<PAGE>

                                                                   Exhibit 99.1

                                  DYNEGY INC.

      INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED AND RESTATED)

<TABLE>
<CAPTION>
                                                                                                Page
                                                                                                ----
<S>                                                                                             <C>
Consolidated Financial Statements (Unaudited and Restated)
   Explanatory Note............................................................................  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
   Valuation and Qualifying Accounts........................................................... F-54
</TABLE>

                                      F-1

<PAGE>

                                  DYNEGY INC.

                               EXPLANATORY NOTE

   Dynegy Inc. ("Dynegy" or the "Company") has restated its 2001, 2000 and 1999
financial statements to reflect the financial effects of the items described in
the Introductory Note to the consolidated financial statements. The restated
financial statements, which are attached hereto, contain adjustments to the
Company's 2001, 2000 and 1999 financial statements originally filed with
Dynegy's Annual Report on Form 10-K for the year ended December 31, 2001 (the
"Form 10-K"). Arthur Andersen LLP, the Company's previous independent public
accountant, has advised the Company that its 2001 audit opinion should not be
relied upon. The unaudited restated financial statements include all known
adjustments that, in the opinion of management, are necessary for a fair
presentation of Dynegy's financial results for the periods presented. While the
preparation of these financial statements is the responsibility of the
Company's management, the restated financial statements contained herein remain
unaudited. Dynegy's independent public accountant, PricewaterhouseCoopers LLP,
is currently re-auditing the Company's historical financial statements for each
of the three years in the period ended December 31, 2001. As a result of this
three year re-audit process, it is possible that additional adjustments to
these financial statements may result, some of which could be material. The
Company expects that the re-audit of its 1999 through 2001 consolidated
financial statements will be completed early in the first quarter 2003. The
Company will file an amended Form 10-K reflecting the unaudited restatements
described herein as soon as practicable after the date hereof. Following
completion of the re-audit, further amendment of the Form 10-K will be
necessary in order to include the audit report of PricewaterhouseCoopers LLP as
well as to reflect other changes resulting from the re-audit, if any.


                                      F-2

<PAGE>

                                  DYNEGY INC.

             CONSOLIDATED BALANCE SHEETS (UNAUDITED AND RESTATED)

   See Introductory Note--Restatements and Absence of Report of Independent
                                  Accountants

<TABLE>
<CAPTION>
                                                                                                  December 31, December 31,
                                                                                                      2001         2000
                                                                                                  ------------ ------------
                                                                                                        (in millions,
                                                                                                   except per share data)
<S>                                                                                               <C>          <C>
                                            ASSETS
Current Assets
   Cash and cash equivalents.....................................................................   $   218      $    86
   Accounts receivable, net of allowance for doubtful accounts of $107 million and $69 million,
    respectively.................................................................................     3,688        4,829
   Accounts receivable, affiliates...............................................................        80          209
   Inventories...................................................................................       258          279
   Assets from risk-management activities........................................................     4,399        4,466
   Prepayments and other assets..................................................................     1,301          248
                                                                                                    -------      -------
      Total Current Assets.......................................................................     9,944       10,117
                                                                                                    -------      -------
Property, Plant and Equipment....................................................................     9,130        7,356
   Less: accumulated depreciation................................................................      (921)        (649)
                                                                                                    -------      -------
                                                                                                      8,209        6,707
Other Assets
   Investments in unconsolidated affiliates......................................................       950          799
   Investment in Northern Natural Gas Company....................................................     1,501           --
   Assets from risk-management activities........................................................     2,680        1,527
   Intangible assets, net of amortization........................................................     1,579        1,479
   Other assets..................................................................................       852          721
                                                                                                    -------      -------
      Total Assets...............................................................................   $25,715      $21,350
                                                                                                    =======      =======
                             LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
   Accounts payable..............................................................................   $ 2,392      $ 4,741
   Accounts payable, affiliates..................................................................        40           83
   Accrued liabilities and other.................................................................     2,497          618
   Liabilities from risk-management activities...................................................     3,805        3,877
   Current portion of long-term debt and transitional funding trust notes........................       458          116
                                                                                                    -------      -------
      Total Current Liabilities..................................................................     9,192        9,435
                                                                                                    -------      -------
Long-Term Debt...................................................................................     3,834        2,828
Other Liabilities
Transitional funding trust notes.................................................................       516          605
Liabilities from risk-management activities......................................................     2,196        1,669
Deferred income taxes............................................................................     1,768        1,396
Other long-term liabilities......................................................................       906          533
                                                                                                    -------      -------
       Total Liabilities.........................................................................    18,412       16,466
                                                                                                    -------      -------
Minority Interest (Note 10)......................................................................     1,020        1,018
Serial Preferred Securities of a Subsidiary (Note 9).............................................        46           46
Company Obligated Preferred Securities of Subsidiary Trust (Note 9)..............................       200          300
Series A Convertible Preferred Securities (Note 9)...............................................     1,503           --
Commitments and Contingencies (Note 11)
Stockholders' Equity
   Class A common stock, no par value, 900,000,000 and 300,000,000 shares authorized at
    December 31, 2001 and 2000, respectively; 269,984,456 and 237,390,802 shares issued and
    outstanding at December 31, 2001 and 2000, respectively......................................     2,814        2,167
   Class B common stock, no par value, 360,000,000 and 120,000,000 shares authorized at
    December 31, 2001 and 2000, respectively; 86,499,914 and 85,330,544 shares issued and
    outstanding at December 31, 2001 and 2000, respectively......................................       801          760
   Subscriptions receivable (Note 13)............................................................       (38)          --
   Accumulated other comprehensive loss, net of tax..............................................       (21)         (15)
   Retained earnings.............................................................................     1,049          611
   Less: treasury stock, at cost: 1,766,800 and 70,000 shares at December 31, 2001 and 2000,
    respectively.................................................................................       (71)          (3)
                                                                                                    -------      -------
      Total Stockholders' Equity.................................................................     4,534        3,520
                                                                                                    -------      -------
   Total Liabilities and Stockholders' Equity....................................................   $25,715      $21,350
                                                                                                    =======      =======
</TABLE>

                See Notes to Consolidated Financial Statements.

                                      F-3

<PAGE>

                                  DYNEGY INC.

        CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED AND RESTATED)

    See Introductory Note--Restatement and Absence of Report of Independent
                                  Accountants

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                                     -----------------------------------
                                                                       2001         2000        1999
                                                                       -------     -------     -------
                                                                     (in millions, except per share data)
<S>                                                                  <C>          <C>         <C>
Revenues............................................................ $42,247      $29,415     $15,418
Cost of sales (exclusive of depreciation shown below)...............  40,357       27,981      14,881
Depreciation and amortization expense...............................     453          388         129
General and administrative expenses.................................     513          330         201
                                                                       -------     -------     -------
Operating income....................................................     924          716         207
Earnings from unconsolidated investments............................     242          205          80
Other income........................................................     120          235          73
Interest expense....................................................    (260)        (251)        (78)
Other expenses......................................................     (74)         (88)        (34)
Minority interest expense...........................................     (62)         (52)        (11)
Accumulated distributions associated with trust preferred securities     (22)         (29)        (17)
                                                                       -------     -------     -------
Income before income taxes..........................................     868          736         220
Income tax provision................................................     331          252          72
                                                                       -------     -------     -------
Income from operations..............................................     537          484         148
Cumulative effect of change in accounting principle.................       2           --          --
                                                                       -------     -------     -------
NET INCOME.......................................................... $   539      $   484     $   148
                                                                       -------     -------     -------
Net income.......................................................... $   539      $   484     $   148
Less: preferred stock dividends.....................................       3           35          --
                                                                       -------     -------     -------
Net income applicable to common stockholders........................ $   536      $   449     $   148
                                                                       =======     =======     =======
Net Income Per Share:
Basic earnings per share............................................ $  1.64      $  1.49     $  0.69
                                                                       =======     =======     =======
Diluted earnings per share.......................................... $  1.58      $  1.43     $  0.64
                                                                       =======     =======     =======
Basic shares outstanding............................................     326          302         213
                                                                       =======     =======     =======
Diluted shares outstanding..........................................     340          315         230
                                                                       =======     =======     =======
</TABLE>


                See Notes to Consolidated Financial Statements.

                                      F-4

<PAGE>

                                  DYNEGY INC.

        CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND RESTATED)

   See Introductory Note--Restatements and Absence of Report of Independent
                                  Accountants

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                                         -----------------------
                                                                           2001     2000    1999
                                                                         -------  -------  -----
                                                                              (in millions)
<S>                                                                      <C>      <C>      <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income........................................................... $   539  $   484  $ 148
Items not affecting cash flows from operating activities:
   Depreciation, amortization, impairment and abandonment...............     448      357    108
   Earnings from unconsolidated investments, net of cash distributions..    (142)     (87)   (14)
   Risk-management activities...........................................    (120)    (181)  (177)
   Deferred income taxes................................................     163      144     60
   Gain on asset sales, net.............................................     (36)    (132)   (50)
   Reserve for doubtful accounts........................................      55       45     --
   Income tax benefit from stock option exercise and other..............      35       71     16
Change in assets and liabilities resulting from operating activities:
   Accounts receivable..................................................   1,639   (5,095)  (455)
   Inventories..........................................................      11     (111)   (27)
   Prepayments and other assets.........................................    (188)      93     50
   Accounts payable and accrued liabilities.............................  (1,885)   4,899    389
Other, net..............................................................       1      (49)   (39)
                                                                         -------  -------  -----
Net cash provided by operating activities...............................     520      438      9
                                                                         -------  -------  -----
CASH FLOWS FROM INVESTING ACTIVITIES
   Capital expenditures.................................................  (1,915)    (769)  (365)
   Investment in unconsolidated affiliates..............................  (1,533)    (141)   (84)
   Business acquisitions, net of cash acquired..........................    (603)  (1,202)    --
   Proceeds from asset sales............................................   1,078      856     81
   Other investing, net.................................................    (440)     (48)    49
                                                                         -------  -------  -----
Net cash used in investing activities...................................  (3,413)  (1,304)  (319)
                                                                         -------  -------  -----
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from long-term borrowings...................................     962      319    397
   Repayments of long-term borrowings...................................    (272)    (359)   (44)
   Net cash flow from commercial paper and money market lines of credit.     599     (906)   (42)
   Proceeds from sale of capital stock, options and warrants............     604    1,216     22
   Proceeds from issuance of convertible preferred stock................   1,500       --     --
   Purchase of treasury stock...........................................     (68)      (3)    --
   Redemption of Illinois Power Preferred Securities....................    (100)     (93)    --
   Dividends and other distributions, net...............................     (98)    (112)    (8)
   Other financing, net.................................................    (102)     845      2
                                                                         -------  -------  -----
Net cash provided by financing activities...............................   3,025      907    327
                                                                         -------  -------  -----
Net increase in cash and cash equivalents...............................     132       41     17
Cash and cash equivalents, beginning of year............................      86       45     28
                                                                         -------  -------  -----
Cash and cash equivalents, end of year.................................. $   218  $    86  $  45
                                                                         =======  =======  =====
</TABLE>

                See Notes to Consolidated Financial Statements.

                                      F-5

<PAGE>

                                  DYNEGY INC.

   CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED AND
                                   RESTATED)

   See Introductory Note--Restatements and Absence of Report of Independent
                                  Accountants

<TABLE>
<CAPTION>
                                      Preferred Stock  Common Stock                           Treasury
                                      --------------  -------------  Paid In       Retained ------------
                                      Shares  Amount  Shares Amount  Capital Other Earnings Shares Amount  Total
                                      ------  ------  ------ ------  ------- ----- -------- ------ ------ ------
                                                                    (in millions)
<S>                                   <C>     <C>     <C>    <C>     <C>     <C>   <C>      <C>    <C>    <C>
December 31, 1998....................    5     $ 75    211   $    1   $ 935  $ --   $   99    (2)   $(17) $1,093
Comprehensive income:
   Net income........................   --       --     --       --      --    --      148    --      --     148
                                                                                                          ------
Total comprehensive income...........                                                                        148
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  $ --   $  239    (2)   $(17) $1,271
Comprehensive income:
   Net income........................   --       --     --       --      --    --      484                   484
   Other comprehensive loss, net of
    tax..............................   --       --     --       --      --   (15)      --    --      --     (15)
                                                                                                          ------
Total comprehensive income...........                                                                        469
Illinova acquisition.................    1      (75)    59    1,817    (973)   --       --     2      17     786
Common Stock issued..................   --       --     23      858      --    --       --    --      --     858
Preferred Stock conversion...........   (6)      --     12       --      --    --       --    --      --      --
Extant acquisition...................   --       --      2       67      --    --       --    --      --      67
Options exercised....................   --       --      9      157      --    --       --    --      --     157
Dividends and other distributions....   --       --     --       --      --    --     (112)   --      --    (112)
401(k) plan and profit sharing stock.   --       --      1       12      --    --       --    --      --      12
Options granted......................   --       --     --       15      --    --       --    --      --      15
Treasury stock.......................   --       --     --       --      --    --       --    --      (3)     (3)
                                        --     ----    ---   ------   -----  ----   ------    --    ----  ------
December 31, 2000....................   --     $ --    323   $2,927   $  --  $(15)  $  611    --    $ (3) $3,520
Comprehensive income:
Net income...........................   --       --     --       --      --    --      539    --      --     539
Other comprehensive loss, net of tax.   --       --     --       --      --    (6)      --    --      --      (6)
                                                                                                          ------
Total comprehensive income...........                                                                        533
Common Stock issued..................   --       --     31      605      --    --       --    --      --     605
Subscriptions receivable.............   --       --     --      (38)     --    --       --    --      --     (38)
Options exercised....................   --       --      3       59      --    --       --    --      --      59
Dividends and other distributions....   --       --     --       --      --    --     (101)   --      --    (101)
401(k) plan and profit sharing stock.   --       --     --       11      --    --       --    --      --      11
Options granted......................   --       --     --       13      --    --       --    --      --      13
Treasury stock.......................   --       --     --       --      --    --       --     2     (68)    (68)
                                        --     ----    ---   ------   -----  ----   ------    --    ----  ------
December 31, 2001....................   --     $ --    357   $3,577   $  --  $(21)  $1,049     2    $(71) $4,534
                                        ==     ====    ===   ======   =====  ====   ======    ==    ====  ======
</TABLE>


                See Notes to Consolidated Financial Statements.

                                      F-6

<PAGE>

                                  DYNEGY INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           (UNAUDITED AND RESTATED)

INTRODUCTORY NOTE--RESTATEMENTS AND ABSENCE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

   This Current Report on Form 8-K includes unaudited 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
adjustments to the Company's 2001, 2000 and 1999 financial statements
originally filed with Dynegy's Annual Report on Form 10-K for the year ended
December 31, 2001 (the "Form 10-K"). The restatements relate to the Project
Alpha structured natural gas transaction, a balance sheet reconciliation
project relating principally to the Company's natural gas marketing business,
adjustments relating to a change in the accounting for certain contracts from
hedge accounting to mark-to-market accounting under Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended ("Statement No. 133") and an overstatement of
the valuation used in the Company's 2000 acquisition of Extant, Inc.
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 decided to present 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 decision 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
("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 was also withdrawn. Dynegy subsequently concluded that its 2001
restated consolidated financial statements would 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. Such
compilations have not been audited and may change upon further assessment by
Dynegy. The most significant impact of this consolidation is to increase
Dynegy's consolidated indebtedness by approximately $280 million at December
31, 2001.

   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. The original $80
million charge has been excluded from the results of operations for the
nine-months ended September 30, 2002. The table below reflects the impact on
net income of the re-allocation of the $80 million charge from the second
quarter 2002 back to the periods in which the transactions giving rise to the
charge originally occurred.

                                      F-7

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


<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
         -          -------- ------- ------------ ----------- ------ ------------ --------
<S>                 <C>      <C>     <C>          <C>         <C>    <C>          <C>
1998 and prior.....                                                                 (34)
1999...............                                                                  (4)
2000...............     1        5         2          (25)       6         8        (17)
2001...............    11      (69)       22            6      (58)      (36)       (30)
2002...............     4        1        --           --        5         5          5
                                                                                    ---
Total Re-allocation                                                                 (80)
                                                                                    ===
</TABLE>

   Changes in Accounting Classification Under Statement No. 133.  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 the periodic assessment of hedge effectiveness, was inadequate to
support the accounting method previously applied. The resulting restatement
reflects the accounting for these contracts on a mark-to-market basis rather
than on the deferred basis previously employed beginning in the first quarter
2001. The impact of the change in accounting method for these contracts reduced
previously reported 2001 net income by approximately $1 million. The change in
accounting increased the net loss for the nine months ended September 30, 2002
by approximately $3 million after-tax. The change in accounting method employed
had no impact on previously reported cash flows from operations in any period.


   Valuation of Extant, Inc. Purchase.  On September 29, 2000, Dynegy completed
the acquisition of Extant, Inc., a privately held entity engaged in the
communications business. The transaction was accounted for as a purchase. In
2000, the Company incorrectly valued the shares of Class A common stock it
issued as consideration for the acquisition at $49.59 per share, rather than
$36.59 per share, which amount represented the average share price during the
five days surrounding the announcement of the acquisition. As a result, the
purchase price allocated to the assets acquired and liabilities assumed in the
purchase was overstated by approximately $23 million in 2000. This error
resulted in an overstatement of the amortization of goodwill acquired in the
transaction during 2001 and 2000. The resulting restatement reflects an
increase in net income in 2001 and 2000 by approximately $1 million and
approximately $300,000, respectively. Additionally, as a result of this error,
the Company overstated by $22 million the impairment of goodwill recorded in
2002 associated with the Company's January 1, 2002 adoption of Statement of
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets."

                                      F-8

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


   A synopsis of the financial impact of these restatements is as follows ($ in
millions):

<TABLE>
<CAPTION>
                                             2001     2000
                                           -------  -------
                    <S>                    <C>      <C>
                    Balance Sheet:
                    Current Assets:
                       As Reported........ $ 9,730  $10,150
                       Restatement Effect.     214      (33)
                                           -------  -------
                       As Restated........   9,944   10,117
                                           =======  =======
                    Total Assets:
                       As Reported........  25,175   21,406
                       Restatement Effect.     540      (56)
                                           -------  -------
                       As Restated........  25,715   21,350
                                           =======  =======
                    Current Liabilities:
                       As Reported........   8,869    9,379
                       Restatement Effect.     323       56
                                           -------  -------
                       As Restated........   9,192    9,435
                                           =======  =======
                    Total Liabilities:
                       As Reported........  17,709   16,444
                       Restatement Effect.     703       22
                                           -------  -------
                       As Restated........  18,412   16,466
                                           =======  =======
                    Stockholders' Equity:
                       As Reported........   4,707    3,598
                       Restatement Effect.    (173)     (78)
                                           -------  -------
                       As Restated........ $ 4,534  $ 3,520
                                           =======  =======
</TABLE>

                                      F-9

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

<TABLE>
<CAPTION>
                                               2001     2000    1999
                                             -------  -------  ------
          <S>                                <C>      <C>      <C>
          Results of Operations:
          Net Income (Loss):
             As Reported.................... $   648  $   501  $  152
             Restatement Effect.............    (109)     (17)     (4)
                                             -------  -------  ------
             As Restated....................     539      484     148
                                             =======  =======  ======
          Earnings (Loss) Per Diluted Share:
             As Reported....................    1.90     1.48    0.66
             Restatement Effect.............   (0.32)   (0.05)  (0.02)
                                             -------  -------  ------
             As Restated....................    1.58     1.43    0.64
                                             =======  =======  ======
          Cash Flow Statement:
          Operating Cash Flows:
             As Reported....................     811      438       9
             Restatement Effect.............    (291)      --      --
                                             -------  -------  ------
             As Restated....................     520      438       9
                                             =======  =======  ======
          Investing Cash Flows:
             As Reported....................  (3,413)  (1,304)   (319)
             Restatement Effect.............      --       --      --
                                             -------  -------  ------
             As Restated....................  (3,413)  (1,304)   (319)
                                             =======  =======  ======
          Financing Cash Flows:
             As Reported....................   2,734      907     327
             Restatement Effect.............     291       --      --
                                             -------  -------  ------
             As Restated.................... $ 3,025  $   907  $  327
                                             =======  =======  ======
</TABLE>

   Dynegy's independent public accountant, PricewaterhouseCoopers LLP, is
currently re-auditing the Company's historical financial statements for each of
the three years in the period ended December 31, 2001. The Company expects that
the re-audit of these financial statements will be completed early in the first
quarter 2003. Accordingly, while the preparation of these financial statements
is the responsibility of the Company's management, no independent public
accountant has rendered an audit opinion on these financial statements. As a
result of the three-year re-audit, there may be other revisions to the
Company's historical financial statements in addition to those reflected
herein, some of which could be material. Dynegy will file an amended Form 10-K
reflecting the restatements described herein as soon as practicable after the
date hereof. Following completion of the re-audit, further amendment(s) to the
Form 10-K will be necessary in order to include PricewaterhouseCoopers LLP's
audit report as well as to reflect other changes resulting from the re-audit,
if any.

   PLEASE NOTE THAT THESE FINANCIAL STATEMENTS AND THE NOTES THERETO DO NOT
REFLECT EVENTS OCCURRING AFTER THE ORIGINAL FILING OF DYNEGY'S 2001 FORM 10-K
ON MARCH 13, 2002 EXCEPT TO REFLECT THE RESTATEMENT ITEMS DESCRIBED ABOVE. SEE
NOTE 20--SUBSEQUENT EVENTS FOR FURTHER DISCUSSION.

NOTE 1--ORGANIZATION AND OPERATIONS OF THE COMPANY

   Dynegy is an energy merchant. Through its global energy delivery network and
marketing, logistics and risk-management capabilities, the Company provides
solutions to customers in North America, the United Kingdom and Continental
Europe. The Company's businesses include power generation and wholesale and
direct

                                     F-10

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

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") and the transmission and
distribution of electricity and natural gas to retail consumers. Dynegy also is
engaged in the telecommunications business through its global long-haul fiber
optic and metropolitan network located in cities in the United States and
Europe.

NOTE 2--ACCOUNTING POLICIES

   The accounting policies of Dynegy conform to generally accepted accounting
principles in the United States. The more significant of such accounting
policies are described below. The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to develop estimates and make assumptions that affect reported
financial position and results of operations and that impact the nature and
extent of disclosure, if any, of contingent assets and liabilities. Actual
results could differ materially from those estimates.

   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 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
$61 million and $76 million, NGLs of $74 million and $135 million and coal of
$58 million and $24 million at December 31, 2001 and 2000, respectively, and
crude oil of $10 million at December 31, 2001. Such inventory is valued at the
lower of

                                     F-11

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

weighted average cost or at market. Materials and supplies inventory of $55
million and $44 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 consisting
principally of gas gathering, processing, fractionation, terminaling and
storage facilities, natural gas transmission lines, pipelines, power generating
facilities and communications equipment 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>
                                                             Annual
                   Asset Group             Range of Years  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%
        Telecommunications Equipment......  7 to 12 years 8.3% to 14.3%
        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>

   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 Other income or Other expense,
respectively, in the Consolidated Statement 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 current 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

                                     F-12

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

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 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 currently 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--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 substantially all of the operations
conducted in the Dynegy Midstream Services ("DMS"), Transmission and
Distribution ("T&D") and Dynegy Global Communications ("DGC") segments as well
as all physically operated assets owned by the Wholesale Energy Network ("WEN")
segment. Ownership and operation of physical assets characterize these
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, the transportation or transmission of commodities through
pipelines or over transmission lines and the delivery of data and voice bits
over communication networks. End sales from these businesses result in physical
delivery of commodities or services to Dynegy wholesale, commercial and
industrial and retail 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. The Company's
transmission and distribution revenues are recognized when services are
provided to customers.

                                     F-13

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

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.

   Revenues derived from communications activities are recognized in the month
the service is provided. Amounts billed in advance of providing services are
recorded as unearned revenue until the period such services are either provided
or expire unused. Revenue related to installation of service and sale of
customer equipment is recognized when equipment is delivered and installation
is completed.

   The fair value model is used to account for certain forward physical and
financial transactions in the WEN, DMS and DGC 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 currently
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 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 its assets and
liabilities in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes."

   Earnings Per Share.  Basic earnings per share represents the amount of
earnings for the period available to each share of common stock outstanding
during the period. Diluted earnings per share represents the amount of earnings
for the period available to each share of common stock outstanding during the
period plus each share that would have been outstanding assuming the issuance
of common shares for all dilutive potential common shares outstanding during
the period. Dilutive potential common shares consisted of approximately 10
million common shares subject to stock options and preferred stock convertible
into approximately 4 million common shares. For 2000 and 1999, dilutive
potential common shares consisted of stock options to purchase

                                     F-14

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

approximately 13 million and 17 million common shares, respectively. Common
shares outstanding and the resulting computation of basic and diluted earnings
per share for all periods prior to December 31, 1999 have been restated to give
effect to the 0.69 fixed exchange ratio contained in the terms of the Illinova
acquisition. Also, all common shares outstanding, price per share, dividends
per share and earnings per share amounts relating to transactions or periods
prior to August 22, 2000 have been restated for the two-for-one stock split
effected by means of a stock dividend distributed on August 22, 2000.

   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
stockholders' 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 its stock
compensation plans. 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. The Company 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.

   Regulatory Assets.  Financial Accounting Standards No. 71, "Accounting for
the Effects of Certain Types of Regulation" ("Statement No. 71") allows
companies whose service obligations and prices are regulated to maintain
balance sheet assets representing costs they expect to recover through
inclusion in future rates. Illinois Power Company ("IP"), the Company's wholly
owned subsidiary, records regulatory assets in accordance with Statement No.
71. Regulatory assets represent probable future revenues associated with
certain costs that are expected to be recovered from customers through the
ratemaking process. The significant components of regulatory assets at December
31, 2001 and 2000 were approximately $336 million and $385 million,
respectively, and are included in other long-term assets.

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

                                     F-15

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


  .   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.

   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.

   Operating results in the transmission and distribution business may be
impacted by commodity price fluctuations resulting from purchases of
electricity used in supplying service to its customers. IP has contracted for
volumes from various suppliers under contracts having various terms. Certain of
these contracts do not obligate the supplier to provide replacement power to IP
in the event of a curtailment or shutdown of operating facilities. If the
commodity volumes supplied from these agreements are inadequate to cover IP's
native load, the Company will be required to purchase its supply needs in
open-market purchases at prevailing market prices. Such purchases would expose
IP to commodity price risk. Price risk associated with the gas marketing
operations of IP is mitigated through contractual terms applicable to the
business, as allowed by the Illinois Commerce Commission (ICC).

   Dynegy's commercial groups manage, on a portfolio basis, the resulting
market risks inherent in commercial transactions, subject to parameters
established by the Dynegy 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

                                     F-16

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


  .   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 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 $51 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.

                                     F-17

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


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

<TABLE>
<CAPTION>
                                       Investment    Below Investment
                                         Grade         Grade Credit
                                     Credit Quality Quality or Unrated  Total
                                     -------------- ------------------ ------
                                                  ($ in millions)
 <S>                                 <C>            <C>                <C>
 Utilities and power generators.....     $  562            $(22)       $  540
 Financial institutions.............       (110)              1          (109)
 Oil and gas producers..............        166             130           296
 Commercial and industrial companies        367              95           462
 Other..............................         48               6            54
                                         ------            ----        ------
 Value of portfolio before reserves.     $1,033            $210         1,243
                                         ======            ====        ======
 Credit and market reserves                                              (199)
                                                                       ------
                                                                        1,044
 Other................................................................     34
                                                                       ------
 Net risk management assets........................................... $1,078
                                                                       ======
</TABLE>

   The net risk management asset of $1,078 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.

   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.

   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.

                                     F-18

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


   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       $ 62
          Income tax effects.....................   (1)       (29)
                                                   ---       ----
                 Total...........................  $ 2       $ 33
                                                   ===       ====
</TABLE>

   Changes in stockholders' 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 $ 33
               Current period increase in fair value......    4
               Reclassifications to earnings, net.........  (11)
                                                           ----
                      Balance at December 31, 2001........ $ 26
                                                           ====
</TABLE>

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

<TABLE>
<S>                                                                                <C>
Statement No. 133, Net............................................................ $ 26
Currency Translation Adjustment...................................................  (28)
Unrealized Loss on Available-for-Sale Securities, Net.............................  (19)
                                                                                   ----
       Accumulated Other Comprehensive Loss, Net of Tax, at December 31, 2001..... $(21)
                                                                                   ====
</TABLE>

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

   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
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 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.

                                     F-19

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   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 $26 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 uses derivative financial instruments, including foreign exchange
forward contracts and cross currency interest rate swaps, to hedge this
exposure. For the year ended December 31, 2001, approximately $29 million of
net losses related to these contracts were included in the cumulative
translation adjustment. This amount neutralizes the cumulative translation
gains of the underlying net investments in foreign subsidiaries for the period
the derivative financial instruments were outstanding.

   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-20

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND 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>
Dynegy Inc
   Series B Convertible Preferred Securities.......................  $1,503  $1,418   $   --  $   --
   Foreign Currency Risk-Management Contracts......................     (11)    (11)       2       2
Dynegy Holdings Inc.
   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.............................     292     292      970     958
Illinova Corporation
   Senior Notes, 7.125%, due 2004..................................     102     100      103     101
   Medium Term Notes, 6.15% through 6.46%, due 2001 through
     2002..........................................................      20      20       50      50
   Serial Preferred Securities of a Subsidiary.....................      46      39       46      27
Illinois Power Company
   Commercial Paper................................................      38      38      148     148
   Revolving Credit Facilities.....................................     240     240       --      --
   Mortgage Bonds, 6% through 7.5%, due 2002 through 2025..........     674     649      674     671
   Pollution Control Revenue Refunding Bonds, 5.4%-7.4%, due 2024
     through 2028..................................................     175     183      175     173
   Adjustable Rate Pollution Control Revenue Refunding Bonds, due
     2032..........................................................     150     150      150     150
   Floating Rate Pollution Control Revenue Refunding Bonds, due
     2017 through 2028.............................................     186     186      186     186
   Transitional Funding Trust Notes, 5.26% through 5.65%, due 2001
     through 2008..................................................     602     607      689     677
   Trust Originated Preferred Securities...........................      --      --      100      99
Dynegy Global Communications
   Investment in Warrants..........................................      37      37       14      14
</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

                                     F-21

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

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.

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

<TABLE>
<CAPTION>
                                                                         December 31,
                                                                   ------------------------
                                                                    2001     2000    1999
                                                                   ------- -------- -------
<S>                                                                <C>     <C>      <C>
Natural Gas (Trillion Cubic Feet).................................  11.894    7.709   5.702
Electricity (Million Megawatt Hours)..............................  77.997  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............................ $   206 $     -- $    --
   Fixed Interest Rate Paid on Swaps (Percent)....................   5.310       --      --
Interest Rate Risk-Management Contract............................ $   100 $     -- $    --
   Fixed Interest Rate Received (Percent).........................   4.370       --      --
U.K. Pound Sterling (In millions of U.S. Dollars)................. $   906 $     15 $    86
Average U.K. Pound Sterling Contract Rate (U.S. Dollars).......... $1.4233 $ 1.4658 $1.6191
Euro Dollars (In millions of U.S. Dollars)........................ $    18 $     36 $    --
Average Euro Dollar Contract Rate (U.S. Dollars).................. $0.8863 $ 1.0200 $    --
Canadian Dollar (In Millions of U.S. Dollars)..................... $ 1,395 $    738 $   289
Average Canadian Dollar Contract Rate (U.S. Dollars).............. $0.6435 $ 0.6768 $0.6775
</TABLE>

   In 2001, approximately 10% of the Company's consolidated revenues and 12% of
consolidated costs of sales were derived from transactions with Enron. Based on
the terms of these transactions, Dynegy can fulfill these needs through other
counterparties.

                                     F-22

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND 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).... $ 241   $   238   $80
                                                     =====   =======   ===
       Taxes paid (net of refunds).................. $  79   $    40   $ 2
                                                     =====   =======   ===
       Detail of businesses acquired:(1)
       Current assets and other..................... $  62   $   648   $--
       Fair value of non-current assets.............   863     7,509    --
       Liabilities assumed, including deferred taxes  (308)   (4,782)   --
       Subordinated capital assumed.................    --      (239)   --
       Capital stock issued and options exercised...    --    (1,884)   --
       Cash balance acquired........................   (14)      (50)   --
                                                     -----   -------   ---
       Cash paid, net of cash acquired.............. $ 603   $ 1,202   $--
                                                     =====   =======   ===
</TABLE>
--------
(1) The businesses acquired included: 2001--BG Storage Limited ("BGSL"), a
    wholly owned subsidiary of BG Group plc, and iaxis, Limited ("iaxis") and
    2000--Extant, Inc. ("Extant") and Illinova Corporation ("Illinova"). See
    Note 14 for more information regarding these acquisitions.

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...................... $4,040  $3,505
              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
           Transmission and Distribution.............  1,993   1,906
           Dynegy Global Communications..............    237      58
           IT Systems and Other......................    436     285
                                                      ------  ------
                                                       9,130   7,356
           Less: accumulated depreciation............   (921)   (649)
                                                      ------  ------
                                                      $8,209  $6,707
                                                      ======  ======
</TABLE>

   Interest capitalized related to costs of projects in process of development
totaled $20 million, $30 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-23

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


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 $843 million and $727 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.

   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 2,400 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)
                               ------------- ------------- -------------
                                      Equity        Equity        Equity
                               Total  Share  Total  Share  Total  Share
                               ------ ------ ------ ------ ------ ------
                                            ($ in millions)
       <S>                     <C>    <C>    <C>    <C>    <C>    <C>
       Current assets......... $1,208 $  513 $1,029 $  374 $  525 $  184
       Non-current assets.....  2,800  1,179  2,934  1,233  2,787  1,193
       Current liabilities....    791    339    734    276    847    374
       Non-current liabilities  1,056    392  1,363    520  1,183    487
       Revenues...............  4,000  1,540  3,988  1,568  1,339    526
       Operating margin.......    920    352    857    324    443    174
       Net income.............    541    218    481    196    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 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.

                                     F-24

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


   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 $84 million and $55 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 $23 million and $17 million, respectively.

   In November 2001, Dynegy acquired 1,000 shares of Series A Preferred Stock
("Series A Preferred Stock") in Northern Natural Gas Company ("Northern
Natural") for $1.5 billion. The Series A Preferred Stock is entitled to
cumulative dividends, as and if declared by the board of directors of Northern
Natural, at a rate of 6%, payable annually beginning on January 31, 2003.
Dividends of $13 million are reflected in "Other Income" on the 2001
Consolidated Statement of Operations. The Series A Preferred Stock is
redeemable at the option of Northern Natural under specified circumstances at a
redemption price equal to the liquidation preference plus accrued and unpaid
dividends and other items.

   Concurrent with the investment in Northern Natural, Dynegy 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's termination of a merger agreement with Enron, it 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, 2001, 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 Series A Preferred Stock and the option
exercise price, subject to adjustments based on Northern Natural's indebtedness
and working capital.

                                     F-25

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


NOTE 7--DEBT

   Long-term debt and transitional funding trust notes outstanding consisted of
the following at December 31:

<TABLE>
<CAPTION>
                                                                                 2001    2000
                                                                                ------  ------
                                                                                ($ in millions)
<S>                                                                             <C>     <C>
Long-Term Debt:
Dynegy Holdings Inc.
   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      --
Illinova Corporation
   Senior Notes, 7.125%, due 2004..............................................    102     103
   Medium Term Notes, 6.15% due 2001...........................................     --      30
   Medium Term Notes, 6.46% due 2002...........................................     20      20
Illinois Power Company
   Commercial Paper............................................................     38     148
   Revolving Credit Facilities.................................................    240      --
   Mortgage Bonds, 6.25% due 2002..............................................     96      96
   Mortgage Bonds, 6.5% due 2003...............................................    101     101
   Mortgage Bonds, 6% due 2003.................................................     90      90
   Mortgage Bonds, 6.75% due 2005..............................................     71      71
   Mortgage Bonds, 7.5% due 2009...............................................    250     250
   Mortgage Bonds, 7.5% due 2025...............................................     66      66
   Floating Rate Pollution Control Revenue Refunding Bonds, due 2017...........     75      75
   Floating Rate Pollution Control Revenue Refunding Bonds, due 2028...........    111     111
   Adjustable Rate Pollution Control Revenue Refunding Bonds, due 2032.........    150     150
   Pollution Control Revenue Refunding Bonds, 5.4%-7.4%, due 2024 through 2028.    175     175
                                                                                ------  ------
                                                                                 4,206   2,860
       Less: Amounts due within one year.......................................    372      32
                                                                                ------  ------
Total Long-Term Debt........................................................... $3,834  $2,828
                                                                                ======  ======
</TABLE>

                                     F-26

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

<TABLE>
<CAPTION>
                                                                  2001    2000
                                                                  ----    ----
                                                                  ($ in millions)
     <S>                                                          <C>     <C>
        Transitional Funding Trust Notes:
        Transitional Funding Trust Notes, 5.26% due 2001......... $ --    $ 38
        Transitional Funding Trust Notes, 5.31% due 2002.........   31      80
        Transitional Funding Trust Notes, 5.34% due through 2003.   85      85
        Transitional Funding Trust Notes, 5.38% due through 2005.  174     174
        Transitional Funding Trust Notes, 5.54% due through 2007.  174     174
        Transitional Funding Trust Notes, 5.65% due through 2008.  138     138
                                                                   ----    ----
                                                                  $602    $689
            Less: Amounts due within one year....................   86      84
                                                                   ----    ----
     Total Transitional Funding Trust Notes...................... $516    $605
                                                                   ====    ====
</TABLE>

   Aggregate maturities of the principal amounts of all long-term indebtedness
are: 2002--$458 million; 2003--$340 million; 2004--$255 million; 2005--$680
million; 2006--$305 million and beyond $2.8 billion.

   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
programs for Dynegy, Dynegy Holdings Inc. ("Holdings") and IP are 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 weighted
average interest rate on amounts outstanding under IP's commercial paper
program were 3.3% and 8.0% 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>
                 Total    Unused  Maturity            Eurodollar Facility
                Capacity Capacity   Date      Term      Margin     Fee
                -------- -------- -------- ---------- ---------- --------
                                     ($ in millions)
       <S>      <C>      <C>      <C>      <C>        <C>        <C>
       Dynegy..  $  300    $300   11/02/02 Multi-year   0.450%    0.150%
       Holdings  $  400    $ --   05/27/03 Multi-year   0.200%    0.100%
                  1,200     618   05/01/02    364-day   0.400%    0.100%
                     40      --   11/20/02     1-year   0.600%    0.250%
       IP......  $  300    $ 22   05/20/02    364-day   0.625%    0.125%
</TABLE>

   The Dynegy, Holdings and IP 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 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.

                                     F-27

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


   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, debentures, new mortgage
bonds, pollution control bonds and transitional funding trust notes having
maturities that extend through 2032. The transitional funding trust notes are
non-recourse to the Company. 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, Dynegy Holdings 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.

NOTE 8--INCOME TAXES

   The Company is subject to U.S. federal, foreign and state income taxes on
its operations. 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.................... $  131    $ 85    $ --
                  Foreign.....................      7      25      12
               Deferred tax expense (benefit):
                  Domestic....................    213     149      53
                  Foreign.....................    (20)     (7)      7
                                                ------    ----   ----
               Income tax provision:.......... $  331    $252    $ 72
                                                ======    ====   ====
</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....................... $ 956  $700 $159
                 Foreign........................   (88)   36   61
                                                 -----  ---- ----
                                                 $ 868  $736 $220
                                                 =====  ==== ====
</TABLE>

                                     F-28

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


   Deferred income taxes are provided for the temporary differences between the
tax basis of Dynegy'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:
         Loss carry forward................................ $   66  $   49
         Alternative Minimum Tax ("AMT") and other credits.    115     218
                                                            ------  ------
                                                               181     267
      Valuation allowance..................................     --      --
                                                            ------  ------
                                                               181     267
      Deferred tax liabilities:
         Items associated with capitalized costs...........  1,949   1,663
                                                            ------  ------
      Net deferred tax liability........................... $1,768  $1,396
                                                            ======  ======
</TABLE>

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

   Income tax provisions for the years ended December 31, 2001, 2000 and 1999,
were equivalent to effective rates of 38 percent, 34 percent and 33 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 $  304   $  258  $  77
           State taxes........................     20       16      4
           Foreign tax benefit................     --       (5)    (3)
           Basis differentials and other......      7      (17)    (6)
                                               ------   ------  -----
           Income tax provision............... $  331   $  252  $  72
                                               ======   ======  =====
</TABLE>

   At December 31, 2001, the Company had approximately $186 million of regular
tax net operating loss carryforwards, $109 million of AMT credit carryforwards
and $564 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.

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

                                     F-29

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

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.

   Illinois Power Financing Inc. ("IPFI") is a statutory business trust in
which IP serves as sponsor. In 1996, IPFI issued $100 million aggregate
liquidation amount of 8% Trust Originated Preferred Securities ("TOPrS") in a
private transaction. The TOPrS were to mature on January 31, 2045 and could be
redeemed at IP's option, in whole or in part, from time to time on or after
January 31, 2001. On September 30, 2001, IP redeemed all $100 million of the
TOPrS. The redemption was financed with $85 million cash and $15 million in
commercial paper.

   Serial Preferred Securities of a Subsidiary of approximately $46 million
consists of six series of preferred stock issued by IP, with interest rates
ranging from 4.08% to 7.75%. Certain series are redeemable at the option of IP,
in whole or in part. On February 25, 2002, Illinova commenced a tender offer
relating to the shares of IP's preferred stock. Concurrently, IP commenced a
solicitation of consents from its preferred stockholders to amend IP's Restated
Articles of Incorporation to eliminate a provision restricting IP's ability to
incur unsecured debt. The completion of the tender offer and consent
solicitation is conditioned on, among other things, the approval of the
proposed amendment by holders of at least two-thirds of the outstanding shares
of preferred stock, voting together as one class.

   On November 13, 2001, ChevronTexaco purchased 150,000 shares of Dynegy's
Series B Mandatorily Convertible Redeemable Preferred Stock ("Series B
Preferred Stock") for $1.5 billion. The proceeds from this issuance were used
to finance Dynegy's investment in Northern Natural, which is discussed in
detail in Note 19. Each share of Dynegy's Series B Preferred Stock is
convertible, at the option of ChevronTexaco, for a period of two years into
shares of Dynegy Class B common stock at the conversion price of $31.64. Dynegy
incurred a special dividend of approximately $65 million based on the intrinsic
value of the conversion option given to ChevronTexaco because the conversion
price was an approximate 5% discount to the market price. Dynegy is recognizing
this dividend over the period the Series B Preferred Stock is outstanding as
required by generally accepted accounting principles. Unless ChevronTexaco
exercises its conversion right, Dynegy is required to redeem the Series B
Preferred Stock for $1.5 billion two years from the date of issuance. The
Series B Preferred Stock does not have a dividend.

NOTE 10--MINORITY INTEREST

   In June 2000, Dynegy and a third party invested in Catlin Associates, L.L.C.
("Catlin"), an entity that is consolidated by Dynegy, with the third party's
investment reflected in Minority Interest on the consolidated balance sheet.
Dynegy invested $100 million in Catlin and the third party investor contributed
$850 million. As a

                                     F-30

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

result of its investment, the third party is entitled to a non-controlling
preferred interest in Catlin, which holds economic interests in midwest
generation assets. On or before June 29, 2005, Dynegy and the third party
investor must agree upon whether and how to make future investments on behalf
of Catlin. If the shareholders are not able to reach agreement regarding
permitted investments or Catlin fails to pay the preferred return to the third
party, Dynegy has the option to purchase the investor's interest for $850
million or liquidate the assets of Catlin. Dynegy retains an option to acquire
the minority investors' interest in Catlin through June 2010 for $850 million.
Catlin has limited recourse to Dynegy, with such recourse building over time to
a maximum of $270 million in 2005. As of December 31, 2001, recourse to Dynegy
was approximately $35 million. In addition, under certain circumstances, Dynegy
may be required to make an additional capital contribution of $60 million to
Catlin. The $60 million contingent obligation expires on December 31, 2002. If
Dynegy Holdings' credit rating from Standard & Poors' and Moody's falls below
investment grade, the Company would be required to post approximately $270
million of cash collateral.

   Minority interest on the consolidated balance sheet also includes
third-party investments in certain other consolidated entities, principally
relating to Dynegy Midstream Services ("DMS") operations and Dynegy Global
Communications ("DGC"). 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

   Legal Proceedings.  On August 3, 1998, Modesto Irrigation District ("MID")
filed a lawsuit against PG&E and Destec Energy, Inc. ("Destec") in federal
court for the Northern District of California, San Francisco division. The
lawsuit alleges violation of federal and state antitrust laws and breach of
contract against Destec. The allegations are related to a power sale and
purchase arrangement in the city of Pittsburg, California. MID seeks actual
damages from PG&E and Destec in amounts not less than $25 million. MID also
seeks a trebling of any portion of damages related to its antitrust claims. By
order dated February 2, 1999, the federal District Court dismissed MID's state
and federal antitrust claims against PG&E and Destec; however, the Court
granted MID leave of thirty days to amend its complaint to state an antitrust
cause of action. On March 3, 1999, MID filed an amended complaint recasting its
federal and state antitrust claims against PG&E and Destec and restated its
breach of contract claim against Destec. PG&E and Destec filed motions to
dismiss MID's revised federal and state antitrust claims and a hearing on the
motions to dismiss was held in July 1999. On August 20, 1999, the District
Court again dismissed MID's antitrust claims against PG&E and Destec, this time
without leave to amend the complaint. As a result of the dismissal of the
antitrust claims, the District Court also dismissed the pendant state law
claims. MID has appealed the District Court's dismissal of its suit to the
Ninth Circuit Court of Appeal. Oral arguments before the Ninth Circuit occurred
on March 15, 2001. The Ninth Circuit has yet to deliver its decision on the
case. Although PG&E filed a Chapter 11 bankruptcy proceeding on April 6, 2001,
the automatic stay applicable in the proceeding will be lifted to permit the
Ninth Circuit to decide the pending appeal.

   Following dismissal of its federal court suit, MID filed suit in California
state court asserting breach of contract and tortious interference with
prospective economic relations claims against Destec and tortious interference
with contract and interference with prospective economic relations claims
against PG&E. Motions to dismiss MID's state court claims were heard by the
state court and by order dated April 6, 2000, MID was directed to amend its
complaint. MID filed its amended complaint on April 20, 2000, including Dynegy
as a defendant. Dynegy filed a motion to dismiss MID's amended complaint
against Dynegy, and the Court partially granted Dynegy's motion to dismiss
while also granting MID leave to amend its complaint. Before MID filed its
amended complaint, MID agreed with PG&E and Dynegy to execute a tolling
agreement on all claims and to

                                     F-31

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

dismiss the state court case until the federal appeal is decided. After
executing the tolling agreement, on October 23, 2000, MID filed in the state
court a Request for Dismissal, which the court granted on October 25, 2000.
Dynegy believes the allegations made by MID are without merit and will continue
to vigorously defend MID's claims. In the opinion of management, the amount of
ultimate liability with respect to these actions will not have a material
adverse effect on the financial position or results of operations of the
Company.

   On November 3, 1999, the United States Environmental Protection Agency
("EPA") issued a Notice of Violation ("NOV") against Illinois Power Company
("IP") and, with the Department of Justice ("DOJ"), filed a complaint against
IP in the U.S. District Court for the Southern District of Illinois, No.
99C833. Subsequently, the DOJ and EPA amended the NOV and complaint to include
Illinova Power Marketing, Inc. (now known as Dynegy Midwest Generation Inc.
("DMG")) (IP and DMG collectively the "Defendants"). Similar notices and
lawsuits have been filed against a number of other utilities. Both the NOV and
complaint allege violations of the Clean Air Act (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 potential penalties that could be imposed if the EPA were to successfully
prosecute its claims.

   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

                                     F-32

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

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.

   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 the allegations are without merit and will vigorously
defend against these claims. In the opinion of management, although significant
capital expenditures could be required, the amount of ultimate liability with
respect to this action will not have a material adverse effect on the financial
position or results of operations of the Company.

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

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

    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

                                     F-33

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

the owners of in-state generation and various power marketers, conspired to
manipulate the California wholesale power market to the detriment of California
consumers. Included among the acts forming the basis of the plaintiffs' claims
are the alleged improper sharing of generation outage data, improper
withholding of generation capacity and the manipulation of power market bid
practices. The plaintiffs seek unspecified treble damages. The Bustamante suit
includes claims against various Dynegy entities, including Dynegy Inc. and
Dynegy Marketing and Trade, as well as against three corporate officers
individually. The allegations in this suit are similar to those in the other
five suits, with the exception that the Bustamante suit includes a claim of
unfair business practices based on "price gouging" during an emergency declared
by Governor Gray Davis.

   The six lawsuits are at preliminary stages. Defendants in the six lawsuits
have yet to file answers. The plaintiffs filed motions to remand 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 the allegations are without merit and will
vigorously defend these claims. In the opinion of management, the amount of
ultimate liability with respect to these actions will not have a material
adverse effect on the financial position or results of operations of the
Company.

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

   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

                                     F-34

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

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.

   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 currently 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

                                     F-35

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

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 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 has closely monitored developments in California in an effort to
manage Dynegy's credit risk. The Company and its affiliates recorded reserves
that are determined to be probable and are considered estimable. Although such
reserves may change over time as the market uncertainties are resolved,
management believes such changes will not ultimately be material to the
Company's consolidated financial position or results of operations.

   On December 2, 2001, Enron Corp. and Enron Transportation Services Co.
(collectively, "Enron") filed suit against Dynegy and Holdings 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 Holdings 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 Holdings 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

                                     F-36

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

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

   The Company believes 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. An adverse result in these proceedings,
however, could have a material adverse effect on the Company's financial
position and results of operations.

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

   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, power generation assets and long-haul fiber
optic and metropolitan networks. The following describes the more significant
commitments outstanding at December 31, 2001.

   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. Based on current estimates, the market value of
electricity available for sale under these contracts, which are not already
recorded at fair value on the balance sheet, exceed the value of the capacity
payments by $347 million, after adjusting for market, credit and other reserves.

   The Company has $75 million of unconditional purchase obligations related to
the purchase of gas, coal, systems design and power purchase agreements. 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 $715 million as
of December 31, 2001, with $305 million of the $715 million due after 2006.

                                     F-37

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


   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
currently 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.

   The Company also has an information systems service agreement under which it
is obligated to pay $6 million a year through 2006.

   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 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, natural gas liquids transportation assets and certain fiber optic
and telecommunications-related assets, 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 80-86% (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 80-86% of the fair market value at lease
termination, we are obligated to pay the owner the difference in valuation.

   In addition, Company subsidiaries are designing and constructing generating
facilities as agent for a third party, and the Company may be obligated to
guarantee up to approximately 90 percent of the actual cost of these facilities
during the construction phase. It is anticipated that a subsidiary of the
Company will subsequently lease the completed facilities from the relevant
third parties for initial terms of four to five years. Under certain
circumstances, the Company maintains an option to purchase the relevant
facility from the third party.

   The Company also has a commitment to pay decommissioning costs of
approximately $5 million a year for the years 2002 to 2004 related to the sale
of the Clinton nuclear facility in 1999. This sale occurred prior to Dynegy's
acquisition of Illinova in 2000; thus, Dynegy was not involved with the sale.
However, Dynegy assumed this decommissioning obligation in connection with its
acquisition of Illinova.

   Minimum commitments in connection with office space, equipment, plant sites
and other leased assets at December 31, 2001, were as follows: 2002--$180
million; 2003--$167 million; 2004--$230 million, 2005--$562 million; 2006--$127
million and beyond--$1.7 billion.

                                     F-38

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


   Rental payments made under the terms of these arrangements totaled--$169
million in 2001, $75 million in 2000 and $31 million in 1999.

   Guarantees.  The Company has $288 million of surety bonds as of December 31,
2001 in which Dynegy indemnifies the respective surety bond companies.
Approximately $204 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 $657 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
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.

NOTE 13--CAPITAL STOCK

   At December 31, 2001, the Company had authorized capital stock consisting of
900,000,000 shares of Class A Common stock, 360,000,000 shares of Class B
Common stock and 70,000,000 shares of preferred stock.

   Preferred Stock.  The Company's preferred stock may be issued from time to
time in one or more series, the shares of each series to have such designations
and powers, preferences, rights, qualifications, limitations and restrictions
thereof as described in the Company's Amended and Restated Articles of
Incorporation.

   Pursuant to the terms of the Illinova acquisition, Dynegy established a
series of preferred stock, designated as Series A Convertible Preferred Stock,
which was issued to British Gas Atlantic ("BG") and NOVA Corporation ("NOVA")
in accordance with the exchange ratios provided in the acquisition documents.
On the effective date of the acquisition, BG and NOVA held an aggregate 6.7
million shares of this Series A Convertible Preferred Stock. All of these
shares were converted into shares of Class A common stock in the second quarter
of 2000. In addition 8,000,000 shares of preferred stock, previously designated
as Dynegy Series A Participating Preferred Stock ("Series A Preferred"), were
converted to shares of Class B common stock on a 0.69-for-one exchange ratio.

   Common Stock.  At December 31, 2001, there were 356,484,370 shares of Class
A and B common stock issued in the aggregate and 1,766,800 shares were held in
treasury. During 2001, Dynegy paid quarterly cash dividends on its common stock
of $0.075 per share, or $0.30 per share on an annual basis.

                                     F-39

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


   Pursuant to the terms of the Illinova acquisition, Dynegy split its common
shares into two classes, Class A and Class B. All of the Class B common stock
is owned by Chevron U.S.A. Inc. ("Chevron"). Generally, holders of Class A and
Class B common stock are entitled to one vote per share on all matters to be
voted upon by the shareholders. Holders of Class A common stock may cumulate
votes in connection with the election of directors. The election of directors
and all other matters will be by a majority of shares represented and entitled
to vote, except as otherwise provided by law. Holders of Class B common stock
vote together with holders of Class A common stock as a single class on every
matter acted upon by the shareholders except for the following matters:

  .   the holders of Class B common stock vote as a separate class for the
      election of three directors of Dynegy, while the holders of Class A
      common stock vote as a separate class for the remaining eleven directors;

  .   any amendment to the special corporate governance rights of Class B
      common stock must be approved by a majority of the directors elected by
      holders of Class B common stock and a majority of all Dynegy directors or
      by a 66 2/3 percent of the outstanding shares of Class B common stock
      voting as a separate class, and the affirmative vote of a majority of the
      shares of Class A and Class B common stock, voting together as a single
      class; and

  .   any amendment to the provision of the Amended and Restated Articles of
      incorporation addressing the voting rights of holders of Class A and
      Class B common stock requires the approval of 66 2/3 percent of the
      outstanding shares of Class B common stock voting as a separate class,
      and the affirmative vote of a majority of the shares of Class A and Class
      B common stock, voting together as a single class.

   Subject to the preferences of preferred stock, holders of Class A and Class
B common stock have equal ratable rights to dividends, when and if dividends
are declared by the board of directors. Holders of Class A and Class B common
stock are entitled to share ratably, as a single class, in all of the assets of
Dynegy available for distribution to holders of shares of common stock upon the
liquidation, dissolution or winding up of the affairs of Dynegy, after payment
of Dynegy's liabilities and any amounts to holders of preferred stock.

   A share of Class B common stock automatically converts into a share of Class
A common stock upon the transfer to any person other than an affiliate of
Chevron. Additionally, each share of Class B common stock automatically
converts into a share of Class A common stock if the holders of all Class B
common stock cease to own collectively 15 percent of the outstanding common
stock of Dynegy. Conversely, any shares of Class A common stock acquired by
Chevron or its affiliates will automatically convert into shares of Class B
common stock, so long as Chevron and its affiliates continue to own 15 percent
or more of the outstanding voting power of Dynegy.

   Holders of Class A and Class B common stock generally are not entitled to
preemptive rights, subscription rights, or redemption rights, except that
Chevron is entitled to preemptive rights under the shareholder agreement. The
rights and preferences of holders of Class A common stock are subject to the
rights of any series of preferred stock Dynegy may issue.

   In December 2001, 27.5 million shares of Class A common stock were sold
through a public offering which resulted in proceeds of approximately $539
million, net of underwriting commission and expenses of approximately $32
million. Concurrent with the public offering, members of the Company's senior
management purchased approximately 1.2 million shares of Class A common stock
from the Company in a private placement. The officers paid $19.75 per share for
the stock, the same price as the net proceeds to the Company in the public
offering, yielding net proceeds of $25 million. The officers paid for the
shares by entering into promissory notes

                                     F-40

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

with the Company for an initial term of 60 days. The maturity date of the notes
was extended for an additional 30 days with the approval of the Board of
Directors. The loans bear interest at 3.25 percent and are full recourse to the
borrowers. Such loans are accounted for as "Subscriptions Receivable" within
Stockholders' Equity on the Consolidated Balance Sheet at December 31, 2001.
The net proceeds from these equity sales were used to reduce indebtedness under
Dynegy Holdings' revolving credit facility by approximately $540 million and
the remainder of the proceeds were invested in cash.

   In January 2002, Chevron purchased approximately 10.4 million shares of
Class B common stock in a private transaction, pursuant to the exercise of its
pre-emptive rights under the shareholder agreement. The proceeds from this sale
were approximately $205 million.

   In July 2001, Dynegy established the Dynegy Inc. Short-Term Executive Stock
Purchase Loan Program pursuant to which eligible employees were loaned funds to
acquire Class A common stock through market purchases. Outstanding loans bear
interest at the greater of five percent or the applicable federal rate as of
the loan date, are full recourse to the participants and mature on December 19,
2004. At December 31, 2001, approximately $13 million, which included accrued
and unpaid interest, was owed to the Company under this program for 375,800
shares of Class A common stock. The loans are accounted for as Subscriptions
Receivable within Stockholders' Equity on the Consolidated Balance Sheet.

   Earlier in 2001, approximately 1.2 million shares of Class B common stock
were sold to Chevron in a private transaction, pursuant to the exercise of its
pre-emptive rights under the shareholder agreement. The proceeds from this
transaction were approximately $41 million.

   During 2000, Dynegy sold approximately 22.6 million shares of common stock.
The offerings included approximately 18.4 million shares of Class A common
stock sold to the public and approximately 4.2 million shares of Class B common
stock sold to Chevron. Total net proceeds to Dynegy from these sales
approximated $858 million, net of underwriting commissions and expenses of
approximately $10 million. Additionally, Chevron purchased $200 million of
Class B common stock concurrent with the acquisition of Illinova.

   Concurrent with the acquisition of Illinova, BG and NOVA were issued
preferred shares which were convertible into Class A common stock. Based on the
value of the conversion features of the preferred stock, the Company incurred
an implied dividend of $32 million.

                                     F-41

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


   Common stock activity (in millions) for the three years ended December 31,
2001 was as follows:

<TABLE>
<CAPTION>
                                                   Class A        Class B
                                  Common Stock   Common Stock  Common Stock
                                  ------------  -------------  -------------
                                  Shares Amount Shares Amount  Shares Amount
                                  ------ ------ ------ ------  ------ ------
   <S>                            <C>    <C>    <C>    <C>     <C>    <C>
   December 31, 1998.............   211   $ 1     --   $   --    --    $ --
   Options exercised.............     5    --     --       --    --      --
   401(k) plan and profit sharing     1    --     --       --    --      --
                                   ----   ---    ---   ------    --    ----
   December 31, 1999.............   217     1     --       --    --      --
   Illinova acquisition..........  (217)   (1)   195    1,168    81     650
   Common stock issued...........    --    --     19      748     4     110
   Preferred Stock conversion....    --    --     12       --    --      --
   Extant acquisition............    --    --      2       67    --      --
   Options exercised.............    --    --      9      157    --      --
   401(k) plan and profit sharing    --    --      1       12    --      --
   Options granted...............    --    --     --       15    --      --
                                   ----   ---    ---   ------    --    ----
   December 31, 2000.............    --    --    238    2,167    85    $760
   Common stock issued...........    --    --     30      564     1      41
   Subscriptions receivable......    --    --     --      (38)   --      --
   Options exercised.............    --    --      3       59    --      --
   401(k) plan and profit sharing    --    --     --       11    --      --
   Options granted...............    --    --     --       13    --      --
                                   ----   ---    ---   ------    --    ----
   December 31, 2001.............    --   $--    271   $2,776    86    $801
                                   ====   ===    ===   ======    ==    ====
</TABLE>

   The December 31, 2001 Class A Common Stock balance is net of $38 million in
Subscriptions receivable described above (see Note 16 for further discussion).
Such amount is included on the face of the Consolidated Balance Sheet and
classified as a separate line item.

                                     F-42

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


   Stock Options.  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. 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 $12.7 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.... 21,531  $ 1.47-$57.02 24,022  $ 1.47-$16.62 25,777  $1.47-$15.67
Granted...............................  8,357  $27.80-$57.95  7,197  $10.44-$57.02  4,203  $1.47-$16.62
Exercised............................. (2,543) $ 1.47-$39.67 (8,592) $ 1.47-$22.21 (4,658) $1.47-$13.68
Cancelled or expired..................   (586) $ 1.47-$56.50 (1,096) $ 1.47-$57.02 (1,232) $1.47-$13.77
Other, contingent share issuance......     --  $          --     --  $          --    (68) $1.47-$ 4.10
                                       ------  ------------- ------  ------------- ------  ------------
Outstanding at end of period.......... 26,759  $ 1.47-$57.95 21,531  $ 1.47-$57.02 24,022  $1.47-$16.62
                                       ======  ============= ======  ============= ======  ============
Exercisable at end of period.......... 12,550  $ 1.47-$57.02 12,779  $ 1.47-$23.83  9,983  $1.47-$15.67
                                       ======  ============= ======  ============= ======  ============
Weighted average fair value of options
 granted during the period at market..         $       24.45         $       14.40         $       7.76
                                               =============         =============         ============
Weighted average fair value of options
 granted during the period at below
 market...............................         $          --         $       24.10         $       9.65
                                               =============         =============         ============
</TABLE>

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

<TABLE>
<CAPTION>
                                 Options Outstanding            Options Exercisable
                         ------------------------------------ -----------------------
                           Number of      Weighted              Number of
                            Options       Average    Weighted    Options     Weighted
                         Outstanding at  Remaining   Average  Exercisable at Average
                          December 31,  Contractual  Exercise  December 31,  Exercise
Range of Exercise Prices      2001      Life (Years)  Price        2001       Price
------------------------ -------------- ------------ -------- -------------- --------
<S>                      <C>            <C>          <C>      <C>            <C>
     $ 1.47-$ 5.80......      7,969         4.2       $ 2.80       4,822      $ 2.25
     $ 5.81-$11.59......      2,516         6.6       $ 9.95       2,516      $ 9.95
     $11.60-$17.39......      6,481         7.3       $15.72       4,653      $15.45
     $17.40-$23.18......         79         7.4       $21.83          30      $21.80
     $23.19-$28.98......        860         7.9       $24.02         253      $23.96
     $28.99-$34.77......      2,549         9.7       $34.32           8      $31.68
     $34.78-$40.57......        224         8.9       $37.78          74      $37.20
     $40.58-$46.36......        588         8.7       $43.38         124      $43.33
     $46.37-$52.16......      5,236         9.1       $47.25          29      $48.78
     $52.17-$57.95......        257         8.7       $55.88          41      $55.51
                             ------         ---       ------      ------      ------
                             26,759                               12,550
                             ======                               ======
</TABLE>

                                     F-43

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


   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 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, 42.1 percent and 40.3
percent, respectively; risk-free interest rate of 4.29 percent, 6.10 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 and per share amounts would have
approximated the following pro forma amounts for the years ended December 31,
2001, 2000 and 1999, respectively.

<TABLE>
<CAPTION>
                                     Years Ended December 31,
                           --------------------------------------------
                                2001           2000           1999
                           -------------- -------------- --------------
                            Net   Diluted  Net   Diluted  Net   Diluted
                           Income   EPS   Income   EPS   Income   EPS
                           ------ ------- ------ ------- ------ -------
                              ($ in millions, except per share data)
         <S>               <C>    <C>     <C>    <C>     <C>    <C>
         Pro forma amounts  $481   $1.41   $468   $1.37   $139   $0.60
</TABLE>

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 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>

                                     F-44

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


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

   Dynegy completed its acquisition of Illinova on February 1, 2000. The merger
of Dynegy and Illinova involved the creation of a new holding company, now
known as Dynegy Inc. Dynegy accounted for the acquisition as a purchase of
Illinova with an effective date of January 1, 2000. This accounting treatment
was based on various factors present in the merger, including the majority
ownership (and voting control) of Dynegy's shareholders following the merger,
the role of Dynegy's management following the merger (including the service of
C.L. Watson as Chairman and Chief Executive Officer) and the influence of
Chevron because of the size of its ownership interest and its rights under the
shareholder agreement, articles of incorporation and bylaws.

   In the combination, Dynegy shareholders, other than Chevron, NOVA and BG,
elected to exchange each former Dynegy share for 0.69 of a share of Dynegy
Class A Common stock, based on a fixed exchange ratio, or elected to receive
$8.25 per share in cash consideration, subject to proration. NOVA and BG
elected cash and thereby reduced their respective ownership in Dynegy as part
of this combination. Additionally, instead of receiving Dynegy Class A common
stock in exchange for their respective shares of former Dynegy common stock,
NOVA and the parent of BG each received a combination of cash, subject to
proration, and shares of Dynegy Series A Convertible Preferred Stock. Chevron
received 0.69 of a share of Dynegy Class B common stock in exchange for each
share of former Dynegy common stock and Series A Participating Preferred Stock
it owned. Additionally, as part of the combination, Chevron purchased $200
million of additional Dynegy Class B common stock. Each share of Illinova
common stock was converted into one share of Dynegy Class A common stock.

   Approximately 60 percent of the consideration received by existing Dynegy
shareholders was in the form of Dynegy stock and 40 percent was cash. In the
aggregate, the cash portion of the consideration approximated $1.1 billion.
Dynegy financed the cash component of the acquisition initially with borrowings
under a debt facility and the issuance of $200 million of Class B common stock
to Chevron. On a long-term basis, Dynegy financed the acquisition of Illinova
through a combination of sales of common equity, the disposition of certain
non-strategic assets, the refinancing of Illinova's unregulated generation
assets and cash flow derived from its operations.

   The results of operations of the acquired Illinova assets are consolidated
with Dynegy's operations beginning January 1, 2000. The following table
reflects certain unaudited pro forma information for the period presented as if
the Illinova acquisition had taken place on January 1, 1999 (in millions,
except per share data). Unaudited pro forma results for the year ended December
31, 1999 include non-recurring after-tax gains of $41.8 million, or $0.15 per
diluted share (restated for two-for-one stock split effected by means of a
stock dividend distributed on August 22, 2000).

<TABLE>
<CAPTION>
                                                 Year Ended
                                                December 31,
                                                    1999
                                                ------------
                   <S>                          <C>
                   Pro forma revenues..........   $17,643
                   Pro forma net income........       214
                   Pro forma earnings per share      0.66
</TABLE>

   On September 29, 2000, Dynegy completed the acquisition of Extant, Inc.
("Extant"), a privately held communications solutions company providing
centralized clearinghouse services, OSS (Operations Support

                                     F-45

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

System) integration and network expansion capabilities to communications
service providers. Dynegy's net investment consisted of $92 million in cash and
1.8 million shares of Class A common stock. Following the transaction, Dynegy
established Dynegy Global Communications, a new segment that, in addition to
pursuing other communications opportunities, owns 80 percent of a limited
partnership called Dynegy Connect, L.P. which conducts many of the activities
previously conducted by Extant.

   Consideration paid for these recent acquisitions of businesses was as
follows:

<TABLE>
<CAPTION>
                                         BGSL iaxis Extant Illinova
                                         ---- ----- ------ --------
            <S>                          <C>  <C>   <C>    <C>
            Cash Purchase of Stock...... $581  $22   $ 91   $1,111
            Capital Stock Issued........   --   --     67    1,817
            Liabilities Assumed.........  263   45     75    4,707
            Subordinated capital assumed   --   --     --      239
                                         ----  ---   ----   ------
            Total Consideration......... $844  $67   $233   $7,874
                                         ====  ===   ====   ======
</TABLE>

   In both the Illinova and Extant acquisitions, the Company issued stock as a
component of the total consideration paid. The value of this consideration for
the Extant acquisition was determined based on the average of the Company's
quoted market price for the five trading days surrounding the announcement
date, which was August 2, 2000 ("average stock price"). This period includes
the announcement date and the two trading days just prior to and after the
announcement date. Each share of Extant common stock was converted into Dynegy
Class A common stock equal to $7.50 divided by the average stock price.

   The value of the stock consideration for the Illinova acquisition was based
on a fixed exchange ratio whereby each share of Illinova common stock was
converted to one share of Dynegy Class A common stock and each Dynegy
shareholder other than BG, NOVA and Chevron was converted into the right to
receive 0.69 shares of Dynegy Class A common stock. (See above for a discussion
of the exchange provisions that impacted these shareholders.) These fixed
exchange ratios were set prior to the circulation of the prospectus in
September 1999. This method of valuing the stock consideration was used since
management did not believe market quotes were a reliable indicator of fair
value. The reasons for this belief included, but were not limited to,
marketplace takeover rumors, Dynegy's stock being thinly traded prior to the
announcement and the merger's being premised on leveraging an unregulated
generation capacity position in a deregulating environment. The cash component
of the consideration was deemed to be a more reliable indicator of fair value,
thus an implied value for the stock consideration was calculated by dividing
the $16.50 per share (not adjusted herein for the two-for-one stock split which
occurred on August 22, 2000) cash price by the 0.69 stock exchange ratio.

NOTE 15--EMPLOYEE COMPENSATION, SAVINGS AND PENSION PLANS

   Corporate Incentive Plan.  Dynegy 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 Board of Directors ("Compensation Committee").

   401(k) Savings Plan.  The Company 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

                                     F-46

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

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).

   Certain eligible employees participate in the Illinois Power Company
Incentive Savings Plan and Illinois Power Company Incentive Savings Plan for
Employees Covered Under A Collective Bargaining Agreement ("IP Plans"), which
meet the requirements of Section 401(k) of the Internal Revenue Code and are
defined contribution plans subject to the provisions of ERISA. The Company
matches 50% of employee contributions to the IP Plans, up to a maximum of six
percent of compensation, subject to IRS limitations. Employees are immediately
100% vested in Company contributions. Matching contributions to the Plan are
made in Dynegy common stock.

   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 $27 million,
$35 million and $25 million, respectively.

                                     F-47

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


   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.............. $ 448  $   9  $  100  $  --
   Business combination..........................................    14    424       5     97
   Service cost..................................................    10     10       2      2
   Interest cost.................................................    34     33       8      7
   Plan amendments...............................................     8     --      --     --
   Actuarial (gain) loss.........................................    30     (3)     31     (1)
   Special termination benefits..................................     9     --      --     --
   Benefits paid.................................................   (29)   (25)     (6)    (5)
                                                                  -----  -----  ------  -----
Projected benefit obligation, end of the year.................... $ 524  $ 448  $  140  $ 100
                                                                  =====  =====  ======  =====
Fair value of plan assets, beginning of the year................. $ 627  $  10  $   83  $  --
Business combination.............................................    16    579      --     80
Actual return on plan assets.....................................   (30)    63      (8)    (4)
Employer contributions...........................................    --     --       9     12
Participant contributions........................................    --     --       1      1
Benefits paid....................................................   (29)   (25)     (6)    (6)
                                                                  -----  -----  ------  -----
Fair value of plan assets, end of the year....................... $ 584  $ 627  $   79  $  83
                                                                  =====  =====  ======  =====
Funded status.................................................... $  60  $ 179  $  (61) $ (17)
Unrecognized prior service costs.................................     8     --      --     --
Unrecognized actuarial (gain) loss...............................   101    (17)     55     10
Net amount recognized............................................ $ 169  $ 162  $   (6) $  (7)
Amounts recognized in the consolidated balance sheets consist of:
Prepaid benefit cost............................................. $ 174  $ 167  $   --  $  --
Accrued benefit liability........................................    (5)    (5)     (6)    (7)
Net amount recognized............................................ $ 169  $ 162  $   (6) $  (7)
Weighted Average Assumptions:
   Discount rate at December 31..................................  7.50%  7.99%   7.50%  8.00%
   Expected return on plan assets as of January 1................  9.47%  9.47%   9.50%  9.50%
   Rate of compensation increase.................................  4.48%  4.48%   4.50%  4.50%
   Medical trend--initial trend..................................    --     --   10.09%  6.70%
   Medical trend--ultimate trend.................................    --     --    5.48%  5.50%
                                                                                 2009/
   Medical trend--year of ultimate trend.........................    --     --    2015   2005
</TABLE>

                                     F-48

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


   The changes in the projected benefit obligation and in plan assets
attributable to business combination in 2000 are the result of the acquisition
of Illinova. 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. Special termination benefits of approximately $9
million in 2001 reflect the additional expense of the early retirement window
related to the Illinois Power Company Retirement Income Plan for Salaried
Employees.

   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... $ 10  $ 10  $ 1  $ 2  $ 2  $--
 Interest cost on projected benefit obligation   34    33    1    8    7   --
 Expected return on plan assets...............  (57)  (53)  (1)  (7)  (7)  --
 Amortization of unrecognized actuarial gain..   --    (1)  --    1   --   --
 Net periodic benefit cost (income)........... $(13) $(11) $ 1  $ 4  $ 2  $--
 Additional early retirement window benefits..    9    --   --   --   --   --
 Additional cost due to curtailment...........   --    --   (2)  --   --   --
 Total net periodic benefit cost (income)..... $ (4) $(11) $(1) $ 4  $ 2  $--
</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......   $ 2      $ (1)
   Impact on accumulated post-retirement benefit obligation   $14      $(13)
</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, $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 in Louisiana; a 39.2% ownership interest in West
Texas LPG Pipeline Limited Partnership, which holds a pipeline gathering system
in West 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.

                                     F-49

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


   The Company also has purchases and sales of 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.

   In July 2001, the Company established the Dynegy Short-Term Executive Stock
Purchase Loan Program. Under this program, the Company may loan eligible
employees funds to acquire Class A common stock through market purchases in
return for a two-year note. The notes bear interest at the greater of 5 percent
or the Applicable Federal Rate as of the loan date and are full recourse to
each payee. At December 31, 2001, the Company had issued approximately $13
million of loans pursuant to this program.

   Concurrent with the December 2001 Class A common stock sale, members of the
Company's senior management purchased approximately 1.2 million shares of Class
A common stock in a private placement transaction pursuant to Section 4(2) of
the Securities Act of 1933. The officers paid $19.75 per share for the stock,
the same price as the net proceeds to the Company in the public offering. The
officers paid for the shares by entering into promissory notes with the Company
for an initial term of 60 days. The maturity date of the notes was extended for
an additional 30 days with the approval of the Board of Directors. The loans
bear interest at 3.25 percent and are full recourse to the borrowers. Such
loans are accounted for as "Subscriptions Receivable" within Stockholders'
Equity on the Consolidated Balance Sheet at December 31, 2001. The Company
recognized compensation expense in 2001 of approximately $1.2 million, which
was recorded as "General and Administrative Expense", related to the shares
purchased by the officer group.

                                     F-50

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


NOTE 17--SEGMENT INFORMATION

   Dynegy's operations are reported in four segments: Wholesale Energy Network
("WEN"), Dynegy Midstream Services ("DMS"), Transmission and Distribution
("T&D") and Dynegy Global Communications ("DGC"). 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's
T&D segment includes the operations of IP, an energy-delivery company engaged
in the transmission, distribution and sale of electricity and natural gas to
customers across a 15,000-square-mile area of Illinois. DGC is engaged in
pursuing and capturing opportunities in the converging energy and
communications marketplace. DGC has a global long-haul fiber optic network and
metropolitan network in key cities in the United States and Europe. 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 Introductory 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     T&D    DGC   Elimination  Total
                                         -------  ------  ------  -----  ----------- -------
                                                           ($ in millions)
<S>                                      <C>      <C>     <C>     <C>    <C>         <C>
Unaffiliated revenues:
   Domestic............................. $25,916  $4,708  $1,593  $  17     $  --    $32,234
   Canadian.............................   4,622   1,463      --     --        --      6,085
   European & Other.....................   3,918      --      --     10        --      3,928
                                         -------  ------  ------  -----     -----    -------
                                          34,456   6,171   1,593     27        --     42,247
Intersegment revenues
   Domestic............................. $   585  $  237  $   25  $  --     $(847)   $    --
                                         -------  ------  ------  -----     -----    -------
   Total revenues....................... $35,041  $6,408  $1,618  $  27     $(847)   $42,247
                                         -------  ------  ------  -----     -----    -------
Depreciation and amortization...........    (182)    (82)   (168)   (21)       --       (453)
Operating income (loss).................     739     137     165   (117)       --        924
Interest expense........................     (87)    (52)   (114)    (7)       --       (260)
Other income (expense)..................     (39)     (5)     26      2        --        (16)
Earnings of unconsolidated affiliates...     203      13      --     26        --        242
Income tax (provision) benefit..........    (308)    (32)    (26)    35        --       (331)
Net income (loss)....................... $   499  $   56  $   45  $ (61)    $  --    $   539
Identifiable assets:
   Domestic............................. $15,093  $2,262  $4,515  $ 498     $  --    $22,368
   Canadian.............................     773     130      --     --        --        903
   European & Other.....................   2,196      --      --    248        --      2,444
Investments in unconsolidated affiliates   1,354     422     568    107        --      2,451
Capital expenditures and investments in
  unconsolidated affiliates.............  (2,119)   (391)   (701)  (237)       --     (3,448)
</TABLE>

                                     F-51

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


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

<TABLE>
<CAPTION>
                                           WEN      DMS     T&D    DGC  Elimination  Total
                                         -------  ------  ------  ----  ----------- -------
                                                           ($ in millions)
<S>                                      <C>      <C>     <C>     <C>   <C>         <C>
Unaffiliated revenues:
   Domestic............................. $17,864  $5,160  $1,581  $  2    $    --   $24,607
   Canadian.............................   2,316   1,224      --    --         --     3,540
   European.............................   1,268      --      --    --         --     1,268
                                         -------  ------  ------  ----    -------   -------
                                          21,448   6,384   1,581     2         --    29,415
Intersegment revenues
   Domestic.............................     743     249      27    --     (1,019)       --
                                         -------  ------  ------  ----    -------   -------
   Total revenues.......................  22,191   6,633   1,608     2     (1,019)   29,415
                                         -------  ------  ------  ----    -------   -------
Depreciation and amortization...........    (125)   (105)   (156)   (2)        --      (388)
Operating income (loss).................     430      90     215   (19)        --       716
Interest expense........................     (89)    (30)   (129)   (3)        --      (251)
Other income (expense)..................     140     (50)      3     2         --        95
Earnings of unconsolidated affiliates...     181      24      --    --         --       205
Income tax (provision) benefit..........    (224)    (10)    (24)    6         --      (252)
Net income (loss)....................... $   424  $   19  $   53  $(12)   $    --   $   484
Identifiable assets:
   Domestic............................. $13,597  $2,156  $3,577  $254    $    --   $19,584
   Canadian.............................     750     299      --    --         --     1,049
   European.............................     644      --      --    73         --       717
Investments in unconsolidated affiliates     625     174      --    --         --       799
Capital expenditures and investments in
  unconsolidated affiliates.............    (623)   (114)   (158)  (15)        --      (910)
</TABLE>

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

<TABLE>
<CAPTION>
                                           WEN      DMS   T&D DGC Elimination  Total
                                         -------  ------  --- --- ----------- -------
                                                        ($ in millions)
<S>                                      <C>      <C>     <C> <C> <C>         <C>
Unaffiliated revenues:
   Domestic............................. $ 8,100  $4,887  $-- $--    $  --    $12,987
   Canadian.............................   1,445      10   --  --       --      1,455
   European.............................     976      --   --  --       --        976
                                         -------  ------  --- ---    -----    -------
                                          10,521   4,897   --  --       --     15,418
Intersegment revenues
   Domestic.............................     131     240   --  --     (371)        --
                                         -------  ------  --- ---    -----    -------
   Total revenues.......................  10,652   5,137   --  --     (371)    15,418
                                         -------  ------  --- ---    -----    -------
Depreciation and amortization...........     (35)    (94)  --  --       --       (129)
Operating income........................     114      93   --  --       --        207
Interest expense........................     (36)    (42)  --  --       --        (78)
Other income (expense)..................      26       2   --  --       --         28
Earnings of unconsolidated affiliates...      62      18   --  --       --         80
Income tax (provision) benefit..........     (55)    (17)  --  --       --        (72)
Net income.............................. $   103  $   45  $-- $--    $  --    $   148
Identifiable assets:
   Domestic............................. $ 3,321  $2,550  $-- $--    $  --    $ 5,871
   Canadian.............................     266      68   --  --       --        334
   European.............................     175      --   --  --       --        175
Investments in unconsolidated affiliates     458     169   --  --       --        627
Capital expenditures and investments in
  unconsolidated affiliates.............    (357)    (92)  --  --       --       (449)
</TABLE>

                                     F-52

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)


NOTE 18--QUARTERLY FINANCIAL INFORMATION

   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, except per share data)
         <S>                        <C>      <C>      <C>        <C>
         Revenues.................. $13,182  $11,734   $8,551     $8,780
         Operating income..........     265       62      417        180
         Income before income taxes     221       71      436        140
         Net income................     148       30      274         87
         Net income per share......    0.44     0.09     0.81       0.25

                                              Quarter Ended
                                    --------------------------------------
                                     March    June    September  December
                                     2000     2000      2000       2000
                                    -------  -------  ---------  --------
                                    ($ in millions, except per share data)
         Revenues.................. $ 5,340  $ 5,723   $8,365     $9,987
         Operating income..........     185      153      221        157
         Income before income taxes     117      147      353        119
         Net income................      71       96      238         79
         Net income per share......    0.23     0.20     0.74       0.24
</TABLE>

NOTE 19--DYNEGY ENERGY PARTNERS L.P.

   On February 25, 2002, Dynegy Energy Partners L.P., a newly formed limited
partnership created to own and operate a portion of the Company's NGL business,
filed a registration statement on Form S-1 with the Securities and Exchange
Commission for an initial public offering. The partnership will succeed to a
portion of DMS' downstream NGL business, specifically, it will be engaged in
fractionation, storage, terminaling, transportation, distribution and marketing
NGLs to consumers throughout North America. Dynegy will own the general partner
of the partnership. The registration statement relating to the offering has not
yet been declared effective by the Securities and Exchange Commission and
Dynegy cannot guarantee its eventual effectiveness or that once effective,
Dynegy Energy Partners' initial public offering will be successfully completed.

NOTE 20--SUBSEQUENT EVENTS

   The Company has experienced a number of materially adverse developments
since the filing of its 2001 Form 10-K on March 13, 2002. For a description of
these events, including Andersen advising the Company that its 2001 audit
opinion should not be relied upon and that such audit opinion was withdrawn,
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. As a result of these adverse developments and the Company's
decision to exit third party risk management aspects of the marketing and
trading business, together with changes in accounting policies which have
significantly affected the Company's reported financial results, 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.

                                     F-53

<PAGE>

                                  DYNEGY INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                           (UNAUDITED AND RESTATED)

                                                                    Schedule II

    DYNEGY INC. VALUATION AND QUALIFYING ACCOUNTS (UNAUDITED AND RESTATED)

Years Ended December 31, 2001, 2000, and 1999

<TABLE>
<CAPTION>
                                         Balance  Charged                      Balance
                                           at     to Costs Charged             at End
                                        Beginning   and    to Other              of
                                        of Period Expenses Accounts Deductions Period
                                        --------- -------- -------- ---------- -------
<S>                                     <C>       <C>      <C>      <C>        <C>
2001
Allowance for doubtful accounts........   $ 69      $ 86     $(2)      $(46)     107
Allowance for risk management assets(1)    146        53      --         --      199

2000
Allowance for doubtful accounts........     24        52      --         (7)      69
Allowance for risk management assets(1)     38       108      --         --      146

1999
Allowance for doubtful accounts........     24         3      --         (3)      24
Allowance for risk management assets(1)      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.

                                     F-54