<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 1-11156
DYNEGY INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3248415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 LOUISIANA, SUITE 5800
HOUSTON, TEXAS 77002
(Address of principal executive offices)
(Zip Code)
(713) 507-6400
(Registrant's telephone number, including area code)
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
------ ---
Number of shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date: Common stock, $.01 par value per share,
152,277,091 shares outstanding as of November 13, 1998.
Page 1 of 29
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DYNEGY INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets:
September 30, 1998 and December 31, 1997................. 3
Condensed Consolidated Statements of Operations:
For the three months ended September 30, 1998 and 1997... 4
Condensed Consolidated Statements of Operations:
For the nine months ended September 30, 1998 and 1997.... 5
Condensed Consolidated Statements of Cash Flows:
For the nine months ended September 30, 1998 and 1997.... 6
Notes to Condensed Consolidated Financial Statements...... 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................... 27
Item 2. Not Applicable.................................. --
Item 3. Not Applicable.................................. --
Item 4. Not Applicable.................................. --
Item 5. Not Applicable.................................. --
Item 6. Exhibits and Reports on Form 8-K................ 28
Page 2 of 29
<PAGE>
DYNEGY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,396 $ 23,047
Accounts receivable, net 1,655,350 1,536,451
Accounts receivable, affiliates 61,508 139,321
Inventories 161,900 136,485
Assets from risk management activities 163,596 127,929
Prepayments and other assets 51,886 55,547
---------- ----------
2,105,636 2,018,780
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 2,321,793 1,958,250
Less: accumulated depreciation (521,855) (436,674)
---------- ----------
1,799,938 1,521,576
---------- ----------
OTHER ASSETS:
Investments in unconsolidated affiliates 548,590 470,477
Assets from risk management activities 127,177 111,341
Other assets 595,394 394,729
---------- ----------
$5,176,735 $4,516,903
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,525,027 $1,404,736
Accounts payable, affiliates 25,384 24,187
Accrued liabilities 172,530 192,159
Liabilities from risk management activities 164,292 132,012
---------- ----------
1,887,233 1,753,094
LONG-TERM DEBT 1,180,345 1,002,054
OTHER LIABILITIES:
Liabilities from risk management activities 50,402 42,679
Deferred income taxes 292,381 254,059
Other long-term liabilities 468,607 245,892
---------- ----------
3,878,968 3,297,778
---------- ----------
COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST 200,000 200,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 50,000,000 shares authorized:
8,000,000 shares designated as Series A Participating
Preferred Stock, 7,815,363 shares issued and outstanding
at September 30, 1998 and December 31, 1997 75,418 75,418
Common stock, $0.01 par value, 400,000,000 shares authorized:
152,849,384 shares issued at September 30, 1998 and
151,796,622 shares issued at December 31, 1997 1,529 1,518
Additional paid-in capital 931,031 919,720
Retained earnings 106,388 32,975
Less: treasury stock, at cost: 1,111,700 shares at September 30,
1998 and 654,900 shares at December 31, 1997 (16,599) (10,506)
---------- ----------
Total Stockholders' Equity 1,097,767 1,019,125
---------- ----------
$5,176,735 $4,516,903
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
Page 3 of 29
<PAGE>
DYNEGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues $4,586,515 $3,657,456
Cost of sales 4,480,530 3,546,608
---------- ----------
Operating margin 105,985 110,848
Depreciation and amortization 30,837 25,981
General and administrative expenses 49,017 40,598
---------- ----------
Operating income 26,131 44,269
Equity in earnings of unconsolidated affiliates 37,147 14,233
Other income 28,735 1,593
Interest expense (21,185) (16,415)
Other expenses (2,931) (2,197)
Minority interest in income of a subsidiary (4,158) (4,157)
---------- ----------
Income before income taxes 63,739 37,326
Income tax provision 20,094 12,298
---------- ----------
NET INCOME $ 43,645 $ 25,028
========== ==========
NET INCOME PER SHARE:
Net income $ 43,645 $ 25,028
Less: preferred stock dividends 98 98
---------- ----------
Net income applicable to common stockholders $ 43,547 $ 24,930
========== ==========
Basic earnings per share $0.29 $0.17
========== ==========
Diluted earnings per share $0.27 $0.15
========== ==========
Basic shares outstanding 151,731 150,877
========== ==========
Diluted shares outstanding 162,917 167,019
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
Page 4 of 29
<PAGE>
DYNEGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
Revenues $11,180,298 $9,613,875
Cost of sales 10,869,409 9,337,913
----------- ----------
Operating margin 310,889 275,962
Depreciation and amortization 83,353 74,750
Severance charge 9,644 ---
General and administrative expenses 136,000 106,389
----------- ----------
Operating income 81,892 94,823
Equity in earnings of unconsolidated affiliates 68,003 41,036
Other income 38,579 18,660
Interest expense (55,281) (44,275)
Other expenses (5,526) (19,232)
Minority interest in income of a subsidiary (12,474) (5,682)
----------- ----------
Income before income taxes 115,193 85,330
Income tax provision 35,768 23,560
----------- ----------
NET INCOME $ 79,425 $ 61,770
=========== ==========
NET INCOME PER SHARE:
Net income $ 79,425 $ 61,770
Less: preferred stock dividends 292 292
----------- ----------
Net income applicable to common stockholders $ 79,133 $ 61,478
=========== ==========
Basic earnings per share $0.52 $0.41
=========== ==========
Diluted earnings per share $0.48 $0.37
=========== ==========
Basic shares outstanding 151,534 150,533
=========== ==========
Diluted shares outstanding 163,670 166,785
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements
Page 5 of 29
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DYNEGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 79,425 $ 61,770
Items not affecting cash flows from operating activities:
Depreciation and amortization 80,146 76,219
Equity in earnings of affiliates, net of cash distributions (25,790) (2,328)
Risk management activities (11,500) (3,808)
Deferred income taxes 35,768 2,817
Gain on asset sales (31,173) (11,330)
Other 9,036 7,383
Changes in assets and liabilities resulting from operating activities:
Accounts receivable (41,891) 129,129
Inventories (28,478) 52,870
Prepayments and other assets 13,363 (42,209)
Accounts payable 91,364 (84,939)
Accrued liabilities (22,056) 100,309
Other, net (7,226) (3,346)
--------- -----------
Net cash provided by operating activities 140,988 282,537
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (176,773) (146,892)
Investment in unconsolidated affiliates, net (75,901) (28,734)
Business acquisitions, net of cash acquired --- (715,589)
Proceeds from asset sales 48,152 449,345
Other, net (11,444) ---
--------- -----------
Net cash used in investing activities (215,966) (441,870)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 171,984 1,344,000
Repayments of long-term borrowings (447,874) (1,323,635)
Net proceeds from commercial paper and money market lines of credit 357,878 ---
Issuance of company obligated preferred securities of subsidiary trust, net --- 198,044
Other, net (18,661) (12,124)
--------- -----------
Net cash provided by (used in) financing activities 63,327 206,285
--------- -----------
Net change in cash and cash equivalents (11,651) 46,952
Cash and cash equivalents, beginning of period 23,047 50,209
--------- -----------
Cash and cash equivalents, end of period $ 11,396 $ 97,161
========= ===========
</TABLE>
See notes to condensed consolidated financial statements.
Page 6 of 29
<PAGE>
DYNEGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 1 - CORPORATE NAME CHANGE AND OTHER STOCKHOLDER ANNOUNCEMENTS
Effective at the close of business on July 6, 1998, NGC Corporation changed its
name to Dynegy Inc. ("DYNEGY" or the "Company"). Concurrent with the change in
name, DYNEGY also changed its New York Stock Exchange symbol from NGL to DYN.
All subsidiaries of the Company now operate under the DYNEGY name.
In August 1998, the Company announced that NOVA Corporation ("NOVA") had given
notice of its intent to divest its 26 percent stake in DYNEGY, representing
approximately 38.8 million common shares. Chevron U.S.A. Inc. ("Chevron") and
BG plc ("BG") each also currently own 26 percent of the outstanding common
shares of DYNEGY and maintain certain preferential rights to purchase the common
shares to be divested by NOVA pursuant to the shareholder's agreement between
BG, Chevron and NOVA dated May 22, 1996.
NOTE 2 -- 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 the Company's Annual Report
on Form 10-K for the year ended December 31, 1997, filed with the SEC.
The financial statements include all material adjustments which, in the opinion
of management, were necessary for a fair presentation of the results for the
interim periods. Other than recognition of the previously disclosed severance
charge, such adjustments consist only of normal recurring adjustments. 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.
At September 30, 1998, the Company reviewed the valuation of its energy trading
purchase and sale portfolios accounted for on the accrual method through
application of an aggregate portfolio lower-of-cost-or-market analysis and
adjusted its valuation reserve accordingly. In the opinion of management, the
reserve is adequate to address known exposures and market risks as of the
balance sheet date. The reserves are monitored and adjusted regularly as
indicated by changes in market conditions, the Company's trading and marketing
portfolio and other factors. The computation of these reserves will be affected
by the recent issuance of FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133") (Note 9) and the
current discussion by the Emerging Issues Task Force ("EITF") regarding
accounting for the purchase and sale of energy trading contracts prior to the
effective date and/or adoption of Statement No. 133.
NOTE 3 - BUSINESS COMBINATIONS AND SIGNIFICANT RESTRUCTURINGS
DESTEC ENERGY, INC. ACQUISITION. On June 27, 1997, DYNEGY acquired Destec
Energy, Inc. ("Destec"), an independent power producer, for $1.26 billion, or
$21.65 per share of Destec common stock. Concurrent with the acquisition, DYNEGY
sold Destec's international facilities and operations for $439 million.
Subsequently, certain non-strategic domestic assets were sold for $296 million.
Such proceeds were used to retire indebtedness incurred in the acquisition. The
Destec acquisition was accounted for under the purchase method of accounting.
Accordingly, the purchase price of approximately $718 million, inclusive of
transaction costs and net of cash acquired, was allocated to the Destec assets
acquired and liabilities assumed based on their estimated fair values as of June
30, 1997, the effective date of the acquisition for accounting purposes. The
results of operations of the acquired Destec assets are consolidated with
DYNEGY's existing operations beginning July 1, 1997. The following table
reflects certain unaudited pro forma information for the nine-months ended
September 30, 1997 assuming the Destec acquisition occurred on January 1, 1997
(in thousands, except per share data):
Page 7 of 29
<PAGE>
DYNEGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30,1998 AND 1997
1997
-----------
Pro forma revenues $9,733,702
Pro forma net income 61,243
Pro forma earnings per share 0.37
RESTRUCTURING OF NOVAGAS CLEARINGHOUSE, LTD. In June 1997, the Company and
NOVA Corporation ("NOVA") completed the restructuring of the companies' Canadian
natural gas operations formerly executed through Novagas Clearinghouse, Ltd.,
Novagas Clearinghouse Limited Partnership and Novagas Clearinghouse Pipelines
Limited Partnership (collectively "NCL"), a joint venture between NGC and NOVA.
Effective April 1, 1997, DYNEGY Canada Inc. ("DCI"), a wholly owned indirect
subsidiary of DYNEGY, acquired NCL's natural gas marketing business, excluding
the natural gas aggregation business of Pan-Alberta Gas Ltd. ("Pan-Alberta"),
from NCL and sold its aggregate 49.9 percent interest in NCL to NOVA Gas
International ("NGI"), a subsidiary of NOVA. NOVA assumed full ownership of
NCL's gathering and processing business and the operations of Pan-Alberta. The
restructuring included amendments to or termination of various agreements
between NCL, DYNEGY, NOVA and certain affiliates of both DYNEGY and NOVA. DYNEGY
and NOVA are pursuing separate midstream asset businesses in Canada with DYNEGY
operating its Canadian marketing and midstream asset businesses through DCI.
RESTRUCTURING OF ACCORD ENERGY LIMITED ("ACCORD"). In early 1997, British Gas
completed a restructuring whereby Centrica plc ("Centrica") was demerged from
British Gas and British Gas was renamed BG plc ("BG"). Centrica became the
Company's joint venture partner in Accord. BG holds the approximate 26 percent
stake in DYNEGY's common stock formerly held by British Gas. On May 2, 1997,
Centrica and the Company completed a restructuring of Accord by converting
certain common stock interests in Accord to participating preferred stock
interests as of an effective date of January 1, 1997. Centrica and the Company
own 75 percent and 25 percent, respectively, of the outstanding participating
preferred stock shares of Accord. The participating preferred stock has (a) the
right to receive cumulative dividends on a priority basis to other corporate
distributions by Accord, and (b) limited voting rights. In addition, Centrica
has an option to purchase the Company's participating preferred stock interest
at any time after July 1, 2000, at a formula based price, as defined in the
agreement. As part of the reorganization, Centrica will operate Accord while
DYNEGY obtained the right to market natural gas, gas liquids and crude oil in
the United Kingdom, which occurs through its wholly owned subsidiary Dynegy UK
Limited ("Dynegy UK"). In addition, as part of the restructuring, Dynegy UK
acquired Accord's existing crude oil marketing business effective July 1, 1997.
No gain or loss was recognized as a result of this restructuring and DYNEGY's
investment in Accord continues to be accounted for under the equity method.
NOTE 4 -- EARNINGS PER SHARE
Basic earnings per share represents the amount of earnings for the period
available to each share of common stock outstanding during the period. Diluted
earnings per share represents the amount of earnings for the period available to
each share of common stock outstanding during the period plus each share that
would have been outstanding assuming the issuance of common shares for all
dilutive potential common shares outstanding during the period. Differences
between basic and diluted shares outstanding in all periods are attributed to
outstanding shares of the Series A Participating Preferred Stock, stock options
outstanding and a warrant.
NOTE 5 -- UNCONSOLIDATED AFFILIATES
At September 30, 1998, DYNEGY's investment in unconsolidated affiliates
accounted for by the equity method included: a 25 percent participating
preferred stock interest in Accord Energy Limited, a United Kingdom limited
company; an approximate 23 percent interest in Venice Energy Services Company,
L.L.C.; a 38.75 percent partnership interest in Gulf Coast Fractionators; a 25
percent interest in Midstream Barge Company, L.L.C.; a 49 percent partnership
interest in West Texas
Page 8 of 29
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DYNEGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
LPG Pipeline, Limited Partnership; interests ranging from eight to 50 percent in
fifteen partnerships, each formed to build (or buy), own and operate
cogeneration power generation facilities; a 33.33 percent interest in Waskom Gas
Processing Company, a partnership that owns and operates a natural gas
processing, extraction and fractionation facility and equity interests in
regional retail energy alliances consisting of a 20 percent interest in
SouthStar Energy Services, L.L.C. and a 50 percent interest in NICOR Energy
L.L.C. Also, at September 30, 1998, the Company had two cost-basis investments:
Indeck North American Power Fund, L.P. and Indeck North American Power Partners,
L.P. Summarized unaudited combined income statement information for the
unconsolidated affiliates accounted for by the equity method is presented in the
table below:
<TABLE>
<CAPTION>
NINE-MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
1998 1997
--------------------- --------------------
EQUITY EQUITY
TOTAL SHARE TOTAL SHARE
--------- --------- --------- --------
($ in thousands)
<S> <C> <C> <C> <C>
Revenues (1) $661,683 $276,614 $252,505 $99,252
======== ======== ======== =======
Operating margin (1) $293,121 $122,219 $ 96,354 $36,854
======== ======== ======== =======
Net income (1) $142,365 $ 54,503 $ 57,864 $23,927
======== ======== ======== =======
</TABLE>
- -------------
(1) The interim financial data for both periods presented is exclusive of
amounts attributable to the Company's investment in Accord and NCL as such
information was unavailable for the current period or is incompatible with
current presentation.
During the second quarter of 1998, the Company purchased all of the outstanding
partnership interests held by third parties in three limited partnerships, each
formed for the purpose of owning and operating a power generation facility in
the State of California. The aggregate acquisition cost approximated $11
million. As a result of the acquisition of these interests, the Company now
consolidates the aggregate assets, liabilities and results of operations
associated with these projects.
NOTE 6 - LONG-TERM DEBT
As part of the Chevron Combination, DYNEGY assumed approximately $155.4 million
payable to Chevron upon demand on or after August 31, 1998 (the "Chevron Note").
In September 1998, the Chevron Note was retired, pursuant to the terms of the
agreement, with funds provided through sale of commercial paper.
In May 1998, the Company amended its revolving bank credit agreement. The
amended agreement ("Credit Agreement") is divided into two parts, a $400 million
five-year facility and a $400 million 364-day facility, with borrowings under
the Credit Agreement representing unsecured obligations of the Company.
Borrowings under each facility bear interest at a Eurodollar rate plus a margin
that is determined based principally on the Company's unsecured senior debt
rating. In addition, the Company incurs a facility fee associated with each part
of the Credit Agreement. Financial covenants in the restructured Credit
Agreement are limited to a debt to capitalization test. At September 30, 1998,
letters of credit and borrowings under the Credit Agreement aggregated $26.9
million and, after consideration of the $587 million of commercial paper
outstanding at such date, unused borrowing capacity under the Credit Agreement
approximated $186.1 million.
On May 20, 1998, the Company sold $175 million of 7.125 percent, 20-year
debentures due May 15, 2018. The debentures were issued at a price of 99.654
percent, which, after deducting underwriting discounts and commissions, resulted
in net proceeds of approximately $172 million. Proceeds from the sale of the
debentures were used to retire short-term debt incurred in connection with the
redemption of certain high-cost debt described in the following paragraph. The
debentures represent senior unsecured obligations and rank pari passu with
existing senior debt.
In February 1998, the Company delivered Notices of Redemption to the holders of
its $105 million principal amount of 10.25% Subordinated Notes and $65 million
principal amount of 14% Senior Subordinated Notes. On March 31, 1998 and April
15, 1998, the Company retired the Senior Subordinated Notes and the Subordinated
Notes, respectively, pursuant to
Page 9 of 29
<PAGE>
DYNEGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
the redemption provisions contained in the respective indentures. DYNEGY funded
the estimated aggregate redemption value of $180 million through a combination
of borrowings under existing credit facilities and commercial paper issuances.
Included in the September 30, 1998 consolidated long-term debt balance are three
notes aggregating $93 million having recourse only to the assets of the three
power generation projects recently acquired as described in Note 5. Each of the
three notes represents a fifteen-year term loan obligation payable in semi-
annual installments of principal plus accrued interest. Each note bears interest
at a base rate plus a margin, as defined in each agreement. Interest rate swaps
effectively fix the base rate on $69 million of the indebtedness at a weighted
average rate of 7.67 percent.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
On April 17, 1997, Pacific Gas and Electric Company ("PG&E") filed a lawsuit in
the Superior Court of the State of California, City and County of San Francisco,
against Destec, Destec Holdings, Inc. ("Holdings"), Destec Operating Company
(wholly-owned subsidiaries of the Company) as well as against San Joaquin CoGen
Limited ("San Joaquin" or the "Partnership"). Dynegy Power Corp. (formerly
Destec) and its affiliates now own all of the partnership interests in the
Partnership as a result of the purchase of the interests of the two outside
partners in the Partnership. In the lawsuit, PG&E asserts claims and alleges
unspecified damages for fraud, negligent misrepresentation, unfair business
practices, breach of contract and breach of the implied covenant of good faith
and fair dealing. PG&E alleges that due to the insufficient use of steam by San
Joaquin's steam host, the Partnership did not qualify as a cogenerator pursuant
to the California Public Utilities Code ("CPUC") Section 218.5, and thus was not
entitled under CPUC Section 454.4 to the discount the Partnership received under
gas transportation agreements entered into between PG&E and San Joaquin in 1989,
1991, 1993 and 1995. All of PG&E's claims in this suit arise out of the
Partnership's alleged failure to comply with CPUC Section 218.5. The defendants
filed a response to the suit on May 15, 1997. On October 20, 1997, PG&E named
Libbey-Owens-Ford ("LOF"), the Partnership's steam host, as an additional
defendant in the action. On February 23, 1998, PG&E served by mail its Second
Amended Complaint on all defendants. On March 30, 1998, the defendants filed
their response to PG&E's Second Amended Complaint, denying PG&E's allegations
and alleging certain counterclaims against PG&E. By Order dated July 20, 1998,
the court dismissed certain of defendants' counterclaims against PG&E, and
abated certain others, pending resolution by the CPUC. The parties are actively
engaged in discovery and the October 1998 trial date was moved to March 15,
1999. The Partnership has previously advised the Federal Energy Regulatory
Commission ("FERC") of PG&E's claims, and stated that it would submit any
appropriate filings upon completion of its investigation. If the facility was
found not to have satisfied the California cogeneration facility standards,
there is a strong likelihood that it would also fail to satisfy the more
stringent federal standards. In accordance with the terms of a Protective Order
entered into by the parties at the commencement of the litigation, PG&E has
notified San Joaquin that it may make a FERC filing seeking damages from San
Joaquin and decertification of its status as a qualifying facility under the
federal standards. Under FERC precedent, if the San Joaquin facility were found
not to have been a qualifying facility, San Joaquin could be required to refund
to PG&E payments it received pursuant to the Power Purchase Agreement in excess
of PG&E's short-term energy costs during the period of non-compliance, plus
interest. In the event the court or FERC determines that San Joaquin is liable
to PG&E under the Gas Transportation Agreement or Power Purchase Agreement due
to LOF's failure to use sufficient quantities of steam, San Joaquin will seek to
recover such amounts from LOF under the terms of the Steam Purchase Agreement
between San Joaquin and LOF. Dynegy Power Corp is currently in settlement
negotiations with PG&E and LOF. If a settlement is not reached, the Company's
subsidiaries intend to vigorously defend this action. In the opinion of
management, the ultimate resolution of this lawsuit will not have a material
adverse effect on the Company's financial position or results of operations.
On March 24, 1995, Southern California Gas Company ("SOCAL") filed a lawsuit in
the Superior Court of the State of California for the County of Los Angeles,
against Destec, Destec Holdings and Destec Gas Services, Inc., wholly-owned
direct and indirect subsidiaries of the Company (collectively, the "Destec
Defendants"), as well as against Chalk Cliff Limited and McKittrick Limited
(collectively, the "Partnerships"). The Company owns an indirect 50 percent
limited partnership interest in McKittrick Limited, and Chalk Cliff Limited is
now wholly owned by subsidiaries of the Company through the purchase of the
interests of Dominion Energy, Inc. in the Chalk Cliff partnership. All general
partners of the Partnerships are also named defendants. The lawsuit alleges
breach of contract against the Partnerships and their respective general
partners, and interference and conspiracy to interfere with contracts against
the Destec Defendants. The breach of contract claims arise out of the
Page 10 of 29
<PAGE>
DYNEGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
"transport-or-pay" provisions of the gas transportation service agreements
between the Partnerships and SOCAL. SOCAL has sought damages from the
Partnerships for past damages and anticipatory breach damages in an amount equal
to approximately $31,000,000. On October 24, 1997, the Court granted SOCAL's
Motion for Summary Judgment relating to the breach of contract causes of action
against the Partnerships and their respective general partners, and requested
that SOCAL submit a proposed order consistent with that ruling for the Court's
signature. On November 21, 1997, the Partnerships filed for voluntary Chapter
11 bankruptcy protection in the Eastern District of California. Normal business
operations by the Partnerships continued throughout the course of these
reorganization proceedings. On January 12, 1998, the Court entered a Final
Order that (a) severed out the Partnerships due to their Chapter 11 bankruptcy
filings, (b) included a finding of contract liability against the Destec
Defendants, (c) dismissed the tortious interference claims against the Destec
Defendants, and (d) assessed damages in an aggregate amount of approximately
$31,000,000. On the same day, the Destec Defendants filed their Notice of
Appeal, and posted a security bond with the Second Appellate District in Los
Angeles based on the lack of allegations made or proven by SOCAL which support
holding those entities liable in contract. On March 11, 1998, the Partnerships
and their respective general partners filed Notices of Appeal with respect to
certain findings of fact in the Court's January 12, 1998 Final Order that were
adverse to those defendants. On or about April 15, 1998, the Court entered a
final judgment against the Partnerships themselves in recognition of the lifting
of the automatic stay against those entities by the Bankruptcy Court. The
Partnership filed their judgement on June 4, 1998. The appeal process is
anticipated to take approximately eighteen months. On October 21, 1998, the
Bankruptcy Court dismissed the voluntary bankruptcy filings of the Partnerships
and their respective lenders thereafter notified each of the Partnerships of the
occurrences of an Event of Default under the Partnerships' respective credit
agreements due to the existence of the SOCAL judgement against them.
The PG&E and SOCAL litigations represent pre-acquisition contingencies acquired
by the Company in the Destec acquisition. In a related matter, Chalk Cliff and
San Joaquin have each guaranteed the obligations of the other partnership,
represented by the project financing loans used to construct the power
generation facilities owned by the respective Partnerships. Chalk Cliff and San
Joaquin believe there is little incentive for their lenders to call on this
cross-guarantee at this time. In the opinion of management, if the lenders chose
to exercise their option under the terms of such arrangements, such action would
not have a material adverse effect on the Company's financial position or
results of operations.
On August 3, 1998, Modesto Irrigation District ("MID") filed a lawsuit against
PG&E and Destec in federal court for the Northern District of California, San
Francisco division. The lawsuit alleges violation of federal and state antitrust
laws and breach of contract against Destec. The allegations are related to a
power sale and purchase arrangement in the city of Pittsburg, CA. MID seeks
actual damages from PG&E and Destec in amounts not less than $25 million. MID
also seeks a trebling of any portion of damages related to its antitrust claims.
Dynegy believes the allegations made by MID are meritless and will vigorously
defend MID's claims. In the opinion of management, the amount of ultimate
liability with respect to these actions will not have a material adverse effect
on the financial position or results of operations of the Company.
The Company assumed liability for various claims and litigation in connection
with the Chevron Combination, the Trident Combination, the Destec acquisition
and in connection with the acquisition of certain gas processing and gathering
facilities from Mesa Operating Limited Partnership. The Company believes,
based on its review of these matters and consultation with outside legal
counsel, that the ultimate resolution of such items will not have a material
adverse effect on the Company's financial position or results of operations.
Further, the Company is subject to various legal proceedings and claims, which
arise in the normal course of business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not have a
material adverse effect on the financial position or results of operations of
the Company.
NOTE 8 -- CAPITAL STOCK
At September 30, 1998, employee stock options aggregating 3.7 million shares
were exercisable at prices ranging from $2.03 to $21.63 per share. Employee
stock option grants made from 1993 to 1998 will vest and become exercisable
during the remainder of 1998 and in 1999, respectively, resulting in the
potential exercise of approximately 6.5 million additional shares during that
period, at exercise prices ranging from $2.03 to $21.63. Other options currently
granted under the Company's option plans will fully vest periodically and become
exercisable through the year 2003 at prices ranging from $2.03 to $21.63. Grants
made under the Company's option plans may be canceled under certain
circumstances as provided in the plans. While
Page 11 of 29
<PAGE>
DYNEGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
the Company cannot predict the timing or the number of shares that may be issued
upon the exercise of option grants by individual employees, the Company is
pursuing a variety of alternatives to help assure an orderly distribution of
shares that may become available to the market.
In May 1997, the Board of Directors approved a stock repurchase program that
allows the Company to repurchase, from time to time, up to 1.6 million shares of
common stock in open-market transactions. The timing and number of shares
ultimately repurchased will depend upon market conditions and consideration of
alternative investments. Pursuant to this program, the Company has acquired 1.1
million shares at a total cost of $16.6 million, or $14.93 per share on a
weighted average cost basis, through September 30, 1998.
NOTE 9 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 130, "Reporting Comprehensive Income" ("Statement No. 130") and Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("Statement No. 131"). In February 1998, the FASB issued Statement No. 132,
"Employers' Disclosure about Pension and Other Postretirement Benefits"
("Statement No. 132") that revised disclosure requirements for pension and other
postretirement benefits. Statement No. 132 does not impact DYNEGY's disclosure
or reporting. During the first quarter of 1998, the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
issued two Statements of Position ("SOPs"), "Reporting on the Costs of Start-up
Activities" and "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". In June 1998, the FASB issued Statement No. 133.
Additionally, during 1998 the EITF initiated and has continued its dialogue and
analysis of current accounting principles and disclosure requirements
principally focused on energy commodity trading activities.
Statement No. 130 established standards for reporting and display of
comprehensive income and its components in a full-set of general purpose
financial statements. This standard does not currently materially alter the
Company's reporting of operating results.
Statement No. 131 established standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
established standards for related disclosures about products and services,
geographic areas, and major customers. Statement No. 131 supersedes or amends
existing authoritative literature governing segment reporting, reporting of
significant customers, reporting of geographic operations and reporting of
previously unconsolidated subsidiaries. The new statement is effective for
annual periods ending after December 15, 1997, and comparative information for
earlier years is to be restated. The statement need not be applied to interim
financial statements in the initial year of its application. The Company is
assessing the impact Statement No. 131 will have on its financial disclosures,
if any, and intends to adopt the provisions of such statement within the
timeframe and in accordance with the requirements provided by the statement.
The SOPs establish guidance on the financial reporting for start-up costs and
organization costs, as defined, and on accounting for the costs of computer
software developed or obtained for internal use. The Company's current
accounting methodologies adhere to the provisions contained in the SOPs in all
material respects.
Statement No. 133 established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires entities to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The standard also
established certain conditions precedent in order to designate and report
derivative instruments as hedges of certain assets, liabilities, firm
commitments and other transactions, as defined by the statement. Finally,
Statement No. 133 expressly defined the accounting for changes in the fair value
of a derivative based principally on the intended use of the derivative and its
designation. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Early adoption is permitted, but only as of the
beginning of any quarter following issuance of the statement and provisions of
the statement do not require retroactive application to financial statements of
prior periods.
Page 12 of 29
<PAGE>
DYNEGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
Utilization of derivative instruments is an integral part of managing the market
and operational risks affecting the Company in the normal course of operating
its business. The Company routinely enters into financial instrument contracts
to hedge purchase and sale commitments and inventories in its natural gas,
natural gas liquids, electricity, crude oil and coal businesses in order to
minimize the risk of market fluctuations. Additionally, the Company may, at
times, have a bias in the market, within established guidelines, resulting from
management of its portfolio. 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. Statement No. 133 amends, modifies or supercedes significantly
all of the authoritative literature governing the accounting for and disclosure
of derivative financial instruments and hedging activities.
The EITF's discussion of accounting for "trading activities" is documented in
its Issue 98-10, "Accounting for Energy Trading and Risk Management Activities".
The focus of the EITF's dialogue is on accounting for energy contracts and
trading activities, as defined, prior to the adoption of Statement No. 133. The
EITF task force has reached tentative conclusions on proposed guidance and it is
anticipated that such guidance will be issued imminently. As currently proposed,
the accounting requirements of Issue 98-10 will generally require energy
contracts entered into under trading activities to be marked-to-market with
gains and losses from such activities reflected currently in the statement of
operations. Such accounting requirements are expected to be effective for
financial statements issued for fiscal years beginning after December 15, 1998.
The Company does not anticipate that its current mark-to-market accounting for
fixed-price natural gas contracts will be significantly affected by the adoption
of Statement No. 133 or by the EITF's tentative conclusions. However, provisions
in Statement No. 133 and in EITF 98-10 will affect the accounting for trading
and marketing operations currently accounted for under the accrual method.
Further, provisions in Statement No. 133 may affect the accounting for other
contractual arrangements and operations of the Company. The Company is
continuing to assess the impact Statement No. 133 will have on its financial
accounting and disclosures and intends to adopt the provisions of such statement
within the timeframe and in accordance with the requirements provided therein.
Further, the Company is assessing the impact of the EITF's tentative conclusions
on its accounting policies and intends to adhere to the guidance provided by the
EITF if and when such guidance is formally issued.
Page 13 of 29
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
The following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements of Dynegy Inc. included
elsewhere herein and with the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
GENERAL
Effective at the close of business on July 6, 1998, NGC Corporation ("NGC")
changed its name to Dynegy Inc. ("DYNEGY" or the "Company"). Concurrent with the
change in name, DYNEGY also changed its New York Stock Exchange symbol to DYN.
All subsidiaries of the Company now operate under the DYNEGY name.
COMPANY PROFILE. DYNEGY is one of the leading marketers of energy products and
services in North America. The Company holds a leadership position in the
marketing of natural gas, natural gas liquids and electricity and is a leading
gatherer, processor and transporter of natural gas liquids through direct and
indirect ownership and operation of natural gas processing plants,
fractionators, storage facilities and pipelines. These activities combined with
a substantial independent power generation business enable the Company to
provide energy solutions to customers throughout North America and in the United
Kingdom.
The Company is a holding company that conducts substantially all of its business
through its subsidiaries. From inception of operations in 1984 until 1990,
Natural Gas Clearinghouse ("Clearinghouse") limited its activities primarily to
natural gas marketing. Starting in 1990, Clearinghouse began expanding its core
business operations through acquisitions and strategic alliances with certain of
its shareholders resulting in the formation of a midstream energy asset business
and establishing energy marketing operations in both Canada and the United
Kingdom. Effective March 1, 1995, Clearinghouse and Trident NGL Holding, Inc.
("Holding"), a fully integrated natural gas liquids company, merged and the
combined entity was renamed NGC Corporation. On August 31, 1996, NGC completed a
strategic combination with Chevron U.S.A. Inc. and certain Chevron affiliates
(collectively "Chevron") whereby substantially all of Chevron's midstream assets
were merged with NGC ("Chevron Combination"). In June 1997, NGC acquired Destec
Energy, Inc. ("Destec"), a leading independent power producer. By virtue of the
growth of DYNEGY's core businesses combined with the synergies derived from
these transactions, DYNEGY has established itself as an industry leader
providing quality, competitively priced energy products and services to
customers primarily throughout North America and in the United Kingdom.
The Company currently reports operations under two primary business segments:
the Wholesale Gas and Power Business ("Wholesale Gas and Power") and the
Natural Gas Liquids Businesses ("Liquids Businesses").
RECENT DEVELOPMENTS. DYNEGY continued successful execution of key operating and
business strategies during the recent quarter. Key accomplishments during the
period are discussed below.
WHOLESALE GAS AND POWER -
In November 1998, the Company announced it is moving forward with final
permitting and construction of its 800 megawatt electric generating facility in
Rockingham County, North Carolina. Construction will commence upon receipt of
final permits and the plant is expected to be in service in June of 2000. In a
related matter, the Company announced the execution of a power purchase
agreement associated with the Rockingham facility.
On July 15, 1998, AGL Resources Inc., Piedmont Natural Gas Company, Inc. and
DYNEGY announced the formation of SouthStar Energy Services L.L.C.
("SouthStar"). The venture, headquartered in Atlanta, Georgia, offers a
combination of unregulated energy products and services to industrial,
commercial and residential customers in the southeast region of the United
States. The products and services will include natural gas, electricity, fuel
oil and propane, along with related retail services. The formation of SouthStar
represents a furtherance of DYNEGY's strategy of forming alliances with entities
that possess a regional presence in order to serve the retail energy customer
base throughout North America.
Page 14 of 29
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
DYNEGY now has interests in five regional alliances with partners having strong
regional retail presence in Canada and in the northeast, the midwest and
southeast regions of the U.S.
LIQUIDS BUSINESSES -
In November 1998, the Company announced the opening of a newly constructed
fractionation facility near Lake Charles, Louisiana. The fractionator is capable
of separating up to 55,000 barrels per day of natural gas liquids into ethane,
propane and a butane and natural gasoline mix. The facility is fed primarily
from offshore production in the Gulf of Mexico. Its products are primarily
shipped through pipeline to customers in the petrochemical and refining
industries in Lake Charles or Mont Belvieu.
On July 9, 1998, Texaco and DYNEGY announced the formation of Versado Gas
Processors L.L.C. ("Versado"), a joint venture of both companies' natural gas
processing facilities in southeast New Mexico and west Texas. DYNEGY will own a
63 percent interest in the venture and will operate the combined facilities with
the intent of gaining efficiencies in operations and economies of scale
consistent with DYNEGY's strategy of asset rationalization and restructuring
that is intended to increase profitability through higher utilization, lower
costs and improved performance. Versado's processing and related gathering
facilities have a combined processing capacity of approximately 340 million
cubic feet of gas per day.
On July 7, 1998, DYNEGY announced that its wholly owned subsidiary Dynegy Canada
Inc. had acquired the Mazeppa and Gladys gas processing plants and associated
gathering lines located in Alberta, Canada, from Compton Petroleum Corporation.
The acquisition of these midstream assets represents the re-establishment of
DYNEGY's Canadian asset base that will complement existing Canadian gas
marketing and trading operations.
DYNEGY announced the closing of the sale of the Ozark Gas Transmission System to
an affiliate of Oklahoma City-based Enogex Inc. for $55 million on August 1,
1998. In addition, the Company was in the process of disposing of its interests
in several non-strategic natural gas processing plants and related facilities
during the period. Aggregate net sales proceeds from these dispositions will
strengthen short-term financial position and supplement cash flow for
redeployment into strategic endeavors.
DEBT PORTFOLIO RESTRUCTURING -
As part of the Chevron Combination, DYNEGY assumed approximately $155.4 million
payable to Chevron upon demand on or after August 31, 1998 (the "Chevron Note").
In September 1998, the Chevron Note was retired, pursuant to the terms of the
agreement, with funds provided through sale of commercial paper.
In August 1998, the Company filed a Registration Statement for the purpose of
registering certain securities for sale or issuance by the Company, from time-
to-time, in an aggregate amount not to exceed $500 million, pursuant to Rule 415
of the Securities Act of 1933. The transaction timing and specific terms of the
particular securities to be issued will be set forth in prospectus supplements,
but such securities may take the form of debt, preferred stock, common stock,
security warrants or trust debentures as provided for in the Registration
Statement.
OTHER -
In October 1998, the Company announced the termination of a letter of intent for
the sale of its crude oil marketing and transportation assets to Duke Energy
Transport and Trading Company. The Company is actively pursuing other strategic
alternatives for these operations, including a sale, merger or joint venture,
and, potentially, continued ownership of these operations.
Page 15 of 29
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION. This Form 10-Q
contains various forward-looking statements and information that are based on
management's beliefs as well as assumptions made by and information currently
available to management. When used in this document, words such as
"anticipate", "estimate", "project", and "expect" are intended to identify
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable; it can give no
assurance that such expectations will prove to have been correct. Such
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, projected or expected. Among the key risk factors that
may have a direct bearing on DYNEGY's results of operations and financial
condition are: (i) competitive practices in the industries in which DYNEGY
competes, (ii) fluctuations in energy commodity prices which have not been
properly hedged or which are inconsistent with DYNEGY's open position in its
energy marketing activities, (iii) operational and systems risks, (iv)
environmental liabilities which are not covered by indemnity or insurance, (v)
software or hardware failures resulting from Year 2000 isues, and (vi) the
impact of current and future laws and governmental regulations (particularly
environmental regulations) affecting the energy industry in general, and
DYNEGY's operations in particular.
IMPACT OF PRICE FLUCTUATIONS. Operating margin earned by Wholesale Gas and
Power, exclusive of risk-management activities, is relatively insensitive to
commodity price fluctuations since most of this segment's 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 the segment's risk-management activities.
DYNEGY generally attempts to balance its fixed-price physical and financial
purchase and sales commitments in terms of contract volumes, and the timing of
performance and delivery obligations. However, the Company may, at times, have
a bias in the market, within established guidelines, resulting from management
of its portfolio. 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. Further, differences in the
comprehensive methods of accounting for North American fixed-price natural gas
transactions, which are accounted for under the mark-to-market method, and
electricity marketing transactions, which are accounted for under accrual
accounting, create differences in the timing of the recognition of such
commodity price movements. 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. Fuel costs, principally natural gas, represent the primary variable
cost impacting margins at the Company's power generating facilities.
Historically, operating margins have been relatively insensitive to commodity
price fluctuations since most of this business's purchase and sales contracts
contain 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.
Operating margins associated with the Liquids Businesses' natural gas gathering,
processing and fractionation activities are very sensitive to changes in natural
gas liquids prices principally as a result of contractual terms under which
products are sold by these businesses. In addition, certain of the Liquids
Businesses' processing plant assets are impacted by changes in, and the
relationship between, natural gas and natural gas liquids prices. Based upon
current operations, a one-cent movement in the annual average price of natural
gas liquids would impact annual operating margin by approximately $10 million.
The operating margin in the field processing, fractionation and gathering
businesses is relatively insensitive to fluctuations in natural gas prices
as a result of the mitigating impact of fuel costs in the Company's
fractionation operations and residue gas sales in its gathering and processing
activities. Commodity price fluctuations also impact the operating margins
derived from the Liquids segment's natural gas liquids and crude oil marketing
businesses. In order to manage its exposure to price risks in these businesses,
the Company, from time to time, will enter into financial instrument contracts
to hedge purchase and sale commitments and inventories.
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 are typically higher in
the winter months than in the summer months, reflecting increased demand due to
greater heating requirements and, typically, higher natural gas prices.
Conversely, electricity marketing operations are typically impacted by higher
demand and commodity price volatility during the summer cooling
Page 16 of 29
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
season. Consistent with electricity marketing, the Company's electricity
generating facilities generally experience peak demand during the summer cooling
season, particularly for merchant plant generating facilities. The Liquids
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.
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,
electricity and natural gas liquids marketing businesses. For the foreseeable
future, the Company's primary focus will be the acquisition and/or construction
of power generating assets that will enable the company to fully realize the
merchant leverage effect of commercialization of these generating assets. The
company's energy convergence strategies are focused on marketing, trading and
arbitrage opportunities involving natural gas and power, centered around the
control and optimization of Btu conversion capacity within the wholesale gas and
power businesses.
DYNEGY has historically relied upon operating cash flow and borrowings from a
combination of sales of commercial paper, money market lines of credit, the
Credit Agreement and various long-term debt issuances for its liquidity and
capital resource requirements. The following briefly describes the terms of
these arrangements.
COMMERCIAL PAPER AND MONEY MARKET LINES OF CREDIT. The Company utilizes
commercial paper proceeds and borrowings under uncommitted money market bank
lines for general corporate purposes, including short-term working capital
requirements. At September 30, 1998, commercial paper outstanding totaled $587
million at an interest rate of 5.74 percent. No amounts were outstanding under
uncommitted money market bank lines at quarter end. The weighted average
interest rates for commercial paper and uncommitted money market bank lines
during the three-months ended September 30, 1998 were 5.87 percent and 6.05
percent, respectively.
CREDIT AGREEMENT. DYNEGY restructured its Credit Agreement in May 1998
establishing an $800 million facility divided into two parts, a $400 million
five-year facility and a $400 million 364-day facility. At September 30, 1998,
letters of credit and borrowings under the Credit Agreement aggregated $26.9
million and after consideration of the outstanding commercial paper, unused
borrowing capacity under the Credit Facility approximated $186.1 million.
SENIOR NOTES. On May 20, 1998, the Company sold $175 million of 7.125 percent,
20-year debentures due May 15, 2018. Interest on the 7.125 percent notes is
payable semiannually on May 15 and November 15 of each year. In October 1996,
DYNEGY sold $175 million of 7.625 percent 30-year Senior Notes due 2026 ("Senior
Debentures"). Interest on the Senior Debentures is payable semiannually on April
15 and October 15 of each year. The Senior Debentures are redeemable, at the
option of the Company, in whole or in part from time to time, at a formula-based
redemption price. On December 15, 1995, the Company sold $150 million of 6.75
percent Senior Notes due 2005 ("Senior Notes"). Interest on the Senior Notes is
payable semiannually on June 15 and December 15 of each year.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED DEFERRABLE INTEREST
DEBENTURES. During May 1997, DYNEGY Corporation Capital Trust I ("Trust"), a
wholly owned subsidiary of DYNEGY, issued in a private transaction $200 million
aggregate liquidation amount of 8.316% Subordinated Capital Income Securities
(referred to herein as "Guaranteed Preferred Beneficial Interests in
Subordinated Deferrable Interest Debentures" or "Trust Securities") representing
preferred undivided beneficial interests in the assets of the Trust. The Trust
invested the proceeds from the issuance of the Trust Securities in an equivalent
amount of 8.316% Subordinated Debentures ("Subordinated Debentures") of the
Company. The sole assets of the Trust are the Subordinated Debentures. Proceeds
from issuance of the Securities were used to reduce amounts outstanding under
the Credit Agreement. During October 1997, the Trust completed an exchange
Page 17 of 29
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
offer through which all of the outstanding Securities were exchanged by the
holders thereof for registered securities having substantially the same rights
and obligations.
COMMITMENTS. A subsidiary of the Company has entered into various binding and
non-binding agreements that could ultimately commit the Company to expend
approximately $500 million over the next three years for the acquisition of
combustion turbine generators and related equipment. This equipment will be used
in the construction of electricity generating capacity in selected sites
throughout the U.S. A significant portion of the current commitment relates to
agreements that include cancellation provisions providing for termination at
DYNEGY's option during the construction phase in exchange for variable penalty
payments.
QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES. The Company is exposed to
certain market risks inherent in the Company's financial instruments that 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 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. A comparison
of the absolute notional contract amounts associated with commodity risk-
management, interest rate and forward exchange contracts, respectively, as of
September 30, 1998 and December 31, 1997, is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Natural Gas (Trillion Cubic Feet) 4.471 2.558
Electricity (Million Megawatt Hours) 1.213 2.244
Natural Gas Liquids (Million Barrels) 4.445 4.355
Crude Oil (Million Barrels) 11.222 14.920
Interest Rate Swaps (in thousands of US Dollars) $ 69,340 $180,000
Weighted Average Fixed Interest Rate Paid on Swaps 7.665 6.603
U.K. Pound Sterling (in thousands of US Dollars) $ 69,855 $ 74,638
Average U.K. Pound Sterling Contract Rate (in US Dollars) $ 1.6022 $ 1.5948
Canadian Dollar (in thousands of US Dollars) $279,354 $ 37,041
Average Canadian Dollar Contract Rate (in US Dollars) $ 0.6766 $ 0.7240
</TABLE>
The Company's electric power marketing and trading business benefited
substantially during the quarter from opportunities created by and resulting
from continued market volatility experienced in certain U.S. markets. Management
believes that such volatility will continue as the electricity markets
deregulate throughout the U.S. Such volatility will result principally from
imbalances between supply and demand created by illiquidity in certain markets
resulting from, among other things, the lack of a mature regional trading and
price discovery mechanism, transmission constraints resulting from continued
regulation in certain U.S. markets and the need for a representative number of
market participants maintaining the financial liquidity and other resources
necessary to compete effectively. These matters may significantly affect
periodic results. Management will continue to monitor exposure to these and
other market and business risks and will adjust valuation reserves accordingly
as indicated by changing circumstances.
YEAR 2000 ISSUES. The Company is continuing its analysis of the "Year 2000"
issue, which arises from the use by certain computer hardware and software
applications of two digits rather than four to define an applicable year. Such
hardware and software may be incapable of appropriately recognizing the year
2000, the result of which could be system failures or miscalculations leading to
disruptions in the Company's activities and operations. If the Company and/or
its significant customers or suppliers fail to timely make necessary
modifications and conversions, the Year 2000 issue could have a
Page 18 of 29
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
material adverse effect on Company operations and its financial position. The
Company believes that its competitors face similar risks.
DYNEGY has established a corporate-wide project team to identify and rectify
non-compliant hardware and software within its infrastructure. Remediation and
testing activities are underway on the Company's core systems and business
applications at both corporate and field locations, and it is expected that all
core systems and business applications will be Year 2000 compliant by August
1999. In addition, the Company is focusing assessment efforts to determine that
major customers and suppliers are also Year 2000 compliant. The project team is
also formulating contingency plans to address alternatives for the Company
should Year 2000 issues disrupt operations. Nevertheless, there can be no
absolute assurance that there will not be a material adverse effect on the
Company if its efforts are delayed or are ineffective, if material issues remain
unidentified and/or if third party entities do not convert or replace hardware
and software applications in a timely manner and in a way that is compatible
with the Company's hardware and software infrastructure.
Results of the review conducted to date indicate that the Company is unlikely to
be burdened by a material event resulting from the Company's untimely resolution
of Year 2000 issues. The potential costs and uncertainties associated with this
review are dependent upon a number of factors, including legacy software and
hardware configurations, planned information technology infrastructure
enhancements and the availability of trained personnel. Current cost estimates
for the entire Year 2000 compliance project are projected to approximate $8
million, with approximately $2 million expended during 1998 and the remainder
during 1999. These cost estimates include costs for identification and
remediation of Year 2000 issues. Such cost estimates are based on current
available information and are subject to revision, either upward or downward, as
the project matures and additional information becomes available.
CONCLUSION
The Company continues to believe that it will be able to meet all foreseeable
cash requirements, including working capital, capital expenditures and debt
service, from operating cash flow and borrowings under its various credit
facilities, money market lines of credit, commercial paper issuances and long-
term debt issuances.
Page 19 of 29
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
RESULTS OF OPERATIONS
Provided below is a tabular presentation of certain domestic and international
operating and financial statistics for the Company's segments and subsegments
for the three- and nine-month periods ended September 30, 1998 and 1997,
respectively. Both the continuity of operations and the resulting comparability
of results between periods are impacted by the Destec acquisition and the
reorganizations of the Company's operations in Canada and in the United Kingdom.
<TABLE>
<CAPTION>
THREE-MONTHS ENDED SEPTEMBER 30, NINE-MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
--------------- -------------- -------------- ---------------
($ US IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING MARGIN (1)(2):
WHOLESALE GAS AND POWER -
Natural Gas Marketing (3) $ 25,439 $ 20,980 $ 79,613 $ 79,334
UK Gas Marketing 230 576 9,902 1,242
Electric Power Marketing 17,138 4,025 40,689 8,701
Power Generation 18,823 10,367 39,630 10,367
-------- -------- -------- --------
TOTAL WHOLESALE GAS AND POWER 61,630 35,948 169,834 99,644
-------- -------- -------- --------
LIQUIDS BUSINESSES
Natural Gas Processing - Field Plants 15,827 35,879 54,264 119,107
Natural Gas Processing - Straddle Plant s 632 9,793 7,283 22,534
Liquids Marketing Assets 7,442 7,112 20,688 18,638
Natural Gas Liquids Marketing 12,909 17,483 35,593 1,153
LPG Sales 1,389 1,440 5,183 3,328
-------- -------- -------- --------
38,199 71,707 123,011 164,760
-------- -------- -------- --------
Crude Oil Marketing 3,396 (430) 8,871 (959)
Natural Gas Gathering and Transmission 2,760 3,623 9,173 12,517
-------- -------- -------- --------
6,156 3,193 18,044 11,558
-------- -------- -------- --------
TOTAL LIQUIDS BUSINESSES 44,355 74,900 141,055 176,318
-------- -------- -------- --------
TOTAL OPERATING MARGIN $105,985 $110,848 $310,889 $275,962
======== ======== ======== ========
OPERATING STATISTICS (1)(2):
Natural Gas Marketing (Bcf/d) -
U.S. Sales Volumes (3) 5.8 5.8 5.8 6.1
Canadian Sales Volumes (4) 2.3 2.0 2.2 1.8
U.K. 0.8 0.2 0.7 0.1
-------- -------- -------- --------
8.9 8.0 8.7 8.0
======== ======== ======== ========
Electric Power Marketing - Million Megawatt Hours Sold 51.4 39.3 102.9 73.3
Power Generation (Million Megawatt Hours Generated) -
Gross 4.1 3.7 10.9 not comparable
Net 2.6 2.2 7.0 not comparable
Natural Gas Liquids Processed (MBbls/d - Gross) -
Field Plants 93.5 91.4 88.5 85.2
Straddle Plants 24.1 46.3 32.2 47.2
Liquids Marketing Assets (MBbls/d) 203.5 217.3 196.1 204.6
NGL Marketing - Sales Volumes (MBbls/d) 385.7 412.6 398.5 406.5
Natural Gas Gathering and Transmission (MMcf/d) 0.3 0.4 0.3 0.4
Crude Oil Marketing - Sales Volumes (MBbls/d) 263.1 173.5 246.8 167.4
Global LPG -- LPG Sales Volumes (MMBbls) (5) 7.8 9.5 17.6 22.0
</TABLE>
- ---------------
(1) The Destec acquisition was accounted for as an acquisition of a business in
accordance with the purchase method of accounting and the results of
operations attributed to the acquired business are included in the
Company's financial statements and operating statistics effective July 1,
1997. The reorganization of the Company's Canadian operations was effective
April 1, 1997, and the reorganization of the Company's operations in the
United Kingdom was effective January 1, 1997.
(2) Information excludes the Company's proportionate share of margin and
operating statistics associated with ventures accounted for under the
equity method.
Page 20 of 29
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(3) Includes immaterial amounts of inter-company gas sales for both periods.
(4) Represents volumes sold by DYNEGY Canada, Inc.
(5) Includes inter-company sales for all periods.
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
For the quarter ended September 30, 1998, DYNEGY realized net income of $43.6
million, or $0.27 per share, on revenues of $4.6 billion. This compared with
net income of $25.0 million, or $0.15 per share, on total revenue of $3.7
billion reported in the third quarter of 1997. Current quarter results include
an after-tax benefit of $17.1 million, or $0.11 per share, related to a gain on
the sale of the Ozark Gas Transmission System.
Consolidated operating margin for the third quarter of 1998 totaled $106.0
million as compared to $110.8 million in the corresponding 1997 period. The
current quarter's consolidated operating margin reflected expanding wholesale
gas and power convergence businesses driven by opportunities created by and
derived from volatility in the electricity markets, continued strong domestic
gas marketing per unit margins and significantly improved contribution from its
power generation assets and businesses. Conversely, the Company's liquids
businesses reported sharply lower operating margins period to period resulting
principally from lower commodity prices. Wholesale Gas and Power contributed
$61.6 million to the 1998 consolidated operating margin, compared to $35.9
million reported a year ago; whereas, the Liquids Businesses contributed an
aggregate $44.4 million to consolidated operating margin in the current quarter,
$30.5 million less than the $74.9 million reported in the 1997 period. Operating
income totaled $26.1 million in the third quarter of 1998 compared to $44.3
million in the comparable 1997 period, reflecting slightly lower consolidated
operating margin period to period as well as increases in both depreciation and
amortization and general and administrative expenses. The increase in
depreciation and amortization expense resulted principally from the continued
expansion of the Company's depreciable asset base resulting from acquisitions
and capital projects completed during the four quarters in the period ended
September 30, 1998. The increase in depreciation and amortization expense was
partially offset by the favorable effect on current period expense of the impact
of the asset abandonments and impairments recognized during the fourth quarter
of 1997. The increased level of general and administrative expenses period to
period resulted principally from the reorganization and expansion of operations
in Canada and in the United Kingdom, expansion of the electricity marketing and
global transportation businesses and the effect of increased overhead required
to support the technology infrastructure improvements currently being
implemented by the Company.
Incremental to DYNEGY's consolidated operating income was the Company's equity
share in the earnings of its unconsolidated affiliates which contributed an
aggregate $37.1 million to 1998 pre-tax quarterly earnings, compared to $14.2
million during the comparable 1997 period. The increase in equity earnings
resulted from the addition of equity investments in certain power generating
assets offset by lower earnings from the Company's investments in operations
associated with its Liquids Businesses. The following table provides a summary
of equity earnings by investment for the comparable periods.
Page 21 of 29
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
FOR THE THREE-MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1998 1997
--------- ---------
<S> <C> <C>
WHOLESALE GAS AND POWER:
Accord (1) $ 4,500 $ 4,500
Power Generation Equity Investments (in aggregate) 29,755 5,988
Other (804) (576)
------- -------
TOTAL WHOLESALE GAS AND POWER 33,451 9,912
------- -------
LIQUIDS BUSINESSES:
Gulf Coast Fractionators 1,031 927
West Texas LPG Pipeline Limited Partnership 1,528 2,029
Venice Energy Services Company, L.L.C. 760 975
Other, net 377 390
------- -------
TOTAL LIQUIDS BUSINESSES 3,696 4,321
------- -------
$37,147 $14,233
======= =======
</TABLE>
- -----------
1. For a discussion of the Accord restructuring, refer to Note 3 of the
Condensed Consolidated Financial Statements.
Interest expense totaled $21.2 million for the quarter ended September 30, 1998,
compared to $16.4 million for the equivalent 1997 period. The increase of $4.8
million is attributed to higher average principal amounts in the 1998 period
resulting principally from capital expenditures related to the acquisition of
interests in certain power generating facilities and a Canadian gas processing
facility partially offset by proceeds from asset sales.
During the second quarter of 1997, the Company sold $200 million of 8.316%
Guaranteed Preferred Beneficial Interests in Subordinated Deferrable Interest
Debentures. The accumulated distributions attributable to these Trust
Securities are reported as minority interest in income of a subsidiary in the
consolidated statements of operations. Accumulated distributions associated with
these Trust Securities totaled $4.2 million in each period.
Other income and expenses, net totaled $25.8 million in the quarter ended
September 30, 1998 compared to a $0.6 million net charge in the 1997 period.
The 1998 period included a pretax gain of $26.3 million related to the sale of
the Ozark Gas Transmission System. The remaining amounts of other income and
expense in both periods consisted of interest income, minority interests in
consolidated subsidiaries and certain other non-recurring income and expense
items.
The Company reported an income tax provision of $20.1 million for the three-
month period ended September 30, 1998, representing an effective tax rate of 32
percent, compared to an income tax provision of $12.3 million and an effective
rate of 33 percent for the equivalent 1997 period. Differences between the
aforementioned effective rates and the statutory rate of 35 percent for each of
the three-month periods ended September 30, 1998 and 1997, respectively, result
principally from permanent differences arising from the amortization of certain
intangibles and debt premiums and, to a lesser degree, state income taxes and
certain foreign tax benefits.
WHOLESALE GAS AND POWER
Financial contribution by Wholesale Gas and Power, which aggregates the
operating margin from the segment businesses and equity earnings from ventures
engaged in operations associated with the segment, totaled $95.1 million for the
three-month period ended September 30, 1998, compared with $45.9 million in the
same 1997 period. The significant increase in financial contribution period to
period generally reflected higher electricity marketing volumes and per unit
margins, higher domestic per unit gas marketing margins and a significant
increase in contribution from the Company's power generation business.
Page 22 of 29
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
Total natural gas volumes sold totaled 8.9 billion cubic feet per day compared
with 8.0 billion cubic feet per day in the prior year period. In North America,
gas volumes increased slightly period to period reflecting reduced volumes in
the U.S. principally due to an intentional elimination of certain marginally
profitable sales from DYNEGY's sales portfolio and storm-related Gulf of Mexico
production curtailments in September 1998, offset by volume increases in Canada.
Sales volumes in the UK continue to improve significantly as that operation
matures. Consolidated per unit natural gas sales margins averaged $0.031 per
thousand cubic feet for the 1998-quarter compared to $0.029 per unit in 1997.
Domestic per unit margins improved to $0.043 per unit in the 1998 quarter
compared to $0.029 in the same 1997 period reflecting the positive impact on
operating margin of the selectivity analysis performed on the domestic gas sales
portfolio.
Electricity marketing continued to improve its sales volumes dramatically,
increasing total megawatt hours sold by 12.1 million period to period. The
Company's electric power marketing and trading business benefited substantially
during the quarter from opportunities created by and resulting from recent
commodity price volatility experienced in certain U.S. markets. The Company
adjusted certain reserves at quarter end in consideration of continuing market
volatility, counterparty credit risks and its market bias.
The Company's power generation operations provided financial contribution of
$48.6 million during the 1998 period compared to $16.4 million during the 1997
period. Ownership of power generating assets continues to be predominantly
through varying interests held in partnerships that own and operate power
generation facilities. The 1998 period was favorably impacted by recent asset
acquisitions that benefited commercially from regional market volatility and
consumer demand. During the period, the power generating assets in which DYNEGY
maintains an interest generated 4.1 million-megawatt hours of electricity (2.6
million-megawatt hours, net to the Company's interest).
NATURAL GAS LIQUIDS BUSINESSES
Financial contribution by this segment dropped to $48.1 million from $79.2
million reported in the comparable 1997 period. The lower 1998 financial
contribution principally resulted from the negative impact lower industry-wide
average natural gas liquids prices had on the segment's gas processing business
and, to a lesser degree, the aforementioned Gulf of Mexico production
curtailments.
Natural gas liquids production volumes decreased 15 percent this quarter to
117.6 thousand barrels per day from 137.7 thousand barrels per day in the third
quarter last year, principally as a result of reduced volumes at the Company's
straddle plant facilities. The straddle plants were shutdown during a portion
of the 1998 period as a result of unfavorable economics created by lower spreads
between natural gas and natural gas liquids prices. The Company will elect to
operate these straddle facilities when the economics become more favorable. NGL
marketing volumes sold were lower period to period reflecting lower demand while
volumes received for fractionation also decreased reflecting the straddle plant
closures, among other factors.
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
For the nine-months ended September 30, 1998, DYNEGY realized net income of
$79.4 million, or $0.48 per share, on revenues of approximately $11.2 billion.
This compared with net income of $61.8 million, or $0.37 per share, on total
revenue of $9.6 billion reported in the same 1997 period. Results in both
periods were impacted by non-recurring items. The 1998 period includes the
previously described gain on sale of the Ozark Gas Transmission System and an
after-tax charge of $6.3 million, or $0.04, related to a severance reserve.
Results for the 1997 period include an aggregate after-tax charge of $13.8
million, or $0.08 per share, attributed to the combination of lower-of-cost-or-
market writedowns of the Company's natural gas liquids and crude oil
inventories, a hedging-related loss and recognition of a reserve related to an
investment in a gas storage facility offset by a gain on the sale of a
fractionator and certain true-ups to actual of prior revenue and cost accruals.
Normalized earnings for the 1998 period totaled $68.6 million, or $0.42 per
share, compared to $75.6 million, or
Page 23 of 29
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
$0.45 per share in 1997. Cash flow provided by operating activities totaled
$141.0 million in 1998 compared to $282.5 million in 1997.
Consolidated operating margin for the first nine months of 1998 totaled $310.9
million compared to $276.0 million in 1997, which is net of $18.1 million of
pretax charges related to the special items discussed in the preceding
paragraph. Wholesale Gas and Power operating margin totaled $169.8 million, an
improvement of $70.2 million period to period. The Liquids Businesses
contributed an aggregate $141.1 million to consolidated operating margin, or
$35.2 million less than the $176.3 million reported in 1997. Operating income
totaled $81.9 million for the nine-months ended September 30, 1998, compared to
$94.8 million in the comparable 1997 period. The decrease in operating income of
$12.9 million reflects the aforementioned increase in consolidated operating
margin offset by an aggregate increase of $47.9 million in depreciation and
amortization and general and administrative expenses. The increases in
depreciation and amortization expense and general and administrative expense
result principally from the same reasons and circumstances that impacted these
items during the three-months ended September 30, 1998 described previously. In
addition, the increased 1998 cost includes a pre-tax amount of $9.6 million
related to the aforementioned severance charge.
The Company's equity share in the earnings of its unconsolidated affiliates
contributed an aggregate $68.0 million to 1998 pretax year-to-date results,
compared to $41.0 million during the comparable 1997 period. The following
table provides a summary of equity earnings by investment for the comparable
periods.
<TABLE>
<CAPTION>
FOR THE NINE-MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1998 1997
---------- ----------
<S> <C> <C>
WHOLESALE GAS AND POWER:
Accord (1) $13,500 $18,000
Power Generation Equity Investments (in aggregate) 43,882 5,988
Other (2,434) (1,709)
------- -------
TOTAL WHOLESALE GAS AND POWER 54,948 22,279
------- -------
LIQUIDS BUSINESSES:
Gulf Coast Fractionators 3,111 5,642
West Texas LPG Pipeline Limited Partnership 5,104 5,313
Venice Energy Services Company, L.L.C. 3,686 7,085
Other, net 1,154 717
------- -------
TOTAL LIQUIDS BUSINESSES 13,055 18,757
------- -------
$68,003 $41,036
======= =======
</TABLE>
- --------
1. For a discussion of the Accord restructuring, refer to Note 3 of the
Condensed Consolidated Financial Statements.
Interest expense totaled $55.3 million for the nine-month period ended September
30, 1998, compared to $44.3 million for the same 1997 period. The increase of
$11.0 million is attributed to higher average principal balances period to
period principally as a result of indebtedness incurred related to the Destec
acquisition combined with other discrete asset acquisitions partially offset by
proceeds from recent asset sales. Distributions associated with the Trust
Securities totaled $12.5 million in 1998 compared to $5.7 million in 1997.
Other income and expenses, net totaled $33.1 million for the first nine months
of 1998 and was immaterial to the nine-month period ended September 30, 1997.
As discussed previously, the 1998 amount is primarily a result of gains on the
sale of a gas processing facility and the Ozark Gas Transmission System.
Page 24 of 29
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
The Company reported an income tax provision of $35.8 million for the nine-month
period ended September 30, 1998, representing an effective tax rate of 31
percent, compared to an income tax provision of $23.6 million and an effective
rate of 28 percent for the equivalent 1997 period. Differences between the
aforementioned effective rates and the statutory rate of 35 percent for each of
the nine-month periods ended September 30, 1998 and 1997, respectively, result
principally from the same factors impacting the effective rates for the three-
month periods ended September 30, 1998 and 1997, previously discussed.
WHOLESALE GAS AND POWER
Financial contribution for the nine-month period ended September 30, 1998,
totaled $224.8 million compared with $121.9 million in the same 1997 period, an
increase of $102.9 million. The 1997 amount includes an $8.8 million benefit
resulting from adjustments related to the aforementioned sales accrual true-ups.
The 99 percent increase in normalized financial contribution period to period
reflects a $32.0 million improvement from electricity marketing operations and a
financial contribution of $83.5 million from power generation, an improvement of
$67.2 million over the 1997 contribution by that operation. The primary factors
influencing 1998 operations in both electricity marketing and power generation
were the continuing expansion and integration of these businesses and volatility
in regional electricity markets that impacted commodity prices and market
demand.
NATURAL GAS LIQUIDS BUSINESSES
Financial contribution for the nine-month period ended September 30, 1998,
totaled $154.1 million compared with $195.1 million in the same 1997 period.
Both periods were negatively influenced by market conditions. The El Nino-
influenced mild winter during 1998 depressed demand for energy increasing
industry-wide inventories of natural gas liquids. As a result, average natural
gas liquids prices are at their lowest levels in several years, negatively
impacting this segment's profitability. The 1997 operating margin included
charges aggregating $26.9 million resulting from the lower-of-cost-or-market
writedowns, hedge related loss and certain accrual to actual true-ups. These
charges were primarily a result of the precipitous drop in commodity prices
during the first quarter of 1997. The Company's emphasis on inventory management
during the 1998 period has improved the segment's performance period to period.
Variances in volumetric data principally reflect the same factors impacting the
three-month periods previously discussed.
OPERATING CASH FLOW
Cash flow from operating activities totaled $141.0 million for the nine-month
period ended September 30, 1998, compared to $282.5 million reported in the same
1997 period. Changes in operating cash flow reflect the operating results
previously discussed herein and the continued focus on management of working
capital, particularly trade accounts receivables and payables and the reduction
of discretionary inventory volume purchases period to period. Changes in other
working capital accounts, which include prepayments, other current assets and
accrued liabilities, reflect expenditures or recognition of liabilities for
insurance costs, certain deposits, salaries, taxes other than on income, certain
deferred revenue accounts and other similar items. Fluctuations in these
accounts, period to period, reflect changes in the timing of payments or
recognition of liabilities and are not directly impacted by seasonal factors.
CAPITAL EXPENDITURES AND INVESTING ACTIVITIES
During the nine months ended September 30, 1998, the Company spent a net $264.1
million, principally on the acquisition of varying interests in power generating
assets, construction costs associated with the previously disclosed Lake Charles
fractionation facility, the acquisition of a Canadian gas processing facility,
expenditures for capital improvements at existing facilities and technology
infrastructure. Additionally, during the period, the Company sold several non-
strategic assets, including the Ozark Gas Transmission System and interests in
several gas processing facilities. During the first nine months of 1997, the
Company spent a net $175.6 million principally on acquisitions of additional
interests in gas processing facilities, for contributions to joint ventures, on
capital improvements at existing facilities and on capital additions at the
Company's new
Page 25 of 29
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
headquarters. In addition, the Company acquired Destec on June 30, 1997, for
$715.6 million, net of cash received and inclusive of transaction costs.
Subsequent to the effective date of the Destec acquisition, the Company disposed
of certain non-strategic domestic assets acquired in the Destec transaction.
Also during the 1997 period, the Company divested itself of the Mont Belvieu I
fractionation facility pursuant to an agreement reached with the Federal Trade
Commission related to the Chevron Combination.
DIVIDEND REQUIREMENTS AND STOCK REPURCHASES
DYNEGY declares quarterly dividends on its outstanding common stock at the
discretion of its Board of Directors. The holders of the Series A Preferred
Stock are entitled to receive dividends or distributions equal per share in
amount and kind to any dividend or distribution payable on shares of the
Company's common stock, when and as the same are declared by the Company's Board
of Directors. The Company paid approximately $5.9 million in cash dividends and
distributions during each nine-month period ended September 30, 1998 and 1997,
respectively.
In May 1997, the Board of Directors approved a stock repurchase program that
allows the Company to repurchase, from time to time, up to 1.6 million shares of
common stock in open-market transactions. The timing and number of shares
ultimately repurchased will depend upon market conditions and consideration of
alternative investments. Pursuant to this program, the Company acquired 456,800
shares of its stock through open-market trades during the nine-month period
ended September 30, 1998, at a total cost of $6.1 million, or $13.34 per share
on a weighted average cost basis. For the nine-month period ended September 30,
1997, the Company acquired 654,900 shares of its common stock in open-market
transactions for an aggregate cost of $10.5 million, or $16.03 per share on a
weighted average cost basis.
Page 26 of 29
<PAGE>
DYNEGY INC.
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On April 17, 1997, Pacific Gas and Electric Company ("PG&E") filed a lawsuit in
the Superior Court of the State of California, City and County of San Francisco,
against Destec, Destec Holdings, Inc. ("Holdings"), Destec Operating Company
(wholly-owned subsidiaries of the Company) as well as against San Joaquin CoGen
Limited ("San Joaquin" or the "Partnership"). Dynegy Power Corp. (formerly
Destec) and its affiliates now own all of the partnership interests in the
Partnership as a result of the purchase of the interests of the two outside
partners in the Partnership. In the lawsuit, PG&E asserts claims and alleges
unspecified damages for fraud, negligent misrepresentation, unfair business
practices, breach of contract and breach of the implied covenant of good faith
and fair dealing. PG&E alleges that due to the insufficient use of steam by San
Joaquin's steam host, the Partnership did not qualify as a cogenerator pursuant
to the California Public Utilities Code ("CPUC") Section 218.5, and thus was not
entitled under CPUC Section 454.4 to the discount the Partnership received under
gas transportation agreements entered into between PG&E and San Joaquin in 1989,
1991, 1993 and 1995. All of PG&E's claims in this suit arise out of the
Partnership's alleged failure to comply with CPUC Section 218.5. The defendants
filed a response to the suit on May 15, 1997. On October 20, 1997, PG&E named
Libbey-Owens-Ford ("LOF"), the Partnership's steam host, as an additional
defendant in the action. On February 23, 1998, PG&E served by mail its Second
Amended Complaint on all defendants. On March 30, 1998, the defendants filed
their response to PG&E's Second Amended Complaint, denying PG&E's allegations
and alleging certain counterclaims against PG&E. By Order dated July 20, 1998,
the court dismissed certain of defendants' counterclaims against PG&E, and
abated certain others, pending resolution by the CPUC. The parties are actively
engaged in discovery and the October 1998 trial date was moved to March 15,
1999. The Partnership has previously advised the Federal Energy Regulatory
Commission ("FERC") of PG&E's claims, and stated that it would submit any
appropriate filings upon completion of its investigation. If the facility was
found not to have satisfied the California cogeneration facility standards,
there is a strong likelihood that it would also fail to satisfy the more
stringent federal standards. In accordance with the terms of a Protective Order
entered into by the parties at the commencement of the litigation, PG&E has
notified San Joaquin that it may make a FERC filing seeking damages from San
Joaquin and decertification of its status as a qualifying facility under the
federal standards. Under FERC precedent, if the San Joaquin facility were found
not to have been a qualifying facility, San Joaquin could be required to refund
to PG&E payments it received pursuant to the Power Purchase Agreement in excess
of PG&E's short-term energy costs during the period of non-compliance, plus
interest. In the event the court or FERC determines that San Joaquin is liable
to PG&E under the Gas Transportation Agreement or Power Purchase Agreement due
to LOF's failure to use sufficient quantities of steam, San Joaquin will seek to
recover such amounts from LOF under the terms of the Steam Purchase Agreement
between San Joaquin and LOF. Dynegy Power Corp is currently in settlement
negotiations with PG&E and LOF. If a settlement is not reached, the Company's
subsidiaries intend to vigorously defend this action. In the opinion of
management, the ultimate resolution of this lawsuit will not have a material
adverse effect on the Company's financial position or results of operations.
On March 24, 1995, Southern California Gas Company ("SOCAL") filed a lawsuit in
the Superior Court of the State of California for the County of Los Angeles,
against Destec, Destec Holdings and Destec Gas Services, Inc., wholly-owned
direct and indirect subsidiaries of the Company (collectively, the "Destec
Defendants"), as well as against Chalk Cliff Limited and McKittrick Limited
(collectively, the "Partnerships"). The Company owns an indirect 50 percent
limited partnership interest in McKittrick Limited, and Chalk Cliff Limited is
now wholly owned by subsidiaries of the Company through the purchase of the
interests of Dominion Energy, Inc. in the Chalk Cliff partnership. All general
partners of the Partnerships are also named defendants. The lawsuit alleges
breach of contract against the Partnerships and their respective general
partners, and interference and conspiracy to interfere with contracts against
the Destec Defendants. The breach of contract claims arise out of the
"transport-or-pay" provisions of the gas transportation service agreements
between the Partnerships and SOCAL. SOCAL has sought damages from the
Partnerships for past damages and anticipatory breach damages in an amount equal
to approximately $31,000,000. On October 24, 1997, the Court granted SOCAL's
Motion for Summary Judgment relating to the breach of contract causes of action
against the Partnerships and their respective general partners, and requested
that SOCAL submit a proposed order consistent with that ruling for the Court's
signature. On November 21, 1997, the Partnerships filed for voluntary Chapter
11 bankruptcy protection in the Eastern District of California. Normal business
operations by the Partnerships continued throughout the course of these
reorganization proceedings. On January 12, 1998, the Court entered a Final
Order that (a) severed out the Partnerships due to their Chapter 11 bankruptcy
filings, (b) included a finding of contract liability against the Destec
Defendants, (c) dismissed the tortious interference claims against the Destec
Defendants, and (d) assessed damages in an aggregate amount of approximately
$31,000,000. On the same day, the Destec Defendants filed their Notice of
Appeal, and posted a security bond with the Second Appellate District in Los
Angeles based on the lack of allegations made or proven by SOCAL which support
holding those entities liable in contract. On March 11, 1998, the Partnerships
and their respective general
Page 27 of 29
<PAGE>
DYNEGY INC.
PART II. OTHER INFORMATION
partners filed Notices of Appeal with respect to certain findings of fact in the
Court's January 12, 1998 Final Order that were adverse to those defendants. On
or about April 15, 1998, the Court entered a final judgment against the
Partnerships themselves in recognition of the lifting of the automatic stay
against those entities by the Bankruptcy Court. The Partnership filed their
judgement on June 4, 1998. The appeal process is anticipated to take
approximately eighteen months. On October 21, 1998, the Bankruptcy Court
dismissed the voluntary bankruptcy filings of the Partnerships and their
respective lenders thereafter notified each of the Partnerships of the
occurrences of an Event of Default under the Partnerships' respective credit
agreements due to the existence of the SOCAL judgement against them.
The PG&E and SOCAL litigations represent pre-acquisition contingencies acquired
by the Company in the Destec acquisition. In a related matter, Chalk Cliff and
San Joaquin have each guaranteed the obligations of the other partnership,
represented by the project financing loans used to construct the power
generation facilities owned by the respective Partnerships. Chalk Cliff and San
Joaquin believe there is little incentive for their lenders to call on this
cross-guarantee at this time. In the opinion of management, if the lenders chose
to exercise their option under the terms of such arrangements, such action would
not have a material adverse effect on the Company's financial position or
results of operations.
On August 3, 1998, Modesto Irrigation District ("MID") filed a lawsuit against
PG&E and Destec in federal court for the Northern District of California, San
Francisco division. The lawsuit alleges violation of federal and state
antitrust laws and breach of contract against Destec. The allegations are
related to a power sale and purchase arrangement in the city of Pittsburg, CA.
MID seeks actual damages from PG&E and Destec in amounts not less than $25
million. MID also seeks a trebling of any portion of damages related to its
antitrust claims. Dynegy believes the allegations made by MID are meritless and
will vigorously defend MID's claims. In the opinion of management, the amount of
ultimate liability with respect to these actions will not have a material
adverse effect on the financial position or results of operations of the
Company.
The Company assumed liability for various claims and litigation in connection
with the Chevron Combination, the Trident Combination, the Destec acquisition
and in connection with the acquisition of certain gas processing and gathering
facilities from Mesa Operating Limited Partnership. The Company believes,
based on its review of these matters and consultation with outside legal
counsel, that the ultimate resolution of such items will not have a material
adverse effect on the Company's financial position or results of operations.
Further, the Company is subject to various legal proceedings and claims, which
arise in the normal course of business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not have a
material adverse effect on the financial position or results of operations of
the Company.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following instruments and documents are included as exhibits to this
Form 10-Q.
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
+ 3.1 Certificate of Amendment to Restated Certificate of
Incorporation of NGC Corporation.
+ 3.2 Bylaws of Dynegy Inc.
+ 27 Financial Data Schedule
(b) No current reports on Form 8-K were filed by the Company during the
Quarterly period ended September 30, 1998.
- -----------
+ Filed herewith.
Page 28 of 29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned and thereunto duly authorized.
DYNEGY INC.
Date: November 13, 1998 By: /s/ Bradley P. Farnsworth
----------------- --------------------------
Bradley P. Farnsworth, Vice President
and Controller (Principal Accounting
Officer)
Page 29 of 29
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
NGC CORPORATION
NGC Corporation, a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation duly adopted
resolutions proposing and declaring the following amendment of the Restated
Certificate of Incorporation of the Corporation to be advisable and recommending
the adoption of such amendment by the stockholders of the Corporation.
SECOND: That in lieu of a meeting and vote of the stockholders of the
Corporation, the requisite stockholder approval was obtained by written consent
to the following amendment in accordance with the provisions of Section 228 of
the Delaware General Corporation Law ("DGCL") and prompt notice of taking of
corporate action without a meeting has been duly given in accordance with
Section 228(d) of the DGCL.
THIRD: The Restated Certificate of Incorporation of the Corporation is
amended by deleting article First in its entirety and replacing it with a new
article First which reads as follows:
"FIRST. The name of the corporation is 'Dynegy Inc.' (the
'Corporation')."
FOURTH: That the amendment was duly adopted in accordance with the
provisions of Sections 228 and 242 of the DGCL.
FIFTH: This Certificate of Amendment shall become effective at 5:00 p.m.,
Eastern Standard Time, on July 6, 1998.
IN WITNESS WHEREOF, NGC Corporation has caused this Certificate to be
signed by C.L. Watson, its Chairman of the Board and Chief Executive Officer,
this 6th day of July, 1998.
NGC CORPORATION
By: /s/ C.L. Watson
--------------------
C.L. Watson
Chairman of the Board and
Chief Executive Officer
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
DYNEGY INC.
A DELAWARE CORPORATION
<PAGE>
TABLE OF CONTENTS
ARTICLE ONE: OFFICES
1.1 Registered Office and Agent......................... 1
1.2 Other Offices....................................... 1
ARTICLE TWO: MEETINGS OF STOCKHOLDERS
2.1 Annual Meeting...................................... 1
2.2 Special Meeting..................................... 1
2.3 Place of Meetings................................... 1
2.4 Notice.............................................. 2
2.5 Voting List......................................... 2
2.6 Quorum.............................................. 2
2.7 Required Vote; Withdrawal of Quorum................. 3
2.8 Method of Voting; Proxies........................... 3
2.9 Record Date......................................... 3
2.10 Conduct of Meeting.................................. 4
2.11 Inspectors.......................................... 4
ARTICLE THREE: DIRECTORS
3.1 Management.......................................... 4
3.2 Number; Term; Advisory Director..................... 4
3.3 Removal; Vacancies.................................. 5
3.4 Meetings of Directors............................... 5
3.5 First Meeting....................................... 5
3.6 Election of Officers................................ 5
3.7 Regular Meetings.................................... 5
3.8 Special Meetings.................................... 5
3.9 Notice.............................................. 6
3.10 Quorum; Vote Required; Actions Requiring Approval... 6
3.11 Procedure........................................... 9
3.12 Presumption of Assent............................... 9
3.13 Compensation........................................ 9
3.14 Interested Directors................................ 9
ARTICLE FOUR: COMMITTEES
4.1 Executive Committee................................. 10
4.2 Other Committees.................................... 10
4.3 Number; Qualification; Term......................... 10
4.4 Authority........................................... 10
<PAGE>
4.5 Committee Changes................................... 10
4.6 Alternate Members of Committees..................... 10
4.7 Regular Meetings.................................... 10
4.8 Special Meetings.................................... 10
4.9 Quorum; Majority Vote............................... 11
4.10 Minutes............................................. 11
4.11 Compensation........................................ 11
4.12 Responsibility...................................... 11
ARTICLE FIVE: NOTICE
5.1 Method.............................................. 11
5.2 Waiver.............................................. 12
ARTICLE SIX: OFFICERS
6.1 Number; Titles; Term of Office...................... 12
6.2 Removal............................................. 12
6.3 Vacancies........................................... 12
6.4 Authority........................................... 12
6.5 Compensation........................................ 12
6.6 Chairman of the Board............................... 13
6.7 President........................................... 13
6.8 Vice Presidents..................................... 13
6.9 Treasurer........................................... 13
6.10 Assistant Treasurers................................ 13
6.11 Secretary........................................... 13
6.12 Assistant Secretaries............................... 14
ARTICLE SEVEN: CERTIFICATES AND STOCKHOLDERS
7.1 Certificates for Shares............................. 14
7.2 Replacement of Lost or Destroyed Certificates....... 14
7.3 Transfer of Shares.................................. 14
7.4 Registered Stockholders............................. 15
7.5 Regulations......................................... 15
7.6 Legends............................................. 15
ARTICLE EIGHT: MISCELLANEOUS PROVISIONS
8.1 Reserves............................................ 15
8.2 Books and Records................................... 15
8.3 Fiscal year......................................... 15
8.4 Seal................................................ 15
8.5 Resignations........................................ 15
ii
<PAGE>
8.6 Securities of Other Corporations.................... 16
8.7 Telephone Meetings.................................. 16
8.8 Invalid Provisions.................................. 16
8.9 Mortgages, etc...................................... 16
8.10 Headings............................................ 16
8.11 References.......................................... 16
8.12 Amendments.......................................... 16
iii
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
DYNEGY INC.
A DELAWARE CORPORATION
PREAMBLE
ARTICLE ONE
OFFICES
1.1 REGISTERED OFFICE AND AGENT. The registered office and registered agent
of the Corporation shall be as designated from time to time by the appropriate
filing by the Corporation in the office of the Secretary of State of the State
of Delaware.
1.2 OTHER OFFICES. The Corporation may also have offices at such other
places, both within and without the State of Delaware, as the Board of Directors
may from time to time determine or as the business of the Corporation may
require.
ARTICLE TWO
MEETINGS OF STOCKHOLDERS
2.1 ANNUAL MEETING. An annual meeting of stockholders of the Corporation
shall be held each calendar year on such date and at such time as shall be
designated from time to time by the Board of Directors and stated in the notice
of the meeting or in a duly executed waiver of notice of such meeting. At such
meeting, the stockholders shall elect directors and transact such other business
as may be properly brought before the meeting.
2.2 SPECIAL MEETING. A special meeting of the stockholders may be called by
the Board of Directors pursuant to a resolution adopted by a majority of the
directors, by the Chairman of the Board, by the President or by any holder or
holders of record of at least ten percent of the outstanding shares of capital
stock of the Corporation then entitled to vote on any matter for which the
respective special meeting is being called (considered for this purpose as one
class). Subject to applicable law, a special meeting shall be held on such date
and at such time as shall be designated by the person(s) calling the meeting and
stated in the notice of the meeting or in a duly executed waiver of notice of
such meeting. Only such business shall be transacted at a special meeting as
may be stated or indicated in the notice of such meeting given in accordance
with these Bylaws or in a duly executed waiver of notice of such meeting.
2.3 PLACE OF MEETINGS. An annual meeting of stockholders may be held at any
place within or without the State of Delaware designated by the Board of
Directors. A special meeting of stockholders may be held at any place within or
without the State of Delaware designated in the notice of the meeting or a duly
executed waiver of notice of such meeting. Meetings of
<PAGE>
stockholders shall be held at the principal office of the Corporation unless
another place is designated for meetings in the manner provided herein.
2.4 NOTICE. A written or printed notice stating the place, day and time of
each meeting of the stockholders and, in the case of a special meeting, the
purpose or purposes for which the meeting is called shall be delivered not less
than ten nor more than sixty days before the date of the meeting, either
personally or by mail, by or at the direction of the Chairman of the Board, the
President, the Secretary or the officer or person(s) calling the meeting, to
each stockholder of record entitled to vote at such meeting. If such notice is
to be sent by mail, it shall be directed to such stockholder at such
stockholder's address as it appears on the records of the Corporation, unless
such stockholder shall have filed with the Secretary of the Corporation a
written request that notices to such stockholder be mailed to some other
address, in which case it shall be directed to such stockholder at such other
address. Notice of any meeting of stockholders shall not be required to be
given to any stockholder who shall attend such meeting in person or by proxy and
shall not, at the beginning of such meeting, object to the transaction of any
business because the meeting is not lawfully called or convened or who shall,
either before or after the meeting, submit a signed waiver of notice, in person
or by proxy.
2.5 VOTING LIST. At least ten days before each meeting of stockholders, the
Secretary or other officer of the Corporation who has charge of the
Corporation's stock ledger, either directly or through another officer appointed
by such officer or through a transfer agent appointed by the Board of Directors,
shall prepare a complete list of stockholders entitled to vote thereat, arranged
in alphabetical order and showing the address of each stockholder and number of
shares of capital stock registered in the name of each stockholder. For a
period of ten days prior to such meeting, such list shall be kept on file at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of meeting or a duly executed waiver of notice of such
meeting or, if not so specified, at the place where the meeting is to be held
and shall be open to examination by any stockholder during ordinary business
hours. Such list shall be produced at such meeting and kept at the meeting at
all times during such meeting and may be inspected by any stockholder who is
present.
2.6 QUORUM. The holders of a majority of the voting power of the outstanding
shares of capital stock entitled to vote on a matter, present in person or by
proxy, shall constitute a quorum at any meeting of stockholders, except as
otherwise provided by law, the certificate of incorporation of the Corporation,
these Bylaws, any rule or regulation applicable to the Corporation or of any
applicable national securities exchange. If a quorum shall not be present, in
person or by proxy, at any meeting of stockholders, the stockholders entitled to
vote thereat who are present, in person or by proxy (or, if no stockholder
entitled to vote is present, any officer of the Corporation), may adjourn the
meeting from time to time without notice other than announcement at the meeting
(unless the Board of Directors, after such adjournment, fixes a new record date
for the adjourned meeting), until a quorum shall be present, in person or by
proxy. At any adjourned meeting at which a quorum shall be present, in person
or by proxy, any business may be transacted which may have been transacted at
the original meeting had a quorum been present; provided that, if the
adjournment is for more than thirty days or if after the
2
<PAGE>
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the adjourned meeting.
2.7 REQUIRED VOTE; WITHDRAWAL OF QUORUM. When a quorum is present at any
meeting, the vote of the holders of at least a majority of the voting power of
the outstanding shares of capital stock entitled to vote thereat who are
present, in person or by proxy, shall decide any questions brought before such
meeting, unless the question is one on which, by express provision of law, the
certificate of incorporation of the Corporation, these Bylaws, any rule or
regulation applicable to the Corporation or of any applicable national
securities exchange, a different vote is required, in which cases such express
provision shall govern and control the decisions of such question. The
stockholders present at a duly constituted meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough shares of
capital stock to leave less than a quorum.
2.8 METHOD OF VOTING; PROXIES. Except as otherwise provided in the
certificate of incorporation of the Corporation or bylaw, each outstanding share
of capital stock, regardless of class, shall be entitled to one vote on each
matter submitted m a vote at a meeting of stockholders. Elections of directors
need not be by written ballot. At any meeting of stockholders, every
stockholder having the right to vote may vote either in person or by proxy
executed in writing by the stockholder or by such stockholder's duly authorized
attorney-in-fact. Each such proxy shall be filed with the Secretary of the
Corporation before or at the time of the meeting. No proxy shall be valid after
three years from the date of its execution, unless otherwise provided in the
proxy. If no date is stated in a proxy, such proxy shall be presumed to have
been executed on the date of the meeting at which it is to be voted. Each proxy
shall be revocable unless expressly provided therein to be irrevocable and
coupled with an interest sufficient in law to support an irrevocable power or
unless otherwise made irrevocable by law.
2.9 RECORD DATE. For the purposes of determining stockholders entitled (a)
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, (b) to receive payment of any dividend or other distribution or
allotment of any rights or (c) to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board of Directors, for any such determination of stockholders, such date in
any case to be not more than sixty days and not less than ten days prior to such
meeting nor more than sixty days prior to any other action. If no record date
is fixed:
(i) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business
on the day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the day next preceding the day on which
the meeting is held.
(ii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
3
<PAGE>
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
2.10 CONDUCT OF MEETING. The Chairman of the Board, if such office has been
filled and, if not or if the Chairman of the Board is absent or otherwise unable
to act, the President shall chair all meetings of stockholders. The Secretary
shall keep the records of each meeting of stockholders. In the absence or
inability to act of any such officer, such officer's duties shall be performed
by the officer given the authority to act for such absent or non-acting officer
under these Bylaws or some person appointed by the meeting.
2.11 INSPECTORS. The Board of Directors may, in advance of any meeting of
stockholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If any of the inspectors so appointed shall fail to appear
or act, the Chairman of the meeting shall or if inspectors shall not have been
appointed, the Chairman of the meeting may, appoint one or more inspectors.
Each inspector, before entering upon the discharge of his or her duties, shall
take and sign an oath faithfully to execute the duties of inspector at such
meeting with strict impartiality and according to the best of his or her
ability. The inspectors shall determine the number of shares of capital stock
of the Corporation outstanding and the voting power of each, the number of
shares represented at the meeting, the existence of a quorum and the validity
and effect of proxies and shall receive votes, ballots or consents, hear and
determine all challenges and questions arising in connection with the right to
vote, count and tabulate all votes, ballots or consents, determine the results
and certify their determination of the number of shares represented at the
meeting and their count of all votes and ballots and do such acts as are proper
to conduct the election or vote with fairness to all stockholders. On request
of the Chairman of the meeting, the inspectors shall make a report in writing of
any challenge, request or matter determined by them and shall execute a
certificate of any fact found by them. No director or candidate for the office
of director shall act as an inspector of an election of directors. No director
or candidate for the office of director shall act as an inspector of an election
of directors. Inspectors need not be stockholders.
ARTICLE THREE
DIRECTORS
3.1 MANAGEMENT. The business and property of the Corporation shall be
managed by the Board of Directors. Subject to the restrictions imposed by law,
the certificate of incorporation of the Corporation or these Bylaws, the Board
of Directors may exercise all the powers of the Corporation.
3.2 NUMBER; TERM; ADVISORY DIRECTOR. The number of directors constituting
the Board of Directors shall be thirteen. Each director shall hold office until
the next annual meeting of stockholders following his or her election and until
his or her successor shall have been duly elected and qualified or until his or
her earlier death, resignation or removal. In addition to the thirteen
directors who shall be elected by the stockholders of the Corporation, the Board
of Directors may also designate, by resolution of the Board, an advisory
director who shall be
4
<PAGE>
entitled to attend all meetings of the Board, but shall not be entitled to vote
on any matters before the Board. Except as set forth in this Section 3.2, the
advisory director shall have no rights as a director either under the
certificate of incorporation of the Corporation, these Bylaws, Delaware law or
any other agreement to which the Corporation is a party. Notwithstanding the
foregoing, an advisory director shall be entitled to receive compensation for
his or her services as a director in the same amount and manner that such
director would be entitled to receive compensation as an employee director or
non-employee director, as the case may be, if such director were elected by the
stockholders of the Corporation.
3.3 REMOVAL; VACANCIES. Any or all directors may be removed, with or without
cause, upon the affirmative vote or consent of the holders of a majority of the
voting power of the outstanding shares of each class of capital stock then
entitled to vote in person or by proxy at an election of such directors. Any
vacancies occurring on the Board of Directors caused by death, resignation,
retirement, disqualification, removal or other termination from office of any
director may be filled by the vote of at least eleven directors then in office
or by the affirmative vote, at any annual meeting or any special meeting of the
stockholders called for the purpose of filling such directorship or
directorships, of the holders of a majority of the outstanding shares of each
class of capital stock then entitled to vote in person or by proxy at an
election of such directors. Each successor director so chosen shall hold office
for the unexpired term of his or her predecessor in office.
3.4 MEETINGS OF DIRECTORS. The directors may hold their meetings and may
have an office and keep the records of the Corporation, except as otherwise
provided by law, in such place or places within or without the State of Delaware
as the Board of Directors may from time to time determine or as shall be
specified in the notice of such meeting or duly executed waiver of notice of
such meeting.
3.5 FIRST MEETING. Each newly elected Board of Directors may hold its first
meeting for the purpose of organization and the transaction of business, if a
quorum is present, immediately after and at the same place as the annual meeting
of stockholders and no notice of such meeting shall be necessary.
3.6 ELECTION OF OFFICERS. At the first meeting of the Board of Directors
after each annual meeting of stockholders at which as quorum shall be present,
the Board of Directors shall elect the officers of the Corporation.
3.7 REGULAR MEETINGS. Regular meetings of the Board of Directors shall be
held at such times and places as shall be designated from time to time by
resolution of the Board of Directors. Notice of such regular meetings shall not
be required.
3.8 SPECIAL MEETINGS. Special meetings of the Board of Directors shall be
held whenever called by the Chairman of the Board or any two or more directors.
5
<PAGE>
3.9 NOTICE. The Secretary shall give notice of each special meeting to each
director at least five business days before the meeting. Notice of any such
meeting need not be given to any director who, either before or after the
meeting, submits a signed waiver of notice or who shall attend such meeting
without protesting, prior to or at its commencement, the lack of notice to him
or her. The purpose of any special meeting shall be specified in the notice or
waiver of notice of such meeting.
3.10 QUORUM; VOTE REQUIRED; ACTIONS REQUIRING APPROVAL.
(a) Except as provided in Section 3.10(b), at all meetings of the
Board of Directors, seven directors shall constitute a quorum for the
transaction of business. If at any meeting of the Board of Directors there
is less than a quorum present, a majority of those present or any director
solely present may adjourn the meeting from time to time without further
notice. Unless the act of a greater number is required by law, the
certificate of incorporation of the Corporation or these Bylaws, the act of
a majority of the directors present at a meeting at which a quorum is in
attendance shall be the act of the Board of Directors.
(b) Notwithstanding anything to the contrary herein (and subject to
the provisions of Section 4.1 of these Bylaws), the Corporation shall not
take (or permit to be taken in its capacity as a shareholder or partner or
otherwise permit any Subsidiary of the Corporation to take) any of the
following actions unless approved by the affirmative vote of at least
eleven directors;
(i) any sale of all or substantially all of the assets of the
Corporation or any Subsidiary;
(ii) any merger, consolidation or liquidation of the Corporation
or any Subsidiary or any purchase or other acquisition of any common
stock of the Corporation;
(iii) adopting any resolution proposing an amendment to the
certificate of incorporation of the Corporation;
(iv) the Corporation or any Subsidiary entering into any line of
business that neither the Corporation nor any Subsidiary is engaged in
on Effective Time (as such term is defined in that certain Combination
Agreement and Plan of Merger among the Corporation and certain other
parties dated as of May 22, 1996);
(v) the Corporation or any Subsidiary paying any dividend or
otherwise making any distribution to any person;
(vi) the Corporation or any Subsidiary issuing any stock or other
security or ownership interests to any person;
6
<PAGE>
(vii) the Corporation or any Subsidiary engaging in any oil or
gas futures activities or other trading activities relating to oil or
gas pricing, including without limitation, hedging, swaps, options or
speculation (such activities referred to herein as "trading
activities"), that, based on the average oil or gas pricing during the
six months preceding the date of such activity, could result in
exposure to loss to the Corporation in excess of $10,000,000 as to any
single transaction, other than trading activities which off-set
physical transactions and are accounted for as a hedge and in no event
shall the uncovered portion of the trading activities of the
Corporation and its Subsidiaries, in the aggregate, result in an
exposure to loss to the Corporation in excess of $10,000,000;
(viii) amending or terminating any contract, commitment or
employee compensation plan if the execution of or entering into such
contract, commitment or plan was approved by the Board of Directors
pursuant to this Section 3.10(b) (or would have been subject to Board
of Directors approval pursuant to this Section 3.10(b) if this Section
3.10 had been in effect at the time of execution of or entering into
such contract, commitment or plan);
(ix) approving a different method in which the Corporation keeps
its books;
(x) the commencement by the Corporation or any Subsidiary of a
voluntary case or proceeding under any applicable federal or state
bankruptcy, insolvency, reorganization or other similar law or of any
other voluntary case or proceeding to be adjudicated a bankrupt or
insolvent or the consent by it to the entry of a decree or order for
relief against it in an involuntary case or proceeding under any
applicable federal or state bankruptcy, insolvency, reorganization or
other similar law or to the commencement of any bankruptcy or
insolvency case or proceeding against it or the filing by it of a
petition or answer or consent seeking reorganization or relief under
any applicable federal or state law or the consent by it to the filing
of such petition or to the appointment of or taking possession by a
custodian, receiver, liquidator, assignee, trustee, sequestrator or
similar official of any substantial part of its property or the making
by it of an assignment for the benefit of creditors or the admission
by it in writing of its inability to pay its debts generally as they
become due or the taking of action in furtherance of any such action;
(xi) the Corporation or any Subsidiary taking any action in its
capacity as a shareholder, partner, member or owner of any interest in
a person which, if taken by the Corporation itself, would require the
approval of the Board of Directors pursuant to this Section 3.10(b);
(xii) the Corporation or any Subsidiary (a) making or committing
to make, any payment in excess of $10,000,000 per transaction or
contract (or series
7
<PAGE>
of related transactions or contracts), whether as or in connection
with a capital expenditure, asset purchase, purchase of goods or
services, investment, rental, settlement, equity contribution, loan,
guaranty or otherwise, (b) borrowing any amount in excess of
$10,000,000 per transaction or contract (or series of related
transactions or contracts), (c) disposing of or otherwise transferring
any asset (or related assets) whose fair market value exceeds
$10,000,000 or (d) entering into any contract or transaction (or
series of contracts or transactions) pursuant to which the Corporation
or any Subsidiary is to receive more than $10,000,000; provided,
however, if the amount in question is in excess of $10,000,000 but
less than $25,000,000, any action referred to in (a), (b), (c) or (d)
(including any such action that is also subject to Section
3.10(b)(vii) and any other such action that is also subject to any of
the other provisions of Section 3.10(b) except for the Corporation
issuing any stock or other security or ownership interests to any
person or paying any dividend or otherwise making any distribution to
any person) need not be approved as aforesaid by the Board of
Directors if approved by the unanimous vote of the Executive
Committee;
(xiii) any change in the fiscal year of the Corporation;
(xiv) the appointment or removal of the Corporation's Chief
Executive Officer, President, Chief Financial Officer or any Senior
Vice President;
(xv) the filling of any vacancy in the Board of Directors of the
Corporation; and
(xvi) the establishment of any committee of the Board of
Directors of the Corporation.
Notwithstanding the foregoing, if one or more directors give written notice to
the Secretary that such director or directors intend to abstain pursuant to
Section 3.14 of these Bylaws on a matter that is subject to this Section
3.10(b), then in lieu of the approval otherwise required herein such action may
be approved by the affirmative vote of at least such number of directors equal
to eleven less the number of directors that have given such notice. For
purposes of these Bylaws, "Subsidiary" means (i) any corporation or other entity
a majority of the capital stock of which having ordinary voting power to elect a
majority of the Board of Directors or other persons performing similar functions
is at the time owned, directly or indirectly, with power to vote, by the
Corporation or (ii) a partnership, joint venture or limited liability company in
which the Corporation holds, directly or indirectly, a majority interest with
respect to voting power, rights to receive distributions or report earnings or
capital accounts, provided that none of Novagas Clearinghouse Limited
Partnership, Novagas Clearinghouse Limited, Novagas Clearinghouse Pipelines
Limited Partnership or Novagas Clearinghouse Pipeline Limited shall be deemed to
be a Subsidiary as currently constituted or as changed in connection with the
transactions contemplated by that certain Combination Agreement and Plan of
Merger dated as of May 22, 1996 among NGC Corporation, Chevron U.S.A. Inc. and
Midstream Combination Corp. and shall not be considered a Subsidiary solely by
reason of an increase in the Corporation's equity
8
<PAGE>
interest in any one or more of the foregoing entities from approximately 49% to
approximately 51%.
3.11 PROCEDURE. At meetings of the Board of Directors, business shall be
transacted in such order as from time to time the Board of Directors may
determine. The Chairman of the Board, if such office has been filled and, if
not or if the Chairman of the Board is absent or otherwise unable to act, the
President shall preside at all meetings of the Board of Directors. In the
absence or inability to act of either such officer, a chairman shall be chosen
by the Board of Directors from among the directors present. The Secretary of
the Corporation shall act as the secretary of each meeting of the Board of
Directors unless the Board of Directors appoints another person to act as
secretary of the meeting. The Board of Directors shall keep regular minutes of
its proceedings, which shall be placed in the minute book of the Corporation.
3.12 PRESUMPTION OF ASSENT. A director of the Corporation who is present at
the meeting of the Board of Directors at which action on any corporate matter is
taken shall be presumed to have assented to the action unless his or her
abstention or dissent shall be entered in the minutes of the meeting or unless
he or she shall file his or her written dissent to such action with the person
acting as secretary of the meeting before the adjournment thereof or shall
forward any dissent or abstention by certified or registered mail to the
Secretary of the Corporation immediately after the adjournment of the meeting.
Such right to dissent shall not apply to a director who voted in favor of such
action.
3.13 COMPENSATION. The Board of Directors shall have the authority to fix the
compensation, including fees and reimbursement of expenses, paid to directors
for attendance at regular or special meetings of the Board of Directors or any
committee thereof; provided, however, that nothing contained herein shall be
construed to preclude any director from serving the Corporation in any other
capacity or receiving compensation therefor.
3.14 INTERESTED DIRECTORS. A director who has an interest in a transaction or
matter within the meaning of Section 144 of the Delaware General Corporation Law
(or in which the stockholder that nominated such director pursuant to that
certain Stockholders Agreement dated May 22, 1996 among the Corporation and
certain other persons (the "Stockholders Agreement") has an interest) that is
the subject of review or action by the Board of Directors shall (i) disclose
such interest to the Board of Directors, (ii) abstain from voting with respect
to such transaction or matter and (iii) give written notice to the Secretary of
the Corporation that he or she intends to so abstain. If one or more directors
give written notice to the Secretary that such director or directors intend to
abstain pursuant to this Section 3.14 with respect to any action by the Board of
Directors, then in lieu of the approval otherwise required under these Bylaws
for such action, such action may be approved by the affirmative vote of at least
the number of directors that would otherwise have been required less the number
of directors that have give a such notice.
9
<PAGE>
ARTICLE FOUR
COMMITTEES
4.1 EXECUTIVE COMMITTEE. The Board of Directors, acting by resolution
adopted by at least eleven directors, may elect from among its members an
Executive Committee of four members, which committee shall have the authority to
approve actions to the extent specified in Section 3.10(b) of these Bylaws and,
with respect to actions not subject to Section 3.10(b), any other actions that a
majority of the Board of Directors could approve except to the extent restricted
by law or the certificate of incorporation of the Corporation. In the event of
a vacancy, the Executive Committee shall have no authority to take any action
until such vacancy is filed.
4.2 OTHER COMMITTEES. In addition to the Executive Committee, the Board of
Directors may, by resolution adopted by at least eleven directors, designate one
or more committees (an "Additional Committee").
4.3 NUMBER; QUALIFICATION; TERM. Each Additional Committee shall consist of
one or more directors appointed by resolution adopted by at least eleven
directors. The number of committee members may be increased or decreased from
time to time by resolution adopted by at least eleven directors. Each committee
member shall serve as such until the earliest of (i) the expiration of his or
her term as director, (ii) his or her resignation as a committee member or as a
director or (iii) his or her removal as a committee member or as a director.
4.4 AUTHORITY. Each Additional Committee, to the extent expressly provided
in the resolution adopted by at least eleven directors establishing such
committee, shall have and may exercise all of the authority of the Board of
Directors in the management of the business and property of the Corporation
except to the extent expressly restricted by such resolution or by law, the
certificate of incorporation of the Corporation or these Bylaws.
Notwithstanding the foregoing, no committee (other than the Executive Committee
as provided in, but only to the extent provided in, Section 3.10(b)) may approve
or authorize the actions specified in Section 3.10(b).
4.5 COMMITTEE CHANGES. The Board of Directors by resolution adopted by at
least eleven directors shall have the power at any time to fill vacancies in, to
change the membership of and to discharge any committee.
4.6 ALTERNATE MEMBERS OF COMMITTEES. The Board of Directors may designate
one or more directors as alternate members of any committee.
4.7 REGULAR MEETINGS. Regular meetings of any committee may be held without
notice at such time and place as may be designated from time m time by the
committee and communicated to all members thereof.
4.8 SPECIAL MEETINGS. Special meetings of any committee may be held whenever
called by any committee member. The committee member calling any special
meeting shall
10
<PAGE>
cause notice of such special meeting, including therein the time and place of
such special meeting, to be given to each committee member at least two days
before such special meeting. The purpose of any special meeting shall be
specified in the notice or waiver of notice of such meeting.
4.9 QUORUM; MAJORITY VOTE. At meetings of any committee, a majority of the
number of members designated by the Board of Directors shall constitute a quorum
for the transaction of business; provided, however, that the quorum for the
transaction of business by the Executive Committee shall be all four members
thereof. If a quorum is not present at a meeting of any committee, a majority
of the members present may adjourn the meeting from time to time, without notice
other than an announcement at the meeting, until a quorum is present. The act
of a majority of the members present at any meeting at which a quorum is in
attendance shall be the act of a committee, unless the act of a greater number
is required by law the certificate of incorporation of the Corporation or
Section 3.10(b) or any other provision of these Bylaws.
4.10 MINUTES. Each committee shall cause minutes of its proceedings to be
prepared and shall report the same to the Board of Directors upon the request of
the Board of Directors. The minutes of the proceedings of each committee shall
be delivered to the Secretary of the Corporation for placement in the minute
books of the Corporation.
4.11 COMPENSATION. Committee members may, by resolution of the Board of
Directors, be allowed a stated salary or a fixed sum and expenses of attendance,
if any, for attending any committee meetings.
4.12 RESPONSIBILITY. The designation of any committee and the delegation of
authority to it shall not operate to relieve the Board of Directors or any
director of any responsibility imposed upon it or such director by law.
ARTICLE FIVE
NOTICE
5.1 METHOD. Whenever by statute, the certificate of incorporation of the
Corporation or these Bylaws, notice is required to be given to any committee
member, director or stockholder and no provision is made as to how such notice
shall be given, personal notice shall not be required and any such notice may be
given (i) in writing, by mail, postage prepaid, addressed to such committee
member, director or stockholder at his or her address as it appears on the books
or (in the case of a stockholder) the stock transfer records of tae Corporation
or (ii) by any other method permitted by law (including, but not limited to,
overnight courier service, telegram, telex or telefax). Any notice required or
permitted to be given by mail shall be deemed to be delivered and given at the
time when the same is deposited in the United States mail as aforesaid. Any
notice required or permitted to be given by overnight courier service shall be
deemed to be delivered and given at the time delivered to such service with all
charges prepaid and addressed as aforesaid. Any notice required or permitted to
be given by telegram, telex or telefax shall be deemed to be delivered and given
at the time transmitted with all charges prepaid and addressed as aforesaid.
11
<PAGE>
5.2 WAIVER. Whenever any notice is required to be given to any stockholder,
director or committee member of the Corporation by statute, the certificate of
incorporation of the Corporation or these Bylaws, a waiver thereof in writing
signed by the person or persons entitled to such notice, whether before or after
the time stated therein, shall be equivalent to the giving of such notice.
Attendance of a stockholder, director or committee member at a meeting shall
constitute a waiver of notice of such meeting, except where such person attends
for the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
ARTICLE SIX
OFFICERS
6.1 NUMBER; TITLES; TERM OF OFFICE. The officers of the Corporation shall be
a Chairman of the Board, a President, a Secretary and such other officers as the
Board of Directors may from time to time elect or appoint, including one or more
Vice Presidents (with each Vice President to have such descriptive title, if
any, as the Board of Directors shall determine) and a Treasurer. The Board of
Directors may also from time to time elect or appoint a Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer or Principal Accounting
Officers, each with such powers and duties as may be assigned by the Board of
Directors. Each officer shall hold office until his or her successor shall have
been duly elected and shall have qualified, until his or her death or until he
or she shall resign or shall have been removed in the manner hereinafter
provided. Any two or more offices may be held by the same person. None of the
officers need be a stockholder or a director of the Corporation or a resident of
the State of Delaware, but the Chairman shall be a director.
6.2 REMOVAL. Any officer or agent elected or appointed by the Board of
Directors may be removed by the Board of Directors whenever in its judgment the
best interest of the Corporation will be served thereby, but such removal shall
be without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer or agent shall not of itself create
contract rights.
6.3 VACANCIES. Any vacancy occurring in any office of the Corporation (by
death, resignation, removal or otherwise) may be filled by the Board of
Directors.
6.4 AUTHORITY. Officers shall have such authority and perform such duties in
the management of the Corporation as are provided in these Bylaws or as may be
determined by resolution of the Board of Directors not inconsistent with these
Bylaws.
6.5 COMPENSATION. The compensation, if any, of officers and agents shall be
fixed from time to time by the Board of Directors or a committee of directors
appointed for such purpose by the Board of Directors; provided, however, that
the Board of Directors may delegate the power to determine the compensation of
any officer and agent (other than the officer to whom such power is delegated)
to the Chairman of the Board or the President.
12
<PAGE>
6.6 CHAIRMAN OF THE BOARD. The Chairman of the Board shall, subject to the
supervision of the Board of Directors of the Corporation, have the general
management and control of the Corporation. Such officer shall preside at all
meetings of the stockholders and of the Board of Directors and shall have such
duties as may from time to time be assigned by the Board of Directors.
6.7 PRESIDENT. The President shall, subject to the supervision of the Board
of Directors of the Corporation, have general charge, management and control of
the properties and operations of the Corporation in the ordinary course of its
business, with all such powers with respect to such properties and operations as
may be reasonably incident to such responsibilities. In the absence or
inability to act of the Chairman of the Board, the President shall exercise all
of the powers and discharge all of the duties of the Chairman of the Board. As
between the Corporation and third parties, any action taken by the President in
the performance of the duties of the Chairman of the Board shall be conclusive
evidence that the Chairman of the Board is absent or unable to act.
6.8 VICE PRESIDENTS. Each Vice President shall have such powers and duties
as may be assigned to him or her by the Board of Directors, the Chairman of the
Board or the President and (in order of their seniority as determined by the
Board of Directors or, in the absence of such determination, as determined by
the length of time they have held the office of Vice President) shall exercise
the powers of the President during that officer's absence or inability to act.
As between the Corporation and third parties, any action taken by a Vice
President in the performance of the duties of the President shall be conclusive
evidence of the absence or inability to act of the President at the time such
action was taken.
6.9 TREASURER. The Treasurer shall have custody of the Corporation's funds
and securities, shall keep full and accurate account of receipts and
disbursements, shall deposit all monies and valuable effects in the name and to
the credit of the Corporation in such depository or depositories as may be
designated by the Board of Directors and shall perform such other duties as may
be prescribed by the Board of Directors, the Chairman of the Board or the
President.
6.10 ASSISTANT TREASURER. Each Assistant Treasurer shall have such powers and
duties as may be assigned to him or her by the Board of Directors, the Chairman
of the Board or the President. The Assistant Treasurers (in the order of their
seniority as determined by the Board of Directors or, in the absence of such a
determination, as determined by the length of time they have held the office of
Assistant Treasurer) shall exercise the powers of the Treasurer during that
officer's absence or inability to act.
6.11 SECRETARY. Except as otherwise provided in these Bylaws, the Secretary
shall keep the minutes of all meetings of the Board of Directors and of the
stockholders in books provided for that purpose and he or she shall attend to
the giving and service of all notices. The Secretary may sign with the Chairman
of the Board or the President or any other authorized officer of the
Corporation, in the name of the Corporation, all contracts of the Corporation
and
13
<PAGE>
affix the seal of the Corporation thereto. The Secretary shall have charge
of the certificate books, transfer books and stock papers as the Board of
Directors may direct, all of which shall at all reasonable times be open to
inspection by any officer of the Corporation upon application at the office of
the Corporation during business hours. The Secretary shall in general perform
all duties incident to the office of the Secretary, subject to the control of
the Board of Directors, the Chairman of the Board and the President.
6.12 ASSISTANT SECRETARIES. Each Assistant Secretary shall have such powers
and duties as may be assigned to him or her by the Board of Directors, the
Chairman of the Board or the President. The Assistant Secretaries (in the order
of their seniority as determined by the Board of Directors or, in the absence of
such a determination, as determined by the length of time they have held the
office of Assistant Secretary) shall exercise the powers of the Secretary during
that officer's absence or inability to act.
ARTICLE SEVEN
CERTIFICATES AND STOCKHOLDERS
7.1 CERTIFICATES FOR SHARES. Certificates representing shares of stock of
the Corporation shall be in such form as shall be approved by the Board of
Directors. The certificates shall be signed by the Chairman of the Board or the
President or a Vice President and also by the Secretary or an Assistant
Secretary or by the Treasurer or an Assistant Treasurer. Any and all signatures
on the certificate may be a facsimile and may be sealed with the seal of the
Corporation or a facsimile thereof. If any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon, a certificate
has ceased to be such officer, transfer agent or registrar before such
certificate is issued, such certificate may be issued by the Corporation with
the same effect as if he or she were such officer, transfer agent or registrar
at the date of issue. The certificates shall be consecutively numbered and
shall be entered in the books of the Corporation as they are issued and shall
exhibit the holder's name and the number of shares.
7.2 REPLACEMENT OF LOST OR DESTROYED CERTIFICATES. The Board of Directors
may direct a new certificate or certificates to be issued in place of a
certificate or certificates theretofore issued by the Corporation and alleged to
have been lost or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate or certificates representing shares to be lost
or destroyed. When authorizing such issue of a new certificate or certificates,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost or destroyed certificate or
certificates or such owner's legal representative, to advertise the same in such
a manner as it shall require and/or to give the Corporation a bond with a surety
or sureties satisfactory to the Corporation in such sum as it may direct as
indemnity against any claim or expense resulting from a claim, that be made
against the Corporation with respect to the certificate or certificates alleged
to have been lost or destroyed.
7.3 TRANSFER OF SHARES. Shares of stock of the Corporation shall be
transferable only on the books of the Corporation by the holders thereof in
person or by their duly authorized
14
<PAGE>
attorneys or legal representatives. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate representing shares duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, the Corporation or its transfer agent shall issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
7.4 REGISTERED STOCKHOLDERS. The Corporation shall be entitled to treat the
holder of record of any share or shares of stock as the holder in fact thereof
and, accordingly, shall not be bound to recognize any equitable or other claim
to or interest in such share or shares on the part of any other person, whether
or not it shall have express or other notice thereof, except as otherwise
provided by law.
7.5 REGULATIONS. The Board of Directors shall have the power and authority
to make all such rules and regulations as they may deem expedient concerning the
issue, transfer and registration or the replacement of certificates for shares
of stock of the Corporation.
7.6 LEGENDS. The Board of Directors shall have the power and authority to
provide that certificates representing shares of stock bear such legends as the
Board of Directors deems appropriate to assure that the Corporation does not
become liable for violations of federal or state securities laws or other
applicable law.
ARTICLE EIGHT
MISCELLANEOUS PROVISIONS
8.1 RESERVES. There may be created by the Board of Directors out of funds
of the Corporation legally available therefor such reserve or reserves as the
directors from time to time, in their discretion, consider proper to provide for
contingencies, to equalize dividends or to repair or maintain any property of
the Corporation or for such other purpose as the Board of Directors shall
consider beneficial to the Corporation and the Board of Directors may modify or
abolish any such reserve in the manner in which it was created.
8.2 BOOKS AND RECORDS. The Corporation shall keep correct and complete books
and records of account, shall keep minutes of the proceedings of its
stockholders and Board of Directors and shall keep at its registered office or
principal place of business or at the office of its transfer agent or registrar,
a record of its stockholders, giving the names and addresses of all stockholders
and the number and class of the shares held by each.
8.3 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by the
Board of Directors.
8.4 SEAL. The seal of the Corporation shall be such as from time to time may
be approved by the Board of Directors.
8.5 RESIGNATIONS. Any director, committee member or officer may resign by so
stating at any meeting of the Board of Directors or by giving written notice to
the Board of
15
<PAGE>
Directors, the Chairman of the Board, the President or the Secretary. Such
resignation shall take effect at the time specified therein or, if no time is
specified therein, immediately upon its receipt. Unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
8.6 SECURITIES OF OTHER CORPORATIONS. Except as otherwise provided in these
Bylaws or resolution of the Board of Directors, the Chairman of the Board, the
President or any Vice President of the Corporation shall have the power and
authority to transfer, endorse for transfer, vote, consent or take any other
action with respect to any securities of another issuer which may be held or
owned by the Corporation and to make, execute and deliver any waiver, proxy or
consent with respect to any such securities.
8.7 TELEPHONE MEETINGS. Members of the Board of Directors and members of a
committee of the Board of Directors may participate in and hold a meeting of the
Board or committee by means of a conference telephone or similar communications
equipment by means of which persons participating in the meeting can hear each
other and participation in a meeting pursuant to this section shall constitute
presence in person at such meeting, except where a person participates in the
meeting for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened.
8.8 INVALID PROVISIONS. If any part of these Bylaws shall be held invalid or
inoperative for any reason, the remaining parts, so far as it is possible and
reasonable, shall remain valid and operative.
8.9 MORTGAGES, ETC. With respect to any deed, deed of trust, mortgage or
other instrument executed by the Corporation through its duly authorized officer
or officers, the attestation to such execution by the Secretary of the
Corporation shall not be necessary to constitute such deed, deed of trust,
mortgage or other instrument a valid and binding obligation against the
Corporation unless the resolutions, if any, of the Board of Directors
authorizing such execution expressly state that such attestation is necessary.
8.10 HEADINGS. The headings used in these Bylaws have been inserted for
administrative convenience only and do not constitute matter to be construed in
interpretation.
8.11 REFERENCES. Whenever herein the singular number is used, the same shall
include the plural where appropriate and words of gender should include the
other gender where appropriate.
8.12 AMENDMENTS. These Bylaws may only be amended or repealed by the
affirmative vote or consent of at least eleven directors of the Corporation or
by the holders of a majority of the outstanding Common Stock.
16
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