<PAGE>
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

(MARK ONE)

<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, 2001
                                       OR

<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            (IRS Employer
              of                      Identification No.)
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, 239,497,472 shares outstanding as of May 9, 2001; Class B common stock,
no par value per share, 86,499,914 shares outstanding as of May 9, 2001.

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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, 2001 and December 31, 2000..................      3
    Condensed Consolidated Statements of Operations:
      For the three months ended March 31, 2001 and 2000....      4
    Condensed Consolidated Statements of Cash Flows:
      For the three months ended March 31, 2001 and 2000....      5
    Notes to Condensed Consolidated Financial Statements....      6

    Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS...     17

    Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
            MARKET RISK.....................................     30

PART II. OTHER INFORMATION

    Item 1. Legal Proceedings...............................     31

    Item 4. Submission of Matters to a Vote of Security
    Holders.................................................     31

    Item 6. Exhibits and Reports on Form 8-K................     31
</TABLE>

                                       2
<PAGE>
                                  DYNEGY INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS

                  (UNAUDITED) (IN MILLIONS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                              MARCH 31,   DECEMBER 31,
                                                                2001          2000
                                                              ---------   ------------
<S>                                                           <C>         <C>
                                        ASSETS
CURRENT ASSETS
Cash and cash equivalents...................................   $   243      $    86
Accounts receivable, net....................................     4,545        5,036
Accounts receivable, affiliates.............................        55           49
Inventories.................................................        25          302
Assets from risk-management activities......................     4,016        4,437
Prepayments and other assets................................       159          240
                                                               -------      -------
    TOTAL CURRENT ASSETS....................................     9,043       10,150
                                                               -------      -------

PROPERTY, PLANT AND EQUIPMENT...............................     8,553        7,356
Accumulated depreciation....................................      (696)        (649)
                                                               -------      -------
    PROPERTY, PLANT AND EQUIPMENT, NET......................     7,857        6,707
                                                               -------      -------
OTHER ASSETS
Investments in unconsolidated affiliates....................       833          799
Assets from risk-management activities......................     1,696        1,527
Intangible assets, net of amortization......................     1,608        1,502
Other assets................................................       658          721
                                                               -------      -------
    TOTAL ASSETS............................................   $21,695      $21,406
                                                               =======      =======
                         LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................   $ 3,949      $ 4,777
Accounts payable, affiliates................................        35           46
Accrued liabilities and other...............................       490          628
Liabilities from risk-management activities.................     3,559        3,838
Notes payable and current portion of long-term debt.........       116          116
                                                               -------      -------
    TOTAL CURRENT LIABILITIES...............................     8,149        9,405

LONG-TERM DEBT..............................................     3,864        2,828

OTHER LIABILITIES
Transitional funding trust notes............................       581          605
Liabilities from risk-management activities.................     1,674        1,568
Deferred income taxes.......................................     1,496        1,426
Other long-term liabilities.................................       750          612
                                                               -------      -------
    TOTAL LIABILITIES.......................................    16,514       16,444
                                                               -------      -------

MINORITY INTEREST...........................................     1,025        1,018

SERIAL PREFERRED SECURITIES OF A SUBSIDIARY.................        46           46

COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY
  TRUST.....................................................       300          300

COMMITMENTS AND CONTINGENCIES (NOTE 7)

STOCKHOLDERS' EQUITY
Class A common stock, no par value, 900,000,000 and
  300,000,000 shares authorized at March 31, 2001 and
  December 31, 2000, respectively; 239,106,975 and
  237,390,802 shares issued and outstanding at March 31,
  2001 and December 31, 2000, respectively..................     2,214        2,190
Class B common stock, no par value, 360,000,000 and
  120,000,000 shares authorized at March 31, 2001 and
  December 31, 2000, respectively; 86,499,914 and 85,330,544
  shares issued and outstanding at March 31, 2001 and
  December 31, 2000, respectively...........................       801          760
Accumulated other comprehensive income (loss), net of tax...        18          (15)
Retained earnings...........................................       780          666
Treasury stock, at cost: 70,000 shares at March 31, 2001 and
  December 31, 2000.........................................        (3)          (3)
                                                               -------      -------
  TOTAL STOCKHOLDERS' EQUITY................................     3,810        3,598
                                                               -------      -------
  TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................   $21,695      $21,406
                                                               =======      =======
</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,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
Revenues....................................................  $14,168     $5,349
Cost of sales...............................................   13,691      4,966
                                                              -------     ------
  Operating margin..........................................      477        383

Depreciation and amortization...............................      107        111
General and administrative expenses.........................      115         90
                                                              -------     ------
  Operating income..........................................      255        182

Equity in earnings of unconsolidated affiliates.............       32         13
Other income................................................       53         57
Interest expense............................................      (62)       (74)
Other expenses..............................................      (63)       (55)
Minority interest in income of subsidiaries.................       (6)        (9)
                                                              -------     ------
Income before income taxes..................................      209        114
Income tax provision........................................       72         45
                                                              -------     ------
Income from operations......................................      137         69
Cumulative effect of change in accounting principle.........        2         --
                                                              -------     ------
NET INCOME..................................................  $   139     $   69
                                                              =======     ======
NET INCOME PER SHARE:
Net income..................................................  $   139     $   69
Less: preferred stock dividends.............................       --         (3)
                                                              -------     ------
Net income applicable to common stockholders................  $   139     $   66
                                                              =======     ======
Basic earnings per share....................................  $  0.43     $ 0.24
                                                              =======     ======
Diluted earnings per share..................................  $  0.41     $ 0.23
                                                              =======     ======
Basic shares outstanding....................................      324        278
                                                              =======     ======
Diluted shares outstanding..................................      338        292
                                                              =======     ======
</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,
                                                              ----------------------
                                                                2001          2000
                                                              --------      --------
<S>                                                           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................  $   139       $    69
Items not affecting cash flows from operating activities:
  Depreciation, amortization, impairment and abandonment....      104           113
  Equity in earnings of affiliates, net of cash
    distributions...........................................      (27)           (7)
  Risk-management activities................................      131           (76)
  Deferred income taxes.....................................       27            45
  Other.....................................................       10           (10)

Change in assets and liabilities resulting from operating
  activities:
  Accounts receivable.......................................      600           (26)
  Inventories...............................................      304           209
  Prepayments and other assets..............................      (43)           52
  Accounts payable..........................................     (858)         (152)
  Accrued liabilities.......................................     (120)          (18)
Other, net..................................................       --           (57)
                                                              -------       -------
Net cash provided by operating activities...................      267           142
                                                              -------       -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................   (1,133)         (227)
Investment in unconsolidated affiliates.....................      (13)           (8)
Business acquisitions, net of cash acquired.................      (20)       (1,111)
Proceeds from asset sales...................................       --           667
                                                              -------       -------
Net cash used in investing activities.......................   (1,166)         (679)
                                                              -------       -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings..........................      496           297
Repayments of long-term borrowings..........................       --           (94)
Net cash flow from commercial paper and money market lines
  of credit.................................................      545            65
Proceeds from sale of capital stock, options and warrants...       49           231
Dividends and other distributions, net......................      (34)           (5)
                                                              -------       -------
Net cash provided by financing activities...................    1,056           494
                                                              -------       -------
Net increase (decrease) in cash and cash equivalents........      157           (43)
Cash and cash equivalents, beginning of period..............       86            45
                                                              -------       -------
Cash and cash equivalents, end of period....................  $   243       $     2
                                                              =======       =======
</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, 2001 AND 2000

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, 2000, 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 year amounts in order to conform to current year
presentation.

NOTE 2--CHANGE IN ACCOUNTING PRINCIPLE

    The Financial Accounting Standards Board issued, and subsequently amended,
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which became
effective January 1, 2001. Provisions in 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 qualify as
hedges of future cash flows. For derivatives qualifying as hedges of future cash
flows, the effective portion of changes in fair value is recorded in equity
until the related hedged items impact earnings. Any ineffective portion of a
hedge is reported in earnings immediately.

    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 Company's Annual Report on Form 10-K for the year
ended December 31, 2000.

    The Company has recorded the impact of the adoption of Statement No. 133, as
amended, as a cumulative effect adjustment in the Company's consolidated results
in the quarter ended March 31, 2001. At January 1, 2001, the Company's financial
statements were adjusted to record a cumulative

                                       6
<PAGE>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

NOTE 2--CHANGE IN ACCOUNTING PRINCIPLE (CONTINUED)
effect of adopting this accounting change. The amounts recorded, which are
immaterial to net income for the quarter 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>

    Changes in stockholders' equity related to derivatives for the quarter ended
March 31, 2001 were as follows, net of taxes (in millions):

<TABLE>
<S>                                                           <C>
Transition adjustment as of January 1, 2001.................    $41
Current period declines in fair value, net..................     (6)
Reclassifications to earnings, net..........................     (3)
                                                                ---
Balance at March 31, 2001...................................    $32
                                                                ===
</TABLE>

    This $32 million balance is included within Accumulated Other Comprehensive
Income in Stockholders' Equity on the Condensed Consolidated Balance Sheet as
follows (in millions):

<TABLE>
<S>                                                           <C>
Statement No. 133, Net......................................    $32
Currency Translation Adjustment, Net........................     (8)
Unrealized Loss on Available-for-Sale Securities, Net.......     (6)
                                                                ---
Accumulated Other Comprehensive Income at March 31, 2001....    $18
                                                                ===
</TABLE>

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

    The Company enters into various derivative instruments related to its energy
convergence and midstream liquids businesses that qualify as cash flow hedges.
Such instruments 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. The Company also has two interest rate swaps which qualified
for cash flow hedge treatment at March 31, 2001. These swaps were entered into
to hedge the fluctuations in the benchmark interest rate on the anticipated
issuance of pass-through trust certificates (see Note 10).

    During the quarter ended March 31, 2001, there was no 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 during the first quarter
of 2001 in connection with forecasted transactions that were no longer
considered probable of occurring.

    The $32 million recorded in stockholders' equity at March 31, 2001 is
expected to be reclassified to future earnings, contemporaneously with the
related purchases of fuel, sales of liquids and maturity of

                                       7
<PAGE>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

NOTE 2--CHANGE IN ACCOUNTING PRINCIPLE (CONTINUED)
the pass-through trust certificates, as applicable to each type of hedge. Of
this amount, approximately $26 million, net of taxes, is estimated to be
reclassified into earnings over the 12-month period ended March 31, 2002. The
actual amounts that will be reclassified to earnings over the next 12 months
could vary materially from this estimated amount as a result of changes in
market conditions. The maximum length of time over which the Company is hedging
exposure is approximately four years, nine months, one month and 13 years for
the forward fuel requirements hedges, domestic midstream liquids hedges, global
liquids hedges and interest rate swaps, respectively.

NOTE 3--BUSINESS COMBINATIONS AND OTHER ACQUISITIONS

    In the first quarter of 2001, Dynegy completed its previously announced
acquisition of the Central Hudson power generation facilities in New York. The
Central Hudson facilities consist of a combination of base load, intermediate
and peaking facilities aggregating 1,700 megawatts ("MW"). The facilities are
located approximately 50 miles north of New York City and were acquired for
approximately $903 million cash, plus inventory and certain working capital
adjustments.

    Also in the first quarter of 2001, Dynegy completed its acquisition of iaxis
Limited, a London-based communications company.

NOTE 4--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. Differences
between basic and diluted shares outstanding in both quarters are attributed to
options outstanding. Common shares outstanding and the resulting computation of
basic and diluted earnings per share for the three months ended March 31, 2000
have been restated for the two-for-one stock split effected by means of a stock
dividend distributed on August 22, 2000.

NOTE 5--CAPITAL STOCK

    In the first quarter of 2001, Dynegy's shareholders approved an amendment to
its Articles of Incorporation, which increased the number of authorized shares
to 900 million for Class A and 360 million for Class B.

    Additionally, Chevron purchased an additional 1.2 million shares of Class B
Common Stock in the first quarter of 2001 pursuant to its shareholder agreement
with Dynegy.

NOTE 6--UNCONSOLIDATED AFFILIATES

    At March 31, 2001, the Company had cost basis investments in eSpeed; Altra
Energy Technologies, Inc.; Canenerco, Ltd.; Compton Petroleum Corporation;
Enertech Capital Partners II L.P.; Sagemaker, Inc.; Energy Infrastructure
Overseas, Ltd.; Media.Net Communications, Inc. and various limited partnerships.

                                       8
<PAGE>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

NOTE 6--UNCONSOLIDATED AFFILIATES (CONTINUED)
    Dynegy's investment in unconsolidated affiliates accounted for by the equity
method included: an approximate 23 percent interest in Venice Energy Services
Company, L.L.C.; a 38.75 percent partnership interest in Gulf Coast
Fractionators; a 39 percent partnership interest in West Texas LPG Pipeline,
Limited Partnership; interests ranging from 17.55 to 50 percent in various
entities, each formed to build (or buy), own and operate power generation
facilities, which includes West Coast Power LLC ("West Coast Power"), located in
the United States, Asia and South America; a 33.33 percent interest in Waskom
Gas Processing Company, a partnership that owns and operates a natural gas
processing, extraction and fractionation facility; a 50 percent interest in
NICOR Energy L.L.C., a retail energy alliance located in the Midwest; a
20 percent interest in SouthStar Energy Services L.L.C., a retail energy
alliance located in the Southeast; and a 29.19 percent interest in Canadian
Midstream Services, Ltd., a partnership that owns and operates a natural gas
processing facility.

    Summarized unaudited combined income statement information for the
unconsolidated affiliates accounted for by the equity method is presented in the
following table (in millions):

<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED MARCH 31,
                                                           -----------------------------------------
                                                                  2001                  2000
                                                           -------------------   -------------------
                                                                       EQUITY                EQUITY
                                                            TOTAL      SHARE      TOTAL      SHARE
                                                           --------   --------   --------   --------
<S>                                                        <C>        <C>        <C>        <C>
Revenues(1)..............................................    $956       $306       $815       $297
                                                             ====       ====       ====       ====
Operating margin(1)......................................    $118       $ 36       $130       $ 37
                                                             ====       ====       ====       ====
Net income(1)............................................    $ 91       $ 32       $ 49       $  7
                                                             ====       ====       ====       ====
</TABLE>

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

(1) The interim financial data for March 31, 2000 is exclusive of amounts
    attributable to the Company's investment in Accord Energy Limited ("Accord")
    as such information was unavailable. The Company sold its investment in
    Accord in the third quarter of 2000.

NOTE 7--COMMITMENTS AND CONTINGENCIES

    LEGAL PROCEEDINGS.  On August 3, 1998, Modesto Irrigation District ("MID")
filed a lawsuit against PG&E and Destec Energy, Inc. ("Destec") in federal court
for the Northern District of California, San Francisco division. The lawsuit
alleges violation of federal and state antitrust laws and breach of contract
against Destec. The allegations are related to a power sale and purchase
arrangement in the city of Pittsburg, California. MID seeks actual damages from
PG&E and Destec in amounts not less than $25 million. MID also seeks a trebling
of any portion of damages related to its antitrust claims. By order dated
February 2, 1999, the federal District Court dismissed MID's state and federal
antitrust claims against PG&E and Destec; however, the Court granted MID leave
of thirty days to amend its complaint to state an antitrust cause of action. On
March 3, 1999, MID filed an amended complaint recasting its federal and state
antitrust claims against PG&E and Destec and restated its breach of contract
claim against Destec. PG&E and Destec filed motions to dismiss MID's revised
federal and state antitrust claims and a hearing on the motions to dismiss was
held in July 1999. On August 20, 1999, the District Court again dismissed MID's
antitrust claims against PG&E and Destec, this time without leave to amend the
complaint. As a result of the dismissal of the antitrust claims, the District

                                       9
<PAGE>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

NOTE 7--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Court also dismissed the pendant state law claims. MID has appealed the District
Court's dismissal of its suit to the Ninth Circuit Court of Appeal. Oral
arguments before the Ninth Circuit occurred on March 15, 2001. Outside counsel
estimates that it could take as long as six months for the Ninth Circuit to
deliver its decision on the case. Although PG&E filed a Chapter 11 bankruptcy
proceeding on April 6, 2001, the automatic stay applicable in the proceeding
will be lifted to permit the Ninth Circuit to decide the pending appeal.

    Following dismissal of its federal court suit, MID filed suit in California
state court asserting breach of contract and tortuous interference with
prospective economic relations claims against Destec and tortuous interference
with contract and tortuous interference with prospective economic relations
claims against PG&E. Motions to dismiss MID's state court claims were heard by
the state court and by order dated April 6, 2000, MID was directed to amend its
complaint. MID filed its amended complaint on April 20, 2000, including Dynegy
as a defendant. Dynegy filed a motion to dismiss MID's amended complaint against
Dynegy, and the Court partially granted Dynegy's motion to dismiss while also
granting MID leave to amend its complaint. Before MID filed its amended
complaint, MID agreed with PG&E and Dynegy to execute a tolling agreement on all
claims and to dismiss the state court case until the federal appeal is decided.
After executing the tolling agreement, on October 23, 2000, MID filed in the
state court a Request for Dismissal, which the court granted on October 25,
2000. Dynegy believes the allegations made by MID are without merit and will
continue to vigorously defend MID's claims. In the opinion of management, the
amount of ultimate liability with respect to these actions will not have a
material adverse effect on the financial position or results of operations of
the Company.

    On November 3, 1999, the United States Environmental Protection Agency
("EPA") issued a Notice of Violation ("NOV") against Illinois Power Company
("IP") and, with the Department of Justice ("DOJ"), filed a complaint against IP
in the U.S. District Court for the Southern District of Illinois, No. 99C833.
Subsequently, the DOJ and EPA amended the NOV and complaint to include Illinova
Power Marketing, Inc. (now known as Dynegy Midwest Generation Inc. ("DMG")) (IP
and DMG collectively the "Defendants"). Similar notices and lawsuits have been
filed against a number of other utilities. Both the NOV and complaint allege
violations of the Clean Air Act and regulations thereunder. More specifically,
both allege, based on the same events, that certain equipment repairs,
replacements and maintenance activities at the Defendants' three Baldwin Station
generating units constituted "major modifications" under either or both the
Prevention of Significant Deterioration and the New Source Performance Standards
regulations. When non-exempt "major modifications" occur, the Clean Air Act and
related regulations generally require that generating facilities meet more
stringent emissions standards. The DOJ amended its complaint to assert the
claims found in the NOV. The Defendants filed an answer denying all claims and
asserting various specific defenses. By order dated April 19, 2000, a trial date
of November 2001 was set. The initial trial is limited to liability.

    The regulations under the Clean Air Act provide certain exemptions to the
definition of "major modifications," particularly an exemption for routine
repair, replacement or maintenance. The Company has analyzed each of the
activities covered by the EPA's allegations and believes each activity
represents prudent practice regularly performed throughout the utility industry
as necessary to maintain the operational efficiency and safety of equipment. As
such, the Company believes that each of these activities is covered by the
exemption for routine repair, replacement and maintenance and that the EPA is
changing, or attempting to change, through enforcement actions, the intent and
meaning of its

                                       10
<PAGE>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

NOTE 7--COMMITMENTS AND CONTINGENCIES (CONTINUED)
regulations. The Company also believes that, even if some of the activities in
question were found not to qualify for routine exemption, there were no
increases either in annual emissions or in the maximum hourly emissions
achievable at any of the units caused by any of the activities. The regulations
provide an exemption for increased hours of operations or production rate and
for increases in emissions resulting from demand growth. Although none of the
Defendants' other facilities are covered in the complaint and NOV, the EPA has
officially requested information concerning activities at the Defendants'
Vermilion, Wood River and Hennepin Plants. It is possible that the EPA will
eventually commence enforcement actions against those plants as well. The
asset(s) subject to the complaint are part of the consolidated assets of Dynegy.

    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 also
will be seeking installation of the "best available control technology" (or the
equivalent) at the Baldwin Station and possibly at the other three plants.

    The parties are engaged in discovery, and numerous discovery-related
disputes have arisen. The United States Magistrate heard arguments on a number
of the discovery disputes in December 2000 and issued orders favorable to the
Defendants on most of the disputed issues. Notwithstanding the favorable order,
discovery disputes continue to arise.

    Two utilities, Virginia Power and Cinergy, reached settlements with the
United States in 2000. The settlements call for the utilities to pay civil
fines; fund various environmental projects; reduce nitrogen oxides, sulfur
oxides, particulate matter and mercury emissions through the installation of
pollution control devices over a period extending from 2012 through 2013, and
forfeit certain emission credits.

    The Company believes the allegations are without merit and will vigorously
defend this claim. In the opinion of management, the amount of ultimate
liability with respect to this action will not have a material adverse effect on
the financial position or results of operations of the Company.

    The following five class action lawsuits have been filed against various
Dynegy entities, including Dynegy Inc. and Dynegy Power Marketing Inc.:

    1.  Gordon v. Reliant Energy Inc., et al. was filed on November 27, 2000 in
       San Diego Superior Court. The defendants subsequently removed the case to
       United States District Court for the Southern District of California. The
       named plaintiffs have filed a motion to remand the case to the state
       court. Plaintiffs' motion is awaiting a hearing.

    2.  Hendricks v. Dynegy Power Marketing Inc., et al. was filed on
       November 29, 2000 in San Diego Superior Court. The defendants
       subsequently removed the case to the United States District Court for the
       Southern District of California. The named plaintiffs have filed a motion
       to remand the case to the state court. Plaintiffs' motion is awaiting a
       hearing.

    3.  People of the State of California v. Dynegy Power Marketing Inc., et al.
       was filed on January 18, 2001 in San Francisco Superior Court. The
       defendants subsequently removed the case to the United States District
       Court for the Northern District of California. The named plaintiffs have
       filed a motion to remand the case to the state court. Plaintiffs' motion
       is awaiting a hearing.

                                       11
<PAGE>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

NOTE 7--COMMITMENTS AND CONTINGENCIES (CONTINUED)
    4.  Pier 23 Restaurant v. PG& E Energy Trading, et al. was filed on
       January 24, 2001 in San Francisco Superior Court. The defendants
       subsequently removed the case to the United States District Court for the
       Northern District of California. The named plaintiffs have filed a motion
       to remand the case to the state court. Plaintiffs' motion is awaiting a
       hearing.

    5.  Sweetwater Authority et al. v. Dynegy Inc., et al. was filed on
       January 16, 2001 in San Diego Superior Court. The defendants subsequently
       removed the case to the United States District Court for the Southern
       District of California. The named plaintiffs have filed a motion to
       remand the case to the state court. Plaintiffs' motion is awaiting a
       hearing.

    The five class action lawsuits are based on the events occurring in the
California power market during the summer of 2000. The complaints allege
violations of California's Business and Professions Code, Unfair Trade Practices
Act and various other statutes. Specifically, the named 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.

    The five lawsuits are at preliminary stages. Defendants have yet to file
answers and, as noted above, the suits have been removed to federal court. The
named plaintiffs have filed motions to remand the cases back to California state
court. The California federal judges originally assigned to the lawsuits have
recused themselves on the basis that they and their families have an economic
stake in the litigation. Visiting federal judges, that is federal judges from
states other than California, will be assigned to the lawsuits. The defendants
have invoked federal multi-district litigation procedures and it is possible
that the multi-district panel, comprised of federal judges, will decide certain
preliminary issues, including the motions to remand. The defendants in the five
lawsuits have formed various joint defense groups in an effort to coordinate the
defense of the claims and to share certain costs of defense. The Company
believes the allegations are without merit and will vigorously defend these
claims. In the opinion of management, the amount of ultimate liability with
respect to these actions will not have a material adverse effect on the
financial position or results of operations of the Company.

    A sixth lawsuit has been filed against various Dynegy entities, including
Dynegy Inc. and Dynegy Marketing and Trade, as well as against three corporate
officers individually.

    Bustamante v. Dynegy Inc. et al. was filed on May 2, 2001 in Los Angeles
Superior Court. The suit was filed on behalf of California taxpayers by
Lieutenant Governor Cruz Bustamante and Assembly Woman Barbara Matthews, both
acting in their capacity as taxpayers and not in their capacity as elected
officials. The allegations in this suit are similar to those in the other five
suits, with the exception that the Bustamante suit includes a claim of unfair
business practices based on "price gouging" during an emergency declared by
Governor Davis. The defendants are in the process of removing the suit to the
United States District Court for the Central District of California.

    In addition, in response to the filing of a number of complaints challenging
the level of wholesale prices, the Federal Energy Regulatory Commission ("FERC")
initiated a staff investigation and issued an order on December 15, 2000
implementing a series of wholesale market reforms, including an interim price
review procedure for prices above a $150/MW hour "breakpoint" on sales to the

                                       12
<PAGE>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

NOTE 7--COMMITMENTS AND CONTINGENCIES (CONTINUED)
California Independent System Operator (the "ISO") and through the California
Power Exchange (the "PX"). The order does not prohibit sales above the
"breakpoint," but the seller is subject to weekly reporting and monitoring
requirements. For each reported transaction, potential refund liability extends
for a period of 60 days following the date any such transaction is reported to
the FERC. On March 9, 2001, the FERC issued a further order establishing a proxy
market clearing price of $273/MW hour for January 2001, and on March 16, 2001
the FERC issued a further order adjusting the proxy market clearing price to
$430/MW hour for February 2001. On April 16, 2001, the FERC issued a further
order adjusting the proxy market clearing price to $300/MW hour for March 2001.

    In the FERC's March 9, March 16 and April 16 orders, the FERC indicated that
approximately $46 million charged by Dynegy Power Marketing Inc. (as scheduling
coordinator for West Coast Power) in January through March 2001 in California to
the ISO and the PX were subject to possible refunds. Because the Company
believes that there is cost or other justification for prices charged above the
proxy market clearing prices established in the orders, it has notified the FERC
of its desire to challenge the refund amounts identified in such orders. Any
refunds the Company may ultimately be obligated to pay are to be credited
against unpaid amounts owed for sales in the PX or to the ISO. Sales between
October 2, 2000 and December 31, 2000 remain subject to refund under the FERC's
December 15 order. The December 15 order also eliminated the requirement that
California's public utilities sell all of their generation into and purchase all
of their power from the PX and directed that the PX wholesale tariffs be
terminated effective April 2001. Motions for rehearing have been filed on a
number of issues related to the December 15 order and such motions are still
pending before the FERC.

    In addition to the FERC investigation discussed above, several state and
other federal regulatory investigations and complaints have commenced in
connection with the wholesale electricity prices in California and other
neighboring Western states to determine the causes of the high prices and
potentially to recommend remedial action. In California, the California Public
Utilities Commission, the California Electricity Oversight Board, the California
Bureau of State Audits and the California Office of the Attorney General all
have separate ongoing investigations into the high prices and their causes. With
the exception of a report by the California Bureau of State Audits, none of
these investigations have been completed and no findings have been made in
connection with any of them. The recently released California state audit report
concluded that the foremost cause of the market disruptions in California was
fundamental flaws in the structure of the power market.

    Management has closely monitored developments in California in an effort to
manage Dynegy's credit risk in these markets. The Company has recorded reserves
for probable losses incurred based on market conditions. Although such reserves
may change over time as the market uncertainties are resolved, management
believes such changes will not ultimately be material to the Company's
consolidated financial position or results of operations.

    The Company is subject to various other legal proceedings and claims that
arise in the normal course of business. Further, the Company has assumed
liability for various claims, assessments and litigation in connection with some
of its strategic acquisitions. In the opinion of management, the amount of
ultimate liability with respect to these actions will not have a material
adverse effect on the financial position or results of operations of the
Company.

                                       13
<PAGE>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

NOTE 8--REGULATORY ISSUES

    GENERAL.  The Company is subject to regulation by various federal, state,
local and foreign agencies. These rules and regulations affect the industry as a
whole; therefore, the Company does not believe that it is affected in a manner
significantly different from its competitors.

    ILLINOIS POWER COMPANY.  IP is an electric utility as defined in the Public
Utility Holding Company Act of 1935 ("PUHCA"). Its direct parent company,
Illinova Corporation ("Illinova"), and Dynegy are holding companies as defined
in PUHCA. However, Illinova and Dynegy generally are each exempt from regulation
under section 3(a)(1) of PUHCA. They remain subject to regulation under PUHCA
with respect to the acquisition of certain voting securities of other domestic
public utility companies and utility holding companies.

    In recent years, several bills have been introduced in Congress that would
repeal PUHCA. Repeal or significant modification to PUHCA could affect the
Company and the electric utility industry generally. The Company cannot predict
the outcome of the repeal efforts or the outlook for additional legislation
during the remainder of 2001.

    IP also is subject to regulation by the Federal Power Act ("FPA") and the
FERC as to transmission rates and certain other matters. The FERC has declared
IP exempt from the Natural Gas Act of 1938 and related FERC orders, rules and
regulations.

    IP is further subject to regulation by the State of Illinois and the
Illinois Commerce Commission (the "ICC"). The Illinois Public Utilities Act was
significantly modified in December 1997 by the Electric Service Customer Choice
and Rate Relief Law of 1997, or P.A. 90-561, but the ICC still has broad powers
of supervision and regulation with respect to IP's rates and charges and various
other matters. Under P.A. 90-561, IP must continue to provide bundled retail
electric services to all who choose to continue to take service at tariff rates
and must provide unbundled electric distribution services to all eligible
customers as defined by P.A. 90-561 at rates determined by the ICC.

    Among other things, P.A. 90-561 also required IP to participate in an
independent system operator. To that end, in January 1998, IP, in conjunction
with eight other transmission-owning entities, filed with the FERC for all
approvals necessary to create and to implement the Midwest Independent
Transmission System Operator, Inc. ("MISO"). On September 20, 2000, IP announced
its intention to withdraw its participation in the MISO and to become a member
of the Alliance Regional Transmission Organization ("Alliance RTO"), pending
necessary regulatory approval. On October 13, 2000, IP filed a notice of its
intent to withdraw from the MISO with FERC. On February 23, 2001, IP reached a
settlement in principle with all parties that allows it to withdraw from the
MISO and join the Alliance RTO, effective upon the FERC's approval of the
settlement, which occurred May 8, 2001. IP has accrued an adequate amount to
cover it share of the settlement obligation.

NOTE 9--SEGMENT INFORMATION

    Dynegy's operations are divided into four reportable segments: Dynegy
Marketing and Trade ("DMT"), Dynegy Midstream Services ("DMS"), Transmission and
Distribution and Dynegy Global Communications ("DGC"). DMT focuses on energy
convergence, including the marketing and trading and arbitrage opportunities
that exist among power, natural gas, weather derivatives and coal that can be
enhanced by the control and optimization of related physical assets. DMS
consists of the Company's North American gathering and processing and midstream
liquids operations, as well as the international

                                       14
<PAGE>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

NOTE 9--SEGMENT INFORMATION (CONTINUED)
liquefied petroleum gas transportation and natural gas liquids ("NGL") marketing
operations located in Houston and London. Dynegy's Transmission and Distribution
segment consists of the operations of IP. DGC is engaged in pursuing and
capturing opportunities in the converging energy and communications marketplace.
Dynegy Energy Services, previously reported as a separate segment in the first
quarter of 2000, is now included with DMT. Generally, Dynegy accounts for
intercompany transactions at prevailing market rates. Operating segment
information for the quarters ended March 31, 2001 and 2000 is presented below.

           DYNEGY'S SEGMENT DATA FOR THE QUARTER ENDED MARCH 31, 2001
                                ($ in millions)

<TABLE>
<CAPTION>
                                                                              TRANSMISSION
                                                                                  AND
                                                          DMT        DMS      DISTRIBUTION     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)          --
                                                        -------     ------       ------        ----         -----      -------
                                                             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)................................      (34)        (5)          23           6            --          (10)
Equity earnings, net..................................       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 investment in unconsolidated
  affiliates..........................................   (1,084)       (33)         (27)         (2)           --       (1,146)
</TABLE>

                                       15
<PAGE>
                                  DYNEGY INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

NOTE 9--SEGMENT INFORMATION (CONTINUED)
           DYNEGY'S SEGMENT DATA FOR THE QUARTER ENDED MARCH 31, 2000
                                ($ in millions)

<TABLE>
<CAPTION>
                                                                        TRANSMISSION
                                                                            AND
                                                    DMT        DMS      DISTRIBUTION      DGC       ELIMINATIONS    TOTAL
                                                  --------   --------   ------------   ----------   ------------   --------
<S>                                               <C>        <C>        <C>            <C>          <C>            <C>
Unaffiliated revenues:
  Domestic......................................   $2,715     $1,264       $  382      $      --        $ --       $ 4,361
  Canadian......................................      373        184           --             --          --           557
  European and other............................      431         --           --             --          --           431
                                                   ------     ------       ------      ----------       ----       -------
                                                    3,519      1,448          382             --          --         5,349
                                                   ------     ------       ------      ----------       ----       -------

Intersegment revenues:
  Domestic......................................       33         52            4             --         (89)           --
                                                   ------     ------       ------      ----------       ----       -------
                                                       33         52            4             --         (89)           --
                                                   ------     ------       ------      ----------       ----       -------
    Total revenues..............................    3,552      1,500          386             --         (89)        5,349
                                                   ------     ------       ------      ----------       ----       -------
Operating margin................................      197         74          112             --          --           383
Depreciation and amortization...................      (28)       (45)         (38)            --          --          (111)
Interest expense................................      (33)        (6)         (35)            --          --           (74)
Other income (expense)..........................       43        (34)          (7)            --          --             2
Equity earnings, net............................        7          6           --             --          --            13
Income tax (provision) benefit..................      (52)        11           (4)            --          --           (45)
Net income (loss)...............................   $   77     $  (11)      $    3      $      --        $ --       $    69
Identifiable assets:
  Domestic......................................   $6,847     $1,897       $3,412      $      --        $ --       $12,156
  Canadian......................................      318        121           --             --          --           439
  European and other............................      447         --           --             --          --           447

Investment in unconsolidated affiliates.........      515        174           --             --          --           689
Capital expenditures and investment in
  unconsolidated affiliates.....................     (174)       (17)         (44)            --          --          (235)
</TABLE>

NOTE 10--SUBSEQUENT EVENTS

    Dynegy Holdings Inc. ("Holdings"), a wholly owned subsidiary of Dynegy,
completed a $920 million leveraged lease transaction in May of 2001. The
leveraged lease transaction relates to the previously announced acquisition of
1,700 MW of Central Hudson power generation facilities in the Northeast. The
transaction included a private offering of approximately $800 million aggregate
principal amount of nine- and 15-year debt securities and an equity investment
by a third party in the amount of approximately $120 million. The debt
securities are pass-through trust certificates issued by two pass-through
trusts. Rent payable by two Holdings subsidiaries in the leveraged lease
transaction will be the source of payment on the certificates. Holdings, which
will guarantee the subsidiaries' obligations under the leveraged lease
transaction, will use the proceeds to repay commercial paper and for general
corporate purposes.

                                       16
<PAGE>
                                  DYNEGY INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

    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
on Form 10-K for the year ended December 31, 2000.

                                    GENERAL

    COMPANY PROFILE.  Dynegy is a leading provider of energy and communications
solutions to customers in North America, the United Kingdom and Continental
Europe. The Company's expertise extends across the entire convergence value
chain, from broadband, power generation and wholesale and direct commercial and
industrial marketing and trading of power, natural gas, coal, emission
allowances, and weather derivatives to transportation, gathering and processing
of natural gas liquids ("NGLs"). The Company also is involved in the
transmission and distribution of electricity and natural gas and provides retail
service to electric and natural gas consumers.

    BUSINESS SEGMENTS.  Dynegy's operations are reported in four segments:
Dynegy Marketing and Trade ("DMT"), Dynegy Midstream Services ("DMS"),
Transmission and Distribution and Dynegy Global Communications ("DGC"). DMT is
actively engaged in value creation through marketing and trading of natural gas,
power, coal and emission allowances and the generation of electricity. DMS
consists of the Company's North American gathering and processing and midstream
liquids operations, global liquefied petroleum gas transportation and NGL
marketing operations. Dynegy's Transmission and Distribution segment includes
the operations of Illinois Power Company ("IP"), a natural gas and electric
utility in Illinois. DGC was formed subsequent to the acquisition of
Extant, Inc. on September 29, 2000. DGC will continue to pursue other
communications opportunities, such as the recently completed acquisition of
iaxis Limited ("iaxis"), a London-based communications company, as it seeks to
develop a worldwide bandwidth marketing and trading operation. Dynegy Energy
Services, previously reported as a separate segment in the quarter ended
March 31, 2000, is now included with DMT.

                        LIQUIDITY AND CAPITAL RESOURCES

    The Company's business strategy has historically focused on acquisitions or
construction of core operating facilities in order to capture significant
synergies existing among these types of assets and Dynegy's natural gas, power
and NGL marketing businesses. The Company's energy convergence strategies are
focused on marketing, trading and arbitrage opportunities involving natural gas
and power, centered around the control and optimization of Btu conversion
capacity within the wholesale gas and power businesses (a.k.a., "Merchant
Leverage Effect"). For the foreseeable future, the Company's primary capital
expenditure focus will be the acquisition and/or construction of merchant power
generating assets that will enable the Company to fully realize the Merchant
Leverage Effect of commercialization of these generating assets. The Company
also anticipates future capital expenditures associated with the worldwide
development and implementation of network and connectivity solutions relating to
its bandwidth communications strategy in the converging energy and
communications marketplace.

    Dynegy has historically relied upon operating cash flow and borrowings from
a combination of commercial paper issuances, money market lines of credit,
corporate credit agreements and various public debt and equity issuances for its
liquidity and capital resource requirements. At March 31, 2001, the Company's
various credit agreements totaled $1.96 billion. Of this credit capacity,
$300 million,

                                       17
<PAGE>
                                  DYNEGY INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

$1.36 billion and $300 million was authorized for use by Dynegy, Dynegy
Holdings Inc. ("Holdings") and IP, respectively. After consideration of
outstanding commercial paper and letters of credit, the unused borrowing
capacity under the credit agreements at March 31, 2001 approximated
$300 million, $697 million and $25 million for Dynegy, Holdings and IP,
respectively. Management believes additional financing arrangements can be
obtained at reasonable terms, if necessary.

                                 OTHER MATTERS

    RECENT ACQUISITIONS.  In the first quarter of 2001, Dynegy completed its
previously announced acquisition of the Central Hudson power generation
facilities in New York. The Central Hudson facilities consist of a combination
of base load, intermediate and peaking facilities aggregating 1,700 megawatts
("MW"). The facilities are located approximately 50 miles north of New York City
and were acquired for approximately $903 million cash, plus inventory and
certain working capital adjustments.

    Also in the first quarter of 2001, Dynegy completed its acquisition of
iaxis.

    PENDING ACQUISITION.  Dynegy and NRG Energy, Inc. have executed an agreement
to purchase 1,330 MW of power generation facilities from Sierra Pacific
Resources, including the 740 MW gas-fired Clark Generating Station and 590 MW of
the 605 MW coal-fired Reid Gardner Generating Station. These facilities
currently serve the Las Vegas, Nevada market. The asset purchase price is
$634 million, subject to adjustments.

    Closing of this transaction is subject to approval by various state and
federal regulatory bodies, which primarily include the Public Utilities
Commission of Nevada, the United States Department of Justice Antitrust Division
and the FERC, and customary closing conditions, such as no regulation or
legislation prohibiting the consummation of the sale. In April 2001, in response
to the power impasse in the western United States, the Nevada legislature passed
a law postponing all divestitures of utility generation assets until after
July 1, 2003, which is beyond the expiration of the purchase agreement. Given
the passage of this legislation, there is a very low probability that the
purchase will be consummated.

    COMMITMENTS AND CONTINGENCIES.  See Part I, Item 1, Condensed Consolidated
Financial Statements, Note 7, which is incorporated herein by reference, for a
discussion of the Company's Commitments and Contingencies.

    CALIFORNIA MARKET.  Since the fourth quarter of 2000, the power and natural
gas markets in California have experienced substantial volatility driven by a
fundamental imbalance in supply and demand and the retail electricity price caps
imposed on the state's two largest utilities. As a result of these market
conditions, both Pacific Gas & Electric Company ("PG&E") and Southern California
Edison Company ("SCE") have defaulted on payments to the California Independent
System Operator (the "ISO") and the California Power Exchange (the "PX") as well
as to other creditors. As a result, the ISO and PX have defaulted on certain
payments to power generators. In addition, natural gas available to the state
has been in tight supply which has caused historic highs in the basis
differential between California and other markets.

    Many events related to the California situation have occurred in recent
weeks. The most significant of these events include: (a) a Chapter 11 bankruptcy
filing by PG&E; (b) Dynegy's inclusion on PG&E's creditor committee;
(c) separate rulings by the Ninth Circuit Court of Appeals and the FERC

                                       18
<PAGE>
                                  DYNEGY INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

acknowledging that generators in California are not required to sell to
noncreditworthy counterparties; (d) a proposal by the FERC related to the
establishment of price caps during periods of real-time emergencies in
California; (e) the FERC's decision to investigate gas supply issues in the
region; and (f) FERC orders directing electricity suppliers to either refund a
portion of first quarter 2001 sales revenue or justify their prices above
approved pricing amounts. In addition, Dynegy and/or certain of its officers
have been named in various lawsuits associated with the California situation,
which are more fully discussed in Note 7 to the Condensed Consolidated Financial
Statements.

    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 as a wholesale
marketer and trader of gas and power. Through Dynegy's interest in West Coast
Power, Dynegy has exposure to the ISO and PX, which primarily rely on receipts
from California utilities to pay their bills. West Coast Power also sells
directly to the California Department of Water Resources ("DWR") and pursuant to
other bilateral agreements. The delay in payments to West Coast Power has
resulted in a covenant default under West Coast Power's bank credit facility.
The West Coast Power bank facility is nonrecourse to Dynegy. West Coast Power
has entered into a forbearance agreement with its lenders in connection with the
covenant default. The covenant default by West Coast Power does not adversely
impact any other credit facilities or borrowing obligations of Dynegy or its
subsidiaries.

    West Coast Power's generation facilities primarily are intended to operate
as peaking units. Because of the power shortage in California, these units have
been running with much greater frequency and for longer durations than is
typically the case. As the summer cooling season approaches, management must
monitor the maintenance needs of the West Coast Power facilities, as well as the
availability of emission credits which are required to operate the facilities.

    In addition to indirect sales to California transacted through West Coast
Power, Dynegy makes direct sales to customers in California. 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.

    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 the recent Ninth Circuit Court of
Appeals and FERC decisions regarding counterparty choice for generators as well
as 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 that the prospect of increased exposure of West Coast Power to the ISO or
PX or for refunds has been largely mitigated. At April 30, 2001, Dynegy's
portion of the receivables owed to West Coast Power by the ISO and PX was
approximately $313 million. Management is continually assessing Dynegy's
exposure relative to its California receivables and has established reserves to
reflect market uncertainties. The Company closely monitors developments in
California in an effort to manage its credit risk in these markets.

    DIVIDEND POLICY.  In 2001, Dynegy intends to pay an annual dividend of $0.30
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, 2001 and 2000, the Company paid
approximately $25 million and $10 million in cash dividends and distributions,
respectively, on common and preferred stock.

                                       19
<PAGE>
                                  DYNEGY INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

    Dynegy had no preferred stock outstanding during the first quarter 2001.

    CONCLUSION.  The Company believes it will meet all foreseeable cash
requirements, including working capital, capital expenditures and debt service,
from operating cash flow, supplemented by borrowings under its various credit
facilities and equity or debt sales, if required.

                             RESULTS OF OPERATIONS

    Provided below is 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, 2001 and 2000, respectively.

THREE-MONTH PERIODS ENDED MARCH 31, 2001 AND 2000

    For the first quarter of 2001, Dynegy's net income was $139 million, or
$0.41 per diluted share, compared with first quarter 2000 net income of
$69 million, or $0.23 per diluted share. Recurring net income was $137 million,
or $0.41 per diluted share, compared to $79 million, or $0.26 per diluted share,
for each quarter, respectively. The first quarter 2001 recurring net income
excludes the $2 million cumulative effect of change in accounting principle
recorded in connection with the Company's adoption of Statement No. 133, while
the first quarter 2000 recurring net income excludes a nonrecurring after-tax
gain on the sale of certain qualifying generation facilities of $34 million and
after-tax charges aggregating $44 million related to the sale and impairment of
certain assets and certain merger-related charges. First quarter 2001 results
were led by a strong performance in energy convergence operations, particularly
in U.S. power and natural gas. The quarter benefited from nationwide volatility
in both the power and natural gas markets, enabling Dynegy to leverage its
diverse asset portfolio with strong marketing, structured origination activity
and term sales. Additionally, Dynegy was able to capture opportunities generated
by a return to seasonal winter weather and the supply and demand imbalances that
are impacting multiple energy commodities.

    Consolidated operating margin for the first quarter of 2001 totaled
$477 million compared to $383 million for the same 2000 period primarily
reflecting improved margins in DMT. DMT contributed $281 million to first
quarter 2001 consolidated operating margin compared to $197 million reported in
the first quarter of 2000, an increase of 43 percent. DMS contributed
$87 million to first quarter 2001 consolidated operating margin compared to
$74 million reported in the first quarter of 2000. After eliminating the effect
of nonstrategic upstream asset sales, DMS' operating margin increased
32 percent period-over-period. Transmission and Distribution contributed
$108 million to first quarter 2001 consolidated operating margin compared to
$112 million reported in the first quarter of 2000. DGC had a financial
contribution of $1 million in the first quarter of 2001.

    Operating income increased $73 million quarter-to-quarter, reflecting the
significantly higher operating results from the energy convergence businesses.
Improved operating results were partially offset by higher general and
administrative expenses, reflecting the impact of incremental costs associated
with a larger, more diverse base of operations.

    Incremental to Dynegy's consolidated results was the Company's equity share
in the earnings of its unconsolidated affiliates, which contributed
approximately $32 million and $13 million to pre-tax quarterly earnings in the
2001 and 2000 periods, respectively. Variances period-to-period in these

                                       20
<PAGE>
                                  DYNEGY INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

results reflect the impact of weather-driven demand and changes in commodity
prices, particularly as these changes impacted DMT investments.

    Interest expense totaled $62 million for the quarter ended March 31, 2001,
compared to $74 million for the equivalent 2000 period. The variance is
attributable to lower interest rates on variable-rate borrowings and lower
average principal balances in the 2001 period compared to the 2000 period.

    Other income and expenses, net totaled $10 million in expense in the quarter
ended March 31, 2001 compared with income of $2 million in the 2000 period. The
increase in other expense in 2001 includes an increase in minority interests in
consolidated subsidiaries partially offset by an insurance settlement and a gain
on the sale of certain Canadian assets. The 2000 quarter included a pre-tax gain
on the sale of certain qualifying generation facilities of $52 million and
pre-tax charges of $43 million related to the sale of certain NGL assets and
merger-related costs. The remaining amounts consisted of immaterial other income
and expense items.

    The Company reported an income tax provision of $72 million for the quarter
ended March 31, 2001, compared to an income tax provision of $45 million for the
2000 period. The effective rates approximated 34 and 39 percent in 2001 and
2000, respectively. In general, the difference from the aforementioned 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, the effect of certain foreign equity investments and state income
taxes.

                                       21
<PAGE>
                                  DYNEGY INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

                           DYNEGY MARKETING AND TRADE

<TABLE>
<CAPTION>
                                                                 THREE MONTHS
                                                                ENDED MARCH 31,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
                                                                ($ IN MILLIONS)
<S>                                                           <C>        <C>
Operating Margin............................................  $   281     $  197
Equity Investments..........................................       31          7
                                                              -------     ------
    SUBTOTAL--FINANCIAL CONTRIBUTION........................      312        204

Depreciation and Amortization...............................      (43)       (28)
General and Administrative Expenses.........................      (63)       (54)
Other Items.................................................      (34)        43
                                                              -------     ------
    EARNINGS BEFORE INTEREST AND TAXES......................      172        165
Interest Expense............................................      (21)       (36)
                                                              -------     ------
    PRE-TAX EARNINGS........................................      151        129
Income Tax Provision........................................      (51)       (52)
                                                              -------     ------
    INCOME FROM OPERATIONS..................................      100         77
Cumulative Effect of Change in Accounting Principle.........        2         --
                                                              -------     ------
    NET INCOME..............................................  $   102     $   77
                                                              =======     ======
    RECURRING NET INCOME(1).................................  $   100     $   50
                                                              =======     ======

OPERATING STATISTICS:
  Natural Gas Marketing (Bcf/d):
    Domestic Sales Volumes..................................      8.4        7.3
    Canadian Sales Volumes..................................      2.3        2.3
    European Sales Volumes..................................      0.7        2.0
                                                              -------     ------
                                                                 11.4       11.6
                                                              =======     ======
  Power Produced and Sold:
    Million MW Hours Generated--Gross.......................     10.3        7.5

    Million MW Hours Generated--Net.........................      8.9        6.8
    Million MW Hours Sold...................................     17.2       15.1
                                                              -------     ------
      Total Produced and Sold...............................     26.1       21.9
                                                              =======     ======
  Average On-Peak Market Power Prices:
    Cinergy.................................................  $ 42.31     $24.56
    TVA.....................................................    42.79      24.78
    PJM.....................................................    44.29      28.41
    CALPX SP 15.............................................   224.24      32.79
</TABLE>

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

(1) Recurring net income consists of segment reported net income adjusted for
    identified nonrecurring items more fully described below.

                                       22
<PAGE>
                                  DYNEGY INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

THREE-MONTH PERIODS ENDED MARCH 31, 2001 AND 2000

    DMT reported recurring segment net income of $100 million for the
three-month period ended March 31, 2001, compared with recurring net income of
$50 million in the 2000 quarter. The 2001 quarter recurring net income excludes
the cumulative effect of a change in accounting principle as described above.
The 2000 quarter recurring net income excludes a nonrecurring after-tax gain of
$34 million relating to the sale of certain qualifying facilities and an
after-tax charge of $7 million related to merger costs. Recurring results of
operations period-to-period were influenced by the following:

    - A return to seasonal winter weather across the U.S. and strong supply and
      demand fundamentals provided opportunities for greater asset utilization,
      higher price realization, and increased customer origination and
      risk-management activities;

    - Increased origination activity by the European operations; and

    - Lower interest expense due to favorable debt principal movements in
      variable-rate debt; partially offset by

    - Increased other expense, net resulting partially from increased minority
      interest in consolidated subsidiaries;

    - Increased depreciation and amortization expenses reflecting continued
      expansion of the Company's asset base; and

    - Increased general and administrative expenses reflecting the impact of
      higher variable compensation costs and increased capital and overhead
      costs required to support a larger, more diverse base of operations.

    Total MW hours produced and sold during the first quarter of 2001 aggregated
26.1 million MW hours compared to 21.9 million MW hours during the 2000 period.
The increase is a result of the addition of nearly 1,100 MW of new generation
that began commercial operation during the latter half of 2000, the acquisition
of 1,700 MW in the Northeast in the first quarter of 2001 and greater merchant
sales opportunities captured throughout Dynegy's national generation fleet.

    Total natural gas volumes sold in North America in the first quarter of 2001
increased to 10.7 billion cubic feet per day from 9.6 billion cubic feet per day
during last year's first quarter. This increase is principally a result of
increased demand from a return to seasonal winter weather, increased gas-fired
generation, growing market share by Dynegy's retail alliances and incremental
sales volumes on DynegyDIRECT, the Company's electronic commerce portal, which
was launched late in 2000.

                                       23
<PAGE>
                                  DYNEGY INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

                           DYNEGY MIDSTREAM SERVICES

<TABLE>
<CAPTION>
                                                                 THREE MONTHS
                                                                ENDED MARCH 31,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
                                                                ($ IN MILLIONS)
<S>                                                           <C>        <C>
Operating Margin............................................   $   87     $   74
Equity Investments..........................................        1          6
                                                               ------     ------
      SUBTOTAL--FINANCIAL CONTRIBUTION......................       88         80

Depreciation and Amortization...............................      (19)       (45)
General and Administrative Expenses.........................      (15)       (16)
Other Items.................................................       (5)       (34)
                                                               ------     ------
      EARNINGS (LOSS) BEFORE INTEREST AND TAXES.............       49        (15)
Interest Expense............................................      (14)        (7)
                                                               ------     ------
      PRE-TAX EARNINGS (LOSS)...............................       35        (22)
Income Tax (Provision) Benefit..............................      (12)        11
                                                               ------     ------
      NET INCOME (LOSS).....................................   $   23     $  (11)
                                                               ======     ======
      RECURRING NET INCOME(1)...............................   $   23     $   24
                                                               ======     ======
OPERATING STATISTICS:
  Natural Gas Liquids Processed (MBbls/d--Gross):
    Field Plants............................................     55.6       75.4
    Straddle Plants.........................................     22.5       41.1
                                                               ------     ------
                                                                 78.1      116.5
                                                               ======     ======

  Fractionation Volumes (MBbls/d)...........................    199.1      219.3

  Natural Gas Liquids Sold (MBbls/d)........................    640.7      595.5

  Average Commodity Prices:
    Natural Gas--Henry Hub (First of the Month) ($/MMBtu)...   $ 7.05     $ 2.53
    Crude Oil--Cushing ($/Bbl)..............................    29.01      26.23
    Natural Gas Liquids ($/Gal).............................     0.61       0.53
</TABLE>

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

(1) Recurring net income consists of segment reported net income adjusted for
    identified nonrecurring items more fully described below.

THREE-MONTH PERIODS ENDED MARCH 31, 2001 AND 2000

    DMS reported recurring net income of $23 million in the first quarter of
2001 compared with recurring net income of $24 million in the same 2000 quarter.
After adjusting for earnings recognized from the Mid-Continent assets in 2000,
recurring first quarter 2001 net income exceeded recurring first quarter 2000
net income by approximately $4 million. The first quarter 2000 recurring net
income excludes an aggregate nonrecurring after-tax charge of $35 million
relating to the sale and impairment

                                       24
<PAGE>
                                  DYNEGY INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

of certain assets and allocated merger costs. Recurring results of operations
period-to-period were influenced by the following:

    - Higher price realization; and

    - Stronger wholesale marketing operations; offset by

    - The sale of the Mid-Continent liquids assets in the first quarter of 2000.

    Aggregate domestic NGL processing volumes totaled 78.1 thousand gross
barrels per day in the first quarter of 2001 compared to a restated average of
97.1 thousand gross barrels per day during the same period in 2000. The restated
volumes reflect the sale of the Mid-Continent assets in March 2000.
Fractionation volumes decreased principally as a result of reduced processing
volume through the Company's straddle plants. Such plants were shut-in during
most of the first quarter of 2001 due to greatly reduced fractionation spreads
compared to the previous year as a result of the unhinging of the relationship
between natural gas and liquids prices. The continued active management of price
risk associated with DMS' field processing plants and greater gas price
realization in field plants mitigated the financial impact of reduced processing
volumes. NGL marketing volumes were higher period-over-period reflecting the
return to seasonal winter weather and greater commercialization of the Company's
NGL business through DynegyDIRECT.

                                       25
<PAGE>
                                  DYNEGY INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

                         TRANSMISSION AND DISTRIBUTION

<TABLE>
<CAPTION>
                                                                 THREE MONTHS
                                                                ENDED MARCH 31,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
                                                                ($ IN MILLIONS)
<S>                                                           <C>        <C>
Operating Margin............................................   $  108     $  112
Depreciation................................................      (40)       (38)
General and Administrative Expenses.........................      (17)       (20)
Other Items.................................................       23         (7)
                                                               ------     ------
      EARNINGS BEFORE INTEREST AND TAXES....................       74         47
Interest Expense............................................      (31)       (40)
                                                               ------     ------
      PRE-TAX EARNINGS......................................       43          7
Income Tax Provision........................................      (17)        (4)
                                                               ------     ------
      NET INCOME............................................   $   26     $    3
                                                               ======     ======
      RECURRING NET INCOME(1)...............................   $   26     $    5
                                                               ======     ======
OPERATING STATISTICS:
  Electric Sales in KWH (Millions):
  Residential...............................................    1,382      1,236
  Commercial................................................    1,077      1,041
  Industrial................................................    2,021      2,098
  Other.....................................................       99         92
                                                               ------     ------
    Sales to Ultimate Customers.............................    4,579      4,467
  Interchange...............................................        1         47
                                                               ------     ------
    Total Electric Sales....................................    4,580      4,514
                                                               ======     ======
  Gas Sales in Therms (Millions):
  Residential...............................................      173        145
  Commercial................................................       74         61
  Industrial................................................       25         24
                                                               ------     ------
    Sales to Ultimate Customers.............................      272        230
  Transportation of Customer-Owned Gas......................       72         75
  Interdepartmental Sales...................................        1          6
                                                               ------     ------
    Total Gas Sales.........................................      345        311
                                                               ======     ======
</TABLE>

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

(1) Recurring net income consists of segment reported net income adjusted for
    identified nonrecurring items more fully described below.

THREE-MONTH PERIODS ENDED MARCH 31, 2001 AND 2000

    The Transmission and Distribution segment, acquired in the Illinova
Corporation ("Illinova") acquisition, reported recurring net income of
$26 million in the first quarter of 2001 compared to $5 million in the first
quarter of 2000. As mentioned previously, operating performance benefited from

                                       26
<PAGE>
                                  DYNEGY INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

cost reductions, efficiencies and seasonal winter demand in IP's market area
during the early part of the first quarter of 2001.

    The increase in other items relates to an insurance settlement and various
other items in 2001.

                          DYNEGY GLOBAL COMMUNICATIONS

<TABLE>
<CAPTION>
                                                                 THREE MONTHS
                                                                ENDED MARCH 31,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
                                                                ($ IN MILLIONS)
<S>                                                           <C>        <C>
Operating Margin............................................   $    1     $   --
Depreciation................................................       (5)        --
General and Administrative Expenses.........................      (20)        --
Other Items.................................................        6         --
                                                               ------     ------
      LOSS BEFORE INTEREST AND TAXES........................      (18)        --
Interest Expense............................................       (2)        --
                                                               ------     ------
      PRE-TAX LOSS..........................................      (20)        --
Income Tax Benefit..........................................        8         --
                                                               ------     ------
      NET LOSS..............................................   $  (12)    $   --
                                                               ======     ======
      RECURRING NET LOSS....................................   $  (12)    $   --
                                                               ======     ======
</TABLE>

THREE-MONTH PERIODS ENDED MARCH 31, 2001 AND 2000

    DGC's segment results reflect a $12 million quarterly loss resulting from
start-up costs associated with expansion of the Company's global communications
business. Dynegy further expanded its global network during the first quarter of
2001 through completion of its acquisition of iaxis.

    OPERATING CASH FLOW.  Cash flow from operating activities totaled
$267 million for the three-month period ended March 31, 2001, compared to
$142 million reported in the same 2000 period. Changes in operating cash flow
reflect favorable variances in net income, cash flow from risk-management
activities and changes in inventory offset by the difference in timing in
accounts payable. Changes in other working capital accounts, which include
prepayments and other current assets and accrued liabilities, reflect
expenditures or recognition of liabilities for settlements of certain
litigation, insurance costs, certain deposits, salaries, taxes other than on
income, certain deferred revenue accounts and other similar items. Fluctuations
in these accounts, period-to-period, reflect changes in the timing of payments
or recognition of liabilities and are not directly impacted by seasonal factors.

    CAPITAL EXPENDITURES AND INVESTING ACTIVITIES.  Investing activities in the
first quarter of 2001 included acquisition costs related to the purchase of
iaxis, while the 2000 period included the aforementioned acquisition of
Illinova. Capital expenditures of $1,133 million and $227 million in the 2001
and 2000 quarters, respectively, related to the aforementioned acquisition of
the Central Hudson power generation facilities in the Northeastern United States
in 2001 and to the construction of power generation assets, betterments of
existing facilities related to the Transmission and Distribution segment and
investment associated with technology infrastructure in both periods. The
nonstrategic assets

                                       27
<PAGE>
                                  DYNEGY INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

disposed of in the first quarter of 2000 principally related to the sale of
certain qualifying facilities and liquids assets for which the Company received
cash inflows of approximately $667 million.

    FINANCING ACTIVITIES.  In March 2001, Holdings issued $500 million of
6.875 percent Senior Notes due April 1, 2011. The net proceeds of approximately
$496 million from the sale were used to repay commercial paper. Interest is
payable on the Senior Notes on April 1 and October 1 of each year, beginning
October 1, 2001.

    In the first quarter of 2000, Chevron purchased shares of Class B Common
Stock for $200 million. Proceeds from this sale were used to partially finance
the cash portion of the Illinova acquisition.

           UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION

    Dynegy's reports, filings and other public announcements often include
statements reflecting assumptions, expectations, projections, intentions or
beliefs about future events. These statements 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;

    - Pending or recent acquisitions, 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 the U.S. and Europe;

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

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

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

    - Anticipated developments with respect to demand for broadband services and
      applications and the Company's strategic plans in connection therewith.

    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 the U.S. 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, as well as Dynegy's ability to maintain its investment grade
      credit ratings;

                                       28
<PAGE>
                                  DYNEGY INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

    - The effectiveness of Dynegy's risk-management policies and procedures and
      the ability of Dynegy's trading 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;

    - 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,
      the unavailability of gas transportation, the unavailability of electric
      transmission service or workforce issues;

    - Uncertainties regarding the development of, and competition within, the
      market for broadband services in the U.S. and Europe, including risks
      relating to competing technologies and standards, regulation, capital
      costs and the timing and amount of customer demand for high bandwidth
      applications;

    - Cost and other effects of legal and administrative proceedings,
      settlements, investigations and claims, including environmental
      liabilities that may not be covered by indemnity or insurance; and

    - Other U.S. 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.

    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.

                                       29
<PAGE>
                                  DYNEGY INC.

           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

             FOR THE INTERIM PERIODS ENDED MARCH 31, 2001 AND 2000

    The Company is exposed to certain market risks indigenous to its industry or
inherent in transactions entered into in the normal course of business. In
executing risk-management strategies intended to mitigate these market risks,
the Company routinely utilizes various types of financial instruments. The
absolute notional contract amounts associated with commodity risk-management,
interest rate and forward exchange contracts were as follows:

                       ABSOLUTE NOTIONAL CONTRACT AMOUNTS

<TABLE>
<CAPTION>
                                                              MARCH 31,   DECEMBER 31,
                                                                2001          2000
                                                              ---------   ------------
<S>                                                           <C>         <C>
Natural Gas (Trillion Cubic Feet)...........................     8.651         7.709
Electricity (Million MW Hours)..............................   142.340       162.321
NGLs (Million Barrels)......................................    10.856         9.899
Weather Derivatives (Thousands of Heating Degree Days)......   231.000       427.423
Interest Rate Swaps (In millions of U.S. Dollars)...........  $    390      $     --
Fixed Interest Rate Paid on Swaps (Percent).................     5.972            --
U.K. Pound Sterling (In millions of U.S. Dollars)...........  $     14      $     15
Average U.K. Pound Sterling Contract Rate (U.S. Dollars)....  $ 1.4195      $ 1.4658
Eurodollars (In millions of U.S. Dollars)...................  $     57      $     36
Average Eurodollar Contract Rate (U.S. Dollars).............  $ 0.9513      $ 1.0200
Canadian Dollar (In millions of U.S. Dollars)...............  $    743      $    738
Average Canadian Dollar Contract Rate (U.S. Dollars)........  $ 0.6615      $ 0.6768
</TABLE>

    Dynegy measures entity-wide market risk in its financial trading and
risk-management portfolios using Value at Risk. The quantification of market
risk using Value at Risk provides a consistent measure of risk across diverse
energy markets and products with different risk factors to set the overall
corporate risk tolerance, determine risk targets, and position limits. The use
of this methodology requires a number of key assumptions including the selection
of a confidence level and the holding period to liquidation. Dynegy relies on
Value at Risk to determine the maximum potential reduction in the trading
portfolio value allowed within a given probability over a defined period.
Because of limitations to Value at Risk, Dynegy uses other means to monitor
market risk in the trading portfolios. In addition to Value at Risk, Dynegy
performs regular stress and scenario analyses to measure extreme losses due to
exceptional events. The Value at Risk and stress testing results are reviewed to
determine the maximum allowable reduction in the total equity of the commodity
portfolios. Additional measures are used to determine the treatment of risks
outside the Value at Risk methodologies, such as market volatility, liquidity,
event and correlation risk. Dynegy estimates Value at Risk using a JP Morgan
RiskMetrics-TM- approach assuming a one-day holding period and a 95 percent
confidence level. At March 31, 2001, the Value at Risk for Dynegy's trading and
risk-management portfolios approximated $7.4 million and the average of such
value during the quarter ended March 31, 2001 was estimated at $9.9 million.

                                       30
<PAGE>
                                  DYNEGY INC.
                           PART II. OTHER INFORMATION

ITEM 1--LEGAL PROCEEDINGS

    See Part I, Item 1, Condensed Consolidated Financial Statements, Note 7,
which is incorporated herein by reference.

ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    A special meeting of the shareholders of the Company (the "Special Meeting")
was held on January 12, 2001. The purpose of the Special Meeting was to consider
and vote upon a proposed amendment to the Company's Articles of Incorporation to
increase the number of authorized shares of (i) Class A common stock, no par
value per share, from 300 million to 900 million and (ii) Class B common stock,
no par value per share, from 120 million to 360 million.

    The following votes were cast with respect to the proposed amendment:

    Class A common shares:

          For: 167,027,031
           Against/Withheld: 40,683,934
           Abstentions: 1,183,346
           Broker Nonvotes: 0

    Class B common shares:

          For: 85,330,544
           Against/Withheld: 0
           Abstentions: 0
           Broker Nonvotes: 0

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

(a) There are no instruments or documents required to be included as exhibits to
    this Form 10-Q.

(b) During the quarter ended March 31, 2001, the Company filed a Current Report
    on Form 8-K dated January 12, 2001. Items 5 and 7 were reported and no
    financial statements were filed.

   During the quarter ended March 31, 2001, the Company filed a Current Report
    on Form 8-K dated January 30, 2001. Items 5 and 7 were reported and no
    financial statements were filed.

                                       31
<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.

                                                       By:             /s/ MICHAEL R. MOTT
                                                            -----------------------------------------
                                                                         Michael R. Mott
                                                               SENIOR VICE PRESIDENT AND CONTROLLER
                                                              (DULY AUTHORIZED OFFICER AND PRINCIPAL
Date: May 14, 2001                                                     ACCOUNTING OFFICER)
</TABLE>

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