<Page>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

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

      For the quarterly period ended September 30, 2001

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

      For the transition period from ______to______

                        Commission file number: 000-29311
                              DYNEGY HOLDINGS INC.
             (Exact name of registrant as specified in its charter)

           DELAWARE                                              94-3248415
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

                           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 |_|

All outstanding equity securities of Dynegy Holdings Inc. are held by its
parent, Dynegy Inc.
<Page>

                              DYNEGY HOLDINGS INC.
                                TABLE OF CONTENTS

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

                                                                            Page

PART I.  FINANCIAL INFORMATION

         Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

         Condensed Consolidated Balance Sheets:
              September 30, 2001 and December 31, 2000.......................  3
         Condensed Consolidated Statements of Operations:
              For the three months ended September 30, 2001 and 2000.........  4
         Condensed Consolidated Statements of Operations:
              For the nine months ended September 30, 2001 and 2000..........  5
         Condensed Consolidated Statements of Cash Flows:
              For the nine months ended September 30, 2001 and 2000..........  6
         Notes to Condensed Consolidated Financial Statements  ..............  7

         Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS......................... 19

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

PART II. OTHER INFORMATION

         Item 1. LEGAL PROCEEDINGS .......................................... 31

         Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 31
<Page>

DYNEGY HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (IN MILLIONS)
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                             SEPTEMBER 30,   DECEMBER 31,
                                                                 2001            2000
                                                             ------------    ------------
<S>                                                          <C>             <C>
                                     ASSETS
CURRENT ASSETS
Cash and cash equivalents                                    $        187    $         32
Accounts receivable, net                                            3,696           4,941
Accounts receivable, affiliates                                        74              49
Inventory                                                             306             264
Assets from risk-management activities                              5,621           4,437
Prepayments and other assets                                          146              36
                                                             ------------    ------------
          TOTAL CURRENT ASSETS                                     10,030           9,759
                                                             ------------    ------------

PROPERTY, PLANT AND EQUIPMENT                                       5,813           5,377
Accumulated depreciation                                             (740)           (586)
                                                             ------------    ------------
          PROPERTY, PLANT AND EQUIPMENT, NET                        5,073           4,791
                                                             ------------    ------------
OTHER ASSETS
Unconsolidated investments                                            886             694
Accounts receivable, affiliates                                       594             423
Assets from risk-management activities                              2,769           1,527
Intangible assets, net of amortization                                466             491
Other assets                                                          256             120
                                                             ------------    ------------
          TOTAL ASSETS                                       $     20,074    $     17,805
                                                             ============    ============

                      LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable                                             $      3,342    $      4,597
Accounts payable, affiliates                                           25              46
Accrued liabilities and other                                         523             422
Liabilities from risk-management activities                         5,200           3,838
                                                             ------------    ------------
      TOTAL CURRENT LIABILITIES                                     9,090           8,903

LONG-TERM DEBT                                                      1,559           1,374

OTHER LIABILITIES
Liabilities from risk-management activities                         2,673           1,568
Deferred income taxes                                                 590             342
Other long-term liabilities                                           244             370
                                                             ------------    ------------
          TOTAL LIABILITIES                                        14,156          12,557
                                                             ------------    ------------

MINORITY INTEREST                                                   1,056             972

COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST            200             200

COMMITMENTS AND CONTINGENCIES (NOTE 5)

STOCKHOLDER'S EQUITY
Additional paid-in capital                                          2,348           2,336
Accumulated other comprehensive income (loss), net of tax               1             (15)
Retained earnings                                                   1,281             723
Stockholder's equity                                                1,032           1,032
                                                             ------------    ------------
      TOTAL STOCKHOLDER'S EQUITY                                    4,662           4,076
                                                             ------------    ------------
      TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY             $     20,074    $     17,805
                                                             ============    ============
</Table>

            See notes to condensed consolidated financial statements.
<Page>

DYNEGY HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (IN MILLIONS)
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                THREE MONTHS ENDED SEPTEMBER 30,
                                                -------------------------------
                                                    2001              2000
                                                ------------      ------------
<S>                                             <C>               <C>
Revenues                                        $      8,100      $      7,920
Cost of sales                                          7,587             7,669
                                                ------------      ------------

Operating margin                                         513               251

Depreciation and amortization                             68                54
General and administrative expenses                      107                54
                                                ------------      ------------

     Operating income                                    338               143

Earnings from unconsolidated investments                  96               110
Other income                                              11               107
Interest expense                                         (32)              (20)
Other expenses                                           (31)              (37)
Minority interest in income of subsidiaries               (4)               (4)
                                                ------------      ------------

Income before income taxes                               378               299
Income tax provision                                     105               104
                                                ------------      ------------
NET INCOME                                      $        273      $        195
                                                ============      ============
</Table>

            See notes to condensed consolidated financial statements.
<Page>

DYNEGY HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (IN MILLIONS)
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                        NINE MONTHS ENDED SEPTEMBER 30,
                                                        ------------------------------
                                                            2001              2000
                                                        ------------      ------------
<S>                                                     <C>               <C>
Revenues                                                $     31,378      $     18,243
Cost of sales                                                 30,153            17,503
                                                        ------------      ------------

Operating margin                                               1,225               740

Depreciation and amortization                                    200               177
General and administrative expenses                              274               169
                                                        ------------      ------------

     Operating income                                            751               394

Earnings from unconsolidated investments                         186               172
Other income                                                      60               176
Interest expense                                                 (95)              (77)
Other expenses                                                   (95)             (100)
Minority interest in income of subsidiaries                      (12)              (12)
                                                        ------------      ------------

Income before income taxes                                       795               553
Income tax provision                                             239               199
                                                        ------------      ------------

Income from operations                                           556               354
Cumulative effect of change in accounting principle                2                --
                                                        ------------      ------------

NET INCOME                                              $        558      $        354
                                                        ============      ============
</Table>

            See notes to condensed consolidated financial statements.
<Page>

DYNEGY HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (IN MILLIONS)

<Table>
<Caption>
                                                                           NINE MONTHS ENDED SEPTEMBER 30,
                                                                           ------------------------------
                                                                                2001                2000
                                                                           ------------      ------------
<S>                                                                        <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES

Net income                                                                 $        558      $        354
Items not affecting cash flows from operating activities:
   Depreciation, amortization, impairment and abandonment                           196               145
   Earnings from unconsolidated investments, net of cash distributions             (152)             (138)
   Risk-management activities                                                       236              (122)
   Deferred income taxes                                                            126               100
   Other                                                                            (15)             (109)
Change in assets and liabilities resulting from operating activities:
   Accounts receivable                                                            1,398              (930)
   Inventory                                                                        (11)               (2)
   Prepayments and other assets                                                    (180)              (10)
   Accounts payable & Accrued Liabilities                                        (1,475)              908
Other, net                                                                          (39)               37
                                                                           ------------      ------------

Net cash provided by operating activities                                           642               233
                                                                           ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES

Capital expenditures                                                             (1,320)             (367)
Unconsolidated investments                                                          (52)              (90)
Proceeds from asset sales                                                         1,001               804
Affiliate transactions                                                              (63)             (669)
Other investing, net                                                               (195)               --
                                                                           ------------      ------------

Net cash used in investing activities                                              (629)             (322)
                                                                           ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from long-term borrowings                                                  496               318
Repayments of long-term borrowings                                                 (200)              (34)
Net cash flow from commercial paper and money market lines of credit               (118)             (183)
Other financing, net                                                                (36)                3
                                                                           ------------      ------------

Net cash provided by (used in) financing activities                                 142               104
                                                                           ------------      ------------

Net increase (decrease) in cash and cash equivalents                                155                15
Cash and cash equivalents, beginning of period                                       32                45
                                                                           ------------      ------------

Cash and cash equivalents, end of period                                   $        187      $         60
                                                                           ============      ============
</Table>

            See notes to condensed consolidated financial statements.
<Page>

                              DYNEGY HOLDINGS INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 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 Holdings Inc. ("Dynegy" or the "Company") for the year ended
December 31, 2000, as filed with the SEC. The Company is a wholly owned
subsidiary of Dynegy Inc.

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

      At the end of September 2000, Dynegy Inc. contributed Dynegy Midwest
Generation ("DMG") to the Company. DMG owns and operates the fossil fuel
generating assets formerly held by Illinois Power Company ("IP"), a wholly owned
subsidiary of Dynegy Inc. The net contribution of approximately $2.2 billion was
accounted for in a manner similar to a pooling of interests. As a result, DMG's
results of operations are reflected in the Company's results of operations for
the three and nine months ended September 30, 2000, the period for which DMG was
a wholly owned subsidiary of Dynegy Inc.

NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLES

      The Financial Accounting Standards Board ("FASB") 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 or net investments. For derivatives
qualifying as hedges of future cash flows, the effective portion of changes in
fair value are 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 recorded the impact of the adoption of Statement No. 133, as
amended, as a cumulative effect adjustment in the Company's consolidated results
on January 1, 2001. The amounts recorded, which are immaterial to net income and
the Company's financial position, are as follows (in millions):

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

                              DYNEGY HOLDINGS INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

      Changes in stockholder's equity related to derivatives for the nine-month
period ended September 30, 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                 (19)
      Reclassifications to earnings, net                           3
                                                              ------
      Balance at September 30, 2001                           $   25
                                                              ======
</Table>

      Accumulated Other Comprehensive Income (Loss), Net of Tax is included in
Stockholder's Equity on the Condensed Consolidated Balance Sheet as follows (in
millions):

<Table>
<S>                                                           <C>
      Statement No. 133, Net                                  $   25
      Currency Translation Adjustment, Net                       (10)
      Unrealized Loss on Available-for-Sale Securities, Net      (14)
                                                              ------
      Accumulated Other Comprehensive Income (Loss), Net of
          Tax, at September 30, 2001                          $    1
                                                              ======
</Table>

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

      The Company enters into various financial 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. In 2001, the Company also executed interest-rate swaps
that were designated as cash flow hedges of the benchmark interest rate
component of certain operating lease rentals.

      During the three and nine months ended September 30, 2001, there was no
material ineffectiveness from changes in fair value of hedge positions, and no
amounts were excluded from the assessment of hedge effectiveness related to the
hedge of future cash flows. Additionally, no amounts were reclassified to
earnings in connection with forecasted transactions that were no longer
considered probable of occurring.

      The accumulated balance in other comprehensive income at September 30,
2001 is expected to be reclassified to future earnings, contemporaneously with
the related purchases of fuel, sales of liquids and recognition of operating
lease expense, as applicable to each type of hedge. Of this amount,
approximately $34 million, net of taxes, is estimated to be reclassified into
earnings over the 12-month period ending September 30, 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 Company has also entered into foreign exchange forward contracts to
hedge its net investment in certain wholly owned subsidiaries. A cumulative
translation adjustment loss of approximately $2 million was recorded in the
third quarter of 2001 related to these contracts.

      On July 20, 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("Statement No. 142").
Statement No. 142 discontinues goodwill amortization over its estimated useful
life; rather, goodwill will be subject to at least an annual fair-value based
impairment test. Similarly, goodwill associated with equity-method investments
is no longer amortized. With regard to intangible assets, Statement No. 142
states that acquired intangible assets should be recognized separately if the
benefit of the intangible asset is obtained through contractual rights or if the
intangible asset can be sold, transferred, licensed, rented or exchanged,
without regard to the acquirer's intent. The Company is evaluating the future
financial effects of adopting Statement No. 142 and expects to adopt the
standard effective January 1, 2002. Goodwill amortization for both nine-month
periods was $10 million .

      In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" ("Statement No. 143").
Statement No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred with
the associated asset retirement costs being capitalized as a part of the
carrying amount of the long-lived asset. Statement No. 143 also includes
disclosure requirements that provide a description of asset retirement
obligations and a reconciliation of changes in the components of those
<Page>

                              DYNEGY HOLDINGS INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

obligations. The Company is evaluating the future financial effects of adopting
Statement No. 143 and expects to adopt the standard effective January 1, 2003.

      In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("Statement No. 144"). Statement No. 144 addresses the accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" and APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The objective of Statement No. 144 is to establish one accounting
model for long-lived assets to be disposed of by sale as well as resolve
implementation issues related to Statement No. 121. The Company expects to adopt
Statement No. 144 effective January 1, 2002 and does not expect such adoption to
have a material impact on its financial condition and results of operations.

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.

      In May 2001, subsidiaries of Dynegy completed a sale-leaseback transaction
to provide the term financing with respect to the Central Hudson facilities.
Under the terms of the sale-leaseback transaction, subsidiaries of Dynegy sold
certain plant and equipment and agreed to lease it back for terms expiring
within 34 years, exclusive of renewal options.

      On July 16, 2001, Dynegy announced its agreement to purchase BG Storage
Limited ("BGSL"), a wholly owned subsidiary of BG Group plc. Under the terms of
the purchase agreement, Dynegy agreed to pay approximately 420 million United
Kingdom Pound Sterling (approximately $603 million at October 26, 2001) for BGSL
and its existing assets. The assets, which are located in the United Kingdom,
consist of 30 gas storage injection wells with five offshore platforms, nine
salt caverns, approximately 19 miles of pipelines and an onshore natural gas
processing terminal. The transaction is subject to approvals from The Gas and
Electricity Markets Authority and The Department of Trade and Industry and
clearance from the Office of Fair Trading in the United Kingdom. In September
2001, in accordance with the advice of the Director General of Fair Trading, the
United Kingdom's Minister for Competition, Consumers and Markets announced her
intention to seek certain undertakings from Dynegy relating to the proposed
acquisition. Discussions relating to these undertakings have delayed the
approvals required to close the acquisition. There is no guarantee that such
approvals will be obtained or that the acquisition will be closed.

NOTE 4 - UNCONSOLIDATED INVESTMENTS

      At September 30, 2001, Dynegy's unconsolidated investments 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; a 50 percent interest in various entities, each
formed to build (or buy), own and operate power generation facilities located in
the United States; 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; and a 20 percent interest in SouthStar
Energy Services L.L.C., a retail energy alliance located in the Southeast.

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

                              DYNEGY HOLDINGS INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

<Table>
<Caption>
                                   NINE MONTHS ENDED SEPTEMBER 30,
                             -----------------------------------------
                                     2001                  2000
                             -------------------   -------------------
                                         EQUITY                EQUITY
                               TOTAL      SHARE      TOTAL      SHARE
                             --------   --------   --------   --------
<S>                          <C>        <C>        <C>        <C>
      Revenues (1)           $  1,588   $    561   $  1,085   $    388
                             ========   ========   ========   ========
      Operating margin (1)   $    191   $     82   $    255   $     99
                             ========   ========   ========   ========
      Net income (1)         $    384   $    188   $    346   $    160
                             ========   ========   ========   ========
</Table>

----------
(1)   The interim financial data for September 30, 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.

      Also included in unconsolidated investments at September 30, 2001 are
Dynegy's various cost basis investments and certain warrants to acquire common
stock of other entities.

NOTE 5 - 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
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. The Ninth Circuit
has yet 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 tortious interference
with prospective economic relations claims against Destec and tortious
interference with contract and 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,
<Page>

                              DYNEGY HOLDINGS INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

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 ("PSD") 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 October 19, 2001, a trial
date of February 11, 2003 has been 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 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.

      The National Energy Policy Report issued in May 2001 by the National
Energy Policy Development Group recommended that the EPA Administrator examine
the new source review regulations, including the PSD regulations, and report to
the President within 90 days on the impact of new source review on investment in
new utility and refinery generation capacity, energy efficiency and
environmental protection. The report also recommended that the Attorney General
review existing enforcement actions regarding new source review to ensure that
the enforcement actions are consistent with the Clean Air Act and its
regulations. These reviews have been undertaken by the respective agencies. The
EPA Administrator announced in August 2001 that the review would be completed in
September 2001. The events of September 11, 2001 have resulted in further delay
of the review, which remains ongoing.

      Two utilities, Virginia Power and Cinergy, reached tentative settlements
with the United States on several issues in 2000. The tentative settlements
would require 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 periods
extending through 2012 to 2013, and forfeit certain emission credits. These
settlements are not expected to be finalized until after the EPA review of the
new source review regulations is completed.

      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 six 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.
<Page>

                              DYNEGY HOLDINGS INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

      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.
      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.
      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.
      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.
      6.    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 defendants subsequently
            removed the case to the United States District Court for the
            Northern District of California.

      The six 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
Bustamante suit includes claims against various Dynegy entities, including
Dynegy Inc. and Dynegy Marketing and Trade, as well as against three corporate
officers individually. 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 Gray Davis.

      The six lawsuits are at preliminary stages. Defendants in the six lawsuits
have yet to file answers. The plaintiffs filed motions to remand the cases to
state court. The California federal judges originally assigned to the lawsuits
recused themselves on the basis that they and their families have an economic
stake in the litigation. The defendants in the first five lawsuits invoked
federal multi-district litigation procedures and the multi-district panel,
comprised of federal judges, assigned the cases to Judge Robert Whaley, a
visiting Judge from the State of Washington sitting in the Southern District of
California. The Bustamante suit was subsequently assigned to Judge Whaley. By
order issued on July 31, 2001, Judge Whaley remanded the first five cases back
to state court.

      In respect to the Bustamante suit, the parties agreed that, based on Judge
Whaley's decision to remand the other five lawsuits, the case should go back to
state court. All six lawsuits are in the process of being consolidated in
California state court. Eventually the cases will be consolidated before a
single California state court judge.

      The defendants in the six 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.

      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 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 was subject to weekly reporting and
monitoring requirements. In an order issued March 9, 2001, FERC determined that
only sales during so-called "Stage 3" emergency hours would be subject to refund
beginning January 1, 2001. However, sales between October 2, 2000 and December
31, 2000 remained subject to refund under the FERC's December 15 order. Various
parties sought rehearing of this market mitigation measure and, as explained
below, the FERC ruled on the matter in an order issued on July 25, 2001.
<Page>

                              DYNEGY HOLDINGS INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

      On April 26, 2001, the FERC revised its market mitigation plan, effective
June 1, 2001, to cover all emergency hours. The mitigated price was to be in
effect only during reserve deficiency hours. Suppliers charging prices above the
mitigated price during those hours could file to justify those prices.

      On June 19, 2001, the FERC again revised its market mitigation plan,
effective June 20, 2001. Pursuant to this plan, the FERC is mitigating prices
charged in all hours throughout the Western Systems Coordinating Counsel based
on the mitigated price in the ISO markets. During reserve deficiency hours, the
mitigated price is set pursuant to an average index for gas times the heat rate
of the last unit dispatched by the ISO during a "Stage 1" emergency, plus a 10
percent adder for credit risk. Nitrogen oxide charges, start-up costs and
additional fuel costs will be collected through an ISO uplift charge. During
non-reserve deficiency hours, the market clearing price is capped at 85 percent
of the mitigated price. The Company has filed for rehearing and clarification of
the order. The FERC also ordered all parties to participate in a 15-day
settlement conference to determine refunds, which proved unsuccessful. Pursuant
to that order, the settlement judge has issued a refund recommendation to the
FERC, stating that refunds from all market participants since October 2000
probably total between several hundred million dollars and a billion dollars. It
should be noted that the April 26 and June 19, 2001 orders apply only to sales
made on a daily basis, that is, within 24 hours of delivery. The vast majority
of power sold by West Coast Power LLC, a 50% equity investee of Dynegy, is
committed to long-term contracts exempt from these orders.

      On July 25, 2001, the FERC ordered a hearing to calculate the refunds that
power generators allegedly owe California for overcharges in spot electricity
markets that occurred between October 2, 2000 and June 20, 2001. Dynegy Power
Marketing (as Scheduling Coordinator for West Coast Power LLC) is subject to
possible refunds. The FERC endorsed the settlement judge's recommendation to
calculate the refunds largely based on a formula used in the FERC's June 19,
2001 order. The Company believes that refund claims are overstated and has
entered into a joint defense arrangement with other California generators. An
administrative law judge will certify his proposed findings of fact to the FERC
on March 8, 2002.

      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, the California Office of the Attorney General and
several California state legislative committees 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
has been completed and no findings have been made in connection with any of
them. The recently released California state audit report concluded that the
primary causes of the market disruptions in California were 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. 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.

NOTE 6 - AFFILIATE TRANSACTIONS

      Certain subsidiaries of the Company recorded revenues of approximately
$349 million and $410 million in association with transactions with IP for the
nine-month periods ended September 30, 2001 and 2000, respectively.

NOTE 7 - SEGMENT INFORMATION

      Dynegy's operations are divided into two reportable segments: Dynegy
Marketing and Trade ("DMT") and Dynegy Midstream Services ("DMS"). DMT is
engaged in a broad array of businesses, including the physical supply of and
risk-

<Page>

                              DYNEGY HOLDINGS INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

management activities around wholesale natural gas, power, coal, emission
allowances and weather derivatives. This segment is focused on optimizing the
Company's and its customers' global portfolio of assets and capacity contracts,
as well as direct commercial and industrial sales and retail marketing
alliances. DMS consists of the Company's North American midstream liquids
processing and marketing business and worldwide natural gas liquids marketing
and transportation operations. Dynegy accounts for intercompany transactions at
prevailing market rates. Unaudited operating segment information for the three-
and nine-month periods ended September 30, 2001 and 2000 is presented below.
<Page>

                              DYNEGY HOLDINGS INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

         DYNEGY'S SEGMENT DATA FOR THE QUARTER ENDED SEPTEMBER 30, 2001
                                 ($ in millions)

<Table>
<Caption>
                                      DMT           DMS      ELIMINATIONS     TOTAL
<S>                               <C>           <C>           <C>           <C>
Unaffiliated revenues:
     Domestic ................... $    5,146    $      958    $       --    $    6,104
     Canadian ...................        612           447            --         1,059
     European and other .........        937            --            --           937
                                  ----------    ----------    ----------    ----------
                                       6,695         1,405            --         8,100

Intersegment revenues:
     Domestic ...................        122            43          (165)           --
                                  ----------    ----------    ----------    ----------
          Total revenues ........      6,817         1,448          (165)        8,100
                                  ----------    ----------    ----------    ----------
Operating margin ................        450            63            --           513
Depreciation and amortization ...        (47)          (21)           --           (68)
Interest expense ................        (20)          (12)           --           (32)
Other income (expense) ..........        (21)            1            --           (20)
Earnings from unconsolidated
   investments ..................         93             3            --            96
Income tax provision ............         98             7            --           105
Net income ...................... $      261    $       12    $       --    $      273
Identifiable assets:
     Domestic ................... $   16,436    $    1,889    $       --    $   18,325
     Canadian ...................        441           342            --           783
     European and other .........        966            --            --           966
Unconsolidated investments ......        726           160            --           886
Capital expenditures and
  unconsolidated investments ....       (101)          (25)           --          (126)
</Table>
<Page>

                              DYNEGY HOLDINGS INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

         DYNEGY'S SEGMENT DATA FOR THE QUARTER ENDED SEPTEMBER 30, 2000
                                 ($ in millions)

<Table>
<Caption>
                                      DMT           DMS      ELIMINATIONS     TOTAL
<S>                               <C>           <C>           <C>           <C>
Unaffiliated revenues:
     Domestic ................... $    5,512    $    1,277    $       --    $    6,789
     Canadian ...................        573           357            --           930
     European and other .........        201            --            --           201
                                  ----------    ----------    ----------    ----------
                                       6,286         1,634            --         7,920

Intersegment revenues:
     Domestic ...................         47            71          (118)           --
                                  ----------    ----------    ----------    ----------
          Total revenues ........      6,333         1,705          (118)        7,920
                                  ----------    ----------    ----------    ----------
Operating margin ................        191            60            --           251
Depreciation and amortization ...        (34)          (20)           --           (54)
Interest expense ................         (5)          (15)           --           (20)
Other income (expense) ..........         75            (5)           --            70
Earnings from unconsolidated
   investments ..................        103             7            --           110
Income tax provision ............         98             6            --           104
Net income ...................... $      187    $        8    $       --    $      195
Identifiable assets:
     Domestic ................... $   10,451    $    1,968    $       --    $   12,419
     Canadian ...................        538           183            --           721
     European and other .........        392            --            --           392
Unconsolidated investments ......        611           159            --           770
Capital expenditures and
  unconsolidated investments ....       (117)          (30)           --          (147)
</Table>
<Page>

                              DYNEGY HOLDINGS INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

       DYNEGY'S SEGMENT DATA FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
                                 ($ in millions)

<Table>
<Caption>
                                        DMT          DMS       ELIMINATIONS      TOTAL
<S>                                 <C>           <C>           <C>           <C>
Unaffiliated revenues:
     Domestic ..................... $   20,028    $    3,678    $       --    $   23,706
     Canadian .....................      3,887         1,128            --         5,015
     European and other ...........      2,657            --            --         2,657
                                    ----------    ----------    ----------    ----------
                                        26,572         4,806            --        31,378
                                    ----------    ----------    ----------    ----------
Intersegment revenues:
     Domestic .....................        196           202          (398)           --
                                    ----------    ----------    ----------    ----------
          Total revenues ..........     26,768         5,008          (398)       31,378
                                    ----------    ----------    ----------    ----------
Operating margin ..................      1,008           217            --         1,225
Depreciation and amortization .....       (139)          (61)           --          (200)
Interest expense ..................        (56)          (39)           --           (95)
Other income (expense) ............        (28)           (7)           --           (35)
Earnings from unconsolidated
   investments ....................        177             9            --           186
Income tax provision ..............        213            26            --           239
Income from operations ............        511            45            --           556
Cumulative effect of change in
   accounting principle ...........          2            --            --             2
Net income ........................ $      513    $       45    $       --    $      558
Identifiable assets:
     Domestic ..................... $   16,436    $    1,889    $       --    $   18,325
     Canadian .....................        441           342            --           783
     European and other ...........        966            --            --           966
Unconsolidated investments ........        726           160            --           886
Capital expenditures and
  unconsolidated investments ......     (1,289)          (83)           --        (1,372)
</Table>
<Page>

                              DYNEGY HOLDINGS INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

       DYNEGY'S SEGMENT DATA FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
                                 ($ in millions)

<Table>
<Caption>
                                      DMT          DMS       ELIMINATIONS     TOTAL
<S>                               <C>           <C>           <C>           <C>
Unaffiliated revenues:
     Domestic ................... $   11,362    $    3,680    $       --    $   15,042
     Canadian ...................      1,402           800            --         2,202
     European and other .........        999            --            --           999
                                  ----------    ----------    ----------    ----------
                                      13,763         4,480            --        18,243

Intersegment revenues:
     Domestic ...................        138           167          (305)           --
                                  ----------    ----------    ----------    ----------
          Total revenues ........     13,901         4,647          (305)       18,243
                                  ----------    ----------    ----------    ----------
Operating margin ................        552           188            --           740
Depreciation and amortization ...        (93)          (84)           --          (177)
Interest expense ................        (59)          (18)           --           (77)
Other income (expense) ..........        116           (40)           --            76
Earnings from unconsolidated
   investments ..................        154            18            --           172
Income tax provision ............        193             6            --           199
Net income ...................... $      341    $       13    $       --    $      354
Identifiable assets:
     Domestic ................... $   10,451    $    1,968    $       --    $   12,419
     Canadian ...................        538           183            --           721
     European and other .........        392            --            --           392
Unconsolidated investments ......        611           159            --           770
Capital expenditures and
   unconsolidated investments ...       (368)          (89)           --          (457)
</Table>

NOTE 8 - SUBSEQUENT EVENT

      On November 9, 2001, Dynegy's parent company, Dynegy Inc., announced the
execution of a definitive merger agreement with Enron Corp.
<Page>

                              DYNEGY HOLDINGS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

      The following discussion and analysis should be read in conjunction with
the unaudited condensed consolidated financial statements of Dynegy Holdings
Inc. ("Dynegy" or the "Company") included elsewhere herein and with the
Company's Form 10-K for the year ended December 31, 2000.

                                     GENERAL

      COMPANY PROFILE. Dynegy is a leading provider of energy solutions to
customers in North America, the United Kingdom and Continental Europe. The
Company's leadership position extends across the entire convergence value chain,
from 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").

      BUSINESS SEGMENTS. Dynegy's operations are divided into two reportable
segments: Dynegy Marketing and Trade ("DMT") and Dynegy Midstream Services
("DMS"). Each of our business segments is more fully discussed above in Note 7 -
Segment Information.

                         LIQUIDITY AND CAPITAL RESOURCES

      The Company's business strategy has historically focused on acquiring,
constructing or contracting for a regionally diverse network of energy assets 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
network is 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. For the
foreseeable future, the Company's primary capital expenditure focus will be the
acquisition and/or construction of energy assets that will enable the Company to
fully realize the commercialization of this energy network.

      Dynegy relies upon operating cash flow and funds provided by a combination
of commercial paper issuances, money market lines of credit, corporate credit
agreements and various public debt issuances for its liquidity and capital
resource requirements. At September 30, 2001, the Company's various credit
agreements totaled $1.67 billion. After consideration of outstanding commercial
paper and letters of credit, the unused borrowing capacity under these
agreements at September 30, 2001 approximated $1.5 billion. Management believes
additional financing arrangements can be obtained at reasonable terms, if
necessary.

      Dynegy completed a $920 million leveraged lease transaction in May of
2001. The leveraged lease transaction relates to the acquisition of 1,700
megawatts ("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, which have
since been exchanged for registered 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 Dynegy subsidiaries in the leveraged lease transaction is the source of
payment on these certificates. Dynegy, which agreed to guarantee the
subsidiaries' obligations under the leveraged lease transaction, used
approximately $50 million of the proceeds to repay commercial paper and is using
the remainder of the proceeds for general corporate purposes.

                                  OTHER MATTERS

      PENDING ACQUISITION. On July 16, 2001, Dynegy announced its agreement to
purchase BG Storage Limited ("BGSL"), a wholly owned subsidiary of BG Group plc.
Under the terms of the purchase agreement, Dynegy agreed to pay approximately
420 million United Kingdom Pound Sterling (approximately $603 million at October
26, 2001) for BGSL and its existing assets. The assets, which are located in the
United Kingdom, consist of 30 gas storage injection wells with five offshore
platforms, nine salt caverns, approximately 19 miles of pipelines and an onshore
natural gas processing terminal. The transaction is subject to approvals from
The Gas and Electricity Markets Authority and The Department of Trade and
Industry and clearance from the Office of Fair Trading in the United Kingdom. In
September 2001, in accordance with the advice of the Director General of Fair
Trading, the United Kingdom's Minister for Competition, Consumers and Markets
announced her intention to seek certain undertakings from Dynegy relating to the
proposed acquisition. Discussions
<Page>

                              DYNEGY HOLDINGS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

relating to these undertakings have delayed the approvals required to close the
acquisition. There is no guarantee that such approvals will be obtained or that
the acquisition will be closed.

      COMMITMENTS AND CONTINGENCIES. See Part I, Item 1, Condensed Consolidated
Financial Statements, Note 5, which is incorporated herein by reference, for a
discussion of the Company's Commitments and Contingencies.

      CALIFORNIA MARKET. 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. In addition, natural gas available to the state was in tight
supply which caused historic highs in the basis differential between California
and other markets.

      Many events related to the California situation have occurred in recent
months. 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
acknowledging that generators in California are not required to sell to
noncreditworthy counterparties; (d) the FERC's decision to investigate gas
pipeline marketing affiliate abuse in the region; (e) the FERC's imposition of a
market mitigation plan for the Western States Coordinating Council; (f) FERC
orders directing electricity suppliers to either refund a portion of certain
sales revenue or justify their prices above approved pricing amounts; (g) a
failed settlement conference to determine potential refunds; (h) the scheduling
of a FERC hearing to calculate any such refunds; (i) continued debate over the
validity and legality of long-term power supply contracts executed by state
agencies: and (j) a settlement agreement between Southern California Edison and
the California Public Utilities Commission that is designed to allow Southern
California Edison to pay its past due debts and return it to creditworthy
status. In addition, Dynegy and certain of its officers have been named in
various lawsuits associated with the California situation, which are more fully
discussed in Note 5 to the Condensed Consolidated Financial Statements.

      Dynegy and NRG Energy each own 50 percent of West Coast Power LLC ("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 credit exposure to certain state
agencies ("ISO" and "PX"), which primarily relied 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 were
running with much greater frequency and for longer durations than is typically
the case. Management continues to 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. Transactions with the aforementioned counterparties, other than the ISO and
PX, are current under the terms of each individual arrangement. At September 30,
2001, Dynegy's portion of the receivables owed to West Coast Power by the ISO
and PX approximated $330 million. Management is continually assessing Dynegy's
exposure relative to its California receivables and has established reserves to
reflect market uncertainties.
<Page>

                              DYNEGY HOLDINGS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

      The Company closely monitors developments in California in an effort to
manage its credit risk. In this regard, there have been press reports of
proposals to renegotiate DWR's long-term contracts. Although Dynegy is mentioned
as having a long-term contract with DWR, these reports focus primarily on
contracts negotiated with others. Dynegy has not been contacted directly by DWR
or the Governor's office at this time. Management views its contract with DWR as
being fair to both sides and therefore does not envision the need for
renegotiations. As a normal matter of business practice, however, management is
open to discussions regarding mutually beneficial changes.

      NEW YORK ELECTRIC GENERATION MARKET. The New York Independent System
Operator, Inc. ("NYISO"), the FERC-approved operator of electric transmission
facilities and centralized electric markets in New York, has filed an "Automated
Mitigation Procedure" ("AMP") proposal with the FERC. The AMP caps bid prices
based on the cost characteristics of generating facilities in New York, such as
those owned or operated by the Company. In an order issued on June 28, 2001, the
FERC accepted the AMP proposal for this past summer. As of September 28, 2001,
the NYISO has filed an application at the FERC to extend the AMP until October
31, 2002. Management cannot predict the outcome of this proceeding.

      GENERATION UNDER CONSTRUCTION. Dynegy has three power plants under
construction that are expected to begin commercial operation during the summer
of 2002. The natural gas-fired facilities will provide additional generation of
approximately 1,500 MW and are located in Kentucky and Michigan. Additionally,
construction has also started on an 800 MW natural gas-fired peaking facility in
Ohio for which operation is expected to begin during the summer of 2003.

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

      CONCLUSION. The Company believes it will meet all foreseeable cash
requirements, including working capital, capital expenditures and debt service,
from operating cash flow, supplemented with funds provided by its various credit
facilities and 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- and nine-month periods ended September 30, 2001 and 2000.

THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

      For the quarter ended September 30, 2001, Dynegy's net income was $273
million, compared with third quarter 2000 net income of $195 million. Recurring
net income was the same as reported net income for the third quarter of 2001.
The third quarter 2000 recurring net income was $137 million, excluding a
one-time pre-tax gain of $83 million ($58 million after-tax) on the disposition
of Dynegy's non-operating equity interest in Accord Energy Ltd. ("Accord"), a
U.K. gas marketing joint venture. Third quarter 2001 results were led by a
strong performance in energy convergence operations, particularly in natural gas
and power marketing operations which benefited from increased customer
origination and increased volumes. In addition, power generation operations
improved as a result of greater utilization of our generating facilities,
including the generating facilities recently acquired from Central Hudson in the
Northeast.

      Consolidated operating margin for the third quarter of 2001 totaled $513
million compared to $251 million for the same 2000 period, primarily reflecting
improved margins in DMT. DMT contributed $450 million to third quarter 2001
consolidated operating margin compared to $191 million reported in the third
quarter of 2000, an increase of 136 percent. DMS contributed $63 million to
third quarter 2001 consolidated operating margin compared to $60 million
reported in the third quarter of 2000.
<Page>

                              DYNEGY HOLDINGS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

      Operating income increased $195 million quarter-to-quarter, reflecting the
significantly higher operating results from the energy convergence businesses.
Improved operating results were partially offset by higher depreciation and
amortization and general and administrative expenses. Increases in depreciation
and amortization expense during the 2001 period reflect the impact of the
continued expansion of the Company's depreciable asset base, principally in DMT,
and capitalized costs associated with enhanced information technology
infrastructure. The increased level of general and administrative expenses
reflect the impact of continued expansion of the Company's operations and higher
company-wide variable compensation accruals.

      Incremental to Dynegy's consolidated results was the Company's earnings
from unconsolidated investments, which contributed approximately $96 million and
$110 million to pre-tax quarterly earnings in the 2001 and 2000 periods,
respectively. Variances period-to-period in these results reflect the impact of
unfavorable market conditions, particularly as these changes impacted DMT
investments.

      Interest expense totaled $32 million for the quarter ended September 30,
2001, compared to $20 million for the equivalent 2000 period. The variance is
primarily attributable to the March 2001 issuance of $500 million of 6.875
percent Senior Notes due April 1, 2011 and reduced capitalization of interest to
construction projects, offset by decreased commercial paper outstanding.

      Other income and expenses, net totaled $20 million in expense in the
quarter ended September 30, 2001 compared with $70 million in income in the 2000
period. The third quarter 2000 amount includes the one-time pre-tax gain of $83
million on the disposition of Dynegy's non-operating interest in Accord. The
2001 and remaining 2000 amounts consist of interest income, minority interest in
consolidated subsidiaries and other miscellaneous income and expense items.

      The Company reported an income tax provision of $105 million for the
three-month period ended September 30, 2001, compared to an income tax provision
of $104 million for the 2000 period. The effective rates approximated 28 and 35
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 and the effect of certain foreign equity
investments and state income taxes.

NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

      For the nine-month period ended September 30, 2001, Dynegy's net income
was $558 million, compared with net income of $354 million for the same 2000
period. Recurring net income was $556 million in 2001, compared to $304 million
in 2000. The recurring net income for the nine-month period ended September 30,
2001 excludes the $2 million cumulative effect of change in accounting principle
recorded in connection with the Company's adoption of Statement No. 133.
Recurring net income for the nine-month period ended September 30, 2000 excludes
the $58 million after-tax gain on the disposition of Dynegy's non-operating
interest in Accord, a nonrecurring after-tax gain on the sale of certain
qualifying generation facilities of $34 million and after-tax charges
aggregating $42 million related to the sale and impairment of certain assets and
certain merger-related charges. Results for the nine-month period ended
September 30, 2001 were led by a strong performance in energy convergence
operations, particularly in domestic natural gas and power marketing, and
increased utilization of developed and acquired generation facilities, including
1,700 MW of power plants in the Northeast which were acquired from Central
Hudson in the first quarter of 2001.

      Consolidated operating margin for the nine-month period ended September
30, 2001 totaled $1.225 billion compared to $740 million for the same 2000
period, primarily reflecting improved margins in DMT. DMT contributed $1.008
billion to the nine-month period ended September 30, 2001 consolidated operating
margin compared to $552 million reported in the same 2000 period, an increase of
83 percent. DMS contributed $217 million to the nine-month period ended
September 30, 2001 consolidated operating margin compared to $188 million
reported in the same 2000 period.

      Operating income increased $357 million period-to-period, reflecting the
significantly higher operating results from the energy convergence businesses.
Improved operating results were partially offset by higher depreciation and
amortization and general and administrative expenses. Increases in depreciation
and amortization expense during the 2001 period reflect the impact of the
continued expansion of the Company's depreciable asset base, principally in
DMT's segment, and capitalized costs associated with enhanced information
technology infrastructure. Additionally, increased general and
<Page>

                              DYNEGY HOLDINGS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

administrative expenses reflect the impact of incremental costs associated with
a larger, more diverse base of operations and higher variable compensation
costs.

      Incremental to Dynegy's consolidated results was the Company's earnings
from unconsolidated investments, which contributed approximately $186 million
and $172 million to pre-tax earnings in the nine months ended September 30, 2001
and 2000, respectively. Variances period-to-period in these results reflect the
impact of favorable market conditions, particularly as these changes impacted
DMT investments.

      Interest expense totaled $95 million for the nine-month period ended
September 30, 2001, compared to $77 million for the equivalent 2000 period. The
variance is primarily attributable to the March 2001 issuance of $500 million of
6.875 percent Senior Notes due April 1, 2011 and reduced capitalization of
interest to construction projects, offset by decreased commercial paper
outstanding.

      Other income and expenses, net totaled $35 million in expense in the
nine-month period ended September 30, 2001 compared with income of $76 million
in the 2000 period. The 2000 amount includes some of the aforementioned
nonrecurring charges described above. The 2001 and remaining 2000 balances
consist of interest income, minority interest in consolidated subsidiaries and
other income and expense items.

      The Company reported an income tax provision of $239 million for the
nine-month period ended September 30, 2001, compared to an income tax provision
of $199 million for the 2000 period. The effective rates approximated 30 and 36
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 and the effect of certain foreign equity
investments and state income taxes.
<Page>

                              DYNEGY HOLDINGS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

SEGMENT DISCLOSURES (UNAUDITED)

                           DYNEGY MARKETING AND TRADE

<Table>
<Caption>
                                              -------------------------------   ------------------------------
                                              THREE MONTHS ENDED SEPTEMBER 30,  NINE MONTHS ENDED SEPTEMBER 30,
                                              -------------------------------   ------------------------------
                                                     2001          2000                2001          2000
                                              -------------------------------   ------------------------------
                                                  (IN MILLIONS, EXCEPT AVERAGE ON-PEAK MARKET POWER PRICES)
<S>                                                <C>           <C>                 <C>           <C>
Operating Margin                                   $    450      $    191            $  1,008      $    552
Earnings from Unconsolidated Investments                 93           103                 177           154
                                                   --------      --------            --------      --------
      SUBTOTAL - FINANCIAL CONTRIBUTION                 543           294               1,185           706

Depreciation and Amortization (1)                       (47)          (34)               (139)          (93)
General and Administrative Expenses                     (92)          (40)               (229)         (124)
Other Items (1)                                         (21)           75                 (28)          116
                                                   --------      --------            --------      --------
      EARNINGS BEFORE INTEREST AND TAXES                383           295                 789           605
Interest Expense                                        (24)          (10)                (65)          (71)
                                                   --------      --------            --------      --------
      PRE-TAX EARNINGS                                  359           285                 724           534
Income Tax Provision                                     98            98                 213           193
                                                   --------      --------            --------      --------
      INCOME FROM OPERATIONS                            261           187                 511           341
Cumulative Effect of Change in Accounting                --            --                   2            --
                                                   --------      --------            --------      --------
      NET INCOME                                   $    261      $    187            $    513      $    341
                                                   ========      ========            ========      ========

      RECURRING NET INCOME (2)                     $    261      $    129            $    511      $    256
                                                   ========      ========            ========      ========

OPERATING STATISTICS:
  Natural Gas Marketing (Bcf/d):
    Domestic Sales Volumes                              8.1           7.6                 7.8           7.3
    Canadian Sales Volumes                              2.9           2.2                 2.9           2.2
      European Sales Volumes                            1.6           1.1                 1.7           1.4
                                                   --------      --------            --------      --------
                                                       12.6          10.9                12.4          10.9
                                                   ========      ========            ========      ========
  Power Produced and Sold:
    Million MW Hours Generated - Gross                 11.5          11.2                31.7          28.0
                                                   --------      --------            --------      --------
    Million MW Hours Generated - Net                   10.1           9.0                26.9          22.9
                                                   --------      --------            --------      --------
      Total Physical Million Megawatt Hours Sold       90.5          48.7               212.6          95.9
                                                   ========      ========            ========      ========
 Coal Marketing Volumes (Millions of Tons)             11.2           2.3                29.7           6.8
                                                   ========      ========            ========      ========
 Average On-Peak Market Power Prices:
     Cinergy                                       $  37.02      $  36.21            $  39.24      $  32.43
     TVA                                              35.72         45.65               38.99         37.59
     PJM                                              48.82         39.24               45.23         36.59
     CALPX SP 15                                      45.02        150.11              147.26         89.52
</Table>

(1)   Three and nine-month periods ended September 30, 2000 results include a
      one-time pre-tax gain of $83 million ($58 million after-tax) on the
      disposition of Dynegy's non-operating interest in Accord Energy Ltd.
      ("Accord"), a U.K. gas marketing joint venture. The nine-month period
      ended September 30, 2000 also includes a pre-tax nonrecurring gain on the
      sale of certain qualifying facilities of $52 million ($34 million
      after-tax), and a reasonable allocation of pre-tax nonrecurring charges
      aggregating $65 million ($42 million after-tax).
(2)   Recurring net income consists of segment reported net income adjusted for
      identified nonrecurring items described in (1) above for 2000 and for the
      cumulative effect of change in accounting principle in the nine-month
      period ended September 30, 2001.
<Page>

                              DYNEGY HOLDINGS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

      DMT reported recurring segment net income of $261 million for the
three-month period ended September 30, 2001, compared with recurring net income
of $129 million in the 2000 quarter. The third quarter 2000 recurring net income
excludes the $58 million after-tax gain on the disposition of Dynegy's
non-operating interest in Accord. Dynegy's recurring results of operations
period-to-period were influenced by the following:

o     Increased generation due to development and acquisition of assets;
o     Increased customer origination;
o     Improved margins on domestic, Canadian and European marketing activities;
o     Expansion of DynegyDIRECT, the Company's electronic commerce portal
      launched late in 2000, offset by
o     Unfavorable variance in other items due to the Accord disposition and
      settlements creating gains in the third quarter of 2000;
o     Increased depreciation and amortization expenses reflecting continued
      expansion of the Company's asset base; and
o     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 physical MW hours sold in the third quarter of 2001 increased to
90.5 million MW hours compared to 48.7 million MW hours in the third quarter of
2000. Total natural gas volumes sold in North America in the third quarter of
2001 totaled 11.0 billion cubic feet per day compared to 9.8 billion cubic feet
per day during last year's third quarter. The increased volumes in both power
and gas were a result of improved market liquidity, greater sales volumes on
DynegyDIRECT, greater market origination and incremental gas marketing in
Canada.

NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

      DMT reported recurring segment net income of $511 million for the
nine-month period ended September 30, 2001, compared with recurring net income
of $256 million in the same 2000 period. The 2001 period recurring net income
excludes the cumulative effect of a change in accounting principle, while the
2000 period recurring net income excludes a one-time after-tax gain of $58
million on the disposition of Dynegy's non-operating interest in Accord, a
non-recurring 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
same factors impacting quarterly results.

      Total physical MW hours sold during the nine-month period ended September
30, 2001 aggregated 212.6 million MW hours compared to 95.9 million MW hours
during the 2000 period. Total North American natural gas volumes sold increased
to 10.7 billion cubic feet per day from 9.5 billion cubic feet per day during
last year's nine-month period ended September 30, 2000.
<Page>

                              DYNEGY HOLDINGS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

                            DYNEGY MIDSTREAM SERVICES

<Table>
<Caption>
                                                        -------------------------------   ------------------------------
                                                        THREE MONTHS ENDED SEPTEMBER 30,  NINE MONTHS ENDED SEPTEMBER 30,
                                                        -------------------------------   ------------------------------
                                                             2001             2000             2001             2000
                                                        -------------------------------   ------------------------------
                                                                 (IN MILLIONS, EXCEPT AVERAGE COMMODITY PRICES)
<S>                                                         <C>              <C>              <C>              <C>
Operating Margin                                            $   63           $   60           $  217           $  188
Earnings from Unconsolidated Investments                         3                7                9               18
                                                            ------           ------           ------           ------
      SUBTOTAL - FINANCIAL CONTRIBUTION                         66               67              226              206

Depreciation and Amortization(1)                               (21)             (20)             (61)             (84)
General and Administrative Expenses                            (15)             (14)             (45)             (45)
Other Items(1)                                                   1               (5)              (7)             (40)
                                                            ------           ------           ------           ------
      EARNINGS BEFORE INTEREST AND TAXES                        31               28              113               37
Interest Expense                                               (12)             (14)             (42)             (18)
                                                            ------           ------           ------           ------
      PRE-TAX EARNINGS                                          19               14               71               19
Income Tax Provision                                             7                6               26                6
                                                            ------           ------           ------           ------
      NET INCOME                                            $   12           $    8           $   45           $   13
                                                            ======           ======           ======           ======

      RECURRING NET INCOME (2)                              $   12           $    8           $   45           $   48
                                                            ======           ======           ======           ======

OPERATING STATISTICS:
  Natural Gas Liquids Processed (MBbls/d-Gross):
      Field Plants                                            56.3             55.1             56.0             62.4
      Straddle Plants                                         26.1             34.2             25.5             37.4
                                                            ------           ------           ------           ------
                                                              82.4             89.3             81.5             99.8
                                                            ======           ======           ======           ======

  Fractionation Volumes (MBbls/d)                            241.6            253.1            230.4            240.3

  Natural Gas Liquids Sold (MBbls/d)                         550.4            520.8            562.0            562.3

  Average Commodity Prices:
      Natural Gas - Henry Hub (First of the Month)
        ($/MMBtu)                                           $ 2.92           $ 4.26           $ 4.87           $ 3.41
      Crude Oil - Cushing ($/Bbl)                            26.64            30.52            27.85            27.29
      Natural Gas Liquids ($/Gal)                             0.39             0.56             0.50             0.53
</Table>

(1)   Nine-month period ended September 30, 2000 results include a reasonable
      allocation of pre-tax nonrecurring charges aggregating $65 million ($42
      million after-tax).
(2)   Recurring net income consists of segment reported net income adjusted for
      identified nonrecurring items described in (1) above.

THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

      DMS reported recurring net income of $12 million in the third quarter of
2001 compared with recurring net income of $8 million in the third quarter of
2000. The following influenced recurring results of operations period-to-period:

o     Higher price realization;
o     Decreased interest expense in 2001 due to timing of interest expense
      allocation, offset by
o     Decreased earnings from unconsolidated affiliates due to fee-based gas
      processing contracts.

      Aggregate domestic NGL processing volumes totaled 82.4 thousand gross
barrels per day in the third quarter of 2001 compared to 89.3 thousand gross
barrels per day during the same period in 2000. This decrease was primarily due
to reduced straddle volumes resulting from lower fractionation spreads compared
to the third quarter of 2000. The continued active management of price risk
associated with DMS' field processing plants and greater gas price realization
in field plants
<Page>

                              DYNEGY HOLDINGS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

mitigated the financial impact of reduced processing volumes. NGL marketing
volumes were higher period-over-period reflecting increased chemical demand in
the third quarter of 2001.

NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

      DMS reported recurring net income of $45 million in the nine-month period
ended September 30, 2001 compared with recurring net income of $48 million in
the same 2000 period. After adjusting for earnings recognized from the
Mid-Continent assets disposed of in 2000, recurring net income for the
nine-month period ended September 30, 2001 increased $2 million
period-over-period. Recurring net income for the 2000 period excludes an
aggregate non-recurring after-tax charge of $35 million relating to the sale and
impairment of certain assets and allocated merger costs. Recurring results of
operations period-to-period were influenced by the following:

o     The sale of the Mid-Continent liquids assets in March 2000; and
o     Increased interest expense in 2001, due to timing of interest expense
      allocation; offset by
o     Higher price realization in 2001;
o     Beneficial restructuring of contracts in 2001; and
o     Stronger wholesale marketing operations in 2001.

      Aggregate domestic NGL processing volumes totaled 81.5 thousand gross
barrels per day in the nine-month period ended September 30, 2001 compared to a
normalized average of 96.0 thousand gross barrels per day during the same 2000
period. The normalized 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 2001 due to greatly reduced fractionation spreads
resulting from 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 price realization in field plants mitigated the
financial impact of reduced processing volumes. NGL marketing volumes were lower
period-to-period reflecting a decrease in demand during the second quarter of
2001 offset by greater commercialization of the Company's NGL business through
DynegyDIRECT.
<Page>

                              DYNEGY HOLDINGS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

CASH FLOW DISCLOSURES

      OPERATING CASH FLOW. Cash flow from operating activities totaled $642
million for the nine-month period ended September 30, 2001, compared to $233
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 accounts receivable 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. Capital expenditures of
$1.3 billion and $367 million in the nine-month periods ended September 30, 2001
and 2000, 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 and investments associated with
technology infrastructure in both periods. Proceeds from asset sales in 2001
included the sale of the Central Hudson facilities in May 2001 for $920 million
pursuant to the previously mentioned leveraged lease transaction in addition to
disposals of certain nonstrategic Canadian assets and investments. The
nonstrategic assets disposed of in 2000 principally related to the sale of
certain qualifying facilities and liquids assets for which the Company received
cash inflows of approximately $804 million.

      FINANCING ACTIVITIES. In March 2001, Dynegy 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.

            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:

o     Projected operating or financial results;
o     Expectations regarding capital expenditures, dividends and other payments;
o     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;
o     Expectations regarding transaction volume and liquidity in wholesale
      energy markets in North America and Europe;
o     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;
o     The Company's ability to effectively compete for market share with
      industry participants;
o     Beliefs regarding the outcome of legal and administrative proceedings;
o     The expected commencement date for commercial operations for new power
      plants; and
o     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:

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

                              DYNEGY HOLDINGS INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

o     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;
o     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;
o     The effectiveness of Dynegy's risk-management policies and procedures and
      the ability of Dynegy's trading counterparties to satisfy their financial
      commitments;
o     The liquidity and competitiveness of wholesale trading markets for energy
      commodities, including the impact of electronic or online trading in these
      markets;
o     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 costs or availability of fuel
      or emission credits, the unavailability of gas transportation, the
      unavailability of electric transmission service or workforce issues;
o     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;
o     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;
o     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; and
o     General political conditions, including any extended period of war or
      conflict involving the United States or Europe.

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

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

<Page>

                              DYNEGY HOLDINGS INC.
           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

      The Company is exposed to certain market risks indigenous to its industry
or inherent in transactions entered into during 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 and
forward exchange contracts were as follows at the dates indicated:

                       ABSOLUTE NOTIONAL CONTRACT AMOUNTS

<Table>
<Caption>
                                                           SEPTEMBER 30,  DECEMBER 31,
                                                               2001           2000
                                                           ------------   ------------
<S>                                                        <C>            <C>
Natural Gas (Trillion Cubic Feet)                                13.687          7.709
Electricity (Million MW Hours)                                   63.922        162.321
NGLs (Million Barrels)                                           11.573          9.899
Weather Derivatives (Thousands of Heating Degree Days)           64.000        427.423
U.K. Pound Sterling (In millions of U.S. Dollars)          $        141   $         15
Average U.K. Pound Sterling Contract Rate (U.S. Dollars)   $     1.4321   $     1.4658
Eurodollars (In millions of U.S. Dollars)                  $      41.50   $         36
Average Eurodollar Contract Rate (U.S. Dollars)            $     0.9140   $     1.0200
Canadian Dollar (In millions of U.S. Dollars)              $      1,719   $        738
Average Canadian Dollar Contract Rate (U.S. Dollars)       $     0.6482   $     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 September 30, 2001, the Value at Risk for Dynegy's trading
and risk-management portfolios approximated $15.7 million and the average of
such value during the quarter ended September 30, 2001 was estimated at $11.8
million.
<Page>

                              DYNEGY HOLDINGS INC.

                           PART II. OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

      See Part I, Item 1, Condensed Consolidated Financial Statements, Note 5,
which is incorporated herein by reference.

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 September 30, 2001, the Company filed a Current
      Report on Form 8-K dated September 14, 2001. Item 5 was reported and no
      financial statements were filed.
<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.

                                    DYNEGY HOLDINGS INC.


Date: November 14, 2001             By: /s/ Michael R. Mott
      -----------------                 ----------------------------------------
                                        Michael R. Mott,
                                        Senior Vice President and Controller
                                        (Duly Authorized Officer and Principal
                                        Accounting Officer)