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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 Number)
1000 Louisiana, Suite 5800
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 507-6400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class: on which registered:
Common Stock, par value $.01 per share New York Stock Exchange
Series A Participating Preferred Stock --
6.75% Debt Securities due 2005 --
7.125% Debentures due 2018 --
7.625% Senior Notes due 2026 --
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Yes [X] No [_]
The aggregate value of Common Stock held by non-affiliates of the registrant was
approximately $434,709,735 on March 24, 1999, (based on $15.00 per share, the
last sale price of the Common Stock as reported on the New York Stock Exchange
Composite Tape on such date). 152,599,134 shares of the registrant's Common
Stock were outstanding as of March 24, 1999.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of Parts I, II and IV in the
Annual Report to Shareholders for the fiscal year ended December 31, 1998. As
to Part III (items 10, 11, 12 and 13), Notice and Proxy Statement for the 1999
Annual Meeting of Stockholders to be filed not later than 120 days after
December 31, 1998.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
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DYNEGY INC.
FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business........................................... 1
Item 1A. Executive Officers................................. 13
Item 2. Properties......................................... 15
Item 3. Legal Proceedings.................................. 20
Item 4. Submission of Matters to a Vote of Security Holders 22
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters........................ 22
Item 6. Selected Financial Data............................. 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 24
Item 8. Financial Statements and Supplementary Data......... 39
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 39
PART III
Item 10. Directors and Executive Officers of the Registrant. 39
Item 11. Executive Compensation............................. 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................ 39
Item 13. Certain Relationships and Related Transactions..... 39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................ 39
Signatures........................................................ 46
For definitions of certain terms used herein,
see "Item 1. BUSINESS -- DEFINITIONS."
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PART I
Item 1. BUSINESS
THE COMPANY
General
Dynegy Inc. ("Dynegy" or the "Company") is a leading provider of energy
products and services in North America and the United Kingdom. Products marketed
by the Company's wholesale marketing operations include natural gas,
electricity, coal, natural gas liquids, crude oil, liquid petroleum gas and
related services. The Company's wholesale marketing operations are supported by
ownership or control of an extensive asset base and transportation network that
includes unregulated power generation, gas and liquids storage capacity, gas,
power and liquids transportation capacity and gas gathering, processing and
fractionation assets. The critical mass achieved through the combination of a
large scale energy marketing operation with strategically located assets which
augment the marketing efforts affords the Company the ability to offer
innovative, value-creating energy solutions to its customers.
The Company is a holding company that conducts substantially all of its
business through its subsidiaries. From inception of operations in 1984 until
1990, Natural Gas Clearinghouse ("Clearinghouse") limited its activities
primarily to natural gas marketing. Starting in 1990, Clearinghouse began
expanding its core business operations through acquisitions and strategic
alliances resulting in the formation of a mid-stream energy asset business and
establishing energy marketing operations in both Canada and the United Kingdom.
The Company initiated electric power marketing operations in February 1994 in
order to exploit opportunities created by the deregulation of the domestic
electric power industry. Effective March 1, 1995, Clearinghouse and Trident NGL
Holding, Inc. ("Holding"), a fully integrated natural gas liquids company,
merged ("Trident Combination") and the combined entity was renamed NGC
Corporation ("NGC"). On August 31, 1996, NGC completed a strategic combination
with Chevron U.S.A. Inc. and certain Chevron affiliates (collectively "Chevron")
whereby substantially all of Chevron's mid-stream assets merged with NGC
("Chevron Combination"). BG plc, Chevron and NOVA Chemicals Corp. ("NOVA") each
own approximately 26 percent of the outstanding common stock of Dynegy.
Effective July 1, 1997, NGC acquired Destec Energy, Inc. ("Destec Acquisition"),
a leading independent power producer. During 1998, the Company changed its name
to Dynegy Inc. in order to reflect its evolution from a natural gas marketing
company to an energy services company capable of meeting the growing demands and
diverse challenges of the dynamic energy market of the 21st Century.
The principal executive office of the Company is located at 1000 Louisiana,
Suite 5800, Houston, Texas 77002, and the telephone number of that office is
(713) 507-6400. Dynegy and its affiliates maintain marketing and/or regional
offices in Atlanta, Georgia; Boston, Massachusetts; Calgary, Alberta; Chicago,
Illinois; Dallas, Texas; Englewood, Colorado; London, England; Midland, Texas;
Oklahoma City, Oklahoma; Pleasanton, California; Tampa, Florida; Tulsa,
Oklahoma; and Washington D.C.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION
This Form 10-K contains various forward-looking statements, within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, and information that are based on management's beliefs as
well as assumptions made by and information currently available to management.
When used in this document, words such as "anticipate", "estimate", "project",
and "expect" reflect forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable; it can give no assurance that such expectations will prove to have
been correct. Such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, projected or expected. Among the
key risk factors that may have a direct bearing on Dynegy's results of
operations and financial condition are:
. Competitive practices in the industries in which Dynegy competes;
. Fluctuations in commodity prices for natural gas, electricity, natural gas
liquids, crude oil or coal;
. Fluctuations in energy commodity prices which could not or have not been
properly hedged or which are inconsistent with Dynegy's open position in its
energy marketing activities;
. Operational and systems risks;
. Environmental liabilities which are not covered by indemnity or insurance;
. Software, hardware or third-party failures resulting from Year 2000 issues;
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. General economic and capital market conditions, including fluctuations in
interest rates; and
. The impact of current and future laws and governmental regulations
(particularly environmental regulations) affecting the energy industry in
general, and Dynegy's operations in particular.
DEFINITIONS
As used in this Form 10-K, the abbreviations listed below are defined as
follows:
Bbl 42 U.S. gallons, the basic unit for measuring crude oil and
natural gas condensate.
MBbls/d Volume of one thousand barrels per day.
MMBbls Volume of one million barrels.
MMcf/d Volume of one million cubic feet per day.
Bcf Volume of one billion cubic feet.
Bcf/d Volume of one billion cubic feet per day.
Btu British Thermal Unit - a measure of the amount of heat required
to raise the temperature of one pound of water one degree Fahrenheit.
Bpd Barrels per day.
NGLs Natural gas liquids.
LPG Liquid petroleum gas.
MW Megawatts.
Spot The Henry Hub cash price posting for natural gas per the "Inside FERC"
publication.
BUSINESS
The Company reports operations under two primary business segments: the
Wholesale Gas and Power and Liquids segments. A general description of the
business strategy employed by each segment is followed by a discussion of each
segment's component businesses.
WHOLESALE GAS AND POWER SEGMENT
This segment is actively engaged in value creation through marketing and
trading of natural gas, power and coal and the generation of electricity
principally under the name Dynegy Marketing and Trade. Dynegy is pursuing an
integrated wholesale energy business approach based on execution of an energy
convergence strategy. This strategy exploits the marketing, trading and
arbitrage opportunities existing in the natural gas and power markets that are
enhanced by the control and optimization of related physical assets. The
combination of a portfolio of strategic generation assets and a national gas and
power marketing franchise allow for extraction of value resulting from arbitrage
opportunities occurring across energy products, across geographic regions and
over time. The Company refers to this synergistic relationship between merchant
generation capacity and energy trading and marketing as the "Merchant Leverage
Effect" depicted below.
DYNEGY'S MERCHANT LEVERAGE EFFECT
GENERATION TRADING & MARKETING
Capacity & Energy National Market Access
Expanded Product Portfolio Market Infrastructure & Intelligence
Supply Reliability Risk Management & Arbitrage
Development Expertise Fuel and Asset Management
Operations Expertise Transmission Expertise & Position
MARKET SHARE INCREASED RETURNS
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Dynegy views its gas and power marketing and power generation businesses as
an integrated unit. Ownership or control of merchant generation, or "Btu
Conversion" capacity, when coupled with the Company's national wholesale gas and
power marketing franchise, creates a wide range of value creation opportunities
benefiting both the Company and its customers. Dynegy's wholesale trading and
marketing franchise adds value to its generation assets by providing national
market access, market infrastructure and intelligence, risk management and
arbitrage opportunities, fuel management and procurement expertise and
transmission expertise for inputs (gas) and outputs (power). Generation capacity
adds value to the Company's wholesale trading and marketing franchise by
providing an outlet/market for gas supply, a source of reliable power supply and
an enhanced ability to structure innovative new products and services for
customers.
Concurrent with the restructuring of the U.S. wholesale electricity
markets, Dynegy is continuing its focus on building a portfolio of merchant
generation capacity in select markets across the country. Dynegy believes that
merchant generation capacity, which is designed principally to supply power to
markets during periods of peak demand, offers the greatest flexibility in
executing its strategy of an integrated gas and power marketing and power
generation business. For the foreseeable future, Dynegy will continue to expand
its ownership or commercial control over strategic generation assets/capacity in
selected markets through acquisitions, greenfield development and asset
management agreements. It is expected that approximately seventy percent of
projected capital expenditures over the next three years will be directed to the
control or ownership of generation assets designed to maximize value extraction
through execution of the Merchant Leverage Effect.
Deregulation of the retail gas and power markets is also evolving to
encourage greater competition and access to markets. Dynegy's retail gas and
electric strategy is designed to access a significant national customer base
while mitigating the large capital investment and financial risks necessitated
by other national retail marketing strategies. Rather than competing directly
with its existing wholesale customers, Dynegy has chosen to strengthen key
customer relationships by forming a number of regional retail gas alliances. The
combination of Dynegy's low cost energy supply (gas and power) with a regional
utility's large, installed customer base and local name recognition positions
each alliance to capture a significant portion of the local gas and power
market, when those markets fully open to competition. Dynegy's goal is to form
a North American network of regional retail energy alliances. Dynegy believes
that this strategy will accelerate its penetration of the retail gas and
electric markets while significantly reducing financial risk during this period
of regulatory uncertainty and restructuring. The following chart provides
geographic data on existing and targeted alliance markets.
DYNEGY'S RETAIL ALLIANCE NETWORK
[Map appears here]
Dynegy's integrated vision of the gas and power marketing and power
generation businesses in the United States is expected to be replicated
throughout Canada, the United Kingdom, Europe and Australia as those markets
open up to greater competition, subject to any unique attributes associated with
market deregulation in those areas. The Company maintains established energy
trading operations in both Canada and in the UK and is continuing to assess
local, regional and national markets, regulatory environments and other factors
in order to support and direct future economic investment.
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Liquids Segment
This segment principally operates under the name Dynegy Mid-Stream Services
and consists of the North American mid-stream liquids operations, as well as the
global liquefied petroleum gas transportation and natural gas liquids marketing
operations located in Houston and London, and certain other businesses. The
North American mid-stream liquids operations are actively engaged in the
gathering and processing of natural gas and the transportation, fractionation
and storage of NGLs. Dynegy believes that a strategic shift in the historical
mid-stream asset business paradigm is occurring as major producers upstream and
refiners downstream have divested their ownership in these assets and
operations. Traditionally, these operations provided intermediate service and
support functions within most integrated petroleum companies. Dynegy believes
that it can achieve significant costs and operating efficiencies as well as
attractive returns on services provided to the market from the independent
ownership and operation of these assets. Dynegy believes that value creation
occurs throughout the mid-stream service businesses. As a result, Dynegy has
built a vertically integrated natural gas liquids infrastructure having the
capability of extracting profit throughout the value chain extending from inlet
natural gas volumes gathered from producing horizons throughout the US and
Canada to marketing NGLs to wholesalers and end-users throughout the world.
DYNEGY'S "LIQUIDS VALUE CHAIN"
[Graphic appears here]
The Company is a recognized industry leader in substantially all mid-stream
component businesses, ranging from natural gas processing to marketing NGLs to
end users. Dynegy is the second largest processor of natural gas in the United
States; it owns substantial fractionation capacity that exceeds three hundred
thousand barrels per day and the Company markets over four hundred fifty
thousand barrels of NGLs daily. These activities are supported by an extensive
storage and transportation system, which includes in excess of 14,000 miles of
natural gas pipelines, 2,000 miles of crude oil pipelines, 500 miles of NGL
pipelines and 60 million barrels of NGL storage capacity. To further assist its
operations, the Company has access to substantial barge, rail, trucking and
terminalling assets as well as large-hull ships having long-haul capabilities,
which enhance international trading opportunities.
Despite significant consolidation over the last four years, the domestic
mid-stream industry remains relatively fragmented and competition for additional
inlet volumes remains intense. The recent downturn in NGL prices has put
additional pressure on operating margins. Dynegy has responded to these industry
conditions by aggressively reducing costs, rationalizing assets in non-core
areas and improving its competitive position in core operating areas through
asset consolidation and alliances with industry partners. The goal of these
efforts is to mitigate the variability of earnings and cash flow caused by
fluctuations in commodity prices.
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OVERVIEW OF SEGMENT BUSINESSES
WHOLESALE GAS AND POWER SEGMENT - NATURAL GAS
The Company's wholesale natural gas marketing activities are conducted
throughout North America and in the United Kingdom. These activities consist of
contracting to purchase specific volumes of natural gas from suppliers at
various points of receipt to be supplied over a specific period of time;
aggregating natural gas supplies and arranging for the transportation of these
gas supplies through proprietary and third-party transmission systems;
negotiating the sale of specific volumes of natural gas over a specific period
of time to local distribution companies (LDCs), utilities, power plants and
other end-users; and matching natural gas receipts and deliveries based on
volumes required by customers.
NATURAL GAS PURCHASES. The Company purchases natural gas from a variety of
suppliers under contracts with varying terms and conditions intended to ensure a
stable supply of natural gas. When purchasing natural gas, the Company considers
price, location, liquids content, if applicable, and quantities available. In
1998, the Company purchased natural gas in every major producing basin in the
United States and Canada from over 700 suppliers, ranging from major producers
to small independent companies. Pursuant to ancillary agreements entered into as
part of the Chevron Combination, Dynegy has the obligation to purchase and the
right to market substantially all of the natural gas produced or controlled by
Chevron in the United States (except Alaska). The Chevron relationship provides
the Company with a significant, stable supply of natural gas which, when
combined with gas supplies available from its network of other supply sources,
allows it to effectively manage gas supplies and reduces the risk of short-term
supply shortages during periods of peak demand.
TRANSPORTATION. The Company arranges for transportation of the natural gas
it markets from the supplier receipt point to the delivery point requested by
the purchaser. The Company generally retains title to the natural gas from the
receipt point to the delivery point and obtains transportation on unaffiliated
pipelines. The Company believes that its understanding of the United States'
pipeline network, along with the scale and geographic reach of its gas marketing
efforts, are important to the Company's success as a gas marketer. The Company
uses a variety of transportation arrangements to move its customers' volumes,
including short-term and long-term firm and interruptible agreements with
pipelines and brokered firm contracts with its customers.
NATURAL GAS SALES. The Company sells natural gas under sales agreements
that have varying terms and conditions intended to match seasonal and other
changes in demand. The Company's wholesale customer base consists primarily of
gas and electric utilities and industrial and commercial end-users and marketers
of natural gas. In 1998, sales were made to approximately 900 customers located
throughout the contiguous United States and parts of Canada. For the year ended
December 31, 1998, the Company's North American operations sold an aggregate
average of 8.2 Bcf per day of natural gas.
NATURAL GAS STORAGE. Natural gas storage capacity plays an important role
in the Company's ability to act as a full-service natural gas marketer by
allowing it to manage relatively constant gas supply volumes with uneven demand
levels. Through the use of its storage capabilities, the Company offers peak
delivery services to satisfy winter heating and summer electric-generating
demands. Storage inventories also provide performance security or "backup"
service to the Company's customers. The Company at various times leases short-
term and long-term firm and interruptible storage.
UNITED KINGDOM. Beginning in 1997, the Company began an independent energy
marketing business through a wholly owned subsidiary in the United Kingdom.
Additionally, Dynegy maintains a twenty-five percent participating preferred
stock interest in Accord Energy Limited ("Accord"), a U.K.-based energy
marketing company. During 1998, the Company's U.K. subsidiary purchased product
from 42 suppliers and marketed sales to 35 customers. For the year ended
December 31, 1998, the Company's U.K.-based operations sold an aggregate average
of 0.7 Bcf per day of natural gas.
WHOLESALE GAS AND POWER SEGMENT - POWER
Dynegy markets electricity and power products and services through Electric
Clearinghouse Inc. ("ECI"), an indirect wholly-owned subsidiary, providing a 24-
hour-a-day resource for the sale and purchase of power through access to
wholesale markets throughout North America. The Company helps generation
customers manage and optimize their fuel supplies, optimize generation assets
and capacity utilization and maximize energy conversion and tolling
opportunities. In addition, the Company provides market aggregation and sales
assistance and risk-management services and strategies. The Company will at
times contract for transmission capacity over regulated transmission lines in
order to facilitate regional movements of power. In 1998, Dynegy made sales to
approximately 180 customers and sold 121 million-megawatt hours of electricity.
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Dynegy has interests in thirty-one power projects in operation, under
construction, in late stage development or pending acquisition having combined
gross capacity of 6,832 megawatts of electricity. The majority of these
facilities are gas-fired and are principally owned through interests in joint
ventures formed to operate the plants. In addition to ownership and operation of
generating capacity, the Company provides services to the joint ventures in
which it owns an interest in the areas of project development, engineering,
environmental affairs, operating services, management and fuel supply services.
Such management services include:
. Engineering oversight of all conceptual planning, feasibility studies,
environmental studies and plant, engineering and construction design;
. Specialized and comprehensive operating, maintenance, testing and start-up
services;
. Power and fuel management involving purchases and sales for and from the
projects;
. Contract negotiation;
. Development and maintenance of business plans and forecasts;
. Development and implementation of profit improvement opportunities;
. Monitoring regulatory, legislative, and environmental affairs; and
. Providing various accounting and financial services.
LIQUIDS SEGMENT - NATURAL GAS GATHERING AND PROCESSING
The natural gas processing industry is a major segment of the oil and gas
industry, providing the necessary service of refining raw natural gas into
marketable pipeline quality natural gas and natural gas liquids. The Company
owns interests in 42 gas processing plants, including 35 plants that it
operates, as well as associated and stand-alone natural gas gathering pipeline
systems. These assets are primarily located in the key producing areas of New
Mexico, Texas, Louisiana, Arkansas, Oklahoma, Kansas and Alberta, Canada.
During 1998, the Company processed an average of 2.3 Bcf per day of natural
gas and produced an average of 110.0 thousand barrels per day of natural gas
liquids. As part of the Chevron Combination's ancillary agreements, Dynegy
acquired the right to process substantially all of Chevron's processable natural
gas in those geographic areas where it is economically feasible for Dynegy to
provide such service.
LIQUIDS SEGMENT - FRACTIONATION
Natural gas liquids removed from the natural gas stream at gas processing
plants are generally in the form of a commingled stream of liquid hydrocarbons
(raw product). The commingled natural gas liquids are separated at fractionation
facilities into the component products of ethane, propane, normal butane,
isobutane and natural gasoline. The Company has ownership interests in three
fractionation facilities; two in Mont Belvieu, Texas and one in Lake Charles,
Louisiana. During 1998, these facilities fractionated an average of 285 thousand
gross barrels per day.
LIQUIDS SEGMENT - NGL MARKETING
The Company markets its own NGL production and also purchases NGLs from
third parties for resale. During 1998, the Company sold approximately 410
thousand barrels per day of natural gas liquids to over 900 customers.
LIQUIDS SEGMENT - TRANSPORTATION OPERATIONS
The Company's transportation assets are inter-connected with the nation's
gas liquids and natural gas pipeline systems. Through this network of pipeline
connections, terminals, rail cars, trucks, barges and storage facilities, the
Company moves natural gas liquids from producing regions in the Gulf Coast, West
and Midwest to most major domestic and international markets. The Company
operates large-scale marine terminals in Texas, Florida and Louisiana, which
offer importers a variety of methods for transporting products to the
marketplace. In addition, Dynegy has access to over 60 million barrels of
underground liquids storage providing customers with the ability to store,
trade, buy and sell specification products. Dynegy also leases large-hull ships
capable of importing/exporting liquid petroleum gas to/from markets throughout
the world.
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LIQUIDS SEGMENT - CRUDE OIL MARKETING
The Company provides a full range of crude oil marketing services to
producers, and serves the North American refining community as a regionally
diversified supplier of crude oil. Through its participation in major trading
centers in Canada and the Mid-Continent, Rocky Mountain and Gulf Coast areas,
the Company has established itself as a dependable source of competitively
priced crude oil. During 1998, the Company sold approximately 240 thousand
barrels per day of crude oil to over 100 customers.
LIQUIDS SEGMENT - INTERNATIONAL LPG MARKETING
The Company markets and trades LPG to markets throughout the world through
use of chartered large-hull ships. Product marketed and traded by this business
is acquired from producing areas in the North Sea, West Africa, Algeria and the
Arabian Gulf as well as from the U.S. Gulf Coast region. Currently, this
business markets approximately 75,000 barrels per day of LPG.
RISK MANAGEMENT ACTIVITIES
Dynegy utilizes certain types of fixed-price forward purchase and sales
contracts, futures and option contracts traded on the New York Mercantile
Exchange and swaps and options traded in the over-the-counter financial markets
to:
. Manage and hedge its fixed-price purchase and sales commitments;
. Provide fixed-price commitments as a service to its customers and suppliers;
. Reduce its exposure to the volatility of cash market prices;
. Protect its investment in storage inventories; and
. Hedge fuel requirements at its gas processing and power generation
facilities.
The Company may, at times, have a bias in the market, within established
guidelines, resulting from the management of its portfolio. Additionally, Dynegy
monitors its exposure to fluctuations in interest rates and foreign currency
exchange rates and may execute swaps, forward-exchange contracts or other
financial instruments to hedge and manage these exposures.
In addition to the risk associated with price or interest rate movements,
credit risk is also inherent in the Company's risk management activities. Credit
risk relates to the risk of loss resulting from the nonperformance of
contractual obligations by a counterparty. Dynegy maintains credit policies with
regard to its counterparties, which management believes minimize its overall
credit risk.
The commercial groups of Dynegy manage, on a portfolio basis, the resulting
market risks inherent in the transactions, subject to parameters established by
the Dynegy Board of Directors. Market risks are monitored by a risk control
group that operates independently from the commercial units that create or
actively manage these risk exposures to ensure compliance with Dynegy's risk
management policies. Risk measurement is also practiced against the Dynegy
portfolios with value at risk, stress testing and scenario analysis.
As a result of recent pronouncements issued by the Financial Accounting
Standards Board and the Emerging Issues Task Force, the Company's comprehensive
method of accounting for energy-related contracts and/or derivative instruments
and hedging activities is changing effective January 1, 1999. Refer to "Item 7.
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8. - Financial Statements and Supplementary Data", for
further discussion and analysis of the effects of these accounting principle
changes.
COMPETITION
All phases of the businesses in which Dynegy is engaged are highly
competitive. In connection with both domestic and foreign operations, the
Company encounters strong competition from companies of all sizes, having
varying levels of financial and personnel resources.
Dynegy competes in its gas marketing business with other natural gas
merchants, producers and pipelines for sales based on its ability to aggregate
competitively priced supplies from a variety of sources and locations and to
utilize transportation efficiently through third-party pipelines. With respect
to its marketing operations, Dynegy believes that:
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. Customers will increasingly scrutinize the financial condition of their
suppliers to assure that contract obligations will be met;
. Suppliers and transporters will demand more stringent credit terms to secure
the performance of natural gas merchants;
. The increased role of storage and other risk management tools will add to the
financial costs of doing business;
. The increasing availability of pricing information to participants in the
natural gas industry will continue to exert downward pressure on per-unit
profit margins in the industry;
. Suppliers will have to be multi-fuel marketers; and
. Large competitors will create competition from entities having significant
liquidity and other resources.
As a result, Dynegy believes its financial condition and its access to capital
markets will play an increasing role in distinguishing the Company from many of
its competitors. Operationally, Dynegy believes its ability to remain a low-cost
merchant and to effectively combine value-added services, competitively priced
supplies and price risk management services will determine the level of success
in its natural gas marketing operations.
Dynegy's power marketing business is similar to its gas marketing business
in that it provides contract services to electric utilities, markets and
supplies electricity and invests in power-related assets and joint ventures. As
a result, the competitive issues incumbent upon the Company's gas marketing
operations similarly affect the Company's power marketing business. As with its
gas marketing operations, the Company believes it has the ability to establish
itself as a low cost and dependable merchant providing competitively priced
supplies and a variety of services which will differentiate Dynegy from the
competition.
The independent power generation industry has grown rapidly over the past
twenty years. The demand for power may be met by generation capacity based on
several competing technologies, such as gas-fired or coal-fired cogeneration and
power generating facilities fueled by alternative energy sources including hydro
power, synthetic fuels, solar, wind, wood, geothermal, waste heat, solid waste
and nuclear sources. The Company's power generation business competes with other
non-utility generators, regulated utilities, unregulated subsidiaries of
regulated utilities and other energy service companies in the development and
operation of energy-producing projects. The trend towards deregulation in the
U.S. electric power industry has resulted in a highly competitive market for
acquisition or development of domestic power generating facilities. As the
nation's regulated utilities seek non-regulated investments and states move
toward retail electric competition, these trends can be expected to continue for
the foreseeable future.
The Company's natural gas liquids, crude oil marketing and gas transmission
businesses face significant competition from a variety of competitors including
major integrated oil companies, major pipeline companies and their marketing
affiliates and national and local gas gatherers, processors, brokers, marketers
and distributors of varying sizes and experience. The principal areas of
competition include obtaining gas supplies for gathering and processing
operations, obtaining supplies of raw product for fractionation, the marketing
of natural gas liquids, crude oil, residue gas, helium, condensate and sulfur,
and the transportation of natural gas, natural gas liquids and crude oil.
Competition typically arises as a result of the location and operating
efficiency of facilities, the reliability of services and price and delivery
capabilities. The Company believes it has the infrastructure, long-term
marketing abilities, financial resources and management experience to enable it
to effectively compete.
Regulation
General. The Company is subject to the laws, rules and regulations of the
jurisdictions and countries in which it conducts its operations. The regulatory
burden on the energy industry increases its cost of doing business and,
consequently, affects its profitability. Inasmuch as these rules and regulations
are frequently amended or reinterpreted, the Company is unable to predict the
future cost or impact of complying with such regulations. These rules and
regulations affect the industry as a whole; therefore, the Company does not
believe that it is affected in a significantly different manner from its
competitors.
NATURAL GAS REGULATION. The transportation and sale for resale of natural
gas is subject to regulation by the Federal Energy Regulatory Commission
("FERC") under the Natural Gas Act of 1938, as amended ("NGA") and, to a lesser
extent, the Natural Gas Policy Act of 1978, as amended ("NGPA"). Interstate
transportation and storage services by natural gas companies, including
interstate pipeline companies, and the rates charged for such services, are
regulated by the FERC. Certain of the Company's pipeline activities and
facilities are involved in interstate transportation of natural gas, crude oil
and natural gas liquids, and are subject to these or other federal regulations.
8
<PAGE>
NATURAL GAS MARKETING. Commencing in 1985, the FERC promulgated a series
of orders and regulations adopting changes that significantly altered the
business of transporting and marketing natural gas by fostering competition. The
thrust of these regulations was to induce interstate pipeline companies to
provide nondiscriminatory transportation services to producers, distributors and
other shippers. The effect of the foregoing regulations has been the creation of
an open access market for natural gas purchases and sales and the creation of a
business environment which has fostered the evolution of various unregulated,
privately negotiated natural gas sales, purchase and transportation
arrangements. Regulations in Canada have resulted in a similar business
environment in that country. The sale for resale of natural gas in North America
has substantially completed its evolution to an unregulated, open access market.
The Company does not believe that any further regulatory matters will have a
material adverse effect on the Company's operations or competitiveness.
In the latter half of 1998, the FERC issued two proposed rulemakings in
which it laid out possible changes to the character of interstate transportation
services. Some proposed changes could benefit the Company, while others could
have a negative impact. It is too early to predict which, if any, changes will
be implemented.
In Canada, certain federal and provincial regulatory authorities require
parties to hold export or removal permits for transactions pursuant to which
natural gas is to be exported from the jurisdiction in which it is produced.
These requirements apply whether the gas is removed from one province to another
or from a province to the United States. The Company's indirectly wholly-owned
Canadian subsidiary, Dynegy Canada Inc., holds permits from the National Energy
Board, the Alberta Energy and Utilities Board ("AEUB") and the British Columbia
Ministry of Employment and Investment, Oil and Gas Section for such purposes. In
addition, Dynegy Canada Inc. holds export permits from the National Energy Board
similar to the foregoing for butane, propane and crude oil. In the United
Kingdom, regulation of the natural gas business is subject to regulation by the
Office of Gas Supply.
GAS PROCESSING. The primary function of Dynegy's gas processing plants is
the extraction of natural gas liquids and the conditioning of natural gas for
marketing, and not natural gas transportation. The FERC has traditionally
maintained that a processing plant is not a facility for transportation or sale
for resale of natural gas in interstate commerce and therefore is not subject to
jurisdiction under the NGA. Even though the FERC has made no specific
declaration as to the jurisdictional status of the Company's gas processing
operations or facilities, Dynegy believes its gas processing plants are
primarily involved in removing natural gas liquids and therefore exempt from
FERC jurisdiction. Nonetheless, certain facilities downstream of processing
plants are being considered for use in transporting gas between pipelines, which
may invoke FERC's jurisdiction. Such jurisdiction should apply to the downstream
facility as a pipeline, however, and not to the plants themselves.
In Canada, the AEUB governs the permitting, emissions and operations of gas
gathering and processing facilities. These facilities require a permit from the
AEUB to process or transport a specified volume of gas and a demonstration at
the time of application that the impact on the environment will be minimal.
Dynegy Canada Inc. holds all necessary permits required in order to own and
operate its processing and gathering facilities. Notwithstanding the
jurisdiction of the AEUB, the rates, terms and conditions of service of such
facilities are the result of privately negotiated arrangements.
Gathering. The NGA exempts gas-gathering facilities from the jurisdiction
of the FERC. Interstate transmission facilities, on the other hand, remain
subject to FERC jurisdiction. The FERC has historically distinguished between
these two types of facilities on a fact-specific basis. Dynegy believes its
gathering facilities and operations meet the current tests used by the FERC to
determine a nonjurisdictional gathering facility status. Some of the recent
cases applying these tests in a manner favorable to the determination of
Dynegy's nonjurisdictional status are still subject to rehearing and appeal. In
addition, the FERC's articulation and application of the tests used to
distinguish between jurisdictional pipelines and nonjurisdictional gathering
facilities have varied over time. While the Company believes current definitions
create nonjurisdictional status for Dynegy's gathering facilities, no assurance
can be given that such facilities will remain classified as gas gathering
facilities and the possibility exists that the rates, terms, and conditions of
the services rendered by those facilities, and the construction and operation of
the facilities will be subject to regulation by the FERC or by the various
states in the absence of FERC regulation.
OTHER REGULATORY ISSUES. The Company's gas purchases and sales are
generally not regulated by the FERC or other regulatory authorities; however, as
a gas merchant, the Company depends on the gas transportation and storage
services offered by various pipeline companies to enable the sale and delivery
of its gas supplies. Additionally, certain other pipeline activities and
facilities of the Company are involved in interstate and intrastate
transportation and storage services and are subject to various federal and state
regulations which generally regulate rates, terms and conditions of service.
9
<PAGE>
ELECTRICITY MARKETING REGULATION. The Federal Power Act ("FPA") and rules
promulgated by the FERC regulate the transmission of electric power in
interstate commerce and sales for resale of that power. As a result, portions of
ECI's operations are under the jurisdiction of the FPA and FERC. In April 1996,
the FERC adopted rules ("Order 888") to expand transmission service and access
and provide alternative methods of pricing for transmission services. Order 888
is intended to open the FERC-jurisdictional interstate transmission grid in the
continental United States to all qualified persons that seek transmission
services to wheel wholesale power. Utilities are required to provide
transmission customers non-discriminatory open access to their transmission
grids with rates, terms, and conditions comparable to that which the utility
imposes on itself. Order 888 was upheld by the FERC in March 1997 and is
subject to appeal. Second generation implementation issues arising out of Order
888 abound. These include issues relating to power pool structures and
transmission pricing. These too will likely find their way to the courts, and
their outcome cannot be predicted.
POWER GENERATION REGULATION. Historically in the United States, regulated
and government-owned utilities have been the only significant producers of
electric power for sale to third parties. Pursuant to the enactment of the
federal Public Utility Regulatory Policies Act of 1978 ("PURPA"), companies
other than utilities were encouraged to enter the electric power business by
reducing regulatory constraints. In addition, PURPA and its implementing
regulations created unique opportunities for the development of cogeneration
facilities by requiring utilities to purchase electric power generated in
cogeneration plants meeting certain requirements (referred to as "Qualifying
Facilities"). As a result of PURPA, a significant market for electric power
produced by independent power producers developed in the United States. The
exemptions from extensive federal and state regulation afforded by PURPA to
Qualifying Facilities are important to Dynegy and its competitors. Many of the
projects that Dynegy currently owns meet the requirements under PURPA to be
Qualifying Facilities and are maintained on that basis.
In 1992, Congress enacted the Energy Policy Act of 1992 ("Energy Act"),
which amended the FPA and the Public Utility Holding Company Act of 1935
("PUHCA") to create new exemptions from PUHCA for independent power producers
selling electric energy at wholesale, to increase electricity transmission
access for independent power producers and to reduce the burdens of complying
with PUHCA's restrictions on corporate structures for owning or operating
generating or transmission facilities in the United States or abroad. The Energy
Act has enhanced the development of independent power projects and has further
accelerated the changes in the electric utility industry that were initiated by
PURPA.
Changes in PURPA, PUHCA and other related federal statutes may occur in the
next several years. The nature and impact of such changes on the Company's
projects, operations and contracts is unknown at this time. Dynegy actively
monitors these developments to determine such impacts as well as to evaluate new
business opportunities created by restructuring of the electric power industry.
Depending on the outcome of these legislative matters, changes in legislation
could have an adverse effect on current contract terms.
The enactment in 1978 of PURPA and the adoption of regulations thereunder
by the FERC and individual states provide incentives for the development of
small power production facilities and cogeneration facilities meeting certain
criteria. In order to be a Qualifying Facility, a cogeneration facility must (i)
produce not only electricity but also a certain quantity of thermal energy (such
as steam) which is used for a qualified purpose other than power generation,
(ii) meet certain energy operating and efficiency standards when oil or natural
gas is used as a fuel source and (iii) not be controlled or more than 50 percent
owned by an electric utility or electric utility holding company, or any
combination thereof. PURPA provides two primary benefits to Qualifying
Facilities owned and operated by non-utility generators. First, Qualifying
Facilities under PURPA are exempt from certain provisions of PUHCA, the FPA and,
except under certain limited circumstances, state laws respecting rate and
financial regulation. Second, PURPA requires that electric utilities purchase
electricity generated by Qualifying Facilities at a price equal to the
purchasing utility's full "avoided cost" and that the utility sell back-up power
to the Qualifying Facility on a non-discriminatory basis. The FERC regulations
also permit Qualifying Facilities and utilities to negotiate agreements for
utility purchases of power at rates other than the purchasing utility's avoided
cost. If Congress amends PURPA, the statutory requirement that an electric
utility purchase electricity from a Qualifying Facility at full avoided costs
could be eliminated. Although current legislative proposals specify the honoring
of existing contracts, repeal of the statutory purchase requirements of PURPA
going forward could increase pressure to renegotiate existing contracts. Any
changes that result in lower contract prices could have an adverse effect on the
Company's operations and financial position.
The Congress passed the Energy Act to promote further competition in the
development of new wholesale power generation sources. Through amendments to
PUHCA, the Energy Act encourages the development of independent power projects
that are certified by the FERC as exempt wholesale generators ("EWGs"). The
owners or operators of qualifying EWGs are exempt from the provisions of PUHCA.
The Energy Act also provides the FERC with extensive new authority to order
electric utilities to provide other electric utilities, Qualifying Facilities
and independent power projects with access to their transmission systems.
However, the Energy Act does preclude the FERC from ordering transmission
services to retail customers and prohibits
10
<PAGE>
"sham" wholesale energy transactions which appear to provide wholesale service,
but actually are providing service to retail customers.
The FPA grants the FERC exclusive ratemaking jurisdiction over wholesale
sales of electricity in interstate commerce. The FPA provides the FERC with
ongoing as well as initial jurisdiction, enabling the FERC to revoke or modify
previously approved rates. Such rates may be based on a cost-of-service approach
or on rates that are determined through competitive bidding or negotiation on a
market basis. Although Qualifying Facilities under PURPA are exempt from
ratemaking and certain other provisions of the FPA, independent power projects
and certain power marketing activities are subject to the FPA and to the FERC's
ratemaking jurisdiction. Utilities are not obligated to purchase power from
projects subject to regulation by the FERC under the FPA because they do not
meet the requirements of PURPA. However, because such projects would not be
bound by PURPA's thermal energy use requirement, they may have greater latitude
in site selection and facility size. All of the projects currently owned or
operated by Dynegy as Qualifying Facilities under PURPA are exempt from the FPA.
Dynegy's EWGs, El Segundo, Long Beach, Commonwealth Atlantic and Hartwell, are
subject to the FPA and the jurisdiction of the FERC. With approval from FERC,
such entities, with certain exceptions, are exempted from being required to sell
at cost-based rates and can make all sales at market-based rates set through
negotiations. Independent power projects in which the Company has an interest
and that are not Qualifying Facilities have been granted market based rate
authority and comply with the FPA requirements governing approval of wholesale
rates and subsequent transfers of ownership interests in such projects.
Development of projects in international markets typically creates exposure
and obligations to the national, provincial and local laws of each host country,
worldwide environmental standards and requirements imposed by multi-lateral
lending institutions. The principal regulatory consideration for international
projects is PUHCA, since it is broadly applicable to the ownership and operation
of power facilities (including generation and transmission facilities) both
inside and outside of the United States. For international projects, the
principal basis for exemption from PUHCA is by obtaining EWG status from the
FERC. EWG status is very beneficial for international projects because EWGs are
generally allowed to make retail sales in international markets. Another way to
obtain an exemption from PUHCA for foreign ownership and operation activities is
by filing a foreign utility company determination ("FUCO") with the Securities
and Exchange Commission. However, FUCO filings are less frequently used,
because unlike EWGs, no formal regulatory order is issued confirming the status
of a FUCO. The development of international power generation and transmission
projects also may entail other multi-national regulatory considerations arising
under United States law, including export/import controls, trade laws and other
similar legislation. Dynegy attempts to identify and manage those issues early
in the development process to ensure compliance with such laws and regulations.
STATE REGULATORY REFORMS. Legislation currently under review in various
states affecting gas and power marketing and power generation businesses is most
likely to impact Dynegy in the near term. However, other state regulatory
reforms impacting the Company's processing and gathering operations and other
businesses are proceeding. While the ultimate impact of such legislation on the
Company's businesses cannot be predicted with certainty, the Company does not
believe that the outcome of these matters will have a material adverse effect on
the Company's operations or competitiveness.
ENVIRONMENTAL AND OTHER MATTERS
Dynegy's operations are subject to extensive federal, state and local
statutes, rules and regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection. Development of
projects in international markets creates exposure and obligations to the
national, provincial and local laws of each host country, including
environmental standards and requirements imposed by these governments.
Compliance with these statutes, rules and regulations requires capital and
operating expenditures including those related to monitoring, pollution control
equipment, emission fees and permitting at various operating facilities and
remediation obligations. Failure to comply with these statutes, rules and
regulations may result in the assessment of civil and even criminal penalties.
The Company's environmental expenditures have not been prohibitive in the past,
but are anticipated to increase in the future with the trend toward stricter
standards, greater regulation, more extensive permitting requirements and an
increase in the number and types of assets operated by the Company subject to
environmental regulation. No assurance can be given that future compliance with
these environmental statutes, rules and regulations will not have a material
adverse effect on the Company's operations or its financial condition.
The vast majority of federal environmental remediation provisions are
contained in the Superfund laws -- the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and the Superfund Amendments and
Reauthorization Act ("SARA") and in the corrective action provisions of the
Federal Resource Conservation and Recovery Act ("RCRA"). Typically, the U.S.
Environmental Protection Agency ("EPA") acts pursuant to Superfund legislation
to
11
<PAGE>
remediate facilities that are abandoned or inactive or whose owners are
insolvent; however, the legislation may be applied to sites still in operation.
Superfund law imposes liability, regardless of fault or the legality of the
original conduct, on certain classes of persons that contributed to the release
of a "hazardous substance" into the environment. These persons include the
current or previous owner and operator of a facility and companies that
disposed, or arranged for the disposal, of the hazardous substance found at a
facility. CERCLA also authorizes the EPA and, in certain instances, private
parties to take actions in response to threats to public health or the
environment and to seek recovery for the costs of cleaning up the hazardous
substances that have been released and for damages to natural resources from
such responsible party. Further, it is not uncommon for neighboring landowners
and other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment. RCRA
provisions apply to facilities that have been used to manage or are currently
managing hazardous waste and which are either still in operation or have
recently been closed. As amended, RCRA requires facilities to remedy any
releases of hazardous wastes or hazardous waste constituents at waste treatment,
storage or disposal facilities.
In connection with discrete asset acquisitions and sales, Dynegy may obtain
or be required to provide indemnification against certain environmental
liabilities. These indemnities are typically limited in scope and time period.
To minimize its exposure for such liabilities, environmental audits of the
assets Dynegy wishes to acquire are made, either by Dynegy personnel, outside
environmental consultants, or a combination of the two. The Company has not
heretofore incurred any material environmental liabilities arising from its
acquisition or divestiture activities. The incurrence of a material
environmental liability, and/or the failure of an indemnitor to meet its
indemnification obligations with respect thereto, could have a material adverse
effect on Dynegy's operations and financial condition.
To the Company's knowledge, it is in substantial compliance with, and is
expected to continue to comply in all material respects with, applicable
environmental statutes, regulations, orders and rules. Further, to the best of
the Company's knowledge, there are no existing, pending or threatened actions,
suits, investigations, inquiries, proceedings or clean-up obligations by any
governmental authority or third party relating to any violations of any
environmental laws with respect to the Company's assets or pertaining to any
indemnification obligations with respect to properties previously owned or
operated by the Company which would have a material adverse effect on the
Company's operations and financial condition. Dynegy's aggregate expenditures
for compliance with laws and regulations related to the discharge of materials
into the environment or otherwise related to the protection of the environment
approximated $9 million in 1998. Total environmental expenditures for both
capital and operating maintenance and administrative costs are not expected to
exceed $14 million in 1999.
In addition to environmental regulatory issues, the design, construction,
operation and maintenance of the Company's pipeline facilities are subject to
the safety regulations established by the Secretary of the Department of
Transportation pursuant to the Natural Gas Pipeline Safety Act ("NGPSA"), or by
state regulations meeting the requirements of the NGPSA, or to similar statutes,
rules and regulations in Canada. The Company believes it is currently in
substantial compliance, and expects to continue to comply in all material
respects, with these rules and regulations.
The Company's operations are subject to the requirements of the Federal
Occupational Safety and Health Act ("OSHA") and other comparable federal, state
and provincial statutes. The OSHA hazard communication standard, the EPA
community right-to-know regulations under Title III of SARA and similar state
statutes require that information be organized and maintained about hazardous
materials used or produced in its operations. Certain of this information must
be provided to employees, state and local government authorities and citizens.
The Company believes it is currently in substantial compliance, and expects to
continue to comply in all material respects, with these rules and regulations.
OPERATIONAL RISKS AND INSURANCE
Dynegy is subject to all risks inherent in the various businesses in which
it operates. These risks include, but are not limited to, explosions, fires and
product spillage, which could result in damage to or destruction of operating
assets and other property, or could result in personal injury, loss of life or
pollution of the environment, as well as curtailment or suspension of operations
at the affected facility. Dynegy maintains general public liability, property
and business interruption insurance in amounts that it considers to be adequate
for such risks. Such insurance is subject to deductibles that the Company
considers reasonable and not excessive. The occurrence of a significant event
not fully insured or indemnified against, and/or the failure of a party to meet
its indemnification obligations, could materially and adversely affect Dynegy's
operations and financial condition. Moreover, no assurance can be given that
Dynegy will be able to maintain insurance in the future at rates it considers
reasonable.
12
<PAGE>
The Company has designated two of its subsidiaries to assist in the
management of certain liabilities principally relating to environmental,
litigation and credit reserves. Together with the involvement of third parties
whose primary consideration will be based on the realization of savings by the
Company, the subsidiaries will attempt to find new ways to handle these costs in
a more efficient manner.
EMPLOYEES
The Company employs approximately 1,220 employees at its administrative
offices and approximately 1,214 employees at its operating facilities.
Approximately 137 employees at Company-operated facilities are subject to
collective bargaining agreements with one of the following unions: the Oil,
Chemical and Atomic Workers International Union, the Metal Trades Council or the
Communications, Energy and Paperworkers Union. Management considers relations
with both union and non-union employees to be satisfactory.
ITEM 1A. EXECUTIVE OFFICERS
Set forth below are the names and positions of the current executive
officers of the Company, together with their ages, position(s) and years of
service with the Company.
<TABLE>
<CAPTION>
Served with the
Name Age * Position(s) Company Since
<S> <C> <C> <C>
C. L. Watson 49 Chairman of the Board, Chief Executive Officer, 1985
and a Director of the Company
Stephen W. Bergstrom 41 President and Chief Operating Officer of 1986
Dynegy Marketing and Trade, and a Director
of the Company
John U. Clarke 46 Senior Vice President, Chief Financial Officer 1997
of the Company, and an Advisory Director of
the Company
Dan W. Ryser 49 Executive Vice President of Dynegy Marketing 1993
and Trade
Stephen A. Furbacher 51 President and Chief Operating Officer of 1996
Dynegy Mid-Stream Services
Kenneth E. Randolph 42 Senior Vice President, General Counsel and 1984
Secretary of the Company
</TABLE>
* As of April 1, 1999.
The executive officers named above will serve in such capacities until the
next annual meeting of the Company's Board of Directors, or until their
respective successors have been duly elected and have been qualified, or until
their earlier death, resignation, disqualification or removal from office.
C. L. Watson is the Chairman and Chief Executive Officer of Dynegy Inc. He
joined the company as President in 1985 and became Chairman and Chief Executive
Officer of NGC Corporation, Dynegy's predecessor, in 1989. Prior to his
employment with Clearinghouse, he served as Director of Gas Sales for the
Western United States for Conoco Inc. Mr. Watson serves on the board of
directors of Baker Hughes Incorporated.
Stephen W. Bergstrom, President and Chief Operating Officer of Dynegy
Marketing and Trade and Senior Vice President of Dynegy Inc., is responsible for
natural gas and power marketing, generation and international functions. He is
also a member of Dynegy's board of directors. After joining Natural Gas
Clearinghouse, the predecessor of Dynegy, in 1986 as Vice President of Gas
Supply, Mr. Bergstrom was promoted to Senior Vice President of Gas Marketing and
Supply in 1987. In 1990, he was named Executive Vice President of Natural Gas
Clearinghouse. Prior to joining the Company, Mr. Bergstrom
13
<PAGE>
was Vice President of Gas Supply for Enron Gas Marketing. Mr. Bergstrom began
his professional career with Transco Energy Company of Houston.
John U. Clarke joined the Company in April 1997 as Senior Vice President
and Chief Financial Officer and serves as the Company's principal financial
officer. Mr. Clarke is also an Advisory Director of the Company. Prior to
joining Dynegy, Mr. Clarke was a managing director and co-head of a specialty
energy practice group with Simmons & Company International, an investment-
banking firm for approximately one year. He previously had served as President
of Concept Capital Group, Inc., a financial advisory firm formed by Mr. Clarke
in May, 1995. Mr. Clarke was Executive Vice President and Chief Financial and
Administrative Officer with Cabot Oil & Gas Corporation from August 1993 to
February 1995, and worked for Transco Energy Company, from April 1981 to May
1993, last serving as Senior Vice President and Chief Financial Officer. Mr.
Clarke began his career with Tenneco Inc. in January 1978.
Dan W. Ryser serves as Senior Vice President of Dynegy Inc. and executive
Vice President of Dynegy Marketing and Trade. Mr. Ryser manages the Company's
power generation business. Since joining Dynegy in 1993, Mr. Ryser has served
the Company in several capacities, including managing ECI's electricity
marketing operations. Prior to joining the Company in 1993, Mr. Ryser held
various positions at Enron Corp. including President of Enron Gas Processing
Company, President of Transwestern Pipeline Company, Executive Vice President of
Enron Gas Marketing and President of Houston Pipe Line Company.
Stephen A. Furbacher serves as President and Chief Operating Officer of
Dynegy Mid-Stream Services. In this capacity, Mr. Furbacher is responsible for
the operations of Dynegy's North American mid-stream liquids operations, as well
as the global liquefied petroleum gas transportation and natural gas liquids
marketing operations. The North American mid-stream liquids operations are
actively engaged in the gathering and processing of natural gas and the
transportation, fractionation and storage of NGLs. Prior to joining the Company
in September 1996, Mr. Furbacher served as President of Warren Petroleum
Company, a division of Chevron U.S.A. Inc.
Kenneth E. Randolph serves as Senior Vice President, General Counsel and
Secretary of the Company. He has served as Senior Vice President and General
Counsel of Dynegy (or its predecessor, Clearinghouse) since July 1987. In
addition, he served as a member of the Clearinghouse Management Committee from
May 1989 through February 1994 and managed Clearinghouse's marketing operations
in the Western and Northwestern United States from July 1984 through July 1987.
Prior to his employment with the Company, Mr. Randolph was associated with the
Washington, D.C. office of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
14
<PAGE>
ITEM 2. PROPERTIES
Over the last 5 years, Dynegy has built a national network of strategic
assets that support and enhance its wholesale gas, liquids and power marketing
franchise. The following provides a geographic view of the depth and breadth of
Dynegy's domestic strategic asset network.
DYNEGY'S STRATEGIC ASSET NETWORK
[Map appears here]
Current year operational activity conducted in these areas is discussed
under "Item 1. BUSINESS -- General." Following is a description of such
properties owned by the Company at December 31, 1998.
POWER GENERATION FACILITIES
Dynegy has interests in thirty-one power projects in operation, under
construction, in late stage development or pending acquisition. The majority of
these projects are cogeneration facilities operated by Dynegy. The portfolio
includes one heat recovery plant and one coal gasification facility. A
cogeneration plant utilizes power production technology that results in the
sequential generation of two or more useful forms of energy (e.g., electricity
and steam) from a single fuel source (e.g., natural gas). The Company's
generation assets include projects that are deemed Qualifying Facilities, EWGs
and "Merchant Plants". A Qualifying Facility is operated under laws outlined in
PURPA, by the FERC and by certain state legislatures, as previously discussed
herein, and typically sells the power it generates to a single power purchaser.
A Merchant Plant operates independently from designated power purchasers and as
a result will generate and sell power to the market when market economics
dictate that electricity prices exceed the cost of production. Merchant Plants
provide flexibility to the Company in executing its Energy Convergence strategy.
The combined gross capacity of facilities in operation is approximately 4,409
megawatts of electricity and over 3.4 million pounds per hour of steam sold to
third parties. The following table provides pertinent information concerning
power projects owned by the Company:
15
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF DYNEGY'S POWER GENERATION FACILITIES
===========================================================================================================================
POWER GENERATION PERCENT GROSS PRIMARY
PROJECT OWNED CAPACITY LOCATION FUEL PRIMARY POWER PURCHASER
- ----------------- -------- -------- -------- -------- -----------------------
(MW)
<S> <C> <C> <C> <C> <C>
OPERATING
CoGen Power 100 5 Port Arthur, TX Waste heat Great Lakes Carbon Corporation
CoGen Lyondell Lessee (100%) 610 Channelview, TX Gas-fired Lyondell Chemical Company
Oyster Creek 50 424 Freeport, TX Gas-fired The Dow Chemical Company
Corona 40 47 Corona, CA Gas-fired SOCAL Edison Company
Kern Front 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company
High Sierra 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company
Double "C" 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company
San Joaquin 100 48 Stockton, CA Gas-fired Pacific Gas & Electric Company
Chalk Cliff 100 46 Kern County, CA Gas fired Pacific Gas & Electric Company
Badger Creek 50 46 Kern County, CA Gas-fired Pacific Gas & Electric Company
McKittrick 50 46 McKittrick, CA Gas-fired Pacific Gas & Electric Company
Live Oak 50 47 Kern County, CA Gas-fired Pacific Gas & Electric Company
Crockett 8 240 Crockett, CA Gas-fired Pacific Gas & Electric Company
Bear Mountain 100 46 Bakersfield, CA Gas-fired Pacific Gas & Electric Company
El Segundo 50 1,020 El Segundo, CA Gas-fired Merchant Facility
Long Beach 50 530 Long Beach, CA Gas-fired Merchant Facility
Black Mountain 50 85 Las Vegas, NV Gas-fired Nevada Power Company
Commonwealth Atlantic 50 340 Chesapeake, VI Gas-fired Virginia Electric & Power Company
Hartwell Energy 50 300 Hart County, GA Gas-fired Ogelthorpe Power Corporation
Michigan Power 50 123 Ludlington, MI Gas-fired Consumers Energy Company
Wabash Lessee (100%) 262 W. Terre Haute, IN Gasification PSI Energy, Inc.
-----
TOTAL 4,409
DEVELOPMENT PROJECTS (1)
Rockingham 100 800 Rockingham County, NC Gas-fired Duke Energy (3 years)
Rocky Road (2) 100 250 Chicago, IL. Gas-fired Merchant Facility
Encina Acquisition 50 1,218 San Diego County, CA. Gas-fired Merchant Facility
CoGen Lyondell Expansion 100 155 Channelview, TX. Gas-fired Merchant Facility
-----
Total 2,423
-----
TOTAL CAPACITY 6,832
============================================================================================================================
</TABLE>
(1) The Encina Acquisition includes the Encina generating facility and
seventeen combustion turbines in the San Diego, Ca. Area. The transaction
is expected to close in the first half of 1999.
(2) This project is currently owned 100 percent by Dynegy but the Company
expects to divest itself of 50 percent of its ownership interest during
1999.
GATHERING SYSTEMS AND PROCESSING FACILITIES
Dynegy's natural gas processing services are provided at two types of gas
processing plants, referred to as field and straddle plants. Field plants
aggregate volumes from multiple producing wells into quantities that can be
economically processed to extract natural gas liquids and to remove water vapor,
solids and other contaminants. Straddle plants are situated on mainline natural
gas pipelines and allow operators to extract natural gas liquids from a natural
gas stream when the market value of natural gas liquids separated from the
natural gas stream is higher than the market value of the same unprocessed
natural gas. The following table provides certain information, including
operational data for the year ended December 31, 1998, concerning the gas
processing plants and gathering systems in which Dynegy owns an interest.
16
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF DYNEGY'S GAS PROCESSING FACILITIES
===================================================================================================================================
LOCATION TOTAL PLANT
-------------------------------- -----------------------------
PRACTICAL 1998 INLET NGL
GAS PROCESSING FACILITIES % OWNED COUNTY/PARISH STATE CAPACITY (2) THROUGHPUT PRODUCTION
- -----------------------------------------------------------------------------------------------------------------------------------
(MMCF/D) (1) (BPD) (1)
<S> <C> <C> <C> <C> <C> <C>
OPERATED FIELD PLANTS:
Binger (3) 100.00 Caddo OK 10 7.2 900.1
Bridger Lake (7) 100.00 Summit UT 25 10.5 434.0
Canadian Complex (3) 100.00 Hemphill TX 25 20.5 2,000.0
Chico Complex (3) 100.00 Wise TX 100 79.7 11,798.4
East Texas (3) 100.00 Gregg TX 34 20.1 3,379.8
Eustace (3) 100.00 Henderson TX 70 32.2 2,002.6
Fashing 58.24 Atascosa TX 38 14.3 286.8
Gladys 100.00 Alberta Can. 15 4.7 60.0
Leedey (3) 100.00 Roger Mills OK 50 31.5 2,891.2
Lefors Complex (3) 100.00 Wheeler TX 13 12.5 2,906.4
Madill (3) 100.00 Marshall OK 25 9.0 636.1
Mazeppa 100.00 Alberta Can. 82 37.6 475.0
Moores Orchard (3) 100.00 Fort Bend TX 7 3.4 71.7
Monahans (3) 100.00 Ward TX 31 24.5 1,378.1
New Hope 100.00 Franklin TX 30 16.4 993.2
Niject 16.00 Caddo OK 3.2 0.3 34.9
Ringwood (3) 100.00 Major OK 75 33.1 2,286.1
Rodman (3) 100.00 Garfield OK 65 52.7 5,086.7
Sand Hills Complex (3) 100.00 Crane TX 200 152.8 14,605.5
Sherman (3) 100.00 Grayson TX 33 20.6 853.0
Sligo 100.00 Bossier LA 40 35.4 593.8
Texarkana (3) 100.00 Miller AR 22 11.5 393.6
West Seminole (3) 40.14 Gaines TX 5 12.9 504.9
Versado Gas Processors Joint 63.00 Various TX / NM 376 161.8 19,088.0
Venture (8)
OPERATED STRADDLE PLANTS:
Barracuda 100.00 Cameron LA 190 169.4 3,442.0
Cheney 100.00 Kingman KS 85 62.9 3,603.6
Lowry (3) 100.00 Cameron LA 265 67.6 1,647.8
Stingray 100.00 Cameron LA 300 292.5 2,229.4
Yscloskey (5) 21.00 St. Bernard LA 473 372.8 6,351.0
NON-OPERATED FIELD PLANTS:
Diamond M (3) 3.98 Scurry TX 1 0.7 117.9
Spivey (4) (5) 3.87 Harper KS 3 0.8 43.2
Dover Hennessey (3) 18.29 Kingfisher OK 14 5.0 525.6
Indian Basin (3) 14.29 Eddy NM 30 27.1 1,519.1
Maysville (3) 44.00 Garvin OK 59 38.1 5,245.8
Snyder (3) (6) 3.25 Scurry TX 2 1.8 73.9
NON-OPERATED STRADDLE PLANTS:
Bluewater 16.72 Acadia LA 122 42.8 952.1
Calumet (5) 21.91 St. Mary's LA 300 223.4 4,696.1
Iowa 9.92 Jefferson LA 50 31.2 647.5
Davis
Patterson 1.09 St. Mary's LA 3 0.7 26.4
Sea Robin 18.70 Vermillion LA 187 17.6 803.6
Terrebone 0.83 Terrebone LA 10 4.0 74.8
Toca 8.86 St. Bernard LA 93 114.2 4,361.8
==============================================================================================================================
</TABLE>
(1) Capacity, throughput and gross production are net to the Company's
ownership interest.
(2) Capacity data is at practical recovery rates, net to Dynegy's interest.
(3) Dynegy owns the indicated percentage of an associated gas gathering system.
(4) Dynegy owns 2.19 percent of the associated gas gathering system.
(5) Dynegy ownership is adjustable and subject to periodic (usually annual)
redetermination.
(6) Dynegy owns the indicated percentage of the Snyder gas gathering system and
3.98 percent of the Diamond M gas gathering system that also supplies the
Snyder plant.
(7) This facility consists of a 100 percent interest in a processing plant and
an NGL pipeline, a 100 percent interest in a crude oil pipeline and a 33.33
percent interest in reserves connected and dedicated to the plant.
(8) Versado Gas Processors includes the Saunders, Monument and the Eunice
Complex facilities. Ownership in the Saunders, Monument and Eunice
facilities changed from 100 percent to 63 percent during 1998 as a result
of formation of a joint venture with Texaco. Statistical information
includes the aggregate inlet gas throughput and NGL production volumes
accruing to Dynegy's interest during the year.
17
<PAGE>
FRACTIONATION FACILITIES
The following table provides certain information concerning stand alone
fractionation facilities in which Dynegy owns an interest.
<TABLE>
<CAPTION>
SUMMARY OF DYNEGY'S FRACTIONATION FACILITIES (1)
PERCENT 1998
FRACTIONATION FACILITIES OWNED GROSS CAPACITY (2) NET CAPACITY (2) INLET THROUGHPUT
------------------------ ------- ------------------ ---------------- ----------------
(MBbls/d) (MBBLS/D) (MBBLS/D)
<S> <C> <C> <C> <C>
Lake Charles, La. (3) 100.00 55 55 28
Cedar Bayou Fractionators (Mont Belvieu, Tx.) (4) 88.00 205 180 158
Gulf Coast Fractionators (Mont Belvieu, Tx.) 38.75 110 42 99
=======================================================================================================================
</TABLE>
(1) Table does not include fractionation operations at VESCO or at other gas
processing facilities.
(2) Gross capacity data is at practical recovery rates and net capacity is at
practical rates multiplied by Dynegy's interest.
(3) The Lake Charles, La. Fractionator extracts ethane and propane only.
(4) Effective January 1, 1998, Dynegy's interest in this facility was reduced
to 88 percent as a result of a formation of a joint venture with Amoco.
STORAGE AND TERMINAL FACILITIES
The following table provides information concerning terminal and storage
facilities owned by the Company:
<TABLE>
<CAPTION>
SUMMARY OF DYNEGY'S STORAGE AND TERMINAL FACILITIES
LOCATION
----------------------------------------
STORAGE AND TERMINAL
FACILITIES % OWNED COUNTY/PARISH STATE DESCRIPTION
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hackberry Storage 100.00 Cameron LA NGL storage facility
Mont Belvieu Storage 100.00 Chambers TX NGL storage facility
Hattiesburg Storage 100.00 Washington MS NGL storage facility
Mont Belvieu Terminal 100.00 Chambers TX Product terminal facility
Galena Park Terminal 100.00 Harris TX LPG import/export terminal
Calvert City Terminal 100.00 Marshall KY Product transport terminal
Greenville Terminal 100.00 Washington MS Propane terminal
Hattiesburg Terminal 50.00 Forrest MS Propane terminal
Pt. Everglades Terminal 100.00 Broward FL Marine propane terminal
Tampa Terminal 100.00 Hillsborough FL Marine propane terminal
Tyler Terminal 100.00 Smith TX Product terminal
Mont Belvieu Transport 100.00 Chambers TX Offices and repair shop
Abilene Transport 100.00 Taylor TX Raw LPG transport terminal
Bridgeport Transport 100.00 Jack TX Raw LPG transport terminal
Gladewater Transport 65.00 Gregg TX Raw LPG transport terminal
Grand Lake Tank Farm 100.00 Cameron LA Condensate storage
====================================================================================================================
</TABLE>
18
<PAGE>
NATURAL GAS, LIQUIDS AND CRUDE OIL PIPELINES
Dynegy owns interests in various interstate and intrastate pipelines and
gathering systems as follows:
<TABLE>
<CAPTION>
SUMMARY OF DYNEGY'S PIPELINE ASSETS
PIPELINE SYSTEMS % OWNED 1998 THROUGHPUT (1) STATES DESCRIPTION
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Crude Oil Pipeline System 100.00 24.1 TX/OK Crude oil pipelines
Kansas Gas Supply 100.00 61.5 KS/OK Intrastate natural gas pipeline
Dynegy NGL Pipeline 100.00 27.1 TX/LA Interstate liquids pipeline
Bridger Lake/Phantex 100.00 0.4 UT/WY Interstate liquids pipeline
Pipeline
Pelican Pipeline 100.00 42.0 LA Gas gathering pipeline
Vermillion Pipeline 100.00 11.4 Gulf of Mexico Gas gathering pipeline
Western Gas Gathering 100.00 2.9 KS Gas gathering pipeline
Pawnee Rock 100.00 11.7 KS Gas gathering pipeline
Seahawk 100.00 41.2 LA Intrastate natural gas pipeline
Dynegy Midstream Pipeline, 100.00 34.1 OK Intrastate natural gas pipeline
Inc.
Dynegy Intrastate Gas 100.00 6.2 TX Intrastate natural gas pipeline
Supply
Lake Boudreaux 100.00 1.0 LA Gas gathering pipeline
Grand Lake Liquids System 100.00 1.3 LA Intrastate liquids pipeline
====================================================================================================================
</TABLE>
(1) 1998 throughput is based on thousands of barrels per day for the liquids and
crude lines and million cubic feet per day for the gas gathering and
transportation lines.
OTHER PROPERTY INVESTMENTS
Dynegy owns a 49 percent interest in a partnership that owns and operates
the West Texas LPG Pipeline, an interstate LPG pipeline. The interest was
acquired in the Chevron Combination.
In 1996, the Company and Chevron formed Venice Gas Processing Company, a
Texas limited partnership ("Venice"). Venice was formed for the purpose of
owning and operating the Venice Complex, located in Plaquemines Parish,
Louisiana. The complex includes 271 miles of gathering pipeline that extends
into the Gulf of Mexico having capacity of 810 MMcf/d, a one lean oil gas
processing plant, a 35,000 barrel per day fractionator, a 300 MMcf/d cryogenic
gas processing unit, 12 million barrels of NGL storage capacity, a marine
terminal and acreage. In 1997, Venice reorganized as a limited liability
company changing its name to VESCO. In September 1997, the VESCO members agreed
to expand ownership in VESCO to include an affiliate of Shell Midstream
Enterprises, a subsidiary of Shell Oil Company ("Shell"), effective September 1,
1997, in exchange for Shell's commitment of certain offshore reserves to VESCO.
In 1998, ownership in the LLC was again expanded to include Koch, in exchange
for their contribution of the cryogenic processing unit. At December 31, 1998,
Dynegy's interest in VESCO approximated 23 percent. Dynegy operates the facility
and has commercial responsibility for product distribution and sales.
During 1997, the Company contributed the Waskom gas processing facility to
the Waskom Gas Processing Company ("Waskom"), a Texas limited partnership.
Dynegy owns a 33 percent interest in Waskom, operates the facility and has
commercial responsibility for product distribution and sales.
TITLE TO PROPERTIES
The Company believes it has satisfactory title to its properties in
accordance with standards generally accepted in the energy industry, subject to
such exceptions which, in the opinion of the Company, would not have a material
adverse effect on the use or value of said properties.
The operating agreements for certain of the Company's natural gas
processing plants and fractionation facilities grant a preferential purchase
right to the plant owners in the event that any owner desires to sell its
interest. Such agreements may also require the consent of a certain percentage
of owners before rights under such agreements can be transferred. The Company is
subject, as a plant owner under such agreements, to all such restrictions on
transfer of its interest. In a few instances, the Company has granted rights of
first refusal with respect to any future sale of certain assets.
19
<PAGE>
Certain of the Company's power generation assets are subject to rights of first
refusal or consent requirements with the Company's partners or power purchasers
which restrict the transfer of interests in the facilities.
Substantially all of Dynegy's gathering and transmission lines are
constructed on rights-of-way granted by the apparent record owners of such
property. In some instances, land over which rights-of-way have been obtained
may be subject to prior liens that have not been subordinated to the right-of-
way grants. Permits have been obtained from public authorities to cross over or
under, or to lay facilities in or along, water courses, county roads, municipal
streets and state highways, and in some instances, such permits are revocable at
the election of the grantor. Permits have also been obtained from railroad
companies to cross over or under lands or rights-of-way, many of which are also
revocable at the grantor's election. Some such permits require annual or other
periodic payments. In a few minor cases, property was purchased in fee.
INDUSTRY SEGMENTS
Segment financial information is included in Note 15 of Dynegy's
consolidated financial statements contained elsewhere herein.
Item 3. 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. and Destec Operating Company
(wholly-owned subsidiaries of the Company now known respectively as Dynegy Power
Corp., Dynegy Power Holdings, Inc. and Dynegy Operating Company) as well as
against San Joaquin CoGen Limited ("San Joaquin" or the "Partnership") and its
general partners (collectively the "Dynegy Defendants"). Dynegy Power Corp. 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 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 trial date is currently June
15, 1999. The Partnership has previously advised the 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 were to
determine 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. The
parties have been actively engaged in settlement discussions, which resulted in
the execution of a Termination and Settlement Agreement between PG&E and the
Dynegy Defendants on March 9, 1999 (the "Settlement Agreement"). The Settlement
Agreement provides for, upon the receipt of CPUC approval, a dismissal with
prejudice of PG&E's claims against the Dynegy Defendants, a release by PG&E of
all claims relative to FERC matters and a termination of the San Joaquin power
purchase agreement as of December 31, 1999, whereupon the San Joaquin facility
will continue to operate as a merchant plant. The Dynegy Defendants will seek to
recover from LOF any losses resulting from the settlement with PG&E. However, if
the settlement is not ultimately concluded, the Dynegy Defendants will seek to
recover from LOF any losses or amounts for which it may be found liable.
Further, the Company's subsidiaries intend to continue 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.
20
<PAGE>
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. (now
known respectively as Dynegy Power Corp., Dynegy Holdings, Inc. and Dynegy Gas
Services, Inc.), wholly-owned direct and indirect subsidiaries of the Company
(collectively, the "Defendants"), as well as against Chalk Cliff Limited and
McKittrick Limited (collectively, the "Partnerships"). 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. All general partners of
the Partnerships are also named defendants. The lawsuit alleged breach of
contract against the Partnerships and their respective general partners, and
interference and conspiracy to interfere with contracts against the Defendants.
The breach of contract claims arose out of the "transport-or-pay" provisions of
the gas transportation service agreements between the Partnerships and SOCAL.
SOCAL sought damages from the Partnerships for past damages and anticipatory
breach damages in an amount equal to approximately $31,000,000. 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 Defendants, (c) dismissed the tortious interference claims
against the Defendants, and (d) assessed damages in an aggregate amount of
approximately $31,000,000. On the same day, the 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
Partnerships filed their appeal of that final judgment on June 4, 1998. 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
judgment against them, and have instituted foreclosure proceedings as to the
projects. Additionally, receivers were named by the lenders and approved by the
Court for each of the projects. In early December 1998, the defendants filed
their opening appellate briefs in the appeal of the Court's final judgment. On
February 23, 1999, the Court granted a motion by SOCAL to amend the Court's
final judgment to include a finding that Dynegy Power Corp. is the alter ego of
the Partnerships and their respective general partners. Dynegy Power Corp. will
appeal the Court's ruling, and will vigorously defend SOCAL's claims.
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. In the
opinion of management, the election by the lender of its option under the terms
of such arrangements 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. By order dated February 2, 1999, the federal District Court
dismissed MID's state and federal antitrust claims against PG&E and Destec;
however, the Court granted MID leave of thirty days to amend its complaint to
state an antitrust cause of action. On March 3, 1999, MID filed an amended
complaint recasting its federal and state antitrust claims against PG&E and
Destec and restating its breach of contract claim against Destec. Dynegy
believes the allegations made by MID are meritless and will continue to
vigorously defend MID's claims. In the opinion of management, the amount of
ultimate liability with respect to these actions will not have a material
adverse effect on the financial position or results of operations of the
Company.
The Company 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
21
<PAGE>
respect to these actions will not have a material adverse effect on the
financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's $0.01 par value common stock ("Common Stock") is listed and
traded on the New York Stock Exchange under the ticker symbol "DYN". The number
of stockholders of record of the Common Stock as of March 24, 1999, was 290.
The following table sets forth the high and low closing prices for
transactions involving the Company's Common Stock for each calendar quarter, as
reported on the New York Stock Exchange Composite Tape and related dividends
paid per common share during such periods.
Summary of Dynegy's Common Stock Price and Dividend Payments
High Low Dividend
------------------------------------------
1998:
Fourth Quarter $15.250 $10.250 $0.0125
Third Quarter 14.063 9.563 0.0125
Second Quarter 15.375 12.500 0.0125
First Quarter 17.250 14.625 0.0125
1997:
Fourth Quarter $19.875 $16.000 $0.0125
Third Quarter 17.750 14.875 0.0125
Second Quarter 19.625 15.500 0.0125
First Quarter 24.000 15.375 0.0125
=========================================================================
The holders of the Common Stock are entitled to receive dividends if, when
and as declared by the Board of Directors of the Company out of funds legally
available therefor. Consistent with the Board of Directors' intent to establish
a policy of declaring quarterly cash dividends, a cash dividend of $0.0125 per
share was declared and paid in each quarter during 1998 and 1997. 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. Accordingly, the Company also paid quarterly cash
dividends on its Series A Participating Preferred Stock of $0.0125 per share, or
$0.05 per share on an annual basis.
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information presented below was derived from, and is
qualified by reference to, the Consolidated Financial Statements of the Company,
including the Notes thereto, contained elsewhere herein. The selected financial
information should be read in conjunction with the Consolidated Financial
Statements and related Notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
DYNEGY'S SELECTED FINANCIAL DATA
Year Ended December 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
($ in thousands, except per share data)
STATEMENT OF OPERATIONS DATA (1) :
Revenues $14,257,997 $13,378,380 $7,260,202 $3,665,946 $3,237,843
Operating margin 428,687 385,294 369,500 194,660 99,126
General and administrative expenses 185,708 149,344 100,032 68,057 47,817
Depreciation and amortization expense 113,202 104,391 71,676 44,913 8,378
Asset impairment, abandonment
Severance and other charges 9,644 275,000 --- --- ---
Net income (loss) (3) $ 108,353 $ (102,485) $ 113,322 $ 92,705 $ 42,101
Earnings (loss) per share (4) $0.66 $(0.68) $0.83 $0.82 n/a
Pro forma earnings per share (4) n/a n/a n/a $0.40 $0.28
Shares outstanding 164,605 150,653 136,099 113,176 97,804
CASH FLOW DATA:
Cash flows from operating activities $ 250,780 $ 278,589 $ (30,954) $ 90,648 $ 17,170
Cash flows from investment activities (295,082) (510,735) (111,140) (310,623) (38,376)
Cash flows from financing activities 49,622 204,984 176,037 221,022 18,959
OTHER FINANCIAL DATA:
EBITDA (5) $ 363,517 $ 291,899 $ 289,023 $ 142,538 $ 57,716
Dividends or distributions to partners, net 7,988 7,925 6,740 9,253 14,041
Capital expenditures, acquisitions
And investments (6) 478,464 1,034,026 859,047 979,603 47,014
=================================================================================================================================
December 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------
($ in thousands)
BALANCE SHEET DATA (2) :
Current assets $ 2,117,241 $ 2,018,780 $1,936,721 $ 762,939 $ 445,782
Current liabilities 2,026,323 1,753,094 1,548,987 705,674 404,144
Property and equipment, net 1,932,107 1,521,576 1,691,379 948,511 114,062
Total assets 5,264,237 4,516,903 4,186,810 1,875,252 645,471
Long-term debt 1,046,890 1,002,054 988,597 522,764 33,000
Total equity 1,128,063 1,019,125 1,116,733 552,380 152,213
=================================================================================================================================
</TABLE>
(1) The Destec Acquisition was accounted for as an acquisition of a business in
accordance with the purchase method of accounting and the results of
operations attributed to the acquired business are included in the
Company's financial statements and operating statistics effective July 1,
1997. The Chevron Combination was accounted for as an acquisition of
assets under the purchase method of accounting and the results of
operations attributed to the acquired assets are included in the Company's
financial statements and operating statistics effective September 1, 1996.
The Trident Combination was accounted for as an acquisition of a business
in accordance with the purchase method of accounting and the results of
operations attributed to the acquired business are included in the
Company's financial statements and operating statistics effective March 1,
1995.
(2) The Destec Acquisition and the Chevron and Trident Combinations were each
accounted for under the purchase method of accounting. Accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values as of the effective dates of each
transaction. The effective dates of the Destec Acquisition, Chevron
Combination and Trident Combination were June 30, 1997, September 1, 1996
and March 1, 1995, respectively.
(3) Net income (loss) does not include a provision for federal income taxes,
other than minimal amounts on the taxable income of Clearinghouse's
corporate subsidiaries, for the year ended December 31, 1994.
(4) Earnings (loss) per share are computed in accordance with provisions of
Statement of Financial Accounting Standard No. 128, "Earnings Per Share",
for each of the years ended December 31, 1998, 1997, 1996 and 1995,
respectively. Pro forma earnings per share for each of the years ended
December 31,
23
<PAGE>
1995 and 1994, respectively, are based on reported net income for the
period adjusted for the incremental statutory federal and state income
taxes that would have been provided had Clearinghouse been a taxpaying
entity prior to the Trident Combination. The pro forma earnings per share
computation for the year ended December 31, 1995, eliminates the effect of
a one-time $45.7 million income tax benefit associated with the Trident
Combination. The weighted average shares outstanding for the year ended
December 31, 1995, is based on the weighted average number of common shares
outstanding plus the common stock equivalents that would arise from the
exercise of outstanding options or warrants, when dilutive. Pro forma
weighted average shares outstanding of 97.8 million shares for the year
ended December 31, 1994, gives effect to the terms of the Trident
Combination and the common stock equivalent shares outstanding as of the
effective date of the Trident Combination assuming a common stock market
price of $12 in all periods.
(5) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is presented as a measure of the Company's ability to service its debt and
to make capital expenditures. It is not a measure of operating results and
is not presented in the Consolidated Financial Statements. The 1997 amount
includes the non-cash portion of items associated with the $275 million
impairment and abandonment charge.
(6) Includes all value assigned the assets acquired in various business and
asset acquisitions. The 1997 amount is before reduction for value received
upon sale of Destec's foreign and non-strategic assets of approximately
$735 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
COMPANY PROFILE
Dynegy is a leading provider of energy products and services in North
American and the United Kingdom. Products marketed by the Company's wholesale
operations include natural gas, electricity, coal, natural gas liquids, crude
oil, liquid petroleum gas and related services. The Company's wholesale
marketing operations are supported by ownership or control of an extensive asset
base and transportation network that includes unregulated power generation, gas
and liquids storage capacity, gas, power and liquids transportation capacity and
gas gathering, processing and fractionation assets. The critical mass achieved
through the combination of a large scale energy marketing operation with
strategically located assets which augment the marketing efforts affords the
Company the ability to offer innovative, value-creating energy solutions to its
customers.
From inception of operations in 1984 until 1990, Clearinghouse limited its
activities primarily to natural gas marketing. Starting in 1990, Clearinghouse
began expanding its core business operations through acquisitions and strategic
alliances resulting in the formation of a mid-stream energy asset business and
establishing energy marketing operations in both Canada and the United Kingdom.
The Company initiated electric power marketing operations in February 1994 in
order to exploit opportunities created by the deregulation of the domestic
electric power industry. Effective March 1, 1995, Clearinghouse and Holding, a
fully integrated natural gas liquids company, merged and the combined entity was
renamed NGC. On August 31, 1996, NGC completed a strategic combination with
Chevron whereby substantially all of Chevron's mid-stream assets were merged
with NGC. Effective July 1, 1997, NGC acquired Destec, a leading independent
power producer. During 1998, the Company changed its name to Dynegy Inc. in
order to reflect its evolution from a natural gas marketing company to an energy
services company capable of meeting the growing demands and diverse challenges
of the dynamic energy market of the 21st Century.
BUSINESS SEGMENTS
Dynegy's operations are divided into two segments: the Wholesale Gas and
Power and Liquids segments. The Wholesale Gas and Power segment is actively
engaged in value creation through marketing and trading of natural gas, power
and coal and the generation of electricity principally under the name Dynegy
Marketing and Trade. The Liquids segment consists of the North American mid-
stream liquids operations, as well as the international liquefied petroleum gas
transportation and natural gas liquids marketing operations located in Houston
and London, and certain other businesses. The North American mid-stream liquids
operations are actively engaged in the gathering and processing of natural gas
and the transportation, fractionation and storage of NGLs. The Liquids segment
operates principally under the name Dynegy Mid-Stream Services.
24
<PAGE>
RECENT DEVELOPMENTS
During 1998, Dynegy successfully executed key operating and business
strategies that management believes provide impetus for financial growth in 1999
and beyond. Key accomplishments during the period, which are more fully
described elsewhere herein, included:
. Expansion of ownership or control of power generating assets and
infrastructure;
. Formation of additional regional retail energy marketing alliances in the
United States;
. Formation of asset management and marketing alliances with electric utilities,
municipalities and others;
. Enhancement of unit margins through selective disposition of marginally
profitable sales volumes;
. Continued rationalization of the Company's natural gas liquids businesses
through formation of joint ventures, asset consolidations, discrete asset
dispositions and strategic cost efficiency and reduction measures;
. Implementation of "just-in-time" controlled inventory management techniques;
. Sales of non-strategic assets and operations;
. Implementation of technology infrastructure improvements intended to provide
the Company with state-of-the-art business and financial software
applications; and
. Continued restructuring of the Company's long-term debt portfolio.
WHOLESALE GAS AND POWER SEGMENT -
Dynegy expects to continue expanding its ownership or commercial control of
strategic assets and generating capacity in selected major market areas through
acquisitions, greenfield development and asset management agreements in order to
leverage its marketing and trading capabilities. Execution of this strategy
began with the acquisition of Destec in 1997 and has continued during 1998 and
into 1999.
During 1998, the Company and a partner, NRG Energy, Inc. ("NRG"), a wholly-
owned subsidiary of Northern States Power Company, acquired two California-based
gas-fired merchant plants known as Long Beach and El Segundo. These generation
facilities have a combined gross capacity of over 1,500 megawatts, providing the
Company with significant commercial flexibility in the recently deregulated
California electricity market. Dynegy and NRG each own a 50 percent interest in
these facilities. Late in 1998, the Company and NRG announced the acquisition of
the Encina power plant and certain other assets representing over 1,200
megawatts of additional generation capacity located in the San Diego, California
area. The transaction is expected to close during the first half of 1999 and
Dynegy will own a 50 percent interest in the special purpose entities that are
acquiring the assets. Dynegy will provide fuel procurement, power marketing and
asset management services for these ventures, while NRG will be responsible for
operation of the facilities. In addition, during the year, Dynegy increased its
ownership interest in certain other California based Qualifying Facilities.
The Company is in the process of constructing two projects in the U.S., one
in North Carolina and one near Chicago, Illinois. The North Carolina project is
an 800 megawatt dual fuel fired facility that is expected to be operational by
mid-year 2000 and is currently wholly owned by the Company. The Illinois
facility is a 250 megawatt gas-fired merchant plant designed to assist in
reducing power system congestion induced by peak electricity demands in the
Midwest. The Illinois facility is expected to be operational in the summer of
1999. Dynegy currently owns 100 percent of this venture, but intends to divest
50 percent of its ownership interest in the venture in 1999. The Company has
also announced its intent to expand the capacity of its Lyondell power
generation facility by 155 megawatts in order to increase its capability of
meeting peak demands in the Texas power markets. The expansion is anticipated
to be operational in June 2000.
Execution of the Company's retail marketing strategy expanded during 1998
with the addition of two new retail marketing alliances, one in the Southeast
and one in the Northern Plains. These alliances expand Dynegy's retail presence
to a significant part of the Eastern U.S. and in Canada. The Company is
continuing to pursue additional alliance partners in order to achieve its goal
of forming a North American network of regional retail energy marketers.
During 1998, Dynegy consummated several agreements to manage the wholesale
power, natural gas supply, transportation and storage needs for numerous
municipalities, utilities and other similar entities. These arrangements
typically represent full-service energy supply and asset management agreements
requiring Dynegy to assure all energy requirements, as dictated by the specific
agreement, as well as requiring Dynegy to manage firm transportation capacity
and firm storage capacity. In addition, Dynegy and Florida Power Corporation, a
Florida Progress Corporation company located in St. Petersburg, Florida, agreed
to form a power marketing alliance that will operate in the U.S. wholesale
electric and natural gas markets. The alliance created a commercial relationship
between a power marketer and a utility focused on developing
25
<PAGE>
wholesale energy markets in Florida and other regions. These examples represent
execution of Dynegy's goal to achieve commercial control over physical assets in
order to optimize returns, to both Dynegy and our customers.
During 1998, the Company eliminated from its wholesale marketing customer
base identified non-strategic or marginally profitable contracts and
arrangements. As a result, the Company's growth in and market share of U.S. gas
marketing volumes decreased during the period. However, this strategy resulted
in higher average per unit margins achieved by the Company during 1998.
Management will continue to stress the quality of its customer base and service
offering over sales volumes in order to maximize profitability.
LIQUIDS SEGMENT -
During 1998, the Liquids segment continued execution of the restructuring
and rationalization of its operations that were begun in 1997. Despite
uncooperative market conditions, the segment's businesses were able to achieve
efficiency improvements and cost reductions that enhance its competitive
position in the marketplace. These businesses increased their focus on
extracting fee income throughout the value chain, unbundling services and
leveraging off the Company's commercial skills and relationships. In addition,
the segment businesses focused efforts on re-negotiating or restructuring
marginally profitable contractual arrangements in order to position these
businesses for profitable growth. Finally, the segment continued to invest in
strategically located mid-stream assets in order to advance existing commercial
advantages or to leverage off identified economies of scale. The intent of these
initiatives is to mitigate the variability commodity prices have on the
operating results of the segment, as well as to position the segment's
businesses to take full advantage of improvements in market conditions when
they occur.
During the period, the Company completed the plant consolidations that were
identified and accrued for in 1997. Additionally, the Company sold three non-
strategic gas processing facilities and formed a joint venture with Texaco that
combined the natural gas processing operations of both companies in Southeast
New Mexico and West Texas. The result of these activities was increased
operating efficiencies and economies of scale that are intended to increase
profitability through higher utilization, lower costs and improved performance.
Also, during the year, Dynegy Canada Inc. acquired the Mazeppa and Gladys gas
processing plants and associated gathering lines located in Alberta, Canada. The
acquisition of these mid-stream assets represents the re-establishment of a
Canadian asset base that will complement existing Canadian gas marketing and
trading operations.
The Company expanded its commercial capability in the Gulf Coast region
through completion of construction of a 55,000 barrel per day fractionation
facility near Lake Charles, Louisiana. The fractionator is capable of separating
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 and
its products are primarily shipped through pipeline to customers in the
petrochemical and refining industries in Lake Charles or to Mont Belvieu, Texas,
for further refinement. Additionally, the commercial capability of the VESCO
investment was enhanced by the contribution of a 300 MMcf/d cryogenic gas
processing unit.
In 1998, management of the Company's investment in NGL inventories was
enhanced through implementation of a "just-in-time" controlled inventory
process. The economic result of the improved management of NGL inventories
reduced carrying costs and assisted in insulating the Company from commodity
price risk resulting from the precipitous drop in NGL prices throughout most of
the year.
During the period, Dynegy sold the Ozark Gas Transmission System ("Ozark")
to an affiliate of Oklahoma City-based Enogex Inc. for $55 million, realizing an
after-tax gain of $17.1 million.
TECHNOLOGY INFRASTRUCTURE ENHANCEMENTS -
Dynegy has launched a technology infrastructure improvement initiative
aimed at optimizing major business and financial processes at the Company. Using
state-of-the-art technology and software applications, the project team is
focused on process enhancements extending throughout the organization, linking
initial price and market discovery with risk control, production, aggregation,
distribution, cash settlement, accounting and financial statement recognition.
DEBT PORTFOLIO RESTRUCTURING -
During 1998, the Company retired certain high-coupon debt and renegotiated
or refinanced other debt agreements with the intent of improving the financial
flexibility of its debt portfolio, thereby reducing the overall cost of its
indebtedness
26
<PAGE>
and positioning the Company to manage its liquidity needs for the foreseeable
future. Further discussion of the renegotiated or refinanced indebtedness is
contained in the Liquidity and Capital Resources section of Item 7 of this Form
10-K and in the footnotes to the financial statements. The following is a
description of the more significant retirements of indebtedness occurring during
1998, which impacted the restructuring of the Company's overall debt portfolio
during the period.
In February 1998, the Company delivered Notices of Redemption to the
holders of its $65 million principal amount of 14% Senior Subordinated Notes and
$105 million principal amount of 10.25% Subordinated Notes. On March 31, 1998
and April 15, 1998, the Company retired the Senior Subordinated Notes and the
Subordinated Notes, respectively, pursuant to the redemption provisions
contained in the respective indentures. Dynegy funded the aggregate redemption
value of approximately $180 million through a public debt issuance.
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"). On August 31, 1998, the Chevron Note was retired, pursuant to the terms
of the agreement, with funds provided through the sale of commercial paper.
IMPACT OF PRICE FLUCTUATIONS
Dynegy's operating results are impacted by commodity price, interest rate and
foreign exchange rate fluctuations. The Company routinely enters into financial
instrument contracts to hedge purchase and sale commitments, fuel requirements
and inventories in its natural gas, natural gas liquids, crude oil, electricity
and coal businesses in order to minimize the risk of market fluctuations. As a
result of marketplace liquidity and other factors, the Company may, at times, be
unable to fully hedge its portfolio for certain market risks. Dynegy also
monitors its exposure to fluctuations in interest rates and foreign currency
exchange rates and may execute swaps, forward-exchange contracts or other
financial instruments to manage these exposures.
Operating margins in the Wholesale Gas and Power segment are separated into
three integrated component businesses: wholesale gas marketing, wholesale power
marketing and power generation. Operating margins earned by wholesale gas and
power marketing, exclusive of risk-management activities, are relatively
insensitive to commodity price fluctuations since most of the purchase and sales
contracts do not contain fixed-price provisions. Generally, prices contained in
these contracts are tied to a current spot or index price and, therefore, adjust
directionally with changes in overall market conditions. However, market price
fluctuations for natural gas and electricity can have a significant impact on
the operating margin derived from risk-management activities in these
businesses. Dynegy generally attempts to balance its fixed-price physical and
financial purchase and sales commitments in terms of contract volumes, and the
timing of performance and delivery obligations. 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
natural gas marketing transactions in the U.K. and power marketing transactions,
which are both 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. However, as the
Company's investment in merchant generation capacity expands, changes in, and
the relationship between natural gas and electricity prices may impact the
financial performance and cash flow related to its portfolio of merchant power
generation assets.
At December 31, 1998, a $0.25 increase in the price of natural gas would
have increased operating margin of the Wholesale Gas and Power segment by
approximately $2.2 million, and a $0.25 decrease in the price of natural gas
would have decreased operating margin by approximately $1.9 million. The impact
of the $0.25 price movements referred to above are before application of market
reserves, which would likely reduce the after-tax earnings impact of these price
movements.
Operating margins associated with the Liquids segment's natural gas
gathering, processing and fractionation activities are very sensitive to changes
in natural gas liquids prices and the availability of inlet volumes. The impact
from changes in natural gas liquids prices results principally from the nature
of contractual terms under which natural gas is
27
<PAGE>
processed and products are sold. 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 which, in turn influences
the volumes of gas processed. Commodity price fluctuations may also affect the
operating margins derived from the Company's natural gas liquid and crude oil
marketing businesses. Based upon current levels of natural gas processing
activities and industry fundamentals, the estimated impact on annual operating
margins of each one-cent movement in the annual average price of natural gas
liquids approximates $8 to $10 million. The availability of inlet volumes
directly affects the utilization and profitability of the segment's businesses
throughout the Liquids Value Chain. The acquisition of inlet volumes is highly
competitive and the availability of such volumes to industry-wide participants
is also impacted by price variability. Unilateral decisions made by producers to
shut-in production or otherwise curtail workovers, reduce well maintenance
activities and/or delay or cancel drilling activities, as a result of depressed
commodity prices or other factors, negatively affects production available to
the entire mid-stream industry. Because such decisions are based upon the
pricing environment at any particular time, management cannot predict with
precision the impact that such decisions may have on its business.
SEASONALITY
Dynegy's revenue and operating margin are subject to fluctuations during
the year, primarily due to the impact certain seasonal factors have on sales
volumes and the prices of natural gas, electricity and natural gas liquids.
Natural gas sales volumes and operating margin 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, power marketing operations are typically impacted by higher demand
and commodity price volatility during the summer cooling season. Consistent with
power marketing, the Company's electricity generating facilities generally
experience peak demand during the summer cooling season, particularly for
merchant plant generating facilities. 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.
EFFECT OF INFLATION
Although Dynegy's operations are affected by general economic trends,
management does not believe inflation has had a material effect on the Company's
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business strategy has historically focused on acquisitions or
construction of core operating facilities in order to capture significant
synergies existing among these types of assets and Dynegy's natural gas, power
and natural gas liquids marketing businesses. 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 commercial paper issuances, money market lines of credit,
corporate credit agreements and various public debt issuances for its liquidity
and capital resource requirements. The following briefly describes the terms of
these arrangements.
COMMERCIAL PAPER AND MONEY MARKET LINES OF CREDIT
The Company uses commercial paper proceeds and borrowings under uncommitted
money market lines of credit for general corporate purposes, including short-
term working capital requirements. The Company maintains a commercial paper
program for amounts up to $800 million, as supported by its corporate credit
agreements. At December 31, 1998, approximately $519 million of commercial paper
was outstanding and $20 million was outstanding under existing money market
lines of credit.
CORPORATE CREDIT AGREEMENTS
Dynegy's corporate credit agreements are comprised of a $400 million, five-
year revolving credit agreement maturing in May 2003, and a $400 million, 364-
day revolving credit agreement maturing in May 1999. Both agreements
28
<PAGE>
provide funding for working capital, letters of credit and other general
corporate expenditures. The Company maintains an additional $240 million, 364-
day revolving credit agreement having a current maturity date of December 17,
1999. This facility also provides funding for general corporate purposes. At
December 31, 1998, letters of credit and borrowings under the corporate credit
agreements aggregated $27 million and, after consideration of the outstanding
commercial paper, aggregate unused borrowing capacity under the corporate credit
agreements approximated $495 million.
CANADIAN CREDIT FACILITY
In November 1998, an indirect wholly-owned Canadian subsidiary of the
Company entered into a $60 million, two-year revolving credit facility maturing
in November 2000. Borrowings under this agreement may be used for general
corporate purposes. At December 31, 1998, $40 million was outstanding under this
agreement.
PUBLIC DEBT
The Company has three separate public debt issues aggregating $500 million,
which mature in 2005, 2018 and 2026, respectively. Net proceeds derived from
these issues were used to reduce outstanding borrowings under credit
arrangements existing at the date of each respective issuance.
DEVELOPMENT PROJECT FINANCING
The consolidated long-term debt balance includes three notes aggregating
$103.1 million having recourse only to the assets of three power generation
projects. Each of the three notes represents a fifteen-year term loan obligation
payable in semi-annual installments of principal plus accrued interest.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED DEFERRABLE INTEREST
DEBENTURES
NGC 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
"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. Following the issuance of the Securities, the Trust
completed an exchange offer through which all of the outstanding Securities were
exchanged by the holders thereof for registered securities having substantially
the same rights and obligations.
OTHER MATTERS
STOCKHOLDER DIVESTITURE. In August 1998, the Company announced that NOVA had
given notice of its intent to divest its 25.4 percent stake in Dynegy,
representing approximately 38.8 million common shares. Chevron and BG each also
currently own 25.4 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. The uncertainty surrounding the change in ownership has
temporarily reduced the Company's financial flexibility by limiting its access
to certain capital market sectors. As a result, the Company's ability to finance
the full execution of its business strategy, as discussed elsewhere herein, may
be diminished if resolution of NOVA's divestiture is prolonged or is concluded
in a manner which negatively impacts Dynegy's stock price. Dynegy's management
and Board of Directors are actively pursuing alternatives to resolve this issue
in a timely manner. Management believes that the ultimate resolution of this
issue will not have a material adverse impact on its operations or financial
condition.
STOCK OPTIONS. Employee stock option grants made from 1994 to 1998 will
become exercisable during 1999 and 2000, respectively, resulting in the
potential exercise of approximately 9.6 million options during that two-year
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 the Company cannot predict the
timing or the number of shares which 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 which may become
available to the market.
29
<PAGE>
ACQUISITION AND CONSTRUCTION PROJECTS. Included in the 1999 budget is
approximately $440 million committed to construction projects in progress,
identified asset acquisitions, maintenance capital projects, environmental
projects, technology infrastructure and software enhancements, contributions to
equity investments and certain discretionary capital investment funds. The
capital budget is subject to revision as unforeseen opportunities or
circumstances arise. Funds committed in 1999 to announced acquisitions and
significant construction projects and other capital investments are as follows:
COMMITTED FUNDING FOR 1999 ACQUISITION AND CONSTRUCTION PROJECTS
ESTIMATED
PROJECTED FUNDING
PROJECT IN-SERVICE DATE COMMITMENT
- -------------------------------------------------------------------------------
($ in
thousands)
Encina Acquisition Mid-Year 1999 $178,000
Rockingham Power Generation Plant Mid-Year 2000 60,000
Lyondell Expansion Mid-Year 2000 8,700
Maintenance Capital Various 73,000
Information Technology Infrastructure and Various 55,000
Software
===============================================================================
COMMITMENTS. In conducting its operations, the Company routinely enters
into agreements that commit future cash flow to the lease and or acquisition of
assets used in its businesses. These commitments are typically associated with
capital projects, reservation charges for storage and transportation capacity,
office and equipment leases and other similar items. The terms of these
agreements vary based on the nature and intent of each transaction. The
following describes the more significant commitments outstanding at December 31,
1998.
A subsidiary of the Company has entered into various binding agreements
committing the Company to expend approximately $14 million for the acquisition
of combustion turbine generators. Currently, other non-binding agreements are
executed which could ultimately commit the Company to expend approximately $500
million in total over the next three years for the acquisition of 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.
In 1997, Dynegy received cash from a gas purchaser as an advance payment
for future natural gas deliveries over a ten-year period ("Advance Agreement").
As a condition of the Advance Agreement, Dynegy entered into a natural gas swap
with a third party under which Dynegy became a fixed-price payor on identical
volumes to those to be delivered under the Advance Agreement at prices based on
then current market rates. The cash payment was classified as an advance on the
balance sheet and is ratably reduced as gas is delivered to the purchaser under
the terms of the Advance Agreement. In addition, the purchaser pays a monthly
fee to Dynegy associated with delivered volumes. The Advance Agreement contains
certain non-performance penalties that impact both parties and as a condition
precedent, Dynegy purchased a surety bond in support of its obligations under
the Advance Agreement.
For a two-year period beginning January 1, 1998, the Company contracted for
1.3 billion cubic feet per day of firm transportation capacity to California on
the El Paso Natural Gas pipeline system. Pursuant to this arrangement, Dynegy is
obligated to pay a minimum of $38 million of reservation charges during 1999.
A wholly-owned subsidiary of the Company leases certain power generating
assets under agreements that are classified as operating leases. These
agreements had aggregate future minimum lease payments of approximately $410
million at December 31, 1998.
DIVIDEND REQUIREMENTS. Holders of the Company's Common Stock are entitled
to receive dividends if, when and as declared by the Board of Directors of the
Company out of funds legally available therefor. Currently, aggregate cash
dividends of $0.05 per share on the outstanding Common Stock are expected to be
declared by the Board of Directors and paid by the Company during 1999.
Accordingly, the Company also anticipates payment of dividends during 1999 on
the outstanding shares of its Series A Participating Preferred Stock of $0.05
per share on an annual basis.
30
<PAGE>
Stock Repurchase Plan. The Company has a stock repurchase program, approved
by the Board of Directors, that allows it to repurchase, from time to time, up
to 1.6 million shares of common stock 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 1,200,700 shares at a total cost of $17.4 million, or
$14.50 per share on a weighted average cost basis, through December 31, 1998.
QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES. The Company is
exposed to certain market risks inherent in the Company's financial instruments,
which arise from transactions entered into in the normal course of business. The
Company routinely enters into financial instrument contracts to hedge purchase
and sale commitments, fuel requirements and inventories in its natural gas,
natural gas liquids, crude oil, electricity and coal businesses in order to
minimize the risk of market fluctuations. Dynegy also monitors its exposure to
fluctuations in interest rates and foreign currency exchange rates and may
execute swaps, forward-exchange contracts or other financial instruments to
hedge and manage these exposures. The absolute notional contract amounts
associated with commodity risk-management, interest rate and forward exchange
contracts, respectively, were as follows:
<TABLE>
<CAPTION>
ABSOLUTE NOTIONAL CONTRACT AMOUNTS
DECEMBER 31,
---------------------------------------------
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Natural Gas (Trillion Cubic Feet) 4.179 2.558 1.535
Electricity (Million Megawatt Hours) 1.835 2.244 ---
Natural Gas Liquids (Million Barrels) 6.397 4.355 3.270
Crude Oil (Million Barrels) 18.800 14.920 2.034
Interest Rate Swaps (in thousands of US Dollars) $ 69,332 $180,000 $ ---
Fixed Interest Rate Paid on Swaps 8.067 6.603 ---
U.K. Pound Sterling (in thousands of US Dollars) $ 69,254 $ 74,638 $ ---
Average U.K. Pound Sterling Contract Rate (in $ 1.6143 $ 1.5948 $ ---
US Dollars)
Canadian Dollar (in thousands of US Dollars) $268,307 $ 37,041 $ ---
Average Canadian Dollar Contract Rate (in US $ 0.6710 $ 0.7240 $ ---
Dollars)
=============================================================================================
</TABLE>
Cash-flow requirements for these commodity risk-management, interest rate
and foreign exchange contracts were estimated based upon market prices in effect
at December 31, 1998. Cash-flow requirements were as follows:
<TABLE>
<CAPTION>
CASH FLOW REQUIREMENTS FOR RISK MANAGEMENT CONTRACTS
<S> <C> <C> <C> <C> <C> <C>
1999 2000 2001 2002 2003 BEYOND
----------------------------------------------------------------------------------------------
($ IN THOUSANDS)
Future estimated net
inflows (outflows) based
on year end market
prices/rates $38,104 $(9,574) $(3,475) $(2,473) $ 180 $1,073
======= ======= ======= ======= ===== ===========
</TABLE>
Accounting Pronouncements. As a result of recent pronouncements issued by
the Financial Accounting Standards Board and the Emerging Issues Task Force, the
Company's comprehensive method of accounting for energy-related contracts and/or
derivative instruments and hedging transactions is changing. Previously, only
North American fixed-price natural gas transactions were recorded at fair value,
net of future servicing costs and reserves as estimated by the Company. 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 Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("Statement No. 133") or by the Emerging Issues Task
Force's conclusions in EITF 98-10, "Accounting for Energy Trading and Risk
Management Activities" ("EITF 98-10"). However, provisions in Statement No. 133
and in EITF 98-10 will affect the accounting for other trading and marketing
operations that are currently accounted for under the accrual method. Further,
provisions in Statement No. 133 will affect the accounting for and disclosure of
other contractual arrangements and operations of the Company. The Company is
required to adopt the provisions of EITF 98-10 effective January 1, 1999. The
cumulative effect of the change in accounting resulting from adoption of the
provisions of EITF 98-10 is immaterial. The transition rules under Statement No.
133 provide for early adoption as of the beginning of any fiscal
31
<PAGE>
quarter subsequent to June 15, 1998. Dynegy intends to adopt the provisions of
Statement No. 133 within the timeframe and in accordance with the requirements
provided by that statement.
Management believes that the adoption of the provisions of these standards
may affect the variability of future periodic results reported by Dynegy, as
well as its competitors, as market conditions and resulting valuations change
from time to time. Such earnings variability, if any, will likely result
principally from valuation issues arising from imbalances between supply and
demand created by illiquidity in certain commodity markets resulting from, among
other things, a lack of mature trading and price discovery mechanisms,
transmission and/or transportation constraints resulting from regulation or
other issues in certain markets and the need for a representative number of
market participants maintaining the financial liquidity and other resources
necessary to compete effectively. Management will monitor exposure to these and
other market and business risks and will adjust valuation factors 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 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. The
Company has completed its inventory of corporate-wide imbedded systems issues as
well as its inventory of corporate hardware and software applications. The
Company is substantially complete with its inventorying of hardware and software
infrastructure at remote locations. A final risk assessment, testing and
remediation activity is ongoing and will be substantially underway on all of the
Company's core systems and business applications at both corporate and field
locations by the end of the first quarter 1999. It is expected that all core
systems and business applications will be Year 2000 ready by September 1999. In
addition, the Company is focusing assessment efforts to determine that major
customers and suppliers are also Year 2000 ready. The project team is also
formulating contingency plans to address alternatives for the Company should
Year 2000 issues disrupt operations. As part of the plan, the Company is
developing contingency plans that address essential aspects of the Year 2000
problem. The contingencies identified include:
. Satisfactory remediation of all core systems and business applications is
not executed by December 31, 1999;
. System modifications and conversions instituted by significant customers or
suppliers fail to satisfactorily remediate Year 2000 issues by December 31,
1999; and
. Year 2000 issues remain unidentified by Dynegy, its industry partners or
ancillary service providers, which disrupt operations of the Company.
Dynegy's contingency plans are being designed to minimize any disruptions or
other adverse effects resulting from Year 2000 incompatibilities regarding core
systems and business applications and to facilitate the early identification and
remediation of system problems that manifest themselves after December 31, 1999.
In addition to software and hardware issues directly affecting commercial
operations of the Company, the contingency plan addresses, for example, loss of
electricity, telecommunications, building access, security and other factors.
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 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.
The Securities and Exchange Commission requires that public companies
forecast the most reasonable likely worst-case Year 2000 scenario. In doing so,
the Company assumed that its Year 2000 plan is ineffective. In reviewing a
worst-case scenario, the Company contemplated issues that, although considered
highly unlikely, must be contemplated in such a review. Issues contemplated in
this review included total failure of financial and operational systems, total
loss of supplies from third parties, total loss of transportation, storage and
similar operational capabilities and widespread extended loss of utilities,
building access and other similar items. Under this scenario, the Company would
face substantial claims by third parties and loss of revenue and cash flow
resulting from, among other things, service interruptions, the inability to meet
contractual obligations and the inability to invoice or pay third parties timely
and accurately. Further, such a disruption could affect the operational
integrity of certain commercial assets, the result of which could have
operational, safety and environmental implications. The Company is not able to
quantify the financial effect of the worst case scenario described
32
<PAGE>
above and will continue to actively monitor business conditions with the aim of
assessing and quantifying material adverse effects, if any, that result or may
result from the Year 2000 issue.
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. Aggregate
current cost estimates for the entire Year 2000 project are projected to range
between $8 and $10.5 million. Approximately $2 million of this amount was
expended during 1998 related to this project. 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.
ENVIRONMENTAL MATTERS. Dynegy's operations are subject to extensive
federal, state, provincial and local statutes, rules and regulations governing
the discharge of materials into the environment or otherwise relating to
environmental protection. Compliance with these statutes, rules and regulations
requires capital and operating expenditures including those related to
monitoring and permitting at various operating facilities and the cost of
remediation obligations. The Company's environmental expenditures have not been
prohibitive in the past, but are anticipated to increase in the future with the
trend toward stricter standards, greater regulation, more extensive permitting
requirements and an increase in the number of assets operated by the Company
subject to environmental regulation.
Dynegy's aggregate expenditures for compliance with laws and regulations
related to the discharge of materials into the environment or otherwise related
to the protection of the environment approximated $9 million in 1998. Total
environmental expenditures for both capital and operating maintenance and
administrative costs are not expected to exceed $14 million in 1999.
CONCLUSION
The Company continues to believe that it will be able to meet all
foreseeable cash requirements, including working capital, capital expenditures
and debt service, from operating cash flow, supplemented by borrowings under its
various credit facilities, if required.
33
<PAGE>
RESULTS OF OPERATIONS
The following table reflects certain operating and financial data for the
Company's business segments for the years ended December 31, 1998, 1997 and
1996, respectively.
<TABLE>
<CAPTION>
DYNEGY'S OPERATING AND FINANCIAL DATA
Years Ended December 31,
------------------------------------------
1998 1997 1996
------------------------------------------
($ in thousands)
<S> <C> <C> <C>
FINANCIAL CONTRIBUTION (1) (2):
WHOLESALE GAS AND POWER -
Natural Gas Marketing $115,895 $ 99,375 $100,243
UK Gas Marketing 14,164 3,917 ---
Electric Power Marketing 42,816 4,526 3,379
Power Generation 63,400 18,987 ---
-------- -------- --------
Total Wholesale Gas and Power Operating Margin 236,275 126,805 103,622
-------- -------- --------
Gas Marketing Investments 18,353 22,943 20,090
Electric Power Marketing Investments 509 518 606
Power Generation Investments 56,380 12,780 ---
-------- -------- --------
Total Wholesale Gas and Power Equity Earnings 75,242 36,241 20,696
-------- -------- --------
TOTAL WHOLESALE GAS AND POWER FINANCIAL CONTRIBUTION 311,517 163,046 124,318
-------- -------- --------
LIQUIDS -
Natural Gas Processing - Field Plants 73,478 159,710 124,054
Natural Gas Processing - Straddle Plants 7,786 30,097 42,198
Fractionation (7) 28,379 25,813 20,223
Natural Gas Liquids Marketing 53,641 22,639 48,355
Crude Oil Marketing 9,138 500 11,583
Natural Gas Gathering and Transmission 10,208 16,757 18,140
International LPG Sales 9,782 2,973 1,325
-------- -------- --------
Total Liquids Operating Margin 192,412 258,489 265,878
-------- -------- --------
Natural Gas Processing Investments 5,643 9,004 2,429
Fractionation Investments 3,741 6,624 3,360
Gathering and Transmission Investments 6,412 7,090 1,590
-------- -------- --------
Total Liquids Equity Earnings 15,796 22,718 7,379
-------- -------- --------
TOTAL LIQUIDS FINANCIAL CONTRIBUTION 208,208 281,207 273,257
-------- -------- --------
TOTAL FINANCIAL CONTRIBUTION $519,725 $444,253 $397,575
======== ======== ========
CONSOLIDATED OPERATING MARGIN $428,687 $385,294 $369,500
CONSOLIDATED EQUITY EARNINGS 91,038 58,959 28,075
-------- -------- --------
TOTAL FINANCIAL CONTRIBUTION $519,725 $444,253 $397,575
======== ======== ========
OPERATING STATISTICS (2) :
Natural Gas Marketing (Bcf/d) -
Domestic Sales Volumes (3) 5.9 6.1 4.3
Canadian Sales Volumes (4) 2.3 1.9 ---
UK Sales Volumes (6) 0.7 0.2 ---
-------- -------- --------
8.9 8.2 4.3
======== ======== ========
Electric Power Marketing - Million Megawatt Hours Sold 120.8 94.7 14.9
Power Generation (Million Megawatt Hours Generated) -
Gross 15.9 7.2 ---
Net 9.8 4.3 ---
Natural Gas Liquids Processed (MBbls/d - Gross) -
Field Plants 91.8 89.8 57.4
Straddle Plants 30.9 46.4 36.9
Fractionation - Barrels Received for Fractionation (MBbls/d) (7) 192.5 201.3 169.1
NGL Marketing - Sales Volumes (MBbls/d) 410.7 413.9 245.0
Crude Oil Marketing - Sales Volumes (MBbls/d) 239.6 168.3 106.0
Natural Gas Gathering and Transmission (MMcf/d) 0.3 0.4 0.3
International LPG Sales Volumes (MMBbls) (5) 26.7 33.5 1.7
===================================================================================================================
</TABLE>
34
<PAGE>
(1) Financial contribution is defined by the Company as the sum of the
segment's operating margin and equity earnings from unconsolidated
affiliates. The Company considers this a key financial benchmark for its
operations due to the significance of the Company's investments in
unconsolidated affiliates as a component of overall results. During 1998,
1997 and 1996, the Company received cash dividends on these investments
approximating $85 million, $64 million and $7 million, respectively.
(2) The Destec acquisition was accounted for as an acquisition of a business in
accordance with the purchase method of accounting and the results of
operations attributed to the acquired business are included in the
Company's financial statements and operating statistics effective July 1,
1997. The Chevron Combination was accounted for as an acquisition of
assets under the purchase method of accounting and the results of
operations attributed to the acquired assets are included in the Company's
financial statements and operating statistics effective September 1, 1996.
(3) Includes immaterial amounts of inter-company gas sales for all periods.
(4) Represents volumes sold by Dynegy Canada, Inc. for the period from April 1,
1997 through December 31, 1997 and for the year ended December 31, 1998.
Volumes sold by NCL prior to the reorganization are not comparable.
(5) Includes 5.8 MMBbls of inter-company sales for the year ended December 31,
1997. A material amount of volumes sold in 1996 are inter-company sales
volumes.
(6) Represents volumes sold by Dynegy UK Ltd. for the years ended December 31,
1998 and 1997, respectively. Volumes sold by Accord prior to the
reorganization are not comparable.
(7) Effective January 1, 1997, the Company sold its interest in the Mont
Belvieu I fractionator and in 1998 the Company reduced its interest in the
Cedar Bayou Fractionator from 100 percent to 88 percent.
THREE YEARS ENDED DECEMBER 31, 1998
For the year ended December 31, 1998, the Company realized net income of
$108.4 million, or $0.66 per diluted share. This compares with a net loss of
$102.5 million, or $0.68 per share, and net income of $113.3 million, or $0.83
per diluted share, in 1997 and 1996, respectively. The comparability of results
period to period was impaired by the recognition of net non-recurring, after-tax
gains totaling $10.8 million during 1998, net after-tax charges totaling $218.5
million recognized in 1997 and after-tax charges of $2.5 million recognized in
1996. In addition, the comparability of results for the three years is
influenced by the Destec Acquisition that was effective July 1, 1997, and the
Chevron Combination that was effective September 1, 1996. Revenues in each of
the three years in the period ended December 31, 1998, totaled $14.3 billion,
$13.4 billion and $7.3 billion, respectively. Operating cash flows totaled
$250.8 million for the year ended December 31, 1998, compared with cash flows of
$278.6 million in 1997 and a use of cash from operations during the 1996 period
of $31.0 million.
Non-recurring items in the current period relate to a $17.1 million after-tax
gain on the sale of Ozark offset by a $6.3 million after-tax severance charge.
The 1997 loss included one-time charges principally associated with the
abandonment and impairment of certain operating and non-operating assets,
inventory obsolescence and lower-of-cost-or-market writedowns, reserves for
contingencies and other obligations, a charge for a hedging related loss and a
charge associated with a change in the method of accounting for certain business
process re-engineering and information technology transformation costs. The 1996
charge related to relocation of the Company's corporate headquarters.
After consideration of the non-recurring items described above, Dynegy's
normalized net income for the year ended December 31, 1998, approximated $97.6
million, or $0.59 per diluted share, compared with normalized net income of
$108.7 million, or $0.65 per diluted share, in 1997 and $115.8 million, or $0.85
per diluted share, in 1996. The lower normalized results in 1998 as compared
with the previous two years generally reflect a material increase in earnings
derived from the Company's Wholesale Gas and Power segment offset by the
significant negative impact that crude and NGL commodity prices had on the
Liquids segment in 1998, as well as a trend towards higher overhead,
depreciation and interest costs during the three-year period.
Consolidated operating margin for each of the three years in the period ended
December 31, 1998, totaled $428.7 million, $385.3 million and $369.5 million,
respectively. For the year ended December 31, 1998, the Company reported
operating income of $120.1 million, compared with an operating loss of $143.4
million and operating income of $197.8 million for the 1997 and 1996 periods,
respectively. Operating income in both the 1998 and 1997 periods was negatively
impacted by the pre-tax effect of portions of the aforementioned non-recurring
items. The increase in depreciation and amortization expense during the three
year period reflects the depreciable assets acquired in the Chevron Combination
and the Destec Acquisition as well as the continued expansion of the Company's
depreciable asset base through other asset acquisitions and capital projects
completed during the three-year period. Depreciation and amortization expense in
the 1998 period benefited from the prospective effect of the asset impairments
and abandonments recognized in 1997. The increase in general and administrative
expenses period to period principally reflects the incremental costs associated
with the operations acquired in the strategic acquisitions, the restructuring of
the Company's businesses in Canada and the United Kingdom, the expansion of
ECI's operations, the growth of the international LPG operations, non-
capitalizable consulting and other costs required to support technology
infrastructure improvements and, to a lesser degree, expenses related to
identifying and resolving Year 2000 issues.
35
<PAGE>
During the three-year period ended December 31, 1998, the Company
significantly increased its investment in unconsolidated affiliates, principally
as a result of the ownership interests and legal structures employed in a
majority of the investments made by the Wholesale Gas and Power segment. As a
result, the financial results of Dynegy's equity investments to its consolidated
operating results have become more significant. The Company has structured these
investments to mitigate financial risk to the corporation. In addition, the
bylaws of a majority of these investments require periodic cash distributions
allowing Dynegy to manage its share of cash flow generated by these investments
in an efficient manner. The Company's equity share in the earnings of its
unconsolidated affiliates contributed an aggregate $91.0 million to 1998 pre-tax
results, compared to $59.0 million in 1997 and $28.1 million in 1996. Cash
distributions received from these investments during each of the three years in
the period ended December 31, 1998 approximated $85 million, $64 million and $7
million, respectively. The following table provides a summary of equity earnings
by investment for the comparable periods:
<TABLE>
<CAPTION>
DYNEGY'S EQUITY EARNINGS FROM UNCONSOLIDATED AFFILIATES
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Accord Energy Limited (1) $ 21,822 $ 25,885 $ 17,131
Other Gas Marketing Investments, Including (3,469) (2,942) 2,959
NCL (1)
Electric Power Marketing Investments 509 518 606
Power Generation Investments 56,380 12,780 --
Gulf Coast Fractionators 3,741 6,624 3,360
West Texas LPG Pipeline Limited Partnership 6,428 7,162 1,661
Venice Energy Services Company, L.L.C. 4,310 8,052 2,429
Other Liquids Businesses Investments, net 1,317 880 (71)
--------- --------- ---------
$ 91,038 $ 58,959 $ 28,075
========= ========= =========
============================================================================================================
</TABLE>
1. For a discussion of the Accord and NCL restructurings, refer to Note 11 of
the Consolidated Financial Statements.
Interest expense totaled $75.0 million for the year ended December 31,
1998, compared with $63.5 million and $46.2 million for the comparable 1997 and
1996 periods. The higher interest expense period to period is attributed to
higher average outstanding principal amounts resulting primarily from debt
assumed in and resulting from the Chevron Combination and the Destec Acquisition
offset partially by interest rates that trended lower over the three-year
period.
Other income and expenses, net benefited the operating results in 1998
and 1997 by $39.1 million and $7.9 million, respectively, while the 1996 period
reflected a net charge of $10 million. Each of the net amounts results
principally from the pre-tax effect of certain of the aforementioned non-
recurring items recognized in each period as well as numerous other less
significant recurring and non-recurring income and expense items.
During the second quarter of 1997, the Company sold $200 million
aggregate liquidation amount of 8.316% Subordinated Capital Income Securities.
Accumulated distributions associated with these Securities totaled $16.6 million
and $9.8 million for the years ended December 31, 1998 and 1997, respectively.
The Company reported an income tax provision of $50.3 million in 1998,
compared to an income tax benefit of $62.2 million in 1997 and an income tax
provision of $56.3 million in 1996, reflecting effective rates of 32 percent,
(41) percent and 33 percent, respectively. In general, differences between the
aforementioned effective rates and the statutory rate of 35 percent result
primarily from permanent differences attributable to amortization of certain
intangibles, permanent differences arising from the effect of certain foreign
equity investments and state income taxes.
WHOLESALE GAS AND POWER -
Aggregate operating margin and equity earnings reported by this
segment totaled $311.5 million for the year ended December 31, 1998, compared to
$163.0 million in 1997 and $124.3 million in 1996. The material increase in
financial contribution by this segment period to period results from, among
other things, the successful execution of the Merchant Leverage Effect during
the 1998 period, the expansion of the Company's investment in power generation
over the three-year period and the impetus placed by this segment on quality of
operating margins over the quantity of sales volumes.
36
<PAGE>
Worldwide gas marketing operations generated operating margin and
equity earnings for the year ended December 31, 1998 of $148.4 million compared
to $126.2 million in 1997 and $120.3 million in 1996, a 23 percent growth during
the three-year period. Market conditions in 1998 and 1997 were influenced by
unseasonably warm weather in the winter months that eliminated any significant
volatility in commodity prices during those periods. Conversely, the 1996 period
included a very cold first quarter that resulted in significant regional swings
in commodity prices, benefiting per unit margins in that period. The growth in
financial contribution from this business reflects the Company's expanded gas
marketing operations in Canada and in the United Kingdom as well as the emphasis
on the quality of the Company's customer base, which had its most significant
impact on domestic operations. Worldwide sales volumes totaled 8.9 Bcf/d in
1998, 8.2 Bcf/d in 1997 and 4.3 Bcf/d in 1996. Worldwide per-unit margins were
$0.040, $0.035 and $0.064 for each of three years in the period ended December
31, 1998, respectively.
Power marketing operations generated operating margin and equity earnings
for the year ended December 31, 1998 of $43.3 million compared to $5.0 million
in 1997 and $4.0 million in 1996. The dramatic growth in financial contribution
from this business in 1998 reflects the value extraction derived from the
extreme market volatility experienced in certain U.S. markets, particularly in
the mid-west, during the 1998 summer coupled with an eightfold increase in sales
volumes during the three-year period. Operating margins in this business also
benefited from the selectivity analysis performed on its customer base.
The power generation business reported explosive growth in 1998, generating
operating margin and equity earnings for the year of $119.8 million. Results for
1998 are not comparable with 1997 as a result of the acquisition of Destec in
mid-year 1997. However, the execution of Dynegy's strategy of integrating the
businesses in this segment and leveraging off the physical assets to enhance the
returns from its marketing and trading businesses was successful during the 1998
period.
LIQUIDS -
Aggregate operating margin and equity earnings reported by this
segment totaled $208.2 million for the year ended December 31, 1998, compared to
$281.2 million in 1997 and $273.3 million in 1996. The decrease in financial
contribution by this segment period to period results primarily from the
negative impact that NGL and crude oil commodity prices had on operations.
During 1998, NGL prices averaged $0.25 per gallon compared to $0.34 per gallon
in 1997 and $0.39 per gallon in 1996. Likewise, crude oil prices gravitated
downward during the three-year period averaging $11.97 per barrel in 1998,
$18.64 per barrel in 1997 and $20.42 per barrel in 1996. The commodity price
environment during 1998 placed significant downward pressure on operating
margins. The initiatives undertaken by this segment beginning in the fourth
quarter of 1997 and executed throughout 1998 allowed the businesses to improve
operating efficiencies, reduce costs and mitigate exposure to asset impairments
resulting from commodity price variability. During 1997, operating margins from
these businesses were negatively impacted by high-cost inventory purchased
during the fourth quarter of 1996, which was recognized in operating results
during the first quarter of 1997, culminating in a lower-of-cost-or-market
writedown of $12.3 million at March 31, 1997. Additionally, included in the 1997
period are pre-tax charges related to a lower-of-cost-or-market writedown of
crude oil inventory of $2.7 million and a hedge-related loss of $8.3 million.
The 1996 period results are not comparable as a result of the acquisition of the
mid-stream operations of Chevron effective September 1, 1996.
Operationally, this segment's businesses continue to reflect a
leadership position in significantly all domestic mid-stream businesses.
Aggregate domestic natural gas liquids processing volumes totaled 122.7 thousand
gross barrels per day in 1998 compared to an average 136.2 thousand gross
barrels per day during 1997 and 94.3 thousand gross barrels per day in 1996. The
lower volumes in 1998 reflect the economic decisions made during the 1998 period
to reduce production at its straddle processing plants principally as a result
of the relationship of natural gas and NGL commodity prices. Fractionation
volumes and natural gas liquids marketing volumes remained relatively level with
1997 amounts averaging 192.5 and 410.7 thousand barrels per day, respectively,
during 1998. Crude oil marketing volumes increased 126 percent during the three-
year period averaging 239.6 thousand barrels per day during 1998. The Company's
LPG sales volumes reduced during 1998 as compared with 1997. However, the
effect of lower sales volumes was more than offset by significantly higher unit
margins in 1998.
OPERATING CASH FLOW
Cash flow from operating activities totaled $250.8 million during the
year ended December 31, 1998 compared to $278.6 million during 1997. For the
year ended December 31, 1996, the Company used $31 million in support of its
operations. 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
37
<PAGE>
accrued liabilities, reflect expenditures or recognition of liabilities for
insurance costs, certain deposits, salaries, taxes other than on income, certain
deferred revenue accounts and other similar items. Fluctuations in these
accounts, period to period, reflect changes in the timing of payments or
recognition of liabilities and are not directly impacted by seasonal factors.
The 1997 period benefited from the advance payment for future gas deliveries
previously discussed.
CAPITAL EXPENDITURES, COMMITMENTS AND DIVIDEND REQUIREMENTS
Capital Expenditures and Investing Activities. During the year ended
December 31, 1998, the Company invested a net $379.5 million, principally on
discrete asset acquisitions primarily focused in the Wholesale Gas and Power
segment. Expenditures were also made to complete construction of the Lake
Charles, Louisiana fractionator, for capital improvements at existing facilities
and on capital additions at the Company's headquarters. During the period, the
Company divested itself of its investment in Ozark, as well as certain non-
strategic Liquids Segment assets. Aggregate net proceeds from these dispositions
approximated $84 million.
During the year ended December 31, 1997, the Company spent a net $510.7
million, principally on the Destec Acquisition, the purchase of NCL's gas
marketing operations and on acquisitions of additional interests in gas
processing facilities, pipelines and other mid-stream assets. Expenditures were
also made on capital improvements at existing facilities and on capital
additions at the Company's headquarters. The Company invested $27.7 million in
its unconsolidated affiliates, principally for amounts committed to VESCO.
During the period, the Company divested itself of the Mont Belvieu I
fractionation facility pursuant to an agreement reached with the Federal Trade
Commission related to the Chevron Combination. Further, Dynegy sold its 49.9
percent interest in NCL, as part of the restructuring of that investment and
consummated the sales of certain non-strategic assets acquired in the Destec
Acquisition. Aggregate net proceeds from these dispositions, plus proceeds from
other immaterial dispositions, approximated $453 million.
Dynegy acquired Destec on June 27, 1997, in a transaction valued at $1.26
billion, or $21.65 per share of Destec common stock. Concurrent with this
acquisition, Dynegy sold Destec's international facilities and operations to The
AES Corporation for $439 million. In July and August 1997, the Company sold
Destec's interest in a partnership that owned a power generation facility and
certain oil, gas and lignite reserves, respectively, for aggregate proceeds of
$296 million. Proceeds from the sales of these non-strategic assets were used to
retire debt incurred in the acquisition.
During 1996, the Company spent a net $111 million in acquisition, capital
project and asset maintenance activities. These funds were expended principally
for maintenance of existing assets, the acquisition of processing plants,
gathering lines, pipelines and on discrete capital assets. In addition, during
1996, the Company completed the acquisitions of LPG Services Group, Inc., a
propane gas marketing and distribution company, and Wilmar Energy Marketing, a
Calgary based crude oil marketer. Investments in unconsolidated affiliates
included contributions of $18.6 million to VESCO. As reflected in the
accompanying notes to the consolidated financial statements, the Chevron
Combination was consummated principally through the assumption of debt and the
issuance of capital stock.
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. During the years ended
December 31, 1998, 1997 and 1996, the Company paid approximately $8.0 million,
$7.9 million and $6.7 million in cash dividends and distributions, 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 545,800 shares of its stock through open-market trades during the year
ended December 31, 1998, at a total cost of $6.9 million, or $12.65 per share on
a weighted average cost basis. For the year ended December 31, 1997, the
Company acquired 654,900 shares of its common stock in open-market transactions
for an aggregate cost of $10.5 million, or $16.04 per share on a weighted
average cost basis.
38
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedule of the Company
are set forth at pages F-1 through F-36 inclusive, found at the end of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain of the information required by this Item 10 will be contained in
the definitive Proxy Statement of the Company for its 1999 Annual Meeting of
Stockholders (the "Proxy Statement") under the headings "Proposal 1 -- Election
of Directors" and "Executive Compensation -- Section 16(a) Beneficial Ownership
Reporting Compliance" and is incorporated herein by reference. The Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after December 31, 1998. Reference is also made to the information
appearing in Part I of this Annual Report on Form 10-K under the caption "Item
1A. Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation will be contained in the
Proxy Statement under the heading "Executive Compensation" and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding ownership of certain of the Company's outstanding
securities will be contained in the Proxy Statement under the heading "Principal
Stockholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding related party transactions will be contained in the
Proxy Statement under the headings "Principal Stockholders", "Proposal 1 --
Election of Directors" and "Executive Compensation -- Indebtedness of
Management" and "-- Certain Relationships and Related Transactions" and is
incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 8-K
The following documents, which have been filed by the Company with the
Securities and Exchange Commission pursuant to the Securities and Exchange Act
of 1934, as amended, are by this reference incorporated in and made a part of
this statement:
a. Financial Statements -- Consolidated financial statements of the Company
and its subsidiaries are incorporated under Item 8. of this Form 10-K.
c. b. Exhibits -- The following instruments and documents are included as
exhibits to this Form 10-K.
39
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
2.1 - Combination Agreement and Plan of Merger, dated May, 22, 1996, by and between NGC
Corporation, Chevron U.S.A. Inc. and Midstream Combination Corp.(7)
2.2 - Amendment to Combination Agreement, dated as of August 29, 1996, by and among NGC
Corporation, Chevron U.S.A. Inc. and Midstream Combination Corp.(5)
2.3 - Agreement and Plan of Merger by and among Destec Energy, Inc., The Dow Chemical Company, NGC
Corporation and NGC Acquisition Corporation II dated as of February 17, 1997. (8)
2.4 - Asset Purchase Agreement by and between NGC Corporation and The AES Corporation dated as of
February 17, 1997. (8)
2.5 - First Amendment to Asset Purchase Agreement by and between NGC Corporation and The AES
Corporation dated June 29, 1997.(9)
2.6 - Asset Purchase Agreement between Destec Energy, Inc. and ECT EOCENE Enterprises, Inc. dated
July 1, 1997.(9)
3.1 - Restated Certificate of Incorporation of NGC Corporation. (8)
3.2 - Certificate of Amendment to Restated Certificate of Incorporation of NGC Corporation (14)
3.3 - Bylaws of Dynegy Inc. (14)
4.1 - Warrant exercisable for 6,228 shares of Common Stock of NGC Corporation registered in the
name of J. Otis Winters. (2)
4.2 - Indenture, dated as of December 11, 1995, by and between NGC Corporation, the Subsidiary
Guarantors named therein and the First National Bank of Chicago, as Trustee.(4)
4.3 - First Supplemental Indenture, dated as of August 31, 1996, by and among NGC Corporation, the
Subsidiary Guarantors named therein, and The First National Bank of Chicago, as Trustee,
supplementing and amending the Indenture dated as of December 11, 1995. (5)
4.4 - Second Supplemental Indenture, dated as of October 11, 1996, by and among NGC Corporation,
the Subsidiary Guarantors named therein, and The First National Bank of Chicago, as Trustee,
supplementing and amending the Indenture dated as of December 11, 1995. (5)
4.5 - Amended and Restated Credit Agreement dated as of June 27, 1997, among NGC Corporation and
The First National Bank of Chicago, Individually and as Agent, The Chase Manhattan Bank and
NationsBank of Texas, N.A., Individually and as Co-Agents, and the Lenders Named therein.(9)
4.6 - First Amendment to Amended and Restated Credit Agreement, dated November 24, 1997, among NGC
Corporation and The First National Bank of Chicago, Individually and as Agent, The Chase
Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents for the Lenders
named therein. (13)
4.7 - Second Amendment to Amended and Restated Credit Agreement, dated as of February 20, 1998,
among NGC Corporation and The First National Bank of Chicago, Individually and as Agent, The
Chase Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents for the
Lenders named therein. (13)
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
4.8 - Subordinated Debenture Indenture between NGC Corporation and The First National Bank of
Chicago, as Debenture Trustee, dated as of May 28, 1997. (10)
4.9 - Amended and Restated Declaration of Trust among NGC Corporation, Wilmington Trust Company,
as Property Trustee and Delaware Trustee, and the Administrative Trustees named therein, dated
as of May 28, 1997. (10)
4.10 - Series A Capital Securities Guarantee executed by NGC Corporation and The First National Bank
of Chicago, as Guarantee Trustee, dated as of May 28, 1997. (10)
4.11 - Common Securities Guarantee of NGC Corporation dated as of May 28, 1997. (10)
4.12 - Registration Rights Agreement, dated as of May 28, 1997, among NGC Corporation, NGC
Corporation Capital Trust I, Lehman Brothers, Salomon Brothers Inc. and Smith Barney Inc. (10)
4.13 - Second Supplemental Indenture among NGC Corporation, Destec Energy, Inc. and The First
National Bank of Chicago, as Trustee, dated as of June 30, 1997, supplementing and amending the
Indenture dated as of June 30, 1997. (11)
4.14 - Fourth Supplemental Indenture among NGC Corporation, Destec Energy, Inc. and The First
National Bank of Chicago, as Trustee, dated as of June 30, 1997, supplementing and amending the
Indenture dated as of December 11, 1995. (11)
4.15 - Fifth Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein
and The First National Bank of Chicago, as Trustee, dated as of September 30, 1997,
supplementing and amending the Indenture dated as of December 11, 1995. (13)
4.16 - Sixth Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein
and The First National Bank of Chicago, as Trustee, dated as of January 5, 1998, supplementing
and amending the Indenture dated as of December 11, 1995. (13)
4.17 - Seventh Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein
and The First National Bank of Chicago, as Trustee, dated as of February 20, 1998, supplementing
and amending the Indenture dated as of December 11, 1995. (13)
4.18 - Indenture, dated as of September 26, 1996, restated as of March 23, 1998, to include
amendments in the First through Fifth Supplemental Indentures, between NGC Corporation and The
First National Bank of Chicago, as Trustee. (13)
4.19 - Credit Agreement dated as of May 27, 1998, among NGC Corporation and The First National
Bank of Chicago, Individually and as Administrative Agent, The Chase Manhattan Bank,
Individually and as Syndication agent and NationsBank, N.A., Individually and as Documentation
Agent and the Lenders named therein. (12)
4.20 - 364-Day Revolving Credit Agreement dated as of May 27, 1998, among NGC Corporation and The
First National Bank of Chicago, Individually and as Administrative Agent, The Chase Manhattan
Bank, Individually and as Syndication agent and NationsBank, N.A., Individually and as
Documentation Agent and the Lenders named therein. (12)
10.1 - Agreement of Sale and Purchase of Assets, dated as of May 5, 1991, as amended on June 6,
1991 and August 30, 1991, by and between OXY USA Inc. and Trident Energy, Inc. (1)
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
10.2 - Master Agreement on Gas Processing, dated as of May 5, 1991, by and between OXY USA Inc. and
Trident NGL, Inc.(1)
+ 10.3 - Dynegy Inc. Amended and Restated 1991 Stock Option Plan.
+ 10.4 - Dynegy Inc. 1998 U.K. Stock Option Plan
+ 10.5 - Dynegy Inc. Amended and Restated Employee Equity Option Plan.
10.6 - The Amended and Restated Natural Gas Clearinghouse Deferred Compensation Plan, dated February
28, 1992.(3)
10.7 - Employment Agreement dated April 2, 1996 by and between NGC Corporation and Stephen A.
Furbacher.(6)
10.8 - Employment Agreement, dated as of April 30, 1997, between Charles L. Watson and NGC
Corporation. (13)
10.9 - Employment Agreement, dated as of May 8, 1997, between Stephen W. Bergstrom and NGC
Corporation. (13)
10.10 - Employment Agreement, dated as of April 14, 1997, between John U. Clarke and NGC Corporation.
(13)
+ 10.11 - First Amendment to Employment Agreement, dated December 11, 1998, between John U. Clarke and
NGC Corporation (n/k/a Dynegy Inc.).
10.12 - Employment Agreement, dated as of May 21, 1997, between Kenneth E. Randolph and NGC
Corporation. (13)
+ 10.12a - Employment Agreement, dated as of July 1, 1997, by and between Dan Ryser and NGC Corporation.
10.13 - Lease Agreement entered into on June 12, 1996 between Metropolitan Life Insurance Company and
Metropolitan Tower Realty Company, Inc., as landlord, and NGC Corporation, as tenant. (6)
10.14 - First Amendment to Lease Agreement entered into on June 12, 1996 between Metropolitan Life
Insurance Company and Metropolitan Tower Realty Company, Inc., as landlord, and NGC Corporation,
as tenant. (6)
10.15 - Contribution and Assumption Agreement, dated as of August 31, 1996, among Chevron U.S.A.
Inc., Chevron Pipe Line Company, Chevron Chemical Company and Midstream Combination Corp. (5)
10.16 - Scope of Business Agreement, dated May 22, 1996 between Chevron Corporation and NGC
Corporation. (6)
10.17 - Stockholders Agreement dated, May 22, 1996, among BG Holdings, Inc., NOVA Gas Services (U.S.)
Inc. and Chevron U.S.A. Inc. (6)
10.18 - Registration Rights Agreement, dated as of August 31,1996, among NGC Corporation, BG
Holdings, Inc., NOVA Gas Services (U.S.) Inc. and Chevron U.S.A. Inc. (5)
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
10.19 - Master Alliance Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc., Chevron
Chemical Company, Chevron Pipe Line Company, and other Chevron U.S.A. Inc. affiliates, NGC
Corporation, Natural Gas Clearinghouse, Warren Petroleum Company, Limited Partnership, Electric
Clearinghouse, Inc. and other NGC Corporation affiliates. (5)
* 10.20 - Natural Gas Purchase and Sale Agreement, dated as of August 30, 1996, among Chevron U.S.A.
Inc. and Natural Gas Clearinghouse. (5)
* 10.21 - Master Natural Gas Processing Agreement, dated as of September 1, 1996, among Chevron U.S.A.
Inc. and Warren Petroleum Company, Limited Partnership. (5)
* 10.22 - Master Natural Gas Liquids Purchase Agreement, dated as of September 1, 1996, among Warren
Petroleum Company, Limited Partnership and Chevron U.S.A. Inc. (5)
* 10.23 - Gas Supply and Service Agreement, dated as of September 1, 1996, among Chevron Products
Company and Natural Gas Clearinghouse. (5)
10.24 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc.
and Chevron U.S.A. Production Company. (6)
10.25 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc.
and Chevron Chemical Company. (6)
10.26 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc.
and Chevron Products Company. (6)
* 10.27 - Feedstock Sale and Refinery Product Purchase Agreements, dated as of September 1, 1996, among
Chevron Products Company and Warren Petroleum Company, Limited Partnership.(5)
* 10.28 - Refinery Product Sale Agreement (Hawaii), dated as of September 1, 1996, among Warren
Petroleum Company, Limited Partnership and Chevron Products Company. (5)
* 10.29 - Feedstock Sale and Refinery Product Master Services Agreement, dated as of September 1, 1996,
among Chevron Products Company and Warren Petroleum Company, Limited Partnership. (5)
* 10.30 - CCC Product Sale and Purchase Agreement dated as of September 1, 1996, among Warren Petroleum
Company, Limited Partnership and Chevron Chemical Company. (5)
* 10.31 - CCC/WPC Services Agreement, dated as of September 1, 1996, among Chevron Chemical Company and
Warren Petroleum Company, Limited Partnership. (5)
* 10.32 - Operating Agreement, dated as of September 1, 1996, among Warren Petroleum Company, Limited
Partnership and Chevron Pipe Line Company. (5)
10.33 - Galena Park Services Agreement, dated as of September 1, 1996, among Chevron Products Company
and Midstream Combination Corp. (5)
* 10.34 - Venice Complex Operating Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc.
and Warren Petroleum Company, Limited Partnership. (6)
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
* 10.35 - Product Storage Lease and Terminal Access Agreement, dated as of September 1, 1996, among
Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership. (6)
10.36 - Lone Star Swap Transaction Confirmation Term Sheet, dated as of September 1, 1996, among
Chevron U.S.A. Inc. and NGC Corporation. (5)
* 10.37 - West Texas LPG Pipeline Limited Partnership Agreement, dated as of September 1, 1996, by and
between Chevron Pipe Line Company, or an affiliate thereof, and an affiliate of NGC Corporation.
(5)
* 10.38 - West Texas LPG Pipeline Operating Agreement, dated as of September 1, 1996, by and between
Chevron Pipe Line Company, or an affiliate thereof, and the West Texas LPG Pipeline Partnership.
(5)
* 10.39 - Time Charter, dated as of August 31, 1996, by and between Midstream Barge Company, L.L.C. and
Warren Petroleum Company, Limited Partnership. (5)
* 10.40 - Limited Liability Company Agreement of Midstream Barge Company, L.L.C., dated as of August
31, 1996, by and between Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership.
(5)
+ 10.41 - Dynegy Inc. Severance Pay Plan.
+ 10.42 - NGC Profit Sharing/401(k) Savings Plan.
+ 10.43 - First Amendment to NGC Profit Sharing/401(k) Savings Plan.
+ 10.44 - Second Amendment to NGC Profit Sharing/401(k) Savings Plan.
+ 12.1 - Computation of Ratio of Earnings to Fixed Charges.
+ 22.1 - Subsidiaries of the Registrant.
+ 23.1 - Consent of Arthur Andersen LLP.
+ 27.1 - Financial Data Schedule.
</TABLE>
- ---------------
+ Filed herewith
* Exhibit omits certain information which the Company has filed separately with
the Commission pursuant to a confidential treatment request pursuant to Rule
406 promulgated under the Securities Act of 1933, as amended.
(1) Incorporated by reference to exhibits to the Registration Statement of
Trident NGL, Inc. on Form S-1, Registration No. 33-43871.
(2) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended September 30, 1993 of Trident NGL Holding,
Inc., Commission File No. 1-11156.
(3) Incorporated by reference to exhibits to the Registration Statement of
Trident NGL Holding, Inc. on Form S-4, Registration No. 33-88907.
(4) Incorporated by reference to the Registration Statement of NGC Corporation
on Form S-3, Registration No. 33-97368.
(5) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended September 30, 1996, of NGC Corporation,
Commission File No. 1-11156.
44
<PAGE>
(6) Incorporated by reference to exhibits to the Registration Statement of
Midstream Combination Corp. on Form S-4, Registration No. 333-09419.
(7) Incorporated by reference to exhibits to the Current Report on Form 8-K of
NGC Corporation, dated May 22, 1996, Commission File No. 1-11156.
(8) Incorporated by reference to exhibits to the Annual Report on Form 10-K for
the Fiscal Year Ended December
31, 1996, of NGC Corporation, Commission File No. 1-11156.
(9) Incorporated by reference to exhibits to the Current Report on Form 8-K of
NGC Corporation, Commission File No. 1-11156, dated June 27, 1997.
(10) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended June 30, 1997, Commission File No. 1-11156.
(11) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended September 30, 1997, Commission File No.
1-11156
(12) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended June 30, 1998, Commission File No. 1-11156.
(13) Incorporated by reference to exhibits to the Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1997, of NGC Corporation, Commission
File No. 1-11156.
(14) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period ended September 30, 1998, Commission File No.
1-11156.
(b) Reports on Form 8-K of Dynegy Inc..
None.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dynegy Inc.
Date: February 26, 1999 By: /s/ C. L. Watson
-------------------------------------
C. L. Watson, Chairman of the Board,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: February 26, 1999 By: /s/ C. L. Watson
-------------------------------------
C. L. Watson, Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
Date: February 26, 1999 By: /s/ John U. Clarke
-------------------------------------
John U. Clarke, Senior Vice President,
Chief Financial Officer (Principal
Financial Officer) and Advisory Director
Date: February 26, 1999 By: /s/ Bradley P. Farnsworth
-------------------------------------
Bradley P. Farnsworth, Vice President and
Controller (Principal Accounting
Officer)
Date: February 26, 1999 By: /s/ Stephen W. Bergstrom
-------------------------------------
Stephen W. Bergstrom, President and Chief
Operating Officer of Dynegy Marketing and
Trade and Director
Date: February 26, 1999 By: /s/ Stephen J. Brandon
-------------------------------------
Stephen J. Brandon, Director
Date: February 26, 1999 By: /s/ Stanley I. Rubenfeld
-------------------------------------
Stanley I. Rubenfeld, Director
Date: February 26, 1999 By: /s/ P. Nicholas Woollacott
-------------------------------------
P. Nicholas Woollacott, Director
46
<PAGE>
Date: February 26, 1999 By: /s/ Jack S. Mustoe
--------------------------------------
Jack S. Mustoe, Director
Date: February 26, 1999 By: /s/ Jeffrey M. Lipton
--------------------------------------
Jeffrey M. Lipton, Director
Date: February 26, 1999 By: /s/ A. Terrance Poole
--------------------------------------
A. Terence Poole, Director
Date: February 26, 1999 By: /s/
--------------------------------------
Darald W. Callahan, Director
Date: February 26, 1999 By: /s/ Patricia A. Woertz
--------------------------------------
Patricia A. Woertz, Director
Date: February 26, 1999 By: /s/ Peter J. Robertson
--------------------------------------
Peter J. Robertson, Director
Date: February 26, 1999 By: /s/ Daniel L. Dienstbier
--------------------------------------
Daniel L. Dienstbier, Director
Date: February 26, 1999 By: /s/ J. Otis Winters
--------------------------------------
J. Otis Winters, Director
47
<PAGE>
DYNEGY INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Consolidated Financial Statements
Report of Independent Public Accountants....................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996............................. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996............................. F-5
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996......... F-6
Notes to Consolidated Financial Statements..................... F-7
FINANCIAL STATEMENT SCHEDULE
Condensed Financial Statements of the Registrant............... F-32
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Dynegy Inc.:
We have audited the accompanying consolidated balance sheets of Dynegy Inc.
(a Delaware corporation formerly known as NGC Corporation) and subsidiaries as
of December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dynegy Inc. and subsidiaries
as of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The information included in Schedule I is
presented for the purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our
audits of the basic financial statements and, in our opinion, is fairly stated
in all material respects in relation to the basic financial statements taken as
a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 24, 1999
F-2
<PAGE>
DYNEGY INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31, DECEMBER 31,
1998 1997
ASSETS ------------ ------------
Current Assets
Cash and cash equivalents $ 28,367 $ 23,047
Accounts receivable, net 1,563,558 1,536,451
Accounts receivable, affiliates 60,180 139,321
Inventories 149,901 136,485
Assets from risk-management activities 219,105 127,929
Prepayments and other assets 96,130 55,547
---------- ----------
2,117,241 2,018,780
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 2,446,878 1,958,250
Less: accumulated depreciation (514,771) (436,674)
---------- ----------
1,932,107 1,521,576
---------- ----------
OTHER ASSETS
Investments in unconsolidated affiliates 502,613 470,477
Assets from risk-management activities 135,100 111,341
Other assets 577,176 394,729
---------- ----------
$5,264,237 $4,516,903
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $1,370,902 $1,404,736
Accounts payable, affiliates 113,827 24,187
Accrued liabilities and other 290,381 192,159
Liabilities from risk-management activities 251,213 132,012
---------- ----------
2,026,323 1,753,094
LONG-TERM DEBT 1,046,890 1,002,054
OTHER LIABILITIES
Liabilities from risk-management activities 40,747 42,679
Deferred income taxes 317,537 254,059
Other long-term liabilities 504,677 245,892
---------- ----------
3,936,174 3,297,778
---------- ----------
COMPANY OBLIGATED PREFERRED SECURITIES OF
SUBSIDIARY TRUST 200,000 200,000
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 50,000,000
shares authorized; 8,000,000 shares designated
as Series A Participating Preferred Stock,
7,815,363 shares issued and outstanding at
December 31, 1998 and 1997, respectively 75,418 75,418
Common stock, $.01 par value, 400,000,000
shares authorized; 153,298,220 shares issued
at December 31, 1998 and 151,796,622
shares issued at December 31, 1997 1,533 1,518
Additional paid-in capital 935,183 919,720
Retained earnings 133,340 32,975
Less: treasury stock, at cost: 1,200,700
shares at December 31, 1998 and 654,900
shares at December 31, 1997 (17,411) (10,506)
---------- ----------
1,128,063 1,019,125
---------- ----------
$5,264,237 $4,516,903
========== ==========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
DYNEGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Revenues $14,257,997 $13,378,380 $7,260,202
Cost of sales 13,829,310 12,993,086 6,890,702
----------- ----------- ----------
Operating margin 428,687 385,294 369,500
Depreciation and amortization 113,202 104,391 71,676
Impairment, abandonment and other charges 9,644 275,000 ---
General and administrative expenses 185,708 149,344 100,032
----------- ----------- ----------
Operating income (loss) 120,133 (143,441) 197,792
Equity in earnings of unconsolidated affiliates 91,038 58,959 28,075
Other income 46,821 28,113 5,485
Relocation costs --- --- (4,000)
Interest expense (74,992) (63,455) (46,202)
Other expenses (7,677) (20,230) (11,505)
Minority interest in income of a subsidiary (16,632) (9,841) ---
----------- ----------- ----------
Income (loss) before income taxes 158,691 (149,895) 169,645
Income tax provision (benefit) 50,338 (62,210) 56,323
----------- ----------- ----------
Net income (loss) from continuing operations before
cumulative effect of accounting change 108,353 (87,685) 113,322
Cumulative effect of change in accounting
principle (net of income tax benefit of $7,913) --- (14,800) ---
----------- ----------- ----------
NET INCOME (LOSS) $ 108,353 $ (102,485) $ 113,322
=========== =========== ==========
Net Income Per Share:
Net income (loss) from continuing operations $ 108,353 $ (87,685) $ 113,322
Cumulative effect of change in accounting
principle (net of income tax benefit of $7,913) --- (14,800) ---
Less: preferred stock dividends (391) (391) (132)
----------- ----------- ----------
Net income (loss) applicable to common stockholders $ 107,962 $ (102,876) $ 113,190
=========== =========== ==========
Basic earnings (loss) per share $ 0.71 $ (0.68) $ 0.99
=========== =========== ==========
Diluted earnings per share $ 0.66 $ n/a $ 0.83
=========== =========== ==========
Basic shares outstanding 151,619 150,653 114,093
=========== =========== ==========
Diluted shares outstanding 164,605 167,009 136,099
=========== =========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
DYNEGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 108,353 $ (102,485) $ 113,322
Items not affecting cash flows from operating activities:
Depreciation, amortization, impairment and abandonment 102,577 378,916 73,176
Equity in earnings of affiliates, net of cash distributions (6,477) (4,073) (21,729)
Risk management activities (7,422) (8,757) (11,220)
Deferred income taxes 52,308 (86,424) 45,896
Amortization of bond premium (2,572) (6,768) (4,892)
Other, including gains on sale of assets (22,540) 1,249 7,466
Change in assets and liabilities resulting from
operating activities:
Accounts receivable 51,046 (35,845) (954,418)
Inventories (17,380) 86,077 (116,353)
Prepayments and other assets (30,605) (20,686) 7,726
Accounts payable 44,113 (22,601) 778,767
Accrued liabilities (27,699) 14,064 47,148
Other, net 7,078 85,922 4,157
--------- ----------- -----------
Net cash provided by (used in) operating activities 250,780 278,589 (30,954)
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (298,738) (220,003) (97,651)
Investment in unconsolidated affiliates (78,096) (27,708) (30,875)
Business acquisitions, net of cash acquired (2,644) (715,589) (714)
Proceeds from asset sales 45,044 452,565 3,600
Other, net 39,352 --- 14,500
--------- ----------- -----------
Net cash used in investing activities (295,082) (510,735) (111,140)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 212,259 2,218,500 1,542,000
Repayments of long-term borrowings (493,277) (2,198,275) (1,360,081)
Net proceeds from commercial paper and money market lines
of credit 350,758 --- ---
Proceeds from sale of capital stock, options and warrants 3,863 5,147 858
Issuance of company obligated preferred securities of a
subsidiary trust, net --- 198,043 ---
Treasury stock acquisitions (6,905) (10,506) ---
Dividends and other distributions, net (7,988) (7,925) (6,740)
Other, net (9,088) --- ---
--------- ----------- -----------
Net cash provided by financing activities 49,622 204,984 176,037
--------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 5,320 (27,162) 33,943
Cash and cash equivalents, beginning of year 23,047 50,209 16,266
--------- ----------- -----------
Cash and cash equivalents, end of year $ 28,367 $ 23,047 $ 50,209
========= =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
DYNEGY INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
SERIES A PREFERRED COMMON STOCK ADDITIONAL TREASURY STOCK
------------------------- ---------------------- PAID-IN RETAINED ------------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
----------- ------------ ---------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995 --- $ --- 110,493 $1,105 $515,785 $ 35,490 --- $ ---
Chevron Combination 7,815 75,418 38,623 386 372,328 --- --- ---
Net income --- --- --- --- --- 113,322 --- ---
Options exercised --- --- 374 3 1,320 --- --- ---
Dividends and other
distributions --- --- --- --- --- (5,427) --- ---
401(k) plan and profit
sharing stock --- --- 309 4 4,175 --- --- ---
issuances
Options granted --- --- --- --- 2,824 --- --- ---
Other --- --- 48 --- --- --- --- ---
------ ------- -------- ------ -------- --------- ----- --------
Balance at December 31,
1996 7,815 75,418 149,847 1,498 896,432 143,385 --- ---
Net loss --- --- --- --- --- (102,485) --- ---
Options exercised --- --- 1,541 15 11,577 --- --- ---
Dividends and other
distributions --- --- --- --- --- (7,925) --- ---
401(k) plan and profit
sharing stock --- --- 385 5 7,401 --- --- ---
issuances
Options granted --- --- --- --- 4,044 --- --- ---
Treasury stock --- --- --- --- --- --- (655) (10,506)
acquisitions
Other --- --- 24 --- 266 --- --- ---
------ ------- -------- ------ -------- --------- ----- --------
Balance at December 31,
1997 7,815 75,418 151,797 1,518 919,720 32,975 (655) (10,506)
Net income --- --- --- --- --- 108,353 --- ---
Options exercised --- --- 1,032 10 3,808 --- --- ---
Dividends and other
distributions --- --- --- --- --- (7,988) --- ---
401(k) plan and profit
sharing stock --- --- 457 5 6,822 --- --- ---
issuances
Options granted --- --- --- --- 4,675 --- --- ---
Treasury stock --- --- --- --- --- --- (546) (6,905)
acquisitions
Other --- --- 12 --- 158 --- --- ---
------ ------- -------- ------ -------- --------- ----- --------
Balance at December 31,
1998 7,815 $75,418 153,298 $1,533 $935,183 $ 133,340 (1,201) $(17,411)
====== ======= ======== ====== ======== ========= ===== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ACCOUNTING POLICIES
Dynegy Inc. ("Dynegy" or the "Company") is a holding company that conducts
substantially all of its business through its subsidiaries. The Company is a
leading provider of energy products and services in North America and the United
Kingdom. Products marketed by the Company's wholesale marketing operations
include natural gas, electricity, coal, natural gas liquids, crude oil, liquid
petroleum gas and related services. The Company's wholesale marketing operations
are supported by ownership or control of an extensive asset base and
transportation network that includes unregulated power generation, gas and
liquids storage capacity, gas, power and liquids transportation capacity and gas
gathering, processing and fractionation assets.
The accounting policies of Dynegy reflect industry practices and conform to
generally accepted accounting principles. The more significant of such
accounting policies are described below. The preparation of the consolidated
financial statements in conformity with generally accepted accounting principles
requires management to develop estimates and make assumptions that affect
reported financial position and results of operations and that impact the nature
and extent of disclosure, if any, of contingent assets and liabilities. Actual
results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries after elimination of intercompany accounts and transactions.
Investments in affiliates in which the Company has a significant ownership
interest, generally 20 percent to 50 percent, are accounted for by the equity
method. Other investments are carried at cost. Certain reclassifications have
been made to prior-period amounts to conform with current period financial
statement classifications.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents consist of all demand
deposits and funds invested in short-term investments with original maturities
of three months or less.
CONCENTRATION OF CREDIT RISK. Dynegy provides multiple energy commodity
solutions principally to customers in the electric and gas distribution
industries and to entities engaged in industrial and petrochemical businesses.
These industry concentrations have the potential to impact the Company's overall
exposure to credit risk, either positively or negatively, in that the customer
base may be similarly affected by changes in economic, industry or other
conditions. Receivables are generally not collateralized; however, Dynegy
believes the credit risk posed by industry concentration is offset by the
diversification and creditworthiness of the Company's customer base.
INVENTORIES. Inventories consisting primarily of natural gas in storage of
$78.2 million and $35.2 million, natural gas liquids of $23.4 million and $55.4
million, and crude oil of $25.2 million and $23.2 million at December 31, 1998
and 1997, respectively, are valued at the lower of weighted average cost or at
market. Materials and supplies inventory of $23.1 million and $19.8 million at
December 31, 1998 and 1997, respectively, is carried at the lower of cost or
market using the specific identification method.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment consisting
principally of gas gathering, processing, fractionation, terminaling and storage
facilities, natural gas transmission lines, pipelines, power generating
facilities and supporting infrastructure is recorded at cost. Expenditures for
major replacements and renewals are capitalized while expenditures for
maintenance, repairs and minor renewals to maintain facilities in operating
condition are expensed. Depreciation is provided using the straight-line method
over the estimated economic service lives of the assets, ranging from three to
30 years. Composite depreciation rates are applied to functional groups of
property having similar economic characteristics. Gains and losses are not
recognized for retirements of property, plant and equipment subject to composite
depreciation rates ("composite rate") until the asset group subject to the
composite rate is retired. The Company reviews the carrying value of its long-
lived assets in accordance with provisions of Financial Accounting Standard No.
121, "Accounting for the Impairment of Long-Lived Assets."
ENVIRONMENTAL COSTS. Environmental costs relating to current operations
are expensed or capitalized, as appropriate, depending on whether such costs
provide future economic benefit. Liabilities are recorded when environmental
assessment indicates that remedial efforts are probable and the costs can be
reasonably estimated. Measurement of liabilities is based on currently enacted
laws and regulations, existing technology and undiscounted,
F-7
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
site-specific costs. Environmental liabilities in connection with assets that
are sold or closed are realized upon such sale or closure, to the extent they
are probable, can be estimated and have not previously been reserved. In
assessing environmental liabilities, no offset is made for potential insurance
recoveries. Recognition of any joint and several liability is based upon the
Company's best estimate of its final pro rata share of such liability.
INTANGIBLE ASSETS. Intangible assets are generally amortized by the
straight-line method over an estimated useful life of up to 30 years.
REVENUE RECOGNITION. Revenues for product sales and gas processing and
marketing services are recognized when title passes to the customer or when the
service is performed. Fractionation and transportation revenues are recognized
based on volumes received in accordance with contractual terms. Revenues derived
from power generation are recognized upon output, product delivery or
satisfaction of specific targets, all as specified by contractual terms. Fees
derived from engineering and construction contracts and development and other
activities received from joint ventures in which Dynegy holds an equity interest
are deferred to the extent of Dynegy's ownership interest and amortized on a
straight-line basis over appropriate periods, which vary according to the nature
of the service provided and the ventures' operations.
The Company accounts for its North American fixed-price natural gas
transactions using the mark-to-market method of accounting. Under such method,
all fixed-price natural gas contracts are recorded at fair value, net of future
servicing costs and reserves. Changes in the market value of these contracts are
recognized as gain or loss in the period of change. The resulting unrealized
gains and losses are recorded as assets and liabilities from risk management
activities. The accrual method of accounting is used for fixed-price natural gas
transactions in the United Kingdom and for accounting for fixed-price commodity
transactions in its wholesale power, NGL and crude marketing activities.
The Company routinely enters into financial instrument contracts to hedge
purchase and sale commitments, fuel requirements and inventories in its natural
gas liquids, crude oil, electricity and coal businesses in order to minimize the
risk of market fluctuations. Dynegy also monitors its exposure to fluctuations
in interest rates and foreign currency exchange rates and may execute swaps,
forward-exchange contracts or other financial instruments to manage these
exposures. Gains and losses from hedging transactions are recognized in income
and are reflected as cash flows from operating activities in the periods for
which the underlying commodity, interest rate or foreign currency transaction
was hedged. If the necessary correlation to the commodity, interest rate or
foreign currency transaction being hedged ceases to exist, the gain or loss
associated with such contract(s) is no longer deferred and is recognized in the
period correlation is lost.
INCOME TAXES. The Company files a consolidated United States federal
income tax return and, for financial reporting purposes, provides income taxes
for the difference in the tax and financial reporting bases of its assets and
liabilities in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes."
EARNINGS PER SHARE. Basic earnings per share represents the amount of
earnings for the period available to each share of common stock outstanding
during the period. Diluted earnings per share represents the amount of earnings
for the period available to each share of common stock outstanding during the
period plus each share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
period. Differences between basic and diluted shares outstanding in all periods
are attributed to the Series A Convertible Participating Preferred Stock,
options outstanding and a warrant.
FOREIGN CURRENCY TRANSLATIONS. For subsidiaries whose functional currency
is other than U.S. dollar, assets and liabilities are translated at year-end
rates of exchange and revenues and expenses are translated at average exchange
rates prevailing during the year. For each of the three years in the period
ended December 31, 1998, items of other comprehensive income were immaterial to
the Company's operating results.
F-8
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
Dynegy's operating results are impacted by commodity price, interest rate
and foreign exchange rate fluctuations. The Company routinely enters into
financial instrument contracts to hedge purchase and sale commitments, fuel
requirements and inventories in its natural gas, natural gas liquids, crude oil,
electricity and coal businesses in order to minimize the risk of market
fluctuations. However, as a result of marketplace liquidity and other factors,
the Company may, at times, be unable to hedge certain identified market risks.
Further, the Company may, at times, have a bias in the market, within
established guidelines, resulting from the management of its commodity
portfolios. Dynegy also monitors its exposure to fluctuations in interest rates
and foreign currency exchange rates and may execute swaps, forward-exchange
contracts or other financial instruments to manage these exposures.
Operating margins in the Wholesale Gas and Power segment are separated into
three integrated component businesses: wholesale gas marketing, wholesale power
marketing and power generation. Operating margins earned by wholesale gas and
power marketing, exclusive of risk-management activities, are relatively
insensitive to commodity price fluctuations since most of the purchase and sales
contracts do not contain fixed-price provisions. Generally, prices contained in
these contracts are tied to a current spot or index price and, therefore, adjust
directionally with changes in overall market conditions. However, market price
fluctuations for natural gas and electricity can have a significant impact on
the operating margin derived from risk-management activities in these
businesses. 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 natural gas marketing transactions in the
U.K. and power marketing transactions, which are both accounted for under
accrual accounting, create differences in the timing of the recognition of such
commodity price movements. 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. However, the financial performance and cash flow
derived from the Company's investment in merchant generation capacity is
sensitive to changes in, and the relationship between, natural gas and
electricity prices.
Operating margins associated with the Liquids segment's natural gas
gathering, processing and fractionation activities are very sensitive to changes
in natural gas liquids prices, principally as a result of contractual terms
under which natural gas is processed and products are sold by these, businesses
and the availability of inlet volumes. In addition, certain of the Liquids
Businesses' processing plant assets are impacted by changes in, and the
relationship between, natural gas and natural gas liquids prices which, in turn
influences the volumes of gas processed. Commodity price fluctuations also
impact the operating margins derived from the Liquids segment's natural gas
liquids and crude oil marketing businesses.
Dynegy's commercial groups manage, on a portfolio basis, the market risks
inherent in their transactions, subject to parameters established by the Dynegy
Board of Directors. Market risks are monitored by a risk control group that
operates independently from the commercial units that create or actively manage
these risk exposures to ensure compliance with Dynegy's risk management
policies. Risk measurement is also practiced against the Dynegy portfolios with
stress testing and scenario analysis.
ACCOUNTING FOR PRICE RISK MANAGEMENT ACTIVITIES -- NATURAL GAS. The
Company uses the mark-to-market method of accounting for its North American
fixed-price natural gas transactions. Under mark-to-market accounting, fixed-
price forwards, swaps, options, futures and other financial instruments with
third parties are reflected at market value, net of future servicing costs and
reserves, with resulting unrealized gains and losses recorded as assets and
liabilities from risk management activities in the consolidated balance sheets.
These assets and liabilities are affected by the actual timing of settlements
related to these contracts and current-period changes resulting primarily from
newly originated transactions and the impact of price movements. These changes
are recognized as revenues in the consolidated statements of operations in the
period in which the change occurs. Market prices used to value outstanding
financial instruments reflect management's consideration of, among other things,
closing exchange and over-the-counter quotations, the time value of money and
volatility factors underlying the commitments. These market
F-9
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
prices are adjusted to reflect the potential impact of liquidating Dynegy's
position in an orderly manner over a reasonable period of time under present
market conditions.
MARKET RISK. Dynegy generally attempts to balance its fixed-price physical
and financial purchase and sales contracts in terms of contract volumes and the
timing of performance and delivery obligations. However, net open positions
often exist or are established due to the origination of new transactions and
the Company's assessment of, and response to, changing market conditions. Dynegy
will take advantage of its bias in the market when it believes, based upon
competitive information gained from its energy marketing activities, that future
price movements will be consistent with its net open position. To the extent a
net open position exists, Dynegy is exposed to the risk that fluctuating market
prices may adversely impact its financial position or results of operations. The
net open position is actively managed, and the impact of a change in price on
the Company's financial condition at a point in time is not necessarily
indicative of the impact of price movements throughout the year.
MARKET RESERVES. In connection with the market valuation of its fixed-
price contracts, the Company maintains certain reserves for a number of risks
and costs associated with these future commitments. Among others, these include
reserves for credit risks based on the financial condition of counterparties,
reserves for product location ("basis") differentials and consideration of the
time value of money for long-term contracts. Counterparties in its trading
portfolio consist principally of financial institutions, major energy companies
and local distribution companies. The creditworthiness of these counterparties
may impact overall exposure to credit risk, either positively or negatively;
however, with regard to its counterparties Dynegy maintains credit policies that
management believes minimize overall credit risk. Determination of the credit
quality of its counterparties is based upon a number of factors, including
credit ratings, financial condition, project economics and collateral
requirements. When applicable, the Company employs standardized agreements that
allow for the netting of positive and negative exposures associated with a
single counterparty. Based on these policies, its current exposures and its
credit reserves, Dynegy does not anticipate a material adverse effect on its
financial position or results of operations as a result of counterparty
nonperformance. The following table displays the mark-to-market portfolio value
of Dynegy's natural gas fixed-price transactions at December 31, 1998:
BELOW
INVESTMENT INVESTMENT
GRADE GRADE
CREDIT CREDIT
QUALITY QUALITY TOTAL
----------------------------
($ IN THOUSANDS)
Utilities and power generators $ 47,752 $13,213 $ 60,965
Financial institutions (22,217) --- (22,217)
Oil and gas producers 14,697 12,605 27,302
Industrial companies 352 5,103 5,455
Other 3,347 204 3,551
-------- ------- --------
Value of fixed-price transactions before reserves $ 43,931 $31,125 75,056
Reserves ======== ======= (6,346)
--------
Net fixed-price value $ 68,710
========
At December 31, 1998, the term of Dynegy's natural gas portfolio extends
to 2007, and the average remaining life of an individual transaction was 3
months.
COMPREHENSIVE CHANGE IN ACCOUNTING PRINCIPLES. As a result of recent
pronouncements issued by the Financial Accounting Standards Board and the
Emerging Issues Task Force, the Company's comprehensive method of accounting for
energy-related contracts and/or derivative instruments and hedging transactions
is changing. Previously, only North American fixed-price natural gas
transactions were recorded at fair value, net of future servicing costs and
reserves as estimated by the Company. 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 Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("Statement No.
133") or by the Emerging Issues Task Force's conclusions in EITF 98-10,
"Accounting for Energy Trading and Risk Management
F-10
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activities" ("EITF 98-10"). However, provisions in Statement No. 133 and in EITF
98-10 will affect the accounting for other trading and marketing operations that
are currently accounted for under the accrual method. Further, provisions in
Statement No. 133 will affect the accounting for and disclosure of other
contractual arrangements and operations of the Company. The Company is required
to adopt the provisions of EITF 98-10 effective January 1, 1999. The cumulative
effect of the change in accounting resulting from adoption of the provisions of
EITF 98-10 is immaterial. The transition rules under Statement No. 133 provide
for early adoption as of the beginning of any fiscal quarter subsequent to June
15, 1998. Dynegy intends to adopt the provisions of Statement No. 133 within the
timeframe and in accordance with the requirements provided by that statement.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The following disclosure of the
estimated fair value of financial instruments is made in accordance with the
requirements of SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments." The estimated fair-value amounts have been determined by the
Company using available market information and selected valuation methodologies.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. The use of different market assumptions or valuation
methodologies could have a material effect on the estimated fair-value amounts.
The carrying values of current assets and liabilities approximate fair
values due to the short-term maturities of these instruments. The carrying
amounts and fair values of the Company's other financial instruments were:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1998 1997
--------------------------- ---------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ------------ ---------- ------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial Paper $518,643 $518,643 $229,500 $229,500
Money market lines of credit 20,000 20,000 --- ---
Credit Agreement --- --- 110,000 110,000
Canadian Credit Agreement 40,000 40,000 --- ---
6.75% Senior Notes, due 2005 150,000 152,000 150,000 152,000
7.625% Senior Notes, due 2026 175,000 179,000 175,000 188,000
7.125% Senior Notes, due 2018 175,000 172,000 --- ---
Power Generation Notes 103,126 103,126 --- ---
Chevron Note --- --- 156,982 159,000
14% Senior Subordinated Notes, due 2001 --- --- 70,063 71,000
10.25% Subordinated Notes, due 2003 --- --- 110,234 111,000
Preferred Securities of a Subsidiary Trust 200,000 204,000 200,000 223,000
Interest rate risk-management contracts --- 8,474 --- 3,470
Foreign currency risk-management contracts 4,418 5,491 892 (375)
Commodity risk-management contracts (29,222) (30,977) (23,167) (25,047)
</TABLE>
The financial statement carrying amounts of the Company's credit
agreement and variable-rate debt were assumed to approximate fair value. The
fair values of the Company's other long-term indebtedness, including the
Preferred Securities of a Subsidiary Trust but excluding the Chevron Note, were
based on quoted market prices by financial institutions that actively trade
these debt securities. The fair value of the Chevron Note was determined by
comparison to publicly traded instruments having similar terms and conditions.
The fair value of the Company's cost basis investments was not estimated as the
investments were considered immaterial. The fair value of interest rate, foreign
currency and commodity risk-management contracts were based upon the estimated
consideration that would be received to terminate those contracts in a gain
position and the estimated cost that would be incurred to terminate those
contracts in a loss position. The interest rate swap contracts, foreign currency
forward exchange contracts and commodity swap and option agreements extend for
periods of up to 12, 2 and 9 years, respectively. The absolute notional contract
amounts associated with the commodity risk-management, interest rate and forward
exchange contracts, respectively, were as follows:
F-11
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Natural Gas (Trillion Cubic Feet) 4.179 2.558 1.535
Electricity (Million Megawatt Hours) 1.835 2.244 ---
Natural Gas Liquids (Million Barrels) 6.397 4.355 3.270
Crude Oil (Million Barrels) 18.800 14.920 2.034
Interest Rate Swaps (in thousands of US Dollars) $ 69,332 $180,000 $ ---
Fixed Interest Rate Paid on Swaps 8.067 6.603 ---
U.K. Pound Sterling (in thousands of US Dollars) $ 69,254 $ 74,638 $ ---
Average U.K. Pound Sterling Contract Rate (in US Dollars) $ 1.6143 $ 1.5948 $ ---
Canadian Dollar (in thousands of US Dollars) $268,307 $ 37,041 $ ---
Average Canadian Dollar Contract Rate (in US Dollars) $ 0.6710 $ 0.7240 $ ---
</TABLE>
Cash-flow requirements for these commodity risk-management, interest rate
and foreign exchange contracts were estimated based upon market prices in effect
at December 31, 1998. Cash-flow requirements were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1999 2000 2001 2002 2003 Beyond
------ ------ ------ ------ ------ --------
($ in thousands)
Future estimated net inflows
(outflows) based on year
end market prices/rates $38,104 $(9,574) $(3,475) $(2,473) $ 180 $1,073
======= ======= ======= ======= ===== ======
</TABLE>
NOTE 3 -- CASH FLOW INFORMATION
Detail of supplemental disclosures of cash flow and non-cash investing
and financing information was:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
($ in thousands)
<S> <C> <C> <C>
Interest paid (net of amount capitalized) $ 83,376 $ 60,323 $ 22,647
========= ========= =========
Taxes paid (net of refunds) $ (8,000) $ 8,043 $ 1,467
========= ========= =========
Detail of businesses acquired:
Current assets and other $ 5,144 $ 547,505 $ 76,490
Fair value of non-current assets 101,630 503,789 967,575
Liabilities assumed, including deferred taxes (104,130) (268,092) (595,219)
Capital stock issued and options exercised --- --- (448,132)
Cash balance acquired --- (67,613) ---
--------- --------- ---------
Cash paid, net of cash acquired $ 2,644 $ 715,589 $ 714
========= ========= =========
</TABLE>
F-12
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT
Investments in property, plant and equipment consisted of:
DECEMBER 31,
--------------------------
1998 1997
($ IN THOUSANDS)
Wholesale Gas and Power Segment:
Natural gas and power marketing $ 1,514 $ 2,588
Power generation 351,378 48,866
Liquids Segment:
Natural gas processing 1,241,658 1,211,727
Fractionation 185,198 152,501
Liquids marketing 139,328 178,820
Natural gas gathering and transmission 429,631 275,116
Crude oil 43,118 44,977
Other 55,053 43,655
---------- ----------
2,446,878 1,958,250
Less: accumulated depreciation (514,771) (436,674)
---------- ----------
$1,932,107 $1,521,576
========== ==========
Interest capitalized related to costs of projects in process of development
totaled $7.6 million, $8.8 million and $1.2 million for each of the three years
in the period ended December 31, 1998.
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 discrete
power generation facility in the State of California. As a result, the Company
now consolidates the aggregate assets, liabilities and results of operations
associated with these projects.
NOTE 5 -- UNCONSOLIDATED AFFILIATES
The equity method of accounting is used for investments in certain
partnerships and for investments in companies in which Dynegy has a voting
interest between 20 percent and 50 percent. Such investments include:
ACCORD ENERGY LIMITED. Accord was formed in 1994 to market energy
resources in the United Kingdom and Europe. Prior to 1997, Dynegy owned a 49
percent limited partner interest in Accord. In January 1997, such interest was
converted to a 25 percent participating preferred stock interest.
NICOR ENERGY, L.L.C. ("NICOR"). NICOR is a retail energy alliance formed
with NICOR Energy Management Services, a subsidiary of NICOR Inc., to provide
energy services to industrial, commercial and residential customers in the
Midwest. Dynegy owns a 50 percent interest in this Delaware limited liability
company.
SOUTHSTAR ENERGY SERVICES L.L.C. SouthStar is a retail energy alliance
formed with AGL Resources Inc. and Piedmont Natural Gas Company. The company
offers a combination of unregulated energy products and services to industrial,
commercial and residential customers in the southeast. Dynegy owns a 20 percent
interest in this Delaware limited liability company.
POWER GENERATION PARTNERSHIPS. Dynegy owns interests in fifteen joint
ventures, each formed to build, own and operate cogeneration facilities. The
Company's interests in these joint ventures range from eight to 50 percent. Each
partnership interest is accounted for under the equity method. Construction of
the cogeneration facilities owned by each of the joint ventures was project
financed and the obligations of the joint ventures are non-recourse to the
Company. At December 31, 1998, the unamortized excess of the Company's
investment in these joint ventures over its equity in the
F-13
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
underlying net assets of the affiliates approximated $160 million. This amount
is being amortized on the straight-line method over the estimated economic
service lives of the underlying assets.
QUICKTRADE L.L.C. ("QUICKTRADE"). Quicktrade, a Delaware limited liability
company, was formed to develop, implement and operate an electronic trading
system. Dynegy owned a 65.5 percent interest in this LLC during 1998 and the LLC
was consolidated in the accompanying financial statements during 1998. During
1996 and 1997, the Company owned varying interests in Quicktrade and accounted
for its interest under the equity method for the majority of those years.
Effective January 1, 1999, the Company sold its interest in Quicktrade.
GULF COAST FRACTIONATORS ("GCF"). GCF is a Texas limited partnership that
owns and operates a natural gas liquids fractionation facility located in Mont
Belvieu, Texas. Dynegy owns a 38.75 percent limited partner interest in GCF. At
December 31, 1998, the unamortized excess of the Company's investment in GCF
over its equity in the underlying net assets of the affiliate approximated $16
million. This amount is being amortized on the straight-line method over the
estimated economic service life of the GCF assets.
WEST TEXAS LPG PIPELINE PARTNERSHIP ("WEST TEXAS PARTNERSHIP"). The West
Texas Partnership, a Texas limited partnership, holds all of the assets
comprising the West Texas Pipeline, an interstate natural gas liquids pipeline.
Dynegy owns a 49 percent interest in the West Texas Partnership acquired as part
of the Chevron Combination. At December 31, 1998, the unamortized excess of the
Company's investment in the West Texas Partnership over its equity in the
underlying net assets of the affiliate approximated $43 million. This amount is
being amortized on the straight-line method over the estimated economic service
life of the underlying assets.
VENICE ENERGY SERVICES COMPANY, L.L.C. ("VESCO"). VESCO is a Delaware
limited liability company that owns and operates a natural gas processing,
extraction, fractionation and storage facility located in Plaquemines Parish,
Louisiana. Dynegy is operator of the facility and originally acquired a 37
percent interest in Venice Gas Processing Company ("Venice") effective November
1, 1996. In 1997, Venice reorganized as a limited liability company and, in
September 1997, the VESCO members agreed to expand ownership in VESCO to include
an affiliate of Shell Midstream Enterprises, a subsidiary of Shell Oil Company
("Shell"), effective September 1, 1997, in exchange for Shell's commitment of
certain offshore reserves to VESCO. The transaction reduced Dynegy's interest
in VESCO from 37 percent to approximately 32 percent, as of the effective date.
Koch Energy Services Company ("Koch") acquired an interest in VESCO during 1998
pursuant to its contribution of a cryogenic gas-processing unit to VESCO. The
transaction reduced Dynegy's interest in VESCO to approximately 23 percent.
Dynegy operates the facility and has commercial responsibility for product
distribution and sales.
WASKOM GAS PROCESSING COMPANY ("WASKOM"). Waskom is a Texas general
partnership that owns and operates a natural gas processing, extraction and
fractionation facility located in Henderson County, Texas. Dynegy owns a 33.33
percent in Waskom. Dynegy operates the facility and has commercial
responsibility for product distribution and sales.
BARGE CO. Barge Co., a Delaware limited liability company, owns pressurized
LPG barges used in transporting LPGs principally in the Gulf of Mexico. Dynegy
owns a 25 percent interest in Barge Co. At December 31, 1998, the unamortized
excess of the Company's investment in Barge Co. over its equity in the
underlying net assets of the affiliate approximated $10 million. This amount is
being amortized on the straight-line method over the estimated economic service
lives of the underlying assets.
Aggregate equity method investment at December 31, 1998, 1997 and 1996, was
$498.5 million, $466.4 million and $177.8 million, respectively. Dividends
received on these investments during each of the three years in the period ended
December 31, 1998, totaled $84.0 million, $63.6 million and $7.3 million,
respectively. Summarized aggregate financial information for these investments
and Dynegy's equity share thereof was:
F-14
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------------
Total Equity Share Total Equity Share Total Equity Share
--------- -------------- --------- --------------- -------- ---------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Current assets (1)(2) $ 324,462 $131,169 $ 283,787 $112,895 $ 93,949 $ 35,321
Non-current assets (1)(2) 1,983,731 803,333 1,830,106 736,667 324,210 122,882
Current liabilities (1)(2) 292,481 124,016 202,754 86,476 30,459 11,893
Non-current liabilities (1)(2) 1,160,639 485,673 1,249,874 521,691 47,250 18,309
Operating margin (1)(2)(3) 397,391 159,288 209,877 86,154 37,296 14,500
Net income (1)(2)(3) 157,054 68,706 83,601 33,799 19,024 7,360
</TABLE>
1. The financial data for all periods presented is exclusive of amounts
attributable to the Company's investment in Accord as disclosure data was
unavailable for the current period. Dynegy's share of Accord earnings for
each of the three years in the period ended December 31, 1998, totaled $21.8
million, $25.9 million and $18.0 million, respectively.
2. The financial data for all periods presented is exclusive of amounts
attributable to the Company's investment in NCL as such information was not
comparable period-to-period, as a result of the NCL restructuring. Dynegy
sold its interest in NCL effective April 1, 1997. Dynegy's share of NCL's
loss for the three months ended March 31, 1997, totaled $892,000. Dynegy's
share of NCL's earnings for the year ended December 31, 1996 totaled $3.6
million.
3. Equity earnings derived from investments acquired in the Destec acquisition
accrue to Dynegy commencing July 1, 1997.
The cost method of accounting is generally used to account for investment in
partnerships or companies in which Dynegy has a voting interest of less than 20
percent. At December 31, 1998, the Company had two cost basis investments:
Indeck North American Power Fund, L.P. and Indeck North American Power Partners,
L.P. (collectively "Indeck"). Indeck is engaged in the acquisition and operation
of electric power generating facilities. Dynegy's aggregate investment in these
entities totaled $4.1 million and $4.0 million at December 31, 1998 and 1997,
respectively, and Dynegy received an aggregate $0.5 million, $0.5 million and
$0.6 million of dividends from Indeck during each of the three years in the
period ended December 31, 1998.
NOTE 6 -- LONG-TERM DEBT
DECEMBER 31,
-----------------------------------
1998 1997
---------- ----------
($ IN THOUSANDS)
Commercial Paper $ 518,643 $ 229,500
Money market lines of credit 20,000 ---
Credit Agreement --- 110,000
Canadian Credit Agreement 40,000 ---
6.75% Senior Notes, due 2005 150,000 150,000
7.625% Senior Debentures, due 2026 175,000 175,000
7.125% Senior Debentures, due 2018 175,000 ---
Power Generation Notes 103,126 ---
Chevron Note --- 155,373
14% Senior Subordinated Notes, due 2001 --- 65,000
10.25% Subordinated Notes, due 2003 --- 105,000
Other, non-interest bearing 275 550
Unamortized premium --- 11,906
---------- ----------
1,182,044 1,002,329
Less: long-term debt due within one year 135,154 275
---------- ----------
$1,046,890 $1,002,054
========== ==========
F-15
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMERCIAL PAPER AND MONEY MARKET LINES OF CREDIT. The Company utilizes
commercial paper proceeds and borrowings under uncommitted money market lines of
credit for general corporate purposes, including short-term working capital
requirements. The commercial paper program is for amounts up to $800 million,
as supported by existing credit agreements. Weighted average interest rates on
amounts outstanding under the commercial paper program were 6.1 percent and 6.8
percent at December 31, 1998 and 1997, respectively. Amounts outstanding under
the uncommitted money market lines of credit bore interest at an average rate of
6.0 percent at December 31, 1998. The Company classifies outstanding commercial
paper and borrowings under money market lines of credit as long-term debt to the
extent of availability under existing committed credit facilities, as
management's intent is to maintain these obligations for longer than one year,
subject to an overall reduction in corporate debt levels.
CREDIT AGREEMENTS. In May 1998, Dynegy refinanced its then existing
revolving credit agreement with a $400 million, five-year revolving credit
agreement that matures May 27, 2003, and a $400 million, 364-day revolving
credit agreement maturing in May, 1999 (the "Credit Agreements"). The Credit
Agreements provide funding for letters of credit, working capital, capital
expenditures and general corporate purposes, including commercial paper support.
The Credit Agreements also require payment of various costs and fees, including
an annual fee of 0.09 percent of the committed amount under the Credit
Agreements. Generally, borrowings under the Credit Agreements bear interest at a
Eurodollar rate plus a margin that is determined based on the Company's
unsecured senior debt rating. At December 31, 1998, such margin was 0.21
percent. Financial covenants in the Credit Agreements are limited to a debt to
capitalization test. Letters of credit under the Credit Agreements aggregated
approximately $27 million at December 31, 1998.
The Company maintains an additional $240 million, 364-day revolving credit
facility having a current maturity date of December 17, 1999. The facility
provides funding for general corporate purposes. The facility also requires
payment of various costs and fees, including an annual fee of 0.125 percent of
the committed amount under the facility. Generally, borrowings under the
facility bear interest at a Eurodollar rate plus a margin that is determined
based on the Company's unsecured senior debt rating. At December 31, 1998, such
margin was 0.525 percent. Financial covenants are limited to a debt to
capitalization test. No amounts were outstanding under this agreement at
December 31, 1998.
After consideration of the outstanding commercial paper, the unused
borrowing capacity under the Credit Agreements and additional 364-day facility
approximated $495 million at December 31, 1998.
CANADIAN CREDIT AGREEMENT. In November 1998, an indirect wholly owned
Canadian subsidiary of the Company entered into a $60 million, two-year
revolving credit facility, which matures on November 24, 2000 (the "Canadian
Credit Agreement"). The Canadian Credit Agreement provides funding for general
corporate purposes. The Canadian Credit Agreement requires payment of various
costs and fees, including an annual fee of 0.25 percent of the committed amount
under the Canadian Credit Agreement. Generally, borrowings under the Canadian
Credit Agreement bear interest at a Eurodollar rate plus a margin that is
determined based on the Company's unsecured senior debt rating. At December 31,
1998, such margin was 0.40 percent. The Canadian subsidiary's obligations under
the Canadian Credit Agreement are fully and unconditionally guaranteed by the
Company. At December 31, 1998, outstanding amounts under the facility totaled
$40.0 million, at an average interest rate of 6.09 percent.
6.75% SENIOR NOTES DUE 2005. In December 1995, the Company sold $150
million of 6.75 percent Senior Notes due December 15, 2005 ("Senior Notes"). The
Senior Notes were issued at a price of 99.984 percent, which, after deducting
underwriting discounts and commissions, resulted in net proceeds to the Company
of approximately $149 million. Proceeds from the sale of the Senior Notes were
used to repay a portion of the outstanding indebtedness under the then existing
revolving credit agreement. Interest on the Notes is payable semiannually on
June 15 and December 15 of each year. Upon issuance, the Senior Notes were
priced based on the then existing yield for 10-year U.S. Treasury Notes ("10-
Year Base Treasury Rate") plus a spread based principally on the Company's
credit rating. Prior to issuing the Senior Notes, the Company entered into two
separate transactions with two separate financial institutions, the effect of
which was to lock in the 10-Year Base Treasury Rate at approximately 6.2 percent
on the full $150 million face value of the Senior Notes.
F-16
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7.625% SENIOR DEBENTURES DUE 2026. In October 1996, Dynegy sold $175
million of 7.625 percent Senior Debentures due October 15, 2026 ("Senior
Debentures"). The Senior Debentures were issued at a price of 99.522 percent,
which, after deducting underwriting discounts and commissions, resulted in net
proceeds to the Company of approximately $173 million. The net proceeds from the
sale of such Senior Debentures were used to repay a portion of the outstanding
indebtedness under the then existing revolving credit agreement. 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 as
defined in the associated indenture. Upon issuance, the Senior Debentures were
priced based on the then existing yield for 30-year U.S. Treasury Notes ("30-
Year Base Treasury Rate") plus a spread based principally on the Company's
credit rating. Prior to issuing the Senior Debentures, the Company entered into
a transaction, the effect of which was to lock in the 30-Year Base Treasury Rate
at approximately 7.0 percent on $150 million of the $175 million face value of
the Senior Debentures.
In February 1998, the Company completed an amendment to the then existing
revolving credit agreement and the filing of supplemental indentures to each of
the Senior Debentures and Senior Notes, the effect of which was to eliminate all
clauses, provisions and terms in such documents requiring certain wholly owned
subsidiaries of the Company to fully and unconditionally guarantee, on a joint
and several basis, the obligations of the Company under such credit agreement,
debentures and notes, respectively.
7.125% SENIOR DEBENTURES DUE 2018. In May 1998, Dynegy sold $175 million
of 7.125 percent Senior Debentures due May 15, 2018 ("Debentures"). The
Debentures were issued at a price of 99.654 percent, which, after deducting
underwriting discounts and commissions, resulted in net proceeds of
approximately $173 million. Proceeds from the sale of the Debentures were used
to retire short-term debt incurred in connection with the redemption of certain
high-cost debt discussed below. Interest on the Debentures is payable
semiannually on May 15 and November 15 of each year. The Debentures are
redeemable, at the option of the Company, in whole or in part from time to time,
at a formula based redemption price as defined in the associated indenture. Upon
issuance, the Debentures were priced based on the then existing 30-Year Base
Treasury Rate plus a spread based principally on the Company's credit rating.
Prior to issuing the Debentures, the Company entered into a series of
transactions, the effect of which was to lock in the 30-Year Base Treasury Rate
at approximately 6.0% on $148 million of the $175 million face value of the
Debentures.
POWER GENERATION NOTES. Included in the December 31, 1998 consolidated
long-term debt balance was $103.1 million representing the aggregate principal
balance outstanding under three separate notes, each having recourse only to the
assets of one of the three power generation projects acquired in 1998 as
described in Note 4. 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 $69.3
million of the indebtedness at a weighted average rate of 8.067 percent.
RETIRED DEBT. During 1998, the Company retired the 14 percent Senior
Subordinated Notes, the 10.25 percent Subordinated Notes and the Chevron Note.
The retirement of these notes was funded through a combination of borrowings
under existing credit agreements and the sale of commercial paper. There was no
financial gain or loss related to these retirements.
Aggregate maturities of all long-term indebtedness are: 1999 - $135.2
million; 2000 - $40.0 million; 2001 - none; 2002 - none; 2003 and beyond - $1.0
billion.
F-17
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 -- INCOME TAXES
The Company is subject to U.S. federal, foreign and state income taxes on
its operations. Components of income tax expense (benefit) were:
Year Ended December 31,
------------------------------------
1998 1997 1996
-------- --------- --------
($ in thousands)
Current tax expense (benefit):
Domestic $ (608) $ 13,230 $ 10,427
Foreign (1,362) 3,071 ---
Deferred tax expense (benefit):
Domestic 44,565 (81,306) 45,510
Foreign 7,743 2,795 386
------- -------- --------
Income tax provision (benefit) $50,338 $(62,210) $ 56,323
======= ======== ========
Components of income (loss) before income taxes was as follows:
Year Ended December 31,
------------------------------------
1998 1997 1996
-------- --------- --------
($ in thousands)
Income (loss) before income taxes:
Domestic $133,867 $(180,127) $150,705
Foreign 24,824 30,232 18,940
-------- --------- --------
$158,691 $(149,895) $169,645
======== ========= ========
Deferred income taxes are provided for the temporary differences between
the tax basis of Dynegy's assets and liabilities and their reported financial
statement amounts. Significant components of deferred tax liabilities and assets
were:
December 31,
----------------------
1998 1997
-------- --------
($ in thousands)
Deferred tax assets:
Clearinghouse partnership basis differential $ 990 $ 19,211
Loss carryforward 132,445 76,885
Tax credits 10,798 23,162
Other --- 8,499
144,233 127,757
-------- --------
Valuation allowance --- ---
-------- --------
144,233 127,757
-------- --------
Deferred tax liabilities:
Items associated with capitalized costs 461,770 381,816
-------- --------
Net deferred tax liability $317,537 $254,059
======== ========
Realization of the aggregate deferred tax asset is dependent on the Company's
ability to generate taxable earnings in the future. There was no valuation
allowance established at December 31, 1998 or 1997, as management believes the
aggregate deferred asset is more likely than not to be fully realized in the
future.
F-18
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax provision (benefit) for the years ended December 31, 1998, 1997
and1996, was equivalent to effective rates of 32 percent, (41) percent and 33
percent, respectively. Differences between taxes computed at the U.S. federal
statutory rate and the Company's reported income tax provision (benefit) were:
Year Ended December 31,
---------------------------------
1998 1997 1996
------- -------- -------
($ in thousands)
Expected tax at U.S. statutory rate $55,444 $(52,463) $59,376
State taxes 2,564 (3,676) 3,393
Foreign tax benefit (2,300) (5,415) (6,621)
Basis differentials and other (5,370) (656) 175
------- -------- -------
Income tax provision (benefit) $50,338 $(62,210) $56,323
======= ======== =======
At December 31, 1998, the Company had approximately $358 million of
regular tax net operating loss carryforwards. The net operating loss
carryforwards expire from 2006 through 2012. Certain provisions of the Internal
Revenue Code place an annual limitation on the Company's ability to utilize tax
carryforwards existing as of the date of a 1995 business acquisition. Management
believes such carryforwards will be fully realized prior to expiration.
NOTE 8 -- COMPANY OBLIGATED PREFERRED SECURITIES OF A SUBSIDIARY TRUST
In May 1997, NGC Corporation Capital Trust I ("Trust") issued, in a private
transaction, $200 million aggregate liquidation amount of 8.316% Subordinated
Capital Income Securities ("Trust Securities") representing preferred undivided
beneficial interests in the assets of the Trust. The Trust invested the
proceeds from the issuance of the Trust Securities in an equivalent amount of
8.316% Subordinated Debentures ("Subordinated Debentures") of the Company. The
sole assets of the Trust are the Subordinated Debentures. The Trust Securities
are subject to mandatory redemption in whole but not in part on June 1, 2027,
upon payment of the Subordinated Debentures at maturity, or in whole but not in
part at any time, contemporaneously with the optional prepayment of the
Subordinated Debentures, as allowed by the associated indenture. The
Subordinated Debentures are redeemable, at the option of the Company, in whole
at any time or in part from time to time, at formula-based redemption prices, as
defined in the indenture. The Subordinated Debentures represent unsecured
obligations of the Company and rank subordinate and junior in right of payment
to all Senior Indebtedness to the extent and in the manner set forth in the
associated indenture. The Company has irrevocably and unconditionally
guaranteed, on a subordinated basis, payment for the benefit of the holders of
the Trust Securities the obligations of the Trust to the extent the Trust has
funds legally available for distribution to the holders of the Trust Securities,
as described in the indenture ("Guarantee"). Distributions on the Trust
Securities are payable each June 1 and December 1, coinciding with the interest
payment due dates on the Subordinated Debentures, and are classified in the
accompanying Statement of Operations as "minority interest in income of a
subsidiary." The periodic distributions accruing at an annual rate of 8.316
percent of the aggregate liquidation amount are recorded as minority interest in
income of a subsidiary in the Company's consolidated statement of operations. So
long as no Debenture Event of Default, as defined, has occurred and continues,
the Company has the right to defer the payment of interest on the Subordinated
Debentures for any Extension Period elected by the Company, which period cannot
extend beyond 10 consecutive semi-annual periods, end on a date other than an
Interest Payment Date or extend beyond the Stated Maturity Date. During October
1997, the Trust completed an exchange offer through which all of the outstanding
Trust Securities were exchanged by the holders thereof for registered securities
having substantially the same rights and obligations.
Note 9 -- COMMITMENTS AND CONTINGENCIES
Litigation. 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. and Destec
Operating Company (wholly-owned subsidiaries of the Company now known
respectively as Dynegy Power Corp.,
F-19
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dynegy Power Holdings, Inc. and Dynegy Operating Company) as well as against San
Joaquin CoGen Limited ("San Joaquin" or the "Partnership") and its general
partners (collectively the "Dynegy Defendants"). Dynegy Power Corp. 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 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 trial date is currently June
15, 1999. The Partnership has previously advised the 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 were to
determine 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. The
parties have been actively engaged in settlement discussions, which resulted in
the execution of a Termination and Settlement Agreement between PG&E and the
Dynegy Defendants on March 9, 1999 (the "Settlement Agreement"). The Settlement
Agreement provides for, upon the receipt of CPUC approval, a dismissal with
prejudice of PG&E's claims against the Dynegy Defendants, a release by PG&E of
all claims relative to FERC matters and a termination of the San Joaquin power
purchase agreement as of December 31, 1999, whereupon the San Joaquin facility
will continue to operate as a merchant plant. The Dynegy Defendants will seek to
recover from LOF any losses resulting from the settlement with PG&E. However, if
the settlement is not ultimately concluded, the Dynegy Defendants will seek to
recover from LOF any losses or amounts for which it may be found liable.
Further, the Company's subsidiaries intend to continue 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. (now
known respectively as Dynegy Power Corp., Dynegy Holdings, Inc. and Dynegy Gas
Services, Inc.), wholly-owned direct and indirect subsidiaries of the Company
(collectively, the "Defendants"), as well as against Chalk Cliff Limited and
McKittrick Limited (collectively, the "Partnerships"). 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. All general partners of
the Partnerships are also named defendants. The lawsuit alleged breach of
contract against the Partnerships and their respective general partners, and
interference and conspiracy to interfere with contracts against the Defendants.
The breach of contract claims arose out of the "transport-or-pay" provisions of
the gas transportation service agreements between the Partnerships and SOCAL.
SOCAL sought damages from the Partnerships for past damages and anticipatory
breach damages in an amount equal to approximately $31,000,000. 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
F-20
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Defendants,
(c) dismissed the tortious interference claims against the Defendants, and (d)
assessed damages in an aggregate amount of approximately $31,000,000. On the
same day, the 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 Partnerships filed their
appeal of that final judgment on June 4, 1998. 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 judgment against them, and have
instituted foreclosure proceedings as to the projects. Additionally, receivers
were named by the lenders and approved by the Court for each of the projects. In
early December 1998, the defendants filed their opening appellate briefs in the
appeal of the Court's final judgment. On February 23, 1999, the Court granted a
motion by SOCAL to amend the Court's final judgment to include a finding that
Dynegy Power Corp. is the alter ego of the Partnerships and their respective
general partners. Dynegy Power Corp. will appeal the Court's ruling, and will
vigorously defend SOCAL's claims.
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. In the
opinion of management, the election by the lender of its option under the terms
of such arrangements 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. By order dated February 2, 1999, the federal District Court
dismissed MID's state and federal antitrust claims against PG&E and Destec;
however, the Court granted MID leave of thirty days to amend its complaint to
state an antitrust cause of action. On March 3, 1999, MID filed an amended
complaint recasting its federal and state antitrust claims against PG&E and
Destec and restating its breach of contract claim against Destec. Dynegy
believes the allegations made by MID are meritless and will continue to
vigorously defend MID's claims. In the opinion of management, the amount of
ultimate liability with respect to these actions will not have a material
adverse effect on the financial position or results of operations of the
Company.
The Company assumed liability for various claims and litigation in
connection with the Chevron Combination, the Trident Combination, the Destec
Acquisition and in connection with the acquisition of certain gas processing and
gathering facilities from Mesa Operating Limited Partnership. The Company
believes, based on its review of these matters and consultation with outside
legal counsel, that the ultimate resolution of such items will not have a
material adverse effect on the Company's financial position or results of
operations. Further, the Company is subject to various legal proceedings and
claims, which arise in the normal course of business. In the opinion of
management, the amount of ultimate liability with respect to these actions will
not have a material adverse effect on the financial position or results of
operations of the Company.
COMMITMENTS. In conducting its operations, the Company routinely enters
into long-term commodity purchase and sale commitments, as well as agreements
that commit future cash flow to the lease or acquisition of assets used in its
businesses. These commitments are typically associated with capital projects,
reservation charges associated with firm transmission, transportation and
storage capacity, lease agreements for ship charters and other distribution
assets and leases for office space, equipment and other similar items. The
following describes the more significant commitments outstanding at December 31,
1998.
F-21
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A subsidiary of the Company has entered into binding agreements committing
the Company to expend approximately $14 million 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.
In 1997, Dynegy received cash from a gas purchaser as an advance payment
for future natural gas deliveries over a ten-year period ("Advance Agreement").
As a condition of the Advance Agreement, Dynegy entered into a natural gas swap
with a third party under which Dynegy became a fixed-price payor on identical
volumes to those to be delivered under the Advance Agreement at prices based on
then current market rates. The cash payment was classified as an advance on the
balance sheet and is ratably reduced as gas is delivered to the purchaser under
the terms of the Advance Agreement. In addition, the purchaser pays a monthly
fee to Dynegy associated with delivered volumes. The Advance Agreement contains
certain non-performance penalties that impact both parties and as a condition
precedent, Dynegy purchased a surety bond in support of its obligations under
the Advance Agreement.
For a two-year period beginning January 1, 1998, the Company contracted for
1.3 billion cubic feet per day of firm transportation capacity to California on
the El Paso Natural Gas pipeline system. Pursuant to this arrangement, Dynegy is
obligated to pay a minimum of $38 million of reservation charges during 1999.
A wholly owned subsidiary of the Company leases certain power generating
assets under agreements that are classified as operating leases. These
agreements have aggregate future minimum lease payments of approximately $432
million at December 31, 1998.
Minimum commitments in connection with office space, equipment, reservation
charges under purchase and firm transportation contracts, power generating and
other leased assets were: 1999 - $134.4 million; 2000 - $232.6 million; 2001 -
$239.0 million; 2002 - $29.0 million; and 2003 and beyond - $99.6 million.
Rental payments made under the terms of these arrangements totaled - $126.1
million in 1998, $85.2 million in 1997 and $45.2 million in 1996.
NOTE 10 -- CAPITAL STOCK
The Company has authorized capital stock consisting of 450,000,000 shares,
of which 50,000,000 shares, par value $0.01 per share, are designated preferred
stock and 400,000,000 shares, par value $0.01 per share, are designated common
stock.
PREFERRED STOCK. The Company's preferred stock may be issued from time to
time in one or more series, the shares of each series to have such designations
and powers, preferences, rights, qualifications, limitations and restrictions
thereof as described in the Company's Certificate of Incorporation. In order to
provide for issuance of preferred shares pursuant to the terms of the Chevron
Combination, 8,000,000 shares of preferred stock were designated during 1996 as
Dynegy Series A Participating Preferred Stock ("Series A Preferred"), of which
7,815,363 shares were issued effective September 1, 1996.
Except as provided by law, the holders of the Series A Preferred have no
voting rights and such shares are not redeemable. At the holders option, each
share of the Series A Preferred may be converted, subject to certain adjustments
and certain defined conditions precedent, into one share of Dynegy common stock.
Such shares have certain preferences, as defined, in the event of liquidation or
dissolution of Dynegy over all stock having a junior ranking. Subject to
certain anti-dilutive adjustments, as defined, the holders of the Series A
Preferred 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 out of funds legally available therefor and paid to the holders of
the Company's common stock. Beginning in the third quarter of 1996, the Company
paid quarterly cash dividends on the Series A Preferred of $0.0125 per share, or
$0.05 per share on an annual basis.
F-22
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMON STOCK. At December 31, 1998, there were 153,298,220 shares of
common stock issued. Dynegy pays quarterly cash dividends on common stock of
$0.0125 per share, or $0.05 per share on an annual basis.
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 1,200,700 shares at a total cost of $17.4 million, or $14.50 per
share on a weighted average cost basis, through December 31, 1998.
STOCK WARRANTS. At December 31, 1998, the Company had warrants outstanding
that entitle the holder thereof to purchase an aggregate 6,228 shares of common
stock at an exercise price of $8.13 per share. The warrants expire in October
2003.
STOCK OPTIONS. Each option granted is valued at an option price, which
ranges from $2.03 per share to the fair market value per share at date of grant.
The difference between the option price and the fair market value, if any, of
each option on the date of grant is recorded as compensation expense over a
vesting period. Options granted at prices below fair market do not become
exercisable until the fifth anniversary date of the grant, at which time they
become fully exercisable. Options granted at market value vest and become
exercisable ratably over a three-year period. The average exercise price of
vested options at December 31, 1998 was $2.69. Compensation expense related to
options granted totaled $4.7 million, $4.0 million and $2.8 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, employee stock options aggregating 4.4 million shares
were exercisable at prices ranging from $2.03 to $21.63 per share. Employee
stock option grants made from 1994 to 1998 will become exercisable during 1999
and 2000, respectively, resulting in the potential exercise of approximately 9.6
million options during that two-year 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 the Company cannot predict the timing or the number of shares which 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 which may become available to the market. Stock option transactions for
1998, 1997 and 1996 were (shares in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- --------------------------
SHARES OPTION PRICE SHARES OPTION PRICE SHARES OPTION PRICE
------- ------------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 14,015 $2.03 - 21.63 13,920 $2.03 - 18.75 12,615 $ 2.03 - 9.38
Granted 7,319 2.03 - 17.50 2,284 2.03 - 21.63 1,842 2.03 - 18.75
Exercised (995) 2.03 - 9.38 (1,469) 2.03 - 9.38 (737) 2.03 - 9.38
Canceled or expired (1,568) 2.03 - 19.00 (629) 2.03 - 18.75 (313) 2.03 - 9.38
Other, contingent share issuance (92) 2.03 - 5.66 (91) 2.03 - 5.66 513 2.03 - 8.13
------- ------------- ------- ------------- ------- -------------
Outstanding at end of period 18,679 $2.03 - 21.63 14,015 $2.03 - 21.63 13,920 $2.03 - 18.75
======= ============= ======= ============= ======= =============
Exercisable at end of period 4,394 $2.03 - 21.63 2,861 $2.03 - 18.75 469 $2.03 - 9.38
======= ============= ======= ============= ======= =============
Weighted average fair value of
Options granted during the period
At market $ 5.77 $ 11.14 $ 15.30
============= ============= =============
Weighted average fair value of
Options granted during the period
At below market $ 7.35 $ 14.63 $ 21.38
============= ============= =============
</TABLE>
F-23
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model, with the following weighted-
average assumptions used for grants in 1998, 1997 and 1996: dividends per year
of $0.05 per annum for all years; expected volatility of 40.1 percent, 42.0
percent and 43.3 percent, respectively; risk-free interest rate of 6.28 percent,
6.28 percent and 5.9 percent, respectively; and an expected life of 10 years for
all periods. The Company accounts for its stock option plan in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Had compensation cost been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company's net
income (loss) and per share amounts would have approximated the following pro
forma amounts for the years ended December 31, 1998, 1997 and 1996,
respectively.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------------
1998 1997 1996
------------------------- --------------------------- --------------------------
Diluted Loss Diluted
Net Income EPS Net Loss Per Share Net Income EPS
------------ --------- ---------- ----------- ------------ ----------
($ in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Pro forma amounts $104,578 $0.63 $(108,007) $(0.72) $107,580 $0.79
======== ===== ========= ====== ======== =====
</TABLE>
As allowed by the transitional disclosure requirements of SFAS No. 123, the
preceding pro forma net income and pro forma EPS amounts do not include the
impact, if any, of applying the accounting methodology of SFAS No. 123 to
options granted prior to January 1, 1995. As a result, the compensation cost
included in the pro forma net income amounts for each of the three years in the
period ended December 31, 1998, may not be indicative of amounts to be expected
in future periods.
NOTE 11 -- BUSINESS COMBINATIONS AND SIGNIFICANT RESTRUCTURINGS
THE DESTEC ACQUISITION. On June 27, 1997, Dynegy acquired Destec Energy,
Inc. ("Destec"), an independent power producer, for $1.26 billion, or $21.65 per
share of Destec common stock. Dynegy financed the transaction through cash on
hand and advances on its credit facilities provided by its existing commercial
banks. Concurrent with this acquisition, Dynegy sold Destec's international
facilities and operations to The AES Corporation ("AES") for $439 million. Also
during 1997, the Company sold certain non-strategic assets acquired in the
purchase for aggregate proceeds of $296 million. Proceeds from the AES and non-
strategic asset sales were used to retire indebtedness.
The Destec acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price of approximately $718 million,
inclusive of transaction costs and net of cash acquired, was allocated to the
Destec assets acquired and liabilities assumed based on their estimated fair
values as of June 30, 1997, the effective date of the acquisition for accounting
purposes. The results of operations of the acquired Destec assets are
consolidated with Dynegy's existing operations beginning July 1, 1997. The
following table reflects certain unaudited pro forma information for the periods
presented as if the Destec acquisition had occurred on January 1, 1996 (in
thousands, except per share data):
Years Ended December 31,
-----------------------------
1997 1996
------------ -----------
Pro forma revenues $ 13,498,207 $ 7,529,928
Pro forma net income (loss) (101,175) 125,962
Pro forma earnings (loss) per share (0.67) 0.93
RESTRUCTURING OF NOVAGAS CLEARINGHOUSE, LTD. In June 1997, the Company and
NOVA Corporation ("NOVA") completed the restructuring of the companies' Canadian
natural gas operations formerly executed through Novagas Clearinghouse, Ltd.,
Novagas Clearinghouse Limited Partnership and Novagas Clearinghouse Pipelines
Limited Partnership (collectively "NCL"), a joint venture between Dynegy and
NOVA. Pursuant to the agreements, Dynegy Canada Inc. ("DCI"), a wholly owned
indirect subsidiary of Dynegy, acquired NCL's natural gas marketing
F-24
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
business, excluding the natural gas aggregation business of Pan-Alberta Gas Ltd.
("Pan-Alberta"), from NCL and sold its aggregate 49.9 percent interest in NCL to
NOVA Gas International ("NGI"), a subsidiary of NOVA. NOVA assumed full
ownership of NCL's gathering and processing business and the operations of Pan-
Alberta. The restructuring included amendments to or termination of various
agreements between NCL, Dynegy, NOVA and certain affiliates of both Dynegy and
NOVA. Dynegy realized a pretax gain on the sale of its interest in NCL of $7.8
million, which is classified as other income in the accompanying consolidated
statements of operations for the year ended December 31, 1997. The acquisition
by Dynegy of NCL's marketing business was accounted for under the purchase
method of accounting. Accordingly, the purchase price of $4.0 million, inclusive
of transaction costs, was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as of April 1, 1997, the effective
date of the acquisition for accounting purposes.
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.
THE CHEVRON COMBINATION. On August 31, 1996, Dynegy completed a strategic
combination (the "Chevron Combination") with Chevron U.S.A. Inc. and certain
Chevron affiliates ("Chevron") pursuant to which Chevron contributed
substantially all of its midstream assets (the "Contribution"), including
substantially all of the assets comprising Warren Petroleum Company and
Chevron's Natural Gas Business Unit and an undivided interest in those assets
that constitute the West Texas LPG Pipeline, into Midstream Combination Corp.
("Midstream"), a Delaware corporation formed for purposes of the transaction.
Dynegy was merged with and into Midstream immediately following the Contribution
and Midstream was renamed Dynegy Corporation. In exchange for the Contribution,
Chevron received approximately 38.6 million shares of Dynegy common stock and
approximately 7.8 million shares of Dynegy Series A Participating Preferred
Stock and Dynegy assumed approximately $283 million of indebtedness. Immediately
following closing of the Chevron Combination, Dynegy paid approximately $128
million to Chevron and funded such payment under its Credit Agreement. The
Chevron Combination was accounted for as an acquisition of assets under the
purchase method of accounting. The purchase price of approximately $740 million,
inclusive of assumed indebtedness and transaction costs, was allocated to the
assets acquired and liabilities assumed based on their estimated fair values as
of an effective date of September 1, 1996.
Note 12 -- IMPAIRMENT, ABANDONMENT AND OTHER CHARGES
During the fourth quarter of 1997, the Company recognized a $275 million
charge principally related to impairment of certain long-lived assets,
abandonment of certain operating assets and reserves for obsolescence,
contingencies and other obligations. The charge primarily resulted from the
completion of a plan of restructuring of the Company's natural gas liquids and
crude oil businesses, which includes rationalization and consolidation of assets
acquired in both the Trident and Chevron Combinations, and the pursuit of a
joint venture partner in order to achieve critical mass in its crude oil
marketing business. In addition, a company-wide reorganization of reporting
responsibilities and improvements in business processes and computer information
systems resulted in the identification during the fourth quarter of 1997 of
other obsolete assets and a reduction of employees involved in non-strategic
operations.
F-25
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The charge, which was substantially non-cash in nature, consisted of the
following (in thousands):
Abandonment of long-lived operating assets $ 154,984
Impairment of operating assets and intangibles 79,550
Inventory obsolescence reserve and write-off 10,340
Write-off of other obsolete assets 12,011
Contingency and other obligation reserves 16,750
Severance charge 1,365
---------
$ 275,000
=========
The fair values of the assets impaired and abandoned were determined using
a discounted cash flow methodology. During 1998, Management substantially
completed its plan of rationalization, reorganization and abandonment of assets
anticipated at the end of 1997. In addition, pursuant to the execution of the
restructuring plan, a charge of $9.6 million related to severance charges was
recognized in the first quarter of 1998. The severance charge was related to the
termination of approximately 200 corporate and field employees. The charge
recognized in the first quarter of 1998 approximated the actual severance
expenditures.
Also during the fourth quarter of 1997, the Company changed its method for
accounting for certain business process re-engineering and information
technology transformation costs pursuant to a consensus reached in November 1997
by the EITF. The EITF concluded that all re-engineering costs, including those
incurred in connection with a software installation, should be expensed as
incurred. The Company had previously capitalized certain re-engineering costs
and was amortizing such costs over the estimated useful lives of the projects.
The cumulative effect of this change in accounting of $14.8 million represented
the one-time charge for the aggregate unamortized re-engineering costs
previously capitalized.
NOTE 13 -- EMPLOYEE COMPENSATION, SAVINGS AND PENSION PLANS
CORPORATE INCENTIVE PLAN. Dynegy maintains a discretionary incentive plan
to provide employees competitive and meaningful rewards for reaching corporate
and individual objectives. Specific rewards are at the discretion of the
Compensation Committee of the Board of Directors ("Compensation Committee").
PROFIT SHARING/SAVINGS PLAN. The Company established the Dynegy Profit
Sharing/401(k) Savings Plan ("Plan"), which meets the requirements of Section
401(k) of the Internal Revenue Code, and is a defined contribution plan subject
to the provisions of the Employee Retirement Income Security Act of 1974. The
Plan and related trust fund are established and maintained for the exclusive
benefit of participating employees in the United States and certain expatriates.
Similar plans are available to other employees resident in foreign countries
subject to the laws of each country. All eligible employees may participate in
the plans and employee contributions are generally matched dollar-for-dollar for
the first 5 percent of compensation, subject to Company performance. Employees
vest in the Company's contributions over various periods. The Company also makes
profit sharing contributions to employees' accounts regardless of their
individual participation in the Profit Sharing/Savings Plans.
Matching contributions to the Plan and certain discretionary profit sharing
contributions are made in Company common stock, other contributions are made in
cash. During the years ended December 31, 1998, 1997 and 1996, Dynegy recognized
aggregate costs related to these employee compensation plans of $12.9 million,
$9.7 million and $5.3 million, respectively.
PENSION PLAN. Through a business acquisition, the Company acquired a
noncontributory defined benefit pension plan and such plan remains in existence
at December 31, 1998. The Trident NGL, Inc. Retirement Plan ("Retirement Plan")
is a qualified plan under the Internal Revenue Service regulations. The
Retirement Plan is closed
F-26
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to new participants. Benefits are based on years of service and final average
pay, as defined in the Retirement Plan document. Contributions to the Retirement
Plan in 1998 and 1997 represent the minimum amount required by federal law and
regulation. The Retirement Plan's funded status and amount recognized in
Dynegy's balance sheet at December 31, 1998 and 1997, were:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
------- ------
($ IN THOUSANDS)
<S> <C> <C>
Projected benefit obligation, beginning of the year $ 9,378 $8,909
Service cost 665 711
Interest cost 722 686
Actuarial (gain) loss 1,137 (807)
Benefits paid (147) (121)
------- ------
Projected benefit obligation, end of the year $11,755 $9,378
======= ======
Fair value of plan assets, beginning of the year $ 8,480 $5,798
Actual return on plan assets 615 1,746
Employer contributions 397 1,057
Benefits paid (147) (121)
------- ------
Fair value of plan assets, end of the year $ 9,345 $8,480
======= ======
Funded status $ 2,410 $ 898
Unrecognized net gain from past experience different from that assumed 3,668 5,025
------- ------
Pension liability $ 6,078 $5,923
======= ======
</TABLE>
Current year pension expense is based on measurements of the projected benefit
obligation and the market related value of the Retirement Plan assets as of the
end of the year. The projected benefit obligation at December 31, 1998, was
based on a discount rate of 7.00 percent and an average long-term rate of
compensation growth of 3.5 percent. The expected long-term rate of return on the
Retirement Plan assets was estimated at 8.0 percent.
The components of net pension expense for the Retirement Plan were:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------
1998 1997
------- ------
($ IN THOUSANDS)
<S> <C> <C>
Service cost benefits earned during period $ 665 $ 712
Interest cost on projected benefit obligation 722 686
Expected return on plan assets (618) (502)
Amortization of unrecognized gain (218) (115)
----- -----
Net periodic pension cost $ 551 $ 781
===== =====
</TABLE>
Note 14 -- RELATED PARTY TRANSACTIONS
The Company is a leading North American marketer of natural gas, electricity,
coal, natural gas liquids, crude oil, liquid petroleum gas and related services.
Dynegy is also engaged in natural gas gathering, processing, fractionation and
transportation and electric power generating activities. The Company has
operations in Canada and the United Kingdom and transports liquid petroleum gas
through its international deepwater LPG business. The Company routinely
transacts business directly or indirectly with three of its significant
shareholders, Chevron, NOVA and BG, each of which owns approximately 26 percent
of the outstanding shares of the Company's common stock. Chevron holds all of
the outstanding shares of the Series A Preferred.
Transactions between the Company and Chevron result principally from the
ancillary agreements entered into as part of the Chevron Combination.
Transactions between Dynegy, NOVA and BG result from purchases and sales of
natural gas, natural gas liquids and crude oil between subsidiaries of Dynegy
and these companies. It is management's opinion that these transactions are
executed at prevailing market rates. During the years ended
F-27
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996, the Company recognized in its statement of
operations aggregate sales to, and aggregate costs from, these significant
shareholders of $888 million and $1.7 billion, $788.9 million and $2.4 billion;
and $286.7 million and $1.1 billion, respectively.
Note 15 -- SEGMENT INFORMATION
The Company has adopted Financial Accounting Standard No. 131, "Disclosures
about Segments of an Enterprise and Related Information" and has restated its
segment disclosures for all reporting periods. Dynegy's operations are divided
into two reportable segments: Wholesale Gas and Power and Liquids. The Wholesale
Gas and Power segment is actively engaged in value creation through marketing
and trading of natural gas, power and coal and the generation of electricity
principally under the name Dynegy Marketing and Trade. The Liquids segment
consists of the North American mid-stream liquids operations, as well as the
international liquefied petroleum gas transportation and natural gas liquids
marketing operations located in Houston and London, and certain other
businesses. The North American mid-stream liquids operations are actively
engaged in the gathering and processing of natural gas and the transportation,
fractionation and storage of NGLs. This segment operates principally under the
name Dynegy Mid-Stream Services. Generally, Dynegy accounts for intercompany
transactions at prevailing market rates. Operating segment information for 1998,
1997 and 1996 is presented below.
DYNEGY'S SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
WHOLESALE GAS
AND POWER LIQUIDS ELIMINATION TOTAL
----------- ---------- --------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic $ 9,149,299 $3,307,320 $ --- $12,456,619
Canadian 969,853 209,830 --- 1,179,683
United Kingdom 621,695 --- --- 621,695
----------- ---------- --------- -----------
10,740,847 3,517,150 --- 14,257,997
----------- ---------- --------- -----------
Intersegment revenues
Domestic 157,492 250,280 (407,772) ---
Canadian 61,223 --- (61,223) ---
United Kingdom --- --- --- ---
----------- ---------- --------- -----------
218,715 250,280 (468,995) ---
----------- ---------- --------- -----------
Total revenues 10,959,562 3,767,430 (468,995) 14,257,997
----------- ---------- --------- -----------
Operating margin 236,238 192,449 --- 428,687
Depreciation and amortization (29,026) (84,176) --- (113,202)
Interest expense (24,944) (50,048) --- (74,992)
Interest and other income 6,763 40,058 --- 46,821
Equity earnings of unconsolidated affiliates 75,242 15,796 --- 91,038
Income tax (provision) benefit (52,262) 1,924 --- (50,338)
Net income from operations 90,750 17,603 --- 108,353
Cumulative effect of change in accounting principle --- --- --- ---
Net income 90,750 17,603 --- 108,353
Identifiable assets:
Domestic $ 2,838,367 $2,036,795 $ --- $ 4,875,162
Canadian 257,070 6,947 --- 264,017
United Kingdom 125,058 --- --- 125,058
Investment in unconsolidated affiliates 343,819 175,863 --- 519,682
Capital expenditures 359,516 118,948 --- 478,464
</TABLE>
F-28
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DYNEGY'S SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
WHOLESALE GAS
AND POWER LIQUIDS ELIMINATION TOTAL
----------- ---------- --------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic $ 8,070,692 $ 4,205,759 $ --- $12,276,451
Canadian 632,411 264,028 --- 896,439
United Kingdom 205,490 --- --- 205,490
----------- ----------- --------- -----------
8,908,593 4,469,787 --- 13,378,380
----------- ----------- --------- -----------
Intersegment revenues
Domestic 83,944 437,567 (521,511) ---
Canadian 30,580 --- (30,580) ---
United Kingdom 1,314 --- (1,314) ---
----------- ----------- --------- -----------
115,838 437,567 (553,405) ---
----------- ----------- --------- -----------
Total revenues 9,024,431 4,907,354 (553,405) 13,378,380
----------- ----------- --------- -----------
Operating margin 126,805 258,489 --- 385,294
Impairment, abandonment and other charges --- 275,000 --- 275,000
Depreciation and amortization (16,425) (87,966) --- (104,391)
Interest expense (12,214) (51,241) --- (63,455)
Interest and other income 13,209 14,904 --- 28,113
Equity earnings of unconsolidated affiliates 36,241 22,718 --- 58,959
Income tax (provision) benefit (8,710) 70,920 --- 62,210
Net income (loss) from operations 24,321 (112,006) --- (87,685)
Cumulative effect of change in accounting principle (7,289) (7,511) --- (14,800)
Net income (loss) 17,033 (119,518) --- (102,485)
Identifiable assets:
Domestic $ 1,882,965 $ 2,299,312 $ --- $ 4,182,277
Canadian 239,090 40,900 --- 279,990
United Kingdom 54,635 --- --- 54,635
Investment in unconsolidated affiliates 310,445 160,032 --- 470,477
Capital expenditures 815,271 189,388 --- 1,004,659
</TABLE>
F-29
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DYNEGY'S SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
WHOLESALE GAS
AND POWER LIQUIDS ELIMINATION TOTAL
----------- ---------- --------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic $ 4,422,849 $ 2,800,813 $ --- $ 7,223,662
Canadian --- 36,540 --- 36,540
United Kingdom --- --- --- ---
----------- ----------- --------- -----------
4,422,849 2,837,353 --- 7,260,202
----------- ----------- --------- -----------
Intersegment revenues
Domestic 80,943 242,297 (323,240) ---
Canadian --- --- --- ---
United Kingdom --- --- --- ---
----------- ----------- --------- -----------
80,943 242,297 (323,240) ---
----------- ----------- --------- -----------
Total revenues 4,503,792 3,079,650 (323,240) 7,260,202
----------- ----------- --------- -----------
Operating margin 103,624 265,876 --- 369,500
Depreciation and amortization (3,897) (67,779) --- (71,676)
Interest expense (2,179) (44,023) --- (46,202)
Interest and other income 4,825 660 --- 5,485
Equity earnings of unconsolidated affiliates 20,696 7,379 --- 28,075
Income tax provision (19,792) (36,531) --- (56,323)
Net income from operations 50,907 62,416 --- 113,323
Cumulative effect of change in accounting principle --- --- --- ---
Net income 50,907 62,416 --- 113,323
Identifiable assets:
Domestic $ 1,467,990 $ 2,635,318 $ --- $ 4,103,308
Canadian 34,917 30,507 --- 65,424
United Kingdom 18,079 --- --- 18,079
Investment in unconsolidated affiliates 52,500 129,188 --- 181,688
Capital expenditures 6,324 821,848 --- 828,172
</TABLE>
F-30
<PAGE>
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the Company's unaudited quarterly financial
information for the years ended December 31, 1998 and 1997.
Quarter Ended
----------------------------------------------
March June September December
1998 1998 1998 1998
----------------------------------------------
($ in thousands, except per share data)
Revenues $3,315,569 $3,278,214 $4,586,515 $3,077,699
Operating margin 96,989 107,915 105,985 117,798
Income before income taxes 16,411 35,043 63,739 43,498
Net income 12,339 23,441 43,645 28,928
Net income per share (2) 0.07 0.14 0.27 0.18
Quarter Ended
----------------------------------------------
March June September December
1998 1998 1998 1998
----------------------------------------------
($ in thousands, except per share data)
Revenues $3,272,080 $2,684,339 $3,657,456 $3,764,505
Operating margin 67,347 97,767 110,848 109,332
Income (loss) before
income taxes 4,429 43,575 37,326 (235,225)
Net income (loss) (1) 4,614 32,128 25,028 (164,255)
Net income (loss)
per share (2) 0.03 0.19 0.15 (1.09)
1. Fourth quarter results include the impairment, abandonment and other charges
of $275 million, on a pre-tax basis, and the $14.8 million effect of the
change in accounting principle.
2. Net income (loss) per share amounts have been restated to conform to the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings
Per Share."
F-31
<PAGE>
SCHEDULE I
DYNEGY INC.
CONDENSED BALANCE SHEETS OF REGISTRANT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 209,439 $ 375
Accounts receivable 500 32
Intercompany accounts receivable 446,959 177,479
Prepayments and other assets 6,773 4,992
---------- ----------
663,671 182,878
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 3,297 9,590
Less: accumulated depreciation (2,587) (3,755)
---------- ----------
710 5,835
---------- ----------
OTHER ASSETS
Investments in affiliates 1,514,635 1,483,092
Intercompany note receivable 160,000 160,000
Deferred taxes and other assets 205,536 77,366
---------- ----------
$2,544,552 $1,909,171
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Intercompany accounts payable $ 155,131 $ 8,289
Accrued liabilities 146,100 16,764
---------- ----------
301,231 25,053
LONG-TERM DEBT 913,000 664,500
COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST 200,000 200,000
OTHER LIABILITIES 2,258 493
---------- ----------
1,416,489 890,046
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 50,000,000 shares
authorized: 8,000,000 shares designated as Series A
Participating Preferred Stock, 7,815,363 shares issued and
outstanding at December 31, 1998 and 1997 75,418 75,418
Common stock, $0.01 par value, 400,000,000 shares
authorized: 153,298,220 shares issued at December 31, 1998,
and 151,796,622 shares issued at December 31, 1997 1,533 1,518
Additional paid-in capital 935,183 919,720
Retained earnings 133,340 32,975
Less: treasury stock, at cost: 1,200,700 shares at December 31, 1998
654,900 shares at December 31, 1997 (17,411) (10,506)
---------- ----------
1,128,063 1,019,125
---------- ----------
$2,544,552 $1,909,171
========== ==========
</TABLE>
See Note to Registrant's Financial Statements.
F-32
<PAGE>
SCHEDULE I
DYNEGY INC.
STATEMENTS OF OPERATIONS OF THE REGISTRANT
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Depreciation and amortization $ (241) $ (1,292) $ (496)
Impairment, abandonment and other charges (959) (3,886) ---
General and administrative expenses --- --- ---
-------- --------- --------
Operating loss (1,200) (5,178) (496)
Equity in earnings of affiliates 215,928 (115,108) 182,159
Intercompany interest and other income 13,667 16,928 17,968
Interest expense (68,403) (45,790) (28,071)
Other expenses (1,301) (747) (1,915)
-------- --------- --------
Income (loss) before income taxes 158,691 (149,895) 169,645
Income tax provision (benefit) 50,338 (62,210) 56,323
-------- --------- --------
Net income (loss) from continuing operations before
cumulative effect of change in accounting 108,353 (87,685) 113,322
Cumulative effect of change in accounting principle
(net of income tax benefit of $7,913) --- (14,800) ---
-------- --------- --------
NET INCOME (LOSS) $108,353 $(102,485) $113,322
======== ========= ========
</TABLE>
See Note to Registrant's Financial Statements.
F-33
<PAGE>
SCHEDULE I
DYNEGY INC.
STATEMENTS OF CASH FLOWS OF THE REGISTRANT
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 108,353 $ (102,485) $ 113,322
Items not affecting cash flows from operating activities:
Depreciation and amortization 1,864 9,631 1,996
Equity in earnings of affiliates, net of cash distributions 215,928 115,108 (182,159)
Deferred taxes 50,338 (86,424) 45,896
Other --- 12,344 7,466
Change in assets and liabilities resulting from operating activities:
Accounts receivable (468) 76 (108)
Intercompany transactions (192,270) 636,063 (298,592)
Prepayments and other assets (2,212) (2,749) 2,260
Accrued liabilities 3,693 1,529 8,487
Other, net (29,778) 2,493 (1,193)
--------- ----------- -----------
Net cash used in operating activities 155,448 585,586 (302,625)
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures --- (5,121) (2,055)
Acquisitions (2,644) (785,349) ---
Other --- --- ---
--------- ----------- -----------
Net cash used in investing activities (2,644) (790,470) (2,055)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 212,259 2,218,500 1,542,000
Repayments of long-term borrowings (493,277) (2,198,000) (1,231,000)
Net proceeds from commercial paper and money market lines of credit 350,758 --- ---
Intercompany advances --- --- ---
Proceeds from sale of capital stock, options and warrants 3,863 203,190 858
Treasury stock acquisitions (6,905) (10,506) ---
Capital contributions --- --- ---
Dividends and other distributions (7,988) (7,925) (7,184)
Other financing (2,450) --- ---
--------- ----------- -----------
Net cash provided by financing activities 56,260 205,259 304,674
--------- ----------- -----------
Net (decrease) increase in cash and cash equivalents 209,064 375 (6)
Cash and cash equivalents, beginning of period 375 --- 6
--------- ----------- -----------
Cash and cash equivalents, end of period $ 209,439 $ 375 $ ---
========= =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid (net of amount capitalized) $ 100,589 $ 60,323 $ 22,341
========= =========== ===========
Taxes paid (net of refunds) $ (8,000) $ 8,043 $ 1,444
========= =========== ===========
Cash dividends paid to parent by consolidated or
unconsolidated subsidiaries $ --- $ --- $ ---
========= =========== ===========
</TABLE>
See Note to Registrant's Financial Statements.
F-34
<PAGE>
SCHEDULE I
DYNEGY INC.
NOTE TO REGISTRANT'S FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
Dynegy Inc. ("Dynegy" or the "Company") is a holding company that
principally conducts all of its business through its subsidiaries. The Company
is the result of a strategic business combination ("Trident Combination")
between Natural Gas Clearinghouse and Trident NGL Holding, Inc. ("Holding"),
under which Holding was renamed NGC Corporation. Pursuant to the terms of the
Trident Combination, Holding was the legally surviving corporation and
Clearinghouse was considered the acquiring company for accounting purposes
resulting in a new historical cost basis for Holding beginning March 1, 1995,
the effective date of the Trident Combination. During 1998, the Company changed
its name to Dynegy Inc. in order to reflect its evolution from a natural gas
marketing company to an energy services company capable of meeting the growing
demands and diverse challenges of the dynamic energy market of the 21st Century.
The accompanying condensed Registrant Financial Statements were prepared
pursuant to rules promulgated by the Securities and Exchange Commission. In
accordance with these rules, the accompanying statements reflect the financial
position, results of operations and cash flows of Dynegy, the holding company of
Dynegy Inc., at December 31, 1998 and 1997, and for the years then ended through
December 31, 1996, respectively. These statements should be read in conjunction
with the Consolidated Statements and notes thereto of Dynegy Inc.
F-35
<PAGE>
EXHIBIT 10.3
DYNEGY INC.
AMENDED AND RESTATED 1991 STOCK OPTION PLAN
[AS AMENDED THROUGH AUGUST 20, 1998]/1/
I. PURPOSES
Dynegy Inc., a Delaware corporation (the "Company"), desires to afford
certain of its directors and key employees (herein, "Key Persons") and the Key
Persons of any Related Entity (as defined below) who are responsible for the
continued growth of the Company an opportunity to acquire a proprietary interest
in the Company, and thus to create in such Key Persons an increased interest in
and a greater concern for the welfare of the Company and its stockholders.
From and after December 8, 1995, for all purposes under the Plan, the term
"Related Entity" shall mean (i) Novagas Clearinghouse Ltd., (ii) Accord Energy
Ltd., and (iii) any corporation, partnership, limited liability company or
partnership, association, trust or other organization now existing or hereafter
formed or acquired which, directly or indirectly, controls, is controlled by, or
is under common control with, the Company: provided, however, that (1) for
purposes of Articles V, VI and VIII of the Plan, and (2) with respect to
Incentive Options (as defined below) granted prior to May 10, 1996, for purposes
of Article XII of the Plan, the term "Related Entity" shall mean a subsidiary
corporation or parent corporation of the Company now existing or hereafter
formed or acquired. For purposes of the preceding sentence, "control"
(including, with correlative meanings, the terms "controlled by" and "under
common control with"), as used with respect to any entity or organization, shall
mean the possession, directly or indirectly, of the power (A) to vote more than
50% of the securities having ordinary voting power for the election of directors
of the controlled entity or organization, or (B) to direct or cause the
direction of the management and policies of the controlled entity or
organization, whether through the ownership of voting securities or by contract
or otherwise. As used in the Plan, the terms "subsidiary corporation" and
"parent corporation" shall mean, respectively, a corporation coming within the
definition of such terms contained in Sections 424(f) and 424(e) of the Internal
Revenue Code of 1986, as amended (the "Code ").
The stock options ("Options") offered pursuant to this Amended and Restated
1991 Stock Option Plan (the "Plan") are a matter of separate inducement and are
not in lieu of any salary or other compensation for services of any Key Person.
The Company, by means of the Plan, seeks to retain the services of persons
now holding key positions and to secure the services of persons capable of
filling such positions.
The Options granted under the Plan are intended to be either incentive
stock options ("Incentive Options") within the meaning of Section 422 of the
Code, or options that do not meet
- ---------------------
/1/ The Plan was amended and restated effective as of May 10, 1996. This
version of the Plan reflects all amendments to the Plan through August 20,
1998, including, without limitation, the amendments implemented to reflect
the corporate name change from "NGC Corporation" to "Dynegy Inc."
<PAGE>
the requirements for Incentive Options ("Non-Qualified Options"), but the
Company makes no warranty as to the qualification of any Option as an Incentive
Option.
II. AMOUNT OF STOCK SUBJECT TO THE PLAN
Subject to the adjustments provided in Article XIII hereof, the total
number of shares of capital stock of the Company that may be purchased pursuant
to the exercise of Options granted under the Plan shall not exceed, in the
aggregate, 9,892,610 shares of authorized voting common stock, par value $0.01
per share, of the Company (the "Shares"); provided, however, that
notwithstanding any provision in the Plan to the contrary, the Committee (as
defined below) may not grant Options under the Plan that could result in more
than 6,692,610 Shares (subject to adjustment in the same manner as provided in
Article XIII hereof with respect to the maximum number of Shares subject to the
Plan) being issued upon the exercise of such Options unless the proposed
transaction with Chevron U.S.A. Inc. ("Chevron") to combine substantially all of
Chevron's gas gathering, processing and marketing operations with the Company is
consummated. As used herein, the authorized common stock of the Company shall
be referred to as "Company Stock."
Shares that may be acquired under the Plan may be authorized but unissued
Shares, Shares of issued stock held in the Company's treasury, issued Shares
reacquired by the Company, or a combination thereof, in each case as the
Committee may determine from time to time at its sole option. If and to the
extent that Options granted under the Plan expire or terminate without having
been exercised, new Options may be granted with respect to the Shares covered by
such expired or terminated Options, provided that the grant and the terms of
such new Options shall in all respects comply with the provisions of the Plan;
provided, however, that no Option shall be granted under the Plan after the
Termination Date (as defined below).
The Company may from time to time grant to certain Key Persons of the
Company or a Related Entity Options under the terms hereinafter set forth;
provided, however, that, except with respect to Options then outstanding, if not
sooner terminated under the provisions of Article XX, the Plan shall terminate
upon and no further Options shall be granted after May 9, 2006 (the "Termination
Date"). Notwithstanding any provision in the Plan to the contrary, Incentive
Options may be granted only to Key Persons who are employed by the Company or a
Related Entity that is a subsidiary corporation or parent corporation of the
Company on the date of grant of any such Option.
III. ADMINISTRATION
The Plan shall be administered by the Option Committee, or any successor
thereto, of the Board of Directors of the Company (the "Board of Directors"), or
by any other committee appointed by the Board of Directors to administer this
Plan (the "Committee"). The number of individuals that shall constitute the
Committee shall be no less than two individuals. A majority of the Committee
shall constitute a quorum (or if the Committee consists of only two members,
then both members shall constitute a quorum), and the acts of a majority of the
members present at any meeting at which a quorum is present, or acts approved
in writing by a majority of the
2
<PAGE>
Committee, shall be the acts of the Committee. The Committee shall be comprised
exclusively of "outside directors" as such term is used pursuant to Section
162(m) of the Code and any rules and regulations promulgated thereunder. At any
time that the Company shall have a class of equity securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), (i) each member of the Committee shall be required to also be a
"disinterested person" to administer the Plan within the meaning of Rule 16b-3,
as amended (herein so called), or other applicable rules under Section 16(b) of
the Exchange Act, and the Committee shall administer the Plan so as to comply at
all times with the Exchange Act and (ii) no member of the Committee shall be
eligible for grants or awards hereunder.
The members of the Committee shall serve at the pleasure of the Board of
Directors, which shall have the power, at any time and from time to time, to
remove members from or add members to the Committee. Removal from the Committee
may be with or without cause. Any individual serving as a member of the
Committee shall have the right to resign from membership in the Committee by
written notice to the Board of Directors. The Board of Directors, and not the
remaining members of the Committee, shall have the power and authority to fill
vacancies on the Committee, however caused. The Board of Directors shall
promptly fill any vacancy that causes the number of members of the Committee to
be below two or any other number that Rule 16b-3 or Section 162(m) of the Code
(or other applicable rules or regulations) may require from time to time.
Subject to the express provisions of the Plan, the Committee shall have
authority, in its discretion, to determine the Key Persons to whom Options shall
be granted, the time when such Options shall be granted to Key Persons, the
number of Shares which shall be subject to each Option, the purchase price of
each Share which shall be subject to each Option, the period(s) during which
such Options shall be exercisable (whether in whole or in part), and the other
terms and provisions thereof. In determining the Key Persons to whom Options
shall be granted and the number of Shares for which Options shall be granted to
each Key Person, the Committee shall consider the length of service, the
contributions to the Company, its parents and subsidiaries taken as a whole, and
the responsibilities and duties of each Key Person.
Subject to the express provisions of the Plan, the Committee also shall
have authority to construe the Plan and Options granted thereunder, to amend, or
in the case of material amendments to the Plan, to recommend to the Board of
Directors and the stockholders of the Company the amendment of, the Plan, to
amend Options granted thereunder, to prescribe amend and rescind rules and
regulations relating to the Plan, to determine the terms and provisions of the
respective Options (which need not be identical) and to make all other
determinations necessary or advisable for administering the Plan. The Committee
also shall have the authority to require, in its discretion, as a condition of
the granting of any such Option, that an employee recipient agree (i) not to
sell or otherwise dispose of Shares acquired pursuant to the exercise of an
Incentive Option for a period of two (2) years from the grant of such Incentive
Option nor within one (1) year from the date of the acquisition of such Shares
pursuant to the exercise of such Incentive Option and (ii) that in the event of
termination of employment of such employee, other than as a result of dismissal
without cause, such employee will not, for a period to be fixed at the time of
the grant of the Option, enter into any other employment or participate directly
or
3
<PAGE>
indirectly in any other business or enterprise which is competitive with the
business of the Company or any Related Entity, or enter into any employment in
which such employee will be called upon to utilize special knowledge obtained
through employment with the Compary or any Related Entity. The Committee shall
also have the authority to require, as a condition to the granting of any
Option, that the person receiving such Option agree not to sell or otherwise
dispose of such Option, any Company Stock acquired pursuant to such Option or
any other "derivative security" (as defined by Rule 16a-1(c) under the Exchange
Act) for a period of six (6)) months following the later of (i) the date of the
grant of such Option, or (ii) the date when the exercise price of such Option is
fixed if such exercise price is not fixed at the date of grant of such Option.
Subject to and consistent with the express provisions of the Code and Rule
16b-3 promulgated under the Exchange Act, the Committee shall have plenary
authority, in lieu of requiring a cash payment from the Key Person upon the
exercise of an Option, to:
(a) provide the establishment of procedures for a Key Person (1) to
have withheld from the total number of Shares to be acquired upon the
exercise of an Option that number of Shares having a fair market value (as
defined herein) which, together with such cash as shall be paid in respect
of fractional Shares, shall equal the Option exercise price, (2) to
exercise an Option by delivering that number of Shares of Company Stock
already owned by such Key Person having a fair market value which shall
equal the Option exercise price, (3) to exercise a portion of an Option by
delivering that number of Shares or Share of Company Stock already owned by
such Key Person having a fair market value which shall equal the partial
Option exercise price and to deliver the Shares thus acquired by such Key
Person in payment of Shares to be received pursuant to the exercise of
additional portions of such Option, the effect of which shall be that such
Key Person can in sequence utilize such newly acquired Shares in payment of
the exercise price of the entire Option, together with such cash as shall
be paid in respect of fractional Shares, if any, or (4) to utilize a
combination of the methods stated in clauses (1) and (3) above, or of cash
and one or both of such methods, in payment of the exercise price of all or
a portion of such Option; provided, however, that in the case of an
Incentive Option, no Shares shall be used to pay the exercise price unless
such Shares were not acquired through the exercise of an Incentive Option
or, if so acquired, have been held for more than two years since the grant
of such Option and for more than one year since the exercise of such
Option; and
(b) if appropriate, to provide an arrangement through registered
broker-dealers whereby temporary financing may be made available by the
broker-dealer to a Key Person who wishes to deliver Shares of the Company
in partial or full payment of the exercise price of such Key Person's
Option, under the rules and regulations of the Board of Governors of the
Federal Reserve, for the purpose of assisting the Key Person in the
exercise of an Option, such authority to include the payment by the Company
of the commissions of the broker-dealer.
4
<PAGE>
The determination of the Committee on matters referred to in this Article
III shall be conclusive.
The Committee may employ such legal counsel, consultants and agents as it
may deem desirable for the administration of the Plan and may rely upon any
opinion received from any such counsel or consultant and any computation
received from any such consultant or agent. Expenses incurred by the Committee
in the engagement of such counsel, consultant or agent shall be paid by the
Company. No member or former member of the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
Option granted hereunder.
IV. ELIGIBILITY
Grants of Incentive Options and Non-Qualified Options may be made under the
Plan, subject to and in accordance with the terms of the Plan, to Key Employees.
As used herein, the term "Key Employee" shall mean any employee of the Company
or any Related Entity, including officers and directors of the Company or any
Related Entity who are also employees of the Company or any Related Entity, who
are regularly employed on a salaried basis and who are so employed on the date
of such grant, whom the Committee identifies as having a direct and significant
effect on the performance of the Company or any Related Entity. Notwithstanding
the preceding provisions of this Article IV, Incentive Options may be granted
only to Key Employees who are employed by the Company or a Related Entity that
is a subsidiary corporation or parent corporation of the Company on the date of
grant of any such Option.
Grants of Non-Qualified Options shall be made, subject to and in accordance
with the terms hereof, to individuals not regularly employed by the Company who
serve as directors of the Company ("Outside Director Participants").
The adoption of this Plan shall not be deemed to give any person a right to
be granted any Options.
Subject to the adjustment provisions contained in Article XIII, the
aggregate number of Shares with respect to which Options granted to any Key
Employee (which for purposes of this sentence shall include the Chairman of the
Board, whether or not such person would otherwise be considered a Key Employee)
are exercisable shall not exceed 1,063,083.
V. LIMITATION ON EXERCISE OF INCENTIVE OPTIONS
Except as otherwise provided under the Code, to the extent that the
aggregate fair market value of stock with respect to which Incentive Options are
exercisable for the first time by an employee during any calendar year (under
all stock option plans of the Company and any Related Entity) exceeds $100,000,
such Options shall be treated as Non-Qualified Options. For purposes of this
limitation (i) the fair market value of stock is determined as of the time the
Option is granted, and (ii) the limitation will be applied by taking into
account Options in the order in which they were granted.
5
<PAGE>
VI. OPTION PRICE AND PAYMENT
The price ("Exercise Price") for each Share purchasable under any Option
granted hereunder shall be such amount as the Committee shall, in its best
judgment made in good faith, determine on the basis of facts and circumstances
and the requirements, if any, of Section 162(m) of the Code and any rules or
regulations promulgated thereunder to be not less than 100% of the fair market
value per Share at the date such Option is granted; provided, however, that in
the case of an Incentive Option granted to a person who, at the time such
Incentive Option is granted, owns shares of the Company or any Related Entity
which possesses ten percent (10%) of the total combined voting power of all
classes of shares of the Company or of any Related Entity, the Exercise Price
for each Share purchasable thereunder shall be such amount as the Committee, in
its best judgment, shall determine to be not less than one hundred ten percent
(110%), of the fair market value per Share at the date the Incentive Option is
granted. In determining stock ownership of a Key Employee for any purposes
under the Plan, the rules of Section 424(d) of the Code shall be applied, and
the Committee may rely on representations of fact made to it by the Key Employee
and believed by it to be true.
If the Shares are listed on a national securities exchange in the United
States on the date any Option is granted, the fair market value per share shall
be deemed to be the average of the high and low quotations at which such Shares
are sold on such national securities exchange on the date such Option is
granted. If the Shares are listed on a national securities exchange in the
United States on such date but the Shares are not traded on such date, or such
national securities exchange is not open for business on such date, the fair
market value per Share shall be determined as of the closest preceding date on
which such exchange shall have been open for business and the Shares were
traded. If the Shares are listed on more than one national securities exchange
in the United States on the date any such Option is granted, the Committee shall
determine which national securities exchange shall be used for the purpose of
determining the fair market value per Share. If the Shares are not listed on a
national securities exchange on such date, the last reported bid price in the
over-the-counter market shall be the fair market value per share, or if the
Shares are not traded on the over-the-counter market on such date, the fair
market value per share shall be determined by the Committee in good faith.
Notwithstanding the prior provisions of this paragraph, to the extent that
Section 162(m) of the Code or any rule or regulation promulgated thereunder
provides a different or inconsistent definition of "fair market value," such
definition shall be applied in determining the fair market value per share of
Options issued hereunder. For purposes of establishing the fair market value of
Shares or underlying Options, the fair market value shall be determined without
regard to any restriction on transfer thereof.
For purposes of this Plan. the determination by the Committee of the fair
market value of a Share shall be conclusive.
Upon the exercise of an Option granted hereunder, the Company shall cause
the purchased Shares to be issued only when it shall have received the full
purchase price for the Shares in cash or by certified check, except as otherwise
provided in Article III hereof.
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VII. USE OF PROCEEDS
The cash proceeds of the sale of Shares subject to the Options granted
hereunder are to be added to the general funds of the Company and used for its
general corporate purposes as the Board of Directors shall determine.
VIII. TERMS OF OPTIONS AND LIMITATIONS ON THE RIGHT OF EXERCISE
Subject to Article V, any Incentive Option granted hereunder shall be
exercisable during a period of not more than ten (10) years from the date of
grant of such Option at such times and in such amounts as the Committee shall
determine at such date of grant; provided, however, that in the case of an
Incentive Option granted to a person who, at the time the Incentive Option is
granted, owns shares in the Company or in any Related Entity which possesses
more than ten percent (10%) of the total combined voting power of all classes of
shares of the Company or of any Related Entity, such Option shall expire not
more than five (5) years from the date of grant.
Any Non-Qualified Option granted hereunder shall be exercisable at such
times, in such amounts and during such period or periods as the Committee shall
determine at the date of the grant of such Option.
The Committee shall have the right to accelerate, in whole or in part, from
time to time, conditionally or unconditionally, rights to exercise any Option
granted hereunder.
To the extent that an Option is not exercised within the period of
exercisability specified therein, it shall expire as to the then unexercised
part. If any Option granted hereunder shall terminate prior to the Termination
Date, the Committee shall have the right to use the Shares as to which such
Option shall not have been exercised to grant one or more additional Options to
any eligible Key Person. but any such grant of an additional Option shall be
made prior to the close of business on the Termination Date.
In no event shall an Option granted hereunder be exercised for a fraction
of a share.
IX. EXERCISE OF OPTIONS
Options granted under the Plan shall be exercised by the Optionee as to all
or part of the Shares covered thereby by the giving of written notice of the
exercise thereof to the Corporate Secretary of the Company at the principal
business office of the Company, specifying the number of Shares to be purchased
and specifying a business day not more than fifteen (15) days from the date such
notice is given, for the payment of the purchase price against delivery of the
Shares being purchased. Subject to the terms of Articles III, XV, XVII and
XVIII, the Company shall cause certificates for the Shares so purchased to be
delivered to the Optionee at the principal business office of the Company,
against payment of the full purchase price in cash or by certified check except
as otherwise provided in Article III.
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X. STOCK APPRECIATION RIGHTS
[DELETED]
XI. NON-TRANSFERABILITY OF OPTIONS
An Option granted hereunder shall not be transferable, whether by operation
of law or otherwise, other than by will or the laws of descent and distribution,
and any Option granted hereunder shall be exercisable, during the lifetime of
the holder, only by such holder.
XII. TERMINATION OF EMPLOYMENT AND SERVICE
Upon termination of a Key Person's service with the Company and all Related
Entities, any Option previously granted hereunder, unless otherwise specified by
the Committee in the Option, shall, to the extent not theretofore exercised,
terminate and become null and void, provided that:
(a) if the recipient shall die while in the service of the Company or
a Related Entity or during either the three (3) month or one (1) year
period, whichever is applicable, specified in clause (b) below and at a
time when such recipient was entitled to exercise an Option as herein
provided, the legal representative of such recipient, or such person who
acquired such Option by bequest or inheritance or by reason of the death of
the recipient, may, not later than one (1) year from the date of death (or
such longer period as may be specified by the Committee with respect to a
Non-Qualified Option), exercise such Option to the extent not theretofore
exercised, in respect of any or all of such number of Shares as specified
by the Committee in such Option; and
(b) if the service of any recipient to whom such Option shall have
been granted shall terminate by reason of the recipient's retirement (at
such age or upon such conditions as shall be specified by the Committee),
disability (as described in Section 22(e)(3) of the Code) or dismissal by
the Company or a Related Entity other than for cause (as defined below),
and while such recipient is entitled to exercise such Option as herein
provided, such recipient shall have the right to exercise such Option so
granted, to the extent not theretofore exercised, in respect of any or all
of such number of Shares as specified by the Committee in such Option, at
any time up to and including (i) three (3) months after the date of such
termination in the case of termination by reason of retirement or dismissal
other than for cause (or such longer period as may be specified by the
Committee with respect to a Non-Qualified Option), and (ii) one (1) year
after the date of termination in the case of termination by reason of
disability (or such longer period as may be specified by the Committee with
respect to a Non-Qualified Option).
If a recipient voluntarily terminates his or her employment or service as
an Outside Director Participant, or is discharged for cause, any Option granted
hereunder shall, unless otherwise specified by the Committee in the Option,
forthwith terminate with respect to any unexercised portion thereof.
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Each Incentive Option by its terms shall require the recipient to remain in
the continuous employ of the Company or any subsidiary corporation or parent
corporation of the Company from the date of grant of the Incentive Option until
no more than three (3) months prior to the date of exercise of the Incentive
Option (except as otherwise provided herein in the event of' death or
disability).
Notwithstanding the preceding paragraphs of this Article XII, if the
service of any recipient with the Company and all Related Entities is
terminated, whether voluntarily or involuntarily, within a one-year period
following a change in control of the Company (as defined Article XIII), other
than a termination of such service for cause, such recipient shall have the
right to exercise all or any portion of the Option, whether vested or unvested,
at any time up and to and including three (3) months after the date of such
termination (or such longer period as may be specified by the Committee with
respect to a Non-Qualified Option), at which time such Option shall cease to be
exercisable.
Notwithstanding the immediately preceding paragraphs of this Article XII,
no Option may be exercised after the expiration of the period of exercisability
provided for in such Option.
If an Option granted hereunder shall be exercised by the legal
representative of a deceased recipient or former recipient, or by a person who
acquired an Option granted hereunder by bequest or inheritance or by reason of
the death of any recipient or former recipient, written notice of such exercise
shall be accompanied by a certified copy of letters testamentary or equivalent
proof of the right of such legal representative or other person to exercise such
Option.
For the purposes of the Plan, the term "for cause" shall mean (i) with
respect to an employee who is a party to a written agreement with, or
alternatively, participates in a compensation or benefit plan of the Company or
a Related Entity, which agreement or plan contains a definition of "for cause"
or "cause" (or words of like import) for purposes of termination of employment
thereunder by the Company or such Related Entity, "for cause" or "cause" as
defined in the most recent of such agreements or plans, or (ii) in all other
cases, as determined by the Committee in its sole discretion, (a) the willful
commission by an employee of a criminal or other act that causes or will
probably cause substantial economic damage to the Company or a Related Entity or
substantial injury to the business reputation of the Company or a Related
Entity; (b) the continuing willful failure of an employee to perform the duties
of such employee to the Company or a Related Entity (other than such failure
resulting from the employee's incapacity due to physical or mental illness)
after written notice thereof (specifying the particulars thereof in reasonable
detail) and a reasonable opportunity to be heard and cure such failure are given
to the employee by the Committee; (c) the order of a court of competent
jurisdiction requiring the termination of the employee's employment; or (d) in
the case of an Outside Director Participant, the failure of such Outside
Director Participant to act in good faith or the taking of any action that
constitutes a material breach of such person's fiduciary duty to the Company.
For purposes of the Plan, no act or failure to act, on the employee's part shall
be considered "willful" unless done or omitted to be done by the employee not in
good faith and
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without reasonable belief that the employee's action or omission was in the best
interest of the Company or a Related Entity.
For the purposes of the Plan, an employment relationship shall be deemed to
exist between an individual and the Company or a Related Entity if, at the time
of the determination, the individual was an "employee" of the Company or such
Related Entity. If an individual is on military, sick leave or other bona fide
leave of absence, such individual shall be considered an "employee" for purposes
of the exercise of an Option and shall be entitled to exercise such Option
during such leave if the period of such leave does not exceed 90 days, or, if
longer, so long as the individual's right to reemployment with the Company (or a
Related Entity) is guaranteed either by statute or by contract. If the period
of leave exceeds ninety (90) days, the employment relationship shall be deemed
to have terminated on the ninety-first (91st) day of such leave, unless the
individuals right to re-employment is guaranteed by statute or contract.
A termination of employment shall not be deemed to occur by reason of (i)
the transfer of an employee from employment by the Company to employment by a
Related Entity, or (ii) the transfer of an employee from employment by a Related
Entity to employment by the Company or by another Related Entity.
XIII. ADJUSTMENT OF SHARES; EFFECT OF CERTAIN TRANSACTION
In the event of any change in the outstanding Shares through merger,
consolidation, reorganization, recapitalization, stock dividend, stock split,
split-up, split-off, spin-off, combination of shares, exchange of shares, or
other like change in capital structure of the Company, an adjustment shall be
made to each outstanding Option such that each such Option shall thereafter be
exercisable for such securities, cash and/or other property as would have been
received in respect of the Shares subject to such Option had such Option been
exercised in full immediately prior to such change, and such an adjustment shall
be made successively each time any such change shall occur. The term "Shares"
shall after any such change refer to the securities, cash and/or property then
receivable upon exercise of an Option. In addition, in the event of any such
change, the Committee shall make any further adjustment as may be appropriate to
the maximum number of Shares subject to the Plan, the maximum number of Shares
of which Options may be granted to any one recipient, and the number of Shares
and price per Share subject to outstanding Options as shall be equitable to
prevent dilution or enlargement of rights under such Options, and the
determination of the Committee as to these matters shall be conclusive.
Notwithstanding the foregoing, (i) each such adjustment with respect to an
Incentive Option shall comply with the rules of Section 424(a) of the Code, and
(ii) in no event shall any adjustment be made which would render any Incentive
Option granted hereunder other than an incentive stock option for purposes of
Section 422 of the Code.
In the event of a change in control of the Company, all then outstanding
vested Options shall immediately become exercisable. For purposes of the Plan,
a "change in control" of the Company occurs if: (a) any "person" (defined as
such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act, as
amended), other than a stockholder of the Company as of the date of the adoption
of the Plan by the Board of Directors or any affiliate of any such stockholder,
is or
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<PAGE>
becomes the beneficial owner, directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the combined voting power of
the Company's outstanding securities then entitled to vote for the election of
directors; (b) the Board of Directors shall approve the sale of all or
substantially all of the assets of the Company; or (c) the Board of Directors
shall approve any merger, consolidation, issuance of securities or purchase of
assets, the result of which would be the occurrence of any event described in
clause (a) above.
The Committee in its discretion may determine that, upon the occurrence of
a transaction described in the preceding paragraph, each Option outstanding
hereunder shall terminate within a specified number of days after notice to the
holder, and such holder shall receive, with respect to each Share subject to
such Option, cash in an amount equal to the excess of the fair market value of
such Share immediately prior to the occurrence of such transaction over the
exercise price per Share of such Option immediately prior to the occurrence of
such transaction. The provisions contained in the preceding sentence shall be
inapplicable to an Option granted within six (6) months before the occurrence of
a transaction described above if the holder of such Option is subject to the
reporting requirements of Section 16(a) of the Exchange Act.
XIV. RIGHT TO TERMINATE EMPLOYMENT
The Plan shall not impose any obligation on the Company or on any Related
Entity thereof to continue the employment of any holder of an Option; and it
shall not impose any obligation on the part of any holder of an Option to remain
in the employ of the Company or of any Related Entity.
XV. PURCHASE FOR INVESTMENT
Except as hereafter provided, the holder of an Option granted hereunder
shall, upon any exercise thereof, execute and deliver to the Company a written
statement, in form satisfactory to the Company, in which such holder represents
and warrants that such holder is purchasing or acquiring the Shares acquired
thereunder for such holder's own account, for investment only and not with a
view to the resale or distribution thereof, and agrees that any subsequent offer
for sale or sale or distribution of any of such Shares shall be made pursuant to
either (a) a Registration Statement on an appropriate form under the Securities
Act of 1933, as amended (the "Securities Act"), which Registration Statement has
become effective and is current with regard to the Shares being offered or sold,
or (b) a specific exemption from the registration requirements of the Securities
Act and any applicable state securities law or regulation, but in claiming such
exemption the holder shall, prior to any offer for sale or sale of such Shares,
obtain a prior favorable written opinion, in form and substance satisfactory to
the Company, from counsel for or approved by the Company, as to the
applicability of such exemption thereto. Notwithstanding the prior sentence, no
exercise of an Option shall be deemed to be effective if the Company, in its
sole discretion, determines that a violation of any federal or state securities
law or rule or regulation promulgated thereunder, would result therefrom. The
foregoing restrictions shall not apply to (i) issuances by the Company so long
as the Shares being issued are registered under the Securities Act and a
prospectus in respect thereof is current, or (ii) reofferings of Shares by
affiliates of the Company (as defined in Rule 405 or any successor rule or
regulation promulgated
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under the Securities Act) if the Shares being reoffered are registered under the
Securities Act and a prospectus in respect thereof is current.
XVI. ISSUANCE OF CERTIFICATES; LEGENDS; PAYMENT OF EXPENSES
Subject to the provisions of Articles III, XV and XVIII hereof, upon any
exercise of an Option which may be granted hereunder and payment of the purchase
price in full in cash or by certified check, a certificate or certificates for
the Shares as to which the Option has been exercised shall be issued by the
Company in the name of the person exercising the Option and shall be delivered
to or upon the order of such person.
The Company may endorse such legend or legends upon the certificates for
Shares issued upon exercise of an Option granted hereunder and may issue such
"stop transfer" instructions to its transfer agent in respect of such Shares as,
in its discretion, it determines to be necessary or appropriate to (i) prevent a
violation of, or to perfect an exemption from, the registration requirements of
the Securities Act or any state "blue sky" law or regulation, (ii) implement the
provisions of the Plan and any agreement between the Company and the optionee or
grantee with respect to such Shares, or (iii) permit the Company to determine
the occurrence of a disqualifying disposition as described in Section 421(b) of
the Code, of Shares transferred upon exercise of an Incentive Option granted
under the Plan.
The Company shall pay all issue taxes with respect to the issuance of
Shares to the person exercising the Option, as well as all fees and expenses
necessarily incurred by the Company in connection with such issuance.
All Shares issued as provided herein shall be fully paid and non-assessable
to the extent permitted by law.
XVII. WITHHOLDING TAXES
The Company may require a Key Person exercising a Non-Qualified Option
granted hereunder, or disposing of Shares acquired pursuant to the exercise of
an Incentive Option in a disqualifying disposition (within the meaning of
Section 421(b) of the Code), to reimburse the Company or Related Entity, as
appropriate, for any taxes required by any governmental authority to be withheld
or otherwise deducted and paid by such corporation in respect of the issuance or
disposition of Shares. In lieu thereof, the Company or Related Entity, as
appropriate, shall have the right to withhold the amount of such taxes from any
other sums due or to become due from such Corporation to the Key Person upon
such terms and conditions as the Committee shall prescribe. At any time that
the Company or a Related Entity becomes subject to a withholding obligation
under applicable law with respect to the exercise of a Non-Qualified Option
except as set forth below, a Key Person may elect to satisfy, in whole or in
part, the Key Person's related personal tax liabilities (an "Election") by (i)
the payment of cash, (ii) electing to have such amount withheld from sums
otherwise due to the Key Person, (iii) subject to the other requirements of this
Section XVII, directing the Company or the subsidiary to withhold from Shares
issuable in the related exercise either a specified number of Shares or Shares
having a
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specified value in each case with a value not in excess of such tax liabilities,
(iv) subject to the requirements of Section 16(b) of the Exchange Act and the
rules promulgated thereunder, tendering Shares previously issued pursuant to an
exercise or other shares of the Company's common stock owned by the Key Person,
or (v) combining any or all of the foregoing options; provided, that the Company
will not be required to redeem any Shares or shares of non-voting or other
common stock in violation of applicable laws. An Election shall be irrevocable.
The withheld Shares and other shares tendered in payment should be valued at
their fair market value on the date that the withholding obligation arises (the
"Tax Date"). The Committee may disapprove of any Election, suspend, or terminate
the right to make Elections or provide that the right to make Elections shall
not apply to particular grants, Shares or exercises. If a Key Person is a person
subject to Section 16 of the Exchange Act and such Key Person intends to satisfy
all or any portion of such withholding obligation by directing the withholding
of Shares issuable or tendering Shares, then (1) any Election by such Key Person
must be made (i) at least six (6) months prior to the relevant Tax Date, or (ii)
on or prior to the relevant Tax Date and during a period that begins on the
third business day following the date of release for publication of the
Company's quarterly or annual summary statements of sales and earnings and that
ends on the twelfth business day following such date, and (2) the Election may
not be made with respect to an exercise, or the withholding obligation arising
thereon, if the relevant Non-Qualified Option was granted six (6) months or less
prior to the date of Election. The Committee may impose any other conditions or
restrictions on the right to make an Election as it shall deem appropriate. If
the Key Person has informed the Company in writing that such withholding would
subject such Key Person to liability under Section 16(b) of the Exchange Act,
the Company shall not be authorized to effect any such withholding without the
prior written consent of the Key Person. The Committee may prescribe such rules
as it determines with respect to Key Persons subject to the reporting
requirements of Section 16(a) of the Exchange Act to effect such tax withholding
in compliance with the rules established by the Securities and Exchange
Commission (the "Commission") under Section 16 of the Exchange Act and the
positions of the staff of the Commission thereunder expressed in no-action
letters exempting such tax withholding from liability under Section 16(b) of the
Exchange Act.
XVIII. LISTING OF SHARES AND RELATED MATTERS
Upon the consummation of a public offering of voting common stock of the
Company which is underwritten on a firm commitment basis by a nationally
recognized investment banking firm, (i) each granted but unexercised Option
shall be deemed from the date thereof to be an option to purchase voting common
stock of the Company instead of an option to purchase nonvoting common stock of
the Company, and (ii) all Options granted after the date thereof shall be
options to purchase voting common stock of the Company and not nonvoting common
stock of the Company.
If at any time the Board of Directors shall determine in its discretion
that the listing, registration or qualification of the Shares covered by the
Plan upon any national securities exchange or under any state or federal law, or
the consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of, or in connection with, the sale or purchase of
Shares under the Plan, no Shares shall be issued unless and until such listing,
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registration, qualification, consent or approval shall have been effected or
obtained, or otherwise provided for, free of any conditions not acceptable to
the Board of Directors. During such suspension of the issuance of Shares,
neither the Company not its parents or subsidiaries shall be liable for any
payment of interest or fees of any kind on Shares not yet issued. Under no
circumstances shall the Company be required to effect any registration or
qualification of any Shares under any federal or state securities laws.
XIX. AMENDMENT OF THE PLAN
The Board of Directors or the Committee, as the case may be, may, from time
to time, amend the Plan, provided that no amendment shall be made, without the
approval of the stockholders of the Company, that will (i) increase the total
number of Shares reserved for Options under the Plan (other than an increase
resulting from an adjustment provided for in Article XIII), (ii) reduce the
exercise price of any Option granted hereunder below the price required by
Article VI, (iii) modify the provisions of the Plan relating to eligibility,
(iv) materially increase the benefits accruing to participants under the Plan,
(v) increase the number of Shares which may be granted to an individual Key
Employee under the Plan, (vi) adversely affect the Plan's qualification under
Section 162(m)(4)(C) of the Code, (vii) adversely affect the qualification of
Incentive Options under Section 422 of the Code, or (viii) otherwise materially
modify the Plan. The Committee shall be authorized to amend the Plan and the
Options granted thereunder to permit the Incentive Options granted thereunder to
qualify as incentive stock Options within the meaning of Section 422 of the Code
and to qualify the Plan under Section 162(m)(4)(C) of the Code. The rights and
obligations under any Option granted before amendment of the Plan or any
unexercised portion of such Option shall not be adversely affected by amendment
of the Plan or the Option without the consent of the holder of the Option.
XX. TERMINATION OR SUSPENSION OF THE PLAN
The Board of Directors may at any time suspend or terminate the Plan. The
Plan, unless sooner terminated by action of the Board of Directors, shall
terminate at the close of business on the Termination Date. An Option may not
be granted while the Plan is suspended or after it is terminated. Rights and
obligations under any Option granted while the Plan is in effect shall not be
altered or impaired by suspension or termination of the Plan, except upon the
consent of the person to whom the Option was granted. The power of the
Committee to construe and administer any Options granted prior to the
termination or suspension of the Plan under Article III nevertheless shall
continue after such termination or during such suspension.
XXI. SAVINGS PROVISION
With respect to persons subject to Section 16 of the Exchange Act,
transactions under the Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent
any provision of the Plan or action by the Committee fails to comply, it shall
be deemed null and void, to the extent permitted by law and deemed advisable by
the Committee.
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XXII. GOVERNING LAW
The Plan, such Options as may be granted thereunder and all related matters
shall be governed by, and construed and enforced in accordance with, the laws of
the State of Delaware from time to time obtaining.
XXIII. PARTIAL INVALIDITY
The invalidity or illegality of any provision herein shall not be deemed to
affect the validity of any other provision.
XXIV. EFFECTIVE DATE OF AMENDMENT AND RESTATEMENT OF THE PLAN
The Plan as set forth herein constitutes an amendment and restatement of
the Trident NGL Holding, Inc. Amended and Restated 1991 Stock Option Plan, as
previously adopted by Trident NGL Holding, Inc. (a predecessor to the Company).
This amendment and restatement of the Plan shall be effective as of May 10,
1996, provided this amendment and restatement of the Plan is approved by the
stockholders of the Company on such date at the Company's 1996 Annual Meeting of
Stockholders./2/
- -----------
/2/ The referenced amendment and restatement of the Plan was effective as of May
10, 1996. This version of the Plan reflects all amendments to the Plan
through August 20, 1998, including, without limitation, the amendments
implemented to reflect the corporate name change from "NGC Corporation" to
"Dynegy Inc."
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EXHIBIT 10.4
DYNEGY INC.
1998 U.K. STOCK OPTION PLAN
CLIFFORD CHANCE
200 Aldersgate St.
London
EC1A 4JJ
Telephone: 0171-600-1000
Fax: 0171-600-5555
Reference: DPP/N2791/00023/RTT
Inland Revenue Reference No.: X19245
<PAGE>
DYNEGY INC.
1998 U.K. STOCK OPTION PLAN
1. DEFINITIONS AND INTERPRETATION.
------------------------------
(1) The following expressions shall have the following meanings in the
1998 Plan unless the context otherwise requires:
"APPROVED STOCK OPTION" means an option granted in accordance with the
1998 Plan.
"INLAND REVENUE" means the United Kingdom's Commissioners of Inland
Revenue.
"PARTICIPANT" means a person who holds an Approved Stock Option.
"PARTICIPATING COMPANY" means the Company or a Subsidiary of the
Company.
"SCHEDULE 9" means Schedule 9 to the Taxes Act.
"SUBSIDIARY" means a body corporate, whether now or hereafter existing
which is (a) a subsidiary of the Company within the meaning of Section 736
of the United Kingdom Companies Act of 1985, and is (b) under the control
of the Company within the meaning of Section 840 of the Taxes Act.
"TAXES ACT" means the United Kingdom's Income and Corporation Taxes
Act 1988.
"1998 PLAN" means the Dynegy Inc. 1998 U.K. Stock Option Plan as
herein set out but subject to any alterations or additions made under Rule
8 below.
"1991 PLAN" means the Dynegy Inc. Amended and Restated 1991 Stock
Option Plan (a copy of which is annexed as a schedule to the 1998 Plan).
(2) Unless the context otherwise requires, all expressions used in the
1998 Plan shall have the same meanings as those ascribed to them in the 1991
Plan, save that:
"FAIR MARKET VALUE" means Market Value.
"MARKET VALUE" shall have the meaning ascribed to it in Rule 5(3)
below.
"KEY EMPLOYEE" AND "KEY PERSON" shall be limited to the persons who
are eligible to be granted an Approved Stock Option as set out in Rule 3
below.
<PAGE>
"OPTION" includes an Approved Stock Option as defined in Sub-rule (1)
above.
"RELATED ENTITY" shall be limited to subsidiaries.
(3) Expressions not otherwise defined herein have the same meanings as
they have in Schedule 9.
(4) Any reference herein to any enactment includes a reference to that
enactment as from time to time modified, extended or reenacted.
2. TERMS AND PROVISIONS OF THE 1998 PLAN. The terms and provisions
of the 1998 Plan shall be the same mutatis mutandis as the terms and provisions
of the 1991 Plan save as hereinafter specified.
3. ELIGIBILITY.
(1) Subject to Sub-rule (3) below, a person is eligible to be granted
an Approved Stock Option if (and only if) he/she is a full-time director or
qualifying employee of a Participating Company.
(2) For the purposes of Sub-rule (1) above:
(a) a person shall be treated as a full-time director of a
Participating Company if he/she is obliged to devote to the
performance of the duties of his/her office or employment with that
and any other Participating Company not less than twenty-five (25)
hours a week (excluding meal breaks);
(b) a qualifying employee, in relation to a Participating
Company, is an employee of the Participating Company (other than one
who is a director of a Participating Company).
(3) A person is not eligible to be granted an Option under the 1998
Plan at any time when he/she is not eligible to participate in the 1998 Plan by
virtue of Paragraph 8 of Schedule 9.
4. GRANT OF OPTIONS.
(1) Subject to Sub-rule (3) below, the Committee may grant to any
person who is eligible to be granted an Option under the 1998 Plan an Approved
Stock Option to acquire shares which satisfy the requirements of Paragraphs 10
to 14 of Schedule 9, upon the terms set out in the 1998 Plan and upon such other
objective terms as the Committee may reasonably specify.
(2) The grant of an Approved Stock Option shall be subject to
obtaining any approval or consent which may be required under the provisions of
any regulation or enactment.
<PAGE>
(3) No person shall be granted an Approved Stock Option under the 1998
Plan which would, at the time it is granted, cause the aggregate Market Value of
the shares which he/she may acquire in pursuance of options granted to him/her
under the 1998 Plan and options granted to him/her under any other share option
scheme, not being a savings-related share option scheme, approved under Schedule
9 and established by the Company or by any associated company of the Company
(and not exercised) to exceed or further exceed (Pounds)30,000.
(4) For the purposes of Sub-rule (3) above, the aggregate Market Value
of the shares in relation to which an option was granted shall be calculated:
(a) in the case of an Approved Stock Option granted under the
1998 Plan, as on the day by reference to which the price at which
shares may be acquired by the exercise thereof is determined as
mentioned in Rule 5(2) below;
(b) in the case of an option granted under any other approved
scheme, as at the time when it was granted or, in a case where an
agreement relating to the shares has been made under Paragraph 29 of
Schedule 9, such earlier time or times as may be provided in the
agreement; and
(c) in the case of any other option, as on the day or days by
reference to which the price at which shares may be acquired by the
exercise thereof was determined.
(5) Unless otherwise agreed with the Inland Revenue, the United States
dollar exchange rate for pounds sterling for the purposes of calculating the
limit in Sub-rule (3) above shall be the noon buying rate in the City of London
on the day by reference to which the price at which shares may be acquired on
the exercise of the Option is determined as mentioned in Rule 5(2) below.
5. EXERCISE PRICE AND CONSIDERATION.
(1) Shares shall be issued to the Participant pursuant to the exercise
of an Approved Stock Option only upon receipt by the Company from the
Participant of payment in full in cash.
(2) The exercise price per share under each Approved Stock Option
granted by the Committee shall be such price as is determined by the Committee
before the grant thereof, provided that it shall not be less than the higher of:
(a) the exercise price calculated in accordance with the
provisions of Article VI of the 1991 Plan; and
(b) one hundred percent (100%) of the Market Value per share on
the date of grant (or such other dealing day not being more than
thirty (30) days
<PAGE>
earlier than the date of grant of the Approved Stock Option as may be
agreed with the Inland Revenue).
(3) The Market Value per share on any day shall be determined as
follows:
(a) if shares of the same class as the shares are quoted on the
New York Stock Exchange, the Market Value per share shall be the
closing price per share in the New York Stock Exchange on the
consolidated transaction reporting system on that day (and if there
shall be no sale of shares reported on such date, the Market Value
shall be deemed equal to the closing price per share on the
consolidated transaction reporting system for the last preceding date
on which sales of shares were reported;
(b) if Paragraph (a) above does not apply, the Market Value shall
be equal to the market value (within the meaning of Part VIII of the
United Kingdom's Taxation of Chargeable Gains Act 1992) of shares, as
agreed in advance for the purposes of the 1998 Plan with the Shares
Valuation Division of the Inland Revenue, on that day.
6. EXERCISE OF OPTIONS.
(1) Any Approved Stock Option granted under the 1998 Plan shall be
exercisable at such times, in such amounts and during such period or periods as
the Committee shall determine at the date of the grant of such Option.
(2) A person is not eligible to exercise an Approved Stock Option
granted under the 1998 Plan at any time when he/she not eligible to participate
in the 1998 Plan by virtue of Paragraph 8 of Schedule 9.
(3) The Committee shall not have authority, in lieu of requiring a
cash payment from the Participant upon exercise of an Approved Stock Option
granted under the 1998 Plan, to provide the establishment of procedures as set
out in Paragraph (a) of Article III of the 1991 Plan or to provide an
arrangement through registered broker-dealers as set out in Paragraph (b) of
Article III of the 1991 Plan.
(4) All shares allotted under the 1998 Plan shall rank pari passu in
all respects with the shares of the same class for the time being in issue save
as regards any rights attaching to such shares by reference to a record date
prior to the date of the allotment.
7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
(1) Article XIII of the 1991 Plan shall apply to Approved Stock
Options granted under the 1998 Plan in respect of a variation of share capital
of the Company only, save that no adjustment under that Article XIII shall be
made to an Approved Stock Option at a time when the 1998 Plan is approved by the
Inland Revenue under Schedule 9:
<PAGE>
(a) without the prior approval of the Inland Revenue; and
(b) unless such adjustment is permitted by Paragraph 29 of
Schedule 9.
(2) In addition to the rights of exercise arising under Article XIII
of the 1991 Plan in the event of a change in control, if any company (the
"Acquiring Company") obtains control of the Company as a result of making:
(a) a general offer to acquire the whole of the Company stock
which is made on a condition such that if it is satisfied, the person
making the offer will have control of the Company, or
(b) a general offer to acquire all the shares in the Company
which are of the same class as the shares which may be acquired by the
exercise of Options granted under the 1998 Plan.
Any Participant may, at any time within the appropriate period (which expression
shall be construed in accordance with Paragraph 15(2) of Schedule 9), by
agreement with the Acquiring Company, release any Option granted under the 1998
Plan which has not lapsed (the "Old Option") in consideration of the grant to
him of an option (the "New Option") which (for the purposes of that paragraph)
is equivalent to the Old Option but relates to shares in a different company
(whether the Acquiring Company itself or some other company falling within
Paragraph 10(b) or (c) of Schedule 9).
(3) The New Option shall not be regarded for the purposes of Sub-rule
(2) above as equivalent to the Old Option unless the conditions set out in
Paragraph 15(3) of Schedule 9 are satisfied, but so that the provisions of the
1998 Plan shall for this purpose be construed as if:
(a) the New Option were an Option granted under the 1998 Plan at
the same time as the Old Option;
(b) except for the purposes of the definitions of "Participating
Company" and "Subsidiary" in Rule 1 above and the references to the
"Committee" in Rule 4(1) above, the references to the "Company" in the
1991 Plan were references to the different company mentioned in Sub-
rule (2) above.
8. ADMINISTRATION, AMENDMENT AND TERMINATION OF THE 1998 PLAN.
(1) The provisions of Article III and Article XIX of the 1991 Plan
shall apply mutatis mutandis to the 1998 Plan, save that:
<PAGE>
(a) if, at a time when the 1998 Plan is approved by the Inland
Revenue under Schedule 9, an amendment is made to the 1998 Plan or to
the 1991 Plan that shall apply to the 1998 Plan or to the terms of an
Approved Stock Option (save for an amendment which solely relates to a
special term subject to which the Option has been granted), the
approval will not thereafter have effect until the Inland Revenue have
approved the alteration or addition;
(b) the Committee shall not have the authority to require, as a
condition of the granting of any Approved Stock Option, that an
employee recipient agree that in the event of termination of
employment of such employee, other than as a result of dismissal
without cause, such employee will not, for a period to be fixed at the
time of the grant of the Option, enter into any other employment or
participate directly or indirectly in any other business or enterprise
which is competitive with the business of the Company or any Related
Entity, or enter into any employment in which such employee will be
called upon to utilize special knowledge obtained through employment
with the Company or any Related Entity.
(c) the Committee shall not have the authority to require, as a
condition to the granting of any Approved Stock Option, that the
person receiving such Option agree not to sell or otherwise dispose of
any Company stock acquired pursuant to such Option for a period of six
(6) months following the later of (i) the date of the grant of such
Option or (ii) the date when the exercise price of such Option is
fixed if such exercise price is not fixed at the date of grant of such
Option;
(d) no alteration which solely related to a special term subject
to which an Approved Stock Option has been granted shall be made
unless:
(i) there shall have occurred an event which shall have
caused the Committee acting fairly and reasonably to consider
that the special term would not, without the alteration, achieve
its original purpose; and
(ii) the alteration shall not have the effect of making the
special term materially more difficult to satisfy than it was
prior to the making of such alteration.
(e) any reference in this Sub-rule (1) to a special term subject
to which an Approved Stock Option has been granted is a reference to
an objective term specified by the Committee as mentioned in Sub-rule
(1) of Rule 4 above.
(2) As soon as reasonably practicable after making any amendment to
the 1998 Plan under Sub-rule (1) above, the Committee shall give notice in
writing thereof to any Participant affected thereby and, if the 1998 Plan is
then approved by the Inland Revenue under Schedule 9, to the Inland Revenue.
<PAGE>
SCHEDULE
RULES OF THE 1991 PLAN
<PAGE>
EXHIBIT 10.5
DYNEGY INC.
EMPLOYEE EQUITY OPTION PLAN
[AS AMENDED THROUGH AUGUST 20, 1998]
I. PURPOSE OF THE PLAN
The DYNEGY INC. EMPLOYEE EQUITY OPTION PLAN (the "Plan") is intended to
provide a means whereby certain employees of Dynegy Inc., a Delaware corporation
(the "Company"), and its affiliates may develop a sense of proprietorship and
personal involvement in the development and financial success of the Company,
and to encourage them to remain with and devote their best efforts to the
business of the Company, thereby advancing the interests of the Company and its
shareholders. Accordingly, the Company may grant to certain employees
("Optionees") the option ("Option") to purchase shares of the common stock of
the Company ("Stock"), as hereinafter set forth. Options granted under the Plan
shall not constitute incentive stock options, within the meaning of Section
422(b) of the Internal Revenue Code of 1986, as amended (the "Code"). The Plan
as set forth herein constitutes an amendment and restatement of the Plan as
previously adopted by the Company, and shall supersede and replace in its
entirety such previously adopted plan./1/
II. ADMINISTRATION
The Plan shall be administered by a committee (the "Committee") of, and
appointed by, the Board of Directors of the Company (the "Board"), and the
Committee shall be comprised solely of two or more individuals who qualify as
(a) outside directors (within the meaning of Section 162(m) of the Code and
applicable interpretive authority thereunder), and (b) non-employee directors
(as defined in Rule 16b-3, as currently in effect or as hereinafter modified or
amended ("Rule 16b-3"), promulgated under the Securities Exchange Act of 1934,
as amended (the "1934 Act")). The Committee shall have sole authority to select
the Optionees from among those individuals eligible hereunder and to establish
the number of shares which may be issued under each Option; provided, however,
that, notwithstanding any provision in the Plan to the contrary, the maximum
number of shares that may be subject to Options granted under the Plan to an
individual Optionee during any calendar year beginning on or after January 1,
1994, may not exceed 2,217,360 (subject to adjustment after May 21, 1998, in the
same manner as provided in Paragraph IX hereof with respect to shares of Stock
subject to Options then outstanding). The limitation set forth in the preceding
sentence shall be applied in a manner that will permit compensation generated
under the Plan that is intended to constitute "performance-based" compensation
for purposes of Section 162(m) of the Code to so qualify, including, without
limitation, counting against such maximum number of shares, to the extent
required under
- -------------------
/1/ The referenced amendment and restatement of the Plan was effective as of May
21, 1998. This version of the Plan reflects all amendments to the Plan
through August 20, 1998, including, without limitation, the amendments
implemented to reflect the corporate name change from "NGC Corporation" to
"Dynegy Inc."
<PAGE>
Section 162(m) of the Code and applicable interpretive authority thereunder, any
shares subject to Options that are canceled or repriced. In selecting the
Optionees from among individuals eligible hereunder and in establishing the
number of shares that may be issued under each Option, the Committee may take
into account the nature of the services rendered by such individuals, their
present and potential contributions to the Company's success and such other
factors as the Committee in its discretion shall deem relevant. The Committee is
authorized to interpret the Plan and may from time to time adopt such rules and
regulations, consistent with the provisions of the Plan, as it may deem
advisable to carry out the Plan. All decisions made by the Committee in
selecting the Optionees and in establishing the number of shares which may be
issued under each Option shall be final.
III. ELIGIBILITY OF OPTIONEE
(a) Options may be granted only to individuals who are employees (including
officers and directors who are also employees) of the Company or any affiliate
of the Company at the time the Option is granted. Options may be granted to the
same individual on more than one occasion.
(b) For all purposes under the Plan, an affiliate of the Company shall mean
any corporation, partnership, limited liability company or partnership,
association, trust or other organization which, directly or indirectly,
controls, is controlled by, or is under common control with, the Company. For
purposes of the preceding sentence, "control" (including, with correlative
meanings, the terms "controlled by" and "under common control with"), as used
with respect to any entity or organization, shall mean the possession, directly
or indirectly, of the power (i) to vote more than 50% of the securities having
ordinary voting power for the election of directors of the controlled entity or
organization, or (ii) to direct or cause the direction of the management and
policies of the controlled entity or organization, whether through the ownership
of voting securities or by contract or otherwise.
IV. SHARES SUBJECT TO THE PLAN
The aggregate number of shares which may be issued under Options granted
under the Plan shall not exceed 14,752,755 shares of Stock, which shall include
all shares of Stock subject to, and issued under, Options granted prior to the
effective date of this amendment and restatement of the Plan. Such shares may
consist of authorized but unissued shares of Stock or previously issued shares
of Stock reacquired by the Company. Any of such shares which remain unissued
and which are not subject to outstanding Options at the termination of the Plan
shall cease to be subject to the Plan, but, until termination of the Plan, the
Company shall at all times make available a sufficient number of shares to meet
the requirements of the Plan. Should any Option hereunder expire or terminate
prior to its exercise in full, the shares theretofore subject to such Option may
again be subject to an Option granted under the Plan to the extent permitted
under Rule 16b-3, and the purchase price of Stock issued under such Option shall
be determined in accordance with the provisions of Paragraph V hereof. The
aggregate number of shares which may be issued under the Plan shall be subject
to adjustment after May 21, 1998, in the same manner as provided in Paragraph IX
hereof with respect to shares of Stock subject to Options
2
<PAGE>
then outstanding. Exercise of an Option in any manner shall result in a decrease
in the number of shares of Stock which may thereafter be available, both for
purposes of the Plan and for sale to any one individual, by the number of shares
as to which the Option is exercised.
V. OPTION PRICE
The purchase price of Stock issued under each Option shall be determined by
the Committee, but such purchase price shall not be less than $5.66 per share of
Stock except as hereinafter provided. As of May 21, 1998, Options with respect
to 4,417,492 shares of Stock are outstanding with a purchase price of $2.028 per
share of Stock and Options with respect to 136,681 shares of Stock are
outstanding with a purchase price of $2.13 per share of Stock (each such Option
is herein referred to as an "Original Option"). If any Original Option expires
or terminates prior to its exercise in full and the shares theretofore subject
to such Original Option are again made subject to an Option (the "Replacement
Option") pursuant to Paragraph IV hereof, then the purchase price of Stock
issued under such Replacement Option shall be determined by the Committee, but
such purchase price shall not be less than (a) $2.028 per share of Stock in the
case of a Replacement Option that relates to an expired or terminated Original
Option with such purchase price or (b) $2.13 per share of Stock in the case of a
Replacement Option that relates to an expired or terminated Original Option with
such purchase price. The purchase prices set forth in this Paragraph V shall be
subject to adjustment after May 21, 1998, by the Committee applying the
principles set forth in Paragraph IX hereof.
VI. OPTION AGREEMENTS; TRANSFERABILITY; WITHHOLDING
(a) Each Option shall be evidenced by a written agreement between the
Company and the Optionee ("Option Agreement") which shall contain such terms and
conditions as may be approved by the Committee and are not inconsistent with the
provisions of the Plan. The terms and conditions of the respective Option
Agreements need not be identical. In the event of a conflict or inconsistency
between the provisions of the Plan and the terms of any Option Agreement, the
provisions of the Plan shall govern and control.
(b) Each Option and all rights granted thereunder shall not be transferable
other than by will or the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined by the Code or Title I of the
Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder, and shall be exercisable during the Optionee's lifetime only by the
Optionee or the Optionee's guardian or legal representative.
(c) To the extent that the exercise of an Option granted under the Plan or
the disposition of shares of Stock acquired by exercise of an Option granted
under the Plan results in compensation income to an Optionee for federal, state
or local income tax purposes, such Optionee shall pay to the Company at the time
of such exercise or disposition such amount of money as the Company may require
to meet its obligation under applicable tax laws or regulations, and, if such
Optionee fails to do so, the Company is authorized to withhold from any
remuneration then or thereafter payable to such Optionee any tax required to be
withheld by reason of such resulting compensation income. Upon an exercise by
an Optionee of an Option
3
<PAGE>
granted under the Plan, the Company is further authorized in its discretion to
satisfy any such withholding requirement out of any cash or shares of Stock
distributable to such Optionee upon such exercise.
VII. VESTING AND CANCELLATION OF OPTIONS
(a) Each Option granted under the Plan shall vest and become immediately
exercisable in accordance with the terms hereof on the fifth anniversary of the
date of grant of such Option.
(b) Subsequent to the vesting of an Option granted hereunder, the
unexercised portion thereof shall automatically and without notice terminate and
become null and void on the earliest to occur of the following:
(i) the tenth anniversary of the date of grant of such Option;
(ii) the expiration of 95 days from the date of termination of the
Optionee's employment with the Company for any reason (other than a
termination described in clauses (iii) or (iv) below); provided, that if
the Optionee shall die during such 95-day period, the time of termination
of the unexercised portion of such Option shall be determined pursuant to
clause (iii) below;
(iii) the expiration of 12 months after an Optionee's death or the
date such Optionee's employment with the Company terminates by reason of
disability (within the meaning of subparagraph (d)(ii) below); and
(iv) the termination of the Optionee's employment with the Company in
the event such termination results from the discharge for cause of such
Optionee. For purposes of the Plan, "discharge for cause" shall have the
meaning set forth in each Optionee's employment agreement with the Company.
If an Optionee does not have an employment agreement with the Company, the
term "discharge for cause" shall mean the involuntary termination of an
Optionee's employment with the Company as a result of dishonesty or similar
serious misconduct directly related to the performance of duties for the
Company which results from a willful act or omission and which is
materially injurious to the operations, financial condition or business
reputation of the Company or any of its affiliates, including but not
limited to (1) refusal to follow the instructions of the President of the
Company, the Board, or the Optionee's superior officer in the performance
of the Optionee's duties, or (2) impairment of the discharge of the
Optionee's duties due to adverse consequences resulting from becoming a
defendant in any criminal proceeding or due to drug or alcohol abuse.
(c) Any Option granted hereunder which is not vested pursuant to
subparagraph (a) above shall automatically and without notice terminate and
become null and void as hereinafter set forth:
4
<PAGE>
(i) In the event an Optionee's employment with the Company
terminates by reason of death or disability (within the meaning of
subparagraph (d)(ii) below), each Option held by such Optionee shall
immediately terminate with respect to the percentage of shares of Stock
subject to such Option as set forth below directly opposite the period
during which the death or disability of such Optionee occurs:
PERCENTAGE
DATE OF DEATH OR DISABILITY TERMINATED
--------------------------- ----------
Date of Grant - 1st anniversary of 80%
date of grant - 1 day
1st Anniversary - 2nd anniversary of 60%
date of grant - 1 day
2nd Anniversary - 3rd anniversary of 40%
date of grant - 1 day
3rd Anniversary - 4th anniversary of 20%
date of grant - 1 day
4th Anniversary - 5th anniversary of 10%
date of grant - 1 day
The portion of an Option that is not terminated shall immediately vest
and shall be subject to the termination provisions of clauses (i) and (iii)
of subparagraph (b) above.
(ii) In the event an Optionee voluntarily resigns his employment with
the Company prior to attaining age 62 or is discharged for cause, all of
such Optionee's Options shall be terminated immediately upon notice of such
resignation or discharge.
(iii) In the event an Optionee voluntarily retires from employment
with the Company on or after attaining age 62 or his employment with the
Company is involuntarily terminated by the Company (or one of its
affiliates) other than pursuant to a discharge for cause, each Option held
by such Optionee shall immediately terminate with respect to the percentage
of shares of Stock subject to such Option set forth below directly opposite
the period during which such termination occurs:
5
<PAGE>
PERCENTAGE
DATE OF TERMINATION TERMINATED
------------------- ----------
Date of Grant - 1st anniversary of 100%
date of grant - 1 day
1st Anniversary - 2nd anniversary of 80%
date of grant - 1 day
2nd Anniversary - 3rd anniversary of 60%
date of grant - 1 day
3rd Anniversary - 4th anniversary of 40%
date of grant - 1 day
4th Anniversary - 5th anniversary of 20%
date of grant - 1 day
The portion of an Option that is not terminated shall immediately vest
and shall be subject to the termination provisions of clauses (i) and (ii)
of subparagraph (b) above.
(d) For all purposes of the Plan, (i) an Optionee shall be considered
to be in the employment of the Company as long as such Optionee remains an
employee of either the Company or any affiliate of the Company, or a corporation
or any affiliate of such corporation assuming or substituting a new option for
the Option granted to such Optionee, and (ii) an Optionee shall be considered to
be disabled if such Optionee is eligible to receive disability benefits under
the Company's long-term disability plan or Social Security disability benefits
if such Optionee's employment with the Company terminates at a time when the
Company does not maintain a long-term disability plan or such plan does not
provide coverage to such Optionee.
(e) The Committee may, in its sole discretion, (i) extend the time
period during which an Option may be exercised following a termination of
employment referred to in clauses (ii), (iii) or (iv) of subparagraph (b) above,
and/or (ii) accelerate the vesting of all or any portion of an Option that would
otherwise terminate pursuant to subparagraph (c) above. Any action by the
Committee pursuant to this subparagraph (e) may vary among individual Optionees
and may vary among Options held by an individual Optionee.
VIII. TERM OF PLAN
The Plan originally became effective on May 19, 1992. This
restatement of the Plan shall be effective as provided in Paragraph I hereof./2/
Except with respect to Options then outstanding, if not sooner terminated under
the provisions of Paragraph X, the Plan shall terminate upon and no further
Options shall be granted after May 18, 2002.
- -----------------------------
/2/ See footnote 1.
6
<PAGE>
IX. RECAPITALIZATION OR REORGANIZATION
(a) The existence of the Plan and the Options granted hereunder shall
not affect in any way the right or power of the Board or the shareholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities, the
dissolution or liquidation of the Company or any sale, lease, exchange or other
disposition of all or any part of its assets or business or any other corporate
act or proceeding.
(b) The shares with respect to which Options may be granted are shares
of Stock as presently constituted, but if, and whenever, prior to the expiration
of an Option theretofore granted, the Company shall effect a subdivision or
consolidation of shares of Stock or the payment of a stock dividend on Stock
without receipt of consideration by the Company, the number of shares of Stock
with respect to which such Option may thereafter be exercised (i) in the event
of an increase in the number of outstanding shares shall be proportionately
increased, and the purchase price per share shall be proportionately reduced,
and (ii) in the event of a reduction in the number of outstanding shares shall
be proportionately reduced, and the purchase price per share shall be
proportionately increased.
(c) If the Company recapitalizes, reclassifies its capital stock, or
otherwise changes its capital structure (a "recapitalization"), the number and
class of shares of Stock covered by an Option theretofore granted shall be
adjusted so that such Option shall thereafter cover the number and class of
shares of stock and securities to which the Optionee would have been entitled
pursuant to the terms of the recapitalization if, immediately prior to the
recapitalization, the Optionee had been the holder of record of the number of
shares of Stock then covered by such Option. If (i) the Company shall not be
the surviving entity in any merger, consolidation or other reorganization (or
survives only as a subsidiary of an entity), (ii) the Company sells, leases or
exchanges all or substantially all of its assets to any other person or entity,
(iii) the Company is to be dissolved and liquidated, (iv) any person or entity,
including a "group" as contemplated by Section 13(d)(3) of the 1934 Act,
acquires or gains ownership or control (including, without limitation, power to
vote) of more than 50% of the outstanding shares of the Company's voting stock
(based upon voting power), or (v) as a result of or in connection with a
contested election of directors, the persons who were directors of the Company
before such election shall cease to constitute a majority of the Board (each
such event is referred to herein as a "Corporate Change"), no later than (a) ten
days after the approval by the shareholders of the Company of such merger,
consolidation, reorganization, sale, lease or exchange of assets or dissolution
or such election of directors or (b) thirty days after a change of control of
the type described in Clause (iv), the Committee, acting in its sole discretion
without the consent or approval of any Optionee, shall act to effect one or more
of the following alternatives, which may vary among individual Optionees and
which may vary among Options held by any individual Optionee: (1) accelerate the
time at which Options then outstanding may be exercised so that such Options may
be exercised in full for a limited period of time on or before a specified date
(before or after such Corporate Change) fixed by the Committee, after which
specified date all unexercised Options
7
<PAGE>
and all rights of Optionees thereunder shall terminate, (2) require the
mandatory surrender to the Company by selected Optionees of some or all of the
outstanding Options held by such Optionees (irrespective of whether such Options
are then exercisable under the provisions of the Plan) as of a date, before or
after such Corporate Change, specified by the Committee, in which event the
Committee shall thereupon cancel such Options and the Company shall pay to each
Optionee an amount of cash per share equal to the excess, if any, of the amount
calculated in Subparagraph (d) below (the "Change of Control Value") of the
shares subject to such Option over the exercise price(s) under such Options for
such shares, (3) make such adjustments to Options then outstanding as the
Committee deems appropriate to reflect such Corporate Change and to keep the
holders of such Options in as nearly the same position as possible to that which
they were in prior to such Corporate Change (provided, however, that the
Committee may determine in its sole discretion that no adjustment is necessary
to Options then outstanding) or (4) provide that the number and class of shares
of Stock covered by an Option theretofore granted shall be adjusted so that such
Option shall thereafter cover the number and class of shares of stock or other
securities or property (including, without limitation, cash) to which the
Optionee would have been entitled pursuant to the terms of the agreement of
merger, consolidation or sale of assets and dissolution if, immediately prior to
such merger, consolidation or sale of assets and dissolution, the Optionee had
been the holder of record of the number of shares of Stock then covered by such
Option.
(d) For the purposes of clause (2) in Subparagraph (c) above, the
"Change of Control Value" shall equal the amount determined in clause (i), (ii)
or (iii), whichever is applicable, as follows: (i) the per share price offered
to shareholders of the Company in any such merger, consolidation,
reorganization, sale of assets or dissolution transaction, (ii) the price per
share offered to shareholders of the Company in any tender offer or exchange
offer whereby a Corporate Change takes place, or (iii) if such Corporate Change
occurs other than pursuant to a tender or exchange offer, the fair market value
per share of the shares into which such Options being surrendered are
exercisable, as determined by the Committee as of the date determined by the
Committee to be the date of cancellation and surrender of such Options. In the
event that the consideration offered to shareholders of the Company in any
transaction described in this Subparagraph (d) or Subparagraph (c) above
consists of anything other than cash, the Committee shall determine the fair
cash equivalent of the portion of the consideration offered which is other than
cash.
(e) Any adjustment provided for in Subparagraphs (b) or (c) above
shall be subject to any required shareholder action.
(f) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares of
stock of any class, for cash, property, labor or services, upon direct sale,
upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, and in any case whether or not for fair value, shall not
affect, and no adjustment by reason thereof shall be made with respect to, the
number of shares of Stock subject to Options theretofore granted or the purchase
price per share.
8
<PAGE>
X. AMENDMENT OR TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with respect
to any shares for which Options have not theretofore been granted. The Board or
the Committee shall have the right to alter or amend the Plan or any part
thereof from time to time; provided, that no change in any Option theretofore
granted may be made which would impair the rights of the Optionee without the
consent of such Optionee; and provided, further, that (i) neither the Board nor
the Committee may make any alteration or amendment which would decrease any
authority granted to the Committee hereunder in contravention of Rule 16b-3 and
(ii) neither the Board nor the Committee may make any alteration or amendment
which would materially increase the benefits accruing to participants under the
Plan, increase the aggregate number of shares which may be issued pursuant to
the provisions of the Plan, change the class of individuals eligible to receive
Options under the Plan or extend the term of the Plan, without the approval of
the shareholders of the Company.
XI. SECURITIES LAWS
(a) The Company shall not be obligated to issue any Stock pursuant to
any Option granted under the Plan at any time when the offering of the shares
covered by such Option have not been registered under the Securities Act of 1933
and such other state and federal laws, rules or regulations as the Company or
the Committee deems applicable and, in the opinion of legal counsel for the
Company, there is no exemption from the registration requirements of such laws,
rules or regulations available for the offering and sale of such shares.
(b) It is intended that the Plan and any grant of an Option made to a
person subject to Section 16 of the 1934 Act meet the requirements of Rule 16b-3
so that any transaction under the Plan involving a grant, award or other
acquisition from the Company or disposition to the Company is exempt from
Section 16(b) of the 1934 Act. If any provision of the Plan or any such Option
would result in any such transaction not being exempt from Section 16(b) of the
1934 Act, such provision or Option shall be construed or deemed amended so that
such transaction will be exempt from Section 16(b) of the 1934 Act.
XII. MISCELLANEOUS
(a) The Plan and all actions taken pursuant to the Plan shall be
governed by, and construed in accordance with, the laws of the State of Texas,
applied without regard to conflict of laws principles thereof.
(b) The invalidity or unenforceability of any one or more provisions
of the Plan shall not affect the validity or enforceability of any other
provision of the Plan, which shall remain in full force and effect.
9
<PAGE>
EXHIBIT 10.11
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to the Employment Agreement (this "Amendment") between
John U. Clarke and NGC Corporation (n/k/a Dynegy Inc.) dated April 8, 1997 (the
"Employment Agreement") is entered into this 11th day of December, 1998, by and
between Dynegy Inc., a Delaware corporation ("Dynegy") and John U. Clarke.
WHEREAS, the Compensation, Corporate Governance and Human Resources
Committee of the Board of Directors of Dynegy has recommended certain amendments
to the Change of Control provisions and certain other provisions of the
Employment Agreement; and
WHEREAS, the Board of Directors has approved such amendments;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. The first sentence of the first paragraph of Paragraph 2(c) of the
Employment Agreement shall be amended by deleting the last clause ",
provided however, that such payment shall not be greater than 2.99
times the sum of your base salary plus guaranteed annual bonus at the
time of your termination."
2. The first sentence of the second paragraph of Paragraph 2(c) of the
Employment Agreement shall be amended by (a) deleting the phrase "or
as the result of the change in control of the Company," from clause
(ii), (b) deleting the word "or" before clause (iii), and (c) by
adding a new clause (iv) to read as follows "; or (iv) a change in
control of the Company occurs." In addition, the following proviso
shall be added to the definition of "change in control of the
Company"; "provided, however, a 'change in control of the Company'
shall not be deemed to have occurred if Chevron, its subsidiaries
and/or affiliates own, directly or indirectly, more than 50% of the
total voting stock of the Company, so long as Chevron, its
subsidiaries or affiliates reduce their ownership interest back below
50% within six months of the date that they acquire a greater than 50%
ownership interest and so long as Dynegy remains a publicly traded
company during such six month period."
3. All provisions of the Employment Agreement shall remain in full force
and effect except as modified by this Amendment.
4. Capitalized terms used in this Amendment and not otherwise defined in
this Amendment shall have the meaning ascribed to such terms in the
Employment Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed as of the date first set forth above.
DYNEGY INC.
By: /s/ C.L. Watson
--------------------------
C.L. Watson, Chairman
AGREED AND ACCEPTED this
11th day of December, 1998.
/s/ John U. Clarke
- ----------------------------
John U. Clarke
<PAGE>
EXHIBIT 10.12A
Dynegy Inc
1000 Louisiana Street, Suite 5800
Houston, Texas 77002
Phone 713-507-6400
www.dynegy.com
July 1, 1997
[LOGO OF DYNEGY APPEARS HERE]
Mr. Dan Ryser
4803 Big Falls
Kingwood, TX 77345
Dear Dan:
Subject to the ratification of this Agreement by the Compensation,
Corporate Governance and Human Resources Committee ("Compensation Committee") of
the Board of Directors of NGC Corporation, set forth below are the terms of your
employment by NGC Corporation (hereinafter referred to collectively as "NGC" or
the "Company").
1. TITLE AND DUTIES
Your title shall be President and Chief Operating Officer of Destec
Energy, Inc., soon to be a wholly-owned subsidiary of NGC and Senior Vice
President of NGC Corporation. You shall have such other duties as may be
delegated from time to time by your immediate supervisor. You shall devote your
full time, energy and skill to the performance of your duties for NGC, and will
exercise due diligence and reasonable care in the performance of such duties.
2. TERM
(a) Unless earlier terminated as provided for herein, the term of this
Agreement will be for three years, beginning on July 1, 1997 (the "Term").
(b) If your employment with NGC is terminated due to your voluntary
resignation or by the Company for "cause", this Agreement shall terminate
immediately (except for the confidentiality, non-competition and non-
solicitation provisions of Paragraph 4), and the Company shall have no further
obligation to you except for the payment of amounts due before the date of such
termination. You further agree that the benefits which you have received from
the execution of this Agreement through the date of such termination constitute
sufficient consideration for your obligations pursuant to Paragraph 4,
notwithstanding the fact that the Company has no further obligation to you
except for the payment of amounts due before the date of such termination. For
purposes of this Agreement, you may be terminated for "cause" as a result of (i)
refusal to implement or adhere to policies or directives of the Board of
Directors of NGC; (ii) serious misconduct, dishonesty or disloyalty, directly
related to the performance of duties for the Company, which results from a
willful act or omission or from gross negligence, and which is materially or is
likely to be materially injurious to the operations, financial condition or
business reputation of the Company or any significant subsidiary thereof; (iii)
your being convicted (or entering into a plea bargain
<PAGE>
Mr. Dan Ryser
July 1, 1997
Page 2
admitting criminal guilt) in any criminal proceeding that may have an adverse
impact on the Company's reputation and standing in the community; (iv) drug or
alcohol abuse; (v) willful and continued failure to perform your duties under
this Agreement; or (vi) any other material breach of this Agreement by you that
is not cured within thirty days after written notice of such breach is delivered
to you from the Company. For these purposes, no act or failure to act shall be
considered "willful" unless it is done, or omitted to be done, in bad faith
without reasonable belief that the action or omission was in the best interest
of the Company.
(c) If your employment is terminated during the Term of this Agreement
due to resignation following "constructive termination" (as defined below) or
for any other reason other than your voluntary resignation, death, disability,
or discharge for cause, you shall receive as your sole compensation (i) your
Base Salary as described in Paragraph 3(a), guaranteed bonus as described in
Paragraph 3(b) and company medical and life insurance coverage, all for the
remainder of the Term, or for two years from the date of actual termination of
employment, whichever provides the longer period of payment and coverage
provided, and (ii) any employee stock options granted to you during the Term of
this Agreement shall become vested as of the date of resignation due to such
constructive termination or discharge not for cause, but only up to the
percentage that would have been vested had you remained in regular employment to
the end of the Term of this Agreement.
For purposes of this Agreement a "constructive termination" shall be
deemed to have occurred in the event that (i) your Base Salary as defined in
Paragraph 3(a), bonus compensation under Paragraph 3(b), option grants under
Paragraph 3(c) or other compensation as described in Paragraph 3(d) and 3(e) is
reduced; (ii) a significant diminution in your responsibilities, authority or
scope of duties is effected by the Board of Directors or as the result of the
change in control of the Company, and such diminution is made without your
written consent (without regard to whether or not any change is made to your
title); or (iii) the Company materially breaches this Agreement. For purposes of
this Agreement, a "change in control of the Company" means the occurrence of any
of the following events: (a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) is or becomes the "beneficial owner" (as defined in Rule l3d-3
under the Exchange Act), directly or indirectly, of more than 50% of the total
voting stock of the Company; (b) the Company is merged with or into or
consolidated with another person and, immediately after giving effect to the
merger or consolidation, (A) less than 50% of the total voting power of the
outstanding voting stock of the surviving or resulting person is then
"beneficially owned" (within the meaning of Rule l3d-3 under the Exchange Act)
in the aggregate by (x) the stockholders of the Company immediately prior to
such merger or consolidation, or (y) if a record date has been set to determine
the stockholders of the Company entitled to vote with respect to such merger or
consolidation, the stockholders of the Company as of such record date and (B)
any "person" or "group" (as defined in Section 13(d)(3) or 14(d)(2) of the
Exchange Act) has become the direct or indirect "beneficial owner" (as defined
in Rule l3d-3 under the Exchange Act) of more than 50% of the voting power of
the voting stock of the surviving or
<PAGE>
Mr. Dan Ryser
July 1, 1997
Page 3
resulting person; (c) the Company, either individually or in conjunction with
one or more of its subsidiaries, sells, assigns, conveys, transfers, leases or
otherwise disposes of, or the subsidiaries sell, assign, convey, transfer, lease
or otherwise dispose of, all or substantially all of the properties and assets
of the Company and the subsidiaries, taken as a whole (either in one transaction
or a series of related transactions), to any person (other than the Company or a
wholly owned subsidiary); or (d) the liquidation or dissolution of the Company.
Any resignation by you as a result of assertion of a constructive termination
shall be communicated by delivery to the Board of Directors of the Company
thirty days' advance written notice of such constructive termination and the
grounds therefor, during which period the Company shall be entitled to cure or
remedy the matters set forth in such notice to your reasonable satisfaction.
Unless you withdraw such notice prior to the expiration of such thirty day
period, such resignation shall take effect upon the expiration of thirty days
from the date of the delivery of such notice. Any other resignation by you shall
be communicated by thirty days' advance written notice.
(d) If you die, or become disabled and cannot perform your duties, you
(or your estate) shall be entitled to the Base Salary (as defined in Paragraph 3
(a)) payable to you hereunder for three months following the month in which you
die or become disabled, plus the amount of any guaranteed bonus as described in
Paragraph 3(b) guaranteed pursuant to Paragraph 3(b) for the year of death or
disability, prorated through the date of death or disability. For purposes of
this Agreement, you shall be disabled as of the first date on which you become
eligible to receive disability benefits under the Company's long-term disability
plan (or Social Security disability benefits at a time when the Company does not
maintain a long-term disability plan or such plan is not available to you).
3. COMPENSATION
(a) Each year during the Term hereof, you will be paid a base salary
of $220,000 per annum ("Base Salary"), payable in accordance with the Company's
payroll guidelines. Increases may be made to your Base Salary at the discretion
of the Board of Directors based upon your individual performance.
(b) You shall be a participant in the Company's Incentive Compensation
Plan. The target bonus level for your position is $150,000 per annum. You shall
receive a guaranteed bonus of at least $75,000 per annum during the three year
Term. As part of NGC's incentive compensation program, you will have the
opportunity to earn Additional Compensation, dependent upon NGC's financial
performance and other personal strategic objectives, determined in accordance
with such program.
(c) Each year during the Term of this Agreement, commencing December,
1997 you will receive stock option grants, with an exercise price equal to
market price on date of grant,
<PAGE>
Mr. Dan Ryser
July 1, 1997
Page 4
under the NGC Corporation Amended & Restated 1991 Stock Option Plan, with a
present value of the projected five year gain ("Projected Value") of at least
$220,000. You recognize that the projected value is subject to the future market
performance of the company stock and that there is no guarantee that the actual
value of such options will achieve that value. "Projected Value" means that, at
the end of five years from the date of grant, assuming an increase in market
price of 15% per annum during the five years, the stock option may be exercised
to obtain stock having a present value of $220,000 over the exercise price. Then
options are subject to the three year vesting, forfeiture and other terms and
conditions of the NGC Corporation Amended & Restated 1991 Stock Option Plan.
(d) You will be entitled to participate in NGC's benefits programs for
senior management executives, including, without limitation, NGC's deferred
compensation plan for executives, and NGC's Alternative Benefits for Senior
Executives Plan.
(e) The Company will pay an additional $5,000 per year on your behalf
to provide you with additional life insurance and disability coverage in excess
of the death benefit or disability coverage under NGC's standard executive
employee and benefit plans. You shall select such coverage and shall own the
insurance policies providing such coverage. You will be responsible for coverage
and effectiveness of the policies, the Company's only obligation being to pay
such amounts.
(f) You shall be entitled to participate in such other plans and
receive such other perquisites as the Board of Directors of the Company in its
sole discretion determines.
4. CONFIDENTIALITY
You recognize and acknowledge that:
(a) You will have access to certain information concerning the Company
that is confidential and proprietary and constitutes valuable and unique
property of the Company. You agree that you will not at any time, either during
or after your employment, disclose to others, use, copy or permit to be copied,
except pursuant to your duties on behalf of the Company or its successors,
assigns or nominees, any secret or confidential information of the Company
(whether or not developed by you) without the prior written consent of the Board
of Directors of the Company. The term "secret or confidential information of the
Company" (sometimes referred to herein as "Confidential Information") shall
include, without limitation, the Company's plans, strategies, potential
acquisitions, costs, prices, systems for buying, selling, and/or trading natural
gas, natural gas liquids, crude oil, coal, and electricity, client lists,
pricing policies, financial information, the names of and pertinent information
regarding suppliers, computer programs, policy or procedure manuals, training
and recruiting procedures, accounting procedures, the status and content of the
<PAGE>
Mr. Dan Ryser
July 1, 1997
Page 5
Company's contracts with its suppliers or clients, or servicing methods and
techniques at any time used, developed, or investigated by the Company, before
or during your tenure of employment to the extent any of the foregoing are (i)
not generally available to the public and (ii) maintained as confidential by the
Company. You further agree to maintain in confidence any confidential
information of third parties received as a result of your employment and duties
with the Company.
(b) At the termination of your employment you will deliver to the
Company, as determined appropriate by the Company, all correspondence,
memoranda, notes, records, client lists, computer systems, programs, or other
documents and all copies thereof made, composed or received by you, solely or
jointly with others, and which are in your possession, custody, or control at
such date and which are related in any manner to the past, present, or
anticipated business of the Company.
(c) To protect and safeguard the Company's trade secrets and
Confidential Information and also the Company's goodwill with its suppliers and
clients, for a period of twenty-four months following the termination of your
employment for any reason you will not, within a 50 mile radius of any location
where the Company had an office at any time during the Term hereof or any
location where a client or supplier of the Company (which is a material client
or supplier at any time during the Term hereof) had an office at any time during
the Term hereof, without the prior written consent of the Board of Directors of
the Company, directly or indirectly, engage in or be interested in (as owner,
partner, shareholder, employee, director, agent, consultant or otherwise), any
business which is a competitor of the Company, as hereinafter defined. For
purposes of this Agreement, a "competitor of the Company" is any entity,
including without limitation a corporation, sole proprietorship, partnership,
joint venture, syndicate, trust or any other form of organization or a parent,
subsidiary or division of any of the foregoing, which, during such period or the
immediately preceding fiscal year of such entity, was engaged in the development
of electric power generation projects, unregulated marketing, gathering,
transportation or processing of natural gas or derivatives of natural gas or
other hydrocarbons or electricity. For purposes of this paragraph, the following
entities shall not be deemed to be competitors of the Company: (i) a Local
Distribution Company ("LDC") to the extent that any purchases or sales by such
LDC are only for consumption on its system; (ii) a natural gas producer to the
extent that such producer sells only its own production or production of other
working interest owners in wells in which it owns an interest; (iii) a natural
gas pipeline company in the jurisdictional aspects of its business, i.e., other
than a nonjurisdictional marketing affiliate or production affiliate (except as
to such production affiliates own production as described in clause (ii) of this
Paragraph 4(c)). The terms of this Paragraph 4(c) shall not apply to your
present or future investments in the securities of companies listed on a
national securities exchange or traded on the over-the-counter market to the
extent such investments do not exceed one percent (1%) of the total outstanding
shares of such company.
<PAGE>
Mr. Dan Ryser
July 1, 1997
Page 6
(d) For a period of twenty-four months after the expiration or
termination of your employment for whatever reason, you shall not induce or
otherwise entice any employee of the Company to leave the Company, nor shall you
attempt to hire any of the Company's employees.
(e) You agree that the foregoing restrictions contain reasonable
limitations as to the time, geographical area, and scope of activity to be
restrained and that these restrictions do not impose any greater restraint than
is necessary to protect the goodwill and other legitimate business interests of
the Company, including but not limited to the protection of Confidential
Information. You also agree that the general public shall not be harmed by
enforcement of this Paragraph 4. Should any provision in this Paragraph 4 be
held unreasonably broad with respect to the restrictions as to time,
geographical area, or scope of activity to be restrained, any such restriction
shall be construed by limiting and reducing it to the extent necessary to render
it reasonable, and as so construed, such provision shall be enforced.
5. INDEMNIFICATION
If, at any time during or after the Term of this Agreement, you are
made a party to, or are threatened to be made a party in, any civil, criminal or
administrative action, suit or proceeding by reason of the fact that you are or
were a director, officer, employee, or agent of the Company, or of any other
corporation or any partnership, joint venture, trust or other enterprise for
which you served as such at the request of the Company, then you shall be
indemnified by the Company against expenses actually and reasonably incurred by
you or imposed on you in connection with, or resulting from, the defense of such
action, suit or proceeding, or in connection with, or resulting from, any appeal
therein if you acted in good faith and in a manner you reasonably believed to be
in or not opposed to the best interest of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe your conduct
was unlawful, except with respect to matters as to which it is adjudged that you
are liable to the Company or to such other corporation, partnership, joint
venture, trust or other enterprise for gross negligence or willful misconduct in
the performance of your duties. As used herein, the term "expenses" shall
include all obligations actually and reasonably incurred by you for the payment
of money, including, without limitation, attorney's fees, judgments, awards,
fines, penalties and amounts paid in satisfaction of a judgment or in settlement
of any such action, suit or proceeding, except amounts paid to the Company or
such other corporation, partnership, joint venture, trust or other enterprise by
you.
6. ARBITRATION
Any controversy or claim arising out of or relating to this Agreement, or any
breach thereof, shall, except as provided in Paragraph 4, be adjusted only by
arbitration in accordance with the rules of the American Arbitration
Association, and judgment upon such award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. The arbitration shall be held
in the City of
<PAGE>
Mr. Dan Ryser
July 1, 1997
Page 7
Houston, Texas, or such other place as may be agreed upon at the time by the
parties to the arbitration. The arbitrator(s) shall, in their award, allocate
between the parties the costs of arbitration, which shall include reasonable
attorneys' fees of the parties, as well as the arbitrators' fees and expenses,
in such proportions as the arbitrator(s) deem just; provided however,
notwithstanding the above, in the event you are the prevailing party, then the
Company agrees to reimburse you for all such costs of arbitration, including but
not limited to attorneys' fees and arbitrators' fees and expenses reasonably
incurred by you; provided further, however, notwithstanding the above, in the
event the Company is the prevailing party, then the total costs of arbitration,
including but not limited to attorneys' fees reasonably incurred by the Company
and arbitrators' fees and expenses, that may be allocated to you by the
arbitrator(s) shall not in any event exceed Twenty-Five Thousand Dollars
($25,000). Notwithstanding the foregoing, you shall be entitled to seek specific
performance in a court of competent jurisdiction of your right to be paid your
full compensation until your separation from employment, during the pendency or
dispute of any controversy arising under or in connection with this Agreement.
7. OTHER PROVISIONS
(a) THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICTS OF LAW,
RULE OR PRINCIPLE THAT MIGHT OTHERWISE REFER TO THE SUBSTANTIVE LAW OF ANOTHER
JURISDICTION.
(b) Except as otherwise indicated, this Agreement is not assignable
without the written authorization of both parties; provided that the Company may
assign this Agreement to any entity to which the Company transfers substantially
all of its assets or to any entity which is a successor to the Company by
reorganization, incorporation, merger or similar business combination.
(c) Except as otherwise provided herein, the provisions of Paragraphs
4, 5 and 6 of this Agreement shall survive the termination of this Agreement.
(d) This Agreement supersedes all previous employment agreements,
written or oral, between the Company and you. This Agreement may be amended only
by written amendment duly executed by both parties or their legal
representatives and authorized by action of the Board. Except as otherwise
specifically provided in this Agreement, no waiver by either party hereto of any
breach by the other party hereto of any condition or provision of this Agreement
to be performed by such other party shall be deemed a waiver of a subsequent
breach of such condition or provision or a waiver of a similar or dissimilar
provision or condition at the same or at any prior or subsequent time.
<PAGE>
Mr. Dan Ryser
July 1, 1997
Page 8
(e) Any notice or other communication required or permitted pursuant
to the terms of this Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by United States mail, first class,
postage prepaid and registered with return receipt requested, addressed to the
intended recipient at his or its address set forth below and, in the case of a
notice or other communication to the Company, directed to the attention of the
Board of Directors with a copy to the Secretary of the Company, or to such other
address as the intended recipient may have theretofore furnished to the sender
in writing in accordance herewith, except that until any notice of change of
address is received, notices shall be sent to the following addresses:
IF TO YOU: IF TO THE COMPANY:
Dan Ryser NGC Corporation
4803 Big Falls 1000 Louisiana, Suite 5800
Kingwood, TX 77345 Houston, TX 77002-5050
(f) If any one or more of the provisions or parts of a provision
contained in this Agreement shall for any reason be held to be invalid, illegal
or unenforceable in any respect, such invalidity or unenforceability shall not
affect any other provision or part of a provision of this Agreement, but this
Agreement shall be reformed and construed as if such invalid or illegal or
unenforceable provision or part of a provision had never been contained herein
and such provisions or part thereof shall be reformed so that it would be valid,
legal and enforceable to the maximum extent permitted by law.
(g) You shall not be required to mitigate damages (or the amount of
any compensation provided under this Agreement to be paid) following your
termination of employment, by seeking employment or otherwise.
If the foregoing reflects your understanding of the terms of your
employment with the Company, please execute each copy of this letter in the
space provided below.
NGC CORPORATION
By: _________________________________
T. M. Matthews
AGREED AND ACCEPTED this
______ day of September, 1997,
and effective as of July 1, 1997
________________________________
Dan Ryser
<PAGE>
EXHIBIT 10.41
DYNEGY INC.
SEVERANCE PAY PLAN
(EFFECTIVE SEPTEMBER 1, 1998)
<PAGE>
DYNEGY INC.
SEVERANCE PAY PLAN
(Effective September 1, 1998)
Table of Contents
Page
I. INTRODUCTION......................................................... 1
II. HIGHLIGHTS........................................................... 1
III. ELIGIBILITY.......................................................... 2
A. Eligibility for Participation.................................. 2
B. Ineligibility for Participation................................ 2
1. Resignation or Discharge.................................. 2
2. Changed Decisions......................................... 3
3. Transition Assistance..................................... 3
IV. SEVERANCE PAY BENEFITS............................................... 3
A. Amount of Severance Pay........................................ 4
B. Integration With Plant Closing Law............................. 4
C. Form of Payment of Severance Pay Benefits...................... 4
D. Effect of Plan on Other Company Benefits....................... 5
E. Rehired Employees.............................................. 5
F. Deceased Employees............................................. 5
V. PLAN ADMINISTRATION.................................................. 5
A. General........................................................ 5
B. Powers of the Plan Administrator............................... 5
VI. CLAIM REVIEW PROCEDURE............................................... 6
A. Initial Claim for Benefits..................................... 6
B. Review of Claim Denial......................................... 7
C. Exhaustion of Review Remedies.................................. 7
VII. PLAN AMENDMENT OR TERMINATION........................................ 7
VIII. REORGANIZED COMPANIES AND PLAN MERGERS............................... 8
IX. ERISA RIGHTS......................................................... 8
X. GENERAL PROVISIONS................................................... 9
A. Voluntary Plan................................................. 9
B. No Rights Created or Accrued................................... 9
C. Relation of the Plan to Other Descriptive Matter............... 10
D. Non-alienation of Benefits..................................... 10
E. Governing Law.................................................. 10
i
<PAGE>
F. Plan Communications............................................ 10
G. Severability................................................... 10
H. Effect on Other Plans.......................................... 10
I. Costs and Indemnification...................................... 10
J. Miscellaneous.................................................. 11
XI. IDENTIFYING DATA..................................................... 11
A. Employer/Plan Sponsor Location................................. 11
B. Plan Administrator............................................. 11
C. Agent for Legal Service of Process............................. 11
XII. DEFINITIONS.......................................................... 11
Attachment A - Agreement and Release
Attachment B - Subsidiaries/Affiliates/Adopting Dynegy Inc. Severance Pay Plan
ii
<PAGE>
I. INTRODUCTION
Dynegy Inc. and its participating subsidiaries and affiliated entities
hereby establish the Dynegy Inc. Severance Pay Plan (defined more completely
below as the "Plan") effective as of September 1, 1998, to provide severance
benefits for certain Eligible Employees whose employment is terminated
involuntarily by the Company/1/ under certain conditions.
The Company is pleased to provide this Plan to its Employees, and wants you,
as an Employee, to know about and understand it. This Plan has been prepared to
let you know how it works and about how it may benefit you. You should read all
parts of this Plan carefully so that you will not only understand the ways in
which it may benefit you, but certain exclusions to coverage and limitations on
the receipt of benefits which may apply to you. This Plan supersedes and
replaces any and all Company severance pay policies, plans or other programs
providing similar benefits in existence prior to September 1, 1998. As of
September 1, 1998, the only Company severance benefits are those offered under
this Plan and any Supplemental Plans specifically referring to this Plan that
are effective after August 31, 1998.
II. HIGHLIGHTS
. Only Eligible Employees who satisfy all the requirements of the Plan
will receive severance payments.
. Severance payments will be made to Eligible Employees based on their
Credited Length of Service.
. Eligible Employees will receive severance pay in a lump sum, less
applicable withholding for taxes and authorized benefit contributions.
. Benefits from certain of the Company's benefits plans may continue if
you ask the Company to withhold the cost of such benefits from your
severance pay.
. Severance pay benefits under the Plan are provided solely by the Company
at no cost to you other than the cost of any other benefit plans under
which you elect continued coverage. See Subsection IV(D) of this Plan.
. As a condition to receipt of severance pay benefits under this Plan, you
must execute an Agreement and Release (hereinafter called the "Release")
in the form provided by the Company acknowledging receipt of the
severance payment and releasing the Company from any liability arising
from your employment or termination. You will also agree, by signing the
Release, not to claim employment or seek employment rights from the
Company.
______________________
/1/ The term "Company," as more completely defined in Section XII, shall
include Dynegy Inc., and each of its subsidiaries and affiliated entities that
participate in the Plan. The participating subsidiaries and affiliated entities
are listed on Attachment B.
<PAGE>
III. ELIGIBILITY
A. ELIGIBILITY FOR PARTICIPATION
You will receive severance pay only if your employment termination meets
specific guidelines. After the Effective Date, each Employee may be eligible to
participate in the Plan in the event such Employee's employment is terminated by
an Employing Company for one of the following reasons (determined by the Plan
Administrator in its sole discretion):
. Reduction in force;
. Position elimination;
. Office closing;
. Mutually satisfactory resignation.
An Employing Company or an operating unit thereof, upon written approval
of the Plan Administrator, in its sole discretion, may grant participation
eligibility due to an employment termination for additional reasons within the
policy or guidelines of the Company and signed by the Vice President of Human
Resources.
If you are given advance notice of your termination, you must remain in
employment until the Company's designated Termination Date in order to receive
severance pay. Severance pay may be paid if you leave prior to the designated
Termination Date if your leaving will not have an adverse effect on the
activities of your department and is approved in writing by the Vice President
of Human Resources.
B. INELIGIBILITY FOR PARTICIPATION
1. RESIGNATION OR DISCHARGE
An Employee is ineligible to participate in the Plan in the event the
Employee's employment by an Employing Company terminates for a reason other than
those enumerated in Subsection A above, including, but not limited to, the
following:
. terminated by an Employing Company for any reason not listed in
Subsection A, above. The Plan Administrator, in its sole discretion,
may determine whether a termination makes an Employee ineligible for
benefits provided by this Plan;
. voluntarily resign for any reason, except participation in a Company
Voluntary Separation Program or a mutually satisfactory resignation as
determined by the Plan Administrator, in its sole discretion;
. involuntarily resign for any reason, except those reasons listed in
Subsection A, above;
. Employee status is canceled due to a failure to report for work,
failure to report from leave, or other similar event;
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. merger, acquisition, sale, transfer, outsourcing, reorganization or
restructuring of all or part of the Employing Company or any affiliate
or division thereof where either (i) you are offered another position
within the Company that provides you a base salary at least equal to
or greater than your base salary on the Termination Date;/2/ or (ii)
you accept any position with a Successor Company, including an outside
contractor, whether affiliated or unaffiliated with the Company and
whether or not the Successor Company adopts the Plan;
. death;
. have an employment contract that contains severance provisions;
. are receiving long-term disability benefits at the time you are
notified that your employment is being terminated even if your
termination is caused by an event listed in Subsection III (A).
However, if your disability benefits cease within two years after your
position is eliminated because you are no longer disabled and you seek
to be reinstated but cannot be rehired due to the elimination of your
position and the absence of a comparable position, the Plan
Administrator or its designee may, but need not, make you eligible for
severance pay by causing the notice, required by the provisions of the
Plan, to be given to you;
. return from a leave of absence which extends beyond the policy
reinstatement period, if applicable, and no position is available.
These exceptions from eligibility shall apply even if your termination
otherwise qualifies under Subsection A above.
2. CHANGED DECISIONS
The Company has the right to cancel or reschedule your termination
before you terminate employment. You will not be eligible for severance benefits
under this Plan if your termination is canceled.
3. TRANSITION ASSISTANCE
You will not be entitled to benefits under this Plan unless you
satisfy all transition assistance requests of the Company to the Company's
satisfaction, such as aiding in the location of files, preparing accounting
records, returning all Company property in your possession, or repaying any
amounts you owe the Company.
IV. SEVERANCE PAY BENEFITS
If you are terminated as a result of an event listed in Subsection
III (A) above, you will receive written notice of your employment
termination from the Vice President of Human Resources. This will be
your notice of potential eligibility to participate in the Plan. If you
think you are eligible for benefits under the Plan and you have not
received notice from the Vice
____________________
/2/ Such an offer includes any position with the Company whether or not in
accepting such position you would be required to transfer to a different work
location, but only so long as you have been offered the Company's standard
relocation package in connection with such transfer.
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<PAGE>
President of Human Resources, you may send a written request for benefits
addressed to the Vice President of Human Resources pursuant to Subsection VI
(A), below.
You will be entitled to receive benefits described in the Plan only if
you execute the Release, in the form approved and distributed to Eligible
Employees by the Plan Administrator within the 45 day time period after
receiving the Release. By signing the Release, you will be waiving any claims
which you may have against the Company arising from your employment or
termination of employment. The Release should be signed only after careful
consideration and consultation with a legal advisor.
A. AMOUNT OF SEVERANCE PAY
The amount of severance pay you receive under this Plan (not including
any supplements to the Plan) will be based on your Credited Length of Service
with the Company. If you become entitled to severance benefits under this Plan,
you will receive two Weeks of Pay for each full, completed Year of Service with
the Company and a pro-rated amount for less than a Year of Service, with a
minimum of eight Weeks of Pay for Employees with less than two Years of Service
on their Separation Date and twelve Weeks of Pay for Employees with two to six
Years of Service on their Separation Date. The maximum amount of severance
payable under the Plan equals 52 Weeks of Pay. However, if you choose not to
execute the Release, you will not receive any of the Plan Benefits. The benefits
payable under this Plan (and any supplements) shall be inclusive of and offset
by any other severance or termination payment made by the Company, including
payments provided by Subsection B below.
B. INTEGRATION WITH PLANT CLOSING LAW
To the extent that any federal, state or local law, including, without
limitation, so-called "Plant closing" laws, requires the Company to give advance
notice or make payment of any kind to an Eligible Employee because of that
Employee's involuntary termination due to a layoff, reduction in force, Plant or
facility closing, sale of business, change of control, or any other similar
event or reason, the benefits provided under this Plan may be reduced or
eliminated, in the sole discretion of the Plan Administrator. The benefits
provided under this Plan are intended to satisfy any and all statutory
obligations that may arise out of any Eligible Employee's involuntary
termination for the foregoing reasons, and the Plan Administrator shall so
construe and implement the terms of the Plan it its sole discretion.
C. FORM OF PAYMENT OF SEVERANCE PAY BENEFITS
Severance pay benefits will be paid to you in a lump sum as soon as
administratively practicable following the expiration of the seven-day
revocation period after the execution of the Release, but in NO event shall such
benefits be paid earlier than your Termination Date. All Plan Benefits will be
subject to withholding for applicable employment and income taxes. Plan Benefits
will be paid by check and sent to your last known mailing address. You are
responsible for informing the Plan Administrator, by written letter delivered
within the seven-day revocation period to the Vice President of the Human
Resources, of any change in your mailing address. All of the required conditions
for other benefits you elect to receive (see Subsection D below) will be
deducted from the lump sum.
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D. EFFECT OF PLAN ON OTHER COMPANY BENEFITS
You may be eligible to continue participation in certain other Company
benefits and/or benefit plans. However, continuation in various Company plans is
subject to the terms and conditions of the applicable plan, documents or
insurance contracts in effect on the date of your termination. Your rights under
the other plans, documents or insurance contracts are not affected by your
decision to participate or to not participate in this Plan. However, no
severance benefits will be payable, except as set forth by this Plan.
E. REHIRED EMPLOYEES
Once you receive severance pay under this Plan, you have no right to be
re-employed by the Company. If you are rehired by the Company after you receive
a lump sum payment of your severance pay, you will be entitled to keep that
portion of your severance pay equal to your regular, normal base weekly rate of
pay prior to your employment termination multiplied times the number of weeks
and/or fraction of weeks between your Termination Date and the rehire date. Any
remainder must be either returned to the Company upon your rehire or it will be
deducted from your pay.
If you are rehired within the same calendar year in which your employment
was terminated because of a reduction in force and you received payment for
vacation earned but not taken, you may either retain the payment and forfeit the
vacation time for which you were eligible prior to your employment termination,
or you may return to the Company the amount you received and reinstate vacation
time for which you were eligible prior to termination.
If your employment ends because of a reduction in force and you are
rehired by the Company within twelve months of your Termination Date, your Years
of Service with the Company prior to such termination will be counted in
determining your vacation benefits eligibility in future years. Applicable
vacation time on rehire will be determined in accordance with the Company's
vacation policy.
F. DECEASED EMPLOYEES
In the event that an Eligible Employee dies after the termination of his
or her employment and before having received the full amount of the severance
benefits for which the Eligible Employee was qualified, Plan Benefits will be
paid to the legal representative of the Employee's estate unless the Employee
notifies the Plan Administrator in writing that they specifically designate a
different Beneficiary. Benefits will be paid as soon as practicable after
receipt of notice of proof of such death.
V. PLAN ADMINISTRATION
A. GENERAL
The administration and operation of the Plan is directed by the Plan
Administrator.
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B. POWERS OF THE PLAN ADMINISTRATOR
The Plan Administrator will have full power to administer the Plan in all
of its details, subject, however, to the requirements of ERISA. For this purpose
the Plan Administrator's power will include, but will not be limited to, sole
discretionary power to:
1. make and enforce such rules and regulations as it deems necessary or
proper for the efficient administration of the Plan or required to
comply with applicable law;
2. interpret the Plan, its interpretation thereof to be final and
conclusive on any Employee, former Employee, Participant, former
Participant and Beneficiary;
3. decide all questions concerning the Plan and the eligibility of any
person to participate in the Plan;
4. compute the amount of benefits which will be payable to any
Participant, former Participant or Beneficiary in accordance with the
provisions of the Plan, and to determine the person or persons to whom
such benefits will be paid;
5. authorize the payment of benefits;
6. keep such records and submit such filings, elections, applications,
returns or other documents or forms as may be required under the Code
and applicable regulations, or under state or local law and
regulations;
7. appoint such agents, counsel, accountants and consultants as may be
required to assist in administering the Plan;
8. by written instrument, allocate and delegate its fiduciary
responsibilities in accordance with Section 405 of ERISA; and
9. the right to amend, terminate, supplement, or modify the Plan at any
time whether or not benefits that are currently payable are affected
or retroactively terminated.
All such rules, regulations, determinations, constructions, decisions and
interpretations made by the Plan Administrator will be final and binding, except
as otherwise required by law. To the extent the Plan Administrator has been
granted discretionary authority under the Plan, the Plan Administrator's prior
exercise of such authority shall not obligate it to exercise its authority in a
like fashion thereafter.
VI. CLAIM REVIEW PROCEDURE
A. INITIAL CLAIM FOR BENEFITS
If your employment has been terminated under circumstances which you
believe entitled you to benefits under this Plan and you have not received
notification of your eligibility to participate in the Plan; if you are an
Eligible Employee who received a written notification and believe an error has
been made either in the determination of the amount of Plan Benefits; if you
believe that the Plan is not being operated properly; if you believe that the
fiduciaries of the Plan
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<PAGE>
have breached their duties; or you believe that your legal rights are being
violated with respect to the Plan, you must file a written claim for benefits
with the Plan Administrator.
A formal claim must be filed within 90 days after the date you first knew
or should have known of the facts on which the claim is based (usually your
Termination Date), unless the Plan Administrator in writing consents otherwise.
The Plan Administrator shall provide you, on request, with a copy of the claims
procedures established under this Section.
The Plan Administrator shall decide, in its sole discretion, whether your
claim shall be allowed. If a claim for Plan Benefits under the Plan is denied by
the Plan Administrator in whole or in part, the claimant will be notified within
sixty (60) days of the date the claim is delivered to the Plan Administrator, or
one-hundred twenty (120) days if the claimant is told of the extension, in
writing, before the end of the initial sixty (60) days, specifying the reason
for the extension. The claim denial will be written in understandable language
and will state: (a) specific reasons for denial of the claim, (b) specific
references to Plan provisions on which the denial is based, (c) a description
(if appropriate) of any additional material or information necessary for the
claimant to perfect the claim, and (d) notice of your right to seek a review of
the denial and an explanation of the Plan's review procedure. A claim that is
not acted upon within sixty (60) days may be deemed by the claimant to have been
denied.
B. REVIEW OF CLAIM DENIAL
If your claim is denied, in whole or in part, you will have the right to
request that the Plan Administrator (or its delegate), review the denial,
provided you file a written request for review with the Plan Administrator
within 60 days after the date on which you received written notification of the
denial. You (or your duly authorized representative) may review pertinent
documents and submit issues and comments in writing to the Plan Administrator.
Within 60 days after a request for review is received, the review will be made
and you will be advised in writing of the decision on review, unless special
circumstances require an extension of time for processing the review, in which
case you will be given a written notification within such initial 60-day period
specifying the reasons for the extension and when such review will be completed
(provided that such review will be completed within 120 days after the date on
which the request for review was filed).
The decision on review will be forwarded to you in writing and will
include specific reasons for the decision and references to Plan provisions upon
which the decision is based. If notice of the decision on review is not
furnished within the periods stated above, the claim will be deemed denied.
C. EXHAUSTION OF REVIEW REMEDIES
You must properly file a claim for benefits, and request a review of any
complete or partial denial, prior to seeking a review of your claim for benefits
in a court of law. A decision on a Review of Claim Denial (see preceding
paragraph) will be the final decision of the Plan Administrator. After this
final decision is provided by the Plan Administrator, you may seek judicial
remedies in accordance with your rights under the Employee Retirement Income
Security Act of 1974 ("ERISA").
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<PAGE>
VII. PLAN AMENDMENT OR TERMINATION
The Plan Sponsor reserves the right to amend, modify, supplement or
terminate, in whole or in part, any or all of the provisions of the Plan at any
time prospectively or retroactively, for any reason, without notice or further
obligation to any Employee or any other person entitled to receive benefits, if
any, under the Plan. The Plan Sponsor also reserves the right to make any
modification, supplementation or amendments to the Plan that are necessary or
appropriate to qualify or maintain the Plan so that it satisfies the applicable
provisions of the Code and the Employee Retirement Income Security Act of 1974
(ERISA). Any Plan amendment must be signed by the Vice President of Human
Resources to be effective.
Any Employing Company, other than the Company, may withdraw from
participation in the Plan at any time by delivering to the Plan Administrator
written notification to that effect signed by such Employing Company's chief
executive officer or his/her delegate. Withdrawal by any Employing Company
pursuant to this paragraph or complete discontinuance of severance benefits
under the Plan by any Employing Company other than the Company, shall constitute
termination of the Plan with respect to such Employing Company.
In the event any Employing Company withdraws from participation or the
Plan Supervisor terminates the Plan, no affected Employee shall be entitled to
receive benefits hereunder for Employment either before or after such action.
VIII. REORGANIZED COMPANIES AND PLAN MERGERS
Any corporation that succeeds to the business and assets of the Company
or any part of its operations may, by appropriate resolution, adopt the Plan and
shall thereupon succeed to such rights and assume such obligations hereunder as
the Company and said corporation shall have agreed upon in writing. Any
corporation that succeeds to the business of any Employing Company other than
the Company, or any part of the operations of such Employing Company may, by
appropriate resolution, adopt the Plan and shall thereupon succeed to such
rights and assume such obligations hereunder as such Employing Company and said
corporation shall have agreed upon in writing; provided, however, that such
adoption and the terms thereof agreed upon in writing have been approved by the
Company.
IX. ERISA RIGHTS
As a Participant in this Plan, you are entitled to certain rights and
protections under federal law. ERISA provides that all Plan Participants shall
be entitled to:
a) Examine, without charge, at the Plan Administrator's office and at
other specified locations, such as work sites, all Plan documents
including contracts, and copies of all documents filed by the Plan
Sponsor with the U.S. Department of Labor, such as detailed annual
reports and Plan descriptions.
b) Obtain a copy of all Plan documents and other Plan information upon
written request to the Plan Administrator. The administrator may make a
reasonable charge for the copies.
c) Receive a summary of the Plan's annual financial report. The Plan
Administrator is required by law to furnish each Participant with a copy
of this summary annual report.
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In addition to creating rights for Plan Participants, ERISA imposes
duties upon the people who are responsible for the operation of the employee
benefit plan. The people who operate your Plan, called "fiduciaries" of the
Plan, have a duty to do so prudently and in the interest of you and other Plan
Participants and beneficiaries. No one, including your Employer, your union, or
any other person may fire you or otherwise discriminate against you in any way
to prevent you from obtaining a welfare benefit or exercising your rights under
ERISA, in whole or in part. If a claim for benefits is denied in whole or in
part, you must receive a written explanation of the reason for the denial of a
benefit claim. You have a right to have the Plan Administrator review and
reconsider your claim. Under ERISA, there are steps you can take to enforce the
above rights. For instance, if you request materials from the Plan and do not
receive them within 30 days, you may file suit in a federal court. In such case,
the court may require the Plan to provide the materials and pay you up to $110 a
day until you receive the materials, unless the materials were not sent because
of reasons beyond the control of the Plan Administrator. If you have a claim for
benefits which is denied or ignored in whole or in part, you may file suit in a
state or federal court having proper jurisdiction. If it should happen that Plan
Fiduciaries misuse the Plan's money or if you are discriminated against for
asserting your rights, you may seek assistance from the U.S. Department of
Labor, or you may file suit in federal court. The court will decide who should
pay for the court costs and legal fees. If you are successful, the court may
order the person you have sued to pay these costs and fees. If you lose, the
court may order you to pay the costs and fees (e.g., if it finds your claim is
frivolous).
If you have any questions about this statement or about your rights under
ERISA, you should contact the area office of the U.S. Labor-Management Services
Administration, Department of Labor. If you have any questions about the Plan,
you should contact the Plan Administrator.
X. GENERAL PROVISIONS
A. VOLUNTARY PLAN
The adoption of the Dynegy Inc. Severance Pay Plan is purely voluntary on
the part of the Company and shall not be deemed to constitute a contract between
the Company, any Employee or other person not in the employ of the Company, or
to be a consideration for, or an inducement or condition of, the employment of
any Employee or other person, or to give any right to be retained in the employ
of the Company, or to interfere with the right of an Employee to quit at any
time, or to interfere with the right of the Company to discharge any Employee or
other person at any time.
B. NO RIGHTS CREATED OR ACCRUED
Nothing in the Plan shall be construed as giving to an Employee of the
Company a right to receive any benefit other than the benefits specifically
provided under the terms of the Plan. Nothing in the Plan shall be construed to
limit in any manner the right of the Company to discharge, demote, downgrade,
transfer, relocate, or in any other manner treat or deal with any person in its
employ, without regard to the effect such treatment or dealing may have upon
such person as someone who might otherwise have become (or remained) a
Participant in the Plan, which right is hereby reserved. No benefits shall be
deemed to accrue under the Plan at any time
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<PAGE>
except the time at which they become payable under the Plan, and no right to a
benefit under the Plan shall be deemed to vest prior to your Termination Date.
C. RELATION OF THE PLAN TO OTHER DESCRIPTIVE MATTER
The Plan shall contain no terms or provisions except those set forth
herein, or as hereafter amended in accordance with the provisions of section VII
of this Plan. If any description made in any other document is deemed to be in
conflict with any provision of the Plan, the provisions of the Plan shall
control.
D. NON-ALIENATION OF BENEFITS
No benefits payable under the Severance Pay Plan shall be subject to
anticipation, alienation, sale, transfer, assignment, pledge or other
encumbrance, and any attempt to do so shall be void.
E. GOVERNING LAW
The provisions of the Severance Pay Plan shall be construed, administered
and enforced according to the Employee Retirement Income Security Act of 1974
("ERISA") and, to the extent not preempted, by the laws of the State of Texas.
F. PLAN COMMUNICATIONS
No communications in connection with the Plan made by you are effective
unless duly executed on an appropriate form provided or approved by, and filed
with, the Plan Administrator.
G. SEVERABILITY
If any provision of the Severance Pay Plan shall be held illegal or
invalid for any reason, such illegality or invalidity shall not affect the
remaining provisions of the Plan, and the Plan shall be construed and enforced
as if such illegal and invalid provisions had never been set forth in the Plan.
Should the Release be held invalid, Employee shall return all monies given to
him or her under this Plan in consideration for the execution of the Release.
H. EFFECT ON OTHER PLANS
This Plan has no effect on the rights of any Participant under any other
employee benefit plan sponsored by the Company (other than as replaced or
superceded in Section I hereof) such as any profit-sharing, medical, dental or
hospitalization, life insurance, AD&D, incentive compensation, or vacation pay
plan. Rights under those plans are governed solely by their terms, and you
should review those plans to ascertain their rights under them. In particular,
your severance benefits under this Plan do not change the date of your
termination of employment for purposes of any other plan.
I. COSTS AND INDEMNIFICATION
All costs of administering the Plan and providing Plan Benefits will be
paid by the Company, with one exception: any expenses (other than arbitrator
fees) incurred in resolving
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disputes with multiple Claimants concerning their entitlement to the same
benefit may be charged against the benefit, which will be reduced accordingly.
To the extent permitted by applicable law and in addition to any other
indemnities or insurance provided by the Company, the Company shall indemnify
and hold harmless its (and its affiliates') current and former officers,
directors, and employees against all expenses, liabilities, and claims
(including legal fees incurred to defend against liabilities and claims) arising
out of their discharge or omission in good faith of their administrative and
fiduciary responsibilities with respect to the Plan. Expenses and liabilities
arising out of willful misconduct will not be covered under this indemnity.
J. MISCELLANEOUS
Where the context so indicates, the singular will include the plural and
vice versa. Titles are provided herein for convenience only and are not to serve
as a basis for interpretation or construction of the Plan. Unless the context
clearly indicates to the contrary, a reference to a statute or document shall be
construed as referring to any subsequently enacted, adopted, or executed
counterpart.
XI. IDENTIFYING DATA
The Severance Pay Plan is a welfare benefit plan providing benefits from
the general assets of the Company. Dynegy Inc. is the Plan Sponsor. The Plan
Year is from January 1 to the following December 31. For identification
purposes, the Plan Sponsor has assigned to the Plan number 504. The Employer
identification number for Dynegy Inc. is 94-3248415.
A. EMPLOYER/PLAN SPONSOR LOCATION
Dynegy Inc.
1000 Louisiana Street, Suite 5800
Houston, Texas 77002
B. PLAN ADMINISTRATOR
Plan Administrator
Dynegy Inc. Severance Pay Plan
c/o Vice President of Human Resources for Dynegy Inc.
1000 Louisiana Street, Suite 5800
Houston, Texas 77002
C. AGENT FOR LEGAL SERVICE OF PROCESS
Plan Administrator
Dynegy Inc. Severance Pay Plan
c/o Vice President of Human Resources for Dynegy Inc.
1000 Louisiana Street, Suite 5800
Houston, Texas 77002
(713) 507-6400
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XII. DEFINITIONS
The following words and phrases are used quite frequently in this
Severance Pay Plan and have special meanings of which you should take note.
a) A Beneficiary is a person or persons entitled to receive benefits
under the Plan upon the death of a Participant.
b) The Code means the Internal Revenue Code of 1986, as amended.
c) The Company is Dynegy Inc., its successors and assigns, and all
Employing Companies, including all of Dynegy Inc.'s subsidiaries and affiliated
entities currently participating in the Plan which are listed on Attachment B.
d) Contract Employees means persons whom the Company regards as Contract
Employees. Contract Employees are not eligible to participate in this Severance
Pay Plan.
e) Contractor's Employees means persons working for a company providing
goods or services (including temporary employee services) to the Company whom
the Company does not regard to be its common law employees, as evidenced by the
Company's failure to withhold taxes from their compensation, even if the persons
really are the Company's common law employees. Contractor's Employees are not
eligible to participate in this Severance Pay Plan.
f) Credited Length of Service means each Year of Service as an Employee
with an Employing Company, an Affiliated Company or a Predecessor Company for
which you are given credit by the Plan Administrator.
g) The Effective Date for purposes of this Plan is September 1, 1998.
h) An Eligible Employee means an Employee who meets the eligibility
requirements set forth in Section III of this Plan.
i) An Employee is any full-time and active Employee employed by the
Company who is paid through the payroll department of the Company or the
Employing Company. Temporary or Part-time Employees, Foreign Employees,
Independent Contractors, Contract Employees, Contractors' Employees and Leased
Employees are not "Employees" under the Plan. Employees covered by a collective
bargaining agreement are not "Employees" unless an agreement has been negotiated
with the bargaining representative for coverage under the Plan.
j) The Employer or Employing Company means the Employee's direct
employer, including Dynegy Inc. and such other of the subsidiaries and
affiliated companies of Dynegy as have adopted the Plan and have been admitted
to participation by the Plan Administrator.
k) ERISA shall mean the Employee Retirement Income Security Act of 1974,
as amended, and the rules and regulations issued thereunder.
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l) Foreign Employees means any persons who are not on a U.S. payroll of
the Company. Foreign Employees are not eligible to participate in this Severance
Pay Plan.
m) Full-time means any Employee who is regularly scheduled to work 40 or
more hours per week.
n) Leased Employees means persons who are the Company's leased employees,
within the meaning of Code Section 414(n). Leased Employees are not eligible to
participate in this Severance Pay Plan.
o) The Named Fiduciary for the Plan is the Plan Administrator.
p) Participants are the Eligible Employees of the Company who elect to,
and do, participate in the Severance Pay Plan and who meet the eligibility
requirements set forth under section III of this Plan.
q) Part-Time Employees are the employees of the Company who are regularly
scheduled to work less than 40 hours per week. Part-Time Employees are not
eligible to participate in this Severance Pay Plan.
r) The Plan is the Dynegy Inc. Severance Pay Plan described in this
document including any Supplemental Plans during the period of time that they
are effective.
s) The Plan Administrator is the person or persons appointed by the
Compensation and Human Resources Committee (or their delegates) to oversee the
operation of the Plan.
t) Plan Benefit means amounts payable under the Plan to a Participant
under the conditions described in Section IV.
u) The Plan Sponsor is Dynegy Inc.
v) The Plan Year is the 12-month period ending on December 31, 1998.
w) Release means the Agreement and Release set forth as Attachment A, or
such other form designated by the Plan Administrator.
x) Separation or Termination Date means an Employee's last day of active
service for the Employer, as designated by the Employer.
y) A Successor Company is any entity that assumes operations or functions
formerly carried out by the Company (such as the buyer of a facility, asset or
division or any entity to which a Company operation or function has been
outsourced); any affiliate of the Company; or any entity making the job offer at
the request of the Company (such as a joint venture of which the Company or an
affiliate is a member).
z) Supplemental Plans mean plans designated as supplements to this Plan
that are signed by the Vice President of Human Resources and are first effective
on or after September 1, 1998.
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aa) Vice President of Human Resources means the individual currently
holding the title Vice President of Human Resources for Dynegy Inc., or his/her
designee.
bb) Voluntary Separation Program means a program designated as a
Voluntary Separation Program by the Company and signed by the Vice President of
Human Resources.
cc) A Week of Pay means your base weekly rate of pay, excluding overtime,
bonuses, commissions (except in the case of truck drivers employed by Dynegy
Crude Gathering Services, Inc., whose base pay is comprised solely of
commissions), premium pay, shift differentials, employee benefits, expense
reimbursements, and similar amounts. However, the fact that amounts are withheld
from your pay for taxes, employee benefits, or other reasons will be disregarded
in calculating your Week of Pay amount. If you are paid by the hour, your base
weekly rate of pay is your regular hourly rate multiplied by your scheduled
hours per week. (e.g., forty (40) hours per week for full time Employees). Your
base weekly rate of pay shall be determined by the Plan Administrator in its
sole discretion.
dd) Year of Service means each continuous year (365 days) of service with
the Company without a break in service.
Effective: September 1, 1998 ----------------------------
Michael B. Barton
Vice President of Human Resources
Dynegy Inc.
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ATTACHMENT A
DYNEGY INC. SEVERANCE PAY PLAN
AGREEMENT AND RELEASE
---------------------
I, ______________________ ("Employee"), hereby agree to participate in the
Dynegy Inc. Severance Pay Plan (the "Plan") in accordance with its terms. A
copy of the Plan has been provided to me.
I understand that in order to receive severance payments under the terms of
the Plan, I must sign this Agreement and Release ("Release") and return it to
the Vice President of Human Resources, Dynegy Inc., 1000 Louisiana Street, Suite
5800, Houston, Texas 77002, no later than __________________________, 1998. I
understand that I have been given forty-five (45) days to consider this Release.
I have been advised to consult an attorney before I signed this Release. I
understand that I will have seven (7) days after I sign and return this Release
to the Vice President of Human Resources to change my mind and revoke this
Release. I further understand that this Release will not become effective or
enforceable until after that date.
RELEASE
-------
In consideration for the benefits provided under the Plan, and by signing
this Release, I understand that I am knowingly, irrevocably, and voluntarily
agreeing for myself and for my heirs, executors and assigns, to a full and
complete release of Dynegy Inc., its predecessors, successors, subsidiaries,
operating units, affiliates, divisions and the agents, representatives,
officers, directors, shareholders, employees and attorneys and each of the
foregoing (individually and collectively called the "Company" or "Employer"),
from all claims, debts, liabilities, demands, obligations, promises, acts,
agreements, costs, expenses, damages, actions and causes of action, whether in
law or in equity, whether known or unknown, suspected or unsuspected, arising
from my employment and termination of employment with Employer, including but
not limited to, any and all claims pursuant to Title VII of the Civil Rights Act
of 1964, 42 U.S.C. (S)2000e, et seq., as amended by the Civil Rights Act of
1991, which prohibits discrimination in employment based on race, color,
national origin, religion or sex; the Civil Rights act of 1966, 42 U.S.C.
(S)(S)1981, 1983 and 1985, which prohibits violations of civil rights; the
Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. (S)621,
et seq., which protects certain employee benefits; the Americans with
Disabilities Act of 1990, as amended, 42 U.S.C. (S)12101, et seq., which
prohibits discrimination against the disabled; the Age Discrimination in
Employment Act of 1967, 29 U.S.C. (S)621, et seq., as amended by the Older
Workers Benefit Protection Act of 1990 (the "ADEA"); the Family and Medical
Leave Act of 1993, 29 U.S.C. (S)2601, et seq., which provides medical and family
leave; the Fair Labor Standards Act, 42 U.S.C. (S)201, et seq., including the
Wage and Hour Law relating to payment of wages; the Worker Adjustment and
Retraining Notification Act, and all other federal, state or local laws or
regulations. This Release also includes, but is not limited to, a release of any
claims for breach of contract, mental pain, suffering and anguish, emotional
upset, impairment of economic opportunities, unlawful interference with
employment rights, defamation, intentional or negligent infliction of emotional
distress, fraud, wrongful termination, wrongful discharge in violation of
<PAGE>
public policy, breach of any express or implied covenant of good faith and fair
dealing, that Employer has dealt with me unfairly or in bad faith, overtime pay,
vacation pay, punitive damages, back-pay, reinstatement, front-pay, liquidated
damages, injunctive relief, costs or attorneys' fees, based on or arising out of
Employee's employment by Dynegy and/or his/her termination therefrom, and all
other common law contract and tort claims. I am not waiving any rights or claims
that may arise under the ADEA after this Agreement and Release is signed by me.
THE PRECEDING PARAGRAPH MEANS THAT BY SIGING THIS RELEASE, YOU WILL HAVE
WAIVED ANY RIGHT YOU MAY HAVE TO BRING A LAWSUIT OR MAKE ANY LEGAL CLAIM AGAINST
THE COMPANY BASED ON ANY ACTIONS TAKEN BY THE COMPANY UP TO THE DATE OF THE
SIGNING OF THIS RELEASE.
WAIVER OF REINSTATEMENT
-----------------------
I forever waive and relinquish any right or claim to reinstatement of
employment with Employer following my termination, and acknowledge that Employer
has no obligation to rehire and return me to active duty at any time in the
future.
ACKNOWLEDGEMENTS
----------------
1. I have been advised by the Employer to consult with an attorney before
executing this Agreement and Release.
2. I have carefully read the contents of this Release, and I understand the
contents of the Release. I am executing this Release voluntarily,
knowingly, and without any duress or coercion.
3. I have been extended a period of 45 days within which to consider this
Release and this has afforded me ample opportunity to consult with
personal, financial, and legal advisors prior to executing this Release.
In the event that I decide to execute this Release prior to the end of the
45 day time period, I certify that, in accordance with 29 CFR Part
1625.22(e)(6), my decision to accept such shortening of time is knowing and
voluntary and is not induced by the Company through fraud,
misrepresentation, a threat to withdraw or alter to offer prior to the
expiration of the 45 day time period, or by providing different terms to
other employees who sign the release prior to the expiration of such time
period. Should I sign this Release before the expiration of the 45 day
time period, the Company may expedite the processing of the severance
benefits provided in exchange for this Release.
4. I understand that for a period of seven (7) days following my execution of
this Release, I may revoke the Release by notifying the Plan Administrator
in care of the Vice President of Human Resources, Dynegy Inc., 1000
Louisiana, Suite 5800, Houston, Texas 77002, in writing, of my desire to do
so. I understand that after the seven (7) day period has elapsed, this
Release shall become effective and enforceable. I understand that no
payment will be made under this Release until after the seven-day period
has elapsed.
<PAGE>
5. I acknowledge that the benefits and payments provided to me under the Plan
is consideration to which I am not otherwise entitled under any Employer
plan, program, or prior agreement.
6. I agree that the benefits and payments paid under the Plan shall constitute
the entire amount of monetary consideration provided to me under this
Release, that I am not entitled to this consideration if I do not sign this
Release and that I will not seek any further compensation for any other
claimed damages, costs or attorneys' fees in connection with my employment
with the Company, the separation of my employment, or any other matters
encompassed by this Release.
7. Any payment received pursuant to the Plans is subject to applicable
employment and income taxes. Employee acknowledges and agrees that the
Company has made no representations regarding the tax consequences of any
amounts received by Employee, and agrees to indemnify the Company for any
amounts that may be deemed subject to withholding tax which were not
withheld from these amounts.
8. I have been provided statistical and other information attached hereto as
Exhibit A relating to the Plan. Exhibit A contains a detailed list of the
job titles and ages of all employees eligible for the Plan and the ages of
all employees of the Company in the same job classifications or
organizational unit who are not eligible or selected. This information has
been considered by me and my advisors in reaching the decision to sign this
Release.
9. I understand and acknowledge that as an employee of the Company and its
predecessors, I have had access to valuable trade secrets and confidential
and proprietary information of the Company. I agree to maintain the
confidentiality of any trade secret or proprietary information acquired by
me during my employment. I further acknowledge that if I fail to maintain
the confidentiality of the information, the Company reserves the right to
pursue all legal and/or equitable remedies available to it.
GENERAL PROVISIONS
------------------
1. This Release sets forth the entire agreement between the parties hereto and
supersedes any and all prior agreements or understandings, written or oral,
between the parties hereto pertaining to the subject matter of this
Release. This Release expresses the full terms upon which Employer and the
Employee conclude the employment relationship. There are no other
representations or terms relating to the Employee employment relationship
or the conclusion of that relationship other than those set forth in
writing in this Release. I hereby represent and acknowledge that in
executing this Release, I do not rely and have not relied upon any
representations or statements made by any of the parties, agents,
attorneys, employees, or representatives with regard to the subject matter,
basis or effect of this Release or otherwise, other than as specifically
stated in this written Release.
<PAGE>
2. In the event that any provision of this Release should be held to be void,
voidable, or unenforceable, the remaining portions shall remain in full
force and effect. Should the Release be held invalid, I understand that I
shall return the monies given to me under the Plan in consideration for the
execution of this Release.
3. This Release shall be construed and enforced according to ERISA and, to the
extent not preempted, by the laws of the State of Texas.
4. Employee hereby submits to the personal jurisdiction of, and venue in, the
federal and state courts in the City of Houston, State of Texas for any
actions arising out of or relating to this Release.
5. I have carefully read, fully understand, and agree to be bound by all of
the provisions of this Release and the Plan.
_____________________ ___________________________________
Date Employee Signature
<PAGE>
ATTACHMENT B
SUBSIDIARIES/AFFILIATES/ADOPTING DYNEGY INC. SEVERANCE PAY PLAN
1. Dynegy Midstream Services, Limited Partnership;
2. Dynegy Midstream, Inc.;
3. Dynegy LPG Services, Inc.;
4. Dynegy Marketing and Trade;
5. Dynegy Energy Resources, Limited Partnership;
6. Dynegy Crude Gathering Services, Inc.; and
7. Dynegy Power Corp.
<PAGE>
EXHIBIT 10.42
NGC
PROFIT SHARING/401(k)
SAVINGS PLAN
As Amended and Restated
Effective January 1, 1998
<PAGE>
NGC PROFIT SHARING/401(k) SAVINGS PLAN
THIS AGREEMENT AND DECLARATION OF TRUST is by and between NGC CORPORATION,
a Delaware corporation, hereinafter referred to as the "COMPANY," and CG TRUST
COMPANY, a trust company organized under the laws of the State of Illinois with
its principal office and place of business in the city of Chicago, Illinois,
hereinafter referred to as "TRUSTEE."
W I T N E S S E T H :
WHEREAS, the Company has heretofore adopted the NGC PROFIT SHARING/401(k)
SAVINGS PLAN, hereinafter referred to as the "PLAN," for the benefit of its
employees; and
WHEREAS, the Company has heretofore entered into a trust agreement with the
Trustee establishing a trust to hold and invest contributions made under the
Plan and from which benefits have been distributed under the Plan;
WHEREAS, the Company desires to restate the Plan and to amend the Plan in
several respects, intending thereby to provide an uninterrupted and continuing
program of benefits and to incorporate the trust agreement into the Plan
document;
NOW THEREFORE, the Plan and the trust agreement are hereby restated in
their entirety as follows with no interruption in time, effective as of January
1, 1998, except as otherwise indicated herein:
(i)
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
----
ARTICLE I DEFINITIONS AND CONSTRUCTION....................... I-1
ARTICLE II PARTICIPATION...................................... II-1
ARTICLE III CONTRIBUTIONS...................................... III-1
ARTICLE IV ALLOCATIONS AND LIMITATIONS........................ IV-1
ARTICLE V INVESTMENT FUNDS................................... V-1
ARTICLE VI RETIREMENT BENEFITS................................ VI-1
ARTICLE VII DISABILITY BENEFITS................................ VII-1
ARTICLE VIII SEVERANCE BENEFITS AND DETERMINATION
OF VESTED INTEREST................................. VIII-1
ARTICLE IX DEATH BENEFITS..................................... IX-1
ARTICLE X TIME AND FORM OF PAYMENT OF BENEFITS............... X-1
ARTICLE XI IN-SERVICE WITHDRAWALS............................. XI-1
ARTICLE XII LOANS.............................................. XII-1
ARTICLE XIII ADMINISTRATION OF THE PLAN......................... XIII-1
ARTICLE XIV TRUSTEE AND ADMINISTRATION OF TRUST FUND........... XIV-1
ARTICLE XV FIDUCIARY PROVISIONS............................... XV-1
ARTICLE XVI AMENDMENTS......................................... XVI-1
ARTICLE XVII DISCONTINUANCE OF CONTRIBUTIONS,
TERMINATION, PARTIAL TERMINATION,
AND MERGER OR CONSOLIDATION........................ XVII-1
ARTICLE XVIII PARTICIPATING EMPLOYERS............................ XVIII-1
ARTICLE XIX MISCELLANEOUS PROVISIONS........................... XIX-1
ARTICLE XX TOP-HEAVY STATUS................................... XX-1
(ii)
<PAGE>
I.
Definitions and Construction
I.1 Definitions. Where the following words and phrases appear in the
Plan, they shall have the respective meanings set forth below, unless their
context clearly indicates to the contrary.
(1) Account(s): A Member's After-Tax Account, Before-Tax Account, Dow ESOP
Account, Dow Transfer Account, Employer Contribution Account, and/or
Rollover Contribution Account, including the amounts credited thereto and
any subaccounts thereof.
(2) Act: The Employee Retirement Income Security Act of 1974, as amended.
(3) After-Tax Account: An individual account for each Member which is credited
with the balance, if any, of such Member's Prior Employee (Post-Tax)
Contribution Account as of December 31, 1997, and which is credited with
(or debited for) such account's allocation of net income (or net loss) and
changes in value of the Trust Fund.
(4) Annuity Starting Date: With respect to each Member or beneficiary, the
first day of the first period for which an amount is payable to the Member
or beneficiary from the Trust Fund as an annuity or in any other form.
(5) Before-Tax Account: An individual account for each Member, which
(A) is credited with
(i) the balance in such Member's Elective Deferral Contributions
Account (also known as the Pre-tax Contributions Account) under
the Plan as of December 31, 1997, and
(ii) the Before-Tax Contributions made by the Employer on such
Member's behalf and the Employer Safe Harbor Contributions, if
any, made on such Member's behalf pursuant to Section 3.5 to
satisfy the restrictions set forth in Section 3.1(e), and
(B) is credited with (or debited for) such account's allocation of net
income (or net loss) and changes in value of the Trust Fund.
(6) Before-Tax Contributions: Contributions made to the Plan by the Employer on
a Member's behalf in accordance with the Member's elections to defer
Compensation under the Plan's qualified cash or deferred arrangement as
described in Section 3.1.
(7) Code: The Internal Revenue Code of 1986, as amended.
I-1
<PAGE>
(8) Committee: The NGC Corporation Retirement/Benefit Plans Committee.
(9) Company: NGC Corporation.
(10) Company Stock: The common stock of NGC Corporation.
(11) Company Stock Fund: The Investment Fund established to invest
primarily in Company Stock.
(12) Compensation: The regular or base salary or wages (but excluding overtime
payments and bonuses) paid by the Employer to or for the benefit of a
Member for services rendered or labor performed for the Employer while a
Member and an Eligible Employee, subject to the following adjustments and
limitations:
(A) The following shall be included:
(i) elective contributions made on a Member's behalf by the Employer
that are not includable in income under section 125, section
402(e)(3), section 402(h), or section 403(b) of the Code;
(ii) compensation deferred under an eligible deferred compensation
plan within the meaning of section 457(b) of the Code; and
(iii) employee contributions described in section 414(h) of the Code
that are picked up by the employing unit and are treated as
employer contributions.
(B) The Compensation of any Member taken into account for purposes of the
Plan shall be limited to $150,000 for any Plan Year with such
limitation to be:
(i) adjusted automatically to reflect any amendments to section
401(a)(17) of the Code and any cost-of-living increases
authorized by section 401(a)(17) of the Code; and
(ii) prorated for a Plan Year of less than twelve months and to the
extent otherwise required by applicable law.
(13) Controlled Entity: Each corporation that is a member of a controlled group
of corporations, within the meaning of section 1563(a) (determined without
regard to sections 1563(a)(4) and 1563(e)(3)(C)) of the Code, of which the
Employer is a member, each trade or business (whether or not incorporated)
with which the Employer is under common control, and each member of an
affiliated service group, within the meaning of section 414(m) of the Code,
of which the Employer is a member.
(14) Destec Account(s): A Member's Destec Before-Tax Account, Destec After-Tax
Account, Destec Employer Contribution Account, and/or Destec Rollover
Contribution Account,
I-2
<PAGE>
including the amounts credited thereto. In addition to other provisions of
the Plan, a Member's Destec Account(s) shall be subject to the provisions
of Appendix B, and in the event of any conflict, Appendix B shall control.
(15) Destec After-Tax Account: A subaccount of the After-Tax Account which is
credited with the amount, if any, transferred from a Member's After-Tax
Account under the Destec Plan and which is credited with (or debited for)
such account's allocation of net income (or net loss) and changes in value
of the Trust Fund.
(16) Destec Before-Tax Account: A subaccount of the Before-Tax Account which is
credited with the amount, if any, transferred from a Member's Before-Tax
Contributions Account under the Destec Plan and which is credited with (or
debited for) such account's allocation of net income (or net loss) and
changes in value of the Trust Fund.
(17) Destec Employer Contribution Account: A subaccount of the Employer
Contribution Account which is credited with the amount, if any, transferred
from a Member's Employer Contribution Account under the Destec Plan and
which is credited with (or debited for) such account's allocation of net
income (or net loss) and changes in value of the Trust Fund.
(18) Destec Plan: The Destec Energy, Inc. Retirement and Savings Plan.
(19) Destec Rollover Contribution Account: A subaccount of the Rollover
Contribution Account which is credited with the amount, if any, transferred
from a Member's Rollover Account under the Destec Plan and which is
credited with (or debited for) such account's allocation of net income (or
net loss) and changes in value of the Trust Fund.
(20) Direct Rollover: A payment by the Plan to an Eligible Retirement Plan
designated by a Distributee.
(21) Directors: The Board of Directors of the Company.
(22) Distributee: Each (A) Member entitled to an Eligible Rollover Distribution,
(B) Member's surviving spouse with respect to the interest of such
surviving spouse in an Eligible Rollover Distribution, and (C) former
spouse of a Member who is an alternate payee under a qualified domestic
relations order, as defined in section 414(p) of the Code, with regard to
the interest of such former spouse in an Eligible Rollover Distribution.
(23) Dow ESOP Account: An individual account for each Member which is credited
with the amount, if any, transferred from the Member's Dow ESOP Account
under the Destec Plan and which is credited with (or debited for) such
account's allocation of net income (or net loss) and changes in value of
the Trust Fund. In addition to other provisions of the Plan, a Member's Dow
ESOP Account shall be subject to the provisions of Appendix C and, in the
event of any conflict, Appendix C shall control.
I-3
<PAGE>
(24) Dow Stock: The common stock of The Dow Chemical Company, or any
successor thereto.
(25) Dow Transfer Account: An individual account for each Member which is
credited with the sum of (A) the amount, if any, transferred from the
Member's Dow Transfer Account under the Destec Plan and, (B) amounts, if
any, transferred from the Member's Dow ESOP Account pursuant to Appendix C,
and which is credited with (or debited for) such account's allocation of
net income (or net loss) and changes in value of the Trust Fund. In
addition to the other provisions of the Plan, a Member's Dow Transfer
Account shall be subject to the provisions of Appendix C and, in the event
of any conflict, Appendix C shall control.
(26) Effective Date: January 1, 1998, as to this restatement of the Plan, except
(A) as otherwise indicated in specific provisions of the Plan, (B) that
provisions of the Plan required to have an earlier effective date by
applicable statute and/or regulation shall be effective as of the required
effective date in such statute and/or regulation, and (C) that provisions
hereof affecting the duties of the Trustee shall be effective as of the
date of execution of this restatement of the Plan by the Trustee. The
original effective date of the Plan was May 1, 1989.
(27) Eligible Employee: Each Employee other than (A) an Employee whose terms and
conditions of employment are governed by a collective bargaining agreement,
unless such agreement provides for his coverage under the Plan, (B) a
nonresident alien, and (C) an Employee who is a Leased Employee or who is
designated, compensated, or otherwise classified by the Employer as a
Leased Employee. Notwithstanding any provision of the Plan to the contrary,
no individual who is designated, compensated, or otherwise classified or
treated by the Employer as an independent contractor shall be eligible to
become a Member of the Plan.
(28) Eligible Retirement Plan: (A) With respect to a Distributee other than a
surviving spouse, an individual retirement account described in section
408(a) of the Code, an individual retirement annuity described in section
408(b) of the Code, an annuity plan described in section 403(a) of the
Code, or a qualified plan described in section 401(a) of the Code, which
under its provisions and applicable law may accept such Distributee's
Eligible Rollover Distribution and (B) with respect to a Distributee who is
a surviving spouse, an individual retirement account described in section
408(a) of the Code or an individual retirement annuity described in section
408(b) of the Code.
(29) Eligible Rollover Distribution: Any distribution of all or any portion of
the Accounts of a Distributee other than (A) a distribution that is one of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Distributee or the
joint lives (or joint life expectancies) of the Distributee and the
Distributee's designated beneficiary or for a specified period of ten years
or more, (B) a distribution to the extent such distribution is required
under section 401(a)(9) of the Code, (C) the portion of a distribution that
is not includable in gross income (determined without regard to the
exclusion for net unrealized appreciation with respect to employer
securities), (D) a loan treated as a distribution under section 72(p) of
the Code and not excepted by
I-4
<PAGE>
section 72(p)(2), (E) a loan in default that is a deemed distribution, (F)
any corrective distribution provided in Sections 3.8 and 4.5(b), and (G)
any other distribution so designated by the Internal Revenue Service in
revenue rulings, notices, and other guidance of general applicability.
(30) Eligible Surviving Spouse: (A) In the case of a Member who is living on his
Annuity Starting Date, the spouse to whom a deceased Member was married on
his Annuity Starting Date and (B) in the case of a Member who dies before
his Annuity Starting Date, the spouse to whom a deceased Member was married
on the date of his death.
(31) Employee: Each (A) individual employed by the Employer and (B) Leased
Employee.
(32) Employer: The Company, Destec Energy, Inc., Warren NGL, Inc., Warren
Energy, Inc., LPG Services Group, Inc., NGC Oil Trading and Transportation,
Inc., Natural Gas Clearinghouse, Inc., Warren Petroleum, and each entity
that has been designated to participate in the Plan pursuant to the
provisions of Article XVIII.
(33) Employer Contribution Account: An individual account for each Member, which
is credited with balance, if any, of the sum of (A) as of December 31,
1997, the balances in the Matching Contribution Account and the Nonelective
Contributions Account (also known as the Profit Sharing/Discretionary
Contribution Account), (B) the Employer Matching Contributions made on such
Member's behalf pursuant to Section 3.2, (C) the Employer Profit Sharing
Contributions made on such Member's behalf pursuant to Section 3.3, (D) the
Employer Discretionary Contributions, if any, made on such Member's behalf
pursuant to Section 3.4, and (E) the Employer Safe Harbor Contributions, if
any, made on such Member's behalf pursuant to Section 3.5 to satisfy the
restrictions set forth in Section 3.6 and which is credited with (or
debited for) such account's allocation of net income (or net loss) and
changes in value of the Trust Fund.
(34) Employer Contribution Account Subject to Vesting. The portion of a Member's
Employer Contribution Account which is subject to the vesting schedule set
forth in Section 8.3(e).
(35) Employer Contributions: The total of Employer Matching Contributions,
Employer Discretionary Contributions, Employer Profit Sharing
Contributions, and Employer Safe Harbor Contributions.
(36) Employer Discretionary Contributions: Contributions made to the Plan by the
Employer pursuant to Section 3.4.
(37) Employer Matching Contributions: Contributions made to the Plan by the
Employer pursuant to Section 3.2.
(38) Employer Profit Sharing Contributions: Contributions made to the Plan by
the Employer pursuant to Section 3.3.
I-5
<PAGE>
(39) Employer Safe Harbor Contributions: Contributions made to the Plan by the
Employer pursuant to Section 3.5.
(40) Employment Commencement Date: The date on which an individual first
performs an Hour of Service.
(41) Highly Compensated Employee: Each Employee who performs services during the
Plan Year for which the determination of who is highly compensated is being
made (the "Determination Year") and who:
(A) is a five-percent owner of the Employer (within the meaning of section
416(i)(1)(A)(iii) of the Code) at any time during the Determination
Year or the twelve-month period immediately preceding the Determination
Year (the "Look-Back Year"); or
(B) For the Look-Back Year
(i) receives compensation (within the meaning of section 414(q)(4)
of the Code; "compensation" for purposes of this Paragraph) in
excess of $80,000 (with such amount to be adjusted automatically
to reflect any cost-of-living adjust-adjustments authorized by
section 414(q)(1) of the Code) during the Look-Back Year; and
(ii) if the Committee elects the application of this clause in such
Look-Back Year, is a member of the top 20% of Employees for the
Look-Back Year (other than Employees described in section
414(q)(5) of the Code) ranked on the basis of compensation
received during the year.
For purposes of the preceding sentence, (i) all employers aggregated with
the Employer under section 414(b), (c), (m), or (o) of the Code shall be
treated as a single employer, (ii) a former Employee who had a separation
year (generally, the Determination Year such Employee separates from
service) prior to the Determination Year and who was an active Highly
Compensated Employee for either such separation year or any Determination
Year ending on or after such Employee's fifty-fifth birthday shall be
deemed to be a Highly Compensated Employee, and (iii) the Committee may
elect, in accordance with the provisions of applicable Treasury
regulations, rulings and notices, to make the Look-Back Year calculation
for a Determination Year on the basis of the calendar year ending with or
within the applicable Determination Year (or, in the case of a
Determination Year that is shorter than twelve months, the calendar year
ending with or within the twelve-month period ending with the end of the
applicable Determination Year). To the extent that the provisions of this
Paragraph are inconsistent or conflict with the definition of a "highly
compensated employee" set forth in section 414(q) of the Code and the
Treasury regulations thereunder, the relevant terms and provisions of
section 414(q) of the Code and the Treasury regulations thereunder shall
govern and control.
I-6
<PAGE>
(42) Hour of Service: Each hour for which an individual is directly or
indirectly paid, or entitled to payment, by the Employer or a Controlled
Entity for the performance of duties or for reasons other than the
performance of duties.
(43) Investment Fund: A portion of the Trust Fund that is invested in a
specified manner as described in Article V.
(44) Leased Employee: Each person who is not an employee of the Employer or a
Controlled Entity but who performs services for the Employer or a
Controlled Entity pursuant to an agreement (oral or written) between the
Employer or a Controlled Entity and any leasing organization, provided that
such person has performed such services for the Employer or a Controlled
Entity or for related persons (within the meaning of section 144(a)(3) of
the Code) on a substantially full-time basis for a period of at least one
year and such services are performed under primary direction or control by
the Employer or a Controlled Entity.
(45) Member: Each individual who (A) has met the eligibility requirements for
participation in the Plan pursuant to Article II, (B) has made a Rollover
Contribution in accordance with Section 3.9, or (C) had an account balance
under the Plan as of December 31, 1997.
(46) Normal Retirement Date: The date a Member attains the age of sixty-five.
(47) Period of Service: Each period of an individual's Service commencing on his
Employment Commencement Date or a Reemployment Commencement Date, if
applicable, and ending on a Severance from Service Date. Notwithstanding
the foregoing, a period during which an individual is absent from Service
by reason of the individual's pregnancy, the birth of a child of the
individual, the placement of a child with the individual in connection with
the adoption of such child by the individual, or for the purposes of caring
for such child for the period immediately following such birth or placement
shall not constitute a Period of Service between the first and second
anniversary of the first date of such absence. A Period of Service shall
also include any period required to be credited as a Period of Service by
federal law other than the Act or the Code, but only under the conditions
and to the extent so required by such federal law.
(48) Period of Severance: Each period of time commencing on an individual's
Severance from Service Date and ending on a Reemployment Commencement Date.
(49) Plan: The NGC Profit Sharing/401(k) Savings Plan, as amended from time to
time.
(50) Plan Year: The twelve-consecutive month period commencing January 1 of each
year.
(51) Reemployment Commencement Date: The first date upon which an individual
performs an Hour of Service following a Severance from Service Date.
(52) Rollover Contribution Account: An individual account for a Member, which is
credited with the sum of (A) the amount, if any, credited to such Member's
Rollover Contributions
I-7
<PAGE>
Account as of December 31, 1997, and (B) the Rollover Contributions of such
Member and which is credited with (or debited for) such account's
allocation of net income (or net loss) and changes in value of the Trust
Fund.
(53) Rollover Contributions: Contributions made by an Eligible Employee pursuant
to Section 3.9.
(54) Service: The period of an individual's employment with the Employer or a
Controlled Entity. In addition, the Committee may, in its discretion,
credit individuals with Service for employment with any other entity, but
only if and when such individual becomes an Eligible Employee and only if
such crediting of Service (i) has a legitimate business reason, (ii) does
not by design or operation discriminate significantly in favor of Highly
Compensated Employees, and (iii) is applied to all similarly-situated
Eligible Employees. Notwithstanding the foregoing, each Member shall be
credited with Service, as of December 31, 1997, in accordance with the
provisions of the Plan in effect at such time.
(55) Severance from Service Date: The earlier of (A) the first date on which an
individual terminates his Service following his Employment Commencement
Date or a Reemployment Commencement Date, if applicable, (B) the first
anniversary of the first date of a period in which an Employee remains
absent from Service (with or without pay) with the Employer for any reason
other than an authorized leave of absence, resignation, retirement,
discharge, or death, such as vacation, holiday, disability, or lay-off that
is not classified by the Employer as a termination of Service, or (C) the
second anniversary of the first date of an Employee's authorized leave of
absence (with or without pay). Notwithstanding the foregoing, the Severance
from Service Date of an individual who is absent from Service by reason of
the individual's pregnancy, the birth of a child of the individual, the
placement of a child with the individual in connection with the adoption of
such child by the individual, or for purposes of caring for such child for
the period immediately following such birth or placement shall be the
second anniversary of the first date of such absence.
(56) Single Plan Member: With respect to a Plan Year, an individual who (A) as
of the last day of such Plan Year, is an Eligible Employee and is not
currently accruing benefits or earning service credit under the Trident
NGL, Inc. Retirement Plan or (B) terminated employment during such Plan
Year on or after his Normal Retirement Date or by reason of death or
disability (as defined in Section 7.2) and, immediately prior to such
termination, was not currently accruing benefits or earning service credit
under the Trident NGL, Inc. Retirement Plan.
(57) Trident Before-Tax Account: A subaccount of the Before-Tax Account which is
credited with the amount, if any, transferred from a Trident Member's
Pretax Deferral Account under the Trident Plan and which is credited with
(or debited for) such account's allocation of net income (or net loss) and
changes in value of the Trust Fund. In addition to other provisions of the
Plan, a Member's Trident Before-Tax Account shall be subject to the
provisions of Appendix A, and in the event of any conflict, Appendix A
shall control.
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(58) Trident Matching Account: A subaccount of the Employer Contribution Account
which is credited with the amounts, if any, transferred from a Member's
Matching Account under the Trident Plan, and which is credited with (or
debited for) such account's allocation of net income (or net loss) and
changes in value of the Trust Fund. In addition to other provisions of the
Plan, a Member's Trident Matching Account shall be subject to the
provisions of Appendix A, and in the event of any conflict, Appendix A
shall control.
(59) Trident Member: A Member with a balance in the Trident NGL, Inc. Savings
Plan that was transferred to the Plan.
(60) Trident Plan: The Trident NGL, Inc. Savings Plan which was, effective
April 1, 1995, merged with and into the Plan.
(61) Trident Matching Stock Account: A subaccount of the Trident Matching
Account which is credited with the amounts, if any, transferred from a
Member's Matching Account under the Trident Plan and that were invested in
Company Stock, and which is credited with (or debited for) such account's
allocation of net income (or net loss) and changes in value of the Trust
Fund.
(62) Trident Profit Sharing Stock Account: A subaccount of the Employer
Contribution Account which is credited with the amounts, if any,
transferred from a Member's Profit Sharing Account under the Trident Plan
and that were invested in Company Stock, and which is credited with (or
debited for) such account's allocation of net income (or net loss) and
changes in value of the Trust Fund.
(63) Trident Rollover Account: A subaccount of the Rollover Account which is
credited with the amounts, if any, transferred from a Member's Rollover
Account under the Trident Plan and which is credited with (or debited for)
such account's allocation of net income (or net loss) and changes in value
of the Trust Fund. In addition to other provisions of the Plan, a Member's
Trident Rollover Account shall be subject to the provisions of Appendix A,
and in the event of any conflict, Appendix A shall control.
(64) Trust: The trust established herein to hold and invest contributions made
under the Plan, and income thereon, and from which the Plan benefits are
distributed.
(65) Trust Fund: The funds and properties held pursuant to the provisions hereof
for the use and benefit of the Members, together with all income, profits,
and increments thereto.
(66) Trustee: The trustee or trustees qualified and acting hereunder at any
time.
(67) Vested Interest: The portion of a Member's Accounts which, pursuant to the
Plan, is nonforfeitable.
(68) Vesting Service: The measure of service used in determining a Member's
Vested Interest as determined pursuant to Section 8.4.
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I.2 Number and Gender. Wherever appropriate herein, words used in the
singular shall be considered to include the plural and words used in the plural
shall be considered to include the singular. The masculine gender, where
appearing in the Plan, shall be deemed to include the feminine gender.
I.3 Headings. The headings of Articles and Sections herein are included
solely for convenience, and if there is any conflict between such headings and
the text of the Plan, the text shall control.
I.4 Construction. It is intended that the Plan be qualified within the
meaning of section 401(a) of the Code and that the Trust be tax exempt under
section 501(a) of the Code, and all provisions herein shall be construed in
accordance with such intent.
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II.
Participation
2.1 Eligibility. On or after the Effective Date, each Eligible Employee
shall be eligible to become a Member immediately upon his employment as an
Eligible Employee. Notwithstanding the foregoing:
(a) An individual who was a Member of the Plan on the day prior to the
Effective Date shall remain a Member of this restatement thereof as of the
Effective Date;
(b) An Employee who has not become a Member of the Plan because he was
not an Eligible Employee shall be eligible to become a Member of the Plan
immediately upon becoming an Eligible Employee as a result of a change in
his employment status; and
(c) A Member who ceases to be an Eligible Employee but remains an
Employee shall continue to be a Member but, on and after the date he ceases
to be an Eligible Employee, he shall no longer be entitled to defer
Compensation hereunder or share in allocations of Employer Contributions
unless and until he shall again become an Eligible Employee.
2.2 Participation. Membership in the Plan is voluntary. Any Eligible
Employee may become a Member upon the date he first become eligible pursuant to
Section 2.1 by following the procedures prescribed by the Committee within the
time limits prescribed by the Committee. Any Eligible Employee who does not
become a Member upon the date he first becomes eligible pursuant to Section 2.1
may become a Member on the first day of any subsequent calendar month by timely
following the procedures prescribed by the Committee. Notwithstanding the
foregoing, membership in the Plan is automatic for any individual who qualifies
as a Single Plan Member.
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III.
Contributions
III.1 Before-Tax Contributions.
(a) A Member who is an Eligible Employee may elect to defer an
integral percentage of from 2% to 12% (or such lesser percentage as may be
prescribed from time to time by the Committee) of his Compensation for a Plan
Year by having the Employer contribute the amount so deferred to the Plan.
Compensation for a Plan Year not so deferred by such election shall be received
by such Member in cash. A Member's election to defer an amount of his
Compensation pursuant to this Section shall be made by authorizing his Employer,
in the manner prescribed by the Committee, to reduce his Compensation in the
elected amount and the Employer, in consideration thereof, agrees to contribute
an equal amount to the Plan. The reduction in a Member's Compensation for a Plan
Year pursuant to his election hereunder shall be effected by Compensation
reductions as of each payroll period within such Plan Year following the
effective date of such election. The amount of Compensation elected to be
deferred by a Member for a Plan Year pursuant to this Section shall become a
part of the Employer's Before-Tax Contributions for such Plan Year.
(b) A Member's Compensation reduction election shall remain in force
and effect for all periods following its effective date until modified or
terminated or until such Member ceases to be an Eligible Employee. A Member who
has elected to defer a portion of his Compensation may change his deferral
election percentage (within the percentage limits set forth in Paragraph (a)
above), effective as of the first of any calendar month, by electing a new
Compensation reduction percentage in the manner and within the time period
prescribed by the Committee.
(c) A Member may cancel his Compensation reduction election,
effective as of the first day of any calendar month, in accordance with the
procedures and within the time period prescribed by the Committee. A Member who
so cancels his Compensation reduction election may resume Compensation
deferrals, effective as of the first day of any calendar month (provided such
Member is an Eligible Employee), by making a new Compensation reduction election
in the manner and within the time period prescribed by the Committee.
(d) In restriction of the Members' elections provided in Paragraphs
(a), (b), and (c) above, the Before-Tax Contributions and the elective deferrals
(within the meaning of section 402(g)(3) of the Code) under all other plans,
contracts, and arrangements of the Employer on behalf of any Member for any
calendar year shall not exceed $7,000 (with such amount to be adjusted
automatically to reflect any cost-of-living adjustments authorized by section
402(g)(5) of the Code).
(e) In further restriction of the Members' elections provided in
Paragraphs (a), (b), and (c) above, it is specifically provided that one of the
"actual deferral percentage" tests set forth in section 401(k)(3) of the Code
and the Treasury regulations thereunder must be met in each Plan Year. If
multiple use of the alternative limitation (within the meaning of section
401(m)(9) of the Code and Treasury regulation (S) 1.401(m)-2(b)) occurs during a
Plan Year, such multiple use shall
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be corrected in accordance with the provisions of Treasury regulation (S) 1.401
(m)-2(c); provided, however, that if such multiple use is not eliminated by
making Employer Safe Harbor Contributions, then the "actual contribution
percentages" of all Highly Compensated Employees participating in the Plan shall
be reduced, and the excess contributions distributed, in accordance with the
provisions of Section 3.8(c) and applicable Treasury regulations, so that there
is no such multiple use.
(f) If the restrictions set forth in Paragraph (d) or (e) above
would not otherwise be met for any Plan Year, the Compensation deferral
elections made pursuant to Paragraphs (a), (b), and (c) above of affected
Members may be reduced by the Committee on a temporary and prospective basis in
such manner as the Committee shall determine.
(g) As soon as administratively feasible following the end of each
month, but no later than the time required by applicable law, the Employer shall
contribute to the Trust, as Before-Tax Contributions with respect to each
Member, an amount equal to the amount of Compensation elected to be deferred,
pursuant to Paragraphs (a) and (b) above (as adjusted pursuant to Paragraph (f)
above), by such Member during such month. Such contributions, as well as the
contributions made pursuant to Sections 3.2, 3.3, 3.4, and 3.5, shall be made
without regard to current or accumulated profits of the Employer.
Notwithstanding the foregoing, the Plan is intended to qualify as a profit
sharing plan for purposes of sections 401(a), 402, 412, and 417 of the Code.
III.2 Employer Matching Contributions. For each calendar month, the
Employer shall contribute to the Trust, as Employer Matching Contributions, an
amount that equals 100% of the Before-Tax Contributions that were made pursuant
to Section 3.1 on behalf of each of the Members during such month and that were
not in excess of 5% of each such Member's Compensation for such month. Employer
Matching Contributions shall be made in shares of Company Stock. The shares of
Company Stock that are so contributed shall be valued at the closing price of
such stock on the New York Stock Exchange, Inc. as reported by The Wall Street
Journal in the New York Stock Exchange Composite Transactions for the last day
of the month for which the contribution is made (or the next preceding regular
business date if the last day of such month is not a regular business date).
III.3 Employer Profit Sharing Contributions. For each Plan Year, the
Employer shall contribute to the Trust, as an Employer Profit Sharing
Contribution, an amount equal to 5% of the Compensation of all Single Plan
Members for such Plan Year.
III.4 Employer Discretionary Contributions. For each Plan Year, the
Employer may contribute to the Trust, as an Employer Discretionary Contribution,
an additional amount as determined in its discretion. Employer Discretionary
Contributions shall be made in shares of Company Stock. The shares of Company
Stock that are so contributed shall be valued at the closing price of such stock
on the New York Stock Exchange, Inc. as reported by The Wall Street Journal in
the New York Stock Exchange Composite Transactions for the last day of the Plan
Year for which the contribution is made (or the next preceding regular business
date if the last day of such Plan Year is not a regular business date).
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<PAGE>
III.5 Employer Safe Harbor Contributions. In addition to the Employer
Matching Contributions made pursuant to Section 3.2, the Employer Profit Sharing
Contributions made pursuant to Section 3.3, and the Employer Discretionary
Contributions made pursuant to Section 3.4, for each Plan Year, the Employer, in
its discretion, may contribute to the Trust as a "safe harbor contribution" for
such Plan Year the amounts necessary to cause the Plan to satisfy the
restrictions set forth in Section 3.1(e) (with respect to certain restrictions
on Before-Tax Contributions) and Section 3.6 (with respect to certain
restrictions on Employer Matching Contributions). Amounts contributed in order
to satisfy the restrictions set forth in Section 3.1(e) shall be considered
"qualified matching contributions" (within the meaning of Treasury regulation
(S) 1.401(k)-1(g)(13)) for purposes of such Section, and amounts contributed in
order to satisfy the restrictions set forth in Section 3.6 shall be considered
Employer Matching Contributions for purposes of such Section. Any amounts
contributed pursuant to this Paragraph shall be allocated in accordance with the
provisions of Sections 4.2(e), (f) and (g).
III.6 Restrictions on Employer Matching Contributions. In restriction of
the Employer Matching Contributions hereunder, it is specifically provided that
one of the "actual contribution percentage" tests set forth in section 401(m) of
the Code and the Treasury regulations thereunder must be met in each Plan Year.
The Committee may elect, in accordance with applicable Treasury regulations, to
treat Before-Tax Contributions to the Plan as Employer Matching Contributions
for purposes of meeting this requirement.
III.7 Return of Contributions. Anything to the contrary herein
notwithstanding, the Employer's contributions to the Plan are contingent upon
the deductibility of such contributions under section 404 of the Code. To the
extent that a deduction for contributions is disallowed, such contributions
shall, upon the written demand of the Employer, be returned to the Employer by
the Trustee within one year after the date of disallowance, reduced by any net
losses of the Trust Fund attributable thereto but not increased by any net
earnings of the Trust Fund attributable thereto. Moreover, if Employer
contributions are made under a mistake of fact, such contributions shall, upon
the written demand of the Employer, be returned to the Employer by the Trustee
within one year after the payment thereof, reduced by any net losses of the
Trust Fund attributable thereto but not increased by any net earnings of the
Trust Fund attributable thereto.
III.8 Disposition of Excess Deferrals and Excess Contributions.
(a) Anything to the contrary herein notwithstanding, any Before-Tax
Contributions to the Plan for a calendar year on behalf of a Member in excess of
the limitations set forth in Section 3.1(d) and any "excess deferrals" from
other plans allocated to the Plan by such Member no later than March 1 of the
next following calendar year within the meaning of, and pursuant to the
provisions of, section 402(g)(2) of the Code, shall be distributed to such
Member not later than April 15 of the next following calendar year.
(b) Anything to the contrary herein notwithstanding, if, for any
Plan Year, the aggregate Before-Tax Contributions made by the Employer on behalf
of Highly Compensated Employees exceeds the maximum amount of Before-Tax
Contributions permitted on behalf of such Highly Compensated Employees pursuant
to Section 3.1(e) (determined by reducing Before-Tax
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Contributions on behalf of Highly Compensated Employees in order of the highest
dollar amounts contributed on behalf of such Highly Compensated Employees in
accordance with section 401(k)(8)(C) of the Code and the Treasury regulations
thereunder), such excess shall be distributed to the Highly Compensated
Employees on whose behalf such excess was contributed before the end of the next
following Plan Year.
(c) Anything to the contrary herein notwithstanding, if, for any
Plan Year, the aggregate Employer Matching Contributions allocated to the
Accounts of Highly Compensated Employees exceeds the maximum amount of such
Employer Matching Contributions permitted on behalf of such Highly Compensated
Employees pursuant to Section 3.6 (determined by reducing Employer Matching
Contributions made on behalf of Highly Compensated Employees in order of the
highest dollar amounts contributed on behalf of such Highly Compensated
Employees in accordance with section 401(m)(6)(C) of the Code and Treasury
regulations thereunder), such excess shall be distributed to the Highly
Compensated Employees on whose behalf such excess contributions were made (or,
if such excess contributions are forfeitable, they shall be forfeited) before
the end of the next following Plan Year.
(d) In coordinating the disposition of excess deferrals and excess
contributions pursuant to this Section, such excess deferrals and excess
contributions shall be disposed of in the following order:
(1) First, Before-Tax Contributions that constitute excess
deferrals described in Paragraph (a) above that are not considered in
determining the amount of Employer Matching Contributions pursuant to
Section 3.2 shall be distributed;
(2) Next, excess Before-Tax Contributions that constitute excess
deferrals described in Paragraph (a) above that are considered in
determining the amount of Employer Matching Contributions pursuant to
Section 3.2 shall be distributed, and the Employer Matching Contributions
with respect to such Before-Tax Contributions shall be forfeited;
(3) Next, excess Before-Tax Contributions described in Paragraph
(b) above that are not considered in determining the amount of Employer
Matching Contributions pursuant to Section 3.3 shall be distributed;
(4) Next, excess Before-Tax Contributions described in Paragraph
(b) above that are considered in determining the amount of Employer
Matching Contributions pursuant to Section 3.3 shall be distributed, and
the Employer Matching Contributions with respect to such Before-Tax
Contributions shall be forfeited; and
(5) Finally, excess Employer Matching Contributions described in
Paragraph (c) above shall be distributed (or, if forfeitable, forfeited).
(e) Any distribution or forfeiture of excess deferrals or excess
contributions pursuant to the provisions of this Section shall be adjusted for
income or loss allocated thereto in the manner determined by the Committee in
accordance with any method permissible under applicable
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Treasury regulations. Any forfeiture pursuant to the provisions of this Section
shall be considered to have occurred on the date which is 22 months after the
end of the Plan Year.
III.9 Rollover Contributions.
(a) Qualified Rollover Contributions may be made to the Plan by any
Eligible Employee of amounts received by such Eligible Employee from an
individual retirement account or annuity or from an employees' trust described
in section 401(a) of the Code, which is exempt from tax under section 501(a) of
the Code, but only if any such Rollover Contribution is made pursuant to and in
accordance with applicable provisions of the Code and Treasury regulations
promulgated thereunder. A Rollover Contribution of amounts that are "eligible
rollover distributions" within the meaning of section 402(f)(2)(A) of the Code
may be made to the Plan irrespective of whether such eligible rollover
distribution was paid to the Eligible Employee or paid to the Plan as a "direct"
Rollover Contribution. A direct Rollover Contribution to the Plan may be
effectuated only by wire transfer directed to the Trustee or by issuance of a
check made payable to the Trustee, which is negotiable only by the Trustee and
which identifies the Eligible Employee for whose benefit the Rollover
Contribution is being made. Any Eligible Employee desiring to effect a Rollover
Contribution to the Plan must execute and file with the Committee the form
prescribed by the Committee for such purpose. The Committee may require as a
condition to accepting any Rollover Contribution that such Eligible Employee
furnish any evidence that the Committee in its discretion deems satisfactory to
establish that the proposed Rollover Contribution is in fact eligible for
rollover to the Plan and is made pursuant to and in accordance with applicable
provisions of the Code and Treasury regulations. All Rollover Contributions to
the Plan must be made in cash. A Rollover Contribution shall be credited to the
Rollover Contribution Account of the Eligible Employee for whose benefit such
Rollover Contribution is being made as of the last day of the month in which
such Rollover Contribution is made.
(b) An Eligible Employee who has made a Rollover Contribution in accordance
with this Section, but who has not otherwise become a Member of the Plan in
accordance with Section 2.2, shall become a Member coincident with such Rollover
Contribution; provided, however, that such Member shall not have a right to
defer Compensation or have Employer Contributions made on his behalf until he
has otherwise satisfied the requirements imposed by Section 2.2.
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<PAGE>
IV.
Allocations and Limitations
IV.1 Suspended Amounts. All contributions, forfeitures, and the net income
(or net loss) of the Trust Fund shall be held in suspense until allocated to the
Accounts of the Members as provided herein.
IV.2 Allocation of Contributions.
(a) Before-Tax Contributions made by the Employer on a Member's
behalf for each month pursuant to Section 3.1 shall be allocated to such
Member's Before-Tax Account.
(b) The Employer Matching Contributions for each calendar month
pursuant to Section 3.2 shall be allocated to the Employer Contribution Accounts
of the Members for whom such contributions were made.
(c) The Employer Profit Sharing Contribution made pursuant to Section
3.3 for a Plan Year shall be allocated to the Employer Contribution Accounts of
the Single Plan Members for whom such contributions were made.
(d) The Employer Discretionary Contribution, if any, made pursuant to
Section 3.4 for a Plan Year shall be allocated to the Employer Contribution
Accounts of the Single Plan Members who received Compensation for such Plan
Year. The allocation to each such eligible Single Plan Member's Employer
Contribution Account shall be that portion of such Employer Discretionary
Contribution which is in the same proportion that such Single Plan Member's
Compensation for such Plan Year bears to the total of all such Single Plan
Member's Compensation for such Plan Year.
(e) The Employer Safe Harbor Contribution, if any, made pursuant to
Section 3.5 for a Plan Year in order to satisfy the restrictions set forth in
Section 3.1(e) shall be allocated to the Before-Tax Accounts of Members who (1)
received an allocation of Before-Tax Contributions for such Plan Year and (2)
were not Highly Compensated Employees for such Plan Year (each such Member
individually referred to as an "Eligible Member" for purposes of this
Paragraph). Such allocation shall be made, first, to the Before-Tax Account of
the Eligible Member who received the least amount of Compensation for such Plan
Year until the limitation set forth in Section 4.5 has been reached as to such
Eligible Member, then to the Before-Tax Account of the Eligible Member who
received the next smallest amount of Compensation for such Plan Year until the
limitation set forth in Section 4.5 has been reached as to such Eligible Member,
and continuing in such manner until the Employer Safe Harbor Contribution for
such Plan Year has been completely allocated or the limitation set forth in
Section 4.5 has been reached as to all Eligible Members. Any remaining Employer
Safe Harbor Contribution for such Plan Year shall be allocated among the Before-
Tax Accounts of all Members who were Eligible Employees during such Plan Year,
with the allocation to each such Member's Before-Tax Account being the portion
of such remaining Employer Safe
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Harbor Contribution which is in the same proportion that such Member's
Compensation for such Plan Year bears to the total of all such Members'
Compensation for such Plan Year.
(f) The Employer Safe Harbor Contribution, if any, made pursuant to
Section 3.5 for a Plan Year in order to satisfy the restrictions set forth in
Section 3.6 shall be allocated to the Employer Contribution Accounts of Members
who (1) received an allocation of Employer Matching Contributions for such Plan
Year and (2) were not Highly Compensated Employees for such Plan Year (each such
Member individually referred to as an "Eligible Member" for purposes of this
Paragraph). Such allocation shall be made, first, to the Employer Contribution
Account of the Eligible Member who received the least amount of Compensation for
such Plan Year until the limitation set forth in Section 4.5 has been reached as
to such Eligible Member, then to the Employer Contribution Account of the
Eligible Member who received the next smallest amount of Compensation for such
Plan Year until the limitation set forth in Section 4.5 has been reached as to
such Eligible Member, and continuing in such manner until the Employer Safe
Harbor Contribution for such Plan Year has been completely allocated or the
limitation set forth in Section 4.5 has been reached as to all Eligible Members.
Any remaining Employer Safe Harbor Contribution for such Plan Year shall be
allocated among the Employer Contribution Accounts of all Members who were
Eligible Employees during such Plan Year, with the allocation to each such
Member's Employer Contribution Account being the portion of such remaining
Employer Safe Harbor Contribution which is in the same proportion that such
Member's Compensation for such Plan Year bears to the total of all such Members'
Compensation for such Plan Year.
(g) If an Employer Safe Harbor Contribution is made in order to
satisfy the restrictions set forth in both Section 3.1(e) and Section 3.6 for
the same Plan Year, the Employer Safe Harbor Contribution made in order to
satisfy the restrictions set forth in Section 3.1(e) shall be allocated pursuant
to Paragraph (e) above prior to allocating the Employer Safe Harbor Contribution
made in order to satisfy the restrictions set forth in Section 3.6. In
determining the application of the limitations set forth in Section 4.5 to the
allocations of Employer Safe Harbor Contributions, all Annual Additions (as such
term is defined in Section 4.5) to a Member's Accounts other than Employer Safe
Harbor Contributions shall be considered allocated prior to Employer Safe Harbor
Contributions.
(h) All contributions to the Plan shall be considered allocated to
Members' Accounts no later than the last day of the Plan Year for which they
were made, as determined pursuant to Article III, except that, for purposes of
Section 4.4, contributions shall be considered allocated to Members' Accounts
when received by the Trustee
IV.3 Application of Forfeitures. Any amounts that are forfeited under any
provision hereof during a Plan Year shall be applied to reduce Employer Matching
Contributions next coming due. Prior to such application, forfeited amounts
shall continue to be invested in the same Investment Fund(s) in which they were
invested immediately prior to their forfeiture.
IV.4 Valuation of Accounts. All amounts contributed to the Trust Fund
shall be invested at the time of their receipt by the Trustee, and the balance
of each Account shall reflect the result of
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daily pricing of the assets in which such Account is invested from the time of
receipt by the Trustee until the time of distribution.
IV.5 Limitations and Corrections.
(a) For purposes of this Section, the following terms and phrases
shall have these respective meanings:
(1) "Annual Additions" of a Member for any Limitation Year shall
mean the total of (A) the Employer Contributions, Before-Tax Contributions, and
forfeitures, if any, allocated to such Member's Accounts for such year, (B)
Member's contributions, if any, (excluding any Rollover Contributions) for such
year, and (C) amounts referred to in sections 415(l)(1) and 419A(d)(2) of the
Code.
(2) "Limitation Year" shall mean the Plan Year.
(3) "Maximum Annual Additions" of a Member for any Limitation
Year shall mean the lesser of (A) $30,000 (or, if greater, one-fourth of
the defined benefit dollar limitation in effect under section 415(b)(1)(A)
of the Code for such Limitation Year) or (B) 25% of such Member's 415
Compensation, within the meaning of section 415(c)(3) of the Code and
applicable Treasury regulations thereunder, during such year except that
the limitation in this Clause (B) shall not apply to any contribution for
medical benefits (within the meaning of section 419A(f)(2) of the Code)
after separation from service with the Employer or a Controlled Entity
which is otherwise treated as an Annual Addition or to any amount otherwise
treated as an Annual Addition under section 415(l)(1) of the Code.
(4) "415 Compensation" shall mean the total of all amounts paid
by the Employer to or for the benefit of a Member, for services rendered or
labor performed for the Employer while a Member, which are required to be
reported on the Member's federal income tax withholding statement or
statements (Form W-2 or its subsequent equivalent), limited to $150,000 for
any Plan Year with such limitation to be:
(A) adjusted automatically to reflect any amendments to
section 401(a)(17) of the Code and any cost-of-living increases
authorized by section 401(a)(17) of the Code; and
(B) prorated for a Plan Year of less than twelve months and
to the extent otherwise required by applicable law.
(b) Contrary Plan provisions notwithstanding, in no event shall the
Annual Additions credited to a Member's Accounts for any Limitation Year exceed
the Maximum Annual Additions for such Member for such year. If as a result of a
reasonable error in estimating a Member's compensation, a reasonable error in
determining the amount of elective deferrals (within the meaning of section
402(g)(3) of the Code) that may be made with respect to any individual under the
limits of section 415 of the Code, or because of other limited facts and
circumstances, the Annual
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Additions that would be credited to a Member's Accounts for a Limitation Year
would nonetheless exceed the Maximum Annual Additions for such Member for such
year, the excess Annual Additions which, but for this Section, would have been
allocated to such Member's Accounts shall be disposed of as follows:
(1) First, any such excess Annual Additions in the form of
Before-Tax Contributions on behalf of such Member that would not have been
considered in determining the amount of Employer Matching Contributions
allocated to such Member's Accounts pursuant to Section 4.2 shall be
distributed to such Member, adjusted for income or loss allocated thereto;
(2) Next, any such excess Annual Additions in the form of Before-
Tax Contributions on behalf of such Member that would have been considered
in determining the amount of Employer Matching Contributions allocated to
such Member's Accounts pursuant to Section 4.2 shall be distributed to such
Member, adjusted for income or loss allocated thereto, and the Employer
Matching Contributions that would have been allocated to such Member's
Accounts based upon such distributed Before-Tax Contributions shall, to the
extent such amounts would have otherwise been allocated to such Member's
Accounts, be treated as a forfeiture;
(3) Next, any such excess Annual Additions in the form of
Employer Profit Sharing Contributions shall, to the extent such amounts
would otherwise have been allocated to such Member's Accounts, be treated
as a forfeiture; and
(4) Finally, any such excess Annual Additions in the form of
Employer Discretionary Contributions shall, to the extent such amounts
would otherwise have been allocated to such Member's Accounts, be treated
as a forfeiture.
(c) For purposes of determining whether the Annual Additions under
this Plan exceed the limitations herein provided, all defined contribution plans
of the Employer are to be treated as one defined contribution plan. In addition,
all defined contribution plans of Controlled Entities shall be aggregated for
this purpose. For purposes of this Section only, a "Controlled Entity" (other
than an affiliated service group member within the meaning of section 414(m) of
the Code) shall be determined by application of a more than 50% control standard
in lieu of an 80% control standard. If the Annual Additions credited to a
Member's Accounts for any Limitation Year under this Plan plus the additions
credited on his behalf under other defined contribution plans required to be
aggregated pursuant to this Paragraph would exceed the Maximum Annual Additions
for such Member for such Limitation Year, the Annual Additions under this Plan
and the additions under such other plans shall be reduced on a pro rata basis
and allocated, reallocated, or returned in accordance with applicable plan
provisions regarding Annual Additions in excess of Maximum Annual Additions.
(d) In the case of a Member who also participated in a defined
benefit plan of the Employer or a Controlled Entity (as defined in Paragraph (d)
above), the Employer shall reduce the Annual Additions credited to the Accounts
of such Member under this Plan pursuant to
IV-4
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the provisions of Paragraph (b) to the extent necessary to prevent the
limitation set forth in section 415(e) of the Code from being exceeded.
Notwithstanding the foregoing, the provisions of this Paragraph shall apply only
if such defined benefit plan does not provide for a reduction of benefits
thereunder to ensure that the limitation set forth in section 415(e) of the Code
is not exceeded. Further, this Paragraph shall not apply for Limitation Years
beginning after December 31, 1999.
(e) If the limitations set forth in this Section would not otherwise
be met for any Limitation Year, the Compensation deferral elections pursuant to
Section 3.1 of affected Members may be reduced by the Committee on a temporary
and prospective basis in such manner as the Committee shall determine.
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V.
Investment Funds
V.1 Investment of Certain Employer Contributions and Accounts.
Notwithstanding any provision of Section 5.2 to the contrary, (a) Employer
Matching Contributions made to the Plan after April 1, 1995, (b) Employer
Discretionary Contributions made to the Plan after April 1, 1995, (c) the
balance, if any of a Member's Trident Profit Sharing Stock Account, and (d) the
balance, if any, of a Member's Trident Matching Stock Account, and any earnings
thereon, shall be invested in the Company Stock Fund. Notwithstanding any
provision of Section 5.2 to the contrary, a Member's Dow ESOP Account shall be
invested in accordance with Appendix C. All Employer Contributions that were
made to the Plan on or before April 1, 1995, and all Employer Profit Sharing
Contributions made to the Plan after April 1, 1995, and any earnings thereon,
shall be invested pursuant to Section 5.2 of the Plan.
V.2 Investment of Accounts.
(a) Except as provided in Section 5.1, each Member shall designate, in
accordance with the procedures established from time to time by the Committee,
the manner in which the amounts allocated to each of his Accounts shall be
invested from among the Investment Funds made available from time to time by the
Committee. With respect to each portion of a Member's Account that is subject to
investment discretion, such Member may designate one of such Investment Funds
for all the amounts allocated to such portion of such Account or he may split
the investment of the amounts allocated to such portion of such Account between
such Investment Funds in such increments as the Committee may prescribe. If a
Member fails to make a designation, then such portions of his Accounts shall be
invested in the Investment Fund or Funds designated by the Committee from time
to time in a uniform and nondiscriminatory manner.
(b) Except as provided in Section 5.1, a Member may change his
investment designation for future contributions to be allocated to any one or
all of his Accounts. Any such change shall be made in accordance with the
procedures established by the Committee, and the frequency of such changes may
be limited by the Committee.
(c) A Member may elect to convert his investment designation with
respect to the amounts already allocated to one or more of his Accounts;
provided however, that a Member may not covert the investment designation of any
amounts allocated to the Company Stock Fund pursuant to Section 5.1. Any such
conversion shall be made in accordance with the procedures established by the
Committee, and the frequency of such conversions may be limited by the
Committee.
(d) Paragraphs (a), (b), and (c) above notwithstanding, in no event
may a Member direct that any portion of his Accounts which are subject to
investment discretion, be invested in the Company Stock Fund.
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V.3 Restriction of Acquisition of Company Stock. Notwithstanding any other
provision hereof, it is specifically provided that the Trustee shall not
purchase Company Stock or other Company securities during any period in which
such purchase is, in the opinion of counsel for the Company or the Committee,
restricted by any law or regulation applicable thereto. During such period,
amounts that would otherwise be invested in Company Stock or other Company
securities pursuant to Section 5.1 or an investment designation shall be
invested in such other assets as the Trustee may in its discretion determine, or
the Trustee may hold such amounts uninvested for a reasonable period pending the
purchase of such stock or securities.
V.4 Voting of Company Stock. No Member or beneficiary shall have any right
to request, direct, or demand that the Committee or the Trustee exercise on his
behalf the voting of Company Stock. At each annual meeting and special meeting
of the shareholders of the Company, the Committee may, in its sole discretion,
direct the Trustee as to the manner in which such shares of Company Stock held
by the Plan are to be voted.
V.5 Stock Rights, Stock Splits, and Stock Dividends. No Member or
beneficiary shall have any right to request, direct, or demand that the
Committee or the Trustee exercise in his behalf rights or privileges to acquire,
convert, or exchange Company Stock or other securities. The Trustee, in its
discretion, may exercise or sell any such rights or privileges. Company Stock
received by the Trustee by reason of a stock split, stock dividend, or
recapitalization shall be appropriately allocated to the Accounts of each
affected Member or beneficiary.
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<PAGE>
VI.
Retirement Benefits
A Member who terminates his employment on or after his Normal Retirement
Date shall be entitled to a retirement benefit, payable at the time and in the
form provided in Article X, equal in value to the aggregate amount in his
Accounts on his Annuity Starting Date. Any contribution allocable to a Member's
Accounts after his Annuity Starting Date shall be distributed, if his benefit
was paid in a lump sum, or used to increase his payments, if his benefit is
being paid on a periodic basis, as soon as administratively feasible after the
date that such contribution is paid to the Trust Fund.
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VII.
Disability Benefits
VII.1 Disability Benefits. In the event a Member's employment is
terminated, and such Member is totally and permanently disabled, as determined
pursuant to Section 7.2, such Member shall be entitled to a disability benefit,
payable at the time and in the form provided in Article X, equal in value to the
aggregate amount in his Accounts on his Annuity Starting Date. Any contribution
allocable to a Member's Accounts after his Annuity Starting Date shall be
distributed, if his benefit was paid in a lump sum, or used to increase his
payments, if his benefit is being paid on a periodic basis, as soon as
administratively feasible after the date that such contribution is paid to the
Trust Fund.
VII.2 Total and Permanent Disability Determined. A Member shall be
considered totally and permanently disabled if the Committee determines, based
on a written medical opinion (unless waived by the Committee as unnecessary),
that such Member is permanently incapable of performing his job for physical or
mental reasons.
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VIII.
Severance Benefits and Determination of Vested Interest
VIII.1 No Benefits Unless Herein Set Forth. Except as set forth in this
Article, upon termination of employment of a Member prior to his Normal
Retirement Date for any reason other than total and permanent disability (as
defined in Section 7.2) or death, such Member shall acquire no right to any
benefit from the Plan or the Trust Fund.
VIII.2 Severance Benefit. Each Member whose employment is terminated prior
to his Normal Retirement Date for any reason other than total and permanent
disability (as defined in Section 7.2) or death shall be entitled to a severance
benefit, payable at the time and in the form provided in Article X, equal in
value to his Vested Interest in the aggregate amount in his Accounts on his
Annuity Starting Date. A Member's Vested Interest in any contribution allocable
to such Member's Accounts after his Annuity Starting Date shall be distributed,
if his benefit was paid in a lump sum, or used to increase his payments, if his
benefit is being paid on a periodic basis, as soon as administratively feasible
after the date that such contribution is paid to the Trust Fund.
VIII.3 Determination of Vested Interest.
(a) A Member shall have a 100% Vested Interest in his Before-Tax
Account, Dow ESOP Account, Dow Transfer Account, After-Tax Account, and Rollover
Contribution Account at all times.
(b) A Member's Vested Interest in his Destec Employer Contribution
Account, Trident Matching Account, and Trident Profit Sharing Stock Account
shall be determined in accordance with the vesting schedule set forth in
paragraph (e) below; provided, however, each Member who, from June 27, 1997, to
December 31, 1997, dates inclusive, was involuntarily terminated from employment
with Destec Energy, Inc. in connection with the acquisition of Destec Energy,
Inc. by the Company and who did not accept employment with the Company or a
Controlled Entity on or before December 31, 1997, shall have a 100% Vested
Interest in his Destec Employer Contribution Account.
(c) A Member shall have a 100% Vested Interest in all Employer
Contributions allocated to his Employer Contribution Account (other than
contributions allocated to a Member's Destec Employer Contribution Account,
Trident Matching Account, or Trident Profit Sharing Stock Account, which shall
vest in accordance with paragraph (b) above) under the Plan on or before April
1, 1995, and all earnings thereon.
(d) A Member's Vested Interest in Employer Contributions allocated
to his Employer Contribution Account (other than contributions allocated to a
Member's Destec Employer Contribution Account, Trident Matching Account, or
Trident Profit Sharing Stock Account, which shall vest in accordance with
paragraph (b) above) under the Plan after April 1, 1995, and the earnings
thereon, shall be determined as follows:
VIII-1
<PAGE>
(1) The Vested Interest in such contributions and earnings of
any Member with three or more years of Vesting Service under the Plan as of
April 1, 1995, shall be 100%.
(2) The Vested Interest in such contributions and earnings of
any Member with less than three years of Vesting Service as of April 1, 1995,
shall be determined by such Member's years of Vesting Service in accordance with
the vesting schedule set forth in paragraph (e) below.
(e) Except as provided in paragraphs (b), (c), and (d) above, a
Member's Vested Interest in his Employer Contribution Account shall be
determined in accordance with the following schedule:
Years of Vesting Service Vested Interest
------------------------ ---------------
Less than 1 year 0%
1 year 25%
2 years 50%
3 years 75%
4 years or more 100%
(f) Paragraphs (b), (d), and (e) above notwithstanding, a Member
shall have a 100% Vested Interest in his Employer Contribution Account upon (1)
the attainment of his Normal Retirement Date while employed by the Employer or a
Controlled Entity, (2) the termination of his employment with the Employer at a
time when he is totally and permanently disabled (as defined in Section 7.2),
(3) the death of such Member while an Employee, or (4) if such Member is an
affected Member, the occurrence of an event described in, under the conditions
set forth in, Section 17.2.
VIII.4 Crediting of Vesting Service.
(a) For the period preceding the Effective Date, subject to the
provisions of Paragraphs (e) and (f) below, an individual shall be credited with
Vesting Service in an amount equal to all service credited to him for vesting
purposes under the Plan as it existed on the day prior to the Effective Date.
(b) On or after the Effective Date, subject to the remaining
Paragraphs of this Section, an individual shall be credited with Vesting Service
in an amount equal to his aggregate Periods of Service whether or not such
Periods of Service are completed consecutively.
(c) Paragraph (b) above notwithstanding, if an individual terminates
his Service (at a time other than during a leave of absence) and subsequently
resumes his Service, if his Reemployment Commencement Date is within twelve
months of his Severance from Service Date, such Period of Severance shall be
treated as a Period of Service for purposes of Paragraph (b) above.
VIII-2
<PAGE>
(d) Paragraph (b) above notwithstanding, if an individual terminates
his Service during a leave of absence and subsequently resumes his Service, if
his Reemployment Commencement Date is within twelve months of the beginning of
such leave of absence, such Period of Severance shall be treated as a Period of
Service for purposes of Paragraph (b) above.
VIII.5 Forfeitures of Vesting Service.
(a) In the case of an individual who terminates employment at a time
when he has a 0% Vested Interest in his Employer Contribution Account and who
then incurs a Period of Severance that equals or exceeds the greater of five
years or his aggregate Period of Service completed before such Period of
Severance, such individual's Period of Service completed before such Period of
Severance shall be forfeited and completely disregarded in determining his years
of Vesting Service.
(b) In the case of a Member who terminates employment with
the Employer at a time when he has a Vested Interest in his Employer
Contribution Account of more than 0% but less than 100% and then incurs a
Period of Severance of five consecutive years, such Member's years of Vesting
Service completed after such Period of Severance shall be disregarded for
purposes of determining such Member's Vested Interest in any Plan benefits
derived from Employer Contributions on his behalf before such Period of
Severance, but his years of Vesting Service completed before such Period of
Severance shall not be disregarded in determining any Plan benefits derived
from Employer Contributions on his behalf after such Period of Severance.
(c) A Member who terminates employment with the Employer at a time
when he has a 100% Vested Interest shall not forfeit any of his Vesting Service
for purposes of determining any Plan benefits.
VIII.6 Forfeitures of Nonvested Account Balance.
(a) With respect to a Member who terminates employment with the
Employer with a Vested Interest in his Employer Contribution Account that is
less than 100% and either is not entitled to a distribution from the Plan or
receives a distribution from the Plan of the balance of his Vested Interest in
his Accounts in the form of a lump sum distribution by the close of the second
Plan Year following the Plan Year in which his employment is terminated, the
nonvested portion of such terminated Member's Employer Contribution Account as
of his Annuity Starting Date shall become a forfeiture as of his Annuity
Starting Date (or as of his date of termination of employment if no amount is
payable from the Trust Fund on behalf of such Member with such Member being
considered to have received a distribution of zero dollars on his date of
termination of employment).
(b) With respect to a Member who terminates employment with the
Employer with a Vested Interest in his Employer Contribution Account greater
than 0% but less than 100% and who is not otherwise subject to the forfeiture
provisions of Paragraph (a) above (or Section 8.8 below), the nonvested portion
of his Employer Contribution Account shall be forfeited
VIII-3
<PAGE>
as of the earlier of (1) the date the Member completes a Period of Severance of
five consecutive years or (2) the date of the terminated Member's death.
VIII.7 Restoration of Forfeited Account Balance. In the event that the
nonvested portion of a terminated Member's Employer Contribution Account becomes
a forfeiture pursuant to Section 8.6, the terminated Member shall, upon
subsequent reemployment with the Employer prior to incurring a Period of
Severance of five consecutive years, have the forfeited amount restored to such
Member's Employer Contribution Account, unadjusted by any subsequent gains or
losses of the Trust Fund; provided, however, that such restoration shall be made
only if such Member repays in cash an amount equal to the amount so distributed
to him pursuant to Section 8.6 within five years from the date the Member is
reemployed. A reemployed Member who was not entitled to a distribution from the
Plan on his date of termination of employment shall be considered to have repaid
a distribution of zero dollars on the date of his reemployment. Any such
restoration shall be made as soon as administratively feasible following the
date of repayment. Notwithstanding anything to the contrary in the Plan,
forfeited amounts to be restored by the Employer pursuant to this Section shall
be charged against and deducted from forfeitures for the Plan Year in which such
amounts are restored that would otherwise be available to reduce Employer
Matching Contributions. If such forfeitures otherwise available are not
sufficient to provide such restoration, the portion of such restoration not
provided by forfeitures shall be charged against and deducted from Employer
Discretionary Contributions otherwise available for allocation to other Members
in accordance with Section 4.2(d), and any additional amount needed to restore
such forfeited amounts shall be a minimum required Employer Discretionary
Contribution.
VIII.8 Special Formula for Determining Vested Interest for Partial
Accounts. With respect to a Member whose Vested Interest in his Employer
Contribution Account Subject to Vesting is less than 100% and who receives a
termination distribution from his Employer Contribution Account Subject to
Vesting other than a lump sum distribution by the close of the second Plan Year
following the Plan Year in which his employment is terminated, any amount
remaining in his Employer Contribution Account Subject to Vesting shall continue
to be maintained as a separate account. At any relevant time, such Member's
nonforfeitable portion of his separate account shall be determined in accordance
with the following formula:
X=P(AB + (R x D)) - (R x D)
For purposes of applying the formula: X is the nonforfeitable portion of such
separate account at the relevant time; P is the Member's Vested Interest in his
Employer Contribution Account Subject to Vesting at the relevant time; AB is the
balance of such separate account at the relevant time; R is the ratio of the
balance of such separate account at the relevant time to the balance of such
separate account after the distribution; and D is the amount of the
distribution. For all other purposes of the Plan, a Member's separate account
shall be treated as an Employer Contribution Account. Upon his incurring a
Period of Severance of five consecutive years, the forfeitable portion of a
terminated Member's separate account and Employer Contribution Account Subject
to Vesting shall be forfeited as of the end of the Plan Year during which the
terminated Member completes such Period of Severance.
VIII-4
<PAGE>
IX.
Death Benefits
Upon the death of a Member while an Employee, the Member's Eligible
Surviving Spouse or designated beneficiary shall be entitled to a death benefit,
payable at the time and in the form provided in Article X, equal in value to the
aggregate amount in his Accounts on his Annuity Starting Date. Any contribution
allocable to a Member's Accounts after his Annuity Starting Date shall be
distributed, if his benefit was paid in a lump sum, or used to increase
payments, if his benefit is being paid on a periodic basis, as soon as
administratively feasible after the date that such contribution is paid to the
Trust Fund.
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X.
Time and Form of Payment of Benefits
X.1 Time of Payment.
(a) Subject to the provisions of the remaining Paragraphs of this
Section, a Member's Annuity Starting Date shall be the date that is as soon as
administratively feasible after the date the Member or his beneficiary becomes
entitled to a benefit pursuant to Article VI, VII, VIII, or IX but no earlier
than the expiration of the seven-day period that begins the day after the
information required to be furnished pursuant to Section 10.2(c) has been
furnished to the Member.
(b) Unless a Member (1) has attained age sixty-five, (2) has died (A)
without leaving an Eligible Surviving Spouse or (B) with an election in effect,
pursuant to Section 10.3(b), not to receive the standard death benefit set forth
in Section 10.3(a), or (3) consents to a distribution pursuant to Paragraph (a)
(and, if such Member has an Eligible Surviving Spouse, unless such Eligible
Surviving Spouse consents (with such consent being irrevocable) in accordance
with the requirements of section 417 of the Code and applicable Treasury
regulations thereunder) within the ninety-day period ending on the date payment
of his benefit hereunder is to commence pursuant to Paragraph (a), his Annuity
Starting Date shall be deferred to the date which is as soon as administratively
feasible after the date the Member attains (or would have attained) age sixty-
five, or such earlier date as the Member (with the consent of his Eligible
Surviving Spouse, if applicable) may elect by written notice to the Committee
prior to such date. Consent of the Member's Eligible Surviving Spouse under this
Paragraph shall not be required if the Member's benefit is to be paid in the
form of the standard benefit described in Section 10.2(a). The Committee shall
furnish information pertinent to his consent to each Member no less than thirty
days (unless such thirty-day period is waived by an affirmative election in
accordance with applicable Treasury regulations) and no more than ninety days
before his Annuity Starting Date, and the furnished information shall include a
general description of the material features of, and an explanation of the
relative values of, the alternative forms of benefit available under the Plan
and must inform the Member of his right to defer his Annuity Starting Date and
of his Direct Rollover right pursuant to Section 10.5 below, if applicable. In
the case of a married Member who dies before his Annuity Starting Date without
electing not to receive the standard death benefit set forth in Section 10.3(a),
the consent and election set forth in this Paragraph may be made by his Eligible
Surviving Spouse.
(c) A Member's Annuity Starting Date shall in no event be later than
the sixtieth day following the close of the Plan Year during which such Member
attains, or would have attained, his Normal Retirement Date or, if later,
terminates his employment with the Employer or a Controlled Entity.
(d) A Member's Annuity Starting Date shall be in compliance with the
provisions of section 401(a)(9) of the Code and applicable Treasury regulations
and shall in no event be later than:
X-1
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(1) For Members attaining age seventy and one-half before January
1, 1999, April 1 of the calendar year following the calendar year in which
such Member attains the age of seventy and one-half;
(2) For Members attaining age seventy and one-half after December
31, 1998, April 1 of the calendar year following the later of (A) the
calendar year in which such Member attains the age of seventy and one-half
or (B) the calendar year in which such Member terminates his employment
with the Employer (provided, however, that clause (B) of this sentence
shall not apply in the case of a Member who is a "five-percent owner" (as
defined in section 416 of the Code) with respect to the Plan Year ending in
the calendar year in which such Member attains the age of seventy and one-
half); and
(3) In the case of a benefit payable pursuant to Article IX, (A)
if payable to other than the Member's spouse, the last day of the one-year
period following the death of such Member or (B) if payable to the Member's
spouse, after the date upon which such Member would have attained the age
of seventy and one-half, unless such surviving spouse dies before payments
commence, in which case the Annuity Starting Date may not be deferred
beyond the last day of the one-year period following the death of such
surviving spouse.
The preceding provisions of this Section notwithstanding, a Member may not elect
to defer the receipt of his benefit hereunder to the extent that such deferral
creates a death benefit that is more than incidental within the meaning of
section 401(a)(9)(G) of the Code and applicable Treasury regulations thereunder.
Further, in determining compliance with the provisions of section 401(a)(9) of
the Code, the life expectancies of a Member and the Member's spouse shall not be
recalculated after the Annuity Starting Date. Finally, a Member (other than a
Member who is a "five-percent owner" (as defined in section 416 of the Code)
with respect to the Plan Year ending in the calendar year in which such Member
attains the age of seventy and one-half) who attains age seventy and one-half in
calendar year 1996, 1997, or 1998 may elect to defer his Annuity Starting Date
until no later than April 1 of the calendar year following the later of (A) the
calendar year in which such Member attains the age of seventy and one-half or
(B) the calendar year in which such Member terminates his employment with the
Employer, provided, that such election is made by the later of the end of the
calendar year in which such Member attains age seventy and one-half or December
31, 1997.
(e) Subject to the provisions of Paragraph (d), a Member's Annuity
Starting Date shall not occur unless the Article VI, VII, VIII, or IX event
entitling the Member (or his beneficiary) to a benefit constitutes a
distributable event described in section 401(k)(2)(B) of the Code and shall not
occur while the Member is employed by the Employer or any Controlled Entity
(irrespective of whether the Member has become entitled to a distribution of his
benefit pursuant to Article VI, VII, VIII, or IX).
(f) Paragraphs (a), (b) and (c) notwithstanding, a Member whose Vested
Interest in his Accounts is $5,000 or more may elect to defer his Annuity
Starting Date beyond the date specified in such Paragraphs, subject to the
provisions of Paragraph (d), by submitting to the
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<PAGE>
Committee a written statement, signed by the Member, which describes the benefit
and designates the date on which the payment of such benefit shall commence.
X.2 Standard and Alternative Forms of Benefit for Members.
(a) For purposes of Article VI, VII, or VIII, the standard benefit for
any Member who is married on his Annuity Starting Date shall be a joint and
survivor annuity. Such joint and survivor annuity shall be a commercial annuity
which is payable for the life of the Member with a survivor annuity for the life
of the Member's Eligible Surviving Spouse which shall be one-half of the amount
of the annuity payable during the joint lives of the Member and the Member's
Eligible Surviving Spouse. The standard benefit for any Member who is not
married on his Annuity Starting Date shall be a commercial annuity which is
payable for the life of the Member.
(b) Any Member who would otherwise receive the standard benefit may
elect not to take his benefit in such form by executing the form prescribed by
the Committee for such election during the election period described in
Paragraph (c) below. Any election may be revoked and subsequent elections may be
made or revoked at any time during such election period. Notwithstanding the
foregoing, an election by a married Member not to receive the standard benefit
as provided in Paragraph (a) above shall not be effective unless (1) the
Eligible Surviving Spouse has consented thereto in writing (including consent to
the specific designated beneficiary to receive payments following the Member's
death or to the specific benefit form elected, which designation or election may
not subsequently be changed by the Member without spousal consent) and such
consent acknowledges the effect of such election and is witnessed by a Plan
representative (other than the Member) or a notary public or (2) the consent of
such spouse cannot be obtained because the Eligible Surviving Spouse cannot be
located or because of other circumstances described by applicable Treasury
regulations. Any such consent by such Eligible Surviving Spouse shall be
irrevocable.
(c) The Committee shall furnish certain information, pertinent to the
Paragraph (b) election, to each Member no less than thirty days (unless such
thirty-day period is waived by an affirmative election in accordance with
applicable Treasury regulations) and no more than ninety days before his Annuity
Starting Date. The furnished information shall include an explanation of (1) the
terms and conditions of the standard benefit, (2) the Member's right to elect to
waive the standard benefit and the effect of such election, (3) the rights of
the Member's Eligible Surviving Spouse, if any, (4) the right to revoke such
election and the effect of such revocation, (5) a general description of the
eligibility conditions and other material features of the alternative forms of
benefit available pursuant to Paragraph (d) below, and (6) sufficient additional
information to explain the relative values of such alternative forms of benefit.
The period of time during which a Member may make or revoke such election shall
be the ninety-day period ending on such Member's Annuity Starting Date provided
that such election may also be revoked at any time prior to the expiration of
the seven-day period that begins the day after the information required to be
furnished pursuant to this Paragraph has been furnished to the Member.
(d) For purposes of Article VI, VII, or VIII, the benefit for any
Member who has elected not to receive the standard benefit shall be paid in one
of the following alternative forms to
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<PAGE>
be selected by the Member or, in the absence of such election, by the Committee;
provided, however, that the period and method of payment of any such form shall
be in compliance with the provisions of section 401(a)(9) of the Code and
applicable Treasury regulations thereunder:
(1) A commercial annuity in the form of a single life annuity for
the life of such Member.
(2) A commercial annuity (A) for the joint lives of the Member and
any person designated by the Member, (B) for a term certain (of 5, 10, or
15 years) and continuous for the life of the Member if he survives such
term certain, or (C) for a term certain to the Member and any designated
beneficiary of the Member if the Member does not survive such term certain.
(3) A lump sum.
(4) Periodic installment payments to such Member for a term
certain or, in the event of such Member's death before the end of such term
certain, to his designated beneficiary; provided, however, that such term
certain shall not exceed the lesser of (i) ten years or (ii) the life
expectancy of the Member or the joint and last survivor expectancy of the
Member and his designated beneficiary. Upon the death of a beneficiary who
is receiving installment payments under this Paragraph, the remaining
balance in the Member's Accounts shall be paid as soon as administratively
feasible, in one lump sum cash payment, to the beneficiary's executor or
administrator or to his heirs at law if there is no administration of such
beneficiary's estate.
(e) If a Member, who terminated his employment under circumstances
such that he was entitled to a benefit pursuant to Article VI, VII, or VIII,
dies prior to his Annuity Starting Date, the amount of the benefit to which he
was entitled shall be paid pursuant to Section 10.3 just as if such Member had
died while employed by the Employer except that his Vested Interest shall be
determined pursuant to Article VI, VII, or VIII, whichever is applicable.
X.3 Standard and Alternative Forms of Death Benefit.
(a) For purposes of Article IX, the standard death benefit for a
deceased Member who leaves an Eligible Surviving Spouse shall be a survivor
annuity. Such survivor annuity shall be a commercial annuity which is payable
for the life of such Eligible Surviving Spouse.
(b) Any Member who would otherwise have his death benefit paid in the
standard survivor annuity form may elect not to have his benefit paid in such
form by executing the beneficiary designation form prescribed by the Committee
and filing same with the Committee, designating a primary beneficiary other than
his Eligible Surviving Spouse or electing some form of payment other than a
survivor annuity. Any election may be revoked and subsequent elections may be
made or revoked at any time prior to a Member's date of death.
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(c) Paragraph (b) above to the contrary notwithstanding:
(1) An election not to have the death benefit paid in the standard
survivor annuity form as provided in Paragraph (a) above shall not be
effective unless (A) the Eligible Surviving Spouse has consented thereto in
writing and such consent (i) acknowledges the effect of such election, (ii)
either consents to the specific designated beneficiary (which designation
may not subsequently be changed by the Member without spousal consent) or
expressly permits such designation by the Member without the requirement of
further consent by the spouse, and (iii) is witnessed by a Plan
representative (other than the Member) or a notary public or (B) the
consent of such spouse cannot be obtained because the Eligible Surviving
Spouse cannot be located or because of other circumstances described by
applicable Treasury regulations. Any such consent by such Eligible
Surviving Spouse shall be irrevocable.
(2) An election not to have the death benefit paid in the standard
survivor annuity form may be made before the first day of the Plan Year in
which a Member attains the age of thirty-five only (A) after the Member
separates from service and only with respect to benefits accrued under the
Plan before the date of such separation and (B) in the case of a Member who
has not separated from service, if the Member has been furnished the
information described in Paragraph (d), with such election to become
invalid upon the first day of the Plan Year in which the Member attains the
age of thirty-five, whereupon a new election may be made by such Member.
(d) The Committee shall furnish certain information pertinent to the
Paragraph (b) election to each Member within the period beginning with the first
day of the Plan Year in which he attains the age of thirty-two (but no earlier
than the date such Member begins participation in the Plan) and ending with the
later of (1) the last day of the Plan Year preceding the Plan Year in which the
Member attains the age of thirty-five or (2) a reasonable time after the
Employee becomes a Member. If a Member separates from service before attaining
age thirty-five, such information shall be furnished to such Member within the
period beginning one year before the Member separates from service and ending
one year after such separation. Such information shall also be furnished to a
Member who has not attained the age of thirty-five or terminated employment,
within a reasonable time after written request by such Member. The furnished
information shall include an explanation of (1) the terms and conditions of the
survivor annuity, (2) the Member's right to elect to waive the survivor annuity
and the effect of such election, (3) the rights of the Member's Eligible
Surviving Spouse, (4) the right to revoke such election and the effect of such
revocation, (5) a general description of the eligibility conditions and other
material features of the alternative forms of benefit available pursuant to
Paragraph (f) below, and (6) sufficient additional information to explain the
relative value of such alternative forms of benefit.
(e) In the event a survivor annuity is to be paid to a Member's
Eligible Surviving Spouse, such Eligible Surviving Spouse may elect to receive
the benefit in one of the alternative forms set forth in Section 10.3(f). Within
a reasonable time after written request by such Eligible Surviving Spouse, the
Committee shall provide to such Eligible Surviving Spouse a written
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explanation of such survivor annuity form and the alternative forms of payment
which may be selected along with the financial effect of each such form.
(f) For purposes of Article IX, the death benefit of a deceased Member
who is not survived by an Eligible Surviving Spouse or who has elected not to
have his death benefit paid in the standard survivor annuity form set forth in
Section 10.3(a) shall be paid to his designated beneficiary in one of the
following alternative forms to be selected by such beneficiary or, in the
absence of such selection, by the Committee; provided, however, that the period
and method of payment of any such form shall be in compliance with the
provisions of section 401(a)(9) of the Code and applicable Treasury regulations
thereunder:
(1) A commercial annuity in the form of a single life annuity for
the life of the designated beneficiary.
(2) A lump sum.
(g) If a deceased Member who either is not survived by an Eligible
Surviving Spouse or has elected (with spousal consent) not to have his standard
death benefit paid in the standard survivor annuity form set forth in Section
10.3(a) does not have a valid beneficiary designation on file with the Committee
at the time of his death, the designated beneficiary or beneficiaries to receive
such Member's death benefit shall be as follows:
(1) If a Member leaves an Eligible Surviving Spouse, his
designated beneficiary shall be such Eligible Surviving Spouse;
(2) If a Member leaves no Eligible Surviving Spouse, his
designated beneficiary shall be (A) such Member's executor or administrator
or (B) his heirs at law if there is no administration of such Member's
estate.
X.4 Cash-Out of Benefit. If a Member terminates his employment and his
Vested Interest in his Accounts is not in excess of $5,000, such Member's
benefit shall be paid in one lump sum payment in lieu of any other form of
benefit herein provided. Any such payment shall be made at the time specified in
Section 10.1(a) without regard to the consent restrictions of Section 10.1(b)
and the election and spousal consent requirements of Sections 10.2 and 10.3
except that a married Member's death benefit shall be paid to his Eligible
Surviving Spouse unless another beneficiary has been designated pursuant to the
provisions of Section 10.3(b). The provisions of this Section shall not be
applicable to a Member following his Annuity Starting Date.
X.5 Direct Rollover Election. Notwithstanding any provision of the Plan to
the contrary that would otherwise limit a Distributee's election under this
Section, a Distributee may elect, at the time and in the manner prescribed by
the Committee, to have all or any portion of an Eligible Rollover Distribution
(other than any portion attributable to the offset of an outstanding loan
balance of such Member pursuant to the Plan's loan procedure) paid directly to
an Eligible Retirement Plan specified by the Distributee in a Direct Rollover.
The preceding sentence notwithstanding, a Distributee may elect a Direct
Rollover pursuant to this Section only if such Distributee's Eligible
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Rollover Distributions during the Plan Year are reasonably expected to total
$200 or more. Furthermore, if less than 100% of the Member's Eligible Rollover
Distribution is to be a Direct Rollover, the amount of the Direct Rollover must
be $500 or more. Prior to any Direct Rollover pursuant to this Section, the
Committee may require the Distributee to furnish the Committee with a statement
from the plan, account, or annuity to which the benefit is to be transferred
verifying that such plan, account, or annuity is, or is intended to be, an
Eligible Retirement Plan.
X.6 Benefits from Account Balances. With respect to any benefit payable in
any form pursuant to the Plan, such benefit shall be provided from the Account
balance(s) to which the particular Member or beneficiary is entitled.
X.7 Distributions of Company Stock and Dow Stock. Benefits shall be paid
(or transferred pursuant to Section 10.5) in cash except that (A) a Member (or
his designated beneficiary or legal representative in the case of a deceased
Member) may elect to have the portion of his Accounts invested in the Company
Stock Fund distributed (or transferred pursuant to Section 10.5) in full shares
of Company Stock to the extent of the Member's pro rata portion of the shares of
Company Stock held in the Company Stock Fund with any balance of the Member's
interest in the Company Stock Fund (including fractional shares) to be paid or
transferred in cash; (B) the portion of a Member's Dow ESOP Account invested in
whole shares of Dow Stock shall be distributed (or transferred pursuant to
Section 10.5) in shares of Dow Stock unless such Member (or his designated
beneficiary or legal representative in the case of a deceased Member) elects to
have such portion paid or transferred in cash; and (C) to the extent possible, a
Member (or his designated beneficiary or legal representative in the case of a
deceased Member) may elect to have his Destec Accounts, if any, paid (or
transferred pursuant to Section 10.5) in kind.
X.8 Commercial Annuities. At the direction of the Committee, the Trustee
may pay any form of benefit provided hereunder other than a lump sum payment or
a Direct Rollover pursuant to Section 10.5 by the purchase of a commercial
annuity contract and the distribution of such contract to the Member or
beneficiary. Thereupon, the Plan shall have no further liability with respect to
the amount used to purchase the annuity contract and such Member or beneficiary
shall look solely to the company issuing such contract for such annuity
payments. All certificates for commercial annuity benefits shall be
nontransferable, except for surrender to the issuing company, and no benefit
thereunder may be sold, assigned, discounted, or pledged (other than as
collateral for a loan from the company issuing same). Notwithstanding the
foregoing, the terms of any such commercial annuity contract shall conform with
the time of payment, form of payment, and consent provisions of Sections 10.1,
10.2, and 10.3.
X.9 Unclaimed Benefits. In the case of a benefit payable on behalf of a
Member, if the Committee is unable to locate the Member or beneficiary to whom
such benefit is payable, upon the Committee's determination thereof, such
benefit shall be forfeited. Notwithstanding the foregoing, if subsequent to any
such forfeiture the Member or beneficiary to whom such benefit is payable makes
a valid claim for such benefit, such forfeited benefit shall be restored to the
Plan in the manner provided in Section 8.7.
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X.10 Claims Review.
(a) In any case in which a claim for Plan benefits of a Member or
beneficiary is denied or modified, the Committee shall furnish written notice to
the claimant within ninety days (or within 180 days if additional information
requested by the Committee necessitates an extension of the ninety-day period
and the claimant is informed of such extension in writing within the original
ninety-day period), which notice shall:
(1) State the specific reason or reasons for the denial or
modification;
(2) Provide specific reference to pertinent Plan provisions on
which the denial or modification is based;
(3) Provide a description of any additional material or
information necessary for the Member, his beneficiary, or representative to
perfect the claim and an explanation of why such material or information is
necessary; and
(4) Explain the Plan's claim review procedure as described in
Paragraph (b) below.
(b) In the event a claim for Plan benefits is denied or modified, if
the Member, his beneficiary, or a representative of such Member or beneficiary
desires to have such denial or modification reviewed, he must, within sixty days
following receipt of the notice of such denial or modification, submit a written
request for review by the Committee of its initial decision. In connection with
such request, the Member, his beneficiary, or the representative of such Member
or beneficiary may review any pertinent documents upon which such denial or
modification was based and may submit issues and comments in writing. Within
sixty days following such request for review the Committee shall, after
providing a full and fair review, render its final decision in writing to the
Member, his beneficiary, or the representative of such Member or beneficiary
stating specific reasons for such decision and making specific references to
pertinent Plan provisions upon which the decision is based. If special
circumstances require an extension of such sixty-day period, the Committee's
decision shall be rendered as soon as possible, but not later than 120 days
after receipt of the request for review. If an extension of time for review is
required, written notice of the extension shall be furnished to the Member,
beneficiary, or the representative of such Member or beneficiary prior to the
commencement of the extension period.
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XI.
In-Service Withdrawals
XI.1 In-Service Withdrawals.
(a) A Member may withdraw any or all amounts held in his After-Tax
Account.
(b) A Member who has a financial hardship, as determined by the
Committee, and who has made all available withdrawals pursuant to Paragraph (a)
above and Appendices A, B, and/or C hereunder, as applicable, and pursuant to
the provisions of any other plans of the Employer and any Controlled Entities of
which he is a member and who has obtained all available loans pursuant to
Article XII and pursuant to the provisions of any other plans of the Employer
and any Controlled Entities of which he is a member may withdraw from his
Rollover Contribution Account and his Before-Tax Account amounts not to exceed
the amount determined by the Committee as being available for withdrawal
pursuant to this Paragraph. Such withdrawal shall come, first, from the Member's
Rollover Contribution Account and, second, from his Before-Tax Account. For
purposes of this Paragraph, financial hardship shall mean the immediate and
heavy financial needs of the Member. A withdrawal based upon financial hardship
pursuant to this Paragraph shall not exceed the amount required to meet the
immediate financial need created by the hardship and not reasonably available
from other resources of the Member. The amount required to meet the immediate
financial need may include any amounts necessary to pay any federal, state, or
local income taxes or penalties reasonably anticipated to result from the
distribution. The determination of the existence of a Member's financial
hardship and the amount required to be distributed to meet the need created by
the hardship shall be made by the Committee. The decision of the Committee shall
be final and binding, provided that all Members similarly situated shall be
treated in a uniform and nondiscriminatory manner. A withdrawal shall be deemed
to be made on account of an immediate and heavy financial need of a Member if
the withdrawal is for:
(1) Expenses for medical care described in section 213(d) of the
Code previously incurred by the Member, the Member's spouse, or any
dependents of the Member (as defined in section 152 of the Code) or
necessary for those persons to obtain medical care described in section
213(d) of the Code and not reimbursed or reimbursable by insurance;
(2) Costs directly related to the purchase of a principal
residence of the Member (excluding mortgage payments);
(3) Payment of tuition and related educational fees, and room and
board expenses, for the next twelve months of post-secondary education for
the Member or the Member's spouse, children, or dependents (as defined in
section 152 of the Code);
(4) Payments necessary to prevent the eviction of the Member from
his principal residence or foreclosure on the mortgage of the Member's
principal residence; or
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(5) Such other financial needs that the Commissioner of Internal
Revenue may deem to be immediate and heavy financial needs through the
publication of revenue rulings, notices, and other documents of general
applicability.
The above notwithstanding, (1) withdrawals under this Paragraph from a Member's
Before-Tax Account shall be limited to the sum of the Member's Before-Tax
Contributions to the Plan, plus income allocable thereto and credited to the
Member's Before-Tax Account as of December 31, 1988, less any previous
withdrawals of such amounts, and (2) amounts allocated to a Member's Before-Tax
Account pursuant to the provisions of Section 4.2(e) shall not be subject to
withdrawal. A Member who makes a withdrawal from his Before-Tax Account under
this Paragraph may not make elective contributions or employee contributions to
the Plan or any other qualified or nonqualified plan of the Employer or any
Controlled Entity for a period of twelve months following the date of such
withdrawal. Further, such Member may not make elective contributions under the
Plan or any other plan maintained by the Employer or any Controlled Entity for
such Member's taxable year immediately following the taxable year of the
withdrawal in excess of the applicable limit set forth in Section 3.1(d) for
such next taxable year less the amount of such Member's elective contributions
for the taxable year of the withdrawal.
XI.2 Restriction on In-Service Withdrawals.
(a) All withdrawals pursuant to this Article shall be made in
accordance with the provisions and within the time period prescribed by the
Committee prior to the proposed date of withdrawal.
(b) Notwithstanding the provisions of this Article, (i) not more than
one withdrawal pursuant to Section 11.1(a) shall be made in any one calendar
quarter, and (ii) no withdrawal shall be made from an Account to the extent such
Account has been pledged to secure a loan from the Plan.
(c) If a Member's Account from which a withdrawal is made is invested
in more than one Investment Fund, the withdrawal shall be made pro rata from
each Investment Fund in which such Account is invested.
(d) All withdrawals under this Article shall be paid in cash.
(e) Any withdrawal hereunder shall be subject to the Direct Rollover
election described in Section 10.5.
(f) Except as provided in Appendix A and Appendix B, this Article
shall not be applicable to a Member following termination of employment and the
amounts in such Member's Accounts shall be distributable only in accordance with
the provisions of Article X.
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XII.
Loans
XII.1 Eligibility for Loan.
(a) Upon application by (1) any Member who is an Employee or (2) any
Member no longer employed by the Employer, a beneficiary of a deceased Member,
or an alternate payee under a qualified domestic relations order, as that term
is defined in section 414(p)(8) of the Code, who retains an Account balance
under the Plan and who is a party-in-interest, as that term is defined in
section 3(14) of the Act, as to the Plan (an individual who is eligible to apply
for a loan under this Article being hereinafter referred to as a "Member" for
purposes of this Article) and subject to such uniform and nondiscriminatory
rules and regulations as the Committee may establish, the Committee may in its
discretion direct the Trustee to make a loan or loans to such Member.
(b) No loan shall be made to a Member who owes any amount on an
outstanding loan previously made to him from the Plan.
XII.2 Maximum Loan.
(a) A loan to a Member may not exceed 50% of the then value of such
Member's Vested Interest in his Accounts and no loan may be made for an amount
which would require the liquidation of a Member's Dow ESOP Account or the
portion of a Member's Employer Contribution Account which is invested in the
Company Stock Fund.
(b) Paragraph (a) above to the contrary notwithstanding, the amount
of a loan made to a Member under this Article shall not exceed an amount equal
to the difference between:
(1) The lesser of $50,000 (reduced by the excess, if any, of (A)
the highest outstanding balance of loans from the Plan during the one-year
period ending on the day before the date on which the loan is made over (B)
the outstanding balance of loans from the Plan on the date on which the
loan is made) or one-half of the present value of the Member's total
nonforfeitable accrued benefit under all qualified plans of the Employer or
a Controlled Entity; minus
(2) The total outstanding loan balance of the Member under all
other loans from all qualified plans of the Employer or a Controlled
Entity.
XII.3 Minimum Loan. A loan to a Member may not be for an amount less
than $1,000.00.
XII.4 Interest and Security.
XII-1
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(a) Any loan made pursuant to this Article shall bear interest at a
rate established by the Committee from time to time and communicated to the
Members, which rate shall provide the Plan with a return commensurate with the
interest rates charged by persons in the business of lending money for loans
which would be made under similar circumstances.
(b) Any loan shall be made as an investment of a segregated loan
fund to be established in the Trust Fund for the Member to whom the loan is
made. Any loan shall be considered to come, first, from the Member's After-Tax
Account, second, from the Member's Rollover Contribution Account, third, from
the Member's Vested Interest in the portion of his Employer Contribution Account
that is not invested in the Company Stock Fund, fourth, from the Member's Dow
Transfer Account, and, finally, from the Member's Before-Tax Account. The
Trustee shall fund a Member's segregated loan fund by liquidating such portion
of the assets of the Accounts from which the Member's loan is to be made as is
necessary to fund the loan and transferring the proceeds to such segregated loan
fund. If a Member's Accounts are invested in more than one Investment Fund, the
transfer shall be made pro rata from each such Investment Fund; provided
however, that no loan shall be funded from the portion of a Member's Employer
Contribution Account that is invested in the Company Stock Fund. The loan shall
be secured by a pledge of the Member's segregated loan fund.
XII.5 Repayment Terms of Loan.
(a) The Member shall be required, as a condition to receiving a
loan, to enter into an irrevocable agreement authorizing the Employer to make
payroll deductions from his Compensation so long as the Member is an Employee
and to transfer such payroll deduction amounts to the Trustee in payment of such
loan plus interest.
(b) The terms of the loan shall (1) require level amortization with
payments not less frequently than quarterly, (2) require that the loan be repaid
within five years unless the Member certifies in writing to the Committee that
the loan is to be used to acquire any dwelling unit which within a reasonable
time is to be used (determined at the time the loan is made) as a principal
residence of the Member, (3) allow prepayment without penalty, provided that any
prepayment must be for the full outstanding loan balance (including interest),
and (4) require that the balance of the loan (including interest) shall become
due and payable (to the extent not otherwise due and payable) on the date the
Member or, if applicable, the Member's beneficiary, is first entitled to a
distribution pursuant to Article VI, VII, VIII, or IX, irrespective of whether
such Member or beneficiary elects or consents to such distribution and that such
Member's outstanding loan balance (including interest) shall be repaid by
offsetting such balance against the amount in the Member's segregated loan fund
pledged as security for the loan. By agreeing to the pledge of the segregated
loan fund as security for the loan, a Member shall be deemed to have consented
to the distribution of such segregated loan fund prior to the time specified in
section 411(a)(11) of the Code and the applicable Treasury regulations
thereunder.
(c) If the Member fails in any way to comply with the repayment
terms of a loan, such loan shall be repaid by offsetting the Member's
outstanding loan balance (including interest) against the amount in the Member's
segregated loan fund pledged as security for the loan. Any such
XII-2
<PAGE>
outstanding loan balance (including interest) shall be so offset and repaid as
soon as administratively feasible after such failure to comply, and such
repayment shall be prior to any withdrawal or distribution of benefits from the
pledged portion of the Member's Accounts pursuant to the provisions of the Plan.
Notwithstanding the foregoing, amounts in a Member's Before-Tax Account may not
be used to satisfy the payment of such loan (including interest) prior to the
time such amounts are otherwise distributable from the Plan, and amounts in a
Member's Employer Contribution Account may not be offset and used to satisfy the
payment of such loan (including interest) prior to the earliest time such
amounts are otherwise permitted to be distributed under applicable law.
(d) The above notwithstanding, a Member who is on an unpaid leave of
absence from the Employer may elect to suspend payments on his loan during such
leave of absence for a period of up to one year. Upon such Member's return to
active employment with the Employer at the conclusion of such leave of absence
or upon the expiration of such one-year period, if earlier, such Member shall be
permitted to refinance his loan, including all accrued and unpaid interest, over
a term that does not extend beyond the expiration of the original term of the
loan.
(e) Amounts tendered to the Trustee by a Member in repayment of a
loan made pursuant to this Article (1) shall initially be credited to the
Member's segregated loan fund, (2) then shall be transferred as soon as
practicable following receipt thereof to the Account or Accounts from which the
Member's loan was made, and (3) invested in accordance with the Member's current
designation as to the investment of contributions pursuant to Section 5.2.
XII.6 Operation of Article. The provisions of this Article shall be
applicable to loans granted or renewed after January 1, 1998. Loans granted or
renewed on or prior to such date shall be governed by the provisions of the Plan
as in effect prior to this amendment and restatement of the Plan.
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XIII.
Administration of the Plan
XIII.1 General Administration of the Plan. The general administration of
the Plan shall be vested in the Committee. For purposes of the Act, the
Committee shall be the Plan "administrator" and shall be the "named fiduciary"
with respect to the general administration of the Plan (except as to the
investment of the assets of the Trust Fund).
XIII.2 Records and Procedures. The Committee shall keep appropriate records
of its proceedings and the administration of the Plan and shall make available
for examination during business hours to any Member or beneficiary such records
as pertain to that individual's interest in the Plan. The Committee shall
designate the person or persons who shall be authorized to sign for the
Committee and, upon such designation, the signature of such person or persons
shall bind the Committee.
XIII.3 Meetings. The Committee shall hold meetings upon such notice and at
such time and place as it may from time to time determine. Notice to a member
shall not be required if waived in writing by that member. A majority of the
members of the Committee duly appointed shall constitute a quorum for the
transaction of business. All resolutions or other actions taken by the Committee
at any meeting where a quorum is present shall be by vote of a majority of those
present at such meeting and entitled to vote. Resolutions may be adopted or
other action taken without a meeting upon written consent signed by all of the
members of the Committee.
XIII.4 Self-Interest of Members. No member of the Committee shall have any
right to vote or decide upon any matter relating solely to himself under the
Plan or to vote in any case in which his individual right to claim any benefit
under the Plan is particularly involved. In any case in which a Committee member
is so disqualified to act and the remaining members cannot agree, the Directors
shall appoint a temporary substitute member to exercise all the powers of the
disqualified member concerning the matter in which he is disqualified.
XIII.5 Compensation and Bonding. The members of the Committee shall not
receive compensation with respect to their services for the Committee. To the
extent required by the Act or other applicable law, or required by the Company,
members of the Committee shall furnish bond or security for the performance of
their duties hereunder.
XIII.6 Committee Powers and Duties. The Committee shall supervise the
administration and enforcement of the Plan according to the terms and provisions
hereof and shall have all powers necessary to accomplish these purposes,
including, but not by way of limitation, the right, power, authority, and duty:
(a) To make rules, regulations, and bylaws for the administration of
the Plan that are not inconsistent with the terms and provisions hereof,
provided such rules, regulations, and bylaws are evidenced in writing and copies
thereof are delivered to the Trustee and to
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the Company, and to enforce the terms of the Plan and the rules and regulations
promulgated thereunder by the Committee;
(b) To construe in its discretion all terms, provisions, conditions,
and limitations of the Plan, and, in all cases, the construction necessary for
the Plan to qualify under the applicable provisions of the Code shall control;
(c) To correct any defect or to supply any omission or to reconcile
any inconsistency that may appear in the Plan in such manner and to such extent
as it shall deem expedient in its discretion to effectuate the purposes of the
Plan;
(d) To employ and compensate such accountants, attorneys, investment
advisors, and other agents, employees, and independent contractors as the
Committee may deem necessary or advisable for the proper and efficient
administration of the Plan;
(e) To determine in its discretion all questions relating to
eligibility;
(f) To make a determination in its discretion as to the right of any
person to a benefit under the Plan and to prescribe procedures to be followed by
distributees in obtaining benefits hereunder;
(g) To prepare, file, and distribute, in such manner as the
Committee determines to be appropriate, such information and material as is
required by the reporting and disclosure requirements of the Act;
(h) To furnish the Employer any information necessary for the
preparation of such Employer's tax return or other information that the
Committee determines in its discretion is necessary for a legitimate purpose;
(i) To require and obtain from the Employer and the Members any
information or data that the Committee determines is necessary for the proper
administration of the Plan;
(j) To instruct the Trustee as to the loans to Members pursuant to
the provisions of Article XII;
(k) To direct the Trustee as to voting of Company Stock pursuant to
the provisions of Section 5.4;
(l) To appoint investment managers pursuant to Section 15.5;
(m) To receive and review reports from the Trustee and from
investment managers as to the financial condition of the Trust Fund, including
its receipts and disbursements; and
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(n) To establish or designate Investment Funds as investment options
as provided in Article V.
XIII.7 Employer to Supply Information. The Employer shall supply full and
timely information to the Committee, including, but not limited to, information
relating to each Member's Compensation, age, retirement, death, or other cause
of termination of employment and such other pertinent facts as the Committee may
require. The Employer shall advise the Trustee of such of the foregoing facts as
are deemed necessary for the Trustee to carry out the Trustee's duties under the
Plan. When making a determination in connection with the Plan, the Committee
shall be entitled to rely upon the aforesaid information furnished by the
Employer.
XIII.8 Indemnification. The Company shall indemnify and hold harmless each
member of the Committee and each Employee who is a delegate of the Committee
against any and all expenses and liabilities arising out of his administrative
functions or fiduciary responsibilities, including any expenses and liabilities
that are caused by or result from an act or omission constituting the negligence
of such individual in the performance of such functions or responsibilities, but
excluding expenses and liabilities that are caused by or result from such
individual's own gross negligence or willful misconduct. Expenses against which
such individual shall be indemnified hereunder shall include, without
limitation, the amounts of any settlement or judgment, costs, counsel fees, and
related charges reasonably incurred in connection with a claim asserted or a
proceeding brought or settlement thereof.
XIII-3
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XIV.
Trustee and Administration of Trust Fund
XIV.1 Appointment, Resignation, Removal, and Replacement of Trustee.
(a) The Trustee shall be appointed, removed, and replaced by and in
the sole discretion of the Directors. The Trustee shall be the "named fiduciary"
with respect to investment of the Trust Fund's assets.
(b) Any Trustee may resign at any time by giving at least thirty
days' written notice of such resignation to the Directors. Any Trustee may be
removed, with or without cause, by the Directors on written notice of such
removal to such Trustee. The Directors may appoint a successor Trustee by
written designation, a copy of which shall be delivered to the Committee and the
former Trustee. If there would be no other Trustee then acting, the actual
appointment and qualification of a successor Trustee to whom the Trust Fund may
be transferred are conditions which must be fulfilled before the resignation or
removal of a Trustee shall become effective. The Directors may by resolution
increase or decrease the number of Trustees at any time acting hereunder.
XIV.2 Acceptance of Fund. The Trustee accepts the Trust Fund hereunder and
agrees to accept and retain, manage, administer and hold the Trust Fund in
accordance with the terms and provisions of this Plan. The Trustee shall receive
any securities or other properties that are tendered to the Trustee pursuant to
the Plan that are acceptable to the Trustee.
XIV.3 Committee Discharging Duty. The Trustee may assume that the
Committee is discharging its duties under the Plan until and unless the Trustee
is notified to the contrary in writing by any person known to be a member of the
Committee or by the Employer. Upon receipt of such notice, the Trustee may, if
the Trustee so desires, apply to a court of competent jurisdiction for guidance
with respect to the disposition of the Trust Fund.
XIV.4 Taxes. If, pursuant to the provisions of any law now or hereafter
enacted, any tax shall be imposed upon the Trustee with respect to the assets or
income of the Trust Fund, the Trustee (without the necessity of any direction or
approval by the Committee) may pay such tax from the Trust Fund, provided such
payment is not otherwise prohibited by law. The Trustee, however, shall not be
obligated to pay any such tax as long as the validity thereof is contested in
good faith. In determining whether or not to pay any such tax, the Trustee may
obtain the advice of counsel (including, but not limited to, counsel for the
Employer or the Committee).
XIV.5 Investment of the Trust Fund. The Committee shall have the exclusive
authority and discretion to select the Investment Funds available for investment
under the Plan. The Committee shall notify the Trustee in writing of any changes
in the selection of Investment Funds available for investment under the Plan.
Each Member shall have the exclusive right, in accordance with Section 5.2 and
subject to the limitations of Section 5.1, to direct the investment by the
Trustee
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of all amounts allocated to such Member's Accounts among one or more of the
available Investment Funds. All investment directions by Members shall be timely
furnished to the Trustee by the Committee, except to the extent such directions
are transmitted telephonically or otherwise by Members directly to the Trustee
or its delegate in accordance with the procedures established by the Committee
and communicated to the Trustee. In making any investment of the assets of the
Trust, except as provided in Section 5.3, the Trustee shall be fully entitled to
rely on such directions furnished by the Committee or by Members in accordance
with the procedures established by the Committee, and shall be under no duty to
make any inquiry or investigation with respect thereto. If the Trustee receives
any contribution under the Plan that is not accompanied by instructions
directing its investment, the Trustee shall promptly notify the Committee of
that fact, and the Trustee shall invest such contribution in such assets as the
Trustee may in its discretion determine, or the Trustee may hold such amounts
uninvested for a reasonable period pending the receipt of directions from the
Committee.
XIV.6 Powers of the Trustee. Subject to any limitations stated elsewhere
herein, in addition to the authority, rights, privileges, powers, and duties
elsewhere herein vested in the Trustee and those now or hereafter conferred by
law, the Trustee shall also have the following authority, rights, privileges,
powers, and duties:
(a) To hold, manage, control, collect, and use the Trust Fund in
accordance with the terms of this instrument;
(b) To sell (for cash or on credit, or both), exchange, or otherwise
dispose of, the whole or any part of the Trust Fund, at public or private sale;
to lease (including, but not limited to, oil, gas, or mineral leases), rent,
mortgage (including purchase money mortgages), pledge, or otherwise encumber the
whole or any part of the Trust Fund; and to loan or borrow money in any manner,
including by joint and several obligations, all upon such terms, regardless of
the duration of the Trust, as the Trustee may deem advisable (provided that
neither the Employer nor any Member may borrow from the Trust Fund except as
otherwise permitted herein);
(c) To invest or reinvest the Trust Fund in property of any
description whatsoever (including, but not limited to, oil, gas, or mineral
interests; common or preferred stock; shares of investment trusts or companies;
bills, notes, and other evidences of indebtedness; non-income producing
property; and property outside of Texas);
(d) To make or hold investments of any part of the Trust Fund in
common or undivided interest with other persons or entities, including an
undivided interest in any property in which any Trustee, individually or
otherwise, may hold an undivided interest; to buy from or sell to any person or
entity to the extent not otherwise prohibited herein;
(e) To make commingled, collective, or common investments and to
invest and reinvest all or any portion of the Trust Fund collectively with funds
of other pension and profit sharing trusts exempt from tax under section 501(a)
of the Code by reason of qualifying under section 401(a) of said Code,
including, without limitation, power to invest
XIV-2
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collectively with such other funds through the medium of one or more of the
common, collective, or commingled trust funds, which has been or may hereafter
be established and maintained by the Trustee or its affiliates. To the extent of
the interest of the Trust Fund in any such collective trust, the agreement or
declaration of trust establishing such collective trust shall be deemed to be
adopted and made a part of the Plan and Trust as if set forth in full herein;
(f) To deposit or invest all or a part of the Trust Fund in savings
accounts, certificates of deposit, or other deposits that bear a reasonable rate
of interest in a bank or similar financial institution, including the commercial
department of the Trustee, if such bank or other institution is supervised by
any agency of a state or the federal government.
(g) To employ and compensate such attorneys, counsel, brokers,
banks, investment advisors, or other agents, employees, or independent
contractors and to delegate to them such of the duties, rights, and powers of
the Trustee as may be deemed advisable in handling and administering the Plan;
(h) To partition any property or interest held as a part of the
Trust Fund and, in any and all such partitions, to pay or receive such money or
property as may be necessary or advisable to equalize differences and to
evaluate any property belonging to the Trust Fund;
(i) To institute, join in, maintain, defend, compromise, submit to
arbitration, or settle any litigation, claim, obligation, or controversy with
respect to any matter affecting the Trust Fund, regardless of the manner in
which such matter may have arisen, all in the name of the Trustee and without
the joinder of any Member; and
(j) To hold uninvested for a reasonable period of time any moneys
received by it until the same shall be invested or disbursed pursuant to the
provisions of the Plan.
The Trustee is also authorized to exercise all the rights, powers, options, and
privileges now or hereafter granted to, provided for, or vested in trustees
under the laws of the State of Illinois, except as such may conflict with the
terms of this instrument or applicable law. As far as possible, no subsequent
legislation or regulation shall be in limitation of the rights, powers, or
privileges granted the Trustee hereunder or set forth under the laws of the
State of Illinois as such laws exist at the time of the execution hereof.
Generally, the Trustee shall have, hold, manage, control, use, invest and
reinvest, disburse, and dispose of the Trust Fund under all circumstances to the
same extent as if the Trustee were the owner thereof in fee simple, subject only
to such limitations as are contained herein and such applicable laws as cannot
be waived. This instrument shall always be construed in favor of the validity of
any act or omission by or of the Trustee. Notwithstanding the foregoing, the
Trustee may not invest the Trust Fund assets in any Company security that is not
a "qualifying Company security" or in any Company real property that is not
"qualifying Company real property." The Trustee may, however, acquire
"qualifying Company securities" or "qualifying Company real property" as an
investment, provided that any such acquisition or investment will not result in
the Trust Fund's holding more than 100% of the then fair market value of the
assets of the Trust Fund in "qualifying Company securities" and "qualifying
Company real property." The term "qualifying
XIV-3
<PAGE>
Company securities" means stock or marketable obligations of the Company or an
affiliate. The term "qualifying Company real property" means parcels of real
property leased to the Company or an affiliate if a substantial number of the
parcels are dispersed geographically and if each such parcel is suitable for, or
adaptable to, more than one use.
XIV.7 Compensation, Expenses, and Bond of Trustee. Unless prohibited by
Section 14.11, the Trustee shall receive such compensation for services as
Trustee hereunder as may be agreed upon from time to time by the Company and the
Trustee. The Trustee shall be reimbursed for all reasonable expenses incurred
while acting as Trustee as provided in Section 14.11. No bond or other security
shall be required of the Trustee unless otherwise required by law or by the
Company.
XIV.8 Reliance. The Trustee shall be fully protected in relying upon a
resolution of the Directors as to the membership of the Committee as it then
exists and in continuing to rely upon such resolution until a subsequent
resolution is filed with the Trustee by the Directors. The Trustee may accept as
true all papers, certificates, statements, and representations of fact that are
presented to the Trustee by the Committee without investigation, questioning, or
verification if the Trustee believes same to be true and authentic, and the
Trustee may rely solely on the written advice of the Committee with respect to
any question of fact.
XIV.9 Accounting. As soon as practicable after the end of each Plan Year,
the Trustee shall render a written accounting of the administration of the Trust
Fund showing all receipts and disbursements during the year and the then value
of the assets of the Trust Fund. This accounting shall be transmitted to the
Committee and to the Company.
XIV.10 Judicial Protection. The Trustee may seek judicial protection by any
action or proceeding deemed necessary to settle the accounts of the Trustee or
may obtain a judicial determination or a declaratory judgment as to a question
of construction of the Plan. The Trustee must join as parties defendant in any
such action only the Committee and the Company, although the Trustee may join
other parties if the Trustee deems it advisable to do so.
XIV.11 Payment of Expenses. All expenses incident to the administration of
the Plan and Trust, including but not limited to, legal, accounting, Trustee
fees, expenses of the Committee, and the cost of furnishing any bond or security
required of the Committee shall be paid by the Trustee from the Trust Fund, and,
until paid, shall constitute a claim against the Trust Fund which is paramount
to the claims of Members and beneficiaries; provided, however, that (a) the
obligation of the Trustee to pay such expenses from the Trust Fund shall cease
to exist to the extent such expenses are paid by the Employer and (b) in the
event the Trustee's compensation is to be paid, pursuant to this Section, from
the Trust Fund, any individual serving as Trustee who already receives full-time
pay from an employer or an association of employers whose employees are
participants in the Plan, or from an employee organization whose members are
participants in the Plan, shall not receive any additional compensation for
serving as Trustee. This Section shall be deemed to be a part of any contract to
provide for expenses of Plan and Trust administration, whether or not the
signatory to such contract is, as a matter of convenience, the Employer.
XIV-4
<PAGE>
XIV.12 Trust Fund Property. All income, profits, recoveries, contributions,
forfeitures, and any and all moneys, securities, and properties of any kind at
any time received or held by the Trustee hereunder shall be held for investment
purposes as a commingled Trust Fund. The Committee shall maintain Accounts in
the name of each Member, but the maintenance of an Account designated as the
Account of a Member shall not mean that such Member shall have a greater or
lesser interest than that due him by operation of the Plan and shall not be
considered as segregating any funds or property from any other funds or property
contained in the commingled fund. No Member shall have any title to any specific
asset in the Trust Fund.
XIV.13 Distributions from Members' Accounts. Distributions from a Member's
Accounts shall be made by the Trustee only if, when, and in the amount and
manner directed in writing by the Committee. Any distribution made to a Member
or for his benefit shall be debited to such Member's Account or Accounts. All
distributions hereunder shall be made in cash except as otherwise specifically
provided herein.
XIV.14 Payments Solely from Trust Fund. All benefits payable under the Plan
shall be paid or provided for solely from the Trust Fund, and neither the
Employer nor the Trustee assumes any liability or responsibility for the
adequacy thereof. The Committee or the Trustee may require execution and
delivery of such instruments as are deemed necessary to assure proper payment of
any benefits.
XIV.15 No Benefits to the Employer. No part of the corpus or income of the
Trust Fund shall be used for any purpose other than the exclusive purpose of
providing benefits for the Members and their beneficiaries and of defraying
reasonable expenses of administering the Plan. Anything to the contrary herein
notwithstanding, the Plan shall not be construed to vest any rights in the
Employer other than those specifically given hereunder.
XIV.16 Indemnification. The Company shall indemnify the Trustee against any
and all claims, liabilities, costs or expenses, including reasonable attorneys'
fees, incurred by the Trustee resulting from the acts, omissions, or breach or
an alleged breach of a fiduciary duty owed to the Plan, by a party other than
the Trustee, including, but not limited to, any acts, omissions, or fiduciary
duty or responsibility owned to the Plan by an investment manager appointed
pursuant to Section 15.5, any predecessor trustee, or the Committee; provided,
however, that nothing herein shall be construed as an indemnification of the
Trustee for any claims, liabilities, costs, and expenses resulting from the
breach by the Trustee of the Trustee's own fiduciary duties with respect to the
Plan or the Trust or the Trustee's own negligence or willful misconduct.
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<PAGE>
XV.
Fiduciary Provisions
XV.1 Article Controls. This Article shall control over any contrary,
inconsistent or ambiguous provisions contained in the Plan.
XV.2 General Allocation of Fiduciary Duties. Each fiduciary with respect
to the Plan shall have only those specific powers, duties, responsibilities and
obligations as are specifically given him under the Plan. The Directors shall
have the sole authority to appoint and remove the Trustee. Except as otherwise
specifically provided herein, the Committee shall have the sole responsibility
for the administration of the Plan, which responsibility is specifically
described herein. Except as otherwise specifically provided herein, the Trustee
shall have the sole responsibility for the administration, investment, and
management of the assets held under the Plan. It is intended under the Plan that
each fiduciary shall be responsible for the proper exercise of his own powers,
duties, responsibilities, and obligations hereunder and shall not be responsible
for any act or failure to act of another fiduciary except to the extent provided
by law or as specifically provided herein.
XV.3 Fiduciary Duty. Each fiduciary under the Plan, including, but not
limited to, the Committee and the Trustee as "named fiduciaries," shall
discharge his duties and responsibilities with respect to the Plan:
(a) Solely in the interest of the Members, for the exclusive purpose
of providing benefits to Members and their beneficiaries and of defraying
reasonable expenses of administering the Plan;
(b) With the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a like capacity and
familiar with such matters would use in the conduct of an enterprise of a like
character and with like aims;
(c) By diversifying the investments of the Plan so as to minimize
the risk of large losses, unless under the circumstances it is prudent not to do
so; and
(d) In accordance with the documents and instruments governing the
Plan insofar as such documents and instruments are consistent with applicable
law.
No fiduciary shall cause the Plan or Trust Fund to enter into a "prohibited
transaction" as provided in section 4975 of the Code or section 406 of the Act.
XV.4 Delegation and Allocation of Fiduciary Duties. The Committee may
appoint subcommittees, individuals, or any other agents as it deems advisable
and may delegate to any of such appointees any or all of the powers and duties
of the Committee. Such appointment and delegation must be in writing, specifying
the powers or duties being delegated, and must be accepted in writing by the
delegatee. Upon such appointment, delegation, and acceptance, the delegating
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<PAGE>
Committee members shall have no liability for the acts or omissions of any such
delegatee, as long as the delegating Committee members do not violate any
fiduciary responsibility in making or continuing such delegation.
XV.5 Investment Manager. The Committee may, in its sole discretion,
appoint an "investment manager," with power to select any or all of the
Investment Funds available pursuant to Section 5.2 and/or with power to manage,
acquire, or dispose of any asset of the Plan and to direct the Trustee in this
regard, so long as:
(a) The investment manager is (1) registered as an investment
adviser under the Investment Advisers Act of 1940, (2) a bank, as defined in the
Investment Advisers Act of 1940, or (3) an insurance company qualified to do
business under the laws of more than one state; and
(b) Such investment manager acknowledges in writing that he is a
fiduciary with respect to the Plan.
Upon such appointment, the Committee shall not be liable for the acts of the
investment manager, as long as the Committee members do not violate any
fiduciary responsibility in making or continuing such appointment. The Trustee
shall follow the directions of such investment manager and shall not be liable
for the acts or omissions of such investment manager. The investment manager may
be removed by the Committee at any time and within its sole discretion.
XV-2
<PAGE>
XVI.
Amendments
XVI.1 Right to Amend. Subject to Section 16.2 and any other limitations
contained in the Act or the Code, the Directors may from time to time amend, in
whole or in part, any or all of the provisions of the Plan on behalf of the
Company and all Employers. Specifically, but not by way of limitation, the
Directors may make any amendment necessary to acquire and maintain a qualified
status for the Plan under the Code, whether or not retroactive.
XVI.2 Limitation on Amendments. No amendment of the Plan shall be made
that would vest in the Employer, directly or indirectly, any interest in or
control of the Trust Fund. No amendment shall be made that would vary the Plan's
exclusive purpose of providing benefits to Members and their beneficiaries and
of defraying reasonable expenses of administering the Plan or that would permit
the diversion of any part of the Trust Fund from that exclusive purpose. No
amendment shall be made that would reduce any then nonforfeitable interest of a
Member. No amendment shall increase the duties or responsibilities of the
Trustee unless the Trustee consents thereto in writing.
XVI-1
<PAGE>
XVII.
Discontinuance of Contributions, Termination,
Partial Termination, and Merger or Consolidation
XVII.1 Right to Discontinue Contributions, Terminate, or Partially
Terminate. The Employer has established the Plan with the bona fide intention
and expectation that from year to year it will be able to, and will deem it
advisable to, make its contributions as herein provided. However, the Directors
realize that circumstances not now foreseen, or circumstances beyond its
control, may make it either impossible or inadvisable for the Employer to
continue to make its contributions to the Plan. Therefore, the Directors shall
have the power to discontinue contributions to the Plan, terminate the Plan, or
partially terminate the Plan at any time hereafter. Each member of the Committee
and the Trustee shall be notified of such discontinuance, termination, or
partial termination.
XVII.2 Procedure in the Event of Discontinuance of Contributions,
Termination, or Partial Termination.
(a) If the Plan is amended so as to permanently discontinue Employer
Contributions, or if Employer Contributions are in fact permanently
discontinued, the Vested Interest of each affected Member shall be 100%,
effective as of the date of discontinuance. In case of such discontinuance, the
Committee shall remain in existence and all other provisions of the Plan that
are necessary, in the opinion of the Committee, for equitable operation of the
Plan shall remain in force.
(b) If the Plan is terminated or partially terminated, the Vested
Interest of each affected Member shall be 100%, effective as of the termination
date or partial termination date, as applicable. Unless the Plan is otherwise
amended prior to dissolution of the Company, the Plan shall terminate as of the
date of dissolution of the Company.
(c) Upon discontinuance of contributions, termination, or partial
termination, any previously unallocated contributions, forfeitures, and net
income (or net loss) shall be allocated among the Accounts of the Members on
such date of discontinuance, termination, or partial termination according to
the provisions of Article IV. Thereafter, the net income (or net loss) shall
continue to be allocated to the Accounts of the Members until the balances of
the Accounts are distributed.
(d) In the case of a termination or partial termination of the Plan,
and in the absence of a Plan amendment to the contrary, the Trustee shall pay
the balance of the Accounts of a Member for whom the Plan is so terminated, or
who is affected by such partial termination, to such Member, subject to the time
of payment, form of payment, and consent provisions of Article X.
XVII.3 Merger, Consolidation, or Transfer. This Plan and Trust Fund may not
merge or consolidate with, or transfer its assets or liabilities to, any other
plan, unless immediately thereafter each Member would, in the event such other
plan terminated, be entitled to a benefit which is equal
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<PAGE>
to or greater than the benefit to which he would have been entitled if the Plan
were terminated immediately before the merger, consolidation, or transfer.
XVII-2
<PAGE>
XVIII.
Participating Employers
XVIII.1 Participation and Designation of Other Employers.
(a) The Committee may designate any entity or organization
eligible by law to participate in the Plan and the Trust as an Employer by
written instrument delivered to the Secretary of the Company and the designated
Employer. Such written instrument shall specify the effective date of such
designated participation, may incorporate specific provisions relating to the
operation of the Plan which apply to the designated Employer only and shall
become, as to such designated Employer and its Employees, a part of the Plan.
(b) Each designated Employer and each Employer listed in Section
1.1(32) shall be conclusively presumed to have consented to its designation or
participation, as applicable, and to have agreed to be bound by the terms of the
Plan and any and all amendments thereto upon its submission of information to
the Committee required by the terms of or with respect to the Plan or upon
making a contribution to the Trust Fund pursuant to the terms of the Plan;
provided, however, that the terms of the Plan may be modified so as to increase
the obligations of an Employer only with the consent of such Employer, which
consent shall be conclusively presumed to have been given by such Employer upon
its submission of any information to the Committee required by the terms of or
with respect to the Plan or upon making a contribution to the Trust Fund
pursuant to the terms of the Plan following notice of such modification.
(c) The provisions of the Plan shall apply separately and equally
to each Employer and its Employees in the same manner as is expressly provided
for the Company and its Employees, except that the power to appoint or otherwise
affect the Committee or the Trustee and the power to amend or terminate the Plan
shall be exercised by the Directors alone.
(d) Transfer of employment among Employers shall not be considered
a termination of employment hereunder, and Service with one shall be considered
as Service with all others.
(e) Any Employer may, by appropriate action of its Board of
Directors or noncorporate counterpart that is communicated in writing to the
Secretary of the Company and to the Committee, terminate its participation in
the Plan and the Trust. Moreover, the Committee may, in its discretion,
terminate an Employer's Plan and Trust participation at any time by written
instrument delivered to the Secretary of the Company and the designated
Employer.
XVIII.2 Single Plan. For purposes of the Code and the Act, the Plan as
adopted by the Employers shall constitute a single plan rather than a separate
plan of each Employer. All assets in the Trust Fund shall be available to pay
benefits to all Members and their beneficiaries.
XVIII-1
<PAGE>
XIX.
Miscellaneous Provisions
XIX.1 Not Contract of Employment. The adoption and maintenance of the Plan
shall not be deemed to be a contract between the Employer and any person or to
be consideration for the employment of any person. Nothing herein contained
shall be deemed to give any person the right to be retained in the employ of the
Employer or to restrict the right of the Employer to discharge any person at any
time nor shall the Plan be deemed to give the Employer the right to require any
person to remain in the employ of the Employer or to restrict any person's right
to terminate his employment at any time.
XIX.2 Alienation of Interest Forbidden. Except as otherwise provided with
respect to "qualified domestic relations orders" pursuant to section 206(d) of
the Act and sections 401(a)(13) and 414(p) of the Code and except as otherwise
provided under other applicable law, no right or interest of any kind in any
benefit shall be transferable or assignable by any Member or any beneficiary or
be subject to anticipation, adjustment, alienation, encumbrance, garnishment,
attachment, execution, or levy of any kind. Plan provisions to the contrary
notwithstanding, the Committee shall comply with the terms and provisions of any
"qualified domestic relations order," including an order that requires
distributions to an alternate payee prior to a Member's "earliest retirement
age" as such term is defined in section 206(d)(3)(E)(ii) of the Act and section
414(p)(4)(B) of the Code, and shall establish appropriate procedures to effect
the same.
XIX.3 Uniformed Services Employment and Reemployment Rights Act
Requirements. Notwithstanding any provision of the Plan to the contrary,
contributions, benefits, and service credit with respect to qualified military
service will be provided in accordance with section 414(u) of the Code.
XIX.4 Corrective Contributions and Distributions. The Employer shall be
permitted to make corrective contributions and or distributions to Members and
former Members (including former Members who are no longer Employees)
(collectively, the "Covered Members") in order to comply with the terms of any
compliance statement (a "Compliance Statement") issued by the Internal Revenue
Service under the Voluntary Compliance Resolution Program applicable to the Plan
as a means of correcting any operational or other defect subject to the
Compliance Statement. The amount of such contributions and the manner of their
allocation among Covered Members shall be determined in accordance with the
provisions of the Compliance Statement.
XIX.5 Payments to Minors and Incompetents. If a Member or beneficiary
entitled to receive a benefit under the Plan is a minor or is determined by the
Committee in its discretion to be incompetent or is adjudged by a court of
competent jurisdiction to be legally incapable of giving valid receipt and
discharge for a benefit provided under the Plan, the Committee may pay such
benefit to the duly appointed guardian or conservator of such Member or
beneficiary for the account of such Member or beneficiary. If no guardian or
conservator has been appointed for such Member or beneficiary, the Committee may
pay such benefit to any third party who is determined by the
XIX-1
<PAGE>
Committee, in its sole discretion, to be authorized to receive such benefit for
the account of such Member or beneficiary. Such payment shall operate as a full
discharge of all liabilities and obligations of the Committee, the Trustee, the
Employer, and any fiduciary of the Plan with respect to such benefit.
XIX.6 Member's Address. It shall be the affirmative duty of each Member to
inform the Committee of, and to keep on file with the Committee, his current
mailing address and the current mailing address of his designated beneficiary.
If a Member fails to keep the Committee informed of his current mailing address
and the current mailing address of his designated beneficiary, neither the
Committee, the Trustee, the Employer, nor any fiduciary under the Plan shall be
responsible for any late or lost payment of a benefit or for failure of any
notice to be provided timely under the terms of the Plan.
XIX.7 Severability. If any provision of this Plan shall be held illegal or
invalid for any reason, said illegality or invalidity shall not affect the
remaining provisions hereof; instead, each provision shall be fully severable
and the Plan shall be construed and enforced as if said illegal or invalid
provision had never been included herein.
XIX.8 Jurisdiction. The situs of the Plan is Texas. Except to the extent
preempted by federal law, (a) the provisions of Article XIV shall be construed
in accordance with the laws of Illinois and (b) all other provisions of the Plan
shall be construed in accordance with the laws of Texas.
XIX-2
<PAGE>
XX.
Top-Heavy Status
XX.1 Article Controls. Any Plan provisions to the contrary notwithstanding,
the provisions of this Article shall control to the extent required to cause the
Plan to comply with the requirements imposed under section 416 of the Code.
XX.2 Definitions. For purposes of this Article, the following terms and
phrases shall have these respective meanings:
(a) Account Balance: As of any Valuation Date, the aggregate amount
credited to an individual's account or accounts under a qualified defined
contribution plan maintained by the Employer or a Controlled Entity (excluding
employee contributions that were deductible within the meaning of section 219 of
the Code and rollover or transfer contributions made after December 31, 1983, by
or on behalf of such individual to such plan from another qualified plan
sponsored by an entity other than the Employer or a Controlled Entity),
increased by (1) the aggregate distributions made to such individual from such
plan during a five-year period ending on the Determination Date and (2) the
amount of any contributions due as of the Determination Date immediately
following such Valuation Date.
(b) Accrued Benefit: As of any Valuation Date, the present value
(computed on the basis of the Assumptions) of the cumulative accrued benefit
(excluding the portion thereof that is attributable to employee contributions
that were deductible pursuant to section 219 of the Code, to rollover or
transfer contributions made after December 31, 1983, by or on behalf of such
individual to such plan from another qualified plan sponsored by an entity other
than the Employer or a Controlled Entity, to proportional subsidies or to
ancillary benefits) of an individual under a qualified defined benefit plan
maintained by the Employer or a Controlled Entity increased by (1) the aggregate
distributions made to such individual from such plan during a five-year period
ending on the Determination Date and (2) the estimated benefit accrued by such
individual between such Valuation Date and the Determination Date immediately
following such Valuation Date. Solely for the purpose of determining top-heavy
status, the Accrued Benefit of an individual shall be determined under (1) the
method, if any, that uniformly applies for accrual purposes under all qualified
defined benefit plans maintained by the Employer and the Controlled Entities or
(2) if there is no such method, as if such benefit accrued not more rapidly than
under the slowest accrual rate permitted under section 411(b)(1)(C) of the Code.
(c) Aggregation Group: The group of qualified plans maintained by the
Employer and each Controlled Entity consisting of (1) each plan in which a Key
Employee participates and each other plan that enables a plan in which a Key
Employee participates to meet the requirements of section 401(a)(4) or 410 of
the Code or (2) each plan in which a Key Employee participates, each other plan
that enables a plan in which a Key Employee participates to meet the
requirements of section 401(a)(4) or 410 of the Code and any other
XX-1
<PAGE>
plan that the Employer elects to include as a part of such group; provided,
however, that the Employer may elect to include a plan in such group only if the
group will continue to meet the requirements of sections 401(a)(4) and 410 of
the Code with such plan being taken into account.
(d) Assumptions: The interest rate and mortality assumptions specified
for top-heavy status determination purposes in any defined benefit plan included
in the Aggregation Group which includes the Plan.
(e) Determination Date: For the first Plan Year of any plan, the last
day of such Plan Year and for each subsequent Plan Year of such plan, the last
day of the preceding Plan Year.
(f) Key Employee: A "key employee" as defined in section 416(i) of the
Code and the Treasury regulations thereunder.
(g) Plan Year: With respect to any plan, the annual accounting period
used by such plan for annual reporting purposes.
(h) Remuneration: Compensation within the meaning of section 415(c)(3)
of the Code, as limited by section 401(a)(17) of the Code.
(i) Valuation Date: With respect to any Plan Year of any defined
contribution plan, the most recent date within the twelve-month period ending on
a Determination Date as of which the trust fund established under such plan was
valued and the net income (or loss) thereof allocated to participants' accounts.
With respect to any Plan Year of any defined benefit plan, the most recent date
within a twelve-month period ending on a Determination Date as of which the plan
assets were valued for purposes of computing plan costs for purposes of the
requirements imposed under section 412 of the Code.
XX.3 Top-Heavy Status.
XX-2
<PAGE>
(a) The Plan shall be deemed to be top-heavy for a Plan Year if, as of
the Determination Date for such Plan Year, (1) the sum of Account Balances of
Members who are Key Employees exceeds 60% of the sum of Account Balances of all
Members unless an Aggregation Group including the Plan is not top-heavy or (2)
an Aggregation Group including the Plan is top-heavy. An Aggregation Group shall
be deemed to be top-heavy as of a Determination Date if the sum (computed in
accordance with section 416(g)(2)(B) of the Code and the Treasury regulations
promulgated thereunder) of (1) the Account Balances of Key Employees under all
defined contribution plans included in the Aggregation Group and (2) the Accrued
Benefits of Key Employees under all defined benefit plans included in the
Aggregation Group exceeds 60% of the sum of the Account Balances and the Accrued
Benefits of all individuals under such plans. Notwithstanding the foregoing, the
Account Balances and Accrued Benefits of individuals who are not Key Employees
in any Plan Year but who were Key Employees in any prior Plan Year shall not be
considered in determining the top-heavy status of the Plan for such Plan Year.
Further, notwithstanding the foregoing, the Account Balances and Accrued
Benefits of individuals who have not performed services for the Employer or any
Controlled Entity at any time during the five-year period ending on the
applicable Determination Date shall not be considered.
(b) If the Plan is determined to be top-heavy for a Plan Year, the Employer
shall contribute to the Plan for such Plan Year on behalf of each Member who is
not a Key Employee and who has not terminated his employment as of the last day
of such Plan Year an amount equal to:
(1) The lesser of (A) 3% of such Member's Remuneration for such Plan
Year or (B) a percent of such Member's Remuneration for such Plan Year
equal to the greatest percent determined by dividing for each Key Employee
the amounts allocated to such Key Employee's Before-Tax Account and
Employer Contribution Account for such Plan Year by such Key Employee's
Remuneration; reduced by
(2) The amount of the sum of Employer Profit Sharing Contributions and
Employer Discretionary Contributions allocated to such Member's Accounts
for such Plan Year.
The minimum contribution required to be made for a Plan Year pursuant to this
Paragraph for a Member employed on the last day of such Plan Year shall be made
regardless of whether such Member is otherwise ineligible to receive an
allocation of the Employer's contributions for such Plan Year. The minimum
contribution required to be made pursuant to this Paragraph shall also be made
for an Eligible Employee who is not a Key Employee and who is excluded from
participation in the Plan solely because of failing to make Before-Tax
Contributions. Notwithstanding the foregoing, if the Plan is deemed to be top-
heavy for a Plan Year, the Employer's contribution for such Plan Year pursuant
to this Paragraph shall be increased by substituting "4%" in lieu of "3%" in
Clause (1) hereof to the extent that the Directors determine to so increase such
contribution to comply with the provisions of section 416(h)(2) of the Code.
Notwithstanding the foregoing, no contribution shall be made pursuant to this
Paragraph for a Plan Year with respect to a Member who is a participant in
another defined contribution plan sponsored by the Employer or a Controlled
Entity if such Member receives under such other defined contribution plan (for
the plan year of such plan ending with or within the Plan Year of the Plan) a
contribution which is equal to or greater than the
XX-3
<PAGE>
minimum contribution required by section 416(c)(2) of the Code. Notwithstanding
the foregoing, no contribution shall be made pursuant to this Paragraph for a
Plan Year with respect to a Member who is a participant in a defined benefit
plan sponsored by the Employer or a Controlled Entity if such Member accrues
under such defined benefit plan (for the plan year of such plan ending with or
within the Plan Year of this Plan) a benefit that is at least equal to the
benefit described in section 416(c)(1) of the Code. If the preceding sentence is
not applicable, the requirements of this Paragraph shall be met by providing a
minimum benefit under such defined benefit plan which, when considered with the
benefit provided under the Plan as an offset, is at least equal to the benefit
described in section 416(c)(1) of the Code.
XX.4 Termination of Top-Heavy Status. If the Plan has been deemed to be
top-heavy for one or more Plan Years and thereafter ceases to be top-heavy, the
provisions of this Article shall cease to apply to the Plan effective as of the
Determination Date on which it is determined no longer to be top-heavy.
XX.5 Effect of Article. Notwithstanding anything contained herein to the
contrary, the provisions of this Article shall automatically become inoperative
and of no effect to the extent not required by the Code or the Act.
XX-4
<PAGE>
EXECUTED this ____ day of December, 1997.
NGC CORPORATION
By:
-----------------------------
CG TRUST COMPANY, TRUSTEE
By:
-----------------------------
<PAGE>
NGC PROFIT SHARING/401(K)
SAVINGS PLAN
APPENDIX A
WITHDRAWALS FROM TRIDENT ACCOUNTS.
---------------------------------
(a) A Member who is an Employee and who has made all available
withdrawals under Section 11.1(a) of the Plan, may withdraw any or all amounts
in his Trident Rollover Account.
(b) A Member who has attained age fifty-nine and one-half and who has
made all available withdrawals pursuant to Section 11.1(a) of the Plan and
Paragraph (a) above may withdraw from his Trident Before-Tax Account an amount
not exceeding the then value of such Account.
(c) A Member who is an Employee and who has made all available
withdrawals under Section 11.1(a) of the Plan and Paragraphs (a) and (b) above
may above may withdraw from his Trident Matching Account any or all amounts held
in such Account that have been so held for twenty-four months or more. A Member
(other than a Member who has attained age 59 1/2 at the time the withdrawal is
requested and who withdraws the entire balance of his Trident Before-Tax Account
and his Trident Matching Account) who makes a withdrawal under this Paragraph
may not make Before-Tax Contributions to the Plan for a period of six months
following the date of such withdrawal.
(d) Not more than one withdrawal pursuant to the provisions of this
Appendix A shall be made in any twelve month period; provided, however, that
withdrawals may be made under Paragraphs (a), (b), and (c) above, in accordance
with the ordering rules therein, simultaneously.
(e) Except as provided in Paragraphs (b) and (d) above, all
withdrawals pursuant to the provisions of this Appendix A shall be subject to
the restrictions provided in Section 11.2 of the Plan.
A-1
<PAGE>
NGC PROFIT SHARING/401(K)
SAVINGS PLAN
APPENDIX B
WITHDRAWALS FROM DESTEC ACCOUNTS.
--------------------------------
(a) A Member who has attained age fifty-nine and one-half may withdraw
from his Destec Before-Tax Account an amount not exceeding the then value of
such Account. A withdrawal by a Member pursuant to the provisions of this
Paragraph may not be for an amount less than $1,000.00.
(b) A Member may withdraw his entire Destec Before-Tax Account upon:
(1) the termination of the Plan without the establishment or
maintenance of another defined contribution plan (other than an employee
stock ownership plan as defined in section 4975(e)(7) of the Code);
(2) the disposition, to an entity which is not a Controlled
Entity, of substantially all of the assets used by the Employer in the
trade or business in which the Member continues employment, following which
the Employer continues to maintain the Plan; or
(3) the disposition, to an entity which is not a Controlled
Entity, of the Employer's interest in a subsidiary in which the Member
continues employment, following which the Employer continues to maintain
the Plan;
provided that any such withdrawal shall constitute a lump sum distribution of
the balance to the Member's credit in his Destec Before-Tax Account under
section 402(d)(4) of the Code (without regard to clauses (i), (ii), (iii), and
(iv) of section 402(d)(4)(A) of the Code or to sections 402(d)(4)(B) and (F) of
the Code).
(c) A Member who terminated employment with the Employer after
attaining age fifty, the occurrence of whose Annuity Starting Date is not
prohibited by Section 10.1(e) of the Plan, may withdraw from his Destec Accounts
an amount not exceeding the then value of such Accounts. An eligible Member may
make no more than one withdrawal pursuant to the provisions of this Paragraph in
any Plan Year.
(d) Except as provided in Paragraph (c) above, all withdrawals
pursuant to the provisions of this Appendix B shall be subject to the
restrictions provided in Section 11.2 of the Plan.
B-1
<PAGE>
NGC PROFIT SHARING/401(K)
SAVINGS PLAN
APPENDIX C
1. INVESTMENT OF DOW ESOP ACCOUNT.
(a) General Rule. Except as otherwise provided in subsection (b), the
Members' Dow ESOP Accounts shall be invested primarily in Dow Stock.
(b) Diversification of Investment. A Member may from time to time
designate that his existing Dow ESOP Account balance be reinvested, in the same
manner, and subject to the same restrictions, as applicable to the reinvestment
of other Accounts under Section 5.2; provided, however, that at least three (3)
Investment Funds, not inconsistent with the Treasury regulations under section
401(a)(28)(B)(ii)(II) of the Code, shall be available for such purpose; provided
further, that the amount so reinvested shall be transferred from the Member's
Dow ESOP Account to his Dow Transfer Account.
(c) Voting Rights. A Member or beneficiary shall be entitled to direct
the Trustee as to the manner in which any rights, including, but not limited to,
voting rights, are to be exercised with respect to the whole shares of Dow Stock
allocated to such Member's Dow ESOP Account, if such Dow Stock is part of a
registration-type class of securities as defined in section 409(e)(4) of the
Code. To the extent permitted by section 404(a) of the Act, fractional shares
from all such Accounts shall be combined and voted by the Trustee on each issue
in the same ratio as the allocated shares are voted. Unless otherwise required
by applicable law, the Trustee shall not exercise voting rights with respect to
Dow Stock allocated to a Member's Dow ESOP Account which such Member fails to
exercise. At the time of mailing the notice for each shareholder's meeting, the
Company shall furnish each such Member or beneficiary with proxy solicitation
material and any other information which the issuer of the Dow Stock distributes
to shareholders regarding the exercise of voting or other rights, together with
a voting instruction form to be returned by the Member or beneficiary to the
Trustee. If the Dow ESOP Accounts are not invested in a registration-type class
of securities as defined in section 409(e)(4) of the Code, a Member or
beneficiary shall be entitled to direct the Trustee as to the manner in which
voting rights will be exercised with respect to any corporate matter which
involves the voting of such shares allocated to the Member's Dow ESOP Account
with respect to the approval or disapproval or any corporate merger or
consolidation, recapitalization, reclassification, liquidation, dissolution,
sale of substantially all assets of a trade or business, or such similar
transaction as may be prescribed in Treasury regulations under section 409(e) of
the Code.
2. DIVIDENDS ON DOW STOCK. All dividends paid with respect to Dow Stock
held by the Trust shall be credited to Members' Dow ESOP Accounts and shall be
reinvested as soon as practicable in Dow Stock.
C-1
<PAGE>
3. DOW ESOP ACCOUNT VALUATION. If and to the extent that the Dow ESOP
Accounts are invested in securities which are not readily tradable on an
established securities market, the valuation thereof for purposes of the Plan
shall be made by an independent appraiser meeting requirements similar to those
contained in Treasury regulations under section 170(a)(1) of the Code.
4. WITHDRAWALS FROM DOW ESOP ACCOUNT. A Member who is an Employee may
withdraw all or a portion of his Dow ESOP Account, in integral multiples of 10%
of the value of such Account. All withdrawals pursuant to the provisions of this
paragraph shall be made in accordance with the procedures established from time
to time by the Committee. Payment of the withdrawal shall be made as soon as
administratively feasible after the date a Member completes such procedures and
shall be made in Dow Stock unless such Member elects to have all or a portion of
such payment made in cash.
C-2
<PAGE>
EXHIBIT 10.43
FIRST AMENDMENT TO
NGC PROFIT SHARING/401(k) SAVINGS PLAN
WHEREAS, NGC CORPORATION (the "Company") and other Employers have
heretofore adopted the NGC PROFIT SHARING/401(k) SAVINGS PLAN (the "Plan") for
the benefit of their eligible employees; and
WHEREAS, the Company amended and restated the Plan on behalf of itself and
the other Employers, effective as of January 1, 1998; and
WHEREAS, the Company desires to further amend the Plan on behalf of itself
and the other Employers;
NOW, THEREFORE, the Plan shall be amended as follows, effective as of
January 1, 1998:
1. The fourth and fifth paragraphs on page (i) of the Plan shall be
deleted and the following shall be substituted therefor:
"WHEREAS, the Company desires to restate the Plan and to amend the
Plan in several respects, intending thereby to provide an uninterrupted and
continuing program of benefits;
NOW THEREFORE, the Plan is hereby restated in its entirety as follows
with no interruption in time, effective as of January 1, 1998, except as
otherwise indicated herein:"
2. The parenthetical "(but excluding overtime payments and bonuses)"
shall be deleted from Paragraph (12) of Section 1.1 of the Plan, and the
parenthetical "(but excluding (i) overtime payments that are made with respect
to overtime that is not regularly scheduled overtime and (ii) bonuses)" shall be
substituted therefor.
3. Paragraphs (64), (65) and (66) of Section 1.1 of the Plan shall be
deleted and the following shall be substituted therefor:
"(64) TRUST: The trust(s) established under the Trust Agreement(s)
to hold and invest contributions made under the Plan and
income thereon, and from which the Plan benefits are
distributed.
(64A) TRUST AGREEMENT: The agreement(s) entered into between the
Company and the Trustee establishing the Trust, as such
agreement(s) may be amended from time to time.
(65) TRUST FUND: The funds and properties held pursuant to the
provisions of the Trust Agreement for the use and benefit of
the Members, together with all income, profits, and increments
thereto.
(66) TRUSTEE: The trustee or trustees qualified and acting under
the Trust Agreement at any time."
<PAGE>
4. The second sentence of Section 5.3 of the Plan shall be deleted and
the following shall be substituted therefor:
"During such period, amounts that would otherwise be invested in Company
Stock or other Company securities pursuant to Section 5.1 or an investment
designation shall be invested in such other assets as the Committee may in
its discretion determine, or the Trustee may hold such amounts uninvested
for a reasonable period pending the purchase of such stock or securities."
5. The second sentence of Section 5.5 of the Plan shall be deleted and
the following shall be substituted therefor:
"The Committee, in its discretion, may exercise or sell any such rights or
privileges and shall direct the Trustee with respect to such matters."
6. Section 13.6(k) of the Plan shall be deleted and the following shall
be substituted therefor:
"(k) To direct the Trustee pursuant to the provisions of the Trust
Agreement and with respect to the matters described in Sections 5.3, 5.4
and 5.5;"
7. Article XIV of the Plan shall be deleted and the following shall be
substituted therefor:
"XIV.
TRUSTEE AND ADMINISTRATION OF TRUST FUND
----------------------------------------
As a means of administering the assets of the Plan, the Company has
entered into a Trust Agreement with CG Trust Company as Trustee. The
administration of the assets of the Plan and the duties, obligations, and
responsibilities of the Trustee shall be governed by the Trust Agreement.
The Trust Agreement may be amended from time to time as the Company and the
Trustee deem advisable in order to effectuate the purposes of the Plan.
The Trust Agreement is incorporated herein by reference and thereby made a
part of the Plan."
8. The second sentence of Section 19.8 of the Plan shall be deleted and
the following shall be substituted therefor:
"All provisions of the Plan shall be construed in accordance with the laws
of Texas except to the extent preempted by federal law."
9. As amended hereby, the Plan is specifically ratified and reaffirmed.
IN WITNESS WHEREOF, the undersigned has caused these presents to be
executed this ___ day of ________________________, 1998.
2
<PAGE>
NGC CORPORATION CG TRUST COMPANY, TRUSTEE
BY: BY:
------------------------- --------------------------
NAME: NAME:
----------------------- ------------------------
TITLE: TITLE:
---------------------- -----------------------
3
<PAGE>
EXHIBIT 10.44
SECOND AMENDMENT TO
NGC PROFIT SHARING/401(k) SAVINGS PLAN
WHEREAS, Dynegy Inc., formerly known as NGC Corporation (the "Company"),
and other Employers have heretofore adopted the NGC Profit Sharing/401(k)
Savings Plan (the "Plan") for the benefit of their eligible employees; and
WHEREAS, the Company amended and restated the Plan on behalf of itself and
the other Employers, effective as of January 1, 1998; and
WHEREAS, the Company desires to further amend the Plan on behalf of itself
and the other Employers;
NOW, THEREFORE, the Plan shall be amended as follows:
I. Effective as of July 6, 1998:
1. All references in the Plan to "NGC Corporation" shall be changed
to references to "Dynegy Inc."
2. All references in the Plan to the "NGC Profit Sharing/401(k)
Savings Plan" shall be changed to references to the "Dynegy Inc. Profit
Sharing/401(k) Savings Plan."
II. Effective as of November 1, 1998, the following sentence shall be
added to the end of Section 1.1(12) of the Plan:
"Notwithstanding any provision in this Section 1.1(12) to the contrary, the
Compensation of any Member who is employed by Dynegy Crude Gathering and
Marketing, Inc. (formerly NGC Oil Trading and Transportation, Inc.) shall,
for all purposes under the Plan, include monthly premium pay that is paid
to or for the benefit of such Member in connection with the anticipated
sale of such company for services rendered or labor performed for such
company while a Member and an Eligible Employee."
III. Effective as of January 1, 1999:
1. The phrase "the Member's elections to defer Compensation" in
Section 1.1(6) of the Plan shall be deleted and the phrase "the Member's
elections to defer Compensation and Overtime Payments" shall be substituted
therefor.
2. The parenthetical "(but excluding (i) overtime payments that are
made with respect to overtime that is not regularly scheduled overtime and (ii)
bonuses)" shall be deleted from Section 1.1(12) of the Plan, and the
parenthetical "(but (i) including overtime payments that are made with respect
to overtime that is regularly scheduled overtime and (ii) excluding Overtime
Payments and bonuses)" shall be substituted therefor.
3. The phrase "The Compensation of any Member" at the beginning of
Section 1.1(12)(B) of the Plan shall be deleted and the phrase "The Compensation
and Overtime Payments of any Member" shall be substituted therefor.
<PAGE>
4. The following new Paragraph (46A) shall be added immediately
following Section 1.1(46) of the Plan:
"(46A) OVERTIME PAYMENT: Any payment made by the Employer to or for the
benefit of a Member for services rendered or labor performed for
the Employer while a Member and an Eligible Employee that is
classified by the Employer as a payment for overtime (other than
regularly scheduled overtime)."
5. The phrase "defer Compensation hereunder" in Section 2.1(c) of
the Plan shall be deleted and the phrase "defer Compensation or Overtime
Payments hereunder" shall be substituted therefor.
6. The following new provision shall be added immediately following
Paragraph (a) of Section 3.1 of the Plan:
"A Member who makes an election to defer an integral percentage of his
Compensation pursuant to this Paragraph (a) for a Plan Year, may, prior to
the first day of such Plan Year, make a separate election, applicable only
to such Plan Year, to defer the same integral percentage of any Overtime
Payments received during such Plan Year by having the Employer contribute
the amount so deferred to the Plan. Overtime Payments not so deferred by
such election shall be received by such Member in cash. A Member's
election to defer an amount of his Overtime Payments pursuant to this
Section shall be made by authorizing his Employer, in the manner prescribed
by the Committee, to reduce his Overtime Payments in the elected amount and
the Employer, in consideration thereof, agrees to contribute an equal
amount to the Plan. The reduction in a Member's Overtime Payments during a
Plan Year pursuant to his election hereunder shall be effected by reducing
such Overtime Payments as of each payroll period in which such Member
receives Overtime Payments within such Plan Year following the effective
date of such election. The amount of Overtime Payments elected to be
deferred by a Member for a Plan Year pursuant to this Section shall become
a part of the Employer's Before-Tax Contributions for such Plan Year."
7. Paragraphs (b) and (c) of Section 3.1 of the Plan shall be
deleted and the following shall be substituted therefor:
"(b) A Member's Compensation reduction election shall remain in force
and effect for all periods following its effective date until modified or
terminated or until such Member ceases to be an Eligible Employee. A
Member's Overtime Payment deferral election shall remain in force and
effect for the Plan Year to which it relates until modified as described in
this Paragraph, terminated as described in Paragraph (c), or such Member
ceases to be an Eligible Employee. A Member who has elected to defer a
portion of his Compensation may change his deferral election percentage
(within the percentage limits set forth in Paragraph (a) above), effective
as of the first of any calendar month, by electing a new Compensation
reduction percentage (which new reduction percentage shall also apply to
his election, if any, to defer Overtime Payments) in the manner and within
the time period prescribed by the Committee.
2
<PAGE>
(c) A Member may cancel his Compensation reduction election, together
with his Overtime Payments reduction election if applicable, effective as
of the first day of any calendar month, in accordance with the procedures
and within the time period prescribed by the Committee. A Member who so
cancels his Compensation reduction election, together with his Overtime
Payments reduction election if applicable, may resume Compensation
deferrals, effective as of the first day of any calendar month (provided
such Member is an Eligible Employee), by making a new Compensation
reduction election in the manner and within the time period prescribed by
the Committee. If such an election to resume Compensation deferrals is to
become effective during the same Plan Year in which a Member's Overtime
Payment reduction election has been canceled pursuant to this Paragraph,
then such Member shall also resume Overtime Payment deferrals based upon
the same deferral percentage elected with respect to his Compensation
deferrals."
8. The phrase "the Compensation deferral elections" in Sections
3.1(f) and 4.5(e) of the Plan shall be deleted and the phrase "the Compensation
and Overtime Payment deferral elections" shall be substituted therefor.
9. The phrase "Compensation elected to be deferred," in Section
3.1(g) of the Plan shall be deleted and the phrase "Compensation and Overtime
Payments elected to be deferred," shall be substituted therefor.
10. The first sentence of Section 3.2 of the Plan shall be deleted
and the following shall be substituted therefor:
"For each calendar month, the Employer shall contribute to the Trust, as
Employer Matching Contributions, an amount that equals 100% of that portion
of the Before-Tax Contributions attributable only to Compensation deferral
elections that were made pursuant to Section 3.1 on behalf of each of the
Members during such month and that were not in excess of 5% of each such
Member's Compensation for such month."
IV. Subject to and conditioned upon receipt of a determination by the
Internal Revenue Service that the following amendments to the Plan do not
adversely affect the qualified status of the Plan under sections 401 et seq. and
501 of the Internal Revenue Code of 1986, as amended, the following amendments
shall be effective as soon as administratively feasible after receipt of such a
determination:
1. Paragraph (b) of Section 11.1 of the Plan shall be changed to
Paragraph (c) and the following new Paragraph (b) shall be added to Section 11.1
of the Plan:
"(b) A Member who has attained age fifty-nine and one-half may
withdraw from his After-Tax Account, Before-Tax Account, and Rollover
Contribution Account an amount not exceeding the then value of such
Accounts. Such withdrawal shall come, first, from the Member's After-Tax
Account, second, from his Rollover Contribution Account, and, third, from
his Before-Tax Account."
2. The reference to "Paragraph (a)" in the first sentence of Section
11.1(c) of the Plan shall be deleted, and a reference to "the Paragraphs" shall
be substituted therefor.
3
<PAGE>
3. Paragraph (b) of Section 11.2 of the Plan shall be deleted and
the following shall be substituted therefor:
"(b) Notwithstanding the provisions of this Article, (i) not more
than one withdrawal pursuant to Section 11.1(a) shall be made in any one
calendar quarter, (ii) not more than one withdrawal pursuant to Section
11.1(b) shall be made in any one Plan Year, and (iii) no withdrawal shall
be made from an Account to the extent such Account has been pledged to
secure a loan from the Plan."
V. As amended hereby, the Plan is specifically ratified and reaffirmed.
IN WITNESS WHEREOF, the undersigned has caused these presents to be
executed this _____ day of December, 1998.
DYNEGY INC.
BY:
-------------------------------
NAME:
-------------------------
TITLE:
------------------------
4
<PAGE>
EXHIBIT 12.1
<TABLE>
<CAPTION>
DYNEGY INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($ in 000'S)
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Computation of Earnings:
Pre-tax income (loss) from continuing operations $158,691 $(149,895) $169,645 $ 65,234 $ 44,105
Undistributed income from equity investees 6,477 4,073 21,729 9,169 3,803
-------- --------- -------- -------- --------
Computed Earnings (Loss) 152,214 (153,968) 147,916 56,065 40,302
-------- --------- -------- -------- --------
Fixed Charges:
Interest costs:
Expensed 74,992 63,455 46,202 34,475 1,114
Capitalized 7,591 8,800 1,200 1,028 -
Minority interest in income of a subsidiary 16,632 9,841 - - -
Amortization of financing costs 1,320 943 772 1,132 1,267
Amortization of Premium (2,568) (6,768) (4,892) (3,216) -
Rental expense representative of interest factor 20,698 13,572 4,171 3,719 955
-------- --------- -------- -------- --------
Total Fixed Charges 118,665 89,843 47,453 37,138 3,336
-------- --------- -------- -------- --------
Earnings Before Income Taxes and Fixed Charges $263,288 $ (72,925) $194,169 $ 92,175 $ 43,638
======== ========= ======== ======== ========
Ratio of Earnings to Fixed Charges 2.22 (a) 4.09 2.48 13.08
======== ========= ======== ======== ========
(a) Earnings are inadequate to cover fixed charges for the year ended December 31, 1997, by approximately $72.9 million.
</TABLE>
<PAGE>
EXHIBIT 22.1
SUBSIDIARIES OF DYNEGY INC.
STATE OR JURISDICTION
OF INCORPORATION
SUBSIDIARY OR FORMATION
- ---------- ----------------------
1. Dynegy Power Corp. Delaware
2. Dynegy Global Energy, Inc. Delaware
3. DMT Holdings, Inc. Delaware
4. Dynegy GP Inc. Delaware
5. Dynegy Midstream, Inc. Delaware
6. Dynegy Regulated Holdings, Inc. Delaware
7. Dynegy Upper Holdings, LLC Delaware
8. Dynegy Administrative Services Company Delaware
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 24, 1999, included in this Form 10-K, into Dynegy Inc.'s
previously filed registration statements of Form S-8 (File Nos. 33-75044,
33-96394 and 333-20773) and Form S-3 (File Nos. 333-12987 and 333-60253).
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Houston, Texas
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 28,367 23,047
<SECURITIES> 0 0
<RECEIVABLES> 1,623,738 1,675,772
<ALLOWANCES> 0 0
<INVENTORY> 149,901 136,485
<CURRENT-ASSETS> 2,117,241 2,018,780
<PP&E> 2,446,878 1,958,250
<DEPRECIATION> (514,771) (436,674)
<TOTAL-ASSETS> 5,264,237 4,516,903
<CURRENT-LIABILITIES> (2,026,323) (1,753,094)
<BONDS> 0 0
0 0
(75,418) (75,418)
<COMMON> (1,533) (1,518)
<OTHER-SE> (1,051,112) (1,017,607)
<TOTAL-LIABILITY-AND-EQUITY> (5,264,237) (4,516,903)
<SALES> (14,257,997) (13,378,380)
<TOTAL-REVENUES> (14,257,997) (13,378,380)
<CGS> 13,829,310 12,993,086
<TOTAL-COSTS> 13,829,310 12,993,086
<OTHER-EXPENSES> 7,677 20,230
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 74,992 63,455
<INCOME-PRETAX> (158,691) 149,895
<INCOME-TAX> 50,338 (62,210)
<INCOME-CONTINUING> (108,353) 87,685
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 14,800
<NET-INCOME> (108,353) 102,485
<EPS-PRIMARY> 0.71 (0.68)
<EPS-DILUTED> 0.66 0
</TABLE>
