.......     (13)
                                                               -----
Accumulated other comprehensive loss, net of tax, at
  March 31, 2002............................................   $ (35)
                                                               =====
</Table>

    Other comprehensive loss is as follows (in millions):

<Table>
<Caption>
                                                              MARCH 31,   MARCH 31,
                                                                2002        2001
                                                              ---------   ---------
<S>                                                           <C>         <C>
Net income (loss)...........................................    $(140)      $139
Other comprehensive income..................................       --         33
                                                                -----       ----
Total comprehensive income (loss)...........................    $(140)      $172
                                                                =====       ====
</Table>

    Additional disclosures required by Statement No. 133, as amended, are
provided in the following paragraphs.

    The Company enters into various financial derivative instruments which
qualify as cash flow hedges. For derivatives treated as hedges of future cash
flows, the effective portion of changes in fair value is recorded in other
comprehensive income until the related hedged items impact earnings. Any
ineffective portion of a hedge is reported in earnings immediately. Instruments
related to the Company's energy convergence and midstream liquids businesses are
entered into for purposes of hedging forward fuel requirements for certain power
generation facilities, locking in future margin in the domestic midstream
liquids business and hedging price risk in the global liquids business. Interest
rate swaps are used to convert the floating interest-rate component of certain
obligations to fixed rates or convert the fixed interest-rate component of
certain obligations to floating rates.

    During the three months ended March 31, 2002 and 2001, there was no material
ineffectiveness from changes in fair value of hedge positions, and no amounts
were excluded from the assessment of hedge effectiveness related to the hedge of
future cash flows. Additionally, no amounts were reclassified to earnings in
connection with forecasted transactions that were no longer considered probable
of occurring.

                                       10
<Page>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 4--COMMERCIAL OPERATIONS, RISK MANAGEMENT ACTIVITIES AND FINANCIAL
INSTRUMENTS (CONTINUED)
    The balance in other comprehensive income at March 31, 2002 is expected to
be reclassified to future earnings, contemporaneously with the related purchases
of fuel, sales of electricity or liquids, payments of interest and recognition
of operating lease expense, as applicable to each type of hedge. Of this amount,
approximately $15 million, net of taxes, is estimated to be reclassed into
earnings over the 12-month period ending March 31, 2003. Actual amounts
ultimately reclassed to earnings over the next 12 months could vary materially
from this estimated amount as a result of changes in market conditions.

    The Company also enters into derivative instruments which qualify as fair
value hedges. For derivatives treated as fair value hedges, changes in the fair
value of the derivative and changes in the fair value of the related asset or
liability are recorded in current period earnings. The Company uses interest
rate swaps to convert a portion of its fixed-rate debt into variable-rate debt.
The Company also uses interest rate swaps to convert a portion of its variable
rate obligations into fixed rate obligations. During the three months ended
March 31, 2002 and 2001, there was no ineffectiveness from changes in fair value
of hedge positions, and no amounts were excluded from the assessment of hedge
effectiveness. Additionally, no amounts were recognized in relation to firm
commitments that no longer qualified as fair value hedge items.

    The Company has investments in foreign subsidiaries, and the net assets of
these subsidiaries are exposed to currency exchange-rate volatility. The Company
uses derivative financial instruments, including foreign exchange forward
contracts and cross currency interest rate swaps, to hedge this exposure. For
derivatives treated as hedges of net investment in foreign operations, the
effective portion of changes in the fair value of the derivative is recorded in
the cumulative translation adjustment. For the three months ended March 31, 2002
approximately $14 million of net gains related to these contracts were included
in the cumulative translation adjustment. There was no net impact on the
cumulative translation adjustment in the first quarter 2001.

NOTE 5--DEBT

    DHI closed a $900 million unsecured revolving credit agreement with a
syndicate of commercial banks on April 29, 2002. This facility, which matures on
April 28, 2003, replaced an expiring $1.2 billion revolving credit agreement.
The new facility provides funding for working capital, capital expenditures and
general corporate purposes. Generally, borrowings under the credit agreement
bear interest at a Eurodollar rate plus a margin that is determined based on
designated unsecured debt ratings. The increase in this margin over the margins
under the expired facility is expected to result in an increase in the fees paid
by DHI compared to the fees paid under the expiring facility. Specifically, DHI
expects to pay approximately $1.4 million in additional borrowing fees during
the term of the new facility and paid approximately $3.2 million in additional
upfront fees in connection with the closing of the new facility. Financial
covenants include a debt-to-capitalization test (which takes into account
certain lease and similar commitments of DHI and its subsidiaries) and a newly
added 3.5 times earnings before interest, taxes and depreciation and
amortization ("EBITDA")-to-interest test. The permissible threshold for the
debt-to-capitalization test was lowered in the new facility from 65% to 60%.
Other newly added covenants in the new facility include subordination of certain
intercompany debt owed to Dynegy and its subsidiaries (other than DHI and its
subsidiaries), restrictions on liens and limitations prohibiting subsidiary debt
at Dynegy Marketing & Trade, Dynegy Power Marketing, Inc.

                                       11
<Page>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 5--DEBT (CONTINUED)
and Dynegy Midstream Services, Limited Partnership. Default provisions include
cross payment default of Dynegy, DHI or any principal subsidiary with respect to
debt or other similar obligations that exceed $100 million, cross acceleration
of Dynegy, DHI or any principal subsidiary under any instrument covering debt or
similar obligations that exceed $100 million and bankruptcy or receivership of
Dynegy, DHI or any principal subsidiary. The new facility does not contain any
defaults relating to material adverse changes in the condition of Dynegy or DHI
after the closing date or to changes in Dynegy's or DHI's credit ratings. The
new facility also does not contain a "term-out" provision that would permit
Dynegy to extend the maturity for borrowings under the facility beyond the
facility's April 28, 2003 maturity date.

    On February 21, 2002, DHI issued $500 million of 8.75% senior notes due
2012. DHI will pay interest on the notes on February 15 and August 15 of each
year, beginning August 15, 2002. The notes are unsecured and unsubordinated debt
securities and are not subject to a sinking fund. DHI may redeem the notes prior
to maturity, in whole or in part, at a redemption price equal to the greater of
the principal amount of the notes and the make-whole price specified in the
indenture relating to the notes.

    The Company acquired debt with a face value of approximately $950 million
(and a fair value of approximately $890 million) through the acquisition of
Northern Natural. Approximately $500 million of the Northern Natural debt
consisted of senior unsecured notes with maturities ranging from 2005 to 2011.
The remaining $450 million consisted of a secured line of credit due
November 2002. On April 26, 2002, DHI purchased $90 million of Northern
Natural's senior unsecured notes due 2005 pursuant to a tender offer. (See
Note 3 above.)

    During the three-month period ended March 31, 2002, the Company repaid
commercial paper and revolving credit facilities for DHI and Illinois Power
Company ("IP"), a wholly owned subsidiary of Dynegy, of approximately $293
million.

NOTE 6--EARNINGS PER SHARE

    Basic earnings per share represents the amount of earnings for the period
available to each share of common stock outstanding during the period. Diluted
earnings per share represents the amount of earnings for the period available to
each share of common stock outstanding during the period plus each share that
would have been outstanding assuming the issuance of common shares for all
dilutive potential common shares outstanding during the period. Outstanding
options contribute to the differences between basic and diluted shares
outstanding in all periods. Additionally, the diluted shares in the 2002 period
include the effect of the assumed conversion of the Series B Mandatorily
Convertible Redeemable Preferred Securities held by ChevronTexaco.

NOTE 7--CAPITAL STOCK

    Chevron U.S.A. Inc., a ChevronTexaco subsidiary, purchased approximately
10.4 million shares of Class B common stock in the three-month period ended
March 31, 2002 pursuant to its preemptive right under its shareholder agreement
with Dynegy. Proceeds from this sale totaled approximately $205 million and were
invested in cash to enhance short-term liquidity.

                                       12
<Page>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 8--INVESTMENTS IN UNCONSOLIDATED AFFILIATES

    Investments in affiliates that are not controlled by the Company but where
the Company has significant influence over operations are accounted for by the
equity method. The Company's share of net income from these affiliates is
reflected in the Condensed Consolidated Statements of Operations as Earnings
(Loss) from Unconsolidated Investments. The Company's principal equity method
investments consist of entities that operate generation assets and natural gas
liquids assets. These equity investments totaled $850 million and $843 million
at March 31, 2002 and December 31, 2001, respectively. The Company entered into
these ventures principally for the purpose of sharing risk and leveraging
existing commercial relationships. These ventures maintain independent capital
structures and have financed their operations on a non-recourse basis to the
Company.

    GENERATION ASSETS.  Investments primarily include ownership interests in
eight joint ventures that own fossil fuel electric generation facilities in
diverse geographic regions. The Company's ownership is generally 50 percent in
the majority of these ventures. The Company's aggregate net investment of $607
million at March 31, 2002 represents approximately 2,400 MW of net generating
capacity. Dynegy's most significant investment in generating capacity is its
interest in West Coast Power, LLC ("West Coast Power"), a 50 percent owned
venture with NRG Energy ("NRG"), representing approximately 1,400 MW of net
generating capacity in California. The net investment in West Coast Power
totaled approximately $325 million at March 31, 2002. West Coast Power provided
equity earnings of approximately $15 million and $12 million in the quarterly
periods ending March 31, 2002 and 2001, respectively.

    MIDSTREAM INVESTMENTS.  Investments primarily include ownership interests in
three ventures that operate natural gas liquids ("NGL") processing, extraction,
fractionation and storage facilities in the Gulf Coast region as well as an
interstate NGL pipeline. The Company's ownership interest in these ventures
ranges from 23 percent to 39 percent. At March 31, 2002, the Company's aggregate
net investment in these midstream businesses totaled approximately $146 million.

    Summarized aggregate financial information for these investments and
Dynegy's equity share thereof was (in millions):

<Table>
<Caption>
                                                                THREE MONTHS ENDED MARCH 31,
                                                          -----------------------------------------
                                                                 2002                  2001
                                                          -------------------   -------------------
                                                                      EQUITY                EQUITY
                                                           TOTAL      SHARE      TOTAL      SHARE
                                                          --------   --------   --------   --------
<S>                                                       <C>        <C>        <C>        <C>
Revenues................................................    $826       $289      $1,481      $568
                                                            ----       ----      ------      ----
Operating margin........................................    $230       $ 68      $  176      $ 65
                                                            ----       ----      ------      ----
Net income..............................................    $114       $ 34      $   91      $ 32
                                                            ----       ----      ------      ----
</Table>

    OTHER INVESTMENTS.  In addition to these equity investments, the Company
holds interests in companies for which it does not have significant influence
over the operations. These investments are generally accounted for by the cost
method. Such investments totaled $63 million and $84 million at March 31, 2002
and December 31, 2001, respectively. The change is primarily attributed to the
impairment of an investment in the Dynegy Global Communications segment
resulting from unfavorable market conditions.

                                       13
<Page>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 8--INVESTMENTS IN UNCONSOLIDATED AFFILIATES (CONTINUED)
    The Company also owns securities that have a readily determinable fair
market value and are considered available-for-sale. The market value of these
investments at March 31, 2002 and December 31, 2001 was estimated to be $13
million and $23 million, respectively. The change is primarily attributed to the
impairment of an available-for-sale investment in the Dynegy Global
Communications segment resulting from unfavorable market conditions.

NOTE 9--PROJECT ALPHA; 2001 RESTATEMENT

    In April 2001, Dynegy entered into a structured natural gas transaction
("Project Alpha") involving two unrelated special purpose entities, NGAI Funding
LLC and ABG Gas Supply LLC, and a newly created partnership, DMT Supply LP. The
transaction was intended to provide Dynegy with access to a significant
long-term supply of physical natural gas, cash funding and a permanent tax
benefit. On April 25, 2002, Dynegy filed a Current Report on Form 8-K discussing
Project Alpha (the "Form 8-K"). As described in the Form 8-K, Dynegy has
decided, after consultation with the Staff of the SEC, to present the cash flow
associated with the gas supply contract as a financing activity in its
Consolidated Statement of Cash Flows in 2001. The change will reduce operating
cash flow for the year ended December 31, 2001 from the $811 million previously
reported to approximately $511 million, with a corresponding increase in
financing cash flow from the $2.7 billion previously reported to approximately
$3 billion. The Company's Consolidated Statement of Cash Flows in this and all
future Exchange Act filings will reflect all cash flows associated with the gas
contract as financing activities.

    Dynegy received both a tax opinion and a letter opinion on the accounting
treatment for Project Alpha from Arthur Andersen LLP ("Andersen"), the Company's
independent accountant in 2001, in connection with the closing of the
transaction. As a result of the recent events described above, Dynegy undertook
an internal assessment of Project Alpha, including the financial statement
recognition of an approximate $79 million income tax benefit in 2001. During
this assessment, Andersen informed the Company that it could no longer support
its tax opinion relating to the transaction. Andersen's change in position was
based in part on its conclusion that the reclassification of $300 million in
cash flow from operations to cash flow from financing relating to the
transaction lessened the factual basis for its opinion. Dynegy's financial
statement recognition of the tax benefit in 2001 was based principally on the
Company's assessment of the relevant issues, as corroborated by Andersen's tax
opinion. Management continues to believe that the tax consequences of the
transaction are as originally reported. However, management has decided that
sufficient support to recognize the income tax benefit in the Company's
financial statements no longer exists.

    As a result of this decision, Retained Earnings at December 31, 2001 will be
reduced by $79 million and Deferred Income Tax Liability will be correspondingly
increased in relation to the balances previously reported by the Company in the
Form 10-K. Eliminating the financial statement recognition of the income tax
benefit reduces previously reported 2001 net income by approximately
$79 million, or $0.23 per diluted share. Restated reported net income for the
year ended December 31, 2001 is $569 million, or $1.67 per diluted share, as
compared to previously reported amounts of $648 million and $1.90 per diluted
share, respectively. The income tax benefit elimination does not impact
operating cash flow for the year ended December 31, 2001. This restatement has
no impact on net income or earnings per share for the three-month periods ended
March 31, 2002 and 2001,

                                       14
<Page>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 9--PROJECT ALPHA; 2001 RESTATEMENT (CONTINUED)
respectively, and will not impact results of operations or reported cash flows
for the remaining 2002 quarters.

    Accordingly, the Company will restate its 2001 results of operations,
stockholders' equity and cash flow to reflect this change in upcoming amendments
to its Form 10-K and its June 30, 2001 and September 30, 2001 Quarterly Reports
on Form 10-Q. As a result, the previously issued financial statements for the
year ended December 31, 2001, and the auditors' report thereon, should no longer
be relied upon as it relates to this item. In addition, subsequent to the filing
of the amendment to its Form 10-K for the year ended December 31, 2001, the
Company will file an amended Form 10-Q for the three-month period ended
March 31, 2002. This amendment will incorporate the changes to retained earnings
and deferred income taxes contained in the accompanying Condensed Consolidated
Balance Sheets resulting from the reversal of the income tax benefit previously
recognized in the 2001 period.

    Dynegy has been advised by the Staff of the SEC that it intends to seek a
formal order of investigation in connection with the previously announced
inquiry into the facts and circumstances surrounding Project Alpha. See Note 10
below.

NOTE 10--COMMITMENTS AND CONTINGENCIES

    Please see Note 11, "Commitments and Contingencies," to the Form 10-K for a
description of the Company's material legal proceedings. Set forth below is a
description of any material developments that have occurred with respect to such
proceedings since the Company's filing of the Form 10-K and a description of any
new matters that have arisen during the quarter.

    BALDWIN STATION LITIGATION.  As previously described in the Form 10-K, IP
and Dynegy Midwest Generation, Inc. (collectively, the "Defendants") are
currently the subject of a Notice of Violation ("NOV") from the Environmental
Protection Agency (the "EPA") and a complaint filed by the EPA and the
Department of Justice alleging violations of the Clean Air Act (the "Act") and
the regulations promulgated under the Act. Similar notices and complaints have
been filed against a number of other utilities. Both the NOV and the complaint
allege that certain equipment repairs, replacements and maintenance activities
at the Defendants' three Baldwin Station generating units constituted "major
modifications" under the Prevention of Significant Deterioration and/or the New
Source Performance Standards regulations. When activities that meet the
definition of "major modifications" occur and they are not otherwise exempt, the
Act and related regulations generally require that generating facilities meet
more stringent emissions standards, which may entail the installation of
potentially costly pollution control equipment. The Defendants filed an answer
denying all claims and asserting various specific defenses and a trial date of
February 11, 2003 has been set.

    None of the Defendants' other facilities are covered in the complaint and
NOV, but the EPA has officially requested information concerning activities at
the Defendants' Vermilion, Wood River, and Hennepin Plants as well as Dynegy
Northeast Generation's Danskammer Plant. It is possible that the EPA will
eventually commence enforcement actions based on activities at those plants as
well. The EPA has also recently requested information concerning activities at
Dynegy Northeast Generation's Roseton Plant. The EPA has the authority to seek
penalties for the alleged violations in question at the rate of up to $27,500
per day for each violation. The EPA may also seek to require installation of the
"best

                                       15
<Page>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
available control technology" (or the equivalent) at the Baldwin Station, and
possibly at the Vermilion, Wood River, Hennepin, Danskammer, and Roseton Plants
if the EPA initiates and successfully prosecutes enforcement actions against
those plants.

    CALIFORNIA MARKET LITIGATION.  As previously described in the Form 10-K, six
class action lawsuits have been filed against various Dynegy entities based on
the events occurring in the California power market. The complaints allege
violations of California's Business and Professions Code, Unfair Trade Practices
Act and various other statutes. The plaintiffs allege that the defendants,
including the owners of in-state generation and various power marketers,
conspired to manipulate the California wholesale power market to the detriment
of California consumers. Included among the acts forming the basis of the
plaintiffs' claims are the alleged improper sharing of generation outage data,
improper withholding of generation capacity and the manipulation of power market
bid practices. The plaintiffs seek unspecified treble damages.

    All six lawsuits have been consolidated before Judge Sammartino, Superior
Court Judge for the County of San Diego. Judge Sammartino recently entered a
pretrial conference order that establishes a trial date of March 1, 2004. In
addition, on April 17, 2002, Dynegy and the other defendants in these actions
filed challenges to the master plaintiffs' complaint moving to, among other
things, have the actions dismissed in their entirety on grounds of federal
preemption and to stay the proceedings in deference to the FERC's primary
jurisdiction over wholesale electricity transactions. Briefing on these motions
is scheduled to be completed on June 7, 2002 and the defendants' pleading
challenges should be heard and decided by Judge Sammartino thereafter.

    On March 11, 2002, the California Attorney General filed, on behalf of the
People of the State of California, complaints in San Francisco Superior Court
against several energy generators, including those owned directly by West Coast
Power and indirectly by Dynegy. The complaints allege that since June 1998,
these generators sold power in the open market that should have been held in
emergency reserve for the State. In the aggregate, the complaints seek more than
$150 million in penalties, restitution and return of profits from the
generators. The Company believes the allegations are without merit and will
vigorously defend against these claims.

    On April 23, 2002, T&E Pastorino and Pastorino & Son Nursery filed a
class action complaint in the Superior Court of the State of California for the
County of San Mateo. Named as defendants are various generators and marketers,
including Dynegy and certain affiliates. The complaint alleges unfair, unlawful
and deceptive practices in violation of the California Unfair Business Practices
Act and seeks to enjoin illegal conduct, restitution and unspecified damages.
While some of the allegations in this lawsuit are similar to the allegations in
the other six lawsuits, this lawsuit includes additional allegations based on
events occurring subsequent to the filing of the other six lawsuits. These
additional allegations include allegations similar to those made by the
California Attorney General in the March 11, 2002 suit described above as well
as allegations that contracts between these generators and the California
Department of Water Resources (the "DWR") constitute unfair business practices
resulting from market manipulation. The Company believes the allegations are
without merit and will vigorously defend against these claims.

    On May 13, 2002, two California law firms filed suit in California State
Court against more than 20 energy generators, including those owned directly by
West Coast Power and indirectly by Dynegy.

                                       16
<Page>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Although Dynegy has not yet been served with this suit, the Company understands
from press reports relating to the suit that it principally alleges the
defendant generators, in connection with their execution of long-term power
supply contracts with the DWR, took advantage of a manipulated market to
overcharge for electricity. The suit, which was filed on behalf of California
taxpayers, seeks to halt enforcement of the existing DWR contracts to the extent
that the contracted prices are found to be unfair. The suit further seeks
damages in the amount of the alleged excess prices under the contracts. The
Company believes these allegations are without merit and will vigorously defend
against these claims.

    As previously described in the Form 10-K, on February 13, 2002, the FERC
initiated an investigation of possible manipulation of natural gas and power
prices in the western United States during the period from January 2001 through
the present. On May 8, 2002, in response to three memoranda discovered by the
FERC allegedly containing evidence of market manipulation by Enron in
California, the FERC issued data requests to all sellers in the California
Independent System Operator (the "ISO") and the California Power Exchange (the
"PX") markets during 2000 and 2001 seeking information with respect to whether
those sellers engaged in trading strategies described in the three Enron
memoranda. Responses to the data requests are due on May 22, 2002. The
California State Senate has issued similar data requests.

    Based on its investigation to date, Dynegy believes that its trading
practices are consistent with applicable law and tariffs and will continue to
cooperate fully with the FERC's investigation. However, the Company is
continuing to assess these allegations and cannot predict with certainty how
such allegations will ultimately be resolved.

    In addition, as previously described in the Form 10-K, on February 25, 2002
the California Public Utilities Commission and the California Electricity
Oversight Board filed complaints with the FERC asking that it void or reform
power supply contracts between the DWR and, among others, West Coast Power. The
complaints allege that prices under the contracts exceed just and reasonable
prices permitted under the Federal Power Act. The FERC recently set these
complaints for evidentiary hearing. The hearing, which will be deferred until
completion of settlement talks currently scheduled to begin on May 16, 2002,
will be limited to the question whether the California real-time market
adversely affected the long-term bilateral markets to the extent that
modifications to the DWR power contracts are required. While the Company
believes the terms of its contracts are just and reasonable and do not reflect
alleged market manipulation, it cannot predict the outcome of this matter.

    On March 20, 2002, the California Attorney General filed, on behalf of the
People of the State of California, a complaint with the FERC against numerous
power marketers and energy generators, including those owned directly by West
Coast Power and indirectly by Dynegy. The complaint alleges that during
2000-2001, these marketers and generators failed to file with sufficient
specificity the required quarterly reports under the Federal Power Act relating
to sales to the ISO, the PX and the California Energy Resources Scheduling
Division of the DWR, thereby making unlawful the market-based rates charged by
these entities. The complaint seeks retroactive refunds to the extent such rates
are found by the FERC to exceed just and reasonable levels. The Company believes
the allegations are without merit and will vigorously defend against these
claims.

                                       17
<Page>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
    ENRON LITIGATION.  As previously described, Dynegy and DHI were sued on
December 2, 2001 by Enron and Enron Transportation Services Co. in the United
States Bankruptcy Court for the Southern District of New York, Adversary
Proceeding No. 01-03626 (AJG). Enron claims that Dynegy materially breached the
Merger Agreement dated November 9, 2001 between Enron and Dynegy and related
entities by wrongfully terminating that Agreement on November 28, 2001. Enron
also claims that DHI wrongfully exercised its option to take ownership of
Northern Natural under an Option Agreement dated November 9, 2001. Enron seeks
damages in excess of $10 billion and declaratory relief against Dynegy for
breach of the Merger Agreement. Enron also seeks unspecified damages against
Dynegy and DHI for breach of the Option Agreement. Dynegy filed an answer on
February 4, 2002, denying all material allegations. On April 12, 2002, the
Bankruptcy Court granted Dynegy's motion to transfer venue in the proceeding to
the United States District Court for the Southern District of Texas (Houston
Division). Discovery in this proceeding has not yet commenced.

    In the Form 10-K, Dynegy also described a suit filed against Dynegy and DHI
by Ann C. Pearl and Joel Getzler in the United States District Court for the
Southern District of New York, Cause No. 01 CV 11652. Plaintiffs filed the
lawsuit as a purported class action on behalf of all persons or entities who
owned common stock of Enron Corp. as of November 28, 2001. A similar suit was
filed by Bernard D. Shapiro and Peter Strub in the 129th Judicial District Court
for Harris County, Texas, Cause No. 2002-00080. Plaintiffs in each case allege
that they are intended third party beneficiaries of the Merger Agreement dated
November 9, 2001 between Enron and Dynegy and related entities. Plaintiffs claim
that Dynegy materially breached the Merger Agreement by, INTER ALIA, wrongfully
terminating that Agreement. Plaintiffs also claim that Dynegy breached the
implied covenant of good faith and fair dealing. Plaintiffs seek an award of
damages and other relief.

    Before any ruling on Dynegy's motion to transfer venue in the PEARL/GETZLER
case, and before any further proceedings in either of these actions, Enron moved
before the Bankruptcy Court for an order staying all further prosecution of both
the PEARL/GETZLER case and the SHAPIRO/STRUB case pursuant to the automatic stay
provision contained in the Bankruptcy Code. On April 12, 2002, Enron's stay
motion was granted. Thereafter, the SHAPIRO/STRUB matter was withdrawn without
prejudice, but the PEARL/GETZLER plaintiffs filed an appeal from the Bankruptcy
Court's stay order, which appeal is pending. The Company continues to believe
the allegations in Enron's claim against Dynegy and the PEARL/GETZLER and
SHAPIRO/STRUB cases arising out of the terminated merger are without merit and
will vigorously defend against these claims. An adverse result in any of these
proceedings, however, could have a material adverse effect on the Company's
financial position, results of operations or cash flows.

    SHAREHOLDER LITIGATION.  Since the filing of the Form 10-K, a number of
class action lawsuits have been publicly announced on behalf of purchasers of
publicly traded securities of Dynegy generally during the period between
April 2001 and April 2002. Dynegy has only been served with some of the
complaints relating to these actions. Based on the complaints which have been
served or are publicly available, Dynegy understands that they principally
assert that Dynegy and certain of its executive officers violated the federal
securities laws in connection with Dynegy's accounting treatment and disclosure
of Project Alpha. Dynegy anticipates that additional suits of this nature may be
commenced and that all such suits will eventually be consolidated in a single
court. Dynegy will fully analyze these allegations once all of the complaints
are received and intends to vigorously defend against them. These lawsuits have
only recently been filed. It is not possible to predict with certainty whether
Dynegy

                                       18
<Page>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
will incur any liability or to estimate the damages, if any, that might be
incurred in connection with such actions, or whether an adverse outcome could
have a material adverse effect on the Company's financial condition or results
of operations.

    SEC INVESTIGATIONS.  Dynegy has been advised by the Staff of the SEC that it
intends to seek a formal order of investigation in connection with the
previously announced inquiry into the facts and circumstances surrounding
Project Alpha. Having commenced an investigation, the SEC can be expected to
examine whether there are any additional transactions with similar financial
statement effects as Project Alpha as well as any other transactions or business
activities which receive media attention, including the CMS Energy trades
described below. The Company has assured the Staff that it intends to cooperate
fully with this investigation.

    CMS TRANSACTIONS.  On November 15, 2001, Dynegy executed two sets of
simultaneous buy and sale trades with CMS Energy Corp. In the first set of
trades, Dynegy purchased 15 million megawatts of power from CMS Energy for
delivery in December 2001 at $25.50 per megawatt hour; concurrently, CMS Energy
purchased from Dynegy the same amount of power at the same price per megawatt
hour. In the second set of trades, Dynegy purchased 5 million megawatts of power
per month from CMS Energy for delivery in January-December 2002 at $34.00 per
megawatt hour; concurrently, CMS Energy purchased from Dynegy the same amount of
power at the same price per megawatt hour.

    The information gathered to date indicates that the trades were consummated
outside the view of other trading parties and, accordingly, could not have
impacted market prices. In addition, the volumes, revenues and costs of sales
associated with the trades were not included in the Company's December 31, 2001
year-end operating statistics as reflected in the Form 10-K and are excluded
from the operating statistics for the three months ended March 31, 2002. The
Company had previously disclosed its first quarter 2002 results of operations in
an earnings release dated April 30, 2002. In that release, 2002 first quarter
revenues and 2002 first quarter costs of sales each contained $236 million
related to these trades. These amounts netted to zero in the operating margin
line, resulting in no net income effect from the trades in that press release.
The Company has eliminated these amounts from revenues and costs of sales in
this report. As a result, these trades do not impact revenues, costs of sales,
net income or cash flows for any of the periods reported by the Company.

    Based on the Company's preliminary investigation, Dynegy believes that it
has not performed any simultaneous buy and sell trades with counterparties for
the purpose of artificially increasing its trading volumes or revenues. The
Staff of the U.S. Commodity Futures Trading Commission ("CFTC") has requested
that Dynegy voluntarily provide information to the Division of Enforcement of
the CFTC relating to, among other things, trading activities on DynegyDIRECT,
the Company's on-line trading platform, including all trades or trading
activities between Dynegy and CMS Energy in November 2001. The Staff of the CFTC
also has requested that Dynegy voluntary provide information relating to the
Company's trading activities in the California power market. The Company expects
that Project Alpha, the CMS Energy trades and other previously consummated
transactions may be reviewed by other governmental and regulatory agencies with
competent jurisdiction. Dynegy intends to cooperate fully with any and all such
reviews.

                                       19
<Page>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 11--REGULATORY ISSUES

    The Company is subject to regulation by various federal, state, local and
foreign agencies, including extensive rules and regulations governing
transportation, transmission and sale of energy commodities as well as the
discharge of materials into the environment or otherwise relating to
environmental protection. Compliance with these regulations requires general and
administrative, capital and operating expenditures including those related to
monitoring, pollution control equipment, emission fees and permitting at various
operating facilities and remediation obligations. In addition, the U.S. Congress
has before it a number of bills that could impact regulations or impose new
regulations applicable to Dynegy and its subsidiaries. The Company cannot
predict the outcome of these bills or other regulatory developments or the
effects that they might have on its business. For a more detailed description of
regulatory issues affecting the Company's business, please refer to "Item 1.
Business--Regulation" in the Form 10-K.

NOTE 12--SEGMENT INFORMATION

    Dynegy's operations are divided into four reportable segments: Wholesale
Energy Network ("WEN"), Dynegy Midstream Services ("DMS"), Transmission and
Distribution ("T&D") and Dynegy Global Communications ("DGC"). WEN is engaged in
a broad array of businesses, including physical supply of and risk-management
activities around wholesale natural gas, power, coal and other similar products.
This segment is focused on optimizing the Company's and its customers' global
portfolio of energy assets and contracts, as well as direct commercial and
industrial sales and retail marketing alliances. DMS consists of the Company's
North American midstream liquids processing and marketing businesses and
worldwide natural gas liquids marketing and transportation operations. Dynegy's
T&D segment includes the operations of IP and Northern Natural. IP is an
energy-delivery company engaged in the transmission, distribution and sale of
electricity and natural gas to customers across a 15,000-square-mile area of
Illinois. Northern Natural's 16,600 miles of pipeline extend from the Permian
Basin in Texas to the Upper Midwest, providing extensive access to major
utilities and industrial customers. Northern Natural's storage capacity is 59
billion cubic feet ("Bcf") and its market area capacity is approximately 4.3 Bcf
per day. DGC is engaged in the telecommunications business through its global
long-haul fiber optic and metropolitan network located in key cities in the
United States and Europe. Dynegy accounts for intercompany transactions at
prevailing market rates. Unaudited operating segment information for the three
months ended March 31, 2002 and 2001 is presented below.

                                       20
<Page>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 12--SEGMENT INFORMATION (CONTINUED)
           DYNEGY'S SEGMENT DATA FOR THE QUARTER ENDED MARCH 31, 2002
                                ($ IN MILLIONS)

<Table>
<Caption>
                                            WEN        DMS        T&D        DGC      ELIMINATIONS    TOTAL
                                          --------   --------   --------   --------   ------------   --------
<S>                                       <C>        <C>        <C>        <C>        <C>            <C>
Unaffiliated revenues:
  Domestic..............................  $ 4,813     $  896     $  483     $   2        $  --       $ 6,194
  Canadian..............................      705        231         --        --           --           936
  European and other....................    1,520         --         --         2           --         1,522
                                          -------     ------     ------     -----        -----       -------
                                            7,038      1,127        483         4           --         8,652
Intersegment revenues:
  Domestic..............................      139         33          8        --         (180)           --
                                          -------     ------     ------     -----        -----       -------
    Total revenues......................    7,177      1,160        491         4         (180)        8,652
                                          -------     ------     ------     -----        -----       -------
Operating margin........................      300         63        166       (21)          --           508
Depreciation and amortization...........      (46)       (19)       (47)       (5)          --          (117)
Interest expense........................      (29)       (10)       (38)       (2)          --           (79)
Other income (expense)..................        6          2          4        (7)          --             5
Earnings (losses) from unconsolidated
  investments...........................       30          4         --       (45)          --           (11)
Income tax provision (benefit)..........       47         10         24       (30)          --            51
Income (loss) from operations...........      133         17         36       (70)          --           116
Cumulative effect of change in
  accounting principle..................       --         --         --      (256)          --          (256)
Net income (loss).......................  $   133     $   17     $   36     $(326)       $  --       $  (140)
Identifiable assets:
  Domestic..............................  $15,443     $2,075     $6,448     $ 148        $  --       $24,114
  Canadian..............................      640        120         --        --           --           760
  European and other....................    2,895         --         --       278           --         3,173
Investments in unconsolidated
  affiliates............................      767        149         --        10           --           926
Capital expenditures and investments in
  unconsolidated affiliates.............      (90)       (31)       (29)      (28)          --          (178)
</Table>

                                       21
<Page>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 12--SEGMENT INFORMATION (CONTINUED)
           DYNEGY'S SEGMENT DATA FOR THE QUARTER ENDED MARCH 31, 2001
                                ($ IN MILLIONS)

<Table>
<Caption>
                                            WEN        DMS        T&D        DGC      ELIMINATIONS    TOTAL
                                          --------   --------   --------   --------   ------------   --------
<S>                                       <C>        <C>        <C>        <C>        <C>            <C>
Unaffiliated revenues:
  Domestic..............................  $ 8,044     $2,140     $  532      $  2        $  --       $10,718
  Canadian..............................    2,087        354         --        --           --         2,441
  European and other....................    1,007         --         --         2           --         1,009
                                          -------     ------     ------      ----        -----       -------
                                           11,138      2,494        532         4           --        14,168
                                          -------     ------     ------      ----        -----       -------
Intersegment revenues:
  Domestic..............................       36         91          6        --         (133)           --
                                          -------     ------     ------      ----        -----       -------
    Total revenues......................   11,174      2,585        538         4         (133)       14,168
                                          -------     ------     ------      ----        -----       -------
  Operating margin......................      281         87        108         1           --           477
Depreciation and amortization...........      (43)       (19)       (40)       (5)          --          (107)
Interest expense........................      (18)       (13)       (29)       (2)          --           (62)
Other income (expense)..................      (37)        (6)        21         6           --           (16)
Earnings from unconsolidated
  investments...........................       31          1         --        --           --            32
Income tax provision (benefit)..........       51         12         17        (8)          --            72
Income (loss) from operations...........      100         23         26       (12)          --           137
Cumulative effect of change in
  accounting principle..................        2         --         --        --           --             2
Net income (loss).......................  $   102     $   23     $   26      $(12)       $  --       $   139
Identifiable assets:
  Domestic..............................  $13,888     $1,931     $3,566      $312        $  --       $19,697
  Canadian..............................      731        230         --        --           --           961
  European and other....................      859         --         --       178           --         1,037
Investment in unconsolidated
  affiliates............................      663        170         --        --           --           833
Capital expenditures and investments in
  unconsolidated affiliates.............   (1,084)       (33)       (27)       (2)          --        (1,146)
</Table>

NOTE 13--SUBSEQUENT EVENTS

    CREDIT RATINGS.  The credit ratings of Dynegy and its subsidiaries were
placed under review for possible downgrade by Moody's, Standard & Poor's and
Fitch on April 25, May 8 and April 26, 2002, respectively, due to uncertainties
regarding the sustainability of cash flow, the Enron litigation (see Note 10),
Dynegy's ability to access the capital markets, the cash flow treatment of
Project Alpha (see Note 9), allegations of market manipulation in California,
the effect of these items on counterparty confidence and other matters. In
addition, as a result of the Enron bankruptcy, the credit rating agencies have
refocused their attention on the credit characteristics and credit protection
measures of industry participants, and in some cases appear to have tightened
the standards for a given rating level.

                                       22
<Page>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

NOTE 13--SUBSEQUENT EVENTS (CONTINUED)
    On March 14, 2002, Moody's affirmed Dynegy's and select subsidiaries'
ratings with a qualification of negative outlook. Subsequently, on April 25,
2002, Moody's placed Dynegy and select subsidiaries under review for possible
downgrade following the Company's announced reclassification of $300 million in
cash flow from operations from 2001 to cash flow from financing in connection
with Project Alpha. On April 24, 2002, Standard & Poor's lowered its credit
ratings for Dynegy and its subsidiaries following a business risk evaluation of
the Company's various operating segments, its overall financial profile, capital
adequacy and liquidity position. In addition, on May 8, 2002, Standard & Poor's
placed Dynegy and it subsidiaries on CreditWatch with negative implications. On
April 30, 2002, Fitch lowered its credit ratings and reiterated its negative
watch status for Dynegy and its subsidiaries due to concerns regarding the
Company's financial flexibility and its ability to operate its business
recognizing a difficult business and capital environment and maintained its
status of review for possible downgrade. For a discussion of the Company's
current credit ratings, please read "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Credit Rating Discussion."

                                       23
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

    The following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements of Dynegy Inc. ("Dynegy"
or the "Company") included elsewhere herein and with the Company's Annual Report
of Form 10-K for the year ended December 31, 2001 (the "Form 10-K"), as filed
with the SEC. As previously disclosed in Note 9 to the accompanying financial
statements, Dynegy expects to file amended Exchange Act reports for the
quarterly periods ended June 30, 2001, September 30, 2001 and March 31, 2002 and
for the fiscal year ended December 31, 2001.

    Dynegy is one of the world's leading energy merchants. Through its global
energy delivery network and marketing, logistics and risk-management
capabilities, the Company provides innovative solutions to customers in North
America, the United Kingdom and Continental Europe. Dynegy's operations are
reported in four segments: Wholesale Energy Network ("WEN"), Dynegy Midstream
Services ("DMS"), Transmission and Distribution ("T&D") and Dynegy Global
Communications ("DGC").

    Like many companies in our industry, Dynegy has faced a number of challenges
since the end of 2001. Events surrounding the collapse of Enron Corp. ("Enron")
have contributed to an unprecedented business environment fueled by skepticism
among regulators and investors alike. Dynegy's management understands the
demands of these new market realities and is responding within the framework of
our customer-focused, asset-backed business model. As we describe below, current
conditions have required us to take steps to strengthen our balance sheet and
address credit concerns. While much of this discussion focuses on the impact of
these developments on our wholesale marketing and risk-management business, this
business is generally responsible for only 30% of the Company's recurring
consolidated financial contribution (operating margin plus equity earnings) on
an annual basis. As we have previously disclosed, approximately 70% of the
Company's annual recurring consolidated financial contribution is derived from
owned physical assets. This asset base is not expected to be significantly
negatively impacted by these recent developments and continues to provide the
foundation for Dynegy's energy merchant business.

    This Form 10-Q describes a number of recent developments affecting the
Company. On April 25, 2002, the Company preliminarily released its first quarter
2002 earnings and announced that it would reclassify $300 million in cash flow
from operations to cash flow from financing in 2001 related to Project Alpha.
Also on April 25th, Moody's placed Dynegy's credit ratings under review for
possible downgrade citing concerns over the Company's ability to generate
sustainable recurring operating cash flow. The Company has subsequently been
named in several purported class action lawsuits alleging violations of the
federal securities laws and announced the SEC's intention to expand its review
of Project Alpha into a formal investigation. More recently, on May 8, 2002,
Standard & Poor's placed Dynegy's credit ratings on credit watch with negative
implications due to concerns regarding the SEC's investigation and renewed
allegations of price manipulation in California power markets as well as the
effect of these actions on counterparty confidence.

    Management remains committed to responding to these recent developments.
With the exception of additional collateral requirements resulting from recent
events, the Company's business results have not been significantly adversely
affected to date. However, we are not operating in a normal business environment
and our results of operations for the remainder of 2002 and beyond will be
significantly

                                       24
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

affected by our ability to restore confidence with customers and investors.
Among the most significant factors that Dynegy must address are the following:

    - confidence in our long-term business strategy as an energy merchant
      company built around a physical asset base and in our execution of this
      strategy, including the cash flow it generates;

    - questions about the capital structure and liquidity position of the
      Company, including the overall amount of leverage relative to our asset
      base;

    - ongoing investigations and litigation relating to Project Alpha, the
      California power markets, the CMS trades and the Enron merger; and

    - our ability to eliminate losses associated with our telecommunications
      business by year end.

    Our success in addressing these issues will in turn affect the views of
credit rating agencies, the capital markets and trade counterparties about our
Company. Each of these factors is described in greater detail below. Please also
read "Uncertainty of Forward-Looking Statements and Information" below for
additional factors that could impact future operating results.

    The following discussion also provides important information about the
effect of recent events on our liquidity and capital resources. The Company's
wholesale marketing and risk-management business has required additional capital
in response to a general tightening of trade credit after Enron's bankruptcy and
in response to recent events impacting Dynegy specifically. We are working
diligently to address the concerns discussed above and to take the measures
necessary to defend our investment grade credit ratings. However, as the Company
has previously disclosed, management believes that Dynegy has sufficient
liquidity and capital resources to continue to meet its obligations and to
operate its business even in the event of the loss of our investment grade
credit rating by one or more rating agencies. The Company intends to manage its
wholesale marketing business in a manner consistent with its liquidity position.
For further discussion, see "Liquidity and Capital Resources" below.

                        LIQUIDITY AND CAPITAL RESOURCES

    In December 2001, Dynegy announced a $1.25 billion capital restructuring
program to respond to concerns of credit rating agencies and trade
counterparties regarding balance sheet strength in the merchant energy sector.
In accordance with the plan, Dynegy raised $744 million in net proceeds by
selling approximately 39.1 million shares of common stock, including 10.4
million shares purchased by ChevronTexaco and 1.2 million shares purchased by
senior management. Net proceeds from the sale of these shares were used to
reduce indebtedness under DHI's revolving credit facility by approximately
$540 million and the remainder of the proceeds were invested in cash. In
addition to these equity sales, the Company reduced its original 2002
capital-spending program by over $500 million to approximately $1.2 billion.
This reduction in capital-spending related to unallocated, discretionary
expenditures.

    The Company believes it prudent to increase liquidity and strengthen its
balance sheet and, as a result, continues to assess additional alternatives,
including possible joint ventures or sales of assets and businesses. These steps
are designed to continue the Company's capital restructuring program. Such steps
are also being taken to reduce leverage and to establish revised targets for
debt to capitalization and coverage ratios.

    Dynegy also continues to pursue a potential initial public offering by a
newly created master limited partnership which would own a portion of the
Company's downstream NGL business. The registration statement relating to this
offering has not yet been declared effective by the SEC and

                                       25
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

Dynegy cannot guarantee its eventual effectiveness or that once effective,
Dynegy Energy Partners' initial public offering will be successfully completed.
Further, the issues currently facing Dynegy as described elsewhere in this
Form 10-Q could affect Dynegy Energy Partners' ability to successfully market
and consummate its initial public offering.

    Dynegy's balance sheet at March 31, 2002 also reflects the increased
leverage associated with our acquisition of Northern Natural Gas Company
("Northern Natural") from Enron at January 31, 2002. This increased leverage
results partially from Northern Natural's $950 million of indebtedness and
partially from the $1.5 billion of Series B Mandatorily Convertible Redeemable
Preferred Stock ("Series B Preferred Stock") sold to ChevronTexaco in
November 2001, the proceeds of which were used to purchase preferred stock in
Northern Natural. The Company is continuing to assess alternatives regarding the
Series B Preferred Stock, its capital structure and other alternatives relating
to Northern Natural in the event Enron does not exercise its repurchase option.
This option expires at the end of June. See "--Other Matters--Enron/Northern
Natural."

    Dynegy has historically accessed the public debt and equity markets to
support its liquidity and capital resource requirements. Our ability to access
the capital markets will be limited until we file amended Exchange Act reports
to reflect the restatement of our financial statements as further described in
Note 9 to the accompanying financial statements.

DHI REVOLVING CREDIT AGREEMENT

    DHI closed a $900 million unsecured revolving credit agreement with a
syndicate of commercial banks on April 29, 2002. This facility, which matures on
April 28, 2003, replaced an expiring $1.2 billion revolving credit agreement.
The new facility provides funding for working capital, capital expenditures and
general corporate purposes. Generally, borrowings under the credit agreement
bear interest at a Eurodollar rate plus a margin that is determined based on
designated unsecured debt ratings. The increase in this margin over the margins
under the expired facility is expected to result in an increase in the fees paid
by DHI compared to the fees paid under the expiring facility. Specifically, DHI
expects to pay approximately $1.4 million in additional borrowing fees during
the term of the new facility and paid approximately $3.2 million in additional
upfront fees in connection with the closing of the new facility.

    Financial covenants in the revolving credit agreement include a
debt-to-capitalization test (which takes into account certain lease and similar
commitments of DHI and its subsidiaries) and a newly added 3.5 times earnings
before interest, taxes and depreciation and amortization ("EBITDA")-to-interest
test. The permissible threshold for the debt-to-capitalization test was lowered
in the new facility from 65% to 60%. Other newly added covenants in the new
facility include subordination of certain intercompany debt owed to Dynegy and
its subsidiaries (other than DHI and its subsidiaries), restrictions on liens
and limitations prohibiting subsidiary debt at Dynegy Marketing & Trade, Dynegy
Power Marketing, Inc. and Dynegy Midstream Services, Limited Partnership.
Default provisions include cross payment default of Dynegy, DHI or any principal
subsidiary with respect to debt or other similar obligations that exceed $100
million, cross acceleration of Dynegy, DHI or any principal subsidiary under any
instrument covering debt or similar obligations that exceed $100 million and
bankruptcy or receivership of Dynegy, DHI or any principal subsidiary. The new
facility does not contain any defaults relating to material adverse changes in
the condition of Dynegy or DHI after the closing date or to changes in Dynegy's
or DHI's credit ratings. The new facility also does not contain a "term-out"

                                       26
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

provision that would permit Dynegy to extend the maturity for borrowings under
the facility beyond the facility's April 28, 2003 maturity date.

AVAILABLE CREDIT CAPACITY AND DEBT MATURITIES

    The following table describes our available credit capacity at quarter end:

                 AVAILABLE CREDIT CAPACITY AS OF MARCH 31, 2002

<Table>
<Caption>
                                                                    DYNEGY
                                                         DYNEGY    HOLDINGS   ILLINOIS   NORTHERN
                                              TOTAL       INC.       INC.      POWER     NATURAL
                                             --------   --------   --------   --------   --------
                                                               ($ IN MILLIONS)
<S>                                          <C>        <C>        <C>        <C>        <C>
Outstanding Loans and Letters of Credit....   $1,425      $ --      $  735      $240       $450
Unused Borrowing Capacity..................    1,265       300         905        60         --
                                              ------      ----      ------      ----       ----
Total Credit Capacity......................   $2,690      $300      $1,640      $300       $450
                                              ======      ====      ======      ====       ====
</Table>

    Under current market conditions, Dynegy does not have access to the
commercial paper markets and has relied on bank credit facilities, operating
cash flow, public equity and debt issuances and cash on hand for its short-term
liquidity requirements. Sales of common stock in December 2001 and January 2002
generated aggregate net proceeds of approximately $744 million which were used
to pay down approximately $540 million of indebtedness under DHI's revolving
credit facility; the remainder was invested in cash. In February 2002, DHI
issued $500 million of 8.75% senior notes due 2012 and used the net proceeds to
pay down approximately $250 million of indebtedness under DHI's revolving credit
facility; the remainder was invested in cash.

    Illinois Power Company ("IP") has a $300 million 364-day revolving credit
facility that matures on May 20, 2002. IP is seeking to replace the maturing IP
facility with a new facility of at least $200 million. The Company can provide
no assurance that IP will be able to refinance this revolving credit facility on
terms comparable to its existing facility. The existing IP revolver includes a
"term-out" provision which would permit IP to convert outstanding borrowings
under the current revolver to a one-year term loan in the event a new facility
cannot be placed.

    In addition to the $900 million DHI facility described above and the IP
facility, Dynegy Inc. has a $300 million revolving credit facility which matures
in November 2002. DHI also has a $400 million revolving credit facility that
matures in May 2003. Northern Natural has a $450 million 364-day revolving
credit facility that matures in November 2002.

    In addition to these bank credit facilities, Dynegy has $317 million of debt
maturities through the third quarter of 2002, including $200 million of DHI
senior notes due July 2002 and $96 million of IP mortgage bonds also due in July
2002. Dynegy also has $42 million of debt other than bank credit facilities
maturing in the fourth quarter of 2002. See Note 5 to the accompanying financial
statements.

    As of May 14, 2002, the Company had committed credit lines of approximately
$2.4 billion, reflecting the new DHI revolving credit facility of $900 million
that replaced a $1.2 billion facility that matured in May 2002. At May 14, 2002,
the Company had borrowings of approximately $1.1 billion and oustanding letters
of credit of approximately $710 million under these credit facilities (of which
approximately $360 million have been posted since April 25, 2002), leaving
approximately $590 million of unused borrowing capacity. In addition, at May 14
the Company had cash of approximately

                                       27
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

$360 million and in excess of $300 million of other highly liquid assets which
is principally natural gas and crude inventories.

CREDIT RATING DISCUSSION

    Credit ratings impact the Company's ability to obtain short- and long-term
financing, the cost of such financing and the execution of its commercial
strategies. In determining the Company's credit ratings, the rating agencies
consider a number of factors. Quantitative factors that are given significant
weight include, among other things, EBITDA; operating cash flow; total debt
outstanding; off balance sheet obligations and other commitments; fixed charges
such as interest expense, rent or lease payments; payments to preferred
stockholders; liquidity needs and availability; and various ratios calculated
from these factors. Qualitative factors include, among other things,
predictability of cash flows, business strategy, industry position and
contingencies. Although these factors are among those considered by the rating
agencies, each agency may calculate and weigh each factor differently.

    The credit ratings of Dynegy and its subsidiaries were placed under review
for possible downgrade by Moody's and Standard & Poor's on April 25 and May 8,
respectively, due to uncertainties regarding the sustainability of cash flow,
the Enron litigation (see Note 10 to the accompanying financial statements),
Dynegy's ability to access the capital markets, the cash flow treatment of
Project Alpha (see Note 9 to the accompanying financial statements), allegations
of market manipulation in California, the effect of these items on counterparty
confidence and other matters. On April 30, 2002, Fitch clarified its position
with respect to a possible downgrade to include similar concerns. In addition,
as a result of the Enron bankruptcy, the credit rating agencies have refocused
their attention on the credit characteristics and credit protection measures of
industry participants, and in some cases appear to have tightened the standards
for a given rating level.

    On April 24, 2002, Standard & Poor's lowered its credit ratings for Dynegy
and its subsidiaries following a business risk evaluation of the Company's
various operating segments, its overall financial profile, capital adequacy and
liquidity position. On April 30, 2002, Fitch lowered its credit ratings for
Dynegy and its subsidiaries due to concerns regarding the Company's financial
flexibility and its ability to operate its business recognizing a difficult
business and capital environment. The updated ratings are reflected in the table
below.

                                       28
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

    As of May 9, 2002, Dynegy's senior unsecured debt ratings, as assessed by
the three major credit rating agencies, were as follows:

<Table>
<Caption>
RATED ENTERPRISES                                    STANDARD & POOR'S    MOODY'S     FITCH
-----------------                                    ------------------   --------   --------
<S>                                                  <C>                  <C>        <C>
Senior Unsecured Debt Rating:
  Dynegy Holdings Inc.(1)..........................        BBB              Baa3       BBB
  Dynegy Inc.(2)...................................        BBB-             Ba1        BBB-
  Illinois Power(3)................................        BBB-             Baa3       BBB
  Illinova Corporation(4)..........................        BBB-             Ba1        BBB-
  Northern Natural(5)..............................         CC               B3         CC
Commercial Paper/Short-Term Rating:
  Dynegy Holdings Inc..............................        A-3              P-3         F3
  Dynegy Inc.......................................        A-3               NP         F3
  Illinois Power...................................        A-3              P-3         F2
</Table>

--------------------------

(1) Dynegy Holdings Inc. is the primary debt financing entity for the
    enterprise. This entity is a subsidiary of Dynegy Inc. and is a holding
    company that includes substantially all of the operations of the WEN and DMS
    business segments and Northern Natural, which is reported in the T&D
    segment.

(2) Dynegy Inc. is the parent holding company. This entity generally provides
    financing to the enterprise through issuance of capital stock.

(3) This entity includes the Company's regulated transmission and distribution
    business in Illinois.

(4) Illinova Corporation is the holding company for Illinois Power and is no
    longer used to raise capital.

(5) Ratings have not changed since Dynegy's acquisition of Northern Natural and
    reflect Enron's repurchase option.

    A downgrade in Dynegy's credit ratings to below investment grade would cause
a reduction in the amount of trade credit expected to be extended by Dynegy's
counterparties until these ratings could be restored. The Company also
anticipates that counterparties would increase their collateral demands relating
to its wholesale marketing and risk-management business. Downgrades in Dynegy's
credit ratings to below investment grade also would trigger the financing
covenants described below under "--Financing Trigger Events." Such a downgrade
also could increase the risk that the Company would be unable to refinance debt
obligations as they mature and could increase the borrowing costs incurred by
the Company in connection with any such refinancings. The Company's financial
flexibility would likewise be reduced as a result of restrictive covenants and
other terms that are typically imposed on non-investment grade borrowers.

    Management is currently in discussions with representatives of Moody's,
Standard & Poor's and Fitch. These discussions focus on the Company's business
strategy, 2002 forecast, business operations and the amount and sustainability
of cash flows. Dynegy cannot predict with any certainty the actions, if any,
that may be taken by the rating agencies subsequent to these meetings.

FINANCING TRIGGER EVENTS

    Dynegy's debt instruments and other financial obligations include routine
provisions, which, if not met, could require early payment, additional
collateral support or similar actions. For Dynegy, these trigger events include
leverage ratios, insolvency events, defaults on scheduled principal or interest
payments, acceleration of other financial obligations and change of control
provisions. Dynegy does not

                                       29
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

have any trigger events tied to specified credit ratings or stock price in its
debt instruments and has not executed any transactions that require it to issue
equity based on credit rating or other trigger events.

    The Company has two non-commercial agreements that have trigger events tied
to credit ratings. At March 31, 2002, the amount of cash collateral that the
Company would have to post in the event of a ratings trigger under these two
agreements was $300 million. The Company's investment in Catlin Associates, LLC,
described below, accounts for $270 million of the $300 million in possible cash
collateralization and would be triggered only if the senior unsecured debt
ratings for DHI were downgraded below investment grade by both Moody's and
Standard & Poor's. The remaining $30 million relates to the Company's guarantee
of certain contingent environmental obligations of West Coast Power, a 50
percent owned equity investment. This obligation would be triggered by a
downgrade in DHI's credit rating to below investment grade by either Moody's or
Standard & Poor's. Dynegy's credit ratings are currently under review by
Moody's, Standard & Poor's and Fitch. Please see "--Credit Rating Discussion."

    In June 2000, Dynegy and Black Thunder Investors LLC ("Investor") invested
in Catlin Associates, LLC ("Catlin"), an entity that is consolidated by Dynegy,
with the Investor's ownership in Catlin reflected as Minority Interest in the
Condensed Consolidated Balance Sheets. Dynegy invested $100 million in Catlin
and the Investor invested $850 million. As a result of its investment, the
Investor received a non-managing preferred interest in Catlin, which holds
indirect economic interests in Dynegy's midwest generation assets. As of March
31, 2002, these assets had a net book value of approximately $3.0 billion. If
DHI's senior unsecured debt is downgraded below investment grade by both
Standard & Poor's and Moody's, Dynegy would be required to post cash collateral
in an aggregate amount of $270 million and, within 30 days, obtain an investment
grade rating for the interest held by the Investor by either Standard & Poor's
or Moody's or obtain a waiver from the Investor.

    If Dynegy were unable to obtain the required rating for the interest held by
the Investor or waiver, Dynegy would have the option of purchasing or
refinancing the Investor's interest in Catlin. If Dynegy were to elect not to
exercise this option, it could ultimately result in an election by the Investor
to cause the liquidation of the underlying generation assets in an amount
sufficient to redeem the Investor's interest. Given the strategic importance of
these generation assets, it is likely that Dynegy would seek to refinance or
purchase the Investor's interest under such circumstances. For additional
information regarding Catlin, please read "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources--Contingent Financial Commitments as of December 31, 2001" in the
Form 10-K.

TRADE CREDIT AND LIQUIDITY

    Following the Enron bankruptcy, there has been a general industry-wide
contraction in trade credit in the wholesale energy markets. Open or unsecured
credit lines generally have been reduced, and counterparties are more stringent
in requiring credit support in the form of cash in advance, letters of credit or
guarantees as a condition to transacting business above open credit limits. In
addition, parties engaged in the wholesale marketing business, including Dynegy,
are moving towards the implementation of standardized agreements that allow for
the netting of positive and negative exposures associated with a single
counterparty. Dynegy believes that the trend towards such master netting
agreements is a positive market development and has executed or is in the
process of negotiating such agreements with a number of its trading partners.
Most commercial agreements typically include "adequate assurance" provisions or
specific ratings triggers. These clauses typically give

                                       30
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

counterparties the right to suspend or terminate credit if the Company's credit
ratings fall below investment grade.

    Dynegy's wholesale marketing and risk-management business has historically
relied upon DHI's senior unsecured debt investment grade credit rating to
satisfy the credit support requirements of many counterparties. Prior to April
25, 2002, Dynegy had approximately $350 million in letters of credit posted in
connection with its commercial operations. Since the April 25, 2002 action by
Moody's placing Dynegy's credit ratings under review for possible downgrade,
Dynegy has been able to transact its wholesale marketing and risk-management
business by posting an additional approximately $360 million in letters of
credit to collateralize its net exposure to various counterparties. Total
outstanding letters of credit as of May 14, 2002 approximate $710 million.

    In the event of a further downgrade by one or more credit rating agencies,
management estimates it would require an additional $350 million to
collateralize existing commercial arrangements. This $350 million of additional
collateral, together with the approximately $360 million in collateral posted
since April 25, represents the approximate $700 million of additional collateral
previously described by management as the necessary liquidity to support the
commercial business in the event of a downgrade. The financing triggers
described above represent an additional $300 million of commitments,
$270 million of which would be triggered only in the event of a downgrade by
both agencies. At May 14, Dynegy had unused borrowing capacity of approximately
$590 million, cash of approximately $360 million and in excess of $300 million
of other highly liquid assets, principally natural gas and crude inventories.

    Dynegy's current liquidity position can be summarized as follows (in
millions):

<Table>
<Caption>

<S>                                                           <C>
CAPACITY
  Bank capacity.............................................   $  590
  Cash......................................................      360
  Highly Liquid Inventory...................................      300
                                                               ------
                                                               $1,250

REQUIREMENTS IN DOUBLE DOWNGRADE EVENT
  Additional Collateral.....................................   $  350
  Financing Triggers........................................      300
                                                               ------
                                                               $  650

    Available Liquidity Remaining...........................   $  600
</Table>

    Dynegy intends to manage its wholesale marketing and risk-management
business in a manner consistent with its liquidity position. In the event of a
downgrade, Dynegy believes it can reduce the level of short-term wholesale
marketing and risk-management business activities with little impact on earnings
and cash flow. However, in the event of a downgrade, longer term wholesale
marketing and risk-management business activities could be affected and could
have an impact on earnings in the future.

    Other factors which will impact liquidity in the near term are cash flow
from operations, capital spending, the approximately $300 million in debt
maturities in July 2002 and the Company's ability to execute additional capital
enhancing transactions such as asset or business sales, joint ventures or
financings. Based on current credit capacity and assumptions management believes
to be reasonable, we

                                       31
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

believe that Dynegy has sufficient liquidity and capital resources to meet its
obligations even in a downgrade scenario.

LONG-TERM SUPPLY COMMITMENTS

    During the first quarter of 2002, the Company executed long-term supply
contracts, including tolling arrangements. This long-term supply was acquired at
a cost below that which would be incurred to build and maintain power generation
facilities to provide such supply. The supply commitment increased the Company's
firm capacity payments by $624 million on a discounted basis, for total capacity
payments of $2.1 billion on a discounted basis at March 31, 2002. The additional
future payment obligations associated with firm capacity contracts executed in
the first quarter 2002 are expected to occur ratably beginning in year 2005 and
beyond. These amounts include supply contracts that are reflected on the
Condensed Consolidated Balance Sheets in Risk Management Assets or Risk
Management Liabilities and those that are accounted for on an accrual basis,
each as determined by the applicable contractual terms and in accordance with
generally accepted accounting principles.

                                       32
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

                                 OTHER MATTERS

    ENRON/NORTHERN NATURAL.  On November 9, 2001, Dynegy entered into a merger
agreement with Enron. The closing of the merger was conditioned upon the
accuracy of representation and warranties, approval of the shareholders of both
Dynegy and Enron, the receipt of applicable regulatory approvals, the absence of
material adverse changes and other customary conditions.

    On November 13, 2001, in connection with the merger agreement, ChevronTexaco
purchased 150,000 shares of Dynegy's Series B Preferred Stock for $1.5 billion.
Dynegy used the $1.5 billion of proceeds from this issuance to purchase 1,000
shares of Series A Preferred Stock in Northern Natural. The Series A Preferred
Stock has a 6% cumulative dividend which accrues from the issue date but is not
payable until January 31, 2003. In connection with the preferred stock
investment in Northern Natural, Dynegy paid $1 million to acquire an option to
purchase all of the equity of Northern Natural's indirect parent company. The
exercise price for the option was $23 million, subject to adjustment based on
Northern Natural's indebtedness and working capital.

    On November 28, 2001, Dynegy exercised its right to terminate the merger
agreement with Enron. The above-mentioned agreements were impacted as follows:

    - Dynegy exercised its option to purchase the indirect parent company of
      Northern Natural. The closing of the transaction occurred on January 31,
      2002. An Enron subsidiary has the option to reacquire Northern Natural
      through June 30, 2002 for $1.5 billion plus accrued but unpaid dividends
      on the Series A Preferred Stock and the option exercise price, subject to
      adjustment based on Northern Natural's indebtedness and working capital.

    - At January 31, 2002, Northern Natural had approximately $950 million of
      debt outstanding. The significant terms of the Northern Natural debt are
      as follows ($ in millions):

<Table>
<Caption>

<S>                                                           <C>
Senior Notes, 6.875% due May 2005...........................    $100
Senior Notes, 6.75% due September 2008......................     150
Senior Notes, 7.00% due June 2011...........................     250
Borrowing under Revolving Credit Agreement, 4.66% due
  November 2002.............................................     450
                                                                ----
  Total face value of Northern Natural debt.................    $950
                                                                ====
</Table>

    In order to obtain a bondholder consent required in connection with the
Northern Natural acquisition, DHI agreed to effect a tender offer for $100
million of senior unsecured notes of Northern Natural due in 2005. On April 26,
2002, DHI purchased $90 million of the notes pursuant to such tender offer.

    - Management believes, based on an internal analysis of Northern Natural's
      credit capacity, including a review of other regulated pipelines, that
      Northern Natural will be able to refinance the $450 million secured line
      of credit, and it is Northern Natural's management's current intention to
      do so.

    - Each share of Dynegy's Series B Preferred Stock became convertible, at the
      option of ChevronTexaco, for a period of two years, into shares of Dynegy
      Class B common stock at the conversion price of $31.64. Dynegy incurred an
      implied dividend as a result of this event of approximately $65 million.
      The intrinsic value of the conversion option given to ChevronTexaco was
      based on the conversion price, which was at a 5 percent discount to
      market. Dynegy is

                                       33
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

     recognizing this dividend over the period the Series B Preferred Stock is
      outstanding as required by generally accepted accounting principles.
      Unless ChevronTexaco exercises its conversion right, Dynegy is required to
      redeem the Series B Preferred Stock for $1.5 billion two years from the
      date of issuance. The Series B Preferred Stock is not entitled to a
      dividend.

    On December 2, 2001, Enron filed for federal bankruptcy protection in the
United States Bankruptcy Court, Southern District of New York. Enron also filed
an adversary proceeding in the bankruptcy court against Dynegy and DHI seeking
damages of $10 billion for wrongful termination of the merger agreement and the
wrongful exercise of its option to take ownership of Northern Natural. Please
refer to Note 10 to the accompanying financial statements for further discussion
of this dispute.

    As previously described in the Form 10-K, as a result of Enron's bankruptcy
filing Dynegy recognized in its fourth quarter 2001 financial results a pretax
charge related to the Company's net exposure for commercial transactions with
Enron. As of March 31, 2002, the Company's net exposure to Enron, inclusive of
certain liquidated damages and other amounts relating to the termination of the
transactions, was approximately $94 million and was calculated by setting off
approximately $220 million owed from Dynegy to Enron against approximately $314
million owed from Enron to Dynegy. The global netting agreement between Dynegy
and Enron as well as the valuation of the commercial transactions covered by the
agreement remain subject to discussions between the parties and, if any disputes
cannot be resolved by the parties, to arbitration. If the setoff rights were
modified, either by agreement or arbitration, the amount available to set off
against sums that might be due Enron and its subsidiaries could be reduced.

    CALIFORNIA MARKET/WEST COAST POWER.  Dynegy and NRG Energy each own 50
percent of West Coast Power, a joint venture owning power generation plants in
southern California. Dynegy's net interest in West Coast Power represents
approximately 1,400 MW of generating capacity. Dynegy also participates in the
California markets independently, as a wholesale marketer of gas and power.
Substantially all of Dynegy's direct sales made in California represent either
gas sales made under securitized arrangements or bilateral sales made to
creditworthy counterparties. Through its interest in West Coast Power, Dynegy
has credit exposure for past transactions to certain state agencies ("ISO" and
"PX"), which primarily relied on receipts from California utilities to pay their
bills. West Coast Power currently sells directly to the California Department of
Water Resources ("DWR") pursuant to other bilateral agreements.

    As described in Note 10 to the accompanying financial statements, on
February 25, 2002, the California Public Utilities Commission and the California
Electricity Oversight Board filed complaints with the FERC asking that it void
or reform power supply contracts between DWR and, among others, West Coast
Power. The complaints allege that prices under the contracts exceed just and
reasonable prices permitted under the Federal Power Act. The FERC recently set
these complaints for evidentiary hearing. The hearing, which will be deferred
until after settlement talks currently scheduled to begin on May 16, 2002, will
be limited to the question whether the California market adversely affected the
long-term bilateral markets to the extent that modifications to the DWR power
contracts are required. While the Company believes the terms of its contracts
are just and reasonable and do not reflect alleged market manipulation, it
cannot predict how the FERC will respond to these complaints. The Company is
vigorously defending against these complaints. Please read Note 11, "Commitments
and Contingencies," to the Form 10-K and Note 10 to the accompanying financial
statements for additional discussion of the Company's activities in the
California power market.

                                       34
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

    As a result of West Coast Power's previously announced long-term sales
arrangement with the DWR, ongoing management of credit risk associated with
direct sales to customers in California and other factors, management believes
that Dynegy's primary exposure relates to the realization of its share of West
Coast Power's receivables from the ISO and PX and potential refunds or offsets
associated with related transactions. Transactions with the aforementioned
counterparties, other than the ISO and PX, are current under the terms of each
individual arrangement. At March 31, 2002, Dynegy's portion of the receivables
owed to West Coast Power by the ISO and PX approximated $206 million. Management
is continually assessing Dynegy's exposure, as well as its exposure through West
Coast Power, relative to its California receivables and establishes reserves to
reflect market uncertainties.

    CHEVRONTEXACO COMMERCIAL RELATIONSHIP.  In March 2002, Dynegy and
ChevronTexaco executed agreements to expand their commercial relationships to
include substantially all of the natural gas and domestic mixed NGLs and NGL
products produced or controlled by the former Texaco. The expanded term
agreements extend through August 2006. This expanded relationship increases the
volume of natural gas Dynegy purchases from ChevronTexaco from approximately 1.7
Bcf/d to approximately 2.9 Bcf/d. Dynegy also provides supply and service for in
excess of 1.6 Bcf/d of natural gas for the combined ChevronTexaco facilities and
third-party term markets. In addition, DMS' expanded contract with ChevronTexaco
includes substantially all of the U.S. NGL production of the former Texaco.
Concurrent with the expanded commercial agreements, the two companies executed
new security provisions that Dynegy believes are mutually beneficial. The new
security agreement improves Dynegy's liquidity position by reducing its reliance
upon the financial markets for surety bonds and letters of credit, while
ChevronTexaco's open credit exposure is significantly reduced. Additionally, it
is scaleable to include the increased volumes in any pricing environment and
provides cost savings to Dynegy. Such provisions involve replacement of historic
credit support arrangements with a perfected security interest in a portion of
Dynegy's domestic natural gas receivables. Dynegy has the option to revert back
to historic credit support arrangements, which included the issuance of surety
bonds and/or letters of credit.

    RECENT ACCOUNTING PRONOUNCEMENTS.  Several recently issued accounting
pronouncements have been adopted or will be adopted within the next year by the
Company. See Note 2 to the accompanying financial statements for a discussion of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("Statement No. 142"), Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("Statement
No. 143"), Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("Statement No. 144") and
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("Statement No. 145").

    In addition, we currently have interests in joint ventures, equity investors
and financing arrangements that existing accounting guidance precludes us from
consolidating. In the wake of the Enron Corp. ("Enron") bankruptcy, accounting
standard setters, including the SEC and FASB, are evaluating the existing
accounting and disclosure rules and requirements. One area that has received a
high level of scrutiny is the accounting rules related to consolidations,
specifically those that address special purpose entities. Standard setting
bodies and regulators are currently evaluating the consolidation rules to
determine whether the existing accounting framework should change. There is a
risk that existing standards will change, particularly in light of the events of
2001, and that these

                                       35
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

changes could result in the consolidation in the Company's financial statements
of entities that it does not currently consolidate.

    COMMITMENTS AND CONTINGENCIES.  See Note 10 to the accompanying financial
statements for a discussion of the Company's Commitments and Contingencies.

    DIVIDEND POLICY.  Dynegy intends to pay a quarterly dividend of $0.075 per
share of common stock, subject to declaration by the Board of Directors of the
Company and the availability of funds legally available therefor. During the
three-month periods ended March 31, 2002 and 2001, the Company paid
approximately $28 million and $25 million in cash dividends, respectively, on
common stock.

    CONCENTRATION OF CREDIT RISK.  As a result of recent volatility in both the
commodity and equity markets, Dynegy has reassessed its industry credit
concentration as well as specific counterparty credit risks. Based on this
reassessment, Dynegy continues to believe that credit risk imposed by industry
concentration is largely offset by the diversification and creditworthiness of
its customer base. The Company believes that its corporate credit policies are
aligned with business risks in support of minimizing enterprise credit risk.

                             ACCOUNTING METHODOLOGY

    The Company has identified three critical accounting policies that require a
significant amount of judgment and are considered to be the most important to
the portrayal of Dynegy's financial position and results of operations. These
policies include the accounting for long-lived assets, the evaluation of
counterparty credit and other similar risks and revenue recognition. See Note 3
to the Form 10-K for a discussion of the process surrounding the evaluation of
counterparty credit and other similar risks. For disclosure on the Company's
accounting for long-lived assets and revenue recognition, refer to Note 2 to the
Form 10-K. Accounting methodology and application of accounting methodologies is
more fully described in the Form 10-K.

              ENTERPRISE RISK MANAGEMENT, VALUATION AND MONITORING

    MARKET RISK.  The Company is exposed to commodity price variability related
to its natural gas, NGLs, crude oil, electricity and coal businesses. In
addition, fuel requirements at its power generation, gas processing and
fractionation facilities represent additional commodity price risks to the
Company. In order to manage these commodity price risks, Dynegy routinely
utilizes certain types of fixed-price forward purchase and sales contracts,
futures and option contracts traded on the New York Mercantile Exchange and
swaps and options traded in the over-the-counter financial markets to:

    - Manage and hedge its fixed-price purchase and sales commitments;

    - Provide fixed-price commitments as a service to its customers and
      suppliers;

    - Reduce its exposure to the volatility of cash market prices;

    - Protect its investment in storage inventories; and

    - Hedge fuel requirements.

                                       36
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

    The potential for changes in the market value of Dynegy's commodity,
interest rate and currency portfolios is referred to as "market risk." A
description of each market risk category is set forth below:

    - Commodity price risks result from exposures to changes in spot rates,
      forward prices and volatilities in commodities, such as electricity,
      natural gas, coal, NGLs, crude oil and other similar products;

    - Interest rate risks primarily result from exposures to changes in the
      level, slope and curvature of the yield curve and the volatility of
      interest rates; and

    - Currency rate risks result from exposures to changes in spot rates,
      forward rates and volatilities in currency rates.

    Dynegy seeks to manage these market risks through diversification,
controlling position sizes and executing hedging strategies. The ability to
manage an exposure may, however, be limited by adverse changes in market
liquidity or other factors.

    VALUATION CRITERIA AND MANAGEMENT ESTIMATES.  As more fully described in the
Form 10-K, Dynegy utilizes a fair value accounting model for certain aspects of
its operations as required by generally accepted accounting principles. The net
gains or losses resulting from the revaluation of these contracts during the
period are recognized currently in the Company's results of operations. For
financial reporting purposes, assets and liabilities associated with these
transactions are reflected on the Company's balance sheet as risk management
assets and liabilities, classified as short- or long-term pursuant to each
contract's individual tenor. Net unrealized gains and losses from these
contracts are classified as revenue in the accompanying statement of operations.
Transactions that have been realized and settled are reflected gross in revenues
and cost of sales.

    Dynegy estimates the fair value of its marketing portfolio using a
liquidation value approach assuming normal liquidity. The estimated fair value
of the portfolio is computed by multiplying all existing positions in the
portfolio by estimated mid-market prices, reduced by a LIBOR-based time value of
money adjustment and deduction of reserves for credit, price and market risks.

    Dynegy's forward price curves are derived by modeling a combined cycle gas
facility as a "spark spread" in the calculation of required cost of capital
returns. This assumption is based on the premise that a portfolio manager would
be indifferent to holding these two assets, and is reflective of how Dynegy
manages its own portfolio of physical and financial positions. Dynegy's modeling
methodology has been consistently applied during the quarter ended March 31,
2002 and the three years in the period ended December 31, 2001. Dynegy's
proprietary models compute forward prices over a time horizon based on the
following set of inputs:

<Table>
<Caption>
           MARKET INFORMATION                     GENERATING FACILITY INFORMATION
<S>                                           <C>
      Natural Gas Location Prices                         Inflation Rates
 Natural Gas Location Market Volatility            Capital and Operational Costs
    Natural Gas Volatility Forecast                    Economic Growth Rates
        Power Volatility Factors                 Impact of Temperature and Altitude
                                                   Local Taxes and Environmental
  Monthly On and Off Peak Curve Shapes                      Restriction
    Regional Correlation Assessments                  Industry Cost of Capital
         Supply/Demand Balance
</Table>

                                       37
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

    Dynegy's enterprise-wide risk department, led by Dynegy's Chief Risk
Officer, independently verifies the outputs from the Company's proprietary
pricing models. This department routinely applies a mathematical model approach
to independently assess forward price curves. This methodology derives forward
energy prices from assumptions about the random factors driving energy prices
and other key variables such as the long-term price and mean reversion rate.
This method is consistent with market observable forward prices and
volatilities. The method models the evolution of the entire forward curve
conditioned on the initial forward curve. Material differences, if any, between
the forward curves developed from Dynegy's proprietary systems and the
mathematical model are reviewed, assessed and, if deemed necessary by the Chief
Risk Officer and Controller, adjusted in determining the reported fair value of
the marketing portfolio.

                                       38
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

    RISK-MANAGEMENT ASSET AND LIABILITY DISCLOSURES.  The following tables
depict the mark-to-market value and cash flow components of the Company's net
risk-management assets and liabilities at March 31, 2002:

              NET RISK-MANAGEMENT ASSET AND LIABILITY DISCLOSURES

<Table>
<Caption>
                                                      TOTAL     2002(2)      2003       2004       2005       2006     THEREAFTER
                                                     --------   --------   --------   --------   --------   --------   ----------
                                                                                   ($ IN MILLIONS)
<S>                                                  <C>        <C>        <C>        <C>        <C>        <C>        <C>
Mark-to-Market Value of Risk-Management Assets and
  Liabilities(1)...................................    $553       $(7)       $132       $61        $(12)      $41         $338
</Table>

--------------------------

(1) The table reflects the fair value of Dynegy's risk-management asset position
    after deduction of time value, credit, price and other reserves necessary to
    determine fair value. These amounts exclude the fair value associated with
    certain derivative instruments designated as hedges, which are included in
    other comprehensive income (a component of Stockholders' Equity). The net
    risk-management assets of $622 million on the Condensed Consolidated Balance
    Sheets include the $553 million herein as well as emission allowance
    credits, other comprehensive income balances and other non-trading amounts.

(2) Amounts represent April 1 to December 31, 2002 values.

              NET RISK-MANAGEMENT ASSET AND LIABILITY DISCLOSURES

<Table>
<Caption>
                                                3-MONTHS      9-MONTHS
                                                  ENDED        ENDED
                                                MARCH 31,   DECEMBER 31,
                                                  2002          2002         2003       2004       2005       2006     THEREAFTER
                                                ---------   ------------   --------   --------   --------   --------   ----------
                                                                                 ($ IN MILLIONS)
<S>                                             <C>         <C>            <C>        <C>        <C>        <C>        <C>
Cash Flow of Risk-Management Assets and
  Liabilities(1)..............................    $270           $6          $143       $76         $2        $67         $962
</Table>

--------------------------

(1) The cash flow value reflects realized cash flows for the first quarter 2002
    and anticipated undiscounted cash inflows and outflows by contract based on
    tenor of individual contract position and have not been adjusted for
    counterparty credit or other reserves. These amounts exclude the cash flows
    associated with certain derivative instruments designated as hedges, which
    are included in other comprehensive income (a component of Stockholders'
    Equity).

    Changes in the March 31, 2002 net risk management assets and liabilities and
the associated cash flows from December 31, 2001 were primarily driven by the
following factors:

    - Cash realization of existing contracts during the first quarter of 2002;

    - Extension of the timing of hedged storage withdrawals from 2002 to 2003
      and beyond as a result of market opportunities;

    - Incremental natural gas and power transactions, which in some instances,
      result in negative cash flows in 2002 and positive cash flows in future
      periods; and

    - Long-term power supply agreements representing approximately 60 percent of
      the "Thereafter" column in the tables above.

                                       38
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

    The following table provides an assessment of the factors impacting the
change in net value of the risk-management asset and liability accounts during
the quarter ended March 31, 2002 ($ in millions).

<Table>
<S>                                                           <C>
Fair value of portfolio at January 1, 2002..................  $ 712
Gains (losses) recognized through the income statement in
  the period, net(1)........................................    204
Cash received related to contracts settled during the
  period, net...............................................   (293)
Changes in fair value as a result of a change in valuation
  technique(2)..............................................     --
Other changes in fair value, net............................     (1)
                                                              -----
Fair value of portfolio at March 31, 2002...................  $ 622
                                                              =====
</Table>

------------------------

(1) This amount includes approximately $133 million which represents
    management's estimate of the initial value of new contracts entered into in
    the first quarter 2002.

(2) Dynegy's modeling methodology has been consistently applied period over
    period.

    The following table provides an assessment of net contract values by year
based on the Company's valuation methodology described above. Approximately 55
percent of Dynegy's net risk-management asset value at March 31, 2002 was
determined by market quotations or validation against industry posted prices.

                     NET FAIR VALUE OF MARKETING PORTFOLIO

<Table>
<Caption>
                                                        TOTAL     2002(1)      2003       2004       2005       2006      BEYOND
                                                       --------   --------   --------   --------   --------   --------   --------
                                                                                    ($ IN MILLIONS)
<S>                                                    <C>        <C>        <C>        <C>        <C>        <C>        <C>
Market Quotations(2).................................    $ 52       $(7)       $78        $ 7        $(82)      $(29)      $ 85
                                                         ====       ===        ===        ===        ====       ====       ====

Other External Sources(3)............................    $250       $--        $62        $61        $ 70       $ 57       $ --
                                                         ====       ===        ===        ===        ====       ====       ====

Prices Based on Models(4)............................    $251       $--        $(8)       $(7)       $ --       $ 13       $253
                                                         ====       ===        ===        ===        ====       ====       ====
</Table>

--------------------------

(1) Amounts represent April 1 to December 31, 2002 values.

(2) Prices obtained from actively traded, liquid markets.

(3) Mid-term prices validated against industry posted prices.

(4) See discussion of the Company's use of long-term models in the "Management's
    Discussion and Analysis of Financial Condition and Results of Operations"
    section in the Form 10-K.

    VALUE AT RISK ("VAR").  In addition to applying business judgment, senior
management uses a number of quantitative tools to manage the Company's exposure
to market risk. These tools include:

    - Risk limits based on a summary measure of market risk exposure, referred
      to as VaR; and

    - Stress and scenario analyses performed daily that measure the potential
      effects of various market events, including substantial swings in
      volatility factors, absolute commodity price changes and the impact of
      interest rate movements.

    The modeling of the risk characteristics of Dynegy's marketing portfolio
involves a number of assumptions and approximations. Dynegy estimates VaR using
a JP Morgan RiskMetrics-TM- approach assuming a one-day holding period. Inputs
for the VaR calculation are prices, positions, instrument valuations and the
variance-covariance matrix. While management believes that these assumptions and

                                       39
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

approximations are reasonable, there is no uniform industry methodology for
estimating VaR, and different assumptions and/or approximations could produce
materially different VaR estimates.

    Dynegy uses historical data to estimate the Company's VaR and, to better
reflect current asset and liability volatilities, these historical data are
weighted to give greater importance to more recent observations. Given its
reliance on historical data, VaR is effective in estimating risk exposures in
markets in which there are not sudden fundamental changes or shifts in market
conditions. An inherent limitation of VaR is that past changes in market risk
factors, even when weighted toward more recent observations, may not produce
accurate predictions of future market risk. VaR should be evaluated in light of
this and the methodology's other limitations.

    VaR represents the potential loss in value of Dynegy's enterprise-wide
marketing portfolio due to adverse market movements over a defined time horizon
within a specified confidence level. For the VaR numbers reported below, a
one-day time horizon and a 95% confidence level were used. This means that there
is a one in 20 statistical chance that the daily portfolio value will fall below
the expected maximum potential reduction in portfolio value at least as large as
the reported VaR. Thus, a change in portfolio value greater than the expected
change in portfolio value on a single trading day would be anticipated to occur,
on average, about once a month. Gains or losses on a single day can exceed
reported VaR by significant amounts. Gains or losses can also accumulate over a
longer time horizon such as a number of consecutive trading days.

    In addition, Dynegy has provided its VaR using a one-day time horizon and a
99% confidence level. The purpose of this disclosure is to provide an indication
of earnings volatility using a higher confidence level. Under this presentation,
there is one in one hundred statistical chance that the daily portfolio value
will fall below the expected maximum potential reduction in portfolio value at
least as large as the reported VaR. The Company has also disclosed an average
VaR for the quarters ended March 31, 2002 and December 31, 2001 in order to
provide context around the one-day amounts.

    The following table sets forth the aggregate daily VaR of Dynegy's marketing
portfolio:

                 DAILY AND AVERAGE VAR FOR MARKETING PORTFOLIO

<Table>
<Caption>
                                                              MARCH 31,   DECEMBER 31,
                                                                2002          2001
                                                              ---------   ------------
                                                                  ($ IN MILLIONS)
<S>                                                           <C>         <C>
One Day VaR--95% Confidence Level...........................     $26           $18
                                                                 ===           ===

One Day VaR--99% Confidence Level...........................     $37           $26
                                                                 ===           ===

Average VaR for the Year-to-Date Period--95% Confidence
  Level.....................................................     $15           $12
                                                                 ===           ===
</Table>

    The increase in VaR from December 31, 2001 is due primarily to increases in
volatility and the long-term origination transactions executed in the period.

    CREDIT RISK.  Credit risk represents the loss that the Company would incur
if a counterparty fails to perform under its contractual obligations. To reduce
the Company's credit exposure, the Company seeks to enter into netting
agreements with counterparties that permit Dynegy to offset receivables and
payables with such counterparties. Dynegy attempts to further reduce credit risk
with certain

                                       40
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

counterparties by entering into agreements that enable the Company to obtain
collateral or to terminate or reset the terms of transactions after specified
time periods or upon the occurrence of credit-related events. The Company may,
at times, use credit derivatives or other structures and techniques to provide
for third-party guarantees of the Company's counterparties' obligations.

    Dynegy's industry typically operates under negotiated credit lines for
physical delivery contracts. Dynegy's Credit Department, based on guidelines set
by Dynegy's Credit Policy Committee, establishes Dynegy's counterparty credit
limits. For collateralized transactions, the Company also evaluates potential
exposure over a shorter collection period and gives effect to the value of
collateral received. The Company further seeks to measure credit exposure
through the use of scenario analyses and other quantitative tools. Dynegy's
credit management systems monitor current and potential credit exposure to
individual counterparties and on an aggregate basis to counterparties and their
affiliates.

    The following table displays the value of Dynegy's marketing portfolio,
inclusive of hedging activities, at March 31, 2002:

<Table>
<Caption>
                                                                         BELOW
                                                                       INVESTMENT
                                                        INVESTMENT    GRADE CREDIT
                                                       GRADE CREDIT    QUALITY OR
                                                         QUALITY        UNRATED       TOTAL
                                                       ------------   ------------   --------
                                                                  ($ IN MILLIONS)
<S>                                                    <C>            <C>            <C>
Utilities and power generators.......................        773              8         781
Financial institutions...............................       (296)            (3)       (299)
Oil and gas producers................................       (215)            92        (123)
Commercial and industrial companies..................        296             42         338
Other................................................         16             (1)         15
                                                           -----          -----       -----
Value of portfolio before reserves...................        574            138         712
                                                           =====          =====
Credit and market reserves...........................                                  (159)
                                                                                      -----
                                                                                        553
Other(1).............................................                                    69
                                                                                      -----
Net risk-management assets(2)........................                                 $ 622
                                                                                      =====
</Table>

------------------------

(1) Amount represents emission allowance credits, other comprehensive income
    balances and other non-trading amounts.

(2) Represents amounts included in "Current Assets-Assets from Risk Management
    Activities", "Other Assets--Assets from Risk-Management Activities",
    "Current Liabilities--Liabilities from Risk-Management Activities", and
    "Other Liabilities--Liabilities from Risk-Management Activities" on the
    Condensed Consolidated Balance Sheet.

    INTEREST RATE RISK.  Interest rate risk results from variable rate financial
obligations and from providing risk-management services to customers, since
changing interest rates impact the discounted value of future cash flows used to
value risk-management assets and liabilities. Management continually monitors
its exposure to fluctuations in interest rates and may execute swaps or other
financial instruments to hedge and mitigate this exposure.

    MARKETING PORTFOLIO.  The following table sets forth the daily and average
VaR associated with the interest rate component of the marketing portfolio.
Dynegy seeks to manage its interest rate exposure

                                       41
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

through application of various hedging strategies. Hedging instruments executed
to mitigate such interest rate exposure in the marketing portfolio are included
in the VaR as of March 31, 2002 and December 31, 2001 and are reflected in the
table below.

       DAILY AND AVERAGE VAR ON INTEREST COMPONENT OF MARKETING PORTFOLIO

<Table>
<Caption>
                                                            AT MARCH 31,   AT DECEMBER 31,
                                                                2002            2001
                                                            ------------   ---------------
                                                                   ($ IN MILLIONS)
<S>                                                         <C>            <C>
One Day VaR--95% Confidence Level.........................      $0.7            $1.6
                                                                ====            ====

Average VaR for the Year-to-Date Period--95% Confidence
  Level...................................................      $0.5            $1.6
                                                                ====            ====
</Table>

    VARIABLE RATE FINANCIAL OBLIGATIONS.  Based on sensitivity analysis as of
March 31, 2002, it is estimated that a one percentage point interest rate
movement in the average market interest rates (either higher or (lower)) over
the twelve months ended March 31, 2003 would (increase) decrease income before
taxes by approximately $17 million. Hedging instruments executed to mitigate
such interest rate exposure are included in the sensitivity analysis.

    FOREIGN CURRENCY EXCHANGE RATE RISK.  Foreign currency risk arises from the
Company's investments in affiliates and subsidiaries owned and operated in
foreign countries. Such risk is also a result of risk management transactions
with customers in countries outside the U.S. Management continually monitors its
exposure to fluctuations in foreign currency exchange rates. When possible,
contracts are denominated in or indexed to the U.S. dollar, or such risk may be
hedged through debt denominated in the foreign currency or through financial
contracts. At March 31, 2002, the Company's primary foreign currency exchange
rate exposures were the United Kingdom Pound, Canadian Dollar, European Euro and
Norwegian Kroner.

    The following table sets forth the daily and average foreign currency
exchange VaR. Hedging instruments executed to mitigate such foreign currency
exchange exposure are included in the VaR as of March 31, 2002 and December 31,
2001 reflected in the table below.

                DAILY AND AVERAGE FOREIGN CURRENCY EXCHANGE VAR

<Table>
<Caption>
                                                            AT MARCH 31,   AT DECEMBER 31,
                                                                2002            2001
                                                            ------------   ---------------
                                                                   ($ IN MILLIONS)
<S>                                                         <C>            <C>
One Day VaR--95% Confidence Level.........................      $0.1            $0.6
                                                                ====            ====

Average VaR for the Year-to-Date Period--95% Confidence
  Level...................................................      $0.5            $1.1
                                                                ====            ====
</Table>

                                       42
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

DERIVATIVE CONTRACTS

    The absolute notional financial contract amounts associated with the
Company's commodity risk-management, interest rate and foreign currency exchange
contracts were as follows:

                       ABSOLUTE NOTIONAL CONTRACT AMOUNTS

<Table>
<Caption>
                                                              MARCH 31,   DECEMBER 31,
                                                                2002          2001
                                                              ---------   ------------
<S>                                                           <C>         <C>
Natural Gas (Trillion Cubic Feet)...........................    16.108        11.936
Electricity (Million Megawatt Hours)........................   101.492        77.997
Natural Gas Liquids (Million Barrels).......................    14.125         5.655
Weather Derivatives (in thousands of $/Degree Day)..........   $   148       $   190
Coal (Millions of Tons).....................................       4.0          18.5
Variable Rate Financial Obligation Interest Rate Swaps (in
  millions of U.S. dollars).................................   $ 2,000       $    --
Weighted Average Fixed Interest Rate Paid (Percent).........     2.754            --
Fair Value Hedge Interest Rate Swaps (in millions of U.S.
  Dollars)..................................................   $   331       $   206
Fixed Interest Rate Received on Swaps (Percent).............     5.298         5.284
Interest Rate Risk-Management Contract......................   $   331       $   206
Fixed Interest Rate Paid (Percent)..........................     5.322         5.310
U.K. Pound Sterling (in millions of U.S. Dollars)...........   $   941       $   906
Average U.K. Pound Sterling Contract Rate (in U.S.
  Dollars)..................................................   $1.4133       $1.4233
Euro Dollars (in millions of U.S. Dollars)..................   $    29       $    18
Average Euro Dollar Contract Rate (in U.S. Dollars).........   $0.8629       $0.8863
Canadian Dollar (in millions of U.S. Dollars)...............   $ 1,326       $ 1,395
Average Canadian Dollar Contract Rate (in U.S. Dollars).....   $0.6389       $0.6435
</Table>

                             RESULTS OF OPERATIONS

    Provided below are a narrative and tabular presentation of certain operating
and financial data and statistics for the Company's businesses for the
three-month periods ended March 31, 2002 and 2001.

THREE-MONTH PERIODS ENDED MARCH 31, 2002 AND 2001

    For the quarter ended March 31, 2002, Dynegy recorded a net loss of $140
million or $(0.41) per diluted share, compared with first quarter 2001 net
income of $139 million or $0.41 per diluted share. Recurring net income,
excluding non-recurring after tax charges of $313 million, was $173 million or
$0.41 per diluted share for the quarter ended March 31, 2002, compared with
first quarter 2001 recurring net income of $137 million or $0.41 per diluted
share. The first quarter 2002 recurring net income excludes non-recurring
charges related to goodwill and other asset impairment in the DGC segment and a
non-recurring charge associated with a volumetric commitment to deliver gas
assumed with the acquisition of Northern Natural. First quarter 2002 recurring
results were led by a strong performance in energy convergence operations
particularly in natural gas and power marketing operations, which benefited from
increased customer origination and increased volumes. In addition, first quarter
2002 results benefited from the January 31, 2002 acquisition of Northern Natural
and the

                                       43
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

fourth quarter 2001 acquisition of the BG Storage Limited ("BGSL") natural gas
storage assets in the United Kingdom.

    As described in Note 2 to the accompanying financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("Statement No. 142"), effective January 1, 2002. The
Company's net income and earnings per share for the three months ended March 31,
2001, exclusive of goodwill, would have been $151 million or $0.45 per diluted
share.

    The reconciliation from reported net income (loss) and EPS to recurring net
income and EPS, adjusted for the impact of non-recurring special charges, is as
follows:

<Table>
<Caption>
                                                                    THREE MONTHS ENDED MARCH 31,
                                                              -----------------------------------------
                                                                     2002                  2001
                                                              -------------------   -------------------
                                                               INCOME
                                                               (LOSS)      EPS       INCOME      EPS
                                                              --------   --------   --------   --------
                                                                 ($ IN MILLIONS, EXCEPT EPS AMOUNTS)
<S>                                                           <C>        <C>        <C>        <C>
NET INCOME (LOSS) AND EPS, AS REPORTED......................   $(140)     $(0.41)     $139      $0.41

Impairment of communications assets(1)......................      44        0.11        --         --
Loss on gas delivery commitment(2)..........................      13        0.03        --         --
Cumulative effect of change in accounting principle(3)......     256        0.61        (2)        --
Special dividend(4).........................................      --        0.02        --         --
FAS 128 EPS calculation difference(5).......................      --        0.05        --         --
                                                               -----      ------      ----      -----
RECURRING NET INCOME AND EPS................................   $ 173      $ 0.41      $137      $0.41
                                                               =====      ======      ====      =====
</Table>

------------------------

(1) The Company recognized an after-tax charge of $44 million ($64 million
    pre-tax) associated with certain communications assets, investments in
    unconsolidated affiliates and equipment. The pre-tax charge is included in
    Cost of Sales, Earnings (Losses) of Unconsolidated Affiliates and Other
    Expenses in the accompanying Condensed Consolidated Statements of
    Operations.

(2) The Company incurred a $13 million after-tax ($18 million pre-tax) charge
    associated with a commitment to deliver gas assumed in the acquisition of
    Northern Natural. The pre-tax charge is included in "Operating Revenues."

(3) Effective January 1, 2002, the Company adopted Statement No. 142, realizing
    an after-tax cumulative effect loss of approximately $256 million. Effective
    January 1, 2001, the Company adopted Statement of Financial Accounting
    Standards No. 133, "Accounting for Derivative Instruments and Hedging
    Activities," as amended, realizing an after-tax cumulative effect gain of
    approximately $2 million.

(4) The special dividend in 2002 relates to the conversion price embedded in the
    Series B Preferred Stock held by ChevronTexaco Corporation.

(5) Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
    requires the diluted earnings per share to equal basic earnings per share
    when there is a net loss.

    Consolidated operating margin for the first quarter of 2002 totaled $508
million compared to $477 million for the same 2001 period, reflective of the
margin associated with two months of operations from Northern Natural and
improved margins in the WEN segment. WEN contributed $300 million to first
quarter 2002 consolidated operating margin compared to $281 million reported in
the first quarter of 2001. The Company's DMS segment contributed $63 million to
first quarter 2002

                                       44
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

consolidated operating margin compared to $87 million reported in the first
quarter of 2001. The Company's T&D segment, which includes IP and Northern
Natural, contributed $166 million to first quarter 2002 consolidated operating
margin compared to $108 million reported in the first quarter of 2001. The
Company's DGC segment had negative margin of $21 million and a positive margin
of $1 million in the 2002 and 2001 first quarters, respectively.

    Operating income decreased $3 million quarter-to-quarter due to increased
general and administrative expense and increased depreciation and amortization
expense. Increased general and administration expense is reflective of the
infrastructure required to support a larger and more diverse operation. Included
in the first quarter 2002 general and administrative expense is approximately
$2 million of non-recurring costs associated with implementing the operating and
support system for the DGC segment. Increased depreciation and amortization
expense is associated with the expansion of Dynegy's depreciable asset base,
primarily due to the acquisitions of Northern Natural and the BGSL natural gas
storage assets.

    Impacting Dynegy's consolidated results was the Company's earnings (loss)
from investment in unconsolidated affiliates, which was approximately $(11)
million and $32 million in the 2002 and 2001 periods, respectively. Variances
period-to-period in these results primarily reflect the impact of the impairment
of $45 million of certain DGC segment investments resulting from unfavorable
market conditions.

    Interest expense totaled $79 million for the three-month period ended March
31, 2002, compared to $62 million for the equivalent 2001 period. The variance
is primarily attributed to higher average principal balances in the 2002 period
compared to the 2001 period, in addition to slight increases in average interest
rates on borrowings.

    Other income and expenses, net (including minority interest expense and
accumulated distributions associated with trust preferred securities) totaled $5
million in income in the quarter ended March 31, 2002 compared with $16 million
in expense in the 2001 period. Variances period-to-period in these results
primarily reflect the impact of more favorable foreign exchange results,
increased interest income, decreased minority interest expense and the
recognition of a dividend on the Series A Preferred Stock in Northern Natural in
January 2002.

    The Company reported an income tax provision of $51 million for the quarter
ended March 31, 2002, compared to an income tax provision of $72 million for the
2001 period. The effective rates approximated 31 percent and 34 percent in 2002
and 2001, respectively. The difference from the effective rates and the
statutory rate of 35 percent results principally from permanent differences
arising from the amortization of certain intangibles, book-tax basis differences
and the effect of certain foreign equity investments and state income taxes.

                                       45
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

SEGMENT DISCLOSURES

                            WHOLESALE ENERGY NETWORK

<Table>
<Caption>
                                                                      THREE MONTHS ENDED MARCH 31,
                                                              --------------------------------------------
                                                                      2002                    2001
                                                              ---------------------   --------------------
                                                              ($ IN MILLIONS, EXCEPT OPERATING STATISTICS)
<S>                                                           <C>                     <C>
Operating Margin:
  Customer and Risk-Management Activities...................         $  169                 $   149
  Asset Businesses..........................................            131                     132
Equity Investments..........................................             30                      31
                                                                     ------                 -------
      SUBTOTAL--FINANCIAL CONTRIBUTION......................            330                     312

  Depreciation and Amortization.............................            (46)                    (43)
  General and Administrative Expenses.......................            (81)                    (63)
  Other Items...............................................              6                     (37)
                                                                     ------                 -------
      EARNINGS BEFORE INTEREST AND TAXES....................            209                     169
Interest Expense............................................            (29)                    (18)
                                                                     ------                 -------
      PRE-TAX EARNINGS......................................            180                     151
Income Tax Provision........................................             47                      51
                                                                     ------                 -------
      INCOME FROM OPERATIONS................................            133                     100
Cumulative Effect of Change in Accounting Principle.........             --                       2
                                                                     ------                 -------
      NET INCOME............................................         $  133                 $   102
                                                                     ======                 =======

      RECURRING NET INCOME(1)...............................         $  133                 $   100
                                                                     ======                 =======

OPERATING STATISTICS:
  Natural Gas Marketing (Bcf/d)--
    Domestic Marketing Volumes..............................            9.7                     8.4
    Canadian Marketing Volumes..............................            3.3                     2.3
    European Marketing Volumes..............................            2.2                     0.7
                                                                     ------                 -------
        Total Marketing Volumes.............................           15.2                    11.4
                                                                     ======                 =======
  Million Megawatt Hours Generated--Gross...................            9.5                    10.3

  Million Megawatt Hours Generated--Net.....................            8.5                     8.9

  North American Physical Million Megawatt Hours Sold.......          150.0                    52.0
  European Physical Million Megawatt Hours Sold.............           60.0                      --
                                                                     ------                 -------
    Total Physical Million Megawatt Hours Sold..............          210.0                    52.0
                                                                     ======                 =======

  Coal Marketing Volumes (Millions of Tons).................            8.3                     4.6

  Average Natural Gas Price--Henry Hub ($/Mmbtu)............         $ 2.34                 $  7.05

  Average On-Peak Market Power Prices
    Cinergy.................................................         $21.90                 $ 42.31
    TVA.....................................................          22.10                   42.79
    PJM.....................................................          25.14                   44.29
    Platts SP 15............................................          28.68                  224.24
</Table>

------------------------------

(1) The 2001 recurring net income consists of segment reported net income
    adjusted for identified non-recurring items more fully described below.

                                       46
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

THREE-MONTH PERIODS ENDED MARCH 31, 2002 AND 2001

    WEN reported recurring segment net income of $133 million for the
three-month period ended March 31, 2002, compared with recurring net income of
$100 million in the 2001 quarter. The first quarter 2001 recurring net income
excludes the $2 million cumulative effect of a change in accounting principle
described in Note 4 to the Condensed Consolidated Financial Statements. Dynegy's
recurring results of operations period-to-period were influenced by the
following:

    - Increased customer origination during the first quarter of 2002 in both
      the wholesale and commercial and industrial businesses that was influenced
      by the absence of Enron in the market, new contracts for the acquisition
      of long-term power supply at competitive prices, and incremental natural
      gas storage contracts; contribution from the long-term power origination
      contracts was significant to the results for the period, accounting for
      approximately 20% of the Company's consolidated financial contribution;

    - Improved Canadian and European margins due to increased volumes as a
      result of market share gains from the prior year. There were increased
      power volumes in Canada due to opening of the markets to competition and
      Enron's absence from the market. Natural gas volumes in Europe increased
      due to trading activity around the BGSL natural gas storage assets in the
      United Kingdom;

    - Incremental ChevronTexaco natural gas volumes associated with former
      Texaco's equity production;

    - Favorable variances in other income and expense related to foreign
      exchange gain and loss and increased interest income;

    - Decreased minority interest expense; partially offset by

    - Unfavorable variances in marketing activities due to a decline in price
      volatility;

    - Reduced margins associated with generation as a result of lower megawatt
      hours generated reflecting milder weather conditions compared to the
      comparable prior year period primarily due to the West and market prices.
      The decline is partially offset as a result of price risk management
      activities that have mitigated the impact of decreased market prices as
      compared to the comparable prior year period;

    - Continued weakness in commodity prices during the first quarter of 2002,
      and an overall decrease in commodity prices compared to the first quarter
      of 2001;

    - Milder weather conditions experienced during the first quarter of 2002
      compared to the first quarter of 2001;

    - Increased general and administration expenses reflecting increased capital
      and overhead costs required to support a larger, more diverse base of
      operations;

    - Increased interest expense due to higher average borrowings; and

    - Increased depreciation due principally to the depreciation of the natural
      gas storage assets in the United Kingdom.

                                       47
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

    Total physical MW hours sold in the first quarter of 2002 increased to 210.0
million MW hours compared to 52.0 million MW hours in the first quarter of 2001.
Total natural gas volumes sold in North America in the first quarter of 2002
totaled 13.0 billion cubic feet per day compared to 10.7 billion cubic feet per
day during last year's first quarter. The increased volumes in both power and
gas were a result of improved market liquidity, greater sales volumes and
greater market origination. These increases were offset by decreased generation
volumes, primarily in the West, as a result of milder weather conditions.

                           DYNEGY MIDSTREAM SERVICES

<Table>
<Caption>
                                                                     THREE MONTHS ENDED MARCH 31,
                                                             --------------------------------------------
                                                                     2002                    2001
                                                             ---------------------   --------------------
                                                             ($ IN MILLIONS, EXCEPT OPERATING STATISTICS)
<S>                                                          <C>                     <C>
Operating Margin:
  Upstream.................................................         $   21                  $   54
  Downstream...............................................             42                      33
Equity Investments.........................................              4                       1
                                                                    ------                  ------
      SUBTOTAL--FINANCIAL CONTRIBUTION.....................             67                      88

  Depreciation and Amortization............................            (19)                    (19)
  General and Administrative Expenses......................            (13)                    (15)
  Other Items..............................................              2                      (6)
                                                                    ------                  ------
      EARNINGS BEFORE INTEREST AND TAXES...................             37                      48
Interest Expense...........................................            (10)                    (13)
                                                                    ------                  ------
      PRE-TAX EARNINGS.....................................             27                      35
Income Tax Provision.......................................             10                      12
                                                                    ------                  ------
      NET INCOME...........................................         $   17                  $   23
                                                                    ======                  ======

      RECURRING NET INCOME.................................         $   17                  $   23
                                                                    ======                  ======

OPERATING STATISTICS:
  Natural Gas Processing Volumes (MBbls/d):
    Field Plants...........................................           55.9                    55.6
    Straddle Plants........................................           36.2                    22.5
                                                                    ------                  ------
      Total Natural Gas Processing Volumes.................           92.1                    78.1
                                                                    ======                  ======

  Fractionation Volumes (MBbls/d)..........................          204.6                   199.1

  Natural Gas Liquids Sold (MBbls/d).......................          609.5                   640.7

  Average Commodity Prices:
    Crude Oil--Cushing ($/Bbl).............................         $20.55                  $29.01
    Natural Gas Liquids ($/Gal)............................           0.32                    0.61
    Fractionation Spread ($/MMBtu).........................           1.30                   (0.03)
</Table>

THREE-MONTH PERIODS ENDED MARCH 31, 2002 AND 2001

    DMS reported recurring net income of $17 million in the first quarter of
2002 compared with recurring net income of $23 million in the first quarter of
2001. The following influenced recurring results of operations period-to-period:

    - Lower natural gas and NGL prices resulting in a decline in processing
      plant margins; partially offset by,

    - Higher price realization resulting from marketing activities; and

                                       48
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

    - Favorable operating expense variances.

    Aggregate domestic NGL processing volumes totaled 92.1 thousand gross
barrels per day in the first quarter of 2002 compared to 78.1 thousand gross
barrels per day during the same period in 2001. This increase was primarily due
to increased straddle volumes resulting from higher fractionation spreads
compared to the first quarter of 2001. The average fractionation spread was
$1.30 for the three months ended March 31, 2002, compared to negative $0.03 for
the comparable 2001 period. NGL marketing volumes were lower period-over-period
reflecting the impact of seasonal winter weather during the first quarter of
2001.

                         TRANSMISSION AND DISTRIBUTION

<Table>
<Caption>
                                                                 THREE MONTHS
                                                                ENDED MARCH 31,
                                                              -------------------
                                                                2002       2001
                                                              --------   --------
                                                                ($ IN MILLIONS)
<S>                                                           <C>        <C>
Operating Margin............................................   $  166     $  108
  Depreciation..............................................      (47)       (40)
  General and Administrative Expenses.......................      (25)       (17)
  Other Items...............................................        4         21
                                                               ------     ------
      EARNINGS BEFORE INTEREST AND TAXES....................       98         72
Interest Expense............................................      (38)       (29)
                                                               ------     ------
      PRE-TAX EARNINGS......................................       60         43
Income Tax Provision........................................       24         17
                                                               ------     ------
      NET INCOME............................................   $   36     $   26
                                                               ======     ======

      RECURRING NET INCOME(1)...............................   $   49     $   26
                                                               ======     ======
</Table>

                                       49
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

<Table>
<Caption>
                                                                 THREE MONTHS
                                                                ENDED MARCH 31,
                                                              -------------------
                                                                2002       2001
                                                              --------   --------
                                                                ($ IN MILLIONS)
<S>                                                           <C>        <C>
OPERATING STATISTICS:
  ILLINOIS POWER:
  Electric Sales in kWh (Millions)--
    Residential.............................................    1,304      1,382
    Commercial..............................................    1,023      1,077
    Industrial..............................................    2,083      2,021
    Other...................................................       93        100
                                                               ------     ------
      Total Electric Sales..................................    4,503      4,580
                                                               ======     ======

  Gas Sales in Therms (Millions)--
    Residential.............................................      153        173
    Commercial..............................................       62         74
    Industrial..............................................       18         25
    Transportation of Customer-Owned Gas....................       72         73
                                                               ------     ------
      Total Gas Delivered...................................      305        345
                                                               ======     ======

    Heating Degree Days.....................................    2,498      2,764
                                                               ======     ======

    NORTHERN NATURAL:
    Heating Degree Days.....................................    3,489        N/A
                                                               ======     ======
    Throughput (Bcf/d)......................................      3.3        N/A
                                                               ======     ======
</Table>

------------------------------

(1) The 2002 recurring net income consists of segment reported net income
    adjusted for identified non-recurring items more fully described in the
    following text.

THREE-MONTH PERIODS ENDED MARCH 31, 2002 AND 2001

    The T&D segment reported recurring net income of $49 million in the first
quarter of 2002 compared to $26 million in the first quarter of 2001. The 2002
recurring net income excludes an $18 million pre-tax ($13 million after tax)
charge associated with a gas delivery commitment that was assumed with the
acquisition of Northern Natural. The T&D segment reflects two months of
operating results from Northern Natural. The increase related to Northern
Natural's results is partially offset by a decrease in IP's results associated
with decreased residential and commercial volumes due to lower weather driven
demand and a downturn in economic conditions.

                                       50
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

                          DYNEGY GLOBAL COMMUNICATIONS

<Table>
<Caption>
                                                                 THREE MONTHS
                                                                ENDED MARCH 31,
                                                              -------------------
                                                                2002       2001
                                                              --------   --------
                                                                ($ IN MILLIONS)
<S>                                                           <C>        <C>
Operating Margin............................................   $ (21)      $  1
  Equity Losses.............................................     (45)        --
  Depreciation..............................................      (5)        (5)
  General and Administrative Expenses.......................     (20)       (20)
  Other Items...............................................      (7)         6
                                                               -----       ----
      LOSS BEFORE INTEREST AND TAXES........................     (98)       (18)
  Interest Expense..........................................      (2)        (2)
                                                               -----       ----
      PRE-TAX LOSS..........................................    (100)       (20)
  Income Tax Benefit........................................     (30)        (8)
                                                               -----       ----
NET LOSS FROM OPERATIONS....................................     (70)       (12)
Cumulative Effect of Change in Accounting Principle
  Accounting Principle......................................    (256)        --
                                                               -----       ----
      NET LOSS..............................................   $(326)      $(12)
                                                               =====       ====
      RECURRING NET LOSS(1).................................   $ (26)      $(12)
                                                               =====       ====
</Table>

------------------------

(1) The 2002 recurring net loss consists of segment reported net income adjusted
    for identified non-recurring items more fully described in the following
    text.

THREE-MONTH PERIODS ENDED MARCH 31, 2002 AND 2001

    DGC's segment recurring results reflect a $26 million quarterly loss in the
three-month period ended March 31, 2002 resulting from start-up costs associated
with expansion of the Company's global communications business and vendor
equipment problems which delayed anticipated revenues. This compares to a $12
million quarterly loss in the three-month period ended March 31, 2001. The 2002
recurring net loss excludes the cumulative effect of change in accounting
principle (see Note 2 to the accompanying financial statements) and impairment
of communications assets, principally underutilized equipment and certain
investments.

    Dynegy is currently assessing alternatives with respect to its
telecommunications business and has publicly expressed its intention to
eliminate the losses associated with this segment by the end of 2002. Continued
losses through 2002 would negatively impact the Company's cash flows and
earnings and could require Dynegy to record additional impairment charges
related to its telecommunications assets, of which there is approximately
$300 million currently recorded in Property, Plant and Equipment on the
Condensed Consolidated Balance Sheets. In addition, if Dynegy were unable to
eliminate these losses and decided to shut down or dispose of its
telecommunications business, Dynegy could incur approximately $367 million in
lease obligations relating to its telecommunications network. As of March 31,
2002, Dynegy also had approximately $270 million, or approximately $195 million
on a discounted basis, in long-term operating commitments relating to its
telecommunications business.

                                       51
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

CASH FLOW DISCLOSURES

    The following table is a condensed version of the operating section of the
Condensed Consolidated Statements of Cash Flows:

<Table>
<Caption>
                                                                 QUARTER ENDED
                                                                   MARCH 31,
                                                              -------------------
                                                                2002       2001
                                                              --------   --------
                                                                ($ IN MILLIONS)
<S>                                                           <C>        <C>
OPERATING CASH FLOWS:
Net Income (Loss)...........................................   $(140)     $ 139
Net Non-Cash Items Included in Net Income...................     585        245
                                                               -----      -----
Operating Cash Flow Before Changes in Working Capital.......     445        384
Changes in Working Capital..................................    (152)      (119)
                                                               -----      -----
Net Cash Provided by Operating Activities...................   $ 293      $ 265
                                                               =====      =====
</Table>

    OPERATING CASH FLOW.  Cash flow from operating activities totaled $293
million for the three-month period ended March 31, 2002, compared to $265
million reported in the same 2001 period. The increase in operating cash flow is
reflective of higher non-cash add-backs such as charges related to the
cumulative effect of a change in accounting principle, depreciation and
amortization, earnings and losses from unconsolidated affiliates and deferred
income taxes. The cumulative effect of a change in accounting principle is a
non-cash charge as a result of adopting Statement No. 142 related to the
impairment of goodwill for the DGC segment. The depreciation and amortization is
higher due to a larger asset base. Changes in working capital had a negative
impact on operating cash flow during the first quarter of 2002 due primarily to
the timing of cash inflows and outflows related to trade accounts as follows:

    - Payments during the quarter for operational and overhead costs accrued at
      December 31, 2001;

    - Increases in receivables associated with the sale of emission allowances
      at the end of the winter season and the sale of NGL liquids inventories,
      as well as an increase in receivables for IP resulting from cooler weather
      late in the quarter; and

    - The accrual of the dividend on the Series A Preferred Stock in Northern
      Natural in January 2002; offset by

    - The non-cash expense associated with the recognition of the gas delivery
      obligation assumed in the acquisition of Northern Natural.

    CAPITAL EXPENDITURES AND INVESTING ACTIVITIES.  Funds used in investing
activities in the first quarter of 2002 totaled $371 million. Capital
expenditures of $175 million relate primarily to the construction and
improvement of power generation assets and investments associated with
technology infrastructure. Other investing activities of $179 million represent
the cash outflows related to the cash collateralization of certain commercial
synthetic lease obligations. The business acquisition cash outflows of $20
million relate to the acquisition of Northern Natural, net of cash acquired.

    Capital expenditures of $1.1 billion in the three-month period ended March
31, 2001 relate to the acquisition of the Central Hudson power generation
facilities in the Northeast and to the construction of power generation assets,
betterments of existing facilities related to the T&D segment and

                                       52
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

investments associated with technology infrastructure. Business acquisitions for
the three-month period ended March 31, 2001 included acquisition costs related
to the acquisition of iaxis, Limited.

    FINANCING ACTIVITIES.  Net cash provided by financing activities was $330
million during the first quarter of 2002. Dynegy received $205 million in cash
proceeds relative to ChevronTexaco's January 2002 purchase of approximately 10.4
million shares of Class B common stock. Capital stock proceeds also include $21
million of cash inflow associated with cash received from senior management
associated with a December 2001 private placement of equity. In March 2002,
dividends of $21 million were paid to the holders of Class A common stock and $7
million was paid to the holder of Class B common stock. In March 2002, Illinova
Corporation, a wholly owned subsidiary of Dynegy and the parent company of IP,
consummated a tender offer pursuant to which it paid $28 million in cash for
shares of IP's preferred stock. Long-term debt net proceeds from the February
2002 issuance of 8.75 percent senior notes due February 2012 were $496 million,
and payments of IP's transitional funding notes totaled $22 million during the
quarter. Additionally, Dynegy repaid commercial paper and borrowings under
revolving credit lines for DHI and IP of $293 million.

           UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION

    This Quarterly Report on Form 10-Q includes statements reflecting
assumptions, expectations, projections, intentions or beliefs about future
events that are intended as "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. You can identify these statements by
the fact that they do not relate strictly to historical or current facts. They
use words such as "anticipate," "estimate," "project," "forecast," "may,"
"will," "should," "expect" and other words of similar meaning. In particular,
these include, but are not limited to, statements relating to the following:

    - Projected operating or financial results;

    - Expectations regarding capital expenditures, dividends and other payments;

    - Pending or recent acquisitions, such as the acquisitions of Northern
      Natural and BG Storage Limited, including the anticipated closing date,
      expected cost savings or synergies and the accretive or dilutive impact of
      an acquisition on earnings;

    - Expectations regarding transaction volume and liquidity in wholesale
      energy markets in North America and Europe;

    - The Company's beliefs and assumptions relating to trade credit in the
      wholesale energy market and its liquidity position, including its ability
      to meet its obligations in the event of a downgrade in its credit ratings;

    - The Company's ability to execute additional capital enhancing transactions
      such as asset sales, joint ventures or financings to enhance its liquidity
      position;

    - Beliefs or assumptions about the outlook for deregulation of retail and
      wholesale energy markets in North America and Europe and anticipated
      business developments in such markets;

    - The Company's ability to effectively compete for market share with
      industry participants;

    - Beliefs about the outcome of legal and administrative proceedings,
      including matters involving Enron, the California power market,
      shareholder class action lawsuits and environmental matters as well as the
      investigations surrounding Project Alpha and CMS Energy trades,
      respectively;

                                       53
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

    - The expected commencement date for commercial operations for new power
      plants; and

    - Demand for broadband services and related applications and the Company's
      strategic plans in connection therewith, including the Company's ability
      to effectively execute DGC's business plan, meet forecasted revenues and
      manage functionality and operating costs of its network.

    Any or all of Dynegy's forward-looking statements may turn out to be wrong.
They can be affected by inaccurate assumptions or by known or unknown risks and
uncertainties, including the following:

    - The timing and extent of changes in commodity prices for energy,
      particularly natural gas, electricity and NGLs, or communications products
      or services;

    - The timing and extent of deregulation of energy markets in North America
      and Europe and the rules and regulations adopted on a transitional basis
      in such markets;

    - The condition of the capital markets generally, which will be affected by
      interest rates, foreign currency fluctuations and general economic
      conditions, and Dynegy's financial condition, including DHI's ability to
      maintain its investment grade credit ratings;

    - Developments in the California power markets, including, but not limited
      to, governmental intervention, deterioration in the financial condition of
      our counterparties, default on receivables due and adverse results in
      current or future litigation;

    - The effectiveness of Dynegy's risk-management policies and procedures and
      the ability of Dynegy's counterparties to satisfy their financial
      commitments;

    - The liquidity and competitiveness of wholesale trading markets for energy
      commodities, including the impact of electronic or online trading in these
      markets;

    - The direct or indirect effects on our business resulting from the
      financial difficulties of Enron, or other competitors of Dynegy,
      including, but not limited to, their effects on liquidity in the trading
      and power industry, and its effects on the capital markets views of the
      energy or trading industry and our ability to access the capital markets
      on the same favorable terms as in the past;

    - Operational factors affecting the start up or ongoing commercial
      operations of Dynegy's power generation or midstream natural gas
      facilities, including catastrophic weather related damage, unscheduled
      outages or repairs, unanticipated changes in fuel costs or availability of
      fuel emission credits, the unavailability of gas transportation, the
      unavailability of electric transmission service or workforce issues;

    - The cost of borrowing, availability of trade credit and other factor's
      affecting Dynegy's financing activities;

    - The direct or indirect effects on our business of a lowering of our credit
      rating (or actions we may take in response to changing credit ratings
      criteria), including, increased collateral requirements to execute our
      business plan, demands for increased collateral by our current
      counterparties, refusal by our current or potential counterparties to
      enter into transactions with us and our inability to obtain credit or
      capital in amounts or on terms favorable to us; and

    - Uncertainties regarding the development of, and competition within, the
      market for broadband services in North America and Europe, including risks
      relating to technologies and standards, regulation, capital costs, the
      timing and amount of customer demand for high bandwidth

                                       54
<Page>
                                  DYNEGY INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

     applications and the effect of global market conditions in the
      telecommunications business on customers and prospective customers and
      equipment and service providers;

    - Cost and other effects of legal and administrative proceedings,
      settlements, investigations and claims, including legal proceedings
      related to the terminated merger with Enron, the California power market,
      shareholder claims and environmental liabilities that may not be covered
      by indemnity or insurance, as well as the SEC and CFTC investigation
      surrounding Project Alpha and simultaneous buy and sell trades,
      respectively;

    - Other North American or European regulatory or legislative developments
      that affect the demand for energy generally, increase the environmental
      compliance cost for Dynegy's power generation or midstream gas facilities
      or impose liabilities on the owners of such facilities; and

    - General political conditions, including any extended period of war or
      conflict involving North America or Europe.

    Many of these factors will be important in determining Dynegy's actual
future results. Consequently, no forward-looking statement can be guaranteed.
Dynegy's actual future results may vary materially from those expressed or
implied in any forward-looking statements.

    All of Dynegy's forward-looking statements, whether written or oral, are
expressly qualified by these cautionary statements and any other cautionary
statements that may accompany such forward-looking statements. In addition,
Dynegy disclaims any obligation to update any forward-looking statements to
reflect events or circumstances after the date of this report.

                                       55
<Page>
                                  DYNEGY INC.
           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
             FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    The Quantitative and Qualitative Disclosures About Market Risk are set forth
in "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations" herein.

                                       56
<Page>
                                  DYNEGY INC.
                           PART II. OTHER INFORMATION

ITEM 1--LEGAL PROCEEDINGS

    See Note 10 to the accompanying financial statements for discussion of
material recent developments in the Company's material legal proceedings.

ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K

<Table>
      <C>                     <S>
       (a)  The following instruments and documents are included as exhibits to this Form
       10-Q:

                      *10.1   Natural Gas Purchase and Sale Agreement among Chevron U.S.A.
                              Inc., Texaco Exploration and Production Inc., Texaco Natural
                              Gas Inc. and Dynegy Marketing and Trade, effective as of
                              March 1, 2002.
                       10.2   Security Agreement among Chevron U.S.A. Inc., Texaco
                              Exploration and Production Inc., Texaco Natural Gas Inc. and
                              Dynegy Marketing and Trade, effective as March 1, 2002.
       (b)  Reports on Form 8-K of Dynegy Inc. for the first quarter of 2002.

                         1.   During the quarter ended March 31, 2002, the Company filed a
                              Current Report on Form 8-K dated January 3, 2002. Items 5
                              and 7 were reported and no financial statements were filed.
                         2.   During the quarter ended March 31, 2002, the Company filed a
                              Current Report on Form 8-K dated January 31, 2002. Items 5,
                              7 and 9 were reported and no financial statements were
                              filed.
                         3.   During the quarter ended March 31, 2002, the Company filed a
                              Current Report on Form 8-K dated March 15, 2002. Items 4 and
                              7 were reported and no financial statements were filed.
</Table>

------------------------

* Exhibit omits certain information that the Company has filed separately with
  the SEC in connection with a confidential request pursuant to Rule 24b-2
  promulgated under the Securities Exchange Act of 1934, as amended.

                                       57
<Page>
                                   SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

<Table>
<S>                                                    <C>  <C>
                                                       DYNEGY INC.

Date: May 15, 2002                                     By:             /s/ MICHAEL R. MOTT
                                                            -----------------------------------------
                                                                         Michael R. Mott,
                                                               SENIOR VICE PRESIDENT AND CONTROLLER
                                                              (DULY AUTHORIZED OFFICER AND PRINCIPAL
                                                                       ACCOUNTING OFFICER)
</Table>

                                       58