<PAGE>

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

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

                                  FORM 10-K/A
                                AMENDMENT NO. 1

   [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934

                  For the fiscal year ended December 31, 2001

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

              For the transition period from         to

                       Commission file number: 000-29311

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

                             DYNEGY HOLDINGS INC.
            (Exact name of registrant as specified in its charter)

                     Delaware                  94-3248415
                  (State or other           (I.R.S. Employer
                  jurisdiction of        Identification Number)
                 incorporation or
                   organization)

             1000 Louisiana, Suite 5800
                  Houston, Texas                  77002
               (Address of principal           (Zip Code)
                executive offices)

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

             Securities registered pursuant to Section 12(b) of
               the Act:
                Title of each class:    Name of each exchange on
                                        which registered:
                None                    None
             Securities registered pursuant to Section 12(g) of
               the Act:
                Title of each class:    Name of each exchange on
                None                    which registered:
                                        None

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

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

   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 the
filing requirements for the past 90 days. Yes [X]  No [_]

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

DOCUMENTS INCORPORATED BY REFERENCE. None

REDUCED DISCLOSURE FORMAT. Dynegy Holdings Inc. meets the conditions set forth
in General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing
this Form 10-K with the reduced disclosure format.

================================================================================

<PAGE>

                       DYNEGY HOLDINGS INC. FORM 10-K/A
                               INTRODUCTORY NOTE

   Dynegy Holdings Inc. ("Dynegy" or the "Company") is filing this Amendment
No. 1 on Form 10-K/A ("Amendment No. 1") to reflect the audited restatement of
its 1999-2001 financial statements. These financial statements were originally
included in its Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, which was originally filed on March 22, 2002 (the "Original
Filing"). This Amendment No. 1 also includes other revisions to the Original
Filing. The financial information contained in the Original Filing has been
revised to reflect the restatement items described in the Explanatory Note to
the accompanying Consolidated Financial Statements. These restatement items
include adjustments previously announced by the Company in its Current Report
on Form 8-K dated November 19, 2002 as well as further adjustments as described
in the Explanatory Note to the accompanying Consolidated Financial Statements.

   The following Items of the Original Filing are amended by this Amendment No.
1:

Item 1. Business

Item 6. Selected Financial Data

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

Unaffected items have not been repeated in this Amendment No. 1.

   PLEASE NOTE THAT THE INFORMATION CONTAINED IN THIS FORM 10-K/A, INCLUDING
THE FINANCIAL STATEMENTS AND THE NOTES THERETO, DOES NOT REFLECT EVENTS
OCCURRING AFTER THE DATE OF THE ORIGINAL FILING. FOR A DESCRIPTION OF THESE
EVENTS, PLEASE READ THE COMPANY'S EXCHANGE ACT REPORTS FILED SINCE MARCH 22,
2002, INCLUDING ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
2002. SEE NOTE 19--SUBSEQUENT EVENTS FOR FURTHER DISCUSSION.

                                       i

<PAGE>

              DYNEGY HOLDINGS INC. FORM 10-K/A TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                               Page
                                                                                               ----
<C>      <S>                                                                                   <C>
PART I
Item 1.  Business.............................................................................   2

PART II
Item 6.  Selected Financial Data..............................................................  16
Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations  18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........................  54
Item 8.  Financial Statements and Supplementary Data..........................................  54

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................  55
Signatures....................................................................................  60

Index to Consolidated Financial Statements.................................................... F-1
Explanatory Note--Restatements................................................................ F-7
</TABLE>

                                      ii

<PAGE>

                             DYNEGY HOLDINGS INC.

                                    PART I

   PLEASE NOTE THAT THE INFORMATION CONTAINED IN THIS FORM 10-K/A, INCLUDING
THE FINANCIAL STATEMENTS AND THE NOTES THERETO, DOES NOT REFLECT EVENTS
OCCURRING AFTER MARCH 22, 2002 (THE DATE ON WHICH DYNEGY ORIGINALLY FILED ITS
2001 FORM 10-K) . FOR A DESCRIPTION OF THESE EVENTS, PLEASE READ THE COMPANY'S
EXCHANGE ACT REPORTS FILED SINCE MARCH 22, 2002, INCLUDING ITS ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002. SEE NOTE 19--SUBSEQUENT EVENTS
FOR FURTHER DISCUSSION.

DEFINITIONS

   As used in this Form 10-K/A, the abbreviations listed below are defined as
follows:

<TABLE>
   <S>                 <C>
   Accord............. Accord Energy Limited.
   Bcf................ Billions of cubic feet.
   Bcf/d.............. Billions of cubic feet per day.
   BGSL............... BG Storage Limited.
   Btu................ British thermal unit--a measure of the amount of
                         heat required to raise the temperature of one pound
                         of water one degree Fahrenheit.
   Catlin............. Catlin Associates, L.L.C.
   Chevron............ Chevron U.S.A. Inc., now a subsidiary of
                         ChevronTexaco.
   ChevronTexaco...... ChevronTexaco Corporation
   CERCLA or Superfund Comprehensive Environmental Response,
                         Compensation and Liability Act.
   Destec............. Destec Energy, Inc.
   DMG................ Dynegy Midwest Generation, Inc.
   DMS................ Dynegy Midstream Services, one of our two
                         reportable business segments.
   DOT................ The U.S. Department of Transportation.
   DWR................ The California Department of Water Resources.
   Dynegy............. Dynegy Holdings Inc.
   Enron.............. Enron Corp.
   EWGs............... Exempt Wholesale Generators.
   FASB............... Financial Accounting Standards Board.
   FERC............... Federal Energy Regulatory Commission.
   FPA................ The Federal Power Act.
   HLPSA.............. The Hazardous Liquid Pipeline Safety Act.
   Illinova........... Illinova Corporation, a wholly owned subsidiary of
                         Dynegy Inc.
   Investor........... Black Thunder Investors LLC.
   IP................. Illinois Power Company, a wholly owned subsidiary
                         of Illinova.
   ISO................ The California Independent System Operator.
   LNG................ Liquefied natural gas.
   LPG................ Liquefied petroleum gas.
   MBbls/d............ Thousands of barrels per day.
   Mcf................ Thousands of cubic feet.
   MMBtu.............. Millions of Btu.
</TABLE>

                                      1

<PAGE>

<TABLE>
    <S>              <C>
    MMcf/d.......... Millions of cubic feet per day.
    MW.............. Megawatts.
    NGA............. The Natural Gas Act of 1938, as amended.
    NGLs............ Natural gas liquids.
    NGPA............ The Natural Gas Policy Act of 1978, as amended.
    NGPSA........... Natural Gas Pipeline Safety Act.
    Northern Natural Northern Natural Gas Company.
    OSHA............ The Federal Occupational Safety and Health Act.
    Project Alpha... A structured natural gas transaction entered into by
                       Dynegy in April 2001.
    PURPA........... The Public Utilities Regulatory Policies Act of 1978.
    PX.............. The California Power Exchange.
    RCRA............ The Resource Conversation and Recovery Act.
    QFs............. "Qualifying facilities" are power generation facilities
                       that typically sell power to a single purchaser and
                       are generally exempt from FERC ratemaking
                       regulation.
    RTOs............ Regional transmission organizations established by
                       the FERC to control electric transmissions facilities
                       within a particular region.
    VaR............. Value at Risk.
    VLGC............ Very Large Gas Carriers.
    WEN............. Wholesale Energy Network, one of our two reportable
                       business segments.
</TABLE>

Item 1.  BUSINESS

THE COMPANY

   Dynegy Holdings Inc. (together with its subsidiaries, "Dynegy" or the
"Company") is one of the world's leading energy merchants. Through our global
energy delivery network and marketing, logistics and risk-management
capabilities, we provide innovative solutions to customers in North America,
the United Kingdom and Continental Europe. Our businesses include power
generation and wholesale and direct commercial and industrial marketing of
power, natural gas, coal and other similar products.

   The Company is a wholly owned subsidiary of Dynegy Inc., which began
operations in 1985. Dynegy Inc. acquired Illinova Corporation ("Illinova") in
the first quarter of 2000. As part of the acquisition of Illinova, the former
Dynegy Inc., which was renamed Dynegy Holdings Inc., became a wholly owned
subsidiary of a new holding company, Dynegy Inc. The assets, liabilities and
operations of the former Dynegy Inc. before the acquisition became the assets,
liabilities and operations of the Company after the acquisition.

   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 Illinova. 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 all of 2000.

   In addition, in January 2002, the Company acquired Northern Natural Gas
Company ("Northern Natural") as a result of Dynegy Inc.'s terminated merger
with Enron Corp. Northern Natural's financial results will be consolidated into
the Company's results of operations beginning February 1, 2002.

   The Company's principal executive office is located at 1000 Louisiana, Suite
5800, Houston, Texas 77002, and the telephone number of that office is (713)
507-6400. Dynegy and its affiliates maintain marketing or regional offices in
Atlanta, Georgia; Boston, Massachusetts; Calgary, Canada; Chicago, Illinois;
Dallas, Texas; London, England; Lucerne, Switzerland; Manama, Bahrain; Midland,
Texas; Milan, Italy; Montreal, Canada; Oakville, Canada; Oklahoma City,
Oklahoma; Omaha, Nebraska; Paris, France; Pleasanton, California; Richmond,
England; Tampa, Florida; and Washington, D.C.

                                      2

<PAGE>

SEGMENT DISCUSSION

             [GRAPHIC DEPICTING SEGMENTS AND SUMMARY INFORMATION]

   The Company is a holding company and has two reportable business segments:
Wholesale Energy Network ("WEN") and Dynegy Midstream Services ("DMS").
Financial information, including revenues from external customers by similar
products or services and by geographic area, net income (loss) and total assets
by geographic area are disclosed by segment as set forth in Note 17 to the
consolidated financial statements.

Wholesale Energy Network Segment

   WEN is engaged in the physical generation of electricity, the aggregation of
natural gas supplies and the delivery of customer-focused products and
services, such as risk-management services, around wholesale natural gas,
power, coal and other similar products. This segment is focused on optimizing
the Company's and its customers' global portfolio of assets and capacity
contracts, as well as direct commercial and industrial sales and retail
marketing alliances. The Company provides customer and risk-management
activities to wholesale energy consumers in North America, the United Kingdom
and Continental Europe and continues to assess local, regional and national
markets, regulatory environments and other factors in order to support and
direct future investment.

   WEN is focused on the "Energy Value Chain," which is predicated on the
notion that the economy consumes physical quantities of energy commodities,
such as natural gas, electricity and coal and other similar products, and that
consumers of energy expect reliability of supply as well as management of
price. The logistics needed to move energy commodities from points of
production to end-users requires substantial knowledge of energy infrastructure
and the ability to access and utilize this infrastructure. The management of
price risk requires knowledge of market factors impacting the economic
realities of supply and demand. Dynegy's strength is its ability to capitalize
on its extensive network of energy assets, contractual arrangements and market
knowledge to provide its customers with reliable sources of physical energy,
products and services. Dynegy combines physical delivery of energy through its
extensive logistics infrastructure with its price risk-management capabilities
and market expertise to provide our customers with customized products to meet
their services needs.

                    [GRAPHIC DEPICTING ENERGY VALUE CHAIN]

   Dynegy views its gas and power marketing and power generation businesses as
an integrated unit. Control of merchant generation, when coupled with the
Company's national wholesale gas and power marketing franchise, creates a wide
range of value-creation opportunities benefiting both the Company and its
customers. Dynegy's wholesale marketing franchise adds value to its generation
assets by providing national market access, market infrastructure and
intelligence, risk-management and arbitrage opportunities, fuel management and
procurement expertise and transmission expertise for inputs (gas, coal and fuel
oil) and outputs (power). Generation capacity, in turn, adds value to the
Company's wholesale marketing franchise by providing an outlet/market for gas
and coal supplies, a source of reliable power supply and an enhanced ability to
structure innovative new products and services for customers.

   Natural Gas Purchases.  As part of our wholesale energy business, Dynegy
purchases natural gas from a wide variety of suppliers. Dynegy also purchases
at various index prices and markets substantially all of the natural gas
produced or controlled by Chevron U.S.A. Inc. in the United States (except
Alaska). In addition, the Company and ChevronTexaco Corp., ("ChevronTexaco")
have agreed pursuant to a term sheet dated December 12, 2001 to expand this
commercial relationship to include the volumes historically produced by Texaco.
On March 1, 2002, a subsidiary of the Company began buying the historical
Texaco volumes on an interim basis and is in the late stages of negotiations
with ChevronTexaco to finalize a long term commercial agreement to cover

                                      3

<PAGE>

these volumes. This relationship provides the Company with a significant,
stable supply of natural gas which, when combined with gas supplies available
from our network of other supply sources, allows us to effectively manage gas
supplies and reduces the risk of short-term supply shortages during periods of
peak demand. In 2001, approximately 22 percent of WEN's natural gas purchases
were made from Chevron U.S.A. Inc.

   The Company's expanded relationship with ChevronTexaco will increase the
volume of natural gas we purchase from Chevron U.S.A. Inc. and ChevronTexaco
from approximately 2.0 Bcf/d to approximately 3.0 Bcf/d. We also expect to
provide supply and service for in excess of 2.0 Bcf/d of natural gas for the
former Texaco's facilities and third-party term markets.

   Transportation.  The Company arranges for transportation of the natural gas
it markets from the supplier's receipt point to the purchaser's requested
delivery point. The Company generally retains title to this natural gas from
the receipt point to the delivery point and obtains pipeline transportation.
The Company believes that its understanding of the United States' pipeline
network, along with the scale and geographic reach of its gas marketing
efforts, are important to the Company's success as a physical supplier of
energy. The Company uses a variety of transportation arrangements to move its
customers' volumes, including short-term and long-term firm and interruptible
agreements with pipelines and brokered firm contracts with its customers.

   Natural Gas Sales.  The Company sells natural gas under sales agreements
that have varying terms and conditions intended to match seasonal and other
changes in demand. The Company's wholesale customer base consists primarily of
gas and electric utilities and industrial and commercial end-users and
marketers of natural gas. For the year ended December 31, 2001, the Company
sold an aggregate average of 12.5 Bcf/d of natural gas. As described above,
Dynegy expects future average physical natural gas sales to increase
significantly as a result of additional supply volumes to be provided by
ChevronTexaco.

   Natural Gas Storage.  Natural gas storage capacity plays an important role
in the Company's ability to act as a full-service natural gas marketer by
allowing us to manage relatively constant gas supply volumes with uneven demand
levels. Through the use of our storage capabilities, we offer peak delivery
services to satisfy winter heating and summer electric-generating demands.
Storage inventories also provide performance security or "backup" service to
our customers. The Company at various times leases short-term and long-term
firm and interruptible storage. Our recent acquisitions of Northern Natural Gas
Company ("Northern Natural") and BG Storage Limited should enable us to expand
storage services in the U.S. and U.K. markets.

   Power.  Dynegy markets electricity and power products and services,
providing a 24-hour-a-day resource for the sale and purchase of power through
access to wholesale markets throughout North America and Europe. The Company
helps generation customers manage and optimize their fuel supplies, optimize
generation assets and capacity utilization and maximize energy conversion and
tolling opportunities. In addition, the Company provides market aggregation and
sales assistance and risk-management services and strategies. The Company will
at times contract for transmission capacity over regulated transmission lines
in order to facilitate regional movements of power. In 2001, Dynegy sold 362
million megawatt-hours of electricity.

   At December 31, 2001, Dynegy had interests in 30 power projects in
operation, under construction or in development, having gross capacity of
15,595 MW (13,094 MW net) of electricity. Approximately 77 percent of these
facilities were solely gas-fired plants, with the remaining facilities fueled
by coal, heavy fuel oil or some combination of coal, fuel oil and natural gas.
The combined gross capacity of owned facilities in operation at December 31,
2001 approximated 12,618 MW (10,117 MW net) of electricity and 2.5 million
pounds per hour of steam available for sale to customers. Approximately 60
percent of the gross capacity (52 percent net) in operation at December 31,
2001 was under long-term power purchase agreements.

   Domestically, our power plants are located in California, Georgia, Illinois,
Kentucky, Louisiana, Michigan, Nevada, New York, North Carolina, Ohio, Texas
and Virginia.

                                      4

<PAGE>

   In addition to ownership and operation of generation facilities, the Company
provides services to affiliated ventures in the areas of project development,
engineering, regulatory and environmental affairs, operating and maintenance
services, business and energy management and fuel supply.

   Commercial and Industrial.  Deregulation of the gas and power markets is
evolving to encourage greater competition and access to markets. As a result,
Dynegy is pursuing opportunities to provide energy solutions to regional and
national commercial and industrial customers who need customized energy
solutions for their natural gas and electricity requirements. Dynegy's services
include full requirements energy management, supply delivery or asset
management and price risk-management services. Dynegy believes that its energy
network and physical logistics capability positions the Company to provide
mutually beneficial energy solutions to our customers.

   In addition, Dynegy's retail gas and electric strategy is to strengthen key
customer relationships by forming regional retail gas and power alliances,
which require less capital investment and fewer financial risks relative to
other national retail marketing strategies. The combination of Dynegy's
low-cost energy supply with a regional utility's large, installed customer base
and local name recognition positions each alliance to capture a significant
portion of the local gas and power market when those markets fully open to
competition.

Dynegy Midstream Services Segment

   General.  DMS consists primarily of the Company's North American midstream
liquids operations, NGL marketing and global LPG transportation and marketing
operations, located principally along the Gulf Coast and in London. North
American midstream liquids operations are actively engaged in gathering and
processing natural gas and fractionating, storing, terminalling, transporting,
distributing and marketing NGLs. This vertically integrated NGL infrastructure
permits the Company to generate revenues throughout all facets of the NGL
business, from inlet natural gas volumes gathered from producing horizons to
distributing and marketing NGLs to end-users throughout the world. This
business provides the Company with broad-based, real-time market information
that allows the Company to capture capacity, demand and distribution
inefficiencies that exist from time to time in the market.

                    [GRAPHIC DEPICTING LIQUIDS VALUE CHAIN]

   DMS attempts to maximize earnings from its vertically integrated core gas
gathering, processing and downstream assets. Similar to WEN's convergence
strategy, ownership and control of upstream processing and downstream
fractionation, storage, terminalling and transportation assets provides
opportunities to DMS' NGL distribution and marketing business. DMS' human and
capital resources are aligned and focused on capturing growth opportunities in
all core areas, including the Gulf of Mexico region and areas outside North
America.

   The Company is among the industry leaders in substantially all midstream
component businesses, ranging from natural gas processing to distributing and
marketing NGLs to end-users. Our position as a natural gas processor is
expected to grow as the Company is in the final stages of negotiations with
ChevronTexaco to

                                      5

<PAGE>

expand its relationship to include the historical Texaco volumes. In December
2001, the Company expanded its commercial agreement with ChevronTexaco to
purchase the undedicated liquid production associated with the processing of
Texaco's natural gas. In January 2002, the Company also purchased Texaco's
wholesale propane marketing business and integrated it into Dynegy's existing
wholesale business.

   Natural Gas Gathering and Processing.  The natural gas processing industry
is a major oil and gas industry segment, providing the necessary service of
refining raw natural gas into marketable pipeline quality natural gas and NGLs.
We own interests in 23 gas processing plants, including 13 plants we operate,
as well as associated and stand-alone natural gas gathering pipeline systems.
These assets are located in key producing areas of Louisiana, New Mexico and
Texas. During 2001, we processed on average 1.9 Bcf/d of natural gas and
produced on average 84 thousand gross barrels per day of NGLs. We have the
right to process substantially all of Chevron U.S.A. Inc.'s processable natural
gas in those geographic areas where it is economically feasible for us to do
so. We are also in the final stages of negotiations with ChevronTexaco to
process the historical Texaco volumes. In 2002, we estimate that approximately
60 percent of the volume processed will be under percentage of proceeds
contracts, 29 percent will be under processor economic election contracts
(either keep whole or fee based) and the remaining 11 percent will be under
keep whole processing arrangements.

   Under percentage of proceeds contracts, we sell the natural gas and NGLs,
return to the producer their share of the proceeds derived from such sale and
keep a portion of the proceeds as our processing fee. If a producer has
negotiated the right to take its share of natural gas and NGLs in kind, the
producer gives to us a percentage of the natural gas and NGLs as our fee and
takes the remaining percentage in kind at the tailgate of the plant. Under
processor economic election contracts, the producer has the election to either
process on a keep whole basis or pay us a fee for processing the natural gas.
This fee could be in the form of a percentage of the natural gas and/or NGLs
processed or a cash payment for providing the processing services. Under keep
whole processing arrangements, the natural gas is processed to remove the NGLs
and other impurities to make the natural gas merchantable. We keep the NGLs and
then return to the producer merchantable natural gas containing the same Btu
content as was delivered to us prior to processing. We are allowed to keep the
NGLs as our fee for processing but must purchase and return to the producer a
volume of merchantable natural gas to replace the Btus that were removed
through processing so that the producer is kept whole on the Btus it delivered
to the plant.

   Our natural gas processing services are provided at two types of plants,
referred to as field and straddle plants. Field plants aggregate volumes from
multiple producing wells into quantities that can be economically processed to
extract NGLs and to remove water vapor, solids and other contaminants. Straddle
plants are situated on mainline natural gas pipelines and allow operators to
extract NGLs from a natural gas stream and replace the equivalent Btus with
pipeline quality gas when the market value of NGLs separated from the natural
gas stream is higher than the market value of the same unprocessed natural gas.

   Fractionation.  Liquids removed from natural gas at processing plants are
generally in the form of a commingled stream of light liquid hydrocarbons (raw
product). The commingled NGLs are separated at fractionation facilities into
component products of ethane, propane, normal butane, isobutane and natural
gasoline. Fractionation contracts typically include a base fee per gallon
subject to adjustment for certain variable costs, such as energy consumed in
operation. The Company has ownership interests in three stand-alone
fractionation facilities: two in Mont Belvieu, Texas and one in Lake Charles,
Louisiana. We operate the Louisiana facility and one of the Mont Belvieu
facilities. During 2001, these facilities fractionated an aggregate average of
226 thousand gross barrels per day.

   Transportation Operations.  The Company has developed a NGL transportation
and logistics infrastructure that is comprised of a wide range of
transportation and distribution assets designed to satisfy the various delivery
requirements of our distribution and marketing services business. In the United
States, the Company owns over 9,700 miles of gas gathering and gas liquids
pipelines, primarily in the North Texas, Gulf Coast and Permian Basin regions.
We also have access to approximately 2,000 railcars through a services
agreement with ChevronTexaco. We own and operate 88 tank trucks and 21
pressurized barges. These assets are

                                      6

<PAGE>

deployed to serve our wholesale distribution terminals, Texas Gulf Coast
fractionators, underground storage facilities, pipeline injection terminals and
many of the nation's crude oil refineries. The Company's large-scale marine
terminals are located in Mississippi, Texas, Florida, Tennessee and Louisiana,
offering importers and wholesalers a variety of methods for transporting
products to the marketplace. We control over 108 million barrels of underground
liquids storage capacity in Texas, Louisiana, and Mississippi, providing
customers with the ability to store, buy and sell specification products.

   Distribution and Marketing Services.  Dynegy's distribution and marketing
services include: (1) refinery services, (2) wholesale propane marketing and
(3) purchasing mixed NGLs and NGL products from NGL producers and other sources
and selling such NGL products to petrochemical manufacturers, refineries and
other marketing companies.

   In connection with our refinery services operations, we purchase NGL
products from refinery customers, such as Chevron U.S.A. Inc, and sell NGL
products to various customers. The Company generally earns a margin in these
operations by retaining a portion of the resale price or a fixed minimum fee
per gallon. Approximately 15 percent of DMS' NGL purchases in 2001 were from
Chevron U.S.A. Inc and approximately 12 percent were from another supplier. In
2001, the Company sold an average of 41 thousand barrels per day through this
refinery services business.

   Wholesale propane marketing operations include the sale of propane and
related logistical services to major multi-state retailers, independent
retailers and other end users. Our propane supply comes from our refinery
services operations and from our other distribution and marketing operations.
We generally sell propane at a fixed price based on the current market price
established at Mont Belvieu or for the posted price at the time of delivery. In
2001, the Company sold an average of approximately 51 thousand barrels of
propane per day.

   We market our own NGL production and also purchase NGLs from other NGL
producers and marketers for resale. Our distribution and marketing services
business sold an average of 366 thousand barrels per day of NGLs in North
America in 2001. The Company generally purchases NGL products from producers at
a monthly pricing index less applicable fractionation, transportation and
marketing fees and resells these products to petrochemical manufacturers,
refineries and other marketing companies. In addition to margins that the
Company earns from purchasing NGL products from producers pursuant to contract,
we also earn a margin by purchasing and selling NGL products in the spot market
and in the forward market.

   Dynegy also markets LPG worldwide via use of chartered large-hull ships. In
2001, 100 thousand barrels per day of LPG were marketed by this business. These
operations acquire and market product from producing areas in the North Sea,
West Africa, Algeria and the Arabian Gulf as well as from the U.S. Gulf Coast
region. Dynegy plans continued expansion of this international business
including developing facilities in producing areas and growing downstream
markets. We charter four VLGC (Very Large Gas Carriers) totaling more than
176,000 tons of capacity supporting our worldwide marketing activities. One
newly built VLGC is committed to charter and is scheduled for September 2002
delivery.

   In total, we sold approximately 557 thousand barrels per day of NGLs to
approximately 770 customers (amounts are aggregate totals for marketing,
wholesale and global operations). In 2001, approximately 23 percent of our NGL
sales were made with ChevronTexaco or one of its affiliates and approximately
11 percent were to another customer.

COMPETITION

   Dynegy faces strong competition in the development of new electric
generating plants, the acquisition of existing generating facilities and the
marketing and transportation of energy commodities. The Company's primary
competition is with merchant energy companies as well as entities vying for
market share in the deregulating domestic electricity generating and marketing
industries. The Company believes its primary competitors in this business
consist of approximately 25 companies.

                                      7

<PAGE>

   Dynegy's wholesale energy network competes with international, national and
regional full-service energy providers, merchants, producers and pipelines for
sales based on its ability to aggregate competitively priced supplies from a
variety of sources and locations and to utilize efficient transportation.
Dynegy believes that technological advances in executing transactions will
differentiate the competition in the near term. Operationally, Dynegy believes
its ability to remain a low-cost merchant and to effectively combine
value-added services, competitively priced supplies and price risk-management
services will determine its level of success through its wholesale energy
network.

   Demand for power may be met by generation capacity based on several
competing technologies, such as gas-fired or coal-fired generation and power
generating facilities fueled by alternative energy sources including hydro
power, synthetic fuels, solar, wind, wood, geothermal, waste heat, solid waste
and nuclear sources. The Company's power generation business competes with
other non-utility generators, regulated utilities, unregulated subsidiaries of
regulated utilities and other energy service companies in the development and
operation of energy-producing projects. The trend towards deregulation in the
U.S. electric power industry has resulted in a highly competitive market for
acquisition or development of domestic power generating facilities. As the
nation's regulated utilities seek non-regulated investments and to the extent
states continue to move toward retail electric competition, these trends can be
expected to continue for the foreseeable future. However, recent events in the
marketplace, including the California electricity crisis in late 2000 and the
alleged manipulation of electricity prices by Enron and other wholesale
electricity merchants, have caused some states to publicly reconsider their
approach to deregulation, or to retreat from deregulation altogether.

   The Company's NGL marketing businesses face significant and varied
competitors, including major integrated oil companies, major pipeline companies
and their marketing affiliates and national and local gas gatherers,
processors, brokers, marketers and distributors of varying sizes and
experience. The principal areas of competition include obtaining gas supplies
for gathering and processing operations, obtaining supplies of raw product for
fractionation, the marketing of NGLs, crude oil, residue gas, condensate and
sulfur, and the transportation and storage of natural gas, NGLs and crude oil.
Competition typically is based on location and operating efficiency of
facilities, reliability of services, delivery capabilities and price.

REGULATION

   The Company is subject to regulation by various federal, state, local and
foreign agencies, including the regulations described below.

   Natural Gas Regulation.  The transportation (including storage) and sale for
resale of natural gas in interstate commerce is subject to regulation by the
FERC under the Natural Gas Act of 1938, as amended ("NGA"), and, to a lesser
extent, the Natural Gas Policy Act of 1978, as amended ("NGPA"). The rates
charged by interstate pipelines for interstate transportation and storage
services, and the terms and conditions for provision of such services, are
regulated by the FERC, which generally also must approve any changes to these
rates or terms and conditions prior to their implementation. The FERC also has
jurisdiction over, among other things, the construction and operation of
pipeline and related facilities used in the transportation and storage of
natural gas in interstate commerce, including the extension, expansion,
acquisition, disposition, or abandonment of such facilities; maintenance of
accounts and records; depreciation and amortization policies; and transactions
with and conduct of interstate pipelines relating to affiliates. Venice
Gathering System is a regulated interstate pipeline.

   Commencing in 1992, the FERC issued Order No. 636 and subsequent orders
(collectively, "Order No. 636"), which require interstate pipelines to provide
transportation separate, or "unbundled," from the pipelines' sales of gas.
Also, Order No. 636 requires pipelines to provide open-access transportation on
a basis that is equal for all shippers. The FERC intends for Order No. 636 to
foster increased competition within all phases of the natural gas industry.
Prior to its acquisition of Venice Gathering System, Order No. 636 did not
directly regulate any of Dynegy's activities; however, like other interstate
pipelines, Venice Gathering System must comply with

                                      8

<PAGE>

FERC's open-access transportation regulations. The implementation of these
orders has not had a material adverse effect on Dynegy's results of operations.
The courts have largely affirmed the significant features of Order No. 636 and
numerous related orders pertaining to the individual pipelines, although
certain appeals remain pending and the FERC continues to review and modify its
open-access regulations.

   In 2000, the FERC issued Order No. 637 and subsequent orders (collectively,
"Order No. 637"), which imposed a number of additional reforms designed to
enhance competition in natural gas markets. Among other things, Order No. 637
revised the FERC pricing policy by waiving price ceilings for short-term
released interstate pipeline transportation capacity for a two-year period, and
effected changes in FERC regulations relating to interstate transportation
scheduling procedures, capacity segmentation, pipeline penalties, rights of
first refusal and information reporting. Most major aspects of Order No. 637
are pending judicial review. It is uncertain whether and to what extent FERC's
market reforms will survive judicial review and, if so, whether the FERC's
actions will achieve the goal of further increasing competition in natural gas
markets.

   The FERC recently proposed to expand its existing rules governing the
conduct of interstate pipelines and their marketing affiliates to include all
energy affiliates. If adopted, the proposed rule would, among other things,
preclude the exchange of transportation related information among an interstate
pipeline and any of its energy affiliates. The FERC has stated that one purpose
of the proposal is to allow pipeline affiliates and non-affiliates to compete
in energy markets on an even basis. It is uncertain whether or when the FERC
may adopt the proposed rule, or the extent to which it may affect the cost or
other aspects of Dynegy's operations; however, Dynegy does not anticipate that
its regulated transmission providers and their energy affiliates will be
impacted any differently than other similar industry participants.

   Pursuant to the NGPA and the Wellhead Decontrol Act of 1989, most sales of
natural gas are no longer subject to price controls. However, the FERC retains
jurisdiction over certain sales made by interstate pipelines or their
affiliates, such as Dynegy has become with its recent acquisitions. The FERC
has authorized such sales to be made at unregulated prices, terms and
conditions. While sales of natural gas can be made at market prices, and upon
unregulated terms and conditions, there is no assurance that such regulatory
treatment will continue indefinitely in the future. Congress or, as to sales
remaining subject to its jurisdiction, the FERC, could re-enact price controls
or other regulation in the future.

   Certain federal and provincial regulatory authorities require parties to
transactions involving natural gas exports to hold export or removal permits.
The Company's indirect wholly owned Canadian subsidiary, Dynegy Canada Inc.,
holds various Canadian and U.S. permits for such purposes. In the United
Kingdom, the natural gas business is subject to regulation by the Office of Gas
Supply.

   Gas Processing.  Dynegy's gas processing operations could become subject to
FERC regulation. The FERC has traditionally maintained that a processing plant
used primarily for removal of NGLs for economic purposes is not a facility for
transportation or sale for resale of natural gas in interstate commerce, and
therefore, is not subject to jurisdiction under the NGA. However, the FERC
considers a processing plant used primarily for purposes related to
transportation safety and efficiency to be subject to such regulation. Dynegy
believes its gas processing plants are primarily involved in removing NGLs for
economic purposes and, therefore, are exempt from FERC jurisdiction.
Nevertheless, the FERC has made no specific finding as to Dynegy's gas
processing plants. In addition, certain facilities downstream of processing
plants are being considered for use in transporting gas between pipelines,
which may invoke FERC's jurisdiction. Such jurisdiction likely would apply to
the downstream facility as a pipeline, however, and not to the plants
themselves.

   Liquified Natural Gas (LNG) Terminals.  LNG terminals operating in
interstate commerce are subject to FERC jurisdiction and regulation of rates,
terms and conditions of service such as is described above concerning
interstate natural gas transportation and storage. Dynegy is in the process of
securing approvals to construct such a facility in Louisiana.

                                      9

<PAGE>

   Gas Gathering.  The NGA exempts gas gathering facilities from the
jurisdiction of the FERC, while interstate transmission facilities remain
subject to FERC jurisdiction, as described above. Dynegy believes its gathering
facilities and operations meet the tests used by the FERC to determine
nonjurisdictional gathering facility status, although the FERC's articulation
and application of such tests have varied over time. Nevertheless, the FERC has
made no specific findings as to the exempt status of any of Dynegy's
facilities. No assurance can be given that all of Dynegy's gas gathering
facilities will remain classified as such and, therefore, remain exempt from
FERC regulation. Some states regulate gathering facilities to varying degrees;
generally rates are not regulated.

   Electricity Marketing Regulation.  The Company's electricity marketing
operations are regulated by the Federal Power Act ("FPA") and the FERC with
respect to rates, terms and conditions of services and various reporting
requirements. FERC policies permit trading and marketing entities to market
electricity at market-based rates. While FERC has affirmed its desire to move
toward competitive markets with market-based pricing, it is reviewing the
specifics of implementing this policy. For further discussion, please see
"Power Generation Regulation" below.

   In December 1999, the FERC issued Order No. 2000, which addressed a number
of issues relating to the regional transmission of electricity. In particular,
Order No. 2000 provided for regional transmission organizations ("RTOs") to
control the transmission facilities within a particular region. After a period
of progress toward voluntary creation of RTOs as envisioned by the FERC,
activity has slowed due to uncertainty concerning required standards and
structures for such entities. Recently, the FERC commenced proceedings designed
to result in the adoption of generally standardized market terms and conditions
governing interstate transmission and RTO operation, including generic
standards and procedures for the interconnection of generation to the
transmission grid. The FERC plans to propose new rules respecting these matters
this year and has directed electric industry participants to establish a single
organization to assist with the development of business practices and protocols
that will be needed to implement such standardized terms and conditions. It is
uncertain what rules the FERC may adopt as the result of these proceedings. The
impact of these RTOs on the Company's electricity marketing operations cannot
be predicted.

   Power Generation Regulation.  The Company's generation assets include
projects that are Exempt Wholesale Generators ("EWGs") or qualifying facilities
("QFs"). One form of EWG is a merchant plant, which operates independently from
designated power purchasers and as a result will generate and sell power to
market when electricity sales prices exceed the cost of production. A QF
typically sells the power it generates to a single power purchaser.

   The FPA grants the FERC exclusive ratemaking jurisdiction over wholesale
sales of electricity in interstate commerce. The Company's power generation
operations also are subject to regulation by the FERC under PURPA with respect
to rates, the procurement and provision of certain services and operating
standards. Although facilities deemed QFs under PURPA are exempt from
ratemaking and other provisions of the FPA, non-QF independent power projects
and certain power marketing activities are subject to the FPA and the FERC's
ratemaking jurisdiction, as well as the Public Utilities Holding Company Act of
1935 ("PUHCA") and the Energy Policy Act of 1992. All of the projects owned or
operated by Dynegy as QFs are qualifying facilities and, as such, under PURPA
are exempt from the ratemaking and other provisions of the FPA. Dynegy's EWGs,
which are not QFs, have been granted market-based rate authority and comply
with the FPA requirements governing approval of wholesale rates and subsequent
transfers of ownership interests in such projects.

   In some markets where Dynegy owns generation facilities, specifically
California and New York, the FERC has from time to time approved and
subsequently extended temporary price caps on wholesale power sales, or other
market mitigation measures. Due to concerns over potential short supply and
high prices in the summer of 2001, 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

                                      10

<PAGE>

("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 the summer of 2001. In a subsequent order issued on
November 27, 2001, the FERC extended the AMP through April 30, 2002. The AMP
may be further extended in the future.

   Price volatility and other market dislocations in the California market have
precipitated a number of FERC actions related to the California market, in
addition to price caps and market mitigation measures. These include an
investigation of gas pipeline marketing affiliate abuse in the region,
proceedings regarding whether, and to what extent, price refunds are owed by
wholesale electricity suppliers serving the state, and complaints requesting
the FERC to reform or void various long-term power sales contracts. Recently,
as a prelude to possible initiation of a new complaint proceeding, the FERC
began investigating whether any entity has manipulated prices for electricity
or natural gas in the West, since January 1, 2000, possibly resulting in unjust
and unreasonable prices under long-term power sales contracts entered into
since that time. Additional matters in California are discussed below under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--California Market/West Coast Power."

   On November 20, 2001, the FERC issued an order that would subject the sales
of all entities with market-based rate tariffs to "refunds or other remedies"
in the event the seller engages in "anticompetitive behavior or the exercise of
market power." The FERC has postponed the effectiveness of this refund
condition pending its consideration of comments submitted by interested
parties. Dynegy and other similarly-situated generators and power marketers
have submitted comments in opposition to the proposed refund condition. It is
uncertain how the FERC will act respecting this matter. If the FERC were to
establish the broad refund condition proposed, it would increase the risk
inherent in electric marketing activities for all wholesale sellers of
electricity, including Dynegy. Establishment of the proposed refund condition,
together with a finding that Dynegy engaged in any of the specified activities,
also could require Dynegy to refund some of the electricity payments it has
collected or reduce the amount it is owed for electricity.

   State Regulatory Reforms.  The Company's domestic gas and power marketing
and power generation businesses are subject to various regulations from the
states in which they operate. Proposed reforms to these regulations are
proceeding in several states, including California, the results of which could
affect the Company's operations.

   Pending Legislation.  The U.S. Congress has before it a number of bills that
could impact regulations applied to Dynegy and its subsidiaries. These include
bills that would repeal PUHCA and portions of PURPA and that would affect
FERC's regulatory authority over energy marketing, generation and trading.
Recent market events, including the California electricity crisis in late 2000
and the alleged manipulation of electricity prices by wholesale electricity
merchants, have prompted questions about the wisdom of PUHCA repeal and whether
more stringent regulation may be needed. The outcome of these bills and the
effects that they might have cannot be predicted with certainty.

   Foreign Regulation.  Dynegy Europe Limited acquired BG Storage Limited in
the fourth quarter of 2001 and, as a result, now owns and operates the Rough
and Hornsea gas storage facilities in the U.K. In connection with that
acquisition, Dynegy Europe Limited gave statutory undertakings to the Secretary
of State for Trade and Industry in the U.K. under the Fair Trading Act of 1973.
The key aspects of these legislatively required undertakings, which relate to
the operation of the storage assets acquired and expire on April 30, 2004, are
as follows:

(1) Dynegy Storage Limited, the Dynegy Europe Limited subsidiary that operates
    the assets, will ensure that the maximum physical capacity of the
    facilities is made available to the market on non-discriminatory terms and
    that 20% of the capacity is sold on one-year terms;

(2) Unless otherwise approved by the regulator, the capacity must be sold in
    standard bundled units;

                                      11

<PAGE>

(3) Where there remains any unsold capacity 30 days before the beginning of a
    storage year (May 1 to April 30), this capacity must be sold by auction
    under prescribed procedures and standard contracts approved by the
    regulator (although prior to such time, Dynegy Storage Limited may sell the
    capacity in its sole discretion); and

(4) Dynegy Storage Limited must maintain a robust financial information and
    systems separation (and separate accounts) of the storage business from
    other commercial activities.

ENVIRONMENTAL AND OTHER MATTERS

   General.  Dynegy's operations are subject to extensive federal, state and
local statutes, rules and regulations governing the discharge of materials into
the environment or otherwise relating to environmental protection. In addition,
development of projects in international markets creates exposure to and
obligations under the national, provincial and local laws of each host country,
including environmental standards and requirements imposed by these
governments. Environmental laws and regulations are complex, change frequently
and have tended to become more stringent over time. Many environmental laws
require permits from governmental authorities before construction on a project
may be commenced or before wastes or other materials may be discharged into the
environment. The process for obtaining necessary permits can be lengthy and
complex, and can sometimes result in the establishment of permit conditions
that make the project or activity for which the permit was sought either
unprofitable or otherwise unattractive. Even where permits are not required,
compliance with environmental laws and regulations can require significant
capital and operating expenditures, and the Company may be required to incur
costs to remediate contamination from past releases of wastes into the
environment. Failure to comply with these statutes, rules and regulations may
result in the assessment of administrative, civil and even criminal penalties.
Furthermore, the failure to obtain or renew an environmental permit could
prevent operation of one or more Dynegy facilities.

   In general, the construction and operation of our facilities are subject to
federal, state and local environmental laws and regulations governing the
siting of energy facilities, the discharge of pollutants and other materials
into the environment, the protection of wetlands, endangered species, and other
natural resources, the control and abatement of noise and other similar
requirements. A variety of permits are typically required before construction
of a project commences, and additional permits are typically required for
facility operation.

   Environmental Expenditures.  Dynegy's aggregate expenditures for compliance
with laws and regulations related to the discharge of materials into the
environment or otherwise related to the protection of the environment were
approximately $81 million in 2001, compared to approximately $121 million in
2000. The 2000 costs exceeded 2001 costs due in large part to expenditures by
the Company to bring certain power generation turbines into compliance with new
environmental regulations ahead of the dates when such compliance was actually
required. The Company estimates that total environmental expenditures (both
capital and operating) in 2002 will be approximately $103 million. A
substantial majority of the Company's environmental expenditures relate to the
federal Clean Air Act ("CAA") and comparable state laws and regulations.
Management does not expect capital spending on environmental matters to
increase materially over the near term; however, changes in environmental
regulations or the outcome of litigation could result in additional legal
requirements that would necessitate increased spending. Please read "--The
Clean Air Act" below for a discussion of the litigation brought by the
Environmental Protection Agency against two Dynegy affiliates relating to
activities at its Baldwin generating station in Illinois.

   The Clean Air Act.  The CAA and comparable state laws and regulations
relating to air emissions impose responsibilities on owners and operators of
sources of air emissions, including requirements to obtain construction and
operating permits and annual compliance and reporting obligations. Although the
impact of air quality regulations cannot be predicted with certainty, these
regulations are expected to become increasingly stringent, particularly for
electric power generating facilities. CAA requirements include the following:

  .   The CAA Amendments of 1990 required a two-phase reduction by electric
      utilities in emissions of sulfur dioxide and nitrogen oxide by 2000 as
      part of an overall plan to reduce acid rain in the eastern

                                      12

<PAGE>

      United States. Installation of control equipment and changes in fuel mix
      and operating practices have been completed to comply with the emission
      reduction requirements of the acid rain provision of the CAA Amendment of
      1990.

  .   In October 1998, the EPA issued a final rule on regional ozone control
      that required 22 eastern states and the District of Columbia to revise
      their State Implementation Plans (SIPs) to significantly reduce emissions
      of nitrogen oxide. The compliance deadline for implementation of these
      emission reductions is May 31, 2004. In January 2000, the EPA finalized
      another ozone-related rule under Section 126 of the CAA that has similar
      emission control requirements. Installation of the necessary emission
      control equipment may involve large technical, design and construction
      projects that require significant time or expense for completion.

  .   Significant reductions in air emissions from Dynegy's facilities could be
      required if the U.S. Congress adopts legislation requiring additional
      reductions in emissions of sulfur dioxide, nitrogen oxides and mercury as
      outlined in various multi-pollutants proposals. Some of these proposals
      also include reductions in carbon dioxide and other "greenhouse gases"
      that allegedly contribute to global warming. The emissions reductions
      contemplated by these initiatives, if they are enacted, could eventually
      require significant capital expenditures for new pollution control
      equipment, but the adoption of emission reduction requirements pursuant
      to any of the various pending proposals is highly uncertain. Although the
      impact of possible future environmental requirements cannot be predicted
      with any degree of certainty, any expenditures that are ultimately
      required are not anticipated to have a more significant effect on
      Dynegy's operations or financial condition than on any similarly situated
      company that generates electricity through the burning of fossil fuels.

  .   The EPA and the Department of Justice ("DOJ") filed complaints against IP
      and DMG, alleging Clean Air Act violations, which are described in Item
      8, Financial Statements and Supplementary Data, Note 11. In general,
      these allegations involve whether repair, maintenance, and replacement
      projects at the Baldwin facility required permitting under the Clean Air
      Act. The EPA has the authority to seek penalties for the alleged
      violations at the rate of up to $27,500 per day for each violation. The
      EPA may also seek to require installation of the "best available control
      technology" at the Baldwin facility and possibly other Company plants. An
      adverse ruling could impose liability on Dynegy, as well as increase the
      costs of ongoing operations to Dynegy. In the opinion of management,
      although significant capital expenditures could be required, 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.

   Remedial Laws.  The Company is also subject to environmental remediation
requirements, including provisions of the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA" or "Superfund") and the corrective
action provisions of the federal Resource Conservation and Recovery Act
("RCRA") and similar state laws. The Superfund law imposes liability,
regardless of fault or the legality of the original conduct, on persons that
contributed to the release of a "hazardous substance" into the environment.
These persons include the current or previous owner and operator of a facility
and companies that disposed, or arranged for the disposal, of the hazardous
substance found at a facility. CERCLA also authorizes the EPA and, in some
cases, private parties to take actions in response to threats to public health
or the environment and to seek recovery for the costs of cleaning up the
hazardous substances that have been released and for damages to natural
resources from such responsible party. Further, it is not uncommon for
neighboring landowners and other affected parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances
released into the environment. RCRA applies to facilities that have been used
to manage or are managing hazardous waste and which are either still in
operation or have recently been closed. RCRA also requires facilities to remedy
any releases of hazardous wastes or hazardous waste constituents at waste
treatment, storage or disposal facilities. CERCLA or RCRA could impose remedial
obligations at a variety of Dynegy facilities, including our electric power
generating plants and NGL facilities.

                                      13

<PAGE>

   Pipeline Safety.  In addition to environmental regulatory issues, the
design, construction, operation and maintenance of the Company's pipeline
facilities are subject to the safety regulations established by the Secretary
of the U.S. Department of Transportation ("DOT") pursuant to the Natural Gas
Pipeline Safety Act ("NGPSA") and the Hazardous Liquid Pipeline Safety Act
("HLPSA"), or by state regulations meeting the requirements of the NGPSA and
the HLPSA, or to similar statutes, rules and regulations in Canada or other
jurisdictions. In December 2000, DOT adopted new regulations requiring
operators of interstate pipelines to develop and follow an integrity management
program that provides for continual assessment of the integrity of all pipeline
segments that could affect so-called "high consequence" environmental impact
areas, through periodic internal inspection, pressure testing, or other equally
effective assessment means. An operator's program to comply with the new rule
must also provide for periodically evaluating the pipeline segments through
comprehensive information analysis, remediating potential problems found
through the required assessment and evaluation, and assuring additional
protection for the high consequence segments through preventative and
mitigative measures. The requirements of this new DOT rule could increase the
costs of pipeline operations.

   Health and Safety.  The Company's operations are subject to the requirements
of the Federal Occupational Safety and Health Act ("OSHA") and other comparable
federal, state and provincial statutes. The OSHA hazard communication standard,
the EPA community right-to-know regulations under Title III of the Superfund
Amendments and Reauthorized Act and similar state statutes require that
information be organized and maintained about hazardous materials used or
produced in the Company's operations. Certain of this information must be
provided to employees, state and local government authorities and citizens. The
Company believes it is in substantial compliance, and expects to continue to
comply in all material respects, with these rules and regulations.

   Other Environmental Issues.  Dynegy is also subject to a variety of other
environmental laws, such as the Clean Water Act, which regulates facilities
that discharge wastewater into the environment. Under the Clean Water Act and
analogous state laws, permits are required for the discharge of any pollutant,
including heat, into any regulated body of water. Failure to obtain or renew
any environmental permit in a timely manner or the loss of a permit due to
legal challenge could require a cessation of operations that involve discharges
of pollutants or other materials into the environment.

   Subject to resolution of the complaints filed by the EPA and the DOJ against
IP and Dynegy Midwest Generation, which are described in Item 8, Financial
Statements and Supplementary Data, Note 11, management believes that it is in
substantial compliance with, and is expected to continue to comply in all
material respects with, applicable environmental statutes, regulations, orders
and rules. Further, to management's knowledge, other than the previously
referenced complaints, there are no existing, pending or threatened actions,
suits, investigations, inquiries, proceedings or clean-up obligations by any
governmental authority or third party relating to any violations of any
environmental laws with respect to the Company's assets or pertaining to any
indemnification obligations with respect to properties previously owned or
operated by the Company, which would have a material adverse effect on the
Company's operations and financial condition.

OPERATIONAL RISKS AND INSURANCE

   Dynegy is subject to all risks inherent in the various businesses in which
it operates. These risks include, but are not limited to, explosions, fires,
terrorist attacks and product spillage, which could result in damage to or
destruction of operating assets and other property, or could result in personal
injury, loss of life or pollution of the environment, as well as curtailment or
suspension of operations at the affected facility. Dynegy maintains general
public liability, property and business interruption insurance in amounts that
it considers to be adequate for such risks. Such insurance is subject to
deductibles that the Company considers reasonable and not excessive. The
occurrence of a significant event not fully insured or indemnified against, or
the failure of a party to meet its indemnification obligations, could
materially and adversely affect Dynegy's operations and financial condition. In
addition, the terrorist attacks on September 11, 2001 and the changes in the
insurance markets attributable to those attacks may make some types of
insurance more difficult to obtain. We may be unable to secure the levels

                                      14

<PAGE>

and types of insurance we would otherwise have secured prior to September
11/th/. No assurance can be given that Dynegy will be able to maintain
insurance in the future at rates it considers reasonable.

SIGNIFICANT CUSTOMER

   For the year ended December 31, 2001, no customer accounted for more than
10% of the Company's consolidated revenues.

                                      15

<PAGE>

                             DYNEGY HOLDINGS INC.

                                    PART II

Item 6.  SELECTED FINANCIAL DATA

   The selected financial information presented below was derived from, and is
qualified by reference to, the Consolidated Financial Statements of the
Company, including the Notes thereto, contained elsewhere herein. The selected
financial information should be read in conjunction with the Consolidated
Financial Statements and related Notes and Management's Discussion and Analysis
of Financial Condition and Results of Operations.

   As discussed in the Explanatory Note to the accompanying Consolidated
Financial Statements, the accompanying Consolidated Financial Statements have
been restated to correct certain errors and to reflect other adjustments
arising since the date of the Original Filing. Please read the Explanatory Note
to the accompanying Consolidated Financial Statements for additional
information about these restatements. The selected financial data that follows
has been adjusted to reflect these restatements.

Dynegy's Selected Financial Data

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                        -------------------------------------------
                                                          2001     2000     1999     1998     1997
                                                        -------  -------  -------  -------  -------
                                                                      ($ in millions)
                                                                         (Restated)
<S>                                                     <C>      <C>      <C>      <C>      <C>
Statement of Operations Data/(1)(4)/:
Revenues............................................... $41,250  $27,820  $15,410  $14,258  $13,378
General and administrative expenses....................     385      242      219      186      149
Depreciation and amortization expense..................     300      240      115      113      104
Asset impairment, abandonment and other charges........      --       --       --       10      275
Operating income (loss)................................     752      604      226       65     (143)
Net income (loss)...................................... $   425  $   398  $   137  $    53  $  (102)
Cash Flow Data:
Cash flows from operating activities................... $   176  $   408  $    40  $   251  $   279
Cash flows from investing activities...................  (1,341)    (951)    (391)    (295)    (511)
Cash flows from financing activities...................   1,300      528      399       50      205
Other Financial Data:
Cash dividends or distributions to partners, net.......      --       --       (8)      (8)      (8)
Capital expenditures, acquisitions and investments/(3)/  (2,600)    (959)    (521)    (478)  (1,034)

                                                                        December 31,
                                                        -------------------------------------------
                                                          2001     2000     1999     1998     1997
                                                        -------  -------  -------  -------  -------
                                                                      ($ in millions)
                                                                         (Restated)
Balance Sheet Data/(2)(4)/:
Current assets......................................... $ 8,669  $10,437  $ 2,658  $ 2,117  $ 2,019
Current liabilities....................................   7,995    9,829    2,467    2,026    1,753
Property and equipment, net............................   6,767    5,117    2,090    1,932    1,522
Total assets...........................................  19,678   19,046    6,451    5,264    4,517
Long-term debt.........................................   2,707    1,635    1,372      953    1,002
Non-recourse debt......................................      --       --       35       94       --
Company obligated preferred securities of subsidiary
  trust................................................     200      200      200      200      200
Minority interest/(5)/.................................   1,003      977       --       --       --
Total stockholder's equity.............................   4,465    3,959    1,240    1,073    1,019
</TABLE>

                                      16

<PAGE>

--------
/(1)/ The following acquisitions were accounted for in accordance with the
      purchase method of accounting and the results of operations attributable
      to the acquired businesses are included in the Company's financial
      statements and operating statistics beginning on the acquisitions'
      effective date for accounting purposes:
  .   BG Storage Limited ("BGSL")--December 1, 2001; and
  .   Destec Energy, Inc. ("Destec")--July 1, 1997.
/(2)/ The BGSL and Destec acquisitions were each accounted for under the
      purchase method of accounting. Accordingly, the purchase price was
      allocated to the assets acquired and liabilities assumed based on their
      estimated fair values as of the effective dates of each transaction. See
      footnote 1 above for respective effective dates.
/(3)/ Includes the value assigned to the assets acquired in various business
      and asset acquisitions. Also includes expenditures associated with the
      leased assets brought onto the Company's balance sheet as a result of the
      restatement items described in the Explanatory Note to the Consolidated
      Financial Statements. The 1997 amount is before reduction for value
      received upon sale of Destec's foreign and non-strategic assets of
      approximately $735 million.
/(4) /As described elsewhere in this report, the financial statements contained
     herein have been restated to reflect various items. Approximately $55
     million of the restatement items relate to periods prior to 1999, the most
     significant of which is related to the re-allocation of an $80 million
     after-tax charge (previously recognized in the second quarter 2002)
     associated with the Company's natural gas marketing business. For purposes
     of this Selected Financial Data table, we have included the entire $55
     million in the balance sheet, statement of operations, cash flow and other
     financial data for the year ended December 31, 1998. Management does not
     believe that the failure to allocate this $55 million charge to periods
     prior to 1999 is material to the presentation of the Company's financial
     results, known material trends or contingencies in the Company's business.
/(5)/ Includes amounts relating to the Catlin transaction discussed under
      "Management's Discussion and Analysis of Financial Condition and Results
      of Operations--Liquidity and Capital Resources--Financing Trigger Events"
      below.

                                      17

<PAGE>

Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
       RESULTS OF OPERATIONS

   The following discussion and analysis should be read in conjunction with the
consolidated financial statements of Dynegy Holdings Inc. ("Dynegy" or the
"Company") and the notes thereto included herein. As discussed in the
Introductory Note to this Form 10-K/A, the financial information contained in
this report has been revised to reflect the restatement items described in the
Explanatory Note to the accompanying Consolidated Financial Statements. These
restatement items include adjustments previously announced by the Company in
its Current Report on Form 8-K dated November 19, 2002, as well as further
adjustments as described in the Explanatory Note to the accompanying
Consolidated Financial Statements.

   PLEASE NOTE THAT THE INFORMATION CONTAINED IN THIS FORM 10-K/A, INCLUDING
THE FINANCIAL STATEMENTS AND THE NOTES THERETO, DOES NOT REFLECT EVENTS
OCCURRING AFTER MARCH 22, 2002 (THE DATE ON WHICH THE COMPANY FILED ITS 2001
FORM 10-K) . FOR A DESCRIPTION OF THESE EVENTS, PLEASE READ THE COMPANY'S
EXCHANGE ACT REPORTS FILED SINCE MARCH 22, 2002, INCLUDING ITS ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002. SEE NOTE 19--SUBSEQUENT EVENTS
FOR FURTHER DISCUSSION.

   Dynegy is one of the world's leading energy merchants. Through its global
energy delivery network and marketing, logistics and risk-management
capabilities, the Company provides innovative solutions to customers in North
America, the United Kingdom and Continental Europe. Dynegy's operations are
reported in two segments: Wholesale Energy Network ("WEN") and Dynegy Midstream
Services ("DMS"). WEN is engaged in the physical supply of and risk-management
activities around wholesale natural gas, power, coal and other similar
products. This segment is focused on optimizing the Company's and its
customers' global portfolio of energy assets and contracts, as well as direct
commercial and industrial sales and retail marketing alliances. DMS consists of
the Company's North American midstream gas processing and NGL marketing
businesses and worldwide natural gas liquids marketing and transportation
operations.

LIQUIDITY AND CAPITAL RESOURCES

   The Company's business strategy has historically focused on acquiring,
constructing or contracting for a regionally diverse network of energy assets
to capture potential synergies existing among these types of assets and
Dynegy's marketing businesses. Dynegy relies upon operating cash flow along
with borrowings under a combination of commercial paper programs, money market
lines of credit, credit facilities and project-specific debt financings, as
well as public debt and equity issuances for its liquidity and capital resource
requirements.

   As part of Dynegy Inc.'s $1.25 billion capital program to respond to
concerns of credit rating agencies and trade counterparties regarding balance
sheet strength in the merchant energy sector, the Company reduced its original
2002 capital-spending program by approximately $300 million to approximately
$1.0 billion. This reduction in capital spending related to funds originally
budgeted for capital expenditure opportunities that were anticipated to arise
during the year. The Company's primary capital expenditure focus will be the
acquisition and/or construction of energy assets that will enable the Company
to expand its energy network. Expenditures will include maintenance capital at
existing facilities of approximately $300 million.

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

                                      18

<PAGE>

   In January 2002, the Company completed its acquisition of Northern Natural.
Enron Corp. ("Enron") has the option to reacquire Northern Natural through June
30, 2002 for $1.5 billion plus various adjustments. Dynegy's acquisition of
this asset increases the Company's financial leverage. This increased leverage
results partially from Northern Natural's $950 million of indebtedness. The
Company is actively assessing alternatives regarding its capital structure to
accommodate Northern Natural in the event Enron does not exercise its
repurchase option. See "--Enron/Northern Natural."

Available Credit Capacity

   The following table provides the components of the Company's available
credit capacity.

Available Credit Capacity as of December 31, 2001

<TABLE>
<CAPTION>
                                                                  Dynegy
                                                                 Holdings
       ($ in millions)                                             Inc.
       --------------------------------------------------------- --------
       <S>                                                       <C>
       Outstanding Commercial Paper, Loans and Letters of Credit  $1,022
       Unused Borrowing Capacity................................     618
                                                                  ------
       Total Credit Capacity....................................  $1,640
                                                                  ======
</TABLE>

   The Company does not have access to the commercial paper markets and has
relied on bank credit facilities, operating cash flow, public debt issuances
and cash on hand for its short-term liquidity requirements. Sales of Dynegy
Inc.'s common stock in December 2001 and January 2002 generated aggregate net
proceeds of approximately $744 million which were used to pay down
approximately $540 million of indebtedness under the Company's revolving credit
facility; the remainder was invested in cash. In February 2002, the Company
issued $500 million of 8.75% senior notes due 2012 and used the net proceeds to
pay down approximately $250 million of indebtedness under the Company's
revolving credit facility; the remainder was invested in cash. The Company's
364-day $1.2 billion revolving credit facility matures in May 2002. In
addition, Northern Natural has a $450 million 364-day revolving credit facility
that matures in November 2002.

   As of March 12, 2002, the Company had committed credit lines of
approximately $2.1 billion (including the Northern Natural revolving credit
facility). As of such date, there were outstanding borrowings of approximately
$840 million and outstanding letters of credit of approximately $370 million
under these credit facilities, leaving approximately $890 million of available
borrowing capacity under these credit facilities. In addition, the Company had
cash of approximately $509 million. As a result, the Company's liquidity
position was approximately $1.4 billion. Management believes this level of
liquidity is adequate to allow the Company to operate its business, even in the
event of a downgrade in credit rating.

Credit Rating Discussion

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

                                      19

<PAGE>

   Substantially all of the credit ratings of the Company are under review for
possible downgrade in part due to uncertainties regarding the litigation by
Enron against Dynegy (which is more fully discussed in Note 11 to the
consolidated financial statements). In addition, the credit rating agencies
have refocused their attention on the credit characteristics and credit
protection measures of industry participants, and appear to have tightened the
standards for a given rating level. Before Dynegy Inc.'s capital program was
announced, Moody's downgraded its ratings of Dynegy Inc. and its subsidiaries,
including the Company. The initial phase of the capital program was designed to
restore the Moody's ratings and maintain the Fitch and Standard & Poors'
ratings. There can be no assurance that these results will be achieved, but the
Company believes it is taking action to accomplish these results.

   As of March 12, 2002, Dynegy's senior unsecured debt ratings, as assessed by
the three major credit rating agencies, were as follows:

<TABLE>
<CAPTION>
                                          Standard & Poors' Moody's Fitch
      Rated Enterprises                   ----------------- ------- -----
      <S>                                 <C>               <C>     <C>
      Senior Unsecured Debt Rating:
       Dynegy Holdings Inc...............       BBB+         Baa3   BBB+
       Northern Natural/(1)/.............         CC           B3     CC
      Commercial Paper/Short-Term Rating:
       Dynegy Holdings Inc...............        A-2          P-3     F2
</TABLE>
--------
/(1)/ Ratings have not changed since Dynegy's acquisition of Northern Natural
      and reflect Enron's repurchase option.

   The abbreviations for the investment grade credit ratings assigned by the
three major credit rating agencies are set forth below, in order of declining
credit:

<TABLE>
<CAPTION>
    Standard & Poor's               Moody's                     Fitch
    -----------------               -------                     -----
<S>                        <C>                        <C>
           AAA                        Aaa                        AAA
           AA+                        Aa1                        AA+
           AA                         Aa2                        AA
           AA-                        Aa3                        AA-
           A+                         A1                         A+
            A                         A2                          A
           A-                         A3                         A-
          BBB+                       Baa1                       BBB+
           BBB                       Baa2                        BBB
          BBB-                       Baa3                       BBB-
</TABLE>

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

Financing Trigger Events

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

                                      20

<PAGE>

acceleration of other financial obligations and change of control provisions.
The Company does not have any trigger events tied to specified credit ratings
or stock price in its debt instruments and has not executed any transactions
that require it to issue equity based on credit rating or other trigger events.

   The Company has two non-commercial agreements that have trigger events tied
to credit ratings. At December 31, 2001, the amount of cash collateral that the
Company could be required to post in the event of a ratings trigger under these
two agreements was approximately $300 million. The Company's investment in
Catlin Associates, LLC, described below, accounts for $270 million of the
possible $300 million in possible cash collateralization and would be triggered
only if the senior unsecured debt ratings for Dynegy were below investment
grade with both Standard & Poor's and Moody's. The remaining approximate $30
million relates to the Company's guarantee of environmental obligations of West
Coast Power, a 50 percent owned equity investment. This obligation would be
triggered by a downgrade in Dynegy's credit rating to below investment grade by
either Moody's or Standard & Poor's. The Company's credit ratings are under
review for possible downgrade by Moody's, Standard & Poor's and Fitch. Please
see "--Credit Rating Discussion."

   In June 2000, Dynegy and Black Thunder Investors LLC ("Investor") invested
in Catlin Associates, L.L.C. ("Catlin"), an entity that is consolidated by
Dynegy into its financial statements, with the Investor's ownership in Catlin
reflected as Minority Interest in the Consolidated Balance Sheet. Dynegy
invested approximately $95 million in Catlin and the Investor invested $850
million. As a result of its investment, the Investor received a preferred
interest in Catlin, which has a security interest in the stock of Dynegy
Midwest Generation, Inc. ("DMG"), an entity holding certain of the Company's
midwest generation assets, including the coal-fired generation units in
Illinois. This preferred interest is a passive interest and generally is not
entitled to management rights.

   On or before June 29, 2005, the Company is effectively obligated to purchase
the Investor's preferred interest for $850 million unless the Investor agrees
to extend or refinance this obligation. Alternatively, the Company could
liquidate Catlin's assets, including DMG's generating assets, to satisfy this
obligation.

   In addition to granting Catlin a security interest in the stock of DMG, the
Company also has agreed to pay to DMG, to the extent that DMG has either
distributed or loaned money directly or indirectly to the Company, an amount
not to exceed $275 million. This payment obligation builds over time to a
maximum of $275 million in 2005. As of December 31, 2001, the Company's
obligation to DMG under the agreement was approximately $35 million. In
addition, in the event projected cash flow is insufficient to cover capital
expenditures and certain other fixed charges, the Company may be required to
make an additional capital contribution of up to $60 million to Catlin. The $60
million contingent obligation expires on December 31, 2002.

   If the Company's senior unsecured debt is downgraded below investment grade
by both Standard & Poor's and Moody's, the Company would be required to post
cash collateral in an aggregate amount of $270 million and, within 30 days,
obtain an investment grade rating for the Catlin membership interest held by
the Investor by either Standard & Poor's or Moody's or obtain a waiver from the
Investor.

   If the Company were unable to obtain the required rating for the interest
held by the Investor or waiver, the Company would have the option of purchasing
or refinancing the Investor's interest in Catlin. If the Company was unable or
otherwise elected not to exercise this option, it could ultimately result in an
election by the Investor to cause the liquidation of the underlying generation
assets in an amount sufficient to redeem the Investor's interest. Given the
strategic importance of these generation assets, it is likely that the Company
would seek to refinance or purchase the Investor's interest under such
circumstances.

Trade Credit

   The Company's commercial agreements typically include adequate assurance
provisions relating to trade credit and some agreements also have credit rating
triggers. These trigger events typically would give counterparties the right to
suspend or terminate credit if the Company's credit ratings were downgraded to
non-

                                      21

<PAGE>

investment grade status. Under such circumstances, the Company would need to
post collateral to continue transacting risk-management business with many of
its counterparties under either adequate assurance or specific credit rating
trigger clauses. The cost of posting collateral would increase the Company's
financing costs and could adversely impact the Company's profitability. If such
collateral was not posted, the Company's ability to continue transacting its
risk-management business as before the downgrade would be materially adversely
affected.

   Following the Enron bankruptcy, there has been a general industry-wide
contraction in trade credit in the wholesale energy markets. Open or unsecured
credit lines generally have been reduced, and counterparties are more stringent
in requiring credit support in the form of cash in advance, letters of credit
or guarantees as a condition to transacting business above open credit limits.
In addition, parties engaged in the wholesale marketing business, including the
Company, are moving towards the implementation of standardized agreements that
allow for the netting of positive and negative exposures associated with a
single counterparty. Most commercial agreements typically include "adequate
assurance" provisions or specific ratings triggers. These clauses typically
give counterparties the right to suspend or terminate credit if the Company's
credit ratings fall below investment grade.

   The Company's wholesale marketing and risk-management business has
historically relied upon the Company's senior unsecured debt investment grade
credit rating to satisfy the credit support requirements of many counterparties.

Disclosure of Financial Obligations and Contingent Financial Commitments

   Dynegy has incurred financial obligations and commitments in the normal
course of its operations and financing activities. Financial obligations
include future cash payments required under existing contractual arrangements,
such as debt and lease agreements. These obligations may result from both
general financing activities as well as from commercial arrangements that are
directly supported by related revenue-producing activities. Financial
commitments represent contingent obligations, which become payable only if
pre-defined events were to occur, such as financial guarantees.

   As discussed in the Explanatory Note to the accompanying Consolidated
Financial Statements, the accompanying Consolidated Financial Statements
reflect various restatement items that have become known to management since
the date of the Original Filing. Please read the Explanatory Note to the
accompanying Consolidated Financial Statements for additional information about
these restatements. The tables that follow have been adjusted since the
Original Filing to reflect these restatements.

   The following table provides a summary of general financial obligations as
of December 31, 2001. This table includes cash obligations related to
outstanding debt, redeemable preferred stock and similar financing
transactions. This table also includes cash obligations for minimum lease
payments associated with general corporate services, such as office and
equipment leases.

                                      22

<PAGE>

General Financial Obligations as of December 31, 2001

<TABLE>
<CAPTION>
                                                    Payments Due By Period
                                          ------------------------------------------
Cash Obligations*
($ in millions)                           Total  2002 2003 2004 2005 2006 Thereafter
----------------------------------------- ------ ---- ---- ---- ---- ---- ----------
<S>                                       <C>    <C>  <C>  <C>  <C>  <C>  <C>
Current Portion of Long Term Debt/(1)/... $  256 $256 $--  $--  $ -- $ --   $   --
Long Term Debt/(1)/......................  2,707   --  64   69   524  388    1,662
Other Mezzanine Preferred Securities/(1)/    200   --  --   --    --   --      200
Operating Leases/(2)/....................    139   20  20   20    20   19       40
                                          ------ ---- ---  ---  ---- ----   ------
Total General Financial Obligations......  3,302  276  84   89   544  407    1,902
                                          ====== ==== ===  ===  ==== ====   ======
</TABLE>
--------
*  Cash obligations herein are not discounted and do not include related
   interest, accretion or dividends.
/(1)/ Total amounts are included in the December 31, 2001 consolidated balance
      sheet. Debt amounts include borrowings outstanding under the following
      arrangements:
  .   Commercial paper ($6 million);
  .   Revolving credit facilities ($600 million);
  .   Canadian credit agreements ($40 million);
  .   Senior notes ($1,693 million);
  .   ABG Gas Supply debt financing ($282 million); and
  .   Lease arrangements relating to the Heard and Riverside generating
      facilities in Georgia and Kentucky ($342 million).
    Please read Note 7--Debt to the Consolidated Financial Statements. The
    approximate $568 million increase in Long-Term Debt over the amount
    originally reported primarily relates to the consolidation of ABG Gas
    Supply, an entity originally formed in connection with Project Alpha, and
    the recognition of debt related to generation assets previously accounted
    for under operating leases.
/(2)/ Includes primarily minimum lease payment obligations associated with
      office and office equipment leases.

   The following table provides a summary of contingent financial commitments
as of December 31, 2001. These commitments represent contingent obligations of
the Company, which may require a payment of cash upon pre-defined events.

Contingent Financial Commitments as of December 31, 2001

<TABLE>
<CAPTION>
                                                  Expiration By Period
                                       ------------------------------------------
Contingent Obligations*
($ in millions)                        Total  2002 2003 2004 2005 2006 Thereafter
-------------------------------------- ------ ---- ---- ---- ---- ---- ----------
<S>                                    <C>    <C>  <C>  <C>  <C>  <C>  <C>
Letters of Credit/(1)/................ $  474 $453 $21  $--  $ -- $--     $--
Surety Bonds/(2)/.....................    286  202  31   12    13  14      14
Guarantees/(3)/.......................    270   --  --   69   145  --      56
                                       ------ ---- ---  ---  ---- ---     ---
Total Contingent Financial Commitments $1,030  655  52   81   158  14      70
                                       ====== ==== ===  ===  ==== ===     ===
</TABLE>
--------
*  Contingent obligations are presented on an undiscounted basis.
/(1)/ Amounts include outstanding letters of credit and uncommitted lines.
/(2)/ Surety bonds are generally on a rolling twelve-month basis.
/(3)/ Amounts include $214 million of residual value guarantees related to
      commercial leasing arrangements, further discussed in footnote (1) to the
      Commercial Financial Obligations table below. Based on the estimated fair
      value of the underlying assets, the Company does not anticipate funding
      such amounts. Approximately $30 million of the balance represents a cash
      collateralization requirement as described in "Trigger Events" above and
      is related to West Coast Power. The remaining $25 million relates to an
      insurance program also for West Coast Power. These guarantees do not have
      specific expiration dates, thus they have been included in the
      "Thereafter" category.

                                      23

<PAGE>

   The following table provides a summary of commercial financial obligations,
which are directly associated with revenue-producing activities. These
arrangements provide Dynegy access to assets that provide it with manufacturing
and logistical capacity needed to execute its business strategy, which is
focused upon the physical delivery of energy products to its customers. These
obligations include unconditional purchase obligations associated with
generation turbines, minimum lease payments associated with operating leases on
generation assets, long-haul fiber optic network capacity and other assets used
in its operations, as well as capacity payments under generation supply tolling
arrangements and transportation, transmission and storage arrangements.

Commercial Financial Obligations as of December 31, 2001

<TABLE>
<CAPTION>
                                                  Payments Due By Period
                                        ---------------------------------------
Cash Obligations*
($ in millions)                         Total  2002 2003 2004 2005 2006 Thereafter
--------------------------------------- ------ ---- ---- ---- ---- ---- ----------
<S>                                     <C>    <C>  <C>  <C>  <C>  <C>  <C>
Operating Leases/(1)/.................. $1,839  96   98   92   76   73    1,404(5)
Unconditional Purchase Obligations/(2)/     44  44   --   --   --   --       --
Firm Capacity Payments/(3)/............  2,626 269  272  264  239  224    1,358
Conditional Purchase Obligations/(4)/..    370   3   51   70  118  104       24
                                        ------ ---  ---  ---  ---  ---    -----
Total Commercial Financial Obligations. $4,879 412  421  426  433  401    2,786
                                        ====== ===  ===  ===  ===  ===    =====
</TABLE>
--------
*  Cash obligations are presented on an undiscounted basis.
/(1)/ Amounts include the minimum lease payment obligations associated with
      various lease arrangements. These lease arrangements are as follows:
  .   Four lease arrangements relating to generation facilities located in New
      York (Central Hudson), Texas (CoGen Lyondell) and Illinois (Tilton); and
  .   Five lease arrangements relating to five VLGCs utilized in the DMS
      segment.
    The Contingent Financial Commitments table above includes residual value
    guarantees of $214 million related to two of these lease arrangements
    (CoGen Lyondell and Tilton). Please read Note 11 to the consolidated
    financial statements for a description of these residual value guarantees.
    Such leasing arrangements are accounted for as operating leases, thus the
    related future obligations are not recorded as liabilities on the Company's
    consolidated balance sheet and the depreciation of these assets is not
    included in the consolidated statement of operations. The Company elected
    to utilize leasing structures to optimize the capital resource allocation,
    earnings and tax attributes of the enterprise. Dynegy may ultimately
    acquire some or all of the leased assets through exercise of purchase
    options established at lease inception based on the then fair market value,
    but does not have any plans to do so at this time.
/(2)/ Amounts include purchase obligations for natural gas and coal.
/(3)/ Firm capacity payments include payments aggregating $2 billion that
      provide Dynegy with the option to convert natural gas to electricity at
      third-party owned facilities ("tolling arrangements"). These amounts
      include tolling payments that are reflected on the Consolidated Balance
      Sheet in "Risk-Management Assets" or "Risk-Management Liabilities" and
      those that are accounted for on an accrual basis, each as determined by
      the applicable contractual terms and in accordance with generally
      accepted accounting principles. Approximately 91 percent of the $2
      billion of aggregate tolling capacity payments are accounted for on an
      accrual basis. These contracts provide Dynegy access to regional
      generation capacity to fulfill physical contract requirements of its
      customers. These $2 billion in capacity payments, on a discounted basis,
      totaled $1.4 billion. Dynegy previously reported in its Form 10-K that
      the estimated market value of electricity available for sale under these
      arrangements as of the date of the Original Filing, discounted for
      credit, price and market liquidity reserves, exceeded the amount of
      capacity payments by approximately $325 million. As a result of Dynegy's
      correction of its forward power curve methodology effective beginning the
      third quarter 2001, the estimated market value of electricity available
      for sale under these arrangements at December 31, 2001, discounted for
      market liquidity reserves, is approximately $52 million less than the
      amount of capacity payments. The other firm capacity payments of
      approximately $715 million include

                                      24

<PAGE>

   fixed obligations associated with transmission, transportation and storage
   arrangements routinely used in the physical movement and storage of energy
   consistent with the Company's business strategy.
/(4)/ Amounts include the Company's obligations as of December 31, 2001 to
      purchase 14 gas-fired turbines and an information systems service
      agreement. Commitments under the turbine purchase orders are payable
      consistent with the delivery schedule. The purchase orders include
      milestone requirements by the manufacturer and provide the Company with
      the ability to cancel each discrete purchase order commitment in exchange
      for a fee, which escalates over time. The amounts herein assume all 14
      turbines will be purchased. However, Dynegy can cancel these arrangements
      at anytime, subject to a termination fee. If Dynegy had terminated the
      turbine purchase orders at December 31, 2001, the termination fee would
      have been approximately $48 million, reducing Dynegy's conditional
      purchase commitment by $435 million. Additionally, if Dynegy had
      terminated the service agreement at December 31, 2001, the termination
      fee would have been $9 million, reducing Dynegy's commitment by $21
      million.
/(5)/ Amounts primarily relate to leases of the Central Hudson generating
      assets discussed further in Note 14 to the consolidated financial
      statements.

   Dynegy has entered into various joint ventures (see Note 6 to the
consolidated financial statements) principally for the purpose of sharing risk
or to optimize existing commercial relationships. These joint ventures maintain
independent capital structures and have financed their operations on a
non-recourse basis to Dynegy.

Enron/Northern Natural

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

   In connection with Dynegy Inc.'s preferred stock investment in Northern
Natural, Dynegy paid $1 million to acquire an option to purchase all of the
equity of Northern Natural's indirect parent company. The exercise price for
the option was $23 million, subject to adjustment based on Northern Natural's
indebtedness and working capital.

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

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

  .   At January 31, 2002, Northern Natural had approximately $950 million of
      debt outstanding. Approximately $500 million of this debt is in the form
      of senior unsecured notes and the remaining $450 million is in the form
      of a secured line of credit. Dynegy has agreed to commence a tender offer
      by April 1, 2002 for $100 million of the senior unsecured notes due May
      2005. The significant terms of the Northern Natural debt are as follows
      ($ in millions):

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

                                      25

<PAGE>

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

   On December 2, 2001, Enron filed for federal bankruptcy protection in the
United States Bankruptcy Court, Southern District of New York. Enron also filed
an adversary proceeding in the bankruptcy court against Dynegy Inc. and Dynegy
Holdings Inc. seeking damages of $10 billion for wrongful termination of the
merger agreement and the wrongful exercise of its option to take ownership of
Northern Natural. (Please refer to Note 11 of the financial statements for
further discussion of this dispute).

   As a result of Enron's bankruptcy filing, the Company recognized in its
fourth quarter 2001 financial statements a pre-tax charge related to the
Company's net exposure for commercial transactions with Enron. As of December
31, 2001, the Company's net exposure to Enron, inclusive of certain liquidated
damages and other amounts relating to the termination of the transactions, was
approximately $84 million and was calculated by setting off approximately $230
million owed from various Dynegy entities to various Enron entities against
approximately $314 million owed from various Enron entities to various Dynegy
entities. The master netting agreement between Dynegy and Enron and the
valuation of the commercial transactions covered by the agreement, which
valuation is based principally on the parties' assessment of market prices for
such period, remain subject to dispute by Enron with respect to which there
have been negotiations between the parties. These negotiations have focused on
the scope of the transactions covered by the master netting agreement and the
parties' valuations of those transactions. If any disputes cannot be resolved
by the parties, the agreements call for arbitration. If the setoff rights were
modified or disallowed, either by agreement or otherwise, the amount available
for Dynegy entities to set off against sums that might be due Enron entities
could be reduced materially.

Recent Acquisitions

   In the fourth quarter of 2001, the Company completed the purchase of BG
Storage Limited ("BGSL"), a wholly owned subsidiary of BG Group plc. Under the
terms of the purchase agreement, Dynegy paid approximately (Pounds)421 million
(approximately $595 million at November 28, 2001) for BGSL. The storage 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 acquisition of
BGSL established Dynegy's physical asset presence in the United Kingdom.

   Also in the first quarter of 2001, the Company completed the acquisition of
two Central Hudson power generation facilities in New York. The Central Hudson
facilities consist of a combination of base load, intermediate and peaking
facilities aggregating approximately 1,700 MW. The facilities are located
approximately 50 miles north of New York City and were acquired for
approximately $903 million cash, plus inventory and working capital
adjustments. The acquisition of these facilities established Dynegy's physical
power presence in the region.

   In May 2001, subsidiaries of Dynegy completed a sale-leaseback transaction
with a third party to provide term financing with respect to the Central Hudson
facilities. Under the terms of the sale-leaseback transaction, subsidiaries of
Dynegy sold certain plants and equipment and agreed to lease them back for
terms expiring within 34 years, exclusive of renewal options. Please read the
"Commercial Financial Obligations as of December 31, 2001" table set forth
above for additional information.

Capital Spending

   The 2002 budget of $1.0 billion includes construction projects in progress,
maintenance capital projects, environmental projects, technology infrastructure
and software enhancements, contributions to equity investments, leasing
transactions and discretionary capital investment funds. The capital budget is
subject to

                                      26

<PAGE>

revision as opportunities arise or circumstances change. Funds approved to be
spent for the aforementioned items by the various segments in 2002 are as
follows:

Capital Budget for 2002

<TABLE>
<CAPTION>
                                                    Estimated
                   Segment or Category               Capital
                   ($ in millions)                  Spending
                   -------------------------------- ---------
                   <S>                              <C>
                   Wholesale Energy Network........  $  733
                   Dynegy Midstream Services.......      75
                   Northern Natural Gas Company....      65
                   Information Technology and Other     144
                                                     ------
                                                     $1,017
                                                     ======
</TABLE>

   Included within WEN's capital budget are funds to complete three power
plants under construction that are expected to begin commercial operation
during the summer of 2002. The natural gas-fired facilities will provide
additional generation of approximately 1,500 MW in the aggregate and are
located in Kentucky and Michigan. Additionally, construction has also started
on an 800 MW natural gas-fired peaking facility in Ohio which is expected to
begin operations during the summer of 2003.

Commitments and Contingencies

   See Item 8, Financial Statements and Supplementary Data, Note 11, which is
incorporated herein by reference, for a discussion of the Company's commitments
and contingencies.

California Market/West Coast Power

   Dynegy and NRG Energy each own 50 percent of West Coast Power, a joint
venture owning power generation plants in southern California. The Company's
net interest in West Coast Power represents approximately 1,400 MW of
generating capacity. The Company also participates in the California markets
independently, as a wholesale marketer of gas and power. Through its interest
in West Coast Power, the Company has credit exposure to state agencies ("ISO"
and "PX"), which primarily relied on receipts from California utilities to pay
their bills. West Coast Power also sells directly to the California Department
of Water Resources ("DWR") and pursuant to other bilateral agreements. Pursuant
to a November 7, 2001 FERC order, the DWR was ordered for the period of January
17, 2001 forward to pay for all power purchased on behalf of the net short
loads of PG&E and Southern California Edison. DWR has complied with this order,
though there remain a number of disputes. Additionally, on February 25, 2002,
the California Public Utilities Commission and the California Electricity
Oversight Board filed complaints with the FERC asking that it void or reform
power supply contracts between DWR and, among others, West Coast Power. The
complaints allege that prices under the contracts exceed just and reasonable
prices permitted under the Federal Power Act. While the Company believes the
terms of its contracts are just and reasonable and do not reflect alleged
market manipulation, it cannot predict how the FERC will respond to these
complaints. The Company is vigorously defending against these complaints.

   Between the fourth quarter of 2000 and the second quarter of 2001, the power
and natural gas markets in California 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. The California market
situation had many impacts, the most significant of which 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

                                      27

<PAGE>

imposition of a market mitigation plan for the Western States Coordinating
Council; (f) FERC orders directing electricity suppliers to either refund a
portion of sales revenue or justify their prices above approved pricing
amounts; (g) a failed settlement conference to determine potential refunds; (h)
the scheduling and subsequent rescheduling of a FERC hearing to calculate any
such refunds; (i) continued debate over the validity and legality of long-term
power supply contracts executed by state agencies; and (j) a settlement
agreement between Southern California Edison and the California Public
Utilities Commission that is designed to allow Southern California Edison to
pay its past due debts and return it to creditworthy status. In addition,
Dynegy and several of its officers were named in various lawsuits associated
with the California situation, which are more fully discussed in Note 11 to the
Consolidated Financial Statements. Additionally, on March 11, 2002, the
California Attorney General filed, on behalf of the People of the State of
California, complaints in San Francisco Superior Court against several energy
generators, including those owned directly by West Coast Power and indirectly
by Dynegy Inc. The complaints allege that since June 1998, these generators
sold power in the open market that should have been held in emergency reserve
for the State. In the aggregate, the complaints seek more than $150 million in
penalties, restitution and return profits from the generators. The Company will
vigorously defend these claims. 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.

   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 Ninth Circuit Court of Appeals
and the 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 potential refunds or offsets associated with related transactions.
Transactions with the aforementioned counterparties, other than the ISO and PX,
are current under the terms of each individual arrangement. At December 31,
2001, Dynegy's portion of the receivables owed to West Coast Power by the ISO
and PX approximated $227 million. Management is continually assessing Dynegy's
exposure, as well as its exposure through West Coast Power, relative to its
California receivables and establishes reserves for contingent liabilities
where the amount of potential loss is determined to be probable and estimable.
During 2001, 2000 and 1999, our share of reserves recorded by West Coast Power
totalled $122.5 million, $24.5 million and $4.7 million, respectively. Our
share of the total reserve at December 31, 2001 and 2000 was $151.8 million and
$29.3 million, respectively.

ChevronTexaco Commercial Relationship

   Dynegy and ChevronTexaco are in the late stages of negotiations to expand
existing commercial relationships to include natural gas and domestic mixed
NGLs and NGL products produced or controlled by the former Texaco. The expanded
term agreements would extend through August 2006. This expanded relationship
will increase the volume of natural gas we purchase from ChevronTexaco from
approximately 2 Bcf/d to approximately 3 Bcf/d. We also expect to provide
supply and service for approximately 2 Bcf/d of natural gas for the former
Texaco's facilities and third-party term markets. In addition, DMS' expanded
contract with ChevronTexaco is expected to include substantially all of the
U.S. NGL production of the former Texaco. Concurrent with the expanded
commercial agreements, the two companies are exploring alternative security
provisions that would be mutually beneficial. Alternatives could include
replacement of existing credit support arrangements with a perfected security
interest in a portion of our trade receivables.

Concentration of Credit Risk

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

                                      28

<PAGE>

Accounting Pronouncements

   See Item 8, Financial Statements and Supplementary Data, Note 2, which is
incorporated herein by reference, for a discussion of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("Statement No. 142"), Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" ("Statement No. 143") and
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("Statement No. 144").

   In addition, the Company has interests in joint ventures, equity investments
and financing arrangements that existing accounting guidance precludes us from
consolidating. In the wake of the Enron bankruptcy, accounting standard
setters, including the SEC and the Financial Accounting Standards Board, are
evaluating the existing accounting and disclosure rules and requirements. One
area that has received a high level of scrutiny is the accounting rules related
to consolidations, specifically those that address special purpose entities.
Standard setting bodies and regulators are evaluating the consolidation rules
to determine whether the existing accounting framework should change. There is
a risk that existing standards will change, particularly in light of the events
of 2001, and that these changes could result in the consolidation in the
Company's financial statements of entities that it does not currently
consolidate.

Conclusion

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

                                      29

<PAGE>

RESULTS OF OPERATIONS

   The following table reflects certain operating and financial data for the
Company's business segments for the years ended December 31, 2001, 2000 and
1999, respectively. This financial data has been revised to reflect the
restatement items described in the Explanatory Note to the accompanying
Consolidated Financial Statements. Please read this Explanatory Note for
further discussion of these restatement items.

   The impact of acquisition and disposition activity during the three-year
period reduces the comparability of certain historical financial and volumetric
data. This is especially true as it relates to power generation and gas
processing volumes.

   For segment reporting purposes, all general and administrative expenses
incurred by Dynegy on behalf of its subsidiaries are charged to the applicable
subsidiary as incurred. Dynegy allocates indirect general and administrative
expenses to its subsidiaries using a two-step formula that considers both
payroll expense and the net book value of property, plant and equipment.
Interest expense incurred by Dynegy on behalf of its subsidiaries is allocated
based on the subsidiaries' debt to equity relationship. Other income (expense)
items incurred by Dynegy on behalf of its subsidiaries are allocated equally
among sub-components of the two segments.

DYNEGY'S RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                      WEN   DMS  Total
                                                     ----  ----  -----
                                                      ($ in Millions)
                                                        (Restated)
         <S>                                         <C>   <C>   <C>
         2001
         Operating Income:
            Wholesale Energy Network:
            Customer and Risk-Management Activities. $294  $ --  $294
            Asset Businesses........................  327    --   327
         Dynegy Midstream Services:
            Upstream................................   --    82    82
            Downstream..............................   --    49    49
                                                     ----  ----  ----
         Operating Income...........................  621   131   752
         Equity Earnings............................  165    13   178
         Other Items, Net...........................  (48)   (3)  (51)
         Net Income................................. $369  $ 56  $425

         2000
         Operating Income:
            Wholesale Energy Network:
            Customer and Risk-Management Activities. $233  $ --  $233
            Asset Businesses........................  287    --   287
         Dynegy Midstream Services:
            Upstream................................   --    44    44
            Downstream..............................   --    40    40
                                                     ----  ----  ----
         Operating Income...........................  520    84   604
         Equity Earnings............................  167    24   191
         Other Items, Net...........................  (48)  (39)  (87)
         Net Income................................. $372  $ 26  $398
</TABLE>


                                      30

<PAGE>

<TABLE>
<CAPTION>
                                                      WEN   DMS  Total
                                                     ----  ----  -----
                                                      ($ in Millions)
                                                        (Restated)
         <S>                                         <C>   <C>   <C>
         1999
         Operating Income:
         Wholesale Energy Network:
            Customer and Risk-Management Activities. $106  $ --  $106
            Asset Businesses........................   38    --    38
         Dynegy Midstream Services:
            Upstream................................   --    18    18
            Downstream..............................   --    64    64
                                                     ----  ----  ----
         Operating Income...........................  144    82   226
         Equity Earnings............................   62    18    80
         Other Items, Net...........................  (13)  (18)  (31)
         Net Income................................. $107  $ 30  $137
</TABLE>

                                      31

<PAGE>

DYNEGY'S OPERATING DATA

<TABLE>
<CAPTION>
                                                      2001    2000    1999
                                                     ------- ------- ------
    <S>                                              <C>     <C>     <C>
    Wholesale Energy Network:
    Domestic Gas Marketing Volumes (Bcf/d)/(1)/.....     8.1     7.5    6.5
    Canadian Gas Marketing Volumes (Bcf/d)/(2)/.....     3.1     2.2    2.3
    European Gas Marketing Volumes (Bcf/d)/(3)/.....     1.3     1.2    1.1
                                                     ------- ------- ------
           Total Gas Marketing Volumes..............    12.5    10.9    9.9
                                                     ======= ======= ======
    Million Megawatt Hours Generated--Gross.........    40.3    36.8   21.5
    Million Megawatt Hours Generated--Net...........    34.5    30.3   12.8
    Total Physical Million Megawatt Hours Sold......   361.8   137.0   79.3
    Coal Marketing Volumes (Millions of Tons).......    43.0    10.4     --
    Average Natural Gas Price--Henry Hub ($/Mmbtu).. $  4.26 $  3.89 $ 2.29
    Average On-Peak Market Power Prices:
       Cinergy...................................... $ 35.19 $ 36.43 $51.40
       TVA..........................................   34.87   39.73  51.96
       PJM..........................................   40.76   39.96  38.29
       CALPX SP15...................................  121.04  113.51  31.99
    Dynegy Midstream Services:
    Natural Gas Processing Volumes (MBbls/d):
       Field Plants.................................    56.1    61.2   85.9
       Straddle Plants..............................    27.7    35.6   36.6
                                                     ------- ------- ------
           Total Natural Gas Processing Volumes.....    83.8    96.8  122.5
                                                     ======= ======= ======
    Fractionation Volumes (MBbls/d).................   226.2   224.3  210.9
    Natural Gas Liquids Sold (MBbls/d)..............   557.4   564.6  537.1
    Average Commodity Prices:
       Crude Oil--Cushing ($/Bbl)................... $ 26.39 $ 28.97 $17.10
       Natural Gas Liquids ($/Gal)..................    0.45    0.55   0.34
       Fractionation Spread ($/MMBtu)...............    0.89    2.40   1.68
</TABLE>
--------
/(1) /Includes immaterial amounts of inter-affiliate gas sales.
/(2) /Represents volumes sold by Dynegy Inc.'s Canadian subsidiary.
/(3) /Represents volumes sold by Dynegy Inc.'s European operations.

                                      32

<PAGE>

Three Years Ended December 31, 2001

   For the year ended December 31, 2001, the Company realized net income of
$425 million. This compares with $398 million and $137 million in 2000 and
1999, respectively. Net income includes the following items:

<TABLE>
<CAPTION>
                                                    2001     2000     1999
                                                  -------- -------- --------
                                                   Income   Income   Income
   ($ in millions)                                (Charge) (Charge) (Charge)
   ---------------------------------------------- -------- -------- --------
   <S>                                            <C>      <C>      <C>
   Enron bankruptcy exposure/(1)/................   (84)      --       --
   Terminated merger related costs/(2)/..........    (6)      --       --
   Cumulative effect of an accounting change/(3)/     2       --       --
   Gain on Sale--Accord Energy Limited/(4)/......    --       58       --
   Gain on Sale--QFs/(5)/........................    --       34       --
   Loss on Sale--Crude Business/(6)/.............    --      (11)      --
   Loss on Sale--Mid-continent Assets/(7)/.......    --       (6)      --
   Impairment of a Liquids Asset/(8)/............    --      (16)      --
   Illinova Acquisition Costs/(9)/...............    --      (10)      --
   Gain on Sale--Quicktrade Investment/(10)/.....    --       --        6
</TABLE>
--------
/(1)/ The Company recognized an after-tax charge of $84 million ($129 million
      pre-tax) related to its net exposure to Enron Corp. as a result of that
      company's bankruptcy filing. The pre-tax charge is included in "Cost of
      Sales" in the accompanying Consolidated Statements of Operations
      ("Statements").
/(2)/ Dynegy Inc. terminated its proposed merger with Enron Corp. on November
      28, 2001. Transaction costs associated with this terminated merger
      approximated $6 million after-tax ($8 million pre-tax). The pre-tax
      charge is included in "General and administrative expenses" in the
      accompanying Statements.
/(3)/ Effective January 1, 2001, the Company adopted Financial Accounting
      Standard No. 133, "Accounting for Derivative Instruments and Hedging
      Activities," as amended, realizing an after-tax cumulative effect gain of
      approximately $2 million.
/(4)/ The Company sold its 25% participating preferred interest in Accord
      Energy Limited in the third quarter of 2000. The after-tax gain of
      approximately $58 million ($83 million pre-tax) is included in "Loss
      (gain) on asset sales" in the accompanying Statements.
/(5)/ The Company sold interests in certain Qualifying Facilities pursuant to
      statutory requirements related to the Illinova acquisition. The after-tax
      gain of approximately $34 million ($52 million pre-tax) is included in
      "Loss (gain) on asset sales" in the accompanying Statements.
/(6)/ The Company sold its non-strategic domestic crude oil marketing and trade
      business in the first quarter of 2000. The charge of approximately $11
      million after-tax ($18.3 million pre-tax) is included in "Loss (gain) on
      asset sales" in the accompanying Statements.
/(7)/ The Company sold its Mid-Continent liquids processing assets in the first
      quarter of 2000. The after-tax charge of approximately $6 million ($9
      million pre-tax) is included in "Loss (gain) on asset sales" in the
      accompanying Statements.
/(8)/ The impairment reserve is associated with a Canadian gas processing
      asset. The after-tax charge of approximately $16 million ($25 million
      pre-tax) is included in "Depreciation and amortization expense" in the
      accompanying Statements.
/(9)/ Amounts relate to non-capitalizable merger related costs associated with
      the Illinova acquisition. The after-tax charge of approximately $10
      million ($15 million pre-tax) is included in "General and administrative
      expenses" in the accompanying Statements.
/(10)/ The Company sold a non-strategic investment in the first quarter of 1999.

   Revenues in each of the three years in the period ended December 31, 2001
totaled $41.3 billion, $27.8 billion and $15.4 billion, respectively. Operating
cash flows totaled $176 million for the year ended December 31, 2001, compared
with $408 million in 2000 and $40 million in 1999.

   For the year ended December 31, 2001, the Company reported operating income
of $752 million, compared with operating income of $604 million and $226
million for the 2000 and 1999 periods, respectively. The growth

                                      33

<PAGE>

in operating margin is partially offset by higher depreciation and amortization
and general and administrative expenses. Increases in depreciation and
amortization expense during the three-year period reflect the impact of
continued expansion of the Company's depreciable operating and technology asset
base. The increased level of general and administrative expenses
period-to-period reflects the infrastructure required to support a larger
operation. Increased overhead costs are primarily a result of expansion of the
Company's operations, primarily in the DGC segment and in Europe. Additionally,
variable compensation costs were higher in 2001 as compared with both the 2000
and 1999 periods. Gain (loss) on asset sales principally reflects the pre-tax
effect of the gains on the sales of Accord Energy Limited and certain QFs in
2000, partially offset by the losses on the sales of the domestic crude
business and the Mid-Continent liquids processing assets. The Company sold its
25 percent participating preferred interest in Accord Energy Limited for an
after tax gain of $58 million ($83 million pre-tax) and sold interests in
certain QFs for an after tax gain of $34 million ($52 million pre-tax). The
Company received cash proceeds of $95 million and $257 million in the Accord
and QF transactions, respectively. The carrying values for the Accord
investment and the QFs were $12 million and $205 million, respectively.

   Incremental to Dynegy's consolidated results was the Company's share in the
earnings of its unconsolidated affiliates, which contributed approximately $178
million, $191 million and $80 million in 2001, 2000 and 1999, respectively.
West Coast Power contributed approximately $162 million, $122 million and $16
million to such earnings in 2001, 2000 and 1999, respectively. Cash
distributions received from these investments during each of the three years in
the period ended December 31, 2001 approximated $87 million, $109 million and
$66 million, respectively.

   Interest expense totaled $143 million for the year ended December 31, 2001,
compared with $96 million and $78 million for the comparable 2000 and 1999
periods, respectively. The increase in interest expense in 2001 is due
primarily to increased principal, partially offset by lower variable rates than
in 2000. The increase in interest expense in 2000 from 1999 is attributable to
the increased indebtedness resulting from Dynegy Inc.'s acquisition of
Illinova. Additionally, interest rates on the variable rate borrowings were
higher in 2000 than in 1999.

   Other income and expenses, net, reduced 2001, 2000 and 1999 operating
results by $51 million, $87 million and $31 million, respectively. The net
amounts for all three years include the financial effects of minority
shareholder investments in some of the Company's operations and other income
and expense items including interest and dividend income, foreign currency
gains and losses, insurance proceeds and other similar items.

   The Company reported an income tax provision of $313 million in 2001,
compared to income tax provisions of $214 million and $60 million in 2000 and
1999, respectively. These amounts reflect effective rates of 43 percent, 35
percent and 30 percent, respectively. In general, differences between the
aforementioned effective rates and the statutory rate of 35 percent result
primarily from permanent differences attributable to amortization of certain
goodwill, book-tax basis differences and other liabilities; and the effect of
certain foreign and state income taxes. Income tax payments are not expected to
have a material impact on liquidity and capital resources. See Item 8,
Financial Statements and Supplementary Data, Note 8, which is incorporated
herein by reference.

                                      34

<PAGE>

Wholesale Energy Network

   WEN reported segment net income of $369 million for the year ended December
31, 2001, compared with net income of $372 million and $107 million for the
years ended December 31, 2000 and 1999, respectively. Results of operations
during the three-year period were influenced either positively or negatively by:

  .   New regionally diverse merchant power generating capacity acquired or
      placed in service in 2001 and 2000;

  .   Increased earnings from the equity investment in West Coast Power
      year-over-year during the three-year period, partially attributable to
      higher price realization for power purchased from West Coast Power;

  .   An increase in customer risk management activities in 2001, as compared
      to 2000, as a result of a long-term power origination contract that
      contributed approximately $35 million of operating income during 2001;

  .   An increase in European and Canadian marketing operations due to
      increased customer origination and service demand during the three-year
      period;

  .   Results for 2001 included approximately $82 million exposure to Enron
      (net of tax) and an allocation of transaction costs associated with both
      the terminated proposed merger with Enron and the execution of Project
      Alpha; and

  .   Results for 2000 include gains of approximately $92 million (net of tax)
      on the sale of Accord and QF interests, offset by an allocated portion of
      the Illinova acquisition costs.

   The new generating capacity in 2001 included the addition of the Central
Hudson power generating facilities in New York and development projects in
Georgia, Kentucky and Louisiana for a total of approximately 2,865 MW, while
new capacity in 2000 included the generation assets from the Illinova
acquisition and development projects in Illinois, Louisiana and North Carolina
for a total of 8,091 MW.

   Total electric power produced and sold during 2001 aggregated 361.8 million
megawatt hours compared to 137.0 million and 79.3 million megawatt hours during
2000 and 1999, respectively. The 2001 and 2000 volumes reflect the impact of
additional generating capacity. Total natural gas volumes sold increased to
12.5 billion cubic feet per day from 10.9 billion cubic feet per day in 2000
and 9.9 billion cubic feet per day in 1999. The 2001 increase in natural gas
volumes sold reflects greater market origination, including sales to commercial
and industrial customers, sales volumes on Dynegydirect and increased gas
marketing in Canada. The 2000 increase in natural gas volumes sold reflects the
increased demand by gas-fired generation, expanding European operations and
greater volumes sold to Dynegy's retail alliances.

   As described in Note 19--Subsequent Events to the Consolidated Financial
Statements, the Company is in the process of exiting third-party risk
management aspects of the marketing and trading business. The WEN segment's
future results of operations will be affected by this development.

Dynegy Midstream Services

   DMS reported net income of approximately $56 million for the year ended
December 31, 2001 compared with net income of $26 million and $30 million in
2000 and 1999, respectively. Results of operations during the three-year period
were influenced either positively or negatively by:

  .   Higher price realization in 2001, as compared to 2000, resulting from an
      active forward sales program and contract restructuring activities,
      despite a depressed pricing environment resulting from larger industry
      wide inventories;

  .   Substantial focus on lowering costs throughout the three-year period;

                                      35

<PAGE>

  .   Lower price realization in 2000, as compared to 1999, resulting from an
      active forward sales program and contract restructuring activities;

  .   NGL commodity prices in 2000, and the volatility associated therewith,
      were generally improved over 1999 levels;

  .   Fluctuating world-wide demand for NGLs, particularly in Europe and Asia,
      enhanced 2000 revenues from global marketing operations;

  .   Results for 2001 include approximately $2 million exposure to Enron (net
      of tax) as a result of that company's bankruptcy filing and an allocation
      of transaction costs associated with the terminated proposed merger with
      Enron; and

  .   Results for 2000 include losses of approximately $17 million (net of tax)
      on sales of the Crude Oil Marketing and Trade business (which was sold in
      April 2000 and contributed approximately $9 million after tax in 1999)
      and Mid-Continent gas processing assets, an impairment of approximately
      $16 million (net of tax) relating to Canadian gas processing assets and
      an allocation of costs related to the Illinova acquisition.

   Average domestic NGL processing volumes totaled 84 MBbls/d in 2001 compared
to an average of 97 MBbls/d and 123 MBbls/d in 2000 and 1999, respectively.
Lower volumes processed in 2001 reflect the impact of market conditions on
straddle plant production during the three-year period and the aforementioned
non-strategic asset dispositions. Volumes processed in 2000 were flat with
volumes processed in 1999 after adjusting for the effects of the asset sales.
NGL market prices during 2001 averaged $0.45 per gallon compared to $0.55 per
gallon and $0.34 per gallon in 2000 and 1999, respectively.

Operating Cash Flow

   The following table is a condensed version of the operating section of the
Consolidated Statements of Cash Flows included in Item 8, Financial Statements
and Supplementary Data. Reported amounts reflect the restatement items further
described in the Explanatory Note to the Condensed Financial Statements,
including the reclassification of approximately $290 million of previously
disclosed 2001 operating cash flow to financing cash flow as a result of
restatements relating to Project Alpha.

Dynegy's Condensed Consolidated Cash Flows

<TABLE>
<CAPTION>
                                                          2001   2000  1999
                                                         -----  -----  ----
                                                           ($ in millions)
   <S>                                                   <C>    <C>    <C>
   Operating Cash Flow:
   Net Income........................................... $ 425  $ 398  $137
   Net Non-Cash Items Included in Net Income............   410    137   (72)
                                                         -----  -----  ----
   Operating Cash Flow Before Changes in Working Capital   835    535    65
   Changes in Working Capital...........................  (659)  (127)  (25)
                                                         -----  -----  ----
   Net Cash Provided by Operating Activities............ $ 176  $ 408  $ 40
                                                         =====  =====  ====
</TABLE>

   Increases in operating cash flow in 2001 primarily reflect higher non-cash
add-backs such as depreciation and amortization, reserve for doubtful accounts
and risk management activities. The depreciation and amortization is higher due
to a larger asset base. The reserve for doubtful accounts includes the Enron
exposure write-off of approximately $129 million on a pre-tax basis. Changes in
working capital had a negative impact on operating cash flow in 2001 due
primarily to the timing of cash inflows and outflows related to trade accounts
and certain other deposits.

                                      36

<PAGE>

   Operating cash flow results in 2000 primarily reflected higher net income
compared to 1999. Higher net income is offset by increased investments in
inventory and the negative impact on operating cash flows due primarily to the
timing of cash inflows and outflows related to trade accounts.

   Operating cash flow in 1999 primarily reflected increased non-cash earnings
from marketing operations.

   Changes in other working capital accounts, which include prepayments, other
current assets and accrued liabilities, reflect expenditures or recognition of
liabilities for 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

   Funds used in 2001 investing activities totaled $1.3 billion. Included in
the capital expenditures in 2001 is the purchase of the Central Hudson power
generation facilities for $903 million. Additional capital expenditures of
approximately $1.1 billion principally related to the construction of power
generation assets and investments associated with technology infrastructure.
Business acquisitions for the year ended December 31, 2001 included acquisition
costs related to the purchase of BGSL of approximately $595 million. Proceeds
from asset sales in 2001 included the sale of the Central Hudson facilities in
May 2001 for $920 million pursuant to a leveraged lease transaction, in
addition to proceeds from the disposal of non-strategic Canadian assets and
investments. Other investing activities in 2001 primarily include investments
relating to a generation lease arrangement.

   In 2000, capital expenditures of approximately $854 million primarily
related to construction of power generation assets and investments associated
with technology infrastructure. Also during 2000, the Company made investments
in unconsolidated affiliates of approximately $104 million. Proceeds from asset
sales in 2000 of $822 million relate to sales of QFs and liquids assets.

   During the year ended December 31, 1999, the Company invested a net $437
million principally in power generation assets, including a power generation
partnership, and additional expenditures related to capital improvements at
existing facilities and capital investment associated with technology
infrastructure improvements. Also during 1999, the Company sold certain DMS
assets, an investment held by WEN and a 50 percent interest in a power
generation partnership, netting proceeds of $81 million.

Financing Activities

   Net cash inflows associated with financing activities in 2001 totaled
approximately $1.3 billion.

   Proceeds of $496 million, net of issuance costs, resulted from the issuance
of $500 million of 6.875 percent Senior Notes due April 1, 2011. Such proceeds
were used to repay credit facility borrowings obtained to finance the purchase
of the Central Hudson generation facilities, while the acquisition of BGSL was
financed primarily with borrowings under revolving credit agreements.

   In April 2001, Dynegy entered into a structured natural gas transaction
referred to as Project Alpha. The cash inflow of $282 million associated with
the borrowings entered into by ABG Gas Supply is presented as a financing
activity in Dynegy's Consolidated Statement of Cash Flows for 2001.

   Also during 2001, proceeds from lease arrangements of approximately $81
million were used in the construction of two generation facilities.

   In 2000, the Company issued $300 million of 8.125 percent Senior Notes due
March 5, 2005. Also during 2000, proceeds from lease arrangements of
approximately $250 million were used in the construction of two

                                      37

<PAGE>

generation facilities. Other financing, net in 2000 relates primarily to the
$850 million received from a third-party investor for a minority interest in
Catlin LLC, which is consolidated by Dynegy. (See Note 10 to the consolidated
financial statements for more information.)

   In December 2001, Dynegy Inc. announced an approximately $1.25 billion
capital program designed to strengthen its balance sheet and restore market
confidence. In accordance with the plan, the Company reduced the original 2002
capital-spending program by approximately $300 million.

SEASONALITY

   Dynegy's revenues and operating margin are subject to fluctuations during
the year, primarily due to the impact seasonal factors have on sales volumes
and the prices of natural gas, electricity and NGLs. Natural gas sales volumes
and operating margin have historically been higher in the winter months than in
the summer months, reflecting increased demand due to greater heating
requirements and, typically, higher natural gas prices. Conversely, power
marketing operations and electricity generating facilities have higher
volatility and demand, respectively, in the summer cooling months, while the
transmission and distribution business has higher seasonal gas sales in the
winter and higher seasonal electricity sales in the summer. These trends may
change over time as demand for natural gas increases in the summer months as a
result of increased gas-fired electricity generation. DMS businesses are also
subject to seasonal factors; however, such factors typically have a greater
impact on sales prices than on sales volumes.

FACTORS AFFECTING FUTURE OPERATING RESULTS

   Dynegy's results of operations in 2002 and beyond may be significantly
affected by the following factors:

  .   changes in demand for the Company's power generation, pipeline, NGL or
      other facilities caused by general economic or industry conditions,
      commodity pricing or competition;

  .   the volatility and level of prices for energy commodities in North
      America and Europe;

  .   the timing and pace of energy deregulation in North America and Europe
      and the effect of the Enron bankruptcy on the pace of deregulation;

  .   the addition of the historical Texaco U.S. gas and liquids volumes to the
      Company's commercial relationship with ChevronTexaco;

  .   the acquisition of Northern Natural and possible repurchase of Northern
      Natural by Enron; and

  .   the effect of market uncertainties and the Enron litigation on Dynegy's
      credit ratings, costs of borrowing and trade credit.

   The Company's results also will be significantly affected by its ability to
execute the business plan and strategy described elsewhere herein, including
the 2002 capital plan, and the ability to manage risk throughout the
enterprise. Additional information regarding our risk management and governance
activities follows. References are also made to the section "Uncertainty of
Forward Looking Statements and Information" for additional factors which might
impact future operating results.

CORPORATE RISK GOVERNANCE

   The Company's operations and periodic returns are impacted by a myriad of
factors, some of which may, and some of which may not, be mitigated by risk
management methods. These risks include, but are not limited to, commodity
price, interest rate and foreign exchange rate fluctuations, weather patterns,
counterparty risk, management estimations, strategic investment decisions,
changes in competition, operational risks, environmental risks and changes in
regulation.

                                      38

<PAGE>

   The effective management of risk is critical to the Company's success.
Dynegy Inc.'s Board of Directors has approved a Risk Policy Statement (referred
to herein as the "Dynegy Risk Policy Statement") that identifies business risks
confronting the enterprise, establishes controls and procedures relating to
these risks, and assigns responsibility for executing the Board's directives.
As a complement to the active management of business risks, the Company
incorporates a multi-level control environment that is consistent and aligned
with the Dynegy Risk Policy Statement. The Company's comprehensive risk
management process monitors, evaluates and manages the principal risks assumed
in conducting the Company's operations consistent with the Company's corporate
strategies and objectives.

Governance Committees Structure

   The Company seeks to monitor and control its exposure to risk through a
variety of separate but complementary accounting, financial, credit,
operational and legal reporting systems. Dynegy Inc. has formed a series of
committees at both the Board and executive leadership levels responsible for
establishing limits, for monitoring adherence to these limits and for general
oversight of the risk management processes of Dynegy Inc. and its subsidiaries,
including the Company. Each level of committee has increasingly greater
policy-setting responsibility migrating from a monitoring and managing role to
the role of establishing enterprise-wide risk management policy. These
committees, which are described below, meet regularly and consist of Board
members and senior members of both Dynegy Inc.'s revenue-producing units and
departments that are independent of revenue-producing units.

Governance Committees Structure

                    [GRAPHIC DEPICTING COMMITTEE STRUCTURE]


                                      39

<PAGE>

   Board of Directors.  Ultimate responsibility for ensuring that risks are
appropriately identified and managed lies with the Board of Directors. The
Board's focus is on enterprise risk, which includes market, credit, interest
rate, currency, operational, legal and reputational exposures. All risk
management and control functions ultimately report to the Board. The Board is
solely responsible for approving and amending Dynegy's Risk Policy Statement.
This responsibility has been delegated to the Audit Committee.

   Audit Committee.  The Audit Committee is a sub-committee of Dynegy Inc.'s
Board. A key responsibility of this committee is the periodic review of the
control structure governing the enterprise's internal control and risk
management activities, including limit structures, risk procedures and
oversight matrices. The Audit Committee governs internal control and
risk-management activities through the Executive Risk Committee and the
Corporate Compliance and Internal Audit Function.

   Audit and Compliance Committee.  The Vice President of Corporate Compliance
and Internal Audit is the Company's Business Ethics and Chief Audit Executive,
who reports directly to the Audit Committee. This position is responsible for
the planning and execution of internal financial and operational audits
regarding the adequacy and effectiveness of accounting and financial and
operational controls. This individual works with the Chairman of the Audit
Committee in determining the scope of this committee's function.

   Executive Risk Committee.  The Executive Risk Committee sets limits, capital
allocation and return targets for enterprise risk, including investment,
commodity and financial risks. Dynegy Inc.'s Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer and Chief Risk Officer comprise this
committee. This committee reports to the Audit Committee.

   Risk Committee.  The Risk Committee is focused on the assessment of
financial risks inherent in the enterprise and the establishment of policies
and limits around these risks. Activities performed by this committee include
review of:

  .   the activities of existing businesses;

  .   new businesses and products;

  .   divisional market risk limits;

  .   business unit market risk limits; and

  .   currency and interest rate risk limits.

   Dynegy's risk limit structure involves five independent limits, which
include: (a) Value at Risk; (b) equity change limits; (c) stop-loss limits; (d)
cash outlay limits; and (e) option limits related to time decay and volatility
factors. These independent limits are applied to each of the Company's
commodity, interest rate and currency portfolios on a segment and business unit
basis. The business unit managers further allocate business unit risk limits to
individuals or desks responsible for executing the Company's strategies. This
process results in a risk control structure, aggregating risk limits throughout
the organization, culminating in an enterprise-wide risk tolerance assessment.
This committee reports to the Executive Risk Committee.

   Finance Committee.  The Finance Committee is also a sub-committee of Dynegy
Inc.'s Board. This committee also functions pursuant to a charter that governs
its responsibilities. The Finance Committee is responsible for oversight of the
Company's capital, liquidity and funding needs as well as reviewing capital
allocation and target return criteria.

   Risk and Environment Committee.  The Risk and Environment Committee provides
oversight of the Company's ongoing development and operational risk policies,
framework and methodologies including policies related to the environment and
occupational health and safety. The committee also determines insurance
coverage and the risk retention policy related thereto. The committee monitors
the effectiveness of this framework. This committee is a sub-committee of
Dynegy Inc.'s Board.

                                      40

<PAGE>

   Credit Policy Committee.  The Credit Policy Committee establishes and
reviews broad credit policies and parameters for the enterprise. This committee
reports to the Finance Committee.

Risk Limits and Governance

   Dynegy Inc.'s Board has appointed a Chief Risk Officer who reports to the
Audit Committee. The Chief Risk Officer heads an enterprise-wide risk control
department. This department is independent of any revenue-producing unit of the
organization and conducts its activities independent of any active management
of risk exposures confronting the enterprise. The enterprise-wide risk
department is charged with assuring adherence to Dynegy's Risk Policy
Statement, the independent validation of valuation methodologies employed by
the enterprise as well as assuring compliance with approved risk strategies.
Risk limits are monitored on a daily basis by this department, and the results
of this monitoring activity is reviewed regularly by the appropriate risk
committees. Limit violations are reported to the appropriate Board and
management committees and business unit managers pursuant to a hierarchical
reporting matrix defined in the Dynegy Risk Policy Statement. Resolution of
each limit violation is consistent with protocol detailed in such statement.

   The Chief Risk Officer ensures quality assurance of the Risk Policy
Statement by maintaining the Dynegy Risk Management and Control Policy Manual
that governs all business activity and the risk exposure therein. The Dynegy
Risk Management and Control Policy Manual is a comprehensive manual advising
employees of known and potential risks, processes and procedures and knowledge
of all policy-related matters of risk.

Accounting Methodology

   Dynegy's Controller Department is responsible for the development and
application of accounting policy and control procedures for the organization's
financial and operational accounting functions. This department conducts its
activities independent of any active management of risk exposures confronting
the enterprise, is independent of revenue-producing units and reports to the
Chief Financial Officer.

   The Company has identified three critical accounting policies that require a
significant amount of judgment and are considered to be the most important to
the portrayal of the Company's financial position and results of operations.
These policies include the accounting for long-lived assets, the evaluation of
counterparty credit and other similar risks and revenue recognition. See Note 3
to the consolidated financial statements for a discussion of the process
surrounding the evaluation of counterparty credit and other similar risks. For
disclosure on the Company's accounting for long-lived assets and revenue
recognition, refer to Note 2 to the consolidated financial statements. The
following narrative provides additional discussion of the Company's revenue
recognition policy. The bankruptcy of Enron has placed substantial focus on
accounting principles and the application of these principles. The focus has
been around the transparency of disclosures relating primarily to liquidity and
capital resource matters, the valuation of energy trading activities,
transactions with related parties and the use of special purpose entities. As a
result, accounting guidance is expected to continue to evolve and the impact of
potential future revisions in accounting principles will be addressed by the
Company when, and if, they occur.

   Dynegy utilizes two comprehensive accounting models in reporting its
consolidated financial position and results of operations as required by
generally accepted accounting principles-an accrual model and a fair value
model. The Company determines the appropriate model for its various operations
based on guidance provided in numerous accounting standards and positions
adopted by the Financial Accounting Standards Board ("FASB") or the Securities
and Exchange Commission. The Company has applied these accounting policies on a
consistent basis during the three years in the period ended December 31, 2001,
except for the adoption of Financial Accounting Standard No. 133 ("FAS No.
133"), which was effective January 1, 2001. The implementation of FAS No. 133
was not material to the Company's results of operations or financial position.

   The accrual model is used to account for the Company's physically owned
asset businesses. These businesses consist largely of the ownership and
operation of physical assets. Dynegy uses these physical assets in

                                      41

<PAGE>

various manufacturing and delivery processes. These processes include the
generation of electricity, the separation of natural gas liquids into their
component parts from a stream of natural gas and the transportation or
transmission of commodities through pipelines. End sales from these businesses
result in physical delivery of commodities to Dynegy's wholesale, commercial
and industrial and retail customers.

   The fair value model is used to account for forward physical and financial
transactions which meet criteria defined by the FASB or the Emerging Issues
Task Force. The criteria are complex but generally require these contracts to
be related to future periods and contain fixed price and volume components and
have terms that require or permit net settlement of the contract in cash or its
equivalent. The FASB determined that the fair value model is the most
appropriate method for accounting for these types of contracts. In part, this
conclusion is based on the cash settlement provisions in these agreements, as
well as the volatility in commodity prices, interest rates and, if applicable,
foreign exchange rates, which impact the valuation of these contracts. Since
these transactions may be settled in cash, the value of the assets and
liabilities associated with these transactions is reported at estimated
settlement value based on current prices and rates as of each balance sheet
date. Under applicable accounting standards, failure to present these
transactions at other than estimated present settlement value based on current
prices and rates would result in an inaccurate portrayal of the assets and
obligations of an enterprise.

   In addition, the Company routinely enters into financial instrument
contracts to hedge purchase and sale commitments, fuel requirements and
inventories in its natural gas, NGLs, electricity and coal businesses in order
to minimize the risk of changes in market prices in these commodities. The
Company will also execute financial instrument transactions to hedge exposure
to fluctuations in interest rates and foreign currency exchange rates. These
transactions are accounted for as either cash flow hedges, fair value hedges or
foreign currency hedges in accordance with generally accepted accounting
principles.

                                      42

<PAGE>

   The following chart provides detail on the accounting principle applications
used by the organization:

Application of Comprehensive Accounting Methodologies

<TABLE>
<CAPTION>
                                   Physical Asset Businesses                       Marketing and Other Activities
                          -------------------------------------------       --------------------------------------------
  Accounting Model              Accrual                   Hedge                   Accrual                 Fair Value
--------------------------------------------------------------------------------------------------------------------------
<S>                   <C> <C>                  <C> <C>                  <C> <C>                  <C> <C>
Businesses            .   Physical Generation  .   Physical Generation  .   Current Supply and   .   Future Supply and
Impacted              .   (WEN)                .   (WEN)                    Market Activities    .   Market Activities
                      .   Owned Storage            Gas Processing           (Spot Market             Meeting Certain
                      .   Capacity (WEN, DMS)      (DMS)                    Transactions) (WEN,      Criteria (WEN, DMS)
                          Gas Processing (DMS)                              DMS)                     Risk Management
                          Fractionation (DMS)                                                        Services (WEN, DMS)
--------------------------------------------------------------------------------------------------------------------------
Transactions          .   Normal Purchases     .   Cash Flow Hedges     .   Current Supply and   .   Future Supply and
Impacted                  and Sales            .   Fair Value Hedges        Market Activities    .   Market Activities
                      .   Equity Earnings      .   Foreign Currency         (Spot Market             Meeting Certain
                          from Investment in       Hedges                   Transactions)            Criteria
                          Physical Assets                                                            Available-for-Sale
                                                                                                     Securities
--------------------------------------------------------------------------------------------------------------------------
Revenue Recognition   .   Revenue and          .   Recognized When      .   Revenue and          .   Future Supply and
                          Expense is           .   Item Hedged is           Expense is               Market Activities and
                          Recognized When          Recognized               Recognized When          Risk Management
                          Title Passes or          Ineffectiveness of       Title Passes or          Services Transactions
                          Service is Performed     Hedges Recognized        Service is Performed     Marked-to-Market
                                                   Immediately                                       When Executed with
                                                                                                     Changes in Fair
                                                                                                     Value Recognized
                                                                                                     Throughout Contract
                                                                                                 .   Term
                                                                                                     Certain Gains and
                                                                                                     Losses on
                                                                                                     Available-for-Sale
                                                                                                     Securities
--------------------------------------------------------------------------------------------------------------------------
Balance Sheet Effects .   Trade Receivables    .   Unrealized Gains and     Trade Receivables        Unrealized Gains and
                      .   and Payables             Losses in Risk           and Payables             Losses from Future
                          Investment in            Management                                        Supply and Market
                          Unconsolidated           Accounts                                          Activities and Risk
                          Affiliates           .   Effective Portion of                              Management Services
                                                   Unrealized Gains and                              in Risk Management
                                                   Losses in Other                                   Accounts
                                                   Comprehensive                                     Unrealized Gains and
                                                   Income                                            Losses on
                                                                                                     Available-for-Sale
                                                                                                     Securities in
                                                                                                     Investment Account
                                                                                                     and Other
                                                                                                 .   Comprehensive
                                                                        .                        .   Income
--------------------------------------------------------------------------------------------------------------------------
Cash Flow Effects     .   Disclosed in Net     .   Periodic Settlements .   Disclosed in Net     .   Unrealized Gains and
                          Income and Working       Disclosed in Net         Income and Working       Losses are Disclosed
                          Capital Accounts         Income and Working       Capital Accounts         as Non-Cash
                                                   Capital Accounts                                  Adjustments to Net
                                                                                                     Income
</TABLE>

                                      43

<PAGE>

ENTERPRISE RISK MANAGEMENT, VALUATION AND MONITORING

Market Risk

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

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

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

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

  .   Protect its investment in storage inventories; and

  .   Hedge fuel requirements.

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

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

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

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

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

Valuation Criteria and Management Estimates

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

   The following table provides an assessment of the factors impacting the
change in net value of the risk management asset and liability accounts during
the year ended December 31, 2001 ($ in millions).

<TABLE>
<S>                                                                            <C>
Fair value of portfolio at January 1, 2001.................................... $ 399
Gains (losses) recognized through the income statement in the period, net/(1)/   647
Cash received related to contracts settled during the period, net.............  (201)
Changes in fair value as a result of a change in valuation technique/(2)/.....  (149)
Other changes in fair value, net/(3)/.........................................   244
                                                                               -----
Fair value of portfolio at December 31, 2001.................................. $ 940
                                                                               =====
</TABLE>

                                      44

<PAGE>

--------
/(1)/ This amount includes approximately $300 million which represents
      management's estimate of the initial value of new contracts entered into
      in 2001.
/(2) /The Company corrected its modeling methodology effective the third
     quarter 2001. This amount represents the difference in the value of the
     portfolio based on the previous methodology and the value as recorded
     based on the new methodology. This corrected curve methodology was applied
     beginning in the third quarter 2001, as this was the period in which the
     Company began to enter into longer-term power transactions in the United
     States. See description of the corrected methodology below.
/(3)/ Consists primarily of the effect of terminating the Company's commercial
      positions with Enron.

   The net risk management asset of $940 million is the aggregate of the
following line items on the Consolidated Balance Sheet: Current Assets--Assets
from risk-management activities, Other Assets--Assets from risk-management
activities, Current Liabilities--Liabilities from risk-management activities
and Other Liabilities--Liabilities from risk-management activities. The
increase in the net value of the risk management asset and liability accounts
at December 31, 2001 from the previously reported amount of $717 million is
primarily due to the following:

  .   a $340 million increase due to the consolidation of ABG Gas Supply, an
      entity formed in connection with Project Alpha. This $340 million
      increase reflects the recognition of ABG Gas Supply's net risk-management
      assets on Dynegy's Consolidated Balance Sheet; and

  .   a $40 million reclassification of inventory.

These items are offset by a $149 million reduction resulting from the
correction to the forward power curves.

   The Company estimates the fair value of its marketing portfolio using a
liquidation value approach assuming that the ability to transact business in
the market remains at historical levels. The estimated fair value of the
portfolio is computed by multiplying all existing positions in the portfolio by
estimated prices, reduced by a LIBOR-based time value of money adjustment and
deduction of reserves for credit, price and market liquidity risks.

   A key aspect of the Company's operations and business strategy is its
ability to provide customers with competitively priced bundled products and
services that address customer specific energy and risk management needs. Many
of these customized products and services are not exchange traded. In addition,
the availability of reliable market quotations in certain regions and for
certain commodities is limited as a result of liquidity and other factors. As a
result, the Company uses a combination of market quotations, derivatives of
market quotations and proprietary models to periodically value its portfolio as
required by generally accepted accounting principles. Market quotations are
validated against broker quotes, regulated exchanges or third-party
information. Derivatives of market quotations use validated market quotes, such
as actively traded natural gas or power prices, as key inputs in determining
market valuations.

   In certain markets or for certain products, market quotes or derivatives of
market quotes are not available or are not considered appropriate valuation
techniques as a result of the newness of markets or products, a lack of
liquidity in such markets or products or other factors. However, under
generally accepted accounting principles, estimating the value of these types
of contracts is required. Consequently, prior to the third quarter 2001, the
Company used models principally derived from market research to estimate
forward price curves for valuing positions in these markets. Dynegy models
generate pricing estimates primarily for regional power markets in the United
States and Europe. Price curves are derived by incorporating a number of
factors, including broker quotes, near-term market indicators and a proprietary
model based on a required rate of return on investment in new generation
facilities. The Company believes that new generation needs in the United States
and Europe primarily will be met through the construction of new gas-fired
generation. Power prices, over the long term, will thus reflect the cost of
building new gas fired generation, the cost of natural gas fuel and a cost of
capital return on new construction investment. While the Company believes its
pricing model is based on reasonable and sound assumptions, the application of
forecasted pricing curves to contractual commitments may result in realized
cash return on these commitments that vary significantly, either positively or
negatively, from the estimated values.

                                      45

<PAGE>

   The Company has reviewed the applicability of the methodology utilized to
estimate forward power curves based on the increasing term length of
contractual arrangements within its U.S. power portfolio. Based on this
assessment, the Company corrected its methodology utilized to estimate forward
U.S. power curves effective for the third quarter 2001. The corrected power
curve methodology incorporates forward energy prices derived from broker quotes
and values from executed transactions to develop mathematical forward price
curves for periods where broker quotes and transaction data cannot be obtained.
Please read "Explanatory Note--Restatements" to the accompanying Consolidated
Financial Statements for further discussion of this correction in methodology.
The Company continues to apply its previous modeling methodology to its
European power portfolio because of the lack of liquidity in that market.

Risk-Management Asset and Liability Disclosures

   The following chart depicts the mark-to-market value and cash flow
components of the Company's net risk management assets and liabilities at
December 31, 2001:

Net Risk-Management Asset and Liability Disclosures

<TABLE>
<CAPTION>
                                                        At December 31, 2001
Risk-Management Assets and Liabilities/(1)/: ------------------------------------------
                                             Total  2002 2003 2004 2005 2006 Thereafter
($ in Millions)                              ------ ---- ---- ---- ---- ---- ----------
<S>                                          <C>    <C>  <C>  <C>  <C>  <C>  <C>
           Mark-to-Market/(2)/.............. $  906 $581 $113 $ 70 $21  $30     $ 91
           Cash Flow........................  1,304  646  154  112  53   58      281
</TABLE>
--------
/(1)/ The table reflects the fair value of the Company's risk-management asset
      position after deduction of time value, credit, price and other reserves
      necessary to determine fair value. The cash flow value reflects
      anticipated undiscounted cash inflows and outflows by contract based on
      tenor of individual contract position and have not been adjusted for
      counterparty credit or other reserves. These amounts exclude the fair
      value and cash flows associated with certain derivative instruments
      designated as hedges, which are included in other comprehensive income (a
      component of Stockholders' Equity).
/(2)/ The increase in the net value of the risk management assets and
      liabilities at December 31, 2001 from the previously reported amount of
      $678 million is primarily due to a $340 million increase as a result of
      the consolidation of ABG Gas Supply and a $40 million reclassification of
      inventory. These items are offset by a $149 million reduction resulting
      from the correction to the forward power curve.

   The following table provides an assessment of net contract values by year
based on the Company's valuation methodology described above. Approximately 97
percent of the Company's net risk-management asset value at December 31, 2001
was determined by market quotations or validation against industry posted
prices.

Net Fair Value of Marketing Portfolio/(4)/

<TABLE>
<CAPTION>
                                Total 2002 2003  2004  2005  2006 Thereafter
          ($ in Millions)       ----- ---- ----  ----  ----  ---- ----------
    <S>                         <C>   <C>  <C>   <C>   <C>   <C>  <C>
    Market Quotations/(1)/..... $668  $581 $ 50  $ 23  $(21) $(8)    $43
                                ----  ---- ----  ----  ----  ---     ---
    Other External Sources/(2)/ $213  $ -- $ 75  $ 60  $ 47  $35     $(4)
                                ----  ---- ----  ----  ----  ---     ---
    Prices Based on Models/(3)/ $ 25  $ -- $(12) $(13) $ (5) $ 3     $52
                                ----  ---- ----  ----  ----  ---     ---
</TABLE>
--------
/(1)/ Prices obtained from actively traded, liquid markets.
/(2)/ Mid-term prices validated against industry posted prices.
/(3)/ See previous discussion of the Company's use of long-term models.
/(4) /The increase in the net fair value of the marketing portfolio at December
     31, 2001 from the previously reported amount of $678 million is primarily
     due to a $340 million increase as a result of the consolidation of ABG Gas
     Supply and a $40 million reclassification of inventory. These items are
     offset by a $149 million reduction resulting from the correction to the
     forward power curve.

                                      46

<PAGE>

Value at Risk ("VaR")

   In addition to applying business judgment, senior management uses a number
of quantitative tools to manage the Company's exposure to market risk. These
tools include:

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

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

   The modeling of the risk characteristics of the Company's marketing
portfolio involves a number of assumptions and approximations. The Company
estimates VaR using a JP Morgan RiskMetrics(TM) approach assuming a one-day
holding period. Inputs for the VaR calculation are prices, positions,
instrument valuations and the variance-covariance matrix. While management
believes that these assumptions and approximations are reasonable, there is no
uniform industry methodology for estimating VaR, and different assumptions
and/or approximations could produce materially different VaR estimates.

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

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

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

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

Daily and Average VaR for Marketing Portfolio

<TABLE>
<CAPTION>
                                                                  At December 31,
                                                                  ---------------
                                                                  2001    2000
     ($ in millions)                                              ----    ----
     <S>                                                          <C>     <C>
     One Day VaR--95% Confidence Level........................... $17     $10
                                                                  ---     ---
     One Day VaR--99% Confidence Level........................... $24     $14
                                                                  ---     ---
     Average VaR for Past Twelve Months--95% Confidence Level (1) $12     $11
                                                                  ---     ---
</TABLE>
(1) Amounts have not been updated for the restatement items discussed in the
    Explanatory Note--Restatements to the accompanying Consolidated Financial
    Statements as such amounts cannot be retroactively recalculated.

                                      47

<PAGE>

   The following table provides a rolling daily and average VaR for the
Company's marketing portfolio over the past two years:

                   [GRAPHIC DEPICTING DAILY AND AVERAGE VAR]

   As the graph above illustrates, the growth in one day VaR from 2000 to 2001
is representative of the Company's growth in business and higher market
volatility in the 2001 period.

Credit Risk

   Credit risk represents the loss that the Company would incur if a
counterparty fails to perform under its contractual obligations. To reduce the
Company's credit exposure, the Company seeks to enter into netting agreements
with counterparties that permit the Company to offset receivables and payables
with such counterparties. The Company attempts to further reduce credit risk
with certain counterparties by entering into agreements that enable the Company
to obtain collateral or to terminate or reset the terms of transactions after
specified time periods or upon the occurrence of credit-related events. The
Company may, at times, use credit derivatives or other structures and
techniques to provide for third-party guarantees of the Company's
counterparty's obligations.

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

   The following table displays the value of the Company's marketing portfolio,
inclusive of hedging activities, at December 31, 2001:

<TABLE>
<CAPTION>
                                                         Below
                                                       Investment
                                          Investment  Grade Credit
                                         Grade Credit  Quality or
                                           Quality      Unrated     Total
                                         ------------ ------------ ------
                                                  ($ in millions)
     <S>                                 <C>          <C>          <C>
     Utilities and power generators.....     $474         $(27)    $  447
     Financial institutions.............      (98)           1        (97)
     Oil and gas producers..............      129          123        252
     Commercial and industrial companies      400           94        494
     Other..............................       52            6         58
                                             ----         ----     ------
     Value of portfolio before reserves.     $957         $197      1,154
                                             ====         ====     ======
     Credit and market reserves.........                             (248)
                                                                   ------
                                                                      906
     Other..............................                               34
                                                                   ------
     Net risk-management assets.........                           $  940
                                                                   ======
</TABLE>

                                      48

<PAGE>

   The net risk management asset of $940 million is the aggregate of the
following line items on the Consolidated Balance Sheet: Current Assets--Assets
from risk-management activities, Other Assets--Assets from risk-management
activities, Current Liabilities--Liabilities from risk-management activities
and Other Liabilities--Liabilities from risk-management activities. The
increase in the net risk-management assets at December 31, 2001 from the
previously reported amount of $717 million is primarily due to a $340 million
increase as a result of the consolidation of ABG Gas Supply and a $40 million
reclassification of inventory. These items are offset by a $149 million
reduction resulting from the adjustments to the forward power curves.

Interest Rate Risk

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

   Marketing portfolio.  The following table sets forth the daily and average
VaR associated with the interest rate component of the marketing portfolio. The
Company seeks to manage its interest rate exposure through application of
various hedging strategies. Hedging instruments executed to mitigate such
interest rate exposure in the marketing portfolio are included in the VaR as of
December 31, 2001 reflected in the table below.

Daily and Average VaR on Interest Component of Marketing Portfolio

<TABLE>
<CAPTION>
                                                               At December 31,
                                                               ---------------
                                                               ($ in millions)
  <S>                                                          <C>
  2001
  One Day VaR--95% Confidence Level...........................      $0.1
                                                                    ====
  Average VaR for Past Twelve Months--95% Confidence Level (1)      $1.6
                                                                    ====
</TABLE>
--------
(1) Amounts have not been updated for the restatement items discussed in the
    Explanatory Note to the accompanying Consolidated Financial Statements as
    such amounts cannot be retroactively recalculated.

   Variable Rate Financial Obligations.  Based on sensitivity analysis as of
December 31, 2001, it is estimated that one percentage point interest rate
movement in the average market interest rates (either higher or (lower)) in
2002 would decrease (increase) income before taxes by approximately $25
million. This amount was determined based on hypothetical interest rate
movement on the Company's variable rate financial obligations as of December
31, 2001. Since December 31, 2001, the Company has entered into approximately
$2.0 billion of interest rate swaps and increased the ratio of fixed interest
obligations to total financial obligations through the acquisition of Northern
Natural and the sale of $500 million of fixed rate debt in February 2002.
Considering these events, the sensitivity at December 31, 2001 would have been
reduced from $25 million to $17 million.

Foreign Currency Exchange Rate Risk

   Foreign currency risk arises from the Company's investments in affiliates
and subsidiaries owned and operated in foreign countries. Such risk is also a
result of risk management transactions with customers in countries outside the
U.S. Management continually monitors its exposure to fluctuations in foreign
currency exchange rates. When possible, contracts are denominated in or indexed
to the U.S. dollar, or such risk may be hedged through debt denominated in the
foreign currency or through financial contracts.

                                      49

<PAGE>

   At December 31, 2001, the Company's primary foreign currency exchange rate
exposures were the United Kingdom Pound, Canadian Dollar, European Euro and
Norwegian Kroner. Dynegy seeks to manage its foreign currency exchange rate
exposure through application of various hedging strategies. Such hedging
strategies have been assessed, initiated and recorded by Dynegy's parent
company since the beginning of 2000.

   The following table sets forth the daily and average Foreign Currency
Exchange VaR:

Daily and Average Foreign Currency Exchange VaR

<TABLE>
<CAPTION>
                                                             At December 31,
                                                                  2001
                                                             ---------------
                                                             ($ in millions)
    <S>                                                      <C>
    One Day VaR--95% Confidence Level.......................      $0.6
                                                                  ====
    Average VaR for Past Twelve Months--95% Confidence Level      $1.1
                                                                  ====
</TABLE>

                                      50

<PAGE>

Derivative Contracts

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

Absolute Notional Contract Amounts

<TABLE>
<CAPTION>
                                                                         December 31,
                                                                   ------------------------
                                                                    2001     2000    1999
                                                                   ------- -------- -------
<S>                                                                <C>     <C>      <C>
Natural Gas (Trillion Cubic Feet).................................  12.044    7.709   5.702
Electricity (Million Megawatt Hours)..............................  79.931  162.321  42.949
Natural Gas Liquids (Million Barrels).............................   5.655    6.410  19.902
Weather Derivatives (in thousands of $/ Degree Day)...............     190      385      --
Crude Oil (Million Barrels).......................................      --       --  35.554
Coal (Millions of Tons)...........................................    18.5     17.3      --
Fair Value Hedge Interest Rate Swaps (in Millions of U.S. Dollars) $   206 $     -- $    37
   Fixed Interest Rate Received on Swaps (Percent)................   5.284       --   8.210
Cash Flow Hedge Interest Rate Swaps (in millions of U.S. Dollars). $   100 $     -- $    --
   Fixed Interest Rate Paid on Swaps (Percent)....................   4.397       --      --
Interest Rate Risk-Management Contract............................ $   503 $     -- $    --
   Fixed Interest Rate Paid (Percent).............................   6.151       --      --
Interest Rate Risk-Management Contract............................ $   100 $     -- $    --
   Fixed Interest Rate Received (Percent).........................   4.370       --      --
U.K. Pound Sterling (in millions of U.S. Dollars)................. $   595 $     -- $    86
Average U.K. Pound Sterling Contract Rate (in U.S. Dollars)....... $1.4125 $     -- $1.6191
Euro Dollars (in millions of U.S. Dollars)........................ $    -- $     -- $    --
Average Euro Dollar Contract Rate (in U.S. Dollars)............... $    -- $     -- $    --
Canadian Dollar (in millions of U.S. Dollars)..................... $    -- $     -- $   289
Average Canadian Dollar Contract Rate (in U.S. Dollars)........... $    -- $     -- $0.6775
</TABLE>

Legal Risks

   Derivative transactions may also involve the legal risk that they are not
authorized or appropriate for a counterparty, that documentation has not been
properly executed or that executed agreements may not be enforceable against
the counterparty. The Company attempts to minimize these risks by employing the
use of standard contracts, where applicable, or by routinely obtaining advice
of counsel on the enforceability of agreements as well as on the authority of a
counterparty to effect the derivative transaction.

Operational Risks

   Dynegy is subject to all risks inherent in the various businesses in which
it operates. These risks include, but are not limited to, explosions, fires,
terrorist attacks and product spillage, any or all of which could result in
damage to or destruction of operating assets and other property or personal
injury, loss of life or pollution of the environment, as well as curtailment or
suspension of operations at the affected facility. Dynegy Inc.'s Risk and
Environment Committee establishes metrics and assesses compliance with
corporate risk guidelines. Dynegy maintains general public liability, property
and business interruption insurance in amounts that it considers to be adequate
for such risks. Such insurance is subject to deductibles that the Company
considers reasonable and not excessive. The occurrence of a significant event
not fully insured or indemnified against or the failure of a party to meet its
indemnification obligations could materially and adversely affect Dynegy's
results of operations and financial condition. Events impacting the economics
of the insurance industry have brought into question companies' ability to
obtain insurance coverage at reasonable rates. Dynegy will continue to assess
the various coverage alternatives and may decide in the future to increase its
reliance on self-insurance.

                                      51

<PAGE>

   In addition to these commercial operational risks, the Company faces
reputational damage and financial loss as a result of inadequate or failed
internal processes, people and systems. A systems failure or failure to enter a
transaction properly into the records may result in an inability to settle
transactions in a timely manner or in a breach of the contract. To minimize
these risks, the Company has developed policies and controls with respect to
data entry and processing of transactions, clearance and settlement of
transactions and the detection and prevention of employee error or improper or
fraudulent activity.

Conclusion

   Management believes the Company has effective procedures for evaluating and
managing the market, credit and other risks to which it is exposed.
Nonetheless, the effectiveness of these policies and procedures for managing
risk exposure can never be completely predicted or fully assured. For example,
unexpectedly large or rapid movements or disruptions in one or more markets or
other unforeseen developments can have a material adverse effect on results of
operations and financial condition. The consequences of these developments can
include decreases in the liquidity of trading positions, higher earnings
volatility, increased credit exposure to customers and counterparties and
increased general systemic risk.

Uncertainty of Forward-Looking Statements and Information

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

  .   Projected operating or financial results;

  .   Expectations regarding capital expenditures, dividends and other matters;

  .   Pending or recent acquisitions such as the Northern Natural and BG
      Storage Limited 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 North America and Europe;

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

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

  .   The Company's ability to refinance its bank credit facilities in the
      ordinary course of business and to satisfy debt service and other
      obligations as they become due;

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

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

  .   Beliefs about the outcome of legal and administrative proceedings,
      including matters involving Enron, the California power market and
      environmental matters; and

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

                                      52

<PAGE>

   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 North America
      and Europe and the rules and regulations adopted on a transitional basis
      in such markets;

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

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

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

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

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

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

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

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

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

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

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

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

                                      53

<PAGE>

   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.

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   The Quantitative and Qualitative Disclosures About Market Risk are set forth
in "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" herein.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The financial statements and financial statement schedule of the Company are
set forth at pages F-1 through F-54 inclusive, found at the end of this report,
and are incorporated herein by reference.

                                      54

<PAGE>

                             DYNEGY HOLDINGS INC.

                                    PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 8-K

(a) The following documents, which have been filed by the Company with the SEC
    pursuant to the Securities Exchange Act of 1934, as amended, are by this
    reference incorporated in and made a part of this report:

    1. Financial Statements--Consolidated financial statements of the Company
       and its subsidiaries are incorporated under Item 8. of this Form 10-K/A.

    2. Financial Statement Schedules--Financial Statement Schedules are
       incorporated under Item 8. of this Form 10-K/A.

    3. Exhibits--The following instruments and documents are included as
       exhibits to this Form 10-K/A. All management contracts or compensation
       plans or arrangements set forth in such list are marked with a ++.

<TABLE>
<CAPTION>
Exhibit
Number                                              Description
-------                                             -----------
<C>     <S>

  3.1   Restated Certificate of Incorporation of Dynegy Holdings Inc. (incorporated by reference to
          Exhibit 3.1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1999 of
          Dynegy Holdings Inc., File No. 0-29311).

  3.2   Amended and Restated Bylaws of Dynegy Holdings Inc. (incorporated by reference to Exhibit 3.2 to
          the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1999 of Dynegy
          Holdings Inc., File No. 0-29311).

  4.1   Indenture, dated as of December 11, 1995, by and among NGC Corporation, the Subsidiary
          Guarantors named therein and the First National Bank of Chicago, as Trustee (incorporated by
          reference to exhibits to the Registration Statement on Form S-3 of NGC Corporation, Registration
          No. 33-97368).

  4.2   First Supplemental Indenture, dated as of August 31, 1996, by and among NGC Corporation, the
          Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee,
          supplementing and amending the Indenture dated as of December 11, 1995 (incorporated by
          reference to Exhibit 4.4 to the Quarterly Report on Form 10-Q for the Quarterly Period Ended
          September 30, 1996 of NGC Corporation, File No. 1-11156).

  4.3   Second Supplemental Indenture, dated as of October 11, 1996, by and among NGC Corporation, the
          Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee,
          supplementing and amending the Indenture dated as of December 11, 1995 (incorporated by
          reference to Exhibit 4.5 to the Quarterly Report on Form 10-Q for the Quarterly Period Ended
          September 30, 1996 of NGC Corporation, File No. 1-11156).

  4.4   Subordinated Debenture Indenture between NGC Corporation and The First National Bank of
          Chicago, as Debenture Trustee, dated as of May 28, 1997 (incorporated by reference to Exhibit 4.5
          to the Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1997 of NGC
          Corporation, File No. 1-11156).

  4.5   Amended and Restated Declaration of Trust among NGC Corporation, Wilmington Trust Company,
          as Property Trustee and Delaware Trustee, and the Administrative Trustees named therein, dated
          as of May 28, 1997 (incorporated by reference to Exhibit 4.6 to the Quarterly Report on Form
          10-Q for the Quarterly Period Ended June 30, 1997 of NGC Corporation, File No. 1-11156).
</TABLE>

                                      55

<PAGE>

                             DYNEGY HOLDINGS INC.

                                    PART IV

<TABLE>
<CAPTION>
Exhibit
Number                                               Description
-------                                              -----------
<C>     <S>

  4.6   Series A Capital Securities Guarantee executed by NGC Corporation and The First National Bank of
          Chicago, as Guarantee Trustee, dated as of May 28, 1997 (incorporated by reference to Exhibit 4.9
          to the Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1997 of NGC
          Corporation, File No. 1-11156).

  4.7   Common Securities Guarantee of NGC Corporation dated as of May 28, 1997 (incorporated by
          reference to Exhibit 4.10 to the Quarterly Report on Form 10-Q for the Quarterly Period Ended
          June 30, 1997 of NGC Corporation, File No. 1-11156).

  4.8   Registration Rights Agreement, dated as of May 28, 1997, among NGC Corporation, NGC
          Corporation Capital Trust I, Lehman Brothers, Salomon Brothers Inc. and Smith Barney Inc.
          (incorporated by reference to Exhibit 4.11 to the Quarterly Report on Form 10-Q for the Quarterly
          Period Ended June 30, 1997 of NGC Corporation, File No. 1-11156).

  4.9   Fourth Supplemental Indenture among NGC Corporation, Destec Energy, Inc. and The First National
          Bank of Chicago, as Trustee, dated as of June 30, 1997, supplementing and amending the
          Indenture dated as of December 11, 1995 (incorporated by reference to Exhibit 4.12 to the
          Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1997 of NGC
          Corporation, File No. 1-11156).

 4.10   Fifth Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein
          and The First National Bank of Chicago, as Trustee, dated as of September 30, 1997,
          supplementing and amending the Indenture dated as of December 11, 1995 (incorporated by
          reference to Exhibit 4.18 to the Annual Report on Form 10-K for the Fiscal Year Ended December
          31, 1997 of NGC Corporation, File No. 1-11156).

 4.11   Sixth Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein
          and The First National Bank of Chicago, as Trustee, dated as of January 5, 1998, supplementing
          and amending the Indenture dated as of December 11, 1995 (incorporated by reference to Exhibit
          4.19 to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997 of NGC
          Corporation, File No. 1-11156).

 4.12   Seventh Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein
          and The First National Bank of Chicago, as Trustee, dated as of February 20, 1998, supplementing
          and amending the Indenture dated as of December 11, 1995 (incorporated by reference to Exhibit
          4.20 to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997 of NGC
          Corporation, File No. 1-11156).

 4.13   Indenture, dated as of September 26, 1996, restated as of March 23, 1998, and amended and restated
          as of March 14, 2001, between Dynegy Holdings Inc. and Bank One Trust Company, National
          Association, as Trustee (incorporated by reference to Exhibit 4.17 to the Annual Report on Form
          10-K for the Fiscal Year Ended December 31, 2000 of Dynegy Holdings Inc., File No. 0-29311).

        There have not been filed or incorporated as exhibits to this Form 10-K other debt instruments
          defining the rights of holders of long-term debt of Dynegy and its subsidiaries, none of which
          relates to authorized indebtedness that exceeds 10% of the consolidated assets of Dynegy and its
          subsidiaries. Dynegy hereby agrees to furnish a copy of any such instrument not previously filed to
          the SEC upon request.

 10.1   Dynegy Inc. Amended and Restated 1991 Stock Option Plan (incorporated by reference to Exhibit
          10.3 to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1998 of Dynegy
          Inc., File No. 1-11156).++
</TABLE>

                                      56

<PAGE>

                             DYNEGY HOLDINGS INC.

                                    PART IV

<TABLE>
<CAPTION>
Exhibit
Number                                              Description
-------                                             -----------
<C>     <S>

  10.2  Dynegy Inc. 1998 U.K. Stock Option Plan (incorporated by reference to Exhibit 10.4 to the Annual
          Report on Form 10-K for the Fiscal Year Ended December 31, 1998 of Dynegy Inc., File No. 1-
          11156).++

  10.3  Dynegy Inc. Amended and Restated Employee Equity Option Plan (incorporated by reference to
          Exhibit 10.5 to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1998 of
          Dynegy Inc., File No. 1-11156).++

  10.4  Dynegy Inc. 1999 Long Term Incentive Plan (incorporated by reference to Exhibit 10.6 to the
          Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1999 of Dynegy Inc., File
          No. 1-11156).++

  10.5  Dynegy Inc. 2000 Long Term Incentive Plan (incorporated by reference to Exhibit 10.7 to the
          Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1999 of Dynegy Inc., File
          No. 1-11156).++

  10.6  Dynegy Inc. 2001 Non-Executive Stock Incentive Plan (incorporated by reference to Exhibit 4.5 to
          the Registration Statement on Form S-8 of Dynegy Inc., Registration No. 333-76080).++

  10.7  Extant, Inc. Equity Compensation Plan (incorporated by reference to Exhibit 10.1 to the Registration
          Statement on Form S-8 of Dynegy Inc., Registration No. 333-47422).++

  10.8  Employment Agreement, effective February 1, 2000, between Charles L. Watson and Dynegy Inc.
          (incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K for the Fiscal Year
          Ended December 31, 1999 of Dynegy Inc., File No. 1-11156).++

  10.9  Employment Agreement, effective February 1, 2000, between Stephen W. Bergstrom and Dynegy
          Inc. (incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K for the Fiscal
          Year Ended December 31, 1999 of Dynegy Inc., File No. 1-11156).++

 10.10  Employment Agreement, effective February 1, 2000, between Robert D. Doty, Jr. and Dynegy Inc.
          (incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K for the Fiscal Year
          Ended December 31, 2000 of Dynegy Inc., File No. 1-15659).++

 10.11  Employment Agreement, effective February 1, 2000, between Kenneth E. Randolph and Dynegy Inc.
          (incorporated by reference to Exhibit 10.12 to the Annual Report on Form 10-K for the Fiscal Year
          Ended December 31, 1999 of Dynegy Inc., File No. 1-11156).++

 10.12  Employment Agreement, effective as of February 1, 2000, between R. Blake Young and Dynegy Inc.
          (incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K for the Fiscal Year
          Ended December 31, 2000 of Dynegy Inc., File No. 1-15659).++

 10.13  Employment Agreement, effective February 1, 2000, between Matthew K. Schatzman and Dynegy
          Inc. (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the
          Quarterly Period Ended March 31, 2000 of Dynegy Inc., File No. 1-15659).++

 10.14  Dynegy Inc. Deferred Compensation Plan for Certain Directors (incorporated by reference to Exhibit
          10.1 to the Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31, 2000 of
          Dynegy Inc., File No. 1-15659).++

 10.15  Dynegy Inc. 401(k) Savings Plan, as amended and restated effective January 1, 2002 (incorporated
          by reference to Exhibit 10.1 to the Registration Statement on Form S-8 of Dynegy Inc.,
          Registration No. 383-76570).++

 10.16  Dynegy Inc. 401(k) Savings Plan Trust Agreement (incorporated by reference to Exhibit 10.2 to the
          Registration Statement on Form S-8 of Dynegy Inc., Registration No. 333-76570).++
</TABLE>

                                      57

<PAGE>

                             DYNEGY HOLDINGS INC.

                                    PART IV

<TABLE>
<CAPTION>
Exhibit
Number                                              Description
-------                                             -----------
<C>     <S>

  10.17 Dynegy Inc. Deferred Compensation Plan (incorporated by reference to Exhibit 4.6 to the
          Registration Statement on Form S-8 of Dynegy Inc., Registration No. 333-76080).++

  10.18 Dynegy Inc. Deferred Compensation Plan Trust Agreement (incorporated by reference to Exhibit 4.7
          to the Registration Statement on Form S-8 of Dynegy Inc., Registration No. 333-76080).++

+ 10.19 Dynegy Inc. Short-Term Executive Stock Purchase Loan Program.++

  10.20 Lease Agreement entered into on June 12, 1996 between Metropolitan Life Insurance Company and
          Metropolitan Tower Realty Company, Inc., as landlord, and NGC Corporation, as tenant
          (incorporated by reference to exhibits to the Registration Statement on Form S-4 of Midstream
          Combination Corp., Registration No. 333-09419).

  10.21 First Amendment to Lease Agreement entered into on June 12, 1996 between Metropolitan Life
          Insurance Company and Metropolitan Tower Realty Company, Inc., as landlord, and NGC
          Corporation, as tenant (incorporated by reference to exhibits to the Registration Statement on
          Form S-4 of Midstream Combination Corp., Registration No. 333-09419).

  10.22 Contribution and Assumption Agreement, dated as of August 31, 1996, among Chevron U.S.A. Inc.,
          Chevron Pipe Line Company, Chevron Chemical Company and Midstream Combination Corp.
          (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the Quarterly
          Period Ended September 30, 1996 of NGC Corporation, File No. 1-11156).

  10.23 Master Alliance Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc., Chevron
          Chemical Company, Chevron Pipe Line Company, and other Chevron U.S.A. Inc. affiliates, NGC
          Corporation, Natural Gas Clearinghouse, Warren Petroleum Company, Limited Partnership,
          Electric Clearinghouse, Inc. and other NGC Corporation affiliates (incorporated by reference to
          Exhibit 10.5 to the Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30,
          1996 of NGC Corporation, File No. 1-11156).

 *10.24 Natural Gas Purchase and Sale Agreement, dated as of August 30, 1996, between Chevron U.S.A.
          Inc. and Natural Gas Clearinghouse (incorporated by reference to Exhibit 10.6 to the Quarterly
          Report on Form 10-Q for the Quarterly Period Ended September 30, 1996 of NGC Corporation,
          File No. 1-11156).

 *10.25 Master Natural Gas Liquids Purchase Agreement, dated as of September 1, 1996, between Warren
          Petroleum Company, Limited Partnership and Chevron U.S.A. Inc. (incorporated by reference to
          Exhibit 10.8 to the Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30,
          1996 of NGC Corporation, File No. 1-11156).

  10.26 Shareholder Agreement of Energy Convergence Holding Company with Chevron U.S.A. Inc.
          (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K of Dynegy Inc., File
          No. 1-11156, dated June 14, 1999).

  10.27 Dynegy Inc. Severance Pay Plan (incorporated by reference to Exhibit 10.41 to the Annual Report on
          Form 10-K for the Fiscal Year Ended December 31, 1998 of Dynegy Inc., File No. 1-11156).++

  10.28 Subscription Agreement dated as of November 9, 2001 by and among Enron Corp., Northern
          National Gas Company and Dynegy Inc. (incorporated by reference to Exhibit 10.3 to the Current
          Report on Form 8-K of Dynegy Inc., File No. 1-15659, dated November 9, 2001).

  10.29 Option Agreement dated as of November 9, 2001 by and among CGNN Holding Company, Inc.,
          MCTJ Holding Co. LLC, Enron Corp., Dynegy Holdings Inc. and, solely for the provisions of
          Section 5.1 thereof, Dynegy Inc. (incorporated by reference to Exhibit 10.4 to the Current Report
          on Form 8-K of Dynegy Inc., File No. 1-15659, dated November 9, 2001).
</TABLE>

                                      58

<PAGE>

                             DYNEGY HOLDINGS INC.

                                    PART IV

<TABLE>
<CAPTION>
Exhibit
Number                                              Description
-------                                             -----------
<C>     <S>
  10.30 Amendment to Option Agreement among CGNN Holding Company, Inc., MCTJ Holding Co. LLC,
          Enron Corp., Dynegy Holdings Inc. and Dynegy Inc. dated as of November 19 2001
          (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Dynegy Inc.,
          File No. 1-15659, dated November 19, 2001).
  10.31 Purchase Option Agreement dated as of November 9, 2001 by and among CGNN Holding
          Company, Inc., MCTJ Holding Co. LLC, Northern Natural Gas Company, Enron Corp., Dynegy
          Holdings Inc. and Dynegy Inc. (incorporated by reference to Exhibit 10.5 to the Current Report
          on Form 8-K of Dynegy Inc., File No. 1-15659, dated November 9, 2001).
  10.32 Amendment to Purchase Option Agreement among CGNN Holding Company, Inc., MCTJ Holding
          Co. LLC, Northern Natural Gas Company, Enron Corp., Dynegy Holdings Inc. and Dynegy Inc.
          dated as of November 19, 2001 (incorporated by reference to Exhibit 10.3 to the Current Report
          on Form 8-K of Dynegy Inc., File No. 1-15659, dated November 19, 2001).
  10.33 Certificate of Designations of Series A Preferred Stock of Northern National Gas Company
          (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K of Dynegy Inc.,
          File No. 1-15659, dated November 9, 2001).
  10.34 Certificate of Correction of Certificate of Designations of Series A Preferred Stock of Northern
          National Gas Company (incorporated by reference to Exhibit 99.3 to the Current Report on Form
          8-K of Dynegy Inc., File No. 1-15659, dated November 9, 2001).
  10.35 Settlement Agreement among Dynegy Inc., Dynegy Holdings Inc., CGNN Holding Company, Inc.
          and MCTJ Holding Co. LLC dated as of January 3, 2002 (incorporated by reference to Exhibit
          99.1 to the Current Report on Form 8-K of Dynegy Inc., File No. 1-15659, dated January 3,
          2002).
  10.36 Agreement among Dynegy Inc., Dynegy Holdings Inc., Enron Corp. and Enron Transportation
          Services Co. dated as of January 3, 2002 (incorporated by reference to Exhibit 99.2 to the Current
          Report on Form 8-K of Dynegy Inc., File No. 1-15659, dated January 3, 2002).
+  21.1 Subsidiaries of the Registrant.
+ +23.1 Consent of PricewaterhouseCoopers LLP.
 **99.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 **99.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
</TABLE>
--------
+  Previously filed.
++ Filed herewith.
*  Exhibit omits certain information, which has been filed separately with the
   SEC pursuant to a confidential treatment request pursuant to Rule 406
   promulgated under the Securities Act of 1933, as amended.
** Furnished herewith.
(b) Reports on Form 8-K of Dynegy Holdings Inc. for the fourth quarter of 2001.

1. During the quarter ended December 31, 2001, the Company filed a Current
   Report on Form 8-K dated November 9, 2001. Items 5 and 7 were reported and
   no financial statements were filed.
2. During the quarter ended December 31, 2001, the Company filed a Current
   Report on Form 8-K dated November 19, 2001. Items 5 and 7 were reported and
   no financial statements were filed.
3. During the quarter ended December 31, 2001, the Company filed a Current
   Report on Form 8-K dated November 28, 2001. Items 5, 7 and 9 were reported
   and no financial statements were filed.
4. During the quarter ended December 31, 2001, the Company filed a Current
   Report on Form 8-K dated December 2, 2001. Items 5, 7 and 9 were reported
   and no financial statements were filed.
5. During the quarter ended December 31, 2001, the Company filed a Current
   Report on Form 8-K dated December 19, 2001. Items 5, 7 and 9 were reported
   and no financial statements were filed.

                                      59

<PAGE>

                             DYNEGY HOLDINGS INC.
                                  SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                         DYNEGY HOLDINGS INC.

Date: April 15, 2003     By:                /s/  NICK J. CARUSO
                             -------------------------------
                             Nick J. Caruso, Executive Vice President and
                                       Chief Financial Officer


                                      60

<PAGE>

                           SECTION 302 CERTIFICATION

   I, Bruce A. Williamson, certify that:

      1.  I have reviewed this Amendment No. 1 to the 2001 Annual Report on
   Form 10-K of Dynegy Holdings Inc. ("Amendment No. 1");

      2.  Based on my knowledge, this Amendment No. 1 does not contain any
   untrue statement of a material fact or omit to state a material fact
   necessary to make the statements made, in light of the circumstances under
   which such statements were made, not misleading with respect to the period
   covered by this Amendment No. 1; and

      3.  Based on my knowledge, the financial statements, and other financial
   information included in this Amendment No. 1, fairly present in all material
   respects the financial condition, results of operations and cash flows of
   Dynegy Holdings Inc. as of, and for, the periods presented in this Amendment
   No. 1.

                                       /s/  Bruce A. Williamson
Date:  April 15, 2003            -------------------------------------
                                          Bruce A. Williamson
                                 President and Chief Executive Officer

                                      61

<PAGE>

                           SECTION 302 CERTIFICATION

   I, Nick J. Caruso, certify that:

    1.  I have reviewed this Amendment No. 1 to the 2001 Annual Report on Form
  10-K of Dynegy Holdings Inc. ("Amendment No. 1");

    2.  Based on my knowledge, this Amendment No. 1 does not contain any untrue
  statement of a material fact or omit to state a material fact necessary to
  make the statements made, in light of the circumstances under which such
  statements were made, not misleading with respect to the period covered by
  this Amendment No. 1; and

    3.  Based on my knowledge, the financial statements, and other financial
  information included in this Amendment No. 1, fairly present in all material
  respects the financial condition, results of operations and cash flows of
  Dynegy Holdings Inc. as of, and for, the periods presented in this Amendment
  No. 1.

                                     /s/  Nick J. Caruso
Date:  April 15, 2003            ----------------------------
                                        Nick J. Caruso
                                 Executive Vice President and
                                   Chief Financial Officer

                                      62

<PAGE>

                             DYNEGY HOLDINGS INC.

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                  Page
                                                -                                                 ----
<S>                                                                                               <C>

Consolidated Financial Statements (Restated)

Report of Independent Accountants................................................................ F-2

Consolidated Balance Sheets as of December 31, 2001 and 2000..................................... F-3

Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999....... F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999....... F-5

Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2001,
2000 and 1999.................................................................................... F-6

Notes to Consolidated Financial Statements....................................................... F-7

Financial Statement Schedule (Restated)

Valuation and Qualifying Accounts................................................................ F-54
</TABLE>

                                      F-1

<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholder of Dynegy Holdings Inc.:

   In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Dynegy Holdings Inc. and its subsidiaries at December 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and this financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and this financial statement schedule
based on our audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

   As discussed in Note 11, the Company is the subject of substantial
litigation. The Company's ongoing liquidity, financial position and operating
results may be adversely impacted by the nature, timing and amount of the
resolution of such litigation. The consolidated financial statements do not
include any adjustments, beyond existing accruals applicable under Statement of
Financial Accounting Standards No. 5, "Accounting for Contingencies," that
might result from the ultimate resolution of such matters.

   As discussed in the Explanatory Note--Restatements, the consolidated
financial statements, which were originally audited by other independent
accountants who have ceased operations, include restatements of the Company's
previously filed consolidated financial statements at December 31, 2001 and
2000 and for each of the three years in the period ended December 31, 2001. As
disclosed in the Explanatory Note--Restatements, the Company has reduced its
retained earnings at December 31, 1998 from amounts previously reported on by
other independent accountants in the amount of $55 million.

   As discussed in Note 3, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" as of January 1, 2001.

PricewaterhouseCoopers LLP
Houston, Texas
April 9, 2003

                                      F-2

<PAGE>

                             DYNEGY HOLDINGS INC.

                          CONSOLIDATED BALANCE SHEETS

                                  (RESTATED)

                      See Explanatory Note--Restatements

<TABLE>
<CAPTION>
                                                                                             December 31, December 31,
                                                                                                 2001         2000
                                                                                             ------------ ------------
                                                                                                   (in millions)
<S>                                                                                          <C>          <C>
ASSETS
Current Assets
Cash and cash equivalents...................................................................   $   144      $    32
Accounts receivable, net of allowance for doubtful accounts of $108 million and $63 million,
 respectively...............................................................................     2,969        4,782
Accounts receivable, affiliates.............................................................        37           50
Inventories.................................................................................       201          243
Assets from risk-management activities......................................................     3,945        5,222
Prepayments and other assets................................................................     1,373          108
                                                                                               -------      -------
       Total Current Assets.................................................................     8,669       10,437
                                                                                               -------      -------
Property, Plant and Equipment...............................................................     7,581        5,703
Less: accumulated depreciation..............................................................      (814)        (586)
                                                                                               -------      -------
                                                                                                 6,767        5,117
Other Assets
Investments in unconsolidated affiliates....................................................       803          695
Accounts receivable, affiliates.............................................................       185          141
Assets from risk-management activities......................................................     2,212        1,795
Intangible assets, net of amortization......................................................       773          751
Other assets................................................................................       269          110
                                                                                               -------      -------
       Total Assets.........................................................................   $19,678      $19,046
                                                                                               =======      =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable............................................................................   $ 3,091      $ 4,532
Accounts payable, affiliates................................................................        36           46
Accrued liabilities and other...............................................................     1,265          542
Liabilities from risk-management activities.................................................     3,347        4,709
Current portion of long-term debt...........................................................       256           --
                                                                                               -------      -------
       Total Current Liabilities............................................................     7,995        9,829
                                                                                               -------      -------
Long-Term Debt..............................................................................     2,707        1,635
Other Liabilities
Liabilities from risk-management activities.................................................     1,870        1,909
Deferred income taxes.......................................................................       585          114
Other long-term liabilities.................................................................       853          423
                                                                                               -------      -------
       Total Liabilities....................................................................    14,010       13,910
                                                                                               -------      -------
Minority Interest (Note 10).................................................................     1,003          977
Company Obligated Preferred Securities of Subsidiary Trust (Note 9).........................       200          200
Commitments and Contingencies (Note 11)
Stockholder's Equity
Additional paid-in capital..................................................................     2,392        2,336
Accumulated other comprehensive income (loss), net of tax...................................        10          (15)
Retained earnings...........................................................................     1,031          606
Stockholder's Equity........................................................................     1,032        1,032
                                                                                               -------      -------
       Total Stockholder's Equity...........................................................     4,465        3,959
                                                                                               -------      -------
Total Liabilities and Stockholder's Equity..................................................   $19,678      $19,046
                                                                                               =======      =======
</TABLE>

                See Notes to Consolidated Financial Statements.

                                      F-3

<PAGE>

                             DYNEGY HOLDINGS INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                                  (RESTATED)

                      See Explanatory Note--Restatements

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                                     -------------------------
                                                                       2001     2000     1999
                                                                     -------  -------  -------
                                                                           (in millions)
<S>                                                                  <C>      <C>      <C>
Revenues............................................................ $41,250  $27,820  $15,410
Cost of sales (exclusive of depreciation shown below)...............  39,848   26,865   14,900
Depreciation and amortization expense...............................     300      240      115
Gain on asset sales.................................................     (35)    (131)     (50)
General and administrative expenses.................................     385      242      219
                                                                     -------  -------  -------
Operating income....................................................     752      604      226
Earnings of unconsolidated affiliates...............................     178      191       80
Other income........................................................      92       14       12
Interest expense....................................................    (143)     (96)     (78)
Other expenses......................................................     (33)     (30)     (15)
Minority interest expense...........................................     (93)     (54)     (11)
Accumulated distributions associated with trust preferred securities     (17)     (17)     (17)
                                                                     -------  -------  -------
Income before income taxes..........................................     736      612      197
Income tax provision................................................     313      214       60
                                                                     -------  -------  -------
Income from operations..............................................     423      398      137
Cumulative effect of change in accounting principle.................       2       --       --
                                                                     -------  -------  -------
NET INCOME.......................................................... $   425  $   398  $   137
                                                                     =======  =======  =======
</TABLE>



                See Notes to Consolidated Financial Statements.

                                      F-4

<PAGE>

                             DYNEGY HOLDINGS INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (RESTATED)

                      See Explanatory Note--Restatements

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                                        -----------------------
                                                                          2001     2000    1999
                                                                        -------  -------  -----
                                                                             (in millions)
<S>                                                                     <C>      <C>      <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................. $   425  $   398  $ 137
Items not affecting cash flows from operating activities:
   Depreciation, amortization, impairment and abandonment..............     294      204     93
   Earnings from unconsolidated investments, net of cash distributions.     (90)     (82)   (14)
   Risk-management activities..........................................      (9)    (145)  (174)
   Deferred income taxes...............................................     136      138     57
   Gain on asset sales, net............................................     (35)    (131)   (50)
   Reserve for doubtful accounts.......................................      56       38     --
   Income tax benefit from stock option exercise and other.............      58      115     16
Change in assets and liabilities resulting from operating activities:
   Accounts receivable.................................................   1,492   (4,908)  (428)
   Inventories.........................................................      18     (142)   (20)
   Prepayments and other assets........................................    (177)      29     51
   Accounts payable and accrued liabilities............................  (2,042)   4,851    404
Other, net.............................................................      50       43    (32)
                                                                        -------  -------  -----
Net cash provided by operating activities..............................     176      408     40
                                                                        -------  -------  -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................................  (1,987)    (854)  (437)
Investment in unconsolidated affiliates................................     (32)    (105)   (84)
Business acquisitions, net of cash acquired............................    (581)      --     --
Proceeds from asset sales..............................................   1,014      822     81
Affiliate transactions.................................................     421     (814)    --
Other investing, net...................................................    (176)      --     49
                                                                        -------  -------  -----
Net cash used in investing activities..................................  (1,341)    (951)  (391)
                                                                        -------  -------  -----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings.....................................   1,091      508    469
Repayments of long-term borrowings.....................................    (233)     (89)   (44)
Net cash flow from commercial paper and money market lines of credit...     469     (696)   (42)
Proceeds from sale of capital stock, options and warrants..............      --       --     22
Dividends and other distributions, net.................................      --       --     (8)
Other financing, net...................................................     (27)     805      2
                                                                        -------  -------  -----
Net cash provided by financing activities..............................   1,300      528    399
                                                                        -------  -------  -----
Effect of exchange rates on cash.......................................     (23)     (29)    --
Net increase (decrease) in cash and cash equivalents...................     112      (44)    48
Cash and cash equivalents, beginning of year...........................      32       76     28
                                                                        -------  -------  -----
Cash and cash equivalents, end of year................................. $   144  $    32  $  76
                                                                        =======  =======  =====
</TABLE>

                See Notes to Consolidated Financial Statements.

                                      F-5

<PAGE>

                             DYNEGY HOLDINGS INC.

          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY

                                  (RESTATED)

                      See Explanatory Note--Restatements

<TABLE>
<CAPTION>
                                      Preferred Stock Common Stock                           Treasury
                                      --------------  ------------  Paid In       Retained ------------  Stockholder's
                                      Shares  Amount  Shares Amount Capital Other Earnings Shares Amount    Equity      Total
                                      ------  ------  ------ ------ ------- ----- -------- ------ ------    ------      -----
                                                                          (in millions)
<S>                                   <C>     <C>     <C>    <C>    <C>     <C>   <C>      <C>    <C>    <C>           <C>
December 31, 1998....................    5     $ 75     211   $ 1   $  935  $ --   $   79    (2)   $(17)        --     $1,073
Comprehensive income:
   Net income........................   --       --      --    --       --    --      137    --      --         --        137
                                                                                                                       ------
Total comprehensive income...........                                                                                     137
Options exercised....................   --       --       5    --       22    --       --    --      --         --         22
Dividends and other distributions....   --       --      --    --       --    --       (8)   --      --         --         (8)
401(k) plan and profit sharing stock.   --       --       1    --       10    --       --    --      --         --         10
Options granted......................   --       --      --    --        6    --       --    --      --         --          6
                                        --     ----    ----   ---   ------  ----   ------    --    ----     ------     ------
December 31, 1999....................    5     $ 75     217   $ 1   $  973  $ --   $  208    (2)   $(17)        --     $1,240
Comprehensive income:
   Net income........................   --       --      --    --       --    --      398    --      --         --        398
   Other comprehensive loss, net of
    tax..............................   --       --      --    --       --   (15)      --    --      --         --        (15)
                                                                                                                       ------
Total comprehensive income...........                                                                                     383
Options exercised....................   --       --      --    --       73    --       --    --      --         --         73
401(k) plan and profit sharing stock.   --       --      --    --       12    --       --    --      --         --         12
Options granted......................   --       --      --    --       15    --       --    --      --         --         15
Transformation of former Dynegy Inc.
 to Dynegy Holdings Inc..............   (5)     (75)   (217)   (1)    (973)   --       --     2      17      1,032         --
Capital contribution.................   --       --      --    --    2,236    --       --    --      --         --      2,236
                                        --     ----    ----   ---   ------  ----   ------    --    ----     ------     ------
December 31, 2000....................   --     $ --      --   $--   $2,336  $(15)  $  606    --    $ --     $1,032     $3,959
Comprehensive income:
   Net income........................   --       --      --    --       --    --      425    --      --         --        425
   Other comprehensive loss, net of
    tax..............................   --       --      --    --       --    25       --    --      --         --         25
                                                                                                                       ------
Total comprehensive income...........                                                                                     450
Options exercised....................   --       --      --    --       32    --       --    --      --         --         32
401(k) plan and profit sharing stock.   --       --      --    --        6    --       --    --      --         --          6
Options granted......................   --       --      --    --        9    --       --    --      --         --          9
Capital contribution.................   --       --      --    --        9    --       --    --      --         --          9
                                        --     ----    ----   ---   ------  ----   ------    --    ----     ------     ------
December 31, 2001....................   --     $ --      --   $--   $2,392  $ 10   $1,031    --    $ --     $1,032     $4,465
                                        ==     ====    ====   ===   ======  ====   ======    ==    ====     ======     ======
</TABLE>


                See Notes to Consolidated Financial Statements.

                                      F-6

<PAGE>

                             DYNEGY HOLDINGS INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  (RESTATED)

EXPLANATORY NOTE--RESTATEMENTS

   This Amendment No. 1 on Form 10-K/A includes restatements of the Company's
consolidated financial statements for each of the three years in the period
ended December 31, 2001. These restated financial statements contain
corrections to the Company's 2001, 2000 and 1999 financial statements
previously filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 2001. The restatements relate to the following items:

  .   the Project Alpha structured natural gas transaction,

  .   a balance sheet reconciliation project relating principally to the
      Company's natural gas marketing business,

  .   corrections to the Company's previous hedge accounting for certain
      contracts resulting in the Company accounting for these contracts
      pursuant to the mark-to-market method under Statement of Financial
      Accounting Standards No. 133, "Accounting for Derivative Instruments and
      Hedging Activities," as amended ("Statement No. 133"); in addition, the
      Company determined that it had incorrectly accounted for certain
      derivative transactions prior to the adoption of Statement No. 133,

  .   the restatement of the Company's forward power curve methodology to
      reflect forward power and market prices more closely,

  .   the recognition of additional assets, accrued liabilities and debt
      associated with certain lease arrangements as well as depreciation and
      amortization expense for the related assets,

  .   the recognition of an other-than-temporary decline in value of a
      technology investment in the third quarter of 2001 rather than the second
      quarter of 2002,

  .   corrections to our previous accounting for income taxes, and

  .   other adjustments that arose during the re-audit of the Company's
      1999-2001 financial statements.

   Quarterly information in this Explanatory Note is unaudited. Specifically,
the restatements are as follows:

   Project Alpha.  Dynegy entered into the Project Alpha structured natural gas
transaction in April 2001. As described in a Current Report on Form 8-K dated
April 25, 2002 (the "Alpha Form 8-K"), Dynegy restated the cash flow associated
with the related gas supply contract as a financing activity in its
Consolidated Statement of Cash Flows for 2001. The effect of this restatement
was to reclassify approximately $290 million of previously disclosed 2001
operating cash flow to financing cash flow. Following the disclosure in the
Alpha Form 8-K and in connection with a further review of Project Alpha, Arthur
Andersen LLP ("Andersen") informed the Company that it could no longer support
its tax opinion relating to the transaction. Andersen's change in position was
based in part on its conclusion that the reclassification of cash flow from
operations to cash flow from financing lessened the factual basis for the
opinion. Dynegy's financial statement recognition of the tax benefit in 2001
was based principally on the Company's assessment of the relevant issues, as
corroborated by Andersen's tax opinion. After the withdrawal of Andersen's tax
opinion, management concluded that sufficient support to include the income tax
benefit for financial statement presentation purposes no longer existed, the
effect of which was a reversal of approximately $79 million of tax benefit
previously recognized by the Company during the 2001 period. Andersen further
advised the Company that its audit opinion relating to 2001 should no longer be
relied upon as a result of the pending restatements relating to Project Alpha
and such audit opinion has been withdrawn. Dynegy subsequently concluded that
its 2001 restated consolidated financial statements would

                                      F-7

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

include the consolidation of ABG Gas Supply, LLC ("ABG"), one of the entities
formed in connection with the transaction. The consolidation of ABG is included
herein based on compilations of financial information received from an agent of
ABG's equity holders. The most significant impact of this consolidation is to
increase Dynegy's consolidated indebtedness by approximately $280 million and
to increase net risk management assets by $340 million, in each case at
December 31, 2001. This $340 million increase reflects the recognition of ABG's
net risk-management assets on Dynegy's Consolidated Balance Sheet.

   The table below reflects the quarterly and year-to-date impact of the
Project Alpha restatements on net income as originally reported:

<TABLE>
<CAPTION>
      Three    Three     Three        Three      Six                  Twelve
      Months  Months     Months      Months    Months  Nine Months    Months
      Ended    Ended     Ended        Ended     Ended     Ended        Ended
     March 31 June 30 September 30 December 31 June 30 September 30 December 31
     -------- ------- ------------ ----------- ------- ------------ -----------
                                  ($ in millions)
<S>  <C>      <C>     <C>          <C>         <C>     <C>          <C>
2001   $--     $(27)      $(36)       $(16)     $(27)      $(63)       $(79)
</TABLE>
   Balance Sheet Reconciliation Project.  Dynegy originally recognized an
after-tax charge of approximately $80 million ($124 million pre-tax) in the
second quarter 2002 related to a balance sheet reconciliation project
undertaken by the Company at the beginning of 2002. The charge related
principally to the Company's natural gas marketing business and was associated
with the process of reconciling accrued to actual results. Accrual accounting
for natural gas marketing involves the estimation of gas volumes bought, sold,
transported and stored, as well as the subsequent reconciliation from estimated
to actual volumes. The Company has restated its financial statements to
allocate this $80 million charge from the second quarter 2002 back to the
periods in which the transactions giving rise to the charge originally
occurred. The table below reflects the impact on net income of this
restatement. The table below reflects revisions to the table originally
included in the Company's Current Report on Form 8-K dated November 19, 2002.
The effect of these revisions is to re-allocate the charge among the periods
presented.

<TABLE>
<CAPTION>
                                                               Six                 Twelve
                     Three    Three     Three        Three    Months               Months
                     Months  Months     Months      Months    Ended  Nine Months   Ended
                     Ended    Ended     Ended        Ended     June     Ended     December
                    March 31 June 30 September 30 December 31   30   September 30    31
         -          -------- ------- ------------ ----------- ------ ------------ --------
                                               ($ in millions)
<S>                 <C>      <C>     <C>          <C>         <C>    <C>          <C>
1998 and prior.....                                                                 $(33)
1999...............   $(12)   $  3       $ 4         $  9      $(9)      $(5)          4
2000...............     (7)      3         1          (35)      (4)       (3)        (38)
2001...............     22     (18)       (4)         (26)       4        --         (26)
2002...............      4       9        --           --       13        13          13
                                                                                    ----
Total Re-allocation                                                                 $(80)
                                                                                    ====
</TABLE>

   Corrected Hedge Accounting.  The Company adopted Statement No. 133 effective
January 1, 2001 and reflected certain contracts as cash flow hedges upon such
adoption. Management has subsequently determined that following the initial
adoption of Statement No. 133, the documentation of compliance requirements
under the standard, particularly as it relates to documentation and the
periodic assessment of hedge effectiveness, was inadequate to support the
accounting method previously applied. In addition, the Company determined that
it had incorrectly accounted for certain derivative transactions prior to the
adoption of Statement No. 133. The resulting

                                      F-8

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

restatement reflects the accounting for these contracts on a mark-to-market
basis rather than on the deferred basis previously employed. The correction in
the accounting method for these contracts increased previously reported 1999
net income by approximately $2 million, decreased previously reported 2000 net
income by approximately $19 million and increased previously reported 2001 net
income by approximately $45 million. This correction had no impact on
previously reported cash flows from operations in any period.

   The table below reflects the impact of this restatement on net income as
originally reported:

<TABLE>
<CAPTION>
      Three    Three     Three        Three      Six                  Twelve
      Months  Months     Months      Months    Months  Nine Months    Months
      Ended    Ended     Ended        Ended     Ended     Ended        Ended
     March 31 June 30 September 30 December 31 June 30 September 30 December 31
     -------- ------- ------------ ----------- ------- ------------ -----------
                                  ($ in millions)
<S>  <C>      <C>     <C>          <C>         <C>     <C>          <C>
1999   $ --    $ --       $ --        $  2      $ --       $ --        $  2
2000     19      14        (14)        (38)       33         19         (19)
2001     15     (12)         5          37         3          8          45
</TABLE>

   Restated Forward Power Curve Methodology.  The Company values substantially
all of its natural gas marketing, power marketing and portions of its natural
gas liquids marketing operations under a mark-to-market accounting methodology.
The estimated fair value of the marketing and trading portfolio is computed by
multiplying all existing positions in the portfolio by estimated prices,
reduced by a LIBOR-based time value of money adjustment and deduction of
reserves for credit, price and market liquidity risks. Dynegy uses a
combination of market quotes, derivatives of market quotes and proprietary
models to periodically value this portfolio as required by generally accepted
accounting principles. Market quotes are used for near-term transactions, where
such quotes are generally available; derivatives of market quotes are used for
mid-term transactions, where broker quotes are only marginally available; and
proprietary models are used for long-term transactions, where broker quotes or
other objective pricing indicators typically are not available. Beginning in
the third quarter 2001, the Company began to enter into longer-term power
transactions in the United States with respect to which no broker quotes or
other market data was available; consequently, the Company applied a
proprietary model to estimate forward prices and, in turn, the fair market
value of these longer-term power transactions.

   During January 2003, in connection with the re-audit of the Company's
1999-2001 financial statements and an assessment of various accounting
policies, the Company reconsidered the model-based methodology used to value
the portions of its power marketing and trading portfolio for which broker
quotes were not available. Under the Company's prior methodology, forward
curves used to calculate the value of its long-term U.S. power contracts were
derived from a proprietary model based on a required rate of return on
investments in new generation facilities. This methodology had been confirmed
by the Company's former independent auditors prior to the withdrawal of their
audit opinion for unrelated matters. The primary disadvantage of this
methodology is that, in certain circumstances, it may not reflect true market
prices in future years. After reconsidering the appropriateness of this
methodology in light of changing industry circumstances, in late January 2003
the Company determined that, beginning with the third quarter 2001, its prior
forward power curve methodology failed to appropriately reflect the value of
its long-term power contracts.

   Upon making this determination, the Company corrected the forward power
curve methodology it used to estimate the fair market value of its U.S. power
marketing and trading portfolio. This corrected methodology

                                      F-9

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

incorporates forward energy prices derived from broker quotes and values from
executed transactions to estimate forward price curves for periods where broker
quotes and transaction data cannot be obtained. Further, the Company determined
that in order to adequately reflect its results, it was appropriate to restate
its prior period financial statements, beginning with the third quarter 2001,
to reflect the corrected methodology.

   This correction in the methodology resulted in a $94 million reduction to
previously reported 2001 net income.

   The table below reflects the impact of this restatement on net income as
originally reported:

<TABLE>
<CAPTION>
      Three    Three     Three        Three      Six                  Twelve
      Months  Months     Months      Months    Months  Nine Months    Months
      Ended    Ended     Ended        Ended     Ended     Ended        Ended
     March 31 June 30 September 30 December 31 June 30 September 30 December 31
     -------- ------- ------------ ----------- ------- ------------ -----------
                                  ($ in millions)
<S>  <C>      <C>     <C>          <C>         <C>     <C>          <C>
2001   $--      $--       $(25)       $(69)      $--       $(25)       $(94)
</TABLE>

                                     F-10

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


   Restated Lease Accounting.  The Company previously accounted for seven
generation lease arrangements as operating leases. Its previous accounting
treatment of these lease arrangements, which was confirmed by the Company's
former independent auditors prior to the withdrawal of their audit opinion for
unrelated matters, reflected its belief that these arrangements satisfied the
applicable generally accepted accounting principles ("GAAP") requirements so as
to justify their treatment as operating leases. However, these requirements are
very technical and subject to a high degree of interpretation. During the
course of the re-audit of the Company's financial statements for 1999-2001, the
Company analyzed its accounting for these arrangements and considered a variety
of factors, including interpretations of the applicable GAAP requirements. Upon
completion of this analysis and discussions with PricewaterhouseCoopers LLP, in
January 2003, the Company determined it was necessary to correct its accounting
for these lease arrangements to recognize on its balance sheet the related
assets as of the inception of six of these arrangements. Although the Company
previously amended the agreements relating to six generation lease arrangements
so as to require them to be treated as capital leases in the second quarter
2002, the restatement of the accounting originally applied to these arrangement
results in the recognition of the related assets as of an earlier date.
Consequently, the Company's previously reported net income for 2001 is reduced
by approximately $3 million, reflecting the recognition of depreciation and
amortization expenses associated with the related assets. In addition, balance
sheet amounts have been adjusted for this change in accounting as follows:

<TABLE>
<CAPTION>
                                                    December 31
                                                ------------------
                                                 2001   2000  1999
                                                -----  -----  ----
                                                  ($ in millions)
             <S>                                <C>    <C>    <C>
             Property, plant and equipment, net $ 713  $ 326  $ 72
             Accrued liabilities and other.....  (447)   (68)   --
             Long-term debt....................  (342)  (261)  (72)
</TABLE>

Please read Note 7--Debt for further discussion.

   The table below reflects the impact of this restatement on net income as
originally reported:

<TABLE>
<CAPTION>
      Three    Three     Three        Three      Six                  Twelve
      Months  Months     Months      Months    Months  Nine Months    Months
      Ended    Ended     Ended        Ended     Ended     Ended        Ended
     March 31 June 30 September 30 December 31 June 30 September 30 December 31
     -------- ------- ------------ ----------- ------- ------------ -----------
                                  ($ in millions)
<S>  <C>      <C>     <C>          <C>         <C>     <C>          <C>
2001   $--      $--       $(1)         $(2)      $--       $(1)         $(3)
</TABLE>

   Valuation of Technology Investment.  We acquired the common stock of a
technology investment in the second quarter 2000. In the second quarter 2002,
after several quarters of declines in the market price of the investment, we
determined that the decline in value was other-than-temporary. As such, we
recognized a $12 million after-tax charge during the second quarter 2002. Upon
further review, we determined that we incorrectly delayed recognition of the
charge associated with this investment, as the decline in value through
September 30, 2001 met the "other-than-temporary" threshold. Therefore, we have
restated the financial statements to record the impairment in the third quarter
2001.

   The table below reflects the impact of this restatement on net income as
originally reported:

<TABLE>
<CAPTION>
      Three    Three     Three        Three      Six       Nine       Twelve
      Months  Months     Months      Months    Months     Months      Months
      Ended    Ended     Ended        Ended     Ended     Ended        Ended
     March 31 June 30 September 30 December 31 June 30 September 30 December 31
     -------- ------- ------------ ----------- ------- ------------ -----------
                                  ($ in millions)
<S>  <C>      <C>     <C>          <C>         <C>     <C>          <C>
2001   $--      $--       $(12)        $--       $--       $(12)       $(12)
</TABLE>

                                     F-11

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


   Correction for Income Taxes.  During the course of the re-audit of our
1999-2001 financial statements, we determined that we made errors in accounting
for certain tax matters. These errors related to book-tax basis differences
that were reflected as permanent differences as opposed to temporary
differences, the failure to record differences between the amounts recognized
as income tax provision and the amounts actually reflected in the applicable
income tax returns, adjustments related to book and tax-basis balance sheet
reconciliations and changes in estimates of tax contingencies. We have restated
our financial statements to correct these errors, resulting in additional
deferred tax expense as further detailed below.

   The table below reflects the impact of these restatements on net income as
originally reported:

<TABLE>
<CAPTION>
                Three    Three     Three        Three      Six                  Twelve
                Months  Months     Months      Months    Months  Nine Months    Months
                Ended    Ended     Ended        Ended     Ended     Ended        Ended
               March 31 June 30 September 30 December 31 June 30 September 30 December 31
               -------- ------- ------------ ----------- ------- ------------ -----------
                                            ($ in millions)
<S>            <C>      <C>     <C>          <C>         <C>     <C>          <C>
1998 and prior                                                                   $(19)
1999..........   $ (2)    $--       $--          $--      $ (2)      $ (2)         (2)
2000..........     (7)     --        --            5        (7)        (7)         (2)
2001..........    (21)     --        --           (4)      (21)       (21)        (25)
</TABLE>

   Other Adjustments Arising During the Re-Audit.  The Company has restated its
1999-2001 financial statements to correct various errors in its historical
financial statements that were discovered during the course of the re-audit.
These restatements, which principally relate to the timing on which various
transactions were recorded in the ordinary course of business, result in
increases (reductions) to previously reported 1999, 2000 and 2001 net income of
approximately $(19) million, $11 million and $(33) million, respectively. The
$19 million reduction to previously reported 1999 net income primarily related
to the following items: a purchase accounting adjustment relating to a prior
acquisition, and adjustments impacting the timing on which certain items were
previously recognized relating to inventory valuations, intercompany balances
and the power marketing business.

   The table below reflects the impact of these restatements on net income as
originally reported.

<TABLE>
<CAPTION>
                Three    Three     Three        Three      Six                  Twelve
                Months  Months     Months      Months    Months  Nine Months    Months
                Ended    Ended     Ended        Ended     Ended     Ended        Ended
               March 31 June 30 September 30 December 31 June 30 September 30 December 31
               -------- ------- ------------ ----------- ------- ------------ -----------
                                            ($ in millions)
<S>            <C>      <C>     <C>          <C>         <C>     <C>          <C>
1998 and prior                                                                   $ (3)
1999..........   $ 15    $ (9)      $ (9)       $(16)     $  6       $ (3)        (19)
2000..........      7       3        (10)         11        10         --          11
2001..........    (21)    (47)        27           8       (68)       (41)        (33)
</TABLE>

                                     F-12

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


   The following table reconciles selected financial data as reported in
various filings:

<TABLE>
<CAPTION>
                                               Adjustment                         Adjustment
                               Form 10-K          and                                and         Form 10-K/A
                                 filed      Reclassification  Form 8-K filed   Reclassification     filed
                             March 22, 2002       (1)        November 19, 2002       (2)        April 15, 2003
                             -------------- ---------------- ----------------- ---------------- --------------
                                                              ($ in millions)
<S>                          <C>            <C>              <C>               <C>              <C>
Selected Balance Sheet Data
December 31, 2001
   Current Assets...........    $ 9,227          $  451           $ 9,678          $(1,009)        $ 8,669
   Total Assets.............     19,659             876            20,535             (857)         19,678
   Current Liabilities......      8,122             643             8,765             (770)          7,995
   Total Liabilities........     13,684           1,017            14,701             (691)         14,010
   Stockholder's Equity.....      4,801            (151)            4,650             (185)          4,465

December 31, 2000
   Current Assets...........    $ 9,759          $  (32)          $ 9,727          $   710         $10,437
   Total Assets.............     17,805             (32)           17,773            1,273          19,046
   Current Liabilities......      8,877              55             8,932              897           9,829
   Total Liabilities........     12,557              23            12,580            1,330          13,910
   Stockholder's Equity.....      4,076             (55)            4,021              (62)          3,959

Results of Operations
Year ended December 31, 2001
   Net Income (Loss)........    $   652          $ (110)          $   542          $  (117)        $   425

Year ended December 31, 2000
   Net Income (Loss)........    $   446          $  (17)          $   429          $   (31)        $   398

Year ended December 31, 1999
   Net Income (Loss)........    $   152          $   (4)          $   148          $   (11)        $   137

Selected Cash Flow Data
Year ended December 31, 2001
   Operating Cash Flow......    $   452          $ (292)          $   160          $    16         $   176
   Investing Cash Flow......     (1,186)             --            (1,186)            (155)         (1,341)
   Financing Cash Flow......        846             292             1,138              162           1,300

Year ended December 31, 2000
   Operating Cash Flow......    $   364          $   --           $   364          $    44         $   408
   Investing Cash Flow......       (716)             --              (716)            (235)           (951)
   Financing Cash Flow......        339              --               339              189             528

Year ended December 31, 1999
   Operating Cash Flow......    $     9          $   --           $     9          $    31         $    40
   Investing Cash Flow......       (319)             --              (319)             (72)           (391)
   Financing Cash Flow......        327              --               327               72             399
</TABLE>
--------
(1) This column includes increases to the December 31, 2001 balances of current
    assets, total assets, current liabilities and total liabilities of $237
    million, $314 million, $314 million and $314 million, respectively, related
    to reclassifications to the December 31, 2001 balance sheet to conform to
    December 31, 2002 balance sheet classifications.

(2) This column includes increases (decreases) of the operating cash flow and
    investing cash flow data of $15 million and $8 million, respectively, for
    the year ended December 31, 2001 and $30 million and $(1) million,
    respectively, for the year ended December 31, 2000 to conform to cash flow
    classifications for the year ended December 31, 2002.

                                     F-13

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


   PLEASE NOTE THAT THESE FINANCIAL STATEMENTS AND THE NOTES THERETO DO NOT
REFLECT EVENTS OCCURRING AFTER MARCH 22, 2002 (THE DATE ON WHICH DYNEGY FILED
ITS 2001 FORM 10-K). FOR A DESCRIPTION OF THESE EVENTS, PLEASE READ THE
COMPANY'S EXCHANGE ACT REPORTS FILED SINCE MARCH 22, 2002, INCLUDING ITS ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002. SEE NOTE
19--SUBSEQUENT EVENTS FOR FURTHER DISCUSSION.

Note 1--ORGANIZATION AND OPERATIONS OF THE COMPANY

   Dynegy Holdings Inc. ("Dynegy" or the "Company") is an energy merchant.
Through its global energy delivery network and marketing, logistics and
risk-management capabilities, the Company provides innovative solutions to
customers in North America, the United Kingdom and Continental Europe. The
Company's businesses include power generation and wholesale and direct
commercial and industrial marketing of power, natural gas, coal and other
similar products. The Company is also engaged in the transportation, gathering
and processing of natural gas liquids ("NGLs").

   The Company is a wholly owned subsidiary of Dynegy Inc. Dynegy Inc. acquired
Illinova Corporation ("Illinova") in the first quarter of 2000. As part of the
acquisition of Illinova, the former Dynegy Inc., which was renamed Dynegy
Holdings Inc., became a wholly owned subsidiary of a new holding company,
Dynegy Inc. The assets, liabilities and operations of the former Dynegy Inc.
before the acquisition became the assets, liabilities and operations of the
Company after the acquisition.

   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 Illinova. 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 our results of operations
for all of 2000.

Note 2--ACCOUNTING POLICIES

   The accounting policies of Dynegy conform to accounting principles generally
accepted in the United States. The more significant of such accounting policies
are described below. The preparation of the consolidated financial statements
in conformity with GAAP 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.

   Principles of Consolidation.  The accompanying consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries after elimination of intercompany accounts and transactions.
Certain reclassifications have been made to prior-period amounts to conform
with current-period financial statement classifications.

   Cash and Cash Equivalents.  Cash and cash equivalents consist of all demand
deposits and funds invested in short-term investments with original maturities
of three months or less.

   Investment in Unconsolidated Affiliates.  Investments in affiliates in which
the Company has a significant ownership interest, generally 20 percent to 50
percent, are accounted for by the equity method. Any excess of the

                                     F-14

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

Company's investment in these entities over its equity in the underlying net
assets of the affiliates is amortized over the estimated economic service lives
of the underlying assets. Effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("Statement No. 142"). Statement No. 142 discontinues the
amortization of goodwill associated with equity investments. Other investments
less than 20 percent owned with readily determinable fair value are considered
available-for-sale and are recorded at quoted market value or at the lower of
cost or net realizable value, if there is no readily determinable fair value.
For securities with a readily determinable fair value, the change in the
unrealized gain or loss, net of deferred income tax, is recorded as a separate
component of other comprehensive income in the consolidated statement of
stockholders' equity. Realized gains and losses on investment transactions are
determined on the specific-identification basis.

   Concentration of Credit Risk.  Dynegy provides multiple energy commodity
solutions principally to customers in the electric and gas distribution
industries and to entities engaged in industrial and petrochemical businesses.
These industry concentrations have the potential to impact the Company's
overall exposure to credit risk, either positively or negatively, in that the
customer base may be similarly affected by changes in economic, industry,
weather or other conditions. Receivables generally are not collateralized;
however, Dynegy believes the credit risk posed by industry concentration is
largely offset by the diversification and creditworthiness of the Company's
customer base.

   Inventories.  Inventories consisted primarily of natural gas in storage of
$9 million and $52 million, NGLs of $49 million and $129 million and coal of
$62 million and $24 million at December 31, 2001 and 2000, respectively, and
crude oil of $19 million at December 31, 2001. Such inventory is valued at the
lower of weighted average cost or at market. Materials and supplies inventory
of $62 million and $38 million at December 31, 2001 and 2000, respectively, is
carried at the lower of cost or market using the specific-identification method.

   Property, Plant and Equipment.  Property, plant and equipment, which
consists principally of gas gathering, processing, fractionation, terminaling
and storage facilities, natural gas transmission lines, pipelines and power
generating facilities, is recorded at cost. Expenditures for major
replacements, renewals, and major maintenance are capitalized. The Company
considers major maintenance to be expenditures incurred on a cyclical basis in
order to maintain and prolong the efficient operation of its assets.
Expenditures for repairs and minor renewals to maintain facilities in operating
condition are expensed. Depreciation is provided using the straight-line method
over the estimated economic service lives of the assets, ranging from three to
40 years. Composite depreciation rates are applied to functional groups of
property having similar economic characteristics. The approximate depreciation
rates are as follows:

<TABLE>
<CAPTION>
          Asset Group                Range of Years Annual Percentage
          -----------                -------------- -----------------
          <S>                        <C>            <C>
          Gathering and Processing
            Systems                  10 to 25 years   4.0% to 10.0%
          Power Facilities           27 to 35 years   2.9% to 3.7%
          Transportation Equipment   10 to 25 years   4.0% to 10.0%
          Buildings and Improvements 10 to 40 years   2.5% to 10.0%
          Office and Miscellaneous
            Equipment                3 to 35 years    2.9% to 33.3%
          Storage Assets             14 to 30 years   3.3% to 7.1%
</TABLE>

                                     F-15

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


   Gains and losses are not recognized for retirements of property, plant and
equipment subject to composite depreciation rates ("composite rate") until the
asset group subject to the composite rate is retired. Gains and losses on the
sale of individual assets are reflected in Loss (gain) on asset sales in the
Consolidated Statements of Operations. Through the end of the period, the
Company has reviewed the carrying value of its long-lived assets in accordance
with provisions of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
("Statement No. 121"). In August 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("Statement
No. 144"). Statement No. 144 addresses the accounting and reporting for the
impairment or disposal of long-lived assets and supersedes Statement No. 121
and APB Opinion No. 30, "Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." The Company's adoption of
Statement No. 144 on January 1, 2002 did not have any impact on the Company's
financial position or results of operations.

   Environmental Costs and Other Contingencies.  Environmental costs relating
to operations are expensed or capitalized, as appropriate, depending on whether
such costs provide future economic benefit. Liabilities are recorded when
environmental assessment indicates that remedial efforts are probable and the
costs can be reasonably estimated. Measurement of liabilities is based on
currently enacted laws and regulations, existing technology and site-specific
costs. Such liabilities may be recognized on a discounted basis if the amount
and timing of anticipated expenditures for a site are fixed or reliably
determinable; otherwise, such liabilities are recognized on an undiscounted
basis. Environmental liabilities in connection with assets that are sold or
closed are recognized upon such sale or closure, to the extent they are
probable, can be estimated and have not previously been reserved. In assessing
environmental liabilities, no offset is made for potential insurance
recoveries. Recognition of any joint and several liability is based upon the
Company's best estimate of its final pro rata share of such liability.

   Liabilities for other contingencies are recognized upon identification of an
exposure, which when fully analyzed indicates that it is both probable that an
asset has been impaired or that a liability has been incurred and that such
loss amount can be reasonably estimated. Costs to remedy such contingencies or
other exposures are charged to a reserve, if one exists, or otherwise to
current-period operations. When a range of probable loss exists, the Company
accrues the lesser end of the range.

   During 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("Statement No. 143").
Statement No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred with
the associated asset retirement costs being capitalized as a part of the
carrying amount of the long-lived asset. The Company is evaluating the future
financial effects of adopting Statement No. 143 and expects to adopt the
standard effective January 1, 2003.

   Goodwill and Other Intangible Assets.  Intangible assets, principally
goodwill, have been amortized on a straight-line basis over their estimated
useful lives of 25 to 40 years. However, during 2001, the FASB issued Statement
No. 142 which discontinues goodwill amortization over its estimated useful
life; rather, goodwill will be subject to at least an annual fair-value based
impairment test. The Company is analyzing any impact the adoption of Statement
No. 142 effective January 1, 2002 will have on its financial position and
results of operations.

   Revenue Recognition.  Dynegy utilizes two comprehensive accounting models in
reporting its consolidated financial position and results of operations as
required by generally accepted accounting principles -

                                     F-16

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

an accrual model and a fair value model. Dynegy determines the appropriateness
of application of one comprehensive accounting model over the other in
accounting for its varied operations based on guidance provided in numerous
accounting standards and positions adopted by the FASB or the Securities and
Exchange Commission.

   The accrual model is used to account for the Company's physically owned
asset businesses. Dynegy uses these physical assets in various manufacturing
and delivery processes. These processes include the generation of electricity,
the separation of natural gas liquids into their component parts from a stream
of natural gas and the transportation or transmission of commodities through
pipelines. End sales from these businesses result in physical delivery of
commodities or services to Dynegy wholesale and commercial and industrial
customers.

   Revenues for product sales and gas processing and marketing services are
recognized when title passes to the customer or when the service is performed.
Fractionation and transportation revenues are recognized based on volumes
received in accordance with contractual terms. Revenues derived from power
generation are recognized upon output, product delivery or satisfaction of
specific targets, all as specified by contractual terms. Fees derived from
engineering and construction contracts and development and other activities
received from joint ventures in which Dynegy holds an equity interest are
deferred to the extent of Dynegy's ownership interest and amortized on a
straight-line basis over appropriate periods, which vary according to the
nature of the service provided and the ventures' operations. Shipping and
handling costs are included in revenue when billed to customers in conjunction
with the sale of products.

   The fair value model is used to account for certain forward physical and
financial transactions in the WEN and DMS segments, which meet criteria defined
by the FASB or the Emerging Issues Task Force. These criteria require these
contracts to be related to future periods and contain fixed price and volume
components and must have terms that require or permit net settlement of the
contract in cash or its equivalent. As these transactions may be settled in
cash, the value of the assets and liabilities associated with these
transactions is reported at estimated settlement value based on current prices
and rates as of each balance sheet date. The net gains or losses resulting from
the revaluation of these contracts during the period are recognized in the
Company's result of operations. Assets and liabilities associated with these
transactions are reflected on the Company's balance sheet as risk management
assets and liabilities, classified as short-term or long-term pursuant to each
contract's individual tenor. Net unrealized gains and losses from these
contracts are classified as revenue in the accompanying statements of
operations. Transactions that have been realized and settled are reflected
gross in revenues and cost of sales.

   The Company routinely enters into financial instrument contracts to hedge
purchase and sale commitments, fuel requirements and inventories in its NGLs,
electricity and coal businesses in order to minimize the risk of changes in
market prices in these commodities. Dynegy also monitors its exposure to
fluctuations in interest rates and foreign currency exchange rates and may
execute swaps, forward-exchange contracts or other financial instruments to
manage these exposures. Gains and losses from hedging transactions are
recognized in income in the periods for which the underlying commodity,
interest rate or foreign currency transaction impacts earnings. If the
underlying being hedged by the commodity, interest rate or foreign currency
transaction is disposed of or otherwise terminated, the gain or loss associated
with such contract is no longer deferred and is recognized in the period the
underlying contract is eliminated.

   Income Taxes.  The Company's parent files a consolidated United States
federal income tax return and, for financial reporting purposes, provides
income taxes for the difference in the tax and financial reporting bases of

                                     F-17

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

its assets and liabilities in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."

   We are included in the consolidated federal and state income tax returns
filed by Dynegy Inc. Pursuant to tax allocation arrangements, we record a
receivable in an amount equal to the tax benefits realized in Dynegy Inc.'s
consolidated federal income tax return resulting from the utilization of our
net operating losses and/or tax credits, or record a payable to Dynegy Inc. in
an amount equal to the federal income tax computed on our separate company
taxable income less the tax benefits associated with net operating losses
and/or tax credits generated by us which are utilized in Dynegy Inc.'s
consolidated federal income tax return.

   Foreign Currency Translations.  For subsidiaries whose functional currency
is not the U.S. Dollar, assets and liabilities are translated at year-end rates
of exchange and revenues and expenses are translated at average exchange rates
prevailing for each month. Translation adjustments for the asset and liability
accounts are included as a separate component of other comprehensive income in
stockholder's equity. Currency transaction gains and losses are recorded in
income.

   Employee Stock Options.  The Company applies the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25") and related interpretations in accounting for Dynegy Inc.'s
issuance of stock options to the Company's employees. Accordingly, compensation
expense is not recognized for employee stock options unless the options were
granted at an exercise price lower than the market value on the grant date.
Dynegy Inc. has granted below-market options in the past and continues to
recognize compensation expense over the applicable vesting periods. Stock
options are no longer issued at less than market price. Additionally, in 2001,
a charge of $1 million recognized in "General and Administrative Expenses" was
incurred due to the extension of the exercise period of various stock options
and the acceleration of vesting for various other stock options.

Note 3--COMMERCIAL OPERATIONS, RISK MANAGEMENT ACTIVITIES AND FINANCIAL
INSTRUMENTS

   Dynegy's operations and periodic returns are impacted by a myriad of risk
factors, some of which may, and some of which may not, be mitigated by risk
management methods. These risks include, but are not limited to, commodity
price, interest rate and foreign exchange rate fluctuations, weather patterns,
counterparty risk, management estimations, strategic investment decisions,
changes in competition, operational risks, environmental risks and changes in
regulation.

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

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

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

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

   Dynegy seeks to manage these market risks through diversification,
controlling position sizes and executing hedging strategies. The ability to
manage an exposure may, however, be limited by adverse changes in market
liquidity or other factors. Dynegy cannot guarantee the ultimate effectiveness
of its risk management activities.

   Dynegy generally attempts to balance its fixed-price physical and financial
purchase and sales commitments in terms of contract volumes, and the timing of
performance and delivery obligations. However, the Company may, at times, have
a bias in the market within guidelines established by management and Dynegy's
Board of Directors, resulting from the management of its portfolio. In
addition, as a result of marketplace illiquidity and other factors, the Company
may, at times, be unable to hedge its portfolio fully for certain market risks.

                                     F-18

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


   The financial performance and cash flow derived from certain merchant
generating capacity (e.g., peaking facilities) are impacted annually, either
favorably or unfavorably, by changes in and the relationship between the cost
of the commodity fueling the facilities and electricity prices, which in turn
influences the volume of electricity generated by these assets.

   Operating results associated with natural gas gathering, processing and
fractionation activities are sensitive to changes in NGL prices and the
availability of inlet volumes. In addition, similar to peaking electricity
generating facilities, straddle processing plants are impacted by changes in,
and the relationship between, natural gas and NGL prices, which in turn
influence the volumes of gas processed at these facilities. The impact from
changes in NGL prices on upstream operations results principally from the
nature of contractual terms under which natural gas is processed and products
are sold. The availability of inlet volumes directly affects the utilization
and profitability of this segment's businesses. Commodity price volatility may
also affect operating margins derived from the Company's NGL marketing
operations.

   Dynegy's commercial groups manage, on a portfolio basis, the resulting
market risks inherent in commercial transactions, subject to parameters
established by the Dynegy Inc. Board of Directors. Market risks are monitored
by a risk control group that operates independently from the commercial units
to ensure compliance with Dynegy's risk-management policies. Risk measurement
is also practiced daily against the Dynegy portfolios with Value at Risk,
stress testing and scenario analysis on the commercial portfolios.

   Quantitative and Qualitative Market Risk Disclosures.  In addition to
applying business judgment, senior management uses a number of quantitative
tools to manage Dynegy's exposure to market risk. These tools include:

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

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

   VaR represents the potential loss in value of Dynegy's enterprise-wide
marketing portfolio due to adverse market movements over a defined time horizon
with a specified confidence level.

   The modeling of the risk characteristics of Dynegy's marketing portfolio
involves a number of assumptions and approximations. Dynegy estimates VaR using
a JP Morgan RiskMetrics(TM) approach assuming a one-day holding period and a 95
percent confidence level. While management believes that these assumptions and
approximations are reasonable, there is no uniform industry methodology for
estimating VaR, and different assumptions and/or approximations could produce
materially different VaR estimates.

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

   Credit and Market Reserves.  In connection with the market valuation of its
energy commodity contracts, the Company maintains certain reserves for a number
of risks associated with these future commitments. Among

                                     F-19

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

others, these include reserves for credit risks based on the financial
condition of counterparties, reserves for price and product location ("basis")
differentials and consideration of the time value of money for long-term
contracts. Counterparties in its marketing portfolio consist principally of
financial institutions, major energy companies and local distribution
companies. The creditworthiness of these counterparties may impact overall
exposure to credit risk, either positively or negatively. However, with regard
to its counterparties Dynegy maintains credit policies that management believes
minimize overall credit risk. Determination of the credit quality of its
counterparties is based upon a number of factors, including credit ratings,
financial condition, project economics and collateral requirements. When
applicable, the Company employs standardized agreements that allow for the
netting of positive and negative exposures associated with a single
counterparty.

   Based on these policies, its current exposures and its credit reserves,
Dynegy does not anticipate a material adverse effect on its financial position
or results of operations as a result of counterparty nonperformance. As a
result of Enron Corp.'s ("Enron") bankruptcy, the Company reserved an after-tax
amount of $84 million in the fourth quarter of 2001 related to the Company's
net exposure for commercial transactions with the bankrupt enterprise. The
global netting agreement between Dynegy and Enron as well as the valuation of
these commercial transactions covered by the agreement are subject to approval
from the bankruptcy court.

   The following table displays the value of Dynegy's marketing transactions at
December 31, 2001:

<TABLE>
<CAPTION>
                                                        Below
                                          Investment  Investment
                                            Grade    Grade Credit
                                            Credit    Quality or
                                           Quality     Unrated     Total
                                          ---------- ------------ ------
                                                  ($ in millions)
      <S>                                 <C>        <C>          <C>
      Utilities and power generators.....    $474        $(27)    $  447
      Financial institutions.............     (98)          1        (97)
      Oil and gas producers..............     129         123        252
      Commercial and industrial companies     400          94        494
      Other..............................      52           6         58
                                             ----        ----     ------
      Value of portfolio before reserves.    $957        $197     $1,154
                                             ====        ====     ======
      Credit and market reserves.........                           (248)
                                                                  ------
                                                                     906
      Other..............................                             34
                                                                  ------
      Net risk-management assets.........                         $  940
                                                                  ======
</TABLE>

   The net risk management asset of $940 million is the aggregate of the
following line items on the Consolidated Balance Sheet: Current Assets--Assets
from risk-management activities, Other Assets--Assets from risk-management
activities, Current Liabilities--Liabilities from risk-management activities
and Other Liabilities--Liabilities from risk-management activities. The
increase in the net risk management assets at December 31, 2001 from the
previously reported amount of $717 million is primarily due to a $340 million
increase from the consolidation of ABG, one of the entities formed in
connection with Project Alpha, and a $40 million reclassification of inventory.
These items are offset by a $149 million reduction resulting from the
adjustment to the forward power curve.

   At December 31, 2001, the term of Dynegy's marketing portfolio extends to
2016 and the average remaining life of an individual transaction was five
months.

                                     F-20

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


   Accounting for Derivative Instruments and Hedging Activities.  The Financial
Accounting Standards Board ("FASB") issued, and subsequently amended, Statement
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 which are not a part of the Company's
marketing activities qualify and are designated as hedges of future cash flows,
fair values, net investments or qualify and are designated as normal purchases
and sales. For derivatives treated as hedges of future cash flows, the
effective portion of changes in fair value is recorded in other comprehensive
income until the related hedged items impact earnings. Any ineffective portion
of a hedge is reported in earnings immediately. For derivatives treated as fair
value hedges, changes in the fair value of the derivative and changes in the
fair value of the related asset or liability are recorded in current period
earnings. For derivatives treated as hedges of net investment in foreign
operations, the effective portion of changes in the fair value of the
derivative is recorded in the cumulative translation adjustment. Derivatives
treated as normal purchases or sales are recorded and recognized in income
using accrual accounting.

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

<TABLE>
<CAPTION>
                                                       Other
                                             Net   Comprehensive
                                            Income    Income
                                            ------ -------------
                <S>                         <C>    <C>
                Adjustment to fair value of
                  derivatives..............  $ 3       $105
                Income tax effects.........   (1)       (44)
                                             ---       ----
                Total......................  $ 2       $ 61
                                             ===       ====
</TABLE>

   Changes in stockholder's equity related to derivatives for the year ended
December 31, 2001 were as follows, net of taxes (in millions):

<TABLE>
               <S>                                         <C>
               Transition adjustment as of January 1, 2001 $ 61
               Current period increase in fair value......    4
               Reclassifications to earnings, net.........  (57)
                                                           ----
               Balance at December 31, 2001............... $  8
                                                           ====
</TABLE>

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

<TABLE>
  <S>                                                                    <C>
  Statement No. 133, Net................................................ $ 8
  Currency Translation Adjustment.......................................   4
  Unrealized Loss on Available-for-Sale Securities, Net.................  (2)
                                                                         ---
  Accumulated Other Comprehensive Loss, Net of Tax, at December 31, 2001 $10
                                                                         ===
</TABLE>

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

                                     F-21

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


   From time to time, the Company may enter into various financial derivative
instruments which qualify as cash flow hedges. Instruments related to its
energy convergence and midstream liquids businesses are entered into for
purposes of hedging forward fuel requirements for certain power generation and
fractionation facilities, locking in future margin in the domestic midstream
liquids business and hedging price risk in the global liquids business.
Interest rate swaps are used to convert the floating interest-rate component of
certain obligations to fixed rates.

   The Company determined that its documentation and assessment of hedge
effectiveness related to certain contracts entered into to hedge fuel
requirements and power sales commitments was incomplete. As a result, the
accounting for these contracts has been restated herein. Otherwise, during the
year ended December 31, 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 balance in other comprehensive income at December 31, 2001 is expected
to be reclassified to future earnings, contemporaneously with the related
purchases of fuel, sales of electricity or liquids, payments of interest and
recognition of operating lease expense, as applicable to each type of hedge. Of
this amount, approximately $4 million of income, net of taxes, is estimated to
be reclassified into earnings over the year ending December 31, 2002. The
actual amounts that will be reclassified to earnings over the next year and
beyond could vary materially from this estimated amount as a result of changes
in market conditions.

   The Company also enters into derivative instruments which qualify as
fair-value hedges. The Company used interest rate-swaps to convert a portion of
its nonprepayable fixed-rate debt into variable-rate debt. During the twelve
months ended December 31, 2001, there was no ineffectiveness from changes in
fair value of hedge positions, and no amounts were excluded from the assessment
of hedge effectiveness. Additionally, no amounts were recognized in relation to
firm commitments that no longer qualified as fair-value hedge items.

   The Company has investments in foreign subsidiaries, and the net assets of
these subsidiaries are exposed to currency exchange-rate volatility. The
Company's parent uses derivative financial instruments, including foreign
exchange forward contracts and cross currency interest rate swaps, to hedge
this exposure.

   Fair Value of Financial Instruments.  The following disclosure of the
estimated fair value of financial instruments is made in accordance with the
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments." The estimated
fair-value amounts have been determined by the Company using available market
information and selected valuation methodologies. Considerable judgment is
required in interpreting market data to develop the estimates of fair value.
The use of different market assumptions or valuation methodologies could have a
material effect on the estimated fair-value amounts.

                                     F-22

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


   The carrying values of current financial assets and liabilities approximate
fair values due to the short-term maturities of these instruments. The carrying
amounts and fair values of the Company's other financial instruments were:

<TABLE>
<CAPTION>
                                                                   December 31,
                                                          ------------------------------
                                                               2001            2000
                                                          --------------  --------------
                                                          Carrying Fair   Carrying Fair
                                                           Amount  Value   Amount  Value
                                                          -------- -----  -------- -----
                                                                 ($ in millions)
<S>                                                       <C>      <C>    <C>      <C>
Commercial Paper.........................................      6       6     115     115
Revolving Credit Facilities..............................    600     600      --      --
Canadian Credit Agreement................................     40      40      59      59
Senior Notes, 6.75% through 8.125%, due 2002 through 2026  1,693   1,488   1,200   1,200
ABG Gas Supply...........................................    282     267      --      --
Preferred Securities of a Subsidiary Trust...............    200     159     200     189
Fair Value Hedge Interest Rate Swap......................     (7)     (7)     --      --
Cash Flow Hedge Interest Rate Swap.......................      1       1      --      --
Interest Rate Risk-Management Contracts..................      6       6      --      --
Commodity Risk-Management Contracts......................    293     293     924     922
Generation Facility Debt.................................    342     342     261     261
</TABLE>

   The financial statement carrying amounts of the Company's credit agreement
and variable-rate debt obligations were assumed to approximate fair value. The
fair values of the Company's other long-term indebtedness, including the
Preferred Securities of a Subsidiary Trust, were based on quoted market prices
by financial institutions that actively trade these debt securities. The fair
value of interest rate, foreign currency and commodity risk-management
contracts were based upon the estimated consideration that would be received to
terminate those contracts in a gain position and the estimated cost that would
be incurred to terminate those contracts in a loss position. The investment in
warrants is recorded at fair value estimated using the Black-Scholes valuation
methodology.

                                     F-23

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


   The absolute notional contract amounts associated with the derivative
instruments designated as hedges were as follows:

<TABLE>
<CAPTION>
                                                                        December 31,
                                                                        ------------
                                                                            2001
                                                                        ------------
<S>                                                                     <C>
Fair Value Hedge Interest Rate Swaps (In millions of U.S. Dollars).....   $   206
   Fixed Interest Rate Received on Swaps (Percent).....................     5.284
Cash Flow Hedge Interest Rate Swaps (In millions of U.S. Dollars)......   $   100
   Fixed Interest Rate Paid on Swaps (Percent).........................     4.397
U.K. Pound Sterling Net Investment Hedges (In millions of U.S. Dollars)   $   595
   Average U.K. Pound Sterling Contract Rate (U.S. Dollars)............   $1.4125
</TABLE>

                                     F-24

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


Note 4--CASH FLOW INFORMATION

   Detail of supplemental disclosures of cash flow and non-cash investing and
financing information was:

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                       -----------------------
                                                        2001     2000   1999
                                                        -----    ----   ----
                                                       ($ in millions)
         <S>                                           <C>       <C>    <C>
         Interest paid (net of amount capitalized).... $ 118     $103   $80
                                                        =====     ====  ===
         Taxes paid (net of refunds).................. $  87     $ 40   $ 2
                                                        =====     ====  ===
         Detail of business acquired:/(1)/
         Current assets and other..................... $  57     $ --   $--
         Fair value of non-current assets.............   801       --    --
         Liabilities assumed, including deferred taxes  (263)      --    --
         Subordinated capital assumed.................    --       --    --
         Capital stock issued and options exercised...    --       --    --
         Cash balance acquired........................   (14)      --    --
                                                        -----     ----  ---
         Cash paid, net of cash acquired.............. $ 581     $ --   $--
                                                        =====     ====  ===
</TABLE>
--------
/(1)/ The business acquired in 2001 was BG Storage Limited ("BGSL"), a wholly
      owned subsidiary of BG Group plc. See Note 14 for more information
      regarding this acquisition.

Note 5--PROPERTY, PLANT AND EQUIPMENT

   Investments in property, plant and equipment consisted of:

<TABLE>
<CAPTION>
                                                       December 31,
                                                      --------------
                                                       2001    2000
                                                      ------  ------
                                                      ($ in millions)
           <S>                                        <C>     <C>
           Wholesale Energy Network:
              Generation assets...................... $4,740  $3,816
              Storage facilities (U.K.)..............    795      --
           Dynegy Midstream Services:
              Natural gas processing.................  1,000     934
              Fractionation..........................    200     198
              Liquids marketing......................    204     268
              Natural gas gathering and transmission.    225     193
              Crude oil..............................     --       9
           IT Systems and Other......................    417     285
                                                      ------  ------
                                                       7,581   5,703
           Less: accumulated depreciation............   (814)   (586)
                                                      ------  ------
                                                      $6,767  $5,117
                                                      ======  ======
</TABLE>

   Interest capitalized related to costs of projects in process of development
totaled $20 million, $31 million and $17 million for the years ended December
31, 2001, 2000 and 1999, respectively. In 2000, a $25 million impairment
reserve was recorded related to Canadian gas processing assets.

                                     F-25

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


   As a result of the changes in accounting for six generation lease
arrangements, the Company recognized additional generation assets of $787
million. For further discussion of these adjustments, see the Explanatory Note.

Note 6--INVESTMENTS IN UNCONSOLIDATED AFFILIATES AND NORTHERN NATURAL GAS
COMPANY

   Investments in affiliates that are not controlled by the Company but where
the Company has significant influence over operations are accounted for by the
equity method. The Company's share of net income from these affiliates is
reflected in the Consolidated Statements of Operations as Equity in earnings of
unconsolidated affiliates. The Company's principal equity method investments
consist of entities that operate generation assets and natural gas liquids
assets. These equity investments totaled $755 million and $663 million at
December 31, 2001 and 2000, respectively. The Company entered into these
ventures principally for the purpose of sharing risk and leveraging existing
commercial relationships. These ventures maintain independent capital
structures and have financed their operations on a non-recourse basis to the
Company. The Company holds investments in three joint ventures in which Chevron
U.S.A. or its affiliates are investors. For additional information about these
investments, please read "Note 16--Related Party Transactions."

   Generation Assets.  Investments include ownership interests in seven joint
ventures that own fossil fuel electric generation facilities in diverse
geographic regions. The Company's ownership is generally 50 percent in the
majority of these ventures. The Company's net investment of $609 million at
December 31, 2001 represents approximately 2,200 MW of net generating capacity.
At December 31, 2001, the Company's investment exceeded its equity in the
underlying assets by approximately $143 million. Dynegy's most significant
investment is comprised of its interest in West Coast Power, LLC ("West Coast
Power"), a 50 percent owned venture with NRG, which totaled approximately $330
million at December 31, 2001 and generated equity earnings of $162 million in
2001.

   Midstream Investments.  Investments include ownership interests in three
ventures that operate natural gas liquids processing, extraction, fractionation
and storage facilities in the Gulf Coast region as well as an interstate NGL
pipeline. The Company's ownership interest in these ventures ranges from 23
percent to 39 percent. At December 31, 2001, the Company's investment exceeded
its equity in the underlying net assets by approximately $43 million.

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

<TABLE>
<CAPTION>
                                               December 31,
                        -----------------------------------------------------------
                               2001              2000/(1)/           1999/(1)/
                        ------------------- ------------------- -------------------
                        Total  Equity Share Total  Equity Share Total  Equity Share
($ in millions)         ------ ------------ ------ ------------ ------ ------------
<S>                     <C>    <C>          <C>    <C>          <C>    <C>
Current assets......... $1,098    $  488    $  887    $  345    $  525    $  184
Non-current assets.....  2,301     1,082     2,483     1,147     2,787     1,193
Current liabilities....    685       320       650       262       847       374
Non-current liabilities    644       322       910       444     1,183       487
Revenues...............  3,503     1,459     3,462     1,479     1,339       526
Operating margin.......    738       321       704       299       443       174
Net income.............    445       208       402       181       135        58
</TABLE>
--------
/(1)/ The financial data for 2000 and 1999 are exclusive of amounts
      attributable to the Company's investment in Accord Energy Limited
      ("Accord") as data was unavailable for these periods. For competitive
      reasons, Accord

                                     F-26

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

  was unwilling to provide the Company with detailed financial information
  concerning its operations. The Company contractually agreed not to require
  the production of such information in its negotiations with Accord. Dynegy's
  share of Accord earnings for each of the years ended December 31, 2000 and
  1999 totaled $9 million and $21 million, respectively. The Company sold its
  investment in Accord in the third quarter of 2000.

   Other Investments.  In addition to these equity investments, the Company
holds interests in companies for which it does not have significant influence
over the operations. These investments are accounted for by the cost method.
Such investments totaled $39 million and $14 million at December 31, 2001 and
2000, respectively. The Company also owns securities that have a readily
determinable fair market value and are considered available-for-sale. The
market value of these investments at December 31, 2001 and 2000 was estimated
to be $9 million and $17 million, respectively.

   In November 2001, Dynegy Inc. acquired 1,000 shares of Series A Preferred
Stock ("Series A Preferred Stock") in Northern Natural Gas Company ("Northern
Natural") for $1.5 billion. Concurrent with the investment in Northern Natural,
the Company entered into an option agreement with a subsidiary of Enron that
indirectly owned the common stock of Northern Natural, under which a Dynegy
subsidiary had the option to purchase all of the equity of that Enron
subsidiary. In connection with Dynegy Inc.'s termination of a merger agreement
with Enron, the Company gave notice of its intention to exercise its option to
purchase such equity. The exercise price for the option was $23 million subject
to adjustment based on Northern Natural's indebtedness and for the amount of
working capital at closing. Subsequent litigation relating to the option was
settled by the parties on January 3, 2002 and the closing of the option
exercise occurred on January 31, 2002. At January 31, 2002, Northern Natural
had approximately $950 million of debt outstanding. Approximately $500 million
of this debt is in the form of senior unsecured notes with maturities ranging
from 2005 to 2011. The remaining $450 million is in the form of a secured line
of credit due November 2002. Dynegy has agreed to commence a tender offer by
April 1, 2002 for $100 million of the senior unsecured notes due in 2005. An
Enron subsidiary has the option to reacquire Northern Natural through June 30,
2002 for $1.5 billion plus accrued and unpaid dividends on the Northern Natural
Series A Preferred Stock and the option exercise price, subject to adjustments
based on Northern Natural's indebtedness and working capital.

                                     F-27

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


Note 7--DEBT

   Long-term debt outstanding consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                         2001    2000
                                                        ------  ------
                                                        ($ in millions)
          <S>                                           <C>     <C>
          Long-Term Debt:
             Commercial Paper.......................... $    6  $  115
             Revolving Credit Facilities...............    600      --
             Canadian Credit Agreements................     40      59
             Senior Notes, 6.875% due 2002.............    200     200
             Senior Notes, 6.75% due 2005..............    150     150
             Senior Notes, 8.125% due 2005.............    300     300
             Senior Notes, 7.45% due 2006..............    200     200
             Senior Notes, 6.875% due 2011.............    493      --
             Senior Debentures, 7.125% due 2018........    175     175
             Senior Debentures, 7.625% due 2026........    175     175
             ABG Gas Supply............................    282      --
             Generation Facility Debt..................    342     261
                                                        ------  ------
                                                         2,963   1,635
                 Less: Amounts due within one year.....    256      --
                                                        ------  ------
          Total Long-Term Debt......................... $2,707  $1,635
                                                        ======  ======
</TABLE>

   Aggregate maturities of the principal amounts of all long-term indebtedness
are: 2002-$256 million; 2003-$64 million; 2004-$69 million; 2005-$524 million;
2006-$388 million and beyond $1,662 million.

   Commercial Paper, Money Market Lines of Credit and Extendible Floating Rate
Loans.  The Company utilizes commercial paper proceeds and borrowings under
uncommitted money market lines of credit for general corporate purposes,
including short-term working capital requirements. The commercial paper program
is limited to and fully supported by committed credit agreements. Weighted
average interest rates on amounts outstanding under the commercial paper
program for Holdings were 3.2% and 8.1% at December 31, 2001 and 2000,
respectively. The Company classifies outstanding commercial paper and
borrowings under money market lines of credit as long-term debt to the extent
of availability under committed credit facilities, as management's intent is to
maintain these obligations for longer than one year, subject to an overall
reduction in corporate debt levels.

   Credit Agreements:  The following table displays certain terms of the
Company's revolving credit agreements as of December 31, 2001:

<TABLE>
<CAPTION>
                    Unused                           Eurodollar
    Total Capacity Capacity Maturity Date    Term      Margin   Facility Fee
    -------------- -------- ------------- ---------- ---------- ------------
                                ($ in millions)
    <S>            <C>      <C>           <C>        <C>        <C>
        $  400       $ 18     05/27/03    Multi-year   0.200%      0.100%
         1,200        600     05/01/02       364-day   0.400%      0.100%
            40         --     11/20/02        1-year   0.600%      0.250%
</TABLE>

   These credit agreements provide funding for working capital, capital
expenditures and general corporate purposes, including support for lines of
credit and commercial paper programs. Generally, borrowings under the

                                     F-28

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

credit agreements bear interest at a Eurodollar rate plus a margin that is
determined based on designated unsecured debt ratings. Financial covenants in
the credit agreements are limited to a debt-to-capitalization test. Letters of
credit under the credit agreements aggregated $377 million at December 31, 2001.

   ABG Gas Supply Credit Agreement.  On April 10, 2001, ABG Gas Supply ("ABG")
entered into a credit agreement with a consortium of lenders in order to
provide financing associated with Project Alpha (the "ABG Credit Agreement").
Advances under the agreement allowed ABG to purchase NYMEX natural gas
contracts with the underlying physical gas supply to be sold to Dynegy
Marketing and Trade under an existing natural gas purchase and sales agreement.
The ABG Credit Agreement requires ABG to repay the advances in monthly
installments commencing February 2002 through December 2004 from the funds
received from Dynegy Marketing and Trade under the natural gas purchases and
sales agreement. The advances bear interest at a Eurodollar rate plus a margin
as defined in the agreement. Advances of $282 million were outstanding under
this agreement at December 31, 2001.

   Long-Term Debt.  The Company has a series of notes and debentures having
maturities that extend through 2026. Certain of these securities are redeemable
at the Company's option, in whole or in part, from time-to-time, at
formula-based redemption prices as defined in the applicable indenture.

   Certain of Dynegy's debt instruments contain routine provisions which, if
not met, could require early payment, additional collateral support or similar
actions. For Dynegy, these events include leverage ratios, bankruptcy or
insolvency, defaults on principal or interest payments and change of control
provisions. These instruments generally provide for a cure period should any of
these events occur.

   In February 2002, the Company issued $500 million of 8.75% Senior Notes due
2012. Interest will be paid on a semi-annual basis beginning in August 2002.
These notes can be redeemed prior to 2012, in whole or in part, at a price
equal to the redemption price included in the related prospectus supplement.

   Generation Facility Debt.  The Company has executed lease arrangements for
the purpose of constructing two generation facilities located in Georgia and
Kentucky. These arrangements require variable-rate interest only payments and
include an option to purchase the related assets at maturity of the facility
for a balloon payment equal to the principal balance on the financing.

   Other Obligations.  The Company previously accounted for four fully
collateralized generation lease arrangements as operating leases. As a result
of the three-year re-audit, the Company has determined it necessary to
recognize on its balance sheet the related assets as of the inception of these
arrangements, resulting in an increase in Property, Plant and Equipment of $65
million and $445 million at December 31, 2000 and 2001, respectively.

   In addition, an adjustment has been made to record a construction agency
liability of the Company related to the increase in Property, Plant and
Equipment. The construction agency liability is included in Accrued Liabilities
and Other in the accompanying Consolidated Balance Sheets, resulting in an
increase of $65 million and $445 million at December 31, 2000 and 2001,
respectively. The construction agency liability was secured by a note
receivable owed to the Company, which is included in Prepaids & Other Assets on
the accompanying Consolidated Balance Sheets, and there is no cash exposure to
the Company associated with this liability. This adjustment has no impact on
equity, net income or cash flows for any period.

                                     F-29

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


Note 8--INCOME TAXES

   The Company is subject to U.S. federal, foreign and state income taxes on
its operations. The following amounts have been adjusted to reflect the tax
impact of the restatement items discussed in the Explanatory Note to these
Consolidated Financial Statements. Components of income tax expense (benefit)
were:

<TABLE>
<CAPTION>
                                                   Year Ended
                                                  December 31,
                                                ----------------
                                                2001  2000  1999
                                                ----  ----  ----
                                                ($ in millions)
                <S>                             <C>   <C>   <C>
                Current tax expense:
                   Domestic.................... $168  $ 24  $--
                   Foreign.....................    9    52    3
                Deferred tax expense (benefit):
                   Domestic....................  146   178   39
                   Foreign.....................  (10)  (40)  18
                                                ----  ----  ---
                Income tax provision:.......... $313  $214  $60
                                                ====  ====  ===
</TABLE>

   Components of income before income taxes were as follows:

<TABLE>
<CAPTION>
                                                    Year Ended
                                                   December 31,
                                                  ---------------
                                                  2001  2000 1999
                                                  ----  ---- ----
                                                  ($ in millions)
               <S>                                <C>   <C>  <C>
               Income (loss) before income taxes:
                  Domestic....................... $753  $587 $134
                  Foreign........................  (17)   25   63
                                                  ----  ---- ----
                                                  $736  $612 $197
                                                  ====  ==== ====
</TABLE>

   Deferred income taxes are provided for the temporary differences between the
tax basis of the Company's assets and liabilities and their reported financial
statement amounts. Significant components of deferred tax liabilities and
assets were:

<TABLE>
<CAPTION>
                                                           December 31,
                                                          ---------------
                                                           2001    2000
                                                          ------- -------
                                                          ($ in millions)
       <S>                                                <C>     <C>
       Deferred tax assets:
          NOL carryforwards.............................. $    97 $   153
          AMT credit carryforwards and other.............      28      13
          Book/tax differences from liabilities..........     177     259
          Miscellaneous book/tax recognition differences.     266      65
                                                          ------- -------
              Total deferred tax assets..................     568     490
       Deferred tax liabilities:
          Investments....................................     756     119
          Depreciation and other property differences....     199     470
          Miscellaneous book/tax recognition differences.     198      15
                                                          ------- -------
              Total deferred tax liabilities.............   1,153     604
                                                          ------- -------
       Net deferred tax liability........................ $   585 $   114
                                                          ======= =======
</TABLE>

   Realization of the aggregate deferred tax asset is dependent on the
Company's ability to generate taxable earnings in the future and regular tax in
excess of tentative minimum tax. There was no valuation allowance

                                     F-30

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

established at December 31, 2001 or 2000, as management believes the aggregate
deferred asset is more likely than not to be fully realized in the future based
on management's estimates of future net income and related taxes.

   Income tax provisions for the years ended December 31, 2001, 2000 and 1999,
were equivalent to effective rates of 43 percent, 35 percent and 30 percent,
respectively. Differences between taxes computed at the U.S. federal statutory
rate and the Company's reported income tax provision were:

<TABLE>
<CAPTION>
                                                     Year Ended
                                                    December 31,
                                                  ---------------
                                                  2001 2000  1999
                                                  ---- ----  ----
                                                  ($ in millions)
              <S>                                 <C>  <C>   <C>
              Expected tax at U.S. statutory rate $258 $214  $ 69
              State taxes........................   17   12     3
              Foreign taxes......................    8    3    --
              Basis differentials and other......   30  (15)  (12)
                                                  ---- ----  ----
              Income tax provision............... $313 $214  $ 60
                                                  ==== ====  ====
</TABLE>

   At December 31, 2001, the Company had approximately $263 million of regular
tax net operating loss carryforwards, $28 million of AMT credit carryforwards
and $331 million of AMT net operating loss carryforwards. The net operating
loss carryforwards expire from 2009 through 2020. The AMT credit carryforwards
do not expire. Certain provisions of the Internal Revenue Code place an annual
limitation on the Company's ability to utilize tax carryforwards existing as of
the date of a 1995 and a 2000 business acquisition. Management believes such
carryforwards will be fully realized prior to expiration.

   The Company plans to reinvest earnings of foreign subsidiaries and no U.S.
taxes or foreign withholding taxes were provided on these earning in 1999, 2000
or 2001. It is not practicable to estimate the amount of unrecognized U.S.
deferred taxes or foreign withholding taxes, if any, that might be payable on
the actual or deemed remittance of such earnings. As of December 31, 2001 the
Company has no material undistributed earnings of foreign subsidiaries.

Note 9--PREFERRED SECURITIES

   In May 1997, NGC Corporation Capital Trust I ("Trust") issued, in a private
transaction, $200 million aggregate liquidation amount of 8.316% Subordinated
Capital Income Securities ("Trust Securities") representing preferred undivided
beneficial interests in the assets of the Trust. The Trust invested the
proceeds from the issuance of the Trust Securities in an equivalent amount of
8.316% Subordinated Debentures ("Subordinated Debentures") of the Company. The
sole assets of the Trust are the Subordinated Debentures. The Trust Securities
are subject to mandatory redemption in whole but not in part on June 1, 2027,
upon payment of the Subordinated Debentures at maturity, or in whole but not in
part at any time, contemporaneously with the optional prepayment of the
Subordinated Debentures, as allowed by the associated indenture. The
Subordinated Debentures are redeemable, at the option of the Company, in whole
at any time or in part from time to time, at formula-based redemption prices,
as defined in the indenture. The Subordinated Debentures represent unsecured
obligations of the Company and rank subordinate and junior in right of payment
to all Senior Indebtedness to the extent and in the manner set forth in the
associated indenture. The Company has irrevocably and unconditionally
guaranteed, on a subordinated basis, payment for the benefit of the holders of
the Trust Securities the obligations of the Trust to the extent the Trust has
funds legally available for distribution to the holders of the Trust
Securities, as described in the indenture. The Company may defer payment of
interest on the subordinated debentures as described in the indenture.

                                     F-31

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


Note 10--MINORITY INTEREST

   In June 2000, Dynegy and Black Thunder Investors LLC ("Investor") invested
in Catlin Associates, L.L.C. ("Catlin"), an entity that is consolidated by
Dynegy, with the Investor's ownership in Catlin reflected as Minority interest
on the consolidated balance sheet. Dynegy invested approximately $95 million in
Catlin and the Investor contributed $850 million. As a result of its
investment, the Investor received a preferred interest in Catlin, which holds
indirect economic interests in midwest generation assets, including the
coal-fired generation units in Illinois. This preferred interest is a passive
interest and generally is not entitled to management rights.

   On or before June 29, 2005, Dynegy is effectively obligated to purchase the
Investor's preferred interest for $850 million unless the Investor agrees to
extend or refinance this obligation. Alternatively, Dynegy could liquidate
Catlin's assets, including DMG's generating assets, to satisfy this obligation.

   In addition to granting Catlin a security interest in the stock of DMG,
Dynegy also has agreed to pay to DMG, to the extent that DMG has either
distributed or loaned money directly or indirectly to Dynegy, an amount not to
exceed $275 million. This payment obligation builds over time to a maximum of
$275 million in 2005. As of December 31, 2001, Dynegy's obligation to DMG under
the agreement was approximately $35 million. In addition, in the event
projected cash flow is insufficient to cover capital expenditures and certain
other fixed charges, Dynegy may be required to make an additional capital
contribution of up to $60 million to Catlin. The $60 million contingent
obligation expires on December 31, 2002.

   If the Company's senior unsecured debt is downgraded below investment grade
by both Standard & Poor's and Moody's, Dynegy would be required to post cash
collateral in an aggregate amount of $270 million and, within 30 days, obtain
an investment grade rating for the Catlin membership interest held by the
Investor by either Standard & Poor's or Moody's or obtain a waiver from the
Investor.

   If Dynegy were unable to obtain the required rating for the interest held by
the Investor or waiver, Dynegy would have the option of purchasing or
refinancing the Investor's interest in Catlin. If Dynegy was unable or
otherwise elected not to exercise this option, it could ultimately result in an
election by the Investor to cause the liquidation of the underlying generation
assets in an amount sufficient to redeem the Investor's interest. Given the
strategic importance of these generation assets, it is likely that Dynegy would
seek to refinance or purchase the Investor's interest under such circumstances.

   Minority interest on the consolidated balance sheet also includes
third-party investments in certain other consolidated entities, principally
relating to DMS operations. The net pre-tax results attributed to minority
interest holders in consolidated entities are classified in minority interest
expense in the accompanying statements of operations.

Note 11--COMMITMENTS AND CONTINGENCIES

   Set forth below is a description of our material legal proceedings. In
addition to the matters described below, Dynegy is a party to legal proceedings
arising in the ordinary course of its business. In the opinion of management,
the resolution of these ordinary course matters will not have a material
adverse effect on our financial condition, results of operations or cash flows.

   Dynegy records reserves for estimated losses from contingencies when
information available indicates that a loss is probable and the amount of the
loss is reasonably estimable in accordance with SFAS No. 5, "Accounting

                                     F-32

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

for Contingencies." For environmental matters, Dynegy records liabilities when
environmental assessment indicates that remedial efforts are probable and the
costs can be reasonably estimated.

   With respect to several of the items listed below, Dynegy has determined
that a loss is not probable or that any such loss, to the extent probable, is
not reasonably estimable. Notwithstanding the foregoing, Dynegy's management
has assessed the matters described below based on currently available
information and made an informed judgment concerning the likely outcome of such
matters, giving due consideration to the nature of the claim, the amount and
nature of damages sought and the probability of success. Management's judgment
may, as a result of facts arising prior to resolution of these matters or other
factors, prove inaccurate and investors should be aware that such judgment is
made subject to the known uncertainty of litigation.

   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. While MID's
pleadings indicate that it cannot measure its damages with specificity, it has
indicated that the actual damages sought from PG&E and Destec may exceed $25
million. MID also seeks a trebling of any portion of damages related to its
antitrust claims. By order dated February 2, 1999, the federal District Court
dismissed MID's state and federal antitrust claims against PG&E and Destec;
however, the Court granted MID leave of thirty days to amend its complaint to
state an antitrust cause of action. On March 3, 1999, MID filed an amended
complaint recasting its federal and state antitrust claims against PG&E and
Destec and restated its breach of contract claim against Destec. PG&E and
Destec filed motions to dismiss MID's revised federal and state antitrust
claims and a hearing on the motions to dismiss was held in July 1999. On August
20, 1999, the District Court again dismissed MID's antitrust claims against
PG&E and Destec, this time without leave to amend the complaint. As a result of
the dismissal of the antitrust claims, the District Court also dismissed the
pendant state law claims. MID has appealed the District Court's dismissal of
its suit to the Ninth Circuit Court of Appeal. Oral arguments before the Ninth
Circuit occurred on March 15, 2001. The Ninth Circuit has yet to deliver its
decision on the case. Although PG&E filed a Chapter 11 bankruptcy proceeding on
April 6, 2001, the automatic stay applicable in the proceeding will be lifted
to permit the Ninth Circuit to decide the pending appeal.

   Following dismissal of its federal court suit, MID filed suit in California
state court asserting breach of contract and tortious interference with
prospective economic relations claims against Destec and tortious interference
with contract and interference with prospective economic relations claims
against PG&E. Motions to dismiss MID's state court claims were heard by the
state court and by order dated April 6, 2000, MID was directed to amend its
complaint. MID filed its amended complaint on April 20, 2000, including Dynegy
as a defendant. Dynegy filed a motion to dismiss MID's amended complaint
against Dynegy, and the Court partially granted Dynegy's motion to dismiss
while also granting MID leave to amend its complaint. Before MID filed its
amended complaint, MID agreed with PG&E and Dynegy to execute a tolling
agreement on all claims and to dismiss the state court case until the federal
appeal is decided. After executing the tolling agreement, on October 23, 2000,
MID filed in the state court a Request for Dismissal, which the court granted
on October 25, 2000. Dynegy believes that it has meritorious defenses to MID's
claims and intends to vigorously defend against them. However, if the plaintiff
were to successfully prosecute its claims, Dynegy could be required to fund a
judgment in excess of $25 million.

   On November 3, 1999, the United States Environmental Protection Agency
("EPA") issued a Notice of Violation ("NOV") against Illinois Power Company
("IP") and, with the Department of Justice ("DOJ"), filed a complaint against
IP in the U.S. District Court for the Southern District of Illinois, No.
99C833. Subsequently,

                                     F-33

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

the DOJ and EPA amended the NOV and complaint to include Illinova Power
Marketing, Inc. (now known as Dynegy Midwest Generation Inc. ("DMG")) (IP and
DMG collectively the "Defendants"). Similar notices and lawsuits have been
filed against a number of other utilities. Both the NOV and complaint allege
violations of the Clean Air Act (the "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 the
Prevention of Significant Deterioration ("PSD") and/or the New Source
Performance Standards regulations. When such activities occur and they are not
otherwise exempt the Act and related regulations generally require that
generating facilities meet more stringent emissions standards, which may entail
the installation of potentially costly pollution control equipment. The DOJ
amended its complaint to assert the claims found in the NOV. The Defendants
filed an answer denying all claims and asserting various specific defenses. By
order dated October 19, 2001, a trial date of February 11, 2003 has been set.
The initial trial is limited to determining whether a violation occurred.

   The regulations under the Act provide certain exemptions from the
applicability of these provisions 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 exemptions, the Act and
regulations also require that the activities cause certain levels of increases
in emissions and there were no such 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 include exemptions for increased hours of
operations or production rate and the PSD regulations exclude increases in
emissions resulting from demand growth. None of the Defendants' other
facilities are covered in the complaint and NOV, but the EPA has officially
requested information concerning activities at the Defendants' Vermilion, Wood
River, Hennepin and Danskammer Plants. It is possible that the EPA will
eventually commence enforcement actions against those plants as well. The
asset(s) subject to the complaint are part of the consolidated assets of Dynegy.

   The EPA has the authority to seek penalties for the alleged violations in
question at the rate of up to $27,500 per day for each violation. The EPA may
also seek to require installation of the "best available control technology"
(or the equivalent) at the Baldwin Station, and possibly at the Vermilion, Wood
River, Hennepin and Danskammer Plants if the EPA successfully prosecutes
enforcement actions against those plants. The Company has recorded a reserve
for penalties that could be imposed if the EPA were to successfully prosecute
its claims based on its assessment of the probability and estimability thereof.

   The National Energy Policy Report issued in May 2001 by the National Energy
Policy Development Group recommended that the EPA Administrator examine the new
source review regulations, including the PSD regulations, and report to the
President within 90 days on the impact of new source review on investment in
new utility and refinery generation capacity, energy efficiency and
environmental protection. The report also recommended that the Attorney General
review existing enforcement actions regarding new source review to ensure that
the enforcement actions are consistent with the Clean Air Act and its
regulations. The EPA Administrator announced in August 2001 that the review
would be completed in September 2001. The events of September 11, 2001 have
resulted in further delay of the EPA review, which remains ongoing. The
Department of Justice issued its report concerning the existing enforcement
actions on January 15, 2002. The report concluded that EPA has a reasonable
legal basis for proceeding with the cases.

                                     F-34

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


   Tampa Electric Company ("TECO") and the government agreed to a Consent
Decree to resolve the similar case brought against TECO and that Consent Decree
was entered by the court hearing that case in 2000. Two other utilities,
Virginia Power and Cinergy, reached agreements in principle with the United
States in 2000 concerning their possible liability for similar alleged
violations, but these agreements have still not been finalized. Additionally,
PSEG Fossil LLC entered into a consent decree in January 2002 to resolve
similar claims. Generally, the TECO Consent Decree and the settlements and
agreements in principle would require the utilities to pay civil fines; fund
various environmental projects; reduce nitrogen oxides, sulfur oxides,
particulate matter and mercury emissions through the installation of pollution
control devices over periods extending through 2012 to 2013; and forfeit
certain emission allowances.

   The Company believes that it has meritorious defenses against these claims
and will vigorously defend against them. However, Dynegy may be required to
incur significant capital expenditures in connection with the installation of
pollution control devices and related remedial actions. To the extent the
Company is required to incur material capital expenditures to resolve this
matter, the Company's financial position and results of operations could be
material adversely affected.

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

    1. Gordon v. Reliant Energy Inc., et al. was filed on November 27, 2000 in
       San Diego Superior court.

    2. Hendricks v. Dynegy Power Marketing Inc., et al. was filed on November
       29, 2000 in a San Diego Superior Court.

    3. People of the State of California v. Dynegy Power Marketing Inc., et al.
       was filed on January 19, 2001 in San Francisco Superior Court.

    4. Pier 23 Restaurant v. PG&E Energy Trading, et al. was filed on January
       24, 2001 in San Francisco Superior Court.

    5. Sweetwater Authority et al. v. Dynegy Inc., et al. was filed on January
       16, 2001 in San Diego Superior Court.

    6. Bustamante v. Dynegy Inc., et al. was filed on May 2, 2001 in Los
       Angeles Superior court. The suit was filed on behalf of California
       taxpayers by Lieutenant Governor Cruz Bustamante and Assembly Woman
       Barbara Matthews, both acting in their capacity as taxpayers and not in
       their capacity as elected officials.

   The six class action lawsuits are based on the events occurring in the
California power market during the summer of 2000. The complaints allege
violations of California's Business and Professions Code, Unfair Trade
Practices Act and various other statutes. Specifically, the named plaintiffs
allege that the defendants, including the owners of in-state generation and
various power marketers, conspired to manipulate the California wholesale power
market to the detriment of California consumers. Included among the acts
forming the basis of the plaintiffs' claims are the alleged improper sharing of
generation outage data, improper withholding of generation capacity and the
manipulation of power market bid practices. The plaintiffs seek unspecified
treble damages. The Bustamante suit includes claims against various Dynegy
entities, including Dynegy Inc. and Dynegy Marketing and Trade, as well as
against three corporate officers individually. The allegations in this suit are
similar to those

                                     F-35

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

in the other five suits, with the exception that the Bustamante suit includes a
claim of unfair business practices based on "price gouging" during an emergency
declared by Governor Gray Davis.

   The six lawsuits are at preliminary stages. Defendants in the six lawsuits
have yet to file answers. The plaintiffs filed motions to remand five of the
cases to state court. In respect to the sixth case, the Bustamante suit, the
parties agreed that, based on a judge's decision to remand the other five
lawsuits, the case should go back to state court. All six lawsuits will be
consolidated before a single California state court judge.

   After the actions were remanded, the parties agreed that they should be
coordinated. On December 12, 2001, the California Judicial Council resolved a
dispute among the parties as to the county in which the actions should be
coordinated and assigned the Coordination Proceedings (Nos. 4204 & 4205) to the
Superior Court of California, County of San Diego. On December 20, 2001, the
presiding judge of the San Diego Superior Court designated Judge Sammartino as
the Coordination Trial Judge for the Coordination Proceedings. On January 17,
2002, Judge Sammartino set a preliminary trial conference for March 4, 2002 to,
among other things, set schedules for: (a) determining legal issues that might
expedite disposition of the Coordination Proceedings; (b) establishing a
discovery schedule; and (c) resolving matters pertinent to the class action
issue.

   The defendants in the six lawsuits have formed various joint defense groups
in an effort to coordinate the defense of the claims and to share certain costs
of defense. The Company believes that it has meritorious defenses to these
claims and intends to vigorously defend against them. Dynegy is unable to
estimate the range of possible loss that could be incurred with respect to
these lawsuits. However, an adverse result in any of these proceedings could
have a material adverse effect on our financial condition and results of
operations.

   On March 11, 2002, the California Attorney General filed, on behalf of the
People of the State of California, complaints in San Francisco Superior Court
against several energy generators, including those owned directly by West Coast
Power and indirectly by Dynegy Inc. The complaints allege that since June 1998,
these generators sold power in the open market that should have been held in
emergency reserve for the State. The complaint against the Company and certain
of its subsidiaries seeks unspecified amounts of restitution and return profits
as well as civil penalties of $2,500 for each alleged violation. The Company
believes that it has meritorious defenses to these claims and intends to
vigorously defend against them. Dynegy is unable to estimate the range of
possible loss that could be incurred with respect to these lawsuits. However,
an adverse result in any of these proceedings could have a material adverse
effect on our financial condition and results of operations.

   In response to the filing of a number of complaints challenging the level of
wholesale prices, the Federal Energy Regulatory Commission ("FERC") initiated a
staff investigation and issued an order on December 15, 2000 implementing a
series of wholesale market reforms and made subject to refund all spot market
sales through the California Independent System Operator (the "ISO") and the
California Power Exchange (the "PX") markets beginning October 2, 2000. FERC
also included an interim price review procedure for prices above a $150/MW hour
"breakpoint" on sales to the ISO and PX. The order does not prohibit sales
above the "breakpoint," but the seller was subject to weekly reporting and
monitoring requirements. In an order issued March 9, 2001, FERC determined that
only sales during so-called "Stage 3" emergency hours would be subject to
refund beginning January 1, 2001 though sales between October 2, 2000 and
December 31, 2000 remained subject to refund. Various parties sought rehearing
of this market mitigation measure and, as explained below, the FERC ruled on
the matter in an order issued on July 25, 2001.

   On April 26, 2001, the FERC revised its market mitigation plan, effective
May 29, 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.

                                     F-36

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


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

   On July 25, 2001, as modified on December 31, 2001, the FERC initiated
refund hearing procedures related to California wholesale spot market sales
that occurred between October 2, 2000 and June 20, 2001. Dynegy Power Marketing
(as Scheduling Coordinator for West Coast Power LLC) is subject to possible
refunds. The July 25/th/ order supercedes prior refund orders issued by the
FERC that cover this period. In the July 25/th/ order, the FERC developed a
methodology to redetermine allegedly competitive market outcomes during each
hour of this period. An administrative law judge has been appointed to
determine: (1) the mitigated price for power during each hour of the refund
period; (2) the amount of refunds owed by each supplier according to the FERC's
methodology; and (3) the amount owed to each supplier (with separate quantities
due from each entity) by the ISO, the investor-owned utilities and the State of
California. Any refunds owed would then be offset against amounts not paid.
Management does not expect the administrative law judge to issue his findings
before August 2002. Dynegy is actively participating in these proceedings and
is appealing these and related orders.

   On December 19, 2001, FERC issued an order that in part focused on the
FERC-established price mitigation plan, which includes a formula prescribed by
FERC to determine maximum rates for wholesale power transactions in spot
markets in the Western Systems Coordinating Council between June 21, 2001 and
September 30, 2002. In this order, the FERC made some changes in its mitigation
plan. Certain of these changes were put in place retroactively and might have
the effect of reducing the applicable maximum rate in past periods. Dynegy
Power Marketing and West Coast Power have sought rehearing or clarification of
this decision, pointing out that various other aspects of the December 19
order, coupled with other recent FERC orders, indicate that the FERC did not
intend to modify past prices under this mitigation plan. The Company cannot
predict how the FERC will ultimately resolve this matter.

   On February 13, 2002, the FERC initiated an investigation of possible
manipulation of natural gas and power prices in the western United States
during the period from January 2001 through the present. Dynegy has been active
in these markets during the relevant period and, as a result, expects that its
pricing policies will be investigated. Management believes that much of what
would be investigated has already been examined pursuant to other
investigations by government entities and in private litigation. To date, there
has been no finding of market manipulation by Dynegy in these markets and
management does not believe that any factual basis to support such a finding
exists.

   In addition to the FERC investigation discussed above, several state and
other federal regulatory investigations and complaints have commenced in
connection with the wholesale electricity prices in California and other
neighboring Western states to determine the causes of the high prices and
potentially to recommend

                                     F-37

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

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 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.
Additionally, on February 25, 2002, the California Public Utilities Commission
and the California Electricity Oversight Board filed complaints with the FERC
asking that it void or reform power supply contracts between DWR and, among
others, West Coast Power. The complaints allege that prices under the contracts
exceed just and reasonable prices permitted under the Federal Power Act. While
the Company believes the terms of its contracts are just and reasonable and do
not reflect alleged market manipulation, it cannot predict how the FERC will
respond to these complaints.

   Management is continually assessing Dynegy's exposure, as well as its
exposure through West Coast Power, relative to its California receivables and
establishes reserves for contingent liabilities where the amount of potential
loss is determined to be probable and estimable. During 2001, 2000 and 1999,
our share of reserves recorded by West Coast Power totalled $122.5 million,
$24.5 million and $4.7 million, respectively. Our share of the total reserve at
December 31, 2001 and 2000 was $151.8 million and $29.3 million, respectively.

   On December 2, 2001, Enron Corp. and Enron Transportation Services Co.
(collectively, "Enron") filed suit against Dynegy and Dynegy Inc. in the United
States Bankruptcy Court for the Southern District of New York, Adversary
Proceeding No. 01-03626 (AJG). Enron claims that Dynegy materially breached the
Merger Agreement dated November 9, 2001 between Enron and Dynegy and related
entities by wrongfully terminating that Agreement on November 28, 2001. Enron
also claims that Holdings wrongfully exercised its option to take ownership of
Northern Natural under an Option Agreement dated November 9, 2001. Enron seeks
damages in excess of $10 billion and declaratory relief against Dynegy for
breach of the Merger Agreement. Enron also seeks unspecified damages against
Dynegy and Dynegy Inc. for breach of the Option Agreement. Dynegy filed an
answer on February 4, 2002, denying all material allegations. Dynegy
subsequently filed a motion to transfer venue in the proceeding to the United
States District Court for the Southern District of Texas (Houston division).
Discovery has not yet commenced.

   On December 20, 2001, Dynegy and Dynegy Inc. were sued by Ann C. Pearl and
Joel Getzler in the United States District Court for the Southern District of
New York, Cause No. 01 CV 11652. Plaintiffs filed the lawsuit as a purported
class action on behalf of all persons or entities who owned common stock of
Enron Corp. as of November 28, 2001. Plaintiffs allege that they are intended
third party beneficiaries of the Merger Agreement dated November 9, 2001
between Enron and Dynegy and related entities. Plaintiffs claim that Dynegy
materially breached the Merger Agreement by, inter alia, wrongfully terminating
that Agreement. Plaintiffs also claim that Dynegy breached the implied covenant
of good faith and fair dealing. Plaintiffs seek an award of damages and other
relief. On February 4, 2002, Dynegy filed a notice of motion to dismiss or
transfer venue to the United States District Court for the Southern District of
Texas (Houston Division). Discovery has not yet commenced.

   On January 3, 2002, Dynegy and Dynegy Inc. were sued by Bernard D. Shapiro
and Peter Strub in the 129th Judicial District Court for Harris County, Texas,
Cause No. 2002-00080. Plaintiffs filed the lawsuit as a purported class action
on behalf of all persons or entities who owned common stock of Enron Corp. as
of November 28, 2001. Plaintiffs allege that they are intended third party
beneficiaries of the Merger Agreement dated November 9, 2001 between Enron and
Dynegy and related entities. Plaintiffs claim that Dynegy materially breached
the Merger Agreement by, inter alia, wrongfully terminating that Agreement.
Plaintiffs also claim that Dynegy breached the implied covenant of good faith
and fair dealing. Plaintiffs seek an award of damages and

                                     F-38

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

other relief. Dynegy filed an answer on February 4, 2002, denying all
allegations. Discovery has not yet commenced.

   The Company believes that it has meritorious defenses to the allegations in
Enron's adversary proceeding and the other cases arising out of the terminated
merger are without merit and will vigorously defend against these claims. Given
the magnitude of Enron's claims, however, an adverse result in these
proceedings could have a material adverse effect on the Company's financial
position and results of operations.

   Purchase Obligations.  In conducting its operations, the Company routinely
enters into long-term commodity purchase and sale commitments, as well as
agreements that commit future cash flow to the lease or acquisition of assets
used in its businesses. These commitments are typically associated with
commodity supply arrangements, capital projects, reservation charges associated
with firm transmission, transportation, storage and leases for office space,
equipment, plant sites, ships and power generation assets. The following
describes the more significant commitments outstanding at December 31, 2001.

   The Company has $44 million of unconditional purchase obligations related to
the purchase of gas, coal, systems design and power purchase agreements. The
Company routinely enters into supply and market contracts for the purchase and
sale of electricity, some of which contain fixed capacity payments. Such
obligations are generally payable on a ratable basis, the terms of which extend
through November 2014. In return for such fixed capacity payments, Dynegy
receives volumes of electricity at agreed prices, which it then may re-market.
These fixed capacity payments totaled approximately $2 billion at December 31,
2001. The capacity payments for contracts that are accounted for on an accrual
basis, which are not already recorded at fair value on the balance sheet,
exceed the market value of electricity available for sale under these contracts
by $27 million. The market value of electricity available for sale under these
contracts has not been reduced for credit or price reserves.

   Dynegy has other firm capacity payments related to storage and
transportation of natural gas and transmission of electricity. Such
arrangements are routinely used in the physical movement and storage of energy
consistent with the Company's business strategy. The total of such obligations
was $614 million as of December 31, 2001, with $302 million of the $614 million
due after 2006.

   The Company is engaged in a continual capital asset expansion program
consistent with its business plan and growth strategies. The emphasis of this
program is on the acquisition or construction of strategically located power
generation assets. Consistent with this strategy and as a result of the long
lead time required by industry manufacturers, the Company has executed or is
negotiating purchase orders to acquire at least 11 gas-fired turbines,
representing a capital commitment of approximately $370 million. Commitments
under these purchase orders are generally payable consistent with the delivery
schedule. Approximately 95% are scheduled to be delivered by the end of 2006.
The purchase orders include milestone requirements by the manufacturer and
provide Dynegy with the ability to cancel each discrete purchase order
commitment in exchange for a fee, which escalates over time. At December 31,
2001, the fee would have been approximately $12 million.

   Advance Agreement.  In 1997, Dynegy received cash from a gas purchaser as an
advance payment for future natural gas deliveries over a ten-year period
("Advance Agreement"). As a condition of the Advance Agreement, Dynegy entered
into a natural gas swap with a third party under which Dynegy became a
fixed-price payer on identical volumes to those to be delivered under the
Advance Agreement at prices based on current market rates. The cash receipt is
included as deferred revenue in "Other Long-Term Liabilities" on the
Consolidated Balance Sheets and is ratably reduced as gas is delivered to the
purchaser under the terms of the Advance Agreement. The balance at December 31,
2001 approximated $65 million. The Advance Agreement

                                     F-39

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

contains certain non-performance penalties that impact both parties and as a
condition precedent, Dynegy purchased a surety bond in support of its
obligations under the Advance Agreement.

   Other Minimum Commitments.  During 2001 and prior years, the Company entered
into lease arrangements associated with natural gas-fired generating facilities
and natural gas liquids transportation assets, some of which are accounted for
as operating leases. Under the terms of certain of these arrangements, the
Company provided residual value guarantees associated with the leased assets.
Pursuant to these guarantees, the Company has the option to acquire at the end
of the lease term the leased assets for a purchase price determined at lease
inception and estimated to represent fair market value at the end of the lease
term. If the Company does not choose to purchase the leased asset, it must
perform under the terms of the residual value guarantee. At lease inception,
the Company as lessee, guaranteed to the owner of the leased asset that the
leased asset would maintain a value equal to at least 80-85% (depending on the
particular lease contract) of its originally estimated fair value. In each of
these arrangements, the Company will receive any sales proceeds that the owner
of the leased asset receives in excess of the originally estimated fair value.
If the value of the asset is less than 80-85% of the fair market value at lease
termination, the Company is obligated to pay the owner the difference.

   Minimum commitments in connection with office space, equipment, plant sites
and other leased assets at December 31, 2001, were as follows: 2002 - $116
million; 2003--$117 million; 2004--$181 million, 2005--$240 million; 2006--$94
million and beyond--$1.4 billion.

   Rental payments made under the terms of these arrangements totaled--$97
million in 2001, $75 million in 2000 and $31 million in 1999.

   Guarantees.  The Company has $286 million of surety bonds as of December 31,
2001 in which Dynegy indemnifies the respective surety bond companies.
Approximately $202 million of these contingent financial commitments expire in
2002, however, these bonds are generally renewed on a rolling twelve-month
basis.

   As mentioned above, the Company has residual value guarantees related to
certain leases. At December 31, 2001, the residual value guarantees totaled
approximately $214 million. Additionally, the Company has made certain
guarantees related to West Coast Power for approximately $56 million.
Approximately $31 million of this $56 million has a cash collateralization
requirement if the Company's debt is downgraded to below investment grade.
Additionally, the Company has posted a $4 million letter of credit for West
Coast Power that expires in 2002.

   Other guarantees at December 31, 2001 include additional letters of credit
and uncommitted lines of $470 million and parental guarantees of debt of
approximately $3 million in connection with its power generation projects.

Note 12--REGULATORY ISSUES

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

                                     F-40

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


Note 13--CAPITAL STOCK

   All of Dynegy's outstanding equity securities are held by its parent, Dynegy
Inc. There is no established trading market for such securities, and they are
not traded on any exchange.

   Stock Options.  The Company's parent grants stock options, from time to
time, to certain employees of the Company. Options granted to and exercised by
Company employees are treated as capital transactions in the accompanying
statements, with the associated tax attributes included in the determination of
the Company's income tax provision. Each option granted is valued at an option
price, which ranges from $1.47 per share to $57.95 per share at date of grant.
The difference, if any, between the option price and the fair market value of
each option on the date of grant is recorded as compensation expense over the
respective vesting period. Most options granted at prices below fair market do
not become exercisable until the fifth anniversary date of the grant, at which
time they become fully exercisable. Options granted at market value vest and
become exercisable ratably over a three-year period. Compensation expense
related to options granted totaled $9 million, $15.4 million and $6.0 million
for the years ended December 31, 2001, 2000 and 1999, respectively. Total
options outstanding and exercisable for 2001, 2000 and 1999 were (options in
thousands) as follows:

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                 ---------------------------------------------------------------
                                         2001                  2000                 1999
                                 --------------------- -------------------- --------------------
                                 Options Option Price  Options Option Price Options Option Price
                                 ------- ------------- ------- ------------ ------- ------------
<S>                              <C>     <C>           <C>     <C>          <C>     <C>
Outstanding at beginning of
  period........................ 19,768  $ 1.47-$57.02 24,022  $ 1.47-16.62 25,777  $1.47-$15.67
Granted.........................  7,771  $27.80-$57.95  4,258  $22.01-56.50  4,203  $1.47-$16.62
Exercised....................... (2,217) $ 1.47-$38.34 (7,531) $ 1.47-22.01 (4,658) $1.47-$13.68
Cancelled or expired............   (521) $ 1.47-$56.50   (981) $ 1.47-57.02 (1,232) $1.47-$13.77
Other, contingent share issuance     --  $          --     --  $         --    (68) $1.47-$ 4.10
                                 ------  ------------- ------  ------------ ------  ------------
Outstanding at end of period.... 24,801  $ 1.47-$57.95 19,768  $ 1.47-57.02 24,022  $1.47-$16.62
                                 ======  ============= ======  ============ ======  ============
Exercisable at end of period.... 11,168  $ 1.47-$57.02 11,928  $1.47-$17.17  9,983  $1.47-$15.67
                                 ======  ============= ======  ============ ======  ============
Weighted average fair value
of options granted during the
  period at market..............         $       21.58         $      19.14         $       7.76
                                         =============         ============         ============
Weighted average fair value of
  options granted during the
  period at below market........         $          --         $         --         $       9.65
                                         =============         ============         ============
</TABLE>

                                     F-41

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


   Options outstanding as of December 31, 2001 (shares in thousands) are
summarized below:

<TABLE>
<CAPTION>
                                    Options Outstanding                           Options Exercisable
                  -------------------------------------------------------- ----------------------------------
                  Number of Options   Weighted Average                     Number of Options
Range of Exercise  Outstanding at   Remaining Contractual Weighted Average  Exercisable at   Weighted Average
Prices            December 31, 2001     Life (Years)       Exercise Price  December 31, 2001  Exercise Price
----------------- ----------------- --------------------- ---------------- ----------------- ----------------
<S>               <C>               <C>                   <C>              <C>               <C>
 $1.47--$5.80           7,876                6.4               $ 2.80            3,793            $ 2.12
 $5.81--$11.59          2,468                6.3               $ 9.99            2,430            $ 9.98
 $11.60--$17.39         5,921                6.6               $15.72            4,581            $15.46
 $17.40--$23.18            16                8.0               $22.45                4            $22.77
 $23.19--$28.98           742                8.6               $23.91              155            $24.14
 $28.99--$34.77         2,472                9.0               $34.33                5            $32.38
 $34.78--$40.57           220                8.8               $37.79               65            $37.26
 $40.58--$46.36           505                9.4               $43.70              107            $43.34
 $46.37--$52.16         4,466                9.2               $47.24               20            $48.62
 $52.17--$57.95           115                9.1               $56.25                8            $54.66
                       ------                                                   ------
                       24,801                                                   11,168
                       ======                                                   ======
</TABLE>

   Pursuant to terms of the Illinova acquisition, certain vesting requirements
on outstanding options were accelerated and the option shares and strike prices
were subject to the exchange ratios described in the acquisition documents.
Additionally, Dynegy's parent instituted new option plans on the effective date
of the acquisition.

   The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model, with the following weighted-average
assumptions used for grants in 2001, 2000 and 1999: dividend per year of $0.30
per share per annum for 2001 and 2000 and a historical dividend of $0.04 per
share for 1999; expected volatility of 46.4 percent, 44 percent and 40.3
percent, respectively; risk-free interest rate of 4.26 percent, 6.30 percent
and 6.42 percent, respectively; and an expected life of ten years for all
periods. As stated previously, the Company accounts for its stock option plan
in accordance with APB No. 25. Had compensation cost been determined on a fair
value basis consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income would have approximated $379 million,
$374 million and $128 million for the years ended December 31, 2001, 2000 and
1999, respectively.

Note 14--BUSINESS COMBINATIONS AND OTHER ACQUISITIONS

   In the first quarter of 2001, Dynegy completed the acquisition of 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 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. The acquisition of these
facilities established Dynegy's physical presence in the region. 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 plants
and equipment and agreed to lease it back for terms expiring within 34 years,
exclusive of renewal options.

   In the fourth quarter of 2001, Dynegy completed the purchase of BGSL. Under
the terms of the purchase agreement, Dynegy paid approximately (Pounds)421
million (approximately $595 million at November 28, 2001) for

                                     F-42

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

BGSL and its existing assets. BGSL's results of operations are included in
Dynegy's consolidated statement of operations beginning December 1, 2001. A
condensed balance sheet as of the acquisition date is as follows (in millions):

<TABLE>
                      <S>                            <C>
                      Current assets................ $ 57
                      Property, plant, and equipment  792
                      Goodwill......................    9
                                                     ----
                      Total assets acquired.........  858
                                                     ----
                      Current liabilities...........   56
                      Long-term liabilities.........  207
                                                     ----
                      Total liabilities assumed.....  263
                                                     ----
                      Net assets acquired........... $595
                                                     ====
</TABLE>

   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 acquisition of BGSL established Dynegy's physical presence in the
United Kingdom.

   Consideration paid for this acquisition of businesses was as follows (in
millions):

<TABLE>
<CAPTION>
                                                    BGSL
                                                    ----
                       <S>                          <C>
                       Cash Purchase of Stock...... $595
                       Capital Stock Issued........   --
                       Liabilities Assumed.........  263
                       Subordinated capital assumed   --
                                                    ----
                       Total Consideration......... $858
                                                    ====
</TABLE>

Note 15--EMPLOYEE COMPENSATION, SAVINGS AND PENSION PLANS

   Corporate Incentive Plan.  Dynegy's parent maintains a discretionary
incentive plan to provide employees competitive and meaningful rewards for
reaching corporate and individual objectives. Specific awards are at the
discretion of the Compensation Committee of the Dynegy Inc. Board of Directors
("Compensation Committee").

   401(k) Savings Plan.  The Company's parent established the Dynegy Inc.
401(k) Savings Plan ("Dynegy Plan"), which meets the requirements of Section
401(k) of the Internal Revenue Code, and is a defined contribution plan subject
to the provisions of the Employee Retirement Income Security Act of 1974
("ERISA"). The Plan and related trust fund are established and maintained for
the exclusive benefit of participating employees in the United States and
certain expatriates. Similar plans are available to other employees resident in
foreign countries and are subject to the laws of each country. All employees of
certain entities are eligible to participate in the Plan. Employee pre-tax
contributions to the Plan are matched 100%, up to a maximum of five percent of
base pay, subject to IRS limitations. Vesting in Company contributions is based
on years of service. The Company may also make discretionary contributions to
employee accounts, subject to the Company's performance. Matching contributions
to the Plan and discretionary contributions are made in Dynegy common stock.
The Company discontinued the additional 5% profit sharing contribution to
active employee accounts in 2001. However, active employees who normally would
have received the profit sharing contribution under the Dynegy Plan began
participating in the pension plan in 2001 (see below).

                                     F-43

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


   Certain eligible employees participate in the Dynegy Northeast Generation,
Inc. Savings Incentive Plan ("Northeast Plan"), which meets the requirements of
Section 401(k) of the Internal Revenue Code and is a defined contribution plan
subject to the provisions of ERISA. The Company matches either 24% or 50% of
employee contributions to the Northeast Plan. The Company guaranteed match is
subject to a maximum of six or eight percent of base pay, subject to IRS
limitations. Employees are immediately 100% vested in Company contributions.
Matching contributions to the Northeast Plan are made in cash.

   During the years ended December 31, 2001, 2000 and 1999, Dynegy recognized
aggregate costs related to these employee compensation plans of $17 million,
$15 million and $25 million, respectively.

   Pension and Other Post-Retirement Benefits.  The Company has various defined
benefit pension plans and post-retirement benefit plans. All domestic employees
participate in the pension plans, but only some of the Company's domestic
employees participate in the other post-retirement benefit plans. The Company
added a cash balance feature effective for 2001 and thereafter with respect to
employees who would have otherwise received a profit sharing contribution under
the Dynegy Plan for 2001 and thereafter (the contribution credit under such
cash balance feature shall generally be 6% of base pay). The following tables
contain information about these plans on a combined basis:

<TABLE>
<CAPTION>
                                                                   Pension
                                                                  Benefits  Other Benefits
                                                                  --------  --------------
                                                                  2001 2000  2001    2000
                                                                  ---- ----  -----   ----
                                                                     ($ in millions)
<S>                                                               <C>  <C>  <C>      <C>
Projected benefit obligation, beginning of the year.............. $ 9  $ 9  $  --    $--
   Business combination..........................................  14   --      5     --
   Service cost..................................................   1   --     --     --
   Interest cost.................................................   2    1      1     --
   Plan amendments...............................................  --   --     --     --
   Actuarial (gain) loss.........................................   1   (1)    --     --
   Benefits paid.................................................  (1)  --   (--)     --
                                                                  ---  ---   -----   ---
Projected benefit obligation, end of the year.................... $26  $ 9  $   6    $--
                                                                  ===  ===   =====   ===
Fair value of plan assets, beginning of the year................. $12  $10  $  --    $--
Business combination.............................................  16   --     --     --
Actual return on plan assets.....................................  (1)   2     --     --
Employer contributions...........................................  --   --     --     --
Participant contributions........................................  --   --     --     --
Benefits paid....................................................  (1)  --     --     --
                                                                  ---  ---   -----   ---
Fair value of plan assets, end of the year....................... $26  $12  $  --    $--
                                                                  ===  ===   =====   ===
Funded status.................................................... $--  $ 3  $  (6)   $--
Unrecognized prior service costs.................................  --   --     --     --
Unrecognized actuarial gain......................................  (2)  (7)    --     --
                                                                  ---  ---   -----   ---
Accrued benefit liability........................................ $(2) $(4) $  (6)    --
                                                                  ===  ===   =====   ===
Amounts recognized in the consolidated balance sheets consist of:
Prepaid benefit cost............................................. $ 2  $--  $  --    $--
Accrued benefit liability........................................  (4)  (4)    (6)    --
                                                                  ---  ---   -----   ---
Net amount recognized............................................ $(2) $(4) $  (6)   $--
                                                                  ===  ===   =====   ===
</TABLE>

                                     F-44

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


<TABLE>
<CAPTION>
                                                        Pension      Other
                                                       Benefits    Benefits
                                                      ----------  -----------
                                                      2001  2000   2001  2000
                                                      ----  ----  -----  ----
   <S>                                                <C>   <C>   <C>    <C>
   Weighted Average Assumptions:
      Discount rate at December 31................... 7.50% 7.50%  7.50%  --
      Expected return on plan assets as of January 1. 8.96% 8.00%  9.50%  --
      Rate of compensation increase.................. 4.11% 3.50%  4.50%  --
      Medical trend--initial trend...................   --    --  12.00%  --
      Medical trend--ultimate trend..................   --    --   5.00%  --
      Medical trend--year of ultimate trend..........   --    --   2015   --
</TABLE>

   The changes in the projected benefit obligations and in plan assets
attributable to business combination in 2001 are the result of the Central
Hudson acquisition.

   The components of net periodic benefit cost were:

<TABLE>
<CAPTION>
                                                Pension Benefits Other Benefits
                                                -------------    --------------
                                                2001   2000 1999 2001 2000 1999
                                                ----   ---- ---- ---- ---- ----
                                                       ($ in millions)
  <S>                                           <C>    <C>  <C>  <C>  <C>  <C>
  Service cost benefits earned during period... $ 1    $--  $--  $--  $--  $--
  Interest cost on projected benefit obligation   2      1    1    1   --   --
  Expected return on plan assets...............  (2)    (1)  (1)  --   --   --
  Amortization of unrecognized actuarial gain..  (1)    --   --   --   --   --
                                                ---    ---  ---  ---  ---  ---
  Net periodic benefit cost.................... $--    $--  $--  $ 1  $--  $--
  Additional cost due to curtailment...........  --     --   (2)  --   --   --
                                                ---    ---  ---  ---  ---  ---
  Total net periodic benefit cost (income)..... $--    $--  $(2) $ 1  $--  $--
                                                ===    ===  ===  ===  ===  ===
</TABLE>

   Impact of a 1% increase/decrease in medical trend:

<TABLE>
<CAPTION>
                                                Increase Decrease
                                                -------- --------
                                                 ($ in millions)
               <S>                              <C>      <C>
               Aggregate impact on service cost
                 and interest cost.............   $--      $--
               Impact on accumulated post-
                 retirement benefit
                 obligation....................   $ 1      $(1)
</TABLE>

Note 16--RELATED PARTY TRANSACTIONS

   In addition to related party transactions described elsewhere herein, the
following are additional items requiring disclosure.

   Transactions with Chevron U.S.A. Inc. result from purchases and sales of
natural gas, NGLs and crude oil between subsidiaries of Dynegy and Chevron
U.S.A. Inc. affiliates. Management believes that these transactions are
executed at prevailing market rates. During the years ended December 31, 2001,
2000 and 1999, the Company recognized in its statement of operations aggregate
sales to this significant shareholder of $1.3 billion,

                                     F-45

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)

$1.4 billion and $1.1 billion, respectively. In the same years, purchases from
this shareholder were $3.6 billion, $3.1 billion and $2.0 billion, respectively.

   The Company also holds investments in three joint ventures in which Chevron
U.S.A. or its affiliates are also investors. These investments include a 22.9%
ownership interest in Venice Energy Services Company, L.L.C., which holds a
pipeline gathering system, processing plant, fractionator and an underground
NGL storage facility in Louisiana; a 39.2% ownership interest in West Texas LPG
Pipeline Limited Partnership, which holds a regulated NGL transportation
pipeline that runs from West Texas to Mont Belvieu, Texas; and a 50% ownership
interest in Nevada Cogeneration Associates #2, a power generation facility.
During the years ended December 31, 2001, 2000 and 1999, the Company's portion
of the net income from the Venice Energy, West Texas and Nevada Cogeneration
joint ventures was approximately $4.6 million, $5.5 million and $3.8 million,
respectively; approximately $9.6 million, $5.6 million and $2.2 million,
respectively; and approximately $7.0 million, $5.0 million and $3.5 million,
respectively.

   The Company routinely conducts business with subsidiaries of Dynegy Inc.
that are not part of this consolidated group. As a result of such transactions,
the Company has an approximate $2.9 million and $6.2 million accounts payable,
affiliated balance at December 31, 2001 and 2000, respectively.

   Additionally, certain subsidiaries of the Company received revenues of
approximately $459 million and $557 million from IP during the years ended
December 31, 2001 and 2000, respectively. These revenues relate to a PPA that
we have with IP that provides IP the right to purchase power from us for a
primary term extending through December 31, 2004. The primary term may be
extended on an annual basis, subject to concurrence by both parties. The PPA
defines the terms and conditions under which we provide power and energy to IP
using a tiered pricing structure. The agreement requires IP to compensate us
for capacity charges through 2004 at a total contract cost of $639.6 million.
According to the PPA agreement, IP is to provide a security guarantee of $50
million upon a credit downgrade event. This guarantee is being fulfilled by a
$50 million guarantee from Dynegy Inc. on IP's behalf. The PPA obligates us to
provide power up to the reservation amount even if we have individual units
unavailable at various times.

   The subsidiaries also purchased approximately $10 million and $11 million of
natural gas from IP during the years ended December 31, 2001 and 2000,
respectively.

   The Company also purchases and sells natural gas, NGLs, crude oil and power
and, in some instances, earns management fees from certain entities in which it
has equity investments. Revenues recognized from these transactions in 2001,
2000 and 1999 were $2.0 billion, $827 million and $377 million, respectively.
Expenses recognized were $385 million, $217 million and $125 million,
respectively. Revenues relate to the supply of fuel for use at generation
facilities, primarily West Coast Power, and the supply of natural gas sold by
retail affiliates. Expenses primarily represent the purchase of natural gas
liquids that are subsequently sold in the Company's marketing operations.

   Also during 2001, the Company earned approximately $8 million of interest
income related to cash lent to West Coast Power. The loan was created as a
result of natural gas fuel costs owed from West Coast Power to a subsidiary of
Dynegy. As of December 31, 2001, West Coast Power had repaid in full all
amounts owed to Dynegy. Dynegy has guaranteed $31 million of estimated
environmental obligations as well as $25 million associated with an insurance
program for West Coast Power.

                                     F-46

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


Note 17--SEGMENT INFORMATION

   Dynegy's operations are reported in two segments: Wholesale Energy Network
("WEN") and Dynegy Midstream Services ("DMS"). WEN is engaged in a broad array
of businesses, including physical supply of and risk-management activities
around wholesale natural gas, power, coal, and other similar products. This
segment is focused on optimizing the Company's and its customers' global
portfolio of energy assets and contracts, as well as direct commercial and
industrial sales and retail marketing alliances. DMS consists of the Company's
North American midstream liquids processing and marketing businesses and
worldwide NGLs marketing and transportation operations. Dynegy accounts for
intercompany transactions at prevailing market rates. Operating segment
information for the years ended December 31, 2001, 2000 and 1999 is presented
below. See Explanatory Note for a discussion of the restatements made to the
financial information included herein.

Dynegy's Segment Data for the Year Ended December 31, 2001

<TABLE>
<CAPTION>
                                                                    WEN      DMS   Elimination  Total
                                                                  -------  ------  ----------- -------
                                                                             ($ in millions)
<S>                                                               <C>      <C>     <C>         <C>
Unaffiliated revenues:
   Domestic...................................................... $26,008  $4,799     $  --    $30,807
   Canadian......................................................   4,622   1,463        --      6,085
   European & Other..............................................   3,899      --        --      3,899
                                                                  -------  ------     -----    -------
                                                                   34,529   6,262        --     40,791
Affiliated revenues..............................................     459      --                  459
Intersegment revenues
   Domestic......................................................     126     237      (363)        --
                                                                  -------  ------     -----    -------
   Total revenues................................................  35,114   6,499      (363)    41,250
                                                                  -------  ------     -----    -------
Depreciation and amortization....................................    (216)    (84)       --       (300)
Operating income (loss)..........................................     621     131        --        752
Interest expense.................................................     (90)    (53)       --       (143)
Other income (expense)...........................................     (48)     (3)       --        (51)
Earnings of unconsolidated affiliates............................     165      13        --        178
Income tax (provision) benefit...................................    (281)    (32)       --       (313)
Cumulative effect of a change in accounting principle............       2      --        --          2
Net income (loss)................................................ $   369  $   56     $  --    $   425
Identifiable assets:
   Domestic...................................................... $14,548  $2,308     $  --    $16,856
   Canadian......................................................     773     130        --        903
   European & Other..............................................   1,919      --        --      1,919
Investments in unconsolidated affiliates.........................     381     422        --        803
Capital expenditures and investments in unconsolidated affiliates  (1,628)   (391)       --     (2,019)
</TABLE>

                                     F-47

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


Dynegy's Segment Data for the Year Ended December 31, 2000

<TABLE>
<CAPTION>
                                                                    WEN      DMS   Elimination  Total
                                                                  -------  ------  ----------- -------
                                                                             ($ in millions)
<S>                                                               <C>      <C>     <C>         <C>
Unaffiliated revenues:
   Domestic...................................................... $17,348  $5,123     $  --    $22,471
   Canadian......................................................   2,316   1,224        --      3,540
   European......................................................   1,252      --        --      1,252
                                                                  -------  ------     -----    -------
                                                                   20,916   6,347        --     27,263
Affiliated revenues..............................................     557      --        --        557
Intersegment revenues
   Domestic......................................................     186     249      (435)        --
                                                                  -------  ------     -----    -------
   Total revenues................................................  21,659   6,596      (435)    27,820
                                                                  -------  ------     -----    -------
Depreciation and amortization....................................    (135)   (105)       --       (240)
Operating income (loss)..........................................     520      84        --        604
Interest expense.................................................     (66)    (30)       --        (96)
Other income (expense)...........................................     (48)    (39)       --        (87)
Earnings of unconsolidated affiliates............................     167      24        --        191
Income tax (provision) benefit...................................    (201)    (13)       --       (214)
Net income (loss)................................................ $   372  $   26     $  --    $   398
Identifiable assets:
   Domestic...................................................... $15,455  $2,104     $  --    $17,559
   Canadian......................................................     750     299        --      1,049
   European......................................................     438      --        --        438
Investments in unconsolidated affiliates.........................     521     174        --        695
Capital expenditures and investments in unconsolidated affiliates    (845)   (114)       --       (959)
</TABLE>

                                     F-48

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


Dynegy's Segment Data for the Year Ended December 31, 1999

<TABLE>
<CAPTION>
                                                                    WEN      DMS    Elimination  Total
                                                                  -------  -------  ----------- -------
                                                                             ($ in millions)
<S>                                                               <C>      <C>      <C>         <C>
Unaffiliated revenues:
   Domestic...................................................... $ 8,097  $ 4,884     $  --    $12,981
   Canadian......................................................   1,443       10        --      1,453
   European......................................................     976       --        --        976
                                                                  -------  -------     -----    -------
                                                                   10,516    4,894        --     15,410
Intersegment revenues
   Domestic......................................................     131      240      (371)        --
                                                                  -------  -------     -----    -------
   Total revenues................................................  10,647    5,134      (371)    15,410
                                                                  -------  -------     -----    -------
Depreciation and amortization....................................     (21)     (94)       --       (115)
Operating income.................................................     144       82        --        226
Interest expense.................................................     (36)     (42)       --        (78)
Other income (expense)...........................................     (13)     (18)       --        (31)
Earnings of unconsolidated affiliates............................      62       18        --         80
Income tax (provision) benefit...................................     (50)     (10)       --        (60)
Net income....................................................... $   107  $    30     $  --    $   137
Identifiable assets:
   Domestic...................................................... $ 3,397  $ 2,545     $  --    $ 5,942
   Canadian......................................................     266       68        --        334
   European......................................................     175       --        --        175
Investments in unconsolidated affiliates.........................     458      169        --        627
Capital expenditures and investments in unconsolidated affiliates    (429)     (92)       --       (521)
</TABLE>

Note 18--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

   The following is a summary of the Company's unaudited quarterly financial
information for the years ended December 31, 2001 and 2000.

<TABLE>
<CAPTION>
                                              Quarter Ended
                                    ----------------------------------
                                     March   June   September December
                                     2001    2001     2001      2001
                                    ------- ------- --------- --------
                                             ($ in millions)
         <S>                        <C>     <C>     <C>       <C>
         Revenues.................. $12,704 $11,756  $8,160    $8,630
         Operating income..........     252     125     341        34
         Income before income taxes     213     109     364        50
         Net income................     121      55     227        22

                                              Quarter Ended
                                    ----------------------------------
                                     March   June   September December
                                     2000    2000     2000      2000
                                    ------- ------- --------- --------
                                             ($ in millions)
         Revenues.................. $ 4,966 $ 5,403  $7,893    $9,558
         Operating income..........     185     159     202        58
         Income before income taxes     159     160     262        31
         Net income................      92      99     172        35
</TABLE>

                                     F-49

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


   These amounts have been restated from amounts previously reported. For
further discussion of the restatements, see the Explanatory Note.

   A synopsis of the aggregate financial impact of these restatements on the
amounts originally reported in the 2001 Form 10-K filed on March 22, 2002 is as
follows ($ in millions):

                RESTATED SELECTED BALANCE SHEET DATA BY QUARTER

<TABLE>
<CAPTION>
                                           2001                                       2000
                        -----------------------------------------  -----------------------------------------
                        March 31 June 30  September 30 December 31 March 31 June 30  September 30 December 31
                        -------- -------  ------------ ----------- -------- -------  ------------ -----------
                                                           ($ in millions)
<S>                     <C>      <C>      <C>          <C>         <C>      <C>      <C>          <C>
Current Assets
   As Reported......... $ 8,707  $10,471    $10,030      $ 9,227    $3,019  $ 5,349    $ 5,562      $ 9,759
   Restatement Effect..     705       92        251         (558)       66      310        217          678
                        -------  -------    -------      -------    ------  -------    -------      -------
   As Restated......... $ 9,412  $10,563    $10,281      $ 8,669    $3,085  $ 5,659    $ 5,779      $10,437
                        =======  =======    =======      =======    ======  =======    =======      =======
Total Assets
   As Reported......... $17,983  $20,066    $20,074      $19,659    $7,148  $ 9,571    $13,533      $17,805
   Restatement Effect..   1,223      709      1,009           19       141      574        671        1,241
                        -------  -------    -------      -------    ------  -------    -------      -------
   As Restated......... $19,206  $20,775    $21,083      $19,678    $7,289  $10,145    $14,204      $19,046
                        =======  =======    =======      =======    ======  =======    =======      =======
Current Liabilities
   As Reported......... $ 7,752  $ 9,166    $ 9,090      $ 8,122    $3,016  $ 4,827    $ 4,948      $ 8,877
   Restatement Effect..     732      394        650         (127)      146      331        315          952
                        -------  -------    -------      -------    ------  -------    -------      -------
   As Restated......... $ 8,484  $ 9,560    $ 9,740      $ 7,995    $3,162  $ 5,158    $ 5,263      $ 9,829
                        =======  =======    =======      =======    ======  =======    =======      =======
Total Liabilities
   As Reported......... $12,567  $14,305    $14,156      $13,684    $5,581  $ 7,952    $ 8,570      $12,557
   Restatement Effect..   1,331      879      1,222          326       193      607        727        1,353
                        -------  -------    -------      -------    ------  -------    -------      -------
   As Restated......... $13,898  $15,184    $15,378      $14,010    $5,774  $ 8,559    $ 9,297      $13,910
                        =======  =======    =======      =======    ======  =======    =======      =======
Stockholder's Equity
   As Reported......... $ 4,238  $ 4,405    $ 4,662      $ 4,801    $1,367  $ 1,418    $ 3,809      $ 4,076
   Restatement Effect..    (112)    (223)      (258)        (336)      (57)     (36)       (60)        (117)
                        -------  -------    -------      -------    ------  -------    -------      -------
   As Restated......... $ 4,126  $ 4,182    $ 4,404      $ 4,465    $1,310  $ 1,382    $ 3,749      $ 3,959
                        =======  =======    =======      =======    ======  =======    =======      =======
</TABLE>

                                     F-50

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


                   RESTATED RESULTS OF OPERATIONS BY QUARTER

<TABLE>
<CAPTION>
                         Three    Three     Three        Three      Six       Nine       Twelve
                         Months  Months     Months      Months    Months     Months      Months
                         Ended    Ended     Ended        Ended     Ended     Ended        Ended
                        March 31 June 30 September 30 December 31 June 30 September 30 December 31
                        -------- ------- ------------ ----------- ------- ------------ -----------
                                                     ($ in millions)
<S>                     <C>      <C>     <C>          <C>         <C>     <C>          <C>
2001
Net Income:
   As Reported.........   $126    $ 159      $273        $ 94      $ 285     $ 558        $ 652
   Restatement Effect..     (5)    (104)      (46)        (72)      (109)     (155)        (227)
                          ----    -----      ----        ----      -----     -----        -----
   As Restated.........   $121    $  55      $227        $ 22      $ 176     $ 403        $ 425
                          ====    =====      ====        ====      =====     =====        =====
2000
Net Income:
   As Reported.........   $ 80    $  79      $195        $ 92      $ 159     $ 354        $ 446
   Restatement Effect..     12       20       (23)        (57)        32         9          (48)
                          ----    -----      ----        ----      -----     -----        -----
   As Restated.........   $ 92    $  99      $172        $ 35      $ 191     $ 363        $ 398
                          ====    =====      ====        ====      =====     =====        =====
1999
Net Income:
   As Reported.........   $ 28    $  28      $ 51        $ 45      $  56     $ 107        $ 152
   Restatement Effect..      1       (6)       (5)         (5)        (5)      (10)         (15)
                          ----    -----      ----        ----      -----     -----        -----
   As Restated.........   $ 29    $  22      $ 46        $ 40      $  51     $  97        $ 137
                          ====    =====      ====        ====      =====     =====        =====
</TABLE>

                                     F-51

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


                  RESTATED SELECTED CASH FLOW DATA BY QUARTER

<TABLE>
<CAPTION>
                                Three     Six       Nine       Twelve
                                Months  Months     Months      Months
                                Ended    Ended     Ended        Ended
                               March 31 June 30 September 30 December 31
                               -------- ------- ------------ -----------
                                            ($ in millions)
       <S>                     <C>      <C>     <C>          <C>
       2001
       Operating Cash Flow:
          As Reported......... $   175   $ 379    $   642      $   452
          Restatement Effect..      10     (72)      (179)        (276)
                               -------   -----    -------      -------
          As Restated......... $   185   $ 307    $   463      $   176
                               =======   =====    =======      =======
       Investing Cash Flows:
          As Reported......... $  (945)  $(527)   $  (629)     $(1,186)
          Restatement Effect..     (88)    (46)      (381)        (155)
                               -------   -----    -------      -------
          As Restated......... $(1,033)  $(573)   $(1,010)     $(1,341)
                               =======   =====    =======      =======
       Financing Cash Flows:
          As Reported......... $   919   $ 587    $   142      $   846
          Restatement Effect..      78     118        560          454
                               -------   -----    -------      -------
          As Restated......... $   997   $ 705    $   702      $ 1,300
                               =======   =====    =======      =======
       2000
       Operating Cash Flow:
          As Reported......... $   123   $ 286    $   233      $   364
          Restatement Effect..     (20)    (20)       (20)          44
                               -------   -----    -------      -------
          As Restated......... $   103   $ 266    $   213      $   408
                               =======   =====    =======      =======
       Investing Cash Flows:
          As Reported......... $  (351)  $ (98)   $  (322)     $  (716)
          Restatement Effect..      (8)    (70)      (120)        (235)
                               -------   -----    -------      -------
          As Restated......... $  (359)  $(168)   $  (442)     $  (951)
                               =======   =====    =======      =======
       Financing Cash Flows:
          As Reported......... $   183   $(205)   $   104      $   339
          Restatement Effect..      28      90        140          189
                               -------   -----    -------      -------
          As Restated......... $   211   $(115)   $   244      $   528
                               =======   =====    =======      =======
       1999
       Operating Cash Flow:
          As Reported......... $   (11)  $ 118    $    96      $     9
          Restatement Effect..      (1)     --         (3)          31
                               -------   -----    -------      -------
          As Restated......... $   (12)  $ 118    $    93      $    40
                               =======   =====    =======      =======
       Investing Cash Flows:
          As Reported......... $  (124)  $(237)   $  (384)     $  (319)
          Restatement Effect..       1      --        (39)         (72)
                               -------   -----    -------      -------
          As Restated......... $  (123)  $(237)   $  (423)     $  (391)
                               =======   =====    =======      =======
       Financing Cash Flows:
          As Reported......... $   119   $ 118    $   288      $   327
          Restatement Effect..      --      --         39           72
                               -------   -----    -------      -------
          As Restated......... $   119   $ 118    $   327      $   399
                               =======   =====    =======      =======
</TABLE>

                                     F-52

<PAGE>

                             DYNEGY HOLDINGS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  (RESTATED)


Note 19--SUBSEQUENT EVENTS

   The Company has experienced a number of material developments since the
filing of its 2001 Form 10-K on March 22, 2002. These developments include,
among others, the following:

  .   the Company's previously announced exit from third-party risk management
      aspects of the marketing and trading business, which business accounted
      for approximately 87%, 78% and 66% of the Company's revenues and
      approximately 25%, 36% and 34% of the Company's pre-tax earnings for the
      years 2001, 2000 and 1999, respectively;

  .   the Company's previously announced organizational restructuring plan and
      the related reductions in force affecting more than 1,000 employees;

  .   reductions in the Company's credit ratings to low non-investment grade
      levels and the resulting increase in collateralization requirements and
      financing costs and limitations on financial flexibility; and

  .   significant changes in senior management of the Company, including a new
      Chief Executive Officer and a new Chief Financial Officer.

The Company also adopted the net presentation provisions of EITF 02-3 in the
third quarter 2002, which resulted in a 81 percent, 75 percent and 68 percent
reduction in revenues in each of 2001, 2000 and 1999, respectively. For further
description of these events, please read the Company's Exchange Act reports
filed subsequent to the filing of the 2001 Form 10-K. This report does not
reflect events occurring after the original filing of the 2001 Form 10-K except
to reflect the restatement items described above and certain other matters. As
a result of these adverse developments, the results of operations and cash
flows covered by the unaudited restated financial statements in this report
should not be considered indicative of the Company's future results of
operations or cash flows.

   For further discussion of the events that have affected the Company since
March 22, 2002, please read its Exchange Act reports filed since such date,
including its Annual Report on Form 10-K for the year ended December 31, 2002,
which discussion is incorporated herein by this reference.

                                     F-53

<PAGE>

            DYNEGY HOLDINGS INC. VALUATION AND QUALIFYING ACCOUNTS

                                  (RESTATED)

                                                                    Schedule II

Years Ended December 31, 2001, 2000, and 1999

<TABLE>
<CAPTION>
                                             Balance at Charged to Charged
                                             Beginning  Costs and  to Other             Balance at
                                             of Period   Expenses  Accounts Deductions End of Period
                                             ---------- ---------- -------- ---------- -------------
<S>                                          <C>        <C>        <C>      <C>        <C>
2001
Allowance for doubtful accounts.............    $ 63       $ 93      $(2)      $(46)        108
Allowance for risk management assets/(1)(2)/     146        102       --         --         248
2000
Allowance for doubtful accounts.............      24         46        1         (8)         63
Allowance for risk management assets/(1)(2)/      38        108       --         --         146
1999
Allowance for doubtful accounts.............      24          3       --         (3)         24
Allowance for risk management assets/(1)(2)/       6         32       --         --          38
</TABLE>
--------
/(1)/ Changes in price and credit reserves related to risk management
      activities are offset in the net mark-to-market income accounts reported
      in revenues.
/(2) /Amounts associated with model reserves, which are offset in the net
     mark-to-market income accounts reported in revenue, have been adjusted to
     reflect the correction in methodology discussed in Enterprise Risk
     Management, Valuation and Monitoring--Valuation Criteria and Management
     Estimates included in Item 7. Management's Discussion and Analysis of
     Financial Condition and Results of Operations.

                                     F-54