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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _____________
COMMISSION FILE NUMBER: 1-029311
DYNEGY HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3248415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Louisiana, Suite 5800
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 507-6400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Name of each exchange on which registered:
Common Stock, par value ---
$0.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes X No
----- -----
All outstanding equity of Dynegy Holdings Inc. is held by its parent Dynegy Inc.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of Parts I, II and IV in the
Dynegy Inc. Annual Report to Shareholders for the fiscal year ended December 31,
1999. As to Part III (items 10, 11, 12 and 13), Dynegy Inc. Notice and Proxy
Statement for the 2000 Annual Meeting of Shareholders to be filed not later than
120 days after December 31, 1999.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
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DYNEGY HOLDINGS INC.
FORM 10-K
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.............................................................................. 1
Item 1A. Executive Officers.................................................................... 18
Item 2. Properties............................................................................ 19
Item 3. Legal Proceedings..................................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders................................... 25
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............. 26
Item 6. Selected Financial Data............................................................... 27
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ 28
Item 8. Financial Statements and Supplementary Data........................................... 46
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................ 46
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 47
Item 11. Executive Compensation................................................................ 47
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 47
Item 13. Certain Relationships and Related Transactions........................................ 47
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 47
Signatures...................................................................................... 55
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For definitions of certain terms used herein, see "Item 1. BUSINESS --
DEFINITIONS."
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PART I
ITEM 1. BUSINESS
THE COMPANY
Dynegy Holdings Inc. ("Dynegy Holdings" or the "Company") is a leading
provider of energy products and services in North America, the United Kingdom
and in 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.
The critical mass achieved through the combination of a large scale energy
marketing operation with strategically located assets which augment the
marketing efforts affords the Company the ability to offer innovative,
value-creating energy solutions to its customers.
The Company is a holding company that conducts substantially all of its
business through its subsidiaries. From inception of operations in 1984 until
1990, Natural Gas Clearinghouse ("Clearinghouse") limited its activities
primarily to natural gas marketing. Starting in 1990, Clearinghouse began
expanding its core business operations through acquisitions and strategic
alliances resulting in the formation of a midstream energy asset business and
establishing energy marketing operations in both Canada and the United Kingdom.
The Company initiated electric power marketing operations in February 1994 in
order to exploit opportunities created by the deregulation of the domestic
electric power industry. Effective March 1, 1995, Clearinghouse and Trident NGL
Holding, Inc. ("Holding"), a fully integrated natural gas liquids company,
merged ("Trident Combination") and the combined entity was renamed NGC
Corporation ("NGC"). On August 31, 1996, NGC completed a strategic combination
with Chevron U.S.A. Inc. and certain Chevron affiliates (collectively "Chevron")
whereby substantially all of Chevron's midstream assets merged with NGC
("Chevron Combination"). Effective July 1, 1997, NGC acquired Destec Energy,
Inc. ("Destec Acquisition"), a leading independent power producer. 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. 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, old Dynegy,
which was renamed Dynegy Holdings Inc., became a wholly-owned subsidiary of a
new holding company, now referred to as 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. Both
Dynegy Inc. and Dynegy Holdings Inc. are subject to the reporting requirements
of the 1934 Securities Act. The financial and operational data of Dynegy
Holdings Inc. contained herein is the same financial and operational data of
Dynegy Inc. for all periods presented.
The principal executive office of the Company is located at 1000
Louisiana, Suite 5800, Houston, Texas 77002, and the telephone number of that
office is (713) 507-6400. Dynegy Holdings and its affiliates maintain marketing
and/or regional offices in Atlanta, Georgia; Boston, Massachusetts; Calgary,
Alberta; Chicago, Illinois; Dallas, Texas; Englewood, Colorado; London, England;
Midland, Texas; Montreal, Quebec; Oakville, Ontario; Oklahoma City, Oklahoma;
Pleasanton, California; Tampa, Florida; Tulsa, Oklahoma; and Washington D.C.
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DEFINITIONS
As used in this Form 10-K, the abbreviations listed below are defined as
follows:
Bbl 42 U.S. gallons, the basic unit for measuring crude oil and
natural gas condensate.
MBbls/d Volume of one thousand barrels per day.
MMBbls Volume of one million barrels.
MMcf/d Volume of one million cubic feet per day.
Bcf Volume of one billion cubic feet.
Bcf/d Volume of one billion cubic feet per day.
Btu British Thermal Unit - a measure of the amount of heat
required to raise the temperature of one pound of water one
degree Fahrenheit.
Bpd Barrels per day.
NGLs Natural gas liquids.
LPG Liquid petroleum gas.
MW Megawatts.
Spot The Henry Hub cash price posting for natural gas per the
"Inside FERC" publication.
BUSINESS
THE ACQUISITION OF ILLINOVA CORPORATION
The merger of the former Dynegy Inc. and Illinova involved the creation
of a new holding company, now known as Dynegy Inc., and two separate but
concurrent mergers. In one concurrent merger, a wholly-owned subsidiary of
Dynegy Inc. merged with and into Illinova. In the other concurrent merger, a
second wholly-owned subsidiary of Dynegy Inc. merged with and into old Dynegy.
As a result of these two concurrent mergers, old Dynegy and Illinova continue to
exist as wholly-owned subsidiaries of Dynegy Inc., and are referred to as Dynegy
Holdings Inc. and Illinova Holding, respectively.
Illinova, headquartered in Decatur, Illinois, was an energy services
holding company with 1999 annual revenues of $2.4 billion. Illinova's four
principal operating subsidiaries were:
- - Illinois Power Company, an electric and natural gas utility engaged in the
transmission, distribution and sale of electricity and natural gas, serving
approximately 650,000 customers over a 15,000 square-mile area of Illinois;
- - Illinova Power Marketing, Inc., a subsidiary engaged in the ownership and
operation of unregulated fossil-fueled electric generation in Illinois;
- - Illinova Generating, Inc., a subsidiary that invests in, develops and
operates independent power projects worldwide; and
- - Illinova Energy Partners, Inc., a subsidiary that markets energy and
energy-related services in the United States and Canada.
Dynegy Inc. believes the acquisition of Illinova provides significant
financial, operational and corporate governance advantages that enhance its
position as a leading provider of energy services and products. The combination
brings together a strong, innovative utility company owning strategically
located generation assets and operations, including electric transmission and
retail distribution capabilities, with one of the leading North American energy
marketers and independent power producers. These two companies have diverse but
complementary operations, providing qualitative and quantitative expansion of
Dynegy Inc.'s electric generation capacity, while enhancing Dynegy Inc.'s access
to dependable cash flow and an improved platform for further expansion.
Factors considered in evaluating the benefits of the merger included:
- - The merger is expected to be accretive to the earnings per share of the
Dynegy Inc. shareholders.
- - The addition of Illinova's traditional utility business is expected to
provide a stable base of cash flow from which the combined company will be
able to leverage its business strategy;
- - The merger provides Dynegy Inc. with a larger platform in the electricity
trading market from which it can expand its marketing operations. This
larger platform is expected to provide the foundation for Dynegy Inc.'s
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strategy to be at the forefront of the restructuring of the power industry
and the convergence of the gas and electricity industries;
- - The merger adds an additional 4,989 gross megawatts of electricity
generating capacity to Dynegy Inc.'s current capacity of 7,238 gross
megawatts per year (both figures include current capacity as well as
capacity under construction). This additional capacity is in the Midwestern
United States and is expected to allow Dynegy Inc. to sell more electricity
for its own account on better terms throughout the North American market;
- - The merger is expected to provide continuing shareholders, who desire to
invest in a full-service provider of energy products and services, an
investment vehicle having the flexibility and resources required to respond
to the numerous opportunities in the energy industry;
- - The merger provides the liquidity needed to allow certain Dynegy Inc.
shareholders to reduce the size of their investment in Dynegy Inc.; and
- - The merger improves public float thereby enhancing Dynegy Inc.'s access to
equity capital at attractive cost.
SEGMENT DISCUSSION
In 1999, the Company reported its operations under two primary business
segments: the Energy Convergence and Midstream segments. Dynegy Holdings will
continue to report under these two segments in 2000. Dynegy Inc. will add a
third business segment consisting of the regulated utility operations, operating
under Illinois Power Company, acquired in the Illinova acquisition, as well as
additional operations to its already existing segments. The operations acquired
in the Illinova acquisition will not initially be part of Dynegy Holdings'
reported assets and operations. Dynegy Inc. intends to transfer the generation
assets formerly held by Illinois Power to Dynegy Holdings in a consolidation of
Dynegy Inc.'s Energy Convergence segment, transfering the operations and assets
to Dynegy Holdings. The generation asset transfer is subject to certain
regulatory approvals. A general description of the business strategy employed by
each segment is followed by a discussion of each segment's component businesses.
[GRAPH]
ENERGY CONVERGENCE SEGMENT
This segment is actively engaged in value creation through marketing
and trading of natural gas, power, coal, emissions and the generation of
electricity principally under the name Dynegy Marketing and Trade. Dynegy Inc.,
is pursuing an integrated wholesale energy business approach based on execution
of an energy convergence strategy. This strategy exploits the marketing, trading
and arbitrage opportunities existing in the natural gas and power markets that
are enhanced by the control and optimization of related physical assets. The
combination of a portfolio of strategic generation assets and a national gas and
power marketing franchise allow for extraction of value resulting from arbitrage
opportunities occurring across energy products, across geographic regions and
over time. The Company refers to this synergistic relationship between merchant
generation capacity and energy trading and marketing as the "Merchant Leverage
Effect" depicted below.
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[GRAPHIC]
Dynegy Inc. views its gas and power marketing and power generation
businesses as an integrated unit. Ownership or control of merchant generation,
or "Btu Conversion" capacity, when coupled with its national wholesale gas and
power marketing franchise, creates a wide range of value creation opportunities
benefiting both Dynegy Inc. and its customers. Dynegy Inc.'s wholesale trading
and marketing franchise adds value to its generation assets by providing
national market access, market infrastructure and intelligence, risk management
and arbitrage opportunities, fuel management and procurement expertise and
transmission expertise for inputs (gas and coal) and outputs (power). Generation
capacity adds value to Dynegy Inc.'s wholesale trading and marketing franchise
by providing an outlet/market for gas and coal supplies, a source of reliable
power supply and an enhanced ability to structure innovative new products and
services for customers.
Concurrent with the restructuring of the U.S. wholesale electricity
markets, Dynegy Inc. is continuing its focus on building a portfolio of merchant
generation capacity in select markets across the country. Dynegy Inc. 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. For the foreseeable future, Dynegy Inc. will continue to
expand its ownership or commercial control over strategic generation
assets/capacity in selected markets through acquisitions, greenfield development
and asset management agreements. The aforementioned acquisition of Illinova's
unregulated fossil-fuel generation complements this strategy both in terms of
strategic location and capacity. It is expected that approximately two-thirds of
projected capital expenditures over the next three years will be directed to the
control or ownership of generation assets designed to maximize value extraction
through execution of the Merchant Leverage Effect.
[GRAPHIC]
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Deregulation of the retail gas and power markets is also evolving to
encourage greater competition and access to markets. Dynegy Inc.'s retail gas
and electric strategy is designed to access a significant national customer base
while mitigating the large capital investment and financial risks necessitated
by other national retail marketing strategies. Rather than competing directly
with its existing wholesale customers, Dynegy Inc. has chosen to strengthen key
customer relationships by forming a number of regional retail gas alliances. The
combination of Dynegy Inc.'s low-cost energy supply (gas and power) with a
regional utility's large, installed customer base and local name recognition
positions each alliance to capture a significant portion of the local gas and
power market, when those markets fully open to competition. Dynegy Inc. refers
to this as the "Incumbent Advantage." Dynegy Inc.'s goal is to form a North
American network of regional retail energy alliances. In addition, Illinova
Power Company and Illinova Energy Partners, Inc. each have varying levels of
retail gas and electric operations. The Illinova retail operations include three
distinct strategies: commercial & industrial and retail commodity sales and
services; non-commodity energy related products and services; and, energy
information software products. Dynegy Inc. is assessing the strategic fit of
these operations in concert with its current retail strategy for the purpose of
defining a coherent retail strategy for the future. These combined operations
are being managed under the name Dynegy Energy Services. The integration of
Illinova's retail operations along with Dynegy Inc.'s established strategy will
accelerate Dynegy Inc.'s penetration of the retail gas and electric markets
while reducing financial risk during this period of regulatory uncertainty and
restructuring. The following chart provides geographic data on existing and
targeted alliance markets.
[GRAPHIC]
Dynegy Inc.'s vision of the ultimate restructuring of the gas and power
marketing and power generation businesses in the United States is expected to be
replicated throughout Canada, the United Kingdom, continental Europe and other
markets as those markets open up to greater competition, subject to any unique
attributes associated with market deregulation in those areas. Dynegy Inc.
maintains energy trading operations in Canada, the UK and continental Europe
and is continuing to assess local, regional and national markets, regulatory
environments and other factors in order to support and direct future economic
investment.
MIDSTREAM SEGMENT
Since 1997, the midstream natural gas liquids industry has experienced
significant upheaval. Volatility in NGL prices from 1997 through 1999 has placed
significant pressure on operating margins within the industry. Despite
significant consolidation over the recent past, the domestic midstream industry
remains relatively fragmented and competition for additional inlet volumes
remains intense. Dynegy Holdings, along with other industry participants, has
responded to these industry conditions by aggressively reducing costs,
rationalizing assets in non-core operating areas and improving its competitive
position in core operating areas through asset consolidation and alliances. The
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principal goal of these efforts is to mitigate the variability of earnings and
cash flow caused by fluctuations in commodity prices, while gaining and
maintaining first quartile operating performance against industry peers. From
1998 through early 2000, the Company disposed of certain non-core assets,
principally in the Mid-Continent region, combined regional operations through an
alliance with an industry partner and consolidated certain upstream and
downstream operations to achieve cost synergies. These efforts resulted in first
quartile operating performance in 1999, positioning the Company to concentrate
its operations and capital expenditure program in the strategic gulf coast area
and any other areas that management views as strategic. Dynegy Holdings believes
that financial returns will benefit from focusing its management and capital
resources towards expanding upstream and downstream opportunities arising as
Gulf of Mexico natural gas production increases, as world-wide liquids marketing
activities become further linked to the industry-wide southern Texas and
Louisiana infrastructure and as other developments in the natural gas industry
arise, which complement the Company's strategy.
[GRAPHIC]
This segment principally operates under the name Dynegy Midstream
Services and consists of the North American midstream liquids operations, the
global liquefied petroleum gas transportation and the natural gas liquids
marketing operations, located primarily in Houston and in London, and certain
other businesses. The North American midstream liquids operations are actively
engaged in the gathering and processing of natural gas and the transportation,
fractionation and storage of NGLs. Major producers upstream and refiners
downstream have divested their ownership in midstream assets and operations over
the last decade. Traditionally, these operations provided intermediate service
and support functions within most integrated petroleum companies. Dynegy
Holdings believes that it can achieve significant cost and operating
efficiencies as well as attractive returns on services provided to the market
from the independent ownership and operation of these assets. Dynegy Holdings
captures value throughout the midstream service business model as shown below.
As a result, Dynegy Holdings has built a vertically integrated natural gas
liquids infrastructure having the capability of extracting profit throughout the
value chain extending from inlet natural gas volumes gathered from producing
horizons throughout the US and Canada to marketing NGLs to wholesalers and
end-users throughout the world.
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[CHART]
The Company is a recognized industry leader in substantially all
midstream component businesses, ranging from natural gas processing to marketing
NGLs to end users. During 1999, Dynegy Holdings was the second largest processor
of natural gas in the United States; it owned substantial fractionation capacity
exceeding three hundred thousand barrels per day and the Company marketed over
four hundred fifty thousand barrels of NGLs daily. These activities were
supported by an extensive storage and transportation system, which included in
excess of 14,000 miles of natural gas pipelines, 2,000 miles of crude oil
pipelines, 500 miles of NGL pipelines and 60 million barrels of NGL storage
capacity. To further assist its operations, the Company has access to
substantial barge, rail, trucking and terminalling assets as well as large-hull
ships having long-haul capabilities, which enhance international trading
opportunities. As discussed elsewhere, the Company is disposing of its
Mid-Continent natural gas processing and gathering assets during the first
quarter 2000.
OVERVIEW OF SEGMENT BUSINESSES
ENERGY CONVERGENCE SEGMENT - NATURAL GAS
The Company's wholesale natural gas marketing activities are conducted
throughout North America and in the United Kingdom. These activities consist of
contracting to purchase specific volumes of natural gas from suppliers at
various points of receipt to be supplied over a specific period of time;
aggregating natural gas supplies and arranging for the transportation of these
gas supplies through proprietary and third-party transmission systems;
negotiating the sale of specific volumes of natural gas over a specific period
of time to local distribution companies (LDCs), utilities, power plants and
other end-users; and matching natural gas receipts and deliveries based on
volumes required by customers.
NATURAL GAS PURCHASES. The Company purchases natural gas from a variety
of suppliers under contracts with varying terms and conditions intended to
ensure a stable supply of natural gas. When purchasing natural gas, the Company
considers price, location, liquids content, if applicable, and quantities
available. In 1999, the Company purchased natural gas in every major producing
basin in the United States and Canada from over 290 suppliers, ranging from
major producers to small independent companies. Pursuant to ancillary agreements
entered into as part of the Chevron Combination, Dynegy Holdings has the
obligation to purchase and the right to market substantially all of the natural
gas produced or controlled by Chevron in the United States (except Alaska). The
Chevron relationship provides the Company with a significant, stable supply of
natural gas which, when combined with gas supplies available from its network of
other supply sources, allows it to effectively manage gas supplies and reduces
the risk of short-term supply shortages during periods of peak demand.
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TRANSPORTATION. The Company arranges for transportation of the natural
gas it markets from the supplier receipt point to the delivery point requested
by the purchaser. The Company generally retains title to the natural gas from
the receipt point to the delivery point and obtains transportation on
unaffiliated pipelines. The Company believes that its understanding of the
United States' pipeline network, along with the scale and geographic reach of
its gas marketing efforts, are important to the Company's success as a gas
marketer. The Company uses a variety of transportation arrangements to move its
customers' volumes, including short-term and long-term firm and interruptible
agreements with pipelines and brokered firm contracts with its customers.
NATURAL GAS SALES. The Company sells natural gas under sales agreements
that have varying terms and conditions intended to match seasonal and other
changes in demand. The Company's wholesale customer base consists primarily of
gas and electric utilities and industrial and commercial end-users and marketers
of natural gas. In 1999, sales were made to approximately 820 customers located
throughout the contiguous United States and parts of Canada. For the year ended
December 31, 1999, the Company's North American operations sold an aggregate
average of 8.8 Bcf per day of natural gas.
NATURAL GAS STORAGE. Natural gas storage capacity plays an important
role in the Company's ability to act as a full-service natural gas marketer by
allowing it to manage relatively constant gas supply volumes with uneven demand
levels. Through the use of its storage capabilities, the Company offers peak
delivery services to satisfy winter heating and summer electric-generating
demands. Storage inventories also provide performance security or "backup"
service to the Company's customers. The Company at various times leases
short-term and long-term firm and interruptible storage.
UNITED KINGDOM. The Company maintains an independent energy marketing
business through a wholly owned subsidiary in the United Kingdom. Additionally,
Dynegy Holdings owns a twenty-five percent participating preferred stock
interest in Accord Energy Limited ("Accord"), a U.K.-based energy marketing
company. During 1999, the Company's U.K. subsidiary purchased product from 45
suppliers and marketed sales to 46 customers. For the year ended December 31,
1999, the Company's U.K.-based operations sold an aggregate average of 1.1 Bcf
per day of natural gas. Additionally, in 1999, the U.K. energy trading operation
began financial trading in the United Kingdom and the Norway Power Pool ("Nord
Pool") electricity markets.
ENERGY CONVERGENCE SEGMENT - POWER
Dynegy Holdings markets electricity and power products and services
through indirect wholly-owned subsidiaries, providing a 24-hour-a-day resource
for the sale and purchase of power through access to wholesale markets
throughout North America. The Company helps generation customers manage and
optimize their fuel supplies, optimize generation assets and capacity
utilization and maximize energy conversion and tolling opportunities. In
addition, the Company provides market aggregation and sales assistance and
risk-management services and strategies. The Company will at times contract for
transmission capacity over regulated transmission lines in order to facilitate
regional movements of power. In 1999, Dynegy Holdings made sales to
approximately 200 customers and sold 67 million-megawatt hours of electricity.
Dynegy Holdings had interests in power projects in operation, under
construction, in late stage development or pending acquisition having combined
gross capacity of 7,238 megawatts of electricity. The Illinova acquisition added
4,989 megawatts of capacity to Dynegy Inc.'s portfolio. Dynegy Holdings was
required by the federal Public Utility Regulatory Policies Act of 1978 ("PURPA")
to divest or restructure its interests in certain qualified facilities, as a
condition precedent to closing the Illinova acquisition. Such interests were
divested on February 1, 2000, resulting in the loss of 709 gross megawatts of
capacity. Substantially all of Dynegy Holdings owned capacity is gas-fired and a
majority of the gas-fired capacity is held through interests owned in joint
ventures or other similar financial structures. In addition to ownership and
operation of generating capacity, the Company may, at times, provide services to
the ventures in which it owns an interest in the areas of project development,
engineering, environmental affairs, operating and maintenance services, business
management and fuel supply services. Such management services include:
- - Engineering oversight of all conceptual planning, feasibility studies,
environmental studies and plant, engineering and construction design;
- - Specialized and comprehensive operating, maintenance, testing and start-up
services;
- - Power and fuel management involving purchases and sales for and from the
projects;
- - Contract negotiation;
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- - Development and maintenance of business plans and forecasts;
- - Development and implementation of profit improvement opportunities;
- - Monitoring regulatory, legislative, and environmental affairs; and
- - Providing various accounting and financial services.
MIDSTREAM SEGMENT - NATURAL GAS GATHERING AND PROCESSING
The natural gas processing industry is a major segment of the oil and
gas industry, providing the necessary service of refining raw natural gas into
marketable pipeline quality natural gas and natural gas liquids. The Company
owns interests in 38 gas processing plants, including 24 plants that it
operates, as well as associated and stand-alone natural gas gathering pipeline
systems. These assets are primarily located in the key producing areas of New
Mexico, Texas, Louisiana, Arkansas, Oklahoma, Kansas and Alberta, Canada.
During 1999, the Company processed an average of 2.9 Bcf per day of
natural gas and produced an average of 123 thousand barrels per day of natural
gas liquids. As part of the Chevron Combination's ancillary agreements, Dynegy
Holdings acquired the right to process substantially all of Chevron's
processable natural gas in those geographic areas where it is economically
feasible for Dynegy Holdings to provide such service.
Through two transactions, one in December 1999 and one in January 2000,
the Company agreed to sell its Mid-Continent natural gas processing and
gathering facilities. These facilities were non-strategic, were under-performing
in comparison to other assets in its portfolio and exposed Dynegy Holdings to
commodity price risk that was difficult to mitigate on a consistent basis. The
December sale has closed and the January sale is set to close in March 2000.
During 1999, these combined assets processed an average of 362 Bcf per day of
natural gas and produced an average of 30 thousand barrels per day of natural
gas liquids. As part of the December 1999 sale, Dynegy Holdings executed a
purchase and sale contract to acquire substantially all of the natural gas
liquids processed by certain of these natural gas processing plants for a period
of three years. The aggregate sales proceeds from these sales approximated $422
million and the Company recognized no material gain or loss on either
transaction.
MIDSTREAM SEGMENT - FRACTIONATION
Natural gas liquids removed from the natural gas stream at gas
processing plants are generally in the form of a commingled stream of liquid
hydrocarbons (raw product). The commingled natural gas liquids are separated at
fractionation facilities into the component products of ethane, propane, normal
butane, isobutane and natural gasoline. The Company has ownership interests in
three fractionation facilities; two in Mont Belvieu, Texas and one in Lake
Charles, Louisiana. During 1999, these facilities fractionated an average of 327
thousand gross barrels per day.
MIDSTREAM SEGMENT - NGL MARKETING
In North America, the Company markets its own NGL production and also
purchases NGLs from third parties for resale. Dynegy Holdings also markets and
trades LPGs throughout the world through use of chartered large-hull ships.
Product marketed and traded by this business is acquired from producing areas in
the North Sea, West Africa, Algeria and the Arabian Gulf as well as from the
U.S. Gulf Coast region. During 1999, the Company sold approximately 537 thousand
barrels per day of natural gas liquids to over 820 customers from these
operations.
MIDSTREAM SEGMENT - TRANSPORTATION OPERATIONS
The Company's transportation assets are inter-connected with the
nation's gas liquids and natural gas pipeline systems. Through this network of
pipeline connections, terminals, rail cars, trucks, barges and storage
facilities, the Company moves natural gas liquids from producing regions in the
Gulf Coast, West and Midwest to most major domestic and international markets.
The Company operates large-scale marine terminals in Texas, Florida and
Louisiana, which offer importers a variety of methods for transporting products
to the marketplace. In addition, Dynegy Holdings has access to over 60 million
barrels of underground liquids storage providing customers with the ability to
store, trade, buy and sell specification products. Dynegy Holdings also leases
large-hull ships capable of importing/exporting liquid petroleum gas to/from
markets throughout the world.
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MIDSTREAM SEGMENT - CRUDE OIL MARKETING
During 1999, Dynegy Holdings placed its domestic crude oil marketing
operations for sale, as the business was not considered strategic or
complementary to the organization's long-term strategy. Divestiture of these
operations is expected to occur in the first quarter 2000. During 1999, the
Company sold approximately 207 thousand barrels per day of crude oil to over 100
customers. The Company will continue crude oil marketing operations in Canada,
through a wholly owned Canadian subsidiary.
BUSINESS RISK MANAGEMENT ASSESSMENT
Dynegy Inc.'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,
management estimations, strategic investment decisions, changes in competition,
operational risks, environmental risks and changes in regulation.
Dynegy Inc. 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. In order to manage these
commodity price risks, Dynegy Inc. routinely utilizes certain types of
fixed-price forward purchase and sales contracts, futures and option contracts
traded on the New York Mercantile Exchange and swaps and options traded in the
over-the-counter financial markets to:
- - Manage and hedge its fixed-price purchase and sales commitments;
- - Provide fixed-price commitments as a service to its customers and
suppliers;
- - Reduce its exposure to the volatility of cash market prices;
- - Protect its investment in storage inventories; and
- - Hedge fuel requirements at its gas processing and power generation
facilities.
Dynegy Inc. 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, Dynegy Inc.
may, at times, be unable to fully hedge its portfolio for certain market risks.
Dynegy Inc. 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.
Dynegy Inc. employs the mark-to-market method of accounting for a
portion of its operations, which 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 world-wide
gas marketing, power marketing, and crude 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 elongated pricing curves, 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 Inc. believes that its mathematical models
utilize state-of-the-art technology, pertinent industry data and prudent
discounting in order to forecast certain elongated pricing curves.
Dynegy Inc.'s commercial groups manage, on a portfolio basis, the
resulting market risks inherent in commercial transactions, subject to
parameters established by the Dynegy Inc. Board of Directors. Market risks are
monitored by a risk control group that operates independently from the
commercial units that create or actively manage these risk exposures to ensure
compliance with Dynegy Inc.'s risk management policies. Risk measurement is also
practiced against the Dynegy Inc. portfolios with value at risk, stress testing
and scenario analysis.
In addition to risks associated with price or interest rate movements,
credit risk is also inherent in Dynegy Inc.'s operations. Credit risk relates to
the risk of loss resulting from the nonperformance of contractual obligations by
a counterparty. Dynegy Inc. maintains credit policies with regard to its
counterparties, which management believes minimize its overall credit risk.
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Dynegy Inc.'s stated business strategy is to expand ownership or
control of merchant generation capacity in select markets across the country.
Dynegy Inc. 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 for
volatility in periodic returns by increasing 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 Inc. moves forward with the execution of its
strategic plan to own or control 70,000 megawatts of capacity within five years,
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 Inc.'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
Inc.'s overall portfolio and strategy may substantially alter Dynegy Inc.'s
earnings risk profile over time.
Finally, the addition of these generation assets to Dynegy Inc.'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 and could result in
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 Inc.'s strategic plan in future periods.
Many of these risks are outside the control of Dynegy Inc. and may not
be fully mitigated through application of risk management methods and/or
state-of-the-art, first quartile power generation operating methods.
COMPETITION
All phases of the businesses in which Dynegy Inc. is engaged are highly
competitive. In connection with both domestic and foreign operations, Dynegy
Inc. encounters strong competition from companies of all sizes, having varying
levels of financial and personnel resources.
Dynegy Inc. competes in its energy marketing and trading businesses
with international, national and regional full service energy providers,
merchants, producers and pipelines for sales based on its ability to aggregate
competitively priced supplies from a variety of sources and locations and to
utilize efficient transportation. With respect to its marketing and trading
operations, Dynegy Inc. believes that:
- - E-Commerce will fast become the primary business enabler resulting in a
shift in how the industry conducts its business;
- - Customers will increasingly scrutinize the financial condition of their
suppliers to assure that contract obligations will be met;
- - Suppliers and transporters will demand more stringent credit terms to
secure performance;
- - The increased role of full service energy providers may add to the
financial cost of doing business;
- - Increasing availability of pricing information to participants in the
industry will continue to exert downward pressure on per-unit profit
margins in the industry;
- - Suppliers will have to be multi-fuel marketers; and
- - Large competitors having significant liquidity and other resources will
compete with Dynegy Inc. for similar business.
As a result, Dynegy Inc. believes its financial condition and its access to
capital markets will play an increasing role in distinguishing it from many of
its competitors. Further, Dynegy Inc. believes that technological advances in
executing transactions will differentiate the competition in the near term.
Operationally, Dynegy Inc. believes its
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ability to remain a low-cost merchant and to effectively combine value-added
services, competitively priced supplies and price risk management services will
determine the level of success in its marketing and trading operations.
The demand for power may be met by generation capacity based on several
competing technologies, such as gas-fired or coal-fired cogeneration and power
generating facilities fueled by alternative energy sources including hydro
power, synthetic fuels, solar, wind, wood, geothermal, waste heat, solid waste
and nuclear sources. The power generation business competes with other
non-utility generators, regulated utilities, unregulated subsidiaries of
regulated utilities and other energy service companies in the development and
operation of energy-producing projects. The trend towards deregulation in the
U.S. electric power industry has resulted in a highly competitive market for
acquisition or development of domestic power generating facilities. As the
nation's regulated utilities seek non-regulated investments and states move
toward retail electric competition, these trends can be expected to continue for
the foreseeable future.
The natural gas liquids and crude oil marketing businesses face
significant competition from a variety of competitors including major integrated
oil companies, major pipeline companies and their marketing affiliates and
national and local gas gatherers, processors, brokers, marketers and
distributors of varying sizes and experience. The principal areas of competition
include obtaining gas supplies for gathering and processing operations,
obtaining supplies of raw product for fractionation, the marketing of natural
gas liquids, crude oil, residue gas, condensate and sulfur, and the
transportation of natural gas, natural gas liquids and crude oil. Competition
typically arises as a result of the location and operating efficiency of
facilities, the reliability of services and price and delivery capabilities. The
trend towards industry consolidation in the North American upstream liquids
businesses has resulted in a highly competitive market for acquisition and
development of such facilities. Dynegy Inc.'s leadership position in this
industry provides unique opportunities to extract value from its investments.
Dynegy Inc. believes it has the infrastructure, long-term marketing abilities,
financial resources and management experience to enable it to effectively
compete.
REGULATION
GENERAL. Dynegy Inc. is subject to the laws, rules and regulations of
the jurisdictions and countries in which it conducts its operations. The
regulatory burden on the energy industry increases its cost of doing business
and, consequently, affects its profitability. Inasmuch as these rules and
regulations are frequently amended or reinterpreted, Dynegy Inc. is unable to
predict the future cost or impact of complying with such regulations. These
rules and regulations affect the industry as a whole; therefore, Dynegy Inc.
does not believe that it is affected in a significantly different manner from
its competitors.
NATURAL GAS REGULATION. The transportation and sale for resale of
natural gas is subject to regulation by the Federal Energy Regulatory Commission
("FERC") under the Natural Gas Act of 1938, as amended ("NGA") and, to a lesser
extent, the Natural Gas Policy Act of 1978, as amended ("NGPA"). Interstate
transportation and storage services by natural gas companies, including
interstate pipeline companies, and the rates charged for such services, are
regulated by the FERC. Certain of Dynegy Inc.'s pipeline activities and
facilities are involved in interstate transportation of natural gas, crude oil
and natural gas liquids, and are subject to these or other federal regulations.
NATURAL GAS MARKETING. Commencing in 1985, the FERC promulgated a
series of orders and regulations adopting changes that significantly altered the
business of transporting and marketing natural gas by fostering competition. The
thrust of these regulations was to induce interstate pipeline companies to
provide nondiscriminatory transportation services to producers, distributors and
other shippers. The effect of the foregoing regulations has been the creation of
an open access market for natural gas purchases and sales and the creation of a
business environment which has fostered the evolution of various unregulated,
privately negotiated natural gas sales, purchase and transportation
arrangements. Regulations in Canada have resulted in a similar business
environment in that country. The sale for resale of natural gas in North America
has substantially completed its evolution to an unregulated, open access market.
Management does not believe that any further regulatory matters will have a
material adverse effect on its operations or competitiveness.
In the first quarter of 2000, the FERC issued Order No. 637, which
changed the character of interstate transportation services. Interstate
pipelines will begin implementation of the new regulations in May 2000. Dynegy
Inc. does not believe that the terms of the FERC Order will adversely affect its
operations.
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In Canada, certain federal and provincial regulatory authorities
require parties to hold export or removal permits for transactions pursuant to
which natural gas is to be exported from the jurisdiction in which it is
produced. These requirements apply whether the gas is removed from one province
to another or from a province to the United States. Dynegy Holdings' indirectly
wholly-owned Canadian subsidiary, Dynegy Canada Inc., holds permits from the
National Energy Board, the Alberta Energy and Utilities Board ("AEUB") and the
British Columbia Ministry of Employment and Investment, Oil and Gas Section for
such purposes. In addition, Dynegy Canada Inc. holds export permits from the
National Energy Board similar to the foregoing for butane, propane and crude
oil. In the United Kingdom, regulation of the natural gas business is subject to
regulation by the Office of Gas Supply.
GAS PROCESSING. The primary function of Dynegy Holdings' gas processing
plants is the extraction of natural gas liquids and the conditioning of natural
gas for marketing, and not natural gas transportation. The FERC has
traditionally maintained that a processing plant is not a facility for
transportation or sale for resale of natural gas in interstate commerce and
therefore is not subject to jurisdiction under the NGA. Even though the FERC has
made no specific declaration as to the jurisdictional status of the Company's
gas processing operations or facilities, Dynegy Holdings believes its gas
processing plants are primarily involved in removing natural gas liquids and
therefore exempt from FERC jurisdiction. Nonetheless, certain facilities
downstream of processing plants are being considered for use in transporting gas
between pipelines, which may invoke FERC's jurisdiction. Such jurisdiction
should apply to the downstream facility as a pipeline, however, and not to the
plants themselves.
In Alberta Canada, the AEUB governs the permitting, emissions and
operations of gas gathering and processing facilities. These facilities require
a permit from the AEUB to process or transport a specified volume of gas and a
demonstration at the time of application that the impact on the environment will
be minimal. Dynegy Canada Inc. holds all necessary permits required in order to
own and operate its processing and gathering facilities. Notwithstanding the
jurisdiction of the AEUB, the rates, terms and conditions of service of such
facilities are generally the result of privately negotiated arrangements.
GATHERING. The NGA exempts gas-gathering facilities from the
jurisdiction of the FERC. Interstate transmission facilities, on the other hand,
remain subject to FERC jurisdiction. The FERC has historically distinguished
between these two types of facilities on a fact-specific basis. Dynegy Holdings
believes its gathering facilities and operations meet the current tests used by
the FERC to determine a nonjurisdictional gathering facility status. Some of the
recent cases applying these tests in a manner favorable to the determination of
Dynegy Holdings' nonjurisdictional status are still subject to rehearing and
appeal. In addition, the FERC's articulation and application of the tests used
to distinguish between jurisdictional pipelines and nonjurisdictional gathering
facilities have varied over time. While the Company believes current definitions
create nonjurisdictional status for Dynegy Holdings' gathering facilities, no
assurance can be given that such facilities will remain classified as gas
gathering facilities and the possibility exists that the rates, terms, and
conditions of the services rendered by those facilities, and the construction
and operation of the facilities will be subject to regulation by the FERC or by
the various states in the absence of FERC regulation.
OTHER REGULATORY ISSUES. Dynegy Inc.'s gas purchases and sales are
generally not regulated by the FERC or other regulatory authorities; however, as
a gas merchant, Dynegy Inc. depends on the gas transportation and storage
services offered by various pipeline companies to enable the sale and delivery
of its gas supplies. Additionally, certain other pipeline activities and
facilities of are involved in interstate and intrastate transportation and
storage services and are subject to various federal and state regulations which
generally regulate rates, terms and conditions of service.
ELECTRICITY MARKETING REGULATION. The Federal Power Act ("FPA") and
rules promulgated by the FERC regulate the transmission of electric power in
interstate commerce and sales for resale of that power. As a result, portions of
these operations are under the jurisdiction of the FPA and FERC. In April 1996,
the FERC adopted rules ("Order 888") to expand transmission service and access
and provide alternative methods of pricing for transmission services. Order 888
is intended to open the FERC-jurisdictional interstate transmission grid in the
continental United States to all qualified persons that seek transmission
services to wheel wholesale power. Utilities are required to provide
transmission customers non-discriminatory open access to their transmission
grids with rates, terms, and conditions comparable to that which the utility
imposes on itself. Order 888 was upheld by the FERC in March 1997 and is subject
to appeal. Second generation implementation issues arising out of Order 888
abound. These include issues relating to power pool structures and transmission
pricing. These too will likely find their way to the courts, and their outcome
cannot be predicted.
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In December, 1999, FERC issued Order 2000 addressing some of the
significant regional transmission issues. This issue will affect the
Transmission and Distribution segment of Dynegy Inc. in 2000 and may impact the
operations of Dynegy Holdings through its electricity marketing operations.
Transmission owning utilities are required to file plans by October, 2000, to
detail their participation in an organization that will control the transmission
facilities within a region. Illinois Power will be required to make such a
filing. The Order allows significant flexibility in the structure of these new
organizations and thus their impact on Dynegy Inc.'s power marketing business
and Illinois Power's transmission operations cannot be predicted.
POWER GENERATION REGULATION. Historically in the United States,
regulated and government-owned utilities have been the only significant
producers of electric power for sale to third parties. Pursuant to the enactment
of PURPA, companies other than utilities were encouraged to enter the electric
power business by reducing regulatory constraints. In addition, PURPA and its
implementing regulations created unique opportunities for the development of
cogeneration facilities by requiring utilities to purchase electric power
generated in cogeneration plants meeting certain requirements (referred to as
"Qualifying Facilities"). As a result of PURPA, a significant market for
electric power produced by independent power producers developed in the United
States. The exemptions from extensive federal and state regulation afforded by
PURPA to Qualifying Facilities are important to Dynegy Inc. and its competitors.
To meet the utility ownership limitation imposed on Qualifying Facilities by
FERC rules, Dynegy Holdings sold all or part of its interest in a number of
Qualifying Facilities prior to the Illinova acquisition. The remaining
cogeneration projects that Dynegy Holdings currently owns meet the requirements
under PURPA to be Qualifying Facilities and are maintained on that basis.
In 1992, Congress enacted the Energy Policy Act of 1992 ("Energy Act"),
which amended the FPA and the Public Utility Holding Company Act of 1935
("PUHCA") to create new exemptions from PUHCA for independent power producers
selling electric energy at wholesale, to increase electricity transmission
access for independent power producers and to reduce the burdens of complying
with PUHCA's restrictions on corporate structures for owning or operating
generating or transmission facilities in the United States or abroad. The Energy
Act has enhanced the development of independent power projects and has further
accelerated the changes in the electric utility industry that were initiated by
PURPA.
Changes in PURPA, PUHCA and other related federal statutes may occur in
the next several years. The nature and impact of such changes on Dynegy Inc.'s
projects, operations and contracts is unknown at this time. Dynegy Inc. actively
monitors these developments to determine such impacts as well as to evaluate new
business opportunities created by restructuring of the electric power industry.
Depending on the outcome of these legislative matters, changes in legislation
could have an adverse effect on current contract terms.
The enactment in 1978 of PURPA and the adoption of regulations
thereunder by the FERC and individual states provide incentives for the
development of small power production facilities and cogeneration facilities
meeting certain criteria. In order to be a Qualifying Facility, a cogeneration
facility must (i) produce not only electricity but also a certain quantity of
thermal energy (such as steam) which is used for a qualified purpose other than
power generation, (ii) meet certain energy operating and efficiency standards
when oil or natural gas is used as a fuel source and (iii) not be controlled or
more than 50 percent owned by an electric utility or electric utility holding
company, or any combination thereof. PURPA provides two primary benefits to
Qualifying Facilities owned and operated by non-utility generators. First,
Qualifying Facilities under PURPA are exempt from certain provisions of PUHCA,
the FPA and, except under certain limited circumstances, state laws respecting
rate and financial regulation. Second, PURPA requires that electric utilities
purchase electricity generated by Qualifying Facilities at a price equal to the
purchasing utility's full "avoided cost" and that the utility sell back-up power
to the Qualifying Facility on a non-discriminatory basis. The FERC regulations
also permit Qualifying Facilities and utilities to negotiate agreements for
utility purchases of power at rates other than the purchasing utility's avoided
cost. If Congress amends PURPA, the statutory requirement that an electric
utility purchase electricity from a Qualifying Facility at full avoided costs
could be eliminated. Although current legislative proposals specify the honoring
of existing contracts, repeal of the statutory purchase requirements of PURPA
going forward could increase pressure to renegotiate existing contracts. Any
changes that result in lower contract prices could have an adverse effect on
Dynegy Inc.'s operations and financial position.
The Congress passed the Energy Act to promote further competition in
the development of new wholesale power generation sources. Through amendments to
PUHCA, the Energy Act encourages the development of independent power projects
that are certified by the FERC as exempt wholesale generators ("EWGs"). The
owners or operators of qualifying EWGs are exempt from the provisions of PUHCA,
but not from the FPA. The Energy Act also provides the FERC with extensive new
authority to order electric utilities to provide other electric utilities,
Qualifying
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Facilities and independent power projects with access to their
transmission systems. However, the Energy Act does preclude the FERC from
ordering transmission services to retail customers and prohibits "sham"
wholesale energy transactions which appear to provide wholesale service, but
actually are providing service to retail customers.
The FPA grants the FERC exclusive ratemaking jurisdiction over
wholesale sales of electricity in interstate commerce. The FPA provides the FERC
with ongoing as well as initial jurisdiction, enabling the FERC to revoke or
modify previously approved rates. Such rates may be based on a cost-of-service
approach or on rates that are determined through competitive bidding or
negotiation on a market basis. Although Qualifying Facilities under PURPA are
exempt from ratemaking and certain other provisions of the FPA, independent
power projects (including EWGs) and certain power marketing activities are
subject to the FPA and to the FERC's ratemaking jurisdiction. Utilities are not
obligated to purchase power from projects subject to regulation by the FERC
under the FPA because they do not meet the requirements of PURPA. However,
because such projects would not be bound by PURPA's thermal energy use
requirement, they may have greater latitude in site selection and facility size.
All of the projects currently owned or operated by Dynegy as Qualifying
Facilities under PURPA are exempt from the FPA. Dynegy Holdings' EWGs, El
Segundo, Long Beach, Cabrillo I, Cabrillo II, Rocky Road, Commonwealth Atlantic
and Hartwell, are subject to the FPA and the jurisdiction of the FERC. With
approval from FERC, such entities, with certain exceptions, are exempted from
being required to sell at cost-based rates and can make all sales at
market-based rates set through negotiations. Independent power projects in which
Dynegy Inc. has an interest and that are not Qualifying Facilities have been
granted market based rate authority and comply with the FPA requirements
governing approval of wholesale rates and subsequent transfers of ownership
interests in such projects.
Development of projects in international markets typically creates
exposure and obligations to the national, provincial and local laws of each host
country, worldwide environmental standards and requirements imposed by
multi-lateral lending institutions. The principal regulatory consideration for
international projects is PUHCA, since it is broadly applicable to the ownership
and operation of power facilities (including generation and transmission
facilities) both inside and outside of the United States (international projects
that sell power outside the United States are not subject to the FPA). For
international projects, the principal basis for exemption from PUHCA is by
obtaining EWG status from the FERC. EWG status is very beneficial for
international projects because EWGs are generally allowed to make retail sales
in international markets. Another way to obtain an exemption from PUHCA for
foreign ownership and operation activities is by filing a foreign utility
company determination ("FUCO") with the Securities and Exchange Commission.
However, FUCO filings are less frequently used, because unlike EWGs, no formal
regulatory order is issued confirming the status of a FUCO. The development of
international power generation and transmission projects also may entail other
multi-national regulatory considerations arising under United States law,
including export/import controls, trade laws and other similar legislation.
Dynegy Inc. attempts to identify and manage those issues early in the
development process to ensure compliance with such laws and regulations.
STATE REGULATORY REFORMS. Legislation currently under review in various
states affecting gas and power marketing and power generation businesses is most
likely to impact Dynegy Inc. in the near term. Other state regulatory reforms
impacting the processing and gathering operations and other businesses are also
proceeding. While the ultimate impact of such legislation on Dynegy Inc.'s
businesses cannot be predicted with certainty, Management does not believe that
the outcome of these matters will have a material adverse effect on Dynegy
Inc.'s operations or competitiveness.
ILLINOIS POWER COMPANY. As stated previously herein, Dynegy Inc.
acquired an electric and natural gas utility engaged in the transmission,
distribution and sale of electricity and natural gas. The acquisition of this
business increases Dynegy Inc.'s exposure to regulation at both the federal and
state levels as Dynegy Inc. manages the operations of Illinois Power in concert
with the rulings and regulations handed down by FERC and the Illinois Commerce
Commission, respectively. Management is confident that it has the resources in
place to effectively manage the anticipated issues imposed by this regulation.
These operations will not be part of Dynegy Holding's consolidated group.
DYNEGY INC. SHAREHOLDER AGREEMENT
Pursuant to the Illinova acquisition, Chevron entered into a
shareholder agreement with Dynegy Inc., Illinova Holding and Dynegy Holding
governing certain aspects of the relationship of Chevron and Dynegy Inc. both
before and after the merger. The shareholder agreement addressed numerous
issues, which are more fully described in Dynegy Inc.'s Form 10-K for the year
ended December 31, 1999 and in the Shareholder Agreement previously filed with
the Securities and Exchange Commission.
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ENVIRONMENTAL AND OTHER MATTERS
Dynegy Inc.'s operations are subject to extensive federal, state and
local statutes, rules and regulations governing the discharge of materials into
the environment or otherwise relating to environmental protection. Development
of projects in international markets creates exposure and obligations to the
national, provincial and local laws of each host country, including
environmental standards and requirements imposed by these governments.
Compliance with these statutes, rules and regulations requires capital and
operating expenditures including those related to monitoring, pollution control
equipment, emission fees and permitting at various operating facilities and
remediation obligations. Failure to comply with these statutes, rules and
regulations may result in the assessment of civil and even criminal penalties.
Dynegy Inc.'s environmental expenditures have not been prohibitive in the past,
but are anticipated to increase in the future with the trend toward stricter
standards, greater regulation, more extensive permitting requirements and an
increase in the number and types of assets operated by Dynegy Inc. subject to
environmental regulation. No assurance can be given that future compliance with
these environmental statutes, rules and regulations will not have a material
adverse effect on Dynegy Inc.'s operations or its financial condition.
The vast majority of federal environmental remediation provisions are
contained in the Superfund laws - the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and the Superfund Amendments and
Reauthorization Act ("SARA") and in the corrective action provisions of the
Federal Resource Conservation and Recovery Act ("RCRA"). Typically, the U.S.
Environmental Protection Agency ("EPA") acts pursuant to Superfund legislation
to remediate facilities that are abandoned or inactive or whose owners are
insolvent; however, the legislation may be applied to sites still in operation.
Superfund law imposes liability, regardless of fault or the legality of the
original conduct, on certain classes of persons that contributed to the release
of a "hazardous substance" into the environment. These persons include the
current or previous owner and operator of a facility and companies that
disposed, or arranged for the disposal, of the hazardous substance found at a
facility. CERCLA also authorizes the EPA and, in certain instances, private
parties to take actions in response to threats to public health or the
environment and to seek recovery for the costs of cleaning up the hazardous
substances that have been released and for damages to natural resources from
such responsible party. Further, it is not uncommon for neighboring landowners
and other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment. RCRA
provisions apply to facilities that have been used to manage or are currently
managing hazardous waste and which are either still in operation or have
recently been closed. As amended, RCRA requires facilities to remedy any
releases of hazardous wastes or hazardous waste constituents at waste treatment,
storage or disposal facilities.
The addition of fossil fuel-fired electric generation to Dynegy Inc.'s
portfolio, acquired in the Illinova acquisition, increases Dynegy Inc.'s
exposure to environmental regulation, as well as anticipated increased
expenditures for remediation requirements and capital costs associated with
Clean Air Act requirements and other federal and state legislation. Management
is confident that it has the resources in place to effectively manage the
anticipated issues imposed by this heightened regulation and the financial
liquidity to address anticipated expenditures associated with adherence to such
regulation.
In connection with discrete asset acquisitions and sales, Dynegy Inc. may obtain
or be required to provide indemnification against certain environmental
liabilities. These indemnities are typically limited in scope and time period.
To minimize its exposure for such liabilities, environmental audits of the
assets Dynegy Inc. wishes to acquire are made, either by Dynegy Inc. personnel,
outside environmental consultants, or a combination of the two. Dynegy Inc. has
not heretofore incurred any material environmental liabilities arising from its
acquisition or divestiture activities. The incurrence of a material
environmental liability, and/or the failure of an indemnitor to meet its
indemnification obligations with respect thereto, could have a material adverse
effect on Dynegy Inc.'s operations and financial condition.
Subject to resolution of the complaints filed by the U.S. Environmental
Protection Agency ("EPA") and the Department of Justice ("DOJ") against Illinois
Power Company, management believes that it is in substantial compliance with,
and is expected to continue to comply in all material respects with, applicable
environmental statutes, regulations, orders and rules. Further, to the best of
management's knowledge, other than the previously referenced complaints, there
are no existing, pending or threatened actions, suits, investigations,
inquiries, proceedings or clean-up obligations by any governmental authority or
third party relating to any violations of any environmental laws with respect to
Dynegy Inc.'s assets or pertaining to any indemnification obligations with
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respect to properties previously owned or operated by Dynegy Inc., which would
have a material adverse effect on Dynegy Inc.'s operations and financial
condition. Dynegy Holdings' aggregate expenditures for compliance with laws and
regulations related to the discharge of materials into the environment or
otherwise related to the protection of the environment approximated $4 million
in 1999. Total environmental expenditures for both capital and operating
maintenance and administrative costs are estimated to approximate $8 million for
Dynegy Holdings in 2000. Dynegy Inc. expects to expend approximately $75 million
in 2000 on environmental compliance, which is inclusive of the assets purchased
in the Illinova acquisition.
In addition to environmental regulatory issues, the design,
construction, operation and maintenance of pipeline facilities are subject to
the safety regulations established by the Secretary of the Department of
Transportation pursuant to the Natural Gas Pipeline Safety Act ("NGPSA"), or by
state regulations meeting the requirements of the NGPSA, or to similar statutes,
rules and regulations in Canada. Dynegy Inc. believes it is currently in
substantial compliance, and expects to continue to comply in all material
respects, with these rules and regulations.
Dynegy Inc.'s operations are subject to the requirements of the Federal
Occupational Safety and Health Act ("OSHA") and other comparable federal, state
and provincial statutes. The OSHA hazard communication standard, the EPA
community right-to-know regulations under Title III of SARA and similar state
statutes require that information be organized and maintained about hazardous
materials used or produced in its operations. Certain of this information must
be provided to employees, state and local government authorities and citizens.
Dynegy Inc. believes it is currently in substantial compliance, and expects to
continue to comply in all material respects, with these rules and regulations.
OPERATIONAL RISKS AND INSURANCE
Dynegy Inc. is subject to all risks inherent in the various businesses
in which it operates. These risks include, but are not limited to, explosions,
fires and product spillage, which could result in damage to or destruction of
operating assets and other property, or could result in personal injury, loss of
life or pollution of the environment, as well as curtailment or suspension of
operations at the affected facility. Dynegy Inc. maintains general public
liability, property and business interruption insurance in amounts that it
considers to be adequate for such risks. Such insurance is subject to
deductibles that management considers reasonable and not excessive. The
occurrence of a significant event not fully insured or indemnified against,
and/or the failure of a party to meet its indemnification obligations, could
materially and adversely affect Dynegy Inc.'s operations and financial
condition. Moreover, no assurance can be given that Dynegy Inc. will be able to
maintain insurance in the future at rates it considers reasonable.
Dynegy Holdings has designated two of its subsidiaries to assist in the
management of certain liabilities principally relating to environmental,
litigation and credit reserves. Together with the involvement of third parties
whose primary consideration will be based on the realization of savings by the
Company, the subsidiaries will attempt to find new ways to handle these costs in
a more efficient manner.
EMPLOYEES
At December 31, 1999, Dynegy Holdings employed approximately 1,319
employees at its administrative offices and approximately 1,144 employees at its
operating facilities. Approximately 108 employees at Company-operated facilities
are subject to collective bargaining agreements with one of the following
unions: the Oil, Chemical and Atomic Workers International Union, the Metal
Trades Council or the Communications, Energy and Paperworkers Union. Management
considers relations with both union and non-union employees to be satisfactory.
17
<PAGE>
ITEM 1A. EXECUTIVE OFFICERS
Set forth below are the names and positions of the current executive officers of
the Company, together with their ages, position(s) and years of service with the
Company.
<TABLE>
<CAPTION>
SERVED WITH THE
NAME AGE * POSITION(S) COMPANY SINCE
<S> <C> <C> <C>
C. L. Watson 50 Chairman and Chief Executive Officer 1985
Stephen W. Bergstrom 42 President and Chief Operating Officer 1986
and a Director
John U. Clarke 47 Executive Vice President, Chief Financial Officer 1997
And Director
Kenneth E. Randolph 43 Senior Vice President, General Counsel and 1984
Secretary, Director
* As of April 1, 2000
</TABLE>
The executive officers named above will serve in such capacities until
the next annual meeting of the Company's Board of Directors, or until their
respective successors have been duly elected and have been qualified, or until
their earlier death, resignation, disqualification or removal from office.
C. L. Watson is the Chairman and Chief Executive Officer of Dynegy
Holdings Inc. He joined the company as President in 1985 and became Chairman and
Chief Executive Officer of NGC in 1989. Prior to his employment with
Clearinghouse, he served as Director of Gas Sales for the Western United States
for Conoco Inc. Mr. Watson serves on the board of directors of Baker Hughes
Incorporated.
Stephen W. Bergstrom, President and Chief Operating of Dynegy Holdings
Inc. is responsible for the day-to-day development and execution of Dynegy's
strategy across its operating business units. He is also a member of Dynegy
Holdings Inc.'s board of directors. Mr. Bergstrom was formerly President and
Chief Operating Officer of Dynegy Marketing and Trade and Senior Vice President
of Dynegy Inc., with responsibility for natural gas and power marketing, supply
and generation functions. After joining Clearinghouse in 1986 as Vice President
of Gas Supply, Mr. Bergstrom was promoted to Senior Vice President of Gas
Marketing and Supply in 1987. In 1990, he was named Executive Vice President of
Clearinghouse. Prior to joining Dynegy Inc., Mr. Bergstrom was Vice President of
Gas Supply for Enron Gas Marketing. Mr. Bergstrom began his professional career
with Transco Energy Company of Houston.
John U. Clarke, Executive Vice President, Chief Financial Officer,
joined Dynegy Inc. in April 1997 and serves as Dynegy Holdings' principal
financial officer. Mr. Clarke is also a Director of Dynegy Holdings Inc.. Prior
to joining Dynegy Holdings Inc., Mr. Clarke was a managing director and co-head
of a specialty energy practice group with Simmons & Company International, an
investment-banking firm for approximately one year. He previously had served as
President of Concept Capital Group, Inc., a financial advisory firm formed by
Mr. Clarke in May, 1995. Mr. Clarke was Executive Vice President and Chief
Financial and Administrative Officer with Cabot Oil & Gas Corporation from
August 1993 to February 1995, and worked for Transco Energy Company, from April
1981 to May 1993, last serving as Senior Vice President and Chief Financial
Officer. Mr. Clarke began his career with Tenneco Inc. in January 1978. He is a
director of Natco Group, Inc.
Kenneth E. Randolph serves as Senior Vice President, General Counsel
and Secretary of Dynegy Holdings Inc.. Mr. Randolph is also a Director of the
Company. He has served in this capacity since July 1987. In addition, he served
as a member of the Clearinghouse Management Committee from May 1989 through
February 1994 and managed Clearinghouse's marketing operations in the Western
and Northwestern United States from July 1984 through July 1987. Prior to his
employment with the Company, Mr. Randolph was associated with the Washington,
D.C. office of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
18
<PAGE>
ITEM 2. PROPERTIES
Current year operational activity conducted in these areas is discussed
under "Item 1. BUSINESS-General." Following is a description of such properties
owned by the Company at December 31, 1999.
POWER GENERATION FACILITIES
Dynegy Holdings has interests in twenty-eight power projects in
operation, under construction, in late stage development or pending acquisition.
The majority of these projects are cogeneration facilities operated by Dynegy
Holdings The portfolio also includes one heat recovery plant. A cogeneration
plant utilizes power production technology that results in the sequential
generation of two or more useful forms of energy (e.g., electricity and steam)
from a single fuel source (e.g., natural gas). The Company's generation assets
include projects that are Qualifying Facilities or EWGs (including "Merchant
Plants"). A Qualifying Facility is operated under laws outlined in PURPA, by the
FERC and by certain state legislatures, as previously discussed herein, and
typically sells the power it generates to a single power purchaser. A Merchant
Plant operates independently from designated power purchasers and as a result
will generate and sell power to the market when market economics dictate that
electricity prices exceed the cost of production. Merchant Plants provide
flexibility to the Company in executing its Energy Convergence strategy. The
combined gross capacity of facilities in operation is approximately 5,687
megawatts of electricity and over 3.6 million pounds per hour of steam sold to
third parties. The following table provides pertinent information concerning
power projects owned by the Company:
===============================================================================
SUMMARY OF DYNEGY HOLDINGS' POWER GENERATION FACILITIES
===============================================================================
<TABLE>
<CAPTION>
POWER GENERATION PERCENT GROSS PRIMARY
PROJECT OWNED CAPACITY LOCATION FUEL PRIMARY POWER PURCHASER
- --------------------------------- ------------- ---------- ---------------------- ------------- --------------------------------
(MW)
<S> <C> <C> <C> <C> <C>
OPERATING:
CoGen Power (3) 50 5 Port Arthur, TX Waste heat Great Lakes Carbon Corporation
CoGen Lyondell (3) Lessee (50%) 610 Channelview, TX Gas-fired Lyondell Chemical Company
Oyster Creek 50 424 Freeport, TX Gas-fired The Dow Chemical Company
El Segundo 50 1,020 El Segundo, CA Gas-fired Merchant Facility
Long Beach 50 560 Long Beach, CA Gas-fired Merchant Facility
Black Mountain 50 85 Las Vegas, NV Gas-fired Nevada Power Company
Virginia Electric & Power
Commonwealth Atlantic 50 340 Chesapeake, VI Gas-fired Company
Hartwell Energy 50 300 Hart County, GA Gas-fired Ogelthorpe Power Corporation
Michigan Power 50 123 Ludington, MI Gas-fired Consumers Energy Company
Cabrillo I - Encina 50 1,008 Carlsbad, CA Gas-fired Merchant Facility
Cabrillo II - California CT 50 253 San Diego County, CA Gas-fired Merchant Facility
Rocky Road 50 250 East Dundee, IL Gas-fired Merchant Facility
---
TOTAL 4,978
OPERATING - FIRST QUARTER 2000 DISPOSITIONS:
Corona (1) 40 47 Corona, CA Gas-fired SOCAL Edison Company
Kern Front(1) 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company
High Sierra(1) 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company
Double "C" (1) 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company
San Joaquin (1) 100 48 Stockton, CA Gas-fired Pacific Gas & Electric Company
Chalk Cliff(1) 100 46 Kern County, CA Gas fired Pacific Gas & Electric Company
Badger Creek(1) 50 46 Kern County, CA Gas-fired Pacific Gas & Electric Company
McKittrick(1) (2) 100 46 McKittrick, CA Gas-fired Pacific Gas & Electric Company
Live Oak(1) (2) 50 46 Kern County, CA Gas-fired Pacific Gas & Electric Company
Crockett (1) 8 240 Crockett, CA Gas-fired Pacific Gas & Electric Company
Bear Mountain(1) 100 46 Bakersfield, CA Gas-fired Pacific Gas & Electric Company
--
709
================================================================================================================================
</TABLE>
19
<PAGE>
===============================================================================
<TABLE>
DEVELOPMENT PROJECTS
--------------------
<S> <C> <C> <C> <C> <C>
Rockingham 100 800 Rockingham County, NC Gas-fired Duke Energy (3 years)
Calcasieu 100 155 Lake Charles, LA Gas-fired Merchant Facility
Heard County 100 500 Heard County, GA Gas-fired Merchant Facility
Palmetto Power 100 500 Osceola County, FL Gas-fired Merchant Facility
Bluegrass 100 500 Louisville, KY Gas-fired Merchant Facility
Rocky Road Expansion 50 100 East Dundee, IL Gas-fired Merchant Facility
CoGen Lyondell Expansion 50 155 Channelview, TX. Gas-fired Merchant Facility
-------
Total 2,710
-------
TOTAL CAPACITY 8,397
===============================================================================================================================
</TABLE>
(1) Interest in Qualifying Facility sold February 1, 2000 pursuant to PURPA
requirements.
(2) Dynegy Holdings' ownership increased to 100 percent in McKittrick effective
October 1, 1999 and in Live Oak effective January 1, 2000.
(3) In December 1999, Dynegy Holdings' ownership/lessee interest decreased from
100 percent.
GATHERING SYSTEMS AND PROCESSING FACILITIES
Dynegy Holdings' natural gas processing services are provided at two
types of gas processing plants, referred to as field and straddle plants. Field
plants aggregate volumes from multiple producing wells into quantities that can
be economically processed to extract natural gas liquids and to remove water
vapor, solids and other contaminants. Straddle plants are situated on mainline
natural gas pipelines and allow operators to extract natural gas liquids from a
natural gas stream when the market value of natural gas liquids separated from
the natural gas stream is higher than the market value of the same unprocessed
natural gas. The following table provides certain information, including
operational data for the year ended December 31, 1999, concerning the gas
processing plants and gathering systems in which Dynegy Holdings owns an
interest.
===============================================================================
SUMMARY OF DYNEGY HOLDINGS' GAS PROCESSING FACILITIES
===============================================================================
<TABLE>
<CAPTION>
LOCATION TOTAL PLANT
---------------------------- ------------------------------
PRACTICAL 1999 INLET NGL
GAS PROCESSING FACILITIES % OWNED COUNTY/PARISH STATE CAPACITY (2) THROUGHPUT PRODUCTION
-----------------------------------------------------------------------------------------------------------------------------
(MMCF/D) (1) (BPD) (1)
<S> <C> <C> <C> <C> <C> <C>
OPERATED FIELD PLANTS -
Chico Complex (3) 100.00 Wise TX 100 77.8 11,520.8
Fashing 58.24 Atascosa TX 38 14.7 298.5
Gladys 100.00 Alberta Can. 15 4.3 37.0
Mazeppa 100.00 Alberta Can. 80 38.5 518.0
Sand Hills Complex (3) 100.00 Crane TX 200 147.0 14,588.9
Sherman (3) 100.00 Grayson TX 33 19.1 835.8
Sligo 100.00 Bossier LA 40 31.3 599.6
West Seminole (3) 40.14 Gaines TX 5 4.0 399.6
Versado Gas Processors Joint
Venture (7) 63.00 Various TX / NM --- 147.6 18,456.7
OPERATED STRADDLE PLANTS -
Barracuda 100.00 Cameron LA 190 187.6 5,278.5
Lowry (3) 100.00 Cameron LA 265 233.9 6,555.4
Stingray 100.00 Cameron LA 300 266.6 3,488.7
VESCO 23.00 Plaquemines LA 299 223.8 5,767.0
Yscloskey (5)(8) 27.71 St. Bernard LA 473 251.2 7,751.6
NON-OPERATED FIELD PLANTS -
Diamond M (3) 7.66 Scurry TX --- 0.7 53.3
Indian Basin (3) 16.35 Eddy NM 30 21.6 1,659.8
Snyder (3) (6) 3.25 Scurry TX 2 1.8 109.2
Waskom 33.33 Gregg TX 50 37.6 1,555.6
NON-OPERATED STRADDLE PLANTS -
Bluewater (8) 15.20 Acadia LA 122 27.6 424.9
Calumet (5) (8) 32.60 St. Mary's LA 300 256.2 5,676.4
Jefferson
Iowa 9.92 Davis LA 50 359.9 931.0
Patterson (8) 17.20 St. Mary's LA 3 5.8 199.5
Sea Robin (8) 0.80 Vermillion LA 187 5.2 205.2
Terrebone (8) 7.40 Terrebone LA 10 30.1 1,190.4
Toca (8) 13.80 St. Bernard LA 93 110.6 4,658.3
===============================================================================================================================
20
<PAGE>
===============================================================================================================================
FIRST QUARTER 2000 DISPOSITIONS:
OPERATED FIELD PLANTS -
Binger (3) (9) 100.00 Caddo OK 10 7.3 795.3
Canadian Complex (3) (9) 100.00 Hemphill TX 25 20.5 1,947.1
Leedey (3) (9) 100.00 Roger Mills OK 50 26.8 2,495.5
Lefors Complex (3) (9) 100.00 Wheeler TX 13 10.0 2,786.0
Moores Orchard (3) (10) 100.00 Fort Bend TX 7 3.1 44.5
Niject (9) 00.16 Caddo OK 3 0.0 1.0
Ringwood (3) (9) 100.00 Major OK 75 18.5 1,666.5
Rodman (3) (9) 100.00 Garfield OK 65 55.5 4,999.4
OPERATED STRADDLE PLANTS -
Cheney (9) 100.00 Kingman KS 85 59.7 3,369.8
NON-OPERATED FIELD PLANTS -
Spivey (4) (5) (9) 5.16 Harper KS 3 10.1 35.5
Dover Hennessey (3) (9) 18.29 Kingfisher OK 14 4.9 516.0
Maysville (3) (9) 44.00 Garvin OK 59 35.6 4,916.1
===============================================================================================================================
</TABLE>
(1) Capacity, throughput and gross production are net to the Company's
ownership interest.
(2) Capacity data is at practical recovery rates, net to Dynegy Holdings'
interest.
(3) Dynegy Holdings owns the indicated percentage of an associated gas
gathering system.
(4) Dynegy Holdings owns 2.48 percent of the associated gas gathering
system.
(5) Dynegy Holdings ownership is adjustable and subject to periodic
(usually annual) redetermination.
(6) Dynegy Holdings owns the indicated percentage of the Snyder gas
gathering system and 3.98 percent of the Diamond M gas gathering system
that also supplies the Snyder plant.
(7) Versado Gas Processors includes the Saunders, Monument and the Eunice
Complex facilities. Ownership in the Saunders, Monument and Eunice
facilities changed from 100 percent to 63 percent during 1998 as a
result of formation of a joint venture with Texaco. Statistical
information includes the aggregate inlet gas throughput and NGL
production volumes accruing to Dynegy Holdings' interest during the
year.
(8) Dynegy Holdings ownership change attributable to a swap with Texaco
reducing our interest in Sea Robin in exchange for an increased
interest in this facility.
(9) A definitive purchase and sale agreement was signed on January 28, 2000
for the sale of this plant. Sale expected to be completed by March
2000.
(10) This plant was sold in January 2000.
FRACTIONATION FACILITIES
The following table provides certain information concerning stand alone
fractionation facilities in which Dynegy Holdings owns an interest.
===============================================================================
SUMMARY OF DYNEGY HOLDINGS' FRACTIONATION FACILITIES (1)
===============================================================================
<TABLE>
<CAPTION>
PERCENT 1999
FRACTIONATION FACILITIES OWNED GROSS CAPACITY (2) NET CAPACITY (2) INLET THROUGHPUT
- ------------------------------------------------- --------- -------------------- ------------------- ---------------------
(MBBLS/D) (MBBLS/D) (MBBLS/D)
<S> <C> <C> <C> <C>
Lake Charles, La. (3) 100.00 55 55 38
Cedar Bayou Fractionators (Mont Belvieu, Tx.) 88.00 205 180 178
Gulf Coast Fractionators (Mont Belvieu, Tx.) 38.75 110 42 111
==========================================================================================================================
</TABLE>
(1) Table does not include fractionation operations at VESCO or at other
gas processing facilities.
(2) Gross capacity data is at practical recovery rates and net capacity is
at practical rates multiplied by Dynegy Holdings' interest.
(3) The Lake Charles, La. Fractionator extracts ethane and propane only.
21
<PAGE>
STORAGE AND TERMINAL FACILITIES
The following table provides information concerning terminal and
storage facilities owned by the Company:
===============================================================================
SUMMARY OF DYNEGY HOLDINGS' STORAGE AND TERMINAL FACILITIES
===============================================================================
<TABLE>
<CAPTION>
LOCATION
-----------------------------------
STORAGE AND TERMINAL FACILITIES % OWNED COUNTY/PARISH STATE DESCRIPTION
- ------------------------------------ ------------- ---------------------- ------------ ------------------------------------
<S> <C> <C> <C> <C>
Hackberry Storage 100.00 Cameron LA NGL storage facility
Mont Belvieu Storage 100.00 Chambers TX NGL storage facility
Hattiesburg Storage 100.00 Washington MS NGL storage facility
Mont Belvieu Terminal 100.00 Chambers TX Product terminal facility
Galena Park Terminal 100.00 Harris TX LPG import/export terminal
Calvert City Terminal 100.00 Marshall KY Product transport terminal
Greenville Terminal 100.00 Washington MS Propane terminal
Hattiesburg Terminal 50.00 Forrest MS Propane terminal
Pt. Everglades Terminal 100.00 Broward FL Marine propane terminal
Tampa Terminal 100.00 Hillsborough FL Marine propane terminal
Tyler Terminal 100.00 Smith TX Product terminal
Mont Belvieu Transport 100.00 Chambers TX Offices and repair shop
Abilene Transport 100.00 Taylor TX Raw LPG transport terminal
Bridgeport Transport 100.00 Jack TX Raw LPG transport terminal
Gladewater Transport 65.00 Gregg TX Raw LPG transport terminal
Grand Lake Tank Farm 100.00 Cameron LA Condensate storage
===========================================================================================================================
</TABLE>
NATURAL GAS, LIQUIDS AND CRUDE OIL PIPELINES
Dynegy Holdings owns interests in various interstate and intrastate
pipelines and gathering systems as follows:
===============================================================================
SUMMARY OF DYNEGY HOLDINGS' PIPELINE ASSETS
===============================================================================
<TABLE>
<CAPTION>
PIPELINE SYSTEMS % OWNED 1999 THROUGHPUT (1) STATES DESCRIPTION
- ------------------------------------ ------------- --------------------- -------------- ------------------------------------
<S> <C> <C> <C> <C>
Crude Oil Pipeline System 100.00 28.0 TX/OK Crude oil pipelines
Kansas Gas Supply (2) 100.00 54.2 KS/OK Intrastate natural gas pipeline
Dynegy NGL Pipeline 100.00 26.0 TX/LA Interstate liquids pipeline
Pelican Pipeline 100.00 29.0 LA Gas gathering pipeline
Vermillion Pipeline 100.00 8.1 Gulf of Mexico Gas gathering pipeline
Western Gas Gathering (2) 100.00 2.6 KS Gas gathering pipeline
Pawnee Rock (2) 100.00 10.6 KS Gas gathering pipeline
Seahawk 100.00 26.4 LA Intrastate natural gas pipeline
Dynegy Midstream Pipeline, Inc. (2) 100.00 44.4 O Interstate natural gas pipeline
Dynegy Intrastate Gas Supply (2) 100.00 4.9 TX Intrastate natural gas pipeline
Lake Boudreaux 100.00 0.8 LA Gas gathering pipeline
Grand Lake Liquids System 100.00 2.5 LA Intrastate liquids pipeline
Gregg Lake 36.00 19.7 Alberta, Can. Gas gathering pipeline
==============================================================================================================================
</TABLE>
1. 1999 throughput is based on thousands of barrels per day for the liquids
and crude lines and million cubic feet per day for the gas gathering and
transportation lines.
2. A definitive purchase and sale agreement was signed on January 28, 2000 for
the sale of this asset. Sale expected to be completed by March 2000.
OTHER PROPERTY INFORMATION
Dynegy Holdings owns a 39 percent interest in a partnership that owns
and operates the West Texas LPG Pipeline, an interstate LPG pipeline. The
interest was acquired in the Chevron Combination.
22
<PAGE>
In 1996, the Company and Chevron formed Venice Gas Processing Company,
a Texas limited partnership ("Venice"). Venice was formed for the purpose of
owning and operating the Venice Complex, located in Plaquemines Parish,
Louisiana. The complex includes 271 miles of pipeline that extends into the Gulf
of Mexico having capacity of 810 MMcf/d, a lean oil gas processing plant, a
35,000 barrel per day fractionator, a 299 MMcf/d cryogenic gas processing unit,
12 million barrels of NGL storage capacity, a marine terminal and acreage. In
1997, Venice reorganized as a limited liability company changing its name to
VESCO. In September 1997, the VESCO members agreed to expand ownership in VESCO
to include an affiliate of Shell Midstream Enterprises, a subsidiary of Shell
Oil Company ("Shell"), effective September 1, 1997, in exchange for Shell's
commitment of certain offshore reserves to VESCO. In 1998, ownership in the LLC
was again expanded to include Koch, in exchange for their contribution of the
cryogenic processing unit. At December 31, 1999, Dynegy Holdings' interest in
VESCO approximated 23 percent. Dynegy Holdings operates the facility and has
commercial responsibility for product distribution and sales.
TITLE TO PROPERTIES
The Company believes it has satisfactory title to its properties in
accordance with standards generally accepted in the energy industry, subject to
such exceptions which, in the opinion of the Company, would not have a material
adverse effect on the use or value of said properties.
The operating agreements for certain of the Company's natural gas
processing plants and fractionation facilities grant a preferential purchase
right to the plant owners in the event that any owner desires to sell its
interest. Such agreements may also require the consent of a certain percentage
of owners before rights under such agreements can be transferred. The Company is
subject, as a plant owner under such agreements, to all such restrictions on
transfer of its interest. In a few instances, the Company has granted rights of
first refusal with respect to any future sale of certain assets. Certain of the
Company's power generation assets are subject to rights of first refusal or
consent requirements with the Company's partners or power purchasers which
restrict the transfer of interests in the facilities.
Substantially all of Dynegy Holdings' gathering and transmission lines
are constructed on rights-of-way granted by the apparent record owners of such
property. In some instances, land over which rights-of-way have been obtained
may be subject to prior liens that have not been subordinated to the
right-of-way grants. Permits have been obtained from public authorities to cross
over or under, or to lay facilities in or along, water courses, county roads,
municipal streets and state highways, and in some instances, such permits are
revocable at the election of the grantor. Permits have also been obtained from
railroad companies to cross over or under lands or rights-of-way, many of which
are also revocable at the grantor's election. Some such permits require annual
or other periodic payments. In a few minor cases, property was purchased in fee.
INDUSTRY SEGMENTS
Segment financial information is included in Note 15 of Dynegy
Holdings' consolidated financial statements contained elsewhere herein.
ITEM 3. LEGAL PROCEEDINGS
Through its acquisition of Destec Energy Inc., Dynegy Holdings became a
party to certain litigation with Pacific Gas and Electric Company ("PG&E") and
with the Southern California Gas Company ("SOCAL"). These cases represent
pre-acquisition contingencies acquired by the Company and settlement thereof did
not have a material adverse effect on the Company's results of operations or
financial position. The following describes resolution of these two cases.
In April 1997, PG&E had filed a lawsuit in the Superior Court of the
State of California, City and County of San Francisco, against Destec Energy,
Inc., Destec Holdings, Inc. and Destec Operating Company (wholly-owned
subsidiaries of the Company now known respectively as Dynegy Power Corp., Dynegy
Power Holdings, Inc. and Dynegy Operating Company) as well as against San
Joaquin CoGen Limited ("San Joaquin") and its general partners (collectively the
"Dynegy Defendants"). In the lawsuit, PG&E asserted claims and alleged
unspecified damages for fraud, negligent misrepresentation, unfair business
practices, breach of contract and breach of the implied covenant of good faith
and fair dealing. Subsequent to the acquisition of Destec Energy Inc. by
23
<PAGE>
Dynegy Holdings, Dynegy Holdings and PG&E engaged in settlement discussions,
which resulted in the execution of a Termination and Settlement Agreement
between PG&E and the Dynegy Defendants on March 9, 1999 (the "PG&E Settlement
Agreement"). The PG&E Settlement Agreement provided for, upon the receipt of
CPUC approval, a dismissal with prejudice of PG&E's claims against the Dynegy
Defendants, a release by PG&E of all claims relative to FERC matters and a
termination of the San Joaquin power purchase agreement as of December 31, 1999,
whereupon the San Joaquin facility would continue to operate as a merchant
plant. Upon termination of the power purchase agreement, Dynegy Holdings would
repay project debt of approximately $26 million. By Order dated October 7, 1999,
the CPUC approved the PG&E Settlement Agreement. The CPUC approval became final
on November 8, 1999.
Pursuant to its lawsuit against Dynegy Holdings, PG&E had named
Libbey-Owens-Ford ("LOF"), San Joaquin's steam host, as an additional defendant
in the action in October 1997. It is alleged that San Joaquin was liable to PG&E
under the Gas Transportation Agreement or Power Purchase Agreement due to LOF's
failure to use sufficient quantities of steam as required to retain its status
as a qualifying facility under federal standards. The Dynegy Defendants will
seek to recover from LOF losses resulting from the settlement with PG&E.
In March 1995, SOCAL had filed a lawsuit in the Superior Court of the
State of California for the County of Los Angeles, against Destec Energy, Inc.,
Destec Holdings and Destec Gas Services, Inc. (now known respectively as Dynegy
Power Corp., Dynegy Power Holdings, Inc. and Dynegy Gas Services, Inc.),
wholly-owned direct and indirect subsidiaries of the Company (collectively, the
"Defendants"), as well as against Chalk Cliff Limited and McKittrick Limited
(collectively, the "Partnerships"). All general partners of the Partnerships
were also named defendants. The lawsuit alleged breach of contract against the
Partnerships and their respective general partners, and interference and
conspiracy to interfere with contracts against the Defendants. The breach of
contract claims arose out of the "transport-or-pay" provisions of the gas
transportation service agreements between the Partnerships and SOCAL. SOCAL
sought damages from the Partnerships for past damages and anticipatory breach
damages in an amount equal to approximately $31 million. Subsequent to the
acquisition of Destec Energy Inc. by Dynegy Holdings, Dynegy Holdings and SOCAL
engaged in settlement discussions, which resulted in the execution of a
Settlement Agreement between SOCAL and all defendants in the pending litigation
on August 25, 1999, (the "SOCAL Settlement Agreement"). The SOCAL Settlement
Agreement was approved by the CPUC and is final. The Settlement Agreement
provided for the dismissal of the pending litigation, the termination of
underlying gas transmission service contracts, and Dynegy Holdings' payment of
settlement consideration approximating $31 million. The pending appeals were
dismissed and the litigation and the associated foreclosure proceedings have
therefore come to an end.
On August 3, 1998, Modesto Irrigation District ("MID") filed a lawsuit
against PG&E and 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 its breach of contract
claims against Destec and its tortious interference with contract claims against
PG&E. Motions to dismiss MID's state court claims are pending and scheduled for
hearing during the first quarter 2000. Dynegy Holdings 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.
On July 30, 1999, The Dow Chemical Company ("Dow") filed a lawsuit in
the United States District Court for the District of Delaware against Dynegy
Power Corporation ("DPC"), a wholly-owned subsidiary of the Company. Dow sought
contribution from DPC in connection with claims against Dow asserted by The AES
Corporation ("AES") in a lawsuit filed on November 30, 1998 in the United States
District Court for the Southern District of Texas. AES asserts various federal
and Texas securities laws claims, and Texas claims for fraud and
24
<PAGE>
civil conspiracy, arising out of AES' September 1997 purchase of stock of Destec
Engineering, a subsidiary of DPC (at that time Destec Power Corp). Specifically,
AES alleges that Destec Power made certain misrepresentations about the expected
profits that Destec Engineering would earn in connection with the construction
of the Elsta power plant in The Netherlands, and the anticipated completion date
of the Elsta plant. AES alleges that Dow is liable because it "controlled" or
had the power to control the management of Destec Power. AES's original
complaint did not assert any claims against Destec Power or any other Dynegy
Inc. entity. Dow is vigorously defending against AES' claims. In response to a
motion to transfer filed by Dow, the United States District Court for the
Southern District of Texas transferred the suit to the United States District
Court for Delaware. Following transfer of the litigation, AES added DPC as a
defendant, asserting claims similar to the claims asserted against Dow. Dow
subsequently dismissed the suit against DPC without prejudice. AES and DPC have
reached a settlement of AES's claims against DPC. The settlement is currently
before the District Court for approval. If approved by the District Court, the
settlement will result in the dismissal of AES's suit against DPC with
prejudice. In the opinion of management, the ultimate resolution of this lawsuit
will not have a material adverse effect on the Company's financial position or
results of operations.
COMPLAINT AGAINST ILLINOIS POWER COMPANY. On November 3, 1999, the U.S.
Environmental Protection Agency ("EPA") issued a Notice of Violation ("NOV")
against Illinois Power Company ("Illinois Power") and, with the Department of
Justice ("DOJ"), filed a Complaint against Illinois Power in the U.S. District
Court for the Southern District of Illinois, No. 99C833. This Claim is more
fully described in Dynegy Inc.'s Form 10-K for the year ended December 31, 1999.
The Company assumed liability for various claims and litigation in
connection with the Chevron Combination, the Trident Combination, the Destec
acquisition and in connection with the acquisition of certain gas processing and
gathering facilities from Mesa Operating Limited Partnership. The Company
believes, based on its review of these matters and consultation with outside
legal counsel, that the ultimate resolution of such items will not have a
material adverse effect on the Company's financial position or results of
operations. Further, the Company is subject to various legal proceedings and
claims, which arise in the normal course of business. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting (the "Special Meeting") of the stockholders of Dynegy
Inc. was held on October 11, 1999. The purpose of the Special Meeting was to
consider and vote upon (i) the Agreement and Plan of Merger, dated as of June
14, 1999 (the "Merger Agreement"), by and among Illinova Corporation, Energy
Convergence Holding Company, Energy Convergence Acquisition Corporation, Dynegy
Acquisition Corporation and Dynegy Inc. and (ii) approve the adoption of the
Dynegy Inc. 2000 Long Term Incentive Plan (the "Long Term Incentive Plan").
The following votes were cast with respect to the approval and adoption of the
Merger Agreement and the Long Term Incentive Plan, respectively:
<TABLE>
<CAPTION>
LONG TERM INCENTIVE
MERGER AGREEMENT PLAN
<S> <C> <C>
For: 144,443,075 133,007,249
Against/Withheld 141,719 11,520,574
Abstentions: 4,033 31,504
Broker Non-Votes: --- ---
</TABLE>
25
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As successor registrant, Dynegy Inc.'s Class A Common Stock, no par
value ("Class A Common Stock") is listed and traded on the New York Stock
Exchange under the ticker symbol "DYN". The number of stockholders of record of
the Class A Common Stock as of February 28, 2000, was 35,713. Dynegy Holdings is
now a wholly-owned subsidiary of Dynegy Inc.
The following table sets forth the high and low closing prices for
transactions involving the Company's common stock for each calendar quarter
(prior to consummation of the Illinova transaction), as reported on the New York
Stock Exchange Composite Tape and related dividends paid per common share during
such periods.
===============================================================================
SUMMARY OF DYNEGY HOLDINGS' COMMON STOCK PRICE AND DIVIDEND PAYMENTS
===============================================================================
<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
------------------ --------------- --------------------
<S> <C> <C> <C>
1999:
Fourth Quarter $ 24.313 $ 20.375 $ 0.0125
Third Quarter 24.375 20.250 0.0125
Second Quarter 20.750 14.250 0.0125
First Quarter 15.000 10.250 0.0125
1998:
Fourth Quarter $ 15.250 $ 10.250 $ 0.0125
Third Quarter 14.063 9.563 0.0125
Second Quarter 15.375 12.500 0.0125
First Quarter 17.250 14.625 0.0125
======================================================================================================================
</TABLE>
Prior to consummation of the Illinova acquisition, the holders of the
common stock were entitled to receive dividends if, when and as declared by the
Board of Directors of the Company out of funds legally available therefor.
Consistent with the Board of Directors' intent to establish a policy of
declaring quarterly cash dividends, a cash dividend of $0.0125 per share was
declared and paid in each quarter during 1999 and 1998. The holders of the
Series A Preferred Stock were entitled to receive dividends or distributions
equal per share in amount and kind to any dividend or distribution payable on
shares of the Company's common stock, when and as the same are declared by the
Company's Board of Directors. Accordingly, the Company also paid quarterly cash
dividends on its Series A Preferred Stock of $0.0125 per share, or $0.05 per
share on an annual basis.
In 2000, Dynegy Inc.'s Class A and Class B common stock will be
entitled to a $0.60 per share dividend if, when and as declared by the Board of
Directors of Dynegy Inc. out of funds legally available therefor. The Class B
common stock has certain conversion features and maintains certain preemptive
rights under the shareholder agreement. The holders of the Series A Convertible
Preferred Stock are entitled to receive dividends or distributions totaling
$3.00 per share annually if and when declared by the Board of Directors of
Dynegy Inc. out of funds legally available therefor. Dividends on the preferred
shares are cumulative from the date of issuance and are payable quarterly on the
last day of March, June, September and December. The preferred stock carries
certain priority, liquidation, redemption, conversion and voting rights not
available to the common shareholders.
26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information presented below was derived from,
and is qualified by reference to, the Consolidated Financial Statements of the
Company, including the Notes thereto, contained elsewhere herein. The selected
financial information should be read in conjunction with the Consolidated
Financial Statements and related Notes and Management's Discussion and Analysis
of Financial Condition and Results of Operations.
===============================================================================
DYNEGY HOLDINGS' SELECTED FINANCIAL DATA
===============================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- -------------- ------------- -------------- ---------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1) :
Revenues $ 15,429,976 $ 14,257,997 $ 13,378,380 $ 7,260,202 $ 3,665,946
Operating margin 543,875 428,687 385,294 369,500 194,660
General and administrative expenses 200,717 185,708 149,344 100,032 68,057
Depreciation and amortization expense 129,458 113,202 104,391 71,676 44,913
Asset impairment, abandonment
Severance and other charges --- 9,644 275,000 --- ---
Net income (loss) $ 151,849 $ 108,353 $ (102,485) $ 113,322 $ 92,705
Earnings (loss) per share (3) $ 0.91 $ 0.66 $ (0.68) $ 0.83 $ 0.82
Pro forma earnings per share (3) N/a n/a n/a n/a $ 0.40
Shares outstanding 166,975 164,605 150,653 136,099 113,176
Cash dividends per common share $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05
CASH FLOW DATA:
Cash flows from operating activities $ 8,839 $ 250,780 $ 278,589 $ (30,954) $ 90,648
Cash flows from investment activities (318,664) (295,082) (510,735) (111,140) (310,623)
Cash flows from financing activities 326,688 49,622 204,984 176,037 221,022
OTHER FINANCIAL DATA:
EBITDA (4) $ 450,780 $ 363,517 $ 291,899 $ 289,023 $ 142,538
Dividends or distributions to partners,
net 8,115 7,988 7,925 6,740 9,253
Capital expenditures, acquisitions
And investments (5) 448,522 478,464 1,034,026 859,047 979,603
=========================================================================================================================
</TABLE>
===============================================================================
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- -------------- ------------- -------------- ---------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (2) :
Current assets $ 2,805,080 $ 2,117,241 $ 2,018,780 $ 1,936,721 $ 762,939
Current liabilities 2,538,523 2,026,323 1,753,094 1,548,987 705,674
Property and equipment, net 2,017,881 1,932,107 1,521,576 1,691,379 948,511
Total assets 6,525,171 5,264,237 4,516,903 4,186,810 1,875,252
Long-term debt 1,333,926 1,046,890 1,002,054 988,597 522,764
Total equity 1,309,482 1,128,063 1,019,125 1,116,733 552,380
=========================================================================================================================
</TABLE>
(1) The Destec Acquisition was accounted for as an acquisition of a business in
accordance with the purchase method of accounting and the results of
operations attributed to the acquired business are included in the
Company's financial statements and operating statistics effective July 1,
1997. The Chevron Combination was accounted for as an acquisition of assets
under the purchase method of accounting and the results of operations
attributed to the acquired assets are included in the Company's financial
statements and operating statistics effective September 1, 1996. The
Trident Combination was accounted for as an acquisition of a business in
accordance with the purchase method of accounting and the results of
operations attributed to the acquired business are included in the
Company's financial statements and operating statistics effective March 1,
1995.
(2) The Destec Acquisition and the Chevron and Trident Combinations were each
accounted for under the purchase method of accounting. Accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values as of the effective dates of each
transaction. The effective dates of the Destec Acquisition, Chevron
Combination and Trident Combination were June 30, 1997, September 1, 1996
and March 1, 1995, respectively.
(3) Earnings (loss) per share are computed in accordance with provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
for each of the years ended December 31, 1999, 1998, 1997, 1996 and 1995,
respectively. Pro forma earnings per share for the year ended December 31,
1995 is based on reported net income for the period adjusted for the
incremental statutory federal and state income taxes that would have been
provided had Clearinghouse been a taxpaying entity prior to the Trident
Combination. The pro forma earnings per share
27
<PAGE>
computation for the year ended December 31, 1995, eliminates the effect of
a one-time $45.7 million income tax benefit associated with the Trident
Combination. The weighted average shares outstanding for the year ended
December 31, 1995, is based on the weighted average number of common shares
outstanding plus the common stock equivalents that would arise from the
exercise of outstanding options or warrants, when dilutive.
(4) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is presented as a measure of the Company's ability to service its debt and
to make capital expenditures. It is not a measure of operating results and
is not presented in the Consolidated Financial Statements. The 1997 amount
includes the non-cash portion of items associated with the $275 million
impairment and abandonment charge.
(5) Includes all value assigned the assets acquired in various business and
asset acquisitions. The 1997 amount is before reduction for value received
upon sale of Destec's foreign and non-strategic assets of approximately
$735 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
COMPANY PROFILE
Dynegy Holdings Inc. ("Dynegy Holdings" or the "Company") is a leading
provider of energy products and services in North America, the United Kingdom
and in 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.
The critical mass achieved through the combination of a large scale energy
marketing operation with strategically located assets which augment the
marketing efforts affords the Company the ability to offer innovative,
value-creating energy solutions to its customers.
The Company is a holding company that conducts substantially all of its
business through its subsidiaries. From inception of operations in 1984 until
1990, Clearinghouse limited its activities primarily to natural gas marketing.
Starting in 1990, Clearinghouse began expanding its core business operations
through acquisitions and strategic alliances resulting in the formation of a
midstream energy asset business and establishing energy marketing operations in
both Canada and the United Kingdom. The Company initiated electric power
marketing operations in February 1994 in order to exploit opportunities created
by the deregulation of the domestic electric power industry. Effective March 1,
1995, Clearinghouse and Holding merged and the combined entity was renamed NGC.
On August 31, 1996, NGC completed a strategic combination with Chevron U.S.A.
Inc. and certain Chevron affiliates whereby substantially all of Chevron's
midstream assets merged with NGC. Effective July 1, 1997, NGC acquired Destec.
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. 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, old Dynegy, which was renamed Dynegy Holdings Inc., became a
wholly-owned subsidiary of a new holding company, now referred to as 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. Both Dynegy Inc. and Dynegy Holdings Inc. are
subject to the reporting requirements of the 1934 Securities Act. The financial
and operational data of Dynegy Holdings Inc. contained herein is the same
financial and operational data of Dynegy Inc. for all periods presented.
BUSINESS SEGMENTS
Dynegy Holdings' operations are reported herein in two segments: the
Energy Convergence and Midstream segments. Dynegy Inc. will add a third business
segment consisting of the regulated utility operations, operating under Illinois
Power Company, acquired in the Illinova acquisition, as well as additional
operations to its already existing segments. The operations acquired in the
Illinova acquisition will not initially be part of Dynegy Holdings' reported
assets and operations. The operations acquired in the Illinova acquisition will
not initially be part of Dynegy Holdings' reported assets and operations. Dynegy
Inc. intends to transfer the generation assets formerly held by Illinois Power
to Dynegy Holdings in a consolidation of Dynegy Inc.'s Energy Convergence
segment, transfering the operations and assets to Dynegy Holdings. The
generation asset transfer is subject to certain regulatory approvals. The Energy
Convergence segment is actively engaged in value creation through marketing and
trading of natural gas, power, coal and emissions and the generation of
electricity principally under the name Dynegy Marketing and Trade.
28
<PAGE>
The Midstream segment consists of the North American midstream liquids
operations, the global liquefied petroleum gas transportation and the natural
gas liquids marketing operations, located primarily in Houston and in London,
and certain other businesses. The North American midstream liquids operations
are actively engaged in the gathering and processing of natural gas and the
transportation, fractionation and storage of NGLs. The Midstream segment
operates principally under the name Dynegy Midstream Services.
ILLINOVA ACQUISITION
Dynegy Inc. completed its acquisition of Illinova early in the first
quarter 2000. Illinova was an energy services holding company maintaining four
principal operating subsidiaries. These subsidiaries were:
- - Illinois Power Company, an electric and natural gas utility engaged in
the transmission, distribution and sale of electricity and natural gas,
serving approximately 650,000 customers over a 15,000 square-mile area
of Illinois;
- - Illinova Power Marketing, Inc., a subsidiary engaged in the ownership
and operation of unregulated fossil-fueled electric generation in
Illinois;
- - Illinova Generating, Inc., a subsidiary that invests in, develops and
operates independent power projects worldwide; and
- - Illinova Energy Partners, Inc., a subsidiary that markets energy and
energy-related services in the United States and Canada.
The merger of Dynegy Inc. and Illinova involved the creation of a new
holding company, now known as Dynegy Inc., and two separate but concurrent
mergers. In one concurrent merger, a wholly-owned subsidiary of Dynegy Inc.
merged with and into Illinova. In the other concurrent merger, a second
wholly-owned subsidiary of Dynegy Inc. merged with and into old Dynegy. As a
result of these two concurrent mergers, Illinova and old Dynegy continue to
exist as wholly-owned subsidiaries of Dynegy Inc., and are referred to as
Illinova Holding and Dynegy Holding, respectively. Dynegy Inc. accounted for the
merger as a purchase of Illinova. This accounting treatment is based on various
factors present in the merger, including the majority ownership (and voting
control) of Dynegy Inc.'s shareholders following the merger, the role of Dynegy
Inc.'s management following the merger (including the service of C.L. Watson as
Chairman and Chief Executive Officer) and the influence of Chevron because of
the size of its ownership interest and its rights under the shareholder
agreement, articles of incorporation and bylaws. As a result, the consolidated
financial statements of Dynegy Inc. after the merger will reflect the assets and
liabilities of Dynegy Inc. at historical book values and the assets and
liabilities of Illinova at fair values.
In the combination, old Dynegy shareholders, other than Chevron U.S.A.
Inc. ("Chevron"), NOVA Gas Services (U.S.) Inc. ("NOVA") and BG Holdings, Inc.,
elected to exchange each old Dynegy share for 0.69 of a share of Dynegy Class A
common stock, based on a fixed exchange ratio, or elected to receive $16.50 per
share in cash consideration, subject to proration. NOVA and BG Holdings, Inc.
elected cash and thereby reduced their respective ownership in Dynegy Inc. as
part of this combination. Therefore, instead of receiving Dynegy Class A common
stock in exchange for their respective shares of old Dynegy common stock, NOVA
and the parent of BG Holdings, Inc. each received a combination of cash, subject
to proration, and shares of Dynegy Series A Convertible Preferred Stock. Chevron
received shares of Dynegy Class B common stock in exchange for all of its shares
of old Dynegy common stock and Series A Preferred Stock, respectively.
Additionally, as part of the combination, Chevron purchased $200 million of
additional Dynegy Class B common stock. Each share of Illinova common stock was
converted into one share of Dynegy Class A common stock. Immediately after the
combination, former Dynegy shareholders owned approximately 51 percent of the
outstanding shares of Dynegy Inc.
Approximately 60 percent of the consideration received by existing
Dynegy shareholders was in the form of Dynegy Inc. stock and 40 percent was
cash. In aggregate, the cash portion of the consideration approximated $1.07
billion. Dynegy Inc. financed the cash component of the merger initially with
borrowings under a debt facility and the issuance of $200 million of Class B
common stock to Chevron. Dynegy Inc. anticipates repaying or refinancing a
significant portion of the debt facility with proceeds from an offering of
equity securities, additional public debt issuances, proceeds from asset sales
and cash flow from operations.
Dynegy Inc. believes the acquisition of Illinova provides significant
financial, operational and corporate governance advantages that enhance its
position as a leading provider of energy services and products. The combination
will bring together a strong, innovative utility company owning strategically
located generation assets and operations, including electric transmission and
retail distribution capabilities, with one of the leading North American energy
marketers and independent power producers. These two companies have diverse but
complementary operations, providing qualitative and quantitative expansion of
Dynegy Inc.'s electric generation
29
<PAGE>
capacity, while enhancing Dynegy Inc.'s access to dependable cash flow and an
improved platform for further expansion. It is expected that the combined
company will be well positioned to be successful in the increasingly competitive
energy marketplace. Dynegy Inc. expects the merger to enhance shareholder value
more than either company could do on its own.
Factors considered in evaluating the benefits of the merger included:
- - The merger is expected to be accretive to the earnings per share of the
Dynegy Inc. shareholders;
- - The addition of Illinova's traditional utility business is expected to
provide a stable base of cash flow from which the combined company will
be able to leverage its business strategy;
- - The merger provides Dynegy Inc. with a larger platform in the
electricity trading market from which it can expand its marketing
operations. This larger platform is expected to provide the foundation
for Dynegy Inc.'s strategy to be at the forefront of the restructuring
of the power industry and the convergence of the gas and electricity
industries;
- - The merger adds an additional 4,989 gross megawatts of electricity
generating capacity to Dynegy Inc.'s post-merger capacity of 7,238
gross megawatts per year (both figures include current capacity as well
as capacity under construction). This additional capacity is in the
Midwestern United States and is expected to allow Dynegy Inc. to sell
more electricity for its own account on better terms throughout the
North American market;
- - The merger is expected to provide continuing shareholders, who desire
to invest in a full-service provider of energy products and services,
an investment vehicle having the flexibility and resources required to
respond to the numerous opportunities in the energy industry;
- - The merger provides the liquidity needed to allow certain Dynegy Inc.
shareholders to reduce the size of their investment in Dynegy Inc.; and
- - The merger improves public float thereby enhancing Dynegy Inc.'s access
to equity capital at attractive cost.
ASSET DISPOSITIONS
During the fourth quarter of 1999 and in early 2000, the Company
disposed of certain assets and settled certain contractual arrangements
realizing approximately $795 million in aggregate net proceeds. These
transactions were entered into as a result of statutory requirements pursuant to
the acquisition of Illinova, for the purpose of eliminating operating assets
considered non-strategic or which were under-performing in comparison to other
assets in the portfolio and in some cases to diversify direct ownership in
certain generation assets while maintaining commercial control over such
investments. The net proceeds received in these transactions are being used to
retire merger-related debt or are being re-deployed into the Company's capital
investment program. The financial impact of these transactions in the aggregate
were not material to Dynegy Holdings' results of operations or financial
position in 1999 and is not expected to be material to net income or financial
position for the year ended December 31, 2000. Further, disposition of these
assets is not expected to have a material adverse effect on Dynegy Inc.'s
prospective competitive position in the businesses in which it operates. The
transactions entered into and the reasons for such are as follows:
- - Qualified Facilities -
As a condition precedent to the Illinova acquisition, Dynegy Holdings sold
its interests in eleven qualifying cogeneration facilities to a third party
for approximately $256 million. The sale of these interests was dictated by
PURPA requirements imposed as a result of Dynegy Inc.'s acquisition of a
regulated utility.
- - Mid-Continent Liquids Assets -
Through two transactions, one in December 1999 and one in January 2000, the
company agreed to sell its Mid-Continent natural gas processing and
gathering facilities. The December sale has closed and the January sale is
set to close in March 2000. These facilities were non-strategic, were
under-performing in comparison to other assets in the portfolio and exposed
Dynegy Holdings to commodity price risk that was difficult to mitigate on a
consistent basis. As part of the December 1999 sale, Dynegy Holdings
executed a purchase and sale contract to acquire substantially all of the
natural gas liquids processed by certain of these natural gas processing
plants for a period of three years. The aggregate net proceeds from these
sales will approximate $422 million and the Company recognized no material
gain or loss on either transaction.
30
<PAGE>
- - Gasification Operations -
In two separate transactions, Dynegy Holdings settled a long-term sales
contract and sold the underlying technology and assets associated with its
coal gasification business in Indiana. Coal gasification technology was not
strategic to Dynegy Holdings' long-term goals. Aggregate net proceeds from
these transactions is proprietary information.
- - Reduced Interest in Rocky Road Power Generation Facility -
Dynegy Holdings reduced its ownership interest in the Rocky Road power
generation facility, located in Illinois, from 100 percent to 50 percent in
December 1999 pursuant to its stated plan to diversify ownership in these
types of assets in order to deploy as much capital as possible to this
segment of our operations. Dynegy Holdings continues to operate and market
the energy from this facility through agency relationships with the LLC.
Aggregate net proceeds from this transaction is proprietary information.
- - Crude Business -
Dynegy Holdings' domestic crude oil marketing operations are held for sale.
Management expects to dispose of these assets during the first quarter
2000. The Company's Canadian crude oil marketing operations are unaffected
by this proposed disposition.
EXECUTION OF BUSINESS STRATEGY
Dynegy Holdings successfully executed key operating and business
strategies that management believes provide impetus for financial growth in 2000
and beyond. Key accomplishments during the period, which are more fully
described elsewhere herein, included:
- - Expansion of ownership or control of power generating assets and
infrastructure;
- - Expansion of operations in the United Kingdom and in continental Europe;
- - Continued concentration on maximizing unit margins through selective
disposition of marginally profitable sales volumes;
- - Expansion of a retail energy marketing strategy combining existing
alliances with businesses acquired in the Illinova acquisition;
- - First quartile operating performance in the Company's natural gas liquids
businesses through formation of joint ventures, asset consolidations,
discrete asset dispositions, revenue enhancements and strategic cost
efficiency and reduction measures;
- - Continued emphasis on "just-in-time" controlled inventory management
techniques and execution of risk management methods to reduce exposure to
swings in liquids commodity prices;
- - Continued implementation of technology infrastructure improvements intended
to provide the Company with state-of-the-art business and financial
software applications; and
- - Appropriate maintenance of the Company's capital structure.
ENERGY CONVERGENCE -
Dynegy Holdings is continuing its expansion of ownership or commercial
control of strategic assets and generating capacity in selected major market
areas through acquisitions, greenfield development and asset management
agreements in order to leverage its marketing and trading capabilities.
Execution of this strategy began with the acquisition of Destec in 1997 and has
accelerated with the acquisition of Illinova, the formation of a west coast
generation venture and the greenfield projects that have been completed or are
under construction.
As discussed previously, Dynegy Inc. completed the acquisition of
Illinova in early 2000 adding 4,989 megawatts of merchant generation capacity,
strategically located in the mid-west, to its portfolio. In June 1999, the
Company completed construction and began commercial operations of a 250 megawatt
gas-fired merchant plant designed to assist in reducing power system congestion
induced by peak electricity demands in the mid-west. Dynegy Holdings owns a 50
percent interest in this facility. In the second quarter of 1999, the Company
completed a restructuring of ownership interests in generation capacity owned
jointly with an industry partner, through
31
<PAGE>
consolidation of four separate investments into a single joint venture. These
assets represent over 1,200 megawatts of generation capacity located in southern
California and the restructuring resulted in favorable financing and operating
synergies. During 1999, the Company announced its intent to develop power
generation projects in the following areas: Rockingham County, North Carolina;
Lake Charles, Louisiana; Heard County, Georgia; Osceola County, Florida;
Louisville, Kentucky; East Dundee, Illinois; and Channelview, Texas. These
facilities will add an additional 2,710 megawatts of generation capacity to
Dynegy Holdings' portfolio. The net additions to Dynegy Holdings' portfolio were
tempered somewhat by the aforementioned disposition of the qualifying
facilities. However, the sale of these assets, which did not consist of merchant
generation capacity, is not expected to be significant to the Company's
execution of its long-term strategy. Finally, consistent with our stated
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 state-of-the-art gas-fired turbines,
representing approximately 6,900 megawatts of capacity. Delivery of the
manufactured turbines will occur ratably beginning in 1999 and ending in 2003.
The timing of delivery of these turbines coincides with Dynegy Holdings' capital
asset program, which is linked to Dynegy Inc.'s goal of owning or controlling
70,000 megawatts of generation capacity within five years.
During 1999, Dynegy Holdings continued its focus on higher margin
business in its gas and power marketing operations. The execution of this
strategy was enhanced by the marketing, trading and arbitrage opportunities
provided by the control and optimization of physical assets. Also in 1999,
Dynegy Holdings expanded its trading and marketing strategy by adding power
marketing operations to its existing gas marketing operations in the UK. This
business is beginning to expand into Europe beginning with trading operations in
the Nord Pool and office expansions in continental Europe.
The acquisition of Illinova brings together two diverse retail gas and
power marketing strategies that we believe complement each other. Dynegy
Holdings will continue to execute its retail gas and electric strategy, which is
designed to access a significant national customer base while mitigating the
large capital investment and financial risks necessitated by other national
retail marketing strategies. However, where commercial synergies exist, Dynegy
Holdings will leverage off the existing Illinova operations in order to maximize
returns from its retail strategy, without altering the overall risk profile of
this business.
MIDSTREAM SEGMENT -
During 1999, the Midstream segment continued execution of the
restructuring and rationalization of its operations that were begun in 1997. The
segment's businesses were able to achieve first quartile operating performance
through efficiency improvements and cost reductions that enhanced its
competitive position in the marketplace. These businesses increased their focus
on extracting fee income throughout the value chain, unbundling services and
leveraging off the Company's commercial skills and relationships. In addition,
the segment businesses focused efforts on re-negotiating or restructuring
marginally profitable contractual arrangements in order to position these
businesses for profitable growth. Finally, the segment continued to invest in
strategically located midstream assets in order to advance existing commercial
advantages or to leverage off identified economies of scale, while divesting
itself of under-performing assets. The intent of these initiatives is to
mitigate the variability that commodity prices have on the operating results of
the segment, as well as to position the segment's businesses to take full
advantage of improvements in market conditions when they occur. For the
foreseeable future, Dynegy Holdings will focus its operations and capital
expansion towards infrastructure and opportunities present in the western Gulf
of Mexico area, stretching from Mont Belvieu, Texas to Mississippi, and in other
areas management views as strategic.
Dynegy Holdings believes that existing owned infrastructure and
commercial acumen uniquely positions the Company to exploit opportunities in
both the domestic and world-wide liquids marketing and trading business. Dynegy
Holdings will continue to focus on reducing commodity volatility exposure, while
maintaining first quartile operating efficiency with an operational emphasis on
downstream marketing and trading.
TECHNOLOGY INFRASTRUCTURE ENHANCEMENTS -
Dynegy Holdings has continued its three-year plan, launched in 1998, to
enhance our competitiveness through technology infrastructure improvements aimed
at optimizing major business and financial processes at the Company. Using
state-of-the-art technology and software applications, the project team is
focused on process
32
<PAGE>
enhancements extending throughout the organization, linking initial price and
market discovery with risk control, production, aggregation, distribution, cash
settlement, accounting and financial statement recognition.
As an integral part of this three-year plan, management is defining and
executing an end-to-end eBusiness Strategy, having the intent of placing Dynegy
at the forefront of our industry as it relates to this technological
advancement. Dynegy Holdings believes that eCommerce is fast becoming the
primary business enabler in our industry resulting in a paradigm shift in how
business is conducted. Management believes that opportunities existing from
application of this technology are significant and that a successful execution
of a comprehensive strategy is paramount to maximizing our stated goals and
strategies.
CAPITAL MAINTENANCE -
During 1999 and into 2000, the Company managed its consolidated capital
structure providing capital for the acquisition of Illinova, the formation of
the West Coast Power generation joint venture under favorable terms and
providing capital for the execution of its aggressive capital investment
program. Dynegy Inc. as well as Dynegy Holdings was granted an investment grade
credit rating following the acquisition of Illinova with no diminution of
previous ratings, despite an increase in indebtedness required to execute the
transaction. Dynegy Inc. anticipates a sale of common equity in the first half
of 2000 that, when combined with proceeds from the sale of non-strategic assets,
should provide a debt to capital ratio consistent with historic norms.
IMPACT OF PRICE FLUCTUATIONS
Dynegy Holdings' operating results are impacted by commodity price,
interest rate and foreign exchange rate fluctuations. 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. 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 Holdings also monitors its exposure to fluctuations
in interest rates and foreign currency exchange rates and may execute swaps,
forward-exchange contracts or other financial instruments to manage these
exposures.
The Energy Convergence segment includes the integrated component
businesses: 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 of the 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
Holdings 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 Holdings' financial
position or results of operations, either 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 natural gas and electricity prices. The Company actively manages the
price risks described above and may, at times, have a bias in the market, within
established guidelines, resulting from management of its portfolio.
Operating margins associated with the Midstream segment's natural gas
gathering, processing and fractionation activities are very sensitive to changes
in natural gas liquids prices and the availability of inlet volumes. The impact
from changes in natural gas liquids prices results principally from the nature
of contractual terms under which natural gas is processed and products are sold.
In addition, certain of the Midstream businesses'
33
<PAGE>
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. Commodity price fluctuations may also affect the
operating margins derived from the Company's natural gas liquid marketing
business. 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.
OPERATIONS RISK
Dynegy Holdings' stated business strategy is to expand ownership or
control of merchant generation capacity in select markets across the country. As
Dynegy Inc. moves forward with the execution of its strategic plan to own or
control 70,000 megawatts of capacity within five years, risk of earnings
volatility increases through exposure to unanticipated variability in generation
capacity dependability factors. The increasing importance of and dependency upon
physical generation of electricity as a percentage of Dynegy Holdings' overall
portfolio and strategy may substantially alter Dynegy Holdings' earnings risk
profile over time. Many of the implied risks associated with ownership and
control of generation capacity may not be fully mitigated through application of
risk management methods and/or state-of-the-art, first quartile power generation
operating methods.
The addition of fossil-fueled generation assets to Dynegy Inc.'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 and could result in
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 anticipated to be used in
executing Dynegy Holdings' strategic plan in future periods.
SEASONALITY
Dynegy Holdings' 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 are
typically higher in the winter months than in the summer months, reflecting
increased demand due to greater heating requirements and, typically, higher
natural gas prices. However, as a result of the industry-wide emphasis on the
growth of gas-fired generation, historical seasonality associated with natural
gas sales volumes and prices may become less pronounced in the future.
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 generating facilities. Partly as a result of Dynegy Holdings'
emphasis on merchant power generation, revenue and operating margin may vary,
either positively or negatively, as weather driven demand varies from historic
norms. The Midstream 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 Holdings' operations are affected by general economic
trends, management does not believe inflation has had a material effect on the
Company's results of operations.
34
<PAGE>
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 Holdings'
natural gas, power and natural gas liquids marketing businesses. For the
foreseeable future, the Company's primary focus will be the acquisition and/or
construction of power generating assets that will enable the Company to fully
realize the Merchant Leverage Effect of commercialization of these generating
assets. 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.
Dynegy Holdings 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. The following briefly describes the
terms of these arrangements.
COMMERCIAL PAPER AND MONEY MARKET LINES OF CREDIT
The Company uses commercial paper proceeds and borrowings under
uncommitted money market lines of credit for general corporate purposes,
including short-term working capital requirements. The Company maintains a
commercial paper program for amounts up to $800 million, as supported by its
corporate credit agreements. At December 31, 1999, approximately $456 million of
commercial paper was outstanding and $40 million was outstanding under existing
money market lines of credit.
CORPORATE CREDIT AGREEMENTS
Dynegy Holdings' corporate credit agreements are comprised of a $400
million, five-year revolving credit agreement maturing in May 2003, and a $400
million, 364-day revolving credit agreement maturing in May 2000. Both
agreements provide funding for working capital, letters of credit and other
general corporate expenditures. At December 31, 1999, letters of credit and
borrowings under the corporate credit agreements aggregated $36 million and,
after consideration of the outstanding commercial paper, aggregate unused
borrowing capacity under the corporate credit agreements approximated $267
million.
CANADIAN CREDIT FACILITY
In November 1998, an indirect wholly-owned Canadian subsidiary of the
Company entered into a $60 million, two-year revolving credit facility maturing
in November 2000. Borrowings under this agreement may be used for general
corporate purposes. At December 31, 1999, $40 million was outstanding under this
agreement.
PUBLIC DEBT
The Company has five separate public debt issues aggregating $900
million, which mature in 2002, 2005, 2006, 2018 and 2026, respectively. Net
proceeds derived from these issues were used to reduce outstanding borrowings
under credit arrangements existing at the date of each respective issuance.
NON-RECOURSE DEBT
The consolidated debt balance includes three notes aggregating $89
million. These notes have recourse only to the assets of identified power
generation projects. Each of the three notes represents a fifteen-year term loan
obligation payable in semi-annual installments of principal plus accrued
interest. These notes are related to the Qualifying Facilities that were sold in
February, 2000.
PREFERRED SECURITIES OF SUBSIDIARY TRUST
NGC Corporation Capital Trust I ("Trust"), a wholly owned subsidiary of
Dynegy Holdings, issued in a private transaction $200 million aggregate
liquidation amount of 8.316% Subordinated Capital Income Securities (referred to
herein as "Securities") representing preferred undivided beneficial interests in
the assets of the Trust. The Trust invested the proceeds from the issuance of
the Trust Securities in an equivalent amount of 8.316% Subordinated Debentures
("Subordinated Debentures") of the Company. The sole assets of the Trust are the
35
<PAGE>
Subordinated Debentures. Following the issuance of the Securities, the Trust
completed an exchange offer through which all of the outstanding Securities were
exchanged by the holders thereof for registered securities having substantially
the same rights and obligations.
OTHER MATTERS
STOCKHOLDER ISSUES. Effective with the execution of the acquisition of
Illinova, BG and NOVA each reduced their stakes in Dynegy Inc. to below 5
percent by accepting $16.50 cash per share for a significant portion of their
previous aggregate common stock ownership in old Dynegy. Further, Dynegy Inc.
granted both BG and NOVA registration rights for shares of Series A Convertible
Preferred Stock and shares of Class A common stock issued or issuable upon
conversion of the Series A Convertible Preferred Stock held by each following
execution of the merger. Finally, BG and NOVA were granted rights to obligate
Dynegy Inc. to initiate a registered public offering for all shares requested to
be sold by BG and NOVA, subject to certain conditions precedent.
Pursuant to the terms of the merger agreement, Chevron maintained a 28
percent equity stake in Dynegy Inc. Further, in accordance with a shareholder
agreement, Chevron was granted certain rights pursuant to its ownership of all
of the Class B common shares of Dynegy.
ACQUISITION AND CONSTRUCTION PROJECTS. Included in the 2000 budget is
$695 million committed to construction projects in progress, identified asset
acquisitions, maintenance capital projects, environmental projects, technology
infrastructure and software enhancements, contributions to equity investments
and certain discretionary capital investment funds. The capital budget is
subject to revision as unforeseen opportunities or circumstances arise. Funds
committed to the various segments in 2000 are as follows:
<TABLE>
<CAPTION>
===================================================================================================
CAPITAL BUDGET FOR 2000 ACQUISITION AND CONSTRUCTION PROJECTS
===================================================================================================
ESTIMATED
CAPITAL
SEGMENT SPENDING
-------------------------------------------------------------- ------------------
($ IN THOUSANDS)
<S> <C>
Energy Convergence:
Power Generation $ 450,000
Marketing and Trade 50,000
Midstream Segment 110,000
Information Technology Infrastructure and Software and Other 85,000
--------------
$ 695,000
==============
===================================================================================================
</TABLE>
COMMITMENTS. In conducting its operations, the Company routinely enters
into agreements that commit future cash flow to the lease and or acquisition of
assets used in its businesses. These commitments are typically associated with
capital projects, reservation charges for storage and transportation capacity,
office and equipment leases and other similar items. The terms of these
agreements vary based on the nature and intent of each transaction. The
following describes the more significant commitments outstanding at December 31,
1999.
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, a
subsidiary of the Company has executed or is currently negotiating purchase
orders to acquire in excess of forty state-of-the-art gas-fired turbines
representing approximately 6,900 megawatts of generating capacity. These
purchase orders represent a capital commitment of approximately $1.3 billion.
Delivery of the manufactured turbines will occur 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 Holdings 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
36
<PAGE>
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.
The Company routinely enters into supply and market contracts for the
purchase and sale of electricity, some of which contain fixed capacity payments.
Obligations under these supply contracts, which are not already fair valued on
the balance sheet at December 31, 1999, totaled $212 million on a discounted
basis. Such obligations are generally payable on a ratable basis, the term of
which extends through 2011. In return for such fixed capacity payments, Dynegy
Holdings receives volumes of electricity at agreed prices, which it then may
re-market. Based on year-end estimates, the market value of electricity
available for sale under these contracts exceeds the cost of such electricity,
which amount includes the fixed capacity payments disclosed herein.
In October 1999, the Company announced that it had achieved all of the
necessary approvals to begin construction on its Heard County Power Project, a
500-megawatt natural gas-fired, simple-cycle peaking facility located in
Franklin in Heard County, Georgia. A Dynegy Holdings subsidiary will design and
construct the generating facility, as agent for a third party, and Dynegy
Holdings is obligated to guarantee approximately 90 percent of the actual cost
of the project during the construction phase. It is anticipated that Dynegy will
subsequently lease the completed facility from that third party for an initial
term of five years. Under certain circumstances, the Company maintains an option
to purchase the facility from the third party and it may participate in the
outright sale of the asset.
A wholly owned subsidiary of the Company leases a power generating
asset under an agreement that is classified as an operating lease. This
agreement has aggregate future minimum lease payments of approximately $7.1
million at December 31, 1999.
DIVIDEND REQUIREMENTS. In 2000, Dynegy Inc.'s Class A and Class B
common stock will be entitled to a $0.60 per share dividend if, when and as
declared by the Board of Directors of the Company out of funds legally available
therefor. The Class B common stock has certain conversion features and maintains
certain preemptive rights under the shareholder agreement. The holders of the
Series A Convertible Preferred Stock are entitled to receive dividends or
distributions totaling $3.00 per share annually if and when declared by the
Board of Directors of the Company out of funds legally available therefor.
Dividends on the preferred shares are cumulative from the date of issuance and
are payable quarterly on the last day of March, June, September and December.
The preferred stock carry certain priority, liquidation, redemption, conversion
and voting rights not available to the common shareholders.
STOCK REPURCHASE PLAN. Dynegy Inc. has a stock repurchase program,
approved by the Board of Directors, that allows it to repurchase, from time to
time, up to 1.6 million shares of common stock (1.1 million shares on an
adjusted basis pursuant to the Illinova acquisition) in open market
transactions. At December 31, 1999, approximately 399,000 shares (276,000 shares
on an adjusted basis pursuant to the Illinova acquisition) remained available
for repurchase under this program.
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 Holdings 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 manage these exposures. The absolute notional contract amounts
associated with commodity risk-management, interest rate and forward exchange
contracts, respectively, were as follows:
37
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================
ABSOLUTE NOTIONAL CONTRACT AMOUNTS
================================================================================================================
DECEMBER 31,
--------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Natural Gas (Trillion Cubic Feet) 5.702 4.179 2.558
Electricity (Million Megawatt Hours) 42.949 1.835 2.244
Natural Gas Liquids (Million Barrels) 19.902 6.397 4.355
Crude Oil (Million Barrels) 35.554 18.800 14.920
Interest Rate Swaps (in thousands of US Dollars) $ 36,524 $ 69,332 $ 180,000
Fixed Interest Rate Paid on Swaps (Percent) 8.210 8.067 6.603
U.K. Pound Sterling (in thousands of US Dollars) $ 85,812 $ 69,254 $ 74,638
Average U.K. Pound Sterling Contract Rate (in US Dollars) $ 1.6191 $ 1.6143 $ 1.5948
Canadian Dollar (in thousands of US Dollars) $ 288,898 $ 268,307 $ 37,041
Average Canadian Dollar Contract Rate (in US Dollars) $ 0.6775 $ 0.6710 $ 0.7240
================================================================================================================
</TABLE>
Cash-flow requirements for these commodity risk-management, interest
rate and foreign exchange contracts were estimated based upon market prices in
effect at December 31, 1999. Cash-flow requirements were as follows:
<TABLE>
<CAPTION>
=========================================================================================================================
CASH FLOW REQUIREMENTS FOR RISK MANAGEMENT CONTRACTS
=========================================================================================================================
2000 2001 2002 2003 2004 BEYOND
-------------- ------------ ------------- -------------- -------------- --------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Future estimated net inflows
(outflows) based on year
end market prices/rates $ 33,893 $ 13,735 $ 13,958 $ 13,711 $ 12,447 $ 6,446
=========== =========== =========== ============ ============ ============
=========================================================================================================================
</TABLE>
Dynegy Holdings 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 in order to set
the overall corporate risk tolerance, to determine risk targets, and to set
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 Holdings 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 Holdings uses other means to monitor market risk in the trading
portfolios. In addition to value at risk, Dynegy Holdings performs regular
stress and scenario analysis 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 Holdings estimates value at risk using a JP Morgan
RiskMetrics-TM- approach assuming a one-day holding period and a 95 percent
confidence level. At December 31, 1999, the value at risk for Dynegy Holdings'
trading and risk-management portfolios approximated $5.8 million and the average
of such value during the year ended December 31, 1999 was estimated at $4.8
million.
ACCOUNTING PRONOUNCEMENTS. Effective January 1, 1999, the Company adopted the
provisions of Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy
Trading and Risk Management Activities" ("EITF 98-10") pursuant to the
implementation requirements stated therein. The resulting effect of adoption of
the provisions of EITF 98-10 was to alter the Company's comprehensive method of
accounting for energy-related contracts, as defined in that statement. The
cumulative effect of this change in accounting principle was not material to the
1999 results of operations. The pro forma effect on prior periods of the
adoption of the provisions of EITF 98-10 was not determinable.
Previously, only North American fixed-price natural gas transactions
were measured at fair value, net of future servicing costs and reserves as
estimated by the Company. The Company now accounts for all energy trading
activities at fair value as of each balance sheet date and recognizes currently
the net gains or losses resulting from the revaluation of these contracts to
market in its results of operations. As a result, substantially all of the
operations of the
38
<PAGE>
Company's world-wide gas marketing, power marketing, and crude marketing
operations are now accounted for under a mark-to-market accounting methodology.
Generally, revenue recognition for the Company's natural gas liquids processing,
fractionation, transportation and marketing activities, as well as its power
generation businesses, remain on an accrual-based accounting methodology. Sales
and purchases by these businesses are not trading operations, as defined in the
statement, and therefore not subject to the provisions of EITF 98-10.
The Company continues to analyze the effects of adoption of the rules
promulgated by Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("Statement No. 133").
Provisions in Statement No. 133 will affect the accounting and disclosure of
contractual arrangements and operations of the Company. The Financial Accounting
Standards Board recently deferred implementation of the provisions of Statement
No. 133 to fiscal periods beginning after June 15, 2000. Dynegy Holdings 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 statement impact; however, such impact is not
determinable at this time.
Management believes the adoption of the provisions of EITF 98-10 and
Statement No. 133 may affect the variability of future periodic results reported
by Dynegy Holdings, 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.
YEAR 2000 ISSUES. Dynegy Holdings completed all phases of the Year 2000
Program relative to computer systems and technology infrastructure considered
essential to the Company's business prior to the event. The year 2000 event
passed without significant incident. Dynegy Holdings' contingency plans are
designed to minimize any disruptions or other adverse effects resulting from
unexpected incompatibilities regarding core systems and business applications
and to facilitate the early identification and remediation of system problems
that manifest themselves after December 31, 1999. To date, no significant items
have been identified. Dynegy Holdings continues to assess, test and remediate
business applications and technology infrastructure that were previously
determined to be other than essential to core business operations. The extent of
these activities is very insignificant to Dynegy Holdings' overall business.
Aggregate costs expended for the Year 2000 Project totaled $6 million.
Approximately $2 million of this amount was expended during 1998 with an
additional $4 million expended in 1999.
ENVIRONMENTAL MATTERS. Dynegy Holdings' operations are subject to
extensive federal, state, provincial and local statutes, rules and regulations
governing the discharge of materials into the environment or otherwise relating
to environmental protection. Compliance with these statutes, rules and
regulations requires capital and operating expenditures including those related
to monitoring and permitting at various operating facilities and the cost of
remediation obligations. The Company's environmental expenditures have not been
prohibitive in the past, but are anticipated to increase in the future with the
trend toward stricter standards, greater regulation, more extensive permitting
requirements and an increase in the number of assets operated by the Company
subject to environmental regulation.
Dynegy Holdings' aggregate expenditures for compliance with laws and
regulations related to the discharge of materials into the environment or
otherwise related to the protection of the environment approximated $4 million
in 1999. The addition of fossil fuel-fired electric generation to Dynegy Inc.'s
portfolio, acquired in the Illinova acquisition, increases Dynegy Inc.'s
exposure to environmental regulation, as well as anticipated increased
expenditures for remediation requirements and capital costs associated with
Clean Air Act requirements and other federal and state legislation. Many of
these exposures represent risks that Dynegy Inc. heretofore has not otherwise
been subjected to. Management is confident that it has the resources in place to
effectively manage the anticipated issues imposed by this heightened regulation
and the financial liquidity to address anticipated expenditures associated with
adherence to such regulation. Total environmental expenditures for both capital
and operating maintenance and administrative costs are estimated to approximate
$8 million for Dynegy Holdings in 2000. Dynegy Inc. expects to expend
approximately $75 million in 2000 on environmental compliance, which is
inclusive of the assets purchased in the Illinova acquisition.
39
<PAGE>
CONCLUSION
The Company, as well as Dynegy Inc., continue to believe that it will
be able to meet all foreseeable cash requirements, including expenditures
associated with the Illinova acquisition, working capital, capital expenditures
and debt service, from operating cash flow, supplemented by borrowings under its
various credit facilities, if required.
40
<PAGE>
RESULTS OF OPERATIONS
The following table reflects certain operating and financial data for
the Company's business segments for the years ended December 31, 1999, 1998 and
1997, respectively.
<TABLE>
<CAPTION>
=============================================================================================================================
DYNEGY HOLDINGS' OPERATING AND FINANCIAL DATA
=============================================================================================================================
ENERGY CONVERGENCE MIDSTREAM
-------------------------------------------- --------------------------------------------
1999 1998 1997 1999 1998 1997
-------------- -------------- -------------- -------------- ------------- ---------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Power Marketing and Generation $ 178,241 $ 106,216 $ 23,513 $ --- $ --- $ ---
Natural Gas Marketing 105,353 130,059 103,292 --- --- ---
Upstream Operations --- --- --- 122,844 91,472 206,564
Downstream Operations --- --- --- 123,870 91,802 51,425
Crude Oil Operations --- --- --- 13,567 9,138 500
Equity Investments 62,185 75,242 36,241 17,669 15,796 22,718
------------ ------------- ------------ ------------- ------------- -------------
SUBTOTAL - FINANCIAL
CONTRIBUTION (1) 345,779 311,517 163,046 277,950 208,208 281,207
Depreciation 35,116 29,026 16,425 94,342 84,176 87,966
General and Administrative 128,260 110,543 76,184 72,457 75,165 73,160
Impairment, Abandonment and
Other --- 2,723 20,228 --- 6,921 254,772
Other Items 26,068 4,181 (2,770) 1,700 34,963 10,653
------------ ------------- ------------ ------------- ------------- -------------
EARNINGS BEFORE INTEREST AND
TAXES (2) $ 208,471 $ 173,406 $ 47,439 $ 112,851 $ 76,909 $ (124,038)
=========== ============ =========== ============ ============ ============
NORMALIZED EBIT (3) $ 199,602 $ 176,129 $ 67,667 $ 112,851 $ 57,509 $ 130,734
=========== ============ =========== ============ ============ ============
OPERATING STATISTICS:
Natural Gas Marketing (4) -
US Sales Volumes 6.5 5.9 6.1 --- --- ---
Canadian Sales Volumes 2.3 2.3 1.9 --- --- ---
UK Sales Volumes 1.1 0.7 0.2 --- --- ---
------------ ------------- ------------ ------------- ------------- -------------
9.9 8.9 8.2 --- --- ---
============ ============= ============ ============= ============= =============
Power Marketing (5) 66.5 120.8 94.7 --- --- ---
Power Generation (6) -
Gross 21.5 15.9 7.2 --- --- ---
Net 12.8 9.8 4.3 --- --- ---
NGLs Processed (7) -
Field Plants --- --- --- 85.9 91.8 89.8
Straddle Plants --- --- --- 36.6 30.9 46.4
------------ ------------- ------------ ------------- ------------- -------------
--- --- --- 122.5 122.7 136.2
============ ============= ============ ============= ============= =============
NGL Gathering and Transmission
(4) --- --- --- 0.2 0.3 0.4
Barrels Received for
Fractionation (8) --- --- --- 210.9 192.5 201.3
NGL Marketing (8) --- --- --- 449.9 410.7 413.9
LPG Sales (8) --- --- --- 87.2 72.9 91.8
Crude Oil Marketing (8) --- --- --- 206.8 239.6 168.3
------------------------------------------
</TABLE>
(1) Financial Contribution is the sum of the segment's operating margin and
equity earnings from unconsolidated affiliates.
(2) Earnings Before Interest and Taxes ("EBIT"), equals pretax earnings before
deduction of interest expense.
(3) Normalized EBIT adjusts EBIT for identified non-recurring items described
in the following narrative on three-year results.
(4) Billion Cubic Feet Per Day
(5) Million Megawatt Hours
(6) Million Megawatt Hours Generated
(7) Thousand Barrels Per Day - Gross
(8) Thousand Barrels Per Day
================================================================================
41
<PAGE>
THREE YEARS ENDED DECEMBER 31, 1999
For the year ended December 31, 1999, the Company realized net income
of $151.8 million, or $0.91 per diluted share. This compares with $108.4
million, or $0.66 per diluted share and a net loss of $102.5 million, or $0.68
per share in 1998 and 1997, respectively. The comparability of results period to
period was impaired by the recognition of net non-recurring, after-tax gains
totaling $5.8 million during 1999, after tax gains totaling $10.8 million during
1998, and net after-tax charges totaling $218.5 million recognized in 1997. In
addition, the comparability of results for the three years is influenced by the
Destec Acquisition that was effective July 1, 1997. Revenues in each of the
three years in the period ended December 31, 1999, totaled $15.4 billion, $14.3
billion, and $13.4 billion, respectively. Operating cash flows totaled $8.8
million for the year ended December 31, 1999, compared with operating cash
inflows of $250.8 million in 1998 and $278.6 million in 1997.
Non-recurring items in the current period relate to a $5.8 million
after-tax gain on the sale of an investment. In 1998 non-recurring items
included a $17.1 million after-tax gain on the sale of Ozark offset by a $6.3
million after-tax severance charge. The 1997 loss included one-time charges
principally associated with the abandonment and impairment of certain operating
and non-operating assets, inventory obsolescence and lower-of-cost-or-market
writedowns, reserves for contingencies and other obligations, a charge for a
hedging related loss and a charge associated with a change in the method of
accounting for certain business process re-engineering and information
technology transformation costs.
After consideration of the non-recurring items described above,
normalized net income for the year ended December 31, 1999, approximated $146.0
million, or $0.87 per diluted share, compared with normalized net income of
$97.5 million, or $0.59 per diluted share in 1998, and $108.7 million, or $0.65
per diluted share, in 1997. The lower normalized results in 1998 as compared
with the other two years generally reflect a material increase in earnings
derived from the Company's Energy Convergence segment offset by the significant
negative impact that crude and NGL commodity prices had on the Midstream segment
in 1998, as well as a trend towards higher overhead, depreciation and interest
costs during the three-year period.
Consolidated operating margin for each of the three years in the period
ended December 31, 1999, totaled $543.9 million, $428.7 million and $385.3
million, respectively. For the year ended December 31, 1999, the Company
reported operating income of $213.7 million, compared with operating income of
$120.1 million and an operating loss of $143.4 million for the 1998 and 1997
periods, respectively. Operating income in both the 1998 and 1997 periods was
negatively impacted by the pre-tax effect of portions of the aforementioned
non-recurring items. The increase in depreciation and amortization expense
during the three-year period reflects the depreciable assets acquired in the
Chevron Combination and the Destec Acquisition as well as the continued
expansion of the Company's depreciable asset base through other asset
acquisitions and capital projects completed during the three-year period.
Depreciation and amortization expense in the 1999 and 1998 periods benefited
from the prospective effect of the asset impairments and abandonments recognized
in 1997. The increased level of general and administrative expenses
period-to-period principally reflects the incremental costs associated with a
larger, more diverse base of operations, non-capitalizable consulting and other
costs required to support technology infrastructure improvements, higher
variable compensation costs in 1999 than in 1998 or 1997 and, to a lesser
degree, expenses related to identifying and resolving Year 2000 issues.
During the three-year period ended December 31, 1999, the Company
significantly increased its investment in unconsolidated affiliates, principally
as a result of the ownership interests and legal structures employed in a
majority of the investments made by the Energy Convergence segment. As a result,
the financial results of the Company's equity investments to its consolidated
operating results have become more significant. The Company has structured these
investments to mitigate financial risk to the corporation. In addition, the
bylaws of a majority of these investments require periodic cash distributions
allowing the Company to manage its share of cash flow generated by these
investments in an efficient manner. The Company's equity share in the earnings
of its unconsolidated affiliates contributed an aggregate $79.9 million to 1999
pre-tax results, compared to $91.0 million in 1998 and $59.0 million in 1997.
Equity earnings in 1999 were lower than in 1998 principally in the generation
investment equity earnings group reflecting weather driven demand differences
between periods and higher interest costs in 1999 associated with the formation
of a new partnership. Cash distributions received from these investments during
each of the three years in the period ended December 31, 1999 approximated $66
million, $85 million and $55 million, respectively. The following table provides
a summary of equity earnings by investment for the comparable periods:
42
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================
DYNEGY HOLDINGS' EQUITY EARNINGS FROM UNCONSOLIDATED AFFILIATES
=================================================================================================================
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997
------------------- -------------------- ------------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Accord Energy Limited (1) $ 21,009 $ 21,822 $ 25,885
Other Gas Marketing Investments, Including NCL (1) (5,980) (3,469) (2,942)
Electric Power Marketing Investments 659 509 518
Power Generation Investments 46,497 56,380 12,780
Gulf Coast Fractionators 3,534 3,741 6,624
West Texas LPG Pipeline Limited Partnership 5,066 6,428 7,162
Venice Energy Services Company, L.L.C. 6,812 4,310 8,052
Other Midstream Businesses Investments, net 2,257 1,317 880
-------------- ------------- --------------
$ 79,854 $ 91,038 $ 58,959
============== ============= =============
=================================================================================================================
</TABLE>
1. For a discussion of the Accord and NCL restructurings, refer to Note 11 of
the Consolidated Financial Statements.
Interest expense totaled $78.2 million for the year ended December 31,
1999, compared with $75.0 million and $63.5 million for the comparable 1998 and
1997 periods. The higher interest expense period to period is attributed to
higher average outstanding principal amounts resulting primarily from debt
assumed in and resulting from the Company's capital expenditure program, the
Chevron Combination and the Destec Acquisition partially offset by interest
rates that trended lower over the three-year period.
Other income and expenses, net benefited operating results in each of
the years ended 1999 by $27.8 million, $39.1 million and $7.9 million,
respectively. In addition to the pretax effect of the previously mentioned
non-recurring gain on sale of an investment, 1999's other income and expense,
net included a $38 million pretax gain associated with the sale of an asset and
a $23 million pretax reserve associated with the realization of certain assets.
As a result, 1999 other income and expense, net benefited by approximately $15
million as a result of these items. Also, included in 1999's pre-tax earnings
was a $15 million pretax reserve for under-realization on a long-term generation
sales contract. Such amount was classified in operating margin. The effect of
these three items on net income was immaterial in the period, and to the segment
disclosures since all three items relate to Energy Convergence operations.
Therefore, the items were not highlighted as non-recurring items in previous
discussions on annual results. Each of the net amounts in 1998 and 1997 result
principally from the pretax effect of certain of the aforementioned
non-recurring items recognized in each period as well as numerous other less
significant recurring and non-recurring income and expense items.
During the second quarter of 1997, the Company sold $200 million
aggregate liquidation amount of 8.316% Subordinated Capital Income Securities.
Accumulated distributions associated with these Securities totaled $16.6 million
for each of the years ended December 31, 1999 and 1998 and $9.8 million for the
year ended December 31, 1997, respectively.
The Company reported an income tax provision of $74.7 million in 1999,
compared to an income tax provision of $50.3 million in 1998 and an income tax
benefit of $62.2 million in 1997, reflecting effective rates of 33 percent, 32
percent and (41) percent, respectively. In general, differences between the
aforementioned effective rates and the statutory rate of 35 percent result
primarily from permanent differences attributable to amortization of certain
intangibles, permanent differences arising from the effect of certain foreign
equity investments and state income taxes.
ENERGY CONVERGENCE -
The Energy Convergence segment had earnings before interest and taxes
("EBIT") of $208.5 million for the year ended December 31, 1999, compared to
$173.4 million in 1998, and $47.4 million in 1997. Normalized EBIT for each of
the three years in the period ended December 31, 1999, totaled $199.6 million,
$176.1 million and $67.7 million, respectively. These results were influenced,
either positively or negatively, by:
- - lower demand for electricity in 1999 than in 1998, particularly in the
southern California market,
- - favorable market movements in the United Kingdom in 1999 combined with
significant growth in operations in the UK over the three year period,
- - expansion of power trading to the UK and Europe in 1999,
43
<PAGE>
- - increased gas and power marketing origination in 1999,
- - less price volatility in the North American power markets in 1999 and 1997
as compared to 1998, which reduced trading opportunities,
- - significant mild weather in 1999 and 1998 as compared with historical
norms,
- - advertising costs by our retail alliances,
- - increased depreciation and general and administrative expenses reflecting
the capital and overhead costs required to support the larger, more diverse
base of operations, partially offset by
- - the acquisition of Destec and its power generation platform in 1997.
Worldwide gas marketing operations were negatively influenced in all
periods by unseasonably warm weather in the winter months that eliminated any
significant volatility in commodity prices during those periods. Worldwide sales
volumes totaled 9.9 Bcf/d in 1999, 8.9 Bcf/d in 1998 and 8.2 Bcf/d in 1997.
Worldwide per-unit margins were $0.029, $0.040 and $0.035 for each of three
years in the period ended December 31, 1999, respectively.
The dramatic growth in financial contribution from the power marketing
business in 1999 is attributable to favorable price movements in the United
Kingdom and increased origination in the U. S. markets despite the lack of
weather-driven volatility and trading opportunities during the year. This is in
contrast to the financial contribution in 1998. Value extraction in that period
was derived from the extreme market volatility experienced in certain U.S.
markets, particularly in the mid-west, during the 1998 summer.
Results in power generation reflect the execution of the Company's
growth strategy over the three-year period. During this timeframe, gross
generation production grew 14.3 million megawatt hours or nearly 200 percent.
MIDSTREAM -
The Midstream segment had earnings before interest and taxes ("EBIT")
of $112.9 million for the year ended December 31, 1999, compared to $76.9
million in 1998, and a loss of $(124.0) million in 1997. Normalized EBIT for
each of the three years in the period ended December 31, 1999, totaled $112.9
million, $57.5 million and $130.7 million, respectively. Improved natural gas
liquids and crude oil prices, supplemented by targeted cost reductions and
revenue enhancements favorably impacted this segment's results period-to-period.
Sustained market price improvements in 1999 have resulted in increased gas
processing, fractionation and trading opportunities. In addition, world demand
for natural gas liquids strengthened in 1999, particularly in Europe and Asia
enhancing revenues from global marketing operations. Forward sales of equity
liquids production prevented this segment from fully realizing value during the
upturn in commodity prices during 1999. This hedging technique has also been
employed in 2000, resulting in the hedging of approximately 50 percent of 2000
equity production at a price above the historical ten-year mean propane price.
Average NGL market prices averaged $0.34 per gallon in 1999 compared to $0.25
per gallon in 1998 and $0.34 per gallon in 1997. Likewise, crude oil prices
improved during the year averaging $17.10 per barrel in 1999, $11.97 per barrel
in 1998 and $18.64 per barrel in 1997. During 1998, the decline in NGL and crude
oil commodity prices negatively impacted operations. During 1997, operating
margins from these businesses were negatively impacted by high-cost inventory
purchased during the fourth quarter of 1996, which was recognized in operating
results during the first quarter of 1997, culminating in a
lower-of-cost-or-market writedown of $12.3 million at March 31, 1997.
Additionally, included in the 1997 period are pre-tax charges related to a
lower-of-cost-or-market writedown of crude oil inventory of $2.7 million and a
hedge-related loss of $8.3 million.
Operationally, this segment's businesses continue to reflect a
leadership position in significantly all domestic midstream businesses.
Aggregate domestic natural gas liquids processing volumes totaled 122.5 thousand
gross barrels per day in 1999 compared to an average 122.7 thousand gross
barrels per day during 1998 and 136.2 thousand gross barrels per day in 1997.
Volumes for 1999 and 1998 remain flat due to the rationalization of certain
assets and the slow return of production volumes behind the field plants in 1999
resulting principally from the aforementioned producer behavior, offset by
volumes received through an alliance with an industry partner. In 2000, natural
gas processing volumes will be lower as a result of the aforementioned asset
sales. The lower volumes in 1999 and 1998 as compared to 1997 reflect the
economic decisions made during the 1998 period to reduce production at its
straddle processing plants principally as a result of the relationship of
natural gas and NGL commodity prices. Fractionation volumes and natural gas
liquids marketing volumes averaged 210.9 and 537.1 thousand barrels per day,
respectively, during 1999 reflecting significant increases over previous
periods. The fractionation volumes increased principally as a result of the
addition of the Lake Charles fractionator to the asset portfolio. The increases
in trading and marketing
44
<PAGE>
volumes reflect a more active world-wide trading and marketing presence as well
as an increasing operational focus on this sector of the business.
OPERATING CASH FLOW
Cash flow from operating activities totaled $8.8 million during the
year ended December 31, 1999 compared to $250.8 million during 1998 and $278.6
million during 1997. Changes in operating cash flow primarily reflect an
increase in inventory and an increase in non-cash earnings resulting from risk
management activities. Changes in other working capital accounts, which include
prepayments, other current assets and accrued liabilities, reflect expenditures
or recognition of liabilities for insurance costs, certain deposits, salaries,
taxes other than on income, certain deferred revenue accounts and other similar
items. Fluctuations in these accounts, period-to-period, reflect changes in the
timing of payments or recognition of liabilities and are not directly impacted
by seasonal factors. The 1997 period benefited from an advance payment for
future gas deliveries.
CAPITAL EXPENDITURES, COMMITMENTS AND DIVIDEND REQUIREMENTS
CAPITAL EXPENDITURES AND INVESTING ACTIVITIES. During the year ended
December 31,1999, the Company invested a net $318.7 million principally on power
generation assets, including a power generation partnership, and additional
expenditures related to maintenance capital improvements at existing facilities
and capital investment associated with technology infrastructure improvements.
During the year, the company sold certain Liquid's segment assets, an investment
held by the Energy Convergence segment and a 50 percent interest in a power
generation partnership, netting proceeds of $80.6 million.
During the year ended December 31, 1998, the Company invested a net
$295.1 million, principally on discrete asset acquisitions primarily focused in
the Energy Convergence segment. Expenditures were also made to complete
construction of the Lake Charles, Louisiana fractionator, for capital
improvements at existing facilities and on capital additions at the Company's
headquarters. During the period, the Company divested itself of its investment
in Ozark, as well as certain non-strategic Midstream Segment assets. Aggregate
net proceeds from these dispositions approximated $84 million.
During the year ended December 31, 1997, the Company spent a net $510.7
million, principally on the Destec Acquisition, the purchase of NCL's gas
marketing operations and on acquisitions of additional interests in gas
processing facilities, pipelines and other midstream assets. Expenditures were
also made on capital improvements at existing facilities and on capital
additions at the Company's headquarters. The Company invested $27.7 million in
its unconsolidated affiliates, principally for amounts committed to VESCO.
During the period, the Company divested itself of the Mont Belvieu I
fractionation facility pursuant to an agreement reached with the Federal Trade
Commission related to the Chevron Combination. Further, the Company sold its
49.9 percent interest in NCL, as part of the restructuring of that investment
and consummated the sales of certain non-strategic assets acquired in the Destec
Acquisition. Aggregate net proceeds from these dispositions, plus proceeds from
other immaterial dispositions, approximated $453 million.
Dynegy Holdings acquired Destec on June 27, 1997, in a transaction
valued at $1.26 billion, or $21.65 per share of Destec common stock. Concurrent
with this acquisition, the Company sold Destec's international facilities and
operations to The AES Corporation for $439 million. In July and August 1997, the
Company sold Destec's interest in a partnership that owned a power generation
facility and certain oil, gas and lignite reserves, respectively, for aggregate
proceeds of $296 million. Proceeds from the sales of these non-strategic assets
were used to retire debt incurred in the acquisition.
DIVIDEND REQUIREMENTS AND STOCK REPURCHASES. Dynegy Inc. declares
quarterly dividends on its outstanding common stock at the discretion of its
Board of Directors. The holders of the Series A Preferred Stock were entitled to
receive dividends or distributions equal per share in amount and kind to any
dividend or distribution payable on shares of the Company's common stock, when
and as the same are declared by the Company's Board of Directors. During the
years ended December 31, 1999, 1998 and 1997, the Company paid approximately
$8.1 million, $8.0 million and $7.9 million in cash dividends and distributions,
respectively.
In May 1997, the Board of Directors approved a stock repurchase program
that allows Dynegy Inc. to repurchase, from time to time, up to 1.6 million
shares of common stock in open-market transactions. The timing and number of
shares ultimately repurchased will depend upon market conditions and
consideration of alternative investments. Pursuant to this program, the Company
acquired no shares in 1999 and 545,800 shares of its stock
45
<PAGE>
through open-market trades during the year ended December 31, 1998. Shares were
acquired in 1998 at a total cost of $6.9 million, or $12.65 per share on a
weighted average cost basis. For the year ended December 31, 1997, the Company
acquired 654,900 shares of its common stock in open-market transactions for an
aggregate cost of $10.5 million, or $16.04 per share on a weighted average cost
basis.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION
This Form 10-K 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
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 Holding competes;
- - Fluctuations in 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 Holdings' open
position in its energy marketing activities;
- - Operational and systems risks;
- - Environmental liabilities which are not covered by indemnity or insurance;
- - Software, hardware or third-party failures resulting from Year 2000 issues;
- - General economic and capital market conditions, including fluctuations in
interest rates; and
- - The impact of current and future laws and governmental regulations
(particularly environmental regulations) affecting the energy industry in
general, and Dynegy Holdings' operations in particular.
In addition, as it relates to the proposed Illinova combination, there can be no
assurance that:
- - We have correctly identified and assessed all of the factors affecting
Illinova's or Dynegy Inc.'s businesses;
- - The available information with respect to these factors on which we have
based our analysis is complete or correct;
- - Our analysis is correct; or
- - Our strategies, which are based in part on this analysis, will be
successful.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedule of the
Company are set forth at pages F-1 through F-36 inclusive, found at the end of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
46
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain of the information required by this Item 10 will be contained
in the definitive Proxy Statement of Dynegy Inc. for its 2000 Annual Meeting of
Stockholders (the "Proxy Statement") under the headings "Proposal 1 -- Election
of Directors" and "Executive Compensation -- Section 16(a) Beneficial Ownership
Reporting Compliance" and is incorporated herein by reference. The Dynegy Inc.
Proxy Statement will be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 1999. Reference is also made to the
information appearing in Part I of this Annual Report on Form 10-K under the
caption "Item 1A. Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation will be contained in
Dynegy Inc.'s Proxy Statement under the heading "Executive Compensation" and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding ownership of certain of Dynegy Inc.'s outstanding
securities will be contained in the Dynegy Inc. Proxy Statement under the
heading "Principal Stockholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding related party transactions will be contained in
the Dynegy Inc. Proxy Statement under the headings "Principal Stockholders",
"Proposal 1 -- Election of Directors" and "Executive Compensation --
Indebtedness of Management" and "-- Certain Relationships and Related
Transactions" and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 8-K
The following documents, which have been filed by Dynegy Inc. with the
Securities and Exchange Commission pursuant to the Securities and Exchange Act
of 1934, as amended, are by this reference incorporated in and made a part of
this statement:
a. Financial Statements -- Consolidated financial statements of the
Company and its subsidiaries are incorporated under Item 8. of this
Form 10-K.
b. Exhibits -- The following instruments and documents are included as
exhibits to this Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
2.1 - Agreement and Plan of Merger among Dynegy Inc., Illinova Corporation and
certain other parties named therein (15)
2.2 - Amendment to Agreement and Plan of Merger among Dynegy Inc., Illinova
Corporation and other parties named therein (18)
2.3 - Combination Agreement and Plan of Merger, dated May, 22, 1996, by and
between NGC
47
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
Corporation, Chevron U.S.A. Inc. and Midstream Combination Corp.(7)
2.4 - Amendment to Combination Agreement, dated as of August 29, 1996, by and
among NGC Corporation, Chevron U.S.A. Inc. and Midstream Combination
Corp.(5)
2.5 - Agreement and Plan of Merger by and among Destec Energy, Inc., The Dow
Chemical Company, NGC Corporation and NGC Acquisition Corporation II dated
as of February 17, 1997. (8)
2.6 - Asset Purchase Agreement by and between NGC Corporation and The AES
Corporation dated as of February 17, 1997. (8)
2.7 - First Amendment to Asset Purchase Agreement by and between NGC Corporation
and The AES Corporation dated June 29, 1997.(9)
2.8 - Asset Purchase Agreement between Destec Energy, Inc. and ECT EOCENE
Enterprises, Inc. dated July 1, 1997.(9)
+3.1 - Restated Certificate of Incorporation of the Company.
+3.2 - Amended and Restated Bylaws of Dynegy Holdings Inc.
+3.3 - Statement of Resolution Establishing Series of Series A Convertible
Preferred Stock filed with the Illinois Secretary of State on February 1,
2000. (19)
4.1 - Warrant exercisable for 6,228 shares of Common Stock of NGC Corporation
registered in the name of J. Otis Winters. (2)
4.2 - Indenture, dated as of December 11, 1995, by and between NGC Corporation,
the Subsidiary Guarantors named therein and the First National Bank of
Chicago, as Trustee.(4)
4.3 - First Supplemental Indenture, dated as of August 31, 1996, by and among NGC
Corporation, the Subsidiary Guarantors named therein, and The First
National Bank of Chicago, as Trustee, supplementing and amending the
Indenture dated as of December 11, 1995. (5)
4.4 - Second Supplemental Indenture, dated as of October 11, 1996, by and among
NGC Corporation, the Subsidiary Guarantors named therein, and The First
National Bank of Chicago, as Trustee, supplementing and amending the
Indenture dated as of December 11, 1995. (5)
4.5 - Amended and Restated Credit Agreement dated as of June 27, 1997, among NGC
Corporation and The First National Bank of Chicago, Individually and as
Agent, The Chase Manhattan Bank and NationsBank of Texas, N.A.,
Individually and as Co-Agents, and the Lenders Named therein.(9)
4.6 - First Amendment to Amended and Restated Credit Agreement, dated November
24, 1997, among NGC Corporation and The First National Bank of Chicago,
Individually and as Agent, The Chase Manhattan Bank and NationsBank of
Texas, N.A., Individually and as Co-Agents for the Lenders named therein.
(13)
4.7 - Second Amendment to Amended and Restated Credit Agreement, dated as of
February 20,
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
1998, among NGC Corporation and The First National Bank of Chicago,
Individually and as Agent, The Chase Manhattan Bank and NationsBank of
Texas, N.A., Individually and as Co-Agents for the Lenders named therein. (13)
4.8 - Subordinated Debenture Indenture between NGC Corporation and The First
National Bank of Chicago, as Debenture Trustee, dated as of May 28, 1997.
(10)
4.9 - Amended and Restated Declaration of Trust among NGC Corporation, Wilmington
Trust Company, as Property Trustee and Delaware Trustee, and the
Administrative Trustees named therein, dated as of May 28, 1997. (10)
4.10 - Series A Capital Securities Guarantee executed by NGC Corporation and The
First National Bank of Chicago, as Guarantee Trustee, dated as of May 28,
1997. (10)
4.11 - Common Securities Guarantee of NGC Corporation dated as of May 28, 1997.
(10)
4.12 - Registration Rights Agreement, dated as of May 28, 1997, among NGC
Corporation, NGC Corporation Capital Trust I, Lehman Brothers, Salomon
Brothers Inc. and Smith Barney Inc. (10)
4.13 - Second Supplemental Indenture among NGC Corporation, Destec Energy, Inc.
and The First National Bank of Chicago, as Trustee, dated as of June 30,
1997, supplementing and amending the Indenture dated as of June 30, 1997.
(11)
4.14 - Fourth Supplemental Indenture among NGC Corporation, Destec Energy, Inc.
and The First National Bank of Chicago, as Trustee, dated as of June 30,
1997, supplementing and amending the Indenture dated as of December 11,
1995. (11)
4.15 - Fifth Supplemental Indenture among NGC Corporation, The Subsidiary
Guarantors named therein and The First National Bank of Chicago, as
Trustee, dated as of September 30, 1997, supplementing and amending the
Indenture dated as of December 11, 1995. (13)
4.16 - Sixth Supplemental Indenture among NGC Corporation, The Subsidiary
Guarantors named therein and The First National Bank of Chicago, as
Trustee, dated as of January 5, 1998, supplementing and amending the
Indenture dated as of December 11, 1995. (13)
4.17 - Seventh Supplemental Indenture among NGC Corporation, The Subsidiary
Guarantors named therein and The First National Bank of Chicago, as
Trustee, dated as of February 20, 1998, supplementing and amending the
Indenture dated as of December 11, 1995. (13)
4.18 - Indenture, dated as of September 26, 1996, restated as of March 23, 1998,
to include amendments in the First through Fifth Supplemental Indentures,
between NGC Corporation and The First National Bank of Chicago, as Trustee.
(13)
4.19 - Credit Agreement dated as of May 27, 1998, among NGC Corporation and The
First National Bank of Chicago, Individually and as Administrative Agent,
The Chase Manhattan Bank, Individually and as Syndication agent and
NationsBank, N.A., Individually and as Documentation Agent and the Lenders
named therein. (12)
4.20 - 364-Day Revolving Credit Agreement dated as of May 27, 1998, among NGC
Corporation and The First National Bank of Chicago, Individually and as
Administrative Agent, The Chase Manhattan Bank, Individually and as
Syndication agent and NationsBank, N.A., Individually and as Documentation
Agent and the Lenders named therein. (12)
4.21 - First Amendment to 364-Day Revolving Credit dated as of May 5, 1999 among
Dynegy Inc.
49
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
and The First National Bank of Chicago, Individually and as
Administrative Agent, The Chase Manhattan Bank, Individually and as
Syndication Agent, and Citibank N.A., Individually and as Documentation
Agent and the Lenders Named therein. (17)
10.1 - Agreement of Sale and Purchase of Assets, dated as of May 5, 1991, as
amended on June 6, 1991 and August 30, 1991, by and between OXY USA Inc.
and Trident Energy, Inc. (1)
10.2 - Master Agreement on Gas Processing, dated as of May 5, 1991, by and between
OXY USA Inc. and Trident NGL, Inc.(1)
10.3 - Dynegy Inc. Amended and Restated 1991 Stock Option Plan. (16)
10.4 - Dynegy Inc. 1998 U.K. Stock Option Plan (16)
10.5 - Dynegy Inc. Amended and Restated Employee Equity Option Plan. (16)
10.6 - Dynegy Inc. 1999 Long Term Incentive Plan. (20)
10.7 - Dynegy 2000 Long Term Incentive Plan. (20)
10.8 - Employment Agreement dated April 2, 1996 by and between NGC Corporation and
Stephen A. Furbacher.(6)
10.9 - Employment Agreement, effective dated as of February 1, 2000, between
Charles L. Watson and Dynegy Inc. (20)
10.10 - Employment Agreement, effective February 1, 2000, between Stephen W.
Bergstrom and Dynegy Inc. (20)
10.11 - Employment Agreement, effective February 1, 2000, between John U. Clarke
and Dynegy Inc. (20)
10.12 - Employment Agreement, effective February 1, 2000, between Kenneth E.
Randolph and Dynegy Inc. (20)
10.13 - Employment Agreement, dated as of July 1, 1997, by and between Dan Ryser
and NGC Corporation.
10.14 - Lease Agreement entered into on June 12, 1996 between Metropolitan Life
Insurance Company and Metropolitan Tower Realty Company, Inc., as landlord,
and NGC Corporation, as tenant. (6)
10.15 - First Amendment to Lease Agreement entered into on June 12, 1996 between
Metropolitan Life Insurance Company and Metropolitan Tower Realty Company,
Inc., as landlord, and NGC Corporation, as tenant. (6)
10.16 - Contribution and Assumption Agreement, dated as of August 31, 1996, among
Chevron U.S.A. Inc., Chevron Pipe Line Company, Chevron Chemical Company
and Midstream Combination Corp. (5)
10.17 - Scope of Business Agreement, dated May 22, 1996 between Chevron Corporation
and NGC Corporation. (6)
10.18 - Master Alliance Agreement, dated as of September 1, 1996, among Chevron
U.S.A. Inc., Chevron Chemical Company, Chevron Pipe Line Company, and other
Chevron U.S.A. Inc.
50
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
affiliates, NGC Corporation, Natural Gas Clearinghouse, Warren Petroleum
Company, Limited Partnership, Electric Clearinghouse, Inc. and other NGC
Corporation affiliates. (5)
* 10.19 - Natural Gas Purchase and Sale Agreement, dated as of August 30, 1996, among
Chevron U.S.A. Inc. and Natural Gas Clearinghouse. (5)
* 10.20 - Master Natural Gas Processing Agreement, dated as of September 1, 1996,
among Chevron U.S.A. Inc. and Warren Petroleum Company, Limited
Partnership. (5)
* 10.21 - Master Natural Gas Liquids Purchase Agreement, dated as of September 1,
1996, among Warren Petroleum Company, Limited Partnership and Chevron
U.S.A. Inc. (5)
* 10.22 - Gas Supply and Service Agreement, dated as of September 1, 1996, among
Chevron Products Company and Natural Gas Clearinghouse. (5)
10.23 - Master Power Service Agreement, dated as of May 16, 1996, among Electric
Clearinghouse, Inc. and Chevron U.S.A. Production Company. (6)
10.24 - Master Power Service Agreement, dated as of May 16, 1996, among Electric
Clearinghouse, Inc. and Chevron Chemical Company. (6)
10.25 - Master Power Service Agreement, dated as of May 16, 1996, among Electric
Clearinghouse, Inc. and Chevron Products Company. (6)
* 10.26 - Feedstock Sale and Refinery Product Purchase Agreements, dated as of
September 1, 1996, among Chevron Products Company and Warren Petroleum
Company, Limited Partnership.(5)
* 10.27 - Refinery Product Sale Agreement (Hawaii), dated as of September 1, 1996,
among Warren Petroleum Company, Limited Partnership and Chevron Products
Company. (5)
* 10.28 - Feedstock Sale and Refinery Product Master Services Agreement, dated as of
September 1, 1996, among Chevron Products Company and Warren Petroleum
Company, Limited Partnership. (5)
* 10.29 - CCC Product Sale and Purchase Agreement dated as of September 1, 1996,
among Warren Petroleum Company, Limited Partnership and Chevron Chemical
Company. (5)
* 10.30 - CCC/WPC Services Agreement, dated as of September 1, 1996, among Chevron
Chemical Company and Warren Petroleum Company, Limited Partnership. (5)
* 10.31 - Operating Agreement, dated as of September 1, 1996, among Warren Petroleum
Company, Limited Partnership and Chevron Pipe Line Company. (5)
10.32 - Galena Park Services Agreement, dated as of September 1, 1996, among
Chevron Products Company and Midstream Combination Corp. (5)
* 10.33 - Venice Complex Operating Agreement, dated as of September 1, 1996, among
Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership. (6)
* 10.34 - Time Charter, dated as of August 31, 1996, by and between Midstream Barge
Company, L.L.C. and Warren Petroleum Company, Limited Partnership. (5)
* 10.35 - Limited Liability Company Agreement of Midstream Barge Company, L.L.C.,
dated as of August 31, 1996, by and between Chevron U.S.A. Inc. and Warren
Petroleum Company, Limited Partnership. (5)
51
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
10.36 - Subscription Agreement between Energy Convergence Holding Company and
Chevron U.S.A. Inc (15)
10.37 - Stock Purchase Agreement between Energy Convergence Holding Company and
British Gas Atlantic Holdings BV and related Guaranty by British Gas
Overseas Holdings Limited (15)
10.38 - Voting Agreement between Illinova and BG Holdings, Inc. (15)
10.39 - Voting Agreement between Illinova and NOVA Gas Services (U.S.) Inc. (15)
10.40 - Voting Agreement between Illinova and Chevron U.S.A. Inc. (15)
10.41 - Shareholder Agreement of Energy Convergence Holding Company with Chevron
U.S.A. Inc. (15)
10.42 - Registration Rights Agreement (NOVA Gas Services (U.S.) Inc. and British
Gas Atlantic Holdings BV) (15)
10.43 - First Amended and Restated Limited Partnership Agreement of the West Texas
LPG Pipeline Limited Partnership (17)
10.44 - Amended and Restated Operating Agreement of the West Texas LPG Pipeline
Limited Partnership and Chevron Pipeline Company (17)
10.45 - Dynegy Inc. Severance Pay Plan. (16)
10.46 - Registration Rights Agreement (Chevron U.S.A. Inc) (15)
10.47 - First Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17)
10.48 - Amendment No. 1 to the First Supplemental Plan to the Dynegy Inc. Severance
Pay Plan (17)
10.49 - Second Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17)
10.50 - Third Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17)
10.51 - Fourth Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17)
10.52 - Dynegy Midstream Services, Limited Partnership Supplemental Severance Pay
Plan (17)
10.53 - NGC Profit Sharing/401(k) Savings Plan. (16)
10.54 - First Amendment to NGC Profit Sharing/401(k) Savings Plan. (16)
10.55 - Second Amendment to NGC Profit Sharing/401(k) Savings Plan. (16)
10.56 - Third Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan. (17)
10.57 - Fourth Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan. (20)
10.58 - Fifth Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan. (20)
10.59 - Sixth Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan. (20)
10.60 - Seventh Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan. (20)
52
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
+12.1 - Computation of Ratio of Earnings to Fixed Charges.
+22.1 - Subsidiaries of the Company.
+23.1 - Consent of Arthur Andersen LLP.
+27.1 - Financial Data Schedule.
</TABLE>
- ------------------
+ Filed herewith
* Exhibit omits certain information which the Company has filed separately
with the Commission pursuant to a confidential treatment request pursuant
to Rule 406 promulgated under the Securities Act of 1933, as amended.
(1) Incorporated by reference to exhibits to the Registration Statement of
Trident NGL, Inc. on Form S-1, Registration No. 33-43871.
(2) Incorporated by reference to exhibits to the Quarterly Report on Form
10-Q for the Quarterly Period Ended September 30, 1993 of Trident NGL
Holding, Inc., Commission File No. 1-11156.
(3) Incorporated by reference to exhibits to the Registration Statement of
Trident NGL Holding, Inc. on Form S-4, Registration No. 33-88907.
(4) Incorporated by reference to the Registration Statement of NGC
Corporation on Form S-3, Registration No. 33-97368.
(5) Incorporated by reference to exhibits to the Quarterly Report on Form
10-Q for the Quarterly Period Ended September 30, 1996, of NGC
Corporation, Commission File No. 1-11156.
(6) Incorporated by reference to exhibits to the Registration Statement of
Midstream Combination Corp. on Form S-4, Registration No. 333-09419.
(7) Incorporated by reference to exhibits to the Current Report on Form 8-K
of NGC Corporation, dated May 22, 1996, Commission File No. 1-11156.
(8) Incorporated by reference to exhibits to the Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1996, of NGC Corporation,
Commission File No. 1-11156.
(9) Incorporated by reference to exhibits to the Current Report on Form 8-K
of NGC Corporation, Commission File No. 1-11156, dated June 27, 1997.
(10) Incorporated by reference to exhibits to the Quarterly Report on Form
10-Q for the Quarterly Period Ended June 30, 1997, Commission File No.
1-11156.
(11) Incorporated by reference to exhibits to the Quarterly Report on Form
10-Q for the Quarterly Period Ended September 30, 1997, Commission File
No. 1-11156
(12) Incorporated by reference to exhibits to the Quarterly Report on Form
10-Q for the Quarterly Period Ended June 30, 1998, Commission File No.
1-11156.
(13) Incorporated by reference to exhibits to the Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1997, of NGC Corporation,
Commission File No. 1-11156.
(14) Incorporated by reference to exhibits to the Quarterly Report on Form
10-Q for the Quarterly Period ended September 30, 1998, Commission File
No. 1-11156.
(15) Incorporated by reference to exhibits to the Current Report on Form 8-K
of Dynegy Inc. dated June 14, 1999.
(16) Incorporated by reference to exhibits to the Annual Report in Form 10-K
of the Fiscal Year Ended December 31, 1998, of Dynegy Inc., Commission
File No. 1-11156.
(17) Incorporated by reference to exhibits to the Quarterly Report on Form
10-Q for the Quarterly Period Ended June 30, 1999, Commission File No.
1-11156.
(18) Incorporated by reference to exhibits to Amendment No. 1 to the
Registration Statement on Form S-4 of Energy Convergence Holding Company
filed with the Securities and Exchange Commission on September 7, 1999.
(19) Incorporated by reference to exhibits to Registration Statement on Form
8-A of Dynegy Inc.
53
<PAGE>
(20) Incorporated by reference to exhibits to the Annual Report on Form 10-K
for the Fiscal year Ended December 31, 1999 of Dynegy Inc.
(b) Reports on Form 8-K of Dynegy Holdings Inc..
None.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dynegy Holdings Inc.
Date: February 24, 2000 By: /s/ Stephen W. Bergstrom
-----------------------------------
Stephen W. Bergstrom, President
and Chief Operating Officer and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: February 24, 2000 By: /s/ Stephen W. Bergstrom
-----------------------------------
Stephen W. Bergstrom, President
and Chief Operating Officer and
Director
Date: February 24, 2000 By: /s/ John U. Clarke
----------------------------------
John U. Clarke, Executive Vice
President, Chief Financial Officer
(Principal Financial Officer) and
Director
Date: February 24, 2000 By: /s/ Bradley P. Farnsworth
-----------------------------------
Bradley P. Farnsworth, Senior Vice
President and Controller (Principal
Accounting Officer)
Date: February 24, 2000 By: /s/ Kenneth E. Randolph
-----------------------------------
Kenneth E Randolph, Senior Vice
President, General Counsel and
Secretary and Director
55
<PAGE>
DYNEGY HOLDINGS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
<S> <C>
Report of Independent Public Accountants........................................................ F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998.................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997........................................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997........................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997....................................... F-6
Notes to Consolidated Financial Statements...................................................... F-7
FINANCIAL STATEMENT SCHEDULE
Condensed Financial Statements of the Registrant................................................ F-36
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Dynegy Holdings Inc.:
We have audited the accompanying consolidated balance sheets of
Dynegy Holdings Inc., formerly Dynegy Inc., (a Delaware corporation and
wholly-owned subsidiary of Dynegy, Inc.) and subsidiaries, as of December 31,
1999 and 1998, and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Dynegy Holdings Inc.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The information included in Schedule I is
presented for the purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our
audits of the basic financial statements and, in our opinion, is fairly stated
in all material respects in relation to the basic financial statements taken as
a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 28, 2000
F-2
<PAGE>
DYNEGY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
--------------- ----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 45,230 $ 28,367
Accounts receivable, net 1,992,450 1,563,558
Accounts receivable, affiliates 48,966 60,180
Inventories 271,884 149,901
Assets from risk-management activities 379,833 219,105
Prepayments and other assets 66,717 96,130
---------------- ----------------
2,805,080 2,117,241
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT 2,575,100 2,446,878
Less: accumulated depreciation (557,219) (514,771)
---------------- ----------------
2,017,881 1,932,107
---------------- ----------------
OTHER ASSETS
Investments in unconsolidated affiliates 627,335 502,613
Assets from risk-management activities 452,913 135,100
Other assets 621,962 577,176
---------------- ----------------
$ 6,525,171 $ 5,264,237
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,667,199 $ 1,370,902
Accounts payable, affiliates 161,500 113,827
Accrued liabilities and other 184,013 155,227
Liabilities from risk-management activities 334,080 251,213
Notes payable and current portion of long-term debt 191,731 135,154
---------------- ----------------
2,538,523 2,026,323
LONG-TERM DEBT 1,299,333 953,001
OTHER LIABILITIES
Non-Recourse Debt 34,593 93,889
Liabilities from risk-management activities 321,252 40,747
Deferred income taxes 335,190 317,537
Other long-term liabilities 486,798 504,677
---------------- ----------------
5,015,689 3,936,174
---------------- ----------------
COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST 200,000 200,000
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERS' EQUITY
Preferred stock, $.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 and 1998,
respectively 75,418 75,418
Common stock, $.01 par value, 400,000,000 shares authorized;
157,499,001 shares issued at December 31, 1999 and 153,298,220
shares issued at December 31, 1998 1,575 1,533
Additional paid-in capital 973,000 935,183
Retained earnings 277,074 133,340
Less: treasury stock, at cost: 1,200,700 shares at December 31, 1999
and 1,200,700 shares at December 31, 1998 (17,585) (17,411)
---------------- ----------------
1,309,482 1,128,063
---------------- ----------------
$ 6,525,171 $ 5,264,237
================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
DYNEGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Revenues $ 15,429,976 $ 14,257,997 $ 13,378,380
Cost of sales 14,886,101 13,829,310 12,993,086
-------------- ---------- --------------
Operating margin 543,875 428,687 385,294
Depreciation and amortization 129,458 113,202 104,391
Impairment, abandonment and other charges --- 9,644 275,000
General and administrative expenses 200,717 185,708 149,344
-------------- -------------- --------------
Operating income (loss) 213,700 120,133 (143,441)
Equity in earnings of unconsolidated affiliates 79,854 91,038 58,959
Other income 73,287 46,821 28,113
Interest expense (78,164) (74,992) (63,455)
Other expenses (45,519) (7,677) (20,230)
Minority interest in income of a subsidiary (16,632) (16,632) (9,841)
-------------- -------------- --------------
Income (loss) before income taxes 226,526 158,691 (149,895)
Income tax provision (benefit) 74,677 50,338 (62,210)
-------------- -------------- --------------
Net income (loss) from continuing operations before 151,849 108,353 (87,685)
cumulative effect of accounting change
Cumulative effect of change in accounting
principle (net of income tax benefit of $7,913) --- --- (14,800)
-------------- -------------- --------------
NET INCOME (LOSS) $ 151,849 $ 108,353 $ (102,485)
============== ============== ==============
NET INCOME PER SHARE:
Net income (loss) from continuing operations $ 151,849 $ 108,353 $ (87,685)
Cumulative effect of change in accounting
principle (net of income tax benefit of $7,913) --- --- (14,800)
Less: preferred stock dividends (391) (391) (391)
-------------- -------------- --------------
Net income (loss) applicable to common stockholders $ 151,458 $ 107,962 $ (102,876)
============== ============== ==============
Basic earnings (loss) per share $ 0.98 $ 0.71 $ (0.68)
=============== ============== ==============
Diluted earnings per share $ 0.91 $ 0.66 $ n/a
=============== ============== ==============
Basic shares outstanding 154,198 151,619 150,653
============== ============== ==============
Diluted shares outstanding 166,975 164,605 167,009
============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
DYNEGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
----------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ 151,849 $ 108,353 $ (102,485)
Items not affecting cash flows from operating activities:
Depreciation, amortization, impairment and abandonment 108,325 102,577 378,916
Equity in earnings of affiliates, net of cash distributions (13,754) (6,477) (4,073)
Risk management activities (115,138) (7,422) (8,757)
Deferred income taxes 63,167 52,308 (86,424)
Amortization of bond premium --- (2,572) (6,768)
Other, including gains on sale of assets (33,972) (22,540) 1,249
Change in assets and liabilities resulting from operating activities:
Accounts receivable (463,479) 51,046 (35,845)
Inventories (106,201) (17,380) 86,077
Prepayments and other assets 53,761 (30,605) (20,686)
Accounts payable 348,077 44,113 (22,601)
Accrued liabilities 37,001 (27,699) 14,064
Other, net (20,797) 7,078 85,922
------------ ----------- -----------
Net cash provided by operating activities 8,839 250,780 278,589
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (364,559) (298,738) (220,003)
Investment in unconsolidated affiliates (83,963) (78,096) (27,708)
Business acquisitions, net of cash acquired --- (2,644) (715,589)
Proceeds from asset sales 80,594 45,044 452,565
Other, net 49,264 39,352 ---
----------- ----------- -----------
Net cash used in investing activities (318,664) (295,082) (510,735)
----------- -------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 397,488 212,259 2,218,500
Repayments of long-term borrowings (43,849) (493,277) (2,198,275)
Net cash flow from commercial paper and money market lines of credit (42,161) 350,758 ---
Proceeds from sale of capital stock, options and warrants 21,855 3,863 5,147
Issuance of company obligated preferred securities of a
subsidiary trust, net --- --- 198,043
Treasury stock acquisitions (174) (6,905) (10,506)
Dividends and other distributions, net (8,115) (7,988) (7,925)
Other, net 1,644 (9,088) ---
----------- ----------- -----------
Net cash provided by financing activities 326,688 49,622 204,984
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 16,863 5,320 (27,162)
Cash and cash equivalents, beginning of year 28,367 23,047 50,209
----------- ----------- -----------
Cash and cash equivalents, end of year $ 45,230 $ 28,367 $ 23,047
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
DYNEGY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
SERIES A PREFERRED COMMON STOCK ADDITIONAL TREASURY STOCK
------------------------- -------------------- PAID-IN RETAINED -------------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
------------- ----------- ----------- --------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996 7,815 $ 75,418 149,847 $ 1,498 $ 896,432 $ 143,385 --- $ ---
Net loss --- --- --- --- --- (102,485) --- ---
Options exercised --- --- 1,541 15 11,577 --- --- ---
Dividends and other
Distributions --- --- --- --- --- (7,925) --- ---
401(k) plan and profit
sharing stock issuances --- --- 385 5 7,401 ---
Options granted --- --- --- --- 4,044 --- --- ---
Treasury stock acquisitions --- --- --- --- --- --- (655) (10,506)
Other --- --- 24 --- 266 --- --- ---
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31,
1997 7,815 75,418 151,797 1,518 919,720 32,975 (655) (10,506)
Net income --- --- --- --- --- 108,353 --- ---
Options exercised --- --- 1,032 10 3,808 --- --- ---
Dividends and other
Distributions --- --- --- --- --- (7,988) --- ---
401(k) plan and profit
sharing stock issuances --- --- 457 5 6,822 --- --- ---
Options granted --- --- --- --- 4,675 --- --- ---
Treasury stock acquisitions --- --- --- --- --- --- (546) (6,905)
Other --- --- 12 --- 158 --- --- ---
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31,
1998 7,815 75,418 153,298 1,533 935,183 133,340 (1,201) (17,411)
Net income --- --- --- --- --- 151,849 --- ---
Options exercised --- --- 3,523 35 21,992 --- --- ---
Dividends and other
Distributions --- --- --- --- --- (8,115) --- ---
401(k) plan and profit
sharing stock issuances --- --- 670 7 9,869 --- --- ---
Options granted --- --- --- --- 6,028 --- --- ---
Treasury stock acquisitions --- --- --- --- --- --- (174)
Other --- --- 8 --- (72) --- --- ---
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31,
1999 7,815 $ 75,418 157,499 $ 1,575 $ 973,000 $ 277,074 (1,201) $ (17,585)
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
DYNEGY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ACCOUNTING POLICIES
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.
The Company is a holding company that conducts substantially all of its
business through its subsidiaries. From inception of operations in 1984 until
1990, Natural Gas Clearinghouse ("Clearinghouse") limited its activities
primarily to natural gas marketing. Starting in 1990, Clearinghouse expanded its
core business operations through acquisitions and strategic alliances resulting
in the formation of a midstream energy asset business and establishing energy
marketing operations in both Canada and the United Kingdom. The Company
initiated electric power marketing operations in February 1994. Effective March
1, 1995, Clearinghouse and Trident NGL Holding, Inc. ("Holding"), a fully
integrated natural gas liquids company, merged ("Trident Combination") and the
combined entity was renamed NGC Corporation ("NGC"). On August 31, 1996, NGC
completed a strategic combination with Chevron U.S.A. Inc. and certain Chevron
affiliates (collectively "Chevron") whereby substantially all of Chevron's
midstream assets merged with NGC ("Chevron Combination"). Effective July 1,
1997, NGC acquired Destec Energy, Inc. ("Destec Acquisition"), a leading
independent power producer. During 1998, the Company changed its name to Dynegy
Inc. 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, old Dynegy, which was
renamed Dynegy Holdings Inc., became a wholly-owned subsidiary of a new holding
company, now referred to as 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. Both Dynegy Inc.
and Dynegy Holdings Inc. are subject to the reporting requirements of the 1934
Securities Act. The financial and operational data of Dynegy Holdings Inc.
contained herein is the same financial and operational data of Dynegy Inc. for
all periods presented.
The accounting policies of Dynegy conform to generally accepted
accounting principles. The more significant of such accounting policies are
described below. The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
develop estimates and make assumptions that affect reported financial position
and results of operations and that impact the nature and extent of disclosure,
if any, of contingent assets and liabilities. Actual results could differ from
those estimates.
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries after elimination of intercompany accounts and transactions.
Investments in affiliates in which the Company has a significant ownership
interest, generally 20 percent to 50 percent, are accounted for by the equity
method. Other investments are carried at cost. Certain reclassifications have
been made to prior-period amounts to conform with current-period financial
statement classifications.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents consist of all
demand deposits and funds invested in short-term investments with original
maturities of three months or less. At December 31, 1999, approximately $7
million of cash and cash equivalents was restricted.
CONCENTRATION OF CREDIT RISK. Dynegy provides multiple energy commodity
solutions principally to customers in the electric and gas distribution
industries and to entities engaged in industrial and petrochemical businesses.
These industry concentrations have the potential to impact the Company's overall
exposure to credit risk, either positively or negatively, in that the customer
base may be similarly affected by changes in economic, industry or other
conditions. Receivables are generally not collateralized; however, Dynegy
believes the credit risk posed by industry concentration is offset by the
diversification and creditworthiness of the Company's customer base.
F-7
<PAGE>
INVENTORIES. Inventories consisting primarily of natural gas in storage
of $165.1 million and $78.2 million, natural gas liquids of $66.2 million and
$23.4 million, and crude oil of $10.7 million and $25.2 million at December 31,
1999 and 1998, respectively, are valued at the lower of weighted average cost or
at market. Materials and supplies inventory of $29.9 million and $23.1 million
at December 31, 1999 and 1998, respectively, is carried at the lower of cost or
market using the specific-identification method.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment consisting
principally of gas gathering, processing, fractionation, terminaling and storage
facilities, natural gas transmission lines, pipelines, power generating
facilities and supporting infrastructure is recorded at cost. Expenditures for
major replacements and renewals are capitalized while expenditures for
maintenance, repairs and minor renewals to maintain facilities in operating
condition are expensed. Depreciation is provided using the straight-line method
over the estimated economic service lives of the assets, ranging from three to
30 years. Composite depreciation rates are applied to functional groups of
property having similar economic characteristics. Gains and losses are not
recognized for retirements of property, plant and equipment subject to composite
depreciation rates ("composite rate") until the asset group subject to the
composite rate is retired. The Company reviews the carrying value of its
long-lived assets in accordance with provisions of Financial Accounting Standard
No. 121, "Accounting for the Impairment of Long-Lived Assets."
ENVIRONMENTAL COSTS AND OTHER CONTINGENCIES. Environmental costs
relating to current operations are expensed or capitalized, as appropriate,
depending on whether such costs provide future economic benefit. Liabilities are
recorded when environmental assessment indicates that remedial efforts are
probable and the costs can be reasonably estimated. Measurement of liabilities
is based on currently enacted laws and regulations, existing technology and
site-specific costs. Such liabilities may be recognized on a discounted basis if
the amount and timing of anticipated expenditures for a site are fixed or
reliably determinable; otherwise, such liabilities are recognized on an
undiscounted basis. Environmental liabilities in connection with assets that are
sold or closed are realized upon such sale or closure, to the extent they are
probable, can be estimated and have not previously been reserved. In assessing
environmental liabilities, no offset is made for potential insurance recoveries.
Recognition of any joint and several liability is based upon the Company's best
estimate of its final pro rata share of such liability.
Liabilities for other contingencies are recognized upon identification
of an exposure, which when fully analyzed indicates that it is both probable
that an asset has been impaired or that a liability has been incurred and that
such loss amount can be reasonably estimated. Costs to remedy such contingencies
or other exposures are charged to a reserve, if one exists, or otherwise to
current operations.
GOODWILL AND OTHER INTANGIBLE ASSETS. Intangible assets, principally
goodwill, are generally amortized by the straight-line method over an estimated
useful life of up to 30 years. At December 31, 1999 and 1998, unamortized
goodwill was classified as an other long-term asset aggregating $364.7 million
and $392.3 million, respectively.
REVENUE RECOGNITION. Revenues for product sales and gas processing and
marketing services are recognized when title passes to the customer or when the
service is performed. Fractionation and transportation revenues are recognized
based on volumes received in accordance with contractual terms. Revenues derived
from power generation are recognized upon output, product delivery or
satisfaction of specific targets, all as specified by contractual terms. Fees
derived from engineering and construction contracts and development and other
activities received from joint ventures in which Dynegy holds an equity interest
are deferred to the extent of Dynegy's ownership interest and amortized on a
straight-line basis over appropriate periods, which vary according to the nature
of the service provided and the ventures' operations.
Substantially all of the operations of the Company's world-wide gas
marketing, power marketing, and crude marketing operations are accounted for
under a mark-to-market accounting methodology. Under mark-to-market accounting,
fixed-price forwards, swaps, options, futures and other financial instruments
with third parties are reflected at fair market value, net of reserves, with
resulting unrealized gains and losses recorded as assets and liabilities from
risk management activities in the consolidated balance sheets. The accrual
method of accounting is used for accounting for NGL marketing activities.
F-8
<PAGE>
The Company routinely enters into financial instrument contracts to
hedge purchase and sale commitments, fuel requirements and inventories in its
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
manage these exposures. Financial instruments that are utilized in the Company's
trading operations are considered to be trading and accounted for accordingly.
Gains and losses from hedging transactions are recognized in income and are
reflected as cash flows from operating activities in the periods for which the
underlying commodity, interest rate or foreign currency transaction was hedged.
If the necessary correlation to the commodity, interest rate or foreign currency
transaction being hedged ceases to exist, the Company ceases to account for the
contract as a hedge and recognizes a gain or loss to the extent the contract
results have not been offset by the effects of price or interest rate changes on
the hedged item since inception of the hedge. If the underlying being hedged by
the commodity, interest rate or foreign currency transaction is disposed of or
otherwise terminated, the gain or loss associated with such contract(s) is no
longer deferred and is recognized in the period the underlying is eliminated.
INCOME TAXES. The Company files a consolidated United States federal
income tax return and, for financial reporting purposes, provides income taxes
for the difference in the tax and financial reporting bases of its assets and
liabilities in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes."
EARNINGS PER SHARE. Basic earnings per share represents the amount of
earnings for the period available to each share of common stock outstanding
during the period. Diluted earnings per share represents the amount of earnings
for the period available to each share of common stock outstanding during the
period plus each share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
period. Differences between basic and diluted shares outstanding in all periods
are attributed to the Series A Preferred Stock, options outstanding and a
warrant.
FOREIGN CURRENCY TRANSLATIONS. For subsidiaries whose functional
currency is other than U.S. dollar, assets and liabilities are translated at
year-end rates of exchange and revenues and expenses are translated at average
exchange rates prevailing during the year. For each of the three years in the
period ended December 31, 1999, items of other comprehensive income were
immaterial to the Company's operating results.
NOTE 2 -- RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
Dynegy's operating results are impacted by commodity price, interest
rate and foreign exchange rate fluctuations. 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. However, as a result of marketplace liquidity and other factors,
the Company may, at times, be unable to hedge certain identified market risks.
Further, the Company may, at times, have a bias in the market, within
established guidelines, resulting from the management of its commodity
portfolios. Dynegy also monitors its exposure to fluctuations in interest rates
and foreign currency exchange rates and may execute swaps, forward-exchange
contracts or other financial instruments to manage these exposures.
The Energy Convergence segment includes the integrated component
businesses: 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 of the 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 favorably or unfavorably. The net open
F-9
<PAGE>
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 natural gas and electricity prices.
Operating margins associated with the Midstream segment's natural gas
gathering, processing and fractionation activities are very sensitive to changes
in natural gas liquids prices, principally as a result of contractual terms
under which natural gas is processed and products are sold by these businesses
and the availability of inlet volumes. In addition, certain of the Midstream
Businesses' 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. Commodity price fluctuations also
impact the operating margins derived from the Midstream segment's natural gas
liquids and crude oil marketing businesses.
Dynegy's commercial groups manage, on a portfolio basis, the market
risks inherent in their transactions, subject to parameters established by the
Dynegy Inc.'s 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. Risk measurement is also practiced against the Dynegy
portfolios with stress testing and scenario analysis.
ACCOUNTING FOR RISK MANAGEMENT ACTIVITIES. Effective with the adoption
of Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy Trading
and Risk Management Activities" ("EITF 98-10") on January 1, 1999, substantially
all of the operations of the Company's world-wide gas marketing, power
marketing, and crude marketing operations are accounted for under a
mark-to-market accounting methodology. Under mark-to-market accounting,
fixed-price forwards, swaps, options, futures and other financial instruments
with third parties are reflected at fair market value, net of reserves, with
resulting unrealized gains and losses recorded as assets and liabilities from
risk management activities in the consolidated balance sheets. These assets and
liabilities are affected by the actual timing of settlements related to these
contracts and current-period changes resulting primarily from newly originated
transactions and the impact of price movements. These changes are recognized as
revenues in the consolidated statements of operations in the period in which the
change occurs. Market prices used to value outstanding financial instruments
reflect management's consideration of, among other things, closing exchange and
over-the-counter quotations, the time value of money and volatility factors
underlying the commitments. 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 elongated pricing curves, which are used to value the
commitments that reside outside of the liquid market quotations. Realized cash
returns on these commitments may vary, either positively or negatively, from the
results estimated through application of forecasted pricing curves generated
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 certain elongated pricing curves.
These market prices are adjusted to reflect the potential impact of liquidating
Dynegy's position in an orderly manner over a reasonable period of time under
present market conditions.
QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES. 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 in order to set the overall corporate risk
tolerance, to determine risk targets, and to set position limits. The use of
this
F-10
<PAGE>
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 analysis 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.
CREDIT AND MARKET RESERVES. In connection with the market valuation of
its energy commodity contracts, the Company maintains certain reserves for a
number of risks associated with these future commitments. Among others, these
include reserves for credit risks based on the financial condition of
counterparties, reserves for product location ("basis") differentials and
consideration of the time value of money for long-term contracts. Counterparties
in its trading portfolio consist principally of financial institutions, major
energy companies and local distribution companies. The creditworthiness of these
counterparties may impact overall exposure to credit risk, either positively or
negatively; however, with regard to its counterparties Dynegy maintains credit
policies that management believes minimize overall credit risk. Determination of
the credit quality of its counterparties is based upon a number of factors,
including credit ratings, financial condition, project economics and collateral
requirements. When applicable, the Company employs standardized agreements that
allow for the netting of positive and negative exposures associated with a
single counterparty. Based on these policies, its current exposures and its
credit reserves, Dynegy does not anticipate a material adverse effect on its
financial position or results of operations as a result of counterparty
nonperformance. The following table displays the mark-to-market portfolio value
of Dynegy's energy commodity risk management transactions at December 31, 1999:
<TABLE>
<CAPTION>
BELOW
INVESTMENT INVESTMENT
GRADE CREDIT GRADE CREDIT
QUALITY QUALITY TOTAL
-----------------------------------------------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Utilities and power generators $ 112,383 $ (2,033) $ 110,350
Financial institutions 37,173 --- 37,173
Oil and gas producers 21,594 5,142 26,736
Industrial companies 2,167 5,849 8,016
Other 419 16 435
--------- --------- ---------
Value of fixed-price transactions before reserves $ 173,736 $ 8,974 182,710
========= ========= (38,177)
Reserves ---------
$ 144,533
Net fixed-price value =========
</TABLE>
At December 31, 1999, the term of Dynegy's risk management portfolio
extends to 2007 and the average remaining life of an individual transaction was
3 months.
COMPREHENSIVE CHANGE IN ACCOUNTING PRINCIPLES. Effective January 1,
1999, the Company adopted the provisions of EITF 98-10 pursuant to the
implementation requirements stated therein. The effect of adoption of the
provisions of EITF 98-10 was to alter the Company's comprehensive method of
accounting for energy-related contracts, as defined in that statement, resulting
in changes to the accounting for certain commodity activity principally in the
gas marketing operations in the United Kingdom and power and crude oil trading
operations world-wide. The cumulative effect of this change in accounting
principle was not material to the estimated annual 1999 results of operations.
The pro forma effect on prior periods of the adoption of the provisions of EITF
98-10 was not determinable.
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"). Provisions
F-11
<PAGE>
in Statement No. 133 will affect the accounting and disclosure of contractual
arrangements and operations of the Company. The Financial Accounting
Standards Board recently deferred implementation of the provisions of
Statement No. 133 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The following disclosure of the
estimated fair value of financial instruments is made in accordance with the
requirements of SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments." The estimated fair-value amounts have been determined by the
Company using available market information and selected valuation methodologies.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. The use of different market assumptions or valuation
methodologies could have a material effect on the estimated fair-value amounts.
The carrying values of current assets and liabilities approximate fair
values due to the short-term maturities of these instruments. The carrying
amounts and fair values of the Company's other financial instruments were:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1999 1998
------------------------------ -----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ---------------- ------------- ---------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial Paper $ 456,482 $ 456,482 $ 518,643 $ 518,643
Money market lines of credit 40,000 40,000 20,000 20,000
Canadian Credit Agreement 40,000 40,000 40,000 40,000
6.75% Senior Notes, due 2005 150,000 145,000 150,000 152,000
7.625% Senior Debentures, due 2026 175,000 163,000 175,000 179,000
7.125% Senior Debentures, due 2018 175,000 157,000 175,000 172,000
6.875% Senior Notes, due 2002 200,000 197,000 --- ---
7.45% Senior Notes, due 2006 200,000 196,000 --- ---
Non-Recourse Debt 89,175 89,175 103,126 103,126
Preferred Securities of a Subsidiary Trust 200,000 191,000 200,000 204,000
Interest rate risk-management contracts --- (2,761) --- (8,474)
Foreign currency risk-management contracts 2,685 2,545 4,418 5,491
Commodity risk-management contracts 97,185 94,406 (29,222) (30,977)
</TABLE>
The financial statement carrying amounts of the Company's credit
agreement, variable-rate debt and power generation notes were assumed to
approximate fair value. The fair values of the Company's other long-term
indebtedness, including the Preferred Securities of a Subsidiary Trust , were
based on quoted market prices by financial institutions that actively trade
these debt securities. The fair value of the Company's cost basis investments
was not estimated as the investments were considered immaterial. The fair value
of interest rate, foreign currency and commodity risk-management contracts were
based upon the estimated consideration that would be received to terminate those
contracts in a gain position and the estimated cost that would be incurred to
terminate those contracts in a loss position. The interest rate swap contracts,
foreign currency forward exchange contracts and commodity swap and option
agreements extend for periods of up to 11, 3 and 8 years, respectively. The
absolute notional contract amounts associated with the commodity
risk-management, interest rate and forward exchange contracts, respectively,
were as follows:
F-12
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1999 1998 1997
---------------- ---------------- -----------------
<S> <C> <C> <C>
Natural Gas (Trillion Cubic Feet) 5.702 4.179 2.558
Electricity (Million Megawatt Hours) 42.949 1.835 2.244
Natural Gas Liquids (Million Barrels) 19.902 6.397 4.355
Crude Oil (Million Barrels) 35.554 18.800 14.920
Interest Rate Swaps (in thousands of US Dollars) $ 36,524 $ 69,332 $ 180,000
Fixed Interest Rate Paid on Swaps (Percent) 8.210 8.067 6.603
U.K. Pound Sterling (in thousands of US Dollars) $ 85,812 $ 69,254 $ 74,638
Average U.K. Pound Sterling Contract Rate (in US Dollars) $ 1.6191 $ 1.6143 $ 1.5948
Canadian Dollar (in thousands of US Dollars) $ 288,898 $ 268,307 $ 37,041
Average Canadian Dollar Contract Rate (in US Dollars) $ 0.6775 $ 0.6710 $ 0.7240
</TABLE>
Cash-flow requirements for these commodity risk-management, interest
rate and foreign exchange contracts were estimated based upon market prices in
effect at December 31, 1999. Cash-flow requirements were as follows:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 BEYOND
-------------- ------------- -------------- -------------- -------------- ---------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Future estimated net inflows
(outflows) based on year
end market prices/rates $ 33,893 $ 13,735 $ 13,958 $ 13,711 $ 12,447 $ 6,446
=========== =========== =========== ============ ============ ============
</TABLE>
NOTE 3 -- CASH FLOW INFORMATION
Detail of supplemental disclosures of cash flow and non-cash investing
and financing information was:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997
------------------ ---------------- -----------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Interest paid (net of amount capitalized) $ 80,393 $ 83,376 $ 60,323
============= ========= =========
Taxes paid (net of refunds) $ 1,927 $ (8,000) $ 8,043
============= ========= =========
Detail of businesses acquired:
Current assets and other $ --- $ 5,144 $ 547,505
Fair value of non-current assets --- 101,630 503,789
Liabilities assumed, including deferred taxes --- (104,130) (268,092)
Capital stock issued and options exercised --- --- ---
Cash balance acquired --- --- (67,613)
------------- --------- ---------
Cash paid, net of cash acquired $ --- $ 2,644 $ 715,589
============= ========= =========
</TABLE>
F-13
<PAGE>
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT
Investments in property, plant and equipment consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1999 1998
-------------------- -------------------
($ IN THOUSANDS)
<S> <C> <C>
Energy Convergence Segment and Other $ 638,181 $ 407,945
Midstream Segment:
Natural gas processing 1,210,713 1,241,658
Fractionation 176,961 185,198
Liquids marketing 141,397 139,328
Natural gas gathering and transmission 353,966 429,631
Crude oil 53,882 43,118
------------- -------------
2,575,100 2,446,878
Less: accumulated depreciation (557,219) (514,771)
------------- -------------
$ 2,017,881 $ 1,932,107
============= =============
</TABLE>
Interest capitalized related to costs of projects in process of
development totaled $16.7 million, $7.6 million and $8.8 million for each of the
three years in the period ended December 31, 1999.
In the second quarter of 1998 and the fourth quarter of 1999, the
Company purchased the outstanding partnership interests held by third parties in
three separate limited partnerships, each formed for the purpose of owning and
operating a discrete power generation facility in the State of California. As of
the effective date of each transaction, the Company began consolidating the
aggregate assets, liabilities and results of operations associated with these
projects. In January 2000, these partnership interests were sold as a condition
precedent to the Illinova acquisition.
NOTE 5 -- UNCONSOLIDATED AFFILIATES
The equity method of accounting is used for investments in certain
partnerships and for investments in companies in which Dynegy has a voting
interest between 20 percent and 50 percent. Such investments include:
ACCORD ENERGY LIMITED ("ACCORD"). Accord was formed in 1994 to market
energy resources in the United Kingdom and Europe. Prior to 1997, Dynegy owned a
49 percent limited partner interest in Accord. In January 1997, such interest
was converted to a 25 percent participating preferred stock interest.
NICOR ENERGY, L.L.C. ("NICOR"). NICOR is a retail energy alliance
formed with NICOR Energy Management Services, a subsidiary of NICOR Inc., to
provide energy services to industrial, commercial and residential customers in
the Midwest. Dynegy owns a 50 percent interest in this Delaware limited
liability company. At December 31, 1999, the unamortized excess of the Company's
investment in this joint venture over its equity in the underlying net assets of
the affiliate approximated $2 million.
SOUTHSTAR ENERGY SERVICES L.L.C. ("SOUTHSTAR"). SouthStar is a retail
energy alliance formed with AGL Resources Inc. and Piedmont Natural Gas Company.
The company offers a combination of unregulated energy products and services to
industrial, commercial and residential customers in the Southeast. Dynegy owns a
20 percent interest in this Delaware limited liability company.
POWER GENERATION PARTNERSHIPS. Dynegy owns interests in fourteen joint
ventures, each formed to build, own and operate cogeneration facilities. The
Company's interests in these joint ventures range from eight to 50 percent. Each
partnership interest is accounted for under the equity method. Construction of
the cogeneration facilities owned by each of the joint ventures was project
financed and the obligations of the joint ventures are non-recourse to the
Company. At
F-14
<PAGE>
December 31, 1999, the unamortized excess of the Company's investment in
these joint ventures over its equity in the underlying net assets of the
affiliates approximated $155 million. This amount is being amortized on the
straight-line method over the estimated economic service lives of the
underlying assets. In January 2000, seven of these partnership interests were
sold as a condition precedent to the Illinova acquisition.
QUICKTRADE L.L.C. ("QUICKTRADE"). Quicktrade, a Delaware limited
liability company, was formed to develop, implement and operate an electronic
trading system. Dynegy owned a 65.5 percent interest in this LLC during 1998 and
the LLC was consolidated in the accompanying financial statements during 1998.
During 1996 and 1997, the Company owned varying interests in Quicktrade and
accounted for its interest under the equity method for the majority of those
years. Effective January 1, 1999, the Company sold its interest in Quicktrade.
GULF COAST FRACTIONATORS ("GCF"). GCF is a Texas limited partnership
that owns and operates a natural gas liquids fractionation facility located in
Mont Belvieu, Texas. Dynegy owns a 38.75 percent limited partner interest in
GCF. At December 31, 1999, the unamortized excess of the Company's investment in
GCF over its equity in the underlying net assets of the affiliate approximated
$15 million. This amount is being amortized on the straight-line method over the
estimated economic service life of the GCF assets.
WEST TEXAS LPG PIPELINE PARTNERSHIP ("WEST TEXAS PARTNERSHIP"). The
West Texas Partnership, a Texas limited partnership, holds all of the assets
comprising the West Texas Pipeline, an interstate natural gas liquids pipeline.
Dynegy acquired a 49 percent interest in the West Texas Partnership as part of
the Chevron Combination. Effective May 1, 1999, Dynegy's interest in the West
Texas Partnership was reduced to 39.2 percent, upon admittance of Mid-America
Pipeline Company ("MAPL"), a subsidiary of Williams into the partnership. At
December 31, 1999, the unamortized excess of the Company's investment in the
West Texas Partnership over its equity in the underlying net assets of the
affiliate approximated $25 million. This amount is being amortized on the
straight-line method over the estimated economic service life of the underlying
assets.
VENICE ENERGY SERVICES COMPANY, L.L.C. ("VESCO"). VESCO is a Delaware
limited liability company that owns and operates a natural gas processing,
extraction, fractionation and storage facility located in Plaquemines Parish,
Louisiana. Dynegy is operator of the facility and originally acquired a 37
percent interest in Venice Gas Processing Company ("Venice") effective November
1, 1996. In 1997, Venice reorganized as a limited liability company and, in
September 1997, the VESCO members agreed to expand ownership in VESCO to include
an affiliate of Shell Midstream Enterprises, a subsidiary of Shell Oil Company
("Shell"), effective September 1, 1997, in exchange for Shell's commitment of
certain offshore reserves to VESCO. The transaction reduced Dynegy's interest in
VESCO from 37 percent to approximately 32 percent, as of the effective date.
Koch Energy Services Company ("Koch") acquired an interest in VESCO during 1998
pursuant to its contribution of a cryogenic gas-processing unit to VESCO. The
transaction reduced Dynegy's interest in VESCO to approximately 23 percent.
Dynegy operates the facility and has commercial responsibility for product
distribution and sales. At December 31, 1999, the unamortized excess of the
Company's investment in this joint venture over its equity in the underlying net
assets of the affiliate approximated $10 million.
WASKOM GAS PROCESSING COMPANY ("WASKOM"). Waskom is a Texas general
partnership that owns and operates a natural gas processing, extraction and
fractionation facility located in Henderson County, Texas. Dynegy owns a 33.33
percent in Waskom. Dynegy operates the facility and has commercial
responsibility for product distribution and sales.
BARGE CO. Barge Co., a Delaware limited liability company, owns
pressurized LPG barges used in transporting LPGs principally in the Gulf of
Mexico. Dynegy owns a 25 percent interest in Barge Co. At December 31, 1999, the
unamortized excess of the Company's investment in Barge Co. over its equity in
the underlying net assets of the affiliate approximated $9 million. This amount
is being amortized on the straight-line method over the estimated economic
service lives of the underlying assets.
Aggregate equity method investment at December 31, 1999, 1998 and 1997,
was $618.6 million, $498.5 million and $466.4 million, respectively. Dividends
received on these investments during each of the three years in
F-15
<PAGE>
the period ended December 31, 1999, totaled $66.1 million, $85 million and
$54.9 million, respectively. Summarized aggregate financial information for
these investments and Dynegy's equity share thereof was:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------- -----------------------------
TOTAL EQUITY SHARE TOTAL EQUITY SHARE TOTAL EQUITY SHARE
------------- ---------------- -------------- ---------------- -------------- --------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Current assets (1)(2) $ 317,731 $ 110,094 $ 324,462 $ 131,169 $ 283,787 $ 112,895
Non-current assets (1)(2) 1,973,318 786,636 1,983,731 803,333 1,830,106 736,667
Current liabilities (1)(2) 296,009 98,179 292,481 124,016 202,754 86,476
Non-current liabilities(1)(2) 1,050,740 420,842 1,160,639 485,673 1,249,874 521,691
Operating margin (1)(2)(3) 366,675 135,352 397,391 159,288 209,877 86,154
Net income (1)(2)(3) 134,836 55,376 157,054 68,706 83,601 33,799
</TABLE>
1. The financial data for all periods presented is exclusive of amounts
attributable to the Company's investment in Accord as disclosure data was
unavailable for these periods. Dynegy's share of Accord earnings for each
of the three years in the period ended December 31, 1999, totaled $21.0
million, $21.8 million and $25.9 million, respectively.
2. The financial data for all periods presented is exclusive of amounts
attributable to the Company's investment in NCL (see Note 11) as such
information was not comparable period-to-period, as a result of the NCL
restructuring. Dynegy sold its interest in NCL effective April 1, 1997.
Dynegy's share of NCL's loss for the three months ended March 31, 1997,
totaled $892,000.
3. Equity earnings derived from investments acquired in the Destec
acquisition accrue to Dynegy commencing July 1, 1997.
The cost method of accounting is generally used to account for
investment in partnerships or companies in which Dynegy has a voting interest of
less than 20 percent. At December 31, 1999, the Company had five cost basis
investments: Indeck North American Power Fund, L.P., Indeck North American Power
Partners, L.P. (collectively "Indeck"), Altra Energy Technologies, Inc.,
Canadian Midstream Services, Ltd. and Compton Petroleum Corporation. Indeck is
engaged in the acquisition and operation of electric power generating
facilities. Altra provides business-to-business e-commerce products and services
to the energy market. Canadian Midstream is a private company that acquires
businesses engaged in gas processing and associated gas gathering systems.
Compton Petroleum is located in Canada and is an independent exploration and
production company. Dynegy's aggregate investment in these entities totaled $8.7
million and $4.1 million at December 31, 1999 and 1998, respectively, and Dynegy
received an aggregate $0.4 million, $0.5 million and $0.5 million of dividends
from Indeck during each of the three years in the period ended December 31,
1999. The Indeck investments totalling $4.2 million were sold in February 2000.
NOTE 6 -- DEBT
Debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1999 1998
-------------------- -------------------
($ IN THOUSANDS)
<S> <C> <C>
Commercial Paper $ 456,482 $ 518,643
Money market lines of credit 40,000 20,000
Canadian Credit Agreement 40,000 40,000
6.75% Senior Notes, due 2005 150,000 150,000
7.625% Senior Debentures, due 2026 175,000 175,000
7.125% Senior Debentures, due 2018 175,000 175,000
6.875% Senior Notes, due 2002 200,000 ---
7.45% Senior Notes, due 2006 200,000 ---
Non-Recourse Debt 89,175 103,126
Other, non-interest bearing --- 275
------------ ------------
1,525,657 1,182,044
Less: long-term debt due within one year 191,731 135,154
------------ ------------
$ 1,333,926 $ 1,046,890
============ ============
</TABLE>
F-16
<PAGE>
COMMERCIAL PAPER AND MONEY MARKET LINES OF CREDIT. The Company utilizes
commercial paper proceeds and borrowings under uncommitted money market lines of
credit for general corporate purposes, including short-term working capital
requirements. The commercial paper program is for amounts up to $800 million, as
supported by existing credit agreements. Weighted average interest rates on
amounts outstanding under the commercial paper program were 6.2 percent, and 6.1
percent at December 31, 1999 and 1998, respectively. Amounts outstanding under
the uncommitted money market lines of credit bore interest at an average rate of
6.1 percent at December 31, 1999. The Company classifies outstanding commercial
paper and borrowings under money market lines of credit as long-term debt to the
extent of availability under existing committed credit facilities, as
management's intent is to maintain these obligations for longer than one year,
subject to an overall reduction in corporate debt levels.
CREDIT AGREEMENTS. In May 1998, Dynegy refinanced its then existing
revolving credit agreement with a $400 million, five-year revolving credit
agreement that matures May 27, 2003, and a $400 million, 364-day revolving
credit agreement originally maturing in May 1999 and renewed through May 2000
(the "Credit Agreements"). The Credit Agreements provide funding for letters of
credit, working capital, capital expenditures and general corporate purposes,
including commercial paper support. The Credit Agreements also require payment
of various costs and fees, including an annual fee of 0.10 percent of the
committed amount under the Credit Agreements. Generally, borrowings under the
Credit Agreements bear interest at a Eurodollar rate plus a margin that is
determined based on the Company's unsecured senior debt rating. At December 31,
1999, such margin was 0.30 percent. Financial covenants in the Credit Agreements
are limited to a debt to capitalization test. Letters of credit under the Credit
Agreements aggregated approximately $36.1 million at December 31, 1999.
After consideration of the outstanding commercial paper, the unused
borrowing capacity under the Credit Agreements approximated $267.4 million at
December 31, 1999.
CANADIAN CREDIT AGREEMENT. In November 1998, an indirect wholly owned
Canadian subsidiary of the Company entered into a $60 million, two-year
revolving credit facility, which matures on November 24, 2000 (the "Canadian
Credit Agreement"). This agreement provides funding for general corporate
purposes. The Canadian Credit Agreement requires payment of various costs and
fees, including an annual fee of 0.25 percent of the committed amount under the
agreement. Generally, borrowings under this agreement bear interest at a
Eurodollar rate plus a margin that is determined based on the Company's
unsecured senior debt rating. At December 31, 1999, such margin was 0.40
percent. The Canadian subsidiary's obligations under the Canadian Credit
Agreement are fully and unconditionally guaranteed by the Company. At December
31, 1999, outstanding amounts under the facility totaled $40.0 million, at an
average interest rate of 6.66 percent.
6.875% SENIOR NOTES DUE 2002. In July 1999, Dynegy sold $200 million of
6.875 percent Senior Notes due July 15, 2002. These notes were issued at a price
of 99.890 percent, which after deducting underwriting discounts and commissions,
resulted in net proceeds to the Company of approximately $199 million. The net
proceeds from the sale were used to repay a portion of the outstanding
indebtedness under the commercial paper program. Interest on these notes is
payable semiannually on January 15 and July 15 of each year. The notes are
redeemable only at maturity. At issuance, the notes were priced based on the
then existing yield for 3-year U.S. Treasury Notes plus a spread based
principally on the Company's credit rating.
6.75% SENIOR NOTES DUE 2005. In December 1995, Dynegy sold $150 million
of 6.75 percent Senior Notes due December 15, 2005. These notes were issued at a
price of 99.984 percent, which, after deducting underwriting discounts and
commissions, resulted in net proceeds to the Company of approximately $149
million. Proceeds from the sale were used to repay a portion of the outstanding
indebtedness under the then existing revolving credit agreement. Interest on the
notes is payable semiannually on June 15 and December 15 of each year. At
issuance, the notes were priced based on the then existing yield for 10-year
U.S. Treasury Notes ("10-Year Base Treasury Rate") plus a spread based
principally on the Company's credit rating. Prior to issuing these notes, the
Company entered into two separate transactions with two separate financial
institutions, the effect of which was to lock in the 10-Year Base Treasury Rate
at approximately 6.2 percent on the full $150 million face value of this
issuance.
F-17
<PAGE>
7.45% SENIOR NOTES DUE 2006. In July 1999, Dynegy sold $200 million of
7.45 percent Senior Notes due July 15, 2006. These notes were issued at a price
of 99.929 percent, which after deducting underwriting discounts and commissions,
resulted in net proceeds to the Company of approximately $198.6 million. The net
proceeds from the sale were used to repay a portion of outstanding indebtedness
under the commercial paper program. Interest on the notes is payable
semiannually on January 15 and July 15 of each year. These notes are redeemable,
at the option of the Company, in whole or in part from time to time, at a
formula based redemption price as defined in the associated indenture. At
issuance, these notes were priced based on a benchmark Treasury of similar terms
plus a spread principally based on the Company's credit rating.
7.625% SENIOR DEBENTURES DUE 2026. In October 1996, Dynegy sold $175
million of 7.625 percent Senior Debentures due October 15, 2026. These
debentures were issued at a price of 99.522 percent, which, after deducting
underwriting discounts and commissions, resulted in net proceeds to the Company
of approximately $173 million. The net proceeds were used to repay a portion of
the outstanding indebtedness under the then existing revolving credit agreement.
Interest on the debentures is payable semiannually on April 15 and October 15 of
each year. These debentures are redeemable, at the option of the Company, in
whole or in part from time to time, at a formula based redemption price as
defined in the associated indenture. At issuance, the debentures were priced
based on the then existing yield for 30-year U.S. Treasury Notes ("30-Year Base
Treasury Rate") plus a spread based principally on the Company's credit rating.
Prior to issuing the debentures, the Company entered into a transaction, the
effect of which was to lock in the 30-Year Base Treasury Rate at approximately
7.0 percent on $150 million of the $175 million face value of this issuance.
7.125% SENIOR DEBENTURES DUE 2018. In May 1998, Dynegy sold $175
million of 7.125 percent Senior Debentures due May 15, 2018. These debentures
were issued at a price of 99.654 percent, which, after deducting underwriting
discounts and commissions, resulted in net proceeds of approximately $173
million. Proceeds from the sale were used to retire short-term debt incurred in
connection with the redemption of certain high-cost debt acquired in an
acquisition. Interest on the debentures is payable semiannually on May 15 and
November 15 of each year. These debentures are redeemable, at the option of the
Company, in whole or in part from time to time, at a formula based redemption
price as defined in the associated indenture. At issuance, the debentures were
priced based on the then existing 30-Year Base Treasury Rate plus a spread based
principally on the Company's credit rating. Prior to issuing these debentures,
the Company entered into a series of transactions, the effect of which was to
lock in the 30-Year Base Treasury Rate at approximately 6.0 percent on $148
million of the $175 million face value of this issuance.
NON-RECOURSE DEBT. Included in the December 31, 1999 consolidated
long-term debt balance was $89.2 million representing the aggregate principal
balance outstanding under three separate notes. These notes are project specific
debt with recourse only to three identified power generation projects. Each of
the three notes represents a fifteen-year term loan obligation payable in
semi-annual installments of principal plus accrued interest. Each note bears
interest at a base rate plus a margin, as defined in each agreement. Interest
rate swaps effectively fix the base rate on $36.5 million of the indebtedness at
a weighted average rate of 8.210 percent. These notes are related to the
Qualifying Facilities that were sold in February 2000.
Aggregate maturities of all long-term indebtedness are: 2000 - $191.7
million; 2001 - $2.6 million; 2002 - $202.6 million; 2003 - $402.1 million;
2004 - $3.0 million; 2005 and beyond - $723.7 million.
F-18
<PAGE>
NOTE 7 -- INCOME TAXES
For year ended December 31, 1999, the Company's federal income tax
return will be filed under Dynegy, Inc. (old Dynegy). The Company is
subject to U.S. federal, foreign and state income taxes on its operations.
Components of income tax expense (benefit) were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense (benefit):
Domestic $ --- $ (608) $ 13,230
Foreign 11,510 (1,362) 3,071
Deferred tax expense (benefit):
Domestic 56,558 44,565 (81,306)
Foreign 6,609 7,743 2,795
-------- -------- --------
Income tax provision (benefit) $ 74,677 $ 50,338 $(62,210)
======== ======== ========
</TABLE>
Components of income (loss) before income taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic $ 165,606 $ 133,867 $(180,127)
Foreign 60,920 24,824 30,232
--------- --------- ---------
$ 226,526 $ 158,691 $(149,895)
========= ========= =========
</TABLE>
Deferred income taxes are provided for the temporary differences
between the tax basis of Dynegy's assets and liabilities and their reported
financial statement amounts. Significant components of deferred tax liabilities
and assets were:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1999 1998
-------------------- -------------------
($ IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Loss carryforward $149,321 $132,445
Tax credits 11,893 10,798
-------- --------
161,214 143,243
Valuation allowance --- ---
-------- --------
161,214 143,243
-------- --------
Deferred tax liabilities:
Items associated with capitalized costs 496,404 460,780
-------- --------
Net deferred tax liability $335,190 $317,537
======== ========
</TABLE>
Realization of the aggregate deferred tax asset is dependent on the
Company's ability to generate taxable earnings in the future. There was no
valuation allowance established at December 31, 1999 or 1998, as management
believes the aggregate deferred asset is more likely than not to be fully
realized in the future.
Income tax provision (benefit) for the years ended December 31, 1999,
1998 and 1997, was equivalent to effective rates of 33 percent, 32 percent and
(41) percent, respectively. Differences between taxes computed at the U.S.
federal statutory rate and the Company's reported income tax provision (benefit)
were:
F-19
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
----------------- ------------------- -----------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Expected tax at U.S. statutory rate $ 79,284 $ 55,444 $(52,463)
State taxes 3,285 2,564 (3,676)
Foreign tax benefit (3,203) (2,300) (5,415)
Basis differentials and other (4,689) (5,370) (656)
-------- -------- --------
Income tax provision (benefit) $ 74,677 $ 50,338 $(62,210)
======== ======== ========
</TABLE>
At December 31, 1999, the Company had approximately $404 million of
regular tax net operating loss carryforwards. The net operating loss
carryforwards expire from 2006 through 2019. Certain provisions of the Internal
Revenue Code place an annual limitation on the Company's ability to utilize tax
carryforwards existing as of the date of a 1995 business acquisition. Management
believes such carryforwards will be fully realized prior to expiration.
NOTE 8 -- COMPANY OBLIGATED PREFERRED SECURITIES OF A SUBSIDIARY TRUST
In May 1997, NGC Corporation Capital Trust I ("Trust") issued, in a
private transaction, $200 million aggregate liquidation amount of 8.316%
Subordinated Capital Income Securities ("Trust Securities") representing
preferred undivided beneficial interests in the assets of the Trust. The Trust
invested the proceeds from the issuance of the Trust Securities in an equivalent
amount of 8.316% Subordinated Debentures ("Subordinated Debentures") of the
Company. The sole assets of the Trust are the Subordinated Debentures. The Trust
Securities are subject to mandatory redemption in whole but not in part on June
1, 2027, upon payment of the Subordinated Debentures at maturity, or in whole
but not in part at any time, contemporaneously with the optional prepayment of
the Subordinated Debentures, as allowed by the associated indenture. The
Subordinated Debentures are redeemable, at the option of the Company, in whole
at any time or in part from time to time, at formula-based redemption prices, as
defined in the indenture. The Subordinated Debentures represent unsecured
obligations of the Company and rank subordinate and junior in right of payment
to all Senior Indebtedness to the extent and in the manner set forth in the
associated indenture. The Company has irrevocably and unconditionally
guaranteed, on a subordinated basis, payment for the benefit of the holders of
the Trust Securities the obligations of the Trust to the extent the Trust has
funds legally available for distribution to the holders of the Trust Securities,
as described in the indenture ("Guarantee"). Distributions on the Trust
Securities are payable each June 1 and December 1, coinciding with the interest
payment due dates on the Subordinated Debentures, and are classified in the
accompanying Statement of Operations as "minority interest in income of a
subsidiary." The periodic distributions accruing at an annual rate of 8.316
percent of the aggregate liquidation amount are recorded as minority interest in
income of a subsidiary in the Company's consolidated statement of operations. So
long as no Debenture Event of Default, as defined, has occurred and continues,
the Company has the right to defer the payment of interest on the Subordinated
Debentures for any Extension Period elected by the Company, which period cannot
extend beyond 10 consecutive semi-annual periods, end on a date other than an
Interest Payment Date or extend beyond the Stated Maturity Date. The Trust has
executed an exchange offer through which all of the outstanding Trust Securities
were exchanged by the holders thereof for registered securities having
substantially the same rights and obligations.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
LITIGATION. Through its acquisition of Destec Energy Inc., Dynegy
became a party to certain litigation with Pacific Gas and Electric Company
("PG&E") and with the Southern California Gas Company ("SOCAL"). These cases
represent pre-acquisition contingencies acquired by the Company and settlement
thereof did not have a material adverse effect on the Company's results of
operations or financial position. The following describes resolution of these
two cases.
F-20
<PAGE>
In April 1997, PG&E had filed a lawsuit in the Superior Court of the
State of California, City and County of San Francisco, against Destec Energy,
Inc., Destec Holdings, Inc. and Destec Operating Company (wholly-owned
subsidiaries of the Company now known respectively as Dynegy Power Corp.,
Dynegy Power Holdings, Inc. and Dynegy Operating Company) as well as against
San Joaquin CoGen Limited ("San Joaquin") and its general partners
(collectively the "Dynegy Defendants"). In the lawsuit, PG&E asserted claims
and alleged unspecified damages for fraud, negligent misrepresentation,
unfair business practices, breach of contract and breach of the implied
covenant of good faith and fair dealing. Subsequent to the acquisition of
Destec Energy Inc. by Dynegy, Dynegy and PG&E engaged in settlement
discussions, which resulted in the execution of a Termination and Settlement
Agreement between PG&E and the Dynegy Defendants on March 9, 1999 (the "PG&E
Settlement Agreement"). The PG&E Settlement Agreement provided for, upon the
receipt of CPUC approval, a dismissal with prejudice of PG&E's claims against
the Dynegy Defendants, a release by PG&E of all claims relative to FERC
matters and a termination of the San Joaquin power purchase agreement as of
December 31, 1999, whereupon the San Joaquin facility would continue to
operate as a merchant plant. Upon termination of the power purchase
agreement, Dynegy would repay project debt of approximately $26 million. By
Order dated October 7, 1999, the CPUC approved the PG&E Settlement Agreement.
The CPUC approval became final on November 8, 1999.
Pursuant to its lawsuit against Dynegy, PG&E had named
Libbey-Owens-Ford ("LOF"), San Joaquin's steam host, as an additional
defendant in the action in October 1997. It is alleged that San Joaquin was
liable to PG&E under the Gas Transportation Agreement or Power Purchase
Agreement due to LOF's failure to use sufficient quantities of steam as
required to retain its status as a qualifying facility under federal
standards. The Dynegy Defendants will seek to recover from LOF losses
resulting from the settlement with PG&E.
In March 1995, SOCAL had filed a lawsuit in the Superior Court of
the State of California for the County of Los Angeles, against Destec Energy,
Inc., Destec Holdings and Destec Gas Services, Inc. (now known respectively
as Dynegy Power Corp., Dynegy Power Holdings, Inc. and Dynegy Gas Services,
Inc.), wholly-owned direct and indirect subsidiaries of the Company
(collectively, the "Defendants"), as well as against Chalk Cliff Limited and
McKittrick Limited (collectively, the "Partnerships"). All general partners
of the Partnerships are also named defendants. The lawsuit alleged breach of
contract against the Partnerships and their respective general partners, and
interference and conspiracy to interfere with contracts against the
Defendants. The breach of contract claims arose out of the "transport-or-pay"
provisions of the gas transportation service agreements between the
Partnerships and SOCAL. SOCAL sought damages from the Partnerships for past
damages and anticipatory breach damages in an amount equal to approximately
$31 million. Subsequent to the acquisition of Destec Energy Inc. by Dynegy,
Dynegy and SOCAL engaged in settlement discussions, which resulted in the
execution of a Settlement Agreement between SOCAL and all defendants in the
pending litigation on August 25, 1999, (the "SOCAL Settlement Agreement").
The SOCAL Settlement Agreement was appproved by the CPUC and is final. The
Settlement Agreement provided for the dismissal of the pending litigation,
the termination of underlying gas transmission service contracts, and
Dynegy's payment of settlement consideration approximating $31 million. The
pending appeals were dismissed and the litigation and the associated
foreclosure proceedings have therefore come to an end.
On August 3, 1998, Modesto Irrigation District ("MID") filed a
lawsuit against PG&E and 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 its breach of contract
F-21
<PAGE>
claims against Destec and its tortious interference with contract claims
against PG&E. Motions to dismiss MID's state court claims are pending and
scheduled for hearing in first quarter 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.
On July 30, 1999, The Dow Chemical Company ("Dow") filed a lawsuit
in the United States District Court for the District of Delaware against
Dynegy Power Corporation ("DPC"), a wholly-owned subsidiary of the Company.
Dow sought contribution from DPC in connection with claims against Dow
asserted by The AES Corporation ("AES") in a lawsuit filed on November 30,
1998 in the United States District Court for the Southern District of Texas.
AES asserts various federal and Texas securities laws claims, and Texas
claims for fraud and civil conspiracy, arising out of AES' September 1997
purchase of stock of Destec Engineering, a subsidiary of DPC (at that time
Destec Power Corp). Specifically, AES alleges that Destec Power made certain
misrepresentations about the expected profits that Destec Engineering would
earn in connection with the construction of the Elsta power plant in The
Netherlands, and the anticipated completion date of the Elsta plant. AES
alleges that Dow is liable because it "controlled" or had the power to
control the management of Destec Power. AES's original complaint did not
assert any claims against Destec Power or any other Dynegy entity. Dow is
vigorously defending against AES' claims. In response to a motion to transfer
filed by Dow, the United States District Court for the Southern District of
Texas transferred the suit to the United States District Court for Delaware.
Following transfer of the litigation, AES added DPC as a defendant, asserting
claims similar to the claims asserted against Dow. Dow subsequently dismissed
the suit against DPC without prejudice. AES and DPC have reached a settlement
of AES's claims against DPC. The settlement is currently before the District
Court for approval. If approved by the District Court, the settlement will
result in the dismissal of AES's suit against DPC with prejudice. In the
opinion of management, the ultimate resolution of this lawsuit will not have
a material adverse effect on the Company's financial position.
COMPLAINT AGAINST ILLINOIS POWER COMPANY. On November 3, 1999, the U.S.
Environmental Protection Agency ("EPA") issued a Notice of Violation ("NOV")
against Illinois Power Company ("Illinois Power") and, with the Department of
Justice ("DOJ"), filed a Complaint against Illinois Power in the U.S.
District Court for the Southern District of Illinois, No. 99C833. Similar
notices and lawsuits have been filed against a number of other utilities.
Both the NOV and Complaint allege violations of the Clean Air Act and
regulations thereunder. More specifically, both allege, based on the same
events, that certain equipment repairs, replacements and maintenance
activities at Illinois Power's three Baldwin Station generating units
constituted "major modifications" under either or both the Prevention of
Significant Deterioration and the New Source Performance Standards
regulations. When non-exempt "major modifications" occur, the Clean Air Act
and related regulations generally require that generating facilities meet
more stringent emissions standards. The DOJ amended its complaint to assert
the claims found in the NOV. Illinois Power is filing responsive pleadings
in the first quarter 2000.
The regulations under the Clean Air Act provide certain exemptions
to the definition of "major modifications," particularly an exemption for
routine repair, replacement or maintenance. Dynegy Inc. has analyzed each of
the activities covered by the EPA's allegations and believes each activity
represents prudent practice regularly performed throughout the utility
industry as necessary to maintain the operational efficiency and safety of
equipment. As such, management believes that each of these activities is
covered by the exemption for routine repair, replacement and maintenance and
that the EPA is changing, or attempting to change through enforcement
actions, the intent and meaning of its regulations.
Dynegy Inc. also believes that, even if some of the activities in
question were found not to qualify for the routine exemption, there were no
increases either in annual emissions or in the maximum hourly emissions
achievable at any of the units caused by any of the activities. The
regulations provide an exemption for increased hours of operation or
production rate and for increases in emissions resulting from demand growth.
Although none of Illinois Power's other facilities are covered in
the Complaint and NOV, the EPA has officially requested information
concerning activities at Illinois Power's Vermilion, Wood River and Hennepin
Plants. It is possible that the EPA will eventually commence enforcement
actions against those plants as well.
F-22
<PAGE>
The EPA has the authority to seek penalties for the alleged
violations in question at the rate of up to $27,500 per day for each
violation. The EPA also will be seeking installation of "best available
control technology" ("BACT") (or equivalent) at the Baldwin Station and
possibly at the other three plants as well.
Management believes that the EPA's and DOJ's claims are without
merit, and that the ultimate resolution of this lawsuit will not have a
material adverse effect on Dynegy Inc.'s financial position or results of
operations. Information on the Illinois Claim is included herein as
resolution of this claim could impact discretionary cash flow available to
Dynegy.
The Company assumed liability for various claims and litigation in
connection with the Chevron Combination, the Trident Combination, the Destec
acquisition and in connection with the acquisition of certain gas processing
and gathering facilities from Mesa Operating Limited Partnership. The Company
believes, based on its review of these matters and consultation with outside
legal counsel, that the ultimate resolution of such items will not have a
material adverse effect on the Company's financial position or results of
operations. Further, the Company is subject to various legal proceedings and
claims, which arise in the normal course of business. 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.
COMMITMENTS. In conducting its operations, the Company routinely
enters into long-term commodity purchase and sale commitments, as well as
agreements that commit future cash flow to the lease or acquisition of assets
used in its businesses. These commitments are typically associated with
capital projects, reservation charges associated with firm transmission,
transportation and storage capacity, lease agreements for ship charters and
other distribution assets and leases for office space, equipment and other
similar items. The following describes the more significant commitments
outstanding at December 31, 1999.
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, a subsidiary of the Company has executed or is currently
negotiating purchase orders to acquire in excess of forty state-of-the-art
gas-fired turbines, representing a capital commitment of approximately $1.3
billion. Delivery of the manufactured turbines will occur 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.
The Company routinely enters into supply and market contracts for
the purchase and sale of electricity, some of which contain fixed capacity
payments. Obligations under these supply contracts, which are not already
fair valued on the balance sheet at December 31, 1999, totaled $212 million
on a discounted basis. Such obligations are generally payable on a ratable
basis, the term of which extends through 2011. In return for such fixed
capacity payments, Dynegy receives volumes of electricity at agreed prices,
which it then may re-market. Based on year-end estimates, the market value of
electricity available for sale under these contracts exceeds the cost of such
electricity, which amount includes the fixed capacity payments disclosed
herein.
In October 1999, the Company announced that it had achieved all of
the necessary approvals to begin construction on its Heard County Power
Project, a 500-megawatt natural gas-fired, simple-cycle peaking facility
located in Franklin in Heard County, Georgia. A Dynegy subsidiary will design
and construct the generating facility, as agent for a third party, and Dynegy
is obligated to guarantee approximately 90 percent of the actual cost of the
project during the construction phase. It is anticipated that Dynegy will
subsequently lease the completed facility from that third party for an
initial term of five years. Under certain circumstances, the Company
maintains an option to purchase the facility from the third party and it may
participate in the outright sale of the asset.
F-23
<PAGE>
A wholly owned subsidiary of the Company leases a power-generating
asset under an agreement that is classified as an operating lease. This
agreement has aggregate future minimum lease payments of approximately $7.1
million at December 31, 1999.
In 1997, Dynegy received cash from a gas purchaser as an advance
payment for future natural gas deliveries over a ten-year period ("Advance
Agreement"). As a condition of the Advance Agreement, Dynegy entered into a
natural gas swap with a third party under which Dynegy became a fixed-price
payor on identical volumes to those to be delivered under the Advance
Agreement at prices based on then current market rates. The cash payment was
classified as an advance on the balance sheet and is ratably reduced as gas
is delivered to the purchaser under the terms of the Advance Agreement. In
addition, the purchaser pays a monthly fee to Dynegy associated with
delivered volumes. The Advance Agreement contains certain non-performance
penalties that impact both parties and as a condition precedent, Dynegy
purchased a surety bond in support of its obligations under the Advance
Agreement.
Minimum commitments in connection with office space, equipment,
reservation charges under purchase and firm transportation contracts, power
generating and other leased assets were: 2000 - $71.6 million; 2001 - $47.0
million; 2002 - $26.9 million; 2003 - $13.3 million; and 2004 and beyond
- -$100.6 million. Rental payments made under the terms of these arrangements
totaled - $ 69.0 million in 1999, $126.1 million in 1998 and $85.2 million in
1997.
NOTE 10 -- CAPITAL STOCK
At December 31, 1999, the Company had authorized capital stock
consisting of 450,000,000 shares, of which 50,000,000 shares, par value $0.01
per share, are designated preferred stock and 400,000,000 shares, par value
$0.01 per share, are designated common stock.
On the effective date of the Illinova acquisition, Dynegy Inc. had authorized
capital as follows:
- - 300,000,000 shares of Class A common stock, no par value;
- - 120,000,000 shares of Class B common stock, no par value;
- - 70,000,000 shares of preferred stock, no par value.
Simultaneous with the close of the merger, Dynegy Holdings became a
wholly-owned subsidiary of Dynegy Inc. As a result, Dynegy Holdings no
longer has equity held by public shareholders. The following describes
Dynegy Holdings' capital structure at December 31, 1999, and the effects of
the Illinova acquisition on the capital structure of Dynegy Inc.
PREFERRED STOCK. Dynegy Inc.'s preferred stock may be issued from
time to time in one or more series, the shares of each series to have such
designations and powers, preferences, rights, qualifications, limitations and
restrictions thereof as described in the Company's Certificate of
Incorporation.
In order to provide for issuance of preferred shares pursuant to the
terms of the Chevron Combination, 8,000,000 shares of preferred stock were
designated during 1996 as Dynegy Series A Participating Preferred Stock
("Series A Preferred"), of which 7,815,363 shares were issued effective
September 1, 1996. These shares remained outstanding at December 31, 1999. As
part of the Illinova acquisition, these shares were converted to shares of
Class B common stock of Dynegy on a 0.69-for-one exchange ratio.
Pursuant to the terms of the Illinova acquisition, Dynegy
established a series of preferred stock, designated as Series A Convertible
Preferred Stock, which was issued to British Gas Atlantic and NOVA
Corporation in accordance with the exchange ratios provided in the merger
documents. On the effective date of the merger, BG and NOVA held an aggregate
6.7 million shares of this Series A Convertible Preferred Stock. Holders of
this Series A preferred stock are entitled to receive dividends or
distributions totaling $3.00 per share annually if and when declared by the
Board of Directors of Dynegy Inc. out of funds legally available therefor.
Dividends on the preferred shares are cumulative from
F-24
<PAGE>
the date of issuance and are payable quarterly on the last day of March,
June, September and December. This Series A Convertible Preferred Stock
carries certain priority, liquidation, redemption, conversion and voting
rights not available to the common shareholders.
COMMON STOCK. At December 31, 1999, there were 157,499,001 shares of
common stock issued and 1,200,700 shares were held in treasury. During 1999,
Dynegy paid quarterly cash dividends on its common stock of $0.0125 per
share, or $0.05 per share on an annual basis.
Pursuant to the terms of the Illinova acquisition, Dynegy Inc. split
its common shares into two classes, Class A and Class B. Generally, holders
of Class A and Class B common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Holders of Class A common stock
may cumulate votes in connection with the election of directors. The election
of directors and all other matters will be by a majority of shares
represented and entitled to vote, except as otherwise provided by law.
Holders of Class B common stock vote together with holders of Class A common
stock as a single class on every matter acted upon by the shareholders except
for the following matters:
- - the holders of Class B common stock vote as a separate class for the
election of three directors of Dynegy Inc., while the holders of Class A
common stock vote as a separate class for the remaining directors;
- - any amendment to the special corporate governance rights of Class B common
stock, must be approved by a majority of the directors elected by holders
of Class B common stock attending a meeting where such amendment is
considered and a majority of all Dynegy Inc. directors or by a 66 2/3
percent of the outstanding shares of Class B common stock voting as a
separate class, and the affirmative vote of a majority of the shares of
Class A and Class B common stock, voting together as a single class; and
- - any amendment to the provision of the articles of incorporation addressing
the voting rights of holders of Class A and Class B common stock requires
the approval of 66 2/3 percent of the outstanding shares of Class B common
stock voting as a separate class, and the affirmative vote of a majority of
the shares of Class A and Class B common stock, voting together as a single
class.
Subject to the preferences of the preferred stock, holders of Class
A and Class B common stock have equal ratable rights to dividends out of
funds legally available for that purpose, when and if dividends are declared
by the board of directors. Holders of Class A common stock and Class B common
stock are entitled to share ratably, as a single class, in all of the assets
of Dynegy Inc. available for distribution to holders of shares of common
stock upon the liquidation, dissolution or winding up of the affairs of
Dynegy Inc., after payment of Dynegy Inc.'s liabilities and any amounts to
holders of preferred stock.
A share of Class B common stock automatically converts into a share
of Class A common stock upon the transfer to any person other than an
affiliate of Chevron. Additionally, each share of Class B common stock
automatically converts into a share of Class A common stock if the holders of
all Class B common stock cease to own collectively 15 percent of the
outstanding common stock of Dynegy Inc. Conversely, any shares of Class A
common stock acquired by Chevron or its affiliates will automatically convert
into shares of Class B common stock, so long as Chevron and its affiliates
continue to own 15 percent or more of the outstanding voting power of Dynegy
Inc.
Holders of Class A and Class B common stock generally are not
entitled to preemptive rights, subscription rights, or redemption rights,
except that, Chevron, who holds all of the shares of Class B common stock, is
entitled to certain preemptive rights under the shareholders agreement. The
rights and preferences of holders of Class A common stock are subject to the
rights of any series of preferred stock Dynegy Inc. may issue.
Beginning in 2000, Holders of Class A and Class B common stock will
be entitled to a $0.60 per share dividend if, when and as declared by the
Board of Directors of Dynegy Inc. out of funds legally available therefor.
Dynegy Inc. has a stock repurchase program, approved by Dynegy
Inc.'s Board of Directors, that allows it to repurchase, from time to time,
up to 1.6 million shares of common stock (1.1 million shares as adjusted for
the Illinova acquisition exchange ratio) in open market transactions. At
December 31, 1999, approximately 399,000
F-25
<PAGE>
shares (276,000 shares as adjusted for the Illinova acquisition exchange
ratio) remained available for repurchase under this program.
STOCK WARRANTS. At December 31, 1999, Dynegy had warrants
outstanding that entitle the holder thereof to purchase an aggregate 6,228
shares of common stock at an exercise price of $8.13 per share. The warrants
expire in October 2003. Such share and per share value amounts are before
application of the exchange ratio pursuant to the Illinova acquisition.
STOCK OPTIONS. Each option granted is valued at an option price,
which ranges from $2.03 per share to the fair market value per share at date
of grant. The difference between the option price and the fair market value,
if any, of each option on the date of grant is recorded as compensation
expense over a vesting period. Options granted at prices below fair market do
not become exercisable until the fifth anniversary date of the grant, at
which time they become fully exercisable. Options granted at market value
vest and become exercisable ratably over a three-year period. The average
exercise price of vested options at December 31, 1999 was $8.39. Compensation
expense related to options granted totaled $6.0 million, $4.7 million and
$4.0 million for the years ended December 31, 1999, 1998 and 1997,
respectively. At December 31, 1999, employee stock options aggregating 7.2
million shares were exercisable at prices ranging from $2.03 to $21.63 per
share. Concurrent with the merger, the option shares and exercise prices were
converted based on the exchange ratios provided for in the merger documents.
Dynegy Inc. adopted a new employee stock option plan subsequent to year-end,
which authorized the issuance of no more than five million common shares.
Total options authorized and non-distributed Stock option transactions for
1999, 1998 and 1997 were (shares in thousands) as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------
SHARES OPTION PRICE SHARES OPTION PRICE SHARES OPTION PRICE
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 18,679 $ 2.03 - 21.63 14,015 $ 2.03 - 21.63 13,920 $ 2.03 - 18.75
Granted 3,046 2.03 - 22.94 7,319 2.03 - 17.50 2,284 2.03 - 21.63
Exercised (3,375) 2.03 - 18.88 (995) 2.03 - 9.38 (1,469) 2.03 - 9.38
Canceled or expired (893) 2.03 - 19.00 (1,568) 2.03 - 19.00 (629) 2.03 - 18.75
Other, contingent share issuance (50) 2.03 - 5.66 (92) 2.03 - 5.66 (91) 2.03 - 5.66
---------- --------------- -------- --------------- ------- ---------------
Outstanding at end of period 17,407 $ 2.03 - 22.94 18,679 $ 2.03 - 21.63 14,015 $ 2.03 - 21.63
========== =============== ======== =============== ======= ===============
Exercisable at end of period 7,234 $ 2.03 - 21.63 4,394 $ 2.03 - 21.63 2,861 $ 2.03 - 18.75
========== =============== ======== =============== ======= ===============
Weighted average fair value of
Options granted during the period
At market $ 10.71 $ 5.77 $ 11.14
=========== ============= ==============
Weighted average fair value of
Options granted during the period
At below market $ 13.32 $ 7.35 $ 14.63
=========== ============= ==============
</TABLE>
Pursuant to terms of the Illinova acquisition, certain vesting
requirements on outstanding options were accelerated and the option shares
and strike prices were subject to the exchange ratios described in the merger
documents. Additionally, Dynegy Inc. instituted new option plans on the
effective date of the merger. At the effective date of the merger, the
following shares were exercisable at the designated prices pursuant to Dynegy
Inc.'s option plans.
<TABLE>
<S> <C> <C>
Exercisable at effective date 8,341 $ 2.94 - 31.35
========== ================
</TABLE>
The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model, with the following
weighted-average assumptions used for grants in 1999, 1998 and 1997:
dividends per year of $0.05 per annum for all years; expected volatility of
40.3 percent, 40.1 percent and 42.0 percent, respectively; risk-free interest
rate of 6.42 percent, 6.28 percent and 6.28 percent, respectively; and an
expected life of 10 years for all periods. Dynegy Inc. accounts for its stock
option plan in accordance with Accounting Principles Board
F-26
<PAGE>
Opinion No. 25, "Accounting for Stock Issued to Employees". Had compensation
cost been determined consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), Dynegy's net income (loss) and
per share amounts would have approximated the following pro forma amounts for
the years ended December 31, 1999, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------
DILUTED LOSS DILUTED
NET INCOME EPS NET LOSS PER SHARE NET INCOME EPS
-------------- -------------- -------------- -------------- ------------- --------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Pro forma amounts $ 142,838 $ 0.86 $ 104,578 $ 0.63 $ (108,007) $ (0.72)
============= ============= ============= ============= ============ ============
</TABLE>
NOTE 11 -- BUSINESS COMBINATIONS AND SIGNIFICANT RESTRUCTURINGS
THE DESTEC ACQUISITION. On June 27, 1997, Dynegy acquired Destec
Energy, Inc. ("Destec"), an independent power producer, for $1.26 billion, or
$21.65 per share of Destec common stock. Dynegy financed the transaction through
cash on hand and advances on its credit facilities provided by its existing
commercial banks. Concurrent with this acquisition, Dynegy sold Destec's
international facilities and operations to The AES Corporation ("AES") for $439
million. Also during 1997, the Company sold certain non-strategic assets
acquired in the purchase for aggregate proceeds of $296 million. Proceeds from
the AES and non-strategic asset sales were used to retire indebtedness.
The Destec acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price of approximately $718 million,
inclusive of transaction costs and net of cash acquired, was allocated to the
Destec assets acquired and liabilities assumed based on their estimated fair
values as of June 30, 1997, the effective date of the acquisition for accounting
purposes. The results of operations of the acquired Destec assets are
consolidated with Dynegy's existing operations beginning July 1, 1997. The
following table reflects certain unaudited pro forma information for the year
ended December 31, 1997 as if the Destec acquisition had occurred on January 1,
1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1997
-------------------
<S> <C>
Pro forma revenues $ 13,498,207
Pro forma net loss (101,175)
Pro forma loss per share (0.67)
</TABLE>
RESTRUCTURING OF NOVAGAS CLEARINGHOUSE, LTD. In June 1997, the Company
and NOVA Corporation ("NOVA") completed the restructuring of the companies'
Canadian natural gas operations formerly executed through Novagas Clearinghouse,
Ltd., Novagas Clearinghouse Limited Partnership and Novagas Clearinghouse
Pipelines Limited Partnership (collectively "NCL"), a joint venture between
Dynegy and NOVA. Pursuant to the agreements, Dynegy Canada Inc. ("DCI"), a
wholly owned indirect subsidiary of Dynegy, acquired NCL's natural gas marketing
business, excluding the natural gas aggregation business of Pan-Alberta Gas Ltd.
("Pan-Alberta"), from NCL and sold its aggregate 49.9 percent interest in NCL to
NOVA Gas International ("NGI"), a subsidiary of NOVA. NOVA assumed full
ownership of NCL's gathering and processing business and the operations of
Pan-Alberta. The restructuring included amendments to or termination of various
agreements between NCL, Dynegy, NOVA and certain affiliates of both Dynegy and
NOVA. Dynegy realized a pretax gain on the sale of its interest in NCL of $7.8
million, which is classified as other income in the accompanying consolidated
statements of operations for the year ended December 31, 1997. The acquisition
by Dynegy of NCL's marketing business was accounted for under the purchase
method of accounting. Accordingly, the purchase price of $4.0 million, inclusive
of transaction costs, was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as of April 1, 1997, the effective
date of the acquisition for accounting purposes.
F-27
<PAGE>
RESTRUCTURING OF ACCORD ENERGY LIMITED ("ACCORD"). In early 1997,
British Gas completed a restructuring whereby Centrica plc ("Centrica") was
demerged from British Gas and British Gas was renamed BG plc ("BG"). Centrica
became the Company's joint venture partner in Accord. BG holds the approximate
26 percent stake in Dynegy's common stock formerly held by British Gas. On May
2, 1997, Centrica and the Company completed a restructuring of Accord by
converting certain common stock interests in Accord to participating preferred
stock interests as of an effective date of January 1, 1997. Centrica and the
Company own 75 percent and 25 percent, respectively, of the outstanding
participating preferred stock shares of Accord. The participating preferred
stock has (a) the right to receive cumulative dividends on a priority basis to
other corporate distributions by Accord, and (b) limited voting rights. In
addition, Centrica has an option to purchase the Company's participating
preferred stock interest at any time after July 1, 2000, at a formula based
price, as defined in the agreement. As part of the reorganization, Centrica will
operate Accord while Dynegy obtained the right to market natural gas, gas
liquids and crude oil in the United Kingdom, which occurs through its wholly
owned subsidiary Dynegy UK Limited ("Dynegy UK"). No gain or loss was recognized
as a result of this restructuring and Dynegy's investment in Accord continues to
be accounted for under the equity method.
NOTE 12 -- IMPAIRMENT, ABANDONMENT AND OTHER CHARGES
During the fourth quarter of 1997, the Company recognized a $275
million charge principally related to impairment of certain long-lived assets,
abandonment of certain operating assets and reserves for obsolescence,
contingencies and other obligations. The charge primarily resulted from the
completion of a plan of restructuring of the Company's natural gas liquids and
crude oil businesses, which includes rationalization and consolidation of assets
acquired in both the Trident and Chevron Combinations, and the pursuit of a
joint venture partner in order to achieve critical mass in its crude oil
marketing business. In addition, a company-wide reorganization of reporting
responsibilities and improvements in business processes and computer information
systems resulted in the identification during the fourth quarter of 1997 of
other obsolete assets and a reduction of employees involved in non-strategic
operations.
The charge, which was substantially non-cash in nature, consisted of the
following (in thousands):
<TABLE>
<S> <C>
Abandonment of long-lived operating assets $ 154,984
Impairment of operating assets and intangibles 79,550
Inventory obsolescence reserve and write-off 10,340
Write-off of other obsolete assets 12,011
Contingency and other obligation reserves 16,750
Severance charge 1,365
-----------
$ 275,000
===========
</TABLE>
The fair values of the assets impaired and abandoned were determined
using a discounted cash flow methodology. During 1998, management substantially
completed its plan of rationalization, reorganization and abandonment of assets
anticipated at the end of 1997. In addition, pursuant to the execution of the
restructuring plan, a charge of $9.6 million related to severance charges was
recognized in the first quarter of 1998. The severance charge was related to the
termination of approximately 200 corporate and field employees. The charge
recognized in the first quarter of 1998 approximated the actual severance
expenditures.
Also during the fourth quarter of 1997, the Company changed its method
for accounting for certain business process re-engineering and information
technology transformation costs pursuant to a consensus reached in November 1997
by the EITF. The EITF concluded that all re-engineering costs, including those
incurred in connection with a software installation, should be expensed as
incurred. The Company had previously capitalized certain re-engineering costs
and was amortizing such costs over the estimated useful lives of the projects.
The cumulative effect of this change in accounting of $14.8 million, net of tax,
represented the one-time charge for the aggregate unamortized re-engineering
costs previously capitalized.
F-28
<PAGE>
NOTE 13 -- EMPLOYEE COMPENSATION, SAVINGS AND PENSION PLANS
CORPORATE INCENTIVE PLAN. Dynegy Inc. maintains a discretionary
incentive plan to provide employees competitive and meaningful rewards for
reaching corporate and individual objectives. Specific rewards are at the
discretion of the Compensation Committee of the Board of Directors
("Compensation Committee").
PROFIT SHARING/SAVINGS PLAN. Dynegy Inc. established the Dynegy Profit
Sharing/401(k) Savings Plan ("Plan"), which meets the requirements of Section
401(k) of the Internal Revenue Code, and is a defined contribution plan subject
to the provisions of the Employee Retirement Income Security Act of 1974. The
Plan and related trust fund are established and maintained for the exclusive
benefit of participating employees in the United States and certain expatriates.
Similar plans are available to other employees resident in foreign countries
subject to the laws of each country. All eligible employees may participate in
the plans and employee contributions are generally matched dollar-for-dollar for
the first 5 percent of compensation, subject to financial performance. Employees
vest in Dynegy Inc.'s contributions over various periods. Dynegy Inc. also makes
profit sharing contributions to employees' accounts regardless of their
individual participation in the Profit Sharing/Savings Plans.
Matching contributions to the Plan and certain discretionary profit
sharing contributions are made in Company common stock, other contributions are
made in cash. During the years ended December 31, 1999, 1998 and 1997, Dynegy
recognized aggregate costs related to these employee compensation plans of $24.9
million, $12.9 million and $9.7 million, respectively.
PENSION PLAN. Through a business acquisition, Dynegy acquired a
noncontributory defined benefit pension plan and such plan remains in existence
at December 31, 1999. The Trident NGL, Inc. Retirement Plan ("Retirement Plan")
is a qualified plan under the Internal Revenue Service regulations. The
Retirement Plan is closed to new participants. Benefits are based on years of
service and final average pay, as defined in the Retirement Plan document.
Contributions to the Retirement Plan in 1999 and 1998 represent the minimum
amount required by federal law and regulation. The Retirement Plan's funded
status and amount recognized in Dynegy's balance sheet at December 31, 1999 and
1998, were:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998
------------------ --------------
($ IN THOUSANDS)
<S> <C> <C>
Projected benefit obligation, beginning of the year $ 11,755 $ 9,378
Service cost 545 665
Interest cost 718 722
Curtailment (1,940) ---
Actuarial (gain) loss (1,102) 1,137
Benefits paid (216) (147)
-------- --------
Projected benefit obligation, end of the year $ 9,760 $ 11,755
======== ========
Fair value of plan assets, beginning of the year $ 9,345 $ 8,480
Actual return on plan assets 1,125 615
Employer contributions 41 397
Benefits paid (216) (147)
-------- --------
Fair value of plan assets, end of the year $ 10,295 $ 9,345
======== ========
Funded status $ (534) $ 2,410
Unrecognized net gain from past experience different from that assumed 4,995 3,668
-------- --------
Pension liability $ 4,461 $ 6,078
======== ========
</TABLE>
Current year pension expense is based on measurements of the projected
benefit obligation and the market related value of the Retirement Plan assets as
of the end of the year. The projected benefit obligation at December 31, 1999
and 1998, was based on a discount rate of 7.5 and 7.0 percent, and an average
long-term rate of
F-29
<PAGE>
compensation growth of 3.5 percent, respectively. The expected long-term rate
of return on the Retirement Plan assets was estimated at 8.0 percent in 1999
and 1998.
The components of net pension expense for the Retirement Plan were:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998
---------------- ----------------
($ IN THOUSANDS)
<S> <C> <C>
Service cost benefits earned during period $ 545 $ 665
Interest cost on projected benefit obligation 718 722
Expected return on plan assets (717) (618)
Amortization of unrecognized gain (182) (218)
-------- --------
Net periodic pension cost $ 364 $ 551
======== ========
</TABLE>
NOTE 14 -- RELATED PARTY TRANSACTIONS
Transactions between the Company and Chevron result principally from
the ancillary agreements entered into as part of the Chevron Combination.
Transactions with Chevron and transactions between Dynegy, NOVA and BG result
from purchases and sales of natural gas, natural gas liquids and crude oil
between subsidiaries of Dynegy and these companies. It is management's opinion
that these transactions are executed at prevailing market rates. During the
years ended December 31, 1999, 1998 and 1997, the Company recognized in its
statement of operations aggregate sales to, and aggregate costs from, these
significant shareholders of $1.1 billion and $2.0 billion, $888 million and $1.7
billion, and $788.9 million and $2.4 billion, respectively. Pursuant to the
terms of the Illinova acquisition, NOVA and BG reduced their respective stakes
in Dynegy to less than 5 percent.
NOTE 15 -- SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" and
has restated its segment disclosures for all reporting periods. Dynegy's
operations are divided into two reportable segments: Energy Convergence and
Midstream. The Energy Convergence segment is actively engaged in value creation
through marketing and trading of natural gas, power and coal and the generation
of electricity principally under the name Dynegy Marketing and Trade. The
Midstream segment consists of the North American midstream liquids operations,
as well as the international liquefied petroleum gas transportation and natural
gas liquids marketing operations located in Houston and London, and certain
other businesses. The North American midstream liquids operations are actively
engaged in the gathering and processing of natural gas and the transportation,
fractionation and storage of NGLs. This segment operates principally under the
name Dynegy Midstream Services. Generally, Dynegy accounts for intercompany
transactions at prevailing market rates. Operating segment information for 1999,
1998 and 1997 is presented below.
F-30
<PAGE>
DYNEGY HOLDINGS' SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
ENERGY
CONVERGENCE MIDSTREAM ELIMINATION TOTAL
--------------- -------------------- ------------------ ----------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic $ 9,855,757 $ 3,143,085 $ --- $ 12,998,842
Canadian 1,445,779 9,795 --- 1,455,574
United Kingdom 975,560 --- --- 975,560
------------ ------------ ------------ ------------
12,277,096 3,152,880 --- 15,429,976
------------ ------------ ------------ ------------
Intersegment revenues
Domestic 355,340 239,848 (595,188) ---
Canadian 58,663 8,517 (67,180) ---
United Kingdom --- --- --- ---
------------ ------------ ------------ ------------
414,003 248,365 (662,368) ---
------------ ------------ ------------ ------------
Total revenues 12,691,099 3,401,245 (662,368) 15,429,976
------------ ------------ ------------ ------------
Operating margin 283,594 260,281 --- 543,875
Depreciation and amortization (35,116) (94,342) --- (129,458)
Interest expense (36,433) (41,731) --- (78,164)
Interest and other income 57,453 15,834 --- 73,287
Equity earnings of unconsolidated affiliates 62,185 17,669 --- 79,854
Income tax (provision) benefit (58,098) (16,579) --- (74,677)
Net income from operations 106,631 45,218 151,849
Cumulative effect of change in accounting principle --- --- --- ---
Net income 106,631 45,218 --- 151,849
Identifiable assets:
Domestic $ 3,465,730 $ 2,549,773 $ --- $ 6,015,503
Canadian 266,338 68,107 --- 334,445
United Kingdom 175,223 --- --- 175,223
Investment in unconsolidated affiliates 458,552 168,783 --- 627,335
Capital expenditures 356,506 92,016 --- 448,522
</TABLE>
F-31
<PAGE>
DYNEGY HOLDINGS' SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ENERGY
CONVERGENCE MIDSTREAM ELIMINATION TOTAL
---------------- ------------------- ----------------- ------------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic $ 9,149,299 $ 3,307,320 $ --- $ 12,456,619
Canadian 969,853 209,830 --- 1,179,683
United Kingdom 621,695 --- --- 621,695
------------- ------------- ------------- ------------
10,740,847 3,517,150 --- 14,257,997
------------- ------------- ------------- ------------
Intersegment revenues
Domestic 157,492 250,280 (407,772) ---
Canadian 61,223 --- (61,223) ---
United Kingdom --- --- --- ---
------------- ------------- ------------- ------------
218,715 250,280 (468,995) ---
------------- ------------- ------------- ------------
Total revenues 10,959,562 3,767,430 (468,995) 14,257,997
------------- ------------- ------------- ------------
Operating margin 236,275 192,412 --- 428,687
Depreciation and amortization (29,026) (84,176) --- (113,202)
Interest expense (24,944) (50,048) --- (74,992)
Interest and other income 6,763 40,058 --- 46,821
Equity earnings of unconsolidated affiliates 75,242 15,796 --- 91,038
Income tax (provision) benefit (52,262) 1,924 --- (50,338)
Net income from operations 90,750 17,603 --- 108,353
Net income 90,750 17,603 --- 108,353
Identifiable assets:
Domestic $ 2,838,367 $ 2,036,795 $ --- $ 4,875,162
Canadian 257,070 6,947 --- 264,017
United Kingdom 125,058 --- --- 125,058
Investment in unconsolidated affiliates 343,819 158,794 --- 502,613
Capital expenditures 359,516 118,948 --- 478,464
</TABLE>
F-32
<PAGE>
DYNEGY HOLDINGS' SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ENERGY
CONVERGENCE MIDSTREAM ELIMINATION TOTAL
---------------- ------------------ ------------------ -------------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic $ 8,070,692 $ 4,205,759 $ --- $ 12,276,451
Canadian 632,411 264,028 --- 896,439
United Kingdom 205,490 --- --- 205,490
------------- ------------- ------------- ------------
8,908,593 4,469,787 --- 13,378,380
------------- ------------- ------------- ------------
Intersegment revenues
Domestic 83,944 437,567 (521,511) ---
Canadian 30,580 --- (30,580) ---
United Kingdom 1,314 --- (1,314) ---
------------- ------------- ------------- ------------
115,838 437,567 (553,405) ---
------------- ------------- ------------- ------------
Total revenues 9,024,431 4,907,354 (553,405) 13,378,380
------------- ------------- -------------- ------------
Operating margin 126,805 258,489 --- 385,294
Impairment, abandonment and other charges (20,228) (254,772) --- (275,000)
Depreciation and amortization (16,425) (87,966) --- (104,391)
Interest expense (12,214) (51,241) --- (63,455)
Interest and other income 13,209 14,904 --- 28,113
Equity earnings of unconsolidated affiliates 36,241 22,718 --- 58,959
Income tax (provision) benefit (8,710) 70,920 --- 62,210
Net income (loss) from operations 24,321 (112,006) --- (87,685)
Cumulative effect of change in accounting (7,289) (7,511) --- (14,800)
principle
Net income (loss) 17,033 (119,518) --- (102,485)
Identifiable assets:
Domestic $ 1,882,965 $ 2,299,312 $ --- $ 4,182,277
Canadian 239,090 40,900 --- 279,990
United Kingdom 54,635 --- --- 54,635
Investment in unconsolidated affiliates 310,445 160,032 --- 470,477
Capital expenditures 844,638 189,388 --- 1,034,026
</TABLE>
F-33
<PAGE>
NOTE 16 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the Company's unaudited quarterly
financial information for the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
1999 1999 1999 1999
----------------- ---------------- --------------- ----------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues $ 3,044,973 $ 3,160,757 $ 4,584,929 $ 4,639,317
Operating margin 120,077 125,747 158,814 139,237
Income before income taxes 40,683 41,510 75,434 68,899
Net income 28,071 27,976 50,692 45,110
Net income per share 0.17 0.17 0.30 0.26
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
1998 1998 1998 1998
---------------- ---------------- ---------------- ----------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues $ 3,315,569 $ 3,278,214 $ 4,586,515 $ 3,077,699
Operating margin 96,989 107,915 105,985 117,798
Income (loss) before income taxes 16,411 35,043 63,739 43,498
Net income (loss) 12,339 23,441 43,645 28,928
Net income (loss) per share (1) 0.07 0.14 0.27 0.18
</TABLE>
1. Net income (loss) per share amounts have been restated to conform to
the provisions of Statement of Financial Accounting Standards No.
128, "Earnings Per Share."
NOTE 17 - SUBSEQUENT EVENTS
ILLINOVA ACQUISITION. Dynegy Inc. completed its acquisition of Illinova
early in the first quarter 2000. The merger of Dynegy and Illinova involved the
creation of a new holding company, now known as Dynegy Inc., and two separate
but concurrent mergers. In one concurrent merger, a wholly-owned subsidiary of
Dynegy Inc. merged with and into Illinova. In the other concurrent merger, a
second wholly-owned subsidiary of Dynegy Inc. merged with and into old Dynegy.
As a result of these two concurrent mergers, Illinova and old Dynegy continue to
exist as wholly-owned subsidiaries of Dynegy Inc., and are referred to as
Illinova Holding and Dynegy Holdings Inc., respectively. Dynegy Inc. accounted
for the merger as a purchase of Illinova. This accounting treatment is based on
various factors present in the merger, including the majority ownership (and
voting control) of Dynegy Inc.'s shareholders following the merger, the role of
Dynegy Inc.'s management following the merger (including the service of C.L.
Watson as Chairman and Chief Executive Officer) and the influence of Chevron
because of the size of its ownership interest and its rights under the
shareholder agreement, articles of incorporation and bylaws. As a result, the
consolidated
F-34
<PAGE>
financial statements of Dynegy Inc. after the merger will reflect the assets
and liabilities of Dynegy Holdings at historical book values and the assets
and liabilities of Illinova at allocated fair values. For accounting
purposes, the effective date of the merger will be January 1, 2000. This date
was selected as a result of the following factors:
- - Affirmative consent had been acquired from both shareholder groups prior to
January 1, 2000,
- - All regulatory consents had been acquired prior to January 1, 2000,
- - Material terms of the purchase and sale agreement for the qualifying
facilities, a condition precedent to the closing, had been negotiated on or
about January 1, 2000, and
- - Board, executive, commercial, financial and regulatory oversight of
Illinova's operations had transferred to Dynegy Inc. on or about January 1,
2000.
In the combination, Dynegy shareholders, other than Chevron U.S.A. Inc.
("Chevron"), NOVA Gas Services (U.S.) Inc. ("NOVA") and BG Holdings, Inc.,
elected to exchange each Dynegy share for 0.69 of a share of Dynegy Class A
common stock, based on a fixed exchange ratio, or elected to receive $16.50 per
share in cash consideration, subject to proration. NOVA and BG Holdings, Inc.
elected cash and thereby reduced their respective ownership in Dynegy Inc. as
part of this combination. Therefore, instead of receiving Dynegy Class A common
stock in exchange for their respective shares of Dynegy Holdings common stock,
NOVA and the parent of BG Holdings, Inc. each received a combination of cash,
subject to proration, and shares of Dynegy Series A Convertible Preferred Stock.
Chevron received shares of Dynegy Class B common stock in exchange for all of
its shares of Dynegy Holdings common stock and Series A Preferred, respectively.
Additionally, as part of the combination, Chevron purchased $200 million of
additional Dynegy Class B common stock. Each share of Illinova common stock was
converted into one share of Dynegy Class A common stock. Immediately after the
combination, former Dynegy Inc. shareholders owned approximately 51 percent of
the outstanding shares of Dynegy Inc.
Approximately 60 percent of the consideration received by existing
Dynegy shareholders was in the form of Dynegy Inc. stock and 40 percent was
cash. In aggregate, the cash portion of the consideration approximated $1.07
billion. Dynegy Inc. financed the cash component of the merger initially with
borrowings under a debt facility and the issuance of $200 million of Class B
common stock to Chevron. Dynegy Inc. anticipates repaying or refinancing a
significant portion of the debt facility with proceeds from an offering of
equity securities, additional public debt issuances, proceeds from asset sales
and cash flow from operations.
ASSET DISPOSITIONS. In early 2000, the Company entered into agreements
to dispose of certain assets for aggregate net proceeds approximating $560
million. In addition, the Company has stated its intent to dispose of its
domestic crude oil marketing operations, likely in the first quarter 2000. These
transactions result from statutory requirements pursuant to the acquisition of
Illinova or for the purpose of eliminating operating assets considered
non-strategic or which were under-performing in comparison to other assets in
the portfolio. The net proceeds received in these transactions are being used to
retire merger-related debt or are being re-deployed into the Company's capital
investment program. The financial impact of these transactions in the aggregate
is not expected to be material to Dynegy's results of operations or financial
position for the year ended December 31, 2000. Further, disposition of these
assets is not expected to have a material adverse effect on Dynegy's prospective
competitive position in the businesses in which it operates. The assets sold
consist of eleven cogeneration facilities designated as qualifying facilities
under PURPA law and substantially all of the Company's natural gas processing
facilities and related infrastructure in the Mid-Continent region.
F-35
<PAGE>
SCHEDULE I
DYNEGY HOLDINGS INC.
CONDENSED BALANCE SHEETS OF REGISTRANT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
----------------------- --------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ --- $ 209,439
Accounts receivable 3,209 500
Intercompany accounts receivable 709,119 446,959
Prepayments and other assets 9,471 6,773
------------- -----------
721,799 663,671
------------- -----------
PROPERTY, PLANT AND EQUIPMENT 3,246 3,297
Less: accumulated depreciation (2,825) (2,587)
------------- -----------
421 710
------------- -----------
OTHER ASSETS
Investments in affiliates 1,763,922 1,514,635
Intercompany notes receivable 500,590 343,311
Deferred taxes and other assets 30,308 22,225
------------- -----------
$ 3,017,040 $ 2,544,552
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Intercompany accounts payable $ --- $ 155,131
Accrued liabilities 126,546 146,100
------------- -----------
126,546 301,231
LONG-TERM DEBT 1,299,333 913,000
COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST 200,000 200,000
OTHER LIABILITIES 81,679 2,258
------------- -----------
1,707,558 1,416,489
------------- -----------
COMMITMENTS AND CONTINGENCIES
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 and 1998 75,418 75,418
Common stock, $0.01 par value, 400,000,000 shares
Authorized: 157,499,001 shares issued at December 31, 1999,
and 153,298,220 shares issued at December 31, 1998 1,575 1,533
Additional paid-in capital 973,000 935,183
Retained earnings 277,074 133,340
Less: treasury stock, at cost: 1,200,700 shares at December 31, 1999
1,200,700 shares at December 31, 1998 (17,585) (17,411)
------------- -----------
1,309,482 1,128,063
------------- -----------
$ 3,017,040 $ 2,544,552
============= ===========
</TABLE>
See Note to Registrant's Financial Statements.
F-36
<PAGE>
SCHEDULE I
DYNEGY HOLDINGS INC.
STATEMENTS OF OPERATIONS OF THE REGISTRANT
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ------------------- ------------------
<S> <C> <C> <C>
Depreciation and amortization $ (238) $ (241) $ (1,292)
Impairment, abandonment and other charges --- (959) (3,886)
--------- --------- ---------
Operating loss (238) (1,200) (5,178)
Equity in earnings of affiliates 249,287 215,928 (115,108)
Intercompany interest and other income 65,325 13,667 16,928
Interest expense (82,825) (68,403) (45,790)
Other expenses (5,023) (1,301) (747)
--------- --------- ---------
Income (loss) before income taxes 226,526 158,691 (149,895)
Income tax provision (benefit) 74,677 50,338 (62,210)
--------- --------- ---------
Net income (loss) from continuing operations before
cumulative effect of change in accounting 151,849 108,353 (87,685)
Cumulative effect of change in accounting principle
(net of income tax benefit of $7,913) --- --- (14,800)
--------- --------- ---------
NET INCOME (LOSS) $ 151,849 $ 108,353 $(102,485)
========= ========= =========
</TABLE>
See Note to Registrant's Financial Statements.
F-37
<PAGE>
SCHEDULE I
DYNEGY HOLDINGS INC.
STATEMENTS OF CASH FLOWS OF THE REGISTRANT
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
----------------- --------------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 151,849 $ 108,353 $ (102,485)
Items not affecting cash flows from operating activities:
Depreciation and amortization 238 1,864 9,631
Equity in earnings of affiliates, net of cash distributions (249,287) (215,928) 115,108
Deferred taxes 63,167 50,338 (86,424)
Other --- --- 12,344
Change in assets and liabilities resulting from operating activities:
Accounts receivable (2,709) (468) 76
Intercompany transactions (574,518) 239,586 636,063
Prepayments and other assets (2,698) (2,212) (2,749)
Accrued liabilities 8,939 3,693 1,529
Other, net 25,043 (29,778) 2,493
----------- ----------- -----------
Net cash (used in) provided by operating activities (579,976) 155,448 585,586
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures --- --- (5,121)
Acquisitions --- (2,644) (785,349)
Other --- --- ---
----------- ----------- -----------
Net cash used in investing activities --- (2,644) (790,470)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 397,488 212,259 2,218,500
Repayments of long-term borrowings --- (493,277) (2,198,000)
Net proceeds from commercial paper and money market lines of credit (42,161) 350,758 ---
Intercompany advances --- --- ---
Proceeds from sale of capital stock, options and warrants 21,855 3,863 203,190
Treasury stock acquisitions (174) (6,905) (10,506)
Capital contributions --- --- ---
Dividends and other distributions (8,115) (7,988) (7,925)
Other financing 1,644 (2,450) ---
----------- ----------- -----------
Net cash provided by financing activities 370,537 56,260 205,259
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (209,439) 209,064 375
Cash and cash equivalents, beginning of period 209,439 375 ---
----------- ----------- -----------
Cash and cash equivalents, end of period $ --- $ 209,439 $ 375
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid (net of amount capitalized) $ 97,540 $ 100,589 $ 60,323
=========== =========== ===========
Taxes paid (net of refunds) $ 1,927 $ (8,000) $ 8,043
=========== =========== ===========
Cash dividends paid to parent by consolidated or
unconsolidated subsidiaries $ --- $ --- $ ---
=========== =========== ===========
</TABLE>
See Note to Registrant's Financial Statements.
F-38
<PAGE>
SCHEDULE I
DYNEGY HOLDINGS INC.
NOTE TO REGISTRANT'S FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
Dynegy Holdings Inc. ("Dynegy Holdings" or the "Company") is a holding
company that principally conducts all of its business through its subsidiaries.
The Company is the result of a strategic business combination ("Trident
Combination") between Natural Gas Clearinghouse and Trident NGL Holding, Inc.
("Holding"), under which Holding was renamed NGC Corporation. Pursuant to the
terms of the Trident Combination, Holding was the legally surviving corporation
and Clearinghouse was considered the acquiring company for accounting purposes
resulting in a new historical cost basis for Holding beginning March 1, 1995,
the effective date of the Trident Combination. 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.
The accompanying condensed Registrant Financial Statements were
prepared pursuant to rules promulgated by the Securities and Exchange
Commission. In accordance with these rules, the accompanying statements reflect
the financial position, results of operations and cash flows of the Company, the
holding company of Dynegy Inc., at December 31, 1999 and 1998, and for the years
then ended through December 31, 1999, respectively. These statements should be
read in conjunction with the Consolidated Statements and notes thereto of Dynegy
Holdings Inc.
F-39
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
DYNEGY HOLDINGS INC.
The present name of the corporation is Dynegy Holdings Inc. The
corporation was incorporated under the name "Midstream Combination Corp." by the
filing of its original Certificate of Incorporation with the Secretary of State
of the State of Delaware on May 22, 1996. This Restated Certificate of
Incorporation of the corporation, which both restates and further amends the
provisions of the corporation's Certificate of Incorporation, was duly adopted
in accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware and by the written consent of its sole
stockholder in accordance with Section 228 of the General Corporation Law of the
State of Delaware. The Certificate of Incorporation of the corporation is hereby
amended and restated to read in its entirety as follows:
Article I
The name of the Corporation is Dynegy Holdings Inc. (the
"CORPORATION").
Article II
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
Article III
The nature of the business or purposes to be conducted or promoted is:
To engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware (the "DGCL").
Article IV
The total number of shares of common stock which the Corporation shall
have authority to issue is One Thousand (1,000) and the par value of each of the
shares is One Dollar ($1.00) amounting in the aggregate to One Thousand Dollars
($1,000).
1
<PAGE>
Article V
The Corporation is to have perpetual existence.
Article VI
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors of the Corporation (the "Board of Directors") is
expressly authorized to make, alter or repeal the bylaws of the Corporation.
Article VII
Elections of directors need not be by written ballot unless the bylaws
of the Corporation shall so provide. Meetings of stockholders may be held within
or without the State of Delaware, as the bylaws may provide. The books of the
Corporation may be kept (subject to any provision contained in the statutes)
outside the State of Delaware at such place or places as may be designated from
time to time by the board of directors or in the bylaws of the Corporation.
Article VIII
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
Article IX
A director of the Corporation shall not be liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the DGCL as the same exists or may hereafter be
amended. Any amendment, modification or repeal of the foregoing sentence shall
not adversely affect any right or protection of a director of the Corporation
hereunder in respect of any act or omission occurring prior to the time of such
amendment, modification or repeal.
2
<PAGE>
Article X
Section 10.1. RIGHT TO INDEMNIFICATION. The Corporation shall indemnify
and hold harmless, to the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended, any person (a "Covered Person")
who was or is made or is threatened to be made a party or is otherwise involved
in any action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative (a "proceeding"), by reason of the fact that he, or
a person for whom he is the legal representative, is or was a director or
officer of the Corporation or, while a director or officer of the Corporation,
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust, enterprise or nonprofit entity, including service with respect to
employee benefit plans, against all liability and loss suffered and expenses
(including attorneys' fees) reasonably incurred by such Covered Person.
Notwithstanding the preceding sentence, except as otherwise provided in Section
10.3 of this Article X, the Corporation shall be required to indemnify a Covered
Person in connection with a proceeding (or part thereof) commenced by such
Covered Person only if the commencement of such proceeding (or part thereof) by
the Covered Person was authorized by the Board of Directors.
Section 10.2. PREPAYMENT OF EXPENSES. The Corporation shall pay the
expenses (including attorneys' fees) incurred by a Covered Person in defending
any proceeding in advance of its final disposition, PROVIDED, HOWEVER, that, to
the extent required by law, such payment of expenses in advance of the final
disposition of the proceeding shall be made only upon receipt of an undertaking
by the Covered Person to repay all amounts advanced if it should be ultimately
determined that the Covered Person is not entitled to be indemnified under this
Article X or otherwise.
Section 10.3. CLAIMS. If a claim for indemnification or advancement of
expenses under this Article X is not paid in full within thirty days after a
written claim therefor by the Covered Person has been received by the
Corporation, the Covered Person may file suit to recover the unpaid amount of
such claim and, if successful in whole or in part, shall be entitled to be paid
the expense of prosecuting such claim. In any such action the Corporation shall
have the burden of
3
<PAGE>
proving that the Covered Person is not entitled to the requested indemnification
or advancement of expenses under applicable law.
Section 10.4. NONEXCLUSIVITY OF RIGHTS. The rights conferred on any
Covered Person by this Article X shall not be exclusive of any other rights
which such Covered Person may have or hereafter acquire under any statute,
provision of this Certificate of Incorporation, bylaws, agreement, vote of
stockholders or disinterested directors or otherwise.
Section 10.5. OTHER SOURCES. The Corporation's obligation, if any, to
indemnify or to advance expenses to any Covered Person who was or is serving at
its request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, enterprise or nonprofit entity shall be
reduced by any amount such Covered Person may collect as indemnification or
advancement of expenses from such other corporation, partnership, joint venture,
trust, enterprise or non-profit enterprise.
Section 10.6. AMENDMENT OR REPEAL. Any repeal or modification of the
foregoing provisions of this Article X shall not adversely affect any right or
protection hereunder of any Covered Person in respect of any act or omission
occurring prior to the time of such repeal or modification.
Section 10.7. OTHER INDEMNIFICATION AND PREPAYMENT OF EXPENSES. This
Article X shall not limit the right of the Corporation, to the extent and in the
manner permitted by law, to indemnify and to advance expenses to persons other
than Covered Persons when and as authorized by appropriate corporate action.
4
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Restated Certificate of
Incorporation this 1st day of February, 2000.
DYNEGY Holdings INC.,
By:
--------------------------------
John U. Clarke
Executive Vice President and Chief Financial Officer
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
DYNEGY HOLDINGS INC.
A DELAWARE CORPORATION
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
A Delaware corporation............................................................................................1
ARTICLE ONE.......................................................................................................1
OFFICES........................................................................................................1
1.1 Registered Office and Agent...........................................................................1
1.2 Other Offices.........................................................................................1
ARTICLE TWO.......................................................................................................1
MEETINGS OF STOCKHOLDERS.......................................................................................1
2.1 Annual Meeting........................................................................................1
2.2 Special Meeting.......................................................................................1
2.3 Place of Meetings.....................................................................................2
2.4 Notice................................................................................................2
2.5 Voting List...........................................................................................2
2.6 Quorum................................................................................................2
2.7 Required Vote; Withdrawal of Quorum...................................................................3
2.8 Method of Voting; Proxies.............................................................................3
2.9 Record Date...........................................................................................3
2.10 Conduct of Meeting....................................................................................4
2.11 Inspectors............................................................................................4
ARTICLE THREE.....................................................................................................5
DIRECTORS......................................................................................................5
3.1 Management............................................................................................5
3.2 Number; Qualification; Election; Term.................................................................5
3.3 Change in Number......................................................................................5
3.4 Removal...............................................................................................5
3.5 Vacancies.............................................................................................6
3.6 Meetings of Directors.................................................................................6
3.7 First Meeting.........................................................................................6
3.8 Election of Officers..................................................................................6
3.9 Regular Meetings......................................................................................6
3.10 Special Meetings......................................................................................7
3.11 Notice................................................................................................7
3.12 Quorum; Majority Vote.................................................................................7
3.13 Procedure.............................................................................................7
3.14 Compensation..........................................................................................7
ARTICLE FOUR......................................................................................................7
COMMITTEES.....................................................................................................7
4.1 Designation...........................................................................................7
4.2 Number; Qualification; Term...........................................................................7
4.3 Authority.............................................................................................8
4.4 Committee Changes.....................................................................................8
4.5 Alternate Members of Committees.......................................................................8
4.6 Regular Meetings......................................................................................8
4.7 Special Meetings......................................................................................8
4.8 Quorum; Majority Vote.................................................................................8
<PAGE>
4.9 Minutes...............................................................................................8
4.10 Compensation..........................................................................................9
4.11 Responsibility........................................................................................9
ARTICLE FIVE......................................................................................................9
NOTICE.........................................................................................................9
5.1 Method................................................................................................9
5.2 Waiver................................................................................................9
ARTICLE SIX.......................................................................................................9
OFFICERS.......................................................................................................9
6.1 Number; Titles; Term of Office........................................................................9
6.2 Removal..............................................................................................10
6.3 Vacancies............................................................................................10
6.4 Authority............................................................................................10
6.5 Compensation.........................................................................................10
6.6 Chairman of the Board................................................................................10
6.7 President............................................................................................10
6.8 Vice Presidents......................................................................................10
6.9 Treasurer............................................................................................11
6.10 Assistant Treasurers.................................................................................11
6.11 Secretary............................................................................................11
6.12 Assistant Secretaries................................................................................11
ARTICLE SEVEN....................................................................................................11
CERTIFICATES AND SHAREHOLDERS.................................................................................11
7.1 Certificates for Shares..............................................................................11
7.2 Replacement of Lost or Destroyed Certificates........................................................12
7.3 Transfer of Shares...................................................................................12
7.4 Registered Stockholders..............................................................................12
7.5 Regulations..........................................................................................12
7.6 Legends..............................................................................................12
ARTICLE EIGHT....................................................................................................13
MISCELLANEOUS PROVISIONS......................................................................................13
8.1 Dividends............................................................................................13
8.2 Reserves.............................................................................................13
8.3 Books and Records....................................................................................13
8.4 Fiscal Year..........................................................................................13
8.5 Seal.................................................................................................13
8.6 Resignations.........................................................................................13
8.7 Securities of Other Corporations.....................................................................13
8.8 Telephone Meetings...................................................................................13
8.9 Action Without a Meeting.............................................................................14
8.10 Invalid Provisions...................................................................................14
8.11 Mortgagee, etc.......................................................................................15
8.12 Headings.............................................................................................15
8.13 References...........................................................................................15
8.14 Amendments...........................................................................................15
</TABLE>
ii
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AMENDED AND RESTATED
BYLAWS
OF
DYNEGY HOLDINGS INC.
A DELAWARE CORPORATION
PREAMBLE
These Bylaws are subject to, and governed by, the General Corporation
Law of the State of Delaware (the "Delaware General Corporation Law") and the
Certificate of Incorporation of Dynegy Holdings Inc., a Delaware corporation
(the "Corporation"). In the event of a direct conflict between the provisions of
these Bylaws and the mandatory provisions of the Delaware General Corporation
Law or the provisions of the Certificate of Incorporation of the Corporation,
such provisions of the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation, as the case may be, will be controlling.
ARTICLE ONE
OFFICES
1.1 REGISTERED OFFICE AND AGENT. The registered office and registered
agent of the Corporation shall be as designated from time to time by the
appropriate filing by the Corporation in the office of the Secretary of State of
the State of Delaware.
1.2 OTHER OFFICES. The Corporation may also have offices at such other
places, both within and without the State of Delaware, as the Board of Directors
may from time to time determine or as the business of the Corporation may
require.
ARTICLE TWO
MEETINGS OF STOCKHOLDERS
2.1 ANNUAL MEETING. An annual meeting of stockholders of the
Corporation shall be held each calendar year on such date and at such time as
shall be designated from time to time by the Board of Directors and stated in
the notice of the meeting or in a duly executed waiver of notice of such
meeting. At such meeting, the stockholders shall elect directors and transact
such other business as may properly be brought before the meeting.
2.2 SPECIAL MEETING. A special meeting of the stockholders may be
called at any time by the Chairman of the Board, the President, or the Board of
Directors, and shall be called by the
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President or the Secretary at the request in writing of the stockholders of
record of not less than ten percent (10%) of all shares entitled to vote at such
meeting, or as otherwise provided by the Certificate of Incorporation of the
Corporation. A special meeting shall be held on such date and at such time as
shall be designated by the person(s) calling the meeting and stated in the
notice of the meeting or in a duly executed waiver of notice of such meeting.
Only such business shall be transacted at a special meeting as may be stated or
indicated in the notice of such meeting or in a duly executed waiver of notice
of such meeting.
2.3 PLACE OF MEETINGS. An annual meeting of stockholders may be held at
any place within or without the State of Delaware designated by the Board of
Directors. A special meeting of stockholders may be held at any place within or
without the State of Delaware designated in the notice of the meeting or a duly
executed waiver of notice of such meeting. Meetings of stockholders shall be
held at the principal office of the Corporation unless another place is
designated for meetings in the manner provided herein.
2.4 NOTICE. Written or printed notice stating the place, day, and time
of each meeting of the stockholders and, in case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not less
than ten (10) nor more than sixty (60) days before the date of the meeting,
either personally or by mail, by or at the direction of the President, the
Secretary, or the officer or person(s) calling the meeting, to each stockholder
of record entitled to vote at such meeting. If such notice is to be sent by
mail, it shall be directed to such stockholder at his address as it appears on
the records of the Corporation, unless he shall have filed with the Secretary of
the Corporation a written request that notices to him be mailed to some other
address, in which case it shall be directed to him at such other address. Notice
of any meeting of stockholders shall not be required to be given to any
stockholder who shall attend such meeting in person or by proxy and shall not,
at the beginning of such meeting, object to the transaction of any business
because the meeting is not lawfully called or convened, or who shall, either
before or after the meeting, submit a signed waiver of notice, in person or by
proxy.
2.5 VOTING LIST. At least ten (10) days before each meeting of
stockholders, the Secretary or other officer of the Corporation who has charge
of the Corporation's stock ledger, either directly or through another officer
appointed by him or through a transfer agent appointed by the Board of
Directors, shall prepare a complete list of stockholders entitled to vote
thereat, arranged in alphabetical order and showing the address of each
stockholder and number of shares registered in the name of each stockholder. For
a period of ten (10) days prior to such meeting, such list shall be kept on file
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of meeting or a duly executed waiver of notice of such
meeting or, if not so specified, at the place where the meeting is to be held
and shall be open to examination by any stockholder during ordinary business
hours. Such list shall be produced at such meeting and kept at the meeting at
all times during such meeting and may be inspected by any stockholder who is
present.
2.6 QUORUM. The holders of a majority of the outstanding shares
entitled to vote on a matter, present in person or by proxy, shall constitute a
quorum at any meeting of stockholders, except as otherwise provided by law, the
Certificate of Incorporation of the Corporation, or these Bylaws. If a quorum
shall not be present, in person or by proxy, at any meeting of stockholders,
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the stockholders entitled to vote thereat who are present, in person or by
proxy, or, if no stockholder entitled to vote is present, any officer of the
Corporation may adjourn the meeting from time to time, without notice other than
announcement at the meeting (unless the Board of Directors, after such
adjournment, fixes a new record date for the adjourned meeting), until a quorum
shall be present, in person or by proxy. At any adjourned meeting at which a
quorum shall be present, in person or by proxy, any business may be transacted
which may have been transacted at the original meeting had a quorum been
present; provided that, if the adjournment is for more than thirty (30) days or
if after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the adjourned meeting.
2.7 REQUIRED VOTE; WITHDRAWAL OF QUORUM. When a quorum is present at
any meeting, the vote of the holders of at least a majority of the outstanding
shares entitled to vote who are present, in person or by proxy, shall decide any
question brought before such meeting, unless the question is one on which, by
express provision of statute, the Certificate of Incorporation of the
Corporation, or these Bylaws, a different vote is required, in which case such
express provision shall govern and control the decision of such question. The
stockholders present at a duly constituted meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
2.8 METHOD OF VOTING; PROXIES. Except as otherwise provided in the
Certificate of Incorporation of the Corporation or by law, each outstanding
share, regardless of class, shall be entitled to one (1) vote on each matter
submitted to a vote at a meeting of stockholders. Elections of directors need
not be by written ballot. At any meeting of stockholders, every stockholder
having the right to vote may vote either in person or by a proxy executed in
writing by the stockholder or by his duly authorized attorney-in-fact. Each such
proxy shall be filed with the Secretary of the Corporation before or at the time
of the meeting. No proxy shall be valid after three (3) years from the date of
its execution, unless otherwise provided in the proxy. If no date is stated in a
proxy, such proxy shall be presumed to have been executed on the date of the
meeting at which it is to be voted. Each proxy shall be revocable unless
expressly provided therein to be irrevocable and coupled with an interest
sufficient in law to support an irrevocable power or unless otherwise made
irrevocable by law.
2.9 RECORD DATE.
(a) For the purpose of determining stockholders entitled to
notice of or to vote at any meeting of stockholders, or any adjournment
thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion, or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may
fix a record date, which record date shall not precede the date upon
which the resolution fixing the record date is adopted by the Board of
Directors, for any such determination of stockholders, such date in any
case to be not more than sixty (60) days and not less than ten (10)
days prior to such meeting nor more than sixty (60) days prior to any
other action. If no record date is fixed:
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(i) The record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day next preceding
the day on which notice is given or, if notice is waived, at
the close of business on the day next preceding the day on
which the meeting is held.
(ii) The record date for determining stockholders for
any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating
thereto.
(iii) A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders
shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date
for the adjourned meeting.
(b) In order that the Corporation may determine the
stockholders entitled to consent to corporate action in writing without
a meeting, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board of Directors, and which date shall
not be more than ten (10) days after the date upon which the resolution
fixing the record date is adopted by the Board of Directors. If no
record date has been fixed by the Board of Directors, the record date
for determining stockholders entitled to consent to corporate action in
writing without a meeting, when no prior action by the Board of
Directors is required by law or these Bylaws, shall be the first date
on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Corporation by delivery to its
registered office in the State of Delaware, its principal place of
business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded.
Delivery made to the Corporation's registered office in the State of
Delaware, principal place of business, or such officer or agent shall
be by hand or by certified or registered mail, return receipt
requested. If no record date has been fixed by the Board of Directors
and prior action by the Board of Directors is required by law or these
Bylaws, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting shall be at
the close of business on the day on which the Board of Directors adopts
the resolution taking such prior action.
2.10 CONDUCT OF MEETING. The Chairman of the Board, if such office has
been filled, and, if not or if the Chairman of the Board is absent or otherwise
unable to act, the President shall preside at all meetings of stockholders. The
Secretary shall keep the records of each meeting of stockholders. In the absence
or inability to act of any such officer, such officer's duties shall be
performed by the officer given the authority to act for such absent or
non-acting officer under these Bylaws or by some person appointed by the
meeting.
2.11 INSPECTORS. The Board of Directors may, in advance of any meeting
of stockholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If any of the inspectors so appointed shall fail to appear
or act, the chairman of the meeting shall, or if inspectors shall not have been
appointed, the chairman of the meeting may, appoint one or
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<PAGE>
more inspectors. Each inspector, before entering upon the discharge of his
duties, shall take and sign an oath faithfully to execute the duties of
inspector at such meeting with strict impartiality and according to the best of
his ability. The inspectors shall determine the number of shares of capital
stock of the Corporation outstanding and the voting power of each, the number of
shares represented at the meeting, the existence of a quorum, and the validity
and effect of proxies and shall receive votes, ballots, or consents, hear and
determine all challenges and questions arising in connection with the right to
vote, count and tabulate all votes, ballots, or consents, determine the results,
and do such acts as are proper to conduct the election or vote with fairness to
all stockholders. On request of the chairman of the meeting, the inspectors
shall make a report in writing of any challenge, request, or matter determined
by them and shall execute a certificate of any fact found by them. No director
or candidate for the office of director shall act as an inspector of an election
of directors. Inspectors need not be stockholders.
ARTICLE THREE
DIRECTORS
3.1 MANAGEMENT. The business and property of the Corporation shall be
managed by the Board of Directors. Subject to the restrictions imposed by law,
the Certificate of Incorporation of the Corporation, or these Bylaws, the Board
of Directors may exercise all the powers of the Corporation.
3.2 NUMBER; QUALIFICATION; ELECTION; TERM. The number of directors,
which shall constitute the entire Board of Directors, shall be not less than
one. The first Board of Directors shall consist of the number of directors named
in the Certificate of Incorporation of the Corporation or, if no directors are
so named, shall consist of the number of directors elected by the
incorporator(s) at an organizational meeting or by unanimous written consent in
lieu thereof. Thereafter, within the limits above specified, the number of
directors which shall constitute the entire Board of Directors shall be
determined by resolution of the Board of Directors or by resolution of the
stockholders at the annual meeting thereof or at a special meeting thereof
called for that purpose. Except as otherwise required by law, the Certificate of
Incorporation of the Corporation, or these Bylaws, the directors shall be
elected at an annual meeting of stockholders at which a quorum is present.
Directors shall be elected by a plurality of the votes of the shares present in
person or represented by proxy and entitled to vote on the election of
directors. Each director so chosen shall hold office until the first annual
meeting of stockholders held after his election and until his successor is
elected and qualified or, if earlier, until his death, resignation, or removal
from office. None of the directors need be a stockholder of the Corporation or a
resident of the State of Delaware. Each director must have attained the age of
majority.
3.3 CHANGE IN NUMBER. No decrease in the number of directors
constituting the entire Board of Directors shall have the effect of shortening
the term of any incumbent director.
3.4 REMOVAL. Except as otherwise provided in the Certificate of
Incorporation of the Corporation or these Bylaws, at any meeting of stockholders
called expressly for that purpose, any director or the entire Board of Directors
may be removed, with or without cause, by a vote of the holders of a majority of
the shares then entitled to vote on the election of directors; provided,
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however, that so long as stockholders have the right to cumulate votes in the
election of directors pursuant to the Certificate of Incorporation of the
Corporation, if less than the entire Board of Directors is to be removed, no one
of the directors may be removed if the votes cast against his removal would be
sufficient to elect him if then cumulatively voted at an election of the entire
Board of Directors.
3.5 VACANCIES. Vacancies and newly-created directorships resulting from
any increase in the authorized number of directors may be filled by a majority
of the directors then in office, though less than a quorum, or by the sole
remaining director, and each director so chosen shall hold office until the
first annual meeting of stockholders held after his election and until his
successor is elected and qualified or, if earlier, until his death, resignation,
or removal from office. If there are no directors in office, an election of
directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly-created directorship, the directors then in
office shall constitute less than a majority of the whole Board of Directors (as
constituted immediately prior to any such increase), the Court of Chancery may,
upon application of any stockholder or stockholders holding at least ten percent
(10%) of the total number of the shares at the time outstanding having the right
to vote for such directors, summarily order an election to be held to fill any
such vacancies or newly-created directorships or to replace the directors chosen
by the directors then in office. Except as otherwise provided in these Bylaws,
when one or more directors shall resign from the Board of Directors, effective
at a future date, a majority of the directors then in office, including those
who have so resigned, shall have the power to fill such vacancy or vacancies,
the vote thereon to take effect when such resignation or resignations shall
become effective, and each director so chosen shall hold office as provided in
these Bylaws with respect to the filling of other vacancies.
3.6 MEETINGS OF DIRECTORS. The directors may hold their meetings and
may have an office and keep the books of the Corporation, except as otherwise
provided by statute, in such place or places within or without the State of
Delaware as the Board of Directors may from time to time determine or as shall
be specified in the notice of such meeting or duly executed waiver of notice of
such meeting.
3.7 FIRST MEETING. Each newly elected Board of Directors may hold its
first meeting for the purpose of organization and the transaction of business,
if a quorum is present, immediately after and at the same place as the annual
meeting of stockholders, and no notice of such meeting shall be necessary.
3.8 ELECTION OF OFFICERS. At the first meeting of the Board of
Directors after each annual meeting of stockholders at which a quorum shall be
present, the Board of Directors shall elect the officers of the Corporation.
3.9 REGULAR MEETINGS. Regular meetings of the Board of Directors shall
be held at such times and places as shall be designated from time to time by
resolution of the Board of Directors. Notice of such regular meetings shall not
be required.
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3.10 SPECIAL MEETINGS. Special meetings of the Board of Directors
shall be held whenever called by the Chairman of the Board, the President, or
any director.
3.11 NOTICE. The Secretary shall give notice of each special meeting to
each director at least twenty-four (24) hours before the meeting. Notice of any
such meeting need not be given to any director who shall, either before or after
the meeting, submit a signed waiver of notice or who shall attend such meeting
without protesting, prior to or at its commencement, the lack of notice to him.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the Board of Directors need be specified in the notice or
waiver of notice of such meeting.
3.12 QUORUM; MAJORITY VOTE. At all meetings of the Board of Directors,
a majority of the directors fixed in the manner provided in these Bylaws shall
constitute a quorum for the transaction of business. If at any meeting of the
Board of Directors there is less than a quorum present, a majority of those
present or any director solely present may adjourn the meeting from time to time
without further notice. Unless the act of a greater number is required by law,
the Certificate of Incorporation of the Corporation, or these Bylaws, the act of
a majority of the directors present at a meeting at which a quorum is in
attendance shall be the act of the Board of Directors. At any time that the
Certificate of Incorporation of the Corporation provides that directors elected
by the holders of a class or series of stock shall have more or less than one
vote per director on any matter, every reference in these Bylaws to a majority
or other proportion of directors shall refer to a majority or other proportion
of the votes of such directors.
3.13 PROCEDURE. At meetings of the Board of Directors, business shall
be transacted in such order as from time to time the Board of Directors may
determine. The Chairman of the Board, if such office has been filled, and, if
not or if the Chairman of the Board is absent or otherwise unable to act, the
President shall preside at all meetings of the Board of Directors. In the
absence or inability to act of either such officer, a chairman shall be chosen
by the Board of Directors from among the directors present. The Secretary of the
Corporation shall act as the secretary of each meeting of the Board of Directors
unless the Board of Directors appoints another person to act as secretary of the
meeting. The Board of Directors shall keep regular minutes of its proceedings,
which shall be placed in the minute book of the Corporation.
3.14 COMPENSATION. The Board of Directors shall have the authority to
fix the compensation, including fees and reimbursement of expenses, paid to
directors for attendance at regular or special meetings of the Board of
Directors or any committee thereof; provided, that nothing contained herein
shall be construed to preclude any director from serving the Corporation in any
other capacity or receiving compensation therefor.
ARTICLE FOUR
COMMITTEES
4.1 DESIGNATION. The Board of Directors, by resolution adopted by a
majority of the entire Board of Directors, may designate one or more committees.
4.2 NUMBER; QUALIFICATION; TERM. Each committee shall consist of one or
more
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directors appointed by resolution adopted by a majority of the entire Board of
Directors. The number of committee members may be increased or decreased from
time to time by resolution adopted by a majority of the entire Board of
Directors. Each committee member shall serve as such until the earliest of (i)
the expiration of his term as director, (ii) his resignation as a committee
member or as a director, or (iii) his removal as a committee member or as a
director.
4.3 AUTHORITY. Each committee, to the extent expressly provided in the
resolution establishing such committee, shall have and may exercise all of the
authority of the Board of Directors in the management of the business and
property of the Corporation except to the extent expressly restricted by law,
the Certificate of Incorporation of the Corporation, or these Bylaws.
4.4 COMMITTEE CHANGES. The Board of Directors shall have the power at
any time to fill vacancies in, to change the membership of, and to discharge any
committee.
4.5 ALTERNATE MEMBERS OF COMMITTEES. The Board of Directors may
designate one or more directors as alternate members of any committee. Any such
alternate member may replace any absent or disqualified member at any meeting of
the committee. If no alternate committee members have been so appointed to a
committee or each such alternate committee member is absent or disqualified, the
member or members of such committee present at any meeting and not disqualified
from voting, whether or not he or they constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of any such absent or disqualified member.
4.6 REGULAR MEETINGS. Regular meetings of any committee may be held
without notice at such time and place as may be designated from time to time by
the committee and communicated to all members thereof.
4.7 SPECIAL MEETINGS. Special meetings of any committee may be held
whenever called by any committee member. The committee member calling any
special meeting shall cause notice of such special meeting, including therein
the time and place of such special meeting, to be given to each committee member
at least two (2) days before such special meeting. Neither the business to be
transacted at, nor the purpose of, any special meeting of any committee need be
specified in the notice or waiver of notice of any special meeting.
4.8 QUORUM; MAJORITY VOTE. At meetings of any committee, a majority of
the number of members designated by the Board of Directors shall constitute a
quorum for the transaction of business. If a quorum is not present at a meeting
of any committee, a majority of the members present may adjourn the meeting from
time to time, without notice other than an announcement at the meeting, until a
quorum is present. The act of a majority of the members present at any meeting
at which a quorum is in attendance shall be the act of a committee, unless the
act of a greater number is required by law, the Certificate of Incorporation of
the Corporation, or these Bylaws.
4.9 MINUTES. Each committee shall cause minutes of its proceedings to
be prepared and shall report the same to the Board of Directors upon the request
of the Board of Directors. The minutes of the proceedings of each committee
shall be delivered to the Secretary of the
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Corporation for placement in the minute books of the Corporation.
4.10 COMPENSATION. Committee members may, by resolution of the Board of
Directors, be allowed a fixed sum and expenses of attendance, if any, for
attending any committee meetings or a stated salary.
4.11 RESPONSIBILITY. The designation of any committee and the
delegation of authority to it shall not operate to relieve the Board of
Directors or any director of any responsibility imposed upon it or such director
by law.
ARTICLE FIVE
NOTICE
5.1 METHOD. Whenever by statute, the Certificate of Incorporation of
the Corporation, or these Bylaws, notice is required to be given to any
committee member, director, or stockholder and no provision is made as to how
such notice shall be given, personal notice shall not be required and any such
notice may be given (a) in writing, by mail, postage prepaid, addressed to such
committee member, director, or stockholder at his address as it appears on the
books or (in the case of a stockholder) the stock transfer records of the
Corporation, or (b) by any other method permitted by law (including, but not
limited to, overnight courier service, telegram, telex, or telefax). Any notice
required or permitted to be given by mail shall be deemed to be delivered and
given at the time when the same is deposited in the United States mail as
aforesaid. Any notice required or permitted to be given by overnight courier
service shall be deemed to be delivered and given at the time delivered to such
service with all charges prepaid and addressed as aforesaid. Any notice required
or permitted to be given by telegram, telex, or telefax shall be deemed to be
delivered and given at the time transmitted with all charges prepaid and
addressed as aforesaid.
5.2 WAIVER. Whenever any notice is required to be given to any
stockholder, director, or committee member of the Corporation by statute, the
Certificate of Incorporation of the Corporation, or these Bylaws, a waiver
thereof in writing signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be equivalent to the
giving of such notice. Attendance of a stockholder, director or committee member
at a meeting shall constitute a waiver of notice of such meeting, except where
such person attends for the express purpose of objecting to the transaction of
any business on the ground that the meeting is not lawfully called or convened.
ARTICLE SIX
OFFICERS
6.1 NUMBER; TITLES; TERM OF OFFICE. The officers of the Corporation
shall be a President, a Secretary, and such other officers as the Board of
Directors may from time to time elect or appoint, including a Chairman of the
Board, one or more Vice Presidents (with each Vice President to have such
descriptive title, if any, as the Board of Directors shall determine), and a
Treasurer. Each officer shall hold office until his successor shall have been
duly elected
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and shall have qualified, until his death, or until he shall resign or shall
have been removed in the manner hereinafter provided. Any two or more offices
may be held by the same person. None of the officers need be a stockholder or a
director of the Corporation or a resident of the State of Delaware.
6.2 REMOVAL. Any officer or agent elected or appointed by the Board of
Directors may be removed by the Board of Directors whenever in its judgment the
best interest of the Corporation will be served thereby, but such removal shall
be without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer or agent shall not of itself create
contract rights.
6.3 VACANCIES. Any vacancy occurring in any office of the Corporation
(by death, resignation, removal or otherwise), may be filled by the Board of
Directors.
6.4 AUTHORITY. Officers shall have such authority and perform such
duties in the management of the Corporation as are provided in these Bylaws or
as may be determined by resolution of the Board of Directors not inconsistent
with these Bylaws.
6.5 COMPENSATION. The compensation, if any, of officers and agents
shall be fixed from time to time by the Board of Directors; provided, however,
that the Board of Directors may delegate the power to determine the compensation
of any officer and agent (other than the officer to whom such power is
delegated) to the Chairman of the Board or the President.
6.6 CHAIRMAN OF THE BOARD. The Chairman of the Board, if elected by the
Board of Directors, shall be the Chief Executive Officer of the Corporation and,
subject to the Board of Directors, he shall have general executive charge,
management, and control of the properties and operations of the Corporation in
the ordinary course of its business, with all such powers with respect to such
properties and operations as may be reasonably incident to such
responsibilities. Such officer shall preside at all meetings of the stockholders
and of the Board of Directors. Such officer may sign all certificates for shares
of stock of the Corporation.
6.7 PRESIDENT. The President shall be the chief operating officer of
the Corporation, and subject to the Board of Directors, shall have charge of the
day to day operations and management of the Corporation and its properties, with
all such powers with respect to such properties and operations as may be
reasonably incident to such responsibilities. If the Board of Directors has not
elected a Chairman of the Board or in the absence or inability to act of the
Chairman of the Board, the President shall exercise all of the powers and
discharge all of the duties of the Chairman of the Board. As between the
Corporation and third parties, any action taken by the President in the
performance of the duties of the Chairman of the Board shall be conclusive
evidence that there is no Chairman of the Board or that the Chairman of the
Board is absent or unable to act.
6.8 VICE PRESIDENTS. Each Vice President shall have such powers and
duties as may be assigned to him by the Board of Directors, the Chairman of the
Board, or the President, and (in order of their seniority as determined by the
Board of Directors, or, in the absence of such determination, as determined by
the length of time they have held the office of Vice President)
10
<PAGE>
shall exercise the powers of the President during that officer's absence or
inability to act. As between the Corporation and third parties, any action taken
by a Vice President in the performance of the duties of the President shall be
conclusive evidence of the absence or inability to act of the President at the
time such action was taken.
6.9 TREASURER. The Treasurer shall have custody of the Corporation's
funds and securities, shall keep full and accurate account of receipts and
disbursements, shall deposit all monies and valuable effects in the name and to
the credit of the Corporation in such depository or depositories as may be
designated by the Board of Directors, and shall perform such other duties as may
be prescribed by the Board of Directors, the Chairman of the Board, or the
President.
6.10 ASSISTANT TREASURERS. Each Assistant Treasurer shall have such
powers and duties as may be assigned to him by the Board of Directors, the
Chairman of the Board, or the President. The Assistant Treasurers (in the order
of their seniority as determined by the Board of Directors or, in the absence of
such a determination, as determined by the length of time they have held the
office of Assistant Treasurer) shall exercise the powers of the Treasurer during
that officer's absence or inability to act.
6.11 SECRETARY. Except as otherwise provided in these Bylaws, the
Secretary shall keep the minutes of all meetings of the Board of Directors and
of the stockholders in books provided for that purpose, and he shall attend to
the giving and service of all notices. He may sign with the Chairman of the
Board or the President, in the name of the Corporation, all contracts of the
Corporation and affix the seal of the Corporation thereto. He may sign with the
Chairman of the Board or the President all certificates for shares of stock of
the Corporation, and he shall have charge of the certificate books, transfer
books, and stock papers as the Board of Directors may direct, all of which shall
at all reasonable times be open to inspection by any director upon application
at the office of the Corporation during business hours. He shall in general
perform all duties incident to the office of the Secretary, subject to the
control of the Board of Directors, the Chairman of the Board, and the President.
6.12 ASSISTANT SECRETARIES. Each Assistant Secretary shall have such
powers and duties as may be assigned to him by the Board of Directors, the
Chairman of the Board, or the President. The Assistant Secretaries (in the order
of their seniority as determined by the Board of Directors or, in the absence of
such a determination, as determined by the length of time they have held the
office of Assistant Secretary) shall exercise the powers of the Secretary during
that officer's absence or inability to act.
ARTICLE SEVEN
CERTIFICATES AND SHAREHOLDERS
7.1 CERTIFICATES FOR SHARES. Certificates for shares of stock of the
Corporation shall be in such form as shall be approved by the Board of
Directors. The certificates shall be signed by the Chairman of the Board or the
President or a Vice President and also by the Secretary or an Assistant
Secretary or by the Treasurer or an Assistant Treasurer. Any and all signatures
on the certificate may be a facsimile and may be sealed with the seal of the
Corporation or a facsimile
11
<PAGE>
thereof. If any officer, transfer agent, or registrar who has signed, or whose
facsimile signature has been placed upon, a certificate has ceased to be such
officer, transfer agent, or registrar before such certificate is issued, such
certificate may be issued by the Corporation with the same effect as if he were
such officer, transfer agent, or registrar at the date of issue. The
certificates shall be consecutively numbered and shall be entered in the books
of the Corporation as they are issued and shall exhibit the holder's name and
the number of shares.
7.2 REPLACEMENT OF LOST OR DESTROYED CERTIFICATES. The Board of
Directors may direct a new certificate or certificates to be issued in place of
a certificate or certificates theretofore issued by the Corporation and alleged
to have been lost or destroyed, upon the making of an affidavit of that fact by
the person claiming the certificate or certificates representing shares to be
lost or destroyed. When authorizing such issue of a new certificate or
certificates the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require and/or to give the Corporation a bond with a
surety or sureties satisfactory to the Corporation in such sum as it may direct
as indemnity against any claim, or expense resulting from a claim, that may be
made against the Corporation with respect to the certificate or certificates
alleged to have been lost or destroyed.
7.3 TRANSFER OF SHARES. Shares of stock of the Corporation shall be
transferable only on the books of the Corporation by the holders thereof in
person or by their duly authorized attorneys or legal representatives. Upon
surrender to the Corporation or the transfer agent of the Corporation of a
certificate representing shares duly endorsed or accompanied by proper evidence
of succession, assignment, or authority to transfer, the Corporation or its
transfer agent shall issue a new certificate to the person entitled thereto,
cancel the old certificate, and record the transaction upon its books.
7.4 REGISTERED STOCKHOLDERS. The Corporation shall be entitled to treat
the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by law.
7.5 REGULATIONS. The Board of Directors shall have the power and
authority to make all such rules and regulations as they may deem expedient
concerning the issue, transfer, and registration or the replacement of
certificates for shares of stock of the Corporation.
7.6 LEGENDS. The Board of Directors shall have the power and authority
to provide that certificates representing shares of stock bear such legends as
the Board of Directors deems appropriate to assure that the Corporation does not
become liable for violations of federal or state securities laws or other
applicable law.
12
<PAGE>
ARTICLE EIGHT
MISCELLANEOUS PROVISIONS
8.1 DIVIDENDS. Subject to provisions of law and the Certificate of
Incorporation of the Corporation, dividends may be declared by the Board of
Directors at any regular or special meeting and may be paid in cash, in
property, or in shares of stock of the Corporation. Such declaration and payment
shall be at the discretion of the Board of Directors.
8.2 RESERVES. There may be created by the Board of Directors out of
funds of the Corporation legally available therefor such reserve or reserves as
the directors from time to time, in their discretion, consider proper to provide
for contingencies, to equalize dividends, or to repair or maintain any property
of the Corporation, or for such other purpose as the Board of Directors shall
consider beneficial to the Corporation, and the Board of Directors may modify or
abolish any such reserve in the manner in which it was created.
8.3 BOOKS AND RECORDS. The Corporation shall keep correct and complete
books and records of account, shall keep minutes of the proceedings of its
stockholders and Board of Directors and shall keep at its registered office or
principal place of business, or at the office of its transfer agent or
registrar, a record of its stockholders, giving the names and addresses of all
stockholders and the number and class of the shares held by each.
8.4 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by
the Board of Directors; provided, that if such fiscal year is not fixed by the
Board of Directors and the selection of the fiscal year is not expressly
deferred by the Board of Directors, the fiscal year shall be the calendar year.
8.5 SEAL. The seal of the Corporation shall be such as from time to
time may be approved by the Board of Directors.
8.6 RESIGNATIONS. Any director, committee member, or officer may resign
by so stating at any meeting of the Board of Directors or by giving written
notice to the Board of Directors, the Chairman of the Board, the President, or
the Secretary. Such resignation shall take effect at the time specified therein
or, if no time is specified therein, immediately upon its receipt. Unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
8.7 SECURITIES OF OTHER CORPORATIONS. The Chairman of the Board, the
President, or any Vice President of the Corporation shall have the power and
authority to transfer, endorse for transfer, vote, consent, or take any other
action with respect to any securities of another issuer which may be held or
owned by the Corporation and to make, execute, and deliver any waiver, proxy, or
consent with respect to any such securities.
8.8 TELEPHONE MEETINGS. Members of the Board of Directors and members
of a committee of the Board of Directors may participate in and hold a meeting
of such Board of Directors or committee by means of a conference telephone or
similar communications equipment by means of which persons participating in the
meeting can hear each other, and
13
<PAGE>
participation in a meeting pursuant to this section shall constitute presence in
person at such meeting, except where a person participates in the meeting for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
8.9 ACTION WITHOUT A MEETING.
(a) Unless otherwise provided in the Certificate of
Incorporation of the Corporation, any action required by the Delaware
General Corporation Law to be taken at any annual or special meeting of
the stockholders, or any action which may be taken at any annual or
special meeting of the stockholders, may be taken without a meeting,
without prior notice, and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the
holders (acting for themselves or through a proxy) of outstanding stock
having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which the
holders of all shares entitled to vote thereon were present and voted
and shall be delivered to the Corporation by delivery to its registered
office in the State of Delaware, its principal place of business, or an
officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Every written
consent of stockholders shall bear the date of signature of each
stockholder who signs the consent and no written consent shall be
effective to take the corporate action referred to therein unless,
within sixty (60) days of the earliest dated consent delivered in the
manner required by this Section 8.9(a) to the Corporation, written
consents signed by a sufficient number of holders to take action are
delivered to the Corporation by delivery to its registered office in
the State of Delaware, its principal place of business, or an officer
or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to
the Corporation's registered office, principal place of business, or
such officer or agent shall be by hand or by certified or registered
mail, return receipt requested.
(b) Unless otherwise restricted by the Certificate of
Incorporation of the Corporation or by these Bylaws, any action
required or permitted to be taken at a meeting of the Board of
Directors, or of any committee of the Board of Directors, may be taken
without a meeting if a consent or consents in writing, setting forth
the action so taken, shall be signed by all the directors or all the
committee members, as the case may be, entitled to vote with respect to
the subject matter thereof, and such consent shall have the same force
and effect as a vote of such directors or committee members, as the
case may be, and may be stated as such in any certificate or document
filed with the Secretary of State of the State of Delaware or in any
certificate delivered to any person. Such consent or consents shall be
filed with the minutes of proceedings of the board or committee, as the
case may be.
8.10 INVALID PROVISIONS. If any part of these Bylaws shall be held
invalid or inoperative for any reason, the remaining parts, so far as it is
possible and reasonable, shall remain valid and operative.
14
<PAGE>
8.11 MORTGAGEE, ETC. With respect to any deed, deed of trust, mortgage,
or other instrument executed by the Corporation through its duly authorized
officer or officers, the attestation to such execution by the Secretary of the
Corporation shall not be necessary to constitute such deed, deed of trust,
mortgage, or other instrument a valid and binding obligation against the
Corporation unless the resolutions, if any, of the Board of Directors
authorizing such execution expressly state that such attestation is necessary.
8.12 HEADINGS. The headings used in these Bylaws have been inserted for
administrative convenience only and do not constitute matter to be construed in
interpretation.
8.13 REFERENCES. Whenever herein the singular number is used, the same
shall include the plural where appropriate, and words of any gender should
include each other gender where appropriate.
8.14 AMENDMENTS. These Bylaws may be altered, amended, or repealed or
new Bylaws may be adopted by the stockholders or by the Board of Directors at
any regular meeting of the stockholders or the Board of Directors or at any
special meeting of the stockholders or the Board of Directors if notice of such
alteration, amendment, repeal, or adoption of new Bylaws be contained in the
notice of such special meeting.
15
<PAGE>
<TABLE>
<CAPTION>
DYNEGY HOLDINGS INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($ IN 000'S)
==========================================================================================================================
YEAR ENDED DECEMBER 31,
=====================================================================
1999 1998 1997 1996 1995
============ ========== ============ =========== ==========
<S> <C> <C> <C> <C> <C>
Computation of Earnings:
Pre-tax income (loss) from continuing operations $ 226,526 $ 158,691 $ (149,895) $ 169,645 $ 65,234
Undistributed income from equity investees 13,754 6,477 4,073 21,729 9,169
------------ ---------- ------------ ----------- ----------
Computed Earnings (Loss) 212,772 152,214 (153,968) 147,916 56,065
------------ ---------- ------------ ----------- ----------
Fixed Charges:
Interest costs:
Expensed 75,730 73,672 63,455 46,202 34,475
Capitalized 16,695 7,591 8,800 1,200 1,028
Minority interest in income of a subsidiary 16,632 16,632 9,841 - -
Amortization of financing costs 2,434 1,320 943 772 1,132
Preferred Stock Dividend - - - - -
Tax Gross-up on Preferred Dividends - - - - -
Amortization of Premium - (2,568) (6,768) (4,892) (3,216)
Rental expense representative of interest factor 24,732 20,698 13,572 4,171 3,719
------------ ---------- ------------ ----------- ----------
Total Fixed Charges 136,223 117,345 89,843 47,453 37,138
------------ ---------- ------------ ----------- ----------
Earnings Before Income Taxes and Fixed Charges $ 332,300 $ 261,968 $ (72,925) $ 194,169 $ 92,175
============ ========== ============ =========== ==========
Ratio of Earnings to Fixed Charges 2.43 2.23 (a) 4.09 2.48
============ ========== ============ =========== ==========
</TABLE>
(a) Earnings are inadequate to cover fixed charges for the year ended December
31, 1997, by approximately $72.9 million.
<PAGE>
EXHIBIT 22.1
SUBSIDIARIES OF DYNEGY HOLDINGS INC.
AS OF 02/29/00
<TABLE>
<CAPTION>
SUBSIDIARY STATE OR JURISDICTION OF INCORPORATION
- ---------- --------------------------------------
<S> <C>
1. Dynegy Power Corp. Delaware
2. Dynegy Global Energy, Inc. Delaware
3. DMT Holdings, Inc. Delaware
4. Dynegy GP Inc. Delaware
5. Dynegy Midstream, Inc. Delaware
6. Dynegy Regulated Holdings, Inc. Delaware
7. Dynegy Upper Holdings, LLC Delaware
8. Dynegy Administrative Services Company Delaware
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-3 (File No 333-89021).
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 45230 28367
<SECURITIES> 0 0
<RECEIVABLES> 2041416 1623738
<ALLOWANCES> 0 0
<INVENTORY> 271884 149901
<CURRENT-ASSETS> 2805080 2117241
<PP&E> 2575100 2446878
<DEPRECIATION> (557219) (514771)
<TOTAL-ASSETS> 6525171 5264237
<CURRENT-LIABILITIES> (2538523) (2026323)
<BONDS> 0 0
0 0
(75418) (75418)
<COMMON> (1575) (1533)
<OTHER-SE> (1232489) (1126530)
<TOTAL-LIABILITY-AND-EQUITY> (6525171) (5264237)
<SALES> (15429976) (14257997)
<TOTAL-REVENUES> (15429976) (14257997)
<CGS> 14886101 13829310
<TOTAL-COSTS> 14886101 13829310
<OTHER-EXPENSES> 45519 7677
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 78164 74992
<INCOME-PRETAX> (226526) (158691)
<INCOME-TAX> 74677 50338
<INCOME-CONTINUING> (151849) (108353)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (151844) (108353)
<EPS-BASIC> 0.98 0.71
<EPS-DILUTED> 0.91 0.66
</TABLE>
