<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-11156
------------------------
DYNEGY HOLDINGS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3248415
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1000 LOUISIANA, SUITE 5800 77002
HOUSTON, TEXAS (zip code)
(Address of principal executive
offices)
</TABLE>
(713) 507-6400
(Registrant's telephone number, including area code)
WWW.DYNEGY.COM
(Registrant's home page)
------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
All outstanding equity of Dynegy Holdings Inc. is held by its parent Dynegy
Inc.
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<PAGE>
DYNEGY HOLDINGS INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets:
June 30, 2000 and December 31, 1999......................... 3
Condensed Consolidated Statements of Operations:
For the three months ended June 30, 2000 and 1999........... 4
Condensed Consolidated Statements of Operations:
For the six months ended June 30, 2000 and 1999............. 5
Condensed Consolidated Statements of Cash Flows:
For the six months ended June 30, 2000 and 1999............. 6
Notes to Condensed Consolidated Financial Statements........ 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 15
AND RESULTS OF OPERATIONS..................................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 33
Item 6. Exhibits and Reports on Form 8-K............................ 33
</TABLE>
2
<PAGE>
DYNEGY HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 27,835 $ 45,230
Accounts receivable, net.................................... 2,288,412 1,992,450
Accounts receivable, affiliates............................. 107,745 48,966
Inventories................................................. 123,517 271,884
Assets from risk management activities...................... 2,767,793 379,833
Prepayments and other assets................................ 33,541 66,717
----------- ----------
5,348,843 2,805,080
----------- ----------
PROPERTY, PLANT AND EQUIPMENT............................... 2,168,466 2,575,100
Less: accumulated depreciation.............................. (451,136) (557,219)
----------- ----------
1,717,330 2,017,881
----------- ----------
OTHER ASSETS:
Investments in unconsolidated affiliates.................... 635,758 627,335
Accounts receivable, affiliates............................. 584,585 --
Assets from risk management activities...................... 810,658 452,913
Other assets................................................ 473,328 621,962
----------- ----------
$ 9,570,502 $6,525,171
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 1,950,782 $1,667,199
Accounts payable, affiliates................................ 238,635 161,500
Accrued liabilities......................................... 212,297 184,013
Liabilities from risk-management activities................. 2,425,784 334,080
Notes payable and current portion of long-term debt......... -- 191,731
----------- ----------
4,827,498 2,538,523
LONG-TERM DEBT.............................................. 1,474,954 1,299,333
OTHER LIABILITIES:
Non-recourse debt........................................... -- 34,593
Liabilities from risk management activities................. 834,646 321,252
Deferred income taxes....................................... 388,762 335,190
Other long-term liabilities................................. 426,474 486,798
----------- ----------
7,952,334 5,015,689
----------- ----------
COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY
TRUST..................................................... 200,000 200,000
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 50,000,000 shares
authorized; 8,000,000 shares designated as Series A
Participating Preferred Stock, 7,815,363 shares issued and
outstanding at December 31, 1999.......................... -- 75,418
Common stock, $0.01 par value, 400,000,000 shares
authorized; 157,499,001 shares issued and outstanding at
December 31, 1999......................................... -- 1,575
Additional paid-in capital.................................. -- 973,000
Accumulated other comprehensive income...................... 795 --
Retained earnings........................................... 384,965 277,074
Less: treasury stock, at cost; 1,200,700 shares at
December 31, 1999......................................... -- (17,585)
Stockholder's equity........................................ 1,032,408 --
----------- ----------
1,418,168 1,309,482
----------- ----------
$ 9,570,502 $6,525,171
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
DYNEGY HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
Revenues.................................................... $5,338,611 $3,160,757
Cost of sales............................................... 5,199,862 3,035,010
---------- ----------
Operating margin...................................... 138,749 125,747
Depreciation and amortization............................... 28,695 31,750
General and administrative expenses......................... 49,549 47,091
---------- ----------
Operating income...................................... 60,505 46,906
Equity in earnings of unconsolidated affiliates............. 52,911 13,224
Other income................................................ 12,043 7,449
Interest expense............................................ (24,465) (18,186)
Other expenses.............................................. (18,569) (3,725)
Minority interest in income of a subsidiary................. (4,181) (4,158)
---------- ----------
Income before income taxes.................................. 78,244 41,510
Income tax provision........................................ 29,285 13,534
---------- ----------
NET INCOME.................................................. $ 48,959 $ 27,976
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
DYNEGY HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
2000 1999
----------- ----------
<S> <C> <C>
Revenues.................................................... $10,159,516 $6,205,730
Cost of sales............................................... 9,816,400 5,959,906
----------- ----------
Operating margin...................................... 343,116 245,824
Depreciation and amortization............................... 82,385 63,038
General and administrative expenses......................... 107,390 96,633
----------- ----------
Operating income...................................... 153,341 86,153
Equity in earnings of unconsolidated affiliates............. 62,113 28,287
Other income................................................ 69,034 21,367
Interest expense............................................ (46,435) (37,420)
Other expenses.............................................. (57,531) (7,878)
Minority interest in income of a subsidiary................. (8,339) (8,316)
----------- ----------
Income before income taxes.................................. 172,183 82,193
Income tax provision........................................ 64,292 26,146
----------- ----------
NET INCOME.................................................. $ 107,891 $ 56,047
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
DYNEGY HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 107,891 $ 56,047
Items not affecting cash flows from operating activities:
Depreciation and amortization............................. 32,340 57,719
Equity in earnings of affiliates, net of cash
distributions........................................... (9,318) (10,766)
Risk management activities................................ (140,607) (41,971)
Deferred income taxes..................................... 64,906 25,852
Other..................................................... 21,820 575
Changes in assets and liabilities resulting from operating
activities:
Accounts receivable....................................... (468,939) (71,374)
Inventories............................................... 136,629 (33,983)
Prepayments and other assets.............................. 33,218 39,340
Accounts payable.......................................... 461,344 132,960
Accrued liabilities....................................... (5,258) (21,755)
Other, net.................................................. (41,312) (14,148)
--------- ---------
Net cash provided by operating activities................... 192,714 118,496
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (168,618) (170,532)
Investment in unconsolidated affiliates, net................ (31,106) (44,098)
Proceeds from asset sales................................... 737,816 16,650
Other, net.................................................. 41,522 (39,061)
--------- ---------
Net cash provided by (used in) investing activities......... 579,614 (237,041)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings.......................... 296,697 --
Repayments of long-term borrowings.......................... (226,324) (13,040)
Net proceeds from commercial paper and money market lines of
credit.................................................... (283,573) 127,587
Affiliate transactions...................................... (584,585) --
Other, net.................................................. 8,062 3,766
--------- ---------
Net cash (used in) provided by financing activities......... (789,723) 118,313
--------- ---------
Net change in cash and cash equivalents..................... (17,395) (232)
Cash and cash equivalents, beginning of period.............. 45,230 28,367
--------- ---------
Cash and cash equivalents, end of period.................... $ 27,835 $ 28,135
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
DYNEGY HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
NOTE 1--ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to interim financial reporting
as prescribed by the Securities and Exchange Commission ("SEC"). These interim
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in Dynegy Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1999, filed with the SEC.
The financial statements include all material adjustments, which, in the
opinion of management, were necessary for a fair presentation of the results for
the interim periods. Interim period results are not necessarily indicative of
the results for the full year. The preparation of the 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 from those estimates. Certain reclassifications have been
made to prior year amounts in order to conform to current year presentation.
The financial statements for the three- and six-month periods ended
June 30, 2000 have been restated for certain matters related to the
consolidation process. Previously reported net income was $63.0 million and
$127.5 million for the three- and six-month periods ended June 30, 2000,
respectively. In order to preserve the nature and character of the disclosures
as of August 14, 2000, the date on which the Form 10-Q for the interim periods
ended June 30, 2000 was originally filed, no attempt has been made in this
Form 10-Q/A to modify or update such disclosures except as required to reflect
effects of the restatement.
On June 14, 1999, Dynegy Inc. announced its intent to acquire Illinova
Corporation ("Illinova"), and completed this acquisition early in the first
quarter 2000. As part of the acquisition of Illinova, the former Dynegy Inc.,
which was renamed Dynegy Holdings Inc., became a wholly owned subsidiary of a
new holding company, Dynegy Inc. The assets, liabilities and operations of the
former Dynegy Inc. before the acquisition became the assets, liabilities and
operations of Dynegy Holdings Inc. ("Dynegy") after the acquisition. As a result
of the Merger, Dynegy Inc. is now Dynegy's sole shareholder.
Dynegy routinely conducts business with subsidiaries of Dynegy Inc. that are
not a part of this consolidated group. These transactions include the purchase
or sale of commodities and other commercial operations as well as certain other
services. Dynegy's results of operations include allocations of certain
overhead, interest, tax and other similar revenues and costs pursuant to entity-
wide sharing arrangements. Affiliate transactions have been conducted at prices
and terms equivalent to those available to and transacted with unrelated
parties, in all material respects.
NOTE 2--BUSINESS COMBINATION
On February 1, 2000, the former Dynegy Inc., a Delaware corporation since
renamed Dynegy Holdings Inc., and Illinova Corporation ("Illinova") merged in a
transaction (the "Merger") in which Dynegy and Illinova became wholly owned
subsidiaries of Dynegy Inc., a newly formed Illinois corporation. This Merger,
which was approved by shareholders of both the former Dynegy Inc. and Illinova
on October 11, 1999, resulted in each share of Dynegy common stock and Series A
Participating Preferred stock being converted into 0.69 shares of Dynegy Inc.
equity pursuant to the
7
<PAGE>
DYNEGY HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
NOTE 2--BUSINESS COMBINATION (CONTINUED)
Merger terms. This Merger was accounted for under the purchase method of
accounting and Dynegy was the acquirer for accounting purposes.
NOTE 3--ACCOUNTING POLICY CHANGE
The Company continues to analyze the effects of adoption of the rules
promulgated by Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133") as amended by
Financial Accounting Standard Nos. 137 and 138. Provisions in Statement No. 133
will affect the accounting and disclosure of contractual arrangements and
operations of the Company. Provisions of Statement No. 133 must be applied to
fiscal periods beginning after June 15, 2000. Dynegy intends to adopt the
provisions of Statement No. 133 within the timeframe and in accordance with the
requirements provided by that statement. Management is currently assessing the
financial impact of the adoption; however, such impact is not determinable at
this time.
Management believes the adoption of the provisions of Statement No. 133 may
affect the variability of future periodic results reported by Dynegy, as well as
its competitors, as market conditions and resulting trading portfolio valuations
change from time to time. Such earnings variability, if any, will likely result
principally from valuation issues arising from imbalances between supply and
demand created by illiquidity in certain commodity markets resulting from, among
other things, a lack of mature trading and price discovery mechanisms,
transmission and/or transportation constraints resulting from regulation or
other issues in certain markets and the need for a representative number of
market participants maintaining the financial liquidity and other resources
necessary to compete effectively.
NOTE 4--UNCONSOLIDATED AFFILIATES
At June 30, 2000, Dynegy's investment in unconsolidated affiliates accounted
for by the equity method included: a 25 percent participating preferred stock
interest in Accord Energy Limited, a United Kingdom limited company; an
approximate 23 percent interest in Venice Energy Services Company, L.L.C.; a
38.75 percent partnership interest in Gulf Coast Fractionators; a 39 percent
partnership interest in West Texas LPG Pipeline, Limited Partnership; interests
ranging from eight to 50 percent in various entities, each formed to build (or
buy), own and operate power generation facilities located in the United States;
a 33.33 percent interest in Waskom Gas Processing Company, a partnership that
owns and operates a natural gas processing, extraction and fractionation
facility; a 50 percent interest in NICOR Energy L.L.C., a retail energy alliance
located in the Midwest; and a 20 percent interest in SouthStar Energy Services
L.L.C., a retail energy alliance located in the Southeast.
In April 2000, Dynegy invested $25 million for a minority interest in
eSpeed, Inc. The eSpeed technology will serve as a platform for the development
of electronic spot and futures marketplaces that will be made available to
market participants. This investment is classified as available-for-sale, thus
the unrealized gain or loss associated with this investment, net of tax, is a
component of accumulated other comprehensive income.
At June 30, 2000, the Company had three other cost basis investments in
addition to eSpeed: Altra Energy Technologies, Inc., Canadian Midstream
Services, Ltd. and Compton Petroleum Corporation.
8
<PAGE>
DYNEGY HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
NOTE 4--UNCONSOLIDATED AFFILIATES (CONTINUED)
Summarized unaudited combined income statement information for the
unconsolidated affiliates accounted for by the equity method is presented in the
table to follow:
<TABLE>
<CAPTION>
SIX-MONTHS ENDED JUNE 30,
-----------------------------------------
2000 1999
------------------- -------------------
EQUITY EQUITY
TOTAL SHARE TOTAL SHARE
-------- -------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues(1)................................. $684,423 $238,895 $533,405 $211,180
======== ======== ======== ========
Operating margin(1)......................... $111,722 $ 43,124 $182,343 $ 72,380
======== ======== ======== ========
Net income(1)............................... $137,293 $ 56,582 $ 44,649 $ 19,233
======== ======== ======== ========
</TABLE>
------------------------
(1) The interim financial data for both periods presented is exclusive of
amounts attributable to the Company's investment in Accord as such
information was unavailable.
NOTE 5--COMMITMENTS AND CONTINGENCIES
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, CA. 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 restating its breach of contract claim against
Destec. PG&E and Destec have filed motions to dismiss MID's revised federal and
state antitrust claims. The 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. 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
tortious 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
has filed a motion to dismiss MID's amended complaint against Dynegy, which
motion is scheduled to be heard in August 2000. Dynegy believes the allegations
made by MID are meritless 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.
9
<PAGE>
DYNEGY HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
NOTE 5--COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is subject to various legal proceedings and claims, which arise
in the normal course of business. Further, in addition to certain disclosures
made previously herein, the Company assumed liability for various claims,
assessments and litigation in connection with its strategic acquisitions. In the
opinion of management, the amount of ultimate liability with respect to these
actions will not have a material adverse effect on the financial position or
results of operations of the Company.
NOTE 6--SEGMENT INFORMATION
Dynegy's operations are divided into three reportable segments: Dynegy
Marketing & Trade ("DMT"), Dynegy Midstream Services ("DMS") and Dynegy Energy
Services ("DES").
- Dynegy Marketing and Trade focuses on energy convergence - the marketing,
trading and arbitrage opportunities that exist among power, natural gas
and coal that can be enhanced by the control and optimization of related
physical assets.
- Dynegy's natural gas liquids subsidiary, Dynegy Midstream Services,
includes North American midstream liquids operations, global natural gas
liquids transportation and marketing operations.
- Dynegy Energy Services markets energy products and services to the retail
sector through direct marketing and strategic alliances with leading
utility companies.
Operating segment information for the three- and six-month periods ended June
30, 2000 and 1999 is presented below.
10
<PAGE>
DYNEGY HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
NOTE 6--SEGMENT INFORMATION (CONTINUED)
DYNEGY HOLDINGS INC.'S SEGMENT DATA FOR QUARTER ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
DMT DMS DES ELIMINATION TOTAL
---------- ---------- -------- ----------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic............................ $3,109,996 $1,138,947 $ 7,109 $ -- $4,256,052
Canadian............................ 455,628 259,724 -- -- 715,352
European............................ 367,207 -- -- -- 367,207
---------- ---------- ------- --------- ----------
3,932,831 1,398,671 7,109 -- 5,338,611
---------- ---------- ------- --------- ----------
Intersegment revenues:
Domestic............................ 16,146 374,430 238 (390,814) --
Canadian............................ 15,477 347 -- (15,824) --
European............................ -- -- -- -- --
---------- ---------- ------- --------- ----------
31,623 374,777 238 (406,638) --
---------- ---------- ------- --------- ----------
Total revenues...................... 3,964,454 1,773,448 7,347 (406,638) 5,338,611
---------- ---------- ------- --------- ----------
Operating margin...................... 84,094 54,288 367 -- 138,749
Depreciation and amortization......... (9,846) (18,849) -- -- (28,695)
Interest income (expense)............. (28,324) 3,181 678 -- (24,465)
Other income (expense)................ (5,818) (1,153) 445 -- (6,526)
Equity earnings (losses).............. 49,052 5,078 (1,219) -- 52,911
Income tax (provision) benefit........ (18,303) (11,760) 778 -- (29,285)
Net income (loss)..................... 33,810 16,261 (1,112) -- 48,959
Identifiable assets:
Domestic............................ $6,693,717 $1,887,489 $23,588 $ -- $8,604,794
Canadian............................ 440,821 162,528 -- -- 603,349
European............................ 362,359 -- -- -- 362,359
Investment in unconsolidated
affiliates.......................... 481,872 150,032 3,854 -- 635,758
Capital expenditures and investments
in unconsolidated affiliates, net... (30,117) (42,207) -- -- (72,324)
</TABLE>
11
<PAGE>
DYNEGY HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
NOTE 6--SEGMENT INFORMATION (CONTINUED)
DYNEGY HOLDINGS INC.'S SEGMENT DATA FOR QUARTER ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
DMT DMS DES ELIMINATION TOTAL
---------- ---------- -------- ----------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic.......................... $1,639,929 $ 961,876 $ -- $ -- $ 2,601,805
Canadian.......................... 337,045 66,382 -- -- 403,427
European.......................... 155,525 -- -- -- 155,525
---------- ---------- -------- --------- -----------
2,132,499 1,028,258 -- -- 3,160,757
---------- ---------- -------- --------- -----------
Intersegment revenues:
Domestic.......................... 75,332 58,410 -- (133,742) --
Canadian.......................... 9,990 -- -- (9,990) --
European.......................... -- -- -- -- --
---------- ---------- -------- --------- -----------
85,322 58,410 -- (143,732) --
---------- ---------- -------- --------- -----------
Total revenues.................... 2,217,821 1,086,668 -- (143,732) 3,160,757
---------- ---------- -------- --------- -----------
Operating margin.................... 70,809 54,938 -- -- 125,747
Depreciation and amortization....... (8,823) (22,927) -- -- (31,750)
Interest expense.................... (9,004) (9,182) -- -- (18,186)
Other income (expense).............. 4,897 (1,173) -- -- 3,724
Equity earnings (losses)............ 12,310 3,353 (2,439) -- 13,224
Income tax (provision) benefit...... (15,000) 611 855 -- (13,534)
Net income (loss)................... 23,097 6,463 (1,584) -- 27,976
Identifiable assets:
Domestic.......................... $3,434,672 $1,989,945 $ 15,729 $ -- $ 5,440,346
Canadian.......................... 383,912 26,744 -- -- 410,656
European.......................... 76,004 -- -- -- 76,004
Investment in unconsolidated
affiliates........................ 363,112 162,736 9,631 -- 535,479
Capital expenditures and investments
in unconsolidated affiliates,
net............................... (98,757) (14,537) -- -- (113,294)
</TABLE>
12
<PAGE>
DYNEGY HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
NOTE 6--SEGMENT INFORMATION (CONTINUED)
DYNEGY HOLDINGS INC.'S SEGMENT DATA FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
DMT DMS DES ELIMINATION TOTAL
---------- ---------- -------- ----------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic.......................... $5,678,377 $2,403,311 $ 7,155 $ -- $ 8,088,843
Canadian.......................... 829,094 443,233 -- -- 1,272,327
European.......................... 798,346 -- -- -- 798,346
---------- ---------- -------- --------- -----------
7,305,817 2,846,544 7,155 -- 10,159,516
---------- ---------- -------- --------- -----------
Intersegment revenues:
Domestic.......................... 33,188 426,762 238 (460,188) --
Canadian.......................... 49,988 8,552 -- (58,540) --
European.......................... -- -- -- -- --
---------- ---------- -------- --------- -----------
83,176 435,314 238 (518,728) --
---------- ---------- -------- --------- -----------
Total revenues.................... 7,388,993 3,281,858 7,393 (518,728) 10,159,516
---------- ---------- -------- --------- -----------
Operating margin.................... 214,358 128,367 391 -- 343,116
Depreciation and amortization....... (17,955) (64,203) (227) -- (82,385)
Interest expense.................... (43,295) (3,097) (43) -- (46,435)
Other income (expense).............. 46,587 (35,492) 408 -- 11,503
Equity earnings..................... 46,210 11,352 4,551 -- 62,113
Income tax provision................ (63,817) (458) (17) -- (64,292)
Net income.......................... 102,505 5,357 29 -- 107,891
Identifiable assets:
Domestic.......................... $6,693,717 $1,887,489 $ 23,588 $ -- $ 8,604,794
Canadian.......................... 440,821 162,528 -- -- 603,349
European.......................... 362,359 -- -- -- 362,359
Investment in unconsolidated
affiliates........................ 481,872 150,032 3,854 -- 635,758
Capital expenditures and investments
in unconsolidated affiliates,
net............................... (137,888) (59,298) (2,538) -- (199,724)
</TABLE>
13
<PAGE>
DYNEGY HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
NOTE 6--SEGMENT INFORMATION (CONTINUED)
DYNEGY HOLDINGS INC.'S SEGMENT DATA FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
DMT DMS DES ELIMINATION TOTAL
---------- ---------- -------- ----------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic.......................... $3,270,724 $1,660,455 $ -- $ -- $ 4,931,179
Canadian.......................... 658,058 109,942 -- -- 768,000
European.......................... 506,551 -- -- -- 506,551
---------- ---------- -------- --------- -----------
4,435,333 1,770,397 -- -- 6,205,730
---------- ---------- -------- --------- -----------
Intersegment revenues:
Domestic.......................... 127,084 100,663 -- (227,747) --
Canadian.......................... 21,283 -- -- (21,283) --
European.......................... -- -- -- -- --
---------- ---------- -------- --------- -----------
148,367 100,663 -- (249,030) --
---------- ---------- -------- --------- -----------
Total revenues.................... 4,583,700 1,871,060 -- (249,030) 6,205,730
---------- ---------- -------- --------- -----------
Operating margin.................... 140,914 104,910 -- -- 245,824
Depreciation and amortization....... (17,384) (45,654) -- -- (63,038)
Interest expense.................... (18,573) (18,847) -- -- (37,420)
Other income (expense).............. 15,550 (2,061) -- -- 13,489
Equity earnings (losses)............ 25,597 5,778 (3,088) -- 28,287
Income tax (provision) benefit...... (30,751) 3,523 1,082 -- (26,146)
Net income (loss)................... 50,017 8,036 (2,006) -- 56,047
Identifiable assets:
Domestic.......................... $3,434,672 $1,989,945 $ 15,729 -- $ 5,440,346
Canadian.......................... 383,912 26,744 -- -- 410,656
European.......................... 76,004 -- -- -- 76,004
Investment in unconsolidated
affiliates........................ 363,112 162,736 9,631 -- 535,479
Capital expenditures and investments
in unconsolidated affiliates,
net............................... (179,188) (35,442) -- -- (214,630)
</TABLE>
NOTE 7--SUBSEQUENT EVENT
In August 2000, Dynegy announced an expansion of its energy convergence
business into the Northeast with the execution of a definitive agreement to
acquire 1,700 megawatts (MW) of power generation facilities for $903 million.
Both facilities are located approximately 50 miles north of New York City. The
transaction is subject to approvals from the Federal Trade Commission, the
Federal Energy Regulatory Commission and the New York Public Service Commission.
It is expected to close during the first quarter of 2001.
14
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
The following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements of Dynegy Holdings Inc.
included elsewhere herein and with the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
GENERAL
COMPANY PROFILE. Dynegy Holdings Inc. ("Dynegy" or the "Company") is a
holding company that conducts substantially all of its business through its
subsidiaries. The Company is a leading provider of energy products and services
in North America, the United Kingdom and continental Europe. Products marketed
by the Company's wholesale marketing operations include natural gas,
electricity, coal, emissions, natural gas liquids, crude oil, liquid petroleum
gas and related services. The Company's wholesale marketing operations are
supported by ownership or control of an extensive asset base and transportation
network that includes unregulated power generation, gas and liquids storage
capacity, gas, power and liquids transportation capacity and gas gathering,
processing and fractionation assets.
From inception of operations in 1984 until 1990, the Company limited its
activities primarily to natural gas marketing. Starting in 1990, business
operations began expanding through acquisitions and strategic alliances
resulting in the formation of a mid-stream energy asset business and established
energy marketing operations in both Canada and the United Kingdom. The Company
initiated domestic electric power marketing operations in February 1994.
Effective March 1, 1995, the Company acquired Trident NGL Holding, Inc., a fully
integrated natural gas liquids company. On August 31, 1996, NGC completed a
strategic combination with Chevron whereby substantially all of Chevron's mid-
stream assets were acquired. Effective July 1, 1997, the Company acquired Destec
Energy, Inc., a leading independent power producer and developer. During 1998,
the Company changed its name to Dynegy Inc. in order to reflect its evolution
from a natural gas marketing company to an energy services company capable of
meeting the growing demands and diverse challenges of the dynamic energy market
of the 21st Century. In 1999, the Company initiated electric power marketing
operations in the United Kingdom and in continental Europe.
On June 14, 1999, Dynegy Inc. announced its intent to acquire Illinova
Corporation ("Illinova"), and completed this acquisition early in the first
quarter 2000. As part of the acquisition of Illinova, the former Dynegy, which
was renamed Dynegy Holdings Inc., became a wholly owned subsidiary of a new
holding company, Dynegy Inc. The assets, liabilities and operations of the
former Dynegy Inc. before the acquisition became the assets, liabilities and
operations of Dynegy Holdings Inc. after the acquisition.
BUSINESS SEGMENTS. Dynegy's operations are divided into three reportable
segments: Dynegy Marketing & Trade ("DMT"), Dynegy Midstream Services ("DMS")
and Dynegy Energy Services ("DES").
- Dynegy Marketing and Trade focuses on energy convergence--the marketing,
trading and arbitrage opportunities that exist among power, natural gas
and coal that can be enhanced by the control and optimization of related
physical assets.
- Dynegy's natural gas liquids subsidiary, Dynegy Midstream Services,
includes North American midstream liquids operations, global natural gas
liquids transportation and marketing operations.
15
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
- Dynegy Energy Services markets energy products and services to the retail
sector through direct marketing and strategic alliances with leading
utility companies.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION. This Form 10-Q
contains various forward-looking statements, within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, and information that are based on management's beliefs as well as
assumptions made by and information currently available to management. When used
in this document, words such as "anticipate", "estimate", "project", "forecast"
and "expect" reflect forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable; it can give no assurance that such expectations will prove to have
been correct. Such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, projected, forecasted or expected.
Among the key risk factors that may have a direct bearing on Dynegy's results of
operations and financial condition are:
- Competitive practices in the industries in which Dynegy competes;
- Volatility of commodity prices for natural gas, electricity, natural gas
liquids, crude oil or coal;
- Fluctuations in energy commodity prices which could not or have not been
properly hedged or that are inconsistent with Dynegy's risk profile from
its energy marketing activities;
- Operational and systems risks;
- Environmental liabilities which are not covered by indemnity or insurance;
- General economic and capital market conditions, including fluctuations in
interest rates;
- Foreign operations risk associated with the potential volatility of
emerging countries and fluctuations in foreign currency exchange rates;
and
- The impact of current and future laws and governmental regulations
(particularly environmental regulations) affecting the energy industry in
general, and Dynegy's operations in particular.
BUSINESS RISK MANAGEMENT ASSESSMENT
Dynegy's operations and periodic returns are impacted by a myriad of
factors, 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,
operational risks, environmental risks, management estimations, strategic
investment decisions, changes in competition and changes in regulation.
The Company is exposed to commodity price variability related to its natural
gas, natural gas liquids, crude oil, electricity and coal businesses. In
addition, fuel requirements at its power generation and gas processing
facilities represent additional commodity price risks to the Company. In order
to manage these commodity price risks, Dynegy routinely utilizes certain types
of fixed-price forward
16
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
purchase and sales contracts, futures and option contracts traded on the New
York Mercantile Exchange and swaps and options traded in the over-the-counter
financial markets to:
- Manage and hedge its fixed-price purchase and sales commitments;
- Provide fixed-price commitments as a service to its customers and
suppliers;
- Reduce its exposure to the volatility of cash market prices;
- Protect its investment in storage inventories; and
- Hedge fuel requirements at its gas processing and power generation
facilities.
The Company may, at times, have a bias in the market, within established
guidelines, resulting from the management of its portfolio. In addition, as a
result of marketplace liquidity and other factors, the Company may, at times, be
unable to fully hedge its portfolio for certain market risks. Dynegy 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 hedge and manage these exposures.
The Company employs the mark-to-market method of accounting for a portion of
its operations. It accounts for all energy trading activities at fair value as
of each balance sheet date and recognizes currently in its results of operations
the net gains or losses resulting from the revaluation of these contracts. As a
result, substantially all of the operations of the Company's world-wide gas
marketing, power marketing, and certain liquids marketing operations are
accounted for under a mark-to-market accounting methodology. In certain of these
markets, long-term contract commitments may extend beyond the period in which
market quotations for such contracts are available. The lack of long-term
pricing liquidity requires the use of mathematical models to value these
commitments under the accounting method employed.
These mathematical models utilize historical market data to forecast future
prices, which are used to value the commitments that reside outside of the
liquid market quotations. The application of forecasted pricing curves to
contractual commitments may result in realized cash returns on these commitments
that vary, either positively or negatively, from the results estimated through
application of the mathematical model. Dynegy believes that its mathematical
models utilize state-of-the-art technology, pertinent industry data and prudent
discounting in order to forecast pricing curves.
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 that
create or actively manage these risk exposures to ensure compliance with
Dynegy's risk management policies. Dynegy's risk control group provides
independent risk measurement of Value at Risk, stress testing and scenario
analysis daily on the commercial profiles.
In addition to risks associated with price or interest rate movements,
credit risk is also inherent in the Company's operations. Credit risk relates to
the risk of loss resulting from the nonperformance of contractual obligations by
a counterparty. Dynegy maintains credit policies with regard to its
counterparties, which management believes minimize its overall credit risk.
17
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
Dynegy's stated business strategy is to expand ownership or control of
merchant generation capacity in select markets across the country. Dynegy
believes that merchant generation capacity, which is designed principally to
supply power to markets during periods of peak demand, offers the greatest
flexibility in executing its strategy of an integrated gas and power marketing
and power generation business. This strategy heightens the risk of volatility in
periodic returns by increasing the Company's exposure to variability in
anticipated demand resulting from:
- changing weather patterns,
- unexpected delays in industry-wide construction of new capacity,
- unforeseen supply constraints or bottlenecks resulting from transmission
failures or other factors,
- unforeseen new technologies, and
- other similar factors.
Further, as Dynegy moves forward with the execution of its strategic plan of
capturing about a 10 percent share of the wholesale power market, risk of
earnings volatility increases through exposure to unanticipated variability in
generation capacity dependability factors. As a result of supply contracts
routine in the industry, Dynegy's exposure relating to performance by these
generating assets resides not only with owned and controlled assets, but also
with third-party operated facilities. The volatility of earnings, whether it be
favorable or unfavorable, will likely be most profound during periods of peak
demand when, and if, regional industry-wide generation capacity fails or is
curtailed. The increasing importance of and dependency upon physical generation
of electricity as a percentage of Dynegy's overall portfolio and strategy may
substantially alter Dynegy's earnings risk profile over time.
The addition of these generation assets to Dynegy's portfolio may increase
enterprise exposure to environmental and regulatory laws and regulations. These
exposures could result in increased expenditures for capital improvements to
meet certain statutory requirements or expenditures for remediation of
unanticipated environmental contamination. The potential redirection of capital
to these types of expenditures could reduce the level of available discretionary
capital currently expected to be used in executing Dynegy's strategic plan in
future periods.
Many of these risks are outside the control of Dynegy and may not be fully
mitigated through application of risk management methods and/or
state-of-the-art, first-quartile operating methods.
SEGMENT PRICE FLUCTUATION EXPOSURES. DMT's integrated component businesses
include: wholesale gas marketing, wholesale power marketing and power
generation. Operating margins earned by wholesale gas and power marketing,
exclusive of risk-management activities, are relatively insensitive to commodity
price fluctuations since most purchase and sales contracts do not contain
fixed-price provisions. Generally, prices contained in these contracts are tied
to a current spot or index price and, therefore, adjust directionally with
changes in overall market conditions. However, market price fluctuations for
natural gas and electricity can have a significant impact on the operating
margin derived from risk-management activities in these businesses. 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. To the extent a net open position exists,
fluctuating commodity market prices can impact Dynegy's financial position or
results of operations, either
18
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
favorably or unfavorably. The net open positions are actively managed, and the
impact of changing prices on the Company's financial condition at a point in
time is not necessarily indicative of the impact of price movements throughout
the year. Historically, fuel costs, principally natural gas, represented the
primary variable cost impacting the financial performance of the Company's
investment in power generating facilities. Operating margins at these facilities
were relatively insensitive to commodity price fluctuations since most purchase
and sales contracts contained variable power sales contract features tied to a
current spot or index natural gas price, allowing revenues to adjust
directionally with changes in natural gas prices. However, the Company's
investment strategy, which emphasizes growth of merchant generation capacity, is
altering the makeup of its generation asset portfolio. The growth of merchant
generation capacity as a percentage of total available capacity increases the
Company's exposure to commodity price risk. The financial performance and cash
flow derived from merchant generation capacity is impacted, either favorably or
unfavorably, by changes in and the relationship between the cost of the
commodity fueling the facilities and electricity prices.
Operating margins associated with DMS' natural gas gathering, processing and
fractionation activities are very sensitive to changes in natural gas liquids
prices and the availability of inlet volumes. Commodity price fluctuations may
also affect the operating margins derived from the Company's natural gas liquid
marketing business. The impact from changes in natural gas liquids prices on
upstream operations results principally from the nature of contractual terms
under which natural gas is processed and products are sold. In addition, certain
processing plant assets are impacted by changes in, and the relationship
between, natural gas and natural gas liquids prices, which in turn influences
the volumes of gas processed. Based upon current levels of natural gas
processing activities and industry fundamentals, the estimated impact on annual
operating margins of each one-cent movement in the annual average price of
natural gas liquids approximates $6 to $8 million. The availability of inlet
volumes directly affects the utilization and profitability of the segment's
businesses throughout the Liquids Value Chain. The acquisition of inlet volumes
is highly competitive and the availability of such volumes to industry-wide
participants is also impacted by price variability. Unilateral decisions made by
producers to shut-in production or otherwise curtail workovers, reduce well
maintenance activities and/ or delay or cancel drilling activities, as a result
of depressed commodity prices or other factors, negatively affects production
available to the entire midstream industry. Because such decisions are based
upon the pricing environment at any particular time, management cannot predict
with precision the impact that such decisions may have on its business.
DES operating margins may be impacted by fixed-price commodity risk imbedded
in certain contractual arrangements entered into by the segment. Such commodity
price risk is managed, on a portfolio basis, with similar commodity risks
inherent in the operations of the other business segments.
SEASONALITY. Dynegy's revenue and operating margin are subject to
fluctuations during the year, primarily due to the impact certain seasonal
factors have on sales volumes and the prices of natural gas, electricity and
natural gas liquids. Natural gas sales volumes and operating margin have
historically been higher in the winter months than in the summer months,
reflecting increased demand due to greater heating requirements and, typically,
higher natural gas prices. Conversely, power marketing operations are typically
impacted by higher demand and commodity price volatility during the summer
cooling season. Consistent with power marketing, the Company's electricity
generating facilities generally experience peak demand during the summer cooling
season, particularly for merchant plant
19
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
generating facilities. Dynegy believes that prospective seasonal fluctuations in
demand and market prices for natural gas will reduce over time as industry-wide
gas-fired merchant generation capacity expands in the United States. DMS'
businesses are also subject to seasonal factors; however, such factors typically
have a greater impact on sales prices than on sales volumes. Natural gas liquids
prices typically increase during the winter season due to greater heating
requirements. The Company's wholesale propane business is seasonally weighted in
terms of volume and price, consistent with the trend in the Company's natural
gas operations, as a result of greater demand for crop-drying and space-heating
requirements in the fall and winter months.
EFFECT OF INFLATION. Although Dynegy's operations are affected by general
economic trends, management does not believe inflation has had a material effect
on the Company's results of operations.
ENTRANCE INTO TECHNOLOGY MARKETPLACE. Dynegy has recently announced
investment in eSpeed signifying an investment in a technology interest outside
the traditional energy business. Although this investment provides opportunities
for Dynegy to grow its presence in this new marketplace, there is no assurance
the business strategy and expectations will be fully realized as currently
forecasted.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business strategy has historically focused on acquisitions or
construction of core operating facilities in order to capture significant
synergies existing among these types of assets and Dynegy's natural gas, power
and natural gas liquids marketing businesses. The Company's energy convergence
strategies are focused on marketing, trading and arbitrage opportunities
involving natural gas and power, centered around the control and optimization of
Btu conversion capacity within the wholesale gas and power businesses (a.k.a.,
"Merchant Leverage Effect"). For the foreseeable future, the Company's primary
focus will be the acquisition and/or construction of merchant power generating
assets that will enable the Company to fully realize the Merchant Leverage
Effect of commercialization of these generating assets.
Dynegy has historically relied upon operating cash flow and borrowings from
a combination of commercial paper issuances, money market lines of credit,
corporate credit agreements and various public debt issuances for its liquidity
and capital resource requirements. At June 30, 2000, Dynegy had access to an
aggregate $586 million of liquidity available under existing credit facilities
and money market lines of credit. Approximately $450 million of shelf
availability remains under outstanding registration statements, which may be
used for general corporate purposes. Management believes additional financing
arrangements can be obtained at reasonable terms, if required.
The Company successfully disposed of non-strategic, under-performing assets
and certain qualifying facilities for aggregate net proceeds of approximately
$737.8 million. The proceeds from these sales were first used to retire
indebtedness incurred by Dynegy Inc. in the acquisition of Illinova and then
redeployed into new business ventures. These dispositions were consistent with
the Company's stated plan to finance the Illinova merger.
In a public offering effective March 15, 2000, Dynegy issued $300 million of
8.125% Senior Notes due March 15, 2005. Total proceeds net of underwriting costs
were $296.7 million. Interest is payable
20
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
on the Senior Notes on March 15 and September 15 of each year, beginning
September 15, 2000. Proceeds were used to repay existing indebtedness of an
affiliate.
OTHER MATTERS
INDEPENDENT SYSTEM OPERATORS UPDATE. Various independent system operators
("ISO"), principally in California and the northeastern United States, have
recently instituted or adjusted price caps having varying terms and conditions.
Management has assessed each of the provisions instituted by these ISOs and
believes that the imposition of such terms and conditions does not materially
alter the Company's current strategy or competitive position in the markets
subject to such price caps. Management cannot predict with precision the impact
that any future decisions made by ISOs, or other similar oversite groups, may
have on its business, strategy or profitability.
CAPITAL ASSET PROGRAM. The Company is engaged in a continuous capital asset
expansion program consistent with its business plan and energy convergence
strategies. The emphasis of this capital asset 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 in excess of forty-three state-of-the-art gas-fired turbines,
representing a capital commitment of approximately $1.4 billion. Delivery of the
manufactured turbines is occurring ratably through 2003. Commitments under these
purchase orders are generally payable consistent with the delivery schedule. 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. The capital asset program is
subject to periodic review and revision, and the actual number of projects and
aggregate cost for such projects will be dependent on various factors including
available capital resources, market conditions, legislative actions, load
growth, changes in materials, supplies and labor costs and the identification of
partners in order to spread investment risk.
QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES. The Company is
exposed to certain market risks inherent in the Company's financial instruments,
which arise from transactions entered into in the normal course of business. The
Company routinely enters into financial instrument contracts to hedge purchase
and sale commitments, fuel requirements and inventories in its natural gas,
natural gas liquids, crude oil, electricity and coal businesses in order to
minimize the risk of market fluctuations. 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
hedge and
21
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
manage these exposures. The absolute notional contract amounts associated with
commodity risk-management, interest rate and forward exchange contracts,
respectively, were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Natural Gas (Trillion Cubic Feet)........................... 7.985 5.702
Electricity (Million Megawatt Hours)........................ 272.281 42.949
Natural Gas Liquids (Million Barrels)....................... 18.045 19.902
Crude Oil (Million Barrels)................................. -- 35.554
Interest Rate Swaps (in thousands of US Dollars)............ $ -- $ 36,524
Weighted Average Fixed Interest Rate Paid on Swaps.......... -- 8.210
U.K. Pound Sterling (in thousands of US Dollars)............ $ 48,298 $ 85,812
Average U.K. Pound Sterling Contract Rate (in US Dollars)... $ 1.4861 $ 1.6191
Canadian Dollar (in thousands of US Dollars)................ $476,177 $288,898
Average Canadian Dollar Contract Rate (in US Dollars)....... $ 0.6827 $ 0.6775
</TABLE>
Dynegy measures entity-wide market risk in its financial trading and
risk-management portfolios using Value at Risk. The quantification of market
risk using Value at Risk provides a consistent measure of risk across diverse
energy markets and products with different risk factors to set the overall
corporate risk tolerance, determine risk targets, and position limits. The use
of this methodology requires a number of key assumptions including the selection
of a confidence level and the holding period to liquidation. Dynegy relies on
Value at Risk to determine the maximum potential reduction in the trading
portfolio value allowed within a given probability over a defined period.
Because of limitations to Value at Risk, Dynegy uses other means to monitor
market risk in the trading portfolios. In addition to Value at Risk, Dynegy
performs regular stress and scenario analyses to measure extreme losses due to
exceptional events. The Value at Risk and stress testing results are reviewed to
determine the maximum allowable reduction in the total equity of the commodity
portfolios. Additional measures are used to determine the treatment of risks
outside the Value at Risk methodologies, such as market volatility, liquidity,
event and correlation risk. Dynegy estimates Value at Risk using a JP Morgan
RiskMetrics (TM) approach assuming a one-day holding period and a 95 percent
confidence level. At June 30, 2000, the Value at Risk for Dynegy's trading and
risk-management portfolios approximated $13.4 million and the average of such
value during the six-month period ended June 30, 2000 was estimated at $11.5
million.
CONCLUSION. The Company continues to believe that it will be able to meet
all foreseeable cash requirements, including working capital, capital
expenditures and debt service, from operating cash flow, supplemented by
borrowings under its various credit facilities.
RESULTS OF OPERATIONS
Provided below is a narrative and tabular presentation of certain operating
and financial data and statistics for the Company's businesses for the three-and
six-month periods ended June 30, 2000 and 1999, respectively.
22
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
THREE-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
For the quarter ended June 30, 2000, Dynegy realized net income of $49.0
million compared with second quarter 1999 net income of $28.0 million. Second
quarter 2000 results were led by a strong performance in energy convergence
operations, particularly in U.S. power and gas. The quarter benefited from
nationwide volatility in both the power and gas markets, enabling Dynegy to
leverage its diverse asset portfolio with strong marketing, structured
origination activity and term sales. This quarter's results also reflect solid
returns in Dynegy's natural gas liquids businesses, which continued to benefit
from higher worldwide demand, a larger contribution of fee-based services and
lower expenses.
Consolidated operating margin for the current quarter totaled
$138.7 million compared to $125.7 million for the same 1999 period, reflecting
improved margins in DMT operations. DMT contributed $84.1 million to second
quarter 2000 consolidated operating margin compared to $70.8 million reported in
second quarter 1999, an increase of 19 percent. DMS contributed $54.3 million in
second quarter 2000 operating margin compared to $54.9 million in the second
quarter 1999. After eliminating the effect of non-strategic upstream asset
sales, the increase in DMS operating margin was 36 percent.
Operating income increased $13.6 million quarter-to-quarter, reflecting the
higher operating results from the convergence and liquids businesses. Improved
operating results were partially offset by higher general and administrative
expenses. The increased level of general and administrative expenses reflects
the incremental costs associated with a larger, more diverse base of operations,
and non-capitalizable costs required to support technology infrastructure
improvements.
Included in Dynegy's consolidated results was the Company's equity share in
the earnings of its unconsolidated affiliates, which contributed approximately
$52.9 million and $13.2 million to pre-tax quarterly earnings in the 2000 and
1999 periods, respectively. Variances period-to-period in these results reflect
the impact of weather driven demand and changes in commodity prices,
particularly as these changes impacted DMT investments. The following table
provides a summary of equity earnings by investment for the comparable periods.
23
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
EQUITY EARNINGS FROM UNCONSOLIDATED AFFILIATES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JUNE 30,
----------------------
2000 1999
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
DYNEGY MARKETING & TRADE:
Accord.................................................... $ 3,750 $ 4,500
Power Generation Equity Investments (in aggregate)........ 45,302 7,545
Other, net................................................ -- 265
------- -------
49,052 12,310
------- -------
DYNEGY ENERGY SERVICES:..................................... (1,219) (2,439)
------- -------
DYNEGY MIDSTREAM SERVICES:
Gulf Coast Fractionators.................................. 726 254
West Texas LPG Pipeline, Limited Partnership.............. 1,584 1,269
Venice Energy Services Company, L.L.C..................... 2,243 1,275
Other, net................................................ 525 555
------- -------
5,078 3,353
------- -------
$52,911 $13,224
======= =======
</TABLE>
Interest expense totaled $24.5 million for the quarter ended June 30, 2000,
compared to $18.2 million for the equivalent 1999 period. The variance is
attributable to higher principal balances resulting from indebtedness incurred
to finance strategic growth and higher interest rates on variable rate
borrowings in the current period as a result of market movements in such rates.
Accumulated distributions associated with trust preferred securities of wholly
owned subsidiaries totaled $4.2 million for each of the quarters ended June 30,
2000 and 1999.
Other income and expenses, net totaled $6.5 million in expense in the
quarter ended June 30, 2000 compared with income of $3.7 million in the 1999
period. These amounts consisted of interest income, minority interests in
consolidated subsidiaries and other income and expense items in both periods.
The Company reported an income tax provision of $29.3 million for the
three-month period ended June 30, 2000, compared to an income tax provision of
$13.5 million for the 1999 period. The effective rates approximated 37 and 33
percent in 2000 and 1999, respectively. The difference for the 1999 period
results principally from permanent differences arising from the amortization of
certain intangibles and debt premiums, permanent differences from the effect of
certain foreign equity investments and state income taxes.
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
For the six-month period ended June 30, 2000, Dynegy realized net income of
$107.9 million compared with net income in the corresponding period in 1999 of
$56.0 million. For the six-month period ended June 30, 2000, Dynegy had
recurring net income of $112.3 million, compared to $50.3 million for the same
period in 1999. Recurring 2000 results exclude the net after tax effect of the
24
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
sale of certain qualifying generation facilities and non-recurring charges
incurred in the first quarter of the year. Recurring 1999 results exclude the
after tax effect of the sale of an investment. The results for the six months
ended June 30, 2000 were led by a strong performance in energy convergence
operations, particularly in U.S. power and gas. The 2000 period benefited from
nationwide volatility in both the power and gas markets, enabling Dynegy to
leverage its diverse asset portfolio with strong marketing, structured
origination activity and term sales. Results for the six-month period ended
June 30, 2000 also reflect solid returns in Dynegy's natural gas liquids
businesses, which continued to benefit from higher worldwide demand, a larger
contribution of fee-based services and lower expenses.
Consolidated operating margin for the six months ended June 30, 2000 totaled
$343.1 million compared to $245.8 million for the same 1999 period. DMT
contributed $214.4 million to consolidated operating margin for the six-month
period ended June 30, 2000 compared to $140.9 million reported in same period in
1999, an increase of 52 percent. DMS contributed $128.4 million in operating
margin in the six-month period ended June 30, 2000 compared to $104.9 million in
the same period in 1999. After eliminating the effect of non-strategic asset
sales, the increase in DMS operating margin was 49 percent.
Operating income increased $67.2 million period-to-period, reflecting the
significantly higher operating results from the convergence and liquids
businesses. Improved operating results were partially offset by higher
depreciation and amortization and general and administrative expenses. Increases
in depreciation and amortization expense in the six-month period ended June 30,
2000 reflect the impairment of certain natural gas liquids processing assets,
continued expansion of the Company's asset base and operations, principally in
the convergence businesses, and enhanced information technology infrastructure.
The increased level of general and administrative expenses reflects incremental
costs associated with a larger, more diverse base of operations,
non-capitalizable consulting and other costs required to support technology
infrastructure improvements.
Included in Dynegy's consolidated operating income was the Company's equity
share in the earnings of its unconsolidated affiliates, which contributed
approximately $62.1 million and $28.3 million to pre-tax earnings in the 2000
and 1999 periods, respectively. Variances period-to-period reflect the positive
impact of the same market and demand issues that impacted results in the three-
month period ended June 30, 2000, for both DMT and DMS investments. The
following table provides a summary of equity earnings by investment for the
comparable periods.
25
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
EQUITY EARNINGS FROM UNCONSOLIDATED AFFILIATES
<TABLE>
<CAPTION>
FOR THE SIX-MONTHS
ENDED JUNE 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
DYNEGY MARKETING & TRADE:
Accord.................................................... $ 7,500 $ 9,000
Power Generation Equity Investments (in aggregate)........ 38,710 16,165
Other, net................................................ -- 432
------- -------
46,210 25,597
------- -------
DYNEGY ENERGY SERVICES:..................................... 4,551 (3,088)
------- -------
DYNEGY MIDSTREAM SERVICES:
Gulf Coast Fractionators.................................. 1,427 1,124
West Texas LPG Pipeline, Limited Partnership.............. 2,888 2,141
Venice Energy Services Company, L.L.C..................... 4,692 1,569
Other, net................................................ 2,345 944
------- -------
11,352 5,778
------- -------
$62,113 $28,287
======= =======
</TABLE>
Interest expense totaled $46.4 million for the six months ended June 30,
2000, compared to $37.4 million for the equivalent 1999 period. The variance is
attributable to higher principal balances and interest rates on variable rate
borrowings which were higher in the current period as a result of market
movements in such rates. Accumulated distributions associated with trust
preferred securities of wholly owned subsidiaries totaled $8.3 million for each
of the six month periods ended June 30, 2000 and 1999.
Other income and expenses, net totaled $11.5 million in income in the
six-month period ended June 30, 2000 compared with income of $13.5 million in
the 1999 period. These amounts consisted of interest income, minority interests
in consolidated subsidiaries and other income and expense items in both periods.
The Company reported an income tax provision of $64.3 million for the
six-month period ended June 30, 2000, compared to an income tax provision of
$26.1 million for the 1999 period. The effective rates approximated 37 and 32
percent in 2000 and 1999, respectively. The difference for the 2000 period is
primarily due to state income taxes. The difference for the 1999 period results
principally from permanent differences arising from the amortization of certain
intangibles and debt premiums, permanent differences from the effect of certain
foreign equity investments and state income taxes.
26
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
SEGMENT DISCLOSURES--
DYNEGY MARKETING AND TRADE
($ IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Margin:
Power Marketing and Generation(1)................... $ 42,897 $48,979 $ 91,619 $ 86,411
Natural Gas Marketing(2)............................ 38,234 27,445 68,770 52,047
European Gas and Power Marketing.................... 2,963 (5,615) 53,969 2,456
Equity Investments.................................... 49,052 12,310 46,210 25,597
-------- ------- -------- --------
SUBTOTAL--FINANCIAL CONTRIBUTION.................. 133,146 83,119 260,568 166,511
Depreciation........................................ (9,846) (8,823) (17,955) (17,384)
General and Administrative Expenses................. (32,544) (30,386) (71,801) (61,925)
Other Items (3) (4)................................. (5,818) 4,897 46,587 15,550
-------- ------- -------- --------
EARNINGS BEFORE INTEREST AND TAXES................ 84,938 48,807 217,399 102,752
Interest Expense...................................... (32,825) (10,710) (51,077) (21,984)
-------- ------- -------- --------
PRETAX EARNINGS................................... 52,113 38,097 166,322 80,768
Income Tax Provision.................................. (18,303) (15,000) (63,817) (30,751)
-------- ------- -------- --------
NET INCOME........................................ $ 33,810 $23,097 $102,505 $ 50,017
RECURRING NET INCOME(5)........................... $ 33,810 $23,097 $ 71,636 $ 44,252
OPERATING STATISTICS:
Natural Gas Marketing (Bcf/d)--
Domestic Gas Marketing Volumes.................... 7.1 6.1 7.2 6.5
Canadian Gas Marketing Volumes.................... 2.2 2.2 2.3 2.3
United Kingdom Gas Marketing Volumes.............. 0.9 0.9 1.5 1.3
-------- ------- -------- --------
10.2 9.2 11.0 10.1
======== ======= ======== ========
Electric Power Marketing--Million Megawatt Hours
Sold................................................ 19.1 14.7 34.2 27.8
</TABLE>
------------------------
(1) Includes domestic power marketing and generating operations.
(2) Includes North American gas marketing operations.
(3) Six-month ended June 30, 2000 results include a pre-tax non-recurring gain
on the sale of certain qualifying generation facilities of $52 million
($33.8 million after-tax), and a reasonable allocation of certain
non-recurring charges which were incurred during the first quarter of 2000.
(4) Six-month ended June 30, 1999 results include a pre-tax $8.9 million
($5.8 million after-tax) non-recurring gain on the sale of an investment.
(5) Recurring net income reflect the allocation of the items described in
(3) and (4) above.
27
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
THREE-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Dynegy Marketing & Trade reported recurring segment net income of
$33.8 million for the three-month period ended June 30, 2000, compared with
recurring net income of $23.1 million in the 1999 quarter. Recurring results of
operations period-to-period were influenced by:
- improved returns from worldwide power and gas marketing and trading
operations, offset by
- increased depreciation and general and administrative expenses reflecting
the impact of higher variable compensation costs and increased capital and
overhead costs required to support the larger, more diverse base of
operations.
Total megawatt hours sold during the second quarter of 2000 quarter
aggregated 19.1 million megawatt hours compared to 14.7 million megawatt hours
during the 1999 period. The increase is a result of the increase in trading
volumes due to more favorable market conditions and expanding operations.
Total natural gas volumes sold increased to 10.2 billion cubic feet per day
from 9.2 billion cubic feet per day during last year's second quarter,
principally as a result of increased volumes sold to the retail alliances and to
gas-fired generation in the U.S.
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Dynegy Marketing & Trade reported recurring segment net income of
$71.6 million for the six-month period ended June 30, 2000, compared with
recurring net income of $44.3 million for the six-month period ended June 30,
1999. Included in earnings for the six months ended June 30, 2000 is a
non-recurring after-tax gain of $33.8 million relating to the sale of certain
qualifying facilities and a reasonable allocation of certain non-recurring
charges which were incurred during the first quarter of 2000. Included in
earnings for the six months ended June 30, 1999 is a non-recurring after-tax
gain of $5.8 million related to the sale of an investment. Recurring results of
operations period-to-period were influenced by the same factors impacting the
quarterly results.
Total megawatt hours sold during the six months ended June 30, 2000
aggregated 34.2 million megawatt hours compared to 27.8 million megawatt hours
during the 1999 period. Total natural gas volumes sold increased to
11.0 billion cubic feet per day from 10.1 billion cubic feet per day during last
year's six-month period ended June 30, 1999.
28
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
DYNEGY MIDSTREAM SERVICES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
($ IN THOUSANDS EXCEPT AVERAGE COMMODITY PRICES)
<S> <C> <C> <C> <C>
Operating Margin:
Upstream Operations........................ $ 23,967 $ 31,264 $ 56,335 $ 49,604
Downstream Operations...................... 30,321 23,674 72,032 55,306
Equity Investments........................... 5,078 3,353 11,352 5,778
-------- -------- -------- --------
SUBTOTAL--FINANCIAL CONTRIBUTION......... 59,366 58,291 139,719 110,688
Depreciation(1)............................ (18,849) (22,927) (64,203) (45,654)
General and Administrative Expenses........ (14,844) (16,705) (30,624) (34,708)
Other Items(1)............................. (1,153) (1,173) (35,492) (2,061)
-------- -------- -------- --------
EARNINGS BEFORE INTEREST AND TAXES....... 24,520 17,486 9,400 28,265
Interest Income (Expense).................. 3,501 (11,634) (3,585) (23,752)
-------- -------- -------- --------
PRETAX EARNINGS.......................... 28,021 5,852 5,815 4,513
Income Tax (Provision) Benefit............. (11,760) 611 (458) 3,523
-------- -------- -------- --------
NET INCOME............................... $ 16,261 $ 6,463 $ 5,357 $ 8,036
RECURRING NET INCOME(2).................. $ 16,261 $ 6,463 $ 40,438 $ 8,036
Operating Statistics:
Natural Gas Liquids Processed (MBbls/d-
Gross)
Field Plants............................. 56.7 86.6 66.0 87.6
Straddle Plants.......................... 37.0 33.5 39.1 31.1
-------- -------- -------- --------
93.7 120.1 105.1 118.7
======== ======== ======== ========
Barrels Received for Fractionation
(MBbls/d).................................. 248.5 225.7 233.9 193.5
Natural Gas Liquids Sold (MBbls/d)........... 570.6 493.4 583.1 516.5
Average Commodity Prices:
Henry Hub Natural Gas (First of Month)
($/MMBtu).................................. $ 3.44 $ 2.16 $ 2.98 $ 1.95
Crude Oil--Cushing ($/Bbl)................. 25.12 15.10 25.67 12.75
Average Mont Belvieu Price ($/Gal)......... 0.49 0.31 0.51 0.27
</TABLE>
------------------------
(1) Six-month ended June 30, 2000 results include a reasonable allocation of
certain non-recurring charges which were incurred during the first quarter
of 2000.
(2) Recurring net income reflect the allocation of the item described in (1)
above.
29
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
THREE-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Dynegy Midstream Services reported recurring net income of $16.3 million in
the second quarter of 2000 compared with recurring net income of $6.5 million in
the same 1999 quarter. Recurring results of operations period-to-period were
influenced by:
- substantially improved natural gas liquids commodity prices,
- increased worldwide demand,
- a larger contribution of fee-based services,
- lower operating costs,
- lower depreciation costs due to the sale of certain non-strategic
processing plants, and
- lower general and administrative and non-variable compensation expenses.
Aggregate domestic natural gas liquids processing volumes totaled
93.7 thousand gross barrels per day in the second quarter of 2000 compared to a
restated average of 89.3 thousand gross barrels per day during the same period
in 1999. The restated volumes reflect the sale of the Ark-La-Tex assets in
fourth quarter 1999 and the Mid-Continent assets in March 2000. Increases in
straddle plant volumes, which reflect the improved pricing relationship between
natural gas and natural gas liquids period-to-period are partially offset by
lower field plant production in 2000. Fractionation volumes increased
principally as a result of the aforementioned improved relationship between
natural gas and natural gas liquids prices that induced increased straddle
production period-to-period resulting in greater volumes available for
fractionation. Natural gas liquids marketing volumes were higher period over
period reflecting improved demand in the chemicals and wholesale markets.
Additionally, the crude business was sold April 1, 2000. In the second
quarter of 1999, the crude business contributed $3.0 million.
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Dynegy Midstream Services reported recurring net income of $40.4 million in
the six-month period ended June 30, 2000 compared with recurring net income of
$8.0 million in the same 1999 period. Included in earnings in the 2000 period is
an aggregate non-recurring after-tax charge of $35.1 million relating to the
sale and impairment of certain assets and businesses and allocated merger costs.
On a pre-tax basis, $25 million of this charge is included in depreciation
expense and $29 million is included in other items. Recurring results of
operations period-to-period were influenced by the same factors impacting
quarterly results.
Aggregate domestic natural gas liquids processing volumes totaled 105.1
thousand gross barrels per day in the six-month period ended June 30, 2000
compared to a restated average of 95.0 thousand gross barrels per day during the
corresponding period in 1999. The restated volumes reflect the sale of the
previously mentioned assets. Increases in straddle plant volumes, which reflect
the improved pricing relationship between natural gas and natural gas liquids
period-to-period are partially offset by lower field plant production in 2000.
Fractionation volumes increased principally as a result of the aforementioned
improved relationship between natural gas and natural gas liquids prices that
induced increased straddle production period-to-period resulting in greater
volumes available for fractionation.
30
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
Additionally, the previously mentioned sale of the crude business on
April 1, 2000 impacted the comparability of the 2000 and 1999 periods.
DYNEGY ENERGY SERVICES
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating Margin:
Retail Operations.............................. $ 367 $ -- $ 391 $ --
Equity Investments............................... (1,219) (2,439) 4,551 (3,088)
------- ------- ------- -------
SUBTOTAL--FINANCIAL CONTRIBUTION............. (852) (2,439) 4,942 (3,088)
Depreciation(1)................................ -- -- (227) --
General and Administrative Expenses............ (2,161) -- (4,965) --
Other Items(1)................................. 445 -- 408 --
------- ------- ------- -------
EARNINGS (LOSS) BEFORE INTEREST AND TAXES.... (2,568) (2,439) 158 (3,088)
Interest Income/(Expense)...................... 678 -- (112) --
------- ------- ------- -------
PRETAX EARNINGS (LOSS)....................... (1,890) (2,439) 46 (3,088)
Income Tax (Provision) Benefit................. 778 855 (17) 1,082
------- ------- ------- -------
NET INCOME (LOSS)............................ $(1,112) $(1,584) $ 29 $(2,006)
======= ======= ======= =======
RECURRING NET INCOME (LOSS)(2)............... $(1,112) $(1,584) $ 216 $(2,006)
======= ======= ======= =======
</TABLE>
------------------------
(1) Six-month ended June 30, 2000 results include a reasonable allocation of a
pre-tax non-recurring charges which were incurred during the first quarter
of 2000.
(2) Recurring net income (loss) reflects the allocation of the item described in
(1) above.
THREE-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Dynegy Energy Services reported a recurring net loss of $1.1 million for the
three-month period ended June 30, 2000, compared with a recurring net loss of
$1.6 million in the 1999 period. This segment was formed effective with the
acquisition of Illinova and is engaged in the marketing of retail energy
products and services through direct marketing and strategic alliances with
regional market leaders. Dynegy's goal is to form a North American network of
regional retail energy alliances while building upon Illinova's retail
operations, which included three distinct strategies: commercial & industrial
and retail commodity sales and services; non-commodity energy related products
and services; and, energy information software products.
31
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Dynegy Energy Services reported recurring net income of $216,000 for the
six-month period ended June 30, 2000, compared with a recurring net loss of
$2.0 million in the 1999 period. Improved earnings reflect positive results in
2000 related to the segment's interests in its midwest and southeast retail
alliances.
OPERATING CASH FLOW
Cash flow from operating activities totaled $192.7 million for the six-month
period ended June 30, 2000, compared to $118.5 million reported in the same 1999
period. Changes in operating cash flow reflect the operating results previously
discussed herein and changes in working capital. Changes in other working
capital accounts, which include trade receivables and payables, prepayments and
other current assets and accrued liabilities, reflect expenditures or
recognition of liabilities for settlements of certain litigation, insurance
costs, certain deposits, salaries, taxes other than on income, certain deferred
revenue accounts and other similar items. Fluctuations in these accounts,
period-to-period, reflect changes in the timing of payments or recognition of
liabilities and are not directly impacted by seasonal factors.
CAPITAL EXPENDITURES AND INVESTING ACTIVITIES
Investing activities in the 2000 period included $168.6 million in capital
expenditures principally related to construction of power generation assets and
investment associated with technology infrastructure. The non-strategic assets
disposed of in 2000 principally related to the sale of certain qualifying
facilities and liquids assets for which the Company received cash inflows of
approximately $737.8 million in the six months ended June 30, 2000. Also during
the 2000 year-to-date period, Dynegy made investments in unconsolidated
affiliates of $31.1 million, $25.0 million of which related to eSpeed as
discussed in Note 4.
During the six-months ended June 30, 1999, the Company spent a net
$237.0 million for investing activities principally on power generation assets,
including an interest in a power generation partnership, and additional
expenditures related to betterments of existing facilities and capital
investment associated with technology infrastructure improvements. Additionally,
during the 1999 period, the Company received proceeds of $16.7 million
principally related to the sale of an investment.
FINANCING ACTIVITIES
In a public offering effective March 15, 2000, Dynegy issued $300 million of
8.125% Senior Notes due March 15, 2005. Total proceeds net of underwriting costs
were $296.7 million. Interest is payable on the Senior Notes on March 15 and
September 15 of each year, beginning September 15, 2000. Proceeds were used to
repay existing indebtedness of an affiliate.
32
<PAGE>
DYNEGY HOLDINGS INC.
PART II. OTHER INFORMATION
ITEM 1--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, CA. 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 restating its breach of contract claim against
Destec. PG&E and Destec have filed motions to dismiss MID's revised federal and
state antitrust claims. The 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.
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 tortious 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 has filed a motion to dismiss MID's amended complaint
against Dynegy, which motion is scheduled to be heard in August 2000. Dynegy
believes the allegations made by MID are meritless 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.
The Company is subject to various legal proceedings and claims, which arise
in the normal course of business. Further, in addition to certain disclosures
made previously herein, the Company assumed liability for various claims,
assessments and litigation in connection with 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.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) The following instruments and documents are included as exhibits to this
Form 10-Q.
27--Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter:
None.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned and thereunto duly authorized.
<TABLE>
<S> <C> <C>
DYNEGY HOLDINGS INC.
By: /s/ BRADLEY P. FARNSWORTH
-----------------------------------------
Bradley P. Farnsworth
SENIOR VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
Date: November 27, 2000
34
