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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

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

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

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

        FOR THE TRANSITION PERIOD FROM ______________ TO ______________

                       COMMISSION FILE NUMBER: 000-29311

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

                              DYNEGY HOLDINGS INC.

             (Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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<Page>
                              DYNEGY HOLDINGS INC.
                               TABLE OF CONTENTS

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

           Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

           Condensed Consolidated Balance Sheets:
           June 30, 2001 and December 31, 2000.........................      3
           Condensed Consolidated Statements of Operations:
           For the three months ended June 30, 2001 and 2000...........      4
           Condensed Consolidated Statements of Operations:
           For the six months ended June 30, 2001 and 2000.............      5
           Condensed Consolidated Statements of Cash Flows:
           For the six months ended June 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.................     20

           Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
                   MARKET RISK.........................................     32

PART II. OTHER INFORMATION

           Item 1. Legal Proceedings...................................     33

           Item 6. Exhibits and Reports on Form 8-K....................     33
</Table>

                                       2
<Page>
                              DYNEGY HOLDINGS INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                           (UNAUDITED) (IN MILLIONS)

<Table>
<Caption>
                                                              JUNE 30,   DECEMBER 31,
                                                                2001         2000
                                                              --------   ------------
<S>                                                           <C>        <C>
                                       ASSETS
CURRENT ASSETS
Cash and cash equivalents...................................  $   471      $    32
Accounts receivable, net....................................    4,109        4,941
Accounts receivable, affiliates.............................       56           49
Inventories.................................................      294          264
Assets from risk-management activities......................    5,390        4,437
Prepayments and other assets................................      151           36
                                                              -------      -------
  TOTAL CURRENT ASSETS......................................   10,471        9,759
                                                              -------      -------
PROPERTY, PLANT AND EQUIPMENT...............................    6,624        5,377
Accumulated depreciation....................................     (667)        (586)
                                                              -------      -------
  PROPERTY, PLANT AND EQUIPMENT, NET........................    5,957        4,791
                                                              -------      -------
OTHER ASSETS
Unconsolidated investments..................................      781          694
Accounts receivable, affiliates.............................      548          423
Assets from risk-management activities......................    1,719        1,527
Intangible assets, net of amortization......................      470          491
Other assets................................................      120          120
                                                              -------      -------
  TOTAL ASSETS..............................................  $20,066      $17,805
                                                              =======      =======

                        LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable............................................  $ 3,709      $ 4,597
Accounts payable, affiliates................................       29           46
Accrued liabilities and other...............................      520          422
Liabilities from risk-management activities.................    4,908        3,838
                                                              -------      -------
  TOTAL CURRENT LIABILITIES.................................    9,166        8,903
LONG-TERM DEBT..............................................    2,678        1,374
OTHER LIABILITIES
Liabilities from risk-management activities.................    1,840        1,568
Deferred income taxes.......................................      320          342
Other long-term liabilities.................................      301          370
                                                              -------      -------
  TOTAL LIABILITIES.........................................   14,305       12,557
                                                              -------      -------
MINORITY INTEREST...........................................    1,156          972
COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY
  TRUST.....................................................      200          200
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDER'S EQUITY
Additional paid-in capital..................................    2,351        2,336
Accumulated other comprehensive income (loss), net of tax...       14          (15)
Retained earnings...........................................    1,008          723
Stockholder's equity........................................    1,032        1,032
                                                              -------      -------
  TOTAL STOCKHOLDER'S EQUITY................................    4,405        4,076
                                                              -------      -------
  TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................  $20,066      $17,805
                                                              =======      =======
</Table>

           See notes to condensed consolidated financial statements.

                                       3
<Page>
                              DYNEGY HOLDINGS INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                           (UNAUDITED) (IN MILLIONS)

<Table>
<Caption>
                                                                 THREE MONTHS
                                                                ENDED JUNE 30,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
Revenues....................................................  $10,670     $5,381
Cost of sales...............................................   10,323      5,161
                                                              -------     ------
Operating margin............................................      347        220
Depreciation and amortization...............................       68         50
General and administrative expenses.........................       89         53
                                                              -------     ------
  Operating income..........................................      190        117
Earnings from unconsolidated investments....................       61         53
Other income................................................       23         12
Interest expense............................................      (34)       (30)
Other expenses..............................................       (5)       (21)
Minority interest in income of subsidiaries.................       (4)        (4)
                                                              -------     ------
Income before income taxes..................................      231        127
Income tax provision........................................       72         48
                                                              -------     ------
NET INCOME..................................................  $   159     $   79
                                                              =======     ======
</Table>

           See notes to condensed consolidated financial statements.

                                       4
<Page>
                              DYNEGY HOLDINGS INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                           (UNAUDITED) (IN MILLIONS)

<Table>
<Caption>
                                                                  SIX MONTHS
                                                                ENDED JUNE 30,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
Revenues....................................................  $23,278    $10,323
Cost of sales...............................................   22,566      9,834
                                                              -------    -------
Operating margin............................................      712        489
Depreciation and amortization...............................      132        123
General and administrative expenses.........................      167        115
                                                              -------    -------
  Operating income..........................................      413        251
Earnings from unconsolidated investments....................       90         62
Other income................................................       49         69
Interest expense............................................      (63)       (57)
Other expenses..............................................      (64)       (63)
Minority interest in income of subsidiaries.................       (8)        (8)
                                                              -------    -------
Income before income taxes..................................      417        254
Income tax provision........................................      134         95
                                                              -------    -------
Income from operations......................................      283        159
Cumulative effect of change in accounting principle.........        2         --
                                                              -------    -------
NET INCOME..................................................  $   285    $   159
                                                              =======    =======
</Table>

           See notes to condensed consolidated financial statements.

                                       5
<Page>
                              DYNEGY HOLDINGS INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (UNAUDITED) (IN MILLIONS)

<Table>
<Caption>
                                                                  SIX MONTHS
                                                                ENDED JUNE 30,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................  $   285     $ 159
Items not affecting cash flows from operating activities:
  Depreciation, amortization, impairment and abandonment....      126       108
  Earnings from unconsolidated investments, net of cash
    distributions...........................................      (72)      (42)
  Risk-management activities................................      236      (140)
  Deferred income taxes.....................................       78        64
  Other.....................................................      (11)       22

Change in assets and liabilities resulting from operating
  activities:
  Accounts receivable.......................................      798      (462)
  Inventories...............................................       34       154
  Prepayments and other assets..............................     (191)       51
  Accounts payable..........................................     (939)      463
  Accrued liabilities.......................................      (31)      (67)
Other, net..................................................       66       (24)
                                                              -------     -----
Net cash provided by operating activities...................      379       286
                                                              -------     -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................   (1,216)     (279)
Unconsolidated investments..................................      (30)      (31)
Proceeds from asset sales...................................      996       737
Affiliate transactions......................................     (119)     (568)
Other investing, net........................................     (158)       43
                                                              -------     -----
Net cash used in investing activities.......................     (527)      (98)
                                                              -------     -----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings..........................      496       297
Repayments of long-term borrowings..........................       --      (226)
Net cash flow from commercial paper and money market lines
  of credit.................................................      (87)     (284)
Other financing, net........................................      178         8
                                                              -------     -----
Net cash provided by (used in) financing activities.........      587      (205)
                                                              -------     -----
Net increase (decrease) in cash and cash equivalents........      439       (17)
Cash and cash equivalents, beginning of period..............       32        45
                                                              -------     -----
Cash and cash equivalents, end of period....................  $   471     $  28
                                                              =======     =====
</Table>

           See notes to condensed consolidated financial statements.

                                       6
<Page>
                              DYNEGY HOLDINGS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

              FOR THE INTERIM PERIODS ENDED JUNE 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. Dynegy 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 year amounts in order to conform to current year
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 six-month periods ended June 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 is recorded in equity until the related hedged items impact earnings.
Any ineffective portion of a hedge is reported in earnings immediately.

    The nature of the Company's business necessarily involves certain market and
financial risks. The Company routinely enters into financial instrument
contracts in an attempt to mitigate or eliminate these various risks. These
risks and the Company's strategy for mitigating these risks are more fully
described in Note 3 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.

    The Company 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

                                       7
<Page>
                              DYNEGY HOLDINGS INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

NOTE 2--CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED)
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>

    Changes in stockholder's equity related to derivatives for the six-month
period ended June 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..................     (9)
Reclassifications to earnings, net..........................      2
                                                                ---
Balance at June 30, 2001....................................    $34
                                                                ===
</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......................................    $ 34
Currency Translation Adjustment, Net........................     (15)
Unrealized Loss on Available-for-Sale Securities, Net.......      (5)
                                                                ----
Accumulated Other Comprehensive Income, Net of Tax, at June
  30, 2001..................................................    $ 14
                                                                ====
</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. During the quarter ended June 30, 2001, the Company
also executed two 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 six months ended June 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 June 30, 2001 is
expected to be reclassified to future earnings contemporaneously with the
related purchases of fuel, sales of liquids

                                       8
<Page>
                              DYNEGY HOLDINGS INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

NOTE 2--CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED)
and recognition of operating lease expense, as applicable to each type of hedge.
Of this amount, approximately $32 million, net of taxes, is estimated to be
reclassified into earnings over the 12-month period ending June 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 $1 million was recorded in the
second 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 six-month periods was $7 million.

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.

NOTE 4--UNCONSOLIDATED INVESTMENTS

    At June 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; 50 percent interests 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. The
Company sold its investment in Canadian Midstream Services, Ltd. during the
second quarter of 2001.

                                       9
<Page>
                              DYNEGY HOLDINGS INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

NOTE 4--UNCONSOLIDATED INVESTMENTS (CONTINUED)
    Summarized unaudited combined income statement information for the
unconsolidated investments accounted for by the equity method is presented in
the following table (in millions):

<Table>
<Caption>
                                                          SIX MONTHS ENDED JUNE 30,
                                                  -----------------------------------------
                                                         2001                  2000
                                                  -------------------   -------------------
                                                              EQUITY                EQUITY
                                                   TOTAL      SHARE      TOTAL      SHARE
                                                  --------   --------   --------   --------
<S>                                               <C>        <C>        <C>        <C>
Revenues(1).....................................   $1,224      $427       $684       $239
                                                   ------      ----       ----       ----
Operating margin(1).............................   $  147      $ 55       $112       $ 43
                                                   ------      ----       ----       ----
Net income(1)...................................   $  207      $ 88       $137       $ 57
                                                   ------      ----       ----       ----
</Table>

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

(1) The interim financial data for June 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 June 30, 2001 are Dynegy's
various cost basis investments and certain warrants to acquire common stock of
another entity.

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. Outside counsel
estimates that it could take as long as six months from such date for the Ninth
Circuit to deliver its decision on the case. Although PG&E filed a Chapter 11
bankruptcy proceeding on April 6, 2001, the automatic stay applicable in the
proceeding will be lifted to permit the Ninth Circuit to decide the pending
appeal.

    Following dismissal of its federal court suit, MID filed suit in California
state court asserting breach of contract and tortuous interference with
prospective economic relations claims against Destec and tortuous interference
with contract and tortuous interference with prospective economic relations

                                       10
<Page>
                              DYNEGY HOLDINGS INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

NOTE 5--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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 DMG) (IP and DMG collectively the "Defendants"). Similar notices
and lawsuits have been filed against a number of other utilities. Both the NOV
and complaint allege violations of the Clean Air Act and regulations thereunder.
More specifically, both allege, based on the same events, that certain equipment
repairs, replacements and maintenance activities at the Defendants' three
Baldwin Station generating units constituted "major modifications" under either
or both the Prevention of Significant Deterioration ("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
May 15, 2001, a trial date of June 2002 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.

                                       11
<Page>
                              DYNEGY HOLDINGS INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

NOTE 5--COMMITMENTS AND CONTINGENCIES (CONTINUED)
    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 the 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 and
are 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 a period
extending from 2012 through 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 five class action lawsuits have been filed against various
Dynegy entities, including 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.

    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.

                                       12
<Page>
                              DYNEGY HOLDINGS INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

NOTE 5--COMMITMENTS AND CONTINGENCIES (CONTINUED)
    5.  Sweetwater Authority et al. v. Dynegy Inc., et al. was filed on
       January 16, 2001 in San Diego Superior Court. The defendants subsequently
       removed the case to the United States District Court for the Southern
       District of California.

    The five class action lawsuits are based on the events occurring in the
California power market during the summer of 2000. The complaints allege
violations of California's Business and Professions Code, Unfair Trade Practices
Act and various other statutes. Specifically, the named plaintiffs allege that
the defendants, including the owners of in-state generation and various power
marketers, conspired to manipulate the California wholesale power market to the
detriment of California consumers. Included among the acts forming the basis of
the plaintiffs' claims are the alleged improper sharing of generation outage
data, improper withholding of generation capacity and the manipulation of power
market bid practices. The plaintiffs seek unspecified treble damages.

    The five lawsuits are at preliminary stages. Defendants in the five 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 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. By order
issued on July 31, 2001, Judge Whaley remanded the five cases back to state
court.

    The defendants in the five lawsuits have formed various joint defense groups
in an effort to coordinate the defense of the claims and to share certain costs
of defense. The Company believes the allegations are without merit and will
vigorously defend these claims. In the opinion of management, the amount of
ultimate liability with respect to these actions will not have a material
adverse effect on the financial position or results of operations of the
Company.

    A sixth lawsuit has been filed against various Dynegy entities, including
Dynegy Marketing and Trade, as well as against three corporate officers
individually. Bustamante v. Dynegy Inc., et al. was filed on May 2, 2001 in Los
Angeles Superior Court. The suit was filed on behalf of California taxpayers by
Lieutenant Governor Cruz Bustamante and Assembly Woman Barbara Matthews, both
acting in their capacity as taxpayers and not in their capacity as elected
officials. The allegations in this suit are similar to those in the other five
suits, with the exception that the Bustamante suit includes a claim of unfair
business practices based on "price gouging" during an emergency declared by
Governor Gray Davis. The defendants removed the case to the United States
District Court for the Central District of California, the plaintiffs filed a
motion to remand the case to state court and the multi-district panel assigned
the case to Judge Whaley. The defendants anticipate that Judge Whaley will
remand the case back to state court.

    In addition, in response to the filing of a number of complaints challenging
the level of wholesale prices in California, 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 is subject to weekly reporting and
monitoring requirements. On March 9, 2001, the FERC issued a

                                       13
<Page>
                              DYNEGY HOLDINGS INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

NOTE 5--COMMITMENTS AND CONTINGENCIES (CONTINUED)
further order establishing a proxy market clearing price of $273/MW hour for
January 2001, and on March 16, 2001 the FERC issued a further order adjusting
the proxy market clearing price to $430/MW hour for February 2001. On April 16,
2001, the FERC issued a further order adjusting the proxy market clearing price
to $300/MW hour for March 2001.

    In the FERC's March 9, March 16 and April 16 orders, the FERC indicated that
approximately $46 million charged by Dynegy Power Marketing Inc. (as scheduling
coordinator for West Coast Power LLC ("West Coast Power"), a 50 percent equity
investee of Dynegy's) from January 2001 through March 2001 in California to the
ISO and PX was subject to possible refunds. Because the Company believes that
there is cost or other justification for prices charged above the proxy market
clearing prices established in the orders, it has notified the FERC of its
desire to challenge the refund amounts identified in such orders. Any refunds
the Company may ultimately be obligated to pay are to be credited against unpaid
amounts owed for sales in the PX or to the ISO. Sales between October 2, 2000
and December 31, 2000 remain subject to refund under the FERC's December 15
order. Motions for rehearing have been filed on a number of issues related to
the December 15 order and such motions are still pending before the FERC. Should
the FERC grant these motions, the refund amounts identified above could change.

    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 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. The FERC endorsed the settlement judge's recommendation to calculate
the refunds based on a formula used in the FERC's June 19, 2001 order. The
formula is expected to be used to determine overcharges that occurred between
October 2, 2000 and June 20, 2001.

    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

                                       14
<Page>
                              DYNEGY HOLDINGS INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

NOTE 5--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 received revenues for power purchased of
approximately $226 million and $264 million from IP for the six-month periods
ended June 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-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 Energy Services, previously reported as a
separate segment in the three- and six-month periods ended June 30, 2000, is now
included with DMT. Dynegy accounts for intercompany transactions at prevailing
market rates. Unaudited operating segment information for the three- and
six-month periods ended June 30, 2001 and 2000 is presented below.

                                       15
<Page>
                              DYNEGY HOLDINGS INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

NOTE 7--SEGMENT INFORMATION (CONTINUED)

           DYNEGY'S SEGMENT DATA FOR THE QUARTER ENDED JUNE 30, 2001
                                ($ IN MILLIONS)

<Table>
<Caption>
                                                               DMT        DMS      ELIMINATIONS    TOTAL
                                                             --------   --------   ------------   --------
<S>                                                          <C>        <C>        <C>            <C>
Unaffiliated revenues:
  Domestic.................................................  $ 7,860     $  580       $  --       $ 8,440
  Canadian.................................................    1,188        327          --         1,515
  European and other.......................................      715         --          --           715
                                                             -------     ------       -----       -------
                                                               9,763        907          --        10,670

Intersegment revenues:
  Domestic.................................................       38         68        (106)           --
                                                             -------     ------       -----       -------
    Total revenues.........................................    9,801        975        (106)       10,670
                                                             -------     ------       -----       -------
Operating margin...........................................      280         67          --           347
Depreciation and amortization..............................      (48)       (20)         --           (68)
Interest expense...........................................      (20)       (14)         --           (34)
Other income (expense).....................................       22         (4)         --            18
Earnings from unconsolidated investments...................       56          5          --            61
Income tax provision.......................................       65          7          --            72
Net income.................................................  $   149     $   10       $  --       $   159
Identifiable assets:
  Domestic.................................................  $16,721     $1,898       $  --       $18,619
  Canadian.................................................      714        227          --           941
  European and other.......................................      506         --          --           506
Unconsolidated investments.................................      620        161          --           781
Capital expenditures and unconsolidated investments........     (123)       (25)         --          (148)
</Table>

                                       16
<Page>
                              DYNEGY HOLDINGS INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

NOTE 7--SEGMENT INFORMATION (CONTINUED)

           DYNEGY'S SEGMENT DATA FOR THE QUARTER ENDED JUNE 30, 2000
                                ($ IN MILLIONS)

<Table>
<Caption>
                                                                DMT        DMS      ELIMINATIONS    TOTAL
                                                              --------   --------   ------------   --------
<S>                                                           <C>        <C>        <C>            <C>
Unaffiliated revenues:
  Domestic..................................................   $3,160     $1,139        $ --       $ 4,299
  Canadian..................................................      456        259          --           715
  European and other........................................      367         --          --           367
                                                               ------     ------        ----       -------
                                                                3,983      1,398          --         5,381
Intersegment revenues:
  Domestic..................................................       52         44         (96)           --
                                                               ------     ------        ----       -------
    Total revenues..........................................    4,035      1,442         (96)        5,381
                                                               ------     ------        ----       -------
Operating margin............................................      166         54          --           220
Depreciation and amortization...............................      (31)       (19)         --           (50)
Interest expense............................................      (33)         3          --           (30)
Other income (expense)......................................       (8)        (1)         --            (9)
Earnings from unconsolidated investments....................       48          5          --            53
Income tax provision........................................       36         12          --            48
Net income..................................................   $   63     $   16        $ --       $    79
Identifiable assets:
  Domestic..................................................   $9,826     $1,887        $ --       $11,713
  Canadian..................................................      443        163          --           606
  European and other........................................      375         --          --           375
Unconsolidated investments..................................      486        150          --           636
Capital expenditures and unconsolidated investments.........      (72)       (42)         --          (114)
</Table>

                                       17
<Page>
                              DYNEGY HOLDINGS INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

NOTE 7--SEGMENT INFORMATION (CONTINUED)

          DYNEGY'S SEGMENT DATA FOR THE SIX MONTHS ENDED JUNE 30, 2001
                                ($ IN MILLIONS)

<Table>
<Caption>
                                                               DMT        DMS      ELIMINATIONS    TOTAL
                                                             --------   --------   ------------   --------
<S>                                                          <C>        <C>        <C>            <C>
Unaffiliated revenues:
  Domestic.................................................  $14,882     $2,720       $  --       $17,602
  Canadian.................................................    3,275        681          --         3,956
  European and other.......................................    1,720         --          --         1,720
                                                             -------     ------       -----       -------
                                                              19,877      3,401          --        23,278
                                                             -------     ------       -----       -------
Intersegment revenues:
  Domestic.................................................       74        159        (233)           --
                                                             -------     ------       -----       -------
    Total revenues.........................................   19,951      3,560        (233)       23,278
                                                             -------     ------       -----       -------
Operating margin...........................................      558        154          --           712
Depreciation and amortization..............................      (92)       (40)         --          (132)
Interest expense...........................................      (36)       (27)         --           (63)
Other income (expense).....................................       (7)        (8)         --           (15)
Earnings from unconsolidated investments...................       84          6          --            90
Income tax provision.......................................      115         19          --           134
Income from operations.....................................      250         33          --           283
Cumulative effect of change in accounting principle........        2         --          --             2
Net income.................................................  $   252     $   33       $  --       $   285
Identifiable assets:
  Domestic.................................................  $16,721     $1,898       $  --       $18,619
  Canadian.................................................      714        227          --           941
  European and other.......................................      506         --          --           506
Unconsolidated investments.................................      620        161          --           781
Capital expenditures and unconsolidated investments........   (1,188)       (58)         --        (1,246)
</Table>

                                       18
<Page>
                              DYNEGY HOLDINGS INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

NOTE 7--SEGMENT INFORMATION (CONTINUED)

          DYNEGY'S SEGMENT DATA FOR THE SIX MONTHS ENDED JUNE 30, 2000
                                ($ IN MILLIONS)

<Table>
<Caption>
                                                                DMT        DMS      ELIMINATIONS    TOTAL
                                                              --------   --------   ------------   --------
<S>                                                           <C>        <C>        <C>            <C>
Unaffiliated revenues:
  Domestic..................................................   $5,850     $2,403       $  --       $ 8,253
  Canadian..................................................      829        443          --         1,272
  European and other........................................      798         --          --           798
                                                               ------     ------       -----       -------
                                                                7,477      2,846          --        10,323
                                                               ------     ------       -----       -------
Intersegment revenues:
  Domestic..................................................       91         96        (187)           --
                                                               ------     ------       -----       -------
    Total revenues..........................................    7,568      2,942        (187)       10,323
                                                               ------     ------       -----       -------
Operating margin............................................      361        128          --           489
Depreciation and amortization...............................      (59)       (64)         --          (123)
Interest expense............................................      (54)        (3)         --           (57)
Other income (expense)......................................       41        (35)         --             6
Earnings from unconsolidated investments....................       51         11          --            62
Income tax provision........................................       95         --          --            95
Net income..................................................   $  154     $    5       $  --       $   159
Identifiable assets:
  Domestic..................................................   $9,826     $1,887       $  --       $11,713
  Canadian..................................................      443        163          --           606
  European and other........................................      375         --          --           375
Unconsolidated investments..................................      486        150          --           636
Capital expenditures and unconsolidated investments.........     (251)       (59)         --          (310)
</Table>

NOTE 8--SUBSEQUENT EVENT

    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 $590 million) 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. It is expected to close during
the third quarter of 2001.

                                       19
<Page>
                              DYNEGY HOLDINGS INC.

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

              FOR THE INTERIM PERIODS ENDED JUNE 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 expertise 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 reported in two 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-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 NGL marketing and transportation
operations. Dynegy Energy Services, previously reported as a separate segment in
the six months ended June 30, 2000, is now included with DMT.

                        LIQUIDITY AND CAPITAL RESOURCES

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

    Dynegy relies upon operating cash flow and borrowings from a combination of
commercial paper issuances, money market lines of credit, corporate credit
agreements and various public debt issuances for its liquidity and capital
resource requirements. At June 30, 2001, the Company's various credit agreements
totaled $1.66 billion. After consideration of outstanding commercial paper and
letters of credit, the unused borrowing capacity under these agreements at
June 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 and an equity investment
by a third party in the amount of approximately $120 million. The debt
securities are pass-through trust

                                       20
<Page>
                              DYNEGY HOLDINGS INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

certificates issued by two pass-through trusts. Rent payable by two Dynegy
subsidiaries in the leveraged lease transaction will be 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 will use 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 $590 million) 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. It is expected
to close during the third quarter of 2001.

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

    Many events related to the California situation have occurred in recent
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 refunds; and (h) the scheduling of a
FERC hearing to calculate such refunds. In addition, Dynegy and/or certain of
its officers have been named in various lawsuits associated with the California
situation, which are more fully discussed in Note 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

                                       21
<Page>
                              DYNEGY HOLDINGS INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

Coast Power represents approximately 1,400 MW of generating capacity. Dynegy
also participates in the California markets as a wholesale marketer and trader
of gas and power. Through Dynegy's interest in West Coast Power, Dynegy has
exposure to the ISO and PX, which primarily rely on receipts from California
utilities to pay their bills. West Coast Power also sells directly to the
California Department of Water Resources ("DWR") and pursuant to other bilateral
agreements. The delay in payments to West Coast Power has resulted in a covenant
default under West Coast Power's bank credit facility. The West Coast Power bank
facility is nonrecourse to Dynegy. West Coast Power has entered into a
forbearance agreement with its lenders in connection with the covenant default.
The covenant default by West Coast Power does not adversely impact any other
credit facilities or borrowing obligations of Dynegy or its subsidiaries.

    West Coast Power's generation facilities primarily are intended to operate
as peaking units. Because of the power shortage in California, these units have
been running with much greater frequency and for longer durations than is
typically the case. 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 and that the prospect of increased exposure of West Coast Power to the ISO or
PX or for refunds has been largely mitigated. At June 30, 2001, Dynegy's portion
of the receivables owed to West Coast Power by the ISO and PX approximated
$318 million. Management is continually assessing Dynegy's exposure relative to
its California receivables and has established reserves to reflect market
uncertainties. The Company closely monitors developments in California in an
effort to manage its credit risk.

    NEW YORK ELECTRIC GENERATION MARKET.  Due to concern over potential short
supply and high prices this summer, the New York Independent System
Operator, Inc. ("NYISO"), the FERC-approved operator of electric transmission
facilities and centralized electric markets in New York, 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 summer; the duration of the AMP may be
extended in the future.

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

                                       22
<Page>
                              DYNEGY HOLDINGS INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

                             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 six-month periods ended June 30, 2001 and 2000, respectively.

THREE-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000

    For the quarter ended June 30, 2001, Dynegy's net income was $159 million,
compared with second quarter 2000 net income of $79 million. Recurring net
income was the same as reported net income for each period. Second quarter 2001
results were led by a strong performance in energy convergence operations,
particularly in natural gas and power marketing operations resulting from
increased domestic, Canadian and European customer origination and
risk-management activities, greater utilization of existing facilities and
additional generation, including 1,700 MW of power plants in the Northeast.

    Consolidated operating margin for the second quarter of 2001 totaled
$347 million compared to $220 million for the same 2000 period primarily
reflecting improved margins in DMT. DMT contributed $280 million to second
quarter 2001 consolidated operating margin compared to $166 million reported in
the second quarter of 2000, an increase of 69 percent. DMS contributed
$67 million to second quarter 2001 consolidated operating margin compared to
$54 million reported in the second quarter of 2000.

    Operating income increased $73 million quarter-to-quarter, reflecting the
significantly higher operating results from the energy convergence business.
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. The increased level of general and administrative
expenses reflect the impact of continued expansion of the Company's operations,
primarily in Europe, and higher company-wide variable compensation accruals.

    Incremental to Dynegy's consolidated results was the Company's earnings from
unconsolidated investments, which contributed approximately $61 million and
$53 million to pre-tax quarterly earnings in the 2001 and 2000 periods,
respectively. Variances period-to-period in these results reflect the impact of
weather-driven demand and changes in commodity prices, particularly as these
changes impacted DMT investments.

    Interest expense totaled $34 million for the quarter ended June 30, 2001,
compared to $30 million for the equivalent 2000 period. The variance is
primarily attributable to the issuance of $500 million of 6.875 percent Senior
Notes due April 1, 2011 in March 2001 and reduced capitalization of interest to
construction projects, offset by decreased commercial paper outstanding.

    Other income and expenses, net totaled $18 million in income in the quarter
ended June 30, 2001 compared with $9 million in loss in the 2000 period. The
balances consisted of interest income, minority interest in consolidated
subsidiaries and other income and expense items.

    The Company reported an income tax provision of $72 million for the quarter
ended June 30, 2001, compared to an income tax provision of $48 million for the
2000 period. The effective rates

                                       23
<Page>
                              DYNEGY HOLDINGS INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

approximated 31 and 38 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.

SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000

    For the six-month period ended June 30, 2001, Dynegy's net income was
$285 million, compared with net income of $159 million for the same 2000 period.
Recurring net income was $283 million in 2001, compared to $167 million in 2000.
The recurring net income for the six-month period ended June 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 six-month period ended June 30, 2000 excludes 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 six-month period ended June 20, 2001 were led by a strong performance in
energy convergence operations, particularly in natural gas and power marketing
operations, and additional generation, including 1,700 MW of power plants in the
Northeast which were acquired in the first quarter of 2001.

    Consolidated operating margin for the six-month period ended June 30, 2001
totaled $712 million compared to $489 million for the same 2000 period,
primarily reflecting improved margins in DMT. DMT contributed $558 million to
the six-month period ended June 30, 2001 consolidated operating margin compared
to $361 million reported in the same 2000 period, an increase of 55 percent. DMS
contributed $154 million to the six-month period ended June 30, 2001
consolidated operating margin compared to $128 million reported in the same 2000
period.

    Operating income increased $162 million period-to-period, reflecting the
significantly higher operating results from the energy convergence business.
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 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 $90 million and
$62 million to pre-tax earnings in the six months ended June 30, 2001 and 2000,
respectively. Variances period-to-period in these results reflect the impact of
weather-driven demand and changes in commodity prices, particularly as these
changes impacted DMT investments.

    Interest expense totaled $63 million for the six-month period ended
June 30, 2001, compared to $57 million for the equivalent 2000 period. The
variance is primarily attributable to the issuance of $500 million of
6.875 percent Senior Notes due April 1, 2011 in March 2001 and reduced
capitalization of interest to construction projects, offset by decreased
commercial paper outstanding.

    Other income and expenses, net totaled $15 million in expense in the
six-month period ended June 30, 2001 compared with income of $6 million in the
2000 period. The 2000 amount includes some

                                       24
<Page>
                              DYNEGY HOLDINGS INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

of the nonrecurring charges described above. The remaining balances consisted of
interest income, minority interest in consolidated subsidiaries and other income
and expense items.

    The Company reported an income tax provision of $134 million for the
six-month period ended June 30, 2001, compared to an income tax provision of
$95 million for the 2000 period. The effective rates approximated 32 and
37 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.

                                       25
<Page>
                              DYNEGY HOLDINGS INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

SEGMENT DISCLOSURES (UNAUDITED)

                           DYNEGY MARKETING AND TRADE

<Table>
<Caption>
                                                                 THREE MONTHS           SIX MONTHS
                                                                ENDED JUNE 30,        ENDED JUNE 30,
                                                              -------------------   -------------------
                                                                2001       2000       2001       2000
                                                              --------   --------   --------   --------
                                                               ($ IN MILLIONS, EXCEPT AVERAGE ON-PEAK
                                                                        MARKET POWER PRICES)
<S>                                                           <C>        <C>        <C>        <C>
Operating Margin............................................  $   280     $  166    $   558     $  361
Earnings from Unconsolidated Investments....................       56         48         84         51
                                                              -------     ------    -------     ------
      SUBTOTAL--FINANCIAL CONTRIBUTION......................      336        214        642        412
Depreciation and Amortization(1)............................      (48)       (31)       (92)       (59)
General and Administrative Expenses.........................      (74)       (38)      (137)       (84)
Other Items(1)..............................................       22         (8)        (7)        41
                                                              -------     ------    -------     ------
      EARNINGS BEFORE INTEREST AND TAXES....................      236        137        406        310
Interest Expense(2).........................................      (22)       (38)       (41)       (61)
                                                              -------     ------    -------     ------
      PRE-TAX EARNINGS......................................      214         99        365        249
Income Tax Provision........................................       65         36        115         95
                                                              -------     ------    -------     ------
      INCOME FROM OPERATIONS................................      149         63        250        154
Cumulative Effect of Change in Accounting Principle.........       --         --          2         --
                                                              -------     ------    -------     ------
      NET INCOME............................................  $   149     $   63    $   252     $  154
                                                              =======     ======    =======     ======
      RECURRING NET INCOME(3)...............................  $   149     $   63    $   250     $  127
                                                              =======     ======    =======     ======
OPERATING STATISTICS:
  Natural Gas Marketing (Bcf/d):
    Domestic Sales Volumes..................................      8.2        7.1        8.3        7.2
    Canadian Sales Volumes..................................      2.7        2.2        2.5        2.3
    European Sales Volumes..................................      0.7        0.9        0.7        1.5
                                                              -------     ------    -------     ------
                                                                 11.6       10.2       11.5       11.0
                                                              =======     ======    =======     ======
  Power Produced and Sold:
    Million MW Hours Generated--Gross.......................      9.9        9.3       20.2       16.8
                                                              =======     ======    =======     ======
    Million MW Hours Generated--Net.........................      7.9        7.1       16.9       13.9
                                                              =======     ======    =======     ======
    Total Physical Million Megawatt Hours Sold..............     70.1       26.2      122.1       48.1
                                                              =======     ======    =======     ======
  Coal Marketing Volumes (Millions of Tons).................      9.3        2.5       18.5        4.5
                                                              =======     ======    =======     ======
  Average On-Peak Market Power Prices:
    Cinergy.................................................  $ 39.71     $36.52    $ 41.01     $30.54
    TVA.....................................................    51.71      49.20      47.25      36.99
    PJM.....................................................    44.09      42.13      44.19      35.27
    CALPX SP 15.............................................   188.92      88.41     206.58      60.60
</Table>

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

(1) Six-month period ended June 30, 2000 results include a pre-tax nonrecurring
    gain on the sale of certain qualifying generation 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) Interest expense for all interim periods presented includes minority
    interest in income of subsidiaries.

                                       26
<Page>
                              DYNEGY HOLDINGS INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

(3) Recurring net income consists of segment reported net income adjusted for
    the cumulative effect of change in accounting principle and the identified
    nonrecurring items described in (1) above for the six-month periods ended
    June 30, 2001 and 2000, respectively.

THREE-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000

    DMT reported recurring segment net income of $149 million for the
three-month period ended June 30, 2001, compared with recurring net income of
$63 million in the 2000 quarter. Recurring results of operations
period-to-period were influenced by the following:

    - New generation and greater utilization of existing facilities;

    - Increased domestic, Canadian and European customer origination and
      risk-management activities;

    - Expansion of DynegyDIRECT, the Company's electronic commerce portal
      launched in late 2000, which reduces the cost of serving customers while
      increasing Dynegy's competitive reach and market share; and

    - Lower interest expense due to timing of interest expense allocation;
      offset by

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

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

    Total physical MW hours sold in the second quarter of 2001 increased to
70.1 million MW hours compared to 26.2 million MW hours in the second quarter of
2000. Total natural gas volumes sold in North America in the second quarter of
2001 totaled 10.9 billion cubic feet per day compared to 9.3 billion cubic feet
per day during last year's second quarter. The increased volumes in both power
and gas were a result of improved market liquidity, greater sales volumes on
DynegyDIRECT and increased market origination.

SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000

    DMT reported recurring segment net income of $250 million for the six-month
period ended June 30, 2001, compared with recurring net income of $127 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 nonrecurring after-tax gain of $34 million
relating to the sale of certain qualifying facilities and an after-tax charge of
$7 million related to merger costs. Recurring results of operations
period-to-period were influenced by the same factors impacting quarterly
results.

    Total physical MW hours sold during the six-month period ended June 30, 2001
aggregated 122.1 million MW hours compared to 48.1 million MW hours during the
2000 period. Total North American natural gas volumes sold increased to
10.8 billion cubic feet per day from 9.5 billion cubic feet per day during the
six-month period ended June 30, 2000.

                                       27
<Page>
                              DYNEGY HOLDINGS INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

                           DYNEGY MIDSTREAM SERVICES

<Table>
<Caption>
                                                                 THREE MONTHS           SIX MONTHS
                                                                ENDED JUNE 30,        ENDED JUNE 30,
                                                              -------------------   -------------------
                                                                2001       2000       2001       2000
                                                              --------   --------   --------   --------
                                                              ($ IN MILLIONS, EXCEPT AVERAGE COMMODITY
                                                                               PRICES)
<S>                                                           <C>        <C>        <C>        <C>
Operating Margin............................................   $   67     $   54     $  154     $  128
Earnings from Unconsolidated Investments....................        5          5          6         11
                                                               ------     ------     ------     ------
      SUBTOTAL--FINANCIAL CONTRIBUTION......................       72         59        160        139
Depreciation and Amortization(1)............................      (20)       (19)       (40)       (64)
General and Administrative Expenses.........................      (15)       (15)       (30)       (31)
Other Items(1)..............................................       (4)        (1)        (8)       (35)
                                                               ------     ------     ------     ------
      EARNINGS BEFORE INTEREST AND TAXES....................       33         24         82          9
Interest (Expense) Income(2)................................      (16)         4        (30)        (4)
                                                               ------     ------     ------     ------
      PRE-TAX EARNINGS......................................       17         28         52          5
Income Tax Provision........................................        7         12         19         --
                                                               ------     ------     ------     ------
      NET INCOME............................................   $   10     $   16     $   33     $    5
                                                               ======     ======     ======     ======
      RECURRING NET INCOME(3)...............................   $   10     $   16     $   33     $   40
                                                               ======     ======     ======     ======
OPERATING STATISTICS:
  Natural Gas Liquids Processed (MBbls/d-Gross):
    Field Plants............................................     56.0       56.7       55.8       66.0
    Straddle Plants.........................................     27.9       37.0       25.2       39.1
                                                               ------     ------     ------     ------
                                                                 83.9       93.7       81.0      105.1
                                                               ======     ======     ======     ======
  Fractionation Volumes (MBbls/d)...........................    250.6      248.5      224.9      233.9
  Natural Gas Liquids Sold (MBbls/d)........................    493.8      570.6      567.9      583.1
  Average Commodity Prices:
    Natural Gas--Henry Hub (First of the Month) ($/MMBtu)...   $ 4.65     $ 3.44     $ 5.85     $ 2.98
    Crude Oil--Cushing ($/Bbl)..............................    27.90      25.12      28.46      25.67
    Natural Gas Liquids ($/Gal).............................     0.49       0.49       0.55       0.51
</Table>

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

(1) Six-month period ended June 30, 2000 results include a reasonable allocation
    of pre-tax nonrecurring charges aggregating $65 million ($42 million
    after-tax).

(2) Interest expense for all interim periods presented includes minority
    interest in income of subsidiaries.

(3) Recurring net income consists of segment reported net income adjusted for
    identified nonrecurring items described in (1) above.

                                       28
<Page>
                              DYNEGY HOLDINGS INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

THREE-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000

    DMS reported recurring net income of $10 million in the second quarter of
2001 compared with recurring net income of $16 million in the second quarter of
2000. The following influenced recurring results of operations period-to-period:

    - Increased interest expense in 2001 due to timing of interest expense
      allocation; offset by

    - Higher price realization in 2001; and

    - Beneficial restructuring of contracts in 2001.

    Aggregate domestic NGL processing volumes totaled 83.9 thousand gross
barrels per day in the second quarter of 2001 compared to 93.7 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 second quarter of 2000. The continued active management of price risk
associated with DMS' field processing plants and greater gas price realization
in field plants mitigated the financial impact of reduced processing volumes.
NGL marketing volumes were lower period-to-period reflecting a reduced demand in
the petrochemical industry in the second quarter of 2001.

SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000

    DMS reported recurring net income of $33 million in the six-month period
ended June 30, 2001 compared with recurring net income of $40 million in the
same 2000 period. After adjusting for earnings recognized from the Mid-Continent
assets in 2000, recurring net income for the six-month period ended June 30,
2001 is $2 million less than the same period in 2000. Recurring net income for
the 2000 period excludes an aggregate nonrecurring 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:

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

    - Increased interest expense in 2001 due to timing of interest expense
      allocation; offset by

    - Higher price realization in 2001;

    - Beneficial restructuring of contracts in 2001; and

    - Stronger wholesale marketing operations in 2001.

    Aggregate domestic NGL processing volumes totaled 81.0 thousand gross
barrels per day in the six-month period ended June 30, 2001 compared to a
normalized average of 96.9 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
compared to the previous year as a result of the unhinging of the relationship
between natural gas and liquids prices. The continued active management of price
risk associated with DMS' field processing plants and greater gas price
realization in field plants mitigated the financial impact of reduced processing
volumes. NGL marketing volumes were lower period-to-period reflecting a
decreased international demand in the second quarter of 2001 partially

                                       29
<Page>
                              DYNEGY HOLDINGS INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

offset by a return to seasonal winter weather in the first quarter of 2001 and
greater commercialization of the Company's NGL business through DynegyDIRECT.

CASH FLOW DISCLOSURES

    OPERATING CASH FLOW.  Cash flow from operating activities totaled
$379 million for the six-month period ended June 30, 2001, compared to
$286 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
$1.2 billion and $279 million in the six-month periods ended June 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 $737 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:

    - Projected operating or financial results;

    - Expectations regarding capital expenditures and other payments;

    - Pending or recent acquisitions, including the anticipated closing date,
      expected cost savings or synergies and the accretive or dilutive impact of
      an acquisition on earnings;

    - Expectations regarding transaction volume and liquidity in wholesale
      energy markets in the U.S. and Europe;

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

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

                                       30
<Page>
                              DYNEGY HOLDINGS INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

              FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000

    - Beliefs regarding the outcome of legal and administrative proceedings and
      the levels of reserves recorded therewith; and

    - The expected commencement date for commercial operations for new power
      plants.

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

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

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

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

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

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

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

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

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

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

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

                                       31
<Page>
                              DYNEGY HOLDINGS INC.

           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

              FOR THE INTERIM PERIODS ENDED JUNE 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>
                                                        JUNE 30,   DECEMBER 31,
                                                          2001         2000
                                                        --------   ------------
<S>                                                     <C>        <C>
Natural Gas (Trillion Cubic Feet).....................     8.509        7.709
Electricity (Million MW Hours)........................   117.243      162.321
NGLs (Million Barrels)................................    10.223        9.899
Weather Derivatives (Thousands of Heating Degree
  Days)...............................................   401.660      427.423
U.K. Pound Sterling (In millions of U.S. Dollars).....  $    153     $     15
Average U.K. Pound Sterling Contract Rate (U.S.
  Dollars)............................................  $ 1.3917     $ 1.4658
Eurodollars (In millions of U.S. Dollars).............  $     23     $     36
Average Eurodollar Contract Rate (U.S. Dollars).......  $ 0.7657     $ 1.0200
Canadian Dollar (In millions of U.S. Dollars).........  $    832     $    738
Average Canadian Dollar Contract Rate (U.S.
  Dollars)............................................  $ 0.6572     $ 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 June 30, 2001, the Value at Risk for Dynegy's trading and
risk-management portfolios approximated $14.5 million and the average of such
value during the quarter ended June 30, 2001 was estimated at $9.6 million.

                                       32
<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) The following document is included as an exhibit to this Form 10-Q.

<Table>
<Caption>
EXHIBIT NUMBER
--------------
<S>             <C>
     12.1       Computation of Ratio of Earnings to Fixed Charges for the
                six-month period ended June 30, 2001
</Table>

(b) During the quarter ended June 30, 2001, the Company filed a Current Report
    on Form 8-K dated May 16, 2001. Items 5 and 7 were reported and no financial
    statements were filed.

                                       33
<Page>
                                   SIGNATURES

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

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

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

                                       34