<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-29311
------------------------
DYNEGY HOLDINGS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3248415
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1000 LOUISIANA, SUITE 5800, HOUSTON, TEXAS 77002
(Address of principal executive offices) (zip code)
</TABLE>
(713) 507-6400
(Registrant's telephone number, including area code)
WWW.DYNEGY.COM
(Registrant's home page)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
All outstanding equity of Dynegy Holdings Inc. is held by its parent,
Dynegy Inc.
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<PAGE>
DYNEGY HOLDINGS INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets:
September 30, 2000 and December 31, 1999................ 3
Condensed Consolidated Statements of Operations:
For the three-months ended September 30, 2000 and
1999.................................................... 4
Condensed Consolidated Statements of Operations:
For the nine-months ended September 30, 2000 and 1999... 5
Condensed Consolidated Statements of Cash Flows:
For the nine-months ended September 30, 2000 and 1999... 6
Notes to Condensed Consolidated Financial Statements........ 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................ 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................. 33
Item 6. Exhibits and Reports on Form 8-K................... 33
</TABLE>
2
<PAGE>
DYNEGY HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 59,808 $ 45,230
Accounts receivable, net.................................... 2,722,527 1,992,450
Accounts receivable, affiliates............................. 117,215 48,966
Inventories................................................. 292,585 271,884
Assets from risk management activities...................... 2,278,199 379,833
Prepayments and other assets................................ 79,350 66,717
----------- ----------
5,549,684 2,805,080
----------- ----------
PROPERTY, PLANT AND EQUIPMENT............................... 5,211,071 2,575,100
Less: accumulated depreciation.............................. (537,471) (557,219)
----------- ----------
4,673,600 2,017,881
----------- ----------
OTHER ASSETS:
Investments in unconsolidated affiliates.................... 769,466 627,335
Accounts receivable, affiliates............................. 722,939 --
Assets from risk management activities...................... 1,261,595 452,913
Other assets................................................ 582,721 621,962
----------- ----------
TOTAL ASSETS............................................ $13,560,005 $6,525,171
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 2,395,320 $1,667,199
Accounts payable, affiliates................................ 292,483 161,500
Accrued liabilities......................................... 281,786 184,013
Liabilities from risk management activities................. 1,970,603 334,080
Notes payable and current portion of long-term debt......... -- 191,731
----------- ----------
4,940,192 2,538,523
LONG TERM DEBT.............................................. 1,574,162 1,299,333
LONG TERM DEBT, AFFILIATE................................... 944,450 --
OTHER LIABILITIES:
Liabilities from risk management activities................. 1,269,577 321,252
Deferred income taxes....................................... 359,139 335,190
Other long term liabilities................................. 390,264 418,102
----------- ----------
9,477,784 4,912,400
----------- ----------
MINORITY INTEREST........................................... 103,688 103,289
COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY
TRUST..................................................... 200,000 200,000
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 50,000,000 shares
authorized; 8,000,000 shares designated as Series A
Participating Preferred Stock, 7,815,363 shares issued and
outstanding at December 31, 1999.......................... -- 75,418
Common stock, $0.01 par value, 400,000,000 shares
authorized; 314,998,002 shares issued and outstanding at
December 31, 1999......................................... -- 1,575
Additional paid-in capital.................................. 2,235,947 973,000
Accumulated other comprehensive income (loss)............... (9,472) --
Retained earnings........................................... 519,650 277,074
Less: treasury stock, at cost; 2,401,400 shares at December
31, 1999.................................................. -- (17,585)
Stockholder's equity........................................ 1,032,408 --
----------- ----------
3,778,533 1,309,482
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $13,560,005 $6,525,171
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
DYNEGY HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Revenues.................................................... $7,761,931 $4,584,929
Cost of sales............................................... 7,639,179 4,426,115
---------- ----------
Operating margin........................................ 122,752 158,814
Depreciation and amortization............................... 32,251 33,235
General and administrative expenses......................... 48,108 53,495
---------- ----------
Operating income........................................ 42,393 72,084
Equity in earnings of unconsolidated affiliates............. 109,776 31,858
Other income................................................ 102,355 8,414
Interest expense............................................ (21,059) (22,039)
Other expenses.............................................. (22,292) (10,725)
Minority interest in income of a subsidiary................. (4,158) (4,158)
---------- ----------
Income before income taxes.................................. 207,015 75,434
Income tax provision........................................ 72,331 24,742
---------- ----------
NET INCOME.................................................. $ 134,684 $ 50,692
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
DYNEGY HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues.................................................... $17,921,447 $10,790,659
Cost of sales............................................... 17,455,579 10,386,021
----------- -----------
Operating margin........................................ 465,868 404,638
Depreciation and amortization............................... 114,636 96,273
General and administrative expenses......................... 155,498 150,128
----------- -----------
Operating income........................................ 195,734 158,237
Equity in earnings of unconsolidated affiliates............. 171,889 60,145
Other income................................................ 171,389 29,781
Interest expense............................................ (67,494) (59,459)
Other expenses.............................................. (79,823) (18,603)
Minority interest in income of a subsidiary................. (12,497) (12,474)
----------- -----------
Income before income taxes.................................. 379,198 157,627
Income tax provision........................................ 136,623 50,888
----------- -----------
NET INCOME.................................................. $ 242,575 $ 106,739
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
DYNEGY HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 242,575 $ 106,739
Items not affecting cash flows from operating activities:
Depreciation and amortization............................. 83,095 82,486
Equity in earnings of affiliates, net of cash
distributions........................................... (138,354) (18,571)
Risk management activities................................ (122,200) (65,079)
Deferred income taxes..................................... 101,636 47,243
Gain on sale of assets, net............................... (108,663) (8,935)
Other..................................................... -- 13,053
Changes in assets and liabilities resulting from operating
activities:
Accounts receivable....................................... (921,293) (366,706)
Inventories............................................... (2,210) (122,106)
Prepayments and other assets.............................. 14,180 74,438
Accounts payable.......................................... 959,574 354,784
Accrued liabilities....................................... (58,866) 25,123
Other, net.................................................. 64,726 (25,711)
---------- ---------
Net cash provided by operating activities................... 114,200 96,758
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (238,656) (279,852)
Investment in unconsolidated affiliates, net................ (90,292) (79,190)
Proceeds from asset sales................................... 804,434 16,650
Other, net.................................................. -- (42,398)
---------- ---------
Net cash provided by (used in) investing activities......... 475,486 (384,790)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings.......................... 318,149 397,488
Repayments of long-term borrowings.......................... (34,592) (13,655)
Net payments on commercial paper and money market lines of
credit.................................................... (183,518) (109,397)
Affiliate transactions...................................... (678,450) --
Other, net.................................................. 3,303 13,566
---------- ---------
Net cash (used in) provided by financing activities......... (575,108) 288,002
---------- ---------
Net change in cash and cash equivalents..................... 14,578 (30)
Cash and cash equivalents, beginning of period.............. 45,230 28,367
---------- ---------
Cash and cash equivalents, end of period.................... $ 59,808 $ 28,337
========== =========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
DYNEGY HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
NOTE 1--ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to interim financial reporting
as prescribed by the Securities and Exchange Commission ("SEC"). These interim
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in Dynegy Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1999, filed with the SEC.
The financial statements include all material adjustments, which, in the
opinion of management, are necessary for a fair presentation of the results for
the interim periods. Interim period results are not necessarily indicative of
the results for the full year. The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to develop estimates and make assumptions that affect reported
financial position and results of operations and that impact the nature and
extent of disclosure, if any, of contingent assets and liabilities. Actual
results could differ from those estimates. Certain reclassifications have been
made to prior year amounts in order to conform to current year presentation.
Dynegy Holdings Inc. ("Dynegy" or the "Company") routinely conducts business
with subsidiaries of Dynegy Inc. that are not part of this consolidated group.
These transactions include the purchase or sale of commodities and other
commercial operations as well as certain other services. Dynegy's results of
operations include allocations of certain overhead, interest, tax and other
similar revenues and costs pursuant to entity-wide sharing arrangements.
Affiliate transactions have been conducted at prices and terms equivalent to
those available to and transacted with unrelated parties, in all material
respects.
NOTE 2--BUSINESS COMBINATION
On February 1, 2000, the former Dynegy Inc., a Delaware corporation since
renamed Dynegy Holdings Inc., and Illinova Corporation ("Illinova") merged in a
transaction (the "Merger") in which Dynegy and Illinova became wholly owned
subsidiaries of Dynegy Inc., a newly formed Illinois corporation. This Merger,
which was approved by shareholders of both the former Dynegy Inc. and Illinova,
resulted in each share of the former Dynegy, Inc common stock and Series A
Participating Preferred stock being converted into 1.38 shares (restated for the
two-for-one stock split effected by a means of a stock dividend distributed
August 22, 2000) of Dynegy Inc. equity pursuant to the Merger terms. This Merger
was accounted for under the purchase method of accounting and Dynegy was the
acquirer for accounting purposes. As a result of the Merger, Dynegy Inc. is now
Dynegy's sole shareholder.
NOTE 3--ACCOUNTING POLICY CHANGE
The Company continues to analyze the effects of adoption of the rules
promulgated by Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133") as amended by
Financial Accounting Standard Nos. 137 and 138. Provisions in Statement No. 133
will affect the accounting and disclosure of contractual arrangements and
certain operations of the Company not presently recorded on a fair value basis.
Provisions of Statement No. 133 must be applied to fiscal periods beginning
after June 15, 2000. Dynegy intends to adopt the provisions of Statement
No. 133 effective January 1, 2001. Management is currently assessing the
financial statement impact of the adoption; however, such adoption is not
expected to have a significant impact on Dynegy's financial position at the time
of adoption.
7
<PAGE>
DYNEGY HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
NOTE 3--ACCOUNTING POLICY CHANGE (CONTINUED)
Management believes the adoption of the provisions of Statement No. 133 may
affect the variability of future periodic results reported by Dynegy, as well as
its competitors, as market conditions and resulting derivative valuations change
from time to time. Such earnings variability, if any, will likely result
principally from valuations issues arising from imbalances between supply and
demand created by illiquidity in certain commodity markets. Illiquidity results
from, among other things, a lack of mature trading and price discovery
mechanisms, transmission and/or transportation constraints resulting from
regulation or other issues in certain markets and the need for a representative
number of market participants maintaining the financial liquidity and other
resources necessary to compete effectively.
NOTE 4--CAPITAL CONTRIBUTION
On September 29, 2000, Dynegy Inc. contributed all of the outstanding equity
of Dynegy Midwest Generation ("DMG") to Dynegy. The contribution of
approximately $2.2 billion has been recorded on Dynegy's balance sheet as of
September 30, 2000. DMG's results of operations will be included with those of
Dynegy's beginning October 1, 2000.
NOTE 5--UNCONSOLIDATED AFFILIATES
At September 30, 2000, the Company had cost basis investments in eSpeed,
Altra Energy Technologies, Inc., Canenerco, Ltd., Enertech Capital
Partners II L.P., Sagemaker, Inc., Energy Infrastructure Overseas, Ltd. and
Compton Petroleum Corporation.
Dynegy's investment in unconsolidated affiliates accounted for by the equity
method included: an approximate 23 percent interest in Venice Energy Services
Company, L.L.C.; a 38.75 percent partnership interest in Gulf Coast
Fractionators; a 39 percent partnership interest in West Texas LPG Pipeline,
Limited Partnership; interests ranging from eight to 50 percent in various
entities, each formed to build (or buy), own and operate power generation
facilities located in the United States, the United Kingdom, Asia and South
America; a 33.33 percent interest in Waskom Gas Processing Company, a
partnership that owns and operates a natural gas processing, extraction and
fractionation facility; a 50 percent interest in NICOR Energy L.L.C., a retail
energy alliance located in the Midwest; a 20 percent interest in SouthStar
Energy Services L.L.C., a retail energy alliance located in the Southeast; and a
29.19 percent interest in Canadian Midstream Services, Ltd., a partnership that
owns and operates a natural gas processing facility.
8
<PAGE>
DYNEGY HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
NOTE 5--UNCONSOLIDATED AFFILIATES (CONTINUED)
Summarized unaudited combined income statement information for the
unconsolidated affiliates accounted for by the equity method is presented in the
following table:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
2000 1999
--------------------- -------------------
EQUITY EQUITY
TOTAL SHARE TOTAL SHARE
---------- -------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues(1)................................ $1,084,474 $388,364 $739,162 $276,296
---------- -------- -------- --------
Operating margin(1)........................ $ 254,503 $ 98,740 $256,553 $ 96,611
---------- -------- -------- --------
Net income(1).............................. $ 345,928 $159,588 $ 98,786 $ 42,446
---------- -------- -------- --------
</TABLE>
------------------------
(1) The interim financial data for both periods presented is exclusive of
amounts attributable to the Company's investment in Accord Energy Limited
("Accord") as such information was unavailable. The Company sold its
investment in Accord in the third quarter of 2000.
NOTE 6--COMMITMENTS AND CONTINGENCIES
On August 3, 1998, Modesto Irrigation District ("MID") filed a lawsuit
against PG&E and Destec Energy, Inc. ("Destec") in federal court for the
Northern District of California, San Francisco division. The lawsuit alleges
violation of federal and state antitrust laws and breach of contract against
Destec. The allegations are related to a power sale and purchase arrangement in
the city of Pittsburg, California. MID seeks actual damages from PG&E and Destec
in amounts not less than $25 million. MID also seeks a trebling of any portion
of damages related to its antitrust claims. By order dated February 2, 1999, the
federal District Court dismissed MID's state and federal antitrust claims
against PG&E and Destec; however, the Court granted MID leave of thirty days to
amend its complaint to state an antitrust cause of action. On March 3, 1999, MID
filed an amended complaint recasting its federal and state antitrust claims
against PG&E and Destec and restating its breach of contract claim against
Destec. PG&E and Destec filed motions to dismiss MID's revised federal and state
antitrust claims and a hearing on the motions to dismiss was held in July 1999.
On August 20, 1999, the District Court again dismissed MID's antitrust claims
against PG&E and Destec, this time without leave to amend the complaint. As a
result of the dismissal of the antitrust claims, the District Court also
dismissed the pendant state law claims. MID has appealed the District Court's
dismissal of its suit to the Ninth Circuit Court of Appeal. While the Ninth
Circuit has not yet scheduled this appeal for oral argument, it is estimated
that oral argument will occur around February 2001.
Following dismissal of its federal court suit, MID filed suit in California
state court asserting breach of contract and tortious interference with
prospective economic relations claims against Destec and tortious interference
with contract and tortious interference with prospective economic relations
claims against PG&E. Motions to dismiss MID's state court claims were heard by
the state court and by order dated April 6, 2000, MID was directed to amend its
complaint. MID filed its amended complaint on April 20, 2000, including Dynegy
as a defendant. Dynegy filed a motion to dismiss MID's amended complaint against
Dynegy, and the Court partially granted Dynegy's motion to dismiss while also
granting MID leave to amend its complaint. Before MID filed its amended
complaint, MID agreed
9
<PAGE>
DYNEGY HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED)
with PG&E and Dynegy to execute a tolling agreement on all claims and to dismiss
the state court case until the federal appeal is decided. 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, results of operations or cash flows of the Company.
The Company is subject to various legal proceeding and claims that arise in
the normal course of business. Further, in addition to certain disclosures made
previously herein, the Company has assumed liability for various claims,
assessments and litigation in connection with some of its strategic
acquisitions. In the opinion of management, the amount of ultimate liability
with respect to these actions will not have a material adverse effect on the
financial position, results of operations or cash flows of the Company.
During 2000, the Company entered into new or restructured lease arrangements
associated with a natural gas-fired generating facility and certain electricity
generating equipment. Under the terms of these arrangements, the Company
provided certain residual value guarantees associated with the leased assets
while retaining certain rights to the assets. The retained rights include the
right to extend the term of the lease arrangement, an option to acquire the
leased assets from each of the lessors and the right to participate in the
outright sale of the related assets. Aggregate future minimum lease payments
under these arrangements total approximately $49 million.
In addition, the Company achieved necessary approvals to begin construction
on its Riverside Power Project, a 500-MW natural gas-fired, simple cycle peaking
facility, located in Louisa, Kentucky. A Dynegy subsidiary is designing and
constructing the generating facility, as agent for a third party, and Dynegy is
obligated to guarantee approximately 90 percent of the actual cost of the
Riverside project during the construction phase. It is anticipated that Dynegy
will subsequently lease the completed Riverside facility from that third party
for an initial term of five years. Under certain circumstances, the Company
maintains an option to purchase the facility from the third party and it may
participate in the outright sale of the asset.
NOTE 7--SEGMENT INFORMATION
Dynegy's operations are divided into two reportable segments: Dynegy
Marketing & Trade ("DMT") and Dynegy Midstream Services ("DMS").
- DMT focuses on energy convergence--the marketing, trading and arbitrage
opportunities that exist among power, natural gas, weather derivatives and
coal that can be enhanced by the control and optimization of related
physical assets.
- Dynegy's natural gas liquids subsidiary, DMS, includes North American
midstream liquids operations, global natural gas liquids transportation
and marketing operations.
Dynegy Energy Services, reported as a separate segment for the first six
months of this year, is included with DMT.
10
<PAGE>
DYNEGY HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
NOTE 7--SEGMENT INFORMATION (CONTINUED)
Operating segment information for the three- and nine-month periods ended
September 30, 2000 and 1999 is presented below.
DYNEGY'S SEGMENT DATA FOR THE QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
DMT DMS ELIMINATION TOTAL
----------- ---------- ----------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic................................. $ 5,353,645 $1,277,412 $ -- $ 6,631,057
Canadian................................. 573,199 356,764 -- 929,963
European................................. 200,911 -- -- 200,911
----------- ---------- -------- -----------
6,127,755 1,634,176 -- 7,761,931
----------- ---------- -------- -----------
Intersegment revenues:
Domestic................................. 163,352 249,749 (413,101) --
Canadian................................. 36,858 153 (37,011) --
European................................. -- -- -- --
----------- ---------- -------- -----------
200,210 249,902 (450,112) --
----------- ---------- -------- -----------
Total revenues........................... 6,327,965 1,884,078 (450,112) 7,761,931
----------- ---------- -------- -----------
Operating margin............................. 62,763 59,989 -- 122,752
Depreciation and amortization................ (12,261) (19,990) -- (32,251)
Interest expense............................. (6,554) (14,505) -- (21,059)
Other income (expense)....................... 84,664 (4,601) -- 80,063
Equity earnings, net......................... 103,600 6,176 -- 109,776
Income tax provision......................... (67,414) (4,917) -- (72,331)
Net income................................... $ 126,849 $ 7,835 $ -- $ 134,684
Identifiable assets:
Domestic................................. $10,478,034 $1,968,510 $ -- $12,446,544
Canadian................................. 538,193 183,078 -- 721,271
Europe................................... 392,190 -- -- 392,190
Investment in unconsolidated affiliates...... 610,735 158,731 -- 769,466
Capital expenditures and investment in
unconsolidated affiliates.................. (99,009) (30,215) -- (129,224)
</TABLE>
11
<PAGE>
DYNEGY HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
NOTE 7--SEGMENT INFORMATION (CONTINUED)
DYNEGY'S SEGMENT DATA FOR THE QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
DMT DMS ELIMINATION TOTAL
---------- ---------- ----------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic................................... $2,585,033 $1,400,520 $ -- $3,985,553
Canadian................................... 324,764 93,400 -- 418,164
European................................... 181,212 -- -- 181,212
---------- ---------- -------- ----------
3,091,009 1,493,920 -- 4,584,929
---------- ---------- -------- ----------
Intersegment revenues:
Domestic................................... 111,763 50,976 (162,739) --
Canadian................................... 21,483 17,483 (38,966) --
European................................... -- -- -- --
---------- ---------- -------- ----------
133,246 68,459 (201,705) --
---------- ---------- -------- ----------
Total revenues............................. 3,224,255 1,562,379 (201,705) 4,584,929
---------- ---------- -------- ----------
Operating margin............................... 75,460 83,354 -- 158,814
Depreciation and amortization.................. (9,796) (23,439) -- (33,235)
Interest expense............................... (12,422) (9,617) -- (22,039)
Other income (expense)......................... 148 (2,459) -- (2,311)
Equity earnings................................ 25,574 6,284 -- 31,858
Income tax provision........................... (14,453) (10,289) -- (24,742)
Net income..................................... $ 26,776 $ 23,916 $ -- $ 50,692
Identifiable assets:
Domestic................................... $3,436,313 $2,510,394 $ -- $5,946,707
Canadian................................... 313,621 39,044 -- 352,665
Europe..................................... 115,088 -- -- 115,088
Investment in unconsolidated affiliates........ 404,964 165,687 -- 570,651
Capital expenditures and investment in
unconsolidated affiliates.................... (110,288) (34,124) -- (144,412)
</TABLE>
12
<PAGE>
DYNEGY HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
NOTE 7--SEGMENT INFORMATION (CONTINUED)
DYNEGY'S SEGMENT DATA FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
DMT DMS ELIMINATION TOTAL
----------- ---------- ----------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic................................. $11,039,177 $3,680,723 $ -- $14,719,900
Canadian................................. 1,402,293 799,997 -- 2,202,290
European................................. 999,257 -- -- 999,257
----------- ---------- --------- -----------
13,440,727 4,480,720 -- 17,921,447
----------- ---------- --------- -----------
Intersegment revenues:
Domestic................................. 196,778 676,511 (873,289) --
Canadian................................. 86,846 8,705 (95,551) --
European................................. -- -- -- --
----------- ---------- --------- -----------
283,624 685,216 (968,840) --
----------- ---------- --------- -----------
Total revenues........................... 13,724,351 5,165,936 (968,840) 17,921,447
----------- ---------- --------- -----------
Operating margin............................. 277,512 188,356 -- 465,868
Depreciation and amortization................ (30,443) (84,193) -- (114,636)
Interest expense............................. (49,892) (17,602) -- (67,494)
Other income (expense)....................... 131,659 (40,093) -- 91,566
Equity earnings.............................. 154,361 17,528 -- 171,889
Income tax provision......................... (131,248) (5,375) -- (136,623)
Net income................................... $ 229,383 $ 13,192 $ -- $ 242,575
Identifiable assets:
Domestic................................. $10,478,034 $1,968,510 $ -- $12,446,544
Canadian................................. 538,193 183,078 -- 721,271
Europe................................... 392,190 -- -- 392,190
Investment in unconsolidated affiliates...... 610,735 158,731 -- 769,466
Capital expenditures and investment in
unconsolidated affiliates.................. (239,435) (89,513) -- (328,948)
</TABLE>
13
<PAGE>
DYNEGY HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
NOTE 7--SEGMENT INFORMATION (CONTINUED)
DYNEGY'S SEGMENT DATA FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
DMT DMS ELIMINATION TOTAL
---------- ---------- ----------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic................................... $5,855,757 $3,060,975 $ -- $8,916,732
Canadian................................... 982,822 203,342 -- 1,186,164
European................................... 687,763 -- -- 687,763
---------- ---------- -------- ----------
7,526,342 3,264,317 -- 10,790,659
---------- ---------- -------- ----------
Intersegment revenues:
Domestic................................... 238,847 151,639 (390,486) --
Canadian................................... 42,766 17,483 (60,249) --
European................................... -- -- -- --
---------- ---------- -------- ----------
281,613 169,122 (450,735) --
---------- ---------- -------- ----------
Total revenues............................. 7,807,955 3,433,439 (450,735) 10,790,659
---------- ---------- -------- ----------
Operating margin............................... 216,374 188,264 -- 404,638
Depreciation and amortization.................. (27,180) (69,093) -- (96,273)
Interest expense............................... (30,995) (28,464) -- (59,459)
Other income (expense)......................... 18,324 (7,146) -- 11,178
Equity earnings................................ 48,084 12,061 -- 60,145
Income tax provision........................... (44,122) (6,766) -- (50,888)
Net income..................................... $ 74,907 $ 31,832 $ -- $ 106,739
Identifiable assets:
Domestic................................... $3,436,313 $2,510,394 $ -- $5,946,707
Canadian................................... 313,621 39,044 -- 352,665
Europe..................................... 115,088 -- -- 115,088
Investment in unconsolidated affiliates........ 404,964 165,687 -- 570,651
Capital expenditures and investment in
unconsolidated affiliates.................... (289,476) (69,566) -- (359,042)
</TABLE>
14
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
The following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements of Dynegy Holdings Inc.
included elsewhere herein and with the Dynegy Inc. Annual Report on Form 10-K
for the year ended December 31, 1999.
GENERAL
COMPANY PROFILE. Dynegy Holdings Inc. ("Dynegy" or the "Company") is a
holding company that conducts substantially all of its business through its
subsidiaries. The Company is a leading provider of energy products and services
in North America, the United Kingdom and continental Europe. Products marketed
by the Company's wholesale marketing operations include natural gas,
electricity, coal, emissions, natural gas liquids, crude oil, liquid petroleum
gas and related services. The Company's wholesale marketing operations are
supported by ownership or control of an extensive asset base and transportation
network that includes unregulated power generation, gas and liquids storage
capacity, gas, power and liquids transportation capacity and gas gathering,
processing and fractionation assets.
From inception of operations in 1984 until 1990, the Company limited its
activities primarily to natural gas marketing. Starting in 1990, business
operations began expanding through acquisitions and strategic alliances
resulting in the formation of a midstream energy asset business and established
energy marketing operations in both Canada and the United Kingdom. The Company
initiated domestic electric power marketing operations in February 1994.
Effective March 1, 1995, the Company acquired Trident NGL Holding, Inc., a fully
integrated natural gas liquids company. On August 31, 1996, Natural Gas
Clearinghouse ("NGC") (the predecessor company to Dynegy Inc.) completed a
strategic combination with Chevron whereby substantially all of Chevron's
mid-stream assets were acquired. Effective July 1, 1997, the Company acquired
Destec Energy, Inc., a leading independent power producer and developer. During
1998, the Company changed its name to Dynegy Inc. in order to reflect its
evolution from a natural gas marketing company to an energy services company
capable of meeting the growing demands and diverse challenges of the dynamic
energy market of the 21st Century. In 1999, the Company initiated electric power
marketing operations in the United Kingdom and in continental Europe.
Dynegy Inc. acquired Illinova Corporation ("Illinova") in the first quarter
of 2000. As part of the acquisition of Illinova, the former Dynegy, which was
renamed Dynegy Holdings Inc., became a wholly owned subsidiary of a new holding
company, Dynegy Inc. The assets, liabilities and operations of the former
Dynegy Inc. before the acquisition became the assets, liabilities and operations
of Dynegy Holdings Inc. after the acquisition.
CAPITAL CONTRIBUTION. On September 29, 2000, Dynegy Inc. contributed Dynegy
Midwest Generation ("DMG") to Dynegy. The net contribution of approximately
$2.2 billion has been recorded on Dynegy's balance sheet as of September 30,
2000. DMG's results of operations will be included with those of Dynegy's
beginning October 1, 2000.
BUSINESS SEGMENTS. Dynegy's operations are divided into two reportable
segments: Dynegy Marketing & Trade ("DMT") and Dynegy Midstream Services
("DMS").
15
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
- DMT focuses on energy convergence--the marketing, trading and arbitrage
opportunities that exist among power, natural gas and coal that can be
enhanced by the control and optimization of related physical assets.
- Dynegy's natural gas liquids subsidiary, DMS, includes North American
midstream liquids operations, global natural gas liquids transportation
and marketing operations.
Dynegy Energy Services, reported as a separate segment for the first six
months of this year, is included with DMT.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION. Dynegy's
reports, filings and other public announcements often include statements
reflecting assumptions, expectations, projections, intentions or beliefs about
future events. These statements are intended as "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995. You can identify
these statements by the fact that they do not relate strictly to historical or
current facts. They use words such as "anticipate," "estimate," "project,"
"forecast," "may," "should," "expect" and other words of similar meaning. In
particular, these include, but are not limited to, statements relating to the
following:
- Projected operating or financial results;
- Pending or recent acquisitions, including the anticipated closing date,
expected cost savings or synergies and the accretive or dilutive impact of
an acquisition on earnings;
- Expectations regarding transaction volume and liquidity in wholesale
energy markets in the U.S. and Europe;
- Beliefs or assumptions about the outlook for deregulation of retail and
wholesale energy markets in the U.S. and Europe;
- The expected commencement date for commercial operations for new power
plants; and
Any or all of Dynegy's forward-looking statements may turn out to be wrong.
They can be affected by inaccurate assumptions or by known or unknown risks and
uncertainties, including the following:
- The timing and extent of changes in commodity prices for energy,
particularly natural gas, electricity and natural gas liquids, or
communications products or services;
- The timing and extent of deregulation of energy markets in the U.S. and
Europe and the rules and regulations adopted on a transitional basis in
such markets;
- The condition of the capital markets generally, which will be affected by
interest rates, foreign currency fluctuations and general economic
conditions, as well as Dynegy's ability to maintain its investment grade
credit ratings;
- The effectiveness of Dynegy's risk management policies and procedures and
the ability of Dynegy's trading counterparties to satisfy their financial
commitments;
- The liquidity and competitiveness of wholesale trading markets for energy
commodities, including the impact of electronic or online trading in these
markets;
16
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
- Operational factors affecting the start up or ongoing commercial
operations of Dynegy's power generation or midstream natural gas
facilities, including catastrophic weather related damage, unscheduled
outages or repairs, unanticipated changes in fuel costs or availability,
the unavailability of gas transportation, the unavailability of electric
transmission service or workforce issues;
- Cost and other effects of legal and administrative proceedings,
settlements, investigations and claims, including environmental
liabilities that may not be covered by indemnity or insurance; and
- Other U.S. or European regulatory or legislative developments that affect
the demand for energy generally, increase the environmental compliance
cost for Dynegy's power generation or midstream gas facilities or impose
liabilities on the owners of such facilities.
Many of these factors will be important in determining Dynegy's actual future
results. Consequently, no forward-looking statement can be guaranteed. Dynegy's
actual future results may vary materially from those expressed or implied in any
forward-looking statements.
All of Dynegy's forward-looking statements, whether written or oral, are
expressly qualified by these cautionary statements and any other cautionary
statements that may accompany such forward-looking statements. In addition,
Dynegy disclaims any obligation to update any forward-looking statements to
reflect events or circumstances after the date of this report.
BUSINESS RISK MANAGEMENT ASSESSMENT
Dynegy's operations and periodic returns are impacted by a myriad of
factors, some of which may not be mitigated by risk-management methods. These
risks include, but are not limited to, commodity price, interest rate and
foreign exchange rate fluctuations, weather patterns, counterparty risk,
operational risks, environmental risks, management estimations, strategic
investment decisions, changes in competition and changes in regulation.
The Company is exposed to commodity price variability related to its natural
gas, natural gas liquids, electricity and coal businesses. In addition, fuel
requirements at its power generation and gas processing facilities represent
additional commodity price risks to the Company. In order to manage these
commodity price risks, Dynegy routinely utilizes certain types of fixed-price
forward purchase and sales contracts, futures and option contracts traded on the
New York Mercantile Exchange and swaps and options traded in the
over-the-counter financial markets to:
- Manage and hedge its fixed-price purchase and sales commitments;
- Provide fixed-price commitments as a service to its customers and
suppliers;
- Reduce its exposure to the volatility of cash market prices;
- Protect its investment in storage inventories; and
- Hedge fuel requirements at its gas processing and power generation
facilities.
The Company may, at times, have a bias in the market, within established
guidelines, resulting from the management of its portfolio. In addition, as a
result of marketplace liquidity and other
17
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
factors, the Company may, at times, be unable to fully hedge its portfolio for
certain market risks. Dynegy monitors its exposure to fluctuations in interest
rates and foreign currency exchange rates and may execute swaps,
forward-exchange contracts or other financial instruments to hedge and manage
these exposures.
The Company employs the mark-to-market method of accounting for a portion of
its operations. It accounts for all energy trading activities at fair value as
of each balance sheet date and recognizes currently in its results of operations
the net gains or losses resulting from the revaluation of these contracts. As a
result, substantially all of the operations of the Company's world-wide gas
marketing, power marketing, and certain liquids marketing operations are
accounted for under a mark-to-market accounting methodology. In certain of these
markets, long-term contract commitments may extend beyond the period in which
reliable or any market quotations for such contracts are available. The lack of
reliable long-term pricing requires the use of mathematical models to value
these commitments.
These mathematical models utilize historical market data to forecast future
prices, which are used to value the commitments that reside outside of the
liquid market quotations. The application of forecasted pricing curves to
contractual commitments may, as with pricing curves derived from quoted market
prices, result in realized cash returns on these commitments that vary, either
positively or negatively, from the results estimated through application of the
mathematical model. Dynegy believes that its mathematical models utilize
state-of-the-art technology and pertinent industry data in order to forecast
pricing curves. However, there can be no assurance that actual cash returns will
not vary materially from those estimated through application of such models.
Dynegy's commercial groups manage, on a portfolio basis, the resulting
market risks inherent in commercial transactions, subject to parameters
established by the Dynegy Board of Directors. Market risks are monitored by a
risk control group that operates independently from the commercial units to
actively manage these risk exposures and to ensure compliance with Dynegy's risk
management policies. Risk measurement is also practiced daily against the Dynegy
portfolios with Value at Risk, stress testing, and scenario analysis on the
commercial profiles.
In addition to risks associated with price or interest rate movements,
credit risk is also inherent in the Company's operations. Credit risk relates to
the risk of loss resulting from the nonperformance of contractual obligations by
a counterparty. Dynegy maintains credit policies with regard to its
counterparties, which management believes minimize its overall credit risk.
Dynegy's stated business strategy is to expand ownership or control of
merchant generation capacity in select markets across the country. Dynegy
believes that merchant generation capacity, which is designed principally to
supply power to markets during periods of peak demand, offers the greatest
flexibility in executing its strategy of an integrated gas and power marketing
and power generation business. This strategy heightens the risk of volatility in
periodic returns by increasing the Company's exposure to variability in
anticipated demand resulting from:
- Changing weather patterns;
- Unexpected delays in industry-wide construction of new capacity;
- Unforeseen supply constraints or bottlenecks resulting from transmission
failures or other factors;
18
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
- Unforeseen new technologies; and
- Other similar factors.
Further, as Dynegy moves forward with the execution of its strategic plan of
capturing about a 10 percent share of the wholesale power market, risk of
earnings volatility increases through exposure to unanticipated variability in
generation capacity dependability factors. As a result of supply contracts
routine in the industry, Dynegy's exposure relating to performance by these
generating assets resides not only with owned and controlled assets, but also
with third-party operated facilities. The volatility of earnings, whether it be
favorable or unfavorable, will likely be most profound during periods of peak
demand when, and if, regional industry-wide generation of electricity as a
percentage of Dynegy's overall portfolio and strategy may substantially alter
Dynegy's earnings risk profile over time.
The addition of these generation assets to Dynegy's portfolio may increase
enterprise exposure to environmental and regulatory laws and regulations. These
exposures could result in increased expenditures for capital improvements to
meet certain statutory requirements or expenditures for remediation of
unanticipated environmental contamination. The potential redirection of capital
to these types of expenditures could reduce the level of available discretionary
capital currently expected to be used in executing Dynegy's strategic plan in
future periods.
Many of these risks are outside the control of Dynegy and may not be fully
mitigated through application of risk management methods and/or
state-of-the-art, first quartile operating methods.
SEGMENT PRICE FLUCTUATION EXPOSURES. DMT's integrated component businesses
include: wholesale and retail gas marketing, power and related marketing
activities and power generation. Operating margins earned by wholesale gas and
power marketing, exclusive of risk-management activities, are relatively
insensitive to commodity price fluctuations since most purchase and sales
contracts do not contain fixed-price provisions. Generally, prices contained in
these contracts are tied to a current spot or index price and, therefore, adjust
directionally with changes in overall market conditions. However, market price
fluctuations for natural gas and electricity can have a significant impact on
the operating margin derived from risk-management activities in these
businesses. Dynegy generally attempts to balance its fixed-price physical and
financial purchase and sales commitments in terms of contract volumes, and the
timing of performance and delivery obligations. To the extent a net open
position exists, fluctuating commodity market prices can impact Dynegy's
financial position or results of operations, either 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
19
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
unfavorably, by changes in and the relationship between the cost of the
commodity fueling the facilities and electricity prices.
Operating margins associated with DMS' natural gas gathering, processing and
fractionation activities are very sensitive to changes in natural gas liquids
prices and availability of inlet volumes. Commodity price fluctuations may also
affect the operating margins derived from the Company's natural gas liquid
marketing business. The impact of changes in natural gas liquids prices on
upstream operations results principally from the nature of contractual terms
under which natural gas is processed and liquids products are sold. In addition,
certain processing plant assets are impacted by changes in, and the relationship
between, natural gas and natural gas liquids prices, which in turn influences
the volumes of gas processed. Based upon current levels of natural gas
processing activities and industry fundamentals, the estimated impact on annual
operating margins of each one-cent movement in the annual average price of
natural gas liquids approximates $6 million 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.
SEASONALITY. Dynegy's revenue and operating margin are subject to
fluctuations during the year, primarily due to the impact certain seasonal
factors have on sales volumes and the prices of natural gas, electricity and
natural gas liquids. Natural gas sales volumes and operating margin have
historically been higher in the winter months than in the summer months,
reflecting increased demand due to greater heating requirements and, typically,
higher natural gas prices. Conversely, power marketing operations are typically
impacted by higher demand and commodity price volatility during the summer
cooling season. Consistent with power marketing, the Company's electricity
generating facilities generally experience peak demand during the summer cooling
season, particularly for merchant plant generating facilities. Dynegy believes
that prospective seasonal fluctuations in demand and market prices for natural
gas will reduce over time as industry-wide gas-fired merchant generation
capacity expands in the United States. DMS' businesses are also subject to
seasonal factors; however, such factors typically have a greater impact on sales
prices than on sales volumes. Natural gas liquids prices typically increase
during the winter season due to greater heating requirements. The Company's
wholesale propane business is seasonally weighted in terms of volume and price,
consistent with the trend in the Company's natural gas operations, as a result
of greater demand for crop-drying and space-heating requirements in the fall and
winter months.
EFFECT OF INFLATION. Although Dynegy's operations are affected by general
economic trends, management does not believe inflation has had a material effect
on the Company's results of operations.
20
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
LIQUIDITY AND CAPITAL RESOURCES
The Company's business strategy has historically focused on acquisitions or
construction of core operating facilities in order to capture significant
synergies existing among these types of assets and Dynegy's natural gas, power
and natural gas liquids marketing businesses. The Company's energy convergence
strategies are focused on marketing, trading and arbitrage opportunities
involving natural gas and power, centered around the control and optimization of
Btu conversion capacity within the wholesale gas and power businesses (a.k.a.,
"Merchant Leverage Effect"). For the foreseeable future, the Company's primary
focus will be the acquisition and/or construction of merchant power generating
assets that will enable the Company to fully realize the Merchant Leverage
Effect of commercialization of these generating assets.
Dynegy has historically relied upon operating cash flow and borrowings from
a combination of commercial paper issuances, money market lines of credit,
corporate credit agreements and various public debt issuances for its liquidity
and capital resource requirements. At September 30, 2000, Dynegy had access to
an aggregate $415 million of liquidity available under existing credit
facilities and money market lines of credit. Approximately $750 million of shelf
availability remains under an outstanding registration statement, which may be
used for general corporate purposes. Management believes additional financing
arrangements can be obtained at reasonable terms, if required.
Since January 1, 2000, the Company has successfully disposed of
non-strategic, under performing assets and certain qualifying facilities for
aggregate net proceeds of approximately $804.4 million. These dispositions were
consistent with the Company's stated plan to finance the Illinova merger. The
proceeds from these sales were first used to retire indebtedness incurred by
Dynegy Inc. in the acquisition of Illinova and then redeployed into new business
ventures.
In a public offering effective March 15, 2000, Dynegy issued $300 million of
8.125% Senior Notes due March 15, 2005. Total proceeds net of underwriting costs
were $296.7 million. Interest is payable on the Senior Notes on March 15 and
September 15 of each year, beginning September 15, 2000. Proceeds were used to
repay existing indebtedness of an affiliate.
During 2000, the Company entered into new or restructured lease arrangements
associated with a natural gas-fired generating facility and certain electricity
generating equipment. Under the terms of these arrangements, the Company
provided certain residual value guarantees associated with the leased assets
while retaining certain rights to the assets. The retained rights include the
right to extend the term of the lease arrangement, an option to acquire the
leased assets from each of the lessors and the right to participate in the
outright sale of the related assets. Aggregate future minimum lease payments
under these arrangements total approximately $49 million.
In addition, the Company achieved necessary approvals to begin construction
on its Riverside Power Project, a 500-MW natural gas-fired, simple cycle peaking
facility, located in Louisa, Kentucky. A Dynegy subsidiary is designing and
constructing the generating facility, as agent for a third party, and Dynegy is
obligated to guarantee approximately 90 percent of the actual cost of the
Riverside 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.
21
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
OTHER MATTERS
INDEPENDENT SYSTEMS OPERATORS UPDATE. The Federal Energy Regulatory
Commission ("FERC") has recently issued a proposed order related to the
California electricity markets. The proposed order includes the following:
- No abuse of California electric market power was found during the FERC's
analysis;
- Generators' revenues prior to October 2, 2000 are not subject to refund;
- Flaws were identified in California's market structure;
- A maximum $150 MWh "soft" price cap was proposed;
- Mandatory PX buy/sell requirements were eliminated; and
- An independent board oversite of the market was proposed.
Management does not believe that the provisions contained in the proposed order
will materially effect its operations in California.
CAPITAL ASSET PROGRAM. The Company is engaged in a continuous capital asset
expansion program consistent with its business plan and energy convergence
strategies. The emphasis of this capital asset program is on the acquisition or
construction of strategically located power generation assets. Consistent with
this strategy and as a result of the long lead time required by industry
manufacturers, the Company has executed or is currently negotiating purchase
orders to acquire in excess of twenty-three state-of-the-art gas-fired turbines,
representing a capital commitment of approximately $700 million. Delivery of the
manufactured turbines is occurring ratably through 2003. Commitments under these
purchase orders are generally payable consistent with the delivery schedule. The
purchase orders include milestone requirements by the manufacturer and provide
Dynegy with the ability to cancel each discrete purchase order commitment in
exchange for a fee, which escalates over time. The capital asset program is
subject to periodic review and revision, and the actual number of projects and
aggregate cost for such projects will be dependent on various factors including
available capital resources, market conditions, legislative actions, load
growth, changes in materials, supplies and labor costs and the identification of
partners in order to spread investment risk.
QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES. The Company is
exposed to certain market risks inherent in the Company's financial instruments,
which arise from transactions entered into in the normal course of business. The
Company routinely enters into financial instrument contracts to hedge purchase
and sale commitments, fuel requirements and inventories in its natural gas,
natural gas liquids, electricity and coal businesses in order to minimize the
risk of market fluctuations. Dynegy also monitors its exposure to fluctuations
in interest rates and foreign currency exchange rates and may execute swaps,
forward-exchange contracts or other financial instruments to hedge and manage
these exposures. The absolute notional contract amounts associated with
commodity risk-management,
22
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
interest rate and forward exchange contracts at September 30, 2000 and
December 31, 1999, respectively, were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(ABSOLUTE NOTIONAL AMOUNTS)
<S> <C> <C>
Natural Gas (Trillion Cubic Feet)........................... 7.890 5.702
Electricity (Million Megawatt Hours)........................ 359.818 42.949
Natural Gas Liquids (Million Barrels)....................... 34.150 19.902
Crude Oil (Million Barrels)................................. -- 35.554
Interest Rate Swaps (in thousands of U.S. Dollars).......... $ -- $ 36,524
Weighted Average Fixed Interest Rate Paid on Swaps.......... -- 8.210
U.K. Pound Sterling (in thousands of U.S. Dollars).......... $ 11,000 $ 85,812
Average U.K. Pound Sterling Contract Rate (in U.S.
Dollars).................................................. $ 1.4667 $ 1.6191
Canadian Dollar (in thousands of U.S. Dollars).............. $509,850 $288,898
Average Canadian Dollar Contract Rate (in U.S. Dollars)..... $ 0.6811 $ 0.6775
</TABLE>
Dynegy measures entity-wide market risk in its financial trading and
risk-management portfolios using Value at Risk. The quantification of market
risk using Value at Risk provides a consistent measure of risk across diverse
energy markets and products with different risk factors to set the overall
corporate risk tolerance, determine risk targets, and position limits. The use
of this methodology requires a number of key assumptions including the selection
of a confidence level and the holding period to liquidation. Dynegy relies on
Value at Risk to determine the maximum potential reduction in the trading
portfolio value allowed within a given probability over a defined period.
Because of limitations to Value at Risk, Dynegy uses other means to monitor
market risk in the trading portfolios. In addition to Value at Risk, Dynegy
performs regular stress and scenario analyses to measure extreme losses due to
exceptional events. The Value at Risk and stress testing results are reviewed to
determine the maximum allowable reduction in the total equity of the commodity
portfolios. Additional measures are used to determine the treatment of risks
outside the Value at Risk methodologies, such as market volatility, liquidity,
event and correlation risk. Dynegy estimates Value at Risk using a JP Morgan
RiskMetrics TM approach assuming a one-day holding period and a 95 percent
confidence level. At September 30, 2000, the Value at Risk for Dynegy's trading
and risk-management portfolios approximated $10.8 million and the average of
such value during the nine-month period ended September 30, 2000 was estimated
at $11.4 million.
CONCLUSION. The Company believes that it will be able to meet all
foreseeable cash requirements, including working capital, capital expenditures
and debt service, from operating cash flow, supplemented by borrowings under its
various credit facilities.
RESULTS OF OPERATIONS
Provided below is a narrative and tabular presentation of certain operating
and financial data and statistics for the Company's businesses for the three-
and nine-month periods ended September 30, 2000 and 1999, respectively.
23
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
For the quarter ended September 30, 2000, Dynegy realized net income of
$134.7 million, compared with third quarter 1999 net income of $50.7 million.
Third quarter 2000 recurring net income was $76.2 million, compared to third
quarter 1999 recurring net income of $50.7 million. The third quarter 2000
amount includes a one-time pre-tax gain of $83.3 million ($58.5 million
after-tax) on the disposition of Dynegy's non-operating equity interest in
Accord Energy Ltd. ("Accord"), a U.K. gas marketing joint venture. Third quarter
2000 results were led by a strong performance in energy convergence operations,
particularly in U.S. power and gas. The quarter benefited from nationwide
volatility in both the power and gas markets, enabling Dynegy to leverage its
diverse asset portfolio with strong marketing, structured origination activity
and term sales. This quarter's results also reflect solid returns in Dynegy's
natural gas liquids businesses, which continued to benefit from improved
commodity prices, higher worldwide demand, a larger contribution of fee-based
services and lower expenses.
Consolidated operating margin for the current quarter totaled
$122.8 million compared to $158.8 million for the same 1999 period. DMT
contributed $62.8 million to third quarter 2000 consolidated operating margin
compared to $75.5 million in the third quarter of 1999. The decrease in DMT's
operating margin is partially due to a loss incurred by Dynegy's European
operations as a result of volatile power and gas prices combined with reduced
liquidity in the U.K. commodity markets, the deferment of the New Electricity
Trading Agreements (N.E.T.A.) in the U.K. and start-up costs associated with the
Company's European expansion. Additionally, third quarter 1999 included
operating margin from a certain subsidiary which was wholly owned at such time.
DMT subsequently sold a considerable portion of the subsidiary and now has an
equity interest, thus results are included in equity in earnings of
unconsolidated subsidiaries in the third quarter of 2000. Further, the sale of
the qualifying facilities in the first quarter of 2000 contributed to the
decrease in operating margin. DMS contributed $60.0 million in third quarter
2000 operating margin compared to $83.4 million in the third quarter 1999. After
eliminating the effect of non-strategic upstream asset sales, the increase in
DMS operating margin was 18 percent.
Operating income was influenced by the same factors which impacted operating
margin. This was offset by a decrease in general and administrative expense due
to decreases in variable compensation costs.
Incremental to Dynegy's consolidated results was the Company's equity share
in the earnings of its unconsolidated affiliates, which contributed
approximately $109.8 million and $31.9 million to pre-tax quarterly earnings in
the 2000 and 1999 periods, respectively. Variances period-to-period in these
results reflect the impact of weather-driven demand and changes in commodity
prices, particularly as these changes impacted DMT investments. The following
table provides a summary of equity earnings by investment for the comparable
periods.
24
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
EQUITY EARNINGS FROM UNCONSOLIDATED AFFILIATES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
DYNEGY MARKETING AND TRADE:
Accord.................................................... $ 1,250 $ 6,020
Power Generation Equity Investments (in aggregate)........ 105,698 22,033
Retail (in aggregate)..................................... (3,348) (2,477)
Other, net................................................ -- (2)
-------- -------
TOTAL DYNEGY MARKETING AND TRADE........................ $103,600 $25,574
-------- -------
DYNEGY MIDSTREAM SERVICES:
Gulf Coast Fractionators.................................. $ 1,206 $ 939
West Texas LPG Pipeline Limited Partnership............... 1,561 1,805
Venice Energy Services Company, L.L.C..................... 2,280 3,306
Other, net................................................ 1,129 234
-------- -------
TOTAL DYNEGY MIDSTREAM SERVICES......................... 6,176 6,284
-------- -------
$109,776 $31,858
======== =======
</TABLE>
Interest expense totaled $21.1 million for the quarter ended September 30,
2000, compared to $22.0 million for the equivalent 1999 period. Accumulated
distributions associated with trust preferred securities and preferred stock of
wholly owned subsidiaries totaled $4.2 million for each of the quarters ended
September 30, 2000 and 1999.
Other income and expenses, net totaled $80.1 million in income in the
quarter ended September 30, 2000 compared with expense of $2.3 million in the
1999 period. The third quarter 2000 amount includes a one-time pre-tax gain of
$83.3 million on the disposition of Dynegy's non-operating equity interest in
Accord. The 1999 and remaining 2000 amounts consisted of interest income,
minority interests in consolidated subsidiaries and certain other income and
expense items.
The Company reported an income tax provision of $72.3 million for the three
month period ended September 30, 2000, compared to an income tax provision of
$24.7 million for the 1999 period. The effective rates approximated 35 and
33 percent in 2000 and 1999, respectively. In 1999, the difference from the
aforementioned effective rates and the statutory rate of 35 percent results
principally from permanent differences arising from the amortization of certain
intangibles and permanent differences from the effect of certain foreign equity
investments and state income taxes.
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
For the nine-month period ended September 30, 2000, Dynegy realized net
income of $242.6 million, compared with net income in the corresponding period
in 1999 of $106.7 million. For the nine-month period ended September 30, 2000,
Dynegy had recurring net income of $188.5 million compared to $101.0 million for
the same period in 1999. Recurring 2000 results exclude the after-tax
25
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
gain on the disposition of a non-operating interest in Accord, the net after-tax
effect of the sale of certain qualifying generation facilities and the after-tax
effect of non-recurring charges incurred in the first quarter of the year.
Recurring 1999 results exclude the after-tax effect of the sale of an
investment. The results for the nine months ended September 30, 2000 were led by
a strong performance in energy convergence operations, particularly in U.S.
power and gas. The 2000 period benefited from nationwide volatility in both the
power and gas markets, enabling Dynegy to leverage its geographically diverse
asset portfolio with strong marketing, structured origination activity and term
sales. Results for the nine-month period ended September 30, 2000 also reflect
solid returns in Dynegy's natural gas liquids businesses, which continued to
benefit from higher worldwide demand, a larger contribution of fee-based
services and lower expenses.
Consolidated operating margin for the nine months ended September 30, 2000
totaled $465.9 million compared to $404.6 million for the same 1999 period. DMT
contributed $277.5 million to consolidated operating margin for the nine-month
period ended September 30, 2000 compared to $216.4 million reported in the same
period in 1999, an increase of 28 percent. DMS contributed $188.4 million in
operating margin in the nine-month period ended September 30, 2000 compared to
$188.3 million in the same period in 1999. After eliminating the effect of
non-strategic upstream asset sales, the increase in DMS operating margin was
40 percent.
Operating income increased $37.5 million period-to-period, reflecting the
higher operating results from the convergence businesses. Improved operating
results were partially offset by higher depreciation and amortization. Increases
in depreciation and amortization expense in the nine-month period ended
September 30, 2000 reflect impairment of certain natural gas liquids processing
assets, continued expansion of the Company's asset base and operations,
principally in the convergence businesses, and enhanced information technology
infrastructure.
Incremental to Dynegy's consolidated results was the Company's equity share
in the earnings of its unconsolidated affiliates, which contributed
approximately $171.9 million and $60.1 million to pre-tax earnings in the 2000
and 1999 periods, respectively. Variances period-to-period reflect the positive
impact of the same market and demand issues that impacted results in the
three-month period ended September 30, 2000, for both DMT and DMS investments.
The following table provides a summary of equity earnings by investment for the
comparable periods.
26
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
EQUITY EARNINGS FROM UNCONSOLIDATED AFFILIATES
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER
30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
DYNEGY MARKETING AND TRADE:
Accord.................................................. $ 8,750 $15,020
Power Generation Equity Investments (in aggregate)...... 142,940 38,198
Retail (in aggregate)................................... 2,671 (5,565)
Other, net.............................................. -- 431
-------- -------
TOTAL DYNEGY MARKETING AND TRADE.................... $154,361 $48,084
-------- -------
DYNEGY MIDSTREAM SERVICES:
Gulf Coast Fractionators................................ $ 2,633 $ 2,063
West Texas LPG Pipeline Limited Partnership............. 4,449 3,946
Venice Energy Services Company, L.L.C................... 6,972 4,875
Other, net.............................................. 3,474 1,177
-------- -------
TOTAL DYNEGY MIDSTREAM SERVICES..................... $ 17,528 $12,061
-------- -------
$171,889 $60,145
======== =======
</TABLE>
Interest expense totaled $67.5 million for the nine-months ended
September 30, 2000, compared to $59.5 million for the equivalent 1999 period.
The variance is attributable to the higher principal balances resulting from
indebtedness incurred to finance strategic growth and higher interest rates on
variable rate borrowings in the current period as a result of market movements
in such rates. Accumulated distributions associated with trust preferred
securities and preferred stock of wholly owned subsidiaries totaled
$12.5 million for each of the nine-month periods ended September 30, 2000 and
1999.
Other income and expenses, net totaled $91.6 million in income in the
nine-month period ended September 30, 2000 compared with income of
$11.2 million in the 1999 period. The components of other income and expense
generally include the pre-tax non-recurring items previously discussed elsewhere
herein, interest income, minority interest in consolidated subsidiaries and
other similar income and expense items. Additionally, the 2000 period includes
the non-recurring gain on the disposition of Accord, the sale of certain
qualifying generation facilities and certain merger and impairment charges. The
1999 period also includes a gain on the sale of an investment.
The Company reported an income tax provision of $136.6 million for the
nine-month period ended September 30, 2000, compared to an income tax provision
of $50.9 million for the 1999 period. The effective rates approximated 36 and
32 percent in 2000 and 1999, respectively. The difference from the statutory
rate of 35 percent for the 1999 period results principally from permanent
differences arising from the amortization of certain intangibles and permanent
differences from the effect of certain foreign equity investments and state
income taxes.
27
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
DYNEGY MARKETING AND TRADE
($ IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Operating Margin.................................... $ 62,763 $ 75,460 $ 277,512 $216,374
Equity Investments.................................. 103,600 25,574 154,361 48,084
-------- -------- --------- --------
SUBTOTAL--FINANCIAL CONTRIBUTION............ 166,363 101,034 431,873 264,458
Depreciation and Amortization................... (12,261) (9,796) (30,443) (27,180)
General and Administrative Expenses............. (33,513) (35,656) (110,279) (97,581)
Other Items(1)(2)............................... 84,664 148 131,659 18,324
-------- -------- --------- --------
EARNINGS BEFORE INTEREST AND TAXES.......... 205,253 55,730 422,810 158,021
Interest Expense................................ (10,990) (14,501) (62,179) (38,992)
-------- -------- --------- --------
PRETAX EARNINGS............................. 194,263 41,229 360,631 119,029
Income Tax Provision............................ (67,414) (14,453) (131,248) (44,122)
-------- -------- --------- --------
NET INCOME.......................................... $126,849 $ 26,776 $ 229,383 $ 74,907
RECURRING NET INCOME(3)............................. $ 68,372 $ 26,776 $ 140,224 $ 69,142
-------- -------- --------- --------
OPERATING STATISTICS:
Natural Gas Marketing (Bcf/d)--
Domestic Gas Marketing Volumes.............. 7.6 6.1 7.3 6.4
Canadian Gas Marketing Volumes.............. 2.2 2.4 2.2 2.2
United Kingdom Gas Marketing Volumes........ 1.1 1.0 1.4 1.2
-------- -------- --------- --------
10.9 9.5 10.9 9.8
-------- -------- --------- --------
Electric Power Marketing--Million Megawatt Hours
Sold.............................................. 40.0 22.7 74.1 50.5
</TABLE>
------------------------
(1) Three- and nine-months ended September 30, 2000 results include a one-time
pre-tax gain of $83.3 million ($58.5 million after-tax) on the disposition
of Dynegy's non-operating equity interest in Accord Energy Ltd., a U.K. gas
marketing joint venture. The nine-months ended September 30, 2000 results
also include a reasonable allocation of a pre-tax non-recurring gain on the
sale of certain qualifying generation facilities of $52 million
($33.8 million after-tax) and certain non-recurring charges which were
incurred during the first quarter of 2000.
(2) Nine-months ended September 30, 1999 results include a pre-tax $8.9 million
($5.8 million after-tax) non-recurring gain on the sale of an investment.
(3) Recurring net income reflects the allocation of the items described in (1)
and (2) above.
28
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
Dynegy Marketing and Trade reported recurring segment net income of
$68.4 million for the three-month period ended September 30, 2000, compared with
recurring net income of $26.8 million in the 1999 quarter. The third quarter
2000 recurring net income excludes the $58.5 million after-tax gain on the
disposition of Dynegy's non-operating equity interest in Accord. Recurring
results of operations period-to period were influenced by:
- Successful execution of the Merchant Leverage Effect strategy, and
- Improved returns from worldwide power and gas marketing and trading
operations, offset by
- A quarterly loss incurred by Dynegy's European operations as a result of
volatile power and gas prices combined with reduced liquidity in the U.K.
commodity markets, the deferment of the New Electricity Trading
Arrangements (N.E.T.A) in the U.K. and start-up costs associated with the
Company's European expansion.
Total megawatt hours sold during the third quarter of 2000 aggregated
40.0 million megawatt hours compared to 22.7 million megawatt hours during the
1999 period. The increase in trading volumes was due to more favorable market
conditions and expanding operations.
Total natural gas volumes sold increased to 10.9 billion cubic feet per day
from 9.5 billion cubic feet per day during last year's third quarter,
principally as a result of increased volumes sold to the retail alliances and to
gas-fired generation facilities in the U.S.
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
Dynegy Marketing and Trade reported recurring segment net income of
$140.2 million for the nine-month period ended September 30, 2000, compared with
recurring net income of $69.1 million for the nine-month period ended
September 30, 1999. Included in earnings for the nine months ended
September 30, 2000 are non-recurring items including an after-tax gain of
$58.5 million relating to the disposition of Dynegy's non-operating equity
interest in Accord, a reasonable allocation of after-tax gain of $33.8 million
relating to the sale of certain qualifying facilities and an after-tax charge of
$2.1 million related to merger costs. Included in earnings for the nine months
ended September 30, 1999 is a non-recurring after-tax gain of $5.8 million
related to the sale of an investment. Recurring results of operations
period-to-period were influenced by the same factors impacting the
aforementioned quarterly results.
Total megawatt hours sold during the nine months ended September 30, 2000
aggregated 74.1 million megawatt hours compared to 50.5 million megawatt hours
during the 1999 period. Total natural gas volumes sold increased to
10.9 billion cubic feet per day from 9.8 billion cubic feet per day during last
year's nine-month period ended September 30, 1999.
29
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
DYNEGY MIDSTREAM SERVICES
($ IN THOUSANDS, EXCEPT AVERAGE COMMODITY PRICES)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Margin..................................... $ 59,989 $ 83,354 $188,356 $188,264
Equity Investments................................... 6,176 6,284 17,528 12,061
-------- -------- -------- --------
SUBTOTAL--FINANCIAL CONTRIBUTION............. 66,165 89,638 205,884 200,325
Depreciation and Amortization(1)................. (19,990) (23,439) (84,193) (69,093)
General and Administrative Expenses.............. (14,595) (17,839) (45,219) (52,547)
Other Items(1)................................... (4,601) (2,459) (40,093) (7,146)
-------- -------- -------- --------
EARNINGS BEFORE INTEREST AND TAXES........... 26,979 45,901 36,379 71,539
Interest Expense................................. (14,227) (11,696) (17,812) (32,941)
-------- -------- -------- --------
PRETAX EARNINGS.............................. 12,752 34,205 18,567 38,598
Income Tax (Provision) Benefit................... (4,917) (10,289) (5,375) (6,766)
-------- -------- -------- --------
NET INCOME........................................... $ 7,835 $ 23,916 $ 13,192 $ 31,832
RECURRING NET INCOME(2).............................. $ 7,835 $ 23,916 $ 48,274 $ 31,832
-------- -------- -------- --------
OPERATING STATISTICS:
Natural Gas Liquids Processed (MBbls/d--Gross)
Field Plants................................. 55.1 83.6 62.4 86.4
Straddle Plants.............................. 34.2 45.7 37.4 35.9
-------- -------- -------- --------
Total Natural Gas Liquids Processed.................. 89.3 129.3 99.8 122.3
-------- -------- -------- --------
Barrels Received for Fractionation (MBbls/d)......... 253.1 230.8 240.3 205.9
Natural Gas Liquids Sold (MBbls/d)................... 520.8 499.0 562.3 510.6
Average Commodity Prices:
Henry Hub Natural Gas (First of Month)
($/MMBtu)...................................... $ 4.26 $ 2.60 $ 3.41 $ 2.17
Crude Oil--Cushing ($/Bbl)....................... 30.52 19.68 27.29 15.06
Average Mont Belvieu NGL Price ($/Gal)........... 0.56 0.40 0.53 0.31
</TABLE>
------------------------
(1) Nine-month ended September 30, 2000 results include certain merger and
impairment charges which were incurred during the first quarter of 2000.
(2) Recurring net income reflects the allocation of the items described in (1)
above.
30
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
Dynegy Midstream Services reported recurring net income of $7.8 million in
the third quarter of 2000 compared with recurring net income of $23.9 million in
the same 1999 quarter. Recurring results of operations period-to-period were
influenced by:
- The sale of approximately one-third of Dynegy's upstream natural gas
processing assets;
- A flat commodity pricing environment during the 2000 quarter that reduced
marketing and trading opportunities in that period compared with a more
volatile commodity price environment which was prevalent in the 1999
quarter;
- Lower operating costs;
- Lower depreciation costs due to the sale of certain non-strategic
processing plants; and
- Lower general and administrative expenses.
Aggregate domestic natural gas liquids processing volumes totaled
89.3 thousand gross barrels per day in the third quarter of 2000 compared to a
restated average of 101.6 thousand gross barrels per day during the same period
in 1999. The restated volumes reflect the sale of the Ark-La-Tex assets in
fourth quarter 1999 and the Mid-Continent assets in March 2000. Fractionation
volumes increased principally as a result of increase gas plant production from
certain pipelines in West Texas.
The crude marketing business, which was sold April 1, 2000, contributed
$3.0 million in the third quarter 1999.
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
Dynegy Midstream Services reported recurring net income of $48.3 million in
the nine-month period ended September 30, 2000 compared with recurring net
income of $31.8 million in the same 1999 period. Included in earnings in the
2000 period is an aggregate non-recurring after-tax charge of $35.1 million
relating to the sale and impairment of certain assets and businesses and
allocated merger costs. On a pre-tax basis, $25 million of this charge is
included in depreciation expense and $29 million is included in other items.
Recurring results of operations period-to-period were influenced by the same
factors impacting quarterly results except natural gas liquids commodity prices
in 2000 were generally improved over 1999 levels.
Average domestic natural gas liquids processing volumes totaled
99.8 thousand gross barrels per day in the nine-month period ended
September 30, 2000 compared to a restated average of 97.3 thousand gross barrels
per day during the corresponding period in 1999. The restated volumes reflect
the sale of the previously mentioned assets. Fractionation volumes increased
principally as a result of the aforementioned improved relationship between
natural gas and natural gas liquids prices in the first six months of 2000,
which induced increased straddle production period-to-period resulting in
greater volumes available for fractionation, and the increased gas plant
production from certain pipelines in West Texas in the third quarter of 2000.
31
<PAGE>
DYNEGY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
OPERATING CASH FLOW
Cash flow from operating activities totaled $114.2 million for the
nine-month period ended September 30, 2000, compared to $96.8 million reported
in the same 1999 period. Changes in operating cash flow reflect the operating
results previously discussed herein, which affected changes in trade accounts
receivable and payable. Changes in other working capital accounts which include
prepayments and other current assets and accrued liabilities, reflect
expenditures or recognition of liabilities for settlements of certain
litigation, insurance costs, certain deposits, salaries, taxes other than on
income, certain deferred revenue accounts and other similar items. Fluctuations
in these accounts, period-to-period, reflect changes in the timing of payments
or recognition of liabilities and are not directly impacted by seasonal factors.
CAPITAL EXPENDITURES AND INVESTING ACTIVITIES
Investing activities in the 2000 period included $238.7 million in capital
expenditures principally related to construction of power generation assets and
investment associated with technology infrastructure. The non-strategic assets
disposed of in 2000 principally related to the sale of certain qualifying
facilities and liquids assets for which the Company received cash inflows of
approximately $804.4 million in the nine months ended September 30, 2000. Also
during the 2000 year-to-date period, Dynegy made investments in unconsolidated
affiliates of $90.3 million.
During the nine months ended September 30, 1999, the Company spent a net
$279.9 million principally on power generation assets, including an interest in
a power generation partnership, and additional expenditures related to
betterments of existing facilities and capital investment associated with
technology infrastructure improvements. Additionally, during the 1999 period,
the Company received proceeds of $16.7 million principally related to the sale
of an investment and made investments in unconsolidated affiliates of
$79.2 million.
FINANCING ACTIVITIES
In a public offering effective March 15, 2000, Dynegy issued $300 million of
8.125% Senior Notes due March 15, 2005. Total proceeds net of underwriting costs
were $296.7 million. Interest is payable on the Senior Notes on March 15 and
September 15 of each year, beginning September 15, 2000. Proceeds were used to
repay existing indebtedness of an affiliate.
32
<PAGE>
DYNEGY HOLDINGS INC.
PART II. OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS
On August 3, 1998, Modesto Irrigation District ("MID") filed a lawsuit
against PG&E and Destec Energy, Inc. ("Destec") in federal court for the
Northern District of California, San Francisco division. The lawsuit alleges
violation of federal and state antitrust laws and breach of contract against
Destec (acquired by Dynegy in 1997). The allegations are related to a power sale
and purchase arrangement in the city of Pittsburg, California. MID seeks actual
damages from PG&E and Destec in amounts not less than $25 million. MID also
seeks a trebling of any portion of damages related to its antitrust claims. By
order dated February 2, 1999, the federal District Court dismissed MID's state
and federal antitrust claims against PG&E and Destec; however, the Court granted
MID leave of thirty days to amend its complaint to state an antitrust cause of
action. On March 3, 1999, MID filed an amended complaint recasting its federal
and state antitrust claims against PG&E and Destec and restating its breach of
contract claim against Destec. PG&E and Destec filed motions to dismiss MID's
revised federal and state antitrust claims and a hearing on the motions to
dismiss was held in July 1999. On August 20, 1999, the District Court again
dismissed MID's antitrust claims against PG&E and Destec, this time without
leave to amend the complaint. As a result of the dismissal of the antitrust
claims, the District Court also dismissed the pendant state law claims. MID has
appealed the District Court's dismissal of its suit to the Ninth Circuit Court
of Appeal. While the Ninth Circuit has not yet scheduled this appeal for oral
argument, it is estimated that oral argument will occur around February 2001.
Following dismissal of its federal court suit, MID filed suit in California
state court asserting breach of contract and tortious interference with
prospective economic relations claims against Destec and tortious interference
with contract and tortious interference with prospective economic relations
claims against PG&E. Motions to dismiss MID's state court claims were heard by
the state court and by order dated April 6, 2000, MID was directed to amend its
complaint. MID filed its amended complaint on April 20, 2000, including Dynegy
as a defendant. Dynegy filed a motion to dismiss MID's amended complaint against
Dynegy, and the Court partially granted Dynegy's motion to dismiss while also
granting MID leave to amend its complaint. Before MID filed its amended
complaint, MID agreed with PG&E and Dynegy to execute a tolling agreement on all
claims and to dismiss the state court case until the federal appeal is decided.
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, results of operations or cash flows of
the Company.
The Company is subject to various legal proceeding and claims that arise in
the normal course of business. Further, in addition to certain disclosures made
previously herein, the Company has assumed liability for various claims,
assessments and litigation in connection with some of its strategic
acquisitions. In the opinion of management, the amount of ultimate liability
with respect to these actions will not have a material adverse effect on the
financial position, results of operations or cash flows of the Company.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) The following instruments and documents are included as exhibits to this
Form 10-Q.
Exhibit 27--Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter:
None.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
DYNEGY HOLDINGS INC.
Date: November 14, 2000 By: /s/ BRADLEY P. FARNSWORTH
-----------------------------------------
Bradley P. Farrnsworth,
SENIOR VICE PRESIDENT AND CONTROLLER
(DULY AUTHORIZED OFFICER AND PRINCIPAL
ACCOUNTING OFFICER)
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